EX-13.4 5 ex-13_4.txt EXHIBIT 13.4 EXHIBIT 13.4 FINANCIAL STATEMENTS
PAGE NO. -------- GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION Combined Selected Financial Data.......................... GSP-2 Management's Discussion and Analysis of Genzyme Surgical Products' Financial Condition and Results of Operations.............................................. GSP-5 Combined Statements of Operations--For the Years Ended December 31, 1999, 1998 and 1997................................................ GSP-16 Combined Balance Sheets--December 31, 1999 and 1998....... GSP-17 Combined Statements of Cash Flows--For the Years Ended December 31, 1999, 1998 and 1997................................................ GSP-18 Notes to Combined Financial Statements.................... GSP-19 Report of Independent Accountants......................... GSP-34
GSP-1 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA Genzyme Surgical Products is our operating division that develops, manufactures and markets surgical products for cardiovascular surgery and general surgery. A series of our common stock, Genzyme Surgical Products Division Common Stock (which we refer to as "Surgical Products Stock") is designed to reflect the value and track the performance of this division. Surgical Products Stock is common stock of Genzyme Corporation, not of Genzyme Surgical Products; Genzyme Surgical Products is a division, not a company or legal entity, and therefore does not and cannot issue stock. The chief mechanisms intended to cause Surgical Products Stock to "track" the financial performance of Genzyme Surgical Products are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Surgical Products into the determination of the amount available to pay dividends on Surgical Products Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Surgical Products Stock if all or substantially all of the assets allocated to Genzyme Surgical Products are sold to a third party. To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Surgical Products Stock is defined in our charter as the net income or loss of Genzyme Surgical Products determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Surgical Products in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to Surgical Products Stock are based on the income or losses attributable to Genzyme Surgical Products, we include financial statements and management's discussion and analysis of Genzyme Surgical Products to aid investors in evaluating its performance. The following combined selected financial data reflect the results of operations and financial position of the operations and assets we have allocated to Genzyme Surgical Products and should be read in conjunction with the financial statements of Genzyme Surgical Products and accompanying notes. We established Genzyme Surgical Products as a division in June 1999. The business of Genzyme Surgical Products had previously been accounted for as a business unit of Genzyme General. The products and assets allocated to Genzyme Surgical Products are those we acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra products (our line of products and product candidates designed to limit post-operative adhesions), and our research and development programs in biomaterials and gene and cell therapy for cardiovascular disease. Genzyme General transferred $150.0 million in cash, cash equivalents and investments, and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of Surgical Products Stock and distributed them as a dividend to holders of Genzyme General Stock. These financial statements reflect the financial position, results of operations and cash flows attributable to Genzyme Surgical Products as if it had been accounted for as a separate division of the corporation for all periods presented. GSP-2 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA COMBINED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- (AMOUNTS IN THOUSANDS) Net product sales(1).................... $ 111,981 $ 103,958 $ 100,835 $ 50,714 $ 8 Operating costs and expenses: Cost of products sold(2).............. 67,242 72,274 59,802 32,654 733 Selling, general and administrative... 63,237 57,297 54,061 28,399 2,576 Research and development.............. 28,056 18,618 11,287 7,693 5,971 Amortization of intangibles........... 5,750 5,748 5,647 2,984 -- Purchase of in-process research and development(3)...................... -- -- -- 24,170 -- --------- --------- --------- --------- -------- Total operating costs and expenses.......................... 164,285 153,937 130,797 95,900 9,280 --------- --------- --------- --------- -------- Operating loss.......................... (52,304) (49,979) (29,962) (45,186) (9,272) Other income (expenses): Equity in net income (loss) of unconsolidated affiliates........... (35) (6) (78) 2 (1) Other................................. 138 60 236 8 -- Investment income..................... 4,199 144 98 84 -- Interest expense...................... (35) (75) (34) (58) -- --------- --------- --------- --------- -------- Total other income (expenses)....... 4,267 123 222 36 (1) --------- --------- --------- --------- -------- Loss before income taxes................ (48,037) (49,856) (29,740) (45,150) (9,273) Tax benefit............................. -- -- -- 837 -- --------- --------- --------- --------- -------- Division net loss....................... $ (48,037) $ (49,856) $ (29,740) $ (44,313) $ (9,273) ========= ========= ========= ========= ========
GSP-3 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED SELECTED FINANCIAL DATA COMBINED BALANCE SHEET DATA
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Cash and investments(4)....................... $126,125 $ -- $ 975 $ 2,182 $ -- Working capital(4)............................ 98,465 32,714 34,279 40,556 118 Total assets(4)............................... 370,924 234,216 242,566 253,609 175 Division equity(4)............................ 353,918 227,088 234,969 239,040 175
------------------------ (1) On July 1, 1996, we acquired Deknatel Snowden Pencer, Inc., or "DSP". (2) Cost of products sold for 1998 includes a $10.4 million charge to write-down our Sepra products inventory to net realizable value. (3) In 1996, we recorded a $24.2 million charge for the purchase of in-process research and development in connection with its acquisition of DSP. (4) We created Genzyme Surgical Products as a separate division of Genzyme on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the allocated results of Genzyme General. On June 28, 1999, Genzyme General transferred $150.0 million in cash, cash equivalents, investments and certain other assets to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of Surgical Products Stock. GSP-4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME SURGICAL PRODUCTS' FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this annual report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for Genzyme Surgical Products and Genzyme Corporation included in this annual report. You should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme Surgical Products and Genzyme. We established Genzyme Surgical Products as a separate division of Genzyme in June 1999. The business of Genzyme Surgical Products had previously been accounted for as a business unit of Genzyme General. The products and assets allocated to Genzyme Surgical Products are those we acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra products (our line of products and product candidates designed to limit post-operative adhesions), and our research and development programs in biomaterials and gene and cell therapy for cardiovascular disease. Genzyme General transferred $150.0 million in cash, cash equivalents, investments, and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of Surgical Products Stock and distributed them as a dividend to holders of Genzyme General Stock. These financial statements reflect the financial position, results of operations and cash flows attributable to Genzyme Surgical Products as if it had been accounted for as a separate division of the corporation for all periods presented. We prepare the financial statements of Genzyme Surgical Products in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Surgical Products in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Surgical Products. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. Genzyme Surgical Products Common Stock, which we refer to as "Surgical Products Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Surgical Products. The chief mechanisms intended to cause Surgical Products Stock to "track" the financial performance of Genzyme Surgical Products are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Surgical Products into the determination of the amount available to pay dividends on Surgical Products Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Surgical Products Stock if all or substantially all of the assets allocated to Genzyme Surgical Products are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Surgical Products Stock is defined in our charter as the net income or loss of Genzyme Surgical Products determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Surgical Products in accordance with our management and accounting policies. Our charter GSP-5 also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Surgical Products Stock are based on the income or losses attributable to Genzyme Surgical Products, we include financial statements and management's discussion and analysis of Genzyme Surgical Products to aid investors in evaluating its performance. While Surgical Products Stock is designed to reflect Genzyme Surgical Products' performance, it is common stock of Genzyme Corporation and not Genzyme Surgical Products; Genzyme Surgical Products is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Genzyme Surgical Products Stock have no specific rights to assets allocated to Genzyme Surgical Products. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Surgical Products and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Surgical Products Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to each division are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of Surgical Products Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. Our charter sets forth what programs and businesses are initially allocated to Genzyme Surgical Products and states that going forward the division will also include all businesses, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Surgical Products and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. We present earnings per share data for Surgical Products Stock in our consolidated financial statements. We present financial information and accounting policies specific to Genzyme Surgical Products in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should, therefore, read this discussion and analysis of Genzyme Surgical Products' financial position and results of operations in conjunction with the financial statements and related notes of Genzyme Surgical Products, the discussion and analysis of Genzyme's financial position and results of operations, and the consolidated financial statements and related notes of Genzyme, all of which are included in this annual report. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division, and the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to that new division. For more information you should read the section entitled "Subsequent Event" below. RESULTS OF OPERATIONS The following discussion summarizes the key factors our management believes are necessary for an understanding of Genzyme Surgical Products' financial statements. GSP-6 The components of Genzyme Surgical Products' combined statements of operations are described in the following table:
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE --------- --------- --------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues............ $ 111,981 $ 103,958 $ 100,835 8% 3% Cost of products sold..... 67,242 72,274 59,802 (7)% 21% Selling, general and administrative.......... 63,237 57,297 54,061 10% 6% Research and development............. 28,056 18,618 11,287 51% 65% Amortization of intangibles............. 5,750 5,748 5,647 0% 2% --------- --------- --------- Total operating costs and expenses........ 164,285 153,937 130,797 7% 18% --------- --------- --------- Operating loss............ (52,304) (49,979) (29,962) 5% 67% Other income (expenses), net..................... 4,267 123 222 3,369% (45)% --------- --------- --------- Division net loss......... $ (48,037) $ (49,856) $ (29,740) (4)% 68% ========= ========= =========
REVENUES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Cardiovascular surgery products................ $ 77,966 $ 74,545 $ 79,560 5% (6)% General surgery products................ 25,192 20,249 14,813 24% 37% Other products............ 8,823 9,164 6,462 (4)% 42% -------- -------- -------- Total revenues...... $111,981 $103,958 $100,835 8 % 3 % ======== ======== ========
1999 AS COMPARED TO 1998 Cardiovascular surgery products include chest drainage and fluid management systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The increase in cardiovascular surgery product revenues in 1999 was primarily attributable to increased sales of instruments for minimally invasive cardiac surgery. The increase in general surgery product revenues was due primarily to the increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane. Sales of Sepra Film-Registered Trademark- bioresorbable membrane in 1999 were $13.4 million compared to $9.3 million in 1998. Other surgery product revenues consisted of sales of Genzyme Surgical Products' Snowden-Pencer-Registered Trademark-line of instruments for plastic surgery and products sold to original equipment manufacturers, including sutures. International sales as a percentage of total sales in 1999 were 30% as compared to 29% in 1998. GSP-7 1998 AS COMPARED TO 1997 Cardiovascular surgery product revenues decreased as a result of a decrease in sales of fluid management products, which were $39.8 million in 1998 compared to $42.3 million in 1997. The decrease in fluid management product sales was due to the termination of a group-purchasing contract in 1997, the impact of which was realized in 1998. The increase in general surgery product revenues in 1998 is primarily due to increased product sales of Sepra Film-Registered Trademark- bioresorbable membrane. These product sales increased 88% to $9.3 million in 1998 compared to $4.9 million in 1997, primarily as a result of increased market acceptance. International sales as a percentage of total sales in 1998 were 29% compared to 28% in 1997. MARGINS
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Gross margins.................... $44,739 $31,684 $41,033 41% (23%) % of total revenues.......... 40% 30% 41%
1999 AS COMPARED TO 1998 Genzyme Surgical Products sells a broad range of products. As a result, Genzyme Surgical Products' gross margins may vary significantly depending on the particular market conditions of each product line. During the third quarter of 1998, Genzyme Surgical Products revised its forecasted sales of Sepra products and, in accordance with our policy, analyzed the Sepra products inventory to determine whether the carrying value exceeded the net realizable value. The revised forecast showed slower sales growth as well as higher manufacturing and sales and marketing costs than originally expected. In addition, the Sepra products inventory on-hand had a relatively high cost per unit because production was significantly less than originally planned. As a result, in the third quarter of 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost of products sold to write down its Sepra products inventory to net realizable value. Without the effect of this charge, Genzyme Surgical Products' gross margin for 1998 would have been 40%. 1998 AS COMPARED TO 1997 In 1997, Genzyme Surgical Products recorded charges of $5.5 million to cost of products sold and $1.9 million to selling, general and administrative expense relating to the manufacture and sale of Sepracoat-TM- coating solution. Genzyme Surgical Products took these charges after an FDA advisory panel recommended against granting market approval of this product in 1997. This product is sold outside of the United States. Excluding this charge and the charge described above, gross margins for 1998 were 40% compared to 46% in 1997. The decrease in gross margins, excluding the other charges described below, was primarily due to lower average selling prices of fluid management products in 1998 and increased sales in 1998 of lower margin products such as Sepra Film-Registered Trademark- bioresorbable membrane. GSP-8 SG&A AND R&D EXPENSES 1999 AS COMPARED TO 1998 Genzyme Surgical Products' selling, general and administrative expense increased in 1999 as a result of higher fringe benefit expenses and costs associated with the creation of Genzyme Surgical Products as a separate division of Genzyme. Genzyme Surgical Products' research and development expense for 1998 includes a $1.7 million charge taken in the third quarter of 1998 to write off certain costs related to equipment that it used to manufacture the Sepra products. Excluding this charge, the increase in research and development costs was a result of the increased spending for Genzyme Surgical Products' cell and gene therapy programs as well as the initiation of several clinical trials for its products. The increase in research and development costs was also attributable to a $2.0 million milestone payment to a collaborator that was recorded in June 1999. 1998 AS COMPARED TO 1997 Excluding a charge of $1.9 million in 1997 related to the manufacture and sale of Sepracoat-TM- coating solution, selling, general and administrative expense increased by 10% over 1997. The increase in selling, general and administrative expense was primarily due to increased charges from Genzyme General, a result of increased support for Genzyme Surgical Products' sales and marketing programs and initiatives. Sepracoat-TM- coating solution was discontinued for the U.S. market after an advisory panel of the FDA recommended against granting market approval of this product. However, this product is sold outside the United States. The increase in research and development expense was primarily due to higher expenditures in cardiovascular gene and cell therapy scientific research as well as additional clinical trials initiated for the Sepra products. In addition, during 1998, Genzyme Surgical Products wrote off $1.7 million of certain costs related to equipment used to manufacture the Sepra products. OTHER INCOME AND EXPENSES
99/98 98/97 INCREASE/(DECREASE) INCREASE/(DECREASE) 1999 1998 1997 % CHANGE % CHANGE -------- -------- -------- ------------------- ------------------- (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates........................ $ (35) $ (6) $ (78) 483% (92%) Other............................... 138 60 236 130% (75%) Investment income................... 4,199 144 98 2,816% 47% Interest expense.................... (35) (75) (34) (53%) 121% ------ ------ ------ Total other income.............. $4,267 $ 123 $ 222 3,369% (45%) ====== ====== ======
