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FINANCIAL STATEMENTS EXHIBIT 13.1
PAGE NO.
I. GENZYME GENERAL
Selected Financial Data........................................................................... 2
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 5
Combined Balance Sheets - December 31, 1997 and 1996.............................................. 12
Combined Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995.......... 13
Combined Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995.......... 15
Notes to Combined Financial Statements............................................................ 17
Report of Independent Accountants................................................................. 30
II. GENZYME CORPORATION AND SUBSIDIARIES
Selected Financial Data........................................................................... 31
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 34
Consolidated Balance Sheets - December 31, 1997 and 1996.......................................... 45
Consolidated Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995...... 47
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995...... 49
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996
and 1995........................................................................................ 51
Notes to Consolidated Financial Statements........................................................ 53
Report of Independent Accountants................................................................. 83
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GENZYME GENERAL
SELECTED FINANCIAL DATA
COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Revenues:
Net product sales ................................. $ 529,927 $ 424,483 $ 304,373 $ 238,645 $ 183,366
Net service sales ................................. 55,835 61,638 47,230 49,686 50,511
Revenues from research and development contracts:
Related parties ................................. 8,041 23,011 26,758 20,883 29,478
Other ........................................... 3,400 2,310 202 1,513 2,332
--------- --------- --------- --------- ---------
Total revenues .................................. 597,203 511,442 378,563 310,727 265,687
Operating costs and expenses:
Cost of products sold (1) ......................... 206,028 155,930 113,964 92,226 64,704
Cost of services sold ............................. 35,451 42,889 31,137 32,116 34,558
Selling, general and administrative (1) ........... 173,020 135,153 97,520 80,026 72,051
Research and development (including research and
development related to contracts)................. 74,192 69,969 57,907 51,696 45,526
Amortization of intangibles ....................... 12,534 8,849 4,647 4,741 5,964
Purchase of in-process research and
development (2)................................... -- 130,639 14,216 -- 24,000
Other (3).......................................... -- 1,465 -- -- 26,517
--------- --------- --------- --------- ---------
Total operating costs and expenses .............. 501,225 544,894 319,391 260,805 273,320
--------- --------- --------- --------- ---------
Operating income (loss) ............................. 95,978 (33,452) 59,172 49,922 (7,633)
Other income (expenses):
Equity in loss of unconsolidated affiliates ....... (5,281) (2,633) (1,810) (1,353) --
Other (1) ......................................... (2,000) 1,711 1,608 (9,752) 9,192
Investment income ................................. 10,038 13,909 7,428 9,072 12,209
Interest expense .................................. (8,108) (6,842) (1,069) (1,354) (2,500)
--------- --------- --------- --------- ---------
Total other income (expenses) ................... (5,351) 6,145 6,157 (3,387) 18,901
--------- --------- --------- --------- ---------
Income (loss) before income taxes.................... 90,627 (27,307) 65,329 46,535 11,268
Provision for income taxes .......................... (33,601) (20,206) (30,506) (16,341) (2,812)
--------- --------- --------- --------- ---------
Net income (loss) ................................... 57,026 (47,513) 34,823 30,194 8,456
Tax benefit allocated from Genzyme Tissue Repair .... 17,666 17,011 8,857 1,860 9,564
Tax benefit allocated from Genzyme Molecular
Oncology .......................................... 2,755 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) attributable to Genzyme General
Division Common Stock ("GGD Stock") (4,6,11) .... $ 77,447 $ (30,502) $ 43,680 $ 32,054 $ 18,020
========= ========= ========= ========= =========
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GENZYME GENERAL
SELECTED FINANCIAL DATA (CONTINUED)
COMBINED STATEMENTS OF OPERATIONS DATA (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- -------
GENZYME GENERAL COMMON SHARE DATA:
Net income (loss) attributable to GGD Stock (4) $77,447 $(30,502) $ 43,680 $ 32,054 $18,020
======= ======== ======== ======== =======
Per Genzyme General common share-basic (4,5,6):
Net income (loss) ............................. $ 1.01 $ (0.45) $ 0.79 $ 0.67 $ 0.37
======= ======== ======== ======== =======
Weighted average shares outstanding (5)........ 76,531 68,289 55,531 48,141 48,075
======= ======== ======== ======== =======
Per Genzyme General common and common
equivalent share-diluted (4,5,6):
Net income (loss) ............................. $ 0.98 $ (0.45) $ 0.68 $ 0.58 $ 0.36
======= ======== ======== ======== =======
Adjusted weighted average shares outstanding (5) 78,925 68,289 63,967 55,321 56,282
======= ======== ======== ======== =======
COMBINED BALANCE SHEET DATA (2): DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
Cash and investments (7) ................... $ 193,197 $ 171,725 $278,663 $128,652 $168,953
Working capital ............................ 307,988 381,373 308,036 83,314 99,503
Total assets ............................... 1,203,056 1,229,519 854,586 630,144 532,357
Long-term debt and capital lease obligations
excluding current portion (8,9) ........... 117,978 223,998 124,473 126,555 144,674
Division equity (10) ....................... 980,876 884,225 659,281 395,651 324,391
There were no cash dividends paid.
NOTES TO SELECTED FINANCIAL DATA:
(1) In the fourth quarter of 1997, Genzyme General recorded $29.2 million of
charges mainly associated with its Pharmaceutical business and Surgical
Products businesses and the sale of Genetic Design, Inc.("GDI"), which was
sold in 1996. This resulted in (i) an $18.1 million charge to cost of
products sold primarily related to the melatonin, bulk pharmaceuticals and
fine chemical product lines which are being discontinued by Genzyme
General; (ii) charges of $5.5 million to cost of products sold and $3.5
million to selling, general and administrative("SG&A") expense primarily
related to the manufacturing and selling of the Sepracoat(TM) product line,
which was also discontinued after an advisory panel of the U.S. Food and
Drug Administration (the "FDA") recommended against granting market
approval of this product in 1997; and (iii) a $2.0 million charge to other
expense related to the uncertainty of collection on certain notes
receivable.
(2) Genzyme General acquired: in 1996 the assets of Deknatel Snowden Pencer,
Inc. ("DSP") and all of the Callable Common Stock of Neozyme II Corporation
("Neozyme II"); in 1995 the publicly-held, minority interest in IG
Laboratories, Inc. ("IG"); and, in 1993, all of the rights to one of the
two remaining development programs of Neozyme I Corporation ("Neozyme I").
In connection with these transactions, all of which were accounted for as
purchases, Genzyme General charged to operations the following amounts
which represented the purchase of in-process research and development:
1996, $130.6 million; 1995, $14.2 million; and 1993, $24.0 million.
(3) In 1996, Genzyme General incurred restructuring charges of $1.5 million
related to the consolidation of laboratory operations in its diagnostic
services business and to the consolidation of foreign operations in its
surgical products business in connection with certain acquisitions. In
1993, Genzyme General incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its diagnostic
services business and wrote off $23.7 million for the value of impaired
goodwill associated primarily with IG's acquisition of GDI in 1992.
(4) Net income (loss) attributable to Genzyme General and net income (loss) per
common and common equivalent share of GGD Stock for the year ended December
31, 1993 gives effect to the provisions of the Management and Accounting
Policies adopted by the Genzyme Board of Directors (the "Genzyme Board") in
connection with the creation of the Genzyme Tissue Repair Division
("Genzyme Tissue Repair" or "GTR") and, accordingly, are pro forma
presentations.
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(5) Reflects a July 25, 1996 2-for-1 stock split of GGD Stock effected by means
of a 100% stock dividend paid to stockholders of record on July 11, 1996.
All share and per share amounts have been restated to reflect this split.
(6) In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
Per Share" which established a different method of computing net income per
share ("EPS") than is required under the provisions of Accounting
Principles Board Opinion No. 15 ("APB 15"). The Company adopted SFAS 128 in
the fiscal quarter ending December 31, 1997. All historical EPS data
presented herein has been restated to conform to the provisions of SFAS
128 (See Note A. "Summary of Significant Accounting Policies-Net Income
(Loss) Per Share" to Genzyme General's Combined Financial Statements).
(7) Cash and investments includes cash, cash equivalents, and short- and
long-term investments and excludes investment in equity securities.
(8) In March 1996, holders of the 6 3/4% Convertible Subordinated Notes due
2001 (the "Notes") issued by Genzyme in October 1991 for net proceeds of
$97.3 million, converted such notes into 3,782,493 shares of GGD Stock and
2,553 shares of Genzyme Tissue Repair Division Common Stock ("GTR Stock").
(9) In June 1996, the Company's $15.0 million credit line with a commercial
bank was increased to $215.0 million in connection with the acquisition of
DSP in July 1996. In November 1996, this credit line was refinanced with
a syndicated group of banks and the line of credit was increased to $225.0
million (the "Revolving Credit Facility"). As of December 1996, Genzyme
had $218.0 million outstanding under the Revolving Credit Facility, of
which $200.0 million was allocated to Genzyme General. As of December 31,
1997, Genzyme had $118.0 million outstanding under the Revolving Credit
Facility, of which $95.0 million was allocated to Genzyme General. (See
Note J. "Long-Term Debt and Leases" to Genzyme's Consolidated Financial
Statements).
(10) In October 1995, Genzyme General completed the sale of 5,750,000 shares of
GGD Stock for net proceeds of $141.3 million.
(11) Genzyme formed Genzyme Molecular Oncology Division ("Genzyme Molecular
Oncology" or "GMO") in June 1997 by acquiring Pharmagenics, Inc. and
combining it with several existing programs in the field of oncology. The
costs related to these programs were included in Genzyme General from
December 1, 1994 to June 18, 1997. Therefore, from June 18, 1997, the costs
and expenses related to GMO are no longer included in Genzyme General's
results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of
Genzyme General Division ("Genzyme General") and Genzyme Corporation ("Genzyme"
or the "Company) as of the filing date of this Annual Report. The actual results
for both Genzyme General and Genzyme could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme General and Genzyme, respectively. Stockholders and potential investors
should consider carefully each of these risks and uncertainties in evaluating
the financial condition and results of operations of Genzyme General and
Genzyme.
Genzyme provides separate financial statements for the Company and its
subsidiaries on a consolidated basis and for each of Genzyme General, Genzyme
Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and Genzyme Molecular
Oncology Division ("Genzyme Molecular Oncology" or "GMO"). The financial
statements of each division include the financial position, results of
operations and cash flows of programs and products allocated to the division
under the Company's Restated Articles of Organization, as amended (the "Genzyme
Charter"), and the management and accounting policies adopted by the Genzyme
Board of Directors (the "Genzyme Board") to govern the relationship of the
divisions. The financial information of Genzyme General, Genzyme Tissue Repair
and Genzyme Molecular Oncology, taken together, include all accounts which
comprise the consolidated financial information presented for Genzyme and its
subsidiaries.
For purposes of financial statement presentation, all of the Company's
programs and products are allocated to Genzyme General, Genzyme Tissue Repair or
Genzyme Molecular Oncology. Notwithstanding this allocation, Genzyme continues
to hold title to all of the assets and is responsible for all of the liabilities
allocated to each of the divisions. Holders of Genzyme General Division Common
Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock")
and Genzyme Molecular Oncology Division Common Stock ("GMO Stock") have no
specific claim against the assets attributed to the division whose performance
is associated with the series of stock they hold. Liabilities or contingencies
of one division that affect Genzyme's resources or financial condition could
affect the financial condition or results of operations of the other divisions.
Stockholders and potential investors should, therefore, read this
discussion and analysis of Genzyme General's financial position and results of
operations in conjunction with the financial statements and related notes of
Genzyme General and the discussion and analysis of Genzyme's financial position
and results of operations and financial statements and related notes of
Genzyme, all of which are included with this Annual Report.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management
considers necessary in reviewing Genzyme General's combined results of
operations. Detailed discussion and analysis of the consolidated results of
operations of Genzyme Corporation and its subsidiaries, which include the
combined results of Genzyme General, Genzyme Tissue Repair and Genzyme Molecular
Oncology, are provided separately in this Annual Report under "Management's
Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial
Condition and Results of Operations. "
In the fourth quarter of 1997, Genzyme General recorded $29.2 million
of charges mainly associated with its Pharmaceutical and Surgical Products
businesses and the sale of Genetic Design, Inc.("GDI"), which was sold in 1996.
The Pharmaceutical business will now focus on products that are more consistent
with Genzyme General's long-term business strategy of moving towards
higher-value products and away from fine chemical and bulk pharmaceuticals. This
change in strategy resulted in a $18.1 million charge to cost of products sold
primarily related to the melatonin, bulk pharmaceuticals and fine chemical
product lines which are being discontinued. In addition, Genzyme General
recorded charges of $5.5 million to cost of products sold and $3.5 million to
selling, general and administrative("SG&A") expense primarily related to the
manufacturing and selling of the Sepracoat(TM) product line, which was also
discontinued after an advisory panel of the U.S. Food and Drug Administration
("FDA") recommended against granting marketing approval of this product in 1997.
Genzyme General also recorded a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
Because of the strategic changes in Genzyme General's business, the
financial condition and results of operations will now be discussed differently
than in previous years. Genzyme General is now focusing its efforts within three
business ares -- therapeutics, surgical products and diagnostics.
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GENZYME GENERAL (CONT.)
1997 AS COMPARED TO 1996
REVENUES. Total revenues for 1997 were $597.2 million compared to
$511.4 million in 1996, an increase of 17%. Product and service revenues were
$585.8 million, compared to $486.1 million in 1996, an increase of 21%. Revenues
from research and development contracts for 1997 were $11.4 million compared to
$25.3 million in 1996, a decrease of 55%.
Product revenues in 1997 increased 25% to $529.9 million from $424.5
million in 1996, due primarily to increased sales of Cerezyme(R) enzyme and a
full year of sales by DSP, which was acquired by the Company in July 1996.
Sales of Therapeutic products in 1997 consisted primarily of sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) increased 26% to $332.7 million from $264.6 million in 1996, due to
continued growth in new patient accruals in existing markets. Genzyme General's
results of operations are highly dependent on sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme, which together represented 63% of consolidated product sales
in 1997 compared to 62% in 1996. In October 1996, Genzyme General received FDA
approval to manufacture Cerezyme(R) enzyme in the Company's large-scale
manufacturing plant located in Boston, Massachusetts. Having achieved the
ability to produce uninterrupted supply of Cerezyme(R) enzyme at the plant,
Genzyme General commenced the process of converting patients receiving
Ceredase(R) enzyme to Cerezyme(R) enzyme. The conversion of patients from
Ceredase(R) enzyme to Cerezyme(R) enzyme is substantially complete in the United
States. Genzyme General may be required to record a charge to earnings for the
equipment used exclusively for and any inventory of Ceredase(R) enzyme remaining
upon completion of the patient conversion process and, if the conversions
proceed more rapidly than anticipated, the remaining inventory of Ceredase(R)
enzyme and the corresponding charge to earnings could be material.
Pharmaceuticals 1997 product sales decreased 31% from 1996 due primarily to a
significant decline in sales of Melatonin in 1997. Melatonin sales declined
materially during the second half of 1996 due to declining market demand and
Genzyme General discontinued this product line in the fourth quarter of 1997.
The Surgical Products business unit was formed in July 1996 following
the acquisition of DSP and combines the business of DSP with Genzyme General's
hyaluronic acid-based products designed to limit post operative adhesions (the
"Sepra Products"). Sepra Products primarily consist of sales of Seprafilm(R).
Product sales by the Surgical Products business unit for 1997 were $100.8
million as compared to $50.7 million for period from July 1, 1996, the date of
the acquisition of DSP, through December 31, 1996. Surgical Products sales
consisted primarily of sales of cardiovascular fluid management products,
surgical closures and surgical instruments. These product sales declined 12% in
the second half of 1997 in comparison to the same period of 1996 due to a loss
of volume and severe price competition in the fluid management business. DSP's
product sales for the first half of 1996, which are not included in the results
of Genzyme General, were $53.2 million.
Seprafilm(R) is being marketed in the United States and Canada by
Genzyme General on behalf of Genzyme Ventures II ("GVII"), the joint venture
between Genzyme and Genzyme Development Partners, L.P. ("GDP"). In March 1997,
Genzyme and GDP reached agreement concerning the operation of and allocations of
profits and losses from GVII. Under the terms of this agreement, Genzyme
purchases product from GVII for resale by Genzyme. Genzyme funds the activities
of GVII and is reimbursed at cost for SG&A expenses. The first $200,000 of
losses generated by GVII are allocated to GDP and thereafter losses are
allocated 40% to GDP and 60% to Genzyme, provided, however, that to the extent a
loss allocated to GDP would, pursuant to the partnership agreement, be allocated
to the general partner of GDP rather than the limited partners, such loss is
allocated 100% to Genzyme. GDP will receive the first $5.6 million in profits
generated by GVII, Genzyme General will receive the next $8.4 million in profits
and, thereafter, Genzyme General and GDP will receive 60% and 40% share,
respectively, in the profits of GVII. In 1997, Genzyme General contributed an
additional $1.5 million to GVII through GDP.
The diagnostics business unit consists of product sales and genetic
testing services. Product sales of diagnostic products in 1997 were level with
1996. Service revenues for genetic testing in 1997 decreased 9% primarily due to
the loss of revenue from GDI, which was sold in November 1996. This decrease was
offset in part by higher unit volumes that were primarily attributable to the
acquisition of Genetrix, Inc. ("Genetrix"), which was included in Genzyme
General's results of operations from May 1, 1996.
International sales as a percentage of total sales in 1997 increased to
37% from 35% in 1996, due primarily to a 32% increase in combined international
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, offset in part by additional
domestic sales by DSP.
Revenues from research and development contracts for 1997 decreased 55%
to $11.4 million from $25.3 million in 1996, due primarily to the absence of
revenue from Neozyme II, which was acquired by
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GENZYME GENERAL (CONT.)
Genzyme in the fourth quarter of 1996. This decrease was offset in part by
increases in revenues from research and development contracts with third
parties. Revenues from Neozyme II were $19.8 million in 1996.
MARGINS AND OPERATING EXPENSES. Gross margins for 1997 were 59%, level with
1996. Excluding the effects of special charges, gross margins were 63% in 1997
compared to 59% in 1996. Genzyme General provides a broad range of health care
products and services, resulting in a range of gross margins depending on the
particular market conditions of each product or service. Product margins for
1997 decreased to 61% from 63% in 1996. Excluding the effects of special
charges, product margins in 1997 were 66%. The increase in product margins
before special charges in 1997 is primarily due to increased sales volume of
Cerezyme[R] enzyme offset in part by a full year of sales of lower margin DSP
products. Service margins for 1997 increased to 37% from 30% in 1996 due to the
consolidation of Genetrix, the sale of GDI in 1996 and the resulting elimination
of redundant facilities and staffing.
SG&A expenses and amortization of intangibles for 1997 were $185.6
million compared to $144.0 million in 1996, an increase of 29%. Excluding
special charges, SG&A expenses increased by 25% over 1996. The increase was due
primarily to the acquisition of DSP and increased staffing in support of the
growth in several product lines, most notably in support of the North American
introduction of Seprafilm(R). DSP added $16.7 million in SG&A expenses and
amortization of intangibles in the first half of 1997 for which comparable
amounts were not included in the results of Genzyme General in 1996. The
acquisition of Genetrix did not materially affect SG&A expenses in 1996 and 1997
due to consolidation of operations.
Research and development expenses for 1997 were $74.2 million compared
to $70.0 million in 1996, an increase of 6%, due to Genzyme General's commitment
to fund development costs of the transgenic recombinant human antithrombin III
("ATIII") program being conducted by Genzyme Transgenics Corporation ("GTC") and
increased spending on internal programs, most notably Thyrogen[R].
OTHER INCOME AND EXPENSES. Other income and expenses were a net expense
of $5.4 million (which includes a $2.0 million special charge) compared to other
income of $6.1 million in 1996. The change was due primarily to a decrease in
investment income and an increase in interest expense as well as increased
equity in net losses of unconsolidated affiliates. Investment income for 1997
was $10.0 million, compared with $13.9 million for 1996. The decrease resulted
from lower average cash and investment balances. Investment income for 1997 did
not include any material gain or loss from sales of securities. Interest expense
for 1997 was $8.1 million, compared to $6.8 million in 1996. The increase
resulted from interest on funds borrowed to finance portions of the acquisitions
of DSP and Neozyme II. Equity in net loss of unconsolidated affiliates increased
from $2.6 million in 1996 to $5.3 million in 1997. The change is primarily due
to increased losses from Genzyme General's 43% owned affiliate, GTC, and
increased losses resulting from the joint venture between Genzyme General and
GelTex Pharmaceuticals, Inc. ("GelTex") for the development and
commercialization of RenaGel[R] phosphate binder.
The net tax provision for 1997 varies from the U.S. statutory tax rate
because of the provision for state income taxes, the foreign sales corporation,
nondeductible amortization of intangibles, tax credits and Genzyme General's
share of the losses of unconsolidated affiliates. In 1997, the effective tax
rate was 37%, compared to 41% in 1996 before acquisitions. The decrease in the
rate was due to additional tax credits in 1997 as well as a change in
Massachusetts state law. The allocated tax benefit generated by GTR and GMO of
$17.7 million and $2.8 million, respectively, in 1997 and $17.0 million and
zero, respectively, in 1996 reduced Genzyme General's tax rate to 15% and 12%
in 1997 and 1996, respectively.
1996 AS COMPARED TO 1995
REVENUES. Total revenues for 1996 were $511.4 million compared to
$378.6 million in 1995, an increase of 35%. Product and service revenues were
$486.1 million in 1996 compared to $351.6 million in 1995, an increase of 38%.
Revenues from research and development contracts for 1996 were $25.3 million
compared to $27.0 million in 1995, a decrease of 6%.
Product revenues in 1996 increased 39% to $424.5 million from $304.4
million in 1995, due primarily to the addition of sales by DSP and to increased
sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Increases in sales by each
of the Diagnostic Products and Pharmaceuticals business units accounted for the
remainder of the increase in product revenues in 1996.
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GENZYME GENERAL (CONT.)
Sales of Therapeutic products in 1996 consisted entirely of sales of
Ceredase(R) enzyme and Cerezyme(R) enzyme. Through the third quarter of 1995,
Therapeutic product sales included sales of Cosmetic Grade HA Powder, which were
reclassified as Pharmaceuticals product sales beginning in the fourth quarter of
1995. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1996 increased 23%
to $264.6 million due to increased shipments resulting from the introduction of
these products in Japan and continued growth in new patient accruals in existing
markets. Genzyme General's results of operations are highly dependent on sales
of Ceredase(R) enzyme and Cerezyme(R) enzyme, which together represented 62% of
consolidated product sales in 1996 compared to 71% in 1995.
Product sales by the Surgical Products business unit for the period
beginning with the DSP acquisition on July 1, 1996 and ending December 31, 1996
were $50.7 million and were generated primarily from sales by DSP. DSP's product
sales for the first half of 1996 and for the years ending December 31, 1995 and
1994, which are not included in the results of Genzyme General, were $53.2
million, $95.2 million and $90.5 million, respectively.
Product sales by the Diagnostic products and Pharmaceuticals business
units increased 15% and 45%, respectively, over 1995. The increase in Diagnostic
Products sales resulted from growth in each of its product lines, most notably
in sales of the Direct LDLTM test and diagnostic intermediates. The increase in
Pharmaceuticals sales was generated primarily from sales of Melatonin during the
first half of 1996 and from sales of cosmetic grade HA powder. Melatonin sales
declined materially during the second half of 1996 due to declining market
demand.
Revenues for the diagnostic services business unit in 1996 increased
31% to $61.6 million, due to higher unit volumes that were primarily
attributable to the acquisition of Genetrix, which was included in Genzyme
General's results of operations from May 1, 1996 forward, and to changes in
service pricing. On November 1, 1996, the assets of GDI were sold. GDI
contributed $11.6 million in diagnostic service revenues through October 31,
1996.
International sales as a percentage of total sales in 1996 decreased to
35% from 36% in 1995, as the addition of domestic sales by DSP offset a 35%
increase in combined international sales of Ceredase(R) enzyme and Cerezyme(R)
enzyme.
Revenues from research and development contracts for 1996 decreased 6%
to $25.3 million from $27.0 million in 1995, as a decrease in revenues from
Neozyme II was partially offset by an increase in revenues from research and
development contracts with third parties. Revenues from Neozyme II decreased 18%
to $19.8 million in 1996 compared to $24.2 million in 1995, due to the
acquisition of Neozyme II in the fourth quarter.
MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 59%, level
with 1995. Genzyme General provides a broad range of health care products and
services, resulting in a range of gross margins depending on the particular
market conditions of each product or service. Product margins for 1996 were 63%,
level with 1995, as sales of higher margin products and cost reductions by both
the Pharmaceuticals and Diagnostic products business units and higher margins on
Ceredase(R) enzyme resulting from manufacturing process improvements were offset
by lower margin products acquired with DSP. Service margins for 1996 decreased
to 30% from 34% in 1995 due to the consolidation of Genetrix, which required the
operation of redundant facilities while staffing was expanded and employees
trained at the facilities that remained open following the consolidation.
SG&A expenses and amortization of intangibles for 1996 were $144.0
million compared to $102.2 million in 1995, an increase of 41%. The increase was
due primarily to the acquisition of DSP and increased staffing in support of
the growth in several product lines, most notably in support of the North
American introduction of the Sepra Products. DSP added $12.1 million in SG&A
expenses in 1996. For the first half of 1996 and for 1995, DSP incurred
SG&A expenses of $15.7 million and $25.3 million, respectively, which are not
included in the results of Genzyme General. Genetrix did not contribute
materially to SG&A expenses in 1996 due to consolidation of its operations with
Genzyme Genetics.
Research and development expenses for 1996 were $70.0 million compared
to $57.9 million in 1995, an increase of 21%, due to Genzyme General's funding
of development costs of the ATIII program being conducted by GTC and increased
spending on internal programs, most notably Thyrogen(R).
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GENZYME GENERAL (CONT.)
Genzyme recorded charges related to the following acquisitions
completed in 1996:
Genetrix. On May 1, 1996, Genzyme acquired all of the outstanding
shares of Genetrix capital stock in exchange for approximately 1,380,000 shares
of GGD Stock valued at approximately $36.5 million. Genzyme General recorded a
charge in 1996 of $1.5 million for amortization of goodwill and a restructuring
charge of $1.0 million in connection with the Genetrix acquisition.
DSP. On July 1, 1996, Genzyme acquired DSP for a total purchase price
of $252.0 million. Genzyme General recorded charges of $24.2 million for the
purchase of in-process research and development and $0.5 million for
restructuring in connection with the acquisition of DSP.
Neozyme II. On October 28, 1996, Genzyme, through a wholly-owned
subsidiary ("Acquisition Corp.") completed a tender offer for outstanding Units
of Neozyme II for $45.00 per Unit in cash. A total of 2,385,686 Units, or 98.8%,
were tendered and accepted for payment. Each Neozyme II Unit consisted of one
share of Callable Common Stock and one Callable Warrant to purchase two shares
of GGD Stock and 0.135 share of GTR Stock. On December 6, 1996, Neozyme II was
merged with and into Acquisition Corp. and the remaining outstanding shares of
Callable Common Stock (other than shares held by Genzyme and its subsidiaries)
were thereby cancelled and converted into the right to receive $29.00 per share
in cash. The Callable Warrants included in the untendered Units separated from
the shares of Callable Common Stock converted in the merger and became
exercisable on December 6, 1996. Genzyme General recorded a charge of $106.5
million for the purchase of in-process research and development in connection
with the acquisition of Neozyme II.
OTHER INCOME AND EXPENSES. Other income and expenses decreased by less
than 1% in 1996 to $6.1 million compared to $6.2 million in 1995, as increases
in interest expenses offset an 87% increase in investment income. Investment
income for 1996 was $13.9 million, compared with $7.4 million for 1995. The
increase resulted from higher average cash and investment balances. Investment
income for 1996 did not include any material gain or loss on sales of
securities. Interest expense for 1996 was $6.8 million, compared to $1.1 million
in 1995. The increase resulted from interest on funds borrowed to finance
portions of the acquisitions of DSP and Neozyme II.
The tax provision for 1996 varies from the U.S. statutory tax rate
because of the provision for state income taxes, tax credits, taxes on foreign
earnings, losses of unconsolidated affiliates and nondeductible charges in
connection with tax-free acquisitions. In 1996, the effective tax rate before
these acquisitions was 41%, compared to 38% in 1995. The increase in the rate
was due to nondeductible goodwill charges in 1996 and to the absence in 1996 of
certain operating loss carryforwards available in 1995. The tax provision in
1996 resulted from taxes on foreign earnings and taxes on earnings before
acquisition-related charges comprising charges for goodwill and incomplete
technologies accruing from the acquisitions of DSP of Genetrix. The allocated
tax benefit generated by GTR of $17.0 million in 1996 and $8.9 million in 1995
reduced Genzyme General's tax rate to 12% and 33% in 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Genzyme General had cash, cash equivalents and
investments (excluding equity securities) of $193.2 million compared to $171.7
million at December 31, 1996 an increase of $21.5 million. In 1997, operating
and financing activities provided $79.5 million and $2.8 million of cash,
respectively, while investing activities used $91.0 million of cash and
fluctuations in exchange rates caused a reduction in cash of $2.3 million.
At December 31, 1997, inventories had increased 12% to $137.7 million
from $123.4 million at December 31, 1996, due primarily to support of increased
business operations, most notably in the Therapeutics inventories as a result of
increased production of the Cerezyme(R) enzyme and in the Surgical Products
business unit in support of the introduction of Seprafilm(R) in the North
American marketplace. Genzyme General used $28.5 million for capital
acquisitions. Genzyme General used $50.3 million for net purchases of
investments. Genzyme General received $123.8 million of cash from issuances of
common stock and used $101.1 million of cash for payments of debt and capital
leases.
Genzyme General believes that its available cash, investments and cash
flow from operations will be sufficient to finance its planned operations and
capital requirements for the foreseeable future. Although Genzyme General
currently has substantial cash resources, it has committed to utilize a portion
of its resources for certain purposes, such as completing the market
introduction of the Sepra Products in the United States and Europe and making
certain payments to third parties in connection with strategic collaborations.
Genzyme General's cash resources will also be diminished upon repayment of
amounts borrowed, plus accrued interest, under the Revolving Credit Facility and
if its option to acquire the partnership interests in GDP is exercised using
cash to pay some or all of the exercise price. In addition, the liabilities or
contingencies of GTR and GMO affect Genzyme's resources or financial condition
and could affect the financial condition or results of operations of Genzyme
General. As a result, Genzyme may have to obtain additional financing. There can
be no assurance that such financing will be available on terms reasonably
acceptable to Genzyme. Genzyme General's capital requirements could differ
materially from those currently anticipated by management due to the factors
described under the "Factors Affecting Future Operating Results-Future Capital
Needs" in "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations".
For a discussion of the demands, commitments and events that may affect
the liquidity and capital resources of Genzyme Corporation including Genzyme
General, see "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations - Liquidity and
Capital Resources" included in this Annual Report.
