-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LKCgaFbBwzKbH03Ji8r8/CCEXNOAkgznfQKvWKs7jvbOrgbQmfxsKGKK6q1RW2qZ BUbLKleoXpEvpHCsNutKnA== 0000950135-99-003139.txt : 19990615 0000950135-99-003139.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950135-99-003139 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990610 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 99644543 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 8-K 1 GENZYME CORP. FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): JUNE 11, 1999 GENZYME CORPORATION (Exact name of registrant as specified in its charter)
MASSACHUSETTS 0-14680 06-1047163 (State or other jurisdiction (Commission File (IRS Employer of incorporation) Number) Identification No.)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (617) 252-7500 2 ITEM 5. OTHER EVENTS. Genzyme Corporation has declared a tax-free dividend of approximately 0.17923 of a share of Genzyme Surgical Products Division Common Stock, which we refer to as GZSP Stock, for each share of Genzyme General Division Common Stock held as of the record date, June 14, 1999. We will distribute approximately 14,800,000 shares of GZSP Stock on June 28, 1999 and pay cash for fractional shares at a rate of $25 per share. In addition, we will reserve approximately 1,132,000 shares of GZSP Stock for future issuance upon conversion of our 5 1/4% convertible subordinated notes due 2005 and approximately 327 shares for future issuance in connection with distributions from existing stock accounts under our directors' deferred compensation plan. GZSP Stock will begin trading on The Nasdaq National Market(R) under the ticker symbol GZSP on June 28, 1999. GZSP Stock is intended to reflect the value and tract the performance of our Genzyme Surgical Products Division. We are creating the Genzyme Surgical Products Division from our existing surgical products business, which was previously operated as a business unit of our Genzyme General Division. Upon formation, Genzyme Surgical Products will also be funded with $150 million in cash from Genzyme General. ITEM 7. EXHIBITS. Number Description ------ ----------- 23.1 Consent of Independent Accountants. Filed herewith. 99.1 Combined Financial Statements of Genzyme Surgical Products. Filed herewith. 99.2 Unaudited, Combined Pro Forma Financial Statements of Genzyme General. Filed herewith. 99.3 Risk Factors Related to Genzyme Surgical Products Division Common Stock. Filed herewith. 99.4 Series Designation for the Genzyme Surgical Products Division Common Stock. Filed as Exhibit 2 to the Registrant's Registration Statement on Form 8-A filed with the Commission on June 11, 1999, and incorporated herein by reference. 99.5 Management and Accounting Policies Governing the Relationship of Genzyme Divisions. Filed herewith. 3 SIGNATURES 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. Dated: June 11, 1999 GENZYME CORPORATION By: /s/ Michael S. Wyzga ---------------------------------- Name: Michael S. Wyzga Title: Senior Vice President, Finance and Chief Financial Officer 2 4 EXHIBIT INDEX Number Description ------ ----------- 23.1 Consent of Independent Accountants. Filed herewith. 99.1 Combined Financial Statements of Genzyme Surgical Products. Filed herewith. 99.2 Unaudited, Combined Pro Forma Financial Statements of Genzyme General. Filed herewith. 99.3 Risk Factors Related to Genzyme Surgical Products Division Common Stock. Filed herewith. 99.4 Series Designation for the Genzyme Surgical Products Division Common Stock. Filed as Exhibit 2 to the Registrant's Registration Statement on Form 8-A filed with the Commission on June 11, 1999, and incorporated herein by reference. 99.5 Management and Accounting Policies Governing the Relationship of Genzyme Divisions. Filed herewith. 3 EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329, 33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003, 333-33249, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005, 333-33251, 33-22464, 33-29440, 33-51416, 33-68186, 33-58353, 33-58355, 33-60435, 333-33291, 33-21241, 333-42371, 333-64103) and on Form S-3 (File Nos. 33-61853, 333-59513, 333-68629, 33-64901) of Genzyme Corporation of our report dated June 9, 1999 on our audits of the combined financial statements and financial statement schedule of Genzyme Surgical Products Division as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is included in the Current Report on Form 8-K of Genzyme Corporation dated June 11, 1999. /s/ PricewaterhouseCoopers LLP -------------------------------- PricewaterhouseCoopers LLP Boston, Massachusetts June 11, 1999 EX-99.1 3 COMBINED FINANCIALS OF GSP 1 GENZYME SURGICAL PRODUCTS COMBINED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE YEARS ENDED MARCH 31, ENDED DECEMBER 31, --------------------- -------------------------------- 1999 1998 1998 1997 1996 --------- -------- -------- -------- -------- (UNAUDITED) Revenues: Net product sales.................. $ 27,353 $24,227 $103,958 $100,835 $ 50,714 Operating costs and expenses: Cost of products sold.............. 15,844 14,723 72,274 59,802 32,654 Selling, general and administrative................... 15,287 13,948 57,297 54,061 28,399 Research and development........... 5,602 3,225 18,618 11,287 7,693 Amortization of intangibles........ 1,417 1,431 5,748 5,647 2,984 Purchase of in-process research and development...................... -- -- -- -- 24,170 -------- ------- -------- -------- -------- Total operating costs and expenses.................. 38,150 33,327 153,937 130,797 95,900 -------- ------- -------- -------- -------- Operating loss....................... (10,797) (9,100) (49,979) (29,962) (45,186) Other income (expenses): Equity in net income (loss) of unconsolidated affiliate......... -- (11) (6) (78) 2 Other.............................. 46 (40) 60 236 8 Investment income.................. 7 52 144 98 84 Interest expense................... (1) (19) (75) (34) (58) -------- ------- -------- -------- -------- Total other income (expenses)................ 52 (18) 123 222 36 -------- ------- -------- -------- -------- Loss before income taxes............. (10,745) (9,118) (49,856) (29,740) (45,150) Income tax benefit................... -- -- -- -- 837 -------- ------- -------- -------- -------- Net loss attributable to GZSP Stock.............................. $(10,745) $(9,118) $(49,856) $(29,740) $(44,313) ======== ======= ======== ======== ======== Per GSP pro forma basic and diluted common share: Pro forma net loss:................ $ (0.73) $ (0.62) $ (3.37) $ (2.01) $ (2.99) ======== ======= ======== ======== ======== Pro forma shares outstanding......... 14,800 14,800 14,800 14,800 14,800 ======== ======= ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. 10 2 GENZYME SURGICAL PRODUCTS COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
DECEMBER 31, MARCH 31, --------------------- 1999 1998 1997 ----------- --------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................. $ 1,199 $ -- $ 975 Accounts receivable, net............................... 16,344 15,663 13,689 Inventories............................................ 24,919 22,026 26,177 Prepaid expenses and other current assets.............. 1,347 1,932 463 --------- --------- -------- Total current assets........................... 43,809 39,621 41,304 Property, plant and equipment, net....................... 16,306 16,249 16,548 Intangibles, net......................................... 176,183 177,897 183,156 Other noncurrent assets.................................. 2,687 2,149 1,558 --------- --------- -------- Total assets................................... $ 238,985 $ 235,916 $242,566 ========= ========= ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable....................................... $ 5,285 $ 3,925 $ 2,858 Accrued expenses....................................... 5,013 4,682 4,015 Current portion of capital lease obligations........... -- -- 152 --------- --------- -------- Total current liabilities...................... 10,298 8,607 7,025 Noncurrent liabilities: Other noncurrent liabilities........................... 221 221 572 --------- --------- -------- Total liabilities.............................. 10,519 8,828 7,597 Commitments and contingencies (See Notes) Division equity: Parent company investment.............................. 377,908 365,785 323,810 Accumulated deficit.................................... (149,442) (138,697) (88,841) --------- --------- -------- Total division equity.......................... 228,466 227,088 234,969 --------- --------- -------- Total liabilities and division equity.......... $ 238,985 $ 235,916 $242,566 ========= ========= ========
The accompanying notes are an integral part of these combined financial statements. 11 3 GENZYME SURGICAL PRODUCTS COMBINED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
FOR THE THREE MONTHS FOR THE YEARS ENDED MARCH 31, ENDED DECEMBER 31, -------------------- ------------------------------- 1999 1998 1998 1997 1996 --------- -------- -------- -------- --------- (UNAUDITED) OPERATING ACTIVITIES: Net loss.................................... $(10,745) $(9,118) $(49,856) $(29,740) $ (44,313) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization............. 2,008 2,512 8,008 8,831 3,480 Provisions for bad debts and inventory.... -- 120 526 759 329 Equity in net income (loss) of unconsolidated affiliate............... -- 11 6 78 (2) Purchase of in-process research and development............................ -- -- -- -- 24,170 Other..................................... (36) 40 (60) (236) (8) Increase (decrease) in cash from working capital changes: Accounts receivable.................. (681) (494) (2,140) 3,179 (2,166) Inventories.......................... (2,893) 209 3,791 2,865 53 Prepaid expenses and other assets.... 585 (569) (1,469) 259 (63) Accounts payable and accrued expenses.......................... 1,691 1,811 1,885 (2,123) (7,712) -------- ------- -------- -------- --------- Net cash used in operating activities........................ (10,071) (5,478) (39,309) (16,128) (26,232) INVESTING ACTIVITIES: Acquisition of property, plant and equipment.............................. (660) (306) (1,959) (3,112) (162) Acquisition, net of acquired cash and assumed liabilities.................... -- -- -- -- (192,414) Other..................................... (491) 1,069 (688) (1,039) (49) -------- ------- -------- -------- --------- Net cash provided by (used in) investing activities.............. (1,151) 763 (2,647) (4,151) (192,625) FINANCING ACTIVITIES: Payments of debt and leases............... -- (45) (152) (173) (54,819) Net cash allocated from Genzyme General... 12,421 5,900 41,484 19,003 275,528 Other..................................... -- (351) (351) 242 330 -------- ------- -------- -------- --------- Net cash provided by financing activities........................ 12,421 5,504 40,981 19,072 221,039 -------- ------- -------- -------- --------- Increase (decrease) in cash and cash equivalents............................... 1,199 789 (975) (1,207) 2,182 Cash and cash equivalents at beginning of period.................................... -- 975 975 2,182 -- -------- ------- -------- -------- --------- Cash and cash equivalents at end of period.................................... $ 1,199 $ 1,764 $ -- $ 975 $ 2,182 ======== ======= ======== ======== ========= Supplemental cash flow information: Cash paid during the period for: Interest............................... $ -- $ 3 $ 9 $ 29 $ 58
The accompanying notes are an integral part of these combined financial statements. 12 4 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Surgical Products develops, manufactures and markets surgical products for three principal business lines: (i) cardiovascular surgery; (ii) general surgery; and (iii) plastic surgery. GSP is a division of Genzyme and has a separate series of common stock intended to reflect its value and track its economic performance. GSP was created from Genzyme's existing surgical products business, which has operated as a business unit of Genzyme General. GSP consists primarily of the products and assets acquired upon the acquisition of DSP in July 1996, Genzyme's portfolio of anti-adhesion products and product candidates, and Genzyme's research and development programs in gene and cell therapy for cardiovascular disease. Accordingly, DSP's results of operations are included from July 1, 1996. BASIS OF PRESENTATION The combined financial statements of GSP include the balance sheets, results of operations and cash flows of Genzyme's surgical products business which is part of Genzyme's General Division. GSP's financial statements are prepared using amounts included in the consolidated financial statements of Genzyme and its subsidiaries ("Genzyme's Consolidated Financial Statements") included in the 1998 Genzyme 10-K and the quarterly report on Form 10-Q for the fiscal quarter ended March 31, 1999. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be reasonable and consistent. The financial statements for the three months ended March 31, 1999 and 1998 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. On June 28, 1999, Genzyme will distribute approximately 14.8 million shares of GZSP Stock to the holders of GENZ Stock of record at the close of business on June 14, 1999. At the time of the distribution, $150.0 million of cash and investments will be allocated to GSP. PRINCIPLES OF COMBINATION The accompanying combined financial statements of GSP reflect the combined accounts of all of GSP's businesses. The equity method is used to account for investments in companies and joint ventures, other than joint ventures which GSP controls, in which GSP has a substantial ownership interest (20% to 50%), or in which GSP participates in policy decisions. Accordingly, GSP's share of the earnings or losses of such entities is included in computation of GSP's net loss. Investments of less than 20% are reported at fair value. All significant interdivisional items and transactions have been eliminated in combination. 13 5 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) FINANCIAL INFORMATION Genzyme will provide to holders of GZSP Stock separate financial statements, management's discussion and analysis, descriptions of business and other relevant information for GSP. Notwithstanding the allocation of assets and liabilities, including contingent liabilities, between Genzyme General, GSP, GMO and GTR, for the purposes of preparing their respective financial statements, Genzyme Corporation continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of GZSP Stock are common stockholders of Genzyme and have no specific claim against the assets attributed to GSP. Liabilities or contingencies of Genzyme General, GSP, GMO or GTR could affect the financial condition or results of operations of the other divisions. Accordingly, the GSP combined financial statements should be read in connection with Genzyme's Consolidated Financial Statements. Genzyme prepares the financial statements of GSP in accordance with generally accepted accounting principles, the management and accounting policies of Genzyme and the divisional accounting policies approved by the Genzyme Board. Except as otherwise provided in the policies set forth below, the management and accounting policies applicable to the presentation of the financial statements of GSP may be modified or rescinded at the sole discretion of the Genzyme Board without approval of the stockholders, subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders. DIVIDEND POLICY Under the terms of the Charter, dividends that may be paid to the holders of GZSP Stock will be limited to the lesser of funds of Genzyme legally available for the payment of dividends and the Available GSP Dividend Amount, as defined in the Charter. Although there is no requirement to do so, the Genzyme Board would declare and pay cash dividends on GZSP Stock, if any, based primarily on earnings, financial condition, cash flow and business requirements of Genzyme. Genzyme has never paid any cash dividends on shares of its capital stock. Genzyme currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on GZSP Stock in the foreseeable future. