8-K/A 1 a2039916z8-ka.txt FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 14, 2000 GENZYME CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 0-14680 06-1047163 (State or other jurisdiction of (Commission file number) (IRS employer identification incorporation or organization) number)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (617) 252-7500 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. As reported on our current report on Form 8-K dated December 14, 2000 (filed December 15, 2000), effective December 14, 2000, we completed the acquisition of GelTex Pharmaceuticals, Inc. ("GelTex"). The acquisition was structured as a merger of GelTex with and into one of our wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of September 11, 2000 among Genzyme Corporation ("Genzyme"), Titan Acquisition Corp. and GelTex, as amended. Pursuant to Item 7(a)(4) of Form 8-K, this Form 8-K/A amends the current report on Form 8-K dated December 14, 2000 to include (1) the financial statements of GelTex required by Item 7(a) of this Form 8-K and (2) the pro forma financial information required by Item 7(b) of this Form 8-K. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Businesses Acquired. The audited financial statements of GelTex Pharmaceuticals, Inc. as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, including the report of independent auditors, were previously reported in the Annual Report on Form 10-K of GelTex (the "GelTex 10-K") for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000, on pages F-1 to F-20 of the GelTex 10-K and are incorporated herein by reference. These audited financial statements as reported on pages F-1 to F-20 of the GelTex 10-K are also filed herewith as Exhibit 99.1. The unaudited financial statements of GelTex as of and for the nine months ended September 30, 2000 and 1999 were previously reported in the Quarterly Report on Form 10-Q of GelTex (the "GelTex 10-Q) for the quarter ended September 30, 2000 (filed on November 14, 2000) on pages 3 to 9 of the GelTex 10-Q and are incorporated herein by reference. These unaudited financial statements as reported on pages 3 to 9 of the GelTex 10-Q are also filed herewith as Exhibit 99.2. (b) PRO FORMA Financial Information. Genzyme hereby files the pro forma financial information beginning on page 5 herein. (c) Exhibits: 2 Agreement and Plan of Merger, dated as of September 11, 2000, among Genzyme, Titan Acquisition Corp. and GelTex, as amended. Previously filed as Exhibit 99.1 to Genzyme's Current Report on Form 8-K dated September 11, 2000 (Commission File No. 000-14680) and incorporated herein by reference. 23.1 Consent of Ernst & Young LLP. Filed herewith. 23.2 Consent of PricewaterhouseCoopers LLP. Filed herewith. 2 99.1 The audited financial statements of GelTex as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, including the report of independent auditors (as reported on pages F-1 to F-20 of the Annual Report on Form 10-K of GelTex for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000)). Filed herewith. 99.2 The unaudited financial statements of GelTex as of and for the nine months ended September 30, 2000 and 1999 (as reported on pages 3 to 9 of the Quarterly Report on Form 10-Q of GelTex for the quarter ended September 30, 2000 (filed on November 14, 2000)). Filed herewith. 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENZYME CORPORATION Dated: February 27, 2001 By: /s/ Michael S. Wyzga --------------------------------------- Michael S. Wyzga, Senior Vice President Finance, Chief Financial Officer, Corporate Controller and Chief Accounting Officer 4 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION On December 14, 2000, Genzyme completed the acquisition of GelTex. The acquisition was structured as a merger of GelTex with and into one of Genzyme's wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of September 11, 2000 among Genzyme, Titan Acquisition Corp. and GelTex, as amended. On December 18, 2000, Genzyme completed the acquisition of Biomatrix, Inc. ("Biomatrix"). The acquisition was structured as a merger of Biomatrix with and into one of Genzyme's wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of March 6, 2000 among Genzyme, Seagull Merger Corporation and Biomatrix, as amended. Concurrent with the completion of Genzyme's acquisition of Biomatrix, Genzyme amended its charter to create Genzyme Biosurgery Division common stock ("Biosurgery Stock") and eliminate Genzyme Surgical Products Division common stock ("Surgical Products Stock") and Genzyme Tissue Repair Division common stock ("Tissue Repair Stock"). The following unaudited pro forma combined financial information describes the pro forma effect of Genzyme's merger with GelTex and Genzyme's merger with Biomatrix on the - unaudited statements of operations for the nine months ended September 30, 2000 and the year ended December 31, 1999 and - unaudited balance sheet as of September 30, 2000 of both Genzyme and Genzyme General, the division of Genzyme to which the assets and liabilities and operations of GelTex were allocated. In addition, the Genzyme pro forma statement of operations for the year ended December 31, 1999 reflects the change in earnings allocations resulting from the June 1999 distribution of Surgical Products Stock as if it took place on January 1, 1999. The purpose of this pro forma financial information is to demonstrate how the combined financial statements of these businesses might have appeared if each of the mergers had been completed at the beginning of the periods presented. To determine earnings per share, Genzyme allocates its earnings to each series of its common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock are defined in Genzyme's charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with Genzyme's management and accounting policies. Genzyme's charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Genzyme's 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 Genzyme General Division common stock ("Genzyme General Stock") are based on the income or losses attributable to Genzyme General, Genzyme included pro forma financial statements of Genzyme General to aid investors in evaluating its performance. Holders of Genzyme General Stock have no specific rights to the assets allocated to Genzyme General. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme General and is responsible for all of its liabilities, regardless of what Genzyme deems for financial statement presentation purposes as allocated to any division. Holders of Genzyme General Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme, as a whole. Genzyme has prepared the pro forma financial information using the purchase method of accounting for both mergers. For the combination of Genzyme Surgical Products and Genzyme Tissue 5 Repair into Genzyme Biosurgery, no adjustments were made to the book values of their net assets because these two divisions are controlled by Genzyme. Genzyme expects to have reorganization and restructuring expenses as well as potential operating efficiencies as a result of combining the companies. The unaudited pro forma information does not reflect these potential expenses and efficiencies. MERGER WITH GELTEX As a result of the merger with GelTex, each share of GelTex common stock was converted into the right to receive either $47.50 in cash or 0.7272 of a share of Genzyme General Stock. GelTex stockholders were entitled to submit an election form on which they indicated their preferred form of merger consideration prior to the closing of the merger. Because under the merger agreement with GelTex not more than 50% of the outstanding shares of GelTex common stock were to be converted into cash or a fraction of a share of Genzyme General Stock, and more than 50% of the GelTex stockholders elected to receive Genzyme General Stock, the merger consideration was prorated. After proration, each share of GelTex common stock for which a valid stock election was submitted was converted into $22.59 in cash and 0.3813 of a share of Genzyme General Stock. All other GelTex stockholders are entitled to receive $47.50 in cash for each share of GelTex common stock that they own. Cash is payable in lieu of any fractional shares of Genzyme General Stock otherwise issuable in the merger for a price equal to the fraction times $95.5625. Cash payments to GelTex stockholders in the merger were approximately $515.2 million. Genzyme funded a portion of this amount through borrowings under senior credit facilities. Genzyme allocated the amounts borrowed and the associated interest expense to Genzyme General. Additionally, each option and warrant to purchase shares of GelTex common stock outstanding immediately before the effective time of the merger was assumed by Genzyme after the merger and became an option or warrant to acquire Genzyme General Stock. The conversion of options to purchase GelTex common stock was accounted for in accordance with Financial Accounting Standards Board Interpretation No. 44 ("FIN 44"). TRACKING STOCK EXCHANGES In connection with the merger with Biomatrix, Genzyme effected an exchange of its tracking stock whereby outstanding shares of Tissue Repair Stock and Surgical Products Stock converted into Biosurgery Stock, the dividend and other provisions of which are designed to track the financial performance of the Genzyme Biosurgery division. Holders of Tissue Repair Stock and Surgical Products Stock, therefore, remain holders of Genzyme common stock, but hold a security whose dividend and other provisions are designed to track a different subset of Genzyme's operations and assets. Additionally, the votes and liquidation units per share of their holdings changed. The earnings attributable to Biosurgery Stock are defined in Genzyme's charter as the net income or loss of Genzyme Biosurgery determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Biosurgery in accordance with Genzyme's management and accounting policies. Prior to the tracking stock exchange, the earnings attributable to Surgical Products Stock and Tissue Repair Stock were defined in Genzyme's charter as the net income or loss of Genzyme Surgical Products and Genzyme Tissue Repair, respectively, determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division. Accordingly, the merger and tracking stock exchanges will involve a change in Genzyme's methodology for allocating its earnings to its series of common stock. 6 MERGER WITH BIOMATRIX Under the Biomatrix merger agreement, Biomatrix stockholders were entitled to submit, on or before December 6, 2000, an election form on which they indicated their preferred form of merger consideration. A stockholder could elect to receive for each share of Biomatrix common stock held either the "standard consideration" of $10.50 and 0.7162 of a share of Biosurgery Stock, the "stock consideration" of one share of Biosurgery Stock, or the "cash consideration" of $37.00. A stockholder failing to submit a valid election would receive the standard consideration. Under the merger agreement, the cash consideration amount of $37.00 per share would be prorated if the final elections would result in more than 28.38% of the outstanding shares of Biomatrix common stock being convertible into cash. A proration was required, and consequently each share of Biomatrix common stock that validly elected the cash consideration converted into a right to receive $11.03 in cash and 0.7169 of a share of Genzyme Biosurgery Stock. In lieu of issuing any fractional shares of Genzyme Biosurgery Stock, Genzyme is paying cash in an amount equal to the share fraction multiplied by $11.79. To ensure that the value of all Biosurgery Stock issued in the merger was at least 45% of the total merger consideration, the number of shares of Biomatrix common stock exchanged for shares of Biosurgery Stock in the merger was to be increased and the number of shares of Biomatrix common stock exchanged for cash was to be decreased if the value of Biosurgery Stock was below approximately $12.00 per share closing. The purpose of this adjustment was to preserve the status of the merger as a reorganization for U.S. federal income tax purposes. The value of Biosurgery Stock at closing was determined by the Genzyme board of directors to be $11.79 per share and, accordingly, such an adjustment occurred. The change in the number of shares exchanged created a new measurement date for the transaction at the closing date. The attached pro forma financial statements reflect the impact of this new measurement date. Upon completion of the tracking stock exchanges, each outstanding share of Surgical Products Stock converted into the right to receive 0.6060 of a share of Biosurgery Stock and each outstanding share of Tissue Repair Stock converted into the right to receive 0.3352 of a share of Biosurgery Stock. Additionally, all outstanding options to purchase Surgical Products Stock, Tissue Repair Stock and Biomatrix common stock converted into options to purchase Biosurgery Stock at the respective conversion rates. The conversion of options to purchase Biomatrix common stock will be accounted for in accordance with FIN 44. These unaudited pro forma balance sheets and statements of operations are for informational purposes only. They do not purport to indicate the results that would have actually been obtained had the mergers been completed on the assumed date or for the periods presented, or which may be obtained in the future. To produce the pro forma financial information, Genzyme allocated the purchase price using its best estimates. The unaudited pro forma balance sheets and statements of operations should be read in conjunction with the historical consolidated financial statements, including the notes thereto, of each of Genzyme, GelTex and Biomatrix. For Genzyme, those financial statements are included in Genzyme's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (filed on November 14, 2000) and its Annual Report on Form 10-K for the year ended December 31, 1999 (filed on March 30, 2000), as amended on June 28, 2000 and October 17, 2000. For GelTex those financial statements are included in GelTex's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (filed on November 14, 2000) and its Annual Report on Form 10-K for the year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000 which are filed as Exhibits 99.2 and 99.1, respectively, to this report on Form 8-K, as amended. For Biomatrix, those financial statements are included in Biomatrix's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (filed on November 14, 2000) and its Annual Report on Form 10-K for the year ended December 31, 1999 (filed on March 30, 2000), as amended on April 26, 2000 and October 26, 2000. 