-----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, N9hSolk0KHJl7N1Hmc/zV37A3kP87t3SLb4FSw6u/rDjuGHXUD68sdMP3L54MiT3 Kf8qdHVUeyO1c7+KFDgvmA== /in/edgar/work/0000912057-00-050073/0000912057-00-050073.txt : 20001115 0000912057-00-050073.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-050073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 767966 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 10-Q 1 a2029877z10-q.txt 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-14680 GENZYME CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 06-1047163 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE KENDALL SQUARE, CAMBRIDGE, 02139 MASSACHUSETTS (zip code) (Address of principal executive offices)
(617) 252-7500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each of the issuer's series of common stock as of October 31, 2000: Genzyme General Division Common Stock 86,975,019 Genzyme Molecular Oncology Division Common Stock 15,866,633 Genzyme Surgical Products Division Common Stock 14,998,968 Genzyme Tissue Repair Division Common Stock 28,867,698
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements, including statements regarding our: - planned creation of a new division and a new publicly traded stock; - planned acquisitions of Biomatrix, Inc. and GelTex Pharmaceuticals, Inc. and related financing expectations; - expected composition of the merger consideration for both acquisitions; - expected timing of the proposed acquisitions; - expected completion of the disposition of our ownership interest in ATIII LLC; - our intention to exercise our option to purchase the limited partnership interests in Genzyme Development Partners, L.P.; - expected future revenues, operations and expenditures; and - projected cash needs. These statements are based upon the current assumptions of our management and are only expectations of future results. These statements are subject to risks and uncertainties, and our actual results may differ significantly from those that are described in this report on Form 10-Q. These risks and uncertainties include: - our ability to successfully complete preclinical and clinical development of our products and services; - our ability to manufacture sufficient amounts of our products for development and commercialization activities; - our ability to obtain and maintain adequate patent and other proprietary rights protection of our products and services; - the content and timing of decisions made by the United States Food and Drug Administration and other regulatory agencies; - the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services; - market acceptance of our products and services; - our ability to obtain reimbursement for our products and services from third-party payers and the extent of such coverage, if available; - our ability to establish and maintain licenses, strategic collaborations and distribution arrangements; - the continued funding of our joint ventures; - the accuracy of our information regarding the products and resources of our competitors and potential competitors; - the likelihood that the regulatory and stockholder approvals required to create a new division and to complete the acquisitions of Biomatrix and GelTex will be obtained and the other closing conditions for the mergers will be satisfied or waived; - conditions in financial markets relevant to the proposed mergers and exchange of Genzyme tracking stock; i - the operational integration and the other risks generally associated with mergers and exchanges of stock; and - the likelihood of receipt of requisite approvals for the disposition of our ownership interest in ATIII LLC and our ability to successfully negotiate definitive agreements for the transaction. For a further description of these risks and other uncertainties, we encourage you to carefully read the sections entitled "Risk Factors" in our final joint proxy statement/prospectus dated November 3, 2000 filed with the Securities and Exchange Commission ("SEC") on November 6, 2000 in connection with the acquisition of Biomatrix and our final joint proxy statement/prospectus dated November 9, 2000 filed with the SEC on November 13, 2000 in connection with the acquisition of GelTex. In addition, you should carefully read Exhibit 99.2, "Factors Affecting Future Operating Results," to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as amended (our "1999 Form 10-K"). NOTE REGARDING REFERENCES TO GENZYME DIVISIONS AND SERIES OF STOCK Throughout this Form 10-Q, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation and all of its operating divisions taken as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation. In addition, we refer to our four operating divisions as follows: - Genzyme General Division = "Genzyme General;" - Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology;" - Genzyme Surgical Products Division = "Genzyme Surgical Products;" and - Genzyme Tissue Repair Division = "Genzyme Tissue Repair." We currently have four designated series of common stock. Each of these series is intended to reflect the value and track the performance of one of our divisions. We refer to each series of common stock as follows: - Genzyme General Division Common Stock = "Genzyme General Stock;" - Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology Stock;" - Genzyme Surgical Products Division Common Stock = "Surgical Products Stock;" and - Genzyme Tissue Repair Division Common Stock = "Tissue Repair Stock." Holders of Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock are stockholders of Genzyme Corporation and are subject to all of the risks and uncertainties of Genzyme Corporation described in Exhibit 99.2 to our 1999 Form 10-K and our other filings with the SEC. NOTE REGARDING INCORPORATION BY REFERENCE The SEC allows us to disclose important information to you by referring you to other documents we have filed with the SEC. The information that we refer you to is "incorporated by reference" into this Form 10-Q. Please read that information. NOTE REGARDING TRADEMARKS GENZYME-REGISTERED TRADEMARK-, CEREZYME-REGISTERED TRADEMARK-, CEREDASE-REGISTERED TRADEMARK-, THYROGEN-REGISTERED TRADEMARK-, SEPRA FILM-REGISTERED TRADEMARK-, CARTICEL-REGISTERED TRADEMARK- and SNOWDEN-PENCER-REGISTERED TRADEMARK- are registered trademarks of Genzyme. FABRAZYME-TM-, SAGE-TM-, SEPRAMESH-TM- and EPICEL-TM- are trademarks of Genzyme. GENZYME-REGISTERED TRADEMARK- is a registered service mark of Genzyme. RENAGEL-REGISTERED TRADEMARK- is a registered trademark of GelTex Pharmaceuticals, Inc. NEUROCELL-TM--PD is a trademark of Diacrin, Inc. ALDURAZYME-TM- is a trademark of BioMarin/Genzyme LLC. FOCALSEAL-REGISTERED TRADEMARK--L is a registered trademark of Focal, Inc. REPLAGAL-TM- is a trademark of Transkaryotic Therapies, Inc. ii TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements................................ 1 GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999.................................................... 1 Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999....................................... 3 Unaudited, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999............................. 4 Notes to Unaudited, Consolidated Financial Statements..... 5 GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999....... 17 Combined Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999....................... 18 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999............................. 19 Notes to Unaudited, Combined Financial Statements......... 20 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999....... 26 Combined Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999....................... 27 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999............................. 28 Notes to Unaudited, Combined Financial Statements......... 29 GENZYME SURGICAL PRODUCTS Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999....... 31 Combined Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999....................... 32 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999............................. 33 Notes to Unaudited, Combined Financial Statements......... 34 GENZYME TISSUE REPAIR Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999....... 37 Combined Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999....................... 38 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999............................. 39 Notes to Unaudited, Combined Financial Statements......... 40 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 42 ITEM 3. Quantitative and Qualitative Analysis of Market Risk...................................................... 77 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................... 78 ITEM 6. Exhibits and Reports on Form 8-K.................... 79 Signatures.................................................. 80
iii PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Net product sales......................................... $206,645 $170,215 $592,505 $499,790 Net service sales......................................... 19,967 19,952 62,280 58,481 Revenues from research and development contracts.......... 747 1,248 4,617 3,572 -------- -------- -------- -------- Total revenues.......................................... 227,359 191,415 659,402 561,843 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 63,729 44,371 165,631 132,757 Cost of services sold..................................... 12,068 12,392 35,886 36,894 Selling, general and administrative....................... 66,379 58,648 195,358 183,951 Research and development (including research and development related to contracts)....................... 39,678 35,925 123,954 109,632 Amortization of intangibles............................... 3,409 6,128 15,191 18,501 Charge for in-process technology.......................... -- 5,436 -- 5,436 -------- -------- -------- -------- Total operating costs and expenses...................... 185,263 162,900 536,020 487,171 -------- -------- -------- -------- Operating income............................................ 42,096 28,515 123,382 74,672 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (11,420) (10,407) (30,866) (29,507) Investment income......................................... 12,758 9,404 33,333 26,692 Interest expense.......................................... (5,010) (5,922) (12,785) (17,010) Minority interest......................................... 977 843 3,185 2,573 Gain on affiliate sale of stock........................... 2,419 1,164 22,689 1,770 Gain on sale of product line.............................. -- 518 -- 8,018 Gain on sale of equity securities......................... 8,544 -- 22,709 1,963 Charge for impaired investments........................... -- -- -- (5,487) Other..................................................... (10) 58 5,185 101 -------- -------- -------- -------- Total other income (expenses)........................... 8,258 (4,342) 43,450 (10,887) -------- -------- -------- -------- Income before income taxes.................................. 50,354 24,173 166,832 63,785 Provision for income taxes.................................. (15,933) (10,395) (51,101) (27,659) -------- -------- -------- -------- Net income.................................................. $ 34,421 $ 13,778 $115,731 $ 36,126 ======== ======== ======== ======== Comprehensive income, net of tax: Net income................................................ $ 34,421 $ 13,778 $115,731 $ 36,126 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ (10,273) 6,463 (20,628) (7,349) -------- -------- -------- -------- Unrealized gains (losses) on securities: Unrealized gains on securities arising during the period.............................................. 44,223 18,869 48,597 17,352 Reclassification adjustment for (gains) losses included in net income.............................. -- -- (5,501) 1,945 -------- -------- -------- -------- Unrealized gains on securities, net................... 44,223 18,869 43,096 19,297 -------- -------- -------- -------- Other comprehensive income................................ 33,950 25,332 22,468 11,948 -------- -------- -------- -------- Comprehensive income........................................ $ 68,371 $ 39,110 $138,199 $ 48,074 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 1 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income......................... $ 50,973 $ 29,971 $160,272 $ 91,389 Genzyme Surgical Products net loss................. -- -- -- (27,523) Tax benefit allocated from Genzyme Molecular Oncology......................................... 2,021 2,016 5,558 6,326 Tax benefit allocated from Genzyme Surgical Products......................................... 4,424 3,841 11,080 14,191 Tax benefit allocated from Genzyme Tissue Repair... 2,031 2,359 5,211 9,733 -------- -------- -------- -------- Net income allocated to Genzyme General Stock........ $ 59,449 $ 38,187 $182,121 $ 94,116 ======== ======== ======== ======== Net income per share of Genzyme General Stock: Basic............................................ $ 0.69 $ 0.46 $ 2.14 $ 1.14 ======== ======== ======== ======== Diluted.......................................... $ 0.64 $ 0.43 $ 1.99 $ 1.09 ======== ======== ======== ======== Weighted average shares outstanding: Basic............................................ 86,380 83,621 85,277 82,741 ======== ======== ======== ======== Diluted.......................................... 97,074 94,331 95,614 93,196 ======== ======== ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss........................................... $ (5,504) $ (7,559) $(17,924) $(22,777) ======== ======== ======== ======== Net loss per share of Molecular Oncology Stock-- basic and diluted................................ $ (0.37) $ (0.60) $ (1.28) $ (1.80) ======== ======== ======== ======== Weighted average shares outstanding................ 14,884 12,682 14,002 12,672 ======== ======== ======== ======== ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss........................................... $(13,936) $(10,953) $(34,346) $(11,833) ======== ======== ======== ======== Net loss per share of Surgical Products Stock-- basic and diluted................................ $ (0.93) $ (0.74) $ (2.30) $ (0.80) ======== ======== ======== ======== Weighted average shares outstanding................ 14,959 14,835 14,907 14,835 ======== ======== ======== ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss........................................... $ (5,588) $ (6,148) $(14,590) $(24,146) ======== ======== ======== ======== Net loss per share of Tissue Repair Stock-- basic and diluted................................ $ (0.19) $ (0.25) $ (0.51) $ (1.05) ======== ======== ======== ======== Weighted average shares outstanding................ 28,795 24,275 28,664 22,995 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 2 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 215,568 $ 130,156 Short-term investments.................................... 164,927 255,846 Accounts receivable, net.................................. 183,779 166,803 Inventories............................................... 123,878 117,269 Prepaid expenses and other current assets................. 29,169 18,918 Deferred tax assets--current.............................. 41,441 41,195 ---------- ---------- Total current assets.................................... 758,762 730,187 Property, plant and equipment, net.......................... 400,630 383,181 Long-term investments....................................... 427,805 266,988 Notes receivable--related party............................. 10,175 6,603 Intangibles, net............................................ 237,343 253,153 Deferred tax asset--noncurrent.............................. -- 18,631 Investment in equity securities............................. 186,883 97,859 Other....................................................... 54,948 30,680 ---------- ---------- Total assets............................................ $2,076,546 $1,787,282 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 23,262 $ 27,853 Accrued expenses.......................................... 95,541 73,359 Income taxes payable...................................... 51,778 27,946 Deferred revenue.......................................... 4,840 3,700 Current portion of long-term debt and capital lease obligations............................................. 128 5,080 ---------- ---------- Total current liabilities............................... 175,549 137,938 Long-term debt and capital lease obligations................ 18,272 18,000 Convertible notes and debentures, net....................... 273,415 272,622 Deferred tax liability...................................... 7,329 -- Other noncurrent liabilities................................ 2,904 2,330 ---------- ---------- Total liabilities....................................... 477,469 430,890 ---------- ---------- Stockholders' equity: Genzyme General Stock, $0.01 par value.................... 867 842 Molecular Oncology Stock, $0.01 par value................. 153 134 Surgical Products Stock, $0.01 par value.................. 150 148 Tissue Repair Stock, $0.01 par value...................... 289 285 Treasury Stock--Genzyme General Stock--at cost............ (901) (901) Additional paid-in capital--Genzyme General Stock......... 524,979 635,996 Additional paid-in capital--Molecular Oncology Stock...... 105,059 67,672 Additional paid-in capital--Surgical Products Stock....... 543,197 376,123 Additional paid-in capital--Tissue Repair Stock........... 228,095 217,103 Retained earnings......................................... 172,933 57,202 Accumulated other comprehensive income.................... 24,256 1,788 ---------- ---------- Total stockholders' equity.............................. 1,599,077 1,356,392 ---------- ---------- Total liabilities and stockholders' equity.............. $2,076,546 $1,787,282 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 115,731 $ 36,126 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization........................... 45,374 48,706 Provision for bad debts................................. 5,574 10,944 Note received from related party and related accrued interest.............................................. (10,175) -- Equity in net loss of unconsolidated affiliates......... 30,866 29,507 Minority interest in net loss of subsidiary............. (3,185) (2,573) Gain on affiliate sale of stock......................... (22,689) (1,770) Gain on sale of product line............................ -- (8,018) Gain on sale of equity securities....................... (22,709) (1,963) Charge for impaired investment.......................... -- 5,487 Charge for purchase of in-process research and development........................................... -- 5,436 Deferred income tax expense (benefit), net.............. 4,668 (1,986) Other................................................... 2,224 1,730 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (30,053) (3,486) Inventories........................................... (15,185) (10,752) Prepaid expenses and other current assets............. (1,970) 9,653 Accounts payable, accrued expenses, income taxes payable and deferred revenue.................................... 19,109 16,495 --------- --------- Net cash provided by operating activities........... 117,580 133,536 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (498,916) (357,248) Sales and maturities of investments....................... 433,150 368,162 Proceeds from sale of equity securities................... 15,773 11,090 Investments in unconsolidated affiliates.................. (5,000) (13,700) Acquisitions, net of acquired cash and assumed liabilities............................................. (342) (6,500) Purchase of property, plant and equipment................. (52,263) (35,602) Proceeds from sale of product line........................ -- 5,000 Investment in joint ventures.............................. (19,639) (32,507) Repayment of notes receivable............................. -- 8,360 Sale of equipment......................................... -- 188 Other..................................................... (1,521) 1,179 --------- --------- Net cash used in investing activities............... (128,758) (51,578) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 104,122 56,432 Payments of debt and capital lease obligations............ (5,000) (3,669) Other..................................................... 1,276 3,320 --------- --------- Net cash provided by financing activities........... 100,398 56,083 --------- --------- Effect of exchange rate changes on cash..................... (3,808) (2,890) --------- --------- Increase in cash and cash equivalents....................... 85,412 135,151 Cash and cash equivalents at beginning of period............ 130,156 118,612 --------- --------- Cash and cash equivalents at end of period.................. $ 215,568 $ 253,763 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Our unaudited, consolidated financial statements for each period include the balance sheets, results of operations and cash flows of each of our divisions and corporate operations taken as a whole. We eliminate all significant intracompany items and transactions in consolidation. We prepared our unaudited, consolidated financial statements following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 1999 data to conform with our 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of the results for future periods. 2. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) Raw materials....................................... $ 44,864 $ 39,958 Work-in-process..................................... 43,104 44,559 Finished products................................... 35,910 32,752 -------- -------- Total........................................... $123,878 $117,269 ======== ========
3. INVESTMENT IN FOCAL, INC. In April 2000, Focal, Inc. exercised its first option under the stock purchase agreement between Genzyme and Focal. As required by the terms of this agreement, we purchased $5.0 million of Focal common stock at a price of $8.14 per share. We have allocated these shares to Genzyme Surgical Products. We are committed, at Focal's option, to make future additional equity investments of up to $10.0 million subject to certain conditions. 4. OFFERING OF MOLECULAR ONCOLOGY STOCK Pursuant to a prospectus filed under Rule 424 of the Securities Act of 1933, as amended, in July 2000 we sold 1,607,400 shares of Molecular Oncology Stock to a limited number of purchasers at a price of $12.91 per share. We received approximately $20.7 million of net proceeds from the offering, which we allocated to Genzyme Molecular Oncology. The proceeds of this offering will be used primarily to fund Genzyme Molecular Oncology's research, preclinical and clinical development programs, and for its working capital and general business purposes. 5. INTERDIVISIONAL FINANCING ARRANGEMENTS GENZYME MOLECULAR ONCOLOGY In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under its interdivisional financing arrangement with Genzyme General in exchange for 676,254 Genzyme Molecular Oncology designated shares. As required by our charter, the number of Genzyme Molecular Oncology designated 5 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INTERDIVISIONAL FINANCING ARRANGEMENTS (CONTINUED) shares was determined using the average closing price of Molecular Oncology Stock for the 20 trading days beginning on the 30th trading day before the draw. Genzyme Molecular Oncology designated shares are authorized shares of Molecular Oncology Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Molecular Oncology. GENZYME TISSUE REPAIR In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its interdivisional financing arrangement with Genzyme General in exchange for 765,169 Genzyme Tissue Repair designated shares. In September 2000, Genzyme Tissue Repair made another draw of $5.0 million under this arrangement in exchange for 927,488 Genzyme Tissue Repair designated shares. As required by our charter, the number of Genzyme Tissue Repair designated shares was determined using the average closing price of Tissue Repair Stock for the 20 trading days beginning on the 30th trading day before the draw. Genzyme Tissue Repair designated shares are authorized shares of Tissue Repair Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Tissue Repair. 6. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS SYNPAC In March 2000, Genzyme General recorded $19.5 million as research and development expense, representing the initial amounts payable to Synpac (North Carolina), Inc. under a license granted by Synpac to us to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease, produced using a Chinese hamster ovary cell line. In connection with this license, Genzyme General will pay Synpac certain amounts upon the achievement of certain development and commercialization milestones. Genzyme General will also pay Synpac royalties for a specified period of time based on certain percentages of sales. PHARMING In June 2000, we entered into a strategic alliance agreement with Pharming Group N.V. to share in the development and funding for the commercialization of a human alpha-glucosidase enzyme replacement therapy. Under the agreement, Pharming paid us $250,000 in cash and issued us a $10.0 million 7% Convertible Senior Note due June 1, 2004. This consideration was a reimbursement for 50% of the amounts Genzyme previously paid to Synpac for product development and technology fees and expenses. Accordingly, Genzyme recorded the $10.3 million as a reduction to research and development expense during the three months ended June 30, 2000. The note issued by Pharming is convertible at any time at our option into fully paid and nonassessable ordinary shares of Pharming. We have allocated our interest in this note to Genzyme General and have classified it as a long-term, related party note receivable as of September 30, 2000. CAMBRIDGE ANTIBODY TECHNOLOGY In September 2000, we entered into a strategic alliance with an affiliate of Cambridge Antibody Technology Limited to develop and commercialize human monoclonal antibodies directed against 6 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS (CONTINUED) TGF-beta for all clinical indications other than ophthalmology. Concurrently, we agreed to make a $20.0 million equity investment in the ordinary shares of Cambridge Antibody Technology Group plc at a price of L44.59 per share, which was a 15% premium over the average market price for the shares for the 20 business days preceding the date of the agreement. In the three month period ended September 30, 2000, we recorded the value of the premium as a charge to research and development expense in our statement of operations. We have allocated our TGF-beta program and our investment in Cambridge Antibody Technology to Genzyme General. 7. GAIN ON AFFILIATE SALE OF STOCK In February 2000, Genzyme Transgenics Corporation, an unconsolidated affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics common stock, resulting in net proceeds to Genzyme Transgenics of $75.2 million (after the exercise of the underwriter's overallotment option). In accordance with our policy pertaining to affiliate sales of stock, we recognized a gain of $20.3 million and recorded a net deferred tax expense of $3.9 million for the three months ended March 31, 2000. The deferred tax expense is net of a $3.4 million credit for the reversal of a valuation allowance on a deferred tax asset. In September 2000, we recorded an additional gain of $2.4 million on our investment in Genzyme Transgenics as a result of the issuance of additional shares of common stock by Genzyme Transgenics. 8. GAINS (LOSSES) ON SALE OF EQUITY SECURITIES In June 2000, Genzyme General recorded a gain of $5.5 million upon the sale of a portion of its investment in Genzyme Transgenics common stock. During the second quarter of 2000, the tax effect of this gain was fully offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. In the third quarter of 2000, we recorded a gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. As of September 30, 2000 our ownership interest in Genzyme Transgenics was approximately 26%. On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc. upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis for shares of Insmed common stock. On the date of exchange, we recognized a $7.6 million realized gain on the exchange of shares. 9. SETTLEMENT OF LAWSUIT In April 2000, we received net proceeds of approximately $5.1 million in connection with the settlement of a lawsuit, which we recorded as other income in our unaudited, consolidated statements of operations for the nine months ended September 30, 2000. The lawsuit, initiated in 1993, pertained to insurance coverage for an accidental spill of Ceredase-Registered Trademark- enzyme at a fill facility operated by a contractor to Genzyme. We allocated the net proceeds of the settlement of this lawsuit to Genzyme General. 7 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Provision for income taxes............ $(15,933) $(10,395) 53% $(51,101) $(27,659) 85% Tax rate.............................. 32% 43% 31% 43%
Our tax rates for both periods vary from the U.S. statutory tax rate as a result of our: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. In the nine months ended September 30, 2000, we reversed valuation allowances totaling $5.3 million, which reduced our tax rate for the period by 4.9%. 11. NET INCOME (LOSS) PER SHARE The following table sets forth our computation of basic and diluted earnings per share: GENZYME GENERAL STOCK:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Genzyme General net income............................ $50,973 $29,971 $160,272 $ 91,389 Genzyme Surgical Products net loss (1)................ -- -- -- (27,523) Tax benefit allocated from Genzyme Molecular Oncology............................................ 2,021 2,016 5,558 6,326 Tax benefit allocated from Genzyme Surgical Products............................................ 4,424 3,841 11,080 14,191 Tax benefit allocated from Genzyme Tissue Repair...... 2,031 2,359 5,211 9,733 ------- ------- -------- -------- Net income allocated to Genzyme General Stock--basic...................................... 59,449 38,187 182,121 94,116 Effect of dilutive securities (net of tax): 5 1/4% convertible subordinated notes: Interest expense.................................. 2,285 2,259 6,643 6,208 Amortization of debt discount and offering costs (2)............................................. 161 161 472 443 5% convertible subordinated debentures: Interest expense.................................. 181 183 531 502 Amortization of debt offering costs (3)........... 30 30 90 83 ------- ------- -------- -------- Net income allocated to Genzyme General Stock--diluted...................................... $62,106 $40,820 $189,857 $101,352 ======= ======= ======== ======== Shares used in computing net income per common share-- basic............................................... 86,380 83,621 85,277 82,741 ------- ------- -------- -------- Effective of dilutive securities: Employee and director stock options................. 3,751 3,743 3,394 3,485
8 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. NET INCOME (LOSS) PER SHARE (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Warrants............................................ -- 24 -- 27 5 1/4% convertible subordinated notes............... 6,313 6,313 6,313 6,313 5% convertible subordinated debentures.............. 630 630 630 630 ------- ------- -------- -------- Dilutive potential common shares (4).............. 10,694 10,710 10,337 10,455 ======= ======= ======== ======== Shares used in computing net income per common share-- diluted (4)......................................... 97,074 94,331 95,614 93,196 ======= ======= ======== ======== Net income per share of Genzyme General Stock: Basic............................................... $ 0.69 $ 0.46 $ 2.14 $ 1.14 ======= ======= ======== ======== Diluted (4)......................................... $ 0.64 $ 0.43 $ 1.99 $ 1.09 ======= ======= ======== ========
9 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. NET INCOME (LOSS) PER SHARE (CONTINUED) - ------------------------ (1) We created Genzyme Surgical Products on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the operations allocated to Genzyme General and, therefore, in the calculation of net income allocated to Genzyme General Stock. (2) We are amortizing the debt discount and offering costs of approximately $7.0 million over the term of these notes, which mature in June 2005. (3) We are amortizing the debt offering costs of approximately $0.9 million over the term of these debentures, which mature in August 2003. (4) We did not include the securities described in the following table in the computation of Genzyme General's diluted earnings per share because these securities had an exercise price greater than the average market price of Genzyme General Stock during the relevant periods:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Total shares of Genzyme General Stock issuable for options.................................... 50 1,680 2,210 1,648 == ===== ===== =====
MOLECULAR ONCOLOGY STOCK: In accounting for the acquisition of PharmaGenics, Inc. in June 1997, we recorded a valuation allowance against a $2.9 million tax asset related to acquired net operating losses due to the application of our policy of accounting for income taxes at the divisional level as if each division were a separate taxpayer. As a result, we recorded and allocated to Genzyme Molecular Oncology an additional $2.9 million of goodwill that was not recorded at the consolidated level. The amortization of this goodwill increases the loss allocated to Genzyme Molecular Oncology and, therefore, the loss allocated to Molecular Oncology Stock. This goodwill was fully amortized in the second quarter of 2000. For all periods presented, basic and diluted net loss per share of Molecular Oncology Stock are the same. We did not include the securities described in the following table in the computation of 10 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. NET INCOME (LOSS) PER SHARE (CONTINUED) Molecular Oncology Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Molecular Oncology Stock.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Shares of Molecular Oncology Stock issuable for options..... 1,083 1,618 783 1,592 Warrants to purchase Molecular Oncology Stock............... 10 10 10 10 Shares of Molecular Oncology Stock issuable upon conversion of the 5 1/4% convertible subordinated notes.............. 682 682 682 682 Genzyme Molecular Oncology designated shares................ 1,318 728 1,318 728 ----- ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock................ 3,093 3,038 2,793 3,012 ===== ===== ===== =====
SURGICAL PRODUCTS STOCK: We created Genzyme Surgical Products on June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the operations allocated to Genzyme General and, therefore, in the net income allocated to Genzyme General Stock. Net loss per share data of Surgical Products Stock is calculated using the net loss allocated to Genzyme Surgical Products for the period June 28, 1999 through September 30, 1999 and weighted average shares outstanding during the same period. Basic and diluted net loss per share of Surgical Products Stock is the same. We did not include the securities described in the following table in the computation of Surgical Products Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Surgical Products Stock:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Shares of Surgical Products Stock issuable for options...... 628 -- 526 -- Shares of Surgical Products Stock issuable upon conversion of the 5 1/4% convertible subordinated notes.............. 1,130 1,130 1,130 1,130 Genzyme Surgical Products designated shares (1)............. 35 -- 35 -- ----- ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Surgical Products Stock................. 1,793 1,130 1,691 1,130 ===== ===== ===== =====
