1
GENZYME SURGICAL PRODUCTS
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
--------------------- --------------------------------
1999 1998 1998 1997 1996
--------- -------- -------- -------- --------
(UNAUDITED)
Revenues:
Net product sales.................. $ 27,353 $24,227 $103,958 $100,835 $ 50,714
Operating costs and expenses:
Cost of products sold.............. 15,844 14,723 72,274 59,802 32,654
Selling, general and
administrative................... 15,287 13,948 57,297 54,061 28,399
Research and development........... 5,602 3,225 18,618 11,287 7,693
Amortization of intangibles........ 1,417 1,431 5,748 5,647 2,984
Purchase of in-process research and
development...................... -- -- -- -- 24,170
-------- ------- -------- -------- --------
Total operating costs and
expenses.................. 38,150 33,327 153,937 130,797 95,900
-------- ------- -------- -------- --------
Operating loss....................... (10,797) (9,100) (49,979) (29,962) (45,186)
Other income (expenses):
Equity in net income (loss) of
unconsolidated affiliate......... -- (11) (6) (78) 2
Other.............................. 46 (40) 60 236 8
Investment income.................. 7 52 144 98 84
Interest expense................... (1) (19) (75) (34) (58)
-------- ------- -------- -------- --------
Total other income
(expenses)................ 52 (18) 123 222 36
-------- ------- -------- -------- --------
Loss before income taxes............. (10,745) (9,118) (49,856) (29,740) (45,150)
Income tax benefit................... -- -- -- -- 837
-------- ------- -------- -------- --------
Net loss attributable to GZSP
Stock.............................. $(10,745) $(9,118) $(49,856) $(29,740) $(44,313)
======== ======= ======== ======== ========
Per GSP pro forma basic and diluted
common share:
Pro forma net loss:................ $ (0.73) $ (0.62) $ (3.37) $ (2.01) $ (2.99)
======== ======= ======== ======== ========
Pro forma shares outstanding......... 14,800 14,800 14,800 14,800 14,800
======== ======= ======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
10
2
GENZYME SURGICAL PRODUCTS
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
MARCH 31, ---------------------
1999 1998 1997
----------- --------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,199 $ -- $ 975
Accounts receivable, net............................... 16,344 15,663 13,689
Inventories............................................ 24,919 22,026 26,177
Prepaid expenses and other current assets.............. 1,347 1,932 463
--------- --------- --------
Total current assets........................... 43,809 39,621 41,304
Property, plant and equipment, net....................... 16,306 16,249 16,548
Intangibles, net......................................... 176,183 177,897 183,156
Other noncurrent assets.................................. 2,687 2,149 1,558
--------- --------- --------
Total assets................................... $ 238,985 $ 235,916 $242,566
========= ========= ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable....................................... $ 5,285 $ 3,925 $ 2,858
Accrued expenses....................................... 5,013 4,682 4,015
Current portion of capital lease obligations........... -- -- 152
--------- --------- --------
Total current liabilities...................... 10,298 8,607 7,025
Noncurrent liabilities:
Other noncurrent liabilities........................... 221 221 572
--------- --------- --------
Total liabilities.............................. 10,519 8,828 7,597
Commitments and contingencies (See Notes)
Division equity:
Parent company investment.............................. 377,908 365,785 323,810
Accumulated deficit.................................... (149,442) (138,697) (88,841)
--------- --------- --------
Total division equity.......................... 228,466 227,088 234,969
--------- --------- --------
Total liabilities and division equity.......... $ 238,985 $ 235,916 $242,566
========= ========= ========
The accompanying notes are an integral part of these combined financial
statements.
11
3
GENZYME SURGICAL PRODUCTS
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- -------- -------- -------- ---------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss.................................... $(10,745) $(9,118) $(49,856) $(29,740) $ (44,313)
Reconciliation of net loss to net cash used
by operating activities:
Depreciation and amortization............. 2,008 2,512 8,008 8,831 3,480
Provisions for bad debts and inventory.... -- 120 526 759 329
Equity in net income (loss) of
unconsolidated affiliate............... -- 11 6 78 (2)
Purchase of in-process research and
development............................ -- -- -- -- 24,170
Other..................................... (36) 40 (60) (236) (8)
Increase (decrease) in cash from
working capital changes:
Accounts receivable.................. (681) (494) (2,140) 3,179 (2,166)
Inventories.......................... (2,893) 209 3,791 2,865 53
Prepaid expenses and other assets.... 585 (569) (1,469) 259 (63)
Accounts payable and accrued
expenses.......................... 1,691 1,811 1,885 (2,123) (7,712)
-------- ------- -------- -------- ---------
Net cash used in operating
activities........................ (10,071) (5,478) (39,309) (16,128) (26,232)
INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment.............................. (660) (306) (1,959) (3,112) (162)
Acquisition, net of acquired cash and
assumed liabilities.................... -- -- -- -- (192,414)
Other..................................... (491) 1,069 (688) (1,039) (49)
-------- ------- -------- -------- ---------
Net cash provided by (used in)
investing activities.............. (1,151) 763 (2,647) (4,151) (192,625)
FINANCING ACTIVITIES:
Payments of debt and leases............... -- (45) (152) (173) (54,819)
Net cash allocated from Genzyme General... 12,421 5,900 41,484 19,003 275,528
Other..................................... -- (351) (351) 242 330
-------- ------- -------- -------- ---------
Net cash provided by financing
activities........................ 12,421 5,504 40,981 19,072 221,039
-------- ------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents............................... 1,199 789 (975) (1,207) 2,182
Cash and cash equivalents at beginning of
period.................................... -- 975 975 2,182 --
-------- ------- -------- -------- ---------
Cash and cash equivalents at end of
period.................................... $ 1,199 $ 1,764 $ -- $ 975 $ 2,182
======== ======= ======== ======== =========
Supplemental cash flow information:
Cash paid during the period for:
Interest............................... $ -- $ 3 $ 9 $ 29 $ 58
The accompanying notes are an integral part of these combined financial
statements.