7 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA GENZYME HISTORICAL CORPORATION GENZYME HISTORICAL PRO FORMA NOTE AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ----------- --------------- ----------- --------- ----------- ---------- Revenues: Net product sales..................... $ 683,482 $ 72,000 $ -- $ 755,482 $ -- Net service sales..................... 79,448 -- -- 79,448 -- Collaborative joint venture project reimbursement....................... -- -- -- -- 5,781 Revenues from research and development contracts: Related parties..................... 2,012 -- -- 2,012 -- Other............................... 7,346 -- -- 7,346 10,668 Income from licenses, royalties, research contracts and grants....... -- 7,700 -- 7,700 -- --------- -------- -------- --------- -------- Total revenues...................... 772,288 79,700 -- 851,988 16,449 --------- -------- -------- --------- -------- Operating costs and expenses: Cost of products sold................. 182,337 21,100 11,330 B7 214,767 -- Cost of services sold................. 49,444 -- -- 49,444 -- Selling, general and administrative... 242,797 18,500 22 B7 (110) B7 261,209 6,935 Collaborative joint venture project costs............................... -- -- -- -- 5,781 Research and development (including research and development relating to contracts).......................... 150,516 9,100 159,616 32,602 Amortization of intangibles........... 24,674 -- 37,080 B6 61,754 -- Purchase of in-process research and development......................... 5,436 -- -- 5,436 9,530 --------- -------- -------- --------- -------- Total operating costs and expenses.......................... 655,204 48,700 48,322 752,226 54,848 --------- -------- -------- --------- -------- Operating income (loss)................. 117,084 31,000 (48,322) 99,762 (38,399) --------- -------- -------- --------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates.......................... (42,696) -- -- (42,696) (7,937) Gain on affiliate sale of stock....... 6,683 -- -- 6,683 -- Gain on sale of investment in equity securities.......................... 1,963 -- -- 1,963 -- Gain on sale of product line.......... 8,018 -- -- 8,018 -- Minority interest..................... 3,674 -- -- 3,674 -- Charge for impaired investments....... (5,712) -- -- (5,712) -- Other................................. 14,527 -- -- 14,527 -- Investment income..................... 36,158 1,500 (2,857) B11 34,801 4,372 Interest expense...................... (21,771) (1,500) (15,000) B11 (38,271) (485) --------- -------- -------- --------- -------- Total other income (expenses)....... 844 -- (17,857) (17,013) (4,050) --------- -------- -------- --------- -------- Income (loss) before income taxes....... 117,928 31,000 (66,179) 82,749 (42,449) Income tax (provision) benefit.......... (46,947) (12,400) 20,338 B10 (39,009) -- --------- -------- -------- --------- -------- Net income (loss)....................... $ 70,981 $ 18,600 $(45,841) $ 43,740 $(42,449) ========= ======== ======== ========= ======== PRO FORMA GENZYME PRO FORMA NOTE CORPORATION AND ADJUSTMENTS REFERENCE SUBSIDIARIES ----------- --------- --------------- Revenues: Net product sales..................... $ 17,676 G12 $ 773,158 Net service sales..................... -- 79,448 Collaborative joint venture project reimbursement....................... (5,781) G11 -- Revenues from research and development contracts: Related parties..................... 1,557 G12 3,569 Other............................... -- 18,014 Income from licenses, royalties, research contracts and grants....... -- 7,700 --------- --------- Total revenues...................... 13,452 881,889 --------- --------- Operating costs and expenses: Cost of products sold................. 15,003 G8 G12 229,770 Cost of services sold................. -- 49,444 Selling, general and administrative... 18,624 G12 1,743 G8 1,837 G8 290,348 Collaborative joint venture project costs............................... (5,781) G11 Research and development (including research and development relating to contracts).......................... 7,348 G8 11,154 G12 210,720 Amortization of intangibles........... 62,350 G7 124,104 Purchase of in-process research and development......................... -- 14,966 --------- --------- Total operating costs and expenses.......................... 112,278 919,352 --------- --------- Operating income (loss)................. (98,826) (37,463) --------- --------- Other income (expenses): Equity in net loss of unconsolidated affiliates.......................... 7,937 G12 8,107 G12 (34,589) Gain on affiliate sale of stock....... -- 6,683 Gain on sale of investment in equity securities.......................... -- 1,963 Gain on sale of product line.......... -- 8,018 Minority interest..................... -- 3,674 Charge for impaired investments....... -- (5,712) Other................................. -- 14,527 Investment income..................... (19,901) G10 166 G12 19,438 Interest expense...................... (10,981) G10 (49,737) --------- --------- Total other income (expenses)....... (14,672) (35,735) --------- --------- Income (loss) before income taxes....... (113,498) (73,198) Income tax (provision) benefit.......... 45,050 G13 6,041 --------- --------- Net income (loss)....................... $ (68,448) $ (67,157) ========= =========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 8 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA GENZYME HISTORICAL HISTORICAL CORPORATION GENZYME BIOMATRIX, PRO FORMA NOTE AND HISTORICAL PRO FORMA CORPORATION INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ADJUSTMENTS ----------- ---------- ----------- --------- ----------- ---------- ----------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $142,077 $ -- $ 142,077 $(110,897) Genzyme Surgical Products net loss........................... (27,523) 27,523 B13 -- Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 7,812 Tax benefit allocated from Genzyme Surgical Products...... 16,128 (16,128) B12 -- Tax benefit allocated from Genzyme Tissue Repair.......... 10,866 (10,866) B12 -- Tax benefit allocated from Genzyme Biosurgery............. -- 21,023 B12 21,023 -------- --------- --------- --------- Net income allocated to Genzyme General Stock.................. $149,360 $ 21,552 $ 170,912 $(110,897) ======== ========= ========= ========= Net income per share of Genzyme General Stock: Basic.......................... $ 1.80 $ 2.06 ======== ========= Diluted........................ $ 1.71 $ 1.94 ======== ========= Weighted average shares outstanding: Basic.......................... 83,092 83,092 6,182 ======== ========= ========= Diluted........................ 93,228 93,228 (537) ======== ========= ========= ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $(28,832) $ (28,832) ======== ========= Net loss per share of Molecular Oncology Stock -- basic and diluted........................ $ (2.25) $ (2.25) ======== ========= Weighted average shares outstanding.................... 12,826 12,826 ======== ========= ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $(20,514) $ 20,514 B9 $ -- ======== ========= ========= Net loss per share of Surgical Products Stock --basic and diluted........................ $ (1.38) $ 1.38 B9 $ -- ======== ========= ========= Weighted average shares outstanding.................... 14,835 (14,835) B8 -- ======== ========= ========= ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $(30,040) $ 30,040 B9 $ -- ======== ========= ========= Net loss per share of Tissue Repair Stock --basic and diluted........................ $ (1.26) $ 1.26 B9 $ -- ======== ========= ========= Weighted average shares outstanding.................... 23,807 (23,807) B8 -- ======== ========= ========= BIOMATRIX, INC.: Net income....................... $18,600 $ (18,600) B9 $ -- ======= ========= ========= Net income per Biomatrix common share-basic.................... $ 0.81 $ (0.81) B9 $ -- ======= ========= ========= Weighted average shares outstanding.................... 22,959 (22,959) B8 -- ======= ========= ========= Net income per Biomatrix common and common equivalent share-diluted.................. $ 0.76 $ (0.76) B9 $ -- ======= ========= ========= Adjusted weighted average shares outstanding.................... 24,350 (24,350) B8 -- ======= ========= ========= ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $ (99,347) B9 $ (99,347) ========= ========= Net loss per share of Biosurgery Stock --basic and diluted...... $ (2.97) B9 $ (2.97) ========= ========= Weighted average shares outstanding.................... 33,494 B9 33,494 ========= ========= GELTEX PHARMACEUTICALS, INC.: Net loss......................... $(42,449) $ 42,449 ======== ========= Net loss per share of GelTex common stock--basic and diluted........................ $ (2.50) $ 2.50 ======== ========= Weighted average shares outstanding.................... 17,003 (17,003) ======== ========= PRO FORMA GENZYME CORPORATION NOTE AND REFERENCE SUBSIDIARIES --------- ------------ NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $ 31,180 Genzyme Surgical Products net loss........................... -- Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 Tax benefit allocated from Genzyme Surgical Products...... -- Tax benefit allocated from Genzyme Tissue Repair.......... -- Tax benefit allocated from Genzyme Biosurgery............. 21,023 --------- Net income allocated to Genzyme General Stock.................. $ 60,015 ========= Net income per share of Genzyme General Stock: Basic.......................... $ 0.67 ========= Diluted........................ $ 0.65 ========= Weighted average shares outstanding: Basic.......................... G9 89,274 ========= Diluted........................ G9 92,691 ========= ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $ (28,832) ========= Net loss per share of Molecular Oncology Stock -- basic and diluted........................ $ (2.25) ========= Weighted average shares outstanding.................... 12,826 ========= ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $ -- ========= Net loss per share of Surgical Products Stock --basic and diluted........................ $ -- ========= Weighted average shares outstanding.................... -- ========= ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $ -- ========= Net loss per share of Tissue Repair Stock --basic and diluted........................ $ -- ========= Weighted average shares outstanding.................... -- ========= BIOMATRIX, INC.: Net income....................... $ -- ========= Net income per Biomatrix common share-basic.................... $ -- ========= Weighted average shares outstanding.................... -- ========= Net income per Biomatrix common and common equivalent share-diluted.................. $ -- ========= Adjusted weighted average shares outstanding.................... -- ========= ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $ (99,347) ========= Net loss per share of Biosurgery Stock --basic and diluted...... $ (2.97) ========= Weighted average shares outstanding.................... 33,494 ========= GELTEX PHARMACEUTICALS, INC.: Net loss......................... G14 $ -- ========= Net loss per share of GelTex common stock--basic and diluted........................ G14 $ -- ========= Weighted average shares outstanding.................... G9 -- =========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 9 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA GENZYME HISTORICAL CORPORATION GENZYME HISTORICAL PRO FORMA NOTE AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ------------- ---------------- ------------- ---------- ------------- ---------- Revenues: Net product sales............ $ 592,505 $ 57,300 $ -- $ 649,805 $ -- Net service sales............ 62,280 -- -- 62,280 -- Collaborative joint venture project reimbursement...... -- -- -- -- 3,841 Revenues from research and development contracts: Related parties............ 245 245 -- Other...................... 4,372 -- -- 4,372 33,070 Income from licenses, royalties, research contracts and grants....... -- 9,100 -- 9,100 -- --------- -------- -------- --------- -------- Total revenues........... 