- ------------------------ (1) Genzyme Surgical Products designated shares are authorized shares of Surgical Products Stock that are not issued and outstanding, but which our board or directors may issue, sell, or distribute without allocating the proceeds to Genzyme Surgical Products. 11 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. NET INCOME (LOSS) PER SHARE (CONTINUED) TISSUE REPAIR STOCK: For all periods presented, basic and diluted net loss per share of Tissue Repair Stock is the same. We did not include the securities described in the following table in the computation of Tissue Repair Stock diluted net loss per share for each period because these securities would have an anti-dilutive effect due to the net loss allocated to Tissue Repair Stock:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Shares of Tissue Repair Stock issuable for options.......... 2,866 4,198 2,843 3,917 Shares of Tissue Repair Stock issuable upon conversion of 5% convertible subordinated note (1)......................... -- 3,445 -- 3,445 Genzyme Tissue Repair designated shares..................... 3,845 2,260 3,845 2,260 ----- ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Tissue Repair Stock..................... 6,711 9,903 6,688 9,622 ===== ===== ===== =====
- ------------------------ (1) The conversion of Genzyme Tissue Repair's 5% convertible subordinated note was completed in the fourth quarter of 1999. 12. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. We have five reportable segments: - Therapeutics, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from sales of Cerezyme-Registered Trademark- enzyme; - Diagnostic Products, which provides diagnostic products to niche markets with a focus on IN VITRO diagnostics; - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors; - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery; and - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage repair, and severe burns. 12 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SEGMENT REPORTING (CONTINUED) Information concerning the operations in these reportable segments is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Genzyme General: Therapeutics.................................... $153,840 $123,492 $436,220 $357,756 Diagnostic Products............................. 15,824 14,286 46,601 43,933 Other........................................... 22,343 19,364 66,191 59,274 Eliminations/Adjustments (1).................... 158 527 473 1,677 -------- -------- -------- -------- Total Genzyme General......................... 192,165 157,669 549,485 462,640 Genzyme Molecular Oncology........................ 635 709 4,153 3,455 Genzyme Surgical Products......................... 29,754 27,385 88,805 81,419 Genzyme Tissue Repair............................. 4,853 5,682 17,007 14,370 Eliminations/Adjustments (2)...................... (48) (30) (48) (41) -------- -------- -------- -------- Total......................................... $227,359 $191,415 $659,402 $561,843 ======== ======== ======== ======== Net income (loss): Net income (loss) allocated to Genzyme General Stock: Division net income (loss)--Genzyme General: Therapeutics.................................. $ 43,050 $ 32,556 $126,565 $ 99,337 Diagnostic Products........................... 865 1,063 2,395 3,263 Other......................................... (260) (2,630) (1,056) (3,958) Eliminations/Adjustments (3).................. 7,318 (1,018) 32,368 (7,253) -------- -------- -------- -------- Net income for Genzyme General.................. 50,973 29,971 160,272 91,389 Genzyme Surgical Products net loss (4).......... -- -- -- (27,523) Tax benefits allocated from other Genzyme divisions..................................... 8,476 8,216 21,849 30,250 -------- -------- -------- -------- Net income allocated to Genzyme General Stock..... 59,449 38,187 182,121 94,116 Net loss allocated to Molecular Oncology Stock.... (5,504) (7,559) (17,924) (22,777) Net loss allocated to Surgical Products Stock..... (13,936) (10,953) (34,346) (11,833) Net loss allocated to Tissue Repair Stock......... (5,588) (6,148) (14,590) (24,146) Eliminations/Adjustments (5)...................... -- 251 470 766 -------- -------- -------- -------- Total........................................... $ 34,421 $ 13,778 $115,731 $ 36,126 ======== ======== ======== ========
- ------------------------ (1) Includes primarily amounts related to Genzyme General's corporate research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme General. (2) Represents the elimination of inter-divisional revenue. (3) Includes primarily amounts related to Genzyme General's corporate research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme 13 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SEGMENT REPORTING (CONTINUED) General. The nine months ended September 30, 2000 includes a gain of $20.3 million relating to a public offering of common shares by Genzyme Transgenics. (See Note 7., "Gain on Affiliate Sale of Stock," above.) In addition, the three and nine months ended September 30, 2000 include net realized gains of $8.5 million and $22.7 million, respectively, resulting from the sale of a portion of our investments in equity securities (See Note 8., "Gains (Losses) on Sale of Equity Securities" above.) (4) Represents losses incurred by Genzyme Surgical Products prior to June 28, 1999. Prior to this date, the operations of Genzyme Surgical Products were included in the operations allocated to Genzyme General and, therefore, in the net income allocated to Genzyme General Stock. (5) Consists primarily of a difference in amortization due to $2.9 million of additional goodwill associated with the PharmaGenics Inc. acquisition carried at the Genzyme Molecular Oncology level as compared to amounts carried at the consolidated level and other adjustments related to our corporate activities that we do not specifically allocate to a particular segment. The difference in the amortization results from the application of our policy to account for income taxes at the divisional level as if each division were a separate taxpayer. There has been no material change in segment assets since December 31, 1999. 13. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance which we will refer to as "Biosurgery Stock". We will hold a special meeting of our shareholders on December 15, 2000 at which holders of each of our four series of tracking stock will be asked to approve a charter amendment creating Biosurgery Stock as a new series of tracking stock of Genzyme, and eliminating Tissue Repair Stock and Surgical Products Stock. In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. We will account for the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical basis for each division because the combination of these two divisions is considered a re-allocation of assets and liabilities within Genzyme. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. The acquisition is subject to: - approval by Biomatrix's shareholders; 14 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY (CONTINUED) - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final joint proxy statement/prospectus dated November 3, 2000, which we filed with the SEC on November 6, 2000. 14. ACQUISITION OF GELTEX PHARMACEUTICALS, INC. On September 11, 2000, we entered into an agreement to acquire GelTex Pharmaceuticals, Inc. In connection with the merger, GelTex shareholders will receive 0.7272 of a share of Genzyme General Stock or $47.50 in cash for each GelTex share owned, subject to proration to maintain the cash portion of the consideration at 50%, approximately $509.4 million. We will account for the merger as a purchase. The merger, which we expect to close by the end of 2000, is subject to: - approval by GelTex's shareholders; - clearance under federal antitrust laws; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final proxy statement/prospectus for the merger dated November 9, 2000, which we filed with the SEC on November 13, 2000. 15. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for our fiscal year beginning January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our balance sheet and measure those instruments at fair value. We are currently assessing the effects of adopting SFAS 133, as amended, and have not yet made a determination of the impact SFAS 133 will have on our consolidated results of operations and financial position. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 will be effective in the fourth quarter of 2000. We are currently evaluating the guidance provided in SAB 101 and do not expect its application to have a material effect on our financial statements. 16. SUBSEQUENT EVENTS PURDUE PHARMA In October 2000, we entered into an arrangement with Purdue Pharma L.P. relating to the discovery and development of cancer antigens. Under this arrangement, we received approximately 15 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS (CONTINUED) $12 million in cash, in the form of an up-front fee, research funding and an equity investment, and will receive approximately $9 million in committed research funding over the next three years. The equity portion of this arrangement provided for two affiliates of Purdue Pharma to purchase an aggregate of 532,066 shares of Molecular Oncology Stock at a premium to the market price for those shares. We allocate our antigen discovery program to Genzyme Molecular Oncology. ATIII LLC In November 2000, we entered into a non-binding letter of intent with Genzyme Transgenics pursuant to which Genzyme Transgenics will acquire our rights in Europe and the Americas for recombinant human antithrombin III. We currently hold these rights through our 50% ownership interest in ATIII LLC, the joint venture we formed with Genzyme Transgenics in 1998. Our 50% ownership interest is currently allocated to Genzyme General. Our board of directors and the board of directors of Genzyme Transgenics have to approve the transaction in order for the transfer of rights to occur. The transaction is also subject to the companies' ability to successfully negotiate definitive agreements and other customary closing conditions. We expect to complete this transaction by the end of 2000. 16 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Net product sales......................................... $176,891 $142,860 $503,700 $418,401 Net service sales......................................... 15,115 14,270 45,296 42,696 Revenues from research and development contracts: Related parties......................................... -- 350 245 1,262 Other................................................... 159 189 244 281 -------- -------- -------- -------- Total revenues........................................ 192,165 157,669 549,485 462,640 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 45,190 27,603 114,461 82,706 Cost of services sold..................................... 9,165 8,834 26,937 26,622 Selling, general and administrative....................... 41,780 36,388 122,974 114,446 Research and development (including research and development related to contracts)....................... 25,567 22,884 83,701 68,896 Amortization of intangibles............................... 1,983 1,978 5,962 6,081 Charge for in-process technology.......................... -- 5,436 -- 5,436 -------- -------- -------- -------- Total operating costs and expenses...................... 123,685 103,123 354,035 304,187 -------- -------- -------- -------- Operating income............................................ 68,480 54,546 195,450 158,453 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (11,420) (9,352) (30,866) (24,077) Investment income......................................... 11,072 6,970 27,798 23,713 Interest expense.......................................... (4,647) (5,445) (11,639) (15,631) Minority interest......................................... 977 843 3,185 2,573 Gain on affiliate sale of stock........................... 2,419 1,164 22,689 1,770 Gain on sale of product line.............................. -- 518 -- 8,018 Gain on sale of equity securities......................... 8,544 -- 22,709 1,963 Charge for impaired investment............................ -- -- -- (5,487) Other..................................................... (43) -- 5,110 -- -------- -------- -------- -------- Total other income (expenses)........................... 6,902 (5,302) 38,986 (7,158) -------- -------- -------- -------- Income before income taxes.................................. 75,382 49,244 234,436 151,295 Provision for income taxes.................................. (24,409) (19,273) (74,164) (59,906) -------- -------- -------- -------- Division net income......................................... $ 50,973 $ 29,971 $160,272 $ 91,389 ======== ======== ======== ======== Comprehensive income, net of tax: Division net income....................................... $ 50,973 $ 29,971 $160,272 $ 91,389 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ (10,340) 6,463 (20,737) (7,349) -------- -------- -------- -------- Unrealized gains (losses) on securities: Unrealized gains arising during the period............ 44,394 18,871 51,179 17,982 Reclassification adjustment for (gains) losses included in division net income..................... -- -- (5,501) 1,945 -------- -------- -------- -------- Unrealized gains on securities, net..................... 44,394 18,871 45,678 19,927 -------- -------- -------- -------- Other comprehensive income................................ 34,054 25,334 24,941 12,578 -------- -------- -------- -------- Comprehensive income........................................ $ 85,027 $ 55,305 $185,213 $103,967 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 17 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 176,316 $ 94,523 Short-term investments.................................... 100,288 214,240 Accounts receivable, net.................................. 157,931 141,949 Inventories............................................... 83,621 84,384 Prepaid expenses and other current assets................. 26,728 17,632 Due from Genzyme Molecular Oncology....................... 4,088 3,793 Due from Genzyme Surgical Products........................ 9,226 6,406 Due from Genzyme Tissue Repair............................ 1,272 683 Deferred tax asset--current............................... 41,441 41,195 ---------- ---------- Total current assets.................................... 600,911 604,805 Property, plant and equipment, net.......................... 380,474 362,548 Long-term investments....................................... 415,301 205,142 Notes receivable--related party............................. 10,175 6,603 Intangibles, net............................................ 68,938 75,370 Deferred tax assets--noncurrent............................. -- 19,844 Investment in equity securities............................. 186,883 94,719 Other....................................................... 46,544 30,552 ---------- ---------- Total assets............................................ $1,709,226 $1,399,583 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 17,648 $ 23,229 Accrued expenses.......................................... 80,406 62,514 Income taxes payable...................................... 51,778 27,946 Deferred revenue.......................................... 4,404 3,475 Current portion of long-term debt and capital lease obligations............................................. 23 80 ---------- ---------- Total current liabilities............................... 154,259 117,244 Long-term debt and capital lease obligations................ 62 -- Convertible subordinated notes and debentures............... 273,415 272,622 Deferred tax liability...................................... 8,797 -- Other....................................................... 2,789 2,103 ---------- ---------- Total liabilities....................................... 439,322 391,969 Division equity............................................. 1,269,904 1,007,614 ---------- ---------- Total liabilities and division equity................... $1,709,226 $1,399,583 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. 18 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net income....................................... $ 160,272 $ 91,389 Reconciliation of division net income to net cash provided by operating activities: Depreciation and amortization........................... 32,834 33,553 Provision for bad debts................................. 5,303 10,683 Note received from related party and related accrued interest............................................... (10,175) -- Equity in net loss of unconsolidated affiliates......... 30,866 24,077 Minority interest in net loss of subsidiary............. (3,185) (2,573) Gain on affiliate sale of stock......................... (22,689) (1,770) Gain on sale of product line............................ -- (8,018) Gain on sale of equity securities....................... (22,709) (1,963) Charge for impaired investment.......................... -- 5,487 Charge for in-process research and development.......... -- 5,436 Deferred income tax expense............................. 5,882 -- Other................................................... 722 763 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (28,776) (6,289) Inventories........................................... (7,813) (1,939) Prepaid expenses and other current assets............. (813) 7,839 Due from other Genzyme divisions...................... (3,839) (12,494) Accounts payable, accrued expenses, income taxes payable and deferred revenue......................... 35,600 44,110 --------- --------- Net cash provided by operating activities............. 171,480 188,291 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (389,549) (342,087) Sales and maturities of investments....................... 298,344 342,010 Proceeds from sale of equity securities................... 15,773 11,090 Purchase of property, plant and equipment................. (49,973) (32,598) Acquisitions, net of acquired cash and assumed liabilities............................................. (342) (6,500) Investments in unconsolidated affiliates.................. -- (13,700) Investments in joint ventures............................. (19,639) (28,912) Repayment of notes receivable............................. -- 8,360 Proceeds from sale of product line........................ -- 5,000 Other..................................................... 3,161 915 --------- --------- Net cash used in investing activities................. (142,225) (56,422) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Genzyme General Stock................................................... 80,064 55,537 Payments of debt and capital lease obligations............ -- (3,525) Net cash allocated to Genzyme Surgical Products........... -- (50,827) Net cash allocated to Genzyme Tissue Repair............... (24,910) (29,984) Other..................................................... 1,276 3,444 --------- --------- Net cash provided by (used in) financing activities... 56,430 (25,355) --------- --------- Effect of exchange rate changes on cash..................... (3,892) (2,890) --------- --------- Increase in cash and cash equivalents....................... 81,793 103,624 Cash and cash equivalents at beginning of period............ 94,523 100,012 --------- --------- Cash and cash equivalents at end of period.................. $ 176,316 $ 203,636 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. 19 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme General for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme General. We also allocate a portion of our corporate operations to Genzyme General using methods described in our allocation policy included in Exhibit 99.1 to our 1999 Form 10-K. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme General following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 1999 data to conform with our 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme General's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme General included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of the results for future periods. We established Genzyme Surgical Products as a separate division of Genzyme in June 1999. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. These unaudited, combined financial statements reflect the allocated financial position, results of operations and cash flows of Genzyme General as if Genzyme Surgical Products had been accounted for as a separate division of Genzyme for all periods presented. 2. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) Raw materials....................................... $23,770 $24,057 Work-in-process..................................... 38,918 40,592 Finished products................................... 20,933 19,735 ------- ------- Total........................................... $83,621 $84,384 ======= =======
3. INTERDIVISIONAL FINANCING ARRANGEMENTS GENZYME MOLECULAR ONCOLOGY In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under its interdivisional financing arrangement with Genzyme General in exchange for 676,254 Genzyme Molecular Oncology designated shares. As required by our charter, the number of Genzyme Molecular Oncology designated shares was determined using the average closing price of Molecular Oncology Stock for the 20 trading days beginning on the 30th trading day before the draw. As of September 30, 2000, $15.0 million remained available to Genzyme Molecular Oncology under this arrangement. 20 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. INTERDIVISIONAL FINANCING ARRANGEMENTS (CONTINUED) GENZYME TISSUE REPAIR In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its interdivisional financing arrangement with Genzyme General in exchange for 765,169 Genzyme Tissue Repair designated shares. In September 2000, Genzyme Tissue Repair made a subsequent draw of $5.0 million under this interdivisional financing arrangement in exchange for 927,488 Genzyme Tissue Repair designated shares. As required by our charter, the number of Genzyme Tissue Repair designated shares was determined using the average closing price of Tissue Repair Stock for the 20 trading days beginning on the 30th trading day before the draw. As of September 30, 2000, $10.0 million remained available to Genzyme Tissue Repair under this arrangement. 4. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS SYNPAC In March 2000, Genzyme General recorded $19.5 million as research and development expense, representing the initial amounts payable to Synpac (North Carolina), Inc. under a license granted by Synpac to us to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease produced using a Chinese hamster ovary cell line. In connection with this license, Genzyme General will pay Synpac certain amounts upon the achievement of certain development and commercialization milestones. Genzyme General will also pay Synpac royalties for a specified period of time based on certain percentages of sales. PHARMING In June 2000, we entered into a strategic alliance agreement with Pharming Group N.V. to share in the development and funding for the commercialization of a human alpha-glucosidase enzyme replacement therapy. Under the agreement, Pharming paid us $250,000 in cash and issued us a $10.0 million 7% Convertible Senior Note due June 1, 2004. This consideration was a reimbursement for 50% of the amounts Genzyme previously paid to Synpac for product development and technology fees and expenses. Accordingly, Genzyme recorded the $10.3 million as a reduction to research and development expense during the three months ended June 30, 2000. The note issued by Pharming is convertible at any time at our option into fully paid and nonassessable ordinary shares of Pharming. We have allocated our interest in this note to Genzyme General and have classified it as a long-term, related party note receivable as of September 30, 2000. CAMBRIDGE ANTIBODY TECHNOLOGY In September 2000, we entered into a strategic alliance with an affiliate of Cambridge Antibody Technology Limited to develop and commercialize human monoclonal antibodies directed against TGF-beta for all clinical indications other than ophthalmology. Concurrently, we agreed to make a $20.0 million equity investment in the ordinary shares of Cambridge Antibody Technology Group plc at a price of L44.59 per share, which was a 15% premium over the average market price for the shares for the 20 business days preceding the date of the agreement. In the three month period ended September 30, 2000, we recorded the value of the premium as a charge to research and development 21 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. LICENSE AND STRATEGIC ALLIANCE AGREEMENTS (CONTINUED) expense in our statement of operations. We have allocated our TGF-beta program and our investment in Cambridge Antibody Technology to Genzyme General. 5. GAIN ON AFFILIATE SALE OF STOCK In February 2000, Genzyme Transgenics Corporation, an unconsolidated affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics common stock, resulting in net proceeds to Genzyme Transgenics of $75.2 million (after the exercise of the underwriter's overallotment option). In accordance with our policy pertaining to affiliate sales of stock, we recognized a gain of $20.3 million and recorded a net deferred tax expense of $3.9 million for the three months ended March 31, 2000. The deferred tax expense is net of a $3.4 million credit for the reversal of a valuation allowance on a deferred tax asset. In September 2000, we recorded an additional gain of $2.4 million on our investment in Genzyme Transgenics as a result of the issuance of additional shares of common stock by Genzyme Transgenics. 6. GAINS (LOSSES) ON SALE OF EQUITY SECURITIES In June 2000, Genzyme General recorded a gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. During the second quarter of 2000, the tax effect of this gain was fully offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. In the third quarter of 2000, we recorded a gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. As of September 30, 2000 our ownership interest in Genzyme Transgenics was approximately 26%. On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc. upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis for shares of Insmed common stock. On the date of exchange, Genzyme General recognized a $7.6 million realized gain on the exchange of shares. 7. SETTLEMENT OF LAWSUIT In April 2000, we received net proceeds of approximately $5.1 million in connection with the settlement of a lawsuit. We allocated these proceeds to Genzyme General and recorded them as other income in Genzyme General's unaudited, combined statements of operations for the nine months ended September 30, 2000. The lawsuit, initiated in 1993, pertained to insurance coverage for an accidental spill of Ceredase-Registered Trademark- enzyme at a fill facility operated by a contractor to Genzyme General. 8. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Provision for income taxes............... $(24,409) $(19,273) 27% $(74,164) $(59,906) 24% Effective tax rate....................... 32% 39% 32% 40%
22 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. TAX PROVISION (CONTINUED) Genzyme General's tax rates for both periods vary from the U.S. statutory tax rate as a result of its: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. In the nine months ended September 30, 2000, we reversed valuation allowances totaling $5.3 million, which reduced Genzyme General's tax rate for the period by 3.5%. 9. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. Genzyme General has two reportable segments: - Therapeutics, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from sales of Cerezyme-Registered Trademark- enzyme; and - Diagnostic Products, which provides diagnostic products to niche markets with a focus on IN VITRO diagnostics. 23 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. SEGMENT REPORTING (CONTINUED) Information concerning the operations in these reportable segments is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Therapeutics...................................... $153,840 $123,492 $436,220 $357,756 Diagnostic Products............................... 15,824 14,286 46,601 43,933 Other............................................. 22,343 19,364 66,191 59,274 Eliminations/Adjustments (1)...................... 158 527 473 1,677 -------- -------- -------- -------- Total........................................... $192,165 $157,669 $549,485 $462,640 ======== ======== ======== ======== Division net income: Therapeutics...................................... $ 43,050 $ 32,556 $126,565 $ 99,337 Diagnostic Products............................... 865 1,063 2,395 3,263 Other............................................. (260) (2,630) (1,056) (3,958) Eliminations/Adjustments (1)...................... 7,318 (1,018) 32,368 (7,253) -------- -------- -------- -------- Total........................................... $ 50,973 $ 29,971 $160,272 $ 91,389 ======== ======== ======== ========
- ------------------------ (1) Includes primarily amounts related to Genzyme General's corporate research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme General. Division net income for the nine months ended September 30, 2000 also includes a gain of $20.3 million relating to a public offering of common shares by Genzyme Transgenics, (See Note 5., "Gain on Affiliate Sale of Stock" above.) In addition, the three and nine months ended September 30, 2000 include $8.5 million and $22.7 million, respectively, of net gains resulting from the sale of a portion of our investments in equity securities (See Note 6., "Gains (Losses) on Sale of Equity Securities" above.) There has been no material change in segment assets since December 31, 1999. 24 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. ACQUISITION OF GELTEX PHARMACEUTICALS, INC. On September 11, 2000, we entered into an agreement to acquire GelTex Pharmaceuticals, Inc. In connection with the merger, GelTex shareholders will receive 0.7272 of a share of Genzyme General Stock or $47.50 in cash for each GelTex share owned, subject to proration to maintain the cash portion of the consideration at 50%, approximately $509.4 million. We will account for the merger as a purchase. The merger, which we expect to close by the end of 2000, is subject to: - approval by GelTex's shareholders; - clearance under federal antitrust laws; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final proxy statement/prospectus for the merger dated November 9, 2000, which we filed with the SEC on November 13, 2000. 11. NEW ACCOUNTING PRONOUNCEMENTS We have included information regarding the impact that recently issued accounting standards will have on our financial statements in Note 15., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate into this note. 12. SUBSEQUENT EVENTS ATIII LLC In November 2000, we entered into a non-binding letter of intent with Genzyme Transgenics pursuant to which Genzyme Transgenics will acquire our rights in Europe and the Americas for recombinant human antithrombin III. We currently hold these rights through our 50% ownership interest in ATIII LLC, the joint venture we formed with Genzyme Transgenics in 1998. Our 50% ownership interest is currently allocated to Genzyme General. Our board of directors and the board of directors of Genzyme Transgenics have to approve the transaction in order for the transfer of rights to occur. The transaction is also subject to the companies' ability to successfully negotiate definitive agreements and other customary closing conditions. We expect to complete this transaction by the end of 2000. 25 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Royalty and licensing revenue...................... $ 635 $ 709 $ 4,153 $ 1,448 Revenue from research and development contracts-- related party.................................... -- -- -- 496 Service revenue.................................... -- -- -- 1,500 Service revenue--related party..................... -- -- -- 11 ------- ------- -------- -------- Total revenues................................... 635 709 4,153 3,455 ------- ------- -------- -------- Operating costs and expenses: Cost of research and development, royalty and licensing revenue................................ 104 62 299 568 Cost of service revenues........................... -- -- -- 506 Selling, general and administrative................ 1,311 1,168 4,289 4,205 Research and development........................... 5,120 3,815 13,772 12,448 Amortization of intangibles........................ -- 2,956 5,420 8,869 ------- ------- -------- -------- Total operating costs and expenses............... 6,535 8,001 23,780 26,596 ------- ------- -------- -------- Operating loss....................................... (5,900) (7,292) (19,627) (23,141) ------- ------- -------- -------- Other income (expenses): Equity in net loss of joint venture................ -- (1,023) -- (2,030) Investment income.................................. 412 99 662 416 Interest expense................................... (16) (5) (173) (8) ------- ------- -------- -------- Total other income (expense)..................... 396 (929) 489 (1,622) ------- ------- -------- -------- Loss before income taxes............................. (5,504) (8,221) (19,138) (24,763) Tax benefit.......................................... -- 662 1,214 1,986 ------- ------- -------- -------- Division net loss.................................... $(5,504) $(7,559) $(17,924) $(22,777) ======= ======= ======== ======== Comprehensive loss, net of tax: Division net loss.................................. $(5,504) $(7,559) $(17,924) $(22,777) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period.............................. -- -- -- -- ------- ------- -------- -------- Comprehensive loss................................... $(5,504) $(7,559) $(17,924) $(22,777) ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 26 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 7,763 $ 3,587 Short term investments.................................... 15,852 -- Accounts receivable....................................... 142 -- Prepaid expenses and other current assets................. 271 218 ------- ------- Total current assets.................................... 24,028 3,805 Equipment, net.............................................. 667 467 Intangibles, net............................................ -- 5,420 ------- ------- Total assets............................................ $24,695 $ 9,692 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses.......................................... $ 1,589 $ 676 Due to Genzyme General.................................... 4,088 3,793 Deferred revenue.......................................... 436 225 Current portion of long-term debt and capital lease obligation.............................................. 105 5,000 ------- ------- Total current liabilities............................... 6,218 9,694 Deferred tax liability.................................... -- 1,213 Long-term capital lease obligations....................... 