12
4
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Surgical Products develops, manufactures and markets surgical
products for three principal business lines: (i) cardiovascular surgery; (ii)
general surgery; and (iii) plastic surgery. GSP is a division of Genzyme and has
a separate series of common stock intended to reflect its value and track its
economic performance. GSP was created from Genzyme's existing surgical products
business, which has operated as a business unit of Genzyme General. GSP consists
primarily of the products and assets acquired upon the acquisition of DSP in
July 1996, Genzyme's portfolio of anti-adhesion products and product candidates,
and Genzyme's research and development programs in gene and cell therapy for
cardiovascular disease. Accordingly, DSP's results of operations are included
from July 1, 1996.
BASIS OF PRESENTATION
The combined financial statements of GSP include the balance sheets,
results of operations and cash flows of Genzyme's surgical products business
which is part of Genzyme's General Division. GSP's financial statements are
prepared using amounts included in the consolidated financial statements of
Genzyme and its subsidiaries ("Genzyme's Consolidated Financial Statements")
included in the 1998 Genzyme 10-K and the quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 1999. Corporate allocations reflected in these
financial statements are determined based upon methods which management believes
to be reasonable and consistent. The financial statements for the three months
ended March 31, 1999 and 1998 are unaudited but include, in management's
opinion, all adjustments (consisting only of normally recurring accruals)
necessary for a fair presentation of the results for the periods presented.
On June 28, 1999, Genzyme will distribute approximately 14.8 million shares
of GZSP Stock to the holders of GENZ Stock of record at the close of business on
June 14, 1999. At the time of the distribution, $150.0 million of cash and
investments will be allocated to GSP.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements of GSP reflect the combined
accounts of all of GSP's businesses. The equity method is used to account for
investments in companies and joint ventures, other than joint ventures which GSP
controls, in which GSP has a substantial ownership interest (20% to 50%), or in
which GSP participates in policy decisions. Accordingly, GSP's share of the
earnings or losses of such entities is included in computation of GSP's net
loss. Investments of less than 20% are reported at fair value. All significant
interdivisional items and transactions have been eliminated in combination.
13
5
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
FINANCIAL INFORMATION
Genzyme will provide to holders of GZSP Stock separate financial
statements, management's discussion and analysis, descriptions of business and
other relevant information for GSP. Notwithstanding the allocation of assets and
liabilities, including contingent liabilities, between Genzyme General, GSP, GMO
and GTR, for the purposes of preparing their respective financial statements,
Genzyme Corporation 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 GZSP Stock are common stockholders of Genzyme and have no specific
claim against the assets attributed to GSP. Liabilities or contingencies of
Genzyme General, GSP, GMO or GTR could affect the financial condition or results
of operations of the other divisions. Accordingly, the GSP combined financial
statements should be read in connection with Genzyme's Consolidated Financial
Statements.
Genzyme prepares the financial statements of GSP in accordance with
generally accepted accounting principles, the management and accounting policies
of Genzyme and the divisional accounting policies approved by the Genzyme Board.
Except as otherwise provided in the policies set forth below, the management and
accounting policies applicable to the presentation of the financial statements
of GSP 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 Charter, dividends that may be paid to the holders
of GZSP Stock will be limited to the lesser of funds of Genzyme legally
available for the payment of dividends and the Available GSP Dividend Amount, as
defined in the Charter. Although there is no requirement to do so, the Genzyme
Board would declare and pay cash dividends on GZSP Stock, if any, based
primarily on earnings, financial condition, cash flow and business requirements
of Genzyme.
Genzyme 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 GZSP Stock in the
foreseeable future.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect 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. Significant estimates include the collectability of accounts receivable,
valuation of inventory and revenue recognition. Actual results could differ from
those estimates.
14
6
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject GSP to significant
concentrations of credit risk consist principally of accounts receivable. GSP
generally invests its cash investments in investment-grade securities to
mitigate risk.