The increase in other income and expenses in 1999 was primarily due to an increase in investment income. Investment income increased because Genzyme Surgical Products had a higher average cash balance as a result of the allocation to Genzyme Surgical Products in June 1999 of $150.0 million in cash from Genzyme General. GSP-9 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, Genzyme Surgical Products had cash, cash equivalents, and short- and long-term investments of $126.1 million. Genzyme Surgical Products had no cash, cash equivalents, and short-and long-term investments at December 31, 1998. Genzyme Surgical Products used $41.0 million in cash for operations in 1999. This was primarily due to Genzyme Surgical Products' net loss of $48.0 million for the year. Genzyme Surgical Products' investing activities in 1999 generated $21.7 million in cash from net sales of investments, used $4.0 million to purchase shares of Focal Inc. common stock, and used $3.9 million to fund capital expenditures. Primarily as a result of the allocation of assets from Genzyme General in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme, financing activities generated $50.9 million of cash in 1999. In June 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to Genzyme Surgical Products in connection with the establishment of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, approximately 14.8 million shares of Surgical Products Stock were issued and distributed as a dividend to holders of Genzyme General Stock. Genzyme Surgical Products, together with our other operating divisions, has access to our revolving credit facilities. At December 31, 1999, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. Genzyme Surgical Products believes that its cash resources, together with the revenues generated from its products and distribution agreements, will be sufficient to finance its planned operations and capital requirements through 2001. Although Genzyme Surgical Products currently has substantial cash resources, it intends to use substantial portions of its available cash for: - research and development; - product development and marketing, including for the Sepra products; - expanding facilities; and - working capital. In addition, if Genzyme Surgical Products exercises its option to purchase the limited partnership interests in Genzyme Development Partners, L.P. and uses cash to pay all or a portion of the purchase price, Genzyme Surgical Products' cash resources will be diminished (See Note L., "Genzyme Development Partners, L.P.," to Genzyme Surgical Products' combined financial statements, which are included in this report and the discussion below). Genzyme Surgical Products currently intends to provide approximately $6.0 million of funding to GDP for the Sepra programs through 2000, based on the 2000 budget for the programs. Future funding commitments for the Sepra development programs will be evaluated on an annual basis. In March 2000, we entered into an agreement to acquire BioMatrix, Inc. The consideration for the proposed acquisition consists of shares of a new series of our common stock and up to approximately $245 million in cash, allocated at the option of Biomatrix stockholders. To the extent Genzyme Surgical Products uses cash to complete this acquisition, its cash reserves will be diminished. Genzyme Surgical Products' cash needs may differ from those planned as a result of many factors, including the: - results of research and development efforts; - ability to establish and maintain strategic alliances; - ability to enter into licensing arrangements and additional distribution arrangements; GSP-10 - costs involved in enforcing patent claims and other intellectual property rights; - market acceptance of novel approaches and therapies; - development of competitive products; and - ability to satisfy regulatory requirements of the FDA and other governmental authorities. Genzyme Surgical Products may require significant additional financing to continue operations beyond 2001. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Surgical Products or find it on favorable terms. If Genzyme Surgical Products has insufficient funds or we are unable to raise additional funds for Genzyme Surgical Products, it may delay, scale back or eliminate certain of its programs. Genzyme Surgical Products may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK See "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" included in this annual report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme Surgical Products could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Factors Affecting Future Operating Results" included in this annual report. GENZYME SURGICAL PRODUCTS ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE. Genzyme Surgical Products expects to have significant operating losses for the next several years. It plans to spend substantial amounts of money on, among other things: - conducting research and development activities; - pursuing regulatory approvals; - conducting commercialization activities; and - providing surgeon education and training. We cannot guarantee that the efforts underlying these expenditures will be successful or that Genzyme Surgical Products' operations will ever be profitable. It may be years before the division generates any revenue from sales of products currently under development. IF GENZYME SURGICAL PRODUCTS FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL TRIALS. We anticipate that Genzyme Surgical Products' current cash resources, together with revenues generated from its products and distribution agreements, will be sufficient to fund its operations through 2001. However, its cash needs may differ from those planned because of many factors, including: - the ability to become profitable; - the results of research and development efforts; - the ability to establish strategic collaborations and licensing arrangements for research and development programs; - the achievement of milestones under strategic collaborations; - the ability to establish and maintain additional distribution arrangements; GSP-11 - the enforcement of patent and other intellectual property rights; - market acceptance of novel approaches and therapies; - the development of competitive products; and - the ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Surgical Products may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that we will be able to obtain any additional financing for Genzyme Surgical Products or find it on favorable terms. If Genzyme Surgical Products has insufficient funds or we are unable to raise additional funds for Genzyme Surgical Products, it may have to delay, reduce or eliminate some of its programs. Genzyme Surgical Products may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. IF GENZYME SURGICAL PRODUCTS EXERCISES AN OPTION TO PURCHASE INTERESTS IN GENZYME DEVELOPMENT PARTNERS, ITS CASH RESOURCES MAY DIMINISH AND THE RIGHTS OF ITS STOCKHOLDERS MAY BE DILUTED. In 1989, we organized Genzyme Development Partners, L.P., a special purpose research and development entity, and transferred to it technology and commercial rights to the Sepra products. We have an option to purchase the limited partnership interests in the partnership under certain circumstances for approximately $26 million plus continuing royalties based on certain sales of the Sepra products. We have allocated the purchase option to Genzyme Surgical Products. The option's exercise price is payable in cash, shares of Genzyme General Stock or a combination of the two, as determined by Genzyme Surgical Products when it exercises the option. If Genzyme Surgical Products exercises this option, it will have to make substantial cash payments or compensate Genzyme General with Genzyme Surgical Products designated shares for the Genzyme General Stock used, or both. If the division makes cash payments, its cash resources would diminish. If it makes the payment in whole or in part in shares of Genzyme General Stock, then our board of directors would need to approve the issuance of Genzyme General Stock in return for Genzyme General having reserved for it a number of Genzyme Surgical Products designated shares with a fair market value equal to the fair market value of the shares of Genzyme General Stock. Those Genzyme Surgical Products designated shares would be shares of Surgical Products Stock that our board would have the option to issue from time to time with all proceeds allocable to Genzyme General. Beginning on June 30, 2000, and on every June 30th thereafter, we will have to distribute substantially all the Genzyme Surgical Products designated shares if the number of those shares exceeds 10% of the number of shares of Surgical Products Stock then outstanding. We cannot guarantee that our board of directors would authorize the issuance of shares of Genzyme General Stock for payment of the option exercise price and the reservation of any Genzyme Surgical Products designated shares. If our board of directors reserves and subsequently distributes or otherwise disposes of any Genzyme Surgical Products designated shares, this would substantially dilute the rights of the holders of Surgical Products Stock and could significantly affect the market price of Surgical Products Stock. If Genzyme Surgical Products does not exercise the option or otherwise purchase the partnership, the partnership would have the right to sell or otherwise transfer to a third party a license to background technology that we granted to it. A sale or transfer of this technology may terminate our joint venture with the partnership to manufacture and sell the Sepra products in the U.S. and Canada. In addition, failure to exercise the option would cause the joint venture to become terminable upon 90 days' prior notice by either Genzyme or Genzyme Development Partners. GSP-12 GENZYME SURGICAL PRODUCTS IS DEVOTING SIGNIFICANT RESOURCES TO DEVELOPING NOVEL ALTERNATIVE PRODUCTS AND TREATMENTS THAT MAY NOT BE COMMERCIALLY SUCCESSFUL. Genzyme Surgical Products is devoting a significant amount of money to developing products that will represent alternatives to traditional surgical procedures or treatments. These products will likely require several years of aggressive and costly marketing before they might become widely accepted by