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Significant estimates include the collectability of accounts receivable, valuation of inventory and revenue recognition. Actual results could differ from those estimates. 14 6 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) FINANCIAL INSTRUMENTS Financial instruments that potentially subject GSP to significant concentrations of credit risk consist principally of accounts receivable. GSP generally invests its cash investments in investment-grade securities to mitigate risk. UNCERTAINTIES GSP is subject to risks common to companies in the medical device and biotechnology industries, including (i) GSP's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and adequate patent and other proprietary rights protection of its products, (ii) the content and timing of decisions made by the FDA and other agencies regarding the applications and indications for which GSP's products may be approved, (iii) the ability of GSP to manufacture adequate supplies of its gene and cell therapy and biomaterials products for development and commercialization activities, (iv) the accuracy of GSP's estimates of the size and characteristics of markets addressed and to be addressed by GSP's products, (v) market acceptance of GSP's products, (vi) GSP's ability to obtain reimbursement for its products from third-party payers, where appropriate, (vii) the accuracy of GSP's information concerning the products and resources of competitors and potential competitors, and (viii) the risk that products and technology developed by competitors will render GSP's products and technology obsolete. CASH AND CASH EQUIVALENTS Cash and cash equivalents, consisting principally of money market funds purchased with initial maturities of three months or less, are valued at cost plus accrued interest, which approximates market. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. On disposal, the related cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. Provision for depreciation is generally computed using the straight-line method over the estimated useful lives of the assets (three to ten years for plant and equipment, five to seven years for furniture and fixtures, and 20 to 40 years for buildings). The remaining life and recoverability of equipment is evaluated periodically based on the appropriate facts and circumstances. Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. 15 7 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) INTANGIBLES Intangible assets consist of goodwill, covenants not to compete, customer lists, patents, trademarks, trade names and technology rights and are being amortized using the straight-line method over useful lives of 6 to 40 years. Management's policy regarding intangible assets is to evaluate the recoverability of its intangible assets when the facts and circumstances suggest that these assets may be impaired. Evaluations consider factors including operating results, business plans, economic projections, strategic plans and market emphasis. Evaluations also compare expected cumulative, undiscounted operating incomes or cash flows with net book values of related intangible assets. Unrealizable intangible asset values are charged to operations if these evaluations indicate an impairment in value, which is measured as the amount by which the carrying amount of the asset exceeds the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved. TRANSLATION OF FOREIGN CURRENCIES The financial statements of Genzyme's foreign subsidiaries are translated from local currency into U.S. dollars using the current exchange rate at the balance sheet date for assets and liabilities and the average exchange rate prevailing during the period for revenues and expenses. The local currency for all of Genzyme's foreign subsidiaries is considered to be the functional currency for each entity and, accordingly, translation adjustments for these subsidiaries are included in division equity. REVENUE RECOGNITION Revenues from product sales are recognized when goods are shipped to third party customers and are net of third party contractual allowances and rebates, as applicable. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract and as costs related to the contracts are incurred. RESEARCH AND DEVELOPMENT Research and development costs are expensed in the period incurred. Costs of purchased technology which management believes has not demonstrated technological feasibility and for which there is no alternative future use are charged to expense in the period of purchase. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities (see Note B., "Policies Governing the Relationship of Genzyme's Divisions" below.) 16 8 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NET INCOME (LOSS) PER SHARE Net income (loss) per share attributable to Genzyme General, GSP, GMO and GTR, gives effect to the management and accounting policies adopted by the Genzyme Board and is reported in lieu of consolidated per share data. Genzyme computes net income (loss) per share for each division by dividing the earnings attributable to each series of stock by the weighted average number of shares of that stock outstanding during the period, for basic earnings per share, and by the weighted average shares of that stock, plus other potentially dilutive securities outstanding during the applicable period for diluted earnings per share. Earnings (loss) attributable to GENZ Stock, GZSP Stock, GZMO Stock and GZTR Stock equals the respective division's net income or loss for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from the other divisions pursuant to the management and accounting policies adopted by the Genzyme Board. Pro forma net loss per share data is presented for GZSP Stock for all periods as there are no shares of GZSP Stock outstanding prior to June 28, 1999. Historical loss per share data is omitted from the statement of operations as GZSP Stock was not part of the capital structure of Genzyme for the periods presented. Genzyme will distribute to the holders of GENZ Stock of record at the close of business on June 14, 1999, approximately 14.8 million shares of GZSP Stock. The following table sets forth the computation of pro forma basic and diluted earnings per share for GSP (in thousands, except per share amounts):
MARCH 31, DECEMBER 31, ------------------- -------------------------------- 1999 1998 1998 1997 1996 -------- ------- -------- -------- -------- (UNAUDITED) Net loss.................... $(10,745) $(9,118) $(49,856) $(29,740) $(44,313) ======== ======= ======== ======== ======== Pro forma basic and diluted shares outstanding........ 14,800 14,800 14,800 14,800 14,800 Pro forma net loss per common share -- basic and diluted................... $ (0.73) $ (0.62) $ (3.37) $ (2.01) $ (2.99) ======== ======= ======== ======== ========
Additionally, stock options and shares issuable upon conversion of Genzyme's 5 1/4% convertible subordinated notes due June 2005 were not included in the computation of pro forma diluted earnings per share because they would have an anti-dilutive effect due to the net loss for those periods. COMPREHENSIVE INCOME GSP has adopted SFAS 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a set of financial statements. Components of comprehensive income are net income and all other non-owner changes in equity such as the change in the cumulative translation adjustment. GSP presents such information in its statement of operations. 17 9 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) ACCOUNTING FOR STOCK-BASED COMPENSATION GSP has elected the disclosure-only alternative permitted under SFAS 123, "Accounting for Stock-Based Compensation." For the years ended December 31, 1998, 1997 and 1996 no disclosure is presented for GSP as there were no GZSP Stock options granted under any of Genzyme's stock plans prior to June 28, 1999. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Genzyme is evaluating SFAS 133 to determine its impact on its consolidated financial statements. SEGMENT INFORMATION GSP has adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of GSP's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers (see Note P., "Segment Reporting" below). NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS Genzyme allocates certain corporate costs for general and administrative, research and development and cash management services to the divisions. Genzyme files a consolidated tax return and allocates income taxes to the divisions in accordance with the policies described below. With the exception of the policy regarding Interdivisional Asset Transfers, policies may be further modified or rescinded by action of the Genzyme Board, or the Genzyme Board may adopt additional policies, without approval of the stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme stockholders. In addition, generally accepted accounting principles require that any change in policy be preferable (in accordance with such principles) to the previous policy. REVENUE ALLOCATION Revenues from the sale or licensing of a division's products and services to entities external to Genzyme are credited to that division. Products and services normally sold by a division to entities external to Genzyme that are used by other divisions within Genzyme 18 10 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) shall be recorded as interdivisional revenues and interdivisional purchases subject to the policy regarding other interdivisional transactions. EXPENSE ALLOCATION Direct expenses are charged to the division for whose benefit the direct expenses have been incurred. Expenses other than direct expenses are subject to the policy regarding other interdivisional transactions. ASSET ALLOCATION Assets that are exclusively dedicated to the production of goods and services of a division shall be allocated to that division. Production assets that are utilized by more than one division are subject to the policy regarding other interdivisional transactions. TAX ALLOCATIONS GSP is included in the consolidated U.S. Federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions using the asset and liability method of accounting for income taxes as if the divisions were separate taxpayers. Accordingly, the realizability of deferred tax assets is assessed at the division level. The sum of the amounts calculated for individual divisions of Genzyme may not equal the consolidated amount under this approach. Income taxes are allocated to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to such division under generally accepted accounting principles as if each division were a separate taxpayer; provided, however, that as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other divisions in proportion to their taxable income without any compensating payment or allocation. ACQUISITIONS OF PROGRAMS, PRODUCTS OR ASSETS Upon the acquisition by Genzyme from a third party of any programs, products or assets (whether by acquisitions of assets or stock, merger, consolidation or otherwise), the aggregate cost of the acquisition and the programs, products or assets acquired shall be allocated among the divisions of Genzyme. In the case of material acquisitions, such allocation shall be made in a manner determined by the Genzyme Board to be fair and reasonable to each division and to the holders of the common stock representing each division, taking into account such matters as the Genzyme Board and its financial advisors, if any, deem relevant. Any such determination will be final and binding on the holders of common stock. 19 11 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) DISPOSITION OF PROGRAMS, PRODUCTS OR ASSETS Upon the sale, transfer, assignment or other disposition by Genzyme of any program, product or asset not consisting of all or substantially all of the assets of the division, all proceeds from such disposition shall be allocated to the division to which the program, product or asset had been allocated among such divisions based on their respective interests in such program, product or asset. Such allocations shall be made in a manner determined by the Genzyme Board to be fair and reasonable to such divisions and to holders of the common stock representing such divisions, taking into account such matters as the Genzyme Board and its financial advisors, if any, deem relevant. Any such determination by the Genzyme Board will be final and binding on the holders of common stock. INTERDIVISIONAL ASSET TRANSFERS The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations shall be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of such program, the phase of clinical development of such program, the expenses associated with realizing any income from such program, the likelihood and timing of any such realization and other matters that the Genzyme Board and its financial advisors, if any, deem relevant. The consideration for such reallocation may be paid by one division to another in cash or other consideration with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from Genzyme General to GSP, GMO or GTR, the Genzyme Board may elect to account for such reallocation as an increase in the designated shares representing the division to which such assets are reallocated in accordance with the provisions of Genzyme's articles of organization. The foregoing policies regarding transfers of assets between divisions will not be changed by the Genzyme Board without the approval of the holders of GZSP Stock, GZMO Stock and GZTR Stock, each voting as a separate class; provided, however, that if a policy change affects one or more, but not all of, Genzyme Surgical Products, Genzyme Molecular Oncology and/or Genzyme Tissue Repair, only holders of shares representing the affected division(s) will be entitled to vote on such matter. OTHER INTERDIVISIONAL TRANSACTIONS This policy shall cover interdivisional transactions other than asset transfers, which shall be subject to the policy regarding Interdivisional Asset Transfers. From time to time, a division may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. Such transactions may include agreements by one division to provide products and services for use by another division and joint venture or other collaborative arrangements involving more than one 20 12 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) division to develop new products and services jointly and with third parties. Such transactions are subject to the following conditions: (a) Research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for the benefit of another division will be charged to the division for which work is performed on a cost basis. Direct costs shall be allocated in a manner described above under "Expense Allocation" and such division performing the work will not recognize revenue as a result of performing such work. Direct labor and indirect costs shall be allocated in a reasonable and consistent manner based on the utilization by the division of the services to which such costs relate. (b) Manufacturing of goods and performance of services by one division exclusively for the benefit of another division and not for external sale shall be charged to the division for which the work is performed on a cost basis. Direct labor and indirect costs shall be allocated in a reasonable and consistent manner based on the receipt of benefit by the division of the goods and services to which such costs relate. The division performing such work will not recognize revenue as a result of performing such work. (c) Other than research and development (including clinical and regulatory support), manufacturing, distribution, sales, marketing, general and administrative services (including allocated space), interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated at arm's length with unaffiliated third parties. The division performing such work will not recognize revenue as a result of performing such work. (d) Any interdivisional transaction (i) to be performed on terms and conditions that deviate from the policies set forth in subparagraphs (a), (b) or (c) above and (ii) that is material to one or more of the participating divisions will require approval by the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to the holders of the common stock representing each such division. (e) Loans may be made from time to time between divisions. Any such loan of $1 million or less will mature within 18 months and interest will accrue at the best borrowing rate available to Genzyme for a loan of like type and duration. Amounts borrowed in excess of $1 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. (f) All material interdivisional transactions shall be reduced to service contracts and signed by an authorized member of the management team of affected divisions. 