9
10
GENZYME GENERAL (CONT.)
NEW ACCOUNTING PRONOUNCEMENTS, YEAR 2000 AND FINANCIAL REPORTING RELEASE 48
("FRR 48")
See Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations -- Liquidity and
Financial Resources included in this Annual Report.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme General could differ materially
from the results described above due to the risks and uncertainties described
below and under the heading "Management's Discussions and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of Operations -
Factors Affecting Future Operating Results" included in this Annual Report.
DEPENDENCE ON CEREZYME(R) ENZYME AND CEREDASE(R) ENZYME SALES. Genzyme
General's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme in 1997 were $332.7 million, representing 63% of Genzyme's
consolidated product sales in 1997.
To address supply constraints, Genzyme General developed Cerezyme(R)
enzyme. Patients receiving Ceredase(R) enzyme are being converted to Cerezyme(R)
enzyme; however, Genzyme General will continue to manufacture Ceredase(R) enzyme
until the process of patient conversion is completed. Any disruption in the
supply or manufacturing process of Cerezyme(R) enzyme may have a material
adverse effect on revenue. In addition, Genzyme General may be required to
record a charge to earnings for the equipment used for and the inventory of
Ceredase(R) enzyme remaining upon completion of the patient conversion process,
and, if the conversions proceed more rapidly than anticipated, the remaining
inventory of Ceredase(R) enzyme and the corresponding charge to earnings could
be material.
NO ASSURANCE OF COMMERCIAL SUCCESS OF THE SEPRA PRODUCTS. In August
1996, Genzyme received marketing approval from the FDA for Seprafilm(R) and
commenced commercial sales of Seprafilm(R) in the U.S. on behalf of GV II. The
successful commercialization of Seprafilm(R) and other Sepra Products will
depend on many factors, including: (i) the content and timing of decisions made
by the FDA and other regulatory authorities, (ii) market acceptance of the Sepra
Products by surgeons and hospital administrators, (iii) Genzyme General's
ability to deploy its sales force to market the Sepra Products, (iv) Genzyme
General's ability to supply sufficient product to meet market demand, (v) the
number and relative efficacy of competitive products that may subsequently enter
the market and (vi) the degree to which third party reimbursement is available
for the Sepra Products. There can be no assurance that Genzyme General will be
successful in its efforts to commercialize the Sepra Products.
TECHNOLOGY TRANSFERRED TO GENZYME DEVELOPMENT PARTNERS, L.P. Genzyme
organized GDP a special purpose research and development entity and transferred
technology and commercial rights to certain products that Genzyme previously had
under development. Genzyme has an option to purchase the limited partnership
interests in GDP under certain circumstances. It is uncertain at this time
whether Genzyme will exercise this option. If Genzyme does not
10
11
GENZYME GENERAL (CONT.)
exercise this option, it will have limited rights in revenues generated from the
sale of GDP's products. If Genzyme does exercise this option, it will be
required to make substantial cash payments or to issue shares of GGD Stock, or
both. Cash payments will diminish Genzyme's capital resources. Payments in GGD
Stock could result in dilution to holders of GGD Stock and could negatively
affect the market price of such stock.
POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS The market
prices for securities of biotechnology companies have been volatile. Factors
such as announcements of technological innovations or new commercial products by
Genzyme or its competitors, governmental regulation, patent or proprietary
rights developments, public concern as to the safety or other implications of
biotechnology products and market conditions in general may have a significant
impact on the market price of GGD Stock. No cash dividends have been paid to
date on GGD Stock, nor does Genzyme General anticipate paying cash dividends on
such stock in the foreseeable future.
11
12
GENZYME GENERAL
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) December 31,
- -----------------------------------------------------------------------------------------------------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 66,276 $ 77,220
Short-term investments ......................................................... 35,294 56,290
Accounts receivable, net ....................................................... 116,056 115,156
Inventories .................................................................... 137,708 123,442
Prepaid expenses and other current assets ...................................... 15,941 99,953
Due from Genzyme Molecular Oncology ............................................ 5,434 --
Due from Genzyme Tissue Repair ................................................. 1,213 1,604
Deferred tax assets - current .................................................. 27,601 17,493
---------- ----------
Total current assets ......................................................... 405,523 491,158
Property, plant and equipment, net ................................................ 365,337 371,610
Long-term investments ............................................................. 91,627 38,215
Notes receivable - related parties ................................................ 4,601 --
Intangibles, net .................................................................. 243,071 247,745
Deferred tax assets - noncurrent .................................................. 35,988 42,221
Investments in equity securities................................................... 30,047 10,813
Other noncurrent assets ........................................................... 26,862 27,757
---------- ----------
Total assets ................................................................. $1,203,056 $1,229,519
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ............................................................... $ 18,409 $ 20,522
Accrued expenses ............................................................... 66,865 67,645
Income taxes payable ........................................................... 11,157 17,926
Deferred revenue - related parties and unaffiliated entities ................... 217 2,693
Current portion of long-term debt and capital lease obligations ................ 887 999
---------- ----------
Total current liabilities .................................................... 97,535 109,785
Noncurrent liabilities:
Long-term debt and capital lease obligations ................................... 117,978 223,998
Other noncurrent liabilities ................................................... 6,667 11,511
---------- ----------
Total liabilities ............................................................ 222,180 345,294
Commitments and contingencies (See Notes) .........................................
Division equity (Note L) .......................................................... 980,876 884,225
---------- ----------
Total liabilities and division equity......................................... $1,203,056 $1,229,519
========== ==========
The accompanying notes are an integral
part of these combined financial statements
12
13
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Net product sales ............................... $ 529,927 $ 424,483 $ 304,373
Net service sales ............................... 55,835 61,638 47,230
Revenues from research and development contracts:
Related parties ................................ 8,041 23,011 26,758
Other .......................................... 3,400 2,310 202
--------- --------- ---------
Total revenues................................. 597,203 511,442 378,563
Operating costs and expenses:
Cost of products sold ........................... 206,028 155,930 113,964
Cost of services sold ........................... 35,451 42,889 31,137
Selling, general and administrative ............. 173,020 135,153 97,520
Research and development (including research and
development related to contracts) .............. 74,192 69,969 57,907
Amortization of intangibles ..................... 12,534 8,849 4,647
Purchase of in-process research and development . -- 130,639 14,216
Other ........................................... -- 1,465 --
--------- --------- ---------
Total operating costs and expenses ............ 501,225 544,894 319,391
--------- --------- ---------
Operating income (loss) ............................. 95,978 (33,452) 59,172
Other income (expenses):
Equity in net loss of unconsolidated affiliates . (5,281) (2,633) (1,810)
Other ........................................... (2,000) 1,711 1,608
Investment income ............................... 10,038 13,909 7,428
Interest expense ................................ (8,108) (6,842) (1,069)
--------- --------- ---------
Total other income (expenses) ................. (5,351) 6,145 6,157
--------- --------- ---------
Income (loss) before income taxes ................... 90,627 (27,307) 65,329
Provision for income taxes .......................... (33,601) (20,206) (30,506)
--------- --------- ---------
Net income (loss) ................................... 57,026 (47,513) 34,823
Tax benefit allocated from Genzyme Tissue Repair..... 17,666 17,011 8,857
Tax benefit allocated from Genzyme Molecular Oncology 2,755 -- --
--------- --------- ---------
Net income (loss) attributable to GGD Stock ......... $ 77,447 $ (30,502) $ 43,680
========= ========= =========
The accompanying notes are an integral part of these
combined financial statements
13
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GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
------- -------- -------
Net income (loss) attributable to GGD Stock ....................... $77,447 $(30,502) $43,680
======= ======== =======
Income (loss) per Genzyme General common share - basic:
Net income (loss) ............................................ $ 1.01 $ (0.45) $ 0.79
======= ======== =======
Weighted average shares outstanding .......................... 76,531 68,289 55,531
======= ======== =======
Income (loss) per Genzyme General common and common equivalent
share - diluted:
Net income (loss) ............................................ $ 0.98 $ (0.45) $ 0.68
======= ======== =======
Adjusted weighted average shares outstanding ................. 78,925 68,289 63,967
======= ======== =======
The accompanying notes are an integral part of
these financial statements
14
15
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1997 1996 1995
--------- --------- ---------
Net income (loss) ........................................... $ 57,026 $ (47,513) $ 34,823
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ............................ 43,653 29,257 22,010
Loss on disposal of fixed assets ......................... 1,234 42 743
Non-cash compensation expense ............................ 2,881 148 131
Accrued interest/amortization on bonds ................... (571) 1,110 (279)
Provisions for bad debts and inventory ................... 14,100 9,521 8,105
Purchase of in-process research and development .......... -- 130,639 14,216
Deferred income taxes .................................... (3,969) (28,558) 4,428
Minority interest in net loss of subsidiaries ............ -- -- (1,608)
Equity in net loss of unconsolidated affiliates .......... 5,281 3,646 1,810
Gain on investment in unconsolidated affiliate ........... -- (1,013) --
Other .................................................... 528 (1,558) 1,568
Increase (decrease) in cash from working capital changes:
Accounts receivable ................................... (10,052) (18,318) (14,486)
Inventories ........................................... (29,149) (40,547) (18,142)
Prepaid expenses and other assets ..................... (8,774) (379) (1,778)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue ........................ 8,945 43,342 14,423
Due from Genzyme Tissue Repair ........................ 391 430 (1,863)
Due from Genzyme Molecular Oncology ................... (2,011) -- --
--------- --------- ---------
Net cash provided by operating activities ............. 79,513 80,249 64,101
INVESTING ACTIVITIES:
Purchases of investments .................................... (131,197) (117,089) (130,253)
Sales and maturities of investments ......................... 80,867 195,952 39,064
Acquisition of property, plant and equipment ................ (28,456) (42,540) (48,694)
Acquisitions, net of acquired cash and assumed liabilities .. -- (299,078) (322)
Additional investment in unconsolidated affiliates .......... (6,449) (3,600) (4,428)
Loans to affiliates ......................................... (4,601) (1,676)
Other ....................................................... (1,173) (7,621) (1,172)
--------- --------- ---------
Net cash used by investing activities ................. (91,009) (275,652) (145,805)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 123,837 39,119 179,623
Proceeds from issuance of common stock by a subsidiary ...... -- -- 1,107
Issuance of debt ............................................ -- 480,000 --
Payments of debt and capital lease obligations .............. (101,118) (340,333) (41,163)
Net cash allocated to Genzyme Tissue Repair ................. (14,892) (11,714) --
Net cash allocated to Genzyme Molecular Oncology ............ (5,000) -- --
--------- --------- ---------
Net cash provided by financing activities ............. 2,827 167,072 139,567
Effect of exchange rate changes on cash ......................... (2,275) 1,920 (781)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................ (10,944) (26,411) 57,082
Cash and cash equivalents at beginning of period ................ 77,220 103,631 46,549
--------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 66,276 $ 77,220 $ 103,631
========= ========= =========
The accompanying notes are an integral part of these
combined financial statements.
15
16
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
------- ------- -------
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................................... $ 8,684 $ 6,169 $ 9,944
Income taxes ............................................... 18,887 14,133 19,581
Supplemental disclosures of non-cash transactions:
Acquisition liability - Note D
Allocation of tax benefit - Note B
Strategic Financial Provisions - Note C
Warrant exercise - Note L
Debt conversion - Note L
The accompanying notes are an integral part of these
combined financial statements.
16
17
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General, a division of Genzyme, is a global diversified human health
care business with product development, manufacturing and marketing
capabilities. Genzyme is focusing its efforts on three broad business areas --
therapeutic products, surgical products and diagnostics.
BASIS OF PRESENTATION
The combined financial statements of Genzyme General include the balance sheets,
results of operations and cash flows of Genzyme's therapeutic products, surgical
products, diagnostics and corporate operations during the periods presented.
Genzyme General's financial statements are prepared using the amounts included
in Genzyme's consolidated financial statements. Corporate allocations reflected
in these financial statements are determined based upon methods which management
believes to be reasonable.
PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme General include the accounts of all
of the majority and wholly-owned subsidiaries and joint ventures of Genzyme,
except for the accounts of Genzyme Tissue Repair and, beginning on June 18,
1997, the accounts of Genzyme Molecular Oncology. The equity method is used to
account for investments in companies and joint ventures in which Genzyme General
has a substantial ownership interest (20% to 50%), or in which Genzyme General
participates in policy decisions. Investments of less than 20% are reported at
fair value. (See Note H., "Investments" to Genzyme's Consolidated Financial
Statements (the "Consolidated Financial Statements" which are incorporated
herein by reference.) All significant intercompany items and transactions have
been eliminated in combination. Certain items in the combined financial
statements for the years ended December 31, 1995 and 1996 have been reclassified
to conform with the December 31, 1997 presentation.
FINANCIAL INFORMATION
Genzyme provides to holders of GGD Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for Genzyme General. Notwithstanding the attribution of
assets and liabilities, including contingent liabilities, between Genzyme
General, GTR and GMO for the purposes of preparing their respective financial
statements, this attribution will not affect legal title to such assets or
responsibility for such liabilities of Genzyme or any of its subsidiaries.
Holders of GGD Stock are common stockholders of Genzyme and continue to be
subject to all the risks associated with an investment in Genzyme. Liabilities
or contingencies of Genzyme General, GTR or GMO could affect the financial
condition or results of operations of the other divisions. Accordingly, the
Genzyme General combined financial statements should be read in connection with
Genzyme's consolidated financial statements included in this Annual Report.
Accounting policies and financial information specific to Genzyme General are
presented in these Genzyme General combined financial statements. Accounting
policies and financial information relevant to Genzyme, Genzyme General, GTR and
GMO collectively are presented in the consolidated financial statements of
Genzyme Corporation and subsidiaries. The Company prepares the financial
statements of the division in accordance with generally accepted accounting
principles, the management and accounting policies of Genzyme and the divisional
accounting policies approved by the Genzyme Board. (See Note A. "Summary of
Significant Accounting Policies" to the Consolidated Financial Statements, which
is incorporated herein by reference). Except as otherwise provided in such
policies, the management and accounting policies applicable to the presentation
of the financial statements of Genzyme General may be modified or rescinded at
the sole discretion of the Genzyme Board without approval of the stockholders,
subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders.
DIVIDEND POLICY
Under the terms of the Genzyme Charter, dividends to be paid to the holders of
GGD Stock will be limited to the lesser of funds of Genzyme legally available
for the payment of dividends and the Available GGD Dividend Amount, as defined
in the Genzyme Charter. Although there is no requirement to do so, the Genzyme
Board would declare and pay cash dividends on GGD Stock, if any, based primarily
on earnings, financial condition, cash flow and business requirements of Genzyme
General. Genzyme General has never paid any cash dividends on shares of its
capital stock. Genzyme General currently intends to retain its earnings to
finance future growth and, therefore, does not anticipate paying any cash
dividends on GGD Stock in the forseeable future.
17
18
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GTR and GMO give
effect to the management and accounting policies adopted by the Genzyme Board in
connection with the re-designation of Genzyme common stock as GGD Stock and the
creation of GTR Stock and GMO Stock and are reported in lieu of consolidated per
share data. The Company computes net income (loss) per share for each division
by dividing the earnings attributable to each series of stock by the weighted
average number of shares of that stock outstanding during the period, for basic
earnings per share, and by the weighted average shares of that stock, plus other
potentially dilutive securities outstanding during the applicable period for
diluted earnings per share. Earnings (loss) attributable to GGD Stock, GTR Stock
and GMO Stock equals the respective division's net income or loss for the
relevant period determined in accordance with generally accepted accounting
principles in effect at such time, adjusted by the amount of tax benefits
allocated to or from the other divisions pursuant to the management and
accounting policies adopted by the Genzyme Board.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted net income per share is similar to the
previously reported fully diluted earnings per share except that the new
treasury stock method used in determining the dilutive effect of options uses
the average market price for the period rather than the higher of the average
market price or the ending market price. All net income (loss) per common share
amounts have been restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
1997 1996 1995
---- ---- ----
Net income (loss) attributable to GGD
Stock-basic and diluted (1) ............... $ 77,447 $(30,502) $ 43,680
======== ======== ========
Shares used in net income per common
share-basic ............................... 76,531 68,289 55,531
Effect of dilutive securities:
Employee and director stock options ..... 2,387 - 2,757
Warrants ................................ 7 - 1,897
6 3/4% convertible subordinated
notes (1) .............................. - - 3,782
-------- -------- --------
Dilutive potential common shares (2) ..... 2,394 - 8,436
-------- -------- --------
Shares used in net income per common
share-diluted (1,2) ...................... 78,925 68,289 63,967
======== ======== ========
Net income (loss) per common share
- basic (1) .............................. $ 1.01 $ (0.45) $ 0.79
======== ======== ========
Net income (loss) per common share -
diluted (1,2) ............................ $ 0.98 $ (0.45) $ 0.68
======== ======== ========
- ------------
(1) In March 1996, $100.0 million of 6 3/4% convertible subordinated notes
issued by Genzyme in October 1991 were converted into approximately
3,782,000 shares of GGD Stock and 2,553 shares of GTR Stock. For the
diluted EPS calculation in 1995, no adjustment to Genzyme General's net
income is required in assuming the conversion of the notes as of
January 1, 1995 because substantially all of the interest costs
incurred on the notes were capitalized.
(2) In computing diluted EPS for 1996, exercise of approximately 6,506,000
options and 35,000 warrants are not assumed as the result would be
antidilutive due to Genzyme General's net loss.
Options to purchase approximately 5,921,000 shares of GGD Stock in 1997,
3,824,000 shares in 1996, and 2,837,000 shares of stock in 1995 were outstanding
during the years then ended but were not included in the year-to-date
calculation of diluted income per share because the options' exercise price was
greater than the average market price of the common shares during those periods.
Warrants to purchase 40,000 shares of GGD stock exercisable as of July 31, 1997
were not included in the year-to-date calculation of diluted income per share
because the exercise price of the warrants was greater than the average market
price of the common shares during those periods.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Genzyme General has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation". Genzyme General has disclosed
herein pro forma net income and pro forma earnings per share in the footnotes
using the fair value based method for 1997, 1996 and 1995.
TRANSLATION OF FOREIGN CURRENCIES
Exchange gains and losses on intercompany balances of a long-term investment
nature are charged to division equity. Transaction gains and losses are included
in the results of operations. Net transaction losses were $0.1 million in 1997,
$1.0 million in 1996 and $0.8 million in 1995. Division equity includes
cumulative foreign currency translation adjustments of $(12.4) million and
$(0.7) million at December 31, 1997 and 1996, respectively.
NOTE B. RELATED PARTY TRANSACTION POLICIES
Genzyme allocates certain corporate costs for general and administrative,
research and development and cash management services to the divisions. Genzyme
files a consolidated tax return and allocates income taxes to the divisions in
accordance with the policies described below. Effective upon the merger of GMO
and PharmaGenics, Inc. ("PharmaGenics"), the Genzyme Board amended certain of
the policies which govern the management of the divisions and added certain new
policies governing interdivision transactions. The policies summarized below,
with the exception of Interdivision Asset Transfers, may be further modified or
rescinded by action of the Genzyme Board, or the Genzyme Board may adopt
additional policies, without approval of the stockholders of Genzyme, subject
only to the Genzyme Board's fiduciary duty to the Genzyme stockholders. In
addition, generally accepted accounting principles require that any change in
policy be preferable (in accordance with such principles) to the previous
policy.
18
19
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
FINANCIAL MATTERS
The Company manages the financial activities of Genzyme General, GTR and GMO.
These financial activities include the investment of cash; the issuance,
repayment and repurchase of short-term and long-term debt; and the issuance and
repurchase of equity instruments.
Loans may be made from time to time between divisions. Any such loan of $1.0
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1.0 million will require approval of
the Genzyme Board, which approval shall include a determination by the Genzyme
Board that the material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating division and to
holders of the common stock representing such division. As of December 31,
1997, a $2.5 million inter-divisional note receivable due from Genzyme
Molecular Oncology (related to GMO's acquisition of PharmaGenics in June 1997)
remained outstanding at an interest rate of 6.15% per annum.
SHARED SERVICES
Genzyme General operates as a division of Genzyme with its own personnel and
financial resources, however, Genzyme General has access to Genzyme's corporate
general and administrative functions, the costs of which are allocated to each
division in a reasonable and consistent manner based on utilization by the
division of the services to which such costs relate. Management believes that
such allocation is a reasonable estimate of such expenses.
Genzyme's corporate general and administrative and research and development
functions and certain selling and marketing efforts are performed primarily by
Genzyme General. General and administrative and selling and marketing expenses
have been allocated to GTR and GMO based upon utilization of such services as if
each division operated independently. Genzyme's allocations to GTR for SG&A
expenses were $7.7 million in 1997, $9.1 million in 1996 and $4.4 million in
1995. Genzyme allocated $2.1 million, $0.2 million and $0.1 million of SG&A
expenses to Genzyme Molecular Oncology in 1997, 1996 and 1995, respectively.
Genzyme's allocations to GTR and GMO for research and development expenses were
(i) in the case of GTR, $7.7 million in 1997, $6.9 million in 1996 and $4.7
million in 1995 and (ii) in the case of GMO, $5.3 million in 1997, $0.8 million
in 1996 and $0.4 million in 1995. Amounts due from GTR for operating activities
were $1.2 million and $1.6 million at December 31, 1997 and 1996 and in the case
of GMO, $5.4 million at December 31, 1997.
INTERDIVISION INCOME TAX ALLOCATIONS
Genzyme General is included in the consolidated U.S. federal income tax return
filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions
by determining the tax provision of each division, in accordance with generally
accepted accounting principles, as if it were a separate taxpayer. Accordingly,
the realizability of deferred tax assets is assessed at the division level. The
sum of division tax provisions may not equal the consolidated tax provision
under this approach.
Pursuant to the management and accounting policies adopted by the Genzyme Board,
as of the end of any fiscal quarter of Genzyme, any projected tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to any
other division which can utilize the benefit without any compensating payment or
allocation. The treatment of such allocation for purposes of earnings per share
computation is discussed in Note A, "Net Income (Loss) Per Share" in Genzyme's
Consolidated Financial Statements.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme General has free access to all technology and know-how of Genzyme that
may prove useful in Genzyme General's business, subject to any obligations or
limitations applicable to Genzyme.
INTERDIVISION ASSET TRANSFERS
The policy described below regarding the transfer of assets between divisions
may not be changed by the Genzyme Board without the approval of the holders of
GTR Stock and GMO Stock, each voting as a separate class; provided, however,
that if a policy change affects GTR or GMO alone, only holders of shares
representing the affected division will be entitled to a class vote on such
matter.
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program, the
likelihood and timing of any such realization and other matters that the Genzyme
Board and its financial advisors, if any, deem relevant. The consideration for
such
19
20
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
reallocation may be paid by one division to another in cash or other
consideration, in lieu of cash, with a value equal to the fair market value of
the assets being reallocated or, in the case of a reallocation of assets from
Genzyme General to GTR or GMO, the Genzyme Board may elect to account for such
reallocation of assets as an increase in Designated Shares representing the
division to which such assets are reallocated. Notwithstanding the foregoing, no
Key GMO Program, as defined in the management and accounting policies, may be
transferred out of GMO without a class vote of the holders of GMO Stock and no
Key GTR Program, as defined in the management and accounting policies, may be
transferred out of GTR without a class vote of the holders of GTR Stock.
OTHER INTERDIVISION TRANSACTIONS
From time to time, a division may engage in transactions with one or more other
divisions or jointly with one or more other divisions and one or more third
parties. Such transactions may include agreements by one division to provide
products and services for use by another division, and joint ventures or other
collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Research and development
performed by one division for the benefit of another division will be charged to
the division for which work is performed on a cost basis. The division
performing the research will not recognize revenue as a result of performing
such research. Other interdivisional transactions shall be on terms and
conditions that would be obtainable in transactions negotiated with unaffiliated
third parties. Any interdivisional transaction to be performed on terms and
conditions other than those previously set forth and that is material to one or
more of the participating divisions will require the approval of the Genzyme
Board, which approval shall include a determination by the Genzyme Board that
the transaction is fair and reasonable to each participating division and to
holders of the common stock representing each division.
If a division (the "purchasing division") requires any product or service from
which another division (the "selling division") derives revenue from
sales to third parties (a "commercial product or service"), the purchasing
division may solicit from the selling division a bid to provide such commercial
product or service in addition to any bids solicited by the purchasing division
from third parties. Subject to determination by the Genzyme Board that the bid
of selling division is fair and reasonable to each division and to their
respective stockholders and that the purchasing division is willing to accept
the selling division's bid, the purchasing division may accept any bid deemed to
offer the most favorable terms and conditions for providing the commercial
product or service sought by the purchasing division.
NOTE C. STRATEGIC FINANCIAL PROVISIONS
In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges
mainly associated with its Pharmaceutical and Surgical Products businesses and
the sale of GDI, which was sold in 1996. The Pharmaceutical business will now
focus on products that are more consistent with Genzyme General's long-term
business strategy of moving towards higher-value products and away from fine
chemical and bulk pharmaceuticals. This change in strategy resulted in a $18.1
million charge to cost of products sold primarily related to the melatonin, bulk
pharmaceuticals and fine chemical product lines which are being discontinued. In
addition, Genzyme General recorded charges of $5.5 million to cost of products
sold and $3.5 million to SG&A expense primarily related to the manufacturing and
selling of the Sepracoat(TM) product line, which was also discontinued after an
advisory panel of the FDA recommended against granting market approval of this
product in 1997. Genzyme General also recorded a $2.0 million charge to other
expense related to the uncertainty of collection on certain notes receivable.
20
21
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE D. ACQUISITIONS
Incorporated by reference herein are the disclosures related to the acquisitions
of IG, Genetrix, DSP and Neozyme II included in Note C., "Acquisitions" to the
Consolidated Financial Statements which are incorporated herein by reference.
PRO FORMA FINANCIAL INFORMATION
The following pro forma information presents the results of operations of
Genzyme General, for the year ended December 31, 1996, with pro forma
adjustments as if the acquisitions of Genetrix, DSP and Neozyme II had been
consummated as of January 1, 1996. This pro forma information does not purport
to be indicative of what would have occurred had the acquisitions been made as
of that date or of results which may occur in the future. The pro forma
financial information does not include charges for in-process technology of
$24.2 million and $106.5 million, related to the DSP and Neozyme II
acquisitions, respectively, which were recognized as expense upon consummation
of each acquisition in 1996.
YEAR ENDED DECEMBER 31,
------------------------
1996
----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
- -------------------------------------------------------------------------------
Pro forma revenues ................................... $ 556,274
Pro forma net income ................................. 65,146
Pro forma net income per Genzyme General
common share - basic ............................... $ 0.95
Pro forma net income per Genzyme General
common and common equivalent share - diluted ....... $ 0.88
NOTE E. MAJORITY-OWNED SUBSIDIARY
IG LABORATORIES, INC.
IG was an approximately seventy-percent-owned subsidiary for the period from
January 1, 1995 through October 1, 1995. (See Note C., "Acquisitions" to the
Consolidated Financial Statements which are incorporated herein by reference).
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme General's trade receivables primarily represent amounts due from
healthcare service providers and companies and institutions engaged
in research, development, or production of pharmaceutical and biopharmaceutical
products. Genzyme General performs ongoing credit evaluations of its customers
and generally does not require collateral. Accounts receivable are stated at
fair value after reflecting the allowance for doubtful accounts of $11.3 million
and $16.1 million at December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, accumulated amortization of intangible assets
was $38.6 million and $26.2 million, respectively.
NOTE G. INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996
------------------------------------------------
Raw materials ........ $ 48,149 $ 30,243
Work-in-process ...... 30,264 36,516
Finished products .... 59,295 56,683
-------- --------
$137,708 $123,442
======== ========
21
22
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE H. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following:
(DOLLARS IN THOUSANDS) 1997 1996
---------------------------------------------------------------
Plant and equipment .............. $ 232,405 $ 163,413
Land and buildings ............... 138,696 173,296
Leasehold improvements ........... 63,244 55,828
Furniture and fixtures ........... 13,522 12,996
Construction in-progress ......... 24,853 53,298
--------- ---------
472,720 458,831
Less accumulated depreciation .. (107,383) (87,221)
--------- ---------
Property, plant and equipment, net $ 365,337 $ 371,610
========= =========
Depreciation expense was $31.1 million, $22.1 million, and $17.3 million in
1997, 1996 and 1995, respectively.
Genzyme General has a production facility at Allston Landing in Boston,
Massachusetts to produce Cerezyme(R) enzyme and other products. The Company had
capitalized approximately $154.1 million of gross expenditures related to this
building and approximately $64.3 million of gross process validation and
optimization costs related to this and other manufacturing facilities. In 1997,
1996 and 1995, the Company capitalized approximately $0.5 million, $2.2 million
and $9.0 million of interest costs, respectively, relating to this and other
facility construction. The Company began depreciating this facility in July 1996
upon receipt of FDA approval for the facility, using the units of production
method of depreciation. Depreciation expense for 1997 and 1996 related to this
facility was $6.1 million and $1.7 million, respectively.
NOTE I. INVESTMENTS
INVESTMENTS
Investments in marketable securities at December 31 consisted of the following:
1997 1996
--------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
----------------------------------------------------------------------------------------
Short Term:
Certificates of deposit ................ $ - $ - $ 1,564 $ 1,564
Corporate notes ........................ 35,298 35,294 54,732 54,726
------- ------- ------- -------
$35,298 $35,294 $56,296 $56,290
======= ======= ======= =======
Long Term:
Corporate notes ........................ $69,932 $69,872 $16,481 $16,485
U.S. Treasury notes .................... 21,667 21,755 22,010 21,730
------- ------- ------- -------
$91,599 $91,627 $38,491 $38,215
======= ======= ======= =======
Equity securities....................... $29,609 $30,047 $10,905 $10,813
======= ======= ======= =======
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
Investment income for 1997, 1996 and 1995 includes net realized losses of
$0, $47,000 and $110,000, respectively. Net realized gains included in
investment income for 1995 were $1.4 million. The realized gain on the sale of
the investment in Nabi was reported as a separate line item in the Company's
statement of operations for 1996.
Gross unrealized holding losses of $2.9 million and gross unrealized holding
gains of $3.4 million were recorded at December 31, 1997 in division equity as
compared to unrealized gross holding losses of $2.7 million and unrealized
holding gains of $2.3 million recorded at December 31, 1996.
Information regarding the range of contractual maturities of investments in debt
securities at December 31, 1997 and 1996 is as follows:
1997 1996
-------------------- --------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
----------------------------------------------------------------------------------------
Within 1 year ............................ $ 35,298 $ 35,294 $56,296 $56,290
After 1 year through 2 years ............. 62,856 62,806 11,399 11,415
After 2 years through 10 years ........... 28,743 28,821 27,092 26,800
-------- -------- ------- -------
$126,897 $126,921 $94,787 $94,505
======== ======== ======= =======
Investments in marketable securities are attributed to either Genzyme General,
GTR or GMO. The Company holds certain strategic investments in unconsolidated
entities which may be attributed to either Genzyme General, GTR or GMO.