UNCERTAINTIES
GSP is subject to risks common to companies in the medical device and
biotechnology industries, including (i) GSP's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval and
adequate patent and other proprietary rights protection of its products, (ii)
the content and timing of decisions made by the FDA and other agencies regarding
the applications and indications for which GSP's products may be approved, (iii)
the ability of GSP to manufacture adequate supplies of its gene and cell therapy
and biomaterials products for development and commercialization activities, (iv)
the accuracy of GSP's estimates of the size and characteristics of markets
addressed and to be addressed by GSP's products, (v) market acceptance of GSP's
products, (vi) GSP's ability to obtain reimbursement for its products from
third-party payers, where appropriate, (vii) the accuracy of GSP's information
concerning the products and resources of competitors and potential competitors,
and (viii) the risk that products and technology developed by competitors will
render GSP's products and technology obsolete.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting principally of money market funds
purchased with initial maturities of three months or less, are valued at cost
plus accrued interest, which approximates market.
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). The remaining life and recoverability of 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.
15
7
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
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 6 to 40 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, which is measured as the amount by
which the carrying amount of the asset exceeds the present value of estimated
expected future cash flows using a discount rate commensurate with the risk
involved.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of Genzyme'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 of Genzyme's foreign subsidiaries is considered to be the functional
currency for each entity and, accordingly, translation adjustments for these
subsidiaries are included in division equity.
REVENUE RECOGNITION
Revenues from product sales are recognized when goods are shipped to third
party customers and are net of third party contractual allowances and rebates,
as applicable. 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.
INCOME TAXES
The Company uses the asset and liability method of accounting for 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 (see Note B., "Policies
Governing the Relationship of Genzyme's Divisions" below.)
16
8
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GSP, GMO and
GTR, gives effect to the management and accounting policies adopted by the
Genzyme Board and is reported in lieu of consolidated per share data. Genzyme
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 GENZ Stock, GZSP Stock, GZMO Stock and
GZTR 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.
Pro forma net loss per share data is presented for GZSP Stock for all
periods as there are no shares of GZSP Stock outstanding prior to June 28, 1999.
Historical loss per share data is omitted from the statement of operations as
GZSP Stock was not part of the capital structure of Genzyme for the periods
presented. Genzyme will distribute to the holders of GENZ Stock of record at the
close of business on June 14, 1999, approximately 14.8 million shares of GZSP
Stock.
The following table sets forth the computation of pro forma basic and
diluted earnings per share for GSP (in thousands, except per share amounts):
MARCH 31, DECEMBER 31,
------------------- --------------------------------
1999 1998 1998 1997 1996
-------- ------- -------- -------- --------
(UNAUDITED)
Net loss.................... $(10,745) $(9,118) $(49,856) $(29,740) $(44,313)
======== ======= ======== ======== ========
Pro forma basic and diluted
shares outstanding........ 14,800 14,800 14,800 14,800 14,800
Pro forma net loss per
common share -- basic and
diluted................... $ (0.73) $ (0.62) $ (3.37) $ (2.01) $ (2.99)
======== ======= ======== ======== ========
Additionally, stock options and shares issuable upon conversion of
Genzyme's 5 1/4% convertible subordinated notes due June 2005 were not included
in the computation of pro forma diluted earnings per share because they would
have an anti-dilutive effect due to the net loss for those periods.
COMPREHENSIVE INCOME
GSP has adopted SFAS 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a set of financial statements. Components of comprehensive income
are net income and all other non-owner changes in equity such as the change in
the cumulative translation adjustment. GSP presents such information in its
statement of operations.
17
9
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
GSP has elected the disclosure-only alternative permitted under SFAS 123,
"Accounting for Stock-Based Compensation." For the years ended December 31,
1998, 1997 and 1996 no disclosure is presented for GSP as there were no GZSP
Stock options granted under any of Genzyme's stock plans prior to June 28, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Genzyme is evaluating SFAS 133 to
determine its impact on its consolidated financial statements.
SEGMENT INFORMATION
GSP has adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of GSP's reportable segments. SFAS 131 also
requires disclosures about products and services, geographic areas and major
customers (see Note P., "Segment Reporting" below).
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS
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. With the exception of the policy
regarding Interdivisional Asset Transfers, policies 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.
REVENUE ALLOCATION
Revenues from the sale or licensing of a division's products and services
to entities external to Genzyme are credited to that division. Products and
services normally sold by a division to entities external to Genzyme that are
used by other divisions within Genzyme
18
10
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
shall be recorded as interdivisional revenues and interdivisional purchases
subject to the policy regarding other interdivisional transactions.
EXPENSE ALLOCATION
Direct expenses are charged to the division for whose benefit the direct
expenses have been incurred. Expenses other than direct expenses are subject to
the policy regarding other interdivisional transactions.
ASSET ALLOCATION
Assets that are exclusively dedicated to the production of goods and
services of a division shall be allocated to that division. Production assets
that are utilized by more than one division are subject to the policy regarding
other interdivisional transactions.
TAX ALLOCATIONS
GSP is included in the consolidated U.S. Federal income tax return filed by
Genzyme. Genzyme allocates current and deferred taxes to the divisions using the
asset and liability method of accounting for income taxes as if the divisions
were separate taxpayers. Accordingly, the realizability of deferred tax assets
is assessed at the division level. The sum of the amounts calculated for
individual divisions of Genzyme may not equal the consolidated amount under this
approach.
Income taxes are allocated to each division based upon the financial
statement income, taxable income, credits and other amounts properly allocable
to such division under generally accepted accounting principles as if each
division were a separate taxpayer; provided, however, that as of the end of any
fiscal quarter of Genzyme, any projected annual 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 the other divisions
in proportion to their taxable income without any compensating payment or
allocation.