210 -- ------- ------- Total liabilities....................................... 6,428 10,907 Division equity............................................. 18,267 (1,215) ------- ------- Total liabilities and division equity....................... $24,695 $ 9,692 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 27 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(17,924) $(22,777) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 5,536 9,063 Equity in net loss of joint venture..................... -- 2,030 Deferred tax benefit.................................... (1,214) (1,986) Other................................................... (291) (34) Increase (decrease) in cash from working capital changes: Accounts receivable................................... (142) 5,675 Prepaid expenses and other current assets............. (53) 49 Accrued expenses, payable to joint venture, deferred revenue............................................. 1,124 (923) Due to Genzyme General................................ 295 (1,600) -------- -------- Net cash used in operating activities............... (12,669) (10,503) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (25,283) -- Sales and maturities of investments....................... 9,722 1,022 Acquisitions of equipment................................. -- (43) Sale of equipment......................................... -- 188 -------- -------- Net cash provided by (used in) investing activities........................................ (15,561) 1,167 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Molecular Oncology Stock................................................... 22,406 155 Repayments of debt........................................ (5,000) -- Net cash allocated from Genzyme General................... 15,000 -- Other..................................................... -- (2) -------- -------- Net cash provided by financing activities........... 32,406 153 -------- -------- Increase (decrease) in cash and cash equivalents............ 4,176 (9,183) Cash and cash equivalents at beginning of period............ 3,587 10,868 -------- -------- Cash and cash equivalents at end of period.................. $ 7,763 $ 1,685 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 28 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme Molecular Oncology for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion of our corporate operations to Genzyme Molecular Oncology using methods described in our allocation policy included in Exhibit 99.1 to our 1999 Form 10-K. These combined financial statements are prepared using amounts included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Molecular Oncology following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 1999 data to conform to the 2000 presentation. These financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of Genzyme Molecular Oncology's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Molecular Oncology included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods. 2. OFFERING OF MOLECULAR ONCOLOGY STOCK Pursuant to a prospectus filed under Rule 424 of the Securities Act of 1933, as amended, in July 2000 we sold 1,607,400 shares of Molecular Oncology Stock to a limited number of purchasers at a price of $12.91 per share. We received approximately $20.7 million of net proceeds from the offering, which we allocated to Genzyme Molecular Oncology. The proceeds of this offering will be used primarily to fund Genzyme Molecular Oncology's research, preclinical and clinical development programs, and for its working capital and general corporate purposes. 3. INTERDIVISIONAL FINANCING ARRANGEMENT In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under its interdivisional financing arrangement with Genzyme General in exchange for 676,254 Genzyme Molecular Oncology designated shares. As required by our charter, the number of Genzyme Molecular Oncology designated shares was determined using the average closing price of Molecular Oncology Stock for the 20 trading days beginning on the 30th trading day before the draw. These funds will be used primarily to fund research, preclinical and clinical development programs, and for working capital and general corporate purposes. As of September 30, 2000, $15.0 million remained available to Genzyme Molecular Oncology under this arrangement. 4. NEW ACCOUNTING PRONOUNCEMENTS We have included information regarding the impact that recently issued accounting standards will have on our financial statements in Note 15., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 29 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. SUBSEQUENT EVENT PURDUE PHARMA In October 2000, we entered into an arrangement with Purdue Pharma L.P. relating to the discovery and development of cancer antigens. Under this arrangement, we received approximately $12 million in cash, in the form of an up-front fee, research funding and an equity investment, and will receive approximately $9 million in committed research funding over the next three years. The equity portion of this arrangement provided for two affiliates of Purdue Pharma to purchase an aggregate of 532,066 shares of Molecular Oncology Stock at a premium to the market price for those shares. We allocate our antigen discovery program to Genzyme Molecular Oncology. 30 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Total revenues....................................... $ 29,754 $ 27,385 $ 88,805 $ 81,419 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold.............................. 18,539 16,798 51,170 50,081 Selling, general and administrative................ 17,772 15,114 51,214 46,893 Research and development........................... 7,215 7,131 21,187 21,716 Amortization of intangibles........................ 1,426 1,445 4,279 4,306 -------- -------- -------- -------- Total operating costs and expenses............... 44,952 40,488 127,850 122,996 -------- -------- -------- -------- Operating loss....................................... (15,198) (13,103) (39,045) (41,577) -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates.... -- (32) -- (32) Investment income.................................. 1,228 2,125 4,619 2,188 Interest expense................................... -- (1) (1) (36) Other.............................................. 34 58 81 101 -------- -------- -------- -------- Total other income (expenses).................... 1,262 2,150 4,699 2,221 -------- -------- -------- -------- Division net loss.................................... $(13,936) $(10,953) $(34,346) $(39,356) ======== ======== ======== ======== Comprehensive loss, net of tax: Division net loss.................................. $(13,936) $(10,953) $(34,346) $(39,356) -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments......... 62 -- 93 -- Unrealized losses on securities arising during the period..................................... (268) (2) (4,050) (630) -------- -------- -------- -------- Other comprehensive loss........................... (206) (2) (3,957) (630) -------- -------- -------- -------- Comprehensive loss................................... $(14,142) $(10,955) $(38,303) $(39,986) ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 31 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 25,898 $ 22,673 Short-term investments.................................... 48,787 41,606 Accounts receivable, net.................................. 20,892 19,886 Inventories............................................... 37,990 30,491 Prepaid expenses and other current assets................. 1,853 815 -------- -------- Total current assets.................................... 135,420 115,471 Property, plant and equipment, net.......................... 17,621 17,621 Long-term investments....................................... 12,504 61,846 Intangibles, net............................................ 168,405 172,833 Investment in equity securities............................. 3,651 3,140 Acquisition costs........................................... 4,405 -- Other....................................................... 245 13 -------- -------- Total assets............................................ $342,251 $370,924 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 5,145 $ 3,562 Accrued expenses.......................................... 11,409 7,038 Due to Genzyme General.................................... 9,226 6,406 -------- -------- Total current liabilities............................... 25,780 17,006 Division equity............................................. 316,471 353,918 -------- -------- Total liabilities and division equity................... $342,251 $370,924 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 32 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(34,346) $(39,356) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 6,707 5,860 Provision for bad debts................................. 223 250 Other................................................... 1,615 1,033 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (1,229) (1,227) Inventories........................................... (7,499) (9,063) Prepaid expenses and other current assets............. (1,038) 1,105 Accounts payable and accrued expenses................. 5,954 2,928 Due to Genzyme General................................ 2,820 13,676 -------- -------- Net cash used in operating activities............... (26,793) (24,794) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (84,084) (15,161) Sales and maturities of investments....................... 125,084 25,130 Purchase of equity securities............................. (5,000) -- Purchase of plant and equipment........................... (2,236) (2,313) Acquisition costs......................................... (4,405) -- Other..................................................... (290) 230 -------- -------- Net cash provided by investing activities........... 29,069 7,886 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Surgical Products Stock................................................... 856 -- Net cash allocated from Genzyme General................... -- 50,827 Other..................................................... -- (10) -------- -------- Net cash provided by financing activities........... 856 50,817 Effect of exchange rate changes on cash..................... 93 -- -------- -------- Increase in cash and cash equivalents....................... 3,225 33,909 Cash and cash equivalents at beginning of period............ 22,673 -- -------- -------- Cash and cash equivalents at end of period.................. $ 25,898 $ 33,909 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 33 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We established Genzyme Surgical Products as a separate division of Genzyme in June 1999. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. These unaudited, combined financial statements reflect the allocated financial position, results of operations and cash flows of Genzyme Surgical Products as if it had been accounted for as a separate division of Genzyme for all periods presented. The unaudited, combined financial statements of Genzyme Surgical Products for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Surgical Products. We also allocate a portion of our corporate operations to Genzyme Surgical Products using methods described in our allocation policy included in Exhibit 99.1 to our 1999 Form 10-K. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Surgical Products following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 1999 data to conform to our 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Surgical Products' financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Surgical Products included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be indicative of results for future periods. 2. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) Raw materials....................................... $20,730 $15,473 Work-in-process..................................... 2,292 2,029 Finished products................................... 14,968 12,989 ------- ------- Total........................................... $37,990 $30,491 ======= =======
3. INVESTMENT IN FOCAL, INC. In April 2000, Focal Inc. exercised its first option under the stock purchase agreement between Genzyme and Focal. As required by the terms of this agreement, Genzyme purchased $5.0 million of Focal common stock at a price of $8.14 per share. We have allocated these shares to Genzyme Surgical Products. We are committed, at Focal's option, to make future additional equity investments of up to $10.0 million subject to certain conditions. 34 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. SEGMENT INFORMATION We present segment information in a manner consistent with the method we use to report this information to our management. Genzyme Surgical Products has two reportable segments: - Cardiovascular Surgery, which includes chest drainage and fluid management systems, a lung sealant product for thoracic surgery, and instruments and closures used in coronary artery bypass, valve replacement, and other cardiothoracic surgeries; and - General Surgery, which includes surgical instruments for general surgery, and Sepra Film-Registered Trademark- bioresorbable membrane and other biomaterials to limit post-surgical adhesions. Information concerning the operations in these reportable segments is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Cardiovascular Surgery................ $18,803 $19,552 $58,239 $56,985 General Surgery....................... 8,136 5,811 22,497 17,946 Other................................. 2,815 2,022 8,069 6,488 ------- ------- ------- ------- Total............................... $29,754 $27,385 $88,805 $81,419 ======= ======= ======= ======= Gross Profit: Cardiovascular Surgery................ $ 6,773 $ 8,094 $23,493 $23,128 General Surgery....................... 3,492 1,795 10,021 6,285 Other................................. 950 698 4,121 1,925 ------- ------- ------- ------- Total............................... $11,215 $10,587 $37,635 $31,338 ======= ======= ======= =======
The other category includes amounts attributable primarily to our products for plastic surgery and products sold to original equipment manufacturers. There has been no material change in segment assets since December 31, 1999. 5. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance which we will refer to as "Biosurgery Stock". We will hold a special meeting of our shareholders on December 15, 2000 at which holders of each of our four series of tracking stock will be asked to approve a charter amendment creating Biosurgery Stock as a new series of tracking stock of Genzyme, and eliminating Tissue Repair Stock and Surgical Products Stock. In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in 35 GENZYME SURGICAL PRODUCTS A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY (CONTINUED) exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. We will account for the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical basis for each division because the combination of these two divisions is considered a re-allocation of assets and liabilities within Genzyme. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final joint proxy statement/prospectus dated November 3, 2000, which we filed with the SEC on November 6, 2000. 6. NEW ACCOUNTING PRONOUNCEMENTS We have included information regarding the impact that recently issued accounting standards will have on our financial statements in Note 15, "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 36 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Total revenues......................................... $ 4,853 $ 5,682 $ 17,007 $ 14,370 ------- ------- -------- -------- Operating costs and expenses: Cost of services sold................................ 2,903 3,558 8,949 9,777 Selling, general and administrative.................. 5,516 5,978 16,881 18,407 Research and development............................. 1,720 2,033 5,043 6,004 ------- ------- -------- -------- Total operating costs and expenses................. 10,139 11,569 30,873 34,188 ------- ------- -------- -------- Operating loss......................................... (5,286) (5,887) (13,866) (19,818) ------- ------- -------- -------- Other income (expenses): Equity in net loss of joint venture.................. -- -- -- (3,368) Investment income.................................... 46 210 254 375 Interest expense..................................... (347) (471) (972) (1,335) Other................................................ (1) -- (6) -- ------- ------- -------- -------- Total other income (expenses)...................... (302) (261) (724) (4,328) ------- ------- -------- -------- Division net loss...................................... $(5,588) $(6,148) $(14,590) $(24,146) ======= ======= ======== ======== Comprehensive loss, net of tax: Division net loss.................................... $(5,588) $(6,148) $(14,590) $(24,146) ------- ------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments........... 5 -- 16 -- ------- ------- -------- -------- Other comprehensive income........................... 5 -- 16 -- ------- ------- -------- -------- Comprehensive loss..................................... $(5,583) $(6,148) $(14,574) $(24,146) ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 37 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 5,591 $ 9,373 Accounts receivable, net.................................. 4,814 4,968 Inventories............................................... 2,267 2,394 Other current assets...................................... 317 253 ------- ------- Total current assets.................................... 12,989 16,988 Property, plant and equipment, net.......................... 1,868 2,545 Other....................................................... 103 115 ------- ------- Total assets............................................ $14,960 $19,648 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 469 $ 1,062 Accrued expenses.......................................... 2,137 3,131 Due to Genzyme General.................................... 1,272 683 ------- ------- Total current liabilities............................... 3,878 4,876 Long-term debt.............................................. 18,000 18,000 Other....................................................... 115 227 ------- ------- Total liabilities....................................... 21,993 23,103 Division equity............................................. (7,033) (3,455) ------- ------- Total liabilities and division equity................... $14,960 $19,648 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 38 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(14,590) $(24,146) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 767 985 Provision for bad debts................................. 48 11 Equity in net loss of joint venture..................... -- 3,368 Other................................................... 178 -- Increase (decrease) in cash from working capital changes: Accounts receivable................................... 94 (1,645) Inventories........................................... 127 250 Other current assets.................................. (66) 660 Accounts payable and accrued expenses................. (1,720) 641 Due to Genzyme General................................ 724 418 -------- -------- Net cash used in operating activities............... (14,438) (19,458) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in joint venture............................... -- (3,595) Purchase of equipment..................................... (54) (648) Other..................................................... 13 34 -------- -------- Net cash used in investing activities............... (41) (4,209) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Tissue Repair Stock, net..................................................... 796 740 Payments of debt and capital lease obligations............ -- (144) Cash allocated from Genzyme General....................... 9,910 29,984 Other..................................................... -- (112) -------- -------- Net cash provided by financing activities........... 10,706 30,468 -------- -------- Effect of exchange rate changes on cash..................... (9) -- -------- -------- Increase (decrease) in cash and cash equivalents............ (3,782) 6,801 Cash and cash equivalents at beginning of period............ 9,373 7,732 -------- -------- Cash and cash equivalents at end of period.................. $ 5,591 $ 14,533 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 39 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme Tissue Repair for each period include the balance sheets, results of operations and cash flows of the businesses we allocate to Genzyme Tissue Repair. We also allocate a portion of our corporate operations to Genzyme Tissue Repair using methods described in our allocation policy included in Exhibit 99.1 to our 1999 Form 10-K. These combined financial statements are prepared using amounts included in our consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Tissue Repair following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Tissue Repair's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Tissue Repair included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim statements may not be indicative of the results for future periods. 2. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ (UNAUDITED) Raw materials....................................... $ 363 $ 428 Work-in-process..................................... 1,894 1,938 Finished goods...................................... 10 28 ------ ------ Total............................................. $2,267 $2,394 ====== ======
3. DIACRIN JOINT VENTURE In May 1999, we re-allocated our ownership interest in Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize products using porcine fetal cells for the treatment of Parkinson's and Huntington's diseases, from Genzyme Tissue Repair to Genzyme General in exchange for $25.0 million in cash. In connection with the re-allocation, it was agreed that Genzyme Tissue Repair would be required to pay to Genzyme General $20.0 million plus accrued interest at an annual rate of 13.5% if the joint venture had not initiated a phase 3 clinical trial of NeuroCell-TM--PD by December 31, 2000. In October 2000, our board of directors extended the milestone timeline to initiate a phase 3 clinical trial of NeuroCell-TM--PD from December 31, 2000 to June 30, 2001. The milestone date and related financial obligation were extended to enable the companies to extend the current blinded phase 2 clinical trial to 18 months from 12 months and allow investigators time to complete and review the results of the trial. If the milestone is not met, any required refund may be paid to Genzyme General in cash, Genzyme Tissue Repair designated shares, or a combination of both, at Genzyme Tissue Repair's option. 4. INTERDIVISIONAL FINANCING ARRANGEMENT In March 2000, Genzyme Tissue Repair made a $5.0 million draw under its interdivisional financing arrangement with Genzyme General in exchange for 765,169 Genzyme Tissue Repair 40 GENZYME TISSUE REPAIR A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. INTERDIVISIONAL FINANCING ARRANGEMENT (CONTINUED) designated shares. In September 2000, Genzyme Tissue Repair made a subsequent draw of $5.0 million under this interdivisional financing arrangement in exchange for 927,488 Genzyme Tissue Repair designated shares. As required by our charter, the number of Genzyme Tissue Repair designated shares was determined using the average closing price of Tissue Repair Stock for the 20 trading days beginning on the 30th trading day before each draw. The funds will be used for Genzyme Tissue Repair's operating needs. As of September 30, 2000, $10.0 million remained available to Genzyme Tissue Repair under this arrangement. 5. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance which we will refer to as "Biosurgery Stock". We will hold a special meeting of our shareholders on December 15, 2000 at which holders of each of our series of four tracking stock will be asked to approve a charter amendment creating Biosurgery Stock as a new series of tracking stock of Genzyme, and eliminating Tissue Repair Stock and Surgical Products Stock. In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. We will account for the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical basis for each division because the combination of these two divisions is considered a re-allocation of assets and liabilities within Genzyme. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final joint proxy statement/prospectus dated November 3, 2000, which we filed with the SEC on November 6, 2000. 6. NEW ACCOUNTING PRONOUNCEMENTS We have included information regarding the impact that recently issued accounting standards will have on our financial statements in Note 15., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 41 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this report. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described in this Form 10-Q under the heading "Note Regarding Forward-Looking Statements" and in Exhibit 99.2, "Factors Affecting Future Operating Results," to our 1999 Form 10-K. You should consider carefully each of these risks and uncertainties in evaluating our financial condition and results of operations. We are a biotechnology company that develops innovative products and services for significant unmet medical needs. We have four operating divisions: - Genzyme General, which develops and markets: - therapeutic products, with an expanding focus on products to treat patients suffering from lysosomal storage disorders and other specialty therapeutics; - diagnostic products, with a focus on IN VITRO diagnostics; and - other products and services, such as genetic testing services and lipids and peptides for drug delivery. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors; - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery; and - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage damage, and severe burns. In June 1997, we formed Genzyme Molecular Oncology as a separate division of Genzyme by acquiring PharmaGenics, Inc. and combining it with several of our ongoing programs in the field of oncology. In June 1999, we established Genzyme Surgical Products as a separate division of Genzyme. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. The discussion that follows reflects the results of operations as if Genzyme Surgical Products had existed as a separate division of Genzyme for all periods presented. The greater segregation of assets, liabilities and earnings (losses) resulting from the creation of Genzyme Molecular Oncology and Genzyme Surgical Products is a trend that we do not expect to continue. As discussed below, Genzyme Surgical Products and Genzyme Tissue Repair will be combined into Genzyme Biosurgery upon the completion of the Biomatrix acquisition, reducing the segregation of assets among our divisions and reducing the number of series of our common stock outstanding. As market or competitive conditions warrant, we may create new series of tracking stock or change our earnings allocation methodology. However, at the present time, we have no plans to do so. We have four series of common stock--Genzyme General Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer to as "tracking stock." Unlike typical common stock, each of our tracking stocks is designed to track the financial performance of a specific subset of our business operations and its allocated assets, rather than operations and assets of our entire company. The chief mechanisms intended to cause each tracking stock to "track" the financial 42 performance of each division are provisions in our charter governing dividends and distributions. Under these provisions, our charter: - factors the assets and liabilities and income or losses attributable to a division into the determination of the amount available to pay dividends on the associated tracking stock; and - requires us to exchange, redeem or distribute a dividend to the holders of Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock if all or substantially all of the assets allocated to those corresponding divisions are sold to a third party (a dividend or redemption payment must equal in value the net after-tax proceeds from the sale; an exchange must be for Genzyme General Stock at a 10% premium to the exchanged stock's average market price following the announcement of the sale). To determine earnings per share, we allocate Genzyme's earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with our management and accounting policies. Our charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. However, subject to fiduciary duties, our board of directors can, at its discretion, change the methods of allocating earnings to each series of common stock. We intend to allocate earnings using our current methods for the foreseeable future. Our board of directors has also adopted accounting policies relating to the management of our operating divisions. These policies are set forth in Exhibit 99.1 to our 1999 Form 10-K. Because the earnings allocated to each series of stock are based on the income or losses attributable to each corresponding division, we include financial statements and management's discussion and analysis of Genzyme Corporation and of each division to aid investors in evaluating Genzyme's performance and the performance of each of its divisions. While each tracking stock is designed to reflect a division's performance, it is common stock of Genzyme Corporation and not of a division; each division is not a company or legal entity, and therefore, cannot issue stock. Consequently, holders of a series of tracking stock have no specific rights to assets allocated to the corresponding division. Genzyme Corporation continues to hold title to all of the assets allocated to each division and is responsible for all of its liabilities, regardless of what we deem for financial statement presentation purposes as allocated to any division. Holders of each tracking stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme as a whole. For instance, the assets allocated to each division are subject to company-wide claims of creditors, product liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency or similar event, holders of each tracking stock would only have the rights of common stockholders in the combined assets of Genzyme. We provide separate financial statements for each of our divisions as well as consolidated financial statements that include the consolidated results of each of our divisions and our corporate operations taken as a whole. These financial statements are prepared in accordance with generally accepted accounting principles. You should read this discussion and analysis of our financial position and results of operations in conjunction with those unaudited, consolidated financial statements and related notes, which are included in this report. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division, and the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to that new division. For more information, you should read the section entitled "Liquidity and Capital Resources" below. 43 A. RESULTS OF OPERATIONS GENZYME CORPORATION The components of our consolidated statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues.......................... $227,359 $191,415 19% $659,402 $561,843 17% -------- -------- -------- -------- Cost of products and services sold...... 75,797 56,763 34% 201,517 169,651 19% Selling, general and administrative..... 66,379 58,648 13% 195,358 183,951 6% Research and development (including research and development expenses related to contracts)................. 39,678 35,925 10% 123,954 109,632 13% Amortization of intangibles............. 3,409 6,128 (44%) 15,191 18,501 (18%) Purchase of in-process research and development........................... -- 5,436 (100%) -- 5,436 (100%) -------- -------- -------- -------- Total operating costs and expenses.... 185,263 162,900 14% 536,020 487,171 10% -------- -------- -------- -------- Operating income........................ 42,096 28,515 48% 123,382 74,672 65% Other income (expenses), net............ 8,258 (4,342) 290% 43,450 (10,887) 499% -------- -------- -------- -------- Income before income taxes.............. 50,354 24,173 108% 166,832 63,785 162% Provision for income taxes.............. (15,933) (10,395) 53% (51,101) (27,659) 85% -------- -------- -------- -------- Net income.............................. $ 34,421 $ 13,778 150% $115,731 $ 36,126 220% ======== ======== ======== ========
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product revenue......................... $206,645 $170,215 21% $592,505 $499,790 19% Service revenue......................... 19,967 19,952 0% 62,280 58,481 6% -------- -------- -------- -------- Total product and service revenue..... 226,612 190,167 19% 654,785 558,271 17% -------- -------- -------- -------- Research and development revenue........ 747 1,248 (40%) 4,617 3,572 29% -------- -------- -------- -------- Total revenues........................ $227,359 $191,415 19% $659,402 $561,843 17% ======== ======== ======== ========
44 PRODUCT REVENUE:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Genzyme General: Therapeutics: Cerezyme-Registered Trademark-/Ceredase-Registered Trademark- enzyme............................ $136,744 $121,058 13% $400,203 $351,716 14% Renagel-Registered Trademark- phosphate binder.................. 13,814 -- 100% 24,032 -- 100% Thyrogen-Registered Trademark- hormone........................... 3,282 2,434 35% 10,149 6,040 68% Other therapeutic products.......... -- -- 0% 1,836 -- 100% -------- -------- -------- -------- Total Therapeutics................ 153,840 123,492 25% 436,220 357,756 22% Diagnostic Products................... 15,824 14,287 11% 46,601 43,933 6% Other................................. 7,227 5,081 42% 20,879 16,712 25% -------- -------- -------- -------- Total product revenue--Genzyme General........................... 176,891 142,860 24% 503,700 418,401 20% Genzyme Surgical Products: Cardiovascular........................ 18,804 19,552 (4%) 58,240 56,985 2% General Surgery....................... 8,136 5,811 40% 22,497 17,946 25% Other................................. 2,814 1,992 41% 8,068 6,458 25% -------- -------- -------- -------- Total product revenue--Genzyme Surgical Products................. 29,754 27,355 9% 88,805 81,389 9% -------- -------- -------- -------- Total product revenue................... $206,645 $170,215 21% $592,505 $499,790 19% ======== ======== ======== ========
We derive product revenue from sales by Genzyme General of therapeutic and diagnostic products and sales by Genzyme Surgical Products of cardiovascular and general surgery products. Our increase in product revenue during both periods is partly due to increased sales of Cerezyme-Registered Trademark- enzyme, which is a therapy for the treatment of Gaucher disease. The increase in sales of Cerezyme-Registered Trademark- enzyme is attributable to our identification of new Gaucher disease patients throughout the world and strong international sales. We also sell Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, but we have successfully converted virtually all Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme. Our results of operations are highly dependent on sales of Cerezyme-Registered Trademark- enzyme, and a reduction in revenue from sales of this product would adversely affect our results of operations. The following table provides information regarding the change in sales of our Gaucher disease therapies as a percentage of total product revenue during both periods.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- % of total product revenue......................... 66% 71% 68% 70%