22
23
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
The disclosures related to the Genzyme General's investments in GTC,
ABIOMED, Inc., Aronex Pharmaceuticals, Inc., Celtrix Pharmaceuticals, Inc.,
Geltex Pharmaceuticals, Inc., and Nabi (formerly North American Biologicals,
Inc.) are included in Note H., "Investments" to the Consolidated Financial
Statements and are incorporated by reference herein.
NOTE J. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1997 1996
--------------------------------------------------
Professional fees .... $ 7,057 $ 3,757
Compensation ......... 19,865 21,252
Royalties ............ 8,151 8,210
Rebates .............. 4,575 7,604
Interest ............. 381 1,677
Other ................ 26,836 25,145
------- -------
$66,865 $67,645
======= =======
NOTE K. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1997 1996
-----------------------------------------------------------------------------
Revolving Credit Facility .................. $ 95,000 $ 200,000
Mortgage note payable, matures June 13, 1999 19,833 20,375
Other mortgage notes payable ............... 3,856 3,983
--------- ---------
118,689 224,358
Less current portion ....................... (711) (999)
--------- ---------
$ 117,978 $ 223,359
========= =========
In January 1997, Genzyme General repaid $100.0 million of its debt outstanding
plus accrued interest of $0.5 million.
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1998-$711,000, 1999-$114,394,000,
2000-$153,000, 2001-$160,000 and 2002-$170,000 and thereafter $3,101,000.
Although the Company retains responsibility for the repayment of all long-term
debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated
Financial Statements which are incorporated herein by reference), such debt is
allocated to either Genzyme General, GTR or GMO for reporting purposes based on
the intended use of the funds borrowed under each instrument.
CREDIT FACILITIES, INTEREST RATE HEDGE AGREEMENTS, MORTGAGE NOTES AND CONVERSION
OF $100.0 million, 6-3/4% CONVERTIBLE SUBORDINATED NOTES
The disclosures related to Genzyme's Credit Facilities, and Interest Rate Hedge
Agreements, Mortgage Notes and conversion of $100.0 million Convertible
Subordinated Notes (the "Notes") (which were converted in March 1996 into shares
of GGD Stock and GTR Stock) and the GTR and GMO Private Placements are included
in Note J., "Long-Term Debt and Leases" to the Consolidated Financial Statements
which are incorporated herein by reference.
OPERATING LEASES
Total rent expense under operating leases was $14.4 million, $10.7 million, and
$8.6 million in 1997, 1996 and 1995, respectively. Genzyme General leases
facilities and personal property under certain operating leases in excess of one
year.
23
24
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
FUTURE MINIMUM PAYMENTS DUE UNDER CAPITAL AND OPERATING LEASES:
Future minimum payments due under Genzyme General's capital and operating leases
are as follows:
CAPITAL OPERATING
(DOLLARS IN THOUSANDS) LEASES LEASES
-----------------------------------------------------------------------------------
1998 ............................................... $182 $ 13,256
1999 ............................................... 10 12,674
2000 ............................................... -- 11,532
2001 ............................................... -- 8,481
2002 ............................................... -- 8,155
Thereafter ......................................... -- 77,824
---- --------
Total minimum payments ............................. 192 131,922
Less: interest ..................................... (10) --
---- --------
$182 $131,922
==== ========
Although the Company retains responsibility for the repayment of all long-term
debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated
Financial Statements which are incorporated herein by reference), such debt is
allocated to either Genzyme General, GTR or GMO for reporting purposes based on
the intended use of the funds borrowed under each instrument.
NOTE L. DIVISION EQUITY
The following presents the division equity of Genzyme General for the periods
presented:
(DOLLARS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of period ............................. $ 884,225 $ 659,281 $395,649
Net income (loss) .......................................... 57,026 (47,513) 34,823
Allocation of tax benefits generated by GTR ................ 17,666 17,011 8,857
Allocation of tax benefits generated by GMO ................ 2,755 -- --
Issuance of common stock under stock plans ................. 35,963 18,581 32,083
Exercise of warrants ....................................... 855 106,164 6,264
Allocation to GTR for designated shares ..................... (14,892) (11,714) --
Shares issued in connection with acquisitions .............. -- 36,991 23,821
Allocation of acquired deferred tax asset in connection with
the acquisition of PharmaGenics, Inc. .................... 2,900 -- --
Tax benefit of disqualified dispositions ................... 4,127 3,500 5,500
Issuance of common stock in connection with the conversion
of $100.0M 6 3/4% Convertible Subordinated Notes .......... -- 101,400 --
Shares issued in public offering ........................... -- -- 141,276
Equity adjustments ......................................... (9,749) 524 11,008
--------- --------- --------
$ 980,876 $ 884,225 $659,281
========= ========= ========
At December 31, 1997 and 1996, Genzyme General had 200,000,000 shares of GGD
Stock authorized and approximately 77,693,000 and 75,537,000 shares,
respectively, issued.
Included in division equity are the cumulative foreign currency translation
adjustments of $(12.4) million and $(0.7) million at December 31, 1997 and
1996, respectively.
In March 1996, holders of the Notes converted such Notes into GGD Stock and GTR
Stock. Holders of such Notes received 37.826 shares of GGD Stock and 2.553
shares of GTR Stock in conversion of each $1,000 Note.
In June 1996, the Genzyme Board declared a 2-for-1 stock split of shares of GGD
Stock to be effected by means of a 100% stock dividend payable on July 25, 1996
to stockholders of record on July 11, 1996. On July 25, 1996, a total of
34,669,435 shares of GGD Stock were distributed to stockholders in connection
with the dividend. All share and per share amounts have been restated to
reflect this split.
24
25
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
PREFERRED STOCK, DIRECTOR'S DEFERRED COMPENSATION PLAN, STOCK RIGHTS, STOCK
OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, CREATION OF GGD STOCK AND GTR STOCK,
WARRANTS, GTR DESIGNATED SHARES AND GMO DESIGNATED SHARES The disclosures
relating to Genzyme's preferred stock, Directors' Deferred Compensation Plan,
stock rights, stock options, Employee Stock Purchase Plan, creation of GGD Stock
and GTR Stock, and warrants are included in Note K., "Stockholders' Equity" to
the Consolidated Financial Statements which are incorporated herein by
reference.
At December 31, 1997, approximately 18,135,000 shares of GGD Stock were reserved
for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997
Equity Incentive Plan, 1988 Director Stock Option Plan, as amended, and 1990
Employee Stock Purchase Plan, as amended, and upon the exercise of outstanding
warrants. At December 31, 1997, approximately 13,347,000 options to purchase
shares of GGD Stock were outstanding.
Pursuant to the Genzyme Charter, GTR and GMO Designated Shares are authorized
shares of GTR Stock and GMO Stock which are not issued and outstanding, but
which the Genzyme Board may from time to time issue, sell or otherwise
distribute without allocating the proceeds or other benefits of such issuance,
sale or distribution to GTR or GMO. GTR and GMO Designated Shares are created in
certain circumstances when cash or other assets are transferred from Genzyme
General to GTR or GMO.
In October 1996, the Genzyme Board approved the allocation of up to $20 million
in cash from Genzyme General to GTR to provide initial funding for GTR's joint
venture with Diacrin, of which $7.0 million has been allocated to GTR in
exchange for 721,455 GTR Designated Shares.
In 1997, the Genzyme Board approved the allocation of up to $25 million in cash
from Genzyme General to GMO (the "GMO Equity Line"). The amount available was
reduced to $5.0 million as a result of the issuance of the GMO debentures in
August 1997. No draws have been made under the GMO Equity Line to date.
As of December 31, 1997, there were approximately 885,000 GTR Designated Shares
reserved for issuance. During 1997, the Company distributed approximately
2,292,000 GTR Designated Shares as a dividend to Genzyme General shareholders.
As of December 31, 1997, there were 6,000,000 GMO Designated Shares reserved
for issuance. There have been no issuances of GMO Designated Shares to date.
Further disclosures relating to Genzyme's stock options and GTR and GMO
Designated Shares are included in Note K., "Stockholders' Equity" to the
Consolidated Financial Statements which are incorporated herein by reference.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related Interpretations in accounting for
its four stock-based compensation plans, the 1990 Equity Incentive Plan (a stock
option plan), the 1997 Equity Incentive Plan (a stock option plan), the 1988
Director Stock Option Plan (a stock option plan) and the 1990 Employee Stock
Purchase Plan (a stock purchase plan) and, accordingly, no compensation expense
has been recognized for options granted and shares purchased under the
provisions of these plans for options granted to employees with an exercise
price equal to fair market value. Had compensation expense for the stock-based
compensation plans been determined based on the fair value at the grant dates
for options granted and shares purchased under the plans consistent with the
provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock-based Compensation", Genzyme General's net (loss) income
and (loss) earnings per share would have been as follows:
DECEMBER 31,
-------------------------------
(Amounts in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
GENZYME GENERAL:
Net income (loss):
As reported ............................... $77,447 $(30,502) $43,680
Pro forma ................................. $65,440 $(40,558) $40,429
Basic earnings per share:
As reported ............................... $ 1.01 $ (0.45) $ 0.79
Pro forma ................................. $ 0.86 $ (0.59) $ 0.73
Diluted earnings per share:
As reported ............................... $ 0.98 $ (0.45) $ 0.68
Pro forma ................................. $ 0.83 $ (0.59) $ 0.63
For the assumptions used in the SFAS 123 calculations for Genzyme General for
the three years ended December 31, 1997, 1996 and 1995 -- see Note K.,
"Stockholders Equity" to the Consolidated Financial Statements which are
incorporated herein by reference.
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995 and additional awards are
anticipated in future years.
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties include
the following:
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------
Fees for research and development activities:
Neozyme II .................................. $ -- $19,799 $24,198
Research contracts .......................... 8,041 3,212 2,560
------- ------- -------
$ 8,041 $23,011 $26,758
======= ======= =======
The disclosures related to Neozyme II and Genzyme General participation in
research contracts are included in Note H., "Investments in GTC and RenaGel
LLC," and Note L., "Research and Development Agreements Genzyme Development
Partners, L.P." to the Consolidated Financial Statements which are
incorporated herein by reference.
NOTE N. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme General has been subject to legal proceedings and
claims arising in connection with its business. At December 31, 1997, there were
no asserted claims against Genzyme General which, in the opinion of management,
if adversely decided would have a material adverse effect on Genzyme General's
financial position and results of operations.
25
26
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE O. INCOME TAXES
Income (loss) before income taxes and the related income tax expense (benefit)
are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------------------------------------------------------------
Domestic (1) ......... $81,805 $(37,615) $62,633
Foreign .............. 8,822 10,308 2,696
------- -------- -------
Total .......... $90,627 $(27,307) $65,329
======= ======== =======
Currently payable:
Federal ........... $ 31,102 $ 37,985 $ 18,780
State ............. 3,498 6,889 5,949
Foreign ........... 2,971 3,616 1,349
-------- -------- --------
Total current .. 37,571 48,490 26,078
Deferred:
Federal ........... (3,723) (28,448) 4,507
State ............. (247) 164 (79)
-------- -------- --------
Total deferred . (3,970) (28,284) 4,428
-------- -------- --------
Provision for income
taxes ............. $ 33,601 $ 20,206 $ 30,506
======== ======== ========
(1) Includes $130.6 million and $14.2 million in charges for purchased
research and development and acquisition expenses in 1996 and 1995,
respectively.
Provisions for income taxes were at rates other than the U.S. federal statutory
tax rate for the following reasons:
1997 1996 1995
----------------------------------------------------------------------------------------------------
Tax at U.S. statutory rate ................................... 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less than 80%-owned
subsidiaries with no current tax benefit .................... 1.1 0.8 0.8
State taxes, net ............................................. 3.0 5.2 5.2
Foreign sales corporation .................................... (2.4) (2.1) (1.4)
Nondeductible amortization ................................... 3.1 2.1 1.4
Benefit of tax credits ....................................... (1.8) -- --
Other, net ................................................... (0.9) 2.2 0.7
Utilization of operating loss carryforwards .................. -- (2.6) (3.8)
------- ------- ------
Effective tax rate before certain charges .................. 37.1 40.6 37.9
Gross charge for purchased research and development net of
related tax benefits ......................................... -- 33.4 8.8
------- ------- ------
37.1 74.0 46.7
Allocated tax benefits generated by Genzyme Tissue Repair .... (19.5) (62.3) (13.6)
Allocated tax benefits generated by Genzyme Molecular Oncology (3.1) -- --
------- ------- ------
Effective tax rate attributable to Genzyme General Stock ..... 14.5% 11.7% 33.1%
========================================================================================================
26
27
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
At December 31 the components of net deferred tax assets were as follows:
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards .......................... $ 4,909 $10,427
Tax credits ............................................... 5,091 --
Deferred gain ............................................. 2,237 --
Intangible amortization ................................... 28,730 29,901
Investments in unconsolidated subsidiaries ................ 1,323 --
Realized and unrealized capital losses .................... 16,987 17,603
Reserves and other ........................................ 23,716 17,687
Allocation of tax benefit from Genzyme Tissue Repair ...... 15,515 13,266
Allocation of tax benefit from Genzyme Molecular Oncology.. 3,252 --
- -------------------------------------------------------------------------------------------------
Gross deferred tax asset .................................. 101,760 88,884
Valuation allowance ....................................... (14,914) (15,299)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset .................................... 86,846 73,585
Deferred tax liabilities:
Depreciable assets ........................................ (23,257) (13,871)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset .................................... $ 63,589 $59,714
=================================================================================================
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses related to the purchase of
in-process research and development, the Company placed a valuation allowance of
$14.9 million and $15.3 million for December 31, 1997 and December 31, 1996,
respectively, against otherwise recognizable deferred tax assets.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
At December 31, 1997 Genzyme General had U.S. net operating loss and tax credit
carryforwards of $14.0 million and $5.1 million, respectively, for income tax
purposes. These carryforwards expire from 2002 to 2012. Utilization of tax net
operating loss carryforwards may be limited under Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). Tax credits of $2.5 million
expire in 2012. The remaining $2.6 million of tax credits carry forward
indefinitely.
NOTE P. BENEFIT PLANS
The disclosures relating to Genzyme's domestic employee savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") and
defined-benefit pension plans are included in Note O., "Benefit Plans" to the
Consolidated Financial Statements which are incorporated herein by reference.
Genzyme General contributed $1.3 million, $1.1 million, and $0.7 million to the
401(k) Plan in 1997, 1996 and 1995, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and its foreign subsidiaries. Pension expense for Genzyme
General related to these plans for 1997, 1996 and 1995 was approximately
$1,110,000, $601,000 and $498,000, respectively. Pension costs are funded as
accrued. Actuarial and other disclosures regarding the plans are not presented
because the plans are not material.
27
28
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE Q. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
Genzyme General operates in the healthcare industry and manufactures and markets
its products in two major geographic areas, the United States and Europe.
Genzyme General's principal manufacturing facilities are located in the United
States, United Kingdom, Switzerland and Germany. Genzyme General purchases
products from its British and Swiss subsidiaries for sale to customers in the
United States. Transfer prices from the foreign subsidiaries are intended to
allow Genzyme to produce profit margins commensurate with its sales and
marketing effort. Genzyme's Netherlands subsidiary is the primary European
distributor of Genzyme General's therapeutic products.
Certain information by geographic area follows (dollars in thousands):
UNITED
STATES NETHERLANDS UK OTHER ELIMINATION COMBINATION
----------- ----------- ------- ------- ----------- -----------
1997
Net sales -
unaffiliated customers ..................... $ 423,912 $ 40,436 $32,852 $88,562 $ -- $ 585,762
Transfers between geographic areas .......... 119,391 63,100 28,205 2,634 (213,330) --
----------- -------- ------- ------- --------- -----------
543,303 103,536 61,057 91,196 (213,330) 585,762
Pre-tax income .............................. 78,942 1,539 3,304 2,699 4,143 90,627
Net income .................................. 70,008 948 2,172 1,235 3,084 77,447
Assets ...................................... 1,144,583 30,638 69,125 39,304 (80,594) 1,203,056
Liabilities ................................. 180,117 28,329 2,058 22,114 (10,438) 222,180
1996
Net sales -
unaffiliated customers ..................... $ 354,323 $ 56,865 $21,217 $53,716 $ -- $ 486,121
Transfers between geographic areas .......... 101,786 33,659 30,435 3,615 (169,495) --
----------- -------- ------- ------- --------- -----------
456,109 90,524 51,652 57,331 (169,495) 486,121
Pre-tax income .............................. (30,124) 920 8,349 1,807 (8,259) (27,307)
Net income .................................. (31,956) 520 8,349 844 (8,259) (30,502)
Assets ...................................... 1,170,826 33,500 69,379 41,511 (85,697) 1,229,519
Liabilities ................................. 283,756 31,930 2,241 27,410 (43) 345,294
1995
Net sales -
unaffiliated customers ..................... $ 247,138 $ 70,532 $13,669 $20,264 $ -- $ 351,603
Transfers between geographic areas .......... 74,697 -- 19,543 4,115 (98,355) --
----------- -------- ------- ------- --------- -----------
321,835 70,532 33,212 24,379 (98,355) 351,603
Pre-tax income .............................. 65,941 836 93 1,759 (3,300) 65,329
Net income .................................. 45,856 540 93 491 (3,300) 43,680
Assets ...................................... 873,252 27,703 54,595 25,692 (126,656) 854,586
Liabilities ................................. 156,650 26,652 1,962 10,041 -- 195,305
Substantially all revenue from research and development contracts is earned in
the United States. Entities comprising Other include Genzyme General's
operations in Germany, France, Switzerland, Japan, Italy, Belgium, Sweden,
Canada, Israel, Spain, Argentina and Brazil. Export sales from the United States
were $36.2 million, $27.4 million and $20.5 million in 1997, 1996 and 1995,
respectively. Export sales by Genzyme's Netherlands subsidiary amounted to $40.4
million, $56.9 million and $66.2 million in 1997, 1996 and 1995, respectively.
Genzyme General's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. In 1997, 1996 and 1995 Cerezyme(R)
enzyme and Ceredase(R) enzyme represented 63%, 62% and 71% of total product
sales, respectively. In 1997, 1996 and 1995, Genzyme General marketed its
Cerezyme(R) enzyme and Ceredase(R) enzyme products directly to physicians,
hospitals and treatment centers, and sold products representing approximately
18%, 12% and 14%, respectively, of net revenue to an unaffiliated distributor.
Otherwise, the credit risk associated with trade receivables is mitigated due to
the large number of customers and their broad dispersion over different
industries and geographic areas.
28
29
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE R. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1997 and 1996 are displayed in the
following table.
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- ---------
1997
Net sales .......................................... $144,606 $147,614 $ 148,841 $ 156,142
Gross profit ....................................... 87,084 91,454 94,387 71,358
Net income (1) ..................................... 21,238 23,283 24,357 8,569
Income per share (2,3):
Basic ............................................ 0.28 0.31 0.32 0.11
Diluted .......................................... 0.27 0.30 0.31 0.11
1996
Net sales .......................................... $111,783 $113,988 $ 141,022 $ 144,649
Gross profit ....................................... 64,171 67,260 73,867 82,004
Net income (loss) (4) ............................. 19,034 20,284 (5,908) (63,912)
Income (loss) per share (2,3):
Basic ............................................ 0.30 0.30 (0.09) (0.91)
Diluted .......................................... 0.26 0.27 (0.09) (0.91)
- ---------
(1) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million
resulting from certain strategic financial provisions recorded in
December 1997 (see Note C., "Strategic Financial Provisions" to the
Combined Financial Statements which are incorporated herein by
reference).
(2) Income (loss) per share data for the first, second and third quarters
of 1997 and for all quarters of 1996 has been restated to reflect the
adoption in December 1997 of SFAS 128, "Earnings Per Share" and is pro
forma. See Note A., "Summary of Significant Accounting Policies" to
the Combined Financial Statements which are incorporated herein by
reference.
(3) Cumulative quarterly income per share data does not equal the annual
amounts due to changes in the average common and common equivalent
shares outstanding.
(4) Includes pre-tax charges in the third and fourth quarters of 1996 of
$24.2 million and $106.5 million, respectively, for acquired incomplete
technology (see Note C., "Acquisitions" to the Consolidated Financial
Statements which are incorporated herein by reference).
NOTE S. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The disclosures relating to off-sheet balance sheet financial instruments are
included in Note D., "Off-Balance-Sheet Financial Instruments" to the
Consolidated Financial Statements which are incorporated herein by reference.
29
30
GENZYME GENERAL
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying combined balance sheets of Genzyme General (as
described in Note A) as of December 31, 1997 and 1996, and the related combined
statements of operations and cash flows, and the combined financial statement
schedule for each of the three years in the period ended December 31, 1997. The
combined financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility is to
express an opinion on these combined financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme General present
fairly, in all material respects, the financial position of Genzyme General as
of December 31, 1997 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the combined financial statement schedule taken as a whole presents
fairly, in all material respects, the information required to be included
therein.
As more fully described in Note A to these financial statements, Genzyme General
is a business group of Genzyme Corporation; accordingly, the combined financial
statements of Genzyme General should be read in conjunction with the audited
consolidated financial statements of Genzyme Corporation and Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
30
31
GENZYME GENERAL DIVISION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
==========================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Allowance for doubtful accounts $16,100,400 $ 2,355,000 - $7,156,400 $11,299,000
Inventory Reserve $ 3,247,200 $15,585,000(1) - $3,840,000 $14,992,200
Year ended December 31, 1996:
Allowance for doubtful accounts $ 7,833,800 $ 8,093,600 $2,534,000(3) $2,361,000(2) $16,100,400
Inventory Reserve $ 3,082,200 $ 1,426,600 - $1,261,600 $ 3,247,200
Year ended December 31, 1995:
Allowance for doubtful accounts $ 5,992,300 $ 5,180,000 - $3,338,500(2) $ 7,833,800
Inventory Reserve $ 1,131,000 $ 2,920,700 - $ 969,500 $ 3,082,200
- -----------
(1) Includes $13.4 million of strategic financial provisions (See Note C,
"Strategic Financial Provisions" to the Genzyme General's Combined
Financial Statements).
(2) Uncollectible accounts written off, net of recoveries.
(3) Reserve acquired in acquisition.
32
GENZYME CORPORATION
SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Revenues:
Net product sales ........................... $ 529,927 $ 424,483 $ 304,373 $ 238,645 $ 183,366
Net service sales ........................... 67,158 68,950 52,450 50,010 50,511
Revenues from research and development
contracts:
Related parties ........................... 8,356 23,011 26,758 20,883 34,162
Other ..................................... 3,400 2,310 202 1,513 2,332
--------- --------- --------- --------- ---------
Total revenues........................... 608,841 518,754 383,783 311,051 270,371
Operating costs and expenses:
Cost of products sold (1) ................... 206,028 155,930 113,964 92,226 64,704
Cost of services sold ....................... 47,289 54,082 35,868 32,403 34,558
Selling, general and administrative (1) ..... 200,476 162,264 110,447 80,990 72,752
Research and development (including research
and development related to contracts) ...... 89,558 80,849 68,845 55,334 48,331
Amortization of intangibles ................. 17,245 8,849 4,647 4,741 5,964
Purchase of in-process research and
development (2) ........................... 7,000 130,639 14,216 11,215 49,000
Other (3) ................................... -- 1,465 -- -- 26,517
--------- --------- --------- --------- ---------
Total operating costs and expenses....... 567,596 594,078 347,987 276,909 301,826
--------- --------- --------- --------- ---------
Operating income (loss) ........................ 41,245 (75,324) 35,796 34,142 (31,455)
Other income (expenses):
Equity in net loss of unconsolidated
subsidiaries (12,258) (4,360) (1,810) (1,353) --
Other (1) ................................... (2,000) 1,711 1,608 (9,752) 9,192
Investment income ........................... 11,409 15,341 8,814 9,101 12,209
Interest expense ............................ (12,667) (6,990) (1,109) (1,354) (2,500)
--------- --------- --------- --------- ---------
Total other income (expenses)............. (15,516) 5,702 7,503 (3,358) 18,901
--------- --------- --------- --------- ---------
Income (loss) before income taxes .............. 25,729 (69,622) 43,299 30,784 (12,554)
Benefit (provision) for income taxes ........... (12,100) (3,195) (21,649) (14,481) 6,459
--------- --------- --------- --------- ---------
Net income (loss)(4,6) ......................... $ 13,629 $ (72,817) $ 21,650 $ 16,303 $ (6,095)
========= ========= ========= ========= =========
31
33
GENZYME CORPORATION
SELECTED FINANCIAL DATA (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA: 1997 1996 1995 1994 1993
----------- ---------- --------- -------- ---------
ATTRIBUTABLE TO GENZYME GENERAL:
Net income (loss) attributable to Genzyme
General Division Common Stock ("GGD Stock")
(1,2,3,4,6) ..................................... $ 77,447 $ (30,502) $ 43,680 $ 32,054 $ 18,020
=========== ========== ========= ======== =========
Per Genzyme General common share-basic (1,2,4,5,6):
Net income (loss) .............................. $ 1.01 $ (0.45) $ 0.79 $ 0.67 $ 0.37
=========== ========== ========= ======== =========
Weighted average shares outstanding ............. 76,531 68,289 55,531 48,141 48,075
=========== ========== ========= ======== =========
Per Genzyme General common and common
equivalent share-diluted (4,5,6):
Net income (loss) ............................... $ 0.98 $ (0.45) $ 0.68 $ 0.58 $ 0.36
=========== ========== ========= ======== =========
Adjusted weighted average shares outstanding .... 78,925 68,289 63,967 55,321 56,282
=========== ========== ========= ======== =========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss attributable to Genzyme Tissue
Repair Division Common Stock
("GTR Stock") (4,6) ............................ $ (45,984) $ (42,315) $ (22,030) $(15,751) $ (24,115)
=========== ========== ========= ======== =========
Per GTR basic and diluted common share (6) ....... $ (3.07) $ (3.38) $ (2.28) $ (4.40) $ (7.43)
=========== ========== ========= ======== =========
Weighted average basic and diluted shares
outstanding .................................... 14,976 12,525 9,659 3,578 3,245
=========== ========== ========= ======== =========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss attributable to Genzyme Molecular
Oncology Division Common Stock ("GMO Stock")(6).. $ (19,578) $ (1,003) $ (464) $ (37) --
=========== ========== ========= ========
Pro forma per GMO basic and diluted common
share (6,7) ..................................... $ (5.01) $ (0.26) $ (0.12) $ (0.01) --
=========== ========== ========= ========
Pro forma basic and diluted shares
outstanding (7) ................................. 3,910 3,910 3,910 3,910 --
=========== ========== ========= ========
CONSOLIDATED BALANCE SHEET DATA: DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- -------
Cash and investments (8) ................... $ 246,341 $ 187,955 $326,236 $153,460 $168,953
Working capital ............................ 350,822 395,605 352,410 103,871 99,605
Total assets ............................... 1,295,453 1,270,508 905,201 658,408 542,052
Long-term debt, convertible debentures and
capital lease obligations excluding
current portion (9,10) .................... 170,276 241,998 124,473 126,729 144,674
Stockholders' equity (9,11) ................ 1,012,050 902,309 705,207 418,964 334,072
There were no cash dividends paid.
NOTES TO SELECTED FINANCIAL DATA:
(1) In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges
mainly associated with its Pharmaceutical and Surgical Products businesses
and the sale of Genetic Design, Inc. ("GDI"), which was sold in 1996. This
resulted in (i) an $18.1 million charge to cost of products sold primarily
related to the melatonin, bulk pharmaceuticals and fine chemical product
lines which are being discontinued by Genzyme General; (ii) charges of $5.5
million to cost of products sold and $3.5 million to selling, general and
administrative ("SG&A") expense primarily related to the manufacturing and
selling of the Sepracoat(TM) product line, which was also discontinued
after an advisory panel of the U.S. Food and Drug Administration
recommended against granting market approval of this product
32
34
in 1997; and (iii) a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
(2) Genzyme acquired: in 1997, the assets of PharmaGenics, Inc.
("PharmaGenics"); in 1996, Deknatel, Snowden Pencer, Inc. ("DSP") and
all of the Callable Common Stock of Neozyme II Corporation ("Neozyme
II"); in 1995, the publicly-held, minority interest in IG Laboratories,
Inc. ("IG"); in 1994, all of the outstanding stock of BioSurface
Technology, Inc. ("BioSurface"); and, in 1993, all of the rights to the
two remaining development programs of Neozyme I Corporation ("Neozyme
I"). In connection with these transactions, all of which were accounted
for as purchases, Genzyme charged to operations the following amounts
which represented the purchase of in-process research and development:
1997, $7.0 million; 1996, $130.6 million; 1995, $14.2 million; 1994,
$11.2 million; and 1993, $49.0 million.
(3) In 1996, Genzyme incurred restructuring charges of $1.5 million related
to the consolidation of laboratory operations in its diagnostic
services business and to the consolidation of foreign operations in its
surgical products business in connection with certain acquisitions. In
1993, Genzyme incurred restructuring charges of $2.8 million related to
the consolidation of laboratory operations in its diagnostic services
business and wrote off $23.7 million for the value of impaired goodwill
associated primarily with IG's acquisition of GDI in 1992.
(4) Net income (loss) attributable to Genzyme General Division ("Genzyme
General") and Genzyme Tissue Repair Division ("GTR") and net income
(loss) per common and common equivalent share of GGD Stock and GTR
Stock for the year ended December 31, 1993 give effect to the
provisions of the Management and Accounting Policies adopted by the
Genzyme Board of Directors (the "Genzyme Board") in connection with the
creation of GTR and accordingly, are pro forma presentations.
(5) Reflects the July 25, 1996 2-for-1 stock split of GGD Stock effected by
means of a 100% stock dividend paid to stockholders of record on July
11, 1996. All share and per share amounts have been restated to
reflect this split.
(6) In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share" which established a different method of
computing net income per share ("EPS") than is required under the
provisions of Accounting Principles Board Opinion No. 15 ("APB 15").
The Company adopted SFAS 128 in the fiscal quarter ending December 31,
1997. All historical EPS data presented herein has been restated to
conform to the provisions of SFAS 128. (See Note A., "Summary of
Significant Accounting Policies" to the Consolidated Financial
Statements.)
(7) Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or
"GMO") is a division of Genzyme Corporation. GMO was part of Genzyme
General from December 1, 1994 (Date of Inception) to June 18, 1997.
Therefore, pro forma net loss per share data is presented for GMO Stock
for all periods presented as there were no shares of GMO Stock
outstanding prior to June 18, 1997. In each year, approximately
3,910,000 shares of GMO Stock, which represents the shares of GMO Stock
issued to effect the merger of PharmaGenics, Inc. ("PharmaGenics") with
and into Genzyme on June 18, 1997, have been used for the pro forma
loss per basic and diluted share calculation.
(8) Cash and investments includes cash, cash equivalents, and short and
long-term investments and excludes investments in equity securities.