21 13 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) ACCESS TO TECHNOLOGY AND KNOW-HOW Each division of Genzyme shall have unrestricted access to all technology and know-how of the Company that may be made useful to such division's business, subject to any obligations or limitations applicable to Genzyme and its divisions. NOTE C. OTHER CHARGES In the third quarter of 1998, GSP recorded $12.1 million of charges associated with its review of its requirements to support the Sepra Products. As a result, in the third quarter of 1998, GSP recorded a $10.4 million charge to cost of products sold to write-down Sepra Products inventory amounts to net realizable value. In addition, during the third quarter of 1998, GSP wrote-off certain costs related to equipment used to manufacture the Sepra Products totaling $1.7 million. In the fourth quarter of 1997, GSP recorded charges of $5.5 million to cost of products sold and $1.9 million to SG&A expense primarily related to the manufacturing and selling of Sepracoat(TM) Coating Solution, which was discontinued for the U.S. market after an advisory panel of the FDA recommended against granting market approval of this product in 1997. This product is sold outside the United States. NOTE D. ACQUISITION The Company allocates all acquisitions to either Genzyme General, GSP, GMO or GTR depending on the nature of the acquired business. On July 1, 1996, Genzyme acquired DSP and allocated it to GSP. The purchase price of $252.2 million consisted of cash of approximately $192.0 million, acquisition costs of approximately $4.6 million and debt obligations of DSP of approximately $55.6 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net tangible assets acquired include an allocation of approximately $130.8 million to goodwill, $45.9 million to tradenames and $15.3 million to patents. The goodwill and tradenames are amortized over 40 years and patents are amortized over their useful lives of 6 to 17 years. The purchase price was allocated to the assets and liabilities of DSP based on their estimated respective fair values on the date of acquisition. Completed technology that had reached technological feasibility was valued using a risk adjusted cash flow model under which future cash flows were discounted, taking into account risks related to existing and future markets and assessments of the life expectancy of the completed technology. In-process technology that had not reached technological feasibility and that has no alternative future use was valued using the same method. Expected future cash flows associated with in-process technology were discounted considering risks and uncertainties related to the viability of and to the potential changes in future target markets and to the completion of the products expected to be ultimately marketed by Genzyme. The amount allocated to in-process technology of $24.2 million was charged to operations in July 1996 upon completion of the acquisition. 22 14 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments create various degrees and types of risk to Genzyme, including credit, interest rate and liquidity risk. In the normal course of business, Genzyme enters into interest rate swap contracts to hedge interest rate risk related to its variable rate notes payable. Interest rate swaps generally involve the exchange of fixed and variable interest payments between two parties based on a common notional principal amount and maturity date. The notional amount of interest rate contracts is the amount upon which interest and other payments under the contract are based. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of counterparties to meet the terms of the contract. For the periods presented, no debt or interest rate swaps have been allocated to GSP. NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS GSP's trade receivables primarily represent amounts due from healthcare service providers. GSP performs ongoing credit evaluations of its customers and generally does not require collateral. Accounts receivable are stated at fair value after reflecting the allowance for doubtful accounts of $0.4 million and $0.5 million at December 31, 1998 and 1997, respectively. Net intangible assets for GSP as of December 31, 1998 and 1997 includes $122.4 million and $125.6 million, respectively, of goodwill due to the DSP acquisition. As of December 31, 1998 and 1997, accumulated amortization of intangible assets was $13.9 million and $8.6 million, respectively. NOTE G. INVENTORIES Inventories consist of the following (amounts in thousands):
DECEMBER 31, MARCH 31, ------------------ 1999 1998 1997 ----------- ------- ------- (UNAUDITED) Raw materials....................... $12,308 $11,567 $ 9,024 Work-in-process..................... 2,017 1,734 1,394 Finished products................... 10,594 8,725 15,759 ------- ------- ------- Total..................... $24,919 $22,026 $26,177 ======= ======= =======
23 15 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NOTE H. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 includes the following (amounts in thousands):
1998 1997 ------- ------- Plant and equipment............................ $ 8,934 $ 8,419 Land and buildings............................. 8,261 8,170 Leasehold improvements......................... 434 387 Furniture and fixtures......................... 3,944 3,021 Construction-in-progress....................... 614 231 ------- ------- 22,187 20,228 Less accumulated depreciation................ (5,938) (3,680) ------- ------- Property, plant and equipment, net........... $16,249 $16,548 ======= =======
Depreciation expense was $2.5 million, $2.7 million and $1.3 million in 1998, 1997 and 1996, respectively. NOTE I. ACCRUED EXPENSES Accrued expenses at December 31 includes the following (amounts in thousands):
1998 1997 ------ ------ Compensation................................... $1,555 $1,963 Professional fees.............................. 291 307 Royalties...................................... 523 414 Other.......................................... 2,313 1,331 ------ ------ $4,682 $4,015 ====== ======
NOTE J. LONG-TERM DEBT AND LEASES Although the Company retains responsibility for the repayment of all long-term debt obligations, such debt is allocated to either Genzyme General, GSP, GMO or GTR for reporting purposes based on the intended use of the funds borrowed under each instrument. REVOLVING CREDIT FACILITY Genzyme has a $225 million revolving credit facility with a syndicate of commercial banks. Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and conditions defined in the credit agreement. Amounts drawn under this facility may be allocated to Genzyme General, GSP, GMO or GTR. As of December 31, 1998 and March 31, 1999, Genzyme had $100.0 million of debt outstanding under the revolving credit facility, $82.0 million of which was allocated to Genzyme General and $18.0 million of which was allocated to GTR. 24 16 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) The notes have certain covenants which require Genzyme to, among other things, maintain certain levels of earnings and liquidity ratios. If Genzyme defaults on the covenants, the revolving credit facility is payable on demand. The stock of Genzyme Securities Corporation, a Massachusetts securities corporation, is pledged as collateral for this facility. As of December 31, 1998, the interest rate on amounts outstanding under the revolving credit facility was approximately 5.75%. Genzyme pays a commitment fee ranging from 0.15% to 0.375% on the unused portion of the revolving credit facility. OPERATING LEASES Total rent expense under operating leases was $0.2 million, $0.2 million and $0.1 million in 1998, 1997 and 1996, respectively. GSP leases facilities and personal property under certain operating leases in excess of one year. Future minimum payments due under operating leases (amounts in thousands):
OPERATING LEASES ---------------- 1999........................................ $ 234 2000........................................ 241 2001........................................ 249 2002........................................ 256 2003........................................ 264 Thereafter.................................. 3,255 ------ Total minimum payments............ $4,499 ======
NOTE K. DIVISION EQUITY The following presents the division equity of GSP for the periods presented (amounts in thousands):
DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Balance at beginning of period.................... $234,969 $239,040 $ 175 Net loss.......................................... (49,856) (29,740) (44,313) Allocation from Genzyme General................... 41,975 25,669 283,178 -------- -------- -------- Balance at end of period.......................... $227,088 $234,969 $239,040 ======== ======== ========
There are 60,000,000 shares of GZSP Stock authorized as of June 1999. Of the authorized shares, 16,000,000 GZSP Designated Shares will be created. On June 28, 1999, Genzyme will issue approximately 14,800,000 shares of GZSP Stock to Genzyme General stockholders of record as of the close of business on June 14, 1999 in a dividend distribution of approximately 0.17923 share of GZSP Stock for each share of GENZ Stock owned. Cash in lieu of fractional shares will be paid at $25.00 per share. 25 17 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) PREFERRED STOCK Shares of preferred stock may be issued from time to time in one or more series. The Genzyme Board may determine, in whole or in part, the preferences, voting powers, qualifications, and special or relative rights or privileges of any such series before the issuance of any such shares of that series. The Genzyme Board shall determine the number of shares constituting each series of preferred stock and each series shall have a distinguishing designation. GZSP DESIGNATED SHARES Pursuant to the Charter, GZSP Designated Shares are authorized shares of GZSP Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GSP. GZSP Designated Shares are not eligible to receive dividends and cannot be voted by Genzyme. GZSP Designated Shares are created in certain circumstances when cash or other assets are transferred from Genzyme General to GSP. The number of GZSP Designated Shares will be decreased by: the number of shares of GZSP Stock issued by Genzyme, the proceeds of which are allocated to Genzyme General; the number of shares of GZSP Stock issued as a dividend to holders of GENZ Stock; and the number of shares of GZSP Stock issued upon the conversion of convertible securities, the proceeds of which are attributed to Genzyme General. Approximately 1,131,000 GZSP Designated Shares will be reserved for issuance upon conversion of Genzyme's 5 1/4% convertible subordinated notes due June 2005. In addition, the number of GZSP Designated Shares can be increased as a result of certain interdivision transactions. If, as of June 30 of each year starting June 30, 2000, the number of GZSP Designated Shares on such date (not including those reserved for issuance with respect to Genzyme General convertible securities as a result of anti-dilution adjustments required by the terms of such instruments by the Genzyme Board) exceeds 10% of the number of shares of GZSP Stock then issued and outstanding, then substantially all GZSP Designated Shares will be distributed to holders of record of GENZ Stock, subject to reservation of a number of such shares equal to the sum of (a) the number of GZSP Designated Shares reserved for issuance upon the exercise or conversion of Genzyme General convertible securities and (b) the number of GZSP Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to Genzyme General. DIRECTORS' DEFERRED COMPENSATION PLAN Genzyme's Directors' Deferred Compensation Plan allows each member of the Genzyme Board who is not also an officer or employee of Genzyme to defer receipt of all or a portion of the cash compensation payable to him or her as a director of Genzyme and receive either cash or stock in the future. Compensation may be deferred until the termination of services as a director or, subject to certain restrictions, such other date as may be specified by the director. All of the current directors of Genzyme, other than those 26 18 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) directors who are also officers or employees of Genzyme, are eligible to participate in the plan and as of December 31, 1998, one of the directors has elected to participate in the plan. Genzyme has reserved 50,000 shares of GENZ Stock, 50,000 shares of GZSP Stock, 50,000 shares of GZMO Stock and 100,000 shares of GZTR Stock to cover distributions of shares credited to stock accounts under the Directors' Deferred Compensation Plan (subject in each case to adjustments for stock splits, stock dividends, and certain transactions affecting Genzyme's capital stock). As of March 31, 1999 and December 31, 1998, no shares of GENZ Stock, GZSP Stock, GZMO Stock and GZTR Stock credited to stock accounts under the Directors' Deferred Compensation Plan have been distributed to participants. SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS' STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN At March 31, 1999, approximately 14,915,000 shares of GENZ Stock, 1,100,000 shares of GZSP Stock, 3,637,000 shares of GZMO Stock and 5,699,000 shares of GZTR Stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997 Equity Plan, as amended, 1998 Director Stock Option Plan, as amended, 1999 Employee Stock Purchase Plan, and upon the exercise of outstanding warrants. STOCK OPTIONS Pursuant to the 1990 Equity Incentive Plan, as amended, and the 1997 Equity Plan, options may be granted to purchase an aggregate of 23,800,000 shares of GENZ Stock, 500,000 shares of GZSP Stock, 3,500,000 shares of GZMO Stock and 5,300,000 shares of GZTR Stock. The plans allow the granting of stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, Genzyme has a 1998 Director Stock Option Plan pursuant to which nonstatutory stock options up to a maximum of 340,000 shares of GENZ Stock, 100,000 shares of GZSP Stock, 140,000 shares of GZMO Stock and 200,000 shares of GZTR Stock are automatically granted at fair market value to members of the Genzyme Board upon their election or reelection as directors. For each year of a director's term of office, he or she receives (a) an option to purchase 4,000 shares of each of GENZ Stock and (b) options to purchase shares of GZSP Stock, GZMO Stock and GZTR Stock. All options expire ten years after the initial grant date and vest over four years. There have been no GZSP stock options granted under these plans. STOCK RIGHTS Pursuant to the Company's Restated Rights Agreement, each outstanding share of GZSP Stock also represents one preferred stock purchase right (a "GZSP Stock Right"). Each GZSP Stock Right, when it become exercisable, will entitle the registered holder to purchase from Genzyme one one-hundredth of a share of Series D Junior Participating Preferred Stock at a purchase price of $150.00, subject to adjustment. 27 19 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NOTE L. RESEARCH AND DEVELOPMENT AGREEMENTS The Company allocates all research and development agreements with unconsolidated affiliates to Genzyme General GSP, GMO or GTR based on the business to which the research relates. Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme and which has been allocated to GSP, is the General Partner of GDP, a Delaware limited partnership which was formed in September 1989 to develop, produce and derive income from the sale of the Sepra Products. The Company has an option (the "GDP Purchase Option") to purchase all of the outstanding partnership interests in GDP for a payment of approximately $26.0 million in cash, GENZ Stock or a combination thereof determined at Genzyme's sole discretion, plus future royalty payments. The GDP Purchase Option is exercisable during the 90-day period commencing on August 31, 2000, but such commencement date will be accelerated to the last day of the first month in which GDP has received distributions from GVII (described below) in an aggregate amount of at least $5.5 million. Genzyme elected without obligation to fund the research and development activities of GDP using Genzyme General cash and spent approximately $8.4 million, $7.3 million and $6.0 million on GDP's programs in 1998, 1997 and 1996, respectively. The Company has agreed to fund GDP's research and development programs and general and administrative expenses through 1999 but, as General Partner, believes that additional funds will be required to complete the development, clinical testing and commercialization of GDP's products. The Company and GDP formed GVII in September 1989 for the purpose of manufacturing and marketing the Sepra Products in the United States and Canada for use in human clinical trials or human surgical procedures. GDP has contributed its technology and $1.7 million to GVII and GSP has contributed its agreement to manufacture and market the Sepra Products, to make non-interest bearing loans to GVII in the amount of any working capital deficiency, and to make capital contributions to the extent deemed necessary by the two venturers in connection with the business of GVII. GVII began to engage in active business after receipt of FDA marketing approval for Seprafilm(R) Bioresobable Membrane in August 1996. For the years ended December 31, 1998, 1997 and 1996, GVII incurred net losses of $4.8 million, $2.3 million and $2.5 million, respectively, primarily attributable to costs associated with the introduction of the Sepra Products to the healthcare marketplace. The results of operations and financial position of GVII are consolidated into GSP's financial statements. NOTE M. COMMITMENTS AND CONTINGENCIES From time to time Genzyme has been subject to legal proceedings and claims arising in connection with its business. At March 31, 1999 and December 31, 1998, there were no asserted claims against Genzyme which, in the opinion of management, if adversely decided would have a material adverse effect on GSP's financial position and results of operations. 28 20 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NOTE N. INCOME TAXES The following summarizes GSP's benefit from income taxes (amounts in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Federal income taxes: Current................................. $ -- $ -- $ -- Deferred................................ -- -- (751) State income taxes: Current................................. -- -- -- Deferred................................ -- -- (86) -------- -------- -------- Total income tax benefit.................. $ -- $ -- $ (837) ======== ======== ========
The differences between the effective tax rates and the U.S. federal statutory tax rates were as follows:
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- U.S. federal income tax statutory rate.... (35.0%) (35.0%) (35.0%) State income taxes, net of federal benefit................................. (3.1%) (3.0%) (5.2%) Nondeductible amortization................ 2.3% 4.0% 2.9% Deductions subject to deferred tax valuation allowance..................... 35.8% 34.0% 35.4% -------- -------- -------- Effective tax rate........................ 0.0% 0.0% (1.9%) ======== ======== ========
At December 31 the components of net deferred tax assets were as follows (amounts in thousands):
1998 1997 -------- -------- Deferred tax assets: Net operating loss carryforwards..................... $ 48,701 $ 29,626 Unrealized capital losses............................ 1,317 1,317 Reserves and other................................... 4,908 3,755 -------- -------- Gross deferred tax asset............................. 54,926 34,698 Valuation allowance.................................. (45,896) (26,324) -------- -------- Net deferred tax assets.............................. $ 9,030 $ 8,374 ======== ======== Deferred tax liabilities: Intangible amortization.............................. $ (6,712) $ (6,012) Depreciable assets................................... (2,318) (2,362) -------- -------- Net deferred tax liabilities......................... $ (9,030) $ (8,374) ======== ========
Due to uncertainty surrounding the realization of certain favorable tax attributes, GSP placed a valuation allowance of $45.9 million and $26.3 million for December 31, 1998 and 1997, respectively, against otherwise recognizable deferred tax assets. At the time GSP 29 21 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) recognizes these tax assets in accordance with generally accepted accounting principles, the resulting deferred tax benefits will be reflected in the tax provision for GSP. However, the benefit of these deferred tax assets has been previously allocated to Genzyme General in accordance with the management and accounting policies, and has been reflected as a reduction of GSP net income to determine net income attributable to GZSP Stock. NOTE O. BENEFIT PLANS Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, covering substantially all employees of the Company with the exception of employees of GSP who have a separate retirement savings plan. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by the Company. GSP contributed $0.8 million, $0.8 million and $0.6 million to the 401(k) Plan in 1998, 1997 and 1996, respectively. The Company has defined-benefit pension plans covering substantially all the employees of GSP and certain of Genzyme's foreign subsidiaries. There was no defined-benefit pension expense recorded for GSP for the years ended December 31, 1998, 1997 and 1996, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans are not presented because the defined-benefit pension plans are not material. NOTE P. SEGMENT REPORTING GSP has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of GSP's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. GSP has two reportable segments: the Cardiovascular Surgery product line, which includes chest drainage systems, instruments and closures which are used primarily in coronary artery bypass, valve replacement and other cardiothoracic procedures; and the General Surgery product line, which is focused on surgical instruments and Seprafilm(R) Bioresorbable Membrane which is used to prevent adhesions in abdominal or pelvic surgery. 30 22 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) Information concerning the operations in these reportable segments is as follows (dollars in thousands):
FOR THE THREE MONTHS FOR THE YEARS ENDED ENDED MARCH 31, DECEMBER 31, -------------------- ------------------------------- 1999 1998 1998 1997 1996 -------- -------- -------- -------- ------- (UNAUDITED) REVENUES: Cardiovascular Surgery........ $19,387 $17,892 $ 74,544 $ 74,727 $39,556 General Surgery............... 5,897 4,713 20,249 19,625 7,073 Other......................... 2,213 1,880 10,045 7,905 4,477 Eliminations/Adjustments...... (144) (258) (880) (1,422) (392) ------- ------- -------- -------- ------- Total......................... $27,353 $24,227 $103,958 $100,835 $50,714 ======= ======= ======== ======== ======= GROSS PROFIT Cardiovascular Surgery........ $ 8,570 $ 7,403 $ 29,596 $ 33,494 $14,189 General Surgery............... 1,878 877 (490) 4,772 1,678 Other......................... 1,061 1,224 2,578 2,767 2,193 ------- ------- -------- -------- ------- Total......................... $11,509 $ 9,504 $ 31,684 $ 41,033 $18,060 ======= ======= ======== ======== =======
The amounts in other consist primarily of amounts related to the Plastic Surgery product line. There are no transactions between reportable segments. The amounts in revenues -- eliminations/adjustments consist of discounts given by GSP to customers. These discounts are not reported by product line. GSP does not break-out assets by product line and therefore they are not disclosed. In 1996, GSP's revenue includes DSP from July 1, 1996 (date of acquisition of DSP) to December 31, 1996. In 1998, gross profit for General Surgery includes a $10.4 million charge to write-down Sepra Products inventory amounts to net realizable value. In 1997, gross profit for Cardiovascular and General Surgery include charges of $0.4 million and $5.1 million, respectively, related primarily to the manufacturing of Sepracoat(TM) Coating Solution, which was discontinued for the U.S. market after an advisory panel of the FDA recommended against granting market approval of this product in 1997. This product is sold outside of the United States. 31 23 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) Certain information by geographic area follows (dollars in thousands):
REVENUES -------- 1998 United States.................................... $ 74,072 Germany.......................................... 17,400 Other............................................ 12,486 -------- Total....................................... $103,958 ======== 1997 United States.................................... $ 71,898 Germany.......................................... 16,839 Other............................................ 12,098 -------- Total....................................... $100,835 ======== 1996 United States.................................... $ 37,741 Germany.......................................... 9,160 Other............................................ 3,813 -------- Total....................................... $ 50,714 ========
All long-lived assets are in the United States. GSP markets its products directly to physicians and hospitals. GSP also markets its products through distributors and had the following sales as a percentage of total revenue to two unaffiliated distributors:
1998 1997 1996 ---- ---- ---- Distributor A......................... 18% 20% 23% Distributor B......................... 8% 11% 12%
32 24 GENZYME SURGICAL PRODUCTS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 IS UNAUDITED) NOTE Q. QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (amounts in thousands, except per share data) for the years ended December 31, 1998 and 1997 are displayed in the following table.
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Net sales................................. $24,227 $27,201 $24,904 $27,626 Gross profit (loss)..................... 9,504 11,942 (919) 11,157 Net loss (1,2).......................... (9,118) (9,886) (21,519) (9,333) Pro forma loss per share: Pro forma basic and diluted.......... $ (0.62) $ (0.67) $ (1.45) $ (0.63) 1997 Net sales................................. $26,916 $26,735 $23,163 $24,021 Gross profit............................ 13,986 13,171 10,069 3,807 Net loss (1,2).......................... (1,282) (2,794) (7,339) (18,325) Pro forma loss per share: Pro forma basic and diluted.......... $ (0.09) $ (0.19) $ (0.50) $ (1.24)
- --------------- (1) Includes pre-tax charges in the third quarter of 1998 of $12.1 million resulting from certain other charges (see Note C., "Other Charges" above). (2) Includes pre-tax charges in the fourth quarter of 1997 of $7.4 million related to certain other charges recorded in December 1997 (see Note C., "Other Charges" above). 33 25 GENZYME SURGICAL PRODUCTS SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------- Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Period Expenses Accounts Deductions Period - --------------------------------------------------------------------------------------------------------------- Year-ended December 31, 1998: Allowance for doubtful accounts $ 476,000 $ 166,000 $ 0 $ 277,000 $ 365,000 Inventory reserve $ 3,700,000 $10,758,000 $ 0 $ 2,331,000 $12,127,000 Year-ended December 31, 1997: Allowance for doubtful accounts $ 917,000 $ 275,000 $ 0 $ 716,000 $ 476,000 Inventory reserve $ 3,854,000 $ 484,000 $ 0 $ 638,000 $ 3,700,000 Year-ended December 31, 1996: Allowance for doubtful accounts $ 0 $ 0 $ 1,026,000(1) $ 109,000 $ 917,000 Inventory reserve $ 0 $ 329,000 $ 3,525,000(1) $ 0 $ 3,854,000 (1) Reserve acquired in acquisition.
34 26 GENZYME SURGICAL PRODUCTS REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of Genzyme Surgical Products (as described in Note A) at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As more fully described in Note A to these financial statements, Genzyme Surgical Products is a division of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Surgical Products should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ PRICEWATERHOUSECOOPERS LLP -------------------------------------- PricewaterhouseCoopers LLP Boston, Massachusetts June 9, 1999 35 EX-99.2 4 UNAUDITED COMBINED PROFORMA FINANCIALS 1 Exhibit 99.2 UNAUDITED, COMBINED PRO FORMA FINANCIAL STATEMENTS OF GENZYME GENERAL INTRODUCTION: On June 28, 1999, Genzyme General Division ("Genzyme General") will transfer $150.0 million of cash and investments (the "Transfer") to Genzyme Surgical Products Division ("GSP") and Genzyme will distribute (the "Distribution") approximately 14.8 million shares of Genzyme Surgical Products Division Common Stock ("GZSP Stock") to the holders of Genzyme General Division Common Stock ("GENZ Stock"). These unaudited, combined pro forma financial statements and the related notes are presented to give effect to the Transfer and the Distribution (as described in Note 1). Pro forma statements of operations have been presented for Genzyme General assuming that the Distribution occurred as of January 1, 1998. A pro forma balance sheet has been presented for Genzyme General assuming that the Transfer and the Distribution occurred as of March 31, 1999. Pro forma financial statements for Genzyme, Genzyme Molecular Oncology Division ("GMO") and Genzyme Tissue Repair Division ("GTR") have not been included because the Transfer will have no effect on the historical financial condition or results of operations of either Genzyme, GTR or GMO. 2 GENZYME GENERAL UNAUDITED, COMBINED PRO FORMA STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA FOR THE FOR THE QUARTER ENDED PRO FORMA QUARTER ENDED 3/31/99 ADJUSTMENTS 2(A) 3/31/99 ------------- ---------------- ------------- Total revenues........................................ $178,119 $(27,353) $150,766 Operating costs and expenses: Cost of products and services sold.................. 52,566 (15,844) 36,722 Selling, general and administrative................. 51,012 (15,287) 35,725 Research and development............................ 26,667 (5,602) 21,065 Amortization of intangibles......................... 3,503 (1,417) 2,086 -------- -------- -------- Total operating costs and expenses.......... 133,748 (38,150) 95,598 -------- -------- -------- Operating income...................................... 44,371 10,797 55,168 Other income (expenses): Equity in net loss of unconsolidated affiliates..... (7,710) (46) (7,756) Gain on affiliate sale of stock..................... 606 -- 606 Minority interest................................... 866 -- 866 Gain on sale of investment in equity securities..... 1,963 -- 1,963 Investment income................................... 7,930 (7) 7,923 Interest expense.................................... (5,050) 1 (5,049) -------- -------- -------- Total other income (expenses)............... (1,395) (52) (1,447) -------- -------- -------- Income before income taxes............................ 42,976 10,745 53,721 Provision for income taxes............................ (16,391) (3,825) (20,216) -------- -------- -------- Net income............................................ 26,585 6,920 33,505 Tax benefit allocated from Genzyme Tissue Repair...... 3,962 -- 3,962 Tax benefit allocated from Genzyme Molecular Oncology............................................ 1,934 -- 1,934 Tax benefit allocated from Genzyme Surgical Products............................................ -- 3,825 3,825 -------- -------- -------- Net income attributable to GENZ Stock................. $ 32,481 $ 10,745 $ 43,226 ======== ======== ======== Per Genzyme General common share: Net income per Genzyme General common share -- basic:..................................... $ 0.40 $ 0.13 $ 0.53 ======== ======== ======== Weighted average shares outstanding................... 