Genzyme General began recording revenues from Renagel-Registered Trademark- phosphate binder (sevelamer hydrochloride) during the second quarter of 2000 under an amended distribution arrangement with its joint venture partner, GelTex Pharmaceuticals, Inc. Revenues from Renagel-Registered Trademark- phosphate binder were previously recorded by the joint venture. Renagel-Registered Trademark- phosphate binder is used to reduce serum phosphorus levels in patients with end-stage renal disease on dialysis. Sales of Renagel-Registered Trademark- phosphate 45 binder include sales of the new tablet formulation, which was launched in the United States in September 2000. Sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well differentiated thyroid cancer, increased in the three and nine months ended September 30, 2000 due to increased market penetration. We commenced commercial sales of Thyrogen-Registered Trademark- hormone in January 1999. Diagnostic products revenue within Genzyme General increased during both periods due primarily to increased sales of HDL and LDL cholesterol testing products, despite the sale of our bioreagent and ELISA product lines in July 1999. Diagnostic product revenue includes royalties on product sales by Techne Corporation's biotechnology group. Genzyme Surgical Products cardiovascular surgery products include chest drainage and fluid management systems, a lung sealant product for thoracic surgery and surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The decrease in cardiovascular surgery products revenue for the three months ended September 30, 2000 as compared to the same period in 1999 was primarily due to seasonal fluctuations, the impact of the strong dollar in Europe and competitive pricing pressures in the chest drainage market. These factors were offset in part by the launch of the Focal Seal-Registered Trademark--L lung sealant and by continued growth in the minimally invasive cardiac surgery product line. Cardiovascular surgery products revenue increased during the nine months ended September 30, 2000 as compared to the same period in 1999 primarily due to increased sales of instruments for minimally invasive cardiac surgery. Genzyme Surgical Products also experienced an increase in general surgery products revenue for both periods, which is due primarily to an increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane and Sepramesh-TM- biosurgical composite. Sales of Sepra products, which are our line of hyaluronic acid-based products and product candidates designed to limit post-surgical adhesions, for the three months ended September 30, 2000 were $4.9 million compared to $3.0 million in the same period in 1999. Sales of Sepra products for the nine months ended September 30, 2000 were $13.2 million, compared to $9.4 million in the same period of 1999. An increase in general surgery instrument sales also contributed to the overall increase in general surgery product revenue. SERVICE REVENUE:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Genzyme General: Genetic testing........................... $15,115 $14,270 6% $45,296 $42,696 6% ------- ------- ------- ------- Genzyme Molecular Oncology: Genomics and gene expression.............. -- -- --% -- 1,500 (100%) ------- ------- ------- ------- Genzyme Tissue Repair: Carticel-Registered Trademark- chondrocytes............................ 4,021 3,619 11% 13,130 10,359 27% Epicel-TM- skin grafts.................... 831 2,063 (60%) 3,854 3,926 (2%) ------- ------- ------- ------- Total service revenue--Genzyme Tissue Repair................................ 4,852 5,682 15% 16,984 14,285 19% ------- ------- ------- ------- Total service revenue....................... $19,967 $19,952 0% $62,280 $58,481 6% ======= ======= ======= =======
Our service revenues remained relatively stable for the three months ended September 30, 2000 when compared to the same period in 1999 as an increase in genetic testing service revenue and an 46 increase in sales of Carticel-Registered Trademark- chondrocytes for the treatment of cartilage damage were substantially offset by a decrease in sales of Epicel-TM- skin grafts. The increase in genetic testing service revenue is a result of growth in sales of our DNA and cancer testing services. The increase in sales of Carticel-Registered Trademark- chondrocytes is a result of continued increases in the number of patients treated as well as an increase in the number of insurance reimbursement approvals. During the nine months ended September 30, 2000, our service revenue increased as compared to the same period of 1999 as a result of increases in sales of Carticel-Registered Trademark- chondrocytes as well as increased revenue from genetic testing as discussed above. These increases were partially offset by a decrease in Epicel-TM- skin grafts as discussed above and a decrease in genomics service revenue. Revenue from Epicel-TM- skin grafts varies widely from quarter to quarter depending on the number of patients requiring severe burn care. The decrease in genomics service revenue in the nine months ended September 30, 2000 is a result of a planned shift in genomics business focus from one in which Genzyme Molecular Oncology provides services to third parties to one in which it grants licenses under SAGE-TM- gene expression technology. RESEARCH AND DEVELOPMENT REVENUE:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Genzyme General.................................. $159 $ 539 (71%) $ 489 $1,543 (68%) Genzyme Molecular Oncology....................... 587 709 (17%) 4,105 1,944 111% Genzyme Tissue Repair............................ 1 -- 100% 23 85 (73%) ---- ------ ------ ------ Total research and development revenue......... $747 $1,248 (40%) $4,617 $3,572 29% ==== ====== ====== ======
Our research and development revenue decreased during the three months ended September 30, 2000 as compared to the same period in 1999 primarily due to a reduction in revenue related to research and development efforts we conducted on behalf of Genzyme Transgenics Corporation and the absence of revenue related to StressGen/Genzyme LLC, our joint venture with StressGen Biotechnologies Corporation and the Canadian Medical Discoveries Fund, Inc. to develop stress gene therapies for the treatment of cancer which was dissolved at the end of 1999. Research and development revenues for both periods of 1999 include work performed by Genzyme Molecular Oncology on behalf of this joint venture for which there was no comparable amount in the same periods of 2000. Research and development revenues for the nine months ended September 30, 2000 increased when compared to the same period in 1999 as a result of various increases in royalty and licensing revenue. Royalty and licensing revenue increased as a result of a license of diagnostic rights, an increase in SAGE-TM- gene expression technology, and a $2.0 million development milestone payment received from Schering-Plough Corporation in connection with the advancement by Schering-Plough Corporation of the p53 tumor suppressor gene in ovarian cancer clinical trials. 47 INTERNATIONAL PRODUCT AND SERVICE SALES: A substantial portion of our revenue is generated outside of the United States, as described in the following table. Most of these revenues are attributable to sales of Cerezyme-Registered Trademark- enzyme.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ -------------------- (DECREASE) -------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) International product and service revenue......................... $89,297 $74,929 19% $264,484 $224,129 18% % of total product and service revenue......................... 39% 39% 40% 40%
MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product margin.......................... $142,916 $125,844 14% $426,874 $367,033 16% % of product revenue.................... 69% 74% 72% 73% Service margin.......................... 7,899 7,560 4% 26,394 21,587 22% % of service revenue.................... 40% 38% 42% 37% Total gross margin...................... $150,815 $133,404 13% $453,268 $388,620 17% % of total product and service revenue............................... 67% 70% 69% 70%
We provide a broad range of health care products and services. As a result, our gross margins vary significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than sales of surgical and diagnostic products. Our service margin increased during both periods. These increases are attributable to: - an increase in sales of DNA and cancer testing services; - increased sales of Carticel-Registered Trademark- chondrocytes; and - a reduction in fixed costs, materials and production costs for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. The increases were partially offset, however, by the reduction in revenue from our genomics services business. OPERATING EXPENSE The increase in selling, general and administrative expenses in both periods is related to: - increased staffing to support the growth in several of Genzyme General's product lines; - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered Trademark- hormone; - increased spending for marketing of Genzyme Surgical Products' cardiovascular products, particularly the minimally invasive cardiac surgery instrument line; and - for the nine months ended September 30, 2000, $0.4 million of legal and audit fees related to the registration of a secondary offering of shares of Molecular Oncology Stock which was subsequently withdrawn. 48 The increase in selling, general and administrative expenses were partially offset in both periods by the efforts of Genzyme Tissue Repair to streamline its operations. The increase in research and development expense for the three and nine months ended September 30, 2000 as compared to the same period last year is a result of the following: - a charge of $19.5 million during the first quarter of 2000 for the initial amounts paid to Synpac under a license agreement granted by Synpac to Genzyme to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease, offset in part by a $10.3 million research and development reimbursement received from Pharming; - increased spending on our program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; - increased costs in connection with the operations of ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of recombinant human transgenic antithrombin III, whose results we consolidate; - a charge of $2.0 million in the third quarter of 2000 due to Genzyme General making an equity investment at a 15% premium to the market price in shares of Cambridge Antibody Technology Group plc concurrently with entry into a broad strategic alliance between the companies to develop and commercialize human monoclonal antibodies directed against TGF-beta. The portion of this equity investment which was above the market price was recorded by Genzyme General as research and development expense; - increased spending in our cell and gene therapy programs; - increased spending associated with the cancer vaccine clinical trials and antigen discovery research programs; - an increase in the number of research personnel and related expenses required to support our immunotherapy and antiangiogenesis programs; and - offset by decreased spending resulting from the termination of our TGF-beta program and other research and development programs allocated to Genzyme Tissue Repair. OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates............................. $(11,420) $(10,407) 10% $(30,866) $(29,507) 5% Investment income........................ 12,758 9,404 36% 33,333 26,692 25% Interest expense......................... (5,010) (5,922) (15%) (12,785) (17,010) (25%) Minority interest........................ 977 843 16% 3,185 2,573 24% Gain on affiliate sale of stock.......... 2,419 1,164 108% 22,689 1,770 1,182% Gain on sale of product line............. -- 518 (100%) -- 8,018 (100%) Gain on sale of equity securities........ 8,544 -- 100% 22,709 1,963 1,057% Charge for impaired investment........... -- -- --% -- (5,487) (100%) Other.................................... (10) 58 (117%) 5,185 101 5,034% -------- -------- -------- -------- Total other income (expenses).......... $ 8,258 $ (4,342) 290% $ 43,450 $(10,887) 499% ======== ======== ======== ========
49 EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES: We currently own approximately 28% of the common stock of Genzyme Transgenics. We record in net loss of unconsolidated affiliates our portion of their results. We also record the results of the following joint ventures and strategic alliances in net loss of unconsolidated affiliates:
JOINT VENTURE/ STRATEGIC ALLIANCE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION - ------------------------------- ------------------------ -------------- ------------------------ ------------------ RenaGel LLC GelTex June 1997 Renagel-Registered Trademark- Genzyme General Pharmaceuticals, Inc. phosphate binder for the reduction of serum phosphorus in patients with end-stage renal disease on hemodialysis BioMarin/Genzyme LLC BioMarin September 1998 Alpha-L-iduronidase for Genzyme General Pharmaceutical Inc. the treatment of mucopolysaccharidosis-I Pharming/Genzyme LLC Pharming Group N.V. October 1998 Transgenically-produced Genzyme General human alpha-glucosidase for the treatment of Pompe disease Genzyme/Pharming Alliance LLC Pharming Group N.V. June 2000 Human alpha-glucosidase Genzyme General enzyme replacement therapy for Pompe disease produced using a CHO cell line Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine Genzyme Tissue fetal cells for the Repair (until treatment of Parkinson's May 1999); and Huntington's Genzyme General diseases (after May 1999) StressGen/Genzyme LLC StressGen July 1997 Stress gene therapies Genzyme Molecular Biotechnologies Ltd.; for the treatment of Oncology Canadian Medical cancer Discoveries Fund, Inc. (until October 1999)
Our equity in net loss of unconsolidated affiliates increased in both periods as a result of: - increased losses from RenaGel LLC; - increased losses from BioMarin/Genzyme LLC; - increased losses from Diacrin/Genzyme LLC; and - increased losses from Genzyme Transgenics. These increases were offset in part by decreased losses from Pharming/Genzyme LLC and the absence of losses from StressGen/Genzyme LLC, which was dissolved in the fourth quarter of 1999. INVESTMENT INCOME: Investment income increased during both periods of 2000 due to higher average cash and investment balances. INTEREST EXPENSE: Our interest expense decreased during both periods of 2000 as a result of our repayment in November 1999 of $82.0 million outstanding under our revolving credit facility. 50 MINORITY INTEREST: Due to our combined direct and indirect ownership interest in ATIII LLC, we consolidate the results of ATIII LLC and record Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest for both periods increased due to increased losses incurred by ATIII LLC. GAIN ON AFFILIATE SALE OF STOCK: In February 2000, Genzyme Transgenics, an unconsolidated affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics common stock, resulting in net proceeds to Genzyme Transgenics of $75.2 million (after the exercise of the underwriter's overallotment option). In accordance with our policy pertaining to affiliate sales of stock, we recognized a gain of $20.3 million and recorded a net deferred tax expense of $3.9 million for the three months ended March 31, 2000. The deferred tax expense is net of a $3.4 million credit for the reversal of the valuation allowance on a deferred tax asset. In September 2000, we recorded an additional gain of $2.4 million on our investment in Genzyme Transgenics as a result of the issuance of additional shares of common stock by Genzyme Transgenics. GAIN ON SALE OF PRODUCT LINE: In June 1999, we recorded a gain of $7.5 million representing the payment of a note receivable that we received as partial consideration for the sale of Genetic Design, Inc. in 1996. We had previously fully reserved the amount of this note because we considered the repayment of the note to be uncertain. GAINS (LOSSES) ON SALE OF EQUITY SECURITIES: In June 2000, we recorded a gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. During the second quarter of 2000, the tax effect of this gain was fully offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. In the third quarter of 2000, we recorded a gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. As of September 30, 2000 our ownership interest in Genzyme Transgenics was approximately 26%. On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc. upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis for shares of Insmed common stock. On the date of the exchange, we recognized a $7.6 million gain on the exchange of shares. CHARGE FOR IMPAIRED INVESTMENT: In June 1999, we recorded a $5.5 million charge in connection with a strategic investment in a collaborator's common stock because we considered the decline in the value of that stock to be other than temporary. In connection with this assessment, we concluded that substantial evidence existed that the value of the investment would recover to at least its cost. This included continued positive progress in the issuer's scientific programs, ongoing activity in our collaborations with the issuer, and a lack of any substantial company-specific adverse events causing the declines in value. However, given the significance and duration of the decline as of the end of the applicable quarter, we concluded that it was unclear over what period such price recovery would take place and that, accordingly, the positive evidence suggesting that the investment would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments. 51 OTHER: In April 2000, we received net proceeds of approximately $5.1 million in connection with the settlement of a lawsuit. The lawsuit, initiated in 1993, pertained to insurance coverage for an accidental spill of Ceredase-Registered Trademark- enzyme at a fill facility operated by a contractor to Genzyme. We allocated the net proceeds from the settlement of this lawsuit to Genzyme General. TAX PROVISION:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ -------------------- (DECREASE) -------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Provision for income taxes........... $(15,933) $(10,395) 53% $(51,101) $(27,659) 85% Tax rate............................. 32% 43% 31% 43%
Our tax rates for both periods vary from the U.S. statutory tax rate as a result of our: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. In the nine months ended September 30, 2000, we reversed valuation allowances totaling $5.3 million, which reduced our tax rate for the period by 4.9%. EARNINGS ALLOCATIONS Genzyme allocates its earnings to each of our series of common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock is defined in our charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with our management and accounting policies. The earnings allocated to each series of common stock are indicated in the table below:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Earnings allocated to: Genzyme General Stock.............................. $ 59,449 $ 38,187 $182,121 $ 94,116 Molecular Oncology Stock........................... (5,504) (7,559) (17,924) (22,777) Surgical Products Stock............................ (13,936) (10,953) (34,346) (11,833) Tissue Repair Stock................................ (5,588) (6,148) (14,590) (24,146)
In connection with the creation of Genzyme Surgical Products as a separate division and the distribution of Surgical Products Stock on June 28, 1999, we modified the way by which we allocate income and losses to our series of stock. Through June 27, 1999, the operations of Genzyme Surgical Products were included in Genzyme General, and the losses of Genzyme Surgical Products were allocated to Genzyme General Stock. Since June 28, 1999, the losses of Genzyme Surgical Products have not been included in the determination of income allocated to Genzyme General Stock. This change in the methodology of allocating income or losses has resulted in an increase in the income allocated to Genzyme General Stock that is not due to 52 operational changes or new business. Subsequent to the creation of Genzyme Surgical Products, pursuant to our management and accounting policies, tax benefits generated by Genzyme Surgical Products continued to be allocated to Genzyme General Stock. From January 1, 1999 through June 27, 1999, the net loss of Genzyme Surgical Products of $27.5 million was allocated to Genzyme General Stock. From June 28, 1999 through September 30, 1999, the net loss of Genzyme Surgical Products of $11.8 million was allocated to Surgical Products Stock and excluded from income allocated to Genzyme General Stock. As a result of this change in allocation methodology, income allocated to Genzyme General Stock for the nine months ended September 30, 1999 was $11.8 million (or 14%) higher than what would have been allocated had Genzyme Surgical Products remained a part of Genzyme General. If the shares of Surgical Products Stock initially issued on June 28, 1999 were assumed to be outstanding since January 1, 1999, net income allocated to Genzyme General Stock, net loss allocated to Surgical Products Stock and weighted average shares outstanding would have been as follows:
NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------------- (AMOUNTS IN THOUSANDS) Genzyme General: Net income allocated to Genzyme General Stock............ $121,639 Weighted average shares outstanding: Basic.................................................. 82,741 Diluted................................................ 93,196 Genzyme Surgical Products: Net loss allocated to Surgical Products Stock............ $(39,356) Weighted average shares outstanding--basic and diluted... 14,800
As noted above, the tax benefits associated with the losses of Genzyme Surgical Products that amounted to $4.1 million for the period from June 28, 1999 to September 30, 1999 continued to be allocated to Genzyme General Stock. Our management and accounting policies provide that if, as of the end of any fiscal quarter, a division can not use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. Tax benefits allocated to Genzyme General, which are included in earnings attributable to Genzyme General Stock, are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Tax benefits allocated from: Genzyme Molecular Oncology.............................. $2,021 $2,016 $ 5,558 $ 6,326 Genzyme Surgical Products............................... 4,424 3,841 11,080 14,191 Genzyme Tissue Repair................................... 2,031 2,359 5,211 9,733 ------ ------ ------- ------- Total............................................... $8,476 $8,216 $21,849 $30,250 ====== ====== ======= ======= Total tax benefits allocated from other Genzyme divisions as a percent of earnings allocated to Genzyme General Stock................................................... 14% 22% 12% 32%
The amount of tax benefits allocated to Genzyme General fluctuate based on the results of Genzyme Molecular Oncology, Genzyme Surgical Products and Genzyme Tissue Repair. If the losses of those divisions decline, as they are expected to, then the tax benefits allocated to Genzyme General will also decline. 53 GENZYME GENERAL The components of Genzyme General's combined statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues........................ $192,165 $157,669 22% $549,485 $462,640 19% -------- -------- -------- -------- Cost of products and services sold.... 54,355 36,437 49% 141,398 109,328 29% Selling, general and administrative... 41,780 36,388 15% 122,974 114,446 7% Research and development.............. 25,567 22,884 12% 83,701 68,896 21% Amortization of intangibles........... 1,983 1,978 0% 5,962 6,081 (2%) Charge for in-process technology...... -- 5,436 (100%) -- 5,436 (100%) -------- -------- -------- -------- Total operating costs and expenses.......................... 123,685 103,123 20% 354,035 304,187 16% -------- -------- -------- -------- Operating income...................... 68,480 54,546 26% 195,450 158,453 23% Other income (expense), net........... 6,902 (5,302) 230% 38,986 (7,158) 645% -------- -------- -------- -------- Income before income taxes............ 75,382 49,244 53% 234,436 151,295 55% Provision for income taxes............ (24,409) (19,273) 27% (74,164) (59,906) 24% -------- -------- -------- -------- Division net income................... $ 50,973 $ 29,971 70% $160,272 $ 91,389 75% ======== ======== ======== ========
REVENUES
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product revenue....................... $176,891 $142,860 24% $503,700 $418,401 20% Service revenue....................... 15,115 14,270 6% 45,296 42,696 6% -------- -------- -------- -------- Total product and service revenue... 192,006 157,130 22% 548,996 461,097 19% -------- -------- -------- -------- Research and development revenue...... 159 539 (71%) 489 1,543 (68%) -------- -------- -------- -------- Total revenues...................... $192,165 $157,669 22% $549,485 $462,640 19% ======== ======== ======== ========
54 The following table sets forth product and service revenues on a segment basis: PRODUCT REVENUE:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product revenue: Therapeutics: Cerezyme-Registered Trademark-/Ceredase-Registered Trademark- enzyme.......................... $136,744 $121,058 13% $400,203 $351,716 14% Renagel-Registered Trademark- phosphate binder................ 13,814 -- 100% 24,032 -- 100% Thyrogen-Registered Trademark- hormone......................... 3,282 2,434 35% 10,149 6,040 68% Other therapeutic products........ -- -- 0% 1,836 -- 100% -------- -------- -------- -------- Total Therapeutics.............. 153,840 123,492 25% 436,220 357,756 22% Diagnostic Products................. 15,824 14,287 11% 46,601 43,933 6% Other............................... 7,227 5,081 42% 20,879 16,712 25% -------- -------- -------- -------- Total product revenue............. 176,891 142,860 24% 503,700 418,401 20% Service revenue: Other............................... 15,115 14,270 6% 45,296 42,696 6% -------- -------- -------- -------- Total product and service revenue..... $192,006 $157,130 22% $548,996 $461,097 19% ======== ======== ======== ========
THERAPEUTICS: Genzyme General's increase in product revenue during both periods is partly due to increased sales of Cerezyme-Registered Trademark- enzyme, which is attributable to its identification of new Gaucher disease patients throughout the world and strong international sales. Genzyme General also sells Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, but it has successfully converted virtually all Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme. Genzyme General's results of operations are highly dependent on sales of Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of this product would adversely affect its results of operations. The following table provides information regarding the change in sales of Genzyme General's Gaucher disease therapies as a percentage of total product revenue during both periods.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- % of total product revenue.................... 77% 85% 79% 84%
Genzyme General began recording revenues from Renagel-Registered Trademark- phosphate binder (sevelamer hydrochloride) during the third quarter of 2000 under an amended distribution arrangement with its joint venture partner, GelTex Pharmaceuticals, Inc. Revenues from Renagel-Registered Trademark- phosphate binder were previously recorded by the joint venture. Renagel-Registered Trademark- phosphate binder is used to reduce serum phosphorus levels in patients with end-stage renal disease on dialysis. Sales of Renagel-Registered Trademark- phosphate binder include sales of all new tablet formulation, which was launched in the United States in September 2000. Therapeutics revenues for both periods also include sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well differentiated thyroid cancer. Sales of Thyrogen-Registered Trademark- hormone increased 55 in the three and nine months ended September 30, 2000 due to increased market penetration. We commenced commercial sales of Thyrogen-Registered Trademark- hormone in January 1999. DIAGNOSTIC PRODUCTS: Diagnostic Products' revenues increased during both periods due primarily to increased sales of HDL and LDL cholesterol testing products, despite the sale of our bioreagent and ELISA product lines in July 1999. Product revenue for Diagnostic Products includes royalties on product sales by Techne Corporation's biotechnology group. Diagnostic Products' service revenue increased during the period as a result of growth in sales of our DNA and cancer testing services. OTHER: Other revenue for both periods includes: - product revenue from sale of lipids and peptides for drug delivery; and - genetic testing service revenue. INTERNATIONAL PRODUCT AND SERVICE SALES: A substantial portion of Genzyme General's revenue is generated outside of the United States, as described in the following table. Most of these revenues are attributable to sales of Cerezyme-Registered Trademark- enzyme.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) International product and service revenue............................. $80,585 $65,963 22% $237,592 $197,011 21% % of total product and service revenue............................. 42% 42% 43% 43%
MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Product margin...................... $131,701 $115,257 14% $389,239 $335,695 16% % of product revenue................ 74% 81% 77% 80% Service margin...................... 5,950 5,436 9% 18,359 16,074 14% % of service revenue................ 39% 38% 41% 38% Total gross margin.................. $137,651 $120,693 14% $407,598 $351,769 16% % of total product and service revenue........................... 72% 77% 74% 76%
Genzyme General provides a broad range of healthcare products and services. As a result, Genzyme General's gross margin varies significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than sales of diagnostic products. Our service margin increased during both periods as a result of increases in sales of DNA and cancer testing services. 56 OPERATING EXPENSE The increase in selling, general and administrative expenses in both periods is related to: - increased staffing to support the growth in several of Genzyme General's product lines; and - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered Trademark- hormone. The increase in research and development expense for the three and nine months ended September 30, 2000 as compared to the same periods last year is a result of the following: - a charge of $19.5 million during the first quarter of 2000 for the initial amounts payable to Synpac under a license agreement granted by Synpac to Genzyme to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease, offset by a $10.3 million research and development reimbursement from Pharming; - a charge of $2.0 million in the third quarter of 2000 due to an equity investment by Genzyme at a 15% premium to the market price in shares of Cambridge Antibody Technology Group plc concurrently with entry into a strategic alliance to develop and commercialize human monoclonal antibodies directed against TGF-beta, the portion of this equity investment above the market price was recorded by Genzyme General as research and development expense; - increased spending on our program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; - increased costs in connection with the operations of ATIII LLC, a joint venture with Genzyme Transgenics Corporation, whose results we consolidate; and - increased spending in our cell and gene therapy programs. OTHER INCOME AND EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates.......................... $(11,420) $ (9,352) 22% $(30,866) $(24,077) 28% Investment income..................... 11,072 6,970 59% 27,798 23,713 17% Interest expense...................... (4,647) (5,445) (15%) (11,639) (15,631) (26%) Minority interest..................... 977 843 16% 3,185 2,573 24% Gain on affiliate sale of stock....... 2,419 1,164 108% 22,689 1,770 1182% Gain on sale of product line.......... -- 518 (100%) -- 8,018 (100%) Gain on sale of equity securities..... 8,544 -- 100% 22,709 1,963 1057% Charge for impaired investment........ -- -- 0% -- (5,487) (100%) Other................................. (43) -- (100%) 5,110 -- 100% -------- -------- -------- -------- Total other income (expense)...... $ 6,902 $ (5,302) 230% $ 38,986 $ (7,158) 645% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES: Genzyme General records in equity in net loss of unconsolidated affiliates its portion of the results of our joint ventures and strategic alliances with GelTex, BioMarin Pharmaceutical Inc., Pharming and Diacrin, Inc. Genzyme General also records a portion of the results of Genzyme Transgenics in equity in net loss of unconsolidated affiliates. 57 Genzyme General's equity in net loss of unconsolidated affiliates increased in both periods as a result of: - increased losses from RenaGel LLC, our joint venture with GelTex; - increased losses from our joint venture with BioMarin to develop and commercialize Aldurazyme-TM- enzyme for the treatment of mucopolysaccharidosis-I; - the addition of losses from Genzyme/Pharming Alliance LLC, our new strategic alliance with Pharming; - the reallocation of our joint venture with Diacrin from Genzyme Tissue Repair to Genzyme General in May 1999; and - increased losses from Genzyme Transgenics. These increases were offset in part by decreased losses from Pharming/Genzyme LLC. INVESTMENT INCOME: For the three and nine months ended September 30, 2000, investment income increased as compared to the same period of 1999 due primarily to higher average cash and investment balances. INTEREST EXPENSE: Genzyme General's interest expense decreased during both periods of 2000 as a result of our repayment in November 1999 of $82.0 million outstanding under our revolving credit facility, which had been allocated to Genzyme General. MINORITY INTEREST: Due to our combined direct and indirect ownership interest in ATIII LLC, Genzyme General consolidates the results of ATIII LLC and records Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest for both periods increased due to increased losses incurred by ATIII LLC. GAIN ON AFFILIATE SALE OF STOCK: In February 2000, Genzyme Transgenics, an unconsolidated affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics common stock, resulting in net proceeds to Genzyme Transgenics of $75.2 million (after the exercise of the underwriter's overallotment option). In accordance with our policy pertaining to affiliate sales of stock, we recognized a gain of $20.3 million and recorded a net deferred tax expense of $3.9 million for the three months ended March 31, 2000. The deferred tax expense is net of a $3.4 million credit for the reversal of the valuation allowance on a deferred tax asset. In September 2000, we recorded an additional gain of $2.4 million on our investment in Genzyme Transgenics as a result of the issuance of additional shares of common stock by Genzyme Transgenics. GAIN ON SALE OF PRODUCT LINE OR BUSINESS: In June 1999, Genzyme General recorded a gain of $7.5 million representing the payment of a note receivable that it received as partial consideration for the sale of Genetic Design, Inc. in 1996. Genzyme General had previously fully reserved the amount of this note because it considered the repayment of the note to be uncertain. 58 GAINS (LOSSES) ON SALE OF EQUITY SECURITIES: In June 2000, we recorded a gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. During the second quarter of 2000, the tax effect of this gain was fully offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. In the third quarter of 2000, we recorded a gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. As of September 30, 2000 our ownership interest in Genzyme Transgenics was approximately 26%. On June 1, 2000, Celtrix Pharmaceuticals, Inc. was acquired by Insmed Inc. upon which our shares of Celtrix common stock were exchanged on a 1-for-1 basis for shares of Insmed common stock. We recognized a $7.6 million gain upon this exchange in the three months ended June 30, 2000. CHARGE FOR IMPAIRED INVESTMENT: In June 1999, Genzyme General recorded a $5.5 million charge in connection with a strategic investment in a collaborator's common stock because it considered the decline in the value of that stock to be other than temporary. In connection with this assessment, we concluded that substantial evidence existed that the value of the investment would recover to at least its cost. This included continued positive progress in the issuer's scientific programs, ongoing activity in our collaborations with the issuer, and a lack of any substantial company-specific adverse events causing the declines in value. However, given the significance and duration of the decline as of the end of the applicable quarter, we concluded that it was unclear over what period such price recovery would take place and that, accordingly, the positive evidence suggesting that the investment would recover to at least our purchase price was not sufficient to overcome the presumption that the current market price was the best indicator of the value of these investments. OTHER: In April 2000, Genzyme General received net proceeds of approximately $5.1 million in connection with the settlement of a lawsuit. The lawsuit, initiated in 1993, pertained to insurance coverage for an accidental spill of Ceredase-Registered Trademark- enzyme at a fill facility operated by a contractor to Genzyme General. TAX PROVISION AND ALLOCATED TAX BENEFITS:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Provision for income taxes........... $(24,409) $(19,273) 27% $(74,164) $(59,906) 24% Effective tax rate................... 32% 39% 32% 40%