(9) In October 1991, the Company issued $100.0 million of 6 3/4%
convertible subordinated notes due October 2001 and received net
proceeds of $97.3 million. The notes were converted into shares of GGD
stock in March 1996. In March 1996, the convertible subordinated notes
were converted into approximately 3,782,000 shares of GGD Stock and
2,553 shares of GTR Stock. See Note J., "Long-Term Debt and Leases" for
disclosures relating to the GTR and GMO private placements.
(10) In June 1996, the Company's $15.0 million credit line with a commercial
bank was increased to $215.0 million in connection with the acquisition
of DSP in July 1996. In November 1996, this credit line was refinanced
with a syndicated group of banks and the line of credit was increased
to $225.0 million (the "Revolving Credit Facility"). As of December
1996, Genzyme had $218.0 million outstanding under the Revolving Credit
Facility. As of December 31, 1997, Genzyme had $118.0 million
outstanding under the Revolving Credit Facility. (See Note J.,
"Long-Term Debt and Leases" to the Consolidated Financial Statements.)
(11) In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public
for $7.75 per share. Net proceeds from the offering after underwriting
discounts, commissions and offering costs were $29.0 million. In
October 1995, Genzyme General completed the sale of 5,750,000 shares
of GGD Stock for net proceeds of $141.3 million.
33
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
This discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of
Genzyme Corporation ("Genzyme" or the "Company") as of the filing date of this
Annual Report. The actual results for Genzyme 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".
Stockholders and potential investors should consider carefully each of these
risks and uncertainties in evaluating the financial condition and results of
operations of Genzyme.
Genzyme is a biotechnology company that develops innovative products
and services for major unmet medical needs. Genzyme has three divisions: Genzyme
General Division ("Genzyme General"), which develops and markets therapeutic and
surgical products and diagnostic services and products; Genzyme Tissue Repair
Division ("Genzyme Tissue Repair" or "GTR"), which develops and markets
biological products for the treatment of cartilage damage, severe burns, chronic
skin ulcers and neurodegenerative diseases; and Genzyme Molecular Oncology
Division ("Genzyme Molecular Oncology" or "GMO"), which was formed in June 1997
in connection with the acquisition of PharmaGenics, Inc. ("PharmaGenics") and
develops gene-based approaches to cancer therapy through genomics, gene therapy
and a small molecule drug discovery program. Genzyme owns approximately 43% of
the outstanding shares of the common stock of Genzyme Transgenics Corporation
("GTC"). GTC applies transgenic technology to enable the development and
production of recombinant proteins and monocolonal antibodies for medical uses.
Primedica Corporation, GTC's contract research organization, provides
preclinical development and testing services to pharmaceutical, biotechnology,
medical device and other companies. GTC is also developing idiotypic vaccines in
collaboration with the National Cancer Institute.
Genzyme Corporation provides separate financial statements for the
Company and its subsidiaries on a consolidated basis and for each of Genzyme
General, GTR and GMO. The financial statements of each division include the
financial position, results of operations and cash flows of programs and
products allocated to the division under the Company's Restated Articles of
Organization, as amended (the "Genzyme Charter"), and the management and
accounting policies adopted by the Genzyme Board of Directors (the "Genzyme
Board") to govern the relationship of the divisions. The financial information
of Genzyme General, GTR and GMO, taken together, include all accounts which
comprise the consolidated financial information presented for Genzyme and its
subsidiaries.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management
considers necessary in reviewing Genzyme's consolidated results of operations.
Detailed discussion and analysis of each division's results of operations are
provided in the respective Management's Discussion and Analysis of Results of
Operations and Financial Condition for each division.
In the fourth quarter of 1997, Genzyme General recorded $29.2 million
of charges mainly associated with its Pharmaceutical and Surgical Products
businesses and the sale of Genetic Design, Inc.("GDI") which was sold in 1996.
The Pharmaceutical business will now focus on products that are more consistent
with Genzyme General's long-term business strategy of moving towards
higher-value products and away from fine chemical and bulk pharmaceuticals. This
change in strategy resulted in a $18.1 million charge to cost of products sold
primarily related to the melatonin, bulk pharmaceuticals and fine chemical
product lines which are being discontinued. In addition, Genzyme General
recorded charges of $5.5 million to cost of products sold and $3.5 million to
selling, general and administrative("SG&A") expense primarily related to the
manufacturing and selling of the Sepracoat(TM) product line, which was also
discontinued after an advisory panel of the U.S. Food and Drug Administration
("FDA") recommended against granting marketing approval of this product in 1997.
Genzyme General also recorded a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
Because of the strategic changes in Genzyme General's business the
financial condition and results of operations will now be discussed differently
than in previous years. Genzyme General is now focusing its efforts within three
business areas - therapeutics, surgical products and diagnostics.
34
36
GENZYME CORPORATION (CONT.)
1997 AS COMPARED TO 1996
REVENUES. Total revenues for 1997 were $608.8 million compared to
$518.8 million in 1996, an increase of 17%. Product and service revenues were
$597.1 million in 1997, compared to $493.4 million in 1996, an increase of 21%.
Revenues from research and development contracts for 1997 were $11.8 million
compared to $25.3 million in 1996, a decrease of 53%.
Products revenues consist of sales by Genzyme General. Product
revenues in 1997 increased 25% to $529.9 million from $424.5 million in 1996,
due primarily to increased sales of Cerezyme(R) enzyme and a full year of sales
by DSP, which was acquired by the Company in July 1996.
Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme by Genzyme General
increased 26% to $332.7 million in 1997 from $264.6 million in 1996, due to
continued growth in new patient accruals in existing markets. Genzyme's results
of operations are highly dependent on sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme, which together represented 63% of consolidated product sales
in 1997 compared to 62% in 1996. In October 1996, Genzyme General received FDA
approval to manufacture Cerezyme(R) enzyme in its large-scale manufacturing
plant located in Boston, Massachusetts. Having achieved the ability to produce
uninterrupted supply of Cerezyme(R) enzyme at the plant, Genzyme General
commenced the process of converting patients receiving Ceredase(R) enzyme to
Cerezyme(R) enzyme. The conversion of patients from Ceredase(R) enzyme to
Cerezyme(R) enzyme is substantially complete in the United States. Genzyme
General may be required to record a charge to earnings for the equipment used
exclusively for and any inventory of Ceredase(R) enzyme remaining upon
completion of the patient conversion process and, if the conversions proceed
more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme and
the corresponding charge to earnings could be material.
Genzyme General's Surgical Products business unit was formed in July
1996 by Genzyme General following the acquisition of DSP and combines the
business of DSP with Genzyme General's hyaluronic acid-based products designed
to limit postoperative adhesions (the "Sepra Products"). Sepra Products
primarily consist of sales of Seprafilm(R). Product sales by the Surgical
Products business unit for 1997 were $100.8 million as compared to $50.7 million
for period from July 1, 1996, the date of the acquisition of DSP, through
December 31, 1996. Surgical Products sales consisted primarily of sales of
cardiovascular fluid management products, surgical closures and surgical
instruments. These product sales declined 12% in the second half of 1997 in
comparison to the same period of 1996 due to a loss of volume and severe price
competition in the fluid management business. DSP's product sales for the first
half of 1996, which are not included in the results of Genzyme General, were
$53.2 million.
Service revenues primarily consist of genetic testing services by
Genzyme General and sales of GTR's autologous cultured chondrocytes
("Carticel(TM) AuCC") and Epicel [SM] services. Service revenues for genetic
testing in 1997 decreased 9% primarily due to the loss of revenue from GDI,
which was sold in November 1996, offset in part by higher unit volumes that
were primarily attributable to the acquisition of Genetrix, Inc. ("Genetrix")
which was included in Genzyme General's results of operations from May 1, 1996
forward.
International sales as a percentage of total sales in 1997 increased to
36% from 35% in 1996, due primarily to a 32% increase in combined international
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, offset in part by additional
domestic sales by DSP.
Revenues from research and development contracts are primarily
attributable to Genzyme General. Revenues from research and development
contracts for 1997 decreased 55% to $11.4 million from $25.3 million in 1996,
due primarily to the absence of revenue from Neozyme II which was acquired by
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GENZYME CORPORATION (CONT.)
Genzyme in the fourth quarter of 1996. This decrease was offset in part by
increases in revenues from research and development contracts with third
parties. Revenues from Neozyme II were $19.8 million in 1996.
MARGINS AND OPERATING EXPENSES. Gross margins for 1997 were 58%, as
compared to 57% in 1996. Excluding the effects of special charges, gross
margins were 62% in 1997 compared to 57% in 1996. Genzyme provides a broad
range of health care products and services, resulting in a range of gross
margins depending on the particular market conditions of each product or
service. Product margins for 1997 decreased to 61% from 63% in 1996. Excluding
the effects of special charges, product margins in 1997 were 66%. The increase
in product margins before special charges in 1997 is primarily due to increased
sales volume of Cerezyme[R] enzyme offset in part by a full year of sales of
lower margin DSP products. Service margins for 1997 were 30%, compared to 22% in
1996 due to the consolidation of Genetrix, the sale of GDI in 1996 and the
resulting elimination of redundant facilities and staffing.
SG&A expenses and amortization of intangibles for 1997 were $217.7
million compared to $171.1 million in 1996, an increase of 27%. Excluding
special charges, SG&A expenses increased by 21% over 1996. The increase was due
primarily to the acquisition of DSP and increased staffing in support of the
growth in several product lines, most notably in support of the North American
introduction of Seprafilm[R] and increased surgeon training costs related to
Carticel(TM) AuCC. DSP added $16.7 million in SG&A expenses and amortization of
intangibles in the first half of 1997 for which comparable amounts were not
included in the results of Genzyme General in 1996. The acquisition of Genetrix
did not materially affect SG&A expenses in 1996 and 1997 due to consolidation of
operations. GMO incurred $5.1 million in amortization of intangibles in 1997 as
a result of the acquisition of PharmaGenics, and there was no similar amount in
1996.
In 1997, GMO recorded a $7.0 million charge for the purchase of
in-process technology which has no alternative future use, as part of the
acquisition of PharmaGenics.
Research and development expenses for 1997 were $89.6 million compared
to $80.8 million in 1996, an increase of 11%, due to Genzyme General's
commitment to fund development costs of the transgenic recombinant human
antithrombin III ("ATIII") program being conducted by GTC and increased spending
on internal programs, most notably Thyrogen[R].
OTHER INCOME AND EXPENSES. Other income and expenses were a net expense
of $15.5 million (which includes a $2.0 million special charge) compared to
other income of $5.7 million in 1996. The change was due primarily to a decrease
in investment income and an increase in interest expense as well as increased
equity in net losses of unconsolidated affiliates. Investment income for 1997
was $11.4 million, compared with $15.3 million for 1996. The decrease resulted
from lower average cash and investment balances. Investment income for 1997 did
not include any material gain or loss from sales of securities. Interest expense
for 1997 was $12.7 million, compared to $7.0 million in 1996. The increase
resulted from interest on funds borrowed to finance portions of the acquisitions
of DSP and Neozyme II and interest related to convertible notes of GTR and GMO
issued in 1997. Equity in net loss of unconsolidated affiliates increased from
$4.3 million in 1996 to $12.3 million in 1997. The change is primarily due to
increased losses from the joint venture established between Genzyme Tissue
Repair and Diacrin Inc., ("Diacrin") to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans, increased losses from GTC and losses resulting
from the joint venture between Genzyme General and GelTex Pharmaceuticals Inc.
("GelTex") for the development and commercialization of RenaGel[R] phosphate
binder.
The tax provision for 1997 varies from the U.S. statutory tax rate
because of the provision for state income taxes, nondeductible interest, the
foreign sales corporation, nondeductible amortization of intangibles, tax
credits and Genzyme's share of the losses of unconsolidated affiliates. In 1997,
the effective tax rate was 37%, compared to 41% in 1996. The decrease in the
rate was due to additional tax credits in 1997 as well as a change in
Massachusetts state law.
1996 COMPARED TO 1995
REVENUES. Total revenues for 1996 were $518.8 million compared to
$383.8 million in 1995, an increase of 35%. Product revenues consisted of
product sales by Genzyme General which increased 39% to $424.5 million in 1996
from $304.4 million in 1995. The increase resulted primarily from the addition
of sales from DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R)
enzyme. Sales of Cerczyme(R) enzyme and Ceredase(R) enzyme by Genzyme General
increased 23% to $264.6 million in 1996 from $215.4 million in 1995.
Service revenues consisted of sales of genetic diagnostic testing
services by Genzyme General's Diagnostic Services business unit and sales of
Genzyme Tissue Repair's Carticel(TM) AuCC and Epicel(SM) Service. Service
revenues in
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GENZYME CORPORATION (CONT.)
1996 increased 31% to $69.0 million from $52.5 million in 1995, due primarily to
higher unit volumes in the Diagnostic Services business unit due primarily to
the acquisition of Genetrix.
Revenues from research and development contracts for 1996 were
attributable entirely to Genzyme General. Revenues from research and development
contracts decreased 7% to $25.3 million in 1996 from $27.0 million in 1995. The
decrease was due to the acquisition of Neozyme II in the fourth quarter of 1996.
MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 57%,
compared to 58% for 1995. Product margins for 1996 were 63%, level with 1995, as
increased sales of higher margin products from the Company's existing portfolio
were offset by lower margin products acquired with DSP. Service margins for 1996
decreased to 22% from 32% in 1995 due primarily to increased costs associated
with sales of Carticel(TM) AuCC and increased costs during the consolidation
period associated with Genzyme General's acquisition of Genetrix.
SG&A expenses for 1996 were $162.3 million compared to $110.4 million
in 1995, an increase of 47%. The increase resulted primarily from the
acquisitions of DSP and Genetrix and increased staffing in support of the growth
in several product lines and the growth in sales of Carticel(TM) AuCC.
Research and development expenses for 1996 were $80.8 million compared
to $68.8 million in 1995, an increase of 17%. The increase was primarily due to
Genzyme General's commitment to fund development costs of the ATIII program
being conducted by GTC and increased spending on internal programs.
Genzyme recorded the following acquisition-related charges in 1996:
$24.2 million and $106.5 million for the purchase of in-process research and
development in connection with the acquisitions of DSP and Neozyme II,
respectively; $8.8 million for the amortization of intangible assets including
goodwill recorded in connection with the acquisitions of Genetrix, DSP and, in
1995, the publicly-held, minority interest in IG; and $1.5 million for
restructuring charges incurred in connection with the acquisitions of DSP and
Genetrix.
OTHER INCOME AND EXPENSES. Other income and expenses were $5.7 million
in 1996, compared to $7.5 million in 1995, a 24% decrease. The decrease was
primarily the result of increases in interest expenses and Genzyme's equity in
the net loss of GTC which offset a 74% increase in investment income. Interest
expense for 1996 was $7.0 million, compared to $1.1 million in 1995. The
increase resulted from interest on funds borrowed to finance portions of the
acquisitions of DSP and Neozyme II.
The tax provision for 1996 varies from the U.S. statutory tax rate
because of the provision for state income taxes, tax credits and taxes on
foreign earnings, losses of unconsolidated affiliates and nondeductible charges
in connection with tax-free acquisitions. In 1996, the effective tax rate before
these acquisitions was 41%, compared to 37% in 1995. The increase in the rate
was due to nondeductible goodwill charges in 1996 and to the absence in 1996 of
certain operating loss carryforwards available in 1995. The tax provision in
1996 resulted from taxes on foreign earnings and taxes on earnings before
acquisition-related charges comprising charges for goodwill and incomplete
technologies accruing from the acquisitions of DSP of Genetrix.
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of December 31, 1997, Genzyme had cash, cash equivalents and
investments (excluding equity securities) of $246.3 million, an increase of
$58.3 million from December 31, 1996. In 1997 operating and financing activities
provided $39.7 million and $87.3 million of cash, respectively, investing
activities used $115.4 million and fluctuations in exchange rates caused a
reduction in cash of $2.3 million. In 1997, financing activities provided $156.0
million of cash proceeds from the exercise of stock options and warrants and the
issuance of stock under the employee stock purchase plan, and $32.1 million from
the issuance of debt, and used $101.1 million for the repayment of debt and
capital lease obligations. At December 31, 1997, $118.0 million was outstanding
under the $225.0 million Revolving Credit Facility, of which $95.0 million was
allocated to Genzyme General, $18.0 million was allocated to GTR and $5.0
million was allocated to GMO. In 1997, investing activities used $66.7 million
of cash for
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GENZYME CORPORATION (CONT.)
net purchases of investments and $29.1 million was used to finance capital
expenditures.
Genzyme had inventories of $139.7 million, an increase of $14.4 million
over December 31, 1996. The increase was due primarily to support of increased
business operations, most notably in Genzyme General's Therapeutics business
unit as a result of increased production of Cerezyme(R) enzyme and in the
Surgical Products business unit in support of the introduction of Seprafilm(R)
in the North American marketplace.
On February 28, 1997, GTR raised $13.0 million through the private
placement of a 5% convertible note (the "GTR Note") to an affiliate of Credit
Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning
May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount
to the average of the closing bid prices of the GTR Stock on the Nasdaq National
Market for the 25 trading days immediately preceding the conversion date (the
"Average GTR Stock Price"). The discount will start at 2% beginning six months
from the date the GTR Note was issued and will increase to 11% at 15 months
after the date of issue. Thereafter, the conversion price will be the lesser of
89% of the Average GTR Stock Price preceding the conversion date or the date 15
months after the date of issue. In the first quarter of 1997, GTR recorded $11.5
million of proceeds attributed to the value of the debt and $1.5 million
attributed to the value of the conversion feature (recorded as an increase to
division equity). The debt will be accreted to its face value by a charge to
interest expense of $1.5 million over the term of the initial 15 month
conversion period. As of December 31, 1997, GTR had accreted $1.1 million of the
value of the conversion feature.
On June 30, 1997, the Genzyme Board declared a dividend of
approximately 2,686,000 GTR Designated Shares which were distributed on July 22,
1997 to Genzyme General stockholders of record as of July 11, 1997, in a
tax-free distribution of approximately .03 share of GTR Stock for each share of
GGD Stock owned. A total of approximately 2,292,000 shares of GTR Stock were
issued to Genzyme General stockholders in the distribution and approximately
394,000 shares of GTR Stock have been reserved for issuance upon the exercise of
Genzyme General stock options and warrants outstanding on the record date.
In June 1997, Genzyme General formed RenaGel LLC for the final
development and commercialization of RenaGel(R) non-absorbed phosphate binder.
Funding for the joint venture is provided equally by Genzyme and GelTex. The
agreement calls for Genzyme General to pay GelTex $27.5 million, consisting of a
$2.5 million equity investment in GelTex made in June 1997, a $15.0 million
payment on receipt of FDA marketing approval for RenaGel(R) and a $10.0 million
payment one year following receipt of FDA marketing approval for RenaGel(R).
In September 1997, Genzyme and GTC entered into an Amended and Restated
Convertible Debt Agreement (the "1997 Debt Agreement"), which superseded and
replaced the provisions of the 1996 Agreement other than the provisions relating
to the development and commercialization of ATIII. Under the 1997 Debt
Agreement, the line of credit was reduced from $10.0 million to $8,327,000 and
the expiration date of the revolving credit line was extended to March 31, 2000,
with an option, at that date, for GTC to convert the outstanding balance to a
three-year term loan. The interest rate remains at 7% through April 1, 1998.
Thereafter, the interest rate increases annually, starting at a rate equal to
the lower of 8% or the prime lending rate in the first year and ending at a rate
equal to the lower of 10% or the prime lending rate plus 2% from April 2, 2002
through the final year of the term loan. Financial covenants require positive
quarterly earnings before interest, taxes, depreciation, amortization and
unfunded research and development expense starting April 1, 1998. Any amounts
outstanding under the credit line may be converted into shares of GTC common
stock at Genzyme's option at any time for up to the full amount outstanding or
at GTC's option on a quarterly basis limited to an amount sufficient to maintain
the minimum tangible net worth required for continental listing on the Nasdaq
National Market.
Under the terms of the BioSurface acquisition agreement,
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GENZYME CORPORATION (CONT.)
the Genzyme Board voted in June 1997 to allocate $10.0 million under the
agreement in exchange for an increase in the GTR Designated Shares of 1,000,000
shares.
In July 1997, StressGen/Genzyme LLC was established as a joint venture
among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian
Medical Discoveries Fund Inc. ("CMDF") to develop stress gene therapies for the
treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in
connection with the joint venture through the combination of a capital
contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian),
the purchase of warrants from Genzyme in the amount of $1.0 million (Canadian),
the purchase of warrants and preferred stock from StressGen in the amount of
$1.4 million (Canadian) and a limited recourse loan bearing interest at 0.125%
per annum to StressGen in the amount of $6.6 million (Canadian). Each of Genzyme
and StressGen (through a U.S. subsidiary) also made a capital contribution to
StressGen/Genzyme LLC in the amount of $1.0 million (Canadian) and a limited
recourse loan was made by the U.S. subsidiary of StressGen to StressGen/Genzyme
LLC in the amount of $7.0 million (Canadian). In addition, Genzyme and StressGen
have agreed to provide in equal shares any additional capital required by the
joint venture in excess of the initial $10.0 million (Canadian) funding.
Genzyme and StressGen have an option (the "Purchase Option"), payable
in equal shares, to purchase CMDF's membership interest in StressGen/Genzyme LLC
at any time during the three-year period beginning July 31, 1999 and ending July
31, 2002. The exercise price of the Purchase Option initially will be $15.6
million (Canadian) in July 1999 and will increase monthly thereafter to a final
exercise price of $30.5 million (Canadian) in July 2002. The limited recourse
loan made by CMDF will be retired in connection with the exercise of the
Purchase Option. If the Purchase Option is not exercised on or before July 31,
2002, CMDF may require Genzyme and StressGen to repay $2.0 million (Canadian)
each of the limited recourse loan. In addition, at any time during the 30-day
period commencing on the date when not less than 75% of the initial funding
provided by CMDF has been spent by the joint venture, but in no event later that
July 31, 1999, CMDF shall have the right (the "Mandatory Purchase Right") to
require Genzyme and StressGen to purchase its membership interest at an
aggregate purchase price of $10.0 million (Canadian) plus interest thereon at a
rate per annum equal to the Canadian prime rate plus 1%. The Mandatory Purchase
Right will terminate if not exercised by CMDF during such 30-day period.
Genzyme's share of any amounts payable to CMDF upon exercise of the Purchase
Option, the Mandatory Purchase Right or repayment of the limited recourse loan
may be paid in cash, Genzyme common stock or any combination thereof at the
discretion of Genzyme.
In August 1997, GMO completed a private placement of Convertible
Debentures (the "GMO Debentures") due August 29, 2002. The GMO Debentures bear
interest at 6% per annum and are convertible into shares of GMO Stock beginning
no earlier than the 91st day after the
39
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GENZYME CORPORATION (CONT.)
effective date of a registration statement covering the initial public offering
of GMO stock (the "GMO IPO"). Beginning on February 26, 1998, the GMO Debentures
are convertible at a discount to the average of the closing bid prices of GMO
Stock as reported by the Nasdaq National Market for the 20 trading days
immediately preceding the applicable conversion date (the "Market Price"), which
discount begins at 7% and will increase by an additional one percent every 30
days thereafter until October 24, 1998. Beginning November 23, 1998, the
conversion price will be the lower of (i) 85% of the Market Price calculated as
of the actual conversion date and (ii) 85% of the Market Price calculated as of
November 21, 1998. In no event, however, will the conversion price be less than
$7.70 per share (subject to adjustment in the event of any stock split, stock
dividend, reclassification, combination or similar event). In the third quarter
of 1997, GMO recorded $16.5 million of proceeds attributed to the value of the
debt and $3.5 million attributed to the value of the conversion feature
(recorded as an increase to division equity). The debt will be accreted to its
$20.0 million face value by a charge to interest expense of $3.5 million over
the term of the initial 15 month conversion period. As of December 31, 1997, GMO
had accreted $407,000 of the value of the conversion feature.
If GMO has not completed the GMO IPO by August 29, 1998, at the
holder's option, the GMO Debentures may be exchanged for 5% debentures
convertible into shares of GGD Stock ("GGD Debentures") due August 29, 2003. If
the GMO IPO is completed before August 29, 1998 but the aggregate proceeds from
the offering are less than $15.0 million or GMO's market capitalization is below
$90.0 million, at the holder's option, 50% of the GMO Debentures can be
exchanged for GGD Debentures. The exchange option must be exercised within 30
business days after August 29, 1998 or the date on which the GMO IPO is
consummated. The GGD Debentures, if issued, will be convertible at the option of
the holder at any time prior to maturity into shares of GGD Stock at a 13%
premium to the average closing bid price of GGD Stock as reported by the Nasdaq
National Market for the five trading days immediately preceding the issue date.
In addition, beginning on the 181st day after the completion of the GMO
IPO, the holders of GMO Debentures have the option (the "Put Option") to require
Genzyme to pay the entire principal amount of the GMO Debentures in cash,
together with interest at the rate of 15% per annum (less any interest
previously paid) if the conversion price (as calculated above) is less than
$7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put
Option is exercisable only with respect to the first Put Option Review Period
that occurs while the GMO Debentures are outstanding and if the Put Option is
not exercised within 15 days after any Put Option Review Period, a period of 90
days from the last day of the previous Put Option Review Period must elapse
before another Put Option Review Period commences.
The GMO Debentures are callable with cash or stock beginning 18 months
after the GMO IPO if the stock has closed at 150% of the Fixed Conversion Price
for 20 consecutive trading days.
The Genzyme Board approved the allocation of up to $25.0 million in
cash from Genzyme General to GMO (the "GMO Equity Line"), subject to a
dollar-for-dollar reduction by the proceeds of outside financing received by
GMO. As a result of the issuance of the GMO debentures in August 1997, the
amount available under the GMO Equity Line was reduced to $5.0 million. No draws
have been made under the Equity Line to date.
In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public
for $7.75 per share. Net proceeds from the offering after underwriting discounts
and commissions were $29.0 million.
In order to provide initial funding for the joint venture with Diacrin,
the Genzyme Board has approved the allocation of up to $20.0 million in cash
from Genzyme General to GTR (the "GTR Equity Line") in exchange for an increase
in the number of GTR Designated Shares at a rate determined by dividing the
amount of cash so allocated by the average of the daily closing prices of one
share of GTR Stock for the 20 consecutive trading days commencing on the 30th
trading day prior to the date of allocation. The Company intends to make monthly
allocations of cash under the GTR Equity Line in an amount corresponding to the
funding commitment of GTR under the joint venture agreement for such month. As
of December 31, 1997 the Company had allocated $5.1 million from Genzyme General
to GTR under the GTR Equity Line.
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GENZYME CORPORATION (CONT.)
Genzyme holds an option to acquire all of the partnership interests in
Genzyme Development Partners, L.P. ("GDP") for approximately $26.0 million plus
a continuing royalty payment for a period of ten years on certain sales of Sepra
Products. Genzyme's decision regarding the exercise of this option will be
based, in part, on the progress in the development and Genzyme's evaluation of
the potential commercial success of the Sepra Products. The exercise price for
the purchase option is payable in cash, shares of GGD Stock or a combination of
the two, as determined by Genzyme at the time the option is exercised.
Genzyme believes that its available cash, investments and cash flow
from operations will be sufficient to finance its planned operations and capital
requirements for the foreseeable future. Although Genzyme had approximately
$246.3 million in cash, cash equivalents and short and long-term investments at
December 31, 1997, it has committed to utilize a portion of such funds for
certain purposes, such as (i) completing the market introduction in the U.S. and
Europe of Seprafilm(R) and clinical development of other Sepra Products, (ii)
completing the market introduction of GTR's Carticel(TM) AuCC and developing,
producing and marketing other products through GTR and GMO and (iii) making
certain payments to third parties in connection with strategic collaborations.
In addition to these commitments, Genzyme historically has pursued strategic
acquisitions and collaborations with complementary businesses as opportunities
became available and will seek additional acquisitions and collaborations in the
future. Genzyme may require additional capital to finance any such activities.
There can be no assurance, however, that such capital will be available on terms
reasonably acceptable to Genzyme.
In addition, as of December 31, 1997, approximately $118.0 million was
outstanding under the Revolving Credit Facility, $95.0 million of which was
allocated to Genzyme General, $18.0 million of which was allocated to GTR and
$5.0 million of which was allocated to GMO. Amounts borrowed under this facility
are payable on November 15, 1999. Genzyme's cash resources will be diminished
upon repayment of amounts borrowed, plus accrued interest, under this credit
facility. In addition, pursuant to the terms of both the GTR Note and the GMO
Debentures, the holders will, in some circumstances, receive cash from Genzyme.
To the extent Genzyme uses cash to pay the principal and accrued interest on the
GTR Note or GMO Debentures, its cash reserves will also be diminished. As a
result, Genzyme may have to obtain additional financing. There can be no
assurance that such financing will be available on terms reasonably acceptable
to Genzyme.
NEW ACCOUNTING PRONOUNCEMENTS, YEAR 2000 AND FINANCIAL REPORTING RELEASE 48
("FRR 48")
In June 1997, the FASB issued Statement of Financial Accounting
Standards Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS 130"), and
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), respectively (collectively, the "Statements"). The Statements are
effective for fiscal years beginning December 15, 1997. SFAS 130 establishes
standards for reporting of comprehensive income and its components in annual
financial statements. SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprises's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS 130
and SFAS 131, respectively. Application of the Statement's disclosure
requirements will have no impact on Genzyme's combined financial position,
results of operations or earnings per share data as currently reported.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 is
effective for fiscal years beginning after December 15, 1997. Genzyme has not
assessed the impact of SFAS 132 on its financial statement disclosures.
Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing the internal readiness of its computer systems for handling the year
2000. The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on future results of operations.
In January 1997, the Securities and Exchange Commission issued
Financial Reporting Release 48 which expands disclosure requirements for certain
derivative and other financial instruments. The Company adopted the sensitivity
analysis approach effective in the fourth quarter of 1997. The sensitivity
approach presents the hypothetical changes in fair value resulting from
hypothetical changes in market rates.
As a result of the Company's worldwide operations, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse effect on the Company's financial results in the future.
Historically, the Company's primary exposures have been related to local
currency operating expenses in Europe and Asia, where the Company sells
primarily in U.S. dollars. The Company generally does not hedge anticipated
foreign currency cash flows.
The carrying amounts reflected in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to the short maturities of these instruments. The
fair values represent estimates of possible value that may not be realized in
the future.
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.
DEPENDENCE ON CEREZYME(R) ENZYME AND CEREDASE(R) ENZYME SALES
Genzyme's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme in 1997 were $332.7 million, representing 63% of Genzyme's
consolidated product sales in 1997.
To address supply constraints, Genzyme developed Cerezyme(R) enzyme.