659,402 66,400 -- 725,802 36,911 --------- -------- -------- --------- -------- Operating costs and expenses: Cost of products sold........ 165,631 17,100 182,731 -- Cost of services sold........ 35,886 -- 35,886 -- Selling, general and administrative............. 195,358 20,800 17 B7 (83) B7 216,092 7,507 Collaborative joint venture project costs.............. -- -- -- -- 3,841 Research and development (including research and development related to contracts)................. 123,954 7,600 131,554 21,587 Amortization of intangibles................ 15,191 27,703 B6 42,894 -- --------- -------- -------- --------- -------- Total operating costs and expenses............... 536,020 45,500 27,637 609,157 32,935 --------- -------- -------- --------- -------- Operating income (loss)........ 123,382 20,900 (27,637) 116,645 3,976 --------- -------- -------- --------- -------- Other income (expenses): Equity in net loss of unconsolidated subsidiaries............... (30,866) -- -- (30,866) 196 Gain on affiliate sale of stock...................... 22,689 -- -- 22,689 -- Minority interest............ 3,185 -- -- 3,185 -- Gain on sale of investment in equity securities.......... 22,709 -- -- 22,709 -- Other........................ 5,185 -- -- 5,185 -- Investment income............ 33,333 2,300 (2,143) B11 33,490 4,331 Interest expense............. (12,785) (700) (11,250) B11 (24,735) -- --------- -------- -------- --------- -------- Total other income (expenses)............. 43,450 1,600 (13,393) 31,657 4,527 --------- -------- -------- --------- -------- Income (loss) before income taxes........................ 166,832 22,500 (41,030) 148,302 8,503 Income tax (provision) benefit...................... (51,101) (9,200) 12,138 B10 (48,163) -- --------- -------- -------- --------- -------- Net income (loss).............. $ 115,731 $ 13,300 $(28,892) $ 100,139 $ 8,503 ========= ======== ======== ========= ======== PRO FORMA GENZYME CORPORATION PRO FORMA NOTE AND ADJUSTMENTS REFERENCE SUBSIDIARIES ------------- ---------- ------------- Revenues: Net product sales............ $ 6,166 G12 $ 655,971 Net service sales............ -- 62,280 Collaborative joint venture project reimbursement...... (3,841) G11 -- Revenues from research and development contracts: Related parties............ -- 245 Other...................... 15 G12 37,457 Income from licenses, royalties, research contracts and grants....... -- 9,100 --------- --------- Total revenues........... 2,340 765,053 --------- --------- Operating costs and expenses: Cost of products sold........ 5,493 G12 188,224 Cost of services sold........ -- 35,886 Selling, general and administrative............. G8 7,177 G12 230,776 Collaborative joint venture project costs.............. (3,841) G11 -- Research and development (including research and development related to contracts)................. 4,568 G12 157,709 Amortization of intangibles................ 46,838 G7 89,732 --------- --------- Total operating costs and expenses............... 60,235 702,327 --------- --------- Operating income (loss)........ (57,895) 62,726 --------- --------- Other income (expenses): Equity in net loss of unconsolidated subsidiaries............... (196) G12 1,812 G11 8,277 G12 (20,777) Gain on affiliate sale of stock...................... -- 22,689 Minority interest............ -- 3,185 Gain on sale of investment in equity securities.......... -- 22,709 Other........................ -- 5,185 Investment income............ (14,777) G10 23,044 Interest expense............. (8,236) G10 (32,971) --------- --------- Total other income (expenses)............. (13,120) 23,064 --------- --------- Income (loss) before income taxes........................ (71,015) 85,790 Income tax (provision) benefit...................... 14,236 G13 (33,927) --------- --------- Net income (loss).............. $ (56,779) $ 51,863 ========= =========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 10 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA GENZYME HISTORICAL HISTORICAL CORPORATION GENZYME BIOMATRIX, PRO FORMA NOTE AND HISTORICAL PRO FORMA CORPORATION INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ADJUSTMENTS ----------- ---------- ----------- --------- ----------- ---------- ----------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $160,272 $ -- $160,272 $(48,276) Tax benefit allocated from Genzyme Molecular Oncology..... 5,558 -- 5,558 Tax benefit allocated from Genzyme Surgical Products...... 11,080 (11,080) B12 -- Tax benefit allocated from Genzyme Tissue Repair.......... 5,211 (5,211) B12 -- Tax benefit allocated from Genzyme Biosurgery............. -- 11,912 B12 11,912 -------- -------- -------- -------- Net income allocated to Genzyme General Stock.................. $182,121 $ (4,379) $177,742 $(48,276) ======== ======== ======== ======== Net income per share of Genzyme General Stock: Basic.......................... $ 2.14 $ 2.08 ======== ======== Diluted........................ $ 1.99 $ 1.94 ======== ======== Weighted average shares outstanding: Basic.......................... 85,277 85,277 7,225 ======== ======== ======== Diluted........................ 95,614 95,614 7,684 ======== ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $(17,924) $(17,924) ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................ $ (1.28) $ (1.28) ======== ======== Weighted average shares outstanding.................... 14,002 14,002 ======== ======== ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $(34,346) $ 34,346 B9 $ -- ======== ======== ======== Net loss per share of Surgical Products Stock--basic and diluted........................ $ (2.30) $ 2.30 B9 $ -- ======== ======== ======== Weighted average shares outstanding.................... 14,907 (14,907) B8 -- ======== ======== ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $(14,590) $ 14,590 B9 $ -- ======== ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted........................ $ (0.51) $ 0.51 B9 $ -- ======== ======== ======== Weighted average shares outstanding.................... 28,664 (28,664) B8 -- ======== ======== ======== BIOMATRIX, INC.: Net income....................... $13,300 $(13,300) B9 $ -- ======= ======== ======== Net income per Biomatrix common share-basic.................... $ 0.57 $ (0.57) B9 $ -- ======= ======== ======== Weighted average shares outstanding.................... 23,401 (23,401) B8 -- ======= ======== ======== Net income per Biomatrix common and common equivalent share-diluted.................. $ 0.55 $ (0.55) B9 $ -- ======= ======== ======== Adjusted weighted average shares outstanding.................... 24,395 (24,395) B8 -- ======= ======== ======== ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $(60,149) B9 $(60,149) ======== ======== Net loss per share of Biosurgery Stock--basic and diluted....... $ (1.70) B9 $ (1.70) ======== ======== Weighted average shares outstanding.................... 35,484 B9 35,484 ======== ======== GELTEX PHARMACEUTICALS, INC.: Net income..................... $ 8,503 $ (8,503) ======= ======== Net income per GelTex common share--basic................. $ 0.43 $ (0.43) ======= ======== Weighted average shares outstanding.................. 19,872 (19,872) ======= ======== Net income per GelTex common and equivalent share-- diluted...................... $ 0.41 $ (0.41) ======= ======== Adjusted weighted average shares outstanding........... 20,502 (20,502) ======= ======== PRO FORMA GENZYME CORPORATION NOTE AND REFERENCE SUBSIDIARIES --------- ------------ NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $111,996 Tax benefit allocated from Genzyme Molecular Oncology..... 5,558 Tax benefit allocated from Genzyme Surgical Products...... -- Tax benefit allocated from Genzyme Tissue Repair.......... -- Tax benefit allocated from Genzyme Biosurgery............. 11,912 -------- Net income allocated to Genzyme General Stock.................. $129,466 ======== Net income per share of Genzyme General Stock: Basic.......................... $ 1.40 ======== Diluted........................ $ 1.33 ======== Weighted average shares outstanding: Basic.......................... G9 92,502 ======== Diluted........................ G9 103,298 ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $(17,924) ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................ $ (1.28) ======== Weighted average shares outstanding.................... 14,002 ======== ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $ -- ======== Net loss per share of Surgical Products Stock--basic and diluted........................ $ -- ======== Weighted average shares outstanding.................... -- ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $ -- ======== Net loss per share of Tissue Repair Stock--basic and diluted........................ $ -- ======== Weighted average shares outstanding.................... -- ======== BIOMATRIX, INC.: Net income....................... $ -- ======== Net income per Biomatrix common share-basic.................... $ -- ======== Weighted average shares outstanding.................... -- ======== Net income per Biomatrix common and common equivalent share-diluted.................. $ -- ======== Adjusted weighted average shares outstanding.................... -- ======== ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $(60,149) ======== Net loss per share of Biosurgery Stock--basic and diluted....... $ (1.70) ======== Weighted average shares outstanding.................... 35,484 ======== GELTEX PHARMACEUTICALS, INC.: Net income..................... G14 $ -- ======== Net income per GelTex common share--basic................. G14 $ -- ======== Weighted average shares outstanding.................. G9 -- ======== Net income per GelTex common and equivalent share-- diluted...................... G14 $ -- ======== Adjusted weighted average shares outstanding........... G9 -- ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 11 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME GENZYME CORPORATION AND HISTORICAL PRO FORMA FOOTNOTE CORPORATION AND HISTORICAL PRO FORMA SUBSIDIARIES BIOMATRIX, INC. ADJUSTMENTS REFERENCE SUBSIDIARIES GELTEX ADJUSTMENTS --------------- --------------- ----------- --------- --------------- ---------- ----------- ASSETS Current assets: Cash and cash equivalents......... $ 215,568 $ 46,700 $ (52,421) B1 $ 209,847 $ 71,179 $(100,000) 4,469 Short-term investments......... 164,927 -- -- 164,927 68,428 (100,000) Accounts receivable, net................. 183,779 12,600 -- 196,379 -- (282) Inventories........... 123,878 8,200 11,330 B5 143,408 -- 8,156 13,461 (329) Prepaid expenses and other current assets.............. 29,169 5,800 -- 34,969 12,575 (295) Deferred tax assets-- current............. 41,441 -- -- 41,441 -- -- ---------- -------- --------- ---------- -------- --------- Total current assets.......... 758,762 73,300 (41,091) 790,971 152,182 (174,820) Property, plant and equipment, net........ 400,630 39,700 (549) B5 439,781 13,538 7,215 4,499 25,000 Long-term receivables, affiliates............ -- -- -- -- 121 (121) Long-term investments... 427,805 -- -- 427,805 -- (165,151) Notes receivable--related party................. 10,175 -- -- 10,175 -- -- Intangibles, net........ 237,343 -- 284,854 B1 111,320 B1 633,517 7,743 916,062 (7,743) Deferred tax assets-- noncurrent............ -- -- 899 B1 899 -- 35,016 Investments in equity securities............ 186,883 -- -- 186,883 -- (4,681) Other noncurrent assets................ 54,948 800 -- 55,748 15,772 (22,865) ---------- -------- --------- ---------- -------- --------- Total assets...... $2,076,546 $113,800 $ 355,433 $2,545,779 $189,356 $ 612,411 ========== ======== ========= ========== ======== ========= PRO FORMA GENZYME NOTE CORPORATION AND REFERENCE SUBSIDIARIES --------- --------------- ASSETS Current assets: Cash and cash equivalents......... G1 $ -- G6 185,495 Short-term investments......... G1 133,355 Accounts receivable, net................. G4 196,097 Inventories........... G1 G6 G4 164,696 Prepaid expenses and other current assets.............. G6 47,249 Deferred tax assets-- current............. 41,441 ---------- Total current assets.......... 768,333 Property, plant and equipment, net........ G6 G1 G1 490,033 Long-term receivables, affiliates............ G4 -- Long-term investments... G1 262,654 Notes receivable--related party................. 10,175 Intangibles, net........ G1 G5 1,549,579 Deferred tax assets-- noncurrent............ G1 35,915 Investments in equity securities............ G1 182,202 Other noncurrent assets................ G4 48,655 ---------- Total assets...... $3,347,546 ==========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 12 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED) AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA HISTORICAL GENZYME GENZYME HISTORICAL PRO FORMA NOTE CORPORATION AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ----------- --------------- ----------- --------- --------------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............. $ 23,262 $ 3,400 $ -- $ 26,662 $ -- Accrued expenses.............. 95,541 7,000 18,803 B2 121,344 5,910 Income taxes payable.......... 51,778 -- -- 51,778 -- Deferred revenue.............. 4,840 -- -- 4,840 -- Current portion of notes payable and long-term debt and capital lease obligations................. 128 900 -- 1,028 1,467 ---------- -------- --------- ---------- ------- Total current liabilities............. 