Genzyme General's tax rates for both periods vary from the U.S. statutory tax rate as a result of its: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. In the nine months ended September 30, 2000, we reversed valuation allowances totaling $5.3 million, which reduced Genzyme General's tax rate for the period by 3.5%. 59 GENZYME MOLECULAR ONCOLOGY The components of Genzyme Molecular Oncology's combined statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues........................... $ 635 $ 709 (10%) $ 4,153 $ 3,455 20% ------- ------- -------- -------- Cost of revenues......................... 104 62 68% 299 1,074 (72%) Selling, general and administrative...... 1,311 1,168 12% 4,289 4,205 2% Research and development................. 5,120 3,815 34% 13,772 12,448 11% Amortization of intangibles.............. -- 2,956 (100%) 5,420 8,869 (39%) ------- ------- -------- -------- Total operating costs and expenses... 6,535 8,001 (18%) 23,780 26,596 (11%) ------- ------- -------- -------- Operating loss........................... (5,900) (7,292) (19%) (19,627) (23,141) (15%) Other income (expenses), net............. 396 (929) 143% 489 (1,622) 130% ------- ------- -------- -------- Division net loss before taxes........... (5,504) (8,221) (33%) (19,138) (24,763) (23%) Tax benefit.............................. -- 662 (100%) 1,214 1,986 (39%) ------- ------- -------- -------- Division net loss........................ $(5,504) $(7,559) (27%) $(17,924) $(22,777) (21%) ======= ======= ======== ========
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Royalty and licensing revenue............ $ 635 $ 709 (10%) $ 4,153 $ 1,448 187% Research and development revenue......... -- -- --% -- 496 (100%) Service revenue.......................... -- -- --% -- 1,511 (100%) ------- ------- -------- -------- Total revenues....................... $ 635 $ 709 (10%) $ 4,153 $ 3,455 20% ======= ======= ======== ========
Royalty and licensing revenue increased for the nine month period ended September 30, 2000 as a result of various licenses of diagnostic rights to third parties, a development milestone payment received from Schering-Plough Corporation and the renewal of licenses under the SAGE-TM- gene expression technology. Our research and development revenue decreased during both periods as a result of the dissolution of StressGen/Genzyme LLC in December 1999. Service revenue decreased for the nine months ended September 30, 2000 as a result of a planned shift in genomics business focus from one in which Genzyme Molecular Oncology provides services to third parties to one in which it grants licenses under the SAGE-TM- gene expression technology. COST OF REVENUE Genzyme Molecular Oncology's cost of revenue includes: - services performed using the SAGE-TM- gene expression technology on behalf of third parties; - royalties paid to third parties; and 60 - work performed on behalf of StressGen/Genzyme LLC in the three and nine months ended September 30, 1999. There are no similar costs for work performed on behalf of the joint venture in the same periods of 2000 because the joint venture was dissolved in the fourth quarter of 1999. Cost of revenue decreased for both periods as a result of the dissolution of StressGen/Genzyme LLC in December 1999 and a planned business reduction of genomics services provided by Genzyme Molecular Oncology. OPERATING EXPENSES Genzyme Molecular Oncology's selling, general and administrative expenses increased for the three months ended September 30, 2000 as compared to the comparable period of 1999 primarily as a result of increased professional service fees. Selling, general and administrative expenses for the nine months ended September 30, 2000 increased slightly in comparison to the same period of 1999 due primarily to $0.4 million of audit and legal fees related to the registration of a secondary offering which was subsequently withdrawn, which were offset in part by reduced legal costs associated with the prosecution and maintenance of its intellectual property portfolio. The majority of Genzyme Molecular Oncology's research and development expenses were directed toward its antigen discovery, immunotherapy and anti-angiogenesis programs. Research and development expenses increased in the three and nine months ended September 30, 2000 due to spending associated with the cancer vaccine clinical trials and antigen discovery program. AMORTIZATION OF INTANGIBLES Genzyme Molecular Oncology's amortization of intangibles is attributable to intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. in June 1997. These assets were fully amortized by the end of the second quarter of 2000. OTHER INCOME AND EXPENSE Genzyme Molecular Oncology's other expenses decreased as a result of the dissolution of StressGen/Genzyme LLC in December 1999. GENZYME SURGICAL PRODUCTS In June 1999, we established Genzyme Surgical Products as a separate division of Genzyme. The business of Genzyme Surgical Products had previously been accounted for as a business unit of Genzyme General. The products and assets allocated to Genzyme Surgical Products consist primarily of: - the products and assets we acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996; - the Sepra products (our line of products and product candidates designed to limit post-surgical adhesions); - the Focal Seal-Registered Trademark--L product for lung sealing distributed by Genzyme Surgical Products in North America; and - our research and development programs in biomaterials and gene and cell therapy for cardiovascular disease. Genzyme General transferred $150.0 million in cash, cash equivalents, investments and certain other assets and liabilities, to Genzyme Surgical Products in connection with the creation of Genzyme 61 Surgical Products as a separate division of Genzyme. The following discussion reflects the results of operations of Genzyme Surgical Products as if it had been accounted for as a separate division of Genzyme for all periods presented. The components of Genzyme Surgical Products' combined statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues......................... $ 29,754 $ 27,385 9% $ 88,805 $ 81,419 9% -------- -------- -------- -------- Cost of products sold.................. 18,539 16,798 10% 51,170 50,081 2% Selling, general and administrative.... 17,772 15,114 18% 51,214 46,893 9% Research and development............... 7,215 7,131 1% 21,187 21,716 (2%) Amortization of intangibles............ 1,426 1,445 (1%) 4,279 4,306 (1%) -------- -------- -------- -------- Total operating costs and expenses......................... 44,952 40,488 11% 127,850 122,996 4% -------- -------- -------- -------- Operating loss......................... (15,198) (13,103) 16% (39,045) (41,577) (6%) Other income, net...................... 1,262 2,150 (41%) 4,699 2,221 112% -------- -------- -------- -------- Division net loss...................... $(13,936) $(10,953) 27% $(34,346) $(39,356) (13%) ======== ======== ======== ========
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Cardiovascular surgery products......... $18,804 $19,552 (4%) $58,240 $56,985 2% General surgery products................ 8,136 5,811 40% 22,497 17,946 25% Other products.......................... 2,814 2,022 39% 8,068 6,488 24% ------- ------- ------- ------- Total revenues...................... $29,754 $27,385 9% $88,805 $81,419 9% ======= ======= ======= =======
Cardiovascular surgery products include chest drainage and fluid management systems, a lung sealant product for thoracic surgery and surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The decrease in cardiovascular surgery products revenue for the three months ended September 30, 2000 when compared to the same period in 1999 was primarily due to seasonal fluctuations, the impact of the strong dollar in Europe and competitive pricing pressures in the chest drainage market. These factors were offset in part by the launch of the Focal Seal-Registered Trademark--L lung sealant and by continued growth in the minimally invasive cardiac surgery instrument product line. Cardiovascular surgery products revenue increased during the nine months ended September 30, 2000 when compared to the same period in 1999 primarily due to increased sales of instruments for minimally invasive cardiac surgery. The increase in general surgery products revenue for both periods is due primarily to the increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane and Sepramesh-TM- biosurgical composite. Sales of Sepra products for the three months ended September 30, 2000 were $4.9 million compared to $3.0 million in the same period in 1999. Sales of Sepra products for the nine months ended September 30, 2000 were $13.2 million compared to $9.4 million in the same period in 1999. An 62 increase in general surgery instrument sales also contributed to the overall increase in general surgery product revenue. Other surgery product revenues consist of sales of Genzyme Surgical Products' Snowden-Pencer-Registered Trademark- line of instruments for plastic surgery and products sold to original equipment manufacturers, including sutures. The increase in other surgery product revenues for both periods is primarily due to an increase in products sold to original equipment manufacturers as well as an increase in sales of instruments for plastic surgery. International revenue as a percentage of total sales for the three months ended September 30, 2000 were 29% as compared to 28% in the same period of 1999. International sales as a percentage of total sales for the nine months ended September 30, 2000 and 1999 was 29% in each period. MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Gross margins............................. $11,215 $10,587 6% $37,635 $31,338 20% % of total revenues....................... 38% 39% 42% 38%
Genzyme Surgical Products sells a broad range of products. As a result, Genzyme Surgical Products' gross margins may vary significantly depending on the particular market conditions of each product line. Gross margin decreased slightly for the three months ended September 30, 2000 when compared to the same period in 1999 due to seasonal fluctuations in product mix and a charge for a retirement-plan funding adjustment. For the nine months ended September 30, 2000, gross margins increased when compared to the nine months ended September 30, 1999 as a result of an increase in sales volume, cost reduction initiatives and increased sales of higher margin products, such as devices for minimally invasive cardiac surgery. OPERATING EXPENSES Genzyme Surgical Products' selling, general and administrative expenses increased for the three months ended September 30, 2000 when compared to the same period in 1999 due primarily to increased spending for marketing of the cardiovascular products, including the launch of three new products for the cardiothoracic market, and spending on certain employee retention programs and non-operational items. For the nine months ended September 30, 2000 selling, general and administrative expenses increased when compared to the same period of 1999 as a result of increased spending for marketing of the cardiovascular products, particularly the minimally invasive cardiac surgery instrument line. Genzyme Surgical Products' research and development expenses remained relatively stable in the three months ended September 30, 2000 when compared to the same period in 1999. Research and development expenses decreased in the nine months ended September 30, 2000 when compared to the same period in 1999 primarily as a result of a $2.0 million milestone payment to a collaborator that was recorded in the second quarter of 1999 for which there was no corresponding amount in 2000. This was partially offset by an increase in research and development expenses for Genzyme Surgical Products' gene therapy programs as well as an increase in research and development spending for surgical 63 instruments and devices during the nine months ended September 30, 2000 compared to the same period in 1999. OTHER INCOME AND EXPENSE Other income and expenses decreased for the three months ended September 30, 2000 as compared to the same period in 1999 due to a decrease in investment income. Investment income decreased due to a higher average cash balance in the third quarter of 1999. The increase in other income and expenses in the nine months ended September 30, 2000 as compared to the same period of 1999 is primarily due to an increase in investment income. Investment income increased because Genzyme Surgical Products had a higher average cash balance during the nine months ended September 30, 2000 as a result of the allocation in June 1999 of $150.0 million in cash and investments from Genzyme General to Genzyme Surgical Products. GENZYME TISSUE REPAIR The components of Genzyme Tissue Repair's combined statements of operations are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues........................... $ 4,853 $ 5,682 (15%) $ 17,007 $ 14,370 18% ------- ------- -------- -------- Cost of services sold.................... 2,903 3,558 (18%) 8,949 9,777 (8%) Selling, general and administrative...... 5,516 5,978 (8%) 16,881 18,407 (8%) Research and development................. 1,720 2,033 (15%) 5,043 6,004 (16%) ------- ------- -------- -------- Total operating costs and expenses... 10,139 11,569 (12%) 30,873 34,188 (10%) ------- ------- -------- -------- Operating loss........................... (5,286) (5,887) (10%) (13,866) (19,818) (30%) Other expenses, net...................... (302) (261) 16% (724) (4,328) (83%) ------- ------- -------- -------- Division net loss........................ $(5,588) $(6,148) (9%) $(14,590) $(24,146) (40%) ======= ======= ======== ========
REVENUES
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Carticel-Registered Trademark- chondrocytes.............................. $4,021 $3,619 11% $13,130 $10,359 27% Epicel-TM- skin grafts...................... 831 2,063 (60%) 3,854 3,926 (2%) Other....................................... 1 -- 100% 23 85 (73%) ------ ------ ------- ------- Total revenues.......................... $4,853 $5,682 (15%) $17,007 $14,370 18% ====== ====== ======= =======
Genzyme Tissue Repair's service revenue decreased for the three months ending September 30, 2000 as compared to the same period of 1999 as a result of a decrease in sales of Epicel-TM- skin grafts. Revenue from Epicel-TM- skin grafts varies widely from quarter to quarter depending on the number of patients requiring severe burn care. For the nine months ended September 30, 2000, service revenues as compared to the same period in 1999 were higher as a result of increased sales of Carticel-Registered Trademark- chondrocytes. 64 The increase in sales of Carticel-Registered Trademark- chondrocytes during both periods is a result of continued increases in the numbers of patients treated as well as an increase in the number of insurance reimbursement approvals. MARGINS
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total gross margin.......................... $1,950 $2,124 (8%) $8,058 $4,593 75% % of total revenue.......................... 40% 37% 47% 32%
Genzyme Tissue Repair's gross margin improved for the nine months ended September 30, 2000 compared to the same period in 1999 as a result of: - increased sales of Carticel-Registered Trademark- chondrocytes; - a reduction in fixed costs, materials and production costs for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts; and - continued expense control efforts. For the three months ended September 30, 2000 gross margin decreased as a result of lower sales of Epicel-TM- skin grafts. Epicel revenues fluctuate from quarter to quarter depending on the need for severe burn care. OPERATING EXPENSES Genzyme Tissue Repair's selling, general and administrative expenses decreased in both the three and nine months ended September 30, 2000 as compared to the same periods of 1999 as a result of its efforts to streamline its operations. Genzyme Tissue Repair's research and development expenses decreased in both periods due to the termination of its TGF-beta program and other research and development programs. OTHER INCOME AND EXPENSE
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2000 1999 % CHANGE 2000 1999 % CHANGE -------- -------- ---------- -------- -------- ---------- (AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Equity in net loss of joint venture............. $ -- $ -- --% $ -- $(3,368) (100%) Investment income............................... 46 210 (78%) 254 375 (32%) Interest expense................................ (347) (471) (26%) (972) (1,335) (27%) Other........................................... (1) -- (100%) (6) -- (100%) ----- ----- ----- ------- Total other income (expense)................ $(302) $(261) 16% $(724) $(4,328) (83%) ===== ===== ===== =======
For the nine months ended September 30, 2000, equity in net loss of joint venture as compared to the same period in 1999 decreased as a result of the reallocation of Genzyme's ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General in May 1999. Investment income decreased in the three and nine months ended September 30, 2000 as compared to the same periods of 1999 as a result of lower average cash balances. Interest expense decreased in both periods of 2000 as a result of the completion of the conversion of Genzyme Tissue Repair's 5% convertible subordinated note in the fourth quarter of 1999. 65 B. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION At September 30, 2000, we had cash, cash-equivalents, and short- and long-term investments of $808.3 million, an increase of $155.3 million from December 31, 1999. We generated $117.6 million in cash from operations for the nine months ended September 30, 2000. Our investing activities utilized net cash of $128.8 million in the first nine months of 2000 due to the following: - the sale of a portion of investments in equity securities provided $15.8 million of cash, of which $14.9 million represented the net proceeds from the sale of a portion of our investment in Genzyme Transgenics common stock; - net purchases of investments used $65.8 million of cash; - $52.3 million was used to fund capital expenditures; - $19.6 million was used to fund our investments in unconsolidated affiliates; - $5.0 million was used for the purchase of Focal, Inc. common stock as required upon the exercise by Focal of its first option under the stock purchase agreement between Genzyme and Focal. We are required, at Focal's option, to make future additional equity investments of up to $10.0 million subject to certain conditions. During the nine months ended September 30, 2000, we received $83.4 million in cash from exercises of stock options and the issuance of stock under our employee stock purchase plan. We also received $20.7 million of net proceeds from a directed public offering of shares of Molecular Oncology Stock in July 2000. During this period, we repaid $5.0 million in long-term debt. In June 2000, we entered into a strategic alliance agreement with Pharming Group N.V. to share in the development and funding for the commercialization of a human alpha-glucosidase enzyme replacement therapy for Pompe disease. Under the agreement, Pharming paid us $250,000 in cash and issued to us a $10.0 million 7% Convertible Senior Note due June 1, 2004. This consideration was a reimbursement for 50% of the amounts we previously paid to Synpac for product development and technology fees and expenses. Accordingly, we recorded the $10.3 million as a reduction to research and development expense during the three months ended June 30, 2000. This note is convertible at any time at Genzyme's option into fully paid and nonassessable ordinary shares of Pharming. We have allocated our interest in this note to Genzyme General and have classified it as a long-term, related party note receivable as of September 30, 2000. In November 1999, we refinanced our $225.0 million revolving credit facility with a $50.0 million revolving credit facility that matures in November 2000 and a $100.0 million revolving credit facility that matures in November 2002. At September 30, 2000, $18.0 million was outstanding under the credit facility that matures in November 2002. We have allocated the $18.0 million of borrowings to Genzyme Tissue Repair. We expect to terminate our existing credit facilities to establish a new $500.0 million revolving credit facility. Under this new credit facility, we intend to borrow approximately $200.0 million to finance in part the cash portion of the Biomatrix merger consideration and $150.0 million to finance in part the cash portion of the GelTex merger consideration. We will allocate the $200.0 million in borrowings for the Biomatrix acquisition to Genzyme Biosurgery in connection with its formation as a separate division of Genzyme and the $150.0 million in borrowings for the GelTex acquisition to Genzyme General. Pursuant to a prospectus filed under Rule 424 of the Securities Act of 1933, in July 2000, we sold 1,607,400 shares of Molecular Oncology Stock to a limited number of purchasers at a price of $12.91 per share. We received approximately $20.7 million of net proceeds from the offering, which we allocated to Genzyme Molecular Oncology. The proceeds of this offering will be used primarily to fund 66 Genzyme Molecular Oncology's research, preclinical and clinical development programs, and for its working capital and general corporate purposes. Except as noted above, we believe that our available cash, investments and cash flow from operations will be sufficient to fund our planned operations and capital requirements for the foreseeable future. Although we currently have substantial cash resources and positive cash flow, we intend to use substantial portions of our available cash for: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. Our cash reserves may be further reduced to pay principal and interest on the following debt: - $21.2 million in principal under our 5% convertible subordinated debentures, which are convertible into Genzyme General Stock; and - $250.0 million in principal under our 5 1/4% convertible subordinated notes, which are convertible into shares of Genzyme General Stock, Molecular Oncology Stock and Surgical Products Stock. If we use cash to pay or redeem all or a portion of this debt, including the principal and interest due on it, our cash reserves will be diminished. In addition, we expect to pay: - approximately $245.0 million in cash to stockholders of Biomatrix in connection with our acquisition of that company, as more fully described below; - approximately $509.4 million in cash to stockholders of GelTex in connection with our acquisition of that company, as more fully described below; and - approximately $26.0 million in cash to the limited partners of Genzyme Development Partners, L.P. if we exercise our option to purchase the limited partnership interests in that partnership, which option may no longer be exercised after November 28, 2000. To satisfy these and other commitments, we will 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. BIOMATRIX ACQUISITION In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance which we will refer to as "Biosurgery Stock". We will hold a special meeting of our shareholders on December 15, 2000 at which holders of each of our four series of tracking stock will be asked to approve a charter amendment creating Biosurgery Stock as a new series of tracking stock of Genzyme, and eliminating Tissue Repair Stock and Surgical Products Stock. In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. We will account for the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical basis for each division because the combination of these two divisions is considered a re-allocation of assets and liabilities within Genzyme. 67 We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final joint proxy statement/prospectus dated November 3, 2000, which we filed with the SEC on November 6, 2000. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. GELTEX ACQUISITION On September 11, 2000, we entered into an agreement to acquire GelTex Pharmaceuticals, Inc. In connection with the merger, GelTex shareholders will receive 0.7272 of a share of Genzyme General Stock or $47.50 in cash for each GelTex share owned, subject to proration to maintain the cash portion of the consideration at 50 percent, approximately $509.4 million. We will account for the merger as a purchase. The merger, which we expect to close by the end of 2000, is subject to: - approval by GelTex's shareholders; - clearance under federal antitrust laws; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final proxy statement/prospectus for the merger dated November 9, 2000, which we filed with the SEC on November 13, 2000. EURO-THE NEW EUROPEAN CURRENCY Since December 31, 1999, there have been no material changes related to our outstanding derivatives and forward contracts, or any other material contracts as a result of the euro conversion, nor have there been any material changes in our competitive position as a result of the conversion. We incorporate our disclosure related to the euro conversion set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Euro--the New European Currency" in Exhibit 13.1 to our 1999 Form 10-K by reference into this discussion. 68 MARKET RISK There have been no material changes in our market risk since December 31, 1999. We incorporate our disclosure related to our market risk set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Market Risk" in Exhibit 13.1 to our 1999 Form 10-K by reference into this discussion. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for our fiscal year beginning January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our balance sheet and measure those instruments at fair value. We are currently assessing the effects of adopting SFAS 133, as amended, and have not yet made a determination of the impact SFAS 133 will have on our consolidated results of operations and financial position. In December 1999, the SEC issued Staff Accounting Bulletin No. 101. "Revenue Recognition in Financial Statements" ("SAB 101") which summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 will be effective in the fourth quarter of 2000. We are currently evaluating the guidance provided in SAB 101 and do not expect its application to have a material effect on our financial statements. SUBSEQUENT EVENTS PURDUE PHARMA In October 2000, we entered into an arrangement with Purdue Pharma L.P. relating to the discovery and development of cancer antigens. Under this arrangement, we received approximately $12 million in cash, in the form of an up-front fee, research funding and an equity investment, and will receive approximately $9 million in committed research funding over the next three years. The equity portion of this arrangement provided for two affiliates of Purdue Pharma to purchase an aggregate of 532,066 shares of Molecular Oncology Stock at a premium to the market price for those shares. We allocate our antigen discovery program to Genzyme Molecular Oncology. ATIII LLC In November 2000, we entered into a non-binding letter of intent with Genzyme Transgenics pursuant to which Genzyme Transgenics will acquire our rights in Europe and the Americas for recombinant human antithrombin III. We currently hold these rights through our 50% ownership interest in ATIII LLC, the joint venture we formed with Genzyme Transgenics in 1998. Our 50% ownership interest is currently allocated to Genzyme General. Our board of directors and the board of directors of Genzyme Transgenics have to approve the transaction in order for the transfer of rights to occur. The transaction is also subject to the companies' ability to successfully negotiate definitive agreements and other customary closing conditions. We expect to complete this transaction by the end of 2000. 69 GENZYME GENERAL At September 30, 2000, Genzyme General had cash, cash-equivalents, and short- and long-term investments of $691.9 million, an increase of $178.0 million from December 31, 1999. Genzyme General generated $171.5 million in cash from operations for the nine months ended September 30, 2000. Genzyme General's investing activities utilized $142.2 million for the nine months ended September 30, 2000 due to the following: - the sale of a portion of our investments in equity securities provided $15.8 million of cash, of which $14.9 million represents the net proceeds from the sale of a portion of our investment in Genzyme Transgenics common stock; - net purchases of investments used $91.2 million of cash; - $50.0 million of cash was used to fund capital expenditures; and - $19.6 million of cash was used to fund Genzyme General's investments in joint ventures. During the nine months ended September 30, 2000, Genzyme General was allocated $80.1 million in cash from exercises of options to purchase shares of Genzyme General Stock and the issuance of Genzyme General Stock under our employee stock purchase plan. In June 2000, we entered into a strategic alliance agreement with Pharming Group N.V. to share in the development and funding for the commercialization of a human alpha-glucosidase enzyme replacement therapy for Pompe disease. Under the agreement, Pharming paid us $250,000 in cash and issued to us a $10.0 million 7% Convertible Senior Note due June 1, 2004. This consideration was a reimbursement for 50% of the amounts we previously paid to Synpac for product development and technology fees and expenses. Accordingly, we recorded the $10.3 million as a reduction to research and development expense during the three months ended June 30, 2000. This note is convertible at any time at Genzyme's option into fully paid and nonassessable ordinary shares of Pharming. We have allocated our interest in this note to Genzyme General and have classified it as a long-term, related party note receivable as of September 30, 2000. Genzyme General, together with our other operating divisions, has access to Genzyme's revolving credit facilities. At September 30, 2000, $50.0 million was available under a facility that matures in November 2000 and $82.0 million was available under a facility that matures in November 2002. We expect to terminate our existing credit facilities to establish a new $500.0 million revolving credit facility. Under this new credit facility, we intend to borrow approximately $200.0 million to finance in part the cash portion of the Biomatrix merger consideration and $150.0 million to finance in part the cash portion of the GelTex merger consideration. We will allocate the $200.0 million in borrowings for the Biomatrix acquisition to Genzyme Biosurgery in connection with its formation as a separate division of Genzyme and the $150.0 million in borrowings for the GelTex acquisition to Genzyme General. At December 31, 1999, $30.0 million of Genzyme General's cash was available to Genzyme Molecular Oncology under its interdivisional financing arrangement with Genzyme General. In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under this arrangement in exchange for 676,254 Genzyme Molecular Oncology designated shares. As of September 30, 2000, $15.0 million remained available to Genzyme Molecular Oncology under this arrangement. For information regarding the determination of the amount of Genzyme Molecular Oncology designated shares authorized in connection with each draw under this arrangement you should read the section entitled "Liquidity and Capital Resources--Genzyme Corporation" above. At December 31, 1999, $20.0 million of Genzyme General's cash was available to Genzyme Tissue Repair under its interdivisional financing arrangement with Genzyme General. In March 2000, 70 Genzyme Tissue Repair made a $5.0 million draw under this arrangement in exchange for 765,169 Genzyme Tissue Repair designated shares. In September 2000, Genzyme Tissue Repair made a subsequent draw of $5.0 million under this interdivisional financing arrangement in exchange for 927,488 Genzyme Tissue Repair designated shares. As of September 30, 2000, $10.0 million remained available under this arrangement. For information regarding the determination of the amount of Genzyme Tissue Repair designated shares authorized in connection with each draw under this arrangement you should read the section entitled "Liquidity and Capital Resources--Genzyme Corporation" above. We believe that Genzyme General's available cash, investments and cash flow from operations will be sufficient to fund its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources and positive cash flow, it intends to use substantial portions of its available cash for: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. Genzyme General's cash reserves may be further reduced to pay principal and interest on the following debt that has been allocated to Genzyme General: - $21.2 million in principal under our 5% convertible subordinated debentures, which are convertible into shares of Genzyme General Stock; and - $250.0 in principal under our 5 1/4% convertible subordinated notes, which are convertible into shares of Genzyme General Stock. If Genzyme General uses cash to pay or redeem all or a portion of this debt, including the principal and interest due on it, its cash reserves will be diminished. In addition, Genzyme General's cash resources will be reduced to the extent that the liabilities of Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair affect our consolidated results of operations. On September 11, 2000, we entered into an agreement to acquire GelTex Pharmaceuticals, Inc. In connection with the merger, GelTex shareholders will receive 0.7272 of a share of Genzyme General Stock or $47.50 in cash for each GelTex share owned, subject to proration to maintain the cash portion of the consideration at 50%, approximately $509.4 million. We will account for the merger as a purchase. The merger, which we expect to close by the end of 2000, is subject to: - approval by GelTex's shareholders; - clearance under federal antitrust laws; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final proxy statement/prospectus dated November 9, 2000 for the merger, which we filed with the SEC on November 13, 2000. To satisfy these and other commitments, we will have to obtain additional financing for Genzyme General. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. 71 GENZYME MOLECULAR ONCOLOGY At September 30, 2000, Genzyme Molecular Oncology had cash, cash equivalents and short-term investments of $23.6 million, an increase of $20.0 million from December 31, 1999. This increase is primarily attributable to the July 2000 offering of Molecular Oncology Stock discussed below. During the first nine months of 2000, Genzyme Molecular Oncology used $12.7 million in cash for operations. This is primarily due to Genzyme Molecular Oncology's net loss for the nine months ended September 30, 2000. Genzyme Molecular Oncology's investing activities in the first nine months of 2000 used $25.3 million in cash to purchase investments and provided $9.7 million from the sale and maturities of investments. Financing activities provided cash of $32.4 million. This is primarily from the $15.0 million draw in April 2000 from funds available to Genzyme Molecular Oncology from Genzyme General discussed below and net proceeds of $20.7 million from the July 2000 offering of Molecular Oncology Stock discussed below. Offsetting these two items was a payment of $5.0 million to repay funds borrowed in 1999 under Genzyme's revolving credit facility. Genzyme Molecular Oncology, together with our other operating divisions, has access to Genzyme's revolving credit facilities. At September 30, 2000, $50.0 million was available under a facility that matures in November 2000 and $82.0 million was available under a facility that matures in November 2002. We expect to terminate our existing credit facilities to establish a new $500.0 million revolving credit facility. Under this new credit facility, we intend to borrow approximately $200.0 million to finance in part the cash portion of the Biomatrix merger consideration and $150.0 million to finance in part the cash portion of the GelTex merger consideration. We will allocate the $200.0 million in borrowings for the Biomatrix acquisition to Genzyme Biosurgery in connection with its formation as a separate division of Genzyme and the $150.0 million in borrowings for the GelTex acquisition to Genzyme General. At December 31, 1999, $30.0 million of Genzyme General's cash was available to Genzyme Molecular Oncology under its interdivisional financing arrangement with Genzyme General. In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under this arrangement in exchange for 676,254 Genzyme Molecular Oncology designated shares. As required by our charter, the number of Genzyme Molecular Oncology designated shares was determined using the average closing price for Molecular Oncology Stock for the 20 trading days beginning on the 30th trading day before the draw. As of September 30, 2000, $15.0 million was available to Genzyme Molecular Oncology under this arrangement. These funds will be used primarily to fund research, preclinical and clinical development programs, and for working capital and general corporate purposes. Pursuant to a prospectus filed under Rule 424 of the Securities Act of 1933, as amended, in July 2000, we sold 1,607,400 shares of Molecular Oncology Stock to a limited number of purchasers at a price of $12.91 per share. We received approximately $20.7 million of net proceeds from the offering, which we allocated to Genzyme Molecular Oncology. The proceeds of this offering will be used primarily to fund Genzyme Molecular Oncology's research, preclinical and clinical development programs, and for its working capital and general corporate purposes. We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through the third quarter of 2002: - revenues generated from license agreements; - committed research funding from collaborators; 72 - the $15.0 million remaining under the interdivisional financing arrangement with Genzyme General; and - our revolving credit facilities. We expect Genzyme Molecular Oncology to have significant operating losses for the next several years. Genzyme Molecular Oncology plans to spend substantial amounts of funds on, among other things: - research and development; - pre-clinical and clinical testing; and - pursuing regulatory approvals. Genzyme Molecular Oncology's cash needs may differ from those planned as a result of many factors, including the: - results of research and development and clinical testing; - achievement of milestones under existing licensing arrangements; - ability to establish and maintain additional strategic alliances and licensing arrangements; - enforcement of patent and other intellectual property rights; - market acceptance of novel approaches and therapies; - development of competitive products and services; - ability to satisfy regulatory requirements of the FDA and other government authorities; and - ability to become profitable; Genzyme Molecular Oncology may require significant additional financing to continue operations. We cannot guarantee that Genzyme Molecular Oncology will be able to obtain any additional financing or find it on favorable terms. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to give rights to third parties to attempt to commercialize technologies or products that it would otherwise commercialize itself. 73 GENZYME SURGICAL PRODUCTS At September 30, 2000, Genzyme Surgical Products had cash, cash equivalents, and short- and long-term investments of $87.2 million, a decrease of $38.9 million from December 31, 1999. Genzyme Surgical Products used $26.8 million in cash for operations in the first nine months of 2000. This is primarily due to Genzyme Surgical Products' net loss of $34.3 million for the nine months ended September 30, 2000. In June 1999, we allocated $150.0 million in cash, cash equivalents, investments and certain other assets and liabilities from Genzyme General to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. Genzyme Surgical Products' investing activities provided $29.1 million of cash due to the following: - net sales and maturities of investments provided $41.0 million of cash; - $5.0 million of cash was used to purchase Focal, Inc. common stock as described below; and - $2.2 million of cash was used to fund capital expenditures. In April 2000, Focal, Inc. exercised its first option under the stock purchase agreement between Genzyme and Focal. As required by the terms of this agreement, Genzyme purchased $5.0 million of Focal common stock, at a price of $8.14 per share. We have allocated these shares to Genzyme Surgical Products. We are committed, at Focal's option, to make additional future equity investments of up to $10.0 million subject to certain conditions. Genzyme Surgical Products, together with our other operating divisions, has access to our revolving credit facilities. At September 30, 2000, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. We expect to terminate our existing credit facilities to establish a new $500.0 million revolving credit facility. Under this new credit facility, we intend to borrow approximately $200.0 million to finance in part the cash portion of the Biomatrix merger consideration and $150.0 million to finance in part the cash portion of the GelTex merger consideration. We will allocate the $200.0 million in borrowings for the Biomatrix acquisition to Genzyme Biosurgery in connection with its formation as a separate division of Genzyme and the $150.0 million in borrowings for the GelTex acquisition to Genzyme General. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance which we will refer to as "Biosurgery Stock". We will hold a special meeting of our shareholders on December 15, 2000 at which holders of each of our four series of tracking stock will be asked to approve a charter amendment creating Biosurgery Stock as a new series of tracking stock of Genzyme, and eliminating Tissue Repair Stock and Surgical Products Stock. In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. We will account for the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical basis for each division because the combination of these two divisions is considered a re-allocation of assets and liabilities within Genzyme. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of 74 Biomatrix stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. For more information about the merger and the merger consideration, we encourage you to carefully read the final joint proxy statement/prospectus dated November 3, 2000, which we filed with the SEC on November 6, 2000. 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; - results of research and development efforts; - the ability to establish and maintain strategic collaborations and licensing arrangements for research and development programs; - the achievement of milestones under strategic collaborations; - the ability to establish and maintain additional distribution arrangements; - 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 governmental authorities. In addition, if we exercise our option to purchase the limited partnership interests in Genzyme Development Partners, L.P. and use cash to pay all or a portion of the approximately $26.0 million advance payment to the limited partners, our cash resources will be diminished. The option is exercisable during the 90-day period that began on August 31, 2000. Genzyme Development Partners is a Delaware limited partnership that was formed in 1989 to develop, produce and derive income from the sale of Sepra products. Its general partner is a wholly-owned subsidiary of Genzyme. GENZYME TISSUE REPAIR At September 30, 2000, Genzyme Tissue Repair had cash and cash equivalents of $5.6 million, a decrease of $3.8 million from December 31, 1999. During the first nine months of 2000, Genzyme Tissue Repair used $14.4 million of cash for operations. This is primarily due to Genzyme Tissue Repair's net loss of $14.6 million during the period. Financing activities provided Genzyme Tissue Repair with $10.7 million of cash. This includes $10.0 million drawn by Genzyme Tissue Repair from funds available from Genzyme General under an interdivisional financing arrangement discussed below and the allocation of $0.7 million of cash from 75 the exercise of options to purchase shares of Tissue Repair Stock and the issuance of Tissue Repair Stock under an employee stock plan. Genzyme Tissue Repair, together with our other operating divisions, has access to our revolving credit facilities. At September 30, 2000, $50.0 million was available under a facility that matures in November 2000 and $82.0 million was available under a facility that matures in November 2002. We expect to terminate our existing credit facilities to establish a new $500.0 million revolving credit facility. Under this new credit facility, we intend to borrow approximately $200.0 million to finance in part the cash portion of the Biomatrix merger consideration and $150.0 million to finance in part the cash portion of the GelTex merger consideration. We will allocate the $200.0 million in borrowings for the Biomatrix acquisition to Genzyme Biosurgery in connection with its formation as a separate division of Genzyme and the $150.0 million in borrowings for the GelTex acquisition to Genzyme General. At December 31, 1999, $20.0 million of Genzyme General's cash was available to Genzyme Tissue Repair under its interdivisional financing arrangement with Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw under this arrangement in exchange for 765,169 Genzyme Tissue Repair designated shares. In September 2000, Genzyme Tissue Repair made a subsequent draw of $5.0 million under this interdivisional financing arrangement in exchange for 927,488 Genzyme Tissue Repair designated shares. As required by our charter, the number of Genzyme Tissue Repair designated shares was determined using the average closing price of Tissue Repair Stock for the 20 trading days beginning on the 30th trading day before each draw. As of September 30, 2000, $10.0 million was still available to Genzyme Tissue Repair under this arrangement. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the merger, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock that is intended to reflect its value and track its performance which we will refer to as "Biosurgery Stock". We will hold a special meeting of our shareholders on December 15, 2000 at which holders of each of our four series of tracking stock will be asked to approve a charter amendment creating Biosurgery Stock as a new tracking stock of Genzyme, and eliminating Tissue Repair Stock and Surgical Products Stock. In connection with the merger, and upon Genzyme shareholder approval, the assets and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock. Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery Stock in exchange for each share of Surgical Products Stock they hold and holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold. We will account for the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical basis for each division because the combination of these two divisions is considered a re-allocation of assets and liabilities within Genzyme. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery Stock, or a combination of cash and stock for each share of Biomatrix stock they hold. The merger agreement provides that we will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. The acquisition is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval by the holders of shares of Surgical Products Stock and Tissue Repair Stock; and - other customary closing conditions. 76 For more information about the merger and the merger consideration, we encourage you to carefully read the final joint proxy statement/prospectus dated November 3, 2000, which we filed with the SEC on November 6, 2000. We anticipate that Genzyme Tissue Repairs' current cash resources, together with the $10.0 million that remains available under the interdivisional financing arrangement from Genzyme General, will be sufficient to fund its operations through the end of 2000. Genzyme Tissue Repair's cash needs may differ from those planned as a result of various factors, including the: - ability to become profitable; - the ability to satisfy regulatory requirements of the FDA and other governmental authorities; - results of research and development and clinical testing; - the enforcement of patent and other intellectual property rights; and - development of competitive products and services. In addition, in 1999, Genzyme Tissue Repair received $25.0 million in cash from Genzyme General in connection with the transfer of our interest in our joint venture with Diacrin, Inc. from Genzyme Tissue Repair to Genzyme General. If the joint venture does not initiate a phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001, Genzyme Tissue Repair will be required to pay to Genzyme General $20.0 million plus accrued interest at an annual rate of 13.5%. If a phase 3 clinical trial is initiated by June 30, 2001 but NeuroCell-TM--PD does not receive final marketing approval from the FDA by June 30, 2004, Genzyme Tissue Repair will be required to pay Genzyme General $15.0 million plus accrued interest at an annual rate of 13.5%. Genzyme Tissue Repair may repay these amounts in cash, Genzyme Tissue Repair designated shares, or combination of both, at its option. If these milestones are not achieved, and Genzyme Tissue Repair elects to repay Genzyme General in cash, its cash reserves will be substantially diminished or depleted in their entirety. If Genzyme Tissue Repair elects to repay Genzyme General in Genzyme Tissue Repair designated shares, this would substantially dilute the rights of the holders of Tissue Repair Stock and could significantly affect the market price of Tissue Repair Stock. Genzyme Tissue Repair will require substantial additional funds in order to continue operations at current levels beyond 2000. We cannot guarantee that Genzyme Tissue Repair will be able to obtain any additional financing or find it on favorable terms. If Genzyme Tissue Repair has insufficient funds or is unable to raise additional funds, it may be required to delay, scale back or eliminate certain of its programs. Genzyme Tissue Repair may also have to give rights to third parties to commercialize technologies or products that it would otherwise commercialize itself. ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK. We are exposed to potential loss from financial market risks that may occur as a result of changes in interest rates, equity prices and foreign exchange rates. Our exposure to these risks has not materially changed since December 31, 1999. We incorporate by reference our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations--Market Risk" in Exhibit 13.1 to our 1999 Form 10-K. 77 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On July 25, 2000, we filed a lawsuit seeking injunctive relief and damages against Transkaryotic Therapies Inc. in the United States District Court in Wilmington, Delaware for patent infringement by the manufacture and use of Replagal-TM-, Transkaryotic Therapies' replacement therapy for Fabry disease. The suit alleges infringement of U.S. patent No. 5,356,804, which is exclusively licensed to Genzyme by Mount Sinai School of Medicine. The patent is directed to methods of making alpha-galactosidase in mammalian cells, as well as the genetically-engineered cells themselves. On September 19, 2000, Transkaryotic Therapies filed a lawsuit against Genzyme and Mount Sinai in U.S. District Court in Boston, Massachusetts seeking declaratory judgements that the manufacture, use and sale of Replagal-TM- does not infringe the patent licensed by Genzyme from Mount Sinai and that the Mount Sinai patent is invalid. 78 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Current Report on Form 8-K filed with the SEC on June 30, 2000, and incorporated herein by reference. 3.2 By-Laws of Genzyme, as amended. Filed as Exhibit 3.2 to Genzyme's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.1* Lease dated August 28, 2000 between Genzyme and Kendall Square, LLC. Filed herewith. 10.2 Lease dated August 4, 2000 between Genzyme and Fafard Real Estate and Development Corp. Filed herewith. 27 Financial Data Schedule for Genzyme for the nine months ended September 30, 2000 (for EDGAR filing purposes only). Filed herewith. *Confidential treatment has been requested for deleted portions of Exhibit 10.1. (b) Reports on Form 8-K - On July 14, 2000, we filed a Current Report on Form 8-K for the purpose of filing an opinion of counsel regarding the validity of 1,464,100 shares of Molecular Oncology Stock being offered to a limited number of purchasers pursuant to a Registration Statement on form S-3. - On July 19, 2000, we filed a Current Report on Form 8-K for the purpose of filing an opinion of counsel regarding the validity of 1,607,400 shares of Molecular Oncology Stock being offered to a limited number of purchasers pursuant to a Registration Statement on Form S-3. - On September 12, 2000, we filed a Current Report on Form 8-K to announce the execution of an Agreement and Plan of Merger, dated September 11, 2000, between Genzyme Corporation, Titan Acquisition Corp. and GelTex Pharmaceuticals, Inc., pursuant to which GelTex would be merged with and into Titan Acquisition Corp, a wholly-owned subsidiary of Genzyme. - On September 13, 2000, we filed a Current Report on Form 8-K to announce the execution of Amendment No. 2 to the Agreement and Plan of Merger, as amended, dated March 6, 2000, between Genzyme Corporation, Seagull Merger Corporation and Biomatrix, Inc., pursuant to which Genzyme and Biomatrix agreed to extend the termination date of the merger of Biomatrix with and into Seagull Merger Corporation 79 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2000 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 thereunto duly authorized. GENZYME CORPORATION DATE: November 14, 2000 By: /s/ MICHAEL S. WYZGA ----------------------------------------- Michael S. Wyzga Senior Vice President Finance, Chief Financial Officer, Corporate Controller and Chief Accounting Officer
80 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2000 EXHIBIT INDEX 3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Current Report on Form 8-K filed with the SEC on June 30, 2000, and incorporated herein by reference. 3.2 By-Laws of Genzyme, as amended. Filed as Exhibit 3.2 to Genzyme's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. 10.1* Lease dated August 28, 2000 between Genzyme and Kendall Square, LLC. Filed herewith. 10.2 Lease dated August 4, 2000 between Genzyme and Fafard Real Estate and Development Corp. Filed herewith. 27 Financial Data Schedule for Genzyme for the nine months ended September 30, 2000 (for EDGAR filing purposes only). Filed herewith.
- ------------------------ * Confidential treatment has been requested for deleted portions of Exhibit 10.1. EX-10.1 2 a2029877zex-10_1.txt EXHIBIT 10.1 LEASE by and between KENDALL SQUARE, LLC LANDLORD, and GENZYME CORPORATION, TENANT ARTICLE I REFERENCE DATA 1.1 SUBJECTS REFERRED TO ANNUAL FIXED RENT RATE PER Subject to Sections 4.1(b), 10.11 RENTABLE SQUARE FOOTAGE and 10.12 hereof, an amount OF PREMISES: determined by (a) dividing (i) the Project Cost by (ii) the Rentable Square Footage of Building and (b) multiplying the result thereof by ***** APPROXIMATE TERM: Subject to Section 10.12 hereof, fifteen (15) years. BUILDING: The building now known as Building D, Cambridge Research Park, Cambridge, Massachusetts, to be constructed by Landlord and containing approximately 300,000 rentable square feet ("r.s.f."), of which approximately 15,000 r.s.f. shall be ground floor retail space (the "Retail Space"). Tenant shall have the right to name the Building "The Genzyme Building," "Genzyme Center" or a similar name, but in each case including the street address of the Building. COMPLEX: An approximately ten acre parcel of land, including the Lot and all buildings thereon and improvements thereto hereafter constructed by Landlord or by an Affiliate of Landlord (as such term is defined below in this Section 1.1), in Cambridge, Massachusetts currently owned by Landlord and shown on a plan entitled "Master Plan" dated June 1, 1999, Scale 1"=50', a reduced copy of which is attached as EXHIBIT A hereto, but excluding any portion of the Complex which is not hereafter owned by Landlord or an Affiliate of Landlord. EXPANSION SPACES: As determined and defined in Section 10.11 hereof. INITIAL ESTIMATED ANNUAL ADDITIONAL RENT FOR BUILDING: ***** * Confidential Treatment has been requested for the marked portion pursuant to Rule 24b-2 and filed separately with the Commission. INITIAL ESTIMATED ANNUAL ADDITIONAL RENT FOR COMPLEX: ***** LANDLORD: Kendall Square, LLC, formerly known as Cambridge Research Park, LLC, a Delaware limited liability company. LANDLORD'S ARCHITECT: As determined pursuant to Section 3.1.1 hereof. LANDLORD'S ADDRESS: c/o Lyme Properties, LLC 101 Main Street Cambridge, Massachusetts 02142 LANDLORD'S CONTRACTOR: As determined pursuant to Section 3.1.1 hereof. LANDLORD'S REPRESENTATIVE: Each of David E. Clem and Robert L. Green LEASE YEAR: Each consecutive period of twelve (12) calendar months commencing on the Commencement Date if it occurs on the first day of a calendar month and otherwise commencing on the first day of the month immediately following the month in which the Commencement Date occurs, and each anniversary of such date. LOT: The land on which the Building is to be constructed and shown on EXHIBIT A as being generally bounded by Atheneum Street, Kendall Street, Easement, and land of others, the legal description of which (and a plan for which) shall be prepared by Landlord prior to the commencement of construction of the Base Building Improvements by Landlord and attached hereto as EXHIBIT A-1 and which plan shall be attached hereto as Exhibit A-2. MANAGING AGENT: To be determined by Landlord based upon a list of managing agents proposed from time to time by Landlord and approved by Tenant, such approval not to be unreasonably withheld, conditioned or delayed. * Confidential Treatment has been requested for the marked portion pursuant to Rule 24b-2 and filed separately with the Commission. -2- OPTIONS TO EXTEND: Two (2) Options to Extend the Term of this Lease for successive periods of ten (10) years each, in accordance with Section 10.12 hereof. PERMITTED USES: General office uses and accessory uses customarily incidental to general office uses. PREMISES: Those portions of the Building demised to Tenant under this Lease from time to time, as such portions are determined pursuant to Section 3.1.1 hereof and subject to Sections 5.1.2 and 10.11 hereof. PROJECT COST: As determined pursuant to Section 3.1.1 hereof. COMMERCIAL LIABILITY INSURANCE LIMITS: Bodily Injury: $10,000,000 Property Damage: $10,000,000 RENTABLE SQUARE As determined pursuant to Section FOOTAGE OF BUILDING: 2.3 hereof, but the Building is currently estimated to consist of 300,000 r.s.f. of space. RENTABLE SQUARE As determined pursuant to Section FOOTAGE OF PREMISES: 2.3 hereof, but the Premises are currently estimated to consist initially of approximately 235,000 r.s.f. of space in the Building to be constructed by Landlord on the Lot; and the Rentable Square Footage of Premises shall be increased at such time as each Expansion Space is demised to Tenant; and the Expansion Spaces are currently estimated to consist of approximately 50,000 r.s.f. of space, in the aggregate, in the Building to be constructed by Landlord on the Lot, subject to Sections 5.1.2 and 10.11 hereof. SCHEDULED SUBSTANTIAL COMPLETION DATE: September 1, 2002 SCHEDULED TERM COMMENCEMENT DATE: December 1, 2002 -3- TENANT: Genzyme Corporation, a Massachusetts corporation. TENANT'S ADDRESS One Kendall Square (For Notice and Billing): Building 1400 Cambridge, Massachusetts 02139 TENANT'S ARCHITECT: To be determined by Tenant. TENANT'S PROPORTIONATE FRACTION FOR BUILDING: As determined and as the same may be adjusted pursuant to Sections 2.3 and 10.11 hereof. TENANT'S PROPORTIONATE FRACTION FOR COMPLEX: As determined and as the same may be adjusted pursuant to Sections 2.3 and 10.11 hereof. TENANT'S CONSTRUCTION REPRESENTATIVE: To be identified by Tenant by notice to Landlord. TENANT'S LEASE REPRESENTATIVE: Evan M. Lebson TERM COMMENCEMENT DATE: The earlier of (a) the date that is ninety-one (91) days after the Substantial Completion Date or (b) the date on which Tenant's personnel occupy all or any portion of the Premises for the conduct of any aspect of Tenant's business (as opposed to the conduct by Tenant of any of Tenant's Work or the installation in the Premises of fixtures, furnishings, equipment or personal property); provided, however, if Tenant only occupies a portion of the Premises for the conduct of its business prior to the date determined by the preceding clause (a), Tenant shall only be obligated to pay Rent calculated with respect to such portion of the Premises so occupied. TERMEXPIRATION DATE: The last day of the fifteenth Lease Year, subject to two (2) Options to Extend for successive periods of ten (10) years each, in accordance with Section 10.12. -4- The following capitalized terms shall have the respective meanings set forth below or as referenced in this Lease: ADA REQUIREMENTS: The Americans with Disabilities Act (42 U.S.C.ss. 12101 ET SEQ.) and the regulations and Accessibility Guidelines for Buildings and Facilities issued pursuant thereto. ADDITIONAL RENT ADJUSTMENT DATE: As defined in Section 4.2.4 ADDITIONAL RENT: All rent, charges and other sums, other than Fixed Rent, due Landlord pursuant to this Lease. AFFILIATE OF LANDLORD: A person or entity controlled by, controlling or under common control with Landlord. AFFILIATE OF TENANT: Any entity controlled by, controlling or under common control with Tenant. ANNUAL BUILDING MAINTENANCE AND OPERATION CHARGE: As defined in Section 4.2.4 ANNUAL COMPLEX MAINTENANCE AND OPERATION CHARGE: As defined in Section 4.2.4. ANNUAL MAINTENANCE CHARGE: The sum of the Annual Building Maintenance and Operation Charge, the Annual Complex Maintenance and Operation Charge and the Nonstandard Charge. ANNUAL TAX, INSURANCE AND UTILITY CHARGE: The sum of the Initial Tax Charge, the Initial Insurance Charge and the Initial Utility Charge. APPRAISER: A commercial real estate broker having at least ten (10) years experience in the commercial leasing market in the City of Cambridge, Massachusetts. APPROVED CONTRACTOR: As defined in Section 3.2.1. ARBITRATOR: As defined in Section 10.13. ARCHITECT'S CONTRACT: As defined in Section 3.1.1. AVAILABILITY NOTICE: As defined in Section 10.18 BASE BUILDING IMPROVEMENTS: As defined in Section 3.1.1. BROKERS: Trammel Crow Company and Insignia/ESG. BUILDING COMMON AREAS: Interior and exterior common areas and facilities of the Building and the Lot. CASUALTY RESTORATION COMPLETION DATE: As defined in Section 6.1. CDD: Community Development Department of the City of Cambridge, Massachusetts. CHANGE ORDERS: As defined in Section 3.1.2. -5- CHAPTER 91 DETERMINATION: As defined in Section 3.1.4. COMMENCEMENT DATE: As defined and determined pursuant to Section 2.2. COMPLEX COMMON AREAS: Interior and exterior common areas and facilities of the Complex. CONFIDENTIAL INFORMATION: Any and all knowledge, information, data, materials, trade secrets, and other work product of a confidential nature gained, obtained, derived, produced, generated or otherwise acquired by Landlord with respect to Tenant's business. CONSTRUCTION CONTRACT: As defined in Section 3.1.1. CONSTRUCTION DOCUMENTS: As defined in Section 3.2.1. DESIGN DEVELOPMENT DOCUMENTS: As defined in Section 3.1.1. DESIGN PROCESS LETTER: Letter dated January 17, 2000 from David Clem of Lyme Properties, LLC to Henri Termeer, President and CEO of Tenant. DEVELOPER'S FEE: As defined in Section 3.1.1. DEVELOPMENT APPROVALS: As defined in Section 3.1.4. EARLY OCCUPANCY SPACE: As defined in Section 10.11. ENVIRONMENTAL AGREEMENT: The Environmental Agreement between Landlord and Tenant in the form of EXHIBIT E hereto. ENVIRONMENTAL REMEDIATION: As defined in Section 3.1.3. ESTIMATED ANNUAL ADDITIONAL RENT: Landlord's estimate of the total amount of Additional Rent which may be due from Tenant for any particular Lease Year with respect to the Building, Lot and Complex. ESTIMATED ANNUAL MAINTENANCE CHARGE: Landlord's reasonable estimate of the Annual Maintenance Charge. ESTIMATED ANNUAL TAX, INSURANCE AND UTILITY CHARGE: Landlord's reasonable estimate of the Annual Tax, Insurance and Utility Charge. EVENT OF DEFAULT: As defined in Section 7.1. EXCLUDED TAXES: Any income taxes, excess profits taxes, excise taxes, franchise taxes, or any taxes or assessments with respect to the Garage and other buildings leased or available for lease (and the parcels of land upon which such buildings are situated), other than the Building, the Lot and any building or portion of a building in the Complex which is not available for lease (and the parcel(s) of land on which the same may be located), in the Complex. EXERCISE NOTICE: As defined in Section 10.12. -6- EXPANSION SPACES: As defined in Section 10.11. EXTENSION PERIODS: As defined in Section 10.12. EXTENSION RENT: As defined in Section 10.12. FAIR MARKET RENT: As defined in Section 10.12. FINAL DESIGN DOCUMENTS: As defined in Section 3.1.1. FINAL PROJECT BUDGET: All hard costs and soft costs incurred by Landlord in connection with the construction of the Base Building Improvements as reflected in a final project budget to be mutually approved by Landlord and Tenant, as provided in Section 3.1.1. FIRST EXPANSION SPACE: As defined in Section 10.11. FIXED RENT: As defined in Section 4.1. GARAGE OWNER: The owner of the Garage. GARAGE PARKING SPACES: Tenant's Parking Spaces and the Valet Parking Spaces. GARAGE: The underground parking structure to be constructed and/or owned by Landlord or an Affiliate of Landlord south of Kendall Street, as shown on EXHIBIT A hereto. HOLDER: As defined in Section 8.1. IMPOSITIONS: As defined in Section 4.2.4(1)(a). INDEMNIFIED PARTIES: As defined in Section 5.1.6. INITIAL ESTIMATED ANNUAL ADDITIONAL RENT FOR BUILDING: As defined in Section 4.2. INQUIRY NOTICE: As defined in Section 10.12. LABOR UNREST: As defined in Section 3.2.1. LANDLORD MILESTONE DATE: As defined in Section 3.2. LANDLORD'S STATEMENT: As defined in Section 4.2.4. LANDLORD'S WORK: The construction of the Base Building Improvements in accordance with the Final Design Documents as affected by Change Orders. MCP: Massachusetts Contingency Plan, 310 CMR 40.0000 ET SEQ., as amended. MEPA CERTIFICATE: Certificate of the Secretary of Environmental Affairs on the Final Environmental Impact Report dated April 15, 1999. -7- MINOR ALTERATION: As defined in Section 3.2.1. MITIGATION EXPENSES: As defined in Section 3.1.1. MORTGAGE: Mortgages, deeds of trust or other similar instruments evidencing other voluntary liens or encumbrances, and modifications, consolidations, extensions, renewals, replacements and substitutes thereof. NONSTANDARD CHARGE: As defined in Section 4.2.4. NONSTANDARD COSTS: As defined in Section 4.2.4. OPTION TO LEASE: The option to lease with respect to Building B executed by Landlord and Tenant simultaneously with the execution hereof. OPTIONS TO EXTEND: As defined in Section 10.12. ORDER OF CONDITIONS: Order of Conditions issued July 12, 1999 by the City of Cambridge Conservation Commission. OUTSIDE COMPLETION DATE: As defined in Section 3.2. PARKING FEE: As defined in Section 10.14. PRELIMINARY DESIGN CONCEPT: As defined in Section 3.1.1. PROGRESS SCHEDULE: As set forth in EXHIBIT B hereto. PTDM APPROVAL: The PTDM Decision, the PTDM Letter and PTDM Plan. PTDM DECISION: PTDM Ordinance Final Decision issued April 20, 1999 by the CDD. PTDM LETTER: The Letter dated April 20, 1999 to Robert L. Green of Lyme Properties from Susanne Rasmussen of the CDD attached to the PTDM Decision. PTDM PLAN: Landlord's Parking Transportation Demand Management Plan dated April 9, 1999. PUD APPROVAL: The PUD Permit and the Settlement Agreement. PUD PERMIT: A Special Permit issued by the City of Cambridge Planning Board, Case No. PB #141 filed April 7, 1999 (the "PUD Permit"), recorded with the Middlesex South District Registry of Deeds (the "Registry") in Book 31137, Page 89. PUNCH LIST ITEMS: Minor items which can be fully completed by Landlord within thirty (30) days without material interference with Tenant and other items which because of the season or weather or the nature of the item are not practicable to do at the time, provided that none of said items is necessary to perform Tenant's Work. RELEVANT MARKET: As defined in Section 10.12(b). -8- REMEDIATION DOCUMENTS: The documents set forth on EXHIBIT E-1 hereto. RENTABLE SQUARE FEET, RENTABLE SQUARE FOOTAGE OR R.S.F.: The rentable square footage of the space in question as measured in accordance with the standard set forth in Section 2.3. RESPONSE ACTION OUTCOME: As such term is defined in the MCP. ROFR NOTICE: As defined in Section 10.18. ROFR SPACE: As defined in Section 10.18. ROFR: As defined in Section 10.18. SCHEMATIC DESIGN DOCUMENTS: As defined in Section 3.1.1. SETTLEMENT AGREEMENT: A Settlement Agreement dated May 24, 1999 among Barbara Broussard, Mary DeFreitas, the East Cambridge Planning Team and Landlord. SNDA: Subordination, Non-disturbance and Attornment Agreement. SUBDIVISION: As defined in Section 9.1.6. SUBLEASE COSTS: As defined in Section 5.2.1. SUBLEASE PROFITS: As defined in Section 5.2.1. SUBSEQUENT APPROVALS: As defined in Section 3.1.4. SUBSTANTIAL COMPLETION DATE: As defined in Section 3.2. SUBSTITUTE TAXES: As defined in Section 4.2.1. TENANT DELAY: As defined in Section 3.1.1. TENANT'S PROPERTY: All of the furnishings, fixtures, equipment, effects and property of every kind, nature and description owned or leased by Tenant or by any person claiming by, through or under Tenant which, during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may be on the Premises. TENANT'S PROPORTIONATE FRACTION FOR BUILDING: As defined in Section 2.3 TENANT'S PROPORTIONATE FRACTION FOR COMPLEX: As defined in Section 2.3. TENANT'S WORK: As defined in Section 3.2.1. TI FACTOR: As defined in Section 10.11. TITLE EXCEPTIONS: Item Nos. 2 through 12, inclusive set forth in Schedule B, Part 1 of the Title Policy. -9- TITLE POLICY: Owner's Policy No. 136-00-336684 dated August 19, 1998, issued by Lawyer's Title Insurance Corporation. TMA: The Charles River Transportation Management Association or any other transportation management association of which Landlord is a member. TRANSFER: As defined in Section 9.1.6. UTILITIES: As defined in Section 4.2.3. UTILITY SERVICE PROVIDER or UTILITY SERVICE PROVIDERS: As defined in Section 4.2.3. UTILITY SERVICES: As defined in Section 4.2.3. VALET PARKING FEE: As defined in Section 10.14. VALET PARKING SPACES: As defined in Section 10.14. 