ACQUISITIONS OF PROGRAMS, PRODUCTS OR ASSETS
Upon the acquisition by Genzyme from a third party of any programs,
products or assets (whether by acquisitions of assets or stock, merger,
consolidation or otherwise), the aggregate cost of the acquisition and the
programs, products or assets acquired shall be allocated among the divisions of
Genzyme. In the case of material acquisitions, such allocation shall be made in
a manner determined by the Genzyme Board to be fair and reasonable to each
division and to the holders of the common stock representing each division,
taking into account such matters as the Genzyme Board and its financial
advisors, if any, deem relevant. Any such determination will be final and
binding on the holders of common stock.
19
11
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
DISPOSITION OF PROGRAMS, PRODUCTS OR ASSETS
Upon the sale, transfer, assignment or other disposition by Genzyme of any
program, product or asset not consisting of all or substantially all of the
assets of the division, all proceeds from such disposition shall be allocated to
the division to which the program, product or asset had been allocated among
such divisions based on their respective interests in such program, product or
asset. Such allocations shall be made in a manner determined by the Genzyme
Board to be fair and reasonable to such divisions and to holders of the common
stock representing such divisions, taking into account such matters as the
Genzyme Board and its financial advisors, if any, deem relevant. Any such
determination by the Genzyme Board will be final and binding on the holders of
common stock.
INTERDIVISIONAL ASSET TRANSFERS
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 shall 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 such program, the phase of clinical development of such
program, the expenses associated with realizing any income from such 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 reallocation may be paid by one division to another in
cash or other consideration 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 GSP, GMO or GTR, the Genzyme Board may elect to account for
such reallocation as an increase in the designated shares representing the
division to which such assets are reallocated in accordance with the provisions
of Genzyme's articles of organization.
The foregoing policies regarding transfers of assets between divisions will
not be changed by the Genzyme Board without the approval of the holders of GZSP
Stock, GZMO Stock and GZTR Stock, each voting as a separate class; provided,
however, that if a policy change affects one or more, but not all of, Genzyme
Surgical Products, Genzyme Molecular Oncology and/or Genzyme Tissue Repair, only
holders of shares representing the affected division(s) will be entitled to vote
on such matter.
OTHER INTERDIVISIONAL TRANSACTIONS
This policy shall cover interdivisional transactions other than asset
transfers, which shall be subject to the policy regarding Interdivisional Asset
Transfers. From time to time, a division may engage in transactions directly
with one or more other divisions or jointly with one or more other divisions and
one or more third parties. Such transactions may include agreements by one
division to provide products and services for use by another division and joint
venture or other collaborative arrangements involving more than one
20
12
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
division to develop new products and services jointly and with third parties.
Such transactions are subject to the following conditions:
(a) Research and development (including clinical and regulatory support),
distribution, sales, marketing, and general and administrative services
(including allocated space) 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. Direct costs shall be allocated in a manner
described above under "Expense Allocation" and such division performing
the work will not recognize revenue as a result of performing such
work. Direct labor and indirect costs shall be allocated in a
reasonable and consistent manner based on the utilization by the
division of the services to which such costs relate.
(b) Manufacturing of goods and performance of services by one division
exclusively for the benefit of another division and not for external
sale shall be charged to the division for which the work is performed
on a cost basis. Direct labor and indirect costs shall be allocated in
a reasonable and consistent manner based on the receipt of benefit by
the division of the goods and services to which such costs relate. The
division performing such work will not recognize revenue as a result of
performing such work.
(c) Other than research and development (including clinical and regulatory
support), manufacturing, distribution, sales, marketing, general and
administrative services (including allocated space), interdivisional
transactions shall be on terms and conditions that would be obtainable
in transactions negotiated at arm's length with unaffiliated third
parties. The division performing such work will not recognize revenue
as a result of performing such work.
(d) Any interdivisional transaction (i) to be performed on terms and
conditions that deviate from the policies set forth in subparagraphs
(a), (b) or (c) above and (ii) that is material to one or more of the
participating divisions will require approval by 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 the holders of the common stock representing each such division.
(e) Loans may be made from time to time between divisions. Any such loan of
$1 million or less will mature within 18 months and interest will
accrue at the best borrowing rate available to Genzyme for a loan of
like type and duration. Amounts borrowed in excess of $1 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.
(f) All material interdivisional transactions shall be reduced to service
contracts and signed by an authorized member of the management team of
affected divisions.
21
13
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
ACCESS TO TECHNOLOGY AND KNOW-HOW
Each division of Genzyme shall have unrestricted access to all technology
and know-how of the Company that may be made useful to such division's business,
subject to any obligations or limitations applicable to Genzyme and its
divisions.
NOTE C. OTHER CHARGES
In the third quarter of 1998, GSP recorded $12.1 million of charges
associated with its review of its requirements to support the Sepra Products. As
a result, in the third quarter of 1998, GSP recorded a $10.4 million charge to
cost of products sold to write-down Sepra Products inventory amounts to net
realizable value. In addition, during the third quarter of 1998, GSP wrote-off
certain costs related to equipment used to manufacture the Sepra Products
totaling $1.7 million.