175,549 11,300 18,803 205,652 7,377 Notes payable and long-term debt and capital lease obligations................... 18,272 11,100 200,000 B1 229,372 5,494 Convertible notes and debentures, net............... 273,415 273,415 -- Deferred tax liabilities--noncurrent....... 7,329 107,044 B1 114,373 -- Other noncurrent liabilities.... 2,904 2,904 430 ---------- -------- --------- ---------- ------- Total liabilities......... 477,469 22,400 325,847 825,716 13,301 ---------- -------- --------- ---------- ------- Stockholders' equity: Genzyme General Stock, $.01 par value................... 867 867 -- Molecular Oncology Stock, $.01 par value................... 153 153 -- Surgical Products Stock, $.01 par value................... 150 (150) B4 -- -- Tissue Repair Stock, $.01 par value....................... 289 (289) B4 -- -- Biosurgery Stock, $.01 par value....................... -- 188 B4 -- 175 B1 363 Treasury Stock--at cost....... (901) (901) -- Additional paid-in capital-- Genzyme General Stock....... 524,979 524,979 -- Additional paid-in capital-- Molecular Oncology Stock.... 105,059 105,059 -- Additional paid-in capital-- Surgical Products Stock..... 543,197 (543,197) B4 -- -- Additional paid-in capital-- Tissue Repair Stock......... 228,095 (228,095) B4 -- -- Additional paid-in capital-- Biosurgery Stock............ -- 543,256 B4 228,287 B4 206,347 B1 11,373 B1 (82,143) B1 907,120 Notes receivable--related parties..................... -- (14,700) B3 (14,700) -- PRO FORMA GENZYME CORPORATION PRO FORMA NOTE AND ADJUSTMENTS REFERENCE SUBSIDIARIES ----------- --------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............. $ -- $ 26,662 Accrued expenses.............. 4,321 G2 1,300 G1 (7,936) G4 11,659 G6 136,598 Income taxes payable.......... -- 51,778 Deferred revenue.............. -- G6 4,840 Current portion of notes payable and long-term debt and capital lease obligations................. -- 2,495 --------- --------- Total current liabilities............. 9,344 222,373 Notes payable and long-term debt and capital lease obligations................... 150,000 G1 25,000 G1 409,866 Convertible notes and debentures, net............... -- 273,415 Deferred tax liabilities--noncurrent....... 175,485 G1 289,858 Other noncurrent liabilities.... (430) G1 1,904 G1 4,808 --------- --------- Total liabilities......... 361,303 1,200,320 --------- --------- Stockholders' equity: Genzyme General Stock, $.01 par value................... 79 G1 946 Molecular Oncology Stock, $.01 par value................... -- 153 Surgical Products Stock, $.01 par value................... -- -- Tissue Repair Stock, $.01 par value....................... -- -- Biosurgery Stock, $.01 par value....................... -- 363 Treasury Stock--at cost....... -- (901) Additional paid-in capital-- Genzyme General Stock....... 491,102 G1 62,882 G1 1,078,963 -- Additional paid-in capital-- Molecular Oncology Stock.... -- 105,059 Additional paid-in capital-- Surgical Products Stock..... -- -- Additional paid-in capital-- Tissue Repair Stock......... -- -- Additional paid-in capital-- Biosurgery Stock............ 907,120 Notes receivable--related parties..................... -- (14,700)
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 13 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED) AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA HISTORICAL GENZYME GENZYME HISTORICAL PRO FORMA NOTE CORPORATION AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX --------------- --------------- ----------- --------- --------------- ---------- Deferred compensation..... (66) B1 (66) -- Retained earnings (accumulated deficit)... 172,933 172,933 -- Biomatrix, Inc. preferred stock, none issued...... -- -- -- -- -- Biomatrix, Inc. common stock, $.0001 par value................... -- -- -- -- -- Biomatrix, Inc. additional paid-in capital......... 84,600 (84,600) B3 -- -- Biomatrix, Inc. notes receivable--related parties................. (14,700) 14,700 B3 -- -- Biomatrix, Inc. treasury stock, at cost.......... (900) 900 B3 -- -- Biomatrix, Inc. retained earnings................ 24,300 (24,300) B3 -- -- GelTex Pharmaceuticals preferred stock, none issued.................. -- GelTex Pharmaceuticals common stock, $.01 par value................... 215 GelTex Pharmaceuticals additional paid-in capital................. 277,025 GelTex Pharmaceuticals deferred compensation... (701) GelTex Pharmaceuticals accumulated deficit..... (100,458) Accumulated other comprehensive income (loss).................. 24,256 (1,900) 1,900 B3 24,256 (26) ---------- -------- -------- ---------- -------- Total stockholders' equity.............. 1,599,077 91,400 29,586 1,720,063 176,055 ---------- -------- -------- ---------- -------- Total liabilities and stockholders' equity.............. $2,076,546 $113,800 $355,433 $2,545,779 $189,356 ========== ======== ======== ========== ======== PRO FORMA GENZYME PRO FORMA NOTE CORPORATION AND ADJUSTMENTS REFERENCE SUBSIDIARIES ----------- --------- --------------- Deferred compensation..... (10,206) G1 (10,272) Retained earnings (accumulated deficit)... (118,048) G1 3,535 G4 58,420 Biomatrix, Inc. preferred stock, none issued...... -- -- Biomatrix, Inc. common stock, $.0001 par value................... -- -- Biomatrix, Inc. additional paid-in capital......... -- -- Biomatrix, Inc. notes receivable--related parties................. -- -- Biomatrix, Inc. treasury stock, at cost.......... -- -- Biomatrix, Inc. retained earnings................ -- -- GelTex Pharmaceuticals preferred stock, none issued.................. -- -- GelTex Pharmaceuticals common stock, $.01 par value................... (215) G3 -- GelTex Pharmaceuticals additional paid-in capital................. (277,025) G3 -- GelTex Pharmaceuticals deferred compensation... 701 G3 -- GelTex Pharmaceuticals accumulated deficit..... 100,458 G3 -- Accumulated other comprehensive income (loss).................. 26 G3 (2,181) G1 22,075 --------- ---------- Total stockholders' equity.............. 251,108 2,147,226 --------- ---------- Total liabilities and stockholders' equity.............. $ 612,411 $3,347,546 ========= ==========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 14 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME HISTORICAL PRO FORMA NOTE GENZYME GENERAL GELTEX ADJUSTMENTS REFERENCE GENERAL ---------- ---------- ----------- --------- ---------- Revenues: Net product sales......................................... $571,531 $ -- $ 17,676 G25 $589,207 Net service sales......................................... 57,223 -- -- 57,223 Collaborative joint venture project reimbursement......... -- 5,781 (5,781) G24 -- Revenues from research and development contracts: Related parties......................................... 1,516 -- 1,557 G25 3,073 Other................................................... 5,096 10,668 -- 15,764 -------- -------- -------- -------- Total revenues............................................ 635,366 16,449 13,452 665,267 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 115,125 -- 15,003 G25 130,128 Cost of services sold..................................... 35,637 -- -- 35,637 Selling, general and administrative....................... 149,427 6,935 18,624 G25 1,743 G22 1,837 G22 178,566 Collaborative joint venture project costs................. -- 5,781 (5,781) G24 -- Research and development (including research and development contracts).................................. 97,746 32,602 7,348 G22 11,154 G25 148,850 Amortization of intangibles............................... 8,106 -- 62,350 G21 70,456 Purchase of in-process research and development........... 5,436 9,530 -- 14,966 -------- -------- -------- -------- Total operating costs and expenses...................... 411,477 54,848 112,278 578,603 -------- -------- -------- -------- Operating income (loss)..................................... 223,889 (38,399) (98,826) 86,664 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (37,423) (7,937) 7,937 G25 8,107 G25 (29,316) Gain on affliate sale of stock............................ 6,683 -- -- 6,683 Gain on sale of investment in equity securities........... 1,963 -- -- 1,963 Minority interest......................................... 3,674 -- -- 3,674 Gain on sale of product line.............................. 8,018 -- -- 8,018 Charge for impaired investments........................... (5,712) -- -- (5,712) Other..................................................... 14,389 -- -- 14,389 Investment income......................................... 30,881 4,372 (19,901) G23 166 G25 15,518 Interest expense.......................................... (19,885) (485) (10,981) G23 (31,351) -------- -------- -------- -------- Total other income (expenses)........................... 2,588 (4,050) (14,672) (16,134) -------- -------- -------- -------- Income before income taxes.................................. 226,477 (42,449) (113,498) 70,530 Income tax (provision) benefit.............................. (84,400) -- 45,050 G26 (39,350) -------- -------- -------- -------- Division net income (loss).................................. $142,077 $(42,449) $(68,448) $ 31,180 ======== ======== ======== ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 15 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA GENZYME HISTORICAL PRO FORMA NOTE GENZYME GENERAL GELTEX ADJUSTMENTS REFERENCE GENERAL --------- ---------- ----------- --------- -------- Revenues: Net product sales.................................... $503,700 $ -- $ 6,166 G25 $509,866 Net service sales.................................... 45,296 -- -- 45,296 Collaborative joint venture project reimbursement.... -- 3,841 (3,841) G24 -- Revenues from research and development contracts: Related parties.................................... 245 -- -- 245 Other.............................................. 244 33,070 15 G25 33,329 -------- ------- -------- -------- Total revenues..................................... 549,485 36,911 2,340 588,736 -------- ------- -------- -------- Operating costs and expenses: Cost of products sold................................ 114,461 -- 5,493 G25 119,954 Cost of services sold................................ 26,937 -- -- 26,937 Selling, general and administrative.................. 122,974 7,507 7,177 G25 137,658 Collaborative joint venture project costs............ -- 3,841 (3,841) G24 -- Research and development (including research and development related to contracts).................. 83,701 21,587 4,568 G25 109,856 Amortization of intangibles.......................... 5,962 -- 46,838 G21 52,800 -------- ------- -------- -------- Total operating costs and expenses................. 354,035 32,935 60,235 447,205 -------- ------- -------- -------- Operating income (loss)................................ 195,450 3,976 (57,895) 141,531 -------- ------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated subsidiaries.... (30,866) 196 (196) G25 1,812 G24 8,277 G25 (20,777) Gain on affiliate sale of stock...................... 22,689 -- -- 22,689 Gain on sale of investment in equity securities...... 22,709 -- -- 22,709 Minority interest.................................... 3,185 -- -- 3,185 Other................................................ 5,110 -- -- 5,110 Investment income.................................... 27,798 4,331 (14,777) G23 17,352 Interest expense..................................... (11,639) -- (8,236) G23 (19,875) -------- ------- -------- -------- Total other income (expenses)...................... 38,986 4,527 (13,120) 30,393 -------- ------- -------- -------- Income (loss) before income taxes...................... 234,436 8,503 (71,015) 171,924 Income tax (provision) benefits........................ (74,164) -- 14,236 G26 (59,928) -------- ------- -------- -------- Net income (loss)...................................... $160,272 $ 8,503 $(56,779) $111,996 ======== ======= ======== ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 16 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME HISTORICAL PRO FORMA NOTE GENZYME GENERAL GELTEX ADJUSTMENTS REFERENCE GENERAL ---------- ---------- ----------- --------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 176,316 $ 71,179 $(100,000) G15 $ -- 4,469 G20 151,964 Short-term investments.................................... 100,288 68,428 (100,000) G15 68,716 Accounts receivable, net.................................. 157,931 -- (282) G18 157,649 Inventories............................................... 83,621 -- 8,156 G15 13,461 G20 (329) G18 104,909 Prepaid and other current assets.......................... 26,728 12,575 (295) G20 39,008 Due from Molecular Oncology............................... 4,088 -- 4,088 Due from Surgical Products................................ 9,226 -- 9,226 Due from Tissue Repair.................................... 1,272 -- 1,272 Deferred tax assets--current.............................. 41,441 -- -- 41,441 ---------- -------- --------- ---------- Total current assets.................................... 600,911 152,182 (174,820) 578,273 ---------- -------- --------- ---------- Property, plant & equipment, net............................ 380,474 13,538 7,215 G20 4,499 G15 25,000 G15 430,726 Long-term receivables, affiliates........................... -- 121 (121) G18 -- Long-term investments....................................... 415,301 -- (165,151) G15 250,150 Notes receivable--related party............................. 