1.2 EXHIBITS. The Exhibits listed below in this section are incorporated in this Lease by reference and are to be construed as a part of this Lease: EXHIBIT A Plan showing Complex EXHIBIT A-1 Legal Description EXHIBIT A-2 Plan showing Lot EXHIBIT A-3 Confirmation of Commencement Date and Rentable Square Footage EXHIBIT A-4 Confirmation of Location of Expansion Spaces EXHIBIT B Progress Schedule EXHIBIT B-1 Project Budget Form EXHIBIT B-2 Annual Maintenance Charge Categories EXHIBIT C Rules and Regulations EXHIBIT D SNDA Form EXHIBIT E Environmental Agreement EXHIBIT E-1 Remediation Documents 1.3 TABLE OF CONTENTS ARTICLE I......................................................................1 1.1 SUBJECTS REFERRED TO..................................................1 1.2 EXHIBITS.............................................................10 1.3 TABLE OF CONTENTS....................................................10 -10- ARTICLE II....................................................................14 2.1 PREMISES.............................................................14 2.2 TERM.................................................................15 2.3 MODIFICATION OF CERTAIN DEFINITIONS; CERTIFICATE REGARDING...........15 ARTICLE III...................................................................16 3.1 INITIAL DESIGN AND CONSTRUCTION......................................16 3.1.1 Architect Selection Process, Development of Design Documents Landlord's Contractor and Project Cost........................16 3.1.2 Change Orders.................................................23 3.1.3 Environmental Remediation.....................................25 3.1.4 Development Approvals and Title Exceptions....................25 3.2 PREPARATION OF PREMISES FOR PERFORMANCE OF TENANT'S WORK.............27 3.2.1. Performance of Tenant's Work..................................29 3.3 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION........................34 3.4 REPRESENTATIVES......................................................34 3.5 LANDLORD INDEMNITY AND CORRECTION OF LANDLORD'S WORK.................34 ARTICLE IV....................................................................35 4.1 FIXED RENT...........................................................35 4.2 ADDITIONAL RENT......................................................35 4.2.1 Real Estate Taxes.............................................36 4.2.2 Insurance.....................................................37 4.2.2.1 Insurance Taken Out by Tenant........................37 4.2.2.2 Insurance Taken Out by Landlord......................38 4.2.2.3 Tenant Reimbursement of Insurance Taken Out by Landlord.............................................39 4.2.2.4 Certain Requirements Applicable to Insurance Policies.............................................39 4.2.2.5 Waiver of Subrogation................................39 4.2.3 Utilities for Premises......................................40 4.2.4 Common Area Maintenance and Expenses........................41 4.2.5 Payments on Account of Taxes, Insurance and Utilities.......45 4.3 LATE PAYMENT OF RENT.................................................46 ARTICLE V.....................................................................47 5.1 AFFIRMATIVE COVENANTS................................................47 -11- 5.1.1 Perform Obligations.........................................47 5.1.2 Occupancy and Use...........................................47 5.1.3 Repair and Maintenance......................................48 5.1.4 Compliance with Law.........................................48 5.1.5 Tenant's Work...............................................50 5.1.6 Indemnity...................................................50 5.1.7 Landlord's Right to Enter...................................51 5.1.8 Personal Property at Tenant's Risk..........................51 5.1.9 Payment of Landlord's Cost of Enforcement...................52 5.1.10 Yield Up....................................................52 5.1.11 Estoppel Certificate........................................52 5.1.12 Landlord's Expenses Re: Consents............................53 5.1.13 Rules and Regulations.......................................53 5.1.14 Loading.....................................................53 5.1.15 Holdover....................................................53 5.2 NEGATIVE COVENANTS...................................................54 5.2.1 Assignment and Subletting...................................54 5.2.2 Nuisance....................................................55 5.2.3 Installation, Alterations or Additions......................55 ARTICLE VI....................................................................56 6.1 DAMAGE BY FIRE.......................................................56 6.2 CONDEMNATION.........................................................59 6.3 AWARD................................................................60 ARTICLE VII...................................................................60 7.1 EVENTS OF DEFAULT....................................................60 7.2 REMEDIES.............................................................61 7.3 REMEDIES CUMULATIVE..................................................62 7.4 LANDLORD'S RIGHT TO CURE DEFAULTS....................................62 7.5 EFFECT OF WAIVERS OF DEFAULT.........................................63 7.6 NO ACCORD AND SATISFACTION...........................................63 ARTICLE VIII..................................................................63 8.1 RIGHTS OF MORTGAGE HOLDERS...........................................63 8.2 SUPERIORITY OF LEASE; OPTION TO SUBORDINATE..........................64 -12- 8.3 LEASE AMENDMENTS.....................................................64 ARTICLE IX....................................................................65 9.1 AFFIRMATIVE COVENANTS................................................65 9.1.1 Perform Obligations.........................................65 9.1.2 Repairs.....................................................65 9.1.3 Compliance with Law.........................................65 9.1.4 Indemnity...................................................66 9.1.5 Estoppel Certificate........................................66 9.1.6 Subdivision.................................................66 ARTICLE X.....................................................................67 10.1 NOTICES FROM ONE PARTY TO THE OTHER..............................67 10.2 QUIET ENJOYMENT..................................................67 10.3 EASEMENTS; CHANGES TO LOT LINES..................................67 10.4 LEASE NOT TO BE RECORDED.........................................67 10.5 BIND AND INURE; LIMITATION OF LANDLORD'S LIABILITY...............68 10.6 ACTS OF GOD......................................................68 10.7 LANDLORD'S DEFAULT...............................................68 10.8 BROKERAGE........................................................69 10.9 APPLICABLE LAW AND CONSTRUCTION..................................69 10.10 SUBMISSION NOT AN OFFER..........................................70 10.11 EXPANSION OF PREMISES............................................70 10.12 OPTIONS TO EXTEND................................................72 10.13 ARBITRATION......................................................74 10.14 PARKING..........................................................75 10.15 CONFIDENTIAL INFORMATION.........................................76 10.16 SIGNAGE..........................................................76 10.17 BUILDING B LEASE.................................................77 10.18 RIGHT OF FIRST REFUSAL...........................................77 10.19 RETAIL TENANTS...................................................78 10.20 ACCESS...........................................................78 10.21 COOPERATION......................................................78 -13- ARTICLE II PREMISES AND TERM 2.1 PREMISES. Landlord hereby leases and demises to Tenant and Tenant hereby leases from Landlord, subject to and with the benefit of the terms, covenants, conditions and provisions of this Lease, the Premises. Tenant shall have, as appurtenant to the Premises, the right to use in common with others, if any, entitled thereto (i) the common areas and common facilities, if any, included in the Building, on the Lot or in the Complex, (ii) the building service fixtures and equipment serving the Premises, and (iii) subject to Section 10.14 hereof, (a) the right to use that number of nonreserved parking spaces determined by dividing the Rentable Square Footage (as the same shall be determined pursuant to Section 2.3 hereof and as the same may be increased pursuant to Section 10.11 hereof) by 500 ("Tenant's Parking Spaces") in the underground parking garage located south of Kendall Street as shown on Exhibit A hereto (the "Garage") and (b) the right to use that number of nonreserved Valet Parking Spaces, as such term is defined and such number is determined pursuant to Section 10.14 hereof. To the extent that the Premises includes all of the rentable square footage on a particular floor of the Building, Tenant shall have exclusive use of the common areas on such floors, but Landlord shall have the rights set forth in the next paragraph hereof. Landlord reserves the right from time to time, without unreasonable interference with Tenant's use, (a) to install, repair, replace, use, maintain and relocate for service to the Premises and to other parts of the Building, or either, building service fixtures and equipment wherever located in the Building, including the perimeter walls of the Premises, on the roof of the Building, in mechanical penthouses and in any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, wires and appurtenant fixtures, ducts, electric or other utilities, telecommunications equipment or other Building facilities, as well as the right of access (which right of access shall be at reasonable times and upon reasonable notice, except in the case of emergency) through the Premises for the purpose of operation, maintenance and repair, provided, however, that the Annual Fixed Rent, Additional Rent (as defined in Section 4.2 hereof) and other charges payable hereunder by Tenant shall be proportionally reduced in the event that any such installation or relocation of service materially reduces the usable floor area of the Premises (other than a temporary reduction to accommodate installation, repair, replacement, maintenance and relocation of such service); notwithstanding the foregoing provisions of this clause (a), to the extent that the Premises include all of the rentable square footage on a particular floor of the Building, Landlord's right to install, repair, replace, use, maintain and relocate such building service fixtures and equipment on such floor of the Building shall be limited to placing or installing such building service fixtures and equipment in shafts, pipes, stacks, conduits, chases and risers located within the central core common area of such floor or in such other locations on such floor as may be set forth in the Final Design Documents; (b) to construct, alter or relocate any Building Common Areas and/or Complex Common Areas (provided that, except for any construction, alteration or relocation of Complex Common Areas required or permitted by the Development Approvals or Subsequent Approvals, no such construction, alteration or relocation of any such Complex Common Areas shall substantially or materially increase any payments due from Tenant under this Lease and any such construction, alteration or relocation shall be -14- substantially similar in quality and utility to Complex Common Areas being altered or relocated or substantially similar to common areas of first-class, mixed use projects in the Relevant Market); and (c) after construction of the Building to construct, alter or relocate any Building Common Areas, subject to approval by Tenant, such approval not to be unreasonably withheld, delayed or conditioned. 2.2 TERM. To have and to hold for a period (the "Term") commencing on the Term Commencement Date (as such term is defined in Section 1.1 hereof) (the "Commencement Date") and continuing until the Term Expiration Date, unless sooner terminated as provided herein, including Section 3.2 and Article VII hereof, and subject to extension in accordance with the terms of Section 10.12 hereof. 2.3 MODIFICATION OF CERTAIN DEFINITIONS; CERTIFICATE REGARDING COMMENCEMENT DATE. Landlord and Tenant acknowledge that the actual rentable square footage of the Premises, the Expansion Spaces (as such term is defined in Section 10.11 hereof) and the Building may, upon completion of construction of the Base Building Improvements (as hereinafter defined), be different than the estimates as set forth in Article I hereof. Accordingly, after completion of construction of the Base Building Improvements, Landlord will notify Tenant of the Rentable Square Footage of the Premises, the Expansion Spaces and the Building, all of which shall be measured by Landlord's Architect in accordance with the ANSI/BOMA Z65.1-1996 Standard Method for Measuring Building Rentable Area, approved June 7, 1996 for a single tenant building. Landlord's Architect's measurement shall be subject to review and approval by Tenant's Architect for conformity to the foregoing standard. If necessary, Landlord and Tenant will execute an amendment to this Lease modifying the definitions of Rentable Square Footage of Premises, Rentable Square Footage of Building, the location in the Building of the Premises and the Expansion Spaces, Tenant's Proportionate Fraction for Building, Tenant's Proportionate Fraction for Complex, Initial Estimated Annual Additional Rent for Building, Initial Estimated Annual Additional Rent for Complex, and such other terms and provisions, if any, of this Lease as may be necessary to reflect such actual measurements. Landlord and Tenant will also execute, upon request of either, a certificate, substantially in the form of Exhibit A-3 hereto, acknowledging, INTER ALIA, the Commencement Date of this Lease as provided for in Section 2.2 hereof, after such Commencement Date has occurred (as described in Section 3.2 hereof), and the Rentable Square Footage of the Building, the Premises and the Expansion Spaces. After such measurement by Landlord's Architect, the Premises, the Expansion Spaces and the Building shall not be subject to remeasurement without the consent of Landlord and Tenant. Anything in this Lease to the contrary notwithstanding, the Premises, as initially demised, shall include all of the Rentable Square Footage in the Building other than the Expansion Spaces and the Retail Space. "Tenant's Proportionate Fraction for Building" shall be the ratio, expressed as a percentage, of the Rentable Square Footage of Premises, including the Expansion Spaces and any ROFR Space (from and after the dates on which each of the Expansion Spaces or any ROFR Space is demised to Tenant), to the Rentable Square Footage of Building. "Tenant's Proportionate Fraction for Complex" shall be the ratio, expressed as a percentage, of the Rentable Square Footage of the Premises, including the Expansion Spaces and -15- any ROFR Space, when applicable, to the Rentable Square Footage of all buildings (other than any garages in the Complex and any building or portion thereof which is not available for lease such as an information kiosk), including the Building, which Landlord is permitted to develop in the Complex pursuant to the PUD Approval. Landlord shall have the right to estimate on a good faith basis, from time to time, the Rentable Square Footage of all such buildings prior to the construction thereof. From time to time after construction of each building in the Complex, Landlord shall notify Tenant of the Rentable Square Footage of such buildings and shall provide to Tenant, upon Tenant's request, such information as Tenant may reasonably request with respect to the calculation thereof. Within thirty (30) days after notice of such Rentable Square Footage, Tenant shall pay to Landlord or Landlord shall credit to Additional Rent next due from Tenant, as applicable, any underpayment owed or overpayment made, as applicable, by Tenant based upon the estimated Rentable Square Footage of such buildings, on account of Tenant's Proportionate Fraction for Complex of taxes and assessments and Tenant's Proportionate Fraction for Complex of the Annual Complex Maintenance and Operation Charge and the actual Rentable Square Footage of such buildings. ARTICLE III BASE BUILDING IMPROVEMENTS 3.1 INITIAL DESIGN AND CONSTRUCTION. 3.1.1 ARCHITECT SELECTION PROCESS, DEVELOPMENT OF DESIGN DOCUMENTS, LANDLORD'S CONTRACTOR AND PROJECT COST. Landlord has initiated a design competition for the Building as more fully set forth in a letter dated January 17, 2000 from David Clem of Lyme Properties, LLC to Henri Termeer, President and CEO of Tenant (the "Design Process Letter"), which is incorporated herein by reference thereto. Landlord and Tenant agree to cooperate in connection with the design competition as set forth in the Design Process Letter. Upon completion of such design competition, Landlord and Tenant shall mutually select Landlord's Architect (for purposes of this Lease the term "Landlord's Design Team" shall be deemed to refer not only to Landlord's Architect but also to the principal engineers, architects and other design consultants employed by Landlord or Landlord's Architect for the design and construction of the Building) and Landlord's Design Team (to the extent then identified). Landlord and Tenant shall also mutually establish and agree upon (i) a preliminary design concept for the Building (the "Preliminary Design Concept"), which shall be based upon Tenant's program, outline building specifications, schedule requirements, and (ii) a preliminary hard and soft cost budget for the Base Building Improvements (the "preliminary Project Cost budget"). Such selection of Tenant's Architect and Landlord's Design Team (to the extent then identified), the establishment and agreement upon the Preliminary Design Concept and the establishment and agreement upon such preliminary Project Cost budget shall be made by the respective dates for each set forth in the progress schedule attached as Exhibit B hereto (the "Progress Schedule"). Landlord and Tenant acknowledge and agree that the Progress Schedule represents a good faith estimate of the respective dates upon which the items set forth in the Progress Schedule are to occur but that the Progress Schedule is subject to finalization by Landlord and Tenant upon selection of Landlord's Architect and Landlord's Contractor. Accordingly, references in this Lease to the Progress -16- Schedule shall mean the Progress Schedule attached hereto as Exhibit B as the same may be finalized. The Preliminary Design Concept shall describe the general scope and quality of the Building and shall identify those portions of the Building which will constitute the Premises initially leased to Tenant and the Expansion Spaces. If despite the diligent and good faith efforts of Landlord and Tenant the parties are unable to mutually select Landlord's Architect, to establish a mutually acceptable Preliminary Design Concept and/or a mutually acceptable preliminary Project Cost budget by the applicable dates set forth in the Progress Schedule, either Landlord or Tenant may terminate this Lease upon thirty (30) days' prior written notice to the other party. During such thirty (30) day period Landlord and Tenant shall use diligent and good faith efforts to select such Architect, establish such Preliminary Design Concept and/or preliminary Project Cost budget, as applicable, failing which this Lease shall terminate on the date set forth in such notice. In the event of such termination, all third party, out-of-pocket costs incurred by Landlord in connection with the design competition and design process solely for the Building shall be shared equally by Landlord and Tenant. Landlord and Tenant also agree to cooperate in good faith in connection with the design of the Building and the Base Building Improvements and the development of a mutually acceptable Final Project Budget (as defined below). Neither Landlord nor Tenant shall be required to approve any Design Documents unless the Building includes at least 285,000 r.s.f. of office space and at least 15,000 r.s.f. of ground floor retail space and each Expansion Space includes approximately 25,000 r.s.f. of contiguous space on a single floor of the Building. The size, layout, design and base building fit-up of the Building and Base Building Improvements and the Final Project Budget shall be mutually agreed upon by Landlord and Tenant. Landlord and Tenant acknowledge and agree that during design development process contemplated hereby, Tenant, with Landlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed, shall have the right to approve and/or design base building electrical, mechanical, HVAC and other systems and design specifications (such as, by way of example, entranceway and lobby design, internal stair location, elevator size and finish, location of electrical and telecom rooms and equipment, location of mechanical shaftways and equipment, structural bay spaces, window mullions spacing and sill depth and height, floor to floor heights and the like), provided that the specifications for such base building elements are equal or better than the quality of the specifications therefor in a newly constructed, first-class office tower in Cambridge. Each party acknowledges and agrees that it is in its best interest for the Substantial Completion Date to occur on or before the Scheduled Substantial Completion Date and that the Final Project Budget be substantially consistent with the preliminary Project Cost budget and the updates thereto. Accordingly, each party hereby agrees that it shall keep the other party informed of the progress and status of its efforts to achieve the various milestones and other scheduled completion dates set forth on the Progress Schedule; and that if either party concludes that a milestone or other scheduled completion date will not be met, such party shall use reasonable efforts to notify the other party of the occurrence of any act, event, condition, omission or circumstance which could have a substantial or material impact on: (i) the ability to achieve the various milestone and other scheduled completion dates set forth on the Progress Schedule; (ii) the cost or financial viability of the construction of the Building or Complex; or (iii) Tenant's use and occupancy of the Premises. -17- After Landlord's Architect and the Landlord's Design Team have been selected and Landlord and Tenant have mutually established the Preliminary Design Concept, Landlord shall enter into a contract (the "Architect's Contract") with Landlord's Architect. The Architect's Contract shall be subject to Tenant's prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. The Architect's Contract shall include provisions requiring Landlord's Architect to submit all Design Documents (as hereinafter defined) for each stage in the design process simultaneously to both Landlord and Tenant sufficiently prior to the applicable Design Document completion date for such design stage set forth in the Progress Schedule, in order to provide Landlord and Tenant with reasonably sufficient time (in any event not less than ten (10) business days for initial review of the applicable Design Document) following receipt of such submission to review, comment on and approve such submission prior to such completion date, to be responsible for the adequacy, accuracy and completeness of the Final Design Documents approved by Landlord and Tenant, and to cause the Final Design Documents to comply with all applicable laws, regulations, building codes, building design standards, the Development Approvals, Subsequent Approvals, agreed upon floor loading limits, and with respect to all materials, equipment and special designs, processes or products, that the same do not infringe any patent or other proprietary rights of others. Contemporaneously with the selection of Landlord's Architect, Landlord shall retain a construction manager or similar consultant (the "Construction Cost Estimator"), reasonably satisfactory to the Tenant, to work with and provide pre-construction services for Landlord, Tenant and Landlord's Architect to develop, and provide value engineering services to control, a preliminary Project Cost budget and updates thereto during the Schematic Design Documents phase and the Design Development Documents phase. The parties acknowledge that Landlord may, subject to Tenant's reasonable approval, elect, at any time, to hire such Construction Cost Estimator as Construction Manager/General Contractor for the Building. Subject to the limitations hereafter set forth with respect to Tenant's right to disapprove bids with respect to the Construction Contract, each of Landlord and Tenant shall have the right to approve such preliminary Project Cost budget and updates thereto, which approvals shall not be unreasonably withheld, conditioned or delayed. Landlord shall cause Landlord's Architect to prepare schematic architectural plans, structural and engineering plans, elevations and building sections, and site plans for the Building based upon the Preliminary Design Concept ("Schematic Design Documents"), which shall mean a conceptual design of the Base Building Improvements illustrating the scale and relationship of the components of the Base Building Improvements and calculating the gross floor area and Rentable Square Footage of the Building. Additionally, the Construction Cost Estimator shall prepare an updated budget for the Base Building Improvements for approval by Landlord and Tenant. The Schematic Design Documents shall show walkways and plazas for the Building and Lot, major landscape features, hardscaping, scale and relationship of other major components of the Building and Lot, pedestrian and vehicular (including service) access and flow through the Lot, lighting, survey information such as existing elevations, benchmarks and utilities, and any known construction limits. The Schematic Design Documents shall also include models, color renderings and outline specifications indicating all basic materials and systems of the proposed Base Building Improvements. The Schematic Design Documents and all subsequent Design Documents shall be prepared and distributed by Landlord's Architect in both hard copy and electronic format. -18- During the development of the Schematic Design Documents, Landlord and Tenant shall meet with representatives of the CDD (as defined in Section 3.1.4 hereof) and their respective consultants to review and refine the design of the Building and the Lot. Thereafter, Landlord shall seek approval of the Schematic Design Documents by the Planning Board (as defined in Section 3.1.4 hereof), and Tenant shall cooperate with Landlord in connection therewith. If despite the good faith efforts of Landlord and Tenant the Planning Board rejects the design reflected in the Schematic Design Documents or insists upon major changes to the Schematic Design Documents which are unacceptable to either Landlord or Tenant and if as a result thereof Landlord is unable to obtain approval of the Schematic Design Documents by the Planning Board by the date set forth in the Progress Schedule, as the same may be changed by any Tenant Delay, either Landlord or Tenant may terminate this Lease upon thirty (30) days prior written notice. If Planning Board approval of the Schematic Design Documents is not obtained by the end of such thirty-day period, this Lease shall thereupon terminate. In the event of such termination, all third party, out-of-pocket costs incurred by Landlord in connection with the design competition and design process solely for the Building and Lot shall be shared equally by Landlord and Tenant. Planning Board approval of the Schematic Design Documents shall be a Subsequent Approval (as defined in Section 3.1.4 hereof). Landlord and Tenant agree to cooperate in connection with any conditions imposed by the Planning Board in connection with the Planning Board's approval of the Schematic Design Documents, such as further review of the Design Documents by the CDD. At such time as the Schematic Design Documents have been approved by Landlord and Tenant (and by the Planning Board, if Landlord elects to have the Schematic Design Documents approved by the Planning Board), Landlord shall cause (i) Landlord's Architect to prepare further details and development of the Schematic Design Documents (the "Design Development Documents") for the Building and the Base Building Improvements, which shall mean plans, sections and elevations, typical construction details, and equipment layouts showing the scope, relationships, forms, size and appearance of the Base Building Improvements and calculating the gross floor area and the Rentable Square Footage of the Building and (ii) the Construction Cost Estimator, based upon such Design Development Documents, to prepare an updated budget for the Base Building Improvements, each for approval by Landlord and Tenant. Design Development Documents shall include architectural, mechanical and electrical drawings and details of the Building, exterior materials to be incorporated in the Building, walkways and other plaza areas on the Lot, a site and landscape plan for the Lot showing all site development and landscape detail for lighting, paving, landscaping, utilities, grading, drainage, access and service areas. The Design Development Documents shall also include outline specifications indicating all basic materials and mechanical and electrical systems of the proposed Base Building Improvements. As with the Schematic Development Documents, the Design Development Documents shall be prepared and distributed in both hard copy and electronic format. At such time as the Design Development Documents have been approved by Landlord and Tenant, Landlord shall cause (i) Landlord's Architect to prepare detailed construction drawings and specifications ("Final Design Documents") which shall set forth in detail the requirements for construction of Landlord's Work (including all architectural, mechanical, electrical and structural drawings and detailed specifications), shall be fully coordinated with one another and with field conditions as they exist on the Lot, shall show all work necessary to complete Landlord's Work, including all cutting, fitting, and patching and all connections to the -19- mechanical and electrical systems and components of the Base Building Improvements, and shall include calculations of the gross floor area and the Rentable Square Footage of the Base Building Improvements and (ii) the Construction Cost Estimator, based upon such Final Design Documents, to prepare an updated budget for the Base Building Improvements, each for approval by Landlord and Tenant. The Final Design Documents shall be used for the construction of the Base Building Improvements and shall be based upon the Design Development Documents and other information which is relevant to the design and construction of the Base Building Improvements. The Final Design Documents shall be prepared and stamped by Landlord's Architect. The Preliminary Design Concept, the Schematic Design Documents and the Final Design Documents (collectively, the "Design Documents") shall not include any of Tenant's Work (as hereinafter defined). As used herein, the term "Base Building Improvements" shall mean the items of work and materials to be performed and supplied by Landlord in accordance with the Final Design Documents as affected by Change Orders (as such term is hereafter defined) and the term "Landlord's Work" shall mean the construction of the Base Building Improvements in accordance with the Final Design Documents as affected by Change Orders. The preliminary and final Schematic Design Documents, the preliminary and final Design Development Documents, and the Final Design Documents shall be submitted to both Landlord and Tenant for review and comment in accordance with the dates and requirements included in the Progress Schedule, which shall be incorporated, to the extent applicable, in the Architect's Contract. In each instance both parties shall have until the respective completion dates set forth in the Progress Schedule to review each submission and to notify the other party of approval or disapproval. Tenant may disapprove any new items shown on a submission which are not in compliance with (i) the Preliminary Design Concept with regard to the Schematic Design Documents, (ii) the Schematic Design Documents with regard to the Design Development Documents, or (iii) the Design Development Documents with regard to the Final Design Documents, specifying and detailing in each case such objections. To the extent that any such submission is consistent with prior submissions approved by Tenant, such submission shall be approved by Tenant, PROVIDED HOWEVER, that Tenant shall have the right, with Landlord's approval, to make modifications as set forth in the next sentence hereof. Tenant, with the approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, shall have the right to modify the design of the Base Building