81,958 -- 81,958 ======== ======== ======== Net income per Genzyme General common and common equivalent share -- diluted:........................ $ 0.38 $ 0.11 $ 0.49 ======== ======== ======== Adjusted weighted average shares outstanding.......... 85,632 6,959 92,591 ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined pro forma financial statements. 2 3 GENZYME GENERAL UNAUDITED, COMBINED PRO FORMA STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA HISTORICAL FOR THE FOR THE YEAR YEAR ENDED PRO FORMA ENDED 12/31/98 ADJUSTMENTS 2(A) 12/31/98 ---------- ---------------- --------- Total revenues............................................ $673,277 $(103,958) $569,319 Operating costs and expenses: Cost of products and services sold...................... 245,316 (72,274) 173,042 Selling, general and administrative..................... 183,469 (57,297) 126,172 Research and development................................ 91,757 (18,618) 73,139 Amortization of intangibles............................. 13,358 (5,748) 7,610 -------- --------- -------- Total operating costs and expenses.............. 533,900 (153,937) 379,963 -------- --------- -------- Operating income.......................................... 139,377 49,979 189,356 Other income (expenses): Equity in net loss of unconsolidated affiliates......... (19,685) (54) (19,739) Gain on affiliate sale of stock......................... 2,369 -- 2,369 Minority interest....................................... 4,285 -- 4,285 Gain on sale of product line............................ 31,202 -- 31,202 Gain on sale of investments............................. 3,391 -- 3,391 Charge for impaired investments......................... (3,397) -- (3,397) Investment income....................................... 23,097 (144) 22,953 Interest expense........................................ (17,069) 75 (16,994) -------- --------- -------- Total other income (expenses)................... 24,193 (123) 24,070 -------- --------- -------- Income before income taxes................................ 163,570 49,856 213,426 Provision for income taxes................................ (62,438) (17,936) (80,374) -------- --------- -------- Net income................................................ 101,132 31,920 133,052 Tax benefit allocated from Genzyme Tissue Repair.......... 16,394 -- 16,394 Tax benefit allocated from Genzyme Molecular Oncology..... 3,527 -- 3,527 Tax benefit allocated from Genzyme Surgical Products...... -- 17,936 17,936 -------- --------- -------- Net income attributable to GENZ Stock..................... $121,053 $ 49,856 $170,909 ======== ========= ======== Per Genzyme General common share: Net income per Genzyme General common share -- basic:..... $ 1.53 $ 0.63 $ 2.16 ======== ========= ======== Weighted average shares outstanding....................... 79,063 -- 79,063 ======== ========= ======== Net income per Genzyme General common and common equivalent share -- diluted:............................ $ 1.48 $ 0.58 $ 2.06 ======== ========= ======== Adjusted weighted average shares outstanding.............. 81,734 4,088 85,822 ======== ========= ========
The accompanying notes are an integral part of these unaudited, combined pro forma financial statements. 3 4 GENZYME GENERAL UNAUDITED, COMBINED PRO FORMA BALANCE SHEET (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME GENZYME GENERAL PRO FORMA GENERAL 3/31/99 ADJUSTMENTS 2(B) 3/31/99 ---------- ---------------- ---------- ASSETS Current assets: Cash and cash equivalents............................. $ 61,668 $ (1,199) $ 60,469 Short-term investments................................ 247,668 (150,000) 97,668 Accounts receivable, net.............................. 156,461 (16,344) 140,117 Inventories........................................... 107,910 (24,919) 82,991 Prepaid expenses and other current assets............. 31,108 (1,347) 29,761 Due from Genzyme Tissue Repair........................ 3,994 -- 3,994 Due from Genzyme Molecular Oncology................... 4,526 -- 4,526 Deferred tax assets -- current........................ 39,690 -- 39,690 ---------- --------- ---------- Total current assets.......................... 653,025 (193,809) 459,216 Property, plant and equipment, net...................... 374,294 (16,306) 357,988 Long-term investments................................... 300,985 -- 300,985 Intangibles, net........................................ 259,934 (176,183) 83,751 Deferred tax assets -- noncurrent....................... 28,245 -- 28,245 Investments in equity securities........................ 39,305 -- 39,305 Other noncurrent assets................................. 33,197 (2,687) 30,510 ---------- --------- ---------- Total assets.................................. $1,688,985 $(388,985) $1,300,000 ========== ========= ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable...................................... $ 21,513 $ (5,285) $ 16,228 Accrued expenses...................................... 76,664 (5,013) 71,651 Income taxes payable.................................. 20,974 12 20,986 Deferred revenue...................................... 1,618 -- 1,618 Current portion of long-term debt and capital lease obligations........................................ 83,158 -- 83,158 ---------- --------- ---------- Total current liabilities..................... 203,927 (10,286) 193,641 Noncurrent liabilities: Long-term debt and capital lease obligations............ 3,070 -- 3,070 Convertible subordinated notes and debentures........... 271,813 -- 271,813 Other................................................... 8,072 (221) 7,851 ---------- --------- ---------- Total liabilities............................. 486,882 (10,507) 476,375 Division equity......................................... 1,202,103 (378,478) 823,625 ---------- --------- ---------- Total liabilities and division equity......... $1,688,985 $(388,985) $1,300,000 ========== ========= ==========
The accompanying notes are an integral part of these unaudited, combined pro forma financial statements. 4 5 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED PRO FORMA FINANCIAL STATEMENTS (1) CREATION OF GSP AND DISTRIBUTION OF GZSP STOCK: GSP was created from Genzyme's existing surgical products business, which previously operated as a business unit of Genzyme General. It primarily consists of the products and assets of Genzyme acquired upon the purchase of DSP in 1996, Genzyme's portfolio of Sepra Products, and Genzyme's research and development programs in gene and cell therapy for cardiovascular disease. On June 28, 1999 (the "Distribution Date"), Genzyme will distribute to the holders of GENZ Stock of record at the close of business on June 14, 1999, approximately 14.8 million shares of GZSP Stock. Also on June 28, 1999, Genzyme General will allocate $150.0 million of cash and investments to GSP. Subsequent to the Distribution, Genzyme General's financial statements will be restated to eliminate the assets and liabilities and revenue and expenses attributable to GSP. These pro forma financial statements reflect such eliminations. (2) PRO FORMA ADJUSTMENTS RELATED TO THE CREATION OF GSP AND DISTRIBUTION OF GZSP STOCK: (A) The pro forma adjustments to the Genzyme General Combined Statements of Operations for the three months ended March 31, 1999 and for the year ended December 31, 1998, reflect the elimination of revenues and expenses attributable to GSP's operations for those periods. In addition, Genzyme General's income tax provision has been adjusted to reflect the impact of eliminating GSP's losses. The tax benefit attributable to GSP has been reallocated to Genzyme General in accordance with Genzyme's tax allocation policy. (B) The pro forma adjustments to the Genzyme General Combined Balance Sheet at March 31, 1999 reflect the elimination of assets, liabilities and division equity attributable to GSP as of March 31, 1999. In addition, the short-term investments have been adjusted to reflect the transfer of $150.0 million to GSP. 5 EX-99.3 5 RISK FACTORS 1 Exhibit 99.3 RISK FACTORS RELATING TO GENZYME SURGICAL PRODUCTS DIVISION COMMON STOCK The following are risk factors associated with owning shares of Genzyme Surgical Products Division Common Stock, which we refer to as GZSP Stock. It is especially important to keep these risk factors in mind when you read forward-looking statements. These are statements that relate to future periods and include statements about: - product development activities and projected expenditures; - receipt of regulatory approvals; - plans for sales and marketing; - estimated market size and shares; - projected cash needs; - financial results; and - dividend policy. Generally, the words "anticipates," "expects," "believes," "intends," "could," "may" and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and our actual results could differ significantly from results discussed in the forward-looking statements. Throughout these risk factors, "we," us," "our," and "Genzyme" refer to Genzyme Corporation and all of its business divisions collectively, and "our board of directors" or "our board" refers to the board of directors of Genzyme. A. RISKS RELATED TO GENZYME TRACKING STOCK GZSP Stock is one of four series of our tracking stock. The following are risks related to owning shares of our tracking stock. FINANCIAL IMPACT ON ONE OF OUR DIVISIONS COULD ADVERSELY AFFECT OUR OTHER DIVISIONS. Neither Genzyme Surgical Products nor our other divisions are separate legal entities. Holders of GZSP Stock, together with holders of our other series of tracking stock, are stockholders of a single company and face all of the risks of an investment in Genzyme and all of our businesses, assets and liabilities. For purposes of financial presentation, we allocate programs, products, assets and liabilities among our four divisions. However, Genzyme continues to own all of the assets and is responsible for all of the liabilities allocated to each of the divisions. A holder of GZSP Stock, for example, would not have any specific rights to the assets allocated to Genzyme Surgical Products in our financial statements. Furthermore, if we are unable to satisfy one division's liabilities out of the assets we allocate to that division, we may be required to satisfy those liabilities with assets we have allocated to another division. You should read both our consolidated financial statements and the financial statements of Genzyme Surgical Products included in the reports that we have filed with the Securities and Exchange Commission (the "SEC"). 2 OUR BOARD OF DIRECTORS MAY TAKE ACTIONS THAT, WHILE IN THE BEST INTERESTS OF GENZYME AS A WHOLE, HAVE AN UNEQUAL AND ADVERSE EFFECT ON ONE OR MORE SERIES OF OUR STOCK. There may be times when the interests of holders of each series of our common stock diverge or appear to diverge. Massachusetts law does not define a board of directors' duties in such a situation. However, based on the advice of counsel, we believe that a Massachusetts court would conclude that a board of directors owes an equal duty to all stockholders regardless of class or series and does not have separate or additional duties to any group of stockholders. That duty is the fiduciary duty to act in good faith and in a manner the board reasonably believes to be in the best interests of the corporation. Under Massachusetts law, if a disinterested and adequately informed board of directors determines in good faith that an action would be in the corporation's best interests, taking into account both the interests of holders of each series of common stock as well as the alternatives reasonably available, then the board of directors should be able to successfully defend against any stockholder claim that such action could have an unequal effect on different series of common stock. In March 1999, the Delaware Court of Chancery reached a similar conclusion in two separate cases and dismissed, in each case, all stockholder claims that the board of directors had violated its fiduciary duties under Delaware law by approving actions that had a disparate impact on holders of different classes of tracking stock. The court concluded in each case that even where the decision of the board of directors affected holders of separate classes of tracking stock differently, stockholders must allege facts sufficient to indicate that a board of directors' approval was not based on the good faith belief that such actions were in the corporation's best interests. While Delaware case law is not binding on a Massachusetts court, we believe that a Massachusetts court would be influenced by these decisions in addressing similar issues. However, a Massachusetts court hearing such a case may apply principles of Massachusetts law other than those described above or develop new principles of Massachusetts law to decide such a case. MEMBERS OF OUR BOARD OF DIRECTORS MAY FAVOR ONE SERIES OF STOCK OVER ANOTHER IF THEY OWN A DISPROPORTIONATE AMOUNT OF THAT SERIES. A member of our board may own a disproportionate amount of stock in a particular series or the value of his or her stockholdings may be different from the value of his or her stockholdings in another series. This disparate stock ownership may cause the board member to favor one series of stock over another. Nevertheless, we believe that a member of our board could properly discharge his or her fiduciary responsibilities even if his or her interests in shares of different series were disproportionate or of unequal values. Our board members may from time to time create committees to review matters that raise conflict- of-interest issues. Any such committee would report to the full board on these matters. HOLDERS OF OUR TRACKING STOCK HAVE LIMITED DECISION-MAKING POWER DUE TO THE STOCKS' LIMITED SEPARATE VOTING RIGHTS. Holders of each series of our common stock vote together as a single class on all matters requiring common stockholder approval, including the election of directors. Holders of a series of common stock do not have the right to vote on matters separately from another series except in limited circumstances, which are provided for under Massachusetts law, our articles of organization and the management and accounting policies adopted by our board of directors. Therefore, stockholders of one series of common stock generally could not make a proposal that would require approval only of the holders 2 3 of that series. Instead, they would have to obtain approval from all common stockholders. The holders of Genzyme General Division Common Stock (which we refer to as GENZ Stock) hold a large majority of the stockholders' voting power. Consequently, on matters requiring common stockholder approval, the holders of GENZ Stock are likely to decide the outcome. INVESTORS MAY BE REQUIRED TO EXCHANGE THEIR SHARES OF GZSP STOCK, GZMO STOCK OR GZTR STOCK FOR CASH OR SHARES OF GENZ STOCK BELOW WHAT A THIRD PARTY MIGHT PAY. Our board of directors may at any time, in its sole discretion, decide to exchange shares of GZSP Stock, Genzyme Molecular Oncology Division Common Stock (which we refer to as GZMO Stock) or Genzyme Tissue Repair Division Common Stock (which we refer to as GZTR Stock) for any combination of cash and shares of GENZ Stock at a 30% premium over a series' then current market value. In addition, if we transfer or sell to a third party all or substantially all of the assets of Genzyme Surgical Products, Genzyme Molecular Oncology or Genzyme Tissue Repair, we must exchange the shares of that division's tracking stock as follows:
THE AMOUNT OF CASH AND/OR IF WE ARE TRANSFERRING OR GENZ STOCK GIVEN IN SELLING ASSETS OF . . . THEN, WE MUST EXCHANGE . . . EXCHANGE WOULD EQUAL . . . - ------------------------- ---------------------------- -------------------------- Genzyme Surgical each share of GZSP Stock for The market value of the Products cash and/or shares of GENZ GZSP Stock being exchanged. Stock. Genzyme Molecular each share of GZMO Stock for a 30% premium over the Oncology cash and/or shares of GENZ market value of the GZMO Stock. Stock being exchanged. Genzyme Tissue Repair each share of GZTR Stock for a 30% premium over the cash and/or shares of GENZ market value of the GZTR Stock. Stock being exchanged.