10,175 -- -- 10,175 Intangibles, net............................................ 68,938 7,743 916,062 G15 (7,743) G19 985,000 Deferred tax assets--noncurrent............................. -- -- 35,016 G15 35,016 Investments in equity securities............................ 186,883 -- (4,681) G15 182,202 Other noncurrent assets..................................... 46,544 15,772 (22,865) G18 39,451 ---------- -------- --------- ---------- Total assets............................................ $1,709,226 $189,356 $ 612,411 $2,510,993 ========== ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 17,648 $ -- $ -- $ 17,648 Accrued expenses.......................................... 80,406 5,910 4,321 G16 1,300 G15 (7,936) G18 11,659 G20 95,660 Income taxes payable...................................... 51,778 -- -- 51,778 Deferred revenue.......................................... 4,404 -- -- 4,404 Current portion of notes payable and long-term debt and capital lease obligations............................... 23 1,467 -- 1,490 ---------- -------- --------- ---------- Total current liabilities............................... 154,259 7,377 9,344 170,980 ---------- -------- --------- ---------- Notes payable and long-term debt and capital lease obligations................................................. 62 5,494 150,000 G15 25,000 G15 180,556 Convertible notes and debentures, net....................... 273,415 -- -- 273,415 Deferred tax liabilities--noncurrent........................ 8,797 -- 175,485 G15 184,282 Other noncurrent liabilities................................ 2,789 430 (430) G15 1,904 G15 4,693 ---------- -------- --------- ---------- Total liabilities....................................... 439,322 13,301 361,303 813,926 ---------- -------- --------- ---------- Division equity: Division Equity........................................... 1,269,904 -- 79 G15 491,102 G15 62,882 G15 (10,206) G15 (118,048) G15 (2,181) G15 3,535 G18 1,697,067 GelTex Pharmaceuticals preferred stock, none issued....... -- -- -- -- GelTex Pharmaceuticals common stock, $.01 par value....... -- 215 (215) G17 -- GelTex Pharmaceuticals additional paid-in capital......... -- 277,025 (277,025) G17 -- GelTex Pharmaceuticals deferred compensation.............. -- (701) 701 G17 -- GelTex Pharmaceuticals accumulated deficit................ -- (100,458) 100,458 G17 -- Accumulated other comprehensive income (loss)............. -- (26) 26 G17 ---------- -------- --------- ---------- Total division equity................................... 1,269,904 176,055 251,108 1,697,067 ---------- -------- --------- ---------- Total liabilities and division equity................... $1,709,226 $189,356 $ 612,411 $2,510,993 ========== ======== ========= ==========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 17 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (1) ACCOUNTING POLICIES AND PRO FORMA INFORMATION The unaudited pro forma combined financial statements reflect the pro forma effect of Genzyme's merger with GelTex and Genzyme's merger with Biomatrix on the - unaudited statements of operations for the nine months ended September 30, 2000 and the year ended December 31, 1999 and - unaudited balance sheet as of September 30, 2000 of both Genzyme and Genzyme General, the division of Genzyme to which the assets and liabilities and operations of GelTex will be allocated. The pro forma balance sheets give effect to the mergers of Genzyme with Biomatrix and GelTex and the combination of Genzyme Surgical Products and Genzyme Tissue Repair as if they occurred on September 30, 2000. The pro forma statements of operations have been presented to give effect to the mergers of Genzyme with both Biomatrix and GelTex using the purchase method of accounting and the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical accounting basis as if such transactions had occurred January 1, 1999. In addition to giving effect to the mergers with Biomatrix and GelTex, the pro forma statement of operations for the year ended December 31, 1999 shows Genzyme's earnings allocated to Genzyme General Stock and earnings per share of Genzyme General Stock, adjusted to reflect the changes in earnings allocations resulting from the June 1999 creation and distribution of Surgical Products Stock as if such change took place on January 1, 1999. (2) GENZYME'S ACQUISITIONS (A) GENZYME'S ACQUISITION OF BIOMATRIX Genzyme entered into the merger agreement to acquire Biomatrix on March 6, 2000. Upon consummation of the merger Biomatrix merged into a specially formed, wholly-owned subsidiary of Genzyme. Concurrently with the merger: - Genzyme Biosurgery was created as a new division of Genzyme; - the businesses of Genzyme Surgical Products and Genzyme Tissue Repair were reallocated to Genzyme Biosurgery; and - the businesses of Biomatrix was allocated to Genzyme Biosurgery. For the purposes of the unaudited pro forma financial statements, we used the following exchange ratios to determine the number of shares of Biosurgery Stock distributed: - 0.6060 multiplied by the number of shares of Surgical Products Stock outstanding; - 0.3352 multiplied by the number of shares of Tissue Repair Stock outstanding; and - 0.7162 multiplied by the number of Biomatrix shares outstanding (based on a one-for-one exchange ratio for 71.62% of the Biomatrix shares). This resulted in approximately: - 9,092,763 shares of Biosurgery Stock exchanged for 15,004,560 shares of Surgical Products Stock; - 9,679,769 shares of Biosurgery Stock exchanged for 28,877,593 shares of Tissue Repair Stock; and 18 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (2) GENZYME'S ACQUISITIONS (CONTINUED) - 17,516,712 shares of Biosurgery Stock and approximately $252.4 million of cash, exchanged for 24,338,908 shares of Biomatrix common stock. In addition, options to purchase: - 3,252,386 shares of Surgical Products Stock under the Genzyme equity plans, - 3,923,281 shares of Tissue Repair Stock under the Genzyme equity plans, and - 1,706,639 shares of Biomatrix common stock under the Biomatrix equity plans converted to options to purchase approximately 1,970,944, 1,315,083, and 1,222,300 shares of Biosurgery Stock, respectively. Using the acquisition price of Biomatrix common stock and certain other assumptions in the Black-Scholes option valuation model, the Biosurgery options issued in exchange for the Biomatrix options have been valued at approximately $11.4 million. In accordance with FIN 44, the intrinsic value of the portion of the unvested options related to the future service period of approximately $66,000 is allocated to deferred compensation in stockholders' equity for Genzyme or division equity for Genzyme Biosurgery, rather than to goodwill. The unvested portion is being amortized to operating expense over the remaining vesting periods of generally less than four years. (B) GENZYME'S ACQUISITION OF GELTEX Genzyme entered into a merger agreement to acquire GelTex on September 11, 2000. Genzyme issued approximately $515.2 million in cash and $491.2 million in Genzyme General Stock for all of the outstanding shares of GelTex common stock, using the stock price of Genzyme General Stock based on the average trading price over three days before and after the September 11, 2000 announcement of the merger. Approximately 7.9 million shares of Genzyme General Stock were issued in exchange for shares of GelTex common stock. In addition, options and warrants to purchase approximately 2.1 million shares of GelTex common stock were exchanged for options and warrants to purchase approximately 1.6 million shares of Genzyme General Stock. The vesting of GelTex options granted to employees of GelTex before the effective date of the merger will be accelerated as of the first anniversary of the effective date of the merger as long as they remain employees of GelTex or Genzyme on the one year anniversary date. Additionally, the vesting of stock options granted to directors and several officers of GelTex were accelerated immediately upon the effective time of the merger. Using the Black-Scholes valuation model, the options and warrants to purchase Genzyme General Stock issued in exchange for the GelTex options and warrants have a value of approximately $62.9 million. In accordance with FIN 44, the intrinsic value of the portion of the unvested options related to the future service period of $10.2 million is allocated to deferred compensation in stockholders' equity for Genzyme. The unvested portion is being amortized to operating expense over the remaining vesting period of approximately one year. 19 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (A) BIOMATRIX The aggregate purchase price of $482.4 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair values as of September 30, 2000 (amounts in thousands): Cash and cash equivalents................................... $ 46,700 Accounts receivable......................................... 12,600 Prepaid expenses and other current assets................... 5,800 Inventory................................................... 19,530 Property, plant & equipment................................. 39,151 Note receivable............................................. 14,700 Other assets................................................ 800 Intangible assets (to be amortized over 1.5 to 11.0 years).................................................... 284,854 Goodwill (to be amortized over 11.0 years).................. 111,320 In-process research and development......................... 82,143 Deferred tax asset.......................................... 899 Deferred compensation....................................... 66 Assumed liabilities......................................... (29,116) Deferred tax liability...................................... (107,044) --------- Aggregate purchase price............................ $ 482,403 =========
The total purchase price, the fair value of assets and liabilities acquired, the allocation of purchase price and the lives of the goodwill and intangible assets will be determined in connection with preparing our December 31, 2000 financial statements and may vary from the amounts presented herein. In connection with the purchase of Biomatrix, Genzyme expects approximately $82.1 million of the purchase price to be allocated to in-process research and development, or IPR&D. Genzyme management assumes responsibility for determining the IPR&D valuation. Genzyme engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The final valuation will be completed following the closing date of the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from each project once it has reached technological feasibility. A discount rate consistent with the risks of each project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from each purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The estimated future cash flows resulting from purchased IPR&D were adjusted for the contribution of core technology to the value of each IPR&D project. The value assigned to purchased research and development was the amount attributable to the efforts of Biomatrix up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of each purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products, principally relates to the completion and/or acceleration of existing development programs, including 20 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) the mandatory completion of several phases of clinical trials and the general and administrative costs necessary to manage the projects and trials. Assuming the approval of the product by the FDA, costs related to the wide scale manufacturing, distribution, and marketing of the products are included in the projection. The resulting net cash flows from such projects are based on Genzyme management's estimates of revenues, cost of sales, research and development expenses, sales and marketing expenses, general and administrative expenses, and the anticipated income tax effect. The discounting of net cash flows back to their present value is based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate utilized in discounting the net cash flows from purchased IPR&D was 38%. This discount rate is higher than Genzyme's WACC due to the inherent uncertainties surrounding the successful development of the purchased IPR&D. The forecast data employed in the analyses was based upon product level forecast information obtained by Genzyme from numerous internal and external resources. These resources included publicly available databases, external market research consultants and internal experts. Genzyme senior management reviewed and challenged the forecast data and related assumptions and utilized the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, Genzyme management believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on Genzyme's financial condition and results of operations. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for each of the programs under development. The acquired IPR&D consists of Biomatrix' work to complete each of the identified programs. The programs are very specific to the disease and market for which they are intended. There are no alternative uses for the in-process programs in the event that the programs fail in clinical trials or are otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for Genzyme as defined by generally accepted accounting principles. Below is a brief description of IPR&D projects including an estimation of when management believes Genzyme may realize revenues from the sale of these products in the respective application. VISCOSUPPLEMENTATION. Viscosupplementation is the use of elastoviscous solutions and viscoelastic gels in disease conditions to supplement tissues and body fluids, alleviating pain and restoring normal function. Biomatrix expects to complete clinical studies demonstrating the efficacy of Synvisc as a treatment for chronic hip pain during early 2001, with market approval occurring later in 2001. Prior clinical studies have demonstrated the product's safety. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trial. Future costs for this program are estimated to be approximately $9.5 million. A discount rate of 38% was utilized in discounting these estimated cash flows. This product is already marketed for the treatment of osteoarthritis of the knee in the United States and 38 foreign countries. VISCOAUGMENTATION. Viscoaugmentation is the use of viscoelastic gels to provide scaffolding for tissue regeneration or as an inert elastic filler for tissues of the skin and the subcutaneous and intermuscular connective tissues. Hylaform is a viscoelastic Hylan B gel for injection into facial tissue. 21 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) Clinical studies in the United States began in 2000. These studies are expected to be completed and analyzed by early 2001. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trials. Assuming favorable results in these studies, we expect that approval to market this product will be obtained by mid-to-late 2001 in the United States. Biomatrix currently expects to launch the product in the United States before the end of 2001, although there can be no assurance that the product will be launched or that the launch will occur within this time period. This product is already marketed for the same indication in 21 foreign countries. Hylagel Uro is a viscoelastic Hylan B gel implant for the treatment of urinary stress incontinence. It is injected intramuscularly to augment the soft connective tissue in between the sphincter muscle of the urethra. This product provides an important advancement in the treatment of urinary stress incontinence, a condition that affects over one million people in the United States. Pilot clinical studies conducted in the United States at two clinical centers under FDA approved protocols have been successfully completed. These initial studies demonstrated that the product is safe and has clinical utility. A pivotal one-year study will begin in 2000 at clinical centers in the United States. It is expected that the studies will be completed, evaluated and submitted for FDA approval by the middle of 2002. When this study is completed, the data will also be submitted for approval in Canada and Europe. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trial. Assuming favorable results in these studies, Biomatrix currently expects that during 2003 Hylagel Uro will be marketed in the United States and Canada, although there can be no assurance that the product will be launched or that the launch will occur within this time period. The future costs of these programs are estimated to be approximately $6.8 million. A discount rate of 38% was utilized in discounting these estimated cash flows. VISCOSEPARATION (ANTI-ADHESION). Viscoseparation is the use of viscoelastic gels and membranes to separate tissues and to decrease formation of adhesions and excessive scars after surgery. Hylagel Nuro is for spinal surgery and herniated lumbar intervertabral disc surgery. Hylagel Nuro is a combination of Hylan A fluid and Hylan B gel for application directly at the surgical site to reduce post surgical adhesions and scarring which often cause chronic pain. Hylagel Nuro is classified as a device by regulatory authorities. A multicenter clinical study started in the United States in late 1999 and, currently, studies are being initiated in Germany, France, the United Kingdom and Belgium. The completion of this study is expected by the fourth quarter of 2001, and submissions for regulatory approvals in the United States, Canada and Europe will occur shortly thereafter. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trial. Assuming favorable results in these studies, Biomatrix believes that Hylagel Nuro can be launched in Europe by the second quarter of 2002 and in the United States by the fourth quarter of the same year, although there can be no assurance that the product will be launched or that the launch will occur within this time period. A discount rate of 38% was utilized in discounting these estimated cash flows. The valuation of these programs assumes that sales of Hylagel Nuro commence in 2002. The estimated aggregate future clinical costs to develop this indication will be approximately $8.3 million. 22 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) The Biomatrix research and development programs currently in process were valued as follows (amounts in thousands): Viscosupplementation........................................ $33,850 Viscoaugmentation........................................... 8,604 Viscoseparation............................................. 39,689 ------- $82,143 =======
(B) GELTEX The aggregate purchase price of $1,076.0 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair value as of September 30, 2000 (amounts in thousands): Cash and investments........................................ $ 141,841 Prepaid expenses and other current assets................... 12,511 Inventory................................................... 14,722 Property, plant & equipment................................. 46,645 Intangible assets (to be amortized over 5 to 15 years)...... 465,109 Goodwill (to be amortized over 15 years).................... 450,953 In-process research and development......................... 118,048 Deferred tax asset.......................................... 35,016 Deferred compensation....................................... 10,206 Assumed liabilities......................................... (40,327) Forwards.................................................... (1,300) Swaps....................................................... (1,904) Deferred tax liability...................................... (175,485) ---------- Aggregate purchase price.................................... $1,076,035 ==========
The total purchase price, the fair value of assets and liabilities acquired, the allocation of purchase price and the lives of the goodwill and intangible assets will be determined in connection with preparing our December 31, 2000 financial statements and may vary from the amounts presented herein. As part of the acquisition of GelTex, Genzyme acquired all of GelTex's interest in RenaGel LLC, a joint venture between Genzyme and GelTex. Prior to the acquisition of GelTex, Genzyme accounted for its investment in RenaGel LLC under the equity method. The adjustments below also reflect the consolidation of RenaGel LLC into Genzyme's financial statements and accounting for the purchase by Genzyme of GelTex's 50%-interest in the joint venture using the purchase method of accounting. The assets and liabilities of the joint venture are reflected in the amounts above. Because Genzyme already owns a 50% interest in RenaGel LLC, the assets of RenaGel LLC are adjusted to fair value only to the extent of the 50%-interest Genzyme acquired. In connection with the purchase of GelTex, Genzyme expects approximately $118.0 million of the purchase price to be allocated to in-process research and development, or IPR&D. Genzyme management assumes responsibility for determining the IPR&D valuation. Genzyme engaged an 23 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The final valuation will be completed following the closing date of the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from each project once it has reached technological feasibility. A discount rate consistent with the risks of each project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from each purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The estimated future cash flows resulting from purchased IPR&D were adjusted for the contribution of core technology to the value of each IPR&D project. The value assigned to purchased research and development was the amount attributable to the efforts of GelTex up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of each purchased research and development project at the time of acquisition. Below is a brief description of the in-process research and development projects including an estimation of when management believes Genzyme Corporation may realize revenues from the sale of these products in the respective application. RENAGEL. Renagel brand phosphate binder is a non-absorbed polymer for the treatment of hyperphosphatemia. GelTex has undertaken a series of clinical studies that are designed to demonstrate the compound's role in the prevention of cardiac calcification and the mortality and morbidity associated with cardiac calcification. GelTex has also undertaken clinical studies designed to demonstrate the compound's role in limiting the complications of hyperphosphatemia in pre-dialysis patients. Clinical studies are scheduled for completion in 2002, 2003 and 2004 for these various indications. Although clinical results to date have been positive, there can be no assurance that statistically significant results will be observed in ongoing or future clinical trials. Future costs for these programs are estimated at $20.0 million. A discount rate of 35% was utilized in discounting the estimated cash flows associated with these programs. C. DIFFICILE. The goal of the C. DIFFICILE program is to develop a toxin-binding polymer for the treatment and prevention of antibiotic induced C. DIFFICILE colitis. GelTex has completed a phase I study, and expects to initiate a phase II study in 2000. Although clinical results to date have been positive, there can be no assurance that statistically significant results will be observed in ongoing or future clinical trials. Assuming favorable results in future studies, it is expected that approval to market this product will be obtained by 2005 in the U.S., although there can be no assurance that a product will be launched or that the launch will occur within this time period. The future cost of this program is estimated to be approximately $37.0 million. A discount rate of 38% was utilized in discounting these estimated cash flows. ORAL MUCOSITIS. Oral Mucositis is common side effect of radiation therapy and chemotherapy. GelTex has identified a series of compounds that alone and in combination have demonstrated efficacy in animal models of Oral Mucositis. GelTex expects that an IND will be filed in the fourth quarter of 2001 and product launch is expected in 2005, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. 24 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) The future cost of this program is estimated to be approximately $25.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. DENSPM. The DENSPM program is focused on the development of a compound for the treatment of mild to moderate psoriasis. Toxicology studies are underway and GelTex expects to file an IND during the first quarter of 2001. Phase I safety and dose-ranging studies are scheduled for 2001 and product launch is anticipated in 2005, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. The future cost of this program is estimated to be approximately $30.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. IRON CHELATION. The iron chelator program is focused on the prevention and treatment of transfusional or hereditary iron overload. GelTex has identified small molecule compounds that are highly effective, orally active iron chelators. Compounds to date display an acceptable tolerability profile for further progression. GelTex expects to file an IND in 2001 and hopes to launch the product in 2005, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. The future cost of this program is estimated to be approximately $31.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. ANTI-OBESITY. The anti-obesity program builds on GelTex's expertise in non-absorbed polymers. The program is focused on the development of a compound that will inhibit lipase and bind fat. GelTex expects to file an IND early in 2002 and hopes to launch a product in 2006, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. The future cost of this program is estimated to be approximately $39.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. GT102-279. GT102-279 is a second generation lipid-lowering compound that has the attributes of GelTex's WelChol lipid lowering agent, but requires 50% fewer tablets. This ease of use could result in higher compliance and greater efficacy, resulting in broader market penetration. One Phase II study has been completed and a second Phase II study is in progress. GelTex expects to complete clinical studies late in 2003 with product launch in 2004. Although clinical results to date have been positive, there can be no assurance that statistically significant results will be observed in ongoing or future clinical trials, that a product will be launched, or that the launch will occur within this time period. Under the terms of GelTex's collaboration agreement with Sankyo, Sankyo was granted an option to license this compound. To keep this option in place, Sankyo must fund the future development cost of this program. A discount rate of 38% was utilized in discounting these estimated cash flows. 25 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) The GelTex research and development programs currently in process were valued as follows (amounts in thousands):