the surgical community. Genzyme Surgical Products is developing products that are designed to enable surgeons to perform minimally invasive cardiovascular surgery. The medical conditions that can be treated with minimally invasive cardiovascular surgery are currently being treated with widely accepted surgical procedures such as coronary artery bypass grafting and catheter-based treatments, including balloon angioplasty, atherectomy and coronary stenting. To date, minimally invasive cardiovascular surgery has been performed on a limited basis and its further adoption by the surgical community will partly depend on Genzyme Surgical Products' ability to educate cardiothoracic surgeons about its effectiveness and to facilitate the training of cardiothoracic surgeons in minimally invasive cardiovascular surgery techniques. Similarly, until recently surgeons have not used products designed to reduce the incidence and extent of postoperative adhesions. Since 1996, when Sepra Film-Registered Trademark- bioresorbable membrane was introduced, market acceptance of anti-adhesion products has been slow. To increase sales of the Sepra products, Genzyme Surgical Products has had to educate surgeons and hospital administrators about the problems of, and costs associated with, adhesions and the benefit of preventing adhesions. It has also had to train surgeons on the proper handling and use of these products. We cannot guarantee that Genzyme Surgical Products' efforts in educating and training the surgical community will result in the widespread adoption of minimally invasive cardiovascular surgery and anti-adhesion products or that surgeons adopting these procedures and products will use Genzyme Surgical Products' products. ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY APPROVAL OR PUBLIC PERCEPTION OF GENZYME SURGICAL PRODUCTS' GENE THERAPY PRODUCTS. The recent death of a patient undergoing gene therapy using an adenoviral vector to deliver a therapeutic gene has been widely publicized. This death and any other adverse events in the field of gene therapy that may occur in the future may result in greater governmental regulation and potential regulatory delays relating to the testing or approval of Genzyme Surgical Products' gene therapy products. As a result of this death, the U.S. Senate has commenced hearings to determine whether additional legislation is required to protect volunteers and patients who participate in gene therapy clinical trials. Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory body to the National Institutes of Health (NIH), has extensively discussed the use of adenoviral vectors in gene therapy clinical trials and recently issued a draft report on the safety of adenoviral vectors. While this draft report recommends that clinical trials using adenoviral vectors should continue with caution, it also suggested a number of changes in the way gene therapy clinical trials are conducted. If any new guidelines are adopted by the NIH, Genzyme Surgical Products' gene therapy clinical trials could be delayed or become more expensive to conduct. The commercial success of any gene therapy products that Genzyme Surgical Products develops will depend in part on public acceptance of the use of gene therapies for the prevention or treatment of human diseases. Public attitudes may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. Negative public reaction to gene therapy could result in greater government regulation and stricter clinical trial oversight and commercial product labeling requirements of gene therapies and could cause a decrease in the demand for any gene therapy product that Genzyme Surgical Products may develop. GSP-13 COMPETITION FROM OTHER MEDICAL DEVICE AND TECHNOLOGY COMPANIES COULD HURT GENZYME SURGICAL PRODUCTS' PERFORMANCE. The human health care products and services industry is extremely competitive. Major medical device and technology companies compete or may compete with Genzyme Surgical Products. These include such companies as: - Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco International, Ltd. in the cardiovascular chest drainage and fluid management market; - The Ethicon division of Johnson & Johnson Ltd. and U.S. Surgical Corporation, a division of Tyco in the cardiovascular closure market; - CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical, Guidant Corporation, Baxter Healthcare Corporation and Ethicon in the minimally invasive cardiovascular surgery market; - Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and Gliatech, Inc. in the anti-adhesion market; and - Karl Storz Endoscopy America, Inc., Scanlan International, Inc., Pilling Weck Surgical Instruments and the Codman division of Johnson & Johnson Ltd. in the reusable instruments market. These competitors may have superior research and development, marketing and production capabilities. Some competitors also may have greater financial resources than Genzyme Surgical Products. The division is likely to incur significant costs developing and marketing new products without any guarantee that it will be commercially successful. The future success of Genzyme Surgical Products will depend on its ability to effectively develop and market its products against those of its competitors. THE TREND TOWARD CONSOLIDATION IN THE SURGICAL DEVICES INDUSTRY MAY ADVERSELY AFFECT GENZYME SURGICAL PRODUCTS' ABILITY TO MARKET SUCCESSFULLY ITS PRODUCTS TO SOME SIGNIFICANT PURCHASERS. The current trend among hospitals and other significant consumers of surgical devices is to combine into larger purchasing groups to increase their purchasing power and thus reduce their purchase price for surgical devices. Partly in response to this development, surgical device manufacturers have been consolidating to be able to offer a more comprehensive product line to these larger purchasing groups. In order to successfully market its products to larger purchasing groups, Genzyme Surgical Products may have to expand its product lines or enter into joint marketing or distribution agreements with other manufacturers of surgical devices. We cannot guarantee that it will be able to employ either of these initiatives or that, when employed, these initiatives will increase the marketability of its products. GENZYME SURGICAL PRODUCTS MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A FAILURE TO ENTER INTO FUTURE COLLABORATIONS. Genzyme Surgical Products' strategy to develop and commercialize some of its products and services includes entering into various arrangements with academic and corporate collaborators and licensees. It depends on the success of these parties in performing research, preclinical and clinical testing and marketing. These arrangements may require Genzyme Surgical Products to transfer important rights to its corporate collaborators and licensees. These collaborators and licensees could choose not to devote resources to these arrangements or, under certain circumstances, may terminate them early. In addition, these collaborators and licensees, outside of their arrangements with Genzyme Surgical Products, may develop technologies or products that are competitive with those that Genzyme Surgical Products is developing. As a result, we cannot guarantee that Genzyme Surgical Products will receive revenues from these relationships or that any of its strategic collaborations will continue or not terminate early. In addition, we cannot guarantee that Genzyme Surgical Products will be able to enter into collaborations in the future. GSP-14 SUBSEQUENT EVENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock is intended to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock or a combination of cash and stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that the cash component of the merger consideration will not exceed 28.38% of the total merger consideration, or approximately $245 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 (File No. 333-34972) filed with the SEC on April 18, 2000 and as amended from time to time. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approvals of the holders of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. GSP-15 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) Total revenues.............................................. $ 111,981 $ 103,958 $ 100,835 Operating costs and expenses: Cost of products sold..................................... 67,242 72,274 59,802 Selling, general and administrative....................... 63,237 57,297 54,061 Research and development.................................. 28,056 18,618 11,287 Amortization of intangibles............................... 5,750 5,748 5,647 --------- --------- --------- Total operating costs and expenses.................... 164,285 153,937 130,797 --------- --------- --------- Operating loss.............................................. (52,304) (49,979) (29,962) Other income (expenses): Equity in net loss of unconsolidated affiliates........... (35) (6) (78) Other..................................................... 138 60 236 Investment income......................................... 4,199 144 98 Interest expense.......................................... (35) (75) (34) --------- --------- --------- Total other income (expenses)......................... 4,267 123 222 --------- --------- --------- Division net loss........................................... $ (48,037) $ (49,856) $ (29,740) ========= ========= ========= Comprehensive loss, net of tax: Division net loss........................................... $ (48,037) $ (49,856) $ (29,740) Other comprehensive income (loss), net of tax: Unrealized losses on securities arising during the period.................................................. (1,839) -- -- --------- --------- --------- Comprehensive loss.......................................... $ (49,876) $ (49,856) $ (29,740) ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. GSP-16 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION BALANCE SHEETS