In the fourth quarter of 1997, GSP recorded charges of $5.5 million to cost
of products sold and $1.9 million to SG&A expense primarily related to the
manufacturing and selling of Sepracoat(TM) Coating Solution, which was
discontinued for the U.S. market after an advisory panel of the FDA recommended
against granting market approval of this product in 1997. This product is sold
outside the United States.
NOTE D. ACQUISITION
The Company allocates all acquisitions to either Genzyme General, GSP, GMO
or GTR depending on the nature of the acquired business.
On July 1, 1996, Genzyme acquired DSP and allocated it to GSP. 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 tangible
assets acquired include an allocation of approximately $130.8 million to
goodwill, $45.9 million to tradenames and $15.3 million to patents. The goodwill
and tradenames are amortized over 40 years and patents are amortized over their
useful lives of 6 to 17 years.
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 had 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 had 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 were discounted considering risks and uncertainties
related to the 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.
22
14
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments create 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 interest rate risk related to its variable rate notes
payable. 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 notional amount of interest rate
contracts is the amount upon which interest and other payments under the
contract are based. 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. For the periods presented, no debt or interest
rate swaps have been allocated to GSP.
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
GSP's trade receivables primarily represent amounts due from healthcare
service providers. GSP 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 $0.4 million and
$0.5 million at December 31, 1998 and 1997, respectively.
Net intangible assets for GSP as of December 31, 1998 and 1997 includes
$122.4 million and $125.6 million, respectively, of goodwill due to the DSP
acquisition.
As of December 31, 1998 and 1997, accumulated amortization of intangible
assets was $13.9 million and $8.6 million, respectively.
NOTE G. INVENTORIES
Inventories consist of the following (amounts in thousands):
DECEMBER 31,
MARCH 31, ------------------
1999 1998 1997
----------- ------- -------
(UNAUDITED)
Raw materials....................... $12,308 $11,567 $ 9,024
Work-in-process..................... 2,017 1,734 1,394
Finished products................... 10,594 8,725 15,759
------- ------- -------
Total..................... $24,919 $22,026 $26,177
======= ======= =======
23
15
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NOTE H. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following
(amounts in thousands):
1998 1997
------- -------
Plant and equipment............................ $ 8,934 $ 8,419
Land and buildings............................. 8,261 8,170
Leasehold improvements......................... 434 387
Furniture and fixtures......................... 3,944 3,021
Construction-in-progress....................... 614 231
------- -------
22,187 20,228
Less accumulated depreciation................ (5,938) (3,680)
------- -------
Property, plant and equipment, net........... $16,249 $16,548
======= =======
Depreciation expense was $2.5 million, $2.7 million and $1.3 million in
1998, 1997 and 1996, respectively.
NOTE I. ACCRUED EXPENSES
Accrued expenses at December 31 includes the following (amounts in
thousands):
1998 1997
------ ------
Compensation................................... $1,555 $1,963
Professional fees.............................. 291 307
Royalties...................................... 523 414
Other.......................................... 2,313 1,331
------ ------
$4,682 $4,015
====== ======
NOTE J. LONG-TERM DEBT AND LEASES
Although the Company retains responsibility for the repayment of all
long-term debt obligations, such debt is allocated to either Genzyme General,
GSP, GMO or GTR for reporting purposes based on the intended use of the funds
borrowed under each instrument.
REVOLVING CREDIT FACILITY
Genzyme has a $225 million revolving credit facility with a syndicate of
commercial banks. Loans bear interest at LIBOR plus an applicable margin
pursuant to the terms and conditions defined in the credit agreement. Amounts
drawn under this facility may be allocated to Genzyme General, GSP, GMO or GTR.
As of December 31, 1998 and March 31, 1999, Genzyme had $100.0 million of debt
outstanding under the revolving credit facility, $82.0 million of which was
allocated to Genzyme General and $18.0 million of which was allocated to GTR.
24
16
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
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,
1998, the interest rate on amounts outstanding under the revolving credit
facility was approximately 5.75%. Genzyme pays a commitment fee ranging from
0.15% to 0.375% on the unused portion of the revolving credit facility.
OPERATING LEASES
Total rent expense under operating leases was $0.2 million, $0.2 million
and $0.1 million in 1998, 1997 and 1996, respectively. GSP leases facilities and
personal property under certain operating leases in excess of one year.
Future minimum payments due under operating leases (amounts in thousands):
OPERATING LEASES
----------------
1999........................................ $ 234
2000........................................ 241
2001........................................ 249
2002........................................ 256
2003........................................ 264
Thereafter.................................. 3,255
------
Total minimum payments............ $4,499
======
NOTE K. DIVISION EQUITY
The following presents the division equity of GSP for the periods presented
(amounts in thousands):
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Balance at beginning of period.................... $234,969 $239,040 $ 175
Net loss.......................................... (49,856) (29,740) (44,313)
Allocation from Genzyme General................... 41,975 25,669 283,178
-------- -------- --------
Balance at end of period.......................... $227,088 $234,969 $239,040
======== ======== ========
There are 60,000,000 shares of GZSP Stock authorized as of June 1999. Of
the authorized shares, 16,000,000 GZSP Designated Shares will be created. On
June 28, 1999, Genzyme will issue approximately 14,800,000 shares of GZSP Stock
to Genzyme General stockholders of record as of the close of business on June
14, 1999 in a dividend distribution of approximately 0.17923 share of GZSP Stock
for each share of GENZ Stock owned. Cash in lieu of fractional shares will be
paid at $25.00 per share.