Patients receiving Ceredase(R) enzyme are being converted to Cerezyme(R) enzyme;
however, Genzyme will continue to manufacture Ceredase(R) enzyme until the
process of patient conversion is completed. Any disruption in the supply or
manufacturing process of Cerezyme(R) enzyme may have a material adverse effect
on revenue. In addition, Genzyme may be required to record a charge to earnings
for the equipment used for and inventory of Ceredase(R) enzyme remaining upon
completion of the patient conversion process, and, if the conversions proceed
more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme
and the corresponding charge to earnings could be material.
41
43
GENZYME CORPORATION (CONT.)
RISKS INHERENT IN INTERNATIONAL OPERATIONS. Foreign operations of
Genzyme accounted for 36% of consolidated net sales in 1997 as compared to 35%
in each of 1996 and 1995. In addition, Genzyme has direct investments in a
number of subsidiaries in foreign countries (primarily in Europe and Japan).
Financial results of Genzyme could be adversely affected by fluctuations in
foreign exchange rates. Fluctuations in the value of foreign currencies affect
the dollar value of Genzyme's net investment in foreign subsidiaries, with these
fluctuations being included in a separate component of stockholders' equity.
Operating results of foreign subsidiaries are translated into U.S. dollars at
average monthly exchange rates. For the year ended December 31, 1997, Genzyme
charged $12.4 million to stockholders' equity as a result of foreign currency
adjustments and there can be no assurance that the Company will not incur
additional charges relating to such adjustments in future periods. In addition,
the U.S. dollar value of transactions based in foreign currency (collections on
foreign sales or payments for foreign purchases) also fluctuates with exchange
rates. The largest foreign currency exposure results from activity in Dutch
guilders, British pounds, French francs, German marks and Japanese yen.
Genzyme has not hedged net foreign investments in the past, although it
may engage in hedging transactions in the future to manage and reduce its
foreign exchange risk, subject to certain restrictions imposed by the Genzyme
Board. There can be no assurance that Genzyme's attempts to manage its foreign
currency exchange risk will be successful.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of Genzyme's
products are currently in or will require clinical trials to test safety and
efficacy in humans for various conditions. There can be no assurance that
Genzyme will not encounter problems in clinical trials that will cause it to
delay or suspend these clinical trials. In addition, there can be no assurance
that such clinical testing, if completed, will ultimately show these products to
be safe and efficacious.
RAPID TECHNOLOGICAL CHANGE. The field of biotechnology is expected to
continue to undergo significant and rapid technological change. Although Genzyme
will seek to expand its technological capabilities in order to remain
competitive, there can be no assurance that research and discoveries by others
will not render Genzyme's products or services obsolete.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES.
A majority of Genzyme's revenues are attributable directly or indirectly to
payments received from third party payers, including government health
administration authorities and private health insurers. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third party payers are increasingly challenging the prices charged for
health care products and services. Third party payers are also increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products and by refusing in some cases to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted marketing approval. There can be no assurance that third
party insurance coverage will be available for any products or services under
development by Genzyme. If adequate coverage and reimbursement are not provided
by government and other third party payers for Genzyme's products and services,
its results of operations may be materially adversely affected.
In addition, Congress has from time to time discussed the possible
implementation of broad-based health care cost containment measures. While these
discussions have not led to the enactment of any specific health care cost
containment legislation, it is possible that health care measures will again be
proposed in Congress. The effects on Genzyme of any such measures that are
ultimately adopted cannot be predicted at this time.
42
44
GENZYME CORPORATION (CONT.)
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY.
Genzyme's success depends, to a large extent, on its ability to maintain a
competitive technological position in its product areas. Proprietary rights
relating to Genzyme's products and services are protected from unauthorized use
by third parties only to the extent that they are covered by patents or are
maintained in confidence as trade secrets. Genzyme has filed for patents and has
rights to numerous patents and patent applications worldwide. While certain of
Genzyme's patents have been allowed or issued, there can be no assurance that
these allowed and issued patents or additional patents allowed or issued to
Genzyme will effectively protect the proprietary technology of Genzyme. In
addition, patent litigation is widespread in the biotechnology industry and it
is not possible to predict how any such litigation will affect Genzyme.
No consistent policy has emerged from the U.S. Patent and Trademark
Office regarding the breadth of claims allowed in biotechnology patents and,
therefore, the degree of future protection for Genzyme's proprietary rights is
uncertain. The allowance of broader claims may increase the incidence and cost
of patent interference proceedings in the U.S. and the risk of infringement
litigation in the U.S. and abroad. Conversely, the allowance or narrower claims,
while reducing the risk of infringement, may limit the value of Genzyme's
proprietary rights under its patents, licenses and pending patent applications.
Genzyme attempts to monitor the patent filings of its competitors in an
effort to guide the design and development of its products to avoid
infringement. Notwithstanding these efforts, there can by no assurance that the
patents issued or licensed to Genzyme will remain free of challenge by third
parties. In addition, patent rights filed by third parties may, if issued, cover
Genzyme's products and services as ultimately developed, which could have an
adverse impact on Genzyme's results of operations in amounts that cannot
presently be determined. Genzyme may, depending on the final formulation of such
products and services, need to acquire license to, or contest the validity of,
such patents. For example, Genzyme may need to acquire patent rights from third
parties that cover particular diagnostic and/or therapeutic gene sequences or
that cover aspects of adjuvant therapies such as compositions of matter or
methods of use related to the administration of cytokines as immunostimulants in
combination with a cancer therapy. In gene therapy, Genzyme may need to license
a number of patents covering different elements of the technique, such as those
relating to particular viral or non-viral vector or methods for its delivery.
The extent to which Genzyme may need to license rights or contest the validity
of patents depends on the scope and validity of such patents and ultimately on
the final design or formulation of its products and services under development.
The cost and ability to license any such rights and the likelihood of
successfully contesting the validity of such patents are uncertain.
Genzyme has also relied upon trade secrets, proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. There can be no assurance that others will not independently develop
such know-how or otherwise obtain access to Genzyme's technology. While
Genzyme's employees, consultants and corporate partners with access to
proprietary information are generally required to enter into confidentiality
agreements, there can be no assurance that these agreements will be honored.
Certain of Genzyme's consultants have developed portions of Genzyme's
proprietary technology at their respective universities or governmental
laboratories. There can be no assurance that such universities or governmental
authorities will not assert rights to intellectual property arising out of
university or government based research conducted by such consultants.
GOVERNMENT REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS. The production and
sale of health care products and provision of health care services are highly
regulated. In particular, human therapeutic and diagnostic products are subject
to pre-marketing approval by the FDA and comparable agencies in foreign
countries. The process of obtaining these approvals varies according to the
nature and use of the product and can involve lengthy and detailed
43
45
GENZYME CORPORATION (CONT.)
laboratory and clinical testing, sampling activities and other costly and
time-consuming procedures. Regulation of Genzyme's products and services could
also limit Genzyme's reimbursement for its products and services and otherwise
materially affect the results of operations of Genzyme. Additional regulatory
regimes, in the U.S. and internationally, affect the Company's work in gene
therapy and the provision of cancer diagnostic services. There can be no
assurance that any of the required regulatory approvals will be granted on a
timely basis, if at all.
Certain of Genzyme's products, including Cerezyme(R) enzyme and
Ceredase(R) enzyme, have been designated as orphan drugs under the Orphan Drug
Act, which provides incentives to manufacturers to develop and market drugs for
rare diseases. The Orphan Drug Act generally entitles the first developer to
receive FDA marketing approval for an orphan drug to a seven-year exclusive
marketing period in the United States for that product. Legislation has been
periodically introduced in recent years, however, to amend the Orphan Drug Act.
Such legislation has generally been directed to shortening the period of
automatic market exclusivity and granting certain market rights to simultaneous
developers of a drug. The effect on Genzyme of any amendments ultimately adopted
cannot be assessed at this time.
PRODUCT LIABILITY AND LIMITATIONS OF INSURANCE. Genzyme may be subject
to product liability claims in connection with the use or misuse of its products
during testing or after commercialization. While Genzyme has taken, and
continues to take, what it believes are appropriate precautions, there can be no
assurance that Genzyme will avoid significant liability exposure. Genzyme has
only limited amounts of product liability insurance and there can be no
assurance that such insurance will provide sufficient coverage against any or
all potential product liability claims. If Genzyme attempts to obtain additional
insurance in the future, there can be no assurance that it will be able to do so
on acceptable terms, if at all, or that such insurance will provide adequate
coverage against claims asserted.
RISKS RELATED TO GENZYME TRACKING STOCK
Prior to June 18, 1997, Genzyme had two outstanding classes of common
stock, GGD Stock and GTR Stock. Effective June 18, 1997, the GGD Stock and GTR
Stock were redesignated as separate series of a single class of common stock and
a new series of the same class of common stock, GMO Stock, was issued. As a
result, Genzyme currently has three series of common stock outstanding: GGD
Stock, GTR Stock and GMO Stock, which are intended to reflect the value and
track the performance of Genzyme's three divisions: Genzyme General, GTR and
GMO. Prospective investors in GGD Stock, GTR Stock or GMO Stock should carefully
consider the following risks relating to an investment in Genzyme "tracking
stock."
STOCKHOLDERS OF ONE COMPANY; FINANCIAL IMPACTS ON ONE DIVISION COULD
AFFECT THE OTHERS. Notwithstanding the allocation of Genzyme's products and
programs between divisions for purposes of financial statement presentation and
allocation of equity interests, Genzyme continues to hold title to all of the
assets and is responsible for all of the liabilities allocated to each of its
divisions. Holders of each series of Genzyme common stock have no specific claim
against the assets attributed for financial statement presentation purposes to
the division whose performance is associated with the series of stock they hold.
Liabilities or contingencies of any division that affect Genzyme's resources or
financial condition could affect the financial condition or results of
operations of the other divisions.
NO RIGHTS OR ADDITIONAL DUTIES WITH RESPECT TO THE DIVISIONS; POTENTIAL
CONFLICTS. Holders of each series of Genzyme common stock have only the rights
of stockholders of Genzyme, and, except in limited circumstances, do not have
any rights specifically related to the division to which such series of common
stock relates. The existence of separate series of common stock may give rise to
occasions when the interests of holders of each series of Genzyme common stock
may diverge or appear to diverge. Although Genzyme is aware of no precedent
concerning the manner in which Massachusetts law would be applied to the duties
of a board of directors in the context of three series of common stock with
divergent interests, Genzyme believes, based on the advice of counsel, that a
Massachusetts court would hold that a board of directors owes an equal duty to
all stockholders regardless of class or series and does not have separate or
additional duties to any group of stockholders. That duty is the fiduciary duty
to act in good faith and in a manner it reasonably believes to be in the best
interests of the corporation. Genzyme has been advised that, under Massachusetts
law, a good faith determination by a disinterested and adequately informed board
of directors that an action is in the best interests of the corporation, taking
into account the interests of the holders of each series of common stock and the
alternatives reasonably available, should represent an appropriate defense to
any challenge by or on behalf of the holders of any series of common stock that
such action could have a disparate effect on different series of common stock.
However, a Massachusetts court hearing a case involving such a challenge may
decide to apply principles of Massachusetts law other than those described
above, or may develop new principles of Massachusetts law to decide such a case.
Disproportionate ownership interests of members of the Genzyme Board in
any series of common stock or disparities in the value of such stock could
create or appear to create potential conflicts of interest when directors are
faced with decisions that could have different implications for each series of
common stock. Nevertheless, Genzyme believes that a director would be able to
discharge his or her fiduciary responsibilities even if his or her interest in
shares of such series were disproportionate or had disparate values. The Genzyme
Board may also from time to time establish one or more committees to review
matters presented to it that raise conflict issues, which committee(s) would
report to the full Genzyme Board on such matters.
NO ADDITIONAL SEPARATE VOTING RIGHTS. Holders of each series of
Genzyme common stock vote together as a single class on all matters as to which
common stockholders generally are entitled to vote (including the election of
directors). Except in certain limited circumstances provided under Massachusetts
law, in the Genzyme Charter and in the management and accounting policies
adopted by the Genzyme Board, holders of each series of common stock have no
rights to vote on matters separately. Accordingly, except in limited
circumstances, holders of shares of one series of common stock could not bring a
proposal to a vote of the holders of that series of common stock only, but would
be required to bring any proposal to a vote of all common stockholders.
On all matters as to which common stockholders generally are entitled
to vote, each share of GGD Stock has one vote, each share of GTR Stock has,
through December 31, 1998, .33 vote and each share of GMO stock will have,
through December 31, 1998, .25 vote. On January 1, 1999 and on January 1 every
two years thereafter, the number of votes to which each share of GTR Stock is
entitled will be adjusted to equal the ratio of the Fair Market Value (as
defined herein) of one share of GTR Stock to the Fair Market Value of one share
of GGD Stock as of such date. The number of votes to which each share of GMO
Stock is entitled will also be adjusted on such dates to equal the ratio of the
Fair Market Value of one share of GMO Stock to the Fair Market Value of one
share of GGD Stock. "Fair Market Value" as of any date means the average of the
daily closing prices as reported by the Nasdaq National Market (or the
appropriate exchange on which such shares are traded) for the 20 consecutive
trading days commencing on the 30th trading day prior to such date. In the event
such closing prices are unavailable, Fair Market Value will be determined by the
Genzyme Board.
Certain matters as to which the holders of common stock are entitled to
vote may involve a divergence or the appearance of a divergence in the interests
of holders of each series of Genzyme common stock. If, when a stockholder vote
is taken on any matter as to which a separate vote by each series is not
required and the holders of any series of common stock would have more than the
number of votes required to approve any such matter, the holders of that series
would control the outcome of the vote on such matter, Holders of GGD Stock, GTR
Stock and GMO Stock currently have approximately 91.1%, 7.7% and 1.2%,
respectively, of the total voting power of Genzyme. As a result, on matters
which are submitted to a vote of the common stockholders, the preferences of the
holders of GGD Stock are likely to dominate and determine the outcome of such
vote unless and until the relative number of shares outstanding and/or the
market value of each series of Genzyme common stock materially changes.
EXCHANGE OF GTR STOCK AND GMO STOCK. The Genzyme Board can, in its
sole discretion, determine to exchange shares of GTR Stock and GMO Stock for
cash or shares of GGD Stock (or any combination thereof) at a 30% premium over
Fair Market Value of the GTR Stock or GMO Stock at any time. In addition,
following a disposition of all or substantially all of the assets of GTR or GMO,
the shares of GTR Stock or GMO Stock, as the case may be, are subject to
mandatory exchange by Genzyme for cash and/or shares of GGD Stock at a 30%
premium over Fair Market Value of such series of common stock as determined by
the trading prices during a specified period prior to public announcement of the
disposition. Consequently, holders of GTR Stock and GMO Stock may receive a
greater or lesser premium for their shares than any premium paid by a third
party buyer of all or substantially all of the assets of GTR or GMO. In
addition, the right of the Genzyme Board to exchange shares of GTR Stock or GMO
Stock at a 30% premium over the Fair Market Value of such shares does not
preclude the Genzyme Board from making an offer to exchange such shares on terms
other than those provided in the Genzyme Charter. Although any alternative offer
would be subject to acceptance by the holders of the shares to be exchanged,
such offer could be made on terms less favorable than those provided in the
Genzyme Charter. Any exchange of shares for GGD Stock could be made at a time
when the GGD Stock may be considered to be undervalued and, if such exchange is
perceived as dilutive, the market price of GGD Stock may be adversely affected.
See "Management and Accounting Policies Governing the Relationship of Genzyme
Divisions -- Open Market Purchases of Shares of Common Stock" set forth in
Exhibit 99.1 to Genzyme's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10-K").
NO ADJUSTMENT TO LIQUIDATING DISTRIBUTIONS. In the event of a
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of Genzyme (other than pursuant to a merger, business combination or sale of
substantially all assets), holders of outstanding shares of each series of
Genzyme common stock would receive the assets, if any, remaining for
distribution to common stockholders on a per share basis in proportion to the
respective per share liquidation units of such series. Currently, each share of
GGD Stock has 100 liquidation units, each share of GTR Stock has 58 liquidation
units and each share of GMO Stock has 25 liquidation units. Because the
liquidation units will not be adjusted to reflect changes in the relative market
value or performance of each of the divisions of Genzyme, the per share
liquidating distribution to a holder of GGD Stock, GTR Stock or GMO Stock is not
likely to correspond to the value of the assets of Genzyme General, GTR or GMO,
respectively, at the time of a dissolution, liquidation or winding up of
Genzyme.
MANAGEMENT AND ACCOUNTING POLICIES TO CHANGE. The Genzyme Board has
adopted certain management and accounting policies applicable to the preparation
of the financial statements of the divisions of Genzyme, the allocation of
corporate expenses, assets and liabilities, the reallocation of assets between
divisions and other matters. These policies may, except as stated therein, be
modified or rescinded at the sole discretion of the Genzyme Board without the
approval of Genzyme's stockholders, subject to the Genzyme Board's fiduciary
duty to all holders of Genzyme's capital stock. See "Management and Accounting
Policies Governing the Relationship of Genzyme Divisions" set forth in Exhibit
99.1 to the 1997 Form 10-K.
NON-COMPETE POLICY. The Genzyme Board has adopted a policy providing
that the Company will not develop products and services outside of GTR or GMO
that compete with products and services being developed or sold by GTR or GMO,
other than through joint ventures in which GTR or GMO participate (the
"Non-Compete Policy"). The scope of the Non-Compete Policy does not extend to
the entire fields of tissue repair and oncology. Accordingly, the Company is
currently developing oncology products outside of GMO that do not compete with
products and services being developed or sold by GMO and, in the future, may
develop additional oncology and tissue repair products and services outside of
GMO and GTR, provided that such products and services do not compete with
then-existing GMO or GTR products and services. See "Management and Accounting
Policies Governing the Relationship of Genzyme Divisions" set forth in Exhibit
99.1 to the 1997 Form 10-K.
USE OF TAX BENEFITS BY OTHER GENZYME DIVISIONS. Genzyme's management
and accounting policies provide that, to the extent any division of Genzyme is
unable to utilize its operating losses or other projected tax benefits to reduce
its current or deferred income tax expense, such losses or benefits may be
reallocated to another division on a quarterly basis for financial reporting
purposes. Accordingly, although the actual payment of taxes is a corporate
liability of Genzyme as a whole, separate financial statements will be prepared
for each division and any losses that cannot be utilized by a division will be
allocated among the profitable divisions rather than carried forward to reduce
the future tax liability of the division generating such losses. This could
result in a division (such as GTR and GMO currently) being charged a greater
portion of the total corporate tax liability and reporting lower earnings after
taxes in the future than would have been the case if such division had retained
its losses or other benefits in the form of a net operating loss carryforward.
44
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) DECEMBER 31,
- ---------------------- ------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 102,406 $ 93,132
Short-term investments ................................................ 51,259 56,608
Accounts receivable, net .............................................. 118,277 116,833
Inventories ........................................................... 139,681 125,265
Prepaid expenses and other current assets ............................. 17,361 100,287
Deferred tax assets - current ......................................... 27,601 17,493
---------- ----------
Total current assets ................................................ 456,585 509,618
Property, plant and equipment, net ....................................... 385,348 393,839
Long-term investments .................................................... 92,676 38,215
Note receivable - related party .......................................... 2,019 --
Intangibles, net ......................................................... 271,275 247,745
Deferred tax assets - noncurrent ......................................... 29,479 42,221
Investment in equity securities........................................... 30,047 10,813
Other noncurrent assets................................................... 28,024 28,057
---------- ----------
Total assets......................................................... $1,295,453 $1,270,508
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
45
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands) DECEMBER 31,
- ---------------------- ------------
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 19,787 $ 22,271
Accrued expenses ............................................................ 72,103 70,124
Income taxes payable ........................................................ 11,168 17,926
Deferred revenue ............................................................ 1,800 2,693
Current portion of long-term debt and capital lease obligations ............. 905 999
----------- -----------
Total current liabilities ............................................... 105,763 114,013
Noncurrent liabilities:
Long-term debt and capital lease obligations ................................ 140,978 241,998
Convertible debentures, net ................................................. 29,298 --
Other noncurrent liabilities ................................................ 7,364 12,188
----------- -----------
Total liabilities ....................................................... 283,403 368,199
Commitments and contingencies (See Notes) ......................................
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 10,000,000 shares; no shares
issued and outstanding
Preferred Stock, Series A Junior Participating, $.01 par value,
2,000,000 shares authorized; no shares issued and outstanding
Preferred Stock, Series B Junior Participating, $.01 par value,
400,000 shares authorized; no shares issued and outstanding
Preferred Stock, Series C Junior Participating, $.01 par value,
400,000 shares authorized; no shares issued and outstanding
Common Stocks:
Genzyme General Division Common Stock, $0.01 par value, 200,000,000
shares authorized; 77,692,550 and 75,537,300 issued and outstanding
at December 31, 1997 and 1996, respectively .............................. 777 755
Genzyme Tissue Repair Division Common Stock, $0.01 par value, 40,000,000
shares authorized; 19,941,193 and 13,161,500 issued and outstanding
at December 31, 1997 and 1996, respectively .............................. 199 132
Genzyme Molecular Oncology Division Common Stock, $0.01 par value,
40,000,000 shares authorized; 3,909,908 and 0 issued and outstanding
at December 31, 1997 and 1996, respectively .............................. 39 --
Treasury common stock, at cost:
Genzyme General Common Stock,106,358 and 105,941 shares at
December 31, 1997 and 1996, respectively ................................. (901) (890)
Additional paid-in capital - Genzyme General ................................ 895,340 871,020
Additional paid-in capital - Genzyme Tissue Repair .......................... 170,430 122,385
Additional paid-in capital - Genzyme Molecular Oncology ..................... 34,517
Accumulated deficit ......................................................... (76,346) (89,975)
Foreign currency translation adjustments .................................... (12,449) (745)
Unrealized gains (losses) on investments .................................... 444 (373)
----------- -----------
Total stockholders' equity............................................. 1,012,050 902,309
----------- -----------
Total liabilities and stockholders' equity............................. $ 1,295,453 $ 1,270,508
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
46
48
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Revenues
Net product sales ................................. $ 529,927 $ 424,483 $ 304,373
Net service sales ................................. 67,158 68,950 52,450
Revenues from research and development contracts:
Related parties .................................. 8,356 23,011 26,758
Other ............................................ 3,400 2,310 202
--------- --------- ---------
Total revenues................................ 608,841 518,754 383,783
Operating costs and expenses:
Cost of products sold ............................. 206,028 155,930 113,964
Cost of services sold ............................. 47,289 54,082 35,868
Selling, general and administrative ............... 200,476 162,264 110,447
Research and development (including research and
development related to contracts) ................ 89,558 80,849 68,845
Amortization of intangibles ....................... 17,245 8,849 4,647
Purchase of in-process research and development 7,000 130,639 14,216
Restructuring charges ............................. -- 1,465 --
--------- --------- ---------
Total operating costs and expenses............ 567,596 594,078 347,987
--------- --------- ---------
Operating income (loss) ............................... 41,245 (75,324) 35,796
Other income (expenses):
Equity in net loss of unconsolidated affiliates .... (12,258) (4,360) (1,810)
Other .............................................. (2,000) 1,711 1,608
Investment income .................................. 11,409 15,341 8,814
Interest expense ................................... (12,667) (6,990) (1,109)
--------- --------- ---------
Total other income (expenses)................. (15,516) 5,702 7,503
--------- --------- ---------
Income (loss) before income taxes ..................... 25,729 (69,622) 43,299
Provision for income taxes ............................ (12,100) (3,195) (21,649)
--------- --------- ---------
Net income (loss) ..................................... $ 13,629 $ (72,817) $ 21,650
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
47
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Amounts in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
ATTRIBUTABLE TO GENZYME GENERAL:
Net income (loss) ............................................... $ 57,026 $(47,513) $ 34,823
Tax benefit allocated from Genzyme Tissue Repair ................ 17,666 17,011 8,857
Tax benefit allocated from Genzyme Molecular Oncology............ 2,755 -- --
-------- -------- --------
Net income (loss) attributable to GGD Stock .................. $ 77,447 $(30,502) $ 43,680
======== ======== ========
Per Genzyme General common share-basic:
Net income (loss) ............................................ $ 1.01 $ (0.45) $ 0.79
======== ======== ========
Weighted average shares outstanding .......................... 76,531 68,289 55,531
======== ======== ========
Per Genzyme General common and common equivalent share - diluted:
Net income (loss) ............................................ $ 0.98 $ (0.45) $ 0.68
======== ======== ========
Adjusted weighted average shares outstanding ................. 78,925 68,289 63,967
======== ======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss attributable to GTR Stock .............................. $(45,984) $(42,315) $(22,030)
======== ======== ========
Per GTR basic and diluted common share:
Net loss ..................................................... $ (3.07) $ (3.38) $ (2.28)
======== ======== ========
Weighted average shares outstanding .......................... 14,976 12,525 9,659
======== ======== ========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss attributable to GMO Stock .............................. $(19,578) $ (1,003) $ (464)
======== ======== ========
Pro forma per GMO basic and diluted
common share:
Pro forma net loss .......................................... $ (5.01) $ (0.26) $ (0.12)
======== ======== ========
Pro forma shares outstanding ................................. 3,910 3,910 3,910
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------- --------------------------------------------
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 13,629 $ (72,817) $ 21,650
Reconciliation of net income (loss) to net cash provided by operating
activities:
Depreciation and amortization .................................... 50,964 30,192 22,638
Loss on disposal of fixed assets ................................. 1,258 101 903
Non-cash compensation expense .................................... 3,160 460 1,013
Accrued interest/amortization on bonds ........................... (900) 1,195 (355)
Provisions for bad debts and inventory ........................... 14,580 9,759 8,336
Purchase of in-process research and development .................. 7,000 130,639 14,216
Deferred income taxes ............................................ (5,061) (28,558) 4,428
Accretion of debt conversion feature.............................. 2,028 -- --
Minority interest in net loss of subsidiaries .................... -- -- (1,608)
Equity in net loss of unconsolidated subsidiaries ................ 12,258 4,360 1,810
Other ............................................................ 528 (1,558) 1,568
Increase (decrease) in cash from changes in working capital net
of acquired assets:
Accounts receivable ............................................ (11,076) (18,395) (15,069)
Inventories .................................................... (29,299) (41,609) (18,827)
Prepaid expenses and other current assets ...................... (10,062) (527) (1,680)
Accounts payable, accrued expenses and deferred revenue ........ (9,333) 26,775 5,679
--------- --------- ---------
Net cash provided by operating activities ...................... 39,674 40,017 44,702
INVESTING ACTIVITIES:
Purchases of investments ............................................ (147,897) (122,093) (146,940)
Maturities of investments ........................................... 81,185 207,399 57,055
Purchases of property, plant and equipment .......................... (29,309) (63,802) (49,988)
Sale of property, plant and equipment ............................... 852 -- --
Acquisitions, net of cash acquired and liabilities assumed .......... 9 (299,078) (322)
Additional investment in unconsolidated affiliates .................. (13,993) (5,511) (4,428)
Loans to affiliates ................................................. (4,601) (1,676) --
Other ............................................................... (1,419) (7,470) (1,265)
--------- --------- ---------
Net cash used by investing activities .......................... (115,173) (292,231) (145,888)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................. 156,036 41,556 223,139
Proceeds from issuance of common stock by subsidiary ................ -- -- 1,107
Proceeds from issuance of debt ...................................... 32,127 536,000 --
Payments of long-term debt and capital lease obligations ............ (101,115) (378,502) (41,449)
--------- --------- ---------
Net cash provided by financing activities ...................... 87,048 199,054 182,797
Effect of exchange rate changes on cash ................................ (2,275) 1,920 (781)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ....................... 9,274 (51,240) 80,830
Cash and cash equivalents at beginning of period ....................... 93,132 144,372 63,542
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 102,406 $ 93,132 $ 144,372
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
49
51
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------- --------------------------------
1997 1996 1995
---- ---- ----
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest ......................................................... $ 9,811 $ 6,285 $ 9,944
Income taxes ..................................................... 18,887 14,149 19,581
Supplemental Disclosures of Non-Cash Transactions:
Acquisition liability -- Note C
Investment in unconsolidated affiliate -- Note H
Exercise of warrants - Note K
Debt conversion - Note J
Strategic financial provision -- Note B
GTR designated share dividend -- Note K
The accompanying notes are an integral part of these consolidated financial
statements.