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- (AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 22,673 $ -- Short-term investments.................................... 41,606 -- Accounts receivable, net.................................. 19,886 15,663 Inventories............................................... 30,491 22,026 Prepaid expenses and other current assets................. 815 1,932 -------- -------- Total current assets.................................. 115,471 39,621 Property, plant and equipment, net........................ 17,621 16,249 Long-term investments..................................... 61,846 -- Intangibles, net.......................................... 172,833 177,897 Investment in equity securities........................... 3,140 -- Other..................................................... 13 449 -------- -------- Total assets.......................................... $370,924 $234,216 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 3,562 $ 3,925 Accrued expenses.......................................... 7,038 2,982 Due to Genzyme General.................................... 6,406 -- -------- -------- Total current liabilities............................. 17,006 6,907 Noncurrent liabilities...................................... -- 221 -------- -------- Total liabilities..................................... 17,006 7,128 Commitments and contingencies (Note K) Division equity (Note J).................................... 353,918 227,088 -------- -------- Total liabilities and division equity................. $370,924 $234,216 ======== ========
The accompanying notes are an integral part of these combined financial statements. GSP-17 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss........................................... $ (48,037) $ (49,856) $ (29,740) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization............................. 8,181 8,008 8,831 Equity in loss of unconsolidated affiliate................ 35 6 78 Accrued interest/amortization of marketable securities.... 1,144 -- -- Loss on sale of plant and equipment....................... 91 -- -- Provision for bad debts and inventory..................... 1,431 526 759 Other..................................................... -- (60) (236) Increase (decrease) in cash from working capital: Accounts receivable..................................... (4,579) (2,140) 3,179 Inventories............................................. (9,540) 3,791 2,865 Prepaid expenses and other assets....................... 1,117 (1,469) 259 Accounts payable and accrued expenses................... 2,709 1,885 (2,123) Due to Genzyme General.................................. 6,406 -- -- --------- --------- --------- Net cash used in operating activities................. (41,042) (39,309) (16,128) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................... (15,161) -- -- Sales and maturities of investments......................... 36,878 -- -- Purchase of investments in equity securities................ (4,000) -- -- Acquisitions of property, plant and equipment............... (3,877) (1,959) (3,112) Purchase of technology rights............................... (1,400) -- -- Other....................................................... 401 (688) (1,039) --------- --------- --------- Net cash provided by (used in) investing activities... 12,841 (2,647) (4,151) CASH FLOWS FROM FINANCING ACTIVITIES: Net cash allocated from Genzyme General..................... 49,414 41,484 19,003 Payments of debt and capital lease obligations.............. -- (152) (173) Bank overdraft.............................................. 1,681 -- -- Other....................................................... (221) (351) 242 --------- --------- --------- Net cash provided by financing activities............. 50,874 40,981 19,072 Increase (decrease) in cash and cash equivalents............ 22,673 (975) (1,207) Cash and cash equivalents at beginning of period............ -- 975 2,182 --------- --------- --------- Cash and cash equivalents at end of period.................. $ 22,673 $ -- $ 975 ========= ========= ========= Supplemental cash flow information: Cash paid during the year for interest $ 35 $ 9 $ 29 Supplemental disclosures of non-cash transactions: Transfer of investment--Note A. Transfer of property, plant and equipment--Note F.
The accompanying notes are an integral part of these combined financial statements. GSP-18 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Surgical Products is our operating division that develops, manufactures and markets surgical products for cardiovascular surgery and general surgery. BASIS OF PRESENTATION The combined financial statements of Genzyme Surgical Products for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Surgical Products. We also allocate a portion of our corporate operations to Genzyme Surgical Products using methods described in our allocation policy below. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this annual report. We have reclassified certain 1998 and 1997 data to conform with the 1999 presentation. We prepare the financial statements of Genzyme Surgical Products in accordance with generally accepted accounting principles. We present financial information and accounting policies specific to Genzyme Surgical Products in the accompanying combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our consolidated financial statements. You should read the consolidated financial statements in conjunction with the financial statements of Genzyme Surgical Products. Note A., "Summary of Significant Accounting Policies," to our consolidated financial statements contains our accounting policies. We incorporate that information into this note by reference. TRACKING STOCK Genzyme Surgical Products Common Stock, which we refer to as "Surgical Products Stock," is a series of our common stock that is designed to reflect the value and track the performance of Genzyme Surgical Products. The chief mechanisms intended to cause Surgical Products Stock to "track" the financial performance of Genzyme Surgical Products are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to Genzyme Surgical Products into the determination of the amount available to pay dividends on Surgical Products Stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Surgical Products Stock if all or substantially all of the assets allocated to Genzyme Surgical Products are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Surgical Products Stock is defined in our charter as the net income or loss of Genzyme Surgical Products determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Surgical Products in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, GSP-19 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Because the earnings allocated to Surgical Products Stock are based on the income or losses attributable to Genzyme Surgical Products, we include financial statements and management's discussion and analysis of Genzyme Surgical Products to aid investors in evaluating its performance. While Surgical Products Stock is designed to reflect Genzyme Surgical Products' performance, it is common stock of Genzyme Corporation and not Genzyme Surgical Products; Genzyme Surgical Products is a division, not a company or legal entity, and therefore does not and cannot issue stock. Consequently, holders of Surgical Products Stock have no specific rights to assets allocated to Genzyme Surgical Products. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Surgical Products and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of Surgical Products Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to each division are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of Surgical Products Stock and other tracking stockholders would only have the rights of common stockholders in the combined assets of Genzyme. ALLOCATION POLICY Our charter sets forth what operations and assets are initially allocated to Genzyme Surgical Products and states that going forward the division will also include all business, products or programs, developed by or acquired for the division, as determined by our board of directors. We then manage and account for transactions between Genzyme Surgical Products and our other divisions and with third parties, and any resulting re-allocations of assets and liabilities, by applying consistently across divisions a detailed set of policies established by our board of directors. We publicly disclose our divisional management and accounting policies, which appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires that all assets and liabilities of Genzyme be allocated among the divisions. Our board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Our allocations to our divisions are based on one of the following methodologies: - Specific identification--assets that are dedicated to the production of goods of a division or which solely benefit a division are allocated to that division. Liabilities incurred as a result of the performance of services for the benefit of a division or in connection with the expenses incurred which directly benefit a division are allocated to the division. Such specifically identified assets and liabilities include cash, investments, accounts receivable, inventories, property and equipment, intangible assets, accounts payable, accrued expenses and deferred revenue. Revenues from the licensing of a division's products or services to third parties and the related costs are allocated to a division; - Actual usage--expenses are charged to the division for whose benefit such expenses are incurred. Research and development, sales and marketing and direct general and administrative services are GSP-20 