Renagel (Calcification, pre-dialysis and M&M) $ 19,747 C. DIFFICILE 37,386 Iron Chelation 15,715 Anti-Obesity 17,788 DENSPM 3,450 Oral Mucositis 17,769 GT102-279 6,193 -------- $118,048 ========
(4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX These adjustments reflect the retirement of all Surgical Products Stock, Tissue Repair Stock and Biomatrix common stock and the issuance of Biosurgery Stock. The value ascribed to the Biosurgery Stock exchanged for Biomatrix common stock for purchase price accounting is $11.79 per share. The aggregate purchase price is comprised of the following (amounts in thousands): Issuance of 17,516,712 shares of Biosurgery Stock........... $206,522 Cash payment................................................ 252,421 -------- Subtotal.................................................. 458,943 Issuance of Biosurgery options to Biomatrix optionholders... 11,373 Acquisition costs........................................... 12,087 -------- Aggregate purchase price............................ $482,403 ========
I. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED BALANCE SHEET (B1) To record the acquisition of the net assets of Biomatrix for an aggregate purchase price of $482.4 million (see Note A). The intangible assets of approximately $396.2 million are as follows:
USEFUL LIFE AMOUNTS DESCRIPTION IN YEARS IN THOUSANDS ----------- ----------- ------------ Workforce............................................. 5.0 $ 2,017 Non-compete agreements................................ 1.5 640 Distribution agreements............................... 8.0 13,950 Trademark/trade name.................................. 11.0 48,746 Patented core technology.............................. 11.0 59,877 Current products technology........................... 11.0 159,624 Goodwill.............................................. 11.0 111,320 -------- Total............................................. $396,174 ========
The $82.1 million allocated to in-process technology has been charged to accumulated deficit for purposes of pro forma balance sheet presentation only and was charged to expense in 26 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) Genzyme's historical financial statements upon completion of the merger with Biomatrix. The goodwill of $111.3 million consists of the excess of the purchase price over the fair market value of net assets acquired. A deferred tax liability of $107.0 million has been generated from the creation of intangible assets, excluding goodwill. An amount of $200.0 million of debt was obtained by Genzyme in order to finance the cash payment portion of the purchase price, and the remaining approximately $52.4 million was paid from the existing cash balances. The purchase price includes $11.4 million for the estimated fair value of the Genzyme Biosurgery options that were issued in exchange for the Biomatrix options. This estimated fair value was calculated using the Black-Scholes option pricing model based on a stock price of $11.79, which is the value of ascribed to the Biosurgery Stock for purchase price accounting, and other assumptions in the Black-Scholes model. The portion of the intrinsic value of unvested options relating to future service, which is estimated to be $66,000, has been allocated to deferred compensation in the pro forma consolidated balance sheet. In the pro forma consolidated statements of operations, compensation expense has been recorded to reflect the amortization of this deferred compensation over the average remaining vesting period of approximately 3 years. (B2) To record $18.8 million of accrued expenses related to the estimated acquisition costs and liabilities for exit activities that have not been reflected in the historical balances as of September 30, 2000. (B3) To eliminate Biomatrix historical stockholders' equity amounts totaling $91.4 million, except for the Biomatrix notes receivable of $14.7 million, which remained outstanding upon completion of the transaction. Biomatrix received these full recourse notes in exchange for the purchase of Biomatrix common stock at fair market value by certain officers, directors and a consultant in accordance with a restricted stock plan. To the extent the holders receive cash, as consideration for their restricted shares, it must be used to repay the balance of the same quantity of shares under the notes. Therefore, the balance of the notes could change. The quantity of the decrease to the balance of the notes will not be known until the acquisition is effective. (B4) To record the cancellation of Surgical Products Stock and Tissue Repair Stock, by eliminating the par value of common stock of $150,000 and $289,000, respectively; and additional paid-in capital of $543.2 million and $228.1 million, respectively; and to record the issuance of Biosurgery Stock, with par value of $188,000 and additional paid-in capital transferred from Surgical Products Stock and Tissue Repair Stock of $771.5 million. (B5) To record inventory and fixed assets of Biomatrix at fair value, by increasing the inventory by $11.3 million and decreasing the fixed assets by $0.5 million. The increased basis for the inventory valuation will result in a $11.3 million decrease in gross margin as the units are sold, after the acquisition. 27 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) II. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED STATEMENTS OF OPERATIONS (B6) To record the amortization of acquired intangible assets and goodwill (amounts in thousands):
ASSIGNED ANNUAL VALUE AMORTIZATION -------- ------------ INTANGIBLE ASSETS: Workforce (5 years)................................. $ 2,017 $ 404 Non-compete agreements (1.5 years).................. 640 427 Distribution agreements (8 years)................... 13,950 1,744 Trademark/trade name (11 years)..................... 48,746 4,431 Patented core technology (11 years)................. 59,877 5,443 Current products technology (11 years).............. 159,624 14,511 Goodwill (11 years)................................. 111,320 10,120 -------- ------- Pro forma adjustment for amortization of intangibles................................... $396,174 $37,080 ======== =======
(B7) To record the following: - Amortization of deferred compensation associated with Genzyme Biosurgery options that were issued in exchange for Biomatrix options; - Impact of the additional expense associated with the increased basis for the Biomatrix inventory; - Impact of the additional depreciation expense related to the increased basis of Biomatrix's fixed assets. (B8) To eliminate Biomatrix' weighted average shares outstanding, and to record the cancellation of Surgical Products Stock and Tissue Repair Stock. (B9) To record the creation of Biosurgery Stock. Net losses for Genzyme Surgical Products and Genzyme Tissue Repair and net income for Biomatrix have been transferred to the calculation of loss per share allocated to Biosurgery Stock. The net income amount for Biomatrix of $22.5 million for the nine months ended September 30, 2000 and $31.0 million for the year ended December 31, 1999 reflects the elimination of the $9.2 million and $12.4 million tax provision, respectively because Genzyme Biosurgery incurred a pro forma net loss for each period. (B10) To adjust the tax provision for the impact of the amortization of acquired intangibles, the reduction in investment income, the additional interest expense and the amortization of the deferred tax liability established in purchase accounting. Income taxes are allocated to Genzyme Biosurgery 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. The realizability of deferred tax assets is assessed at the division level. (B11) To record interest expense that would have been incurred on the $200.0 million of debt, at a rate of 7.5% per annum; and to reduce the investment income balance to reflect the payment of $52.4 million of cash at a rate of return of 5.45% per annum. 28 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) (B12) To eliminate the tax benefits of Genzyme Surgical Products and Genzyme Tissue Repair that had been allocated to Genzyme General and to allocate the pro forma tax benefits of Genzyme Biosurgery to Genzyme General. Genzyme's management and accounting policies provide that, if as of the end of any fiscal quarter, a division can not use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, Genzyme may allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. The tax benefits allocated to Genzyme General from Genzyme Surgical Products and Genzyme Tissue Repair totaled $27.0 million for the year ended December 31, 1999 and $16.3 million in the nine months ended September 30, 2000. On a pro forma basis, the tax benefits allocated to Genzyme General from Genzyme Biosurgery would have been $21.0 million for the year ended December 31, 1999 and $11.9 million for the nine months ended September 30, 2000. The tax benefits generated by Genzyme Biosurgery and allocated to Genzyme General are lower on a pro forma basis due to Biomatrix' profitability offsetting losses incurred by Genzyme Surgical Products and Genzyme Tissue Repair. (B13) To eliminate Genzyme Surgical Products' loss from earnings allocated to Genzyme General Stock to reflect the change in Genzyme's earnings allocation resulting from the creation and distribution of Surgical Products Stock in June 1999. (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX The following adjustments reflect the acquisition of GelTex by Genzyme for a combination of cash and stock and the replacement of GelTex options and warrants with options and warrants to purchase Genzyme General Stock. As part of the acquisition of GelTex, Genzyme acquired all of GelTex's interest in RenaGel LLC, a joint venture between Genzyme and GelTex. Prior to the acquisition of GelTex, Genzyme accounted for its investment in RenaGel LLC under the equity method. The adjustments below reflect the consolidation of RenaGel LLC into Genzyme's financial statements and accounting for Genzyme's purchase of GelTex' interest in the joint venture using the purchase method of accounting. I. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED BALANCE SHEET (G1) To record the acquisition of the net assets of GelTex for an aggregate purchase price of $1,076.0 million. The aggregate purchase price is comprised of the following (amounts in thousands): Issuance of 7,886,404 shares of Genzyme General Stock....... $ 491,181 Cash payment................................................ 515,151 ---------- Subtotal.................................................... 1,006,332 Basis of GelTex investment.................................. 2,500 Issuance of Genzyme General options and warrants to GelTex option and warrant holders................................ 62,882 Acquisition costs........................................... 4,321 ---------- Aggregate purchase price.................................... $1,076,035 ==========
29 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) The aggregate purchase price of $1,076.0 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair value as of September 30, 2000 (amounts in thousands): Cash and investments........................................ $ 141,841 Prepaid expenses and other current assets................... 12,511 Inventory................................................... 14,722 Property, plant & equipment................................. 46,645 Intangible assets (to be amortized over 5 to 15 years)...... 465,109 Goodwill (to be amortized over 15 years).................... 450,953 In-process research and development......................... 118,048 Deferred tax asset.......................................... 35,016 Deferred compensation....................................... 10,206 Assumed liabilities......................................... (40,327) Forwards.................................................... (1,300) Swaps....................................................... (1,904) Deferred tax liability...................................... (175,485) ---------- Aggregate purchase price.................................... $1,076,035 ==========