Consequently, holders of GZSP Stock, GZMO Stock and GZTR Stock may receive an amount for their shares that is greater or less than the premium that a third party buyer of the division's assets would pay. Our board's discretion to cause such an exchange is described in our articles of organization. Furthermore, our board may exchange shares of GZSP Stock into GENZ Stock in the event of certain adverse tax developments, as discussed in the immediately following risk factor. WE MAY EXCHANGE GENZ STOCK FOR GZSP STOCK IF A RECENT CLINTON ADMINISTRATION PROPOSAL IMPOSING A CORPORATE LEVEL TAX ON THE ISSUANCE OF TRACKING STOCK IS ADOPTED. A recent tax proposal by the Clinton Administration would impose a corporate level tax on issuances of tracking stock. If the proposal is enacted into law or effected through Treasury Regulations, we could be taxed on an amount up to the gain realized in future financings in which we sell tracking stock, including the GZSP Stock. Also, any use of our tracking stock to acquire other companies could be taxed. We also may be taxed if we distribute to stockholders "designated" shares of tracking stock, which are shares designated by the tracked division as issuable at our board's option for Genzyme General's benefit. These or similarly adverse tax consequences could cause us to eliminate tracking stock from our capital structure. We cannot predict, however, whether Congress will enact, or the Treasury Department will issue regulations effecting, this or a similar proposal. 3 4 The GZSP Stock's terms provide that in the event of adverse tax developments, we may exchange shares of GZSP Stock for shares of GENZ Stock without any premium to the holders. Upon the exchange, a former holder of GZSP Stock would no longer hold a security intended to reflect the value and track the performance of assets and programs that were allocated to Genzyme Surgical Products immediately prior to the exchange. Instead, he, she or it would hold a security intended to reflect the value and track the performance of the assets and programs allocated to Genzyme General, including the assets and programs previously allocated to Genzyme Surgical Products. THE LIQUIDATION UNITS FOR EACH SERIES OF COMMON STOCK ARE NOT ADJUSTED TO REFLECT CHANGES IN THE SERIES' MARKET VALUE. If we dissolve, liquidate or wind up our affairs (other than as part of a merger, business combination or sale of substantially all of our assets), our stockholders will receive any remaining assets according to the percentage of total liquidation units that they hold. The number of liquidation units per share for each series of our common stock is as follows: - each share of GZSP Stock has 61 liquidation units; - each share of GENZ Stock has 100 liquidation units; - each share of GZMO Stock has 25 liquidation units; and - each share of GZTR Stock has 58 liquidation units. Although liquidation units are adjusted to prevent dilution in the event of certain subdivisions, combinations or distributions of common stock, they are not adjusted to reflect changes in the relative market value or performance of the divisions. Therefore, at the time of a dissolution, liquidation or winding up, the relative liquidation units attributable to each series of common stock may not correspond to the value of the underlying assets of that division. OUR BOARD OF DIRECTORS MAY CHANGE ITS MANAGEMENT AND ACCOUNTING POLICIES TO THE DETRIMENT OF ONE SERIES OF COMMON STOCK WITHOUT STOCKHOLDER APPROVAL. Our board of directors has adopted management and accounting policies that are used to govern our business and to prepare our financial statements. These policies cover the allocation of our corporate expenses, assets and liabilities and other accounting matters, and the reallocation of assets between divisions and other matters. Our board may generally modify or rescind these policies or adopt new ones without stockholder approval. Any revised policies could have different effects on each series of our common stock and could be detrimental to one series as compared to another. Our board's discretion to make changes is limited only by the policies themselves and the board's fiduciary duty to all of our stockholders. We encourage you to review the full text of these policies. OUR OTHER DIVISIONS MAY DEVELOP PRODUCTS IN THE FIELD OF BIOSURGERY OR SURGICAL PRODUCTS THAT WILL NOT BE ALLOCATED TO GENZYME SURGICAL PRODUCTS AND MAY COMPETE WITH ITS PRODUCTS. Our board of directors has adopted a policy that no division engage in another division's principal business other than through joint ventures or other collaborative arrangements with more than one division and third parties. This non-compete policy, however, does not cover the entire field of biosurgery or surgical products. Therefore, 4 5 Genzyme General, Genzyme Molecular Oncology and Genzyme Tissue Repair may develop biosurgery or surgical products that will not be allocated to Genzyme Surgical Products and that may compete with Genzyme Surgical Products' products. For example, both Genzyme Surgical Products and the Pharmaceuticals business unit of Genzyme General are investigating the use of certain biomaterials for drug delivery purposes, and both may compete in this field. In addition, the Therapeutics business unit of Genzyme General is developing recombinant human antithrombin III for use in coronary artery bypass graft surgery under a joint venture with Genzyme Transgenics Corporation. We encourage you to review the full text of our non-compete policy. THE USE OF OPERATING LOSSES TO LOWER THE TAX LIABILITY OF OUR PROFITABLE DIVISIONS WILL CAUSE LOWER FUTURE EARNINGS AND FULL TAX BURDEN FOR THE DIVISIONS GENERATING THESE OPERATING LOSSES. Genzyme Corporation, rather than its divisions, is liable for taxes. Under our management and accounting policies, for financial reporting purposes we generally allocate taxes among our divisions as if they were separate taxpayers. However, our board of directors has adopted a policy that provides that if any of our divisions is unable to use its operating losses or other projected annual tax benefits to reduce its current or deferred income tax expense, we may reallocate such losses or benefits to our profitable divisions on a quarterly basis for financial reporting purposes. This will result in a division with current losses (such as Genzyme Surgical Products, Genzyme Molecular Oncology and Genzyme Tissue Repair) reporting lower earnings available to its common stockholders in the future than would be the case if that division had retained its historical losses or other benefits in the form of a net operating loss carryforward. We encourage you to review the full text of this policy. WE CANNOT PREDICT HOW THE DISTRIBUTION OF THE GZSP STOCK WILL AFFECT THE MARKET PRICE OF GENZ STOCK. In March 1999, we issued a press release informing the investment community that we intended to create a separate Surgical Products division with its own series of tracking stock out of Genzyme General's existing surgical products business. While this press release may have influenced the market prices of our common stock, we cannot predict what further effect, if any, the upcoming distribution of the GZSP Stock will have on the market price of the GENZ Stock or of our other series of common stock. 5 6 B. RISKS RELATED TO GENZYME SURGICAL PRODUCTS The following risks and uncertainties may adversely affect the business of Genzyme Surgical Products. GENZYME SURGICAL PRODUCTS ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE. Genzyme Surgical Products expects to have significant operating losses for the next several years. It plans to spend substantial amounts of money on, among other things: - conducting research and development activities; - pursuing regulatory approvals; - conducting commercialization activities; and - providing surgeon education and training. We cannot guarantee that the efforts underlying these expenditures will be successful or that Genzyme Surgical Products' operations will ever be profitable. It may be years before the division generates any revenue from sales of products currently under development. We anticipate that Genzyme Surgical Products' current cash resources, together with revenues generated from its products and distribution agreements, will be sufficient to fund its operations through 2001. However, its cash needs may differ from those planned because of many factors, including: - the ability to become profitable; - the results of research and development efforts; - the ability to establish strategic alliances and licensing arrangements for research and development programs; - the achievement of milestones under strategic alliances; - the ability to establish and maintain additional distribution arrangements; - the enforcement of patent and other intellectual property rights; - market acceptance of novel approaches and therapies; - the development of competitive products; and - the ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Surgical Products may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that it will be able to obtain additional financing on favorable terms, if at all. If the division has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. It may also have to give rights to third parties to attempt to commercialize technologies or products that it would otherwise commercialize itself. 6 7 BECAUSE THE DEVELOPMENT OF GENZYME SURGICAL PRODUCTS' THERAPEUTIC PRODUCTS WILL INVOLVE A LENGTHY AND COMPLEX PROCESS, IT IS UNCERTAIN WHETHER THE DIVISION WILL BE ABLE TO DEVELOP ANY MARKETABLE THERAPEUTIC PRODUCTS. Prior to commercializing any of its therapeutic products, Genzyme Surgical Products will need to: - conduct substantial research and development; - undertake pre-clinical and clinical testing; and - pursue regulatory approvals. We cannot guarantee that these efforts will be successful. Many of the division's biomaterials, gene therapy and cell therapy products are currently in pre-clinical development. If any of these products advance into clinical trials, the trials may not support the safety or effectiveness of such products. Genzyme Surgical Products may encounter problems in clinical trials that lead it to delay or suspend the trials. Gene and cell therapies may cause serious side effects that may preclude regulatory approval. To date, the FDA has not approved the sale of any gene therapy products. ANY MARKETABLE THERAPEUTIC PRODUCTS THAT THE DIVISION DEVELOPS MAY NOT BE COMMERCIALLY SUCCESSFUL. The commercial success of any marketable therapeutic product that Genzyme Surgical Products develops will depend on many factors, including: - regulation by the FDA and other government authorities; - market acceptance by surgeons and hospital administrators; - the effectiveness of Genzyme Surgical Products' sales force; - the effectiveness of Genzyme Surgical Products' production and marketing capabilities; - the success of competitive products; and - the availability of third party reimbursement. For example, although the division continues to market Sepracoat(TM) Coating Solution in Europe, in January 1998, it announced that it had discontinued development of the product for abdominal surgery in the United States after an FDA advisory committee recommended against approval of the product. The division may stop developing other product candidates if there is insufficient demand or if it encounters regulatory or development problems. IF GENZYME SURGICAL PRODUCTS EXERCISES AN OPTION TO PURCHASE CERTAIN LIMITED PARTNERSHIP INTERESTS, ITS CASH RESOURCES MAY DIMINISH AND THE RIGHTS OF ITS STOCKHOLDERS MAY BE DILUTED. In 1989, we organized Genzyme Development Partners, L.P., a special purpose research and development entity, transferring to it certain technology and commercial rights to the Sepra family of products. We have an option to purchase the limited partnership interests in the partnership under certain circumstances for approximately $26 million plus continuing royalties based on certain sales of the Sepra products. We have allocated the purchase option to Genzyme Surgical Products. The option's exercise price is payable in cash, shares of GENZ Stock valued at a 5% discount to their then fair market 7 8 value, or a combination of the two, as determined by Genzyme Surgical Products when it exercises the option. If Genzyme Surgical Products exercises this option, it will have to make substantial cash payments or compensate Genzyme General with shares of GZSP Stock for the GENZ Stock used, or both. If the division makes cash payments, its cash resources would diminish. If it makes the payment in whole or in part in shares of GENZ Stock, then our board of directors would need to approve the issuance of GENZ Stock in return for Genzyme General receiving a number of GZSP designated shares with a fair market value equal to the fair market value of the shares of GENZ Stock. Those GZSP designated shares would be shares of GZSP Stock that our board would have the option to issue from time to time with all proceeds allocable to Genzyme General. Beginning on June 30, 2000, and on every June 30th thereafter, we will have to distribute substantially all the GZSP designated shares if the number of those shares exceeds the sum of 10% of the GZSP Stock then outstanding plus all shares of GZSP Stock then issuable under options, warrants or other securities either convertible into or exchangeable for GZSP Stock. We cannot guarantee that our board would authorize the issuance of shares of GENZ Stock for payment of the option exercise price and the creation of any GZSP designated shares. If our board did create and subsequently distribute or otherwise dispose of any GZSP designated shares, this would substantially dilute the rights of the holders of GZSP Stock and could significantly affect the market price of GZSP Stock. If Genzyme Surgical Products does not exercise the option, the partnership would have the right to sell or otherwise transfer to a third party a license to background technology that we granted to it. Such a sale or transfer may terminate our joint venture with the partnership to manufacture and sell the Sepra products in the United States and Canada. In addition, failure to exercise the option would cause the joint venture to become terminable upon 90 days' prior notice by either Genzyme or Genzyme Development Partners. GENZYME SURGICAL PRODUCTS IS DEVOTING SIGNIFICANT RESOURCES TO DEVELOPING NOVEL ALTERNATIVE PRODUCTS AND TREATMENTS THAT MAY NOT BE COMMERCIALLY SUCCESSFUL. Genzyme Surgical Products is devoting a significant amount of money to developing products that will represent alternatives to traditional surgical procedures or treatments. These products will likely require several years of aggressive and costly marketing before they might become widely accepted by the surgical community. Genzyme Surgical Products is developing products that are designed to enable surgeons to perform minimally invasive cardiovascular surgery. The medical conditions that can be treated with minimally invasive cardiovascular surgery are currently being treated with widely accepted surgical procedures such as coronary artery bypass grafting and catheter-based treatments, including balloon angioplasty, atherectomy and coronary stenting. To date, minimally invasive cardiovascular surgery has been performed on a limited basis and its further 8 9 adoption by the surgical community will partly depend upon Genzyme Surgical Products' ability to educate cardiothoracic surgeons about its effectiveness and to facilitate the training of cardiothoracic surgeons in minimally invasive cardiovascular surgery techniques. Similarly, until recently surgeons have not used products designed to reduce the incidence and extent of postoperative adhesions. Since 1996, when Seprafilm(R) Bioresorbable Membrane was introduced, market acceptance of anti-adhesion products has been slow. To increase sales of the Sepra family of products, the division has had to educate surgeons and hospital administrators about the problems of, and costs associated with, adhesions and the benefit of preventing adhesions. It has also had to train surgeons on the proper handling and use of these products. Gene and cell therapies also represent new approaches to the treatment of cardiovascular disease, and Genzyme Surgical Products will need to overcome many technical obstacles in developing products based upon gene and cell therapies. We cannot guarantee that Genzyme Surgical Products' efforts in educating and training the surgical community will result in the widespread adoption of minimally invasive cardiovascular surgery, anti-adhesion products and gene and cell therapies or that surgeons adopting these procedures and products will use the division's products. GENZYME SURGICAL PRODUCTS MAY FAIL TO ADEQUATELY PROTECT ITS PROPRIETARY TECHNOLOGY WHICH WOULD ENABLE COMPETITORS TO TAKE ADVANTAGE OF ITS RESEARCH AND DEVELOPMENT EFFORTS. Genzyme Surgical Products' long-term success largely depends on its ability to market technologically competitive products. It can prevent unauthorized third parties from using proprietary rights relating to its products and services only if these rights are covered by patents or are kept confidential as trade secrets. We cannot guarantee that the division's proprietary technology is adequately protected against unauthorized use by third parties. Third party patent rights and pending patent applications filed by third parties, if issued, may cover some of the products the division is developing or testing. As a result, the division may be required to obtain licenses from the holders of these patents in order to test, use or market certain products and services. We cannot guarantee that these licenses will be available on acceptable terms, if at all. We cannot guarantee that the patents issued or licensed to Genzyme and attributed to Genzyme Surgical Products will remain free from challenge by third parties. If we become involved in litigation to defend ourselves