50
52
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------- --------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
COMMON STOCKS:
GENZYME GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ................. 75,537 62,372 52,894 $ 755 $ 624 $ 529
Exercise of stock options .................... 1,750 1,371 1,916 18 13 19
Issuance from employee stock purchase plan ... 367 291 286 4 3 3
Exercise of warrants ......................... 39 6,341 686 -- 63 7
Shares issued in public offering ............. -- -- 5,750 -- -- 58
Issuance of GGD Stock in connection with
conversion of convertible notes ............ -- 3,782 -- -- 38 --
Issuance of GGD Stock in connection with
acquisitions ............................... -- 1,380 840 -- 14 8
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 77,693 75,537 62,372 $ 777 $ 755 $ 624
====== ====== ====== ===== ===== =====
GENZYME TISSUE REPAIR DIVISION COMMON STOCK:
Balance at beginning of year ................. 13,162 12,113 8,675 $ 132 $ 121 $ 87
Exercise of stock options .................... 206 124 122 2 1 1
Issuance from employee stock purchase plan ... 281 325 270 2 3 3
Exercise of warrants ......................... -- 345 46 -- 4 --
Issuance of GTR Stock in connection with
declared dividend of GTR Designated Shares . 2,292 -- -- 23 -- --
Shares issued in public offering ............. 4,000 -- 3,000 40 -- 30
Issuance of GTR Stock in connection with
conversion of convertible notes ............. -- 255 -- -- 3 --
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 19,941 13,162 12,113 $ 199 $ 132 $ 121
====== ====== ====== ===== ===== =====
GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK:
Balance at beginning of year ................. -- -- -- $ -- $-- $--
Issuance of GMO Stock in connection with
the acquisition of PharmaGenics ........... 3,910 -- -- 39 -- --
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 3,910 -- -- $ 39 $-- $--
====== ====== ====== ===== ===== =====
TREASURY COMMON STOCK (AT COST):
GENZYME GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ................. (106) (106) (100) $(890) $(882) $(755)
Purchases .................................... -- -- (6) (11) (8) (127)
------ ------ ------ ----- ----- -----
Balance at end of year ....................... (106) (106) (106) $(901) $(890) $(882)
====== ====== ====== ===== ===== =====
51
53
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
DOLLARS IN THOUSANDS
--------------------
1997 1996 1995
---- ---- ----
ADDITIONAL PAID IN CAPITAL - GENZYME GENERAL:
Balance at beginning of year ........................................... $ 871,020 $ 616,096 $ 406,991
Exercise of stock options .............................................. 28,518 13,870 27,903
Issuance from employee stock purchase plan ............................. 7,370 4,695 4,158
Exercise of warrants ................................................... 855 106,101 6,257
GGD Stock issued in public offering .................................... -- -- 141,218
Issuance of GGD Stock in connection with conversion of convertible
notes ................................................................ -- 101,362 --
Issuance of GGD Stock in connection with acquisitions .................. -- 36,508 23,813
Callable Warrants issued in connection with acquisition of Neozyme II .. -- 469 --
Allocation to Genzyme Tissue Repair for Designated Shares............... (14,892) (11,714) --
Allocation to Genzyme Molecular Oncology for Designated Shares.......... (2,886) -- --
Tax benefit from disqualified dispositions ............................. 4,127 3,500 5,500
Stock compensation expense ............................................. 1,218 123 131
Purchase of Treasury Stock ............................................. 10 10 125
--------- --------- ---------
Balance at end of year ................................................. $ 895,340 $ 871,020 $ 616,096
========= ========= =========
ADDITIONAL PAID IN CAPITAL- GENZYME TISSUE REPAIR:
Balance at June 18, 1997 ............................................... $ 122,385 $ 107,934 $ 63,573
Exercise of stock options .............................................. 705 539 240
Issuance from employee stock purchase plan ............................. 1,729 1,893 980
Exercise of warrants ................................................... -- (4) (3)
Issuance of GTR Stock in public offering ............................... 28,997 -- 42,262
Issuance of GTR Stock in connection with conversion of Genzyme's 6 3/4%
convertible subordinated notes ......................................... -- (3) --
Issuance of GTR Stock in connection with declared dividend of GTR
Designated Shares ................................................... (23) -- --
Value of debt conversion feature ....................................... 1,524 -- --
Allocation from Genzyme General for Designated Shares................... 14,892 11,714 --
Stock compensation expense ............................................. 221 312 882
--------- --------- ---------
Balance at end of year ................................................. $ 170,430 $ 122,385 $ 107,934
========= ========= =========
ADDITIONAL PAID IN CAPITAL- GENZYME MOLECULAR ONCOLOGY:
Balance at June 18, 1997 ............................................... $ --
Issuance of GMO Stock in connection with the acquisition of PharmaGenics 27,330
Sale of warrants ....................................................... 724
Value of debt conversion feature ....................................... 3,530
Allocation from Genzyme General for Designated Shares................... 2,886
Stock compensation expense ............................................. 47
---------
Balance at end of year ................................................. $ 34,517
=========
ACCUMULATED DEFICIT
Balance at beginning of year ........................................... $ (89,975) $ (17,158) $ (38,808)
Net income (loss) ...................................................... 13,629 (72,817) 21,650
--------- --------- ---------
Balance at end of year ................................................. $ (76,346) $ (89,975) $ (17,158)
========= ========= =========
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year ........................................... $ (745) $ (3,590) $ (4,915)
Translation adjustments ................................................ (11,704) 2,845 1,325
--------- --------- ---------
Balance at end of year ................................................. $ (12,449) $ (745) $ (3,590)
========= ========= =========
UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Balance at beginning of year ........................................... $ (373) $ 2,062 $ (7,735)
Adjustments ............................................................ 817 (2,435) 9,797
--------- --------- ---------
Balance at end of year ................................................. $ 444 $ (373) $ 2,062
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
52
54
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Corporation is a global diversified human healthcare business with
product development, manufacturing and marketing capabilities in therapeutic
products, surgical products, diagnostics, tissue repair and molecular oncology.
BASIS OF PRESENTATION
The consolidated financial statements of Genzyme include the balance sheets,
results of operations and cash flows of Genzyme's therapeutic products, surgical
products, diagnostics, tissue repair, molecular oncology and corporate
operations during the periods presented.
The approval effective December 16, 1994 (the "Effective Date") by the
stockholders of Genzyme of the Genzyme Stock Proposal as described in Genzyme's
Prospectus/Proxy Statement dated November 10, 1994 resulted in the redesignation
of Genzyme's common stock. The outstanding shares of Genzyme common stock were
redesignated as GGD Stock and a second class of common stock, designated as GTR
Stock was distributed on the basis of .135 of one share of GTR Stock for each
share of Genzyme's common stock. The merger of PharmaGenics with and into
Genzyme was consummated on June 18, 1997. In connection with the merger, Genzyme
established Genzyme Molecular Oncology, a new division of Genzyme, which
consists of all of PharmaGenics's business, several programs previously
allocated to Genzyme General in the area of molecular oncology and Genzyme's
rights under agreements with third parties relating to gene therapies for the
treatment of cancer. (See Note C., "Acquisitions" below). Contemporaneous with
the Merger, the Genzyme stockholders also approved the amendment and restatement
of the Genzyme Charter redesignating the GGD Stock and GTR Stock as a separate
series of a single class of common stock with substantially the same features as
the existing GGD Stock and GTR Stock and authorizing the designation of the GMO
Stock. GGD Stock, GTR Stock and GMO Stock provide stockholders with separate
securities which are intended to reflect the performance of Genzyme General,
GTR, and GMO, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority and wholly-owned subsidiaries. Investments in companies and joint
ventures in which the Company has a substantial ownership interest (20% to 50%),
or in which the Company participates in policy decisions are accounted for using
the equity method. Accordingly, the Company's share of the earnings of these
entities is included in consolidated net income. Investments of less than 20%
are reported at fair value (see Note H., "Investments" below). All significant
intercompany items and transactions have been eliminated in consolidation.
Certain items in the consolidated financial statements for the years ended
December 31, 1995 and 1996 have been reclassified to conform with the December
31, 1997 presentation.
FINANCIAL INFORMATION
The Company prepares separate financial statements for Genzyme General, GTR and
GMO in addition to consolidated financial statements of the Company. Although
the financial statements of Genzyme General, GTR and GMO separately report the
assets, liabilities and stockholders' equity of Genzyme attributable to each
such division, such attribution of assets and liabilities (including contingent
liabilities) and stockholders' equity among Genzyme General, GTR and GMO does
not affect legal title to such assets or responsibility for such liabilities.
Holders of GGD Stock, GTR Stock and GMO Stock are holders of common stock of
Genzyme and continue to be subject to all the risks associated with an
investment in Genzyme and all of its businesses and liabilities. Liabilities or
contingencies of Genzyme General, GTR or GMO could affect the results of
operations and financial condition of the other divisions.
DIVIDEND POLICY
The Company has never paid any cash dividends on shares of its capital stock.
Genzyme currently intends to retain its earnings to finance future growth and
therefore does not anticipate paying any cash dividends on Genzyme Common Stock
in the foreseeable future.
53
55
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
current and non-current investments and accounts receivable. The Company
generally invests its cash investments in investment-grade securities to
mitigate risk.
UNCERTAINTIES
The Company is subject to risks common to companies in the biotechnology
industry, including the Company's ability to successfully complete preclinical
and clinical development and obtain timely regulatory approval and patent and
other proprietary rights protection of its products and services, (ii)
decisions, and the timing of decisions, made by the U.S. Food and Drug
Administration (the "FDA") and other agencies regarding the indications for
which the Company's products may be approved, (iii) the accuracy of the
Company's estimates of the size and characteristics of markets to be addressed
by the Company's products and services, (iv) market acceptance of the Company's
products and services, (v) the Company's ability to obtain reimbursement for its
products from third-party payers, where appropriate, and (vi) the accuracy of
the Company's information concerning the products and resources of competitors
and potential competitors.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting principally of money market funds and
municipal notes purchased with initial maturities of three months or less, are
valued at cost plus accrued interest, which approximates market.
INVESTMENTS
Short-term investments include all investments with remaining maturities of
twelve months or less. Long-term investments include all investments with
remaining maturities greater than twelve months. The Company classifies its
equity investments as available-for-sale and its investments in debt securities
as either held-to-maturity or available-for-sale based on facts and
circumstances present at the time the investments are purchased. As of December
31, 1997 and 1996, the Company classified all investments in debt and equity
securities as available-for-sale.
Available-for-sale investments are reported at fair value as of the balance
sheet date with unrealized holding gains and losses (the adjustment to fair
value) included in Stockholders' equity. If the adjustment to fair value
reflects a decline in the value of the investment, management considers all
available evidence to evaluate the extent to which the decline is "other than
temporary" and marks the investment to market through a charge to the income
statement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments is obtained from market quotations and is
disclosed in Note H., "Investments" below. The fair value of foreign currency
forward contracts is based on forward rates in effect at the balance sheet date
and is disclosed below (see -- Hedging). There were no foreign currency forward
contracts outstanding at December 31, 1997.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. On disposal, the related cost
and accumulated depreciation or amortization are removed from the accounts and
any resulting gain or loss is included in the results of operations. Provision
for depreciation is generally computed using the straight-line method over the
estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and 20 to 40 years
for buildings). Certain specialized manufacturing equipment and facilities
allocated to Genzyme General (with a net book value of $169.9 million at
December 31, 1997) is depreciated over its remaining useful life using the
units-of-production method. The remaining life and recoverability of such
equipment is evaluated periodically based on the appropriate facts and
circumstances. Leasehold improvements are amortized over the lesser of the
useful life or the term of the respective lease. For products expected to be
commercialized, the Company capitalizes, to construction in-progress, the costs
of manufacturing process validation and optimization incurred beginning when the
product is deemed to have demonstrated technological feasibility and ending when
the asset is substantially complete and ready for its intended use. Qualified
costs include incremental labor and direct material, and incremental fixed
overhead and interest. These costs are depreciated using the units of production
method.
54
56
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLES
Intangible assets consist of goodwill, covenants not to compete, customer lists,
patents, trademarks, trade-names and technology rights and are being amortized
using the straight-line method over useful lives of three to forty years.
Management's policy regarding intangible assets is to evaluate the
recoverability of its intangible assets when the facts and circumstances suggest
that these assets may be impaired. Evaluations consider factors including
operating results, business plans, economic projections, strategic plans and
market emphasis. Evaluations also compare expected cumulative, undiscounted
operating incomes or cash flows with net book values of related intangible
assets. Unrealizable intangible asset values are charged to operations if these
evaluations indicate an impairment in value. Accumulated amortization of
intangibles were $43.3 million and $26.2 million as of December 31, 1997 and
1996.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company's foreign subsidiaries are translated
from local currency into U.S. dollars using the current exchange rate at the
balance sheet date for assets and liabilities and the average exchange rate
prevailing during the period for revenues and expenses. The local currency for
all Company foreign subsidiaries is considered to be the functional currency for
each entity and accordingly, translation adjustments for these subsidiaries are
included in Stockholders' equity. Exchange gains and losses on intercompany
balances of a long-term investment nature are also recorded as a charge or
credit to Stockholder's equity.
Transaction gains and losses are recorded in income and totaled net losses of
$0.3, $0.9 million and $0.8 million for the years ended December 31, 1997, 1996
and 1995, respectively.
HEDGING
FORWARD CONTRACTS
From time to time, the Company enters into forward contracts to reduce
foreign currency exchange risk. Such contracts are revalued using current
exchange rates at the balance sheet date. All gains and losses on revaluation
of forward contracts are included in net income. At December 31, 1997 the
Company had no currency contracts outstanding and at December 31, 1996, had
currency contracts valued at approximately $0.9 million. Related gains and
losses were not material to the financial statements.
INTEREST RATE HEDGE AGREEMENTS
Interest rate hedge agreements are used to reduce interest rate risks and
costs inherent in the Company's debt portfolio. The Company enters into these
agreements to change the fixed/variable interest rate mix of the portfolio to
reduce the Company's aggregate risk to movements in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. The differentials to be received or paid under contracts designated
as hedges are recognized in income over the life of the contracts as
adjustments to interest expense. The fair values of interest rate contracts
are estimated based on the estimated amount necessary to terminate the
agreements.
REVENUE RECOGNITION
Revenues from product sales are recognized when goods are shipped and are net of
third party contractual allowances and rebates, as applicable. Revenues from
service sales are recognized when the service procedures have been completed or
applicable milestones have been achieved. Revenues from research and development
contracts are recognized over applicable contractual periods as specified by
each contract and as costs related to the contracts are incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred. Costs of
purchased technology which management believes has not demonstrated
technological feasibility and for which there is no alternative future use are
charged to expense in the period of purchase.
ISSUANCE OF STOCK BY A SUBSIDIARY
Gains on the issuance of stock by a subsidiary are included in net income
unless the subsidiary 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 the Company accounts for the change in its
proportionate share of subsidiary equity resulting from the additional equity
raised by the subsidiary as an equity transaction.
55
57
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company uses the asset and liability method of accounting for deferred
income taxes. The provision for income taxes includes income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities. The Company has not
provided for possible U.S. taxes on the undistributed earnings of foreign
subsidiaries that are considered to be reinvested indefinitely. At December 31,
1997, such undistributed foreign earnings were approximately $4.0 million.
Based on the Company's policy of indefinite reinvestment in non-US operations,
it is not currently practicable to determine the tax liability associated with
the repatriation of those earnings.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GTR and GMO give
effect to the management and accounting policies adopted by the Genzyme Board in
connection with the redesignation of Genzyme common stock as GGD Stock and the
creation of GTR Stock and GMO Stock and are reported in lieu of consolidated per
share data. The Company computes net income (loss) per share for each division
by dividing the earnings attributable to each series of stock by the weighted
average number of shares of that stock outstanding during the period for basic
earnings per share and by the weighted average shares of that stock plus other
potentially dilutive securities outstanding during the applicable period for
diluted earnings per share. Earnings (loss) attributable to GGD Stock, GTR Stock
and GMO Stock equal the respective division's net income or loss for the
relevant period determined in accordance with generally accepted accounting
principles in effect at such time, adjusted by the amount of tax benefits
allocated to or from the division pursuant to the management and accounting
policies adopted by the Genzyme Board.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted net income per
share is very similar to the previously reported fully diluted earnings per
share except that the new treasury stock method used in determining the dilutive
effect of options uses the average market price for the period rather than the
higher of the average market price or the ending market price. All net income
(loss) per common share amounts have been restated to conform to SFAS 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
1997 1996 1995
---- ---- ----
GENZYME GENERAL
Net income (loss) attributable to GGD Stock
-basic and diluted (1) .................. $ 77,447 $(30,502) $ 43,680
======== ======== ========
Shares used in net income per common
share-basic .............................. 76,531 68,289 55,531
Effect of dilutive securities:
Employee and director stock options ........ 2,387 - 2,757
Warrants ................................... 7 - 1,897
6 3/4% convertible subordinated notes (1) .. - - 3,782
-------- -------- --------
Dilutive potential common shares (2) ....... 2,394 - 8,436
-------- -------- --------
Shares used in net income per common
share-diluted (1,2) ...................... $ 78,925 $ 68,289 $ 63,967
======== ======== ========
Net income (loss) per common share
- basic (1) .............................. $ 1.01 $ (0.45) $ 0.79
======== ======== ========
Net income (loss) per common share
- diluted (1,2) .......................... $ 0.98 $ (0.45) $ 0.68
======== ======== ========
- -------------------------
(1) In March 1996, $100.0 million of 6 3/4% convertible subordinated notes
issued by Genzyme in October 1991 were converted into approximately
3,782,000 shares of GGD Stock and 2,553 shares of GTR Stock. For the
diluted EPS calculation in 1995, no adjustment to Genzyme General's net
income is required in assuming the conversion of the notes as of
January 1, 1995 because substantially all of interest costs incurred on
the notes were capitalized.
(2) In computing diluted EPS for 1996, exercise of approximately 6,506,000
options and 35,000 warrants are not assumed as the result would be
antidilutive due to Genzyme General's net loss.
Options to purchase approximately 5,921,000 shares of GGD Stock in
1997, 3,824,000 shares in 1996, and 2,837,000 shares of stock in 1995 were
outstanding during the years then ended but were not included in the
year-to-date calculation of diluted income per share because the options'
exercise price was greater than the average market price of the common shares
during those periods. Warrants to purchase 40,000 shares of GGD stock
exercisable as of July 31, 1997 were not included in the year-to-date
calculation of diluted income per share because the exercise price of the
warrants was greater than the average market price of the common shares during
the year.
GENZYME TISSUE REPAIR
The following table sets forth the computation of basic and diluted
earnings per share:
(Amounts in thousands, except per share amounts) December 31,
- -----------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Net loss for basic and diluted weighted
average shares outstanding.................... $(45,984) $(42,315) $(22,030)
Basic and diluted weighted average shares
outstanding................................... 14,976 12,525 9,659
Net loss per common share -
basic and diluted ............................ $ (3.07) $ (3.38) $ (2.28)
During the years ended December 31, 1997, 1996, and 1995, certain
securities which were not included in the computation of diluted earnings per
share because they would have an anti-dilutive effect due to the net loss for
the years, were as follows: (i) options to purchase approximately 2,777,000,
2,574,000 and 1,985,000 shares of GTR Stock with a price range of $4.84-$12.88
per share; (ii) 885,000, 1,794,000 and 1,287,000 GTR Designated shares issuable
for the benefit of Genzyme General; (iii) debentures convertible into 1,772,000
shares of GTR Stock computed as of December 31, 1997.
GENZYME MOLECULAR ONCOLOGY
The following table sets forth the computation of basic and diluted
earnings per share:
(Amounts in thousands, except per share amounts) December 31,
- -----------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Net loss for basic and diluted weighted
average shares ............................... $(19,578) $ (1,003) $ (464)
Basic and diluted weighted average shares
outstanding................................... 3,910 3,910 3,910
Pro forma net loss per common share -
basic and diluted............................. $ (5.01) $ (0.26) $ (0.12)
During the year ended December 31, 1997, certain securities which
were not included in the computation of diluted earnings per share because they
would have an anti-dilutive effect due to the net loss for the year were as
follows: (i) options to purchase approximately 826,000 shares of GMO Stock at
$7.00 per share; (ii) warrants to purchase 10,000 shares of GMO Stock at $8.04
per share; (iii) debentures convertible into 3,476,000 shares of GMO Stock; and
(iv) 6,000,000 GMO Designated Shares issuable for the benefit of Genzyme
General. During the years ended December 31, 1996 and 1995, there were no
securities outstanding to be considered in this calculation.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has
disclosed herein pro forma net income and pro forma earnings per share in the
footnotes using the fair value based method for fiscal 1997, 1996 and 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its
56
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
components in annual financial statements. SFAS 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS 130 and SFAS 131, respectively. Application of SFAS 130
will have no impact on Genzyme's consolidated financial position, results of
operations or earnings per share data as currently reported or the combined
financial position, results of operations or earnings per share data as
currently reported for Genzyme General, GTR or GMO. The impact of adoption of
SFAS 131 on the Company's disclosures is being evaluated.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits ("SFAS 132"). SFAS 132 effective for
fiscal years beginning after December 15, 1997. Genzyme has not assessed the
impact of the Statement on its financial statement disclosures.
NOTE B. STRATEGIC FINANCIAL PROVISIONS
In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges mainly
associated with its Pharmaceutical and Surgical Products businesses and the sale
of GDI, which was sold in 1996. The Pharmaceutical business will now focus on
products that are more consistent with Genzyme's long-term business strategy of
moving towards higher-value products and away from fine chemical and bulk
pharmaceuticals. This change in strategy resulted in a $18.1 million charge to
cost of products sold primarily related to the melatonin, bulk pharmaceuticals
and fine chemical product lines which are being discontinued. In addition,
Genzyme recorded charges of $5.5 million to cost of products sold and $3.5
million to SG&A expense primarily related to the manufacturing and selling of
the Sepracoat product line, which an advisory panel of the U.S. Food and Drug
Administration ("FDA") recommended against granting market approval of this
product in 1997. Genzyme also recorded a $2.0 million charge to other expense
related to the uncertainty of collection on certain notes receivable.
NOTE C. ACQUISITIONS
ACQUISITIONS
The Company allocates all acquisitions to either Genzyme General, GTR or GMO
depending on the nature of the acquired business.
ALLOCATED TO GENZYME GENERAL:
NEOZYME II CORPORATION On October 28, 1996, Genzyme completed its tender
offer for the outstanding units (the "Units") of Neozyme II, each Unit
consisting of (i) one share of Neozyme II Callable Common Stock ("Callable
Common Stock"), and (ii) one callable warrant (the "Neozyme II Callable
Warrants") to purchase two shares of GGD Stock and 0.135 share of GTR
Stock, for $45.00 per Unit in cash. A total of 2,385,686 Units, or 98.8%,
were tendered and accepted for payment resulting in payment of $107.4
million.
On December 6, 1996, Neozyme II was merged with and into a wholly-owned
subsidiary of Genzyme and, as a result of the merger, all outstanding
shares of Callable Common Stock (other than shares held by Genzyme and its
subsidiaries) were cancelled and converted into the right to receive
$29.00 in cash per share, for an aggregate merger consideration of $0.9
million. The Neozyme II Callable Warrants included in the untendered Units
separated from the shares of Callable Common Stock converted in the
merger, and accordingly, 29,314 of such warrants became exercisable on
December 6, 1996. The Neozyme II Callable Warrants have an exercise price
of $44.202 per share and will expire on December 31, 1998. The aggregate
purchase price of Neozyme II was $111.3 million and consisted of $108.2
million of cash, warrants valued at $0.5 million and acquisition costs of
$2.6 million.
57
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for as a purchase. The excess purchase
price was allocated to Neozyme II's only remaining assets which were
technologies still in the development stage. These technologies consisted
of specific programs for the treatment of cystic fibrosis and have no
alternative future use. Accordingly, the statement of operations for the
year ended December 31, 1996 reflects a $106.5 million charge for
in-process technology and a related deferred tax benefit of $21.7 million
which were recorded upon consummation of the acquisition.
DEKNATEL SNOWDEN PENCER, INC.
On July 1, 1996, Genzyme completed the acquisition of DSP, a privately held
surgical products company. The purchase price of $252.2 million consisted
of cash of approximately $192.0 million, acquisition costs of approximately
$4.6 million and debt obligations of DSP of approximately $55.6 million.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair market value of the net assets acquired,
approximately $130.8 million, was allocated to goodwill to be amortized
over 40 years. Funds for the acquisition, the repayment of the debt and the
payment of the acquisition costs were provided by borrowings of $200.0
million under a revolving credit facility from Fleet National Bank.
The purchase price was allocated to the assets and liabilities of DSP based
on their estimated respective fair values on the date of acquisition.
Completed technology that has reached technological feasibility was valued
using a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks related to existing and future
markets and assessments of the life expectancy of the completed technology.
In-process technology that has not reached technological feasibility and
that has no alternative future use was valued using the same method.
Expected future cash flows associated with in-process technology are
discounted considering risks and uncertainties related to viability of and
to the potential changes in future target markets and to the completion of
the products expected to be ultimately marketed by Genzyme. The amount
allocated to in-process technology of $24.2 million was charged to
operations in July 1996 upon completion of the acquisition. The Company
incurred restructuring charges of $0.5 million related to this acquisition.
GENETRIX, INC.
On May 1, 1996, the Company acquired Genetrix, a privately held genetic
testing laboratory based in Phoenix, Arizona, in a tax-free exchange of
GGD Stock. In the aggregate, approximately 1,380,000 shares of GGD Stock
valued at approximately $36.5 million were issued for all the
outstanding shares of Genetrix preferred stock and Genetrix common stock.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets and liabilities of Genetrix based on their
respective estimated fair values at the date of acquisition. The excess of
the purchase price over the fair market value of the net assets acquired,
approximately $39.0 million, was allocated to goodwill to be amortized
over 15 years. The Company incurred restructuring charges of $1.0 million
related to closings of laboratories made redundant by the acquisition.
IG LABORATORIES, INC.
IG was an approximately 70%-owned subsidiary for the period from January
1, 1995 through October 1, 1995. In October 1995, Genzyme acquired the
publicly-held minority interest in IG by issuing approximately 770,510
shares of GGD Stock, valued at approximately $22.5 million. The
acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market value of the net assets acquired, approximately
$18.6 million, was allocated $14.2 million to in-process research and
development and charged to operations, and $4.4 million to goodwill to be
amortized over 11 years. Pro forma information is not presented since the
impact of the acquisition on financial statement periods prior to the
acquisition is not material.
ALLOCATED TO GENZYME MOLECULAR ONCOLOGY:
PHARMAGENICS, INC.
The merger of PharmaGenics with and into Genzyme (the "Merger") was
consummated on June 18, 1997.
58
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As compensation to Genzyme General for its contribution to GMO, 6,000,000
shares of GMO Stock have been reserved for issuance at the discretion of
the Genzyme Board for the benefit of Genzyme General or its stockholders
("GMO Designated Shares"). (See Note K., "Stockholder's Equity - GMO
Designated Shares" below).
The aggregate purchase price of $27.4 million (net of $0.6 million which
represents the fees payable by PharmaGenics in connection with the merger),
plus acquisition costs of $2.6 million and assumed liabilities of $5.4
million has been allocated to the acquired tangible and intangible assets
based on their respective fair values (amounts in thousands):
Property, plant & equipment .............................. $ 208
Other assets ............................................. 50
Completed technology rights (to be amortized over 3 years) 20,000
Goodwill (to be amortized over 3 years) .................. 15,729
Deferred tax liability (to be amortized over 3 years) .... (7,600)
In-process technology .................................... 7,000
--------
$ 35,387
========
Accumulated amortization of the completed technology rights and goodwill
was $5,127,000 as of December 31, 1997.
The $7.0 million allocated to in-process technology represents the value
assigned to PharmaGenics's programs which are still in the development
stage and for which there is no alternative use. The value assigned to
these programs (both complete and in-process) has been determined by
selecting the maximum anticipated value of these programs, as provided by
an independent valuation of the PharmaGenics business, based on comparable
technologies. The amount allocated to in-process technology was charged to
operations in June 1997, the period in which the merger was consummated.
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.
As of the date of the Merger, PharmaGenics had borrowed $2.5 million from
Genzyme under a credit facility (the "PharmaGenics Note") which Genzyme had
made available to PharmaGenics to fund PharmaGenics's documented operating
costs. Upon consummation of the Merger, the PharmaGenics Note became a
liability allocated to GMO and the $2.5 million of outstanding principal is
considered an intracompany loan by Genzyme General to GMO bearing interest
at 6% per annum and maturing on February 10, 2002 and convertible at any
time prior thereto, at the Genzyme Board's option, into GMO Designated
Shares. See Note K., "Stockholder's Equity - GMO Designated Shares" below.
Pro forma information is not presented since the impact of the acquisition
on financial statement periods prior to the acquisition is not material.
59
61
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents the results of
operations of Genzyme for the years ended December 31, 1997 and 1996 as if
the acquisitions of Genetrix, DSP, Neozyme II and PharmaGenics had been
consummated as of the beginning of the periods presented. This pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions been made as of those dates or of results that may occur in
the future. The pro forma financial information does not include charges for
in-process technology of (i) $24.2 million and $106.5 million related to the
DSP and Neozyme II acquisitions, respectively in 1996 and (ii) $7.0 million
related to the acquisition of PharmaGenics in 1997, all of which were
recognized as expense upon consummation of each acquisition.
YEARS ENDED DECEMBER 31,
----------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
------------------------------------------------ ----------- ----------
Pro forma revenues .......................................... $608,916 $565,004
Pro forma net income ........................................ 7,667 9,668
Pro forma net income attributable to GGD Stock .............. $77,447 $65,146
Pro forma net income per Genzyme
General common share - basic ............................ $1.01 $0.95
====== ======
Weighted average shares outstanding ....................... 76,531 68,289
====== ======
Pro forma net income per Genzyme
General common and common equivalent share - diluted .... $0.98 $0.88
====== ======
Adjusted weighted average shares outstanding .............. 78,925 73,704
====== ======
Pro forma net loss attributable to GMO Stock ................ $(26,091) $(15,113)
Pro forma net loss per GMO common share -
basic and diluted ....................................... $(6.67) $(3.87)
====== ======
Weighted average shares outstanding ....................... 3,910 3,910
====== ======
NOTE D. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments represent various degrees and types of
risk to Genzyme, including credit, interest rate and liquidity risk.
In the normal course of business, Genzyme enters into interest rate swap
contracts to hedge its interest rate risk related to its variable rate notes
payable. The notional amount of interest rate contracts is the amount upon which
interest and other payments under the contract are based.
Interest rate swaps generally involve the exchange of fixed and variable
interest payments between two parties based on a common notional principal
amount and maturity date. The primary risks associated with interest rate swaps
are the exposure to movements in interest rates and the ability of
counterparties to meet the terms of the contract.
At December 31, 1997, Genzyme had one swap agreement with a notional value of
approximately $100.0 million. The agreement matures in 1998.
NOTE E. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme's trade receivables primarily represent amounts due from healthcare
service providers and companies and institutions engaged in research,
development or production of pharmaceutical and biopharmaceutical products.
Genzyme performs ongoing credit evaluations of its customers and generally does
not require collateral. Accounts receivable are stated at fair value after
reflecting the allowance for doubtful accounts of $12.1 million and $16.5
million at December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996 accumulated amortization of intangible assets
was $43.3 million and $26.2 million, respectively.
NOTE F. INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
Raw materials ............ $ 48,392 $ 30,379
Work-in-process .......... 31,994 38,203
Finished products ........ 59,295 56,683
-------- --------
$139,681 $125,265
========= =========
NOTE G. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 include the following
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
Plant and equipment ....................$ 249,718 $ 217,594
Land and buildings ..................... 141,020 122,843
Leasehold improvements ................. 65,672 58,215
Furniture and fixtures ................. 15,364 14,714
Construction in-progress ............... 24,953 69,286
--------- ---------
496,727 482,652
Less accumulated depreciation .......... (111,379) (88,813)
--------- ---------
Property, plant and equipment, net.. $ 385,348 $ 393,839
========== ==========
60
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense was $33.5 million, $23.1 million and
$18.0 million in 1997, 1996 and 1995, respectively.
The Company attributes its fixed assets to Genzyme General, GTR or GMO based on
use.
The Company has completed construction of the Company's mammalian cell
production facility at Allston Landing in Boston, Massachusetts to produce a
recombinant form of Ceredase(R) enzyme and other products. The Company has
capitalized approximately $154.1 million of expenditures related to this
building and approximately $64.3 million of gross process validation and
optimization costs related to this and other manufacturing facilities. In 1997,
1996 and 1995, the Company capitalized approximately $0.5 million, $2.2 million
and $9.0 million of interest costs, respectively, relating to this and other
facility construction. The Company began depreciating this facility in July 1996
using the units of production method of depreciation. Depreciation expense for
1997 and 1996 related to this facility was $6.1 million and $1.7 million,
respectively.
NOTE H. INVESTMENTS
Consolidated investments in marketable securities at December 31 consisted of
the following:
1997 1996
-------------------- ----------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------- ---- ----- ---- -----
Short Term:
Certificates of deposit $ -- $ -- $ 1,882 $ 1,882
Corporate notes ....... 51,280 51,259 54,732 54,726
------- ------- ------- -------
$51,280 $51,259 $56,614 $56,608
======= ======= ======= =======
Long Term:
Corporate notes ....... $70,981 $70,921 $16,481 $16,485
U.S. Treasury notes ... 21,667 21,755 22,010 21,730
------- ------- ------- -------
$92,648 $92,676 $38,491 $38,215
======= ======= ======= =======
Equity securities ........ $29,609 $30,047 $10,905 $10,813
======= ======= ======= =======
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
Investment income for 1997, 1996 and 1995 includes gross realized
losses of $2,000, $47,000 and $110,000 respectively. Gross realized gains
included in investment income for 1995 were $1.4 million. The realized gain on
the investment in Nabi was reported as a separate line item in the Company's
statement of operations for 1996.