25
17
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
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.
GZSP DESIGNATED SHARES
Pursuant to the Charter, GZSP Designated Shares are authorized shares of
GZSP 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 GSP. GZSP
Designated Shares are not eligible to receive dividends and cannot be voted by
Genzyme. GZSP Designated Shares are created in certain circumstances when cash
or other assets are transferred from Genzyme General to GSP. The number of GZSP
Designated Shares will be decreased by: the number of shares of GZSP Stock
issued by Genzyme, the proceeds of which are allocated to Genzyme General; the
number of shares of GZSP Stock issued as a dividend to holders of GENZ Stock;
and the number of shares of GZSP Stock issued upon the conversion of convertible
securities, the proceeds of which are attributed to Genzyme General.
Approximately 1,131,000 GZSP Designated Shares will be reserved for issuance
upon conversion of Genzyme's 5 1/4% convertible subordinated notes due June
2005. In addition, the number of GZSP Designated Shares can be increased as a
result of certain interdivision transactions.
If, as of June 30 of each year starting June 30, 2000, the number of GZSP
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 GZSP Stock then issued and outstanding,
then substantially all GZSP Designated Shares will be distributed to holders of
record of GENZ Stock, subject to reservation of a number of such shares equal to
the sum of (a) the number of GZSP Designated Shares reserved for issuance upon
the exercise or conversion of Genzyme General convertible securities and (b) the
number of GZSP 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.
DIRECTORS' DEFERRED COMPENSATION PLAN
Genzyme's Directors' Deferred Compensation Plan allows each member of the
Genzyme Board who is not also an officer or employee of Genzyme to defer receipt
of all or a portion of the cash compensation payable to him or her as a director
of Genzyme and receive either cash or stock in the future. 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
26
18
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
directors who are also officers or employees of Genzyme, are eligible to
participate in the plan and as of December 31, 1998, one of the directors has
elected to participate in the plan. Genzyme has reserved 50,000 shares of GENZ
Stock, 50,000 shares of GZSP Stock, 50,000 shares of GZMO Stock and 100,000
shares of GZTR Stock to cover distributions of shares credited to stock accounts
under the Directors' Deferred Compensation Plan (subject in each case to
adjustments for stock splits, stock dividends, and certain transactions
affecting Genzyme's capital stock). As of March 31, 1999 and December 31, 1998,
no shares of GENZ Stock, GZSP Stock, GZMO Stock and GZTR Stock credited to stock
accounts under the Directors' Deferred Compensation Plan have been distributed
to participants.
SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS' STOCK OPTION
PLAN AND EMPLOYEE STOCK PURCHASE PLAN
At March 31, 1999, approximately 14,915,000 shares of GENZ Stock, 1,100,000
shares of GZSP Stock, 3,637,000 shares of GZMO Stock and 5,699,000 shares of
GZTR Stock were reserved for issuance under the Company's 1990 Equity Incentive
Plan, as amended, 1997 Equity Plan, as amended, 1998 Director Stock Option Plan,
as amended, 1999 Employee Stock Purchase Plan, 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
GENZ Stock, 500,000 shares of GZSP Stock, 3,500,000 shares of GZMO Stock and
5,300,000 shares of GZTR 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 years. In addition,
Genzyme has a 1998 Director Stock Option Plan pursuant to which nonstatutory
stock options up to a maximum of 340,000 shares of GENZ Stock, 100,000 shares of
GZSP Stock, 140,000 shares of GZMO Stock and 200,000 shares of GZTR Stock 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 (a) an option to purchase 4,000 shares of each of
GENZ Stock and (b) options to purchase shares of GZSP Stock, GZMO Stock and GZTR
Stock. All options expire ten years after the initial grant date and vest over
four years. There have been no GZSP stock options granted under these plans.
STOCK RIGHTS
Pursuant to the Company's Restated Rights Agreement, each outstanding share
of GZSP Stock also represents one preferred stock purchase right (a "GZSP Stock
Right"). Each GZSP Stock Right, when it become exercisable, will entitle the
registered holder to purchase from Genzyme one one-hundredth of a share of
Series D Junior Participating Preferred Stock at a purchase price of $150.00,
subject to adjustment.
27
19
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NOTE L. RESEARCH AND DEVELOPMENT AGREEMENTS
The Company allocates all research and development agreements with
unconsolidated affiliates to Genzyme General GSP, GMO or GTR based on the
business to which the research relates.
Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme
and which has been allocated to GSP, 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 the Sepra Products.