in patent suits brought by third parties involving the intellectual property used by Genzyme Surgical Products or if we initiate such suits, it could consume a substantial portion of that division's resources. Any legal action against us or the division's strategic partners claiming damages or seeking to stop commercial activities relating to the division's products and processes could subject us and therefore the division to potential liability for damages. Congress recently imposed restrictions on the ability of medical device manufacturers to enforce certain patent claims relating to surgical and medical methods against medical practitioners. These restrictions may prevent us from adequately protecting the division's proprietary procedures against unauthorized use by medical practitioners. The division also relies upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We cannot guarantee that other parties will not independently develop such know-how or otherwise obtain access to the division's technology. While Genzyme Surgical Products' employees, consultants and corporate 9 10 partners with access to proprietary information are generally required to enter into confidentiality agreements, we cannot guarantee that these agreements will be honored. In addition, some of the division's consultants have developed portions of the division's proprietary technology at universities or in governmental laboratories. These universities or governmental authorities may claim rights to the intellectual property arising out of the research performed at the university or governmental laboratory. REGULATION BY GOVERNMENT AGENCIES IMPOSES SIGNIFICANT COSTS AND RESTRICTIONS ON THE DEVELOPMENT OF GENZYME SURGICAL PRODUCTS' THERAPEUTIC PRODUCTS. Genzyme Surgical Products' ability to successfully satisfy regulatory requirements will significantly determine its future success. We cannot guarantee that any required regulatory approvals will be granted or that they will be granted on a timely basis. The production and sale of health care products and provision of health care services are highly regulated. In particular, the FDA and comparable agencies in foreign countries must approve human therapeutic and diagnostic products before they are marketed. This approval process can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. This regulation may delay the time at which a product or service can first be sold, limit how a product or service may be used or adversely impact third party reimbursement. COMPETITION FROM OTHER MEDICAL DEVICE AND TECHNOLOGY COMPANIES COULD HURT GENZYME SURGICAL PRODUCTS' PERFORMANCE. The human health care products and services industry is extremely competitive. Major medical device and technology companies compete or may compete with Genzyme Surgical Products. These include such companies as: - Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco International, Ltd. in the cardiovascular chest drainage and fluid management market; - The Ethicon division of Johnson & Johnson Ltd. and U.S. Surgical Corporation, a division of Tyco in the cardiovascular closure market; - CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical, Guidant Corporation, Baxter Healthcare Corporation and Ethicon in the minimally invasive cardiovascular surgery market; - Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and Gliatech, Inc. in the anti-adhesion market; and - Karl Storz Endoscopy America, Inc., Scanlan International, Inc., Pilling Weck Surgical Instruments and the Codman division of Johnson & Johnson Ltd. in the reusable instruments market. These competitors may have superior research and development, marketing and production capabilities. Some competitors also may have greater financial resources than Genzyme Surgical Products. The division is likely to incur significant costs developing and marketing new products without any guarantee that they will be commercially successful. The future success of the division will depend on its ability to effectively develop and market its products against those of its competitors. The trend toward consolidation in the surgical devices industry may adversely affect the division's ability to successfully market its products to some significant purchasers. The 10 11 current trend among hospitals and other significant consumers of surgical devices is to combine into larger purchasing groups to increase their purchasing power and thus reduce their purchase price for surgical devices. Partly in response to this development, surgical device manufacturers have been consolidating to be able to offer a more comprehensive product line to these larger purchasing groups. In order to successfully market its products to larger purchasing groups, Genzyme Surgical Products may have to expand its product lines or enter into joint marketing or distribution agreements with other manufacturers of surgical devices. We cannot guarantee that the division will be able to employ either of these initiatives or that, when employed, these initiatives will increase the marketability of its products. RAPID TECHNOLOGICAL CHANGE COULD MAKE THE DIVISION'S PRODUCTS OBSOLETE. The fields of biotechnology, biosurgery and surgical instrumentation are characterized by significant and rapid technological change. Although Genzyme Surgical Products attempts to expand its technological capabilities in order to remain competitive, research, discoveries and innovations by others may make its products obsolete. GENZYME SURGICAL PRODUCTS MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A FAILURE TO ENTER INTO FUTURE COLLABORATIONS. Genzyme Surgical Products' strategy to develop and commercialize certain of its products, in particular its gene and cell therapies for the treatment of cardiovascular disease, includes entering into various arrangements with both academic collaborators and corporate partners and licensees. The division may depend on the success of these parties in performing research, pre-clinical and clinical testing and marketing. These arrangements may require the division to transfer certain important rights to these collaborators and licensees. While we believe that the division's collaborators and licensees will want to perform their contractual responsibilities, in some cases the amount and timing of resources that they devote to their collaborations with the division, and the ability to terminate the collaboration, will be controlled by the collaborators and licensees. As a result, we cannot guarantee that the division will receive revenues or profits from these arrangements, that any of its strategic alliances will continue or not terminate early, or that it will be able to enter into future collaborations. YOU MAY HAVE DIFFICULTY SELLING GZSP STOCK IF AN ACTIVE PUBLIC MARKET DOES NOT DEVELOP. Prior to this distribution of GZSP Stock, there has been no public market for GZSP Stock. An active public market for this stock may not develop or be sustained after this distribution. Without active trading in GZSP Stock, you may be unable to sell any shares of this stock and thus liquidate any portion of your GZSP Stock holdings. BECAUSE THE MARKET PRICE OF GZSP STOCK IS LIKELY TO BE VOLATILE, YOU MAY LOSE A SIGNIFICANT AMOUNT OF THE VALUE OF YOUR GZSP STOCK. We have determined the initial value of GZSP Stock through consultations with our financial advisors. This initial value is not necessarily indicative of the market price at which GZSP Stock will trade after this distribution. Some of our large institutional stockholders may be forced immediately to sell some or all of the shares of GZSP Stock they receive in the distribution if their investment guidelines restrict their investing in entities with Genzyme Surgical Products' market capitalization. In addition, a significant 11 12 portion of other holders of GENZ Stock may, for various reasons, choose not to retain the GZSP Stock they receive. Significant selling would depress the GZSP Stock's market price. The market price for GZSP Stock likely will also vary widely as a result of several factors, including: - announcements of technological innovations or new commercial products by Genzyme Surgical Products or by its competitors; - governmental regulatory initiatives; - patent or proprietary rights developments; - public concern as to the safety or other implications of biotechnology products; - adoption of legislation relating to tracking stock; and - general market conditions. This volatility could lead to the loss of a significant amount of the value of GZSP Stock. FUTURE SALES OR DISTRIBUTIONS OF GZSP DESIGNATED SHARES MAY DILUTE YOUR OWNERSHIP OF GZSP STOCK SIGNIFICANTLY. Our management and accounting policies require us to sell or distribute any GZSP designated shares that may be created subject to certain limitations. Proceeds from a sale or distribution will not be allocated to Genzyme Surgical Products and the issuance and sale may substantially dilute your ownership of GZSP Stock. In addition, we may sell additional shares of GZSP Stock in the future to finance the operations of the division. C. RISKS RELATED TO GENZYME, INCLUDING THE OTHER GENZYME DIVISIONS Holders of GZSP Stock are stockholders of Genzyme. Liabilities or contingencies of the divisions of Genzyme other than Genzyme Surgical Products that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of Genzyme Surgical Products. Therefore, you should review the following risks as well as the risks and uncertainties described under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations -- Factors Affecting Future Operating Results" included on pages 41 through 44 of Exhibit 13.1 of Genzyme's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. A REDUCTION IN REVENUES FROM SALES OF PRODUCTS WHICH TREAT GAUCHER DISEASE WOULD AVERSELY AFFECT OUR BUSINESS. Genzyme, through Genzyme General, generates a majority of its product revenues from sales of enzyme-replacement products for patients with Gaucher disease. Genzyme General entered this market in 1991 with Ceredase(R) enzyme. Because production of Ceredase(R) enzyme was subject to supply constraints, the division developed Cerezyme(R) enzyme, a recombinant form of the enzyme. Genzyme General stopped producing Ceredase(R) enzyme, except for small quantities, during 1998, after substantially all the patients previously using Ceredase(R) enzyme had converted to Cerezyme(R) enzyme. Sales of 12 13 Cerezyme(R) enzyme and Ceredase(R) enzyme totaled $411.1 million for the year ended December 31, 1998, representing approximately 67% of our product revenues for that year. Because our business is highly dependent on Cerezyme(R) enzyme, a reduction in revenue from sales of this product would adversely affect our results of operations. Revenues from Cerezyme(R) enzyme would be negatively impacted if competitors developed alternative treatments for Gaucher disease and these alternative products gained commercial acceptance. Certain companies have initiated efforts to develop competitive products and other companies may do so in the future. WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON FAVORABLE TERMS, IF AT ALL. As of March 31, 1999, we had approximately $629.2 million in cash, cash equivalents and short- and long-term investments (excluding investments in equity securities). Although we currently have substantial cash resources and positive cash flow, we intend to use substantial portions for: - product development and marketing; - expanding facilities; and - working capital as Genzyme grows. We will further reduce available cash reserves to pay principal and interest on the following debt: - As of March 31, 1999, we owed approximately $100 million under a $225 million revolving credit facility with a group of commercial banks. Of this outstanding amount, we have allocated $82 million to Genzyme General and $18 million to Genzyme Tissue Repair. Amounts borrowed under this revolving credit facility bear interest at a floating rate based upon an applicable margin above the London InterBank Offered Rate. We must repay all borrowings under this facility on November 15, 1999. We intend to renew this credit line, although we cannot guarantee that we will be able to do so on the same or as favorable terms, if at all. - In February 1997, we issued a $13 million convertible note, the entire principal amount of which is allocated to Genzyme Tissue Repair. This convertible note bears interest at an annual rate of 5% and matures on February 27, 2000, but the holders of these convertible notes may exchange principal, and under some circumstances interest, on the note for shares of GZTR Stock. As of May 31, 1999, $7.93 million of principal on this convertible note was outstanding. - In August 1998, we issued $21.2 million in convertible debentures, the entire principal amount of which is allocated to Genzyme General. These convertible debentures bear interest at an annual rate of 5% and mature on August 29, 2003, but the holders of these convertible debentures may exchange principal, and under some circumstances interest, on the convertible debentures for shares of GENZ Stock. - In May 1998, we issued $250 million in convertible notes, the entire principal amount of which is allocated to Genzyme General. These convertible notes bear interest at an annual rate of 5 1/4% and mature on June 1, 2005, but the holders of these notes may exchange principal on the notes for shares of GENZ Stock, shares of GZMO Stock and, after this distribution, shares of GZSP Stock. 13 14 To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement or obtain either on favorable terms. SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE OUR STOCKHOLDERS OF THE OPPORTUNITY TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL. Certain provisions of Massachusetts law and our articles of organization, bylaws and stockholder rights plan could delay or prevent a change in control of Genzyme or a change in Genzyme's management. Our tracking stock structure may also deprive our stockholders of the opportunity to receive a premium for their shares upon a change in control because, in order to obtain control of a particular division, an acquiror would have to obtain control of Genzyme. In addition, our board of directors may, in its sole discretion, (1) exchange shares of GZSP Stock, GZMO Stock or GZTR Stock for GENZ Stock at a 30% premium over the market value of the respective shares being so exchanged and (2) issue shares of undesignated common and preferred stock from time to time in one or more series. Either of these board actions could increase the cost of an acquisition of Genzyme and thus discourage a take over attempt. 14 EX-99.5 6 MD+A 1 Exhibit 99.5 MANAGEMENT AND ACCOUNTING POLICIES GOVERNING THE RELATIONSHIP OF GENZYME DIVISIONS The board of directors of Genzyme Corporation (the "Genzyme Board" or "our board") has adopted the following policies to govern the management of Genzyme Surgical Products, Genzyme General, Genzyme Molecular Oncology and Genzyme Tissue Repair, and the relationships between each division. Except as otherwise provided in the policies, our board may modify or rescind the policies, or adopt additional policies, in its sole discretion without approval of the stockholders, subject only to our board's fiduciary duty to our stockholders. 1. PURPOSE OF GENZYME SURGICAL PRODUCTS, GENZYME GENERAL, GENZYME MOLECULAR ONCOLOGY AND GENZYME TISSUE REPAIR. The purpose of Genzyme Surgical Products is to create a business with a comprehensive approach to and portfolio of devices, biomaterials, biotherapeutics and other products for the field of biosurgery. The purpose of Genzyme General is to develop and market therapeutic products and diagnostic services and products. The purpose of Genzyme Molecular Oncology is to create a focused, integrated oncology business that will develop and commercialize novel therapeutic and diagnostic products and services based upon molecular tools and genomic information. The purpose of Genzyme Tissue Repair is to create a business with a comprehensive approach to the field of tissue repair by developing and commercializing a portfolio of novel products for the treatment and prevention of serious tissue injury (excluding products developed on behalf of GDP). In addition to the programs initially assigned to each of Genzyme Surgical Products, Genzyme Molecular Oncology and Genzyme Tissue Repair, it is expected that the product and service portfolio of each division will expand through the addition of complementary programs, products and services developed either within or outside of the division, including acquiring or in-licensing programs, products and services from outside of Genzyme. Each of Genzyme Surgical Products, Genzyme Molecular Oncology and Genzyme Tissue Repair will be operated and managed similarly to Genzyme General except as provided herein. 2. REVENUE ALLOCATION. Revenues from the sale or licensing of a division's products and services to entities external to Genzyme Corporation shall be credited to that division. Products and services normally sold by a division to entities external to Genzyme Corporation that are used by other divisions within Genzyme Corporation shall be recorded as interdivisional revenues and interdivisional purchases subject to the policy regarding Other Interdivisional Transactions. 3. EXPENSE ALLOCATION. Direct Expenses shall be charged to the division for whose benefit the Direct Expenses have been incurred. Expenses other than Direct Expenses shall be subject to the policy regarding Other Interdivisional Transactions. 4. ASSET ALLOCATION. Assets that are exclusively dedicated to the production of goods and services of a division shall be allocated to that division. Production assets that are utilized by more than one division shall be subject to the policy regarding Other Interdivisional Transactions. 