Gross unrealized holding losses of $3.0 million and unrealized holding gains of
$3.4 million were recorded at December 31, 1997 in Stockholders' equity as
compared to unrealized holding losses of $2.7 million and unrealized holding
gains of $2.3 million at December 31, 1996.
Information regarding the range of contractual maturities of investments in debt
securities at December 31, 1997 and 1996 is as follows:
1997 1996
-------------------- ----------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------- ---- ----- ---- -----
Within 1 year ................ $ 51,280 $ 51,259 $56,614 $56,608
After 1 year through 2 years . 63,905 63,855 11,399 11,415
After 2 years through 10 years 28,743 28,821 27,092 26,800
-------- -------- ------- -------
$143,928 $143,935 $95,105 $94,823
======== ======== ======= =======
Investments in marketable securities are attributed to either Genzyme General,
GTR or GMO.
61
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company holds certain strategic investments in unconsolidated entities
which may be attributed to either Genzyme General, GTR or GMO.
INVESTMENTS ALLOCATED TO GENZYME GENERAL:
ABIOMED, INC. ("ABIOMED")
In July 1997, Genzyme General purchased 1,153,846 shares of ABIOMED common
stock for $13.00 per share for an aggregate investment of $14,999,998. As a
result of the investment, Genzyme owns approximately 13% of ABIOMED. As of
December 31, 1997, the fair market value of the Company's investment in
ABIOMED was approximately $18.9 million. The Company's Chairman and Chief
Executive Officer is a director of ABIOMED.
CELTRIX Pharmaceuticals, INC. ("CELTRIX") and Aronex Pharmaceuticals, Inc.
("ARONEX") Genzyme owns 3,023,217 shares of common stock of CELTRIX and
423,306 shares of common stock of ARONEX. At December 31, 1997, the fair
market value of the Company's investments in Celtrix and Aronex were
approximately $5.5 million and $1.8 million, respectively.
Nabi (formerly NORTH AMERICAN BIOLOGICALS, INC.)
In April 1996, the Company disposed of its entire investment in Nabi and
recorded a realized gain of approximately $1.7 million on the sale.
GENZYME TRANSGENICS CORPORATION
Genzyme currently holds approximately 43% of the outstanding common stock of
GTC, and accounts for its investment in GTC under the equity method. Genzyme
and GTC are parties to a services agreement under which GTC pays Genzyme for
certain basic services provided by Genzyme, such as treasury, data processing
and laboratory support services, a sublease agreement pursuant to which
Genzyme subleases a portion of one of its facilities in Framingham,
Massachusetts to GTC and a research and development agreement pursuant to
which Genzyme and GTC each perform certain research services for each other.
During 1997, Genzyme received approximately $7.4 million from GTC pursuant to
the three agreements between the companies and GTC received approximately
$5.9 million from Genzyme pursuant to the research and development agreement.
In December 1995, GTC refinanced its line of credit and term loan agreement
with a commercial bank, subject to Genzyme's continuing guaranty of a total
of $9.8 million of credit facilities provided to GTC by the commercial bank.
The largest amount outstanding under these facilities during the fiscal year
ended December 31, 1997 was $6.0 million. In exchange for its guaranty,
Genzyme received a warrant to purchase 145,000 shares of GTC common stock
with an exercise price of $2.84375 per share.
In March 1996, GTC entered into a Convertible Debt and Development Funding
Agreement with Genzyme under which Genzyme agreed to provide a revolving line
of credit in the amount of $10.0 million and agreed to fund development costs
of the transgenic antithrombin ("AT-III") program through March 31, 1997 (the
"1996 Agreement"). Under the agreement, GTC granted to the Company
co-marketing rights to AT-III in all territories other than Asia subject to
negotiation and execution of a development and supply agreement between the
parties prior to March 31, 1997. Pursuant to the terms of this agreement, GTC
borrowed $4.3 million in 1996 from Genzyme General, of which $1.7 million of
this debt was converted into 219,565 shares of GTC Stock, $1.2 million was
offset against amounts owed by Genzyme General to GTC for services provided
in relation to the AT-III program and $1.4 million was repaid by GTC with
accrued interest.
62
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 1997, Genzyme and GTC entered into an Amended and Restated
Convertible Debt Agreement (the "1997 Debt Agreement"), which superseded and
replaced the provisions of the 1996 Agreement other than the provisions relating
to the development and commercialization of ATIII. Under the 1997 Debt
Agreement, the line of credit was reduced to $8,327,000 and the expiration date
of the revolving credit line was extended to March 31, 2000, with an option, at
that date, for GTC to convert the outstanding balance to a three-year term loan.
The interest rate remains at 7% through April 1, 1998. Thereafter, the interest
rate increases annually starting at a rate equal to the lower of 8% or the prime
lending rate in the first year and ending at a rate equal to the lower of 10% or
the prime lending rate plus 2% from April 2, 2002 through the final year of the
term loan. Financial covenants require positive quarterly earnings before
interest, taxes, depreciation, amortization and unfunded research and
development expense starting April 1, 1998. Any amounts outstanding under the
credit line may be converted into shares of GTC common stock at Genzyme's option
at any time for up to the full amount outstanding or at GTC's option on a
quarterly basis limited to an amount sufficient to maintain a minimum tangible
net worth required for continued listing on the Nasdaq National Market. All such
conversions are to be based on the average closing stock price over 20 trading
days ending two trading days prior to the date of conversion. The largest amount
outstanding under this line of credit during the fiscal year ended December 31,
1997 was $6.0 million. As of December 31, 1997, $2.0 million remained
outstanding under this credit line.
In December 1997, Genzyme and GTC established ATIII LLC, a joint venture for the
development and commercialization of ATIII effective as of January 1, 1998.
Initially, Genzyme will fund 70% of the development costs up to a maximum of
$33.0 million and GTC will fund the remaining 30% of the development costs. Both
companies will fund equally any costs in excess of that level, and profits will
be split equally. To the extent that either party fails to fund its share of
costs and expenses, the profit sharing interests and the future funding
obligations of the parties may be proportionately adjusted. The joint venture
has the right to commercialize ATIII worldwide, excluding Asia. GTC has
contributed ATIII and the product's underlying patents and technology to
the joint venture. Pursuant to the terms of the joint venture agreements,
Genzyme will pay GTC certain amounts upon the achievement of milestones events.
GTC will manufacture ATIII in bulk form and Genzyme will perform the finished
processing work. Genzyme, as the exclusive distributor for ATIII LLC, will
market and sell products for the joint venture in the territory. The joint
venture agreements supersede and replace the provisions of the 1996 Agreement
that related to the ATIII program, pursuant to which Genzyme had previously
funded the ATIII program.
The fair market value of the GTC shares, based on quoted market prices, was
$71.5 million and $45.5 million at December 31, 1997 and 1996, respectively.
The Company reported equity in GTC's net losses of $2.9 million, $2.4 million
and $1.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Following are condensed statements of operations and balance
sheet data of GTC which are recorded as other noncurrent assets in Genzyme's
financial statements:
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ---- ---- ----
Revenues ............. $ 62,938 $ 46,834 $32,421
Operating loss ....... (8,352) (7,253) (7,855)
Net loss ............. (9,343) (7,746) (4,133)
DECEMBER 31,
------------
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- ---- ----
Current assets ....... $ 24,400 $24,642
Noncurrent assets .... 46,580 42,062
Current liabilities .. 32,823 24,758
Noncurrent liabilities 10,779 6,742
63
65
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GELTEX PHARMACEUTICALS, INC. AND RENAGEL LLC
In June 1997, Genzyme and GelTex established RenaGel LLC, a joint venture for
the final development and commercialization of RenaGel(R) non-absorbed
phosphate binder. Each of Genzyme and GelTex currently hold a 50% ownership
interest in RenaGel LLC. Genzyme and GelTex are each required to fund 50% of
the joint venture's costs and expenses, and will share equally in the
profits. To the extent that either party fails to fund its share of costs and
expenses, the profit sharing interests and the future funding obligations of
the parties may be proportionately adjusted. GelTex contributed RenaGel(R)
and the product's underlying patents and technologies to the joint venture.
Pursuant to the terms of the joint venture agreements, Genzyme will pay
GelTex a total of $27.5 million, consisting of a $2.5 million equity
investment for 100,000 shares of GelTex common stock at $25.00 per share,
which represents less than 1% ownership in GelTex, which was made in June
1997, a $15.0 million payment on receipt of FDA marketing approval for
RenaGel and a $10.0 million payment one year following FDA marketing approval
for RenaGel(R). The joint venture has rights to commercialize RenaGel(R)
worldwide, except in Japan and Pacific Rim countries. Genzyme, as exclusive
distributor for RenaGel LLC, will market and sell products for the joint
venture pursuant to the terms of the joint venture agreement in the
territory. The Company's Chairman and Chief Executive Officer is a director
of Geltex.
INVESTMENT ALLOCATED TO GENZYME TISSUE REPAIR:
DIACRIN/GENZYME LLC
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin to develop and commercialize products and processes
for use in the treatment of Parkinson's disease and Huntington's disease in
humans using porcine fetal cells. Under the terms of the joint venture
agreement, GTR is required to provide 100% of the initial $10.0 million of
the funding requirements and 75% of the next $40.0 million of funding
requirements. After that, all costs will be shared equally between GTR and
Diacrin. Profits from the joint venture will be shared by the two parties.
Genzyme General has agreed to provide funding to GTR in support of GTR's
joint venture efforts in exchange for GTR Designated Shares. Pursuant to this
agreement, Genzyme General allocated $5.1 million and $1.9 million of cash to
GTR in 1997 and 1996, respectively, and 489,810 and 231,645 GTR Designated
Shares, respectively, were reserved for issuance by the Genzyme Board's for
the benefit of Genzyme General or its stockholders. As of December 31, 1997,
GTR has provided a total of $8.7 million of funding to the joint venture and
realized net losses from the joint venture of $6.7 million in 1997 and $1.7
million in 1996. Summary financial information is not presented as the
impact of the Joint Venture's activities on the Company's statement of
operations for the years ended December 31, 1997 is not considered to be
material. The Company's Chairman and Chief Executive Officer is a director of
Diacrin.
INVESTMENT ALLOCATED TO GENZYME MOLECULAR ONCOLOGY:
STRESSGEN/GENZYME LLC
In July 1997, StressGen/Genzyme LLC was established as a joint venture among
Genzyme, StressGen and CMDF to develop stress gene therapies for the
treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in
connection with the joint venture through the combination of a capital
contribution to StressGen/Genzyme LLC in the amount of $1.0 million
(Canadian), the purchase of warrants from Genzyme in the amount of $1.0
million (Canadian), the purchase of warrants and preferred stock from
StressGen in the amount of $1.4 million (Canadian) and a limited recourse
loan bearing interest at 0.125% per annum to StressGen in the amount of $6.6
million (Canadian). Each of Genzyme and StressGen (through a U.S. subsidiary)
also made a capital contribution to StressGen/Genzyme LLC in the amount of
$1.0 million (Canadian) and a limited recourse loan was made by the U.S.
subsidiary of StressGen to StressGen/Genzyme LLC in the amount of $7.0
million (Canadian). In addition, Genzyme and StressGen have agreed to provide
in equal shares any additional capital required by the joint venture in
excess of the initial $10.0 million (Canadian) in funding.
64
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Genzyme and StressGen have an option, payable in equal shares, to purchase
CMDF's membership interest in StressGen/Genzyme LLC at any time during the
three-year period beginning July 31, 1999 and ending July 31, 2002. The
exercise price of the Purchase Option initially will be $15.6 million
(Canadian) in July 1999 and will increase monthly thereafter to a final
exercise price of $30.5 million (Canadian) in July 2002. The limited
recourse loan made by CMDF will be retired in connection with the exercise
of the Purchase Option. If the Purchase Option is not exercised on or before
July 31, 2002, CMDF may require Genzyme and StressGen to repay $2.0 million
(Canadian) each of the limited recourse loan. In addition, at any time
during the 30-day period commencing on the date when not less than 75% of
the initial funding provided by CMDF has been spent by the joint venture,
but in no event later than July 31, 1999, CMDF shall have the right to
require Genzyme and StressGen to purchase its membership interest at an
aggregate purchase price of $10.0 million (Canadian) plus interest thereon
at a rate per annum equal to the Canadian prime rate plus 1%. The Mandatory
Purchase Right will terminate if not exercised by CMDF during such 30-day
period. Genzyme's share of any amounts payable to CMDF upon exercise of the
Purchase Option, the Mandatory Purchase Right or repayment of the limited
recourse loan may be paid in cash, Genzyme common stock or any combination
thereof at the discretion of Genzyme.
Prior to the repurchase of CMDF's membership interest in StressGen/Genzyme
LLC, profits from the joint venture will be shared in proportion to the
capital contributions of the three parties. Following the repurchase of
CMDF's membership interest, profits will be shared equally by StressGen and
Genzyme. However, GMO currently records 50% of the net operating losses of
the joint venture due to the existence of the Mandatory Purchase Right.
Accordingly, for the year ended December 31, 1997, GMO recorded $258,000 of
equity in loss of joint venture.
GMO recorded $315,000 and $287,000 of research and development revenue and
cost of research and development revenue, respectively, related to services
billed to StressGen/Genzyme LLC for the year ended December 31, 1997. GMO
has a receivable of $427,000 from StressGen/Genzyme LLC at December 31,
1997, which is included in other current assets.
NOTE I. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
Professional fees .... $ 7,949 $ 4,402
Compensation ......... 21,917 22,626
Royalties ............ 8,421 8,323
Rebates .............. 4,575 7,604
Interest ............. 799 1,681
Other ................ 28,442 25,488
------- -------
$72,103 $70,124
======= =======
65
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Although the Company retains responsibility for the repayment of all long-term
debt obligations, such debt and leases are allocated to Genzyme General, GTR or
GMO for reporting purposes based on the intended use of the funds borrowed under
each instrument or facility or equipment leased.
Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1997 1996
----------------------------------------------------- ---- ----
Revolving Credit Facility ........................... $ 118,000 $ 218,000
6% convertible subordinated debentures .............. 16,617 --
5% convertible subordinated debentures .............. 12,681 --
Mortgage note payable, matures June 13, 1999 ........ 19,833 20,375
Other mortgage notes payable ........................ 3,856 3,983
--------- ---------
170,987 242,358
Less current portion ................................ (711) (999)
--------- ---------
$ 170,276 $ 241,359
========= =========
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1998 - $711,000, 1999 -
$137,397,000, 2000 - $12,831,000, 2001 - $160,000, 2002 - $16,787,000 and
thereafter $3,101,000.
CREDIT FACILITIES
In November 1996, Genzyme refinanced its existing $215.0 million line of credit
(the "Credit Line") with a Revolving Credit Facility made available through a
syndicate of commercial banks administered by Fleet National Bank in the amount
of $225.0 million. Amounts drawn under this facility may be allocated to Genzyme
General, GTR or GMO. As of December 31, 1996, Genzyme had $218.0 million of debt
outstanding under the Revolving Credit Facility, of which $200.0 million was
allocated to Genzyme General and $18.0 million to GTR. In June 1997, $5.0
million of borrowings originally allocated to Genzyme General were reallocated
to GMO. As of December 31, 1997, Genzyme had $118.0 million of debt outstanding
under the Revolving Credit Facility, which had been allocated $95.0 million to
Genzyme General, $18.0 million to GTR and $5.0 million to GMO.
REVOLVING CREDIT FACILITY
Genzyme may request loans up to a maximum aggregate principal amount outstanding
at any time of $225.0 million under the terms of the Revolving Credit Facility.
Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and
conditions defined in the credit agreement. The notes have certain covenants
which require Genzyme to, among other things, maintain certain levels of
earnings and liquidity ratios. If Genzyme defaults on the covenants the
Revolving Credit Facility is payable on demand. The stock of Genzyme Securities
Corporation, a Massachusetts Securities Corporation, is pledged as collateral
for this facility. As of December 31, 1997, the interest rate on amounts
outstanding under the Revolving Credit Facility was approximately 6.28%. Genzyme
pays a commitment fee ranging from .15% to .375% on the unused portion of the
Revolving Credit Facility.
INTEREST RATE HEDGE AGREEMENT
In December 1996, Genzyme entered into a $100.0 million interest rate swap
contract (the "Interest Rate Swap Contract") to effectively convert the variable
interest rate on borrowings under the Revolving Credit Facility to fixed
interest rates. Net payments made or received under the Interest Rate Swap
Contract are recorded as interest expense. At December 31, 1997, the Interest
Rate Swap Contract had a termination value of approximately ($618,000).
66
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTR PRIVATE PLACEMENT:
On February 28, 1997, GTR raised $13.0 million through the private placement of
the GTR Note to an affiliate of Credit Suisse First Boston due February 27,
2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR
Stock and, beginning August 1997, at a discount to the average of the closing
bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading
days immediately preceding the conversion date (the "Average GTR Stock Price").
The discount will start at 2% beginning six months from the date the GTR Note
was issued and will increase to 11% at 15 months after the date of issue.
Thereafter, the conversion price will be the lesser of 89% of the Average GTR
Stock Price preceding the conversion date or the date 15 months after the date
of issue. In the first quarter of 1997, GTR recorded $11.5 million of proceeds
attributed to the value of the debt and $1.5 million attributed to the value of
the conversion feature (recorded as an increase to division equity). The debt
will be accreted to its $13.0 million face value by a charge to interest expense
of $1.5 million over the term of the initial 15 month conversion period.
GMO PRIVATE PLACEMENT
On August 29, 1997, GMO raised $20.0 million through the private placement of
the GMO Debentures, due August 29, 2002. The GMO Debentures are convertible into
shares of GMO Stock, at the option of the holders, beginning on the 91st day
after the effective date of a registration statement covering the GMO IPO at the
average of the closing bid prices of GMO Stock as reported by the Nasdaq
National Market for the 20 trading days immediately preceding the applicable
conversion date (the "GMO Market Price"). Beginning February 26, 1998, the GMO
Debentures are convertible at a discount to the GMO Market Price. This discount
will begin at 7% on February 26, 1998 and will increase by an additional one
percent every 30 days thereafter to 15% on October 24, 1998. Beginning November
23, 1998, the conversion price will be the lower of (i) 85% of the GMO Market
Price calculated as of the actual conversion date and (ii) 85% of the GMO Market
Price calculated as of November 21, 1998. In no event, however, will the
conversion price be less than $7.70 per share (subject to adjustment in the
event of any stock split, stock dividend, reclassification, combination or
singular event). In the third quarter of 1997, GMO recorded $16.5 million of
proceeds attributed to the value of the debt and $3.5 million attributed to the
value of the conversion feature (recorded as an increase to division equity).
The debt will be accreted to its $20.0 million face value by a charge to
interest expense of $3.5 million over the term of the initial 15 month
conversion period.
The Genzyme Board approved the allocation of up to $25.0 million in cash from
Genzyme General to GMO (the "GMO Equity Line"), subject to a dollar-for-dollar
reduction by the proceeds of outside financing received by GMO. As a result
of the issuance of the GMO debentures in August 1997, the amount available
under the GMO Equity Line was reduced to $5.0 million. No draws have been made
under the Equity Line to date. Upon successful completion of a GMO IPO the
Equity Line will terminate.
If the effective date of the GMO IPO does not occur before August 29, 1998, at
the holder's option, the GMO Debentures may be exchanged for a 5% convertible
debenture issued by Genzyme General (the "GGD Debenture") due August 29, 2003.
If the GMO IPO is completed before August 29, 1998 but the aggregate proceeds
from the offering are less than $15.0 million or GMO's market capitalization is
below $90.0 million, at the holder's option, 50% of the GMO Debentures can be
exchanged for the Genzyme General Debentures. The exchange option must be
exercised within 30 business days of the event triggering the right of exchange.
Beginning on the 181st day following the effective date of the GMO IPO, the
holders of the GMO Debentures have the option (the "Put Option") to require
Genzyme to pay the entire principal amount of the GMO Debentures in cash,
together with interest at the rate of 15% per annum (less any interest
previously paid) if the conversion price (as calculated above) is less than
$7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put
Option is exercisable only with respect to the first three Put Option Review
Periods that occur while the GMO Debentures are outstanding and, if the Put
Option is not exceeded within 15 days after any Put Option Review Period, a
period of 90 days from the last day of the previous Put Option Review Period
must elapse before another Put Option Review Period commences.
The GMO Debentures are callable with cash or stock beginning 18 months after the
effective date of the GMO IPO if the stock has closed at 150% of the fixed
conversion price for 20 consecutive trading days.
MORTGAGE NOTES
The Company's three mortgage notes have been attributed to Genzyme General.
The mortgage note due June 1999 is collateralized by land and buildings with a
net book value of $27.6 million at December 31, 1997, bears interest at 7.73%
annually, and is payable monthly based on a 20 year direct reduction
amortization schedule, with the remaining principal due June 13, 1999.
67
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The mortgage note maturing November 2014 is collateralized by land and buildings
with a net book value of $6.1 million at December 31, 1997 and bears interest at
10.5%. The mortgage note maturing January 2008 provides the bank with a "call or
review" feature at the end of the first 60 month period, allowing the bank to
adjust the note under specific circumstances. This note bears interest at a
variable rate of prime plus 1% and is collateralized by land and fixtures.
Principal and interest are payable monthly on both of these notes.
CONVERSION OF $100.0 Million 6 3/4% CONVERTIBLE SUBORDINATED NOTES
In March 1996, holders of Genzyme's 6 3/4% Convertible Subordinated Notes due
October 1, 2001 in the aggregate principal amount of $100.0 million (the
"Notes"), converted such Notes into shares of GGD Stock and GTR Stock pursuant
to the amended terms of the Notes and received 37.826 shares of GGD Stock and
2.553 shares of GTR Stock in conversion of each $1,000 Note. Prior to
conversion, the Notes had been allocated to Genzyme General.
OPERATING LEASES
Total rent expense under operating leases was $16.3 million, $12.8 million and
$10.0 million in 1997, 1996 and 1995, respectively. The Company leases
facilities and personal property under certain operating leases in excess of one
year.
FUTURE MINIMUM PAYMENTS DUE UNDER CAPITAL AND OPERATING LEASES:
Future minimum payments due under the Company's long-term obligations and
capital and operating leases are as follows:
CAPITAL OPERATING
(DOLLARS IN THOUSANDS) LEASES LEASES
---------------------- ------ ------
1998 .................................. 203 $ 14,903
1999 .................................. 20 14,296
2000 .................................. 0 13,153
2001 .................................. 0 10,014
2002 .................................. 0 9,611
Thereafter ............................ 0 80,009
---- --------
Total minimum payments ............. 223 141,986
Less: interest ........................ (12)
---- --------
$211 $141,986
==== ========
NOTE K. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more series.
The Genzyme Board may determine, in whole or in part, the preferences, voting
powers, qualifications, and special or relative rights or privileges of any such
series before the issuance of any such shares of that series. The Genzyme Board
shall determine the number of shares constituting each series of preferred stock
and each series shall have a distinguishing designation.
CREATION OF GGD STOCK AND GTR STOCK
Immediately prior to the Effective Date, as defined in Note A., "Summary of
Significant Accounting Policies" above, approximately 31,582,000 shares of
Genzyme common stock were reserved for issuance under the Company's 1990 Equity
Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase
Plan, outstanding warrants (the "Warrants"), and the conversion of the Notes.
Pursuant to antidilution provisions in the agreements covering the options,
Genzyme has adjusted each option outstanding on the Effective Date to provide
for separation of the option into an option exercisable for GGD Stock and an
option exercisable for the number of shares of GTR Stock that the holder would
have received if the holder had exercised the option immediately prior to the
Effective Date. The Warrants provide that the holder of the Warrant is entitled
to receive the number of shares of GGD Stock and GTR Stock upon exercise of the
Warrant that the holder would have received had the holder exercised the Warrant
immediately prior to the Effective Date. Pursuant to the indenture under which
the Notes were issued, the conversion privilege of the Notes
68
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was adjusted so that the holder of a Note converted after the Effective Date
would receive, in addition to the shares of GGD Stock into which the Note is
convertible, the same number of shares of GTR Stock as the holder would have
received had the holder converted the Note immediately prior to the Effective
Date.
CREATION OF GMO STOCK
In June 1997, Genzyme issued 3,909,908 shares of GMO Stock to effect the
acquisition of PharmaGenics (See Note C., "Acquisitions" above).
STOCK OFFERINGS
In November 1997, Genzyme sold 4,000,000 shares of GTR Stock to the public at a
price of $7.75 per share for net proceeds of $29.0 million after offering costs
and underwriting discounts and commissions. In October 1995, Genzyme sold
5,750,000 shares of GGD Stock to the public at a price of $25.63 per share for
net proceeds of $141.3 million after underwriting discounts and commissions. In
September 1995, Genzyme sold 3,000,000 shares of GTR Stock to the public at a
price of $15.00 per share for net proceeds of $42.3 million after underwriting
discounts and commissions.
STOCK SPLIT
In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of
GGD Stock to be effected by means of a 100% stock dividend payable on July 25,
1996 to stockholders of record on July 11, 1996, subject to stockholder approval
of an amendment to the Genzyme Charter to increase the number of authorized
shares of GGD Stock from 100,000,000 to 200,000,000 shares (the "Amendment").
The Amendment was approved by holders of a majority in interest of the
outstanding GGD Stock and GTR Stock, voting together as a single class, at a
special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a
total of 34,669,435 shares of GGD Stock were distributed to stockholders in
connection with the dividend. All share and per share amounts have been
re-stated to reflect this split.
DEFERRED COMPENSATION PLAN
Genzyme's Directors' Deferred Compensation Plan (the "Deferred Compensation
Plan") allows each member of the Genzyme Board who is not also an officer,
employee or consultant of Genzyme to defer receipt of all or a portion of the
cash compensation payable to him or her as a director of Genzyme. Compensation
may be deferred until the termination of services as a director or, subject to
certain restrictions, such other date as may be specified by the director. All
of the current directors of Genzyme, other than those directors who are also
officers, employees or consultants of Genzyme, are eligible to participate in
the plan and as of December 31, 1997, one of the directors has elected to
participate in the plan. Genzyme has reserved 50,000 shares of GGD Stock,
100,000 shares of GTR Stock and 50,000 shares of GMO Stock to cover
distributions of shares credited to stock accounts under the Deferred
Compensation Plan (subject in each case to adjustments for stock splits, stock
dividends, and certain transactions affecting Genzyme's capital stock). As of
December 31, 1997, no shares of GGD Stock, GTR Stock, or GMO Stock credited to
stock accounts under the Deferred Compensation Plan have been distributed to
participants in such plan.
SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS STOCK OPTION PLAN
AND EMPLOYEE STOCK PURCHASE PLAN
At December 31, 1997, approximately 18,135,000 shares of GGD Stock, 5,392,000
shares of GTR Stock and 4,070,000 shares of GMO Stock were reserved for issuance
under the Company's 1990 Equity Incentive Plan, as amended, 1997 Equity Plan,
1988 Director Stock Option Plan, as amended, 1990 Employee Stock Purchase Plan,
as amended, and upon the exercise of outstanding warrants.
STOCK OPTIONS
Pursuant to the 1990 Equity Incentive Plan, as amended, and the 1997 Equity Plan
options may be granted to purchase an aggregate of 23,800,000 shares of GGD
Stock 5,300,000 shares of GTR Stock and 3,500,000 shares of GMO Stock. The
plans allow the granting of stock options at not less than fair market value at
date of grant, and stock appreciation rights, performance shares, restricted
stock and stock units to employees and consultants of the Company, each with a
maximum term of ten
69
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years. In addition, Genzyme has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 233,600 shares
or GGD Stock, 100,000 shares of GTR Stock and 70,000 shares of GMO Stock,
respectively, are automatically granted at fair market value to members of the
Genzyme Board upon their election or reelection as directors. For each year of
a director's term of office, he or she receives an option to purchase 4,000
shares of GGD Stock and a number of GTR Stock and GMO Stock options with a
market value equal to one-quarter of the market value of the stock subject to
GGD Stock options. All options expire ten years after the initial grant date
and generally vest over four years.