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) charged to the divisions for which the service is performed on a cost basis. Such charges are generally based on direct labor hours; - Proportionate usage--costs incurred which benefit more than one division are allocated based on management's estimate of the proportionate benefit each division receives. Such costs include facilities, legal, finance, human resources, executive and investor relations; or - Board directed--programs and products, both internally developed and acquired, are allocated to divisions by the board of directors. The board of directors also allocates long-term debt and strategic investments. Note B., "Policies Governing the Relationship of Genzyme's Operating Divisions," further describes our policies concerning interdivisional transactions and income tax allocations. We believe that the divisional allocations are reasonable and have been consistently applied. However, the division's results of operations may not be indicative of what would have been realized if the division was a stand-alone entity. TRANSLATION OF FOREIGN CURRENCIES We translate the financial statements of foreign subsidiaries allocated to Genzyme Surgical Products from local currency into U.S. dollars and record translation adjustments for these subsidiaries to division equity. Genzyme Surgical Products records gains and losses in foreign currency transactions in income. We include exchange gains and losses on intercompany balances which are long-term in nature in our division equity. Our gains and losses on all other transactions are included in our results of operations. REVENUE RECOGNITION Genzyme Surgical Products recognizes revenue from product sales when it ships the product and title has passed, net of any applicable third party contractual allowances and rebates. NET INCOME (LOSS) PER SHARE Earnings per share is calculated for each series of Genzyme stock using the two-class method, as further described in the notes to the consolidated financial statements. We present earnings per share data only in the consolidated financial statements of Genzyme because Genzyme Corporation is the issuer of the securities Genzyme's divisions do not and cannot issue securities because they are not companies or legal entities. NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS Because each of our operating divisions is a part of a single company, our board of directors has adopted policies to address issues that may arise among divisions and to govern the management of and the relationships between each division. With some exceptions that are mentioned specifically in this note, our board of directors may modify or rescind these policies, or adopt additional policies, in its sole GSP-21 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) discretion without stockholder approval, subject only to our board of directors' fiduciary duty to stockholders. Generally accepted accounting principles require that any change in policy be preferable (in accordance with these principles) to the previous policy. INTERDIVISION ASSET TRANSFERS Our board of directors may at any time reallocate any program, product or other asset from one division to any other division. We account for interdivision asset transfers at book value. The consideration paid for an asset transfer generally must be fair value as determined by our board of directors. The difference between the consideration paid and the book value of the assets transferred is recorded in division equity. Our board of directors determines fair value using the following methodologies: a risk-adjusted discounted cash flow model or a comparable transaction model. The risk-adjusted discounted cash flow model estimates fair value by taking the discounted value of all the cash inflows and outflows related to a program or product over a specified period of time, generally the economic life of the project, adjusted for the probabilities of certain outcomes occurring or not occurring. In performing this analysis, we consider various factors that could affect the success or failure of the program including: - the duration, cost and probability of success of each phase of development; - the current and potential size of the market and barriers to entry into the market; - the maximum number of patients likely to be treated with the product and the speed with which that maximum number will be reached; - reimbursement policies and pricing limitations; - current and potential competitors; - the net proceeds received by us upon the sale of the program or product; and - the costs of manufacturing and marketing the product or program. The comparable transaction model estimates fair value through comparison to valuations established for other transactions within the biotechnology and biosurgical areas involving similar programs and products having similar terms and structure. In identifying comparable transactions, we consider, among other factors, the following: - the similarity of market opportunity; - the comparability of the medical needs addressed; - the similarity of the regulatory, reimbursement and competitive environment; - the stage of product or program development; and - the risk profile of successfully commercializing the product or program. GSP-22 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) We customarily use the comparable transaction model to corroborate valuations derived under the risk-adjusted discounted cash flow model. GSP-23 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) When determining the fair value of a program under development using either model, our board of directors also takes into account the following criteria in the case of a program under development: - the commercial potential of the program; - the phase of clinical development of the program; - the expenses associated with realizing any income from the program and the likelihood and time of the realization; and - other matters that our board of directors and its financial advisors, if any, deem relevant. One division may compensate another division for a reallocation with cash or other consideration having a value equal to the fair market value of the reallocated assets. In the case of a reallocation of assets from Genzyme General to Genzyme Surgical Products, our board of directors may elect instead to account for the reallocation as an increase in Genzyme Surgical Products designated shares in accordance with the provisions of our charter. Genzyme Surgical Products designated shares are shares of Surgical Products Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Surgical Products. No gain or loss is recognized as a result of these transfers. Our policy regarding transfers of assets between divisions may not be changed by our board of directors without the approval of the holders of Surgical Products Stock voting as a separate class unless the policy change does not affect Genzyme Surgical Products. OTHER INTERDIVISION TRANSACTIONS Our divisions may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. These transactions may include agreements by one division to provide products and services for use by another division, license agreements and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. These transactions are subject to the following conditions: - We charge research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for another division to the division for which the services are performed on a cost basis. We charge direct costs to the division for which we incur them. We allocate direct labor and indirect costs in reasonable and consistent manners based on the use by a division of relevant services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - We charge the manufacturing of goods and performance of services by one division exclusively for another division to the division for which it is performed on a cost basis. We include in manufacturing costs an interest charge (based on our short-term borrowing rate at the beginning of the fiscal year) on the gross fixed assets used in the manufacturing process. To perform this calculation, we determine gross fixed assets for the facility used at the beginning of each fiscal year and apply our short-term borrowing rate. We allocate direct labor and indirect costs in reasonable and consistent GSP-24 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS (CONTINUED) manners based on the benefit received by a division of related goods and services. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Other than transactions involving research and development, manufacturing, distribution, sales, marketing, general and administrative services, which are addressed above, all interdivisional transactions are performed on terms and conditions obtainable in arm's length transactions with third parties. Divisions performing services for other divisions do not recognize revenue for the services they perform. - Our board of directors must approve interdivisional transactions that are performed on terms and conditions other than as described above and are material to one or more of the participating divisions. In giving its approval, our board of directors must determine that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each participating division. - Divisions may make loans to other divisions. Any loan of $1 million or less matures within 18 months and accrues interest at the best borrowing rate available to the corporation for a loan of like type and duration. Our board of directors must approve any loan in excess of $1 million. In giving its approval, our board of directors must determine that the material terms of the loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing each such division. - All material interdivisional transactions are set forth in a written agreement that is signed by an authorized member of the management team of each division involved in the transaction. TAX ALLOCATIONS We file a consolidated tax return and allocate income taxes to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. We assess the realizability of our deferred tax assets at the division level. As a result, our consolidated tax provision may not equal the sum of the divisions' tax provision. As of the end of any fiscal quarter, however, if a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to the other divisions in proportion to their taxable income without any compensating payment or allocation. ACCESS TO TECHNOLOGY AND KNOW-HOW Genzyme Surgical Products has unrestricted access to all technology and know-how owned or controlled by Genzyme Corporation that may be useful in its business, subject to any obligations or limitations that apply to the corporation generally. NOTE C. OTHER CHARGES During the third quarter of 1998, Genzyme Surgical Products revised its forecasted sales of Sepra products and, in accordance with our policy, analyzed the Sepra products inventory to determine whether GSP-25 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE C. OTHER CHARGES (CONTINUED) the carrying value exceeded the net realizable value. The revised forecast showed slower sales growth as well as higher manufacturing and sales and marketing costs than originally expected. In addition, the Sepra products inventory on-hand had a relatively high cost per unit because production was significantly less than originally planned. As a result, in the third quarter of 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost of products sold to write down its Sepra products inventory to net realizable value. In the fourth quarter of 1997, Genzyme Surgical Products also recorded a $5.5 million charge to cost of products sold and a $1.9 million charge to selling, general and administrative expense relating to the manufacturing and sale of Sepracoat-TM- coating solution. Genzyme Surgical Products took these charges after an FDA advisory panel recommended against granting marketing approval for the product. NOTE D. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Genzyme Surgical Products' trade receivables primarily represent amounts due from healthcare service providers. Genzyme Surgical Products performs credit evaluations of its customers on an ongoing basis and generally does not require collateral. Genzyme Surgical Products states accounts receivable at fair value after reflecting an allowance for doubtful accounts. This allowance was $0.3 million at December 31, 1999 and $0.4 million at December 31, 1998. The following table contains information on Genzyme Surgical Products' intangible assets for the periods presented:
WEIGHTED WEIGHTED AVERAGE AVERAGE ESTIMATED ESTIMATED USEFUL USEFUL DECEMBER 31, LIFE DECEMBER 31, LIFE 1999 (YEARS) 1998 (YEARS) ------------ --------- ------------ --------- (AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA) Goodwill......................................... $129,847 40 $130,544 40 Tradenames....................................... 45,878 40 45,878 40 Patents.......................................... 15,319 12 15,319 12 Other............................................ 1,890 9 490 14 -------- -------- 192,934 192,231 Less accumulated amortization.................... (20,101) (14,334) -------- -------- Intangible assets, net........................... $172,833 $177,897 ======== ========
NOTE E. INVENTORIES
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Raw materials......................................... $15,473 $11,567 Work-in-process....................................... 2,029 1,734 Finished products..................................... 12,989 8,725 ------- ------- Total inventory................................... $30,491 $22,026 ======= =======
GSP-26 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE F. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Plant and equipment................................... $10,276 $ 8,934 Land and buildings.................................... 8,268 8,261 Leasehold improvements................................ 434 434 Furniture and fixtures................................ 4,001 3,944 Construction-in-progress.............................. 1,407 614 ------- ------- 24,386 22,187 Less accumulated depreciation......................... (6,765) (5,938) ------- ------- Property, plant and equipment, net.................... $17,621 $16,249 ======= =======
Genzyme Surgical Products' depreciation expense was $2.4 million in 1999, $2.5 million in 1998, and $2.7 million in 1997. The estimated cost of completion for assets under construction as of December 31, 1999 is $1.9 million. NOTE G. INVESTMENTS Genzyme Surgical Products had no cash, cash equivalents, and short- and long-term investments at December 31, 1998. Investments in marketable securities at December 31, 1999 consisted of the following:
DECEMBER 31, 1999 ------------------- MARKET COST VALUE -------- -------- (AMOUNTS IN THOUSANDS) Cash equivalents(1): Corporate notes....................................... $16,930 $16,915 Money market fund..................................... 4,317 4,317 ------- ------- $21,247 $21,232 ======= ======= Short-term: Corporate notes....................................... $41,757 $41,606 ======= ======= Long-term: Corporate notes....................................... $37,598 $36,878 Federal............................................... 4,081 4,026 U.S. Treasury notes................................... 20,979 20,942 ------- ------- $62,658 $61,846 ======= ======= Investment in equity securities....................... $ 4,000 $ 3,140 ======= =======
------------------------ (1) Cash equivalents are included as part of cash and cash equivalents on our balance sheets. GSP-27 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE G. INVESTMENTS (CONTINUED) Genzyme Surgical Products records gross unrealized holding gains and losses in division equity. The following table sets forth the amounts recorded:
DECEMBER 31, 1999 ------------ Unrealized holding losses............................. $1,839
The following table contains information regarding the range of contractual maturities of Genzyme Surgical Products' investments in debt securities:
DECEMBER 31, 1999 ---------------------- MARKET COST VALUE -------- -------- (AMOUNTS IN THOUSANDS) Within 1 year.......................................... $ 63,004 $ 62,838 1-2 years.............................................. 62,658 61,846 -------- -------- $125,662 $124,684 ======== ========
Note I., "Investments," to our consolidated financial statements contains information regarding Genzyme Surgical Products' equity investment in Focal, Inc. We incorporate that information into this note by reference. NOTE H. ACCRUED EXPENSES
DECEMBER 31, ---------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Compensation............................................... $2,812 $1,555 Professional fees.......................................... 466 291 Royalties.................................................. 610 523 Other...................................................... 3,150 613 ------ ------ $7,038 $2,982 ====== ======
NOTE I. LONG-TERM DEBT AND LEASES REVOLVING CREDIT FACILITY Note K., "Long Term Debt and Leases," to our consolidated financial statements contains information regarding our revolving credit facilities. We incorporate that information into this note by reference. GSP-28 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE I. LONG-TERM DEBT AND LEASES (CONTINUED) OPERATING LEASES Genzyme Surgical Products leases facilities and personal property under operating leases with terms in excess of one year. Genzyme Surgical Products' total expense under operating leases was:
1999 1998 1997 ------------------------ ------------------------ ------------------------ $0.2 million $0.2 million $0.2 million
Over the next five years, Genzyme Surgical Products will be required to repay the following amounts under operating leases:
2000 2001 2002 2003 2004 AFTER 2004 --------------------- ----------- ----------- ----------- ----------- ----------- $0.2 $0.3 $0.3 $0.3 $3.0 $0.2 million million million million million million
NOTE J. DIVISION EQUITY The following table contains the components of division equity for Genzyme Surgical Products for the periods presented:
DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Balance at beginning of period............... $227,088 $234,969 $239,040 Division net loss............................ (48,037) (49,856) (29,740) Unrealized gain (loss) on investments........ (1,839) -- -- Allocation from Genzyme General.............. 176,706 41,975 25,669 -------- -------- -------- Balance at end of period..................... $353,918 $227,088 $234,969 ======== ======== ========
STOCK COMPENSATION PLANS We apply APB Opinion 25 and related interpretations in accounting for our five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997 Equity Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director Stock Option Plan. We do not recognize compensation expense for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price greater than or equal to fair market value. The following table sets forth division net loss data for Genzyme Surgical Products as if compensation expense for our stock-based compensation plans was determined in accordance with SFAS 123 based on GSP-29 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE J. DIVISION EQUITY (CONTINUED) the fair value at the grant dates of the awards, and the compensation expense related to Surgical Products Stock awards would be allocated to Genzyme Surgical Products in accordance with our allocation policies:
DECEMBER 31, 1999 ------------ Division net loss: As reported......................................... $ (48,037) Pro forma........................................... $ (50,583)