The Company has an option (the "GDP Purchase Option") to purchase all of
the outstanding partnership interests in GDP for a payment of approximately
$26.0 million in cash, GENZ Stock or a combination thereof determined at
Genzyme's sole discretion, plus future royalty payments. The GDP Purchase Option
is exercisable during the 90-day period commencing on August 31, 2000, but such
commencement date will be accelerated to the last day of the first month in
which GDP has received distributions from GVII (described below) in an aggregate
amount of at least $5.5 million. Genzyme elected without obligation to fund the
research and development activities of GDP using Genzyme General cash and spent
approximately $8.4 million, $7.3 million and $6.0 million on GDP's programs in
1998, 1997 and 1996, respectively. The Company has agreed to fund GDP's research
and development programs and general and administrative expenses through 1999
but, as General Partner, believes that additional funds will be required to
complete the development, clinical testing and commercialization of GDP's
products.
The Company and GDP formed GVII 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. GDP has
contributed its technology and $1.7 million to GVII and GSP has contributed its
agreement to manufacture and market the Sepra Products, to make non-interest
bearing loans to GVII 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 GVII. GVII began to engage in active business
after receipt of FDA marketing approval for Seprafilm(R) Bioresobable Membrane
in August 1996. For the years ended December 31, 1998, 1997 and 1996, GVII
incurred net losses of $4.8 million, $2.3 million and $2.5 million,
respectively, primarily attributable to costs associated with the introduction
of the Sepra Products to the healthcare marketplace. The results of operations
and financial position of GVII are consolidated into GSP's financial statements.
NOTE M. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme has been subject to legal proceedings and claims
arising in connection with its business. At March 31, 1999 and December 31,
1998, there were no asserted claims against Genzyme which, in the opinion of
management, if adversely decided would have a material adverse effect on GSP's
financial position and results of operations.
28
20
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NOTE N. INCOME TAXES
The following summarizes GSP's benefit from income taxes (amounts in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Federal income taxes:
Current................................. $ -- $ -- $ --
Deferred................................ -- -- (751)
State income taxes:
Current................................. -- -- --
Deferred................................ -- -- (86)
-------- -------- --------
Total income tax benefit.................. $ -- $ -- $ (837)
======== ======== ========
The differences between the effective tax rates and the U.S. federal
statutory tax rates were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
U.S. federal income tax statutory rate.... (35.0%) (35.0%) (35.0%)
State income taxes, net of federal
benefit................................. (3.1%) (3.0%) (5.2%)
Nondeductible amortization................ 2.3% 4.0% 2.9%
Deductions subject to deferred tax
valuation allowance..................... 35.8% 34.0% 35.4%
-------- -------- --------
Effective tax rate........................ 0.0% 0.0% (1.9%)
======== ======== ========
At December 31 the components of net deferred tax assets were as follows
(amounts in thousands):
1998 1997
-------- --------
Deferred tax assets:
Net operating loss carryforwards..................... $ 48,701 $ 29,626
Unrealized capital losses............................ 1,317 1,317
Reserves and other................................... 4,908 3,755
-------- --------
Gross deferred tax asset............................. 54,926 34,698
Valuation allowance.................................. (45,896) (26,324)
-------- --------
Net deferred tax assets.............................. $ 9,030 $ 8,374
======== ========
Deferred tax liabilities:
Intangible amortization.............................. $ (6,712) $ (6,012)
Depreciable assets................................... (2,318) (2,362)
-------- --------
Net deferred tax liabilities......................... $ (9,030) $ (8,374)
======== ========
Due to uncertainty surrounding the realization of certain favorable tax
attributes, GSP placed a valuation allowance of $45.9 million and $26.3 million
for December 31, 1998 and 1997, respectively, against otherwise recognizable
deferred tax assets. At the time GSP
29
21
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
recognizes these tax assets in accordance with generally accepted accounting
principles, the resulting deferred tax benefits will be reflected in the tax
provision for GSP. However, the benefit of these deferred tax assets has been
previously allocated to Genzyme General in accordance with the management and
accounting policies, and has been reflected as a reduction of GSP net income to
determine net income attributable to GZSP Stock.
NOTE O. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the
Internal Revenue Code of 1986, as amended, covering substantially all employees
of the Company with the exception of employees of GSP 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. GSP contributed $0.8 million, $0.8 million and $0.6 million to the
401(k) Plan in 1998, 1997 and 1996, respectively.
The Company has defined-benefit pension plans covering substantially all
the employees of GSP and certain of Genzyme's foreign subsidiaries. There was no
defined-benefit pension expense recorded for GSP for the years ended December
31, 1998, 1997 and 1996, respectively. Pension costs are funded as accrued.
Actuarial and other disclosures regarding the plans are not presented because
the defined-benefit pension plans are not material.
NOTE P. SEGMENT REPORTING
GSP has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of GSP's reportable
segments. SFAS No. 131 also requires disclosures about products and services,
geographic areas and major customers.
GSP has two reportable segments: the Cardiovascular Surgery product line,
which includes chest drainage systems, instruments and closures which are used
primarily in coronary artery bypass, valve replacement and other cardiothoracic
procedures; and the General Surgery product line, which is focused on surgical
instruments and Seprafilm(R) Bioresorbable Membrane which is used to prevent
adhesions in abdominal or pelvic surgery.