Stock option activity is summarized below:
WEIGHTED
SHARES AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
GGD STOCK:
Outstanding at December 31, 1994 .... 10,481,700 $15.13 4,683,967
Granted ........................... 4,141,502 23.25
Exercised ......................... (2,007,654) 13.97
Forfeited and cancelled ........... (442,882) 14.96
----------
Outstanding at December 31, 1995 .... 12,172,666 17.79 5,138,502
Granted ........................... 3,442,484 29.16
Exercised ......................... (906,041) 15.70
Forfeited and cancelled ........... (643,626) 22.81
----------
Outstanding at December 31, 1996 .... 14,065,483 20.48 6,505,835
Granted ........................... 2,083,936 29.86
Exercised ......................... (1,760,934) 16.25
Forfeited and cancelled ........... (1,041,218) 23.77
----------
Outstanding at December 31, 1997 .... 13,347,267 22.22 6,982,224
==========
GTR STOCK:
Outstanding at December 31, 1994 .... 940,976 4.84 207,583
Granted ........................... 1,160,928 12.86
Exercised ......................... (48,232) 5.15
Forfeited and cancelled ........... (68,435) 4.96
----------
Outstanding at December 31, 1995 .... 1,985,237 8.66 449,257
Granted ........................... 819,142 12.88
Exercised ......................... (81,117) 5.23
Forfeited and cancelled ........... (149,043) 9.50
----------
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
==========
GMO STOCK:
Outstanding June 18, 1997 --
Granted ............................. 826,334 7.00
----------
Outstanding at December 31, 1997 .... 826,334 7.00 180,063
==========
70
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total exercise proceeds for all options outstanding at December 31, 1997 is
approximately $296,601,000, $29,152,000 and $5,784,338 for GGD Stock, GTR Stock
and GMO Stock, respectively. Information regarding the range of option prices as
of December 31, 1997 is as follows:
GGD STOCK:
EXERCISABLE
------------------------------
RANGE OF NUMBER WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE
AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
CONTRACTUAL
LIFE
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.85 - $14.72 2,678,907 4.44 $11.32 1,953,504 $10.16
$14.75 - $19.44 3,238,377 6.10 $17.61 2,131,983 $17.72
$19.50 - $28.00 3,390,201 7.19 $25.32 1,569,813 $24.04
$28.06 - $30.63 3,830,507 8.95 $30.36 1,233,521 $30.27
$30.65 - $38.00 209,275 7.90 $33.63 93,403 $33.13
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.85 - $38.00 13,347,267 6.89 $22.2168 6,982,224 $19.45
GTR STOCK:
EXERCISABLE
------------------------------
RANGE OF NUMBER WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE
AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
CONTRACTUAL
LIFE
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.19 - $ 6.00 906,686 7.07 $ 5.09 655,865 $ 5.03
$ 6.63 - $11.75 752,948 9.50 $ 9.90 133,227 $ 9.97
$11.88 - $17.50 1,052,530 8.09 $14.93 274,797 $13.49
$17.63 - $25.75 64,598 8.08 $21.24 20,643 $20.50
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.19 - $25.75 2,776,762 8.14 $10.50 1,084,532 $ 8.07
GMO STOCK:
EXERCISABLE
------------------------------
NUMBER WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICE OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE
AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
CONTRACTUAL
LIFE
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$7.00 826,334 9.77 $7.00 180,063 $ 7.00
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
EMPLOYEE STOCK PURCHASE PLAN
Genzyme's 1990 Employee Stock Purchase Plan allows full-time employees, as
defined in the plan, to purchase the Company's stock at 85% of fair market
value. Under this plan, (i) 2,000,000 shares of GGD Stock are authorized, of
which 366,922, 291,053 and 285,868 shares were issued in 1997, 1996 and 1995,
respectively, (ii) 1,100,000 shares of GTR Stock are authorized, of which
280,819, 325,300 and 269,920 shares of GTR Stock were issued in 1997, 1996 and
1995, respectively, and (iii) 500,000 shares of GMO Stock are authorized, of
which no shares were issued in or prior to 1997.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related Interpretations in accounting for
its four stock-based compensation plans, the 1990 Equity Incentive Plan and
the 1997 Equity Incentive Plan (both of which are stock option plans), the
1990 Employee Stock Purchase Plan (a stock
71
73
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase plan) and the 1988 Director Stock Option Plan and accordingly, no
compensation expense has been recognized for options granted and shares
purchased under the provisions of these plans for options granted to employees
with an exercise price equal to fair market value. Had compensation expense for
the stock-based compensation plans been determined based on the fair value at
the grant dates for options granted and shares purchased under the plans
consistent with the method of SFAS 123, net income (loss) and income (loss) per
share would have been as follows (In the case of GMO, disclosure is presented
exclusively for the year ended December 31, 1997, as there were no stock options
issued under the above mentioned plans prior to 1997):
DECEMBER 31,
------------
(Amounts in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
CONSOLIDATED:
Net income (loss):
as reported .................. $ 13,629 $ (72,817) $ 21,650
pro forma .................... (2,150) $ (86,293) $ 17,261
GENZYME GENERAL:
Net income (loss):
As reported .................. $ 77,447 $ (30,502) $ 43,680
Pro forma .................... 65,440 $ (40,558) $ 40,429
Basic income (loss) per share:
As reported .................. $ 1.01 $ (0.45) $ 0.79
Pro forma .................... $ 0.86 $ (0.59) $ 0.73
Diluted income (loss) per share:
As reported .................. $ 0.98 $ (0.45) $ 0.68
Pro forma .................... $ 0.83 $ (0.59) $ 0.63
GENZYME TISSUE REPAIR:
Net loss:
As reported .................. $ (45,984) $ (42,315) $ (22,030)
Pro forma .................... $ (49,547) $ (45,735) $ (23,168)
Basic and diluted loss per share:
As reported .................. $ (3.07) $ (3.38) $ (2.28)
Pro forma .................... $ (3.31) $ (3.65) $ (2.40)
GENZYME MOLECULAR ONCOLOGY:
Net loss:
As reported .................. $ (19,578) -- --
Pro forma .................... $ (19,787) -- --
Basic and diluted loss per share:
As reported .................. $ (5.01) -- --
Pro forma .................... $ (5.06) -- --
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995, and additional awards are
anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, Genzyme General has assumed a risk-free interest rate equal to
approximately 5.96%, 6.37% and 6.33%, expected volatility of 42% in 1997 and
45% in each of 1996 and 1995, zero dividend yields and expected lives of four
years for 1997,
72
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 and 1995, respectively. The average fair value of the Genzyme General
options granted during 1997, 1996 and 1995 is estimated as $12.21, $11.98 and
$11.53, respectively, on the date of grant. In computing these pro forma
amounts, GTR has assumed a risk-free interest rate equal to approximately 5.96%,
6.37% and 6.33%, expected volatility of 70% in 1997 and 80% in each of 1996 and
1995, zero dividend yields and expected lives of four years for 1997, 1996, and
1995, respectively. The average fair value of GTR Stock granted during 1997,
1996 and 1995 is estimated as $5.66, $9.23 and $10.06, respectively, on the date
of grant. In computing these pro forma amounts, GMO has assumed a risk-free
interest rate equal to approximately 5.96%, expected volatility of 45%, zero
dividend yields and expected lives of four years for 1997. The average fair
value of the options exercisable for shares of GMO Stock granted during 1997 is
estimated as $2.97 on the date of grant.
STOCK RIGHTS
Pursuant to the Company's Restated Rights Agreement, each outstanding share of
GGD Stock, GTR Stock and GMO Stock also represents one preferred stock purchase
right (a "GGD Stock Right", a "GTR Stock Right" and a "GMO Stock Right",
respectively). Each GGD Stock Right, GTR Stock Right and GMO Stock Right, when
it becomes exercisable, will entitle the registered holder to purchase from
Genzyme (i) in the case of a GGD Stock Right, one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a purchase price of $26.00,
subject to adjustment, (ii) in the case of a GTR Stock Right, one one-hundredth
of a share of Series B Junior Participating Preferred Stock at a purchase price
of $25.00, subject to adjustment, and (iii) in the case of a GMO Stock Right,
one one-hundredth of a share of Series C Junior Participating Preferred Stock
at a purchase price of $21.00, subject to adjustment.
WARRANTS
Genzyme sold three warrants (the "Front-End Warrant", the "NDA Warrant", and the
"Callable Warrant", to purchase Genzyme common stock to CMDF for an aggregate
purchase price of $1.0 million (Canadian). Each warrant is initially exercisable
for up to 40,000 shares of GGD Stock and will be converted automatically upon
the closing date of the GMO IPO into warrants to purchase shares of GMO Stock as
follows:
The Front-End Warrant is exercisable immediately and will terminate upon the
earlier of the exercise of the Mandatory Purchase Right by CMDF or July 31,
2002. The exercise price of the Front-End Warrant is $30.18 per share of GGD
Stock (120% of $25.15) and, upon conversion following the GMO IPO, will be equal
to 120% of a defined conversion price per share of GMO Stock.
73
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The NDA Warrant will be exercisable during the one-year period following the
filing of the first new drug application with the FDA for a product developed
through the collaboration and will terminate upon the earliest of the exercise
of the Mandatory Purchase Right by CMDF, the expiration of the Purchase Option
or July 31, 2007. The exercise price of the NDA Warrants is $30.18 per share of
GGD Stock and, upon conversion following the GMO IPO, will be equal to 120% of a
defined conversion price per share of GMO Stock.
The Callable Warrant will terminate upon the earliest of the exercise of the
Mandatory Purchase Right by CMDF, the exercise of the Purchase Option or July
31, 2005 and will be exercisable during the three-year period following the
expiration of the Purchase Option. The exercise price of the Callable Warrant
per share of GGD Stock will be equal to the average of the closing sale prices
of GGD Stock on the Nasdaq National Market for the 20 trading days ending on
the expiration date of the Purchase Option and, upon conversion following the
GMO IPO, will be equal to the average of closing sale prices of GMO Stock on
the Nasdaq National Market for the 20 trading days ending on the expiration date
of the Purchase Option.
In 1992 and 1995, Genzyme issued certain warrants which, when exercised, grant
the holders two shares of GGD Stock and .135 share of GTR Stock for each warrant
exercised. These warrants were granted in exchange for the receipt of options to
purchase the callable common stock of Neozyme II and in connection with
Genzyme's purchase of the publicly-held shares of IG in exchange for IG
warrants.
Warrant activity related to GGD Stock is summarized below:
WARRANTS WARRANT PRICE
-------- -------------
Outstanding at December 31, 1994 ... 5,934,381 $16.01 - $38.25
Granted ........................ 6,005 42.67
Exercised ...................... (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995 ... 5,597,241 16.01 - 42.67
----------
Exercised ...................... (3,170,551) 16.01 - 38.25
Tendered ....................... (2,385,686)
Expired ........................ (5,685) 16.01 - 38.25
----------
Outstanding at December 31, 1996 ... 35,319 42.67 - 44.20
Granted ........................ 120,000 30.18
Exercised ...................... (19,340) 44.20
----------
Outstanding at December 31, 1997 135,979 16.01 - 44.20
==========
GTR DESIGNATED SHARES
Pursuant to Genzyme's charter, as amended, GTR Designated Shares are authorized
shares of GTR Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or distribution
to GTR. GTR Designated Shares are created in certain circumstances when cash or
other assets are transferred from Genzyme General to GTR. The number of GTR
Designated Shares will be decreased by: the number of shares of GTR Stock issued
by Genzyme, the proceeds of which are allocated to Genzyme General; the number
of shares of GTR Stock issued as a dividend to holders of GGD Stock; and the
number of shares of GTR Stock issued upon the conversion of convertible
securities, including the 5% convertible note, the proceeds of which are
attributed to Genzyme General. In addition, the number of GTR Designated Shares
can be increased as a result of certain interdivision transactions.
At the Effective Date, 5,000,000 GTR Designated Shares were established. As a
result of the distribution of approximately 3,300,000 shares of GTR Stock to
holders of GGD Stock on the Effective Date, the number of GTR Designated Shares
were reduced by a corresponding amount. The remaining 1,700,000 GTR Designated
Shares were reserved for issuance upon the exercise of Genzyme stock options and
warrants and the conversion of Genzyme's convertible notes which were
outstanding on the Effective Date.
74
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Genzyme also has the option to allocate to GTR, at $10.00 per GTR Designated
Share, up to $30.0 million from Genzyme General (the "GTR Purchase Option") in
exchange for a maximum of 3,000,000 GTR Designated Shares to be issued in
connection with the exercise of the GTR Purchase Option. In each of June 1996
and 1997, pursuant to the terms of the GTR Purchase Option, the Genzyme Board
elected to allocate $10.0 million in cash from Genzyme General to GTR in
exchange for 1,000,000 GTR Designated Shares, respectively, which were reserved
for issuance at the sole discretion of the Genzyme Board for the benefit of the
Genzyme General stockholders.
In October 1996, the Genzyme Board approved the allocation of up to a maximum of
$20.0 million of cash from Genzyme General to GTR (the "GTR Equity Line") to
provide initial funding for GTR's joint venture with Diacrin. The GTR Equity
Line was provided in exchange for an increase in the number of GTR Designated
Shares at a rate determined by dividing the cash so allocated by the average of
the daily closing prices of one share of GTR Stock for the 20 consecutive
trading days commencing on the 30th trading day prior to the date of allocation.
As of December 31, 1997, Genzyme had allocated a total of $7.0 million of cash
from Genzyme General to GTR under the GTR Equity line and 721,455 GTR Designated
Shares had been reserved for issuance at the discretion of the Genzyme Board for
the benefit of the Genzyme General stockholders.
If, as of May 31 of each year starting May 31, 1997, the number of GTR
Designated Shares on such date (not including those reserved for issuance with
respect to Genzyme General convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds 10% of the number of shares of GTR Stock then issued and outstanding,
then substantially all GTR Designated Shares will be distributed to holders of
record of GGD Stock, subject to reservation of a number of such shares equal to
the sum of (a) the number of GTR Designated Shares reserved for issuance upon
the exercise or conversion of Genzyme General convertible securities and (b) the
number of GTR Designated Shares reserved by the Genzyme Board as of such date
for sale not later than six months after such date, the proceeds of which sale
will be allocated to Genzyme General.
On June 30, 1997, the Genzyme Board declared a dividend of approximately
2,686,000 GTR Designated Shares for distribution to Genzyme General stockholders
of record as of July 11, 1997, in a tax-free distribution of approximately .03
shares of GTR Stock for each share of GGD Stock owned. In total, 2,292,000
shares of GTR Stock were issued to GGD Stockholders on July 22, 1997 in the
distribution with a fair market value of $22.9 million and 394,000 shares of GTR
Stock have been reserved for issuance upon the exercise of GGD Stock options and
warrants outstanding on the record date.
GTR Designated Share activity is summarized below:
GTR DESIGNATED
SHARES
--------------
Balance at December 31, 1994 1,409,707
Stock options exercised ........... (72,942)
Stock warrants exercised .......... (46,244)
ESPP shares issued ................ (3,613)
----------
Balance at December 31, 1995 1,286,908
Stock options exercised ........... (42,728)
Stock warrants exercised .......... (426,984)
Convertible notes conversion ...... (255,249)
Exercise of GTR Purchase Option ... 1,000,000
Increase from equity line ......... 231,645
----------
Balance at December 31, 1996 1,793,592
Stock options exercised ........... (103,729)
Stock warrants exercised .......... (2,617)
Exercise of GTR Purchase Option ... 1,000,000
Increase from equity line ......... 489,810
Dividend distribution ............. (2,292,003)
----------
Balance at December 31, 1997 885,053
==========
75
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GMO DESIGNATED SHARES:
Pursuant to Genzyme's charter, as amended, GMO Designated Shares are authorized
shares of GMO Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or distribution
to GMO. GMO Designated Shares are created in certain circumstances when cash or
other assets are transferred from Genzyme General to GMO. The Genzyme Board may
issue the GMO Designated Shares as a stock dividend to the holders of GGD Stock
or it may sell such shares in a public or private sale and allocate all of the
proceeds to Genzyme General. Genzyme's management and accounting policies
require Genzyme to distribute GMO Designated Shares to holders of GGD Stock on
the later of November 30, 1998 or 360 days following completion of an initial
public offering of shares of GMO Stock, although the Genzyme Board may elect to
distribute these shares at any time but not later than November 29, 1999.
As compensation to Genzyme General for its contribution to GMO, 6,000,000 GMO
Designated Shares have been reserved for issuance at the discretion of the
Genzyme Board for the benefit of Genzyme General or its stockholders.
Upon consummation of the PharmaGenics Merger, the $2.5 million of debt
outstanding under a credit facility which Genzyme had made available to
PharmaGenics to fund PharmaGenics's documented operating costs became a
liability allocated to GMO (the "GMO Note"), and is considered as an
intracompany loan by Genzyme General to GMO, due on February 10, 2002, and
convertible at any time prior thereto, at the Genzyme Board's option, into GMO
Designated Shares. The number of GMO Designated Shares resulting from any
conversion of the GMO Note will be determined by dividing the principal and
interest being converted by the conversion price (the "GMO Conversion Price") in
effect on the date of conversion. The initial GMO Conversion Price will be
determined upon the closing of a GMO initial public offering in which the
aggregate gross proceeds to GMO equal or exceed $10.0 million (an "Offering"),
and will be equal to (i) the per share price of the GMO Stock sold in the
Offering or, if GMO Stock is not sold in the Offering, (ii) the initial
conversion price of the security convertible into GMO Stock that is sold in the
Offering, provided that if any portion of the PharmaGenics Note is converted
prior to any Offering, the initial GMO Conversion Price is $7.00. The GMO
Conversion Price is subject to adjustment upon declaration of any stock dividend
or on completion of any subdivision or combination of the GMO Stock.
NOTE L. RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties include
the following:
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ------- ------- -------
Fees for research and development activities:
Neozyme II ............................. $ -- 19,799 24,198
Research contracts ..................... 8,041 3,212 2,560
------ ------- -------
$8,041 $23,011 $26,758
====== ======= =======
The Company allocates all research and development agreements with
unconsolidated affiliates to Genzyme General, GTR or GMO based on the business
to which the research relates.
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENZYME GENERAL:
GENZYME DEVELOPMENT PARTNERS, L.P.
Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme, is
the General Partner of GDP, a Delaware limited partnership which was formed
in September 1989 to develop, produce and derive income from the sale of
products (the "Sepra Products") based on hyaluronic acid. Such Sepra Products
are intended to be used to limit the incidence and severity of postoperative
adhesions.
The Company has an option (the "GDP Purchase Option") to purchase all of the
outstanding partnership interests for a payment of approximately $26.0
million in cash, GGD Stock or a combination thereof determined at Genzyme's
sole discretion, plus future royalty payments. The GDP Purchase Option does
not become exercisable until at least twenty-four months after the first
commercial sale of a product of GDP and certain returns have been earned by
GDP. Genzyme elected without obligation to fund the research and development
activities of GDP using Genzyme General cash and spent approximately $7.3
million, $6.0 million and $6.4 million on the GDP's programs in 1997, 1996
and 1995, respectively. The Company has agreed to fund the GDP's research and
development programs and general and administrative expenses through 1998
but, as General Partner, believes that additional funds will be required to
complete the development, clinical testing and commercialization of GDP's
products. In 1997, Genzyme made an additional capital contribution of $1.5
million to the Partnership.
The Company and GDP formed Genzyme Ventures II (the "Joint Venture"), in
September 1989 for the purpose of manufacturing and marketing the Sepra
Products in the United States and Canada for use in human clinical trials or
human surgical procedures. In December 1994, the Company allocated its
interests in the Joint Venture to Genzyme General. GDP has contributed its
technology and $1.7 million to the Joint Venture and Genzyme General has
contributed its agreement to manufacture and market the Sepra Products, to
make non-interest bearing loans to the Joint Venture in the amount of any
working capital deficiency, and to make capital contributions to the extent
deemed necessary by the two venturers in connection with the business of the
Joint Venture. The Joint Venture began to engage in active business after
receipt of FDA marketing approval for Seprafilm[R] in August 1996. For the
years ended December 31, 1997 and 1996, the Joint Venture incurred net losses
of $2.3 million and $2.5 million, respectively, primarily attributable to
costs associated with the introduction of the Sepra Products to the
healthcare marketplace. Summary financial information is not presented as the
impact of the Joint Venture's activities on the Company's statement of
operations for the year ended December 31, 1997 is not considered to be
material.
NEOZYME II
In 1992, the Company entered into a development agreement with Neozyme II
Corporation ("Neozyme II") whereby the Company was engaged to perform all
research, development and clinical testing activities related to products and
77
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
programs for which Neozyme II was licensed. Pursuant to the terms of the
development agreement, Neozyme II was required to reimburse the Company for
research and development expenses incurred by Genzyme in connection with the
Neozyme II development programs and fulfilled this obligation through October
1996, at which time Genzyme acquired 98.8% outstanding Neozyme II Units
through a tender offer (See Note C., "Acquisitions" above).
GTC:
The disclosures related to the research and development agreement between
Genzyme and GTC are included in Note H., "Investments" above.
RENAGEL LLC AND ATIII LLC:
The disclosures related to Genzyme General's participation in RenaGel LLC and
ATIII LLC, joint ventures with Geltex and GTC, respectively, are included in
Note H., "Investments" above.
GENZYME TISSUE REPAIR:
The disclosures related to GTR's participation Diacrin/Genzyme LLC, a joint
venture are included in Note H., "Investments" above.
GENZYME MOLECULAR ONCOLOGY:
The disclosures related to GMO's participation StressGen/Genzyme LLC, a joint
venture are included in Note H., "Investments" above.
NOTE M. COMMITMENTS AND CONTINGENCIES
From time to time the Company has been subject to legal proceedings and claims
arising in connection with its business. At December 31, 1997, there were no
asserted claims against the Company which, in the opinion of management, if
adversely decided would have a material adverse effect on the Company's
financial position and results of operations.
NOTE N. INCOME TAXES
Income (loss) before income taxes and the related income tax expense (benefit)
are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ---- ---- ----
Domestic (includes $7.0 million in charges for purchased research and
development in 1997, $130.7 million in charges for purchased
research and development and acquisition expenses in 1996, and
$14.2 million in charges for purchased research and
development in 1995) ................................................. $16,907 $(79,930) $40,551
Foreign ................................................................. 8,822 10,308 2,748
------- -------- -------
Total ............................................................. $25,729 $(69,622) $43,299
======= ======== =======
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- -------- -------- --------
Currently payable:
Federal ......................... $11,344 $ 23,174 $11,051
State ........................... 1,754 4,689 4,803
Foreign ......................... 2,971 3,616 1,367
------- -------- -------
Total current ................ 16,069 31,479 17,221
Deferred:
Federal ......................... (3,723) (28,448) 4,507
State ........................... (246) 164 (79)
------- -------- -------
Total deferred ............... (3,969) (28,284) 4,428
------- -------- -------
Provision (benefit) for income taxes $12,100 $ 3,195 $21,649
======= ======== =======
78
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provisions for income taxes were at rates other than the U.S. Federal statutory
tax rate for the following reasons:
1997 1996 1995
---- ----- ----
Tax at U.S. statutory rate ............................. 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less than 80%-owned
subsidiaries with no current tax benefit .............. 3.1 1.4 1.0
State taxes, net ....................................... 3.0 5.2 5.2
Foreign sales corporation .............................. (6.7) (3.6) (2.0)
Nondeductible amortization ............................. 10.6 3.6 1.9
Benefit of tax credits ................................. (7.7) -- --
Other, net ............................................. (2.6) 3.7 1.1
Nondeductible interest ................................. 2.2 -- --
Utilization of operating loss carryforwards ............ -- (4.5) (5.2)
Effective tax rate before certain charges - expense .... 36.9 40.8 37.0
---- ---- ----
Gross charge for purchased research and development
net of related tax benefits ........................... 10.1 (36.3) 13.0
---- ----- ----
Effective tax rate - expense ........................... 47.0% 4.5% 50.0%
==== ===== ====
At December 31 the components of net deferred tax assets were as follows:
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------- -------- --------
Deferred tax assets:
Net operating loss carryforwards ............ $ 7,702 $ 10,427
Tax credits ................................. 6,514 --
Deferred gain ............................... 2,237 --
Intangible amortization ..................... 46,391 41,183
Investments in unconsolidated subsidiary .... 1,323 1,323
Realized and unrealized capital losses ...... 10,182 17,603
Reserves and other .......................... 27,328 19,670
-------- --------
Gross deferred tax asset .................... 101,677 90,206
Valuation allowance ......................... (14,914) (16,622)
-------- --------
Net deferred tax asset ...................... 86,763 73,584
Deferred tax liabilities:
Depreciable Assets .......................... (23,174) (13,870)
Intangible amortization ..................... (6,509) --
-------- --------
Net deferred tax asset ...................... $ 57,080 $ 59,714
======== ========
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses related to the purchase of
in-process research and development, the Company placed a valuation allowance of
$14.9 million and $16.6 million for December 31, 1997 and December 31, 1996,
respectively, against otherwise recognizable deferred tax assets.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
79
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 the Company had U.S. net operating loss and tax credit
carryforwards of $22.0 million and $6.5 million, respectively, for income tax
purposes. These loss carryforwards expire from 2002 to 2012. Utilization of tax
net operating loss carryforwards may be limited under Section 382 of the
Internal Revenue Code of 1986. Tax credits of $3.9 million expire in 2012. The
remaining $2.6 million of tax credits carry forward indefinitely.
NOTE O. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all employees of the Company with
the exception of employees of DSP who have a separate retirement savings plan.
The plan allows employees to make contributions up to a specified percentage of
their compensation, a portion of which are matched by the Company. The Company
contributed $1.5 million, $1.1 million, and $0.7 million to the 401(k) Plan in
1997, 1996 and 1995, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and its foreign subsidiaries. Pension expense for 1997, 1996
and 1995 was approximately $1,100,000, $601,000 and $498,000, respectively.
Pension costs are funded as accrued. Actuarial and other disclosures regarding
the plans are not presented because they are not material.
NOTE P. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The Company operates in the human healthcare industry and manufactures and
markets its products in two major geographic areas, the United States and
Europe. The Company's principal manufacturing facilities are located in the
United States, United Kingdom, Switzerland and Germany. The Company purchases
products from its British, Swiss and German subsidiaries for sale to customers
in the United States. Transfer prices from the foreign subsidiaries are intended
to allow the United States parent to produce profit margins commensurate with
its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary
European distributor of the Company's therapeutic products.
Certain information by geographic area follows (dollars in thousands):
UNITED
STATES NETHERLANDS UK OTHER ELIMINATION CONSOLIDATION
---------- ----------- ------- ------- ----------- -------------
1997
- ----
Net sales -
unaffiliated customers .......... $ 435,235 $ 40,436 $32,852 $88,562 $ -- $ 597,085
Transfers between geographic areas 119,391 63,100 28,205 2,634 (213,330) --
---------- -------- ------- ------- --------- ----------
Total product and service sales... 554,626 103,536 61,057 91,196 (213,330) 597,085
Pre-tax income ................... 14,075 1,539 3,304 2,699 4,112 25,729
Net income ....................... 6,233 948 2,172 1,235 3,041 13,629
Assets ........................... 1,236,980 30,638 69,125 39,304 (80,594) 1,295,453
Liabilities ...................... 241,330 28,329 2,058 22,114 (10,428) 283,403
1996
- ----
Net sales -
unaffiliated customers .......... $ 361,635 $ 56,865 $21,217 $53,716 $ -- $ 493,433
Transfers between geographic areas 101,786 33,659 30,435 3,615 (169,495) --
---------- -------- ------- ------- --------- ----------
Total product and service sales... 463,421 90,524 51,652 57,331 (169,495) 493,433
Pre-tax income (loss) ............ (72,439) 920 8,349 1,807 (8,259) (69,622)
Net income ....................... (74,271) 520 8,349 844 (8,259) (72,817)
Assets ........................... 1,211,816 33,500 69,378 41,511 (85,697) 1,270,508
Liabilities ...................... 306,662 31,930 2,240 27,410 (43) 368,199
80
82
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995
- ----
Net sales -
unaffiliated customers .......... $252,358 $70,532 $13,669 $20,264 $ -- $356,823
Transfers between geographic areas 74,697 -- 19,543 4,115 (98,355) --
-------- ------- ------- ------- --------- --------
327,055 70,532 33,212 24,379 (98,355) 356,823
Pre-tax income ................... 43,911 836 93 1,759 (3,300) 43,299
Net income ....................... 23,826 540 93 491 (3,300) 21,650
Assets ........................... 923,867 27,703 54,594 25,692 (126,655) 905,201
Liabilities ...................... 161,339 26,652 1,962 10,041 -- 199,994
Substantially all revenue from research and development contracts is earned in
the United States. Entities comprising "Other" include Genzyme's operations in
Germany, France, Switzerland, Japan, Italy, Belgium, Sweden, Israel, Canada,
Spain, Argentina and Brazil. Export sales from the United States were $36.2
million, $27.4 million and $20.5 million in 1997, 1996 and 1995, respectively.
Export sales by the Netherlands subsidiary amounted to $40.4 million, $56.9
million and $66.2 million in 1997, 1996 and 1995, respectively. Genzyme's
results of operations are highly dependent upon the sales of Cerezyme(R) enzyme
and Ceredase(R) enzyme. For the years ended December 31, 1997, 1996 and 1995,
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme represented 63%, 62% and 71%
of total product sales. In 1997, 1996 and 1995, Genzyme marketed its Cerezyme(R)
enzyme and Ceredase(R) enzyme products directly to physicians, hospitals and
treatment centers, and sold products representing approximately 18%, 12% and
14%, respectively, of net revenue to an unaffiliated distributor. The credit
risk associated with trade receivables is mitigated due to the large number of
customers and their broad dispersion over different industries and geographic
areas.
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1997 and 1996 are displayed in the
following table.
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
1997
- ----
Net revenue ............................ $146,593 $150,268 $152,094 $159,886
Gross profit ........................... 86,215 90,973 94,466 72,114
Net income (loss) (1,2) ................ 9,367 4,269 9,557 (9,564)
Income (loss) per share (3,4):
Attributable to GGD Stock:
Basic ............................. 0.28 0.27 0.32 (0.11)
Diluted ........................... 0.27 0.26 0.31 (0.11)
Attributable to GTR Stock:
Basic and diluted ................. (0.90) (0.83) (0.78) (1.02)
Pro forma attributable to GMO
Stock (5):
Basic and diluted ................. (0.16) (2.16) (1.00) (1.69)
1996
- ----
Net revenue ............................ $113,497 $115,635 $142,883 $146,739
Gross profit ........................... 63,459 65,451 73,212 81,299
Net income (loss) (2) .................. 10,292 9,784 (15,840) (77,053)
Income (loss) per share (3,4):
Attributable to GGD Stock:
Basic ............................. 0.30 0.30 (0.09) (0.91)
Diluted ........................... 0.26 0.27 (0.09) (0.91)
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Attributable to GTR Stock:
Basic and diluted .................... (0.71) (0.83) (0.78) (1.02)
Pro forma attributable to GMO Stock (5):
Basic and diluted .................... (0.06) (0.06) (0.06) (0.08)
- --------------
(1) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million
related to resulting from certain strategic financial provisions recorded
in December 1997 (see Note B., "Strategic Financial Provisions" above).
(2) Includes pre-tax charges in the second quarter of 1997 and third and fourth
quarters of 1996 of $7.0 million, $24.2 million and $106.5 million,
respectively for acquired incomplete technology (see Note C.,
"Acquisitions" above).
(3) Income (loss) per share data for the first three quarters of 1997 and for
all quarters of 1996 have been restated to reflect the adoption in
December 1997 of SFAS 128, "Earnings Per Share". (See Note A. "Summary of
Significant Accounting Policies" above.)
(4) Cumulative quarterly income per share data does not equal the annual
amounts due to changes in the average common and common equivalent shares
outstanding.
(5) Pro forma net loss per share data is presented for GMO Stock for the first
and second quarters of 1997 and all four quarters of 1996 as there were no
shares of GMO Stock outstanding prior to June 18, 1997. In each such
quarter, approximately 3,910,000 shares of GMO Stock, which represents the
shares of GMO Stock issued to effect the merger with PharmaGenics, were
used for the pro forma loss per share calculation.
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENZYME CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying consolidated balance sheets of Genzyme
Corporation and Subsidiaries as of December 31, 1997 and 1996, the related
consolidated statements of operations, cash flows and stockholders' equity, and
the consolidated financial statement schedule for each of the three years in the
period ended December 31, 1997. The consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Genzyme
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the consolidated
financial statement schedule taken as a whole presents fairly, in all material
respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
83
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GENZYME CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
===============================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
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ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Allowance for doubtful accounts $16,508,400 $ 2,835,000 $7,205,400 $12,138,000
Inventory Reserve $ 7,674,200 $19,505,000(1) -- $3,840,000 $23,339,200
Year ended December 31, 1996:
Allowance for doubtful accounts $ 8,158,800 $ 8,331,600 $2,534,000(2) $2,516,000(3) $16,508,400
Inventory Reserve $ 3,082,200 $ 5,853,600 $1,261,600 $ 7,674,200
Year ended December 31, 1995:
Allowance for doubtful accounts $ 6,169,100 $ 5,390,000 $3,400,100(3) $ 8,159,000
Inventory Reserve $ 1,131,000 $ 2,920,700 $ 969,500 $ 3,082,200
(1) Includes $13.4 million of strategic financial provisions (See Note B.,
"Strategic Financial Provisions" to the Consolidated Financial Statements).
(2) Reserve acquired in acquisition.
(3) Uncollectible accounts written off, net of recoveries.