The $118.0 million allocated to in-process technology has been charged to retained earnings for purposes of pro forma balance sheet presentation only and was charged to expense in Genzyme's historical financial statements upon completion of the merger with GelTex. The goodwill of $451.0 million consists of the excess of the purchase price over the fair market value of net assets acquired. A deferred tax liability of $175.5 million has been generated from the creation of intangible assets, excluding goodwill. An amount of $150.0 million of debt was obtained by Genzyme in order to finance the cash payment portion of the purchase price, and the remaining approximately $365.2 million was paid from the existing cash and investment balances. The purchase price includes $62.9 million for the estimated fair value of the Genzyme General options and warrants that were issued in exchange for the GelTex options and warrants. This estimated fair value was calculated using the Black-Scholes valuation model. The portion of the intrinsic value of unvested options relating to future service, which is estimated to be $10.2 million, has been allocated to deferred compensation in the pro forma consolidated balance sheet. In the pro forma consolidated statements of operations, compensation expense has been recorded to reflect the amortization of this deferred compensation over the average remaining vesting period of approximately one year. This amortization expense of approximately $10.2 million has been recorded to the appropriate expense category based on the payroll classification of the grantee. The remaining vesting period of approximately one year is the result of a consent granted by Genzyme to GelTex pursuant to the merger agreement which allows GelTex to amend GelTex options granted to employees before the effective date of the merger to provide that vesting will be accelerated as of the first anniversary of the effective date of the merger as long as they remain employees of GelTex or Genzyme on the one year anniversary date. (G2) To record $4.3 million of accrued expenses related to the estimated acquisition costs that have not been reflected in the historical balances as of September 30, 2000. (G3) To eliminate GelTex's historical stockholders' equity amounts totaling $176.1 million. (G4) To eliminate intercompany balances between Genzyme, GelTex and RenaGel LLC. (G5) To eliminate GelTex's intangible assets. 30 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) (G6) To eliminate Genzyme's and GelTex's investment in RenaGel LLC and to consolidate RenaGel LLC with Genzyme. The assets of the joint venture have been adjusted to fair value to the extent of the percentage ownership of RenaGel LLC acquired by Genzyme in this transaction (i.e., 50%). Assets of RenaGel LLC for which book value does not approximate fair value are as follows (amounts in thousands):
DESCRIPTION BOOK VALUE FAIR VALUE RECORDED VALUE ----------- ---------- ---------- -------------- Inventory................................. $13,461 $ 29,773 $ 21,617 Renagel Technology........................ 0 232,540 116,270
The inventory and Renagel technology are reflected in adjustment (G1) above. The increased basis for the inventory will result in a $8.2 million decrease to Genzyme's gross margin as the units are sold after the acquisition. II. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED STATEMENTS OF OPERATIONS (G7) To record the amortization of acquired intangible assets and goodwill (amounts in thousands):
INTANGIBLE ASSETS: ASSIGNED VALUE ANNUAL AMORTIZATION ------------------ -------------- ------------------- Workforce (5 years)......................................... $ 2,327 $ 465 Patents (15 years).......................................... 115,772 7,718 Trademarks/trade name (15 years)............................ 6,526 435 Core technology (15 years).................................. 65,313 4,354 Current products technology (5 to 15 years)................. 275,171 19,948 Goodwill (15 years)......................................... 450,953 30,065 -------- ------- Pro forma adjustment for amortization of intangibles........ $916,062 $62,985 ======== =======
(G8) To record the following: - Amortization of deferred compensation associated with Genzyme General options that were issued in exchange for GelTex options; - Impact of the additional expense associated with the increased basis for the Renagel LLC inventory of $8.2 million; - Impact of the additional depreciation expense related to the increased basis of GelTex's fixed assets. (G9) To eliminate GelTex's weighted average shares outstanding, to reflect the issuance of 7,886,404 shares of Genzyme General Stock and to reflect the dilutive effect of the issuance of options to purchase Genzyme General Stock to holders of GelTex options. (G10) To record interest expense that would have been incurred on the $150.0 million of debt, at a rate of 7.5% per annum; and to reduce the investment income balance to reflect the payment of $365.2 million of cash at a rate of return of 5.45% per annum. (G11) To eliminate intercompany transactions between Genzyme, GelTex and RenaGel LLC. 31 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) (G12) To eliminate Genzyme's and GelTex's equity in the net loss of RenaGel LLC and to consolidate RenaGel LLC with Genzyme. (G13) To adjust the tax provision for the impact of the reduction in investment income, the additional interest expense and the amortization of the deferred tax liability established in purchase accounting. These adjustments plus the impact of including GelTex's loss in determining Genzyme's tax provision and the effects of the Biomatrix merger would increase Genzyme's effective tax rate from 29.9% to 44.5% for the nine months ended September 30, 2000 and would decrease Genzyme's effective tax rate from 39.8% to (4.3)% for the year ended December 31, 1999. (G14) The net loss of GelTex has been transferred to the calculation of net income per share allocated to Genzyme General Stock. III. PRO FORMA ADJUSTMENTS TO GENZYME GENERAL'S COMBINED BALANCE SHEET (G15) To record the acquisition of the net assets of GelTex for an aggregate purchase price of $1,076.0 million. The aggregate purchase price is comprised of the following (amounts in thousands): Issuance of 7,886,404 shares of Genzyme General Stock....... $ 491,181 Cash payment................................................ 515,151 ---------- Subtotal.................................................... 1,006,332 Basis of GelTex investment.................................. 2,500 Issuance of Genzyme General options and warrants to GelTex option and warrant holders................................ 62,882 Acquisition costs........................................... 4,321 ---------- Aggregate purchase price.................................... $1,076,035 ==========
The aggregate purchase price of $1,076.0 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair value as of September 30, 2000 (amounts in thousands): Cash and investments........................................ $ 141,841 Prepaid expenses and other current assets................... 12,511 Inventory................................................... 14,722 Property, plant & equipment................................. 46,645 Intangible assets (to be amortized over 5 to 15 years)...... 465,109 Goodwill (to be amortized over 15 years).................... 450,953 In-process research and development......................... 118,048 Deferred tax asset.......................................... 35,016 Deferred compensation....................................... 10,206 Assumed liabilities......................................... (40,327) Forwards.................................................... (1,300) Swaps....................................................... (1,904) Deferred tax liability...................................... (175,485) ---------- Aggregate purchase price.................................... $1,076,035 ==========
The $118.0 million allocated to in-process technology has been charged to division equity for purposes of pro forma balance sheet presentation only and was allocated to expense in Genzyme 32 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) General's historical financial statements upon completion of the merger with GelTex. The goodwill of $451.0 million consists of the excess of the purchase price over the fair market value of net assets acquired. A deferred tax liability of $175.5 million has been generated from the creation of intangible assets, excluding goodwill. An amount of $150.0 million of debt was obtained by Genzyme and allocated to Genzyme General in order to finance the cash payment portion of the purchase price, and the remaining approximately $365.2 million was paid from Genzyme General's existing cash and investment balances. The purchase price includes $62.9 million for the estimated fair value of the Genzyme General options and warrants that were issued in exchange for the GelTex options and warrants. This estimated fair value was calculated using the Black-Scholes valuation model. The portion of the intrinsic value of unvested options relating to future service, which is estimated to be $10.2 million, has been allocated to deferred compensation, included in division equity in the pro forma combined balance sheet. In the pro forma combined statements of operations, compensation expense has been recorded to reflect the amortization of this deferred compensation over the average remaining vesting period of approximately one year. This amortization expense of approximately $10.2 million has been recorded to the appropriate expense category based on the payroll classification of the grantee. The remaining vesting period of approximately one year is the result of a consent granted by Genzyme to GelTex pursuant to the merger agreement which allows GelTex to amend GelTex options granted to employees before the effective date of the merger to provide that vesting will be accelerated as of the first anniversary of the effective date of the merger as long as they remain employees of GelTex or Genzyme on the one year anniversary date. (G16) To record $4.3 million of accrued expenses related to the estimated acquisition costs that have not been reflected in the historical balances as of September 30, 2000. (G17) To eliminate GelTex's historical stockholders' equity amounts totaling $176.1 million. (G18) To eliminate intercompany balances between Genzyme General, GelTex and RenaGel LLC. (G19) To eliminate GelTex's intangible assets. (G20) To eliminate Genzyme General's and GelTex's investment in RenaGel LLC and to consolidate RenaGel LLC with Genzyme General. The assets of the joint venture have been adjusted to fair value to the extent of the percentage ownership of RenaGel LLC acquired by Genzyme and allocated to Genzyme General in this transaction (i.e., 50%). Assets of RenaGel LLC for which book value does not approximate fair value are as follows (amounts in thousands):
DESCRIPTION BOOK VALUE FAIR VALUE RECORDED VALUE ----------- ---------- ---------- -------------- Inventory................................. $13,461 $ 29,773 $ 21,617 Renagel Technology........................ 0 232,540 116,270
The inventory and Renagel technology are reflected in adjustment (G15) above. The increased basis for the inventory will result in a $8.2 million decrease to Genzyme General's gross margin as the units are sold after the acquisition. 33 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) IV. PRO FORMA ADJUSTMENTS TO GENZYME GENERAL'S COMBINED STATEMENTS OF OPERATIONS (G21) To record the amortization of acquired intangible assets and goodwill (amounts in thousands):
INTANGIBLE ASSETS: ASSIGNED VALUE ANNUAL AMORTIZATION ------------------ -------------- ------------------- Workforce (5 years)......................................... $ 2,327 $ 465 Patents (15 years).......................................... 115,772 7,718 Trademarks/trade name (15 years)............................ 6,526 435 Core technology (15 years).................................. 65,313 4,354 Current products technology (5 to 15 years)................. 275,171 19,948 Goodwill (15 years)......................................... 450,953 30,065 -------- ------- Pro forma adjustment for amortization of intangibles........ $916,062 $62,985 ======== =======
(G22) To record the following: - Amortization of deferred compensation associated with Genzyme General options that were issued in exchange for GelTex options; - Impact of the additional expense associated with the increased basis for the Renagel LLC inventory of $8.2 million; - Impact of the additional depreciation expense related to the increased basis of GelTex's fixed assets. (G23) To record interest expense that would have been incurred on the $150.0 million of debt allocated to Genzyme General, at a rate of 7.5% per annum; and to reduce the investment income balance to reflect the payment of $365.2 million of cash at a rate of return of 5.45% per annum. (G24) To eliminate intercompany transactions between Genzyme General, GelTex and RenaGel LLC. (G25) To eliminate Genzyme General's and GelTex's equity in the net loss of RenaGel LLC and to consolidate RenaGel LLC with Genzyme General. (G26) To adjust the tax provision for the impact of the reduction in investment income, the additional interest expense and the amortization of the deferred tax liability established in purchase accounting. 34 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 2.1 Agreement and Plan of Merger, dated as of September 11, 2000, among Genzyme, Titan Acquisition Corp. and GelTex, as amended. Previously filed as Exhibit 99.1 to Genzyme's Current Report on Form 8-K dated September 11, 2000 (Commission File No. 000-14680) and incorporated herein by reference. 23.1 Consent of Ernst & Young LLP. Filed herewith. 23.2 Consent of PricewaterhouseCoopers LLP. Filed herewith. 99.1 The audited financial statements of GelTex as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, including the report of independent auditors (as reported on pages F-1 to F-20 of the Annual Report on Form 10-K of GelTex for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000)). Filed herewith. 99.2 The unaudited financial statements of GelTex as of and for the nine months ended September 30, 2000 and 1999 (as reported on pages 3 to 9 of the Quarterly Report on Form 10-Q of GelTex for the quarter ended September 30, 2000 (filed November 14, 2000)). Filed herewith. 35