30
22
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
Information concerning the operations in these reportable segments is as
follows (dollars in thousands):
FOR THE THREE MONTHS FOR THE YEARS ENDED
ENDED MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- -------
(UNAUDITED)
REVENUES:
Cardiovascular Surgery........ $19,387 $17,892 $ 74,544 $ 74,727 $39,556
General Surgery............... 5,897 4,713 20,249 19,625 7,073
Other......................... 2,213 1,880 10,045 7,905 4,477
Eliminations/Adjustments...... (144) (258) (880) (1,422) (392)
------- ------- -------- -------- -------
Total......................... $27,353 $24,227 $103,958 $100,835 $50,714
======= ======= ======== ======== =======
GROSS PROFIT
Cardiovascular Surgery........ $ 8,570 $ 7,403 $ 29,596 $ 33,494 $14,189
General Surgery............... 1,878 877 (490) 4,772 1,678
Other......................... 1,061 1,224 2,578 2,767 2,193
------- ------- -------- -------- -------
Total......................... $11,509 $ 9,504 $ 31,684 $ 41,033 $18,060
======= ======= ======== ======== =======
The amounts in other consist primarily of amounts related to the Plastic
Surgery product line.
There are no transactions between reportable segments. The amounts in
revenues -- eliminations/adjustments consist of discounts given by GSP to
customers. These discounts are not reported by product line. GSP does not
break-out assets by product line and therefore they are not disclosed. In 1996,
GSP's revenue includes DSP from July 1, 1996 (date of acquisition of DSP) to
December 31, 1996.
In 1998, gross profit for General Surgery includes a $10.4 million charge
to write-down Sepra Products inventory amounts to net realizable value. In 1997,
gross profit for Cardiovascular and General Surgery include charges of $0.4
million and $5.1 million, respectively, related primarily to the manufacturing
of Sepracoat(TM) Coating Solution, which was discontinued for the U.S. market
after an advisory panel of the FDA recommended against granting market approval
of this product in 1997. This product is sold outside of the United States.
31
23
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
Certain information by geographic area follows (dollars in thousands):
REVENUES
--------
1998
United States.................................... $ 74,072
Germany.......................................... 17,400
Other............................................ 12,486
--------
Total....................................... $103,958
========
1997
United States.................................... $ 71,898
Germany.......................................... 16,839
Other............................................ 12,098
--------
Total....................................... $100,835
========
1996
United States.................................... $ 37,741
Germany.......................................... 9,160
Other............................................ 3,813
--------
Total....................................... $ 50,714
========
All long-lived assets are in the United States.
GSP markets its products directly to physicians and hospitals. GSP also
markets its products through distributors and had the following sales as a
percentage of total revenue to two unaffiliated distributors:
1998 1997 1996
---- ---- ----
Distributor A......................... 18% 20% 23%
Distributor B......................... 8% 11% 12%
32
24
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999
AND MARCH 31, 1998 IS UNAUDITED)
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (amounts in thousands, except per share
data) for the years ended December 31, 1998 and 1997 are displayed in the
following table.
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1998
Net sales................................. $24,227 $27,201 $24,904 $27,626
Gross profit (loss)..................... 9,504 11,942 (919) 11,157
Net loss (1,2).......................... (9,118) (9,886) (21,519) (9,333)
Pro forma loss per share:
Pro forma basic and diluted.......... $ (0.62) $ (0.67) $ (1.45) $ (0.63)
1997
Net sales................................. $26,916 $26,735 $23,163 $24,021
Gross profit............................ 13,986 13,171 10,069 3,807
Net loss (1,2).......................... (1,282) (2,794) (7,339) (18,325)
Pro forma loss per share:
Pro forma basic and diluted.......... $ (0.09) $ (0.19) $ (0.50) $ (1.24)
- ---------------
(1) Includes pre-tax charges in the third quarter of 1998 of $12.1 million
resulting from certain other charges (see Note C., "Other Charges" above).
(2) Includes pre-tax charges in the fourth quarter of 1997 of $7.4 million
related to certain other charges recorded in December 1997 (see Note C.,
"Other Charges" above).
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GENZYME SURGICAL PRODUCTS
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses Accounts Deductions Period
- ---------------------------------------------------------------------------------------------------------------
Year-ended December 31, 1998:
Allowance for doubtful accounts $ 476,000 $ 166,000 $ 0 $ 277,000 $ 365,000
Inventory reserve $ 3,700,000 $10,758,000 $ 0 $ 2,331,000 $12,127,000
Year-ended December 31, 1997:
Allowance for doubtful accounts $ 917,000 $ 275,000 $ 0 $ 716,000 $ 476,000
Inventory reserve $ 3,854,000 $ 484,000 $ 0 $ 638,000 $ 3,700,000
Year-ended December 31, 1996:
Allowance for doubtful accounts $ 0 $ 0 $ 1,026,000(1) $ 109,000 $ 917,000
Inventory reserve $ 0 $ 329,000 $ 3,525,000(1) $ 0 $ 3,854,000
(1) Reserve acquired in acquisition.
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GENZYME SURGICAL PRODUCTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Genzyme Surgical Products (as
described in Note A) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As more fully described in Note A to these financial statements, Genzyme
Surgical Products is a division of Genzyme Corporation; accordingly, the
combined financial statements of Genzyme Surgical Products should be read in
conjunction with the audited consolidated financial statements of Genzyme
Corporation and Subsidiaries.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 9, 1999
35