5. TAX ALLOCATIONS. Income taxes shall be allocated to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to such division under generally accepted accounting principles as if each division were a separate taxpayer; provided, however, that as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be 2 utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other divisions in proportion to their taxable income without any compensating payment or allocation 6. ACQUISITIONS OF PROGRAMS, PRODUCTS OR ASSETS. Upon the acquisition by Genzyme from a third party of any programs, products or assets (whether by acquisitions of assets or stock, merger, consolidation or otherwise), the aggregate cost of the acquisition and the programs, products or assets acquired shall be allocated among the divisions of Genzyme. In the case of material acquisitions, such allocation shall be made in a manner determined by the Genzyme Board to be fair and reasonable to each division and to the holders of the common stock representing each division, taking into account such matters as the Genzyme Board and its financial advisors, if any, deem relevant. Any such determination will be final and binding on the holders of common stock. 7. DISPOSITION OF PROGRAMS, PRODUCTS OR ASSETS. Upon the sale, transfer, assignment or other disposition by Genzyme of any program, product or asset not consisting of all or substantially all of the assets of the division, all proceeds from such disposition shall be allocated to the division to which the program, product or asset had been allocated among such divisions based on their respective interests in such program, product or asset. Such allocations shall be made in a manner determined by the Genzyme Board to be fair and reasonable to such divisions and to holders of the common stock representing such divisions, taking into account such matters as the Genzyme Board and its financial advisors, if any, deem relevant. Any such determination by the Genzyme Board will be final and binding on the holders of common stock. 8. INTERDIVISIONAL ASSET TRANSFERS. The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations shall be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of such program, the phase of clinical development of such program, the expenses associated with realizing any income from such program, the likelihood and timing of any such realization and other matters that the Genzyme Board and its financial advisors, if any, deem relevant. The consideration for such reallocation may be paid by one division to another in cash or other consideration with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from Genzyme General to Genzyme Surgical Products, Genzyme Molecular Oncology or Genzyme Tissue Repair, the Genzyme Board may elect to account for such reallocation as an increase in the Designated Shares representing the division to which such assets are reallocated in accordance with the provisions of Genzyme's articles of organization. Notwithstanding the foregoing, no Key GMO Program or Key GTR Program, as defined below, may be transferred out of Genzyme Molecular Oncology or Genzyme Tissue Repair, respectively, without a class vote of the holders of the common stock representing the division from which such Key GMO Program or Key GTR Program is to be removed unless the Genzyme Board determines that (i) in the case of a Key GMO Program, such Key GMO Program has application outside of the field of oncology (in which case it may be transferred out only for the non-oncology applications; provided, however that the SAGE Service (as herein defined) may not be transferred out of Genzyme Molecular Oncology for any application without the approval of the holders of the GZMO Stock voting as a separate class) and (ii) in the case of a Key GTR Program, such Key GTR Program has application outside of the field of tissue repair (in which case it may be transferred out only for the non-tissue repair applications). 2 3 A "Key GMO Program" is any of the following: (i) use of the Serial Analysis of Gene Expression ("SAGE(TM)") technology licensed from The Johns Hopkins University School of Medicine for third parties ("SAGE Service"); (ii) the clinical program developing adenovirus vectors containing the tumor antigens Ad-MART 1 or Ad-gp100 for the treatment of melanoma; (iii) the "suicide" gene therapy research program developing adenovirus and lipid vectors containing genes to enhance chemotherapy for oncology indications; (iv) the research program developing adenovirus and lipid vectors containing tumor suppressor genes for oncology indications; (v) the research program developing adenovirus and lipid vectors containing genes to regulate the immune system for oncology indications, including heat shock proteins; (vi) the research program developing antibody-based gene therapy for the treatment of tumors; and (vii) any additional program, product or service being developed from time to time in Genzyme Molecular Oncology which (a) constituted 20% or more of the research and development budget of Genzyme Molecular Oncology in any one of the three most recently completed fiscal years or (b) has had a cumulative investment of $8 million or more in research and development expenses by Genzyme Molecular Oncology. A "Key GTR Program" is any of the following: (i) Vianain(R) for debridement of necrotic or damaged tissue; (ii) TGF-SS(2) for all indications licensed from Celtrix as of December 16, 1994; (iii) Epicel(TM) cultured epithelial cell autografts for tissue replacement or repair; (iv) Acticel(TM) cultured epithelial cell allografts for tissue replacement or repair; (v) Carticel(R) Autologous Cultured Chondrocyte Service; and (vi) any additional tissue repair program or product being developed from time to time in Genzyme Tissue Repair which (a) constituted 20% or more of the research and development budget of Genzyme Tissue Repair in any one of the three most recently completed fiscal years or (b) has had a cumulative investment of $8 million or more in research and development expenses by Genzyme Tissue Repair. The foregoing policies regarding transfers of assets between divisions will not be changed by the Genzyme Board without the approval of the holders of the GZSP Stock, the GZMO Stock and the GZTR Stock, each voting as a separate class; provided, however, that if a policy change affects one or more, but not all of, Genzyme Surgical Products, Genzyme Molecular Oncology and/or Genzyme Tissue Repair, only holders of shares representing the affected division(s) will be entitled to vote on such matter. 9. OTHER INTERDIVISIONAL TRANSACTIONS. This policy shall cover interdivisional transactions other than asset transfers, which shall be subject to the policy regarding Interdivisional Asset Transfers. From time to time, a division may engage in transactions directly with one or more other divisions or jointly with one or more other divisions and one or more third parties. Such transactions may include agreements by one division to provide products and services for use by another division and joint venture or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. Such transactions shall be subject to the following conditions: (a) Research and development (including clinical and regulatory support), distribution, sales, marketing, and general and administrative services (including allocated space) performed by one division for the benefit of another division will be charged to the division for which work is performed on a cost basis. Direct costs shall be allocated in a manner described above under "Expense Allocation" and such division performing the work will not recognize revenue as a result of performing such work. Direct labor and indirect costs 3 4 shall be allocated in a reasonable and consistent manner based on the utilization by the division of the services to which such costs relate. (b) Manufacturing of goods and performance of services by one division exclusively for the benefit of another division and not for external sale shall be charged to the division for which the work is performed on a cost basis. Manufacturing costs shall include an interest charge on the gross fixed assets employed in such manufacturing process. Gross fixed assets in this case shall be determined at the beginning of each fiscal year for the facility used. The interest rate in this case shall be the short term borrowing rate of Genzyme Corporation at the beginning of each fiscal year. Direct labor and indirect costs shall be allocated in a reasonable and consistent manner based on the receipt of benefit by the division of the goods and services to which such costs relate. The division performing such work will not recognize revenue as a result of performing such work. (c) Other than Research and development (including clinical and regulatory support), manufacturing, distribution, sales, marketing, general and administrative services (including allocated space), interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated at arm's length with unaffiliated third parties. The division performing such work will not recognize revenue as a result of performing such work. (d) Any interdivisional transaction (i) to be performed on terms and conditions that deviate from the policies set forth in subparagraphs (a), (b) or (c) above and (ii) that is material to one or more of the participating divisions will require approval by the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to the holders of the common stock representing each such division. (e) Loans may be made from time to time between divisions. Any such loan of $1 million or less will mature within 18 months and interest will accrue at the best borrowing rate available to Genzyme for a loan of like type and duration. Amounts borrowed in excess of $1 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. (f) All material interdivisional transactions shall be reduced to service contracts and signed by an authorized member of the management team of affected divisions. 10. ACCESS TO TECHNOLOGY AND KNOW-HOW. Each division of Genzyme Corporation shall have unrestricted access to all technology and know-how of the Corporation that may be made useful to such division's business, subject to any obligations or limitations applicable to Genzyme and its divisions. 11. DISPOSITION OF GZSP, GZMO AND GZTR DESIGNATED SHARES. (a) The GZSP Designated Shares, the GZMO Designated Shares and the GZTR Designated Shares may be (i) issued upon the exercise or conversion of outstanding stock options, warrants or convertible securities allocated to Genzyme General, (ii) subject to the restrictions set forth in Paragraph 13, sold for any valid business purpose, or 4 5 (iii) distributed as a dividend to the holders of shares of GENZ Stock, all as determined from time to time by the Genzyme Board in its sole discretion. (b) If, as of June 30 of each year starting on June 30, 2000 the number of GZSP Designated Shares on such date exceeds the sum of (i) ten percent (10%) of the number of shares of GZSP Stock then issued and outstanding and (ii) the number of shares of GZSP Stock issuable on such date with respect to stock options, stock purchase rights, warrants or other securities convertible into or exercisable for shares of GZSP Stock outstanding on such date, substantially all GZSP Designated Shares will be distributed to holders of record of GENZ Stock, subject to reservation of a number of such shares equal to the sum of (x) the number of GZSP Designated Shares reserved for issuance with respect to stock options, stock purchase rights, warrants or other securities convertible into or exercisable for shares of GENZ Stock outstanding on such date ("GENZ Convertible Securities") as a result of anti-dilution adjustments required by the terms of such instruments or approved by the Genzyme Board and (y) the number of GZSP Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to Genzyme General. (c) If, as of November 30 of each year, the number of GZMO Designated Shares on such date exceeds the sum of (i) ten percent (10%) of the number of shares of GZMO Stock then issued and outstanding and (ii) the number of shares of GZMO Stock issuable on such date with respect to stock options, stock purchase rights, warrants or other securities convertible into or exercisable for shares of GZMO Stock outstanding on such date, substantially all GZMO Designated Shares will be distributed to holders of record of GENZ Stock, subject to reservation of a number of such shares equal to the sum of (x) the number of GZMO Designated Shares reserved for issuance upon the exercise or conversion of GENZ Convertible Securities as a result of anti-dilution adjustments required by the terms of such instruments or approved by the Genzyme Board and (y) the number of GZMO Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to Genzyme General. (d) If, as of May 31 of each year, the number of GZTR Designated Shares on such date exceeds the sum of (i) ten percent (10%) of the number of shares of GZTR Stock then issued and outstanding and (ii) the number of shares of GZTR Stock issuable on such date with respect to stock options, stock purchase rights, warrants or other securities convertible into or exercisable for shares of GZTR Stock outstanding on such date, substantially all GZTR Designated Shares will be distributed to holders of record of GENZ Stock (a "Distribution"), subject to reservation of a number of such shares equal to the sum of (x) the number of GZTR Designated Shares reserved for issuance upon the exercise or conversion of GENZ Convertible Securities as a result of anti-dilution adjustments required by the terms of such instruments or approved by the Genzyme Board and (y) the number of GZTR Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to Genzyme General. 12. ISSUANCE AND SALE OF ADDITIONAL SHARES OF COMMON STOCK. When additional shares of common stock are issued and sold by Genzyme, Genzyme will identify (i) the number of such shares issued and sold for the account of the division to which they relate, the proceeds of which will be allocated to and reflected in the financial statements of such division and (ii) the number of such shares issued and sold that shall reduce the number of Designated Shares of such division. Notwithstanding the foregoing, Genzyme will not 5 6 sell any GZSP Designated Shares, GZMO Designated Shares or GZTR Designated Shares (except upon exercise or conversion of options, warrants or convertible securities issued by Genzyme General that were adjusted as a result of a dividend of GZSP, GZMO or GZTR Stock paid to holders of GENZ Stock) unless (i) the Genzyme Board determines that Genzyme Surgical Products, Genzyme Molecular Oncology or Genzyme Tissue Repair, as the case may be, has cash sufficient to fund its operations for at least the next 12 months or (ii) shares of GZSP Stock, GZMO Stock or GZTR Stock, as the case may be, are concurrently being sold for the account of Genzyme Surgical Products, Genzyme Molecular Oncology or Genzyme Tissue Repair, respectively, in an amount that will produce proceeds sufficient to fund such division's cash needs for the next 12 months. 13. OPEN MARKET PURCHASES OF SHARES OF COMMON STOCK. Genzyme may make open market purchases of its common stock in accordance with applicable securities law requirements; provided, however, that in no event shall any such purchases be made if as an immediate result thereof the number of Designated Shares representing a division will exceed 60% of the number of shares of such division outstanding plus such number of Designated Shares. Notwithstanding the foregoing, within 90 days of any open market purchase of the common stock representing any division, Genzyme may not exercise the right provided under its articles of organization to exchange shares representing such division for cash and/or shares of GENZ Stock. 14. CLASS VOTING. In addition to any stockholder approval required by Massachusetts law, whenever the approval of the holders of the common stock representing a division is required to take any action pursuant to these policies or Genzyme's articles of organization, such requirement shall be satisfied if a meeting of the holders of the common stock representing such division is held at which a quorum is present and the votes cast in favor of the proposed action exceed the votes cast against. 15. NON-COMPETE. Genzyme Surgical Products, Genzyme General, Genzyme Molecular Oncology and Genzyme Tissue Repair shall not engage to any material extent in each other's principal businesses other than through joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties, which transactions shall be subject to the conditions set forth in Paragraph 8. The divisions may compete in a business which is not a principal business of another division. The Genzyme Board may determine in its good faith business judgment whether any particular activities of one division involve a material engagement in the principle businesses of another division. 16. CORPORATE OPPORTUNITIES. The Genzyme Board will review any matter which involves the allocation of a corporate opportunity to any of the divisions, or in part to one division and in part to another division. In accordance with Massachusetts law, the Genzyme Board will make its determination with regard to the allocation of any such opportunity and the benefit of any such opportunity in accordance with its good faith business judgment of the best interests of Genzyme and all of its stockholders as a whole. Among the factors that the Genzyme Board may consider in making this allocation are (i) whether a particular corporate opportunity is principally related to the business of Genzyme Surgical Products, Genzyme General, Genzyme Molecular Oncology or Genzyme Tissue Repair; (ii) whether one division, because of its managerial or operational expertise, will be better positioned to undertake the corporate opportunity; (iii) whether one division, because of its financial resources, will be better positioned to undertake the corporate opportunity; and (iv) existing contractual agreements and restrictions. 6 -----END PRIVACY-ENHANCED MESSAGE-----