Note L., "Stockholders' Equity," to our consolidated financial statements contains information regarding the assumptions we made in calculating pro forma compensation expense in accordance with SFAS 123. NOTE K. COMMITMENTS AND CONTINGENCIES We periodically become subject to legal proceedings and claims arising in connection with our business. We do not believe that there were any asserted claims against us as of December 31, 1999 which, if adversely decided, would have a material adverse effect on Genzyme Surgical Products' results of operations, financial condition, or liquidity. NOTE L. GENZYME DEVELOPMENT PARTNERS Genzyme Development Partners, L.P. was formed in September 1989 to develop, produce and derive income from the sale of the Sepra products. We refer to Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the general partner of GDP. In September 1989, we also formed a joint venture with GDP to manufacture and market the Sepra products in the United States and Canada for use in human clinical trials or human clinical procedures. We refer to this joint venture as GVII. We consolidate GVII for financial statement purposes and allocate it to Genzyme Surgical Products. We have the option to purchase all of the outstanding partnership interests in GDP for approximately $26.0 million in cash, Genzyme General Stock or Surgical Products Stock, or a combination of both, plus future royalty payments on the sale of the Sepra products. We can exercise this option during the 90-day period beginning on August 31, 2000. This option will be accelerated if at any time prior to August 31, 2000 GDP receives distributions from GVII of at least $5.5 million. If we exercise this right, we will allocate the acquisition of GDP to Genzyme Surgical Products. While we have no obligation to fund the research and development activities of GDP, it elected to fund the following amounts:
1999 1998 1997 ------------ ------------ ------------ $ 9.0 million..... $8.4 million $7.3 million
We intend to provide approximately $6.0 million of funding to GDP for the Sepra programs through 2000, based on the 2000 budget for the programs. Future funding commitments for the Sepra development programs will be evaluated on an annual basis. We believe, however, that additional funds will be required to complete the development, clinical testing and commercialization of GDP's products. GSP-30 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE M. INCOME TAXES Genzyme Surgical Products' provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1999 1998 1997 -------- -------- -------- Tax at U.S. statutory rate.................................. (35.0)% (35.0)% (35.0)% State taxes, net............................................ (1.2) (3.1) (3.0) Nondeductible amortization.................................. 2.3 2.3 4.0 Other, net.................................................. 0.3 -- -- Deductions subject to deferred tax valuation allowance...... 33.6% 35.8% 34.0% ----- ----- ----- Effective tax rate.......................................... 0.0% 0.0% 0.0% ===== ===== =====
The components of net deferred tax assets are described in the following table:
DECEMBER 31, ------------------------- 1999 1998 -------- -------- (AMOUNTS IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards................. $ 64,156 $ 48,701 Unrealized capital losses........................ -- 1,317 Reserves and other............................... 5,638 4,908 -------- -------- Gross deferred tax asset............................. 69,794 54,926 Valuation allowance.................................. (60,087) (45,896) -------- -------- $ 9,707 $ 9,030 Deferred tax liabilities: Intangible amoritization......................... (7,390) (6,712) Depreciable assets............................... (2,317) (2,318) -------- -------- Net deferred tax asset............................... $ -- $ -- ======== ========
As a result of uncertainty surrounding our ability to realize certain tax benefits that primarily relate to operating loss carryforwards, we placed valuation allowances of $60.1 million in 1999 and $45.9 million in 1998 against otherwise recognizable deferred tax assets. As Genzyme Surgical Products recognizes these deferred tax assets in accordance with generally accepted accounting principles, the benefits of those assets are reflected in its tax provision. However, the benefit of these deferred tax assets has previously been allocated to Genzyme General in accordance with our management and accounting policies. NOTE N. BENEFIT PLANS Note P., "Benefit Plans," to our consolidated financial statements contains information regarding our 401(k) and other pension plans. We incorporate that information into this note by reference. GSP-31 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE O. SEGMENT INFORMATION We present segment information in a manner consistent with the method we use to report this information to our management and have restated our 1997 segment information to conform with this method of presentation. Applying SFAS 131, Genzyme Surgical Products has two reportable segments: - Cardiovascular Surgery, which includes chest drainage systems, instruments and closures used in coronary artery bypass, valve replacement, and other cardiothoracic surgeries; and - General Surgery, which includes surgical instruments and Sepra Film-Registered Trademark- bioresorbable membrane. We have provided information concerning the operations in these reportable segments in the following table:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: Cardiovascular Surgery.................................. $ 77,966 $ 74,545 $ 79,560 General Surgery......................................... 25,192 20,249 14,813 Other................................................... 8,823 9,164 6,462 -------- -------- -------- Total....................................................... $111,981 $103,958 $100,835 ======== ======== ======== Gross Profit: Cardiovascular Surgery.................................. $ 33,360 $ 29,596 $ 33,494 General Surgery......................................... 8,604 (490) 4,772 Other................................................... 2,775 2,578 2,767 -------- -------- -------- Total....................................................... $ 44,739 $ 31,684 $ 41,033 ======== ======== ========
The Other category includes amounts attributable to our products for plastic surgery. The following table contains revenue information by geographic area:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenues: U.S..................................................... $ 78,854 $ 74,072 $ 71,898 Germany................................................. 16,886 17,400 16,839 Other................................................... 16,241 12,486 12,098 -------- -------- -------- Total................................................. $111,981 $103,958 $100,835 ======== ======== ========
All long-lived assets are in the United States. GSP-32 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE O. SEGMENT INFORMATION (CONTINUED) Genzyme Surgical Products markets its products directly to physicians and hospitals. Genzyme Surgical Products also markets its products through distributors and had the following sales as a percentage of total revenue to two unaffiliated distributors:
DECEMBER 31, ---------------------------- 1999 1998 1997 -------- -------- ---- (AMOUNTS IN THOUSANDS) Revenues: Distributor A........................................... 16% 18% 20% Distributor B........................................... 9% 8% 11%
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) 1999: Net revenue............................................ $ 27,353 $ 26,681 $ 27,385 $30,562 Gross profit........................................... 11,509 9,242 10,587 13,401 Division net loss...................................... (10,745) (17,658) (10,953) (8,681) 1998: Net revenue............................................ $ 24,227 $ 27,201 $ 24,904 $27,626 Gross profit........................................... 9,504 11,942 (919) 11,157 Division net loss...................................... (9,118) (9,886) (21,519) (9,333)
NOTE R. SUBSEQUENT EVENT In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon the effectiveness of our Registration Statement on Form S-4 and completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock designed to reflect its value and track its performance. We refer to this stock as "Biosurgery Stock." In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be reallocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix Stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. GSP-33 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note A to these financial statements, Genzyme 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 Boston, Massachusetts February 23, 2000 GSP-34 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------------------------- ------------------- --------------------------------- ---------- ------------- ADDITIONS --------------------------------- BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD -------------------------- ------------------- ---------------- -------------- ---------- ------------- Year ended December 31, 1999: Allowance for doubtful accounts................ $ 365,000 $ 375,000 $ -- $ 407,000(1) $ 333,000 Inventory reserve......... $12,127,000 $ 1,056,000 $ -- $4,460,000 $ 8,723,000 Year ended December 31, 1998: Allowance for doubtful accounts................ $ 476,000 $ 166,000 $ -- $ 277,000(1) $ 365,000 Inventory reserve......... $ 3,700,000 $10,758,000 $ -- $2,331,000 $12,127,000 Year ended December 31, 1997: Allowance for doubtful accounts................ $ 917,000 $ 275,000 $ -- $ 716,000(1) $ 476,000 Inventory reserve......... $ 3,854,000 $ 484,000 $ -- $ 638,000 $ 3,700,000
------------------------ (1) Uncollectible accounts written off, net of recoveries. GSP-35