Improvements at any time during the design process contemplated hereby, provided that if as a result of any such design change (a) any particular Design Document submission is not approved by the applicable completion date set forth on the Progress Schedule, or (b) any such design change delays the Substantial Completion Date, such lack of approval or design change shall constitute a Tenant Delay for purposes of Section 3.2. In the event Tenant shall fail to object to any Design Documents submissions by the applicable completion date for such submission set forth in the Progress Schedule, provided that Tenant had received such submission not less than five (5) business days prior to the applicable completion date, such failure shall constitute a Tenant Delay for purposes of Section 3.2. If Tenant objects to any such submission because such submission is inconsistent with the prior submission approved by Tenant, Landlord shall cause Landlord's Architect to modify such submission to respond to Tenant's objection and submit such modified submission to Tenant within five (5) business days after receipt of Tenant's objections for approval by Tenant in the same manner as with regard to the prior submission. Rejection of new items included in any submission that are inconsistent with the approvals given -20- for prior design phases shall not give rise to a Tenant Delay so long as the initial rejection was delivered within the dates established in the Progress Schedule, as modified. Landlord and Tenant agree to cooperate with one another diligently and in good faith so as to complete the review and approval of all Design Document submission by the applicable completion dates set forth in the Progress Schedule. Upon approval of the Final Design Documents, Landlord shall solicit bids from general contractors or construction managers mutually identified by Landlord and Tenant by the date set forth in the Progress Schedule. Landlord and Tenant shall mutually determine whether such bids shall be submitted on the basis of a guaranteed maximum or fixed price contract basis. Upon receipt of bids from such general contractors or construction managers, Landlord and Tenant shall mutually select Landlord's Contractor from among such bidders and thereupon Landlord shall enter into a contract (the "Construction Contract") with Landlord's Contractor for construction of the Base Building Improvements. The parties acknowledge that if Landlord and Tenant have agreed to hire the Construction Cost Estimator to serve as Construction Manager/General Contractor for the Building, instead of soliciting bids from general contractors or construction managers as described above, such Construction Manager shall instead be required to solicit bids from all subcontractors, and in such case Landlord and Tenant shall be entitled to approve the subcontractors selected by the Construction Manager and require Landlord's Contractor to enter into such subcontracts. The Construction Contract shall be subject to Tenant's prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. If, after such bids are received, none of such bids is acceptable to Tenant and/or Tenant seeks any change in previously approved Design Documents, and as a result thereof Tenant fails or refuses to approve the Final Project Budget (as hereinafter defined) by the date set forth in the Project Schedule, such failure or refusal shall constitute a Tenant Delay. Additionally, Tenant shall have no right to withhold approval of any general contractor bid or any subcontractor bid if the total amount of all such bids does not exceed by more than fifteen percent (15%) the estimated amount thereof set forth in the preliminary budget for Project Cost or the updated budget for Project Cost, as the case may be, then most recently approved by Landlord and Tenant. As used in this Lease, the term "Project Cost" shall mean (i) all hard costs and soft costs incurred by Landlord in connection with the construction of the Base Building Improvements as reflected in a final project budget (the "Final Project Budget") to be mutually approved by Landlord and Tenant based upon, INTER ALIA, all amounts payable by Landlord pursuant to the Architect's Contract and the Construction Contract, and including all liabilities and expenses of all architectural and engineering services relating to Landlord's Work, appropriate amounts for the other line item categories set forth on the Project Budget form attached hereto as Exhibit B-1 (the "Project Budget Form"), (ii) the net amount of all Change Orders (as hereinafter defined), (iii) a pro-rata portion of all "Mitigation Expenses" (as such term is hereafter defined) incurred by Landlord or any Affiliate of Landlord pursuant to the Development Approvals and the Subsequent Approvals (as such terms are defined in Section 3.1.4 hereof), which pro-rata portion shall be equal to the ratio of the gross floor area of the Building (as such gross floor area is determined pursuant to the Cambridge Zoning Ordinance) to 1,313,000 square feet (being the maximum amount of gross floor area, determined pursuant to the Cambridge Zoning Ordinance, permitted to be developed in the Complex pursuant to the PUD Approval (as such term is defined in Section 3.1.4 hereof) except as hereinafter set forth and (iv) taxes and assessments for -21- the Building and Lot, utility and insurance costs for the Building and Lot and all other operating and maintenance costs for the Building and Lot, in each case incurred by Landlord for the period from the Substantial Completion Date through the Term Commencement Date. The term "Mitigation Expenses" shall mean all capital expenses for housing linkage payments and public open space linkage payments required pursuant to the PUD Approval with respect to the Building, costs of traffic mitigation required by the Development Approvals and Subsequent Approvals and infrastructure improvements for the Complex required by the Development Approvals and Subsequent Approvals. Tenant's pro-rata share of capital expenses for housing linkage payments and public open space linkage payments required pursuant to the PUD Approval with respect to the Building shall be equal to the ratio of the Rentable Square Footage of Premises to the Rentable Square Footage of Building. For purposes of determining Project Cost, the line item amount for Land and Environmental Remediation shall be fixed at $60.00 per r.s.f. regardless of the actual cost of such line item; Project Cost shall not include any amount for construction of the Garage (as hereinafter defined) or for the leasing of (or the making of any tenant improvements to) the Expansion Spaces to tenants; the developer's fee shall be fixed at five percent (5%) of Project Cost (exclusive, however, of the line item amounts for Land and Environmental Remediation, Development Fee/Supervision (the "Developer's Fee") and Interest on Landlord's Equity (as such term is hereinafter defined)); the broker's fee shall not exceed $7.50 per r.s.f. and no amount shall be included in Project Cost for general or administrative expenses of Landlord or for improvements to the Retail Space in excess of the cost of Base Building Improvements related thereto, and no amount shall be included in Project Cost for any interest, charges or fees paid or payable by Landlord with respect to any construction loan financing for the Project. Project Cost shall include an amount determined by multiplying all components of the Project Cost (exclusive, however, of the line item for the Developer's Fee) by twelve percent (12%) per annum for the period commencing as of the date the cost of each such component is incurred through and including the Term Commencement Date (as so determined, "Interest on Landlord's Equity"), it being understood and agreed by Landlord and Tenant that Interest on Landlord's Equity with respect to any component of Project Cost that Landlord has acquired, purchased or incurred prior to the date of execution of this Lease, such as the cost of the Land & Environmental component of the Project Cost, shall be deemed to begin to accrue, not as of the date that the cost was actually incurred, but rather as of the execution date of this Lease. Landlord shall account for all Project Costs on a so-called "open book" basis. Within ninety (90) days after the Substantial Completion Date, Landlord shall deliver to Tenant a full accounting of the Project Cost incurred as of the Substantial Completion Date; Tenant, from the date hereof through the date which is twelve (12) months after receipt of such full accounting of Project Cost, may review all of Landlord's books and records relating to the incurrence and payment of the Project Cost in order to verify and confirm the accuracy thereof. If Landlord incurs any cost or expense properly includable in Project Cost after the Substantial Completion Date (including, without limitation, any Mitigation Expenses) which is not included in the full accounting, Landlord shall notify Tenant thereof and Landlord shall provide Tenant with such documentation with respect thereto as Tenant reasonably may request. Landlord and Tenant acknowledge and agree that the incurrence of additional costs and expenses by Landlord after the Substantial Completion Date which are properly includable in Project Cost will result in an increase in the Annual Fixed Rent Rate, which increase shall be effective as of the date of incurrence thereof. -22- Tenant shall have the right (but not the obligation) to offer to finance up to twenty percent (20%) of the Project Cost as hereinafter provided ("Tenant Financing"). If Tenant shall desire to offer Tenant Financing, Tenant shall give Landlord written notice ("Financing Notice") of such offer not later than thirty (30) days after Landlord and Tenant have agreed upon the first preliminary Project Budget; such Financing Notice shall specify the amount (the "Tenant Financing Amount") and other financial terms of such Tenant Financing described below. Delivery by Tenant of a Financing Notice shall constitute a representation by Tenant that it has the capacity to provide such Tenant Financing. If Tenant offers to provide Tenant Financing and all of the terms and conditions thereof, including without limitation, all documents evidencing and securing Tenant Financing, are acceptable to Landlord and its construction and/or permanent lenders, in their respective sole discretion, Tenant shall make a loan to Landlord for an amount equal to the Tenant Financing Amount. The Financing Notice shall specify the interest rate per annum payable on such Tenant Financing loan and the repayment schedule (interest only until maturity; or payments of principal and interest based upon the amortization period specified by Tenant in the Financing Notice), which interest rate and repayment schedule shall be subject to Landlord acceptance or rejection. Such Tenant Financing loan shall be due and payable not later than the scheduled expiration date of the initial Term of the Lease, and shall be secured by a mortgage on the Lot and Building, which mortgage shall be subject and subordinate to the lien of any mortgage granted to any lender now or hereafter providing Landlord with construction and/or permanent financing ("Landlord's Project Financing"). The amount by which the Project Cost exceeds the Tenant Financing Amount is herein referred to as the "Landlord Project Cost Portion". Tenant agrees that upon any uncured Event of Default hereunder, Landlord shall be entitled to offset against any payments due under the Tenant Financing loan any amount owed by Tenant to Landlord pursuant to this Lease. In addition, Tenant agrees that it will enter into any intercreditor agreement (which may include typical subordinate lender standstill agreements) requested by any lender providing Landlord's Project Financing. Tenant shall disburse the proceeds of such Tenant Financing loan to Landlord on the Commencement Date, and Landlord shall apply such proceeds to pay down Landlord's Project Financing by the Tenant Financing Amount. If Tenant provides Tenant Financing as aforesaid, the definition of Annual Fixed Rent Rate set forth in Section 1.1 shall be deemed to be revised to read as follows: Subject to Sections 4.1(b), 10.11 and 10.12 thereof, an amount equal to (a) the sum of (i) the product of (x) the Landlord Project Cost Portion multiplied by (y) twelve percent (12%) plus (ii) the product of (x) the Tenant Financing Amount multiplied by (y) the Tenant Financing interest rate per annum payable on the Tenant Financing (or debt service constant if Tenant elects to have the Tenant Financing amortized), divided by (b) the Rentable Square Footage of the Building. 3.1.2 CHANGE ORDERS. Tenant and Landlord recognize that it may be necessary or advisable to make certain changes to the Final Design Documents or the Base Building Improvements from time to time. Any changes shall be made in accordance with this Lease. -23- (a) In the event that Tenant shall request or authorize any Change Order (as hereinafter defined) or additional services from Landlord with respect to the Base Building Improvements for the purpose of upgrading or changing the scope, manner of performance, or quality of the Base Building Improvements, including any change of design, subcontractor, supplier or materials made at the request of Tenant, such Change Order when implemented by Landlord may result in a change in the Progress Schedule and/or the Project Cost. As used herein, the term "Change Order" shall mean (A) a written order from Landlord which Landlord determines is necessary to carry out the approved design and construction of the Base Building Improvements, whether due to any mistake or omission in, or clarification of, the Design Documents, or (B) a written order to Landlord from Tenant requesting or authorizing a Change in Landlord's Work or an adjustment of the Project Cost or the Progress Schedule. Landlord shall provide Tenant with copies of all proposed and final Change Orders. In addition: subject to the last sentence of this Subparagraph (a), (i) with respect to additive Change Orders, the Project Cost shall be increased by an amount equal to the change in the cost of Landlord's Work (as determined pursuant to the Construction Contract and/or the Architect's Contract) attributable to such Change Order, and (ii) with respect to deductive Change Orders, the Project Cost shall be reduced by the change in the cost of Landlord's Work (as determined pursuant to the Construction Contract and/or the Architect's Contract) attributable to such Change Order. Additive or deductive Change Orders shall result in an increase or decrease, respectively, in the Developer's Fee (but not in any change of the percentage thereof), and Landlord shall be reimbursed by Tenant, either directly or through an increase or decrease, as applicable, in the Project Cost, for the actual cost of overhead and profit, if any, which Landlord is required to pay to Landlord's Contractor on account of any additive Change Order as set forth in the Construction Contract approved by Tenant and Landlord. Anything herein to the contrary notwithstanding, Tenant's approval of a Change Order shall be required for each of the following, which approval shall not be unreasonably withheld, conditioned or delayed: (1) A change in the rentable square footage of the Premises by more than four percent (4%) in the aggregate; (2) A change in the rentable square footage of any floor included within the Premises by more than five percent (5%) in the aggregate; (3) Any material change in the elevator systems or mechanical or electrical systems serving the Premises with the result that such systems would be significantly different than those shown on the Final Design Documents; (4) Any material change in standard structural floor load capacities from those shown on the Final Design Documents; (5) Any material change in the quality of materials and fixtures used in the lobby of the Building, passenger elevator cabs serving the Premises, or washrooms serving the Premises with the result that the same would be significantly different from to those shown on the Final Design Documents; (6) Any change in the exterior design or appearance of the Building; or -24- (7) Any individual Change Order which increases the Project Cost by more than $500,000.00. (b) If Tenant requests or requires any Change Order for the Base Building Improvements, Landlord shall submit all such Change Orders with plans, specifications, pricing and a schedule of values if appropriate to Tenant for its review and approval, which approval shall not be unreasonably withheld, delayed or conditioned. No Change Order for the Base Building Improvements requested by Tenant shall be effective unless approved by Landlord's Representative and Tenant's Construction Representative in writing, such approval not to be unreasonably withheld, delayed or conditioned. Tenant may withdraw any Change Order requested by Tenant at any time prior to Tenant's Construction Representative having given its approval to such Change Order. Promptly, but not later than ninety (90) days after the Term Commencement Date, Landlord shall deliver a set of as built plans and operating and maintenance manuals for the Base Building Improvements to Tenant. 3.1.3 ENVIRONMENTAL REMEDIATION. Landlord shall be responsible for undertaking and completing environmental remediation of the Lot ("Environmental Remediation") pursuant to an Environmental Agreement (the "Environmental Agreement") between Landlord and Tenant in the form of EXHIBIT E hereto. Landlord has delivered to Tenant the documents set forth on EXHIBIT E-1 hereto (the "Remediation Documents") and Landlord will provide Tenant with such additional information pertaining to Environmental Remediation and hazardous substances present on other portions of the Lot as Tenant reasonably may request, including correspondence with regulatory authorities and other governmental bodies with respect to the Environmental Remediation. Landlord will provide Tenant with notice of any circumstances relating to the Environmental Remediation which could delay the Substantial Completion Date, as affected by any Tenant Delay, by more than thirty (30) days. 3.1.4 DEVELOPMENT APPROVALS AND TITLE EXCEPTIONS. Reference is hereby made to (i) a Special Permit issued by the City of Cambridge Planning Board (the "Planning Board"), Case No. PB #141 filed April 7, 1999 (the "PUD Permit"), recorded with the Middlesex South District Registry of Deeds (the "Registry") in Book 31137, Page 89 as affected by a Settlement Agreement dated May 24, 1999 among Barbara Broussard, Mary DeFreitas, the East Cambridge Planning Team and Landlord (the "Settlement Agreement") (the PUD Permit and the Settlement Agreement are herein collectively referred to herein as the "PUD Approval"), (ii) PTDM Ordinance Final Decision issued April 20, 1999 by the Community Development Department ("CDD") of the City of Cambridge (the "PTDM Decision"), the Letter dated April 20, 1999 to Robert L. Green of Lyme Properties from Susanne Rasmussen of the CDD (the "PTDM Letter") attached to the PTDM Decision, and Landlord's Parking Transportation Demand Management Plan dated April 9, 1999 (the "PTDM Plan") (the PTDM Decision, the PTDM Letter and PTDM Plan are collectively referred to herein as the "PTDM Approval"), (iii) a Certificate of the Secretary of Environmental Affairs on the Final Environmental Impact Report dated April 15, 1999 (the "MEPA Certificate"), (iv) an Order of Conditions issued July 12, 1999 by the City of Cambridge Conservation Commission (the "Order -25- of Conditions") and (v) a Determination for Issuance of a Waterways License Amendment dated December 8, 1999, issued by the Executive Office of Environmental Affairs of the Commonwealth of Massachusetts (the "Chapter 91 Determination"), (collectively, the "Development Approvals"). Reference is also hereby made to Item Nos. 2 through 12, inclusive (the "Title Exceptions") set forth in Schedule B, Part 1 of Owner's Policy No. 136-00-336684 dated August 19, 1998, issued by Lawyer's Title Insurance Corporation (the "Title Policy"). Tenant acknowledges that Landlord has delivered to Tenant copies of the Development Approvals, the Title Exceptions and the Title Policy. This Lease, and the development, construction and operation of the Building, the Lot and the Complex, shall be subject to the Development Approvals, the license to be issued pursuant to the Chapter 91 Determination, the Title Exceptions and all other determinations, approvals, decisions and actions of governmental authorities having jurisdiction of the Complex hereafter issued pursuant to or contemplated by the Development Approvals and delivered to Tenant ("Subsequent Approvals"). Each of Landlord and Tenant, in the exercise of their respective rights and the performance of their respective obligations pursuant to this Lease, shall observe and comply with all requirements of the Development Approvals and Subsequent Approvals. Landlord, however, shall not enter into any Subsequent Approval which will materially and adversely decrease the amount of parking spaces available at the Complex. Without limiting the generality of the foregoing, to the extent required for compliance with the PUD Permit and the PTDM Approval, as the same may be affected by Subsequent Approvals (but only for so long as the same remain in force and effect from time to time), Tenant shall comply with the following: (a) Tenant shall comply with the obligations of the PTDM Approval applicable to tenants, employers and/or employees in the Complex, (b) Tenant shall cooperate with Landlord in the implementation of the Additional Recommendations set forth in the PTDM Letter if the mode split goal of the PTDM Approval is not achieved, (c) Tenant shall cooperate with Landlord and/or the Charles River Transportation Management Association or any other transportation management association of which Landlord is a member (a "TMA") in implementing the PTDM Approval and TMA programs (and Tenant is hereby encouraged to participate in all TMA programs), (d) Tenant shall establish a guaranteed ride home program for Tenant's employees as provided in the PUD Approval and the PTDM Approval, as the same may be affected by Subsequent Approvals, (e) Tenant shall, either directly or through a program established by Landlord or a TMA for tenants of the Complex, complete surveys pursuant to Section III D of the PTDM Plan, (f) as required by the PUD Approval and PTDM Approval, as the same may be affected by Subsequent Approvals, Tenant shall contract with the MBTA and subsidize transit passes and commuter rail passes in an amount not less than 60% of the cost thereof or such higher percentage as Landlord may require if mode split commitments are not achieved, (g) as provided in the PTDM Approval, as the same may be affected by Subsequent Approvals, Tenant shall cooperate with Landlord in connection with surveys concerning attitudes of employees and customers of Tenant in order to refine and develop transportation demand management programs, (h) Tenant shall provide Tenant's employees with information provided to Tenant by or on behalf of Landlord pursuant to the PTDM Plan, including information on the advantages and benefits of telecommuting, flexible time, compressed work week programs, the materials to be provided pursuant to Section VII A of the PTDM Plan and other programs recommended by the City of Cambridge, (i) as provided in the PTDM Approval, as the same may be affected by Subsequent Approvals, Tenant is hereby encouraged to use a commuter choice program which allows qualifying employees the option of receiving the cash value of a -26- Tenant's Parking Space, (j) Tenant shall participate in and pay a reasonable share (which shall not be less than Tenant's Proportionate Fraction for Complex) of the cost of any TMA shuttle bus service serving the Complex, as contemplated by the PTDM Approvals, and (k) Tenant shall cooperate with Landlord with respect to all other aspects of the PTDM Approval. 3.2 PREPARATION OF PREMISES FOR PERFORMANCE OF TENANT'S WORK. During the course of performance of Landlord's Work, Landlord and Tenant shall meet on not less than a monthly basis to review the progress of Landlord's Work. Landlord agrees to use reasonable and diligent efforts to have the Premises ready for the performance of Tenant's Work on or before the Scheduled Substantial Completion Date which Substantial Completion Date shall, however, be extended for a period equal to that of (a) any delays due to Acts of God, labor disputes or unrest, riots, fire, unusual delays in deliveries, casualties or other causes beyond Landlord's reasonable control (collectively, "Force Majeure Events") and (b) any delays due to (i) any Change Order, (ii) any act, omission or neglect of Tenant, or of any employee, agent, or separate contractor of Tenant, (iii) the concurrent performance of the Base Building Improvements and Tenant's Work, (iv) Tenant's failure to furnish information or approve any of the Design Documents, the Architect's Contract, the Construction Contract or the Project Cost by the applicable dates set forth in the Progress Schedule or to respond to any request by Landlord for information or approval within the time period required by the Progress Schedule, or if no time period is required by the Progress Schedule, within five (5) business days of Landlord's request, or (v) any breach or default by Tenant in the performance of Tenant's obligations pursuant to this Lease, even if such breach or default is cured (collectively, "Tenant Delay"). In the event of any such Force Majeure Event, Landlord shall use reasonable efforts to eliminate the cause of such delays or to secure alternate supplies. If any one or more Force Majeure Events shall delay the Substantial Completion Date by more than one hundred eighty (180) days, either Landlord or Tenant may terminate this Lease upon not less than fifteen (15) days prior written notice to the other. A Tenant Delay shall not affect the Substantial Completion Date unless Landlord has given Tenant notice thereof and Tenant fails to cure the same within two (2) business days, PROVIDED, HOWEVER, that Landlord shall not be required to provide Tenant with any notice or opportunity to cure with respect to any date set forth in the Progress Schedule by which Tenant must take any action, and any failure or refusal by Tenant to take such action by any such date set forth in the Progress Schedule, which failure or refusal in fact results in a delay, shall constitute a Tenant Delay. As used herein, the term "Substantial Completion Date" shall mean and refer to the date on which: (i) the Base Building Improvements have been substantially completed in accordance with the Final Design Documents, as affected by Change Orders, without material deviation therefrom as certified by Landlord's Architect and confirmed by Tenant's Architect, which confirmation shall not be unreasonably withheld, delayed or conditioned, with the exception of minor items which can be fully completed by Landlord within thirty (30) days without material interference with Tenant and other items which because of the season or weather or the nature of the item are not practicable to do at the time, provided that none of said items is necessary to perform Tenant's Work (collectively "Punch List Items"), (ii) if Tenant's Work has not then commenced, a Certificate of Occupancy from the City of Cambridge (or a Temporary Certificate of Occupancy with conditions which can be satisfied without material interference with the performance of Tenant's Work ) shall have been obtained, (iii) the Premises are broom clean and free of debris except to the extent, if any, resulting from Tenant's Work, and (iv) all utilities required for the -27- use of the Premises have been brought by Landlord to the location(s) shown on the Final Design Documents, as the same may be affected by Change Orders; provided, however, that if the Substantial Completion Date does not occur on or before the Scheduled Substantial Completion Date due to any Tenant Delay, then solely for purposes of determining the Commencement Date under Section 2.2 and other applicable provisions of this Lease, the Base Building Improvements shall be deemed to be substantially completed, and the Substantial Completion Date shall be deemed to have occurred, on the date on which the Substantial Completion Date would have occurred taking into account any Force Majeure Events but without taking into account any Tenant Delay. If Landlord's Architect has certified that the Base Building Improvements are substantially complete but Tenant's Architect does not confirm the same within five (5) business days thereafter, Landlord's Architect and Tenant's Architect shall immediately select a third independent architect who shall conclusively determine whether the Base Building Improvements are substantially complete. Landlord and Tenant shall share equally the costs of such third architect. Landlord's Work shall be deemed to have been performed as of the date on which the Base Building Improvements are substantially complete (as certified by Landlord's Architect and confirmed by Tenant's Architect or such independent architect) except for latent defects, Punch List Items and items which do not conform with the requirements of the Final Design Documents, as affected by Change Orders, and as to which Tenant or Tenant's Architect shall have given written notice to Landlord prior to such date. If Tenant or Tenant's Architect does not provide such written notice prior to the date on which the Base Building Improvements are substantially complete, a certificate of substantial completion by a licensed architect or registered engineer shall be conclusive evidence that Landlord has performed all such obligations except for latent defects, Punch List Items and items stated in such certificate to be incomplete or not in conformity with such requirements. Landlord shall use reasonable and diligent efforts to complete Punch List Items within thirty (30) days after the Substantial Completion Date and in a manner which will not unreasonably interfere with the performance of Tenant's Work (as defined in Section 3.2.1 hereof). Landlord represents that Landlord has the capacity to effect financial arrangements to enable Landlord to complete Landlord's Work, and to otherwise enable Landlord to fulfill all of its obligations under this Lease. After the commencement of construction of Landlord's Work, Landlord shall furnish to Tenant, at Tenant's request, a copy of the portions of Landlord's financing commitment for construction of the Building confirming the availability of construction financing therefor. Tenant agrees to observe any reasonable limitations on dissemination thereof to others that Landlord may impose. Notwithstanding the foregoing, (A) if Landlord has not commenced the Environmental Remediation of the Lot by the date set forth in the Progress Schedule, (B) if Landlord has not filed a Response Action Outcome Statement (as such term is defined in the Massachusetts Contingency Plan, 310 CMR 40.0000 ET SEQ., as amended ("MCP")) for the Lot by the date set forth in the Progress Schedule, (C) if a building permit for the Base Building Improvements has not been issued by the date set forth in the Progress Schedule, (D) if construction of the Base Building Improvements has not commenced by the date set forth in the Progress Schedule (each of the foregoing being referred to as a "Landlord Milestone Date"), Tenant shall have the right to terminate this Lease as hereinafter set forth. Upon request of Tenant, Landlord shall provide such evidence as Tenant reasonably may request to evidence achievement of each Landlord Milestone Date. Each of the Landlord Milestone Dates shall be extended by one business day for each day of Tenant Delay occurring before a respective Landlord Milestone Date. If -28- Landlord is in default with respect to any Landlord Milestone Date, as extended as aforesaid by any Tenant Delay, Tenant shall notify Landlord within five (5) business days thereof. If Landlord does not cure the default or alleged default within thirty (30) business days after receipt of such notice, Tenant, upon written notice, may thereupon terminate this Lease. If the Garage and the streets and roadways of the Complex necessary for access to the Building and Garage are not substantially complete by the date of substantial completion of Tenant's Work to be performed in connection with Tenant's initial occupancy of the Premises then Tenant, as Tenant's sole remedy, shall receive a credit against the initial and succeeding payments of the Parking Fee due hereunder, until such credit is fully exhausted, equal to two day's Parking Fee (for all of Tenant's Garage Parking Spaces or for such number of Tenant's Garage Parking Spaces as may be unavailable, as applicable) for each day from substantial completion of Tenant's Work until the Garage and such street and roadway work are substantially complete. In the event Landlord's Work shall not be substantially completed by the Scheduled Substantial Completion Date specified in Section 1.1 (as and to the extent such Scheduled Substantial Completion Date may be extended by Tenant Delays and delays caused by Force Majeure Events), then after the Term does commence, Tenant, as Tenant's sole remedy, shall receive a credit against the initial and succeeding payments of Annual Fixed Rent due hereunder, until such credit is fully exhausted, equal to one day's Annual Fixed Rent for each day from the Scheduled Substantial Completion Date (as so extended) until the date that Landlord's Work is substantially completed. In the event Landlord's Work shall not be substantially completed within one hundred eighty (180) days after the Scheduled Substantial Completion Date (as and to the extent such Scheduled Substantial Completion Date may be extended by Tenant Delays and delays caused by Force Majeure Events) (such 180th day is referred to herein as the "Outside Completion Date"), Tenant may at any time thereafter, but prior to Landlord's Work being substantially completed, notify Landlord of Tenant's election to terminate this Lease. Tenant shall give Landlord no less than thirty (30) days' prior notice of Tenant's intention to terminate this Lease before notifying Landlord of Tenant's election to terminate this Lease; it being understood and agreed, however, that Tenant may give notice of such intention as early as thirty (30) days prior to the Outside Completion Date. 3.2.1. PERFORMANCE OF TENANT'S WORK. Except for the Base Building Improvements to be performed by Landlord in accordance with the Design Documents, all of Tenant's initial interior improvements, fixtures, finishes, furnishings, furniture, telephones, movable equipment and signs (collectively, "Tenant's Work"), shall be performed and provided at the sole cost and expense of Tenant. Tenant's performance of Tenant's Work shall be coordinated with any work being performed by Landlord and/or by any Affiliate of Landlord in the Building, on the Lot or in the Complex in such manner as to maintain harmonious labor relations during the performance of Landlord's Work (which Landlord expects will be performed by union contractors) and thereafter and not to damage the Building or Lot or interfere with Building or Lot operations or with any work being performed by or on behalf of Landlord or any Affiliate of Landlord in the Complex. All work described in -29- Tenant's Work shall be performed by an Approved Contractor. For purposes of this Lease, an "Approved Contractor" shall mean a contractor or mechanic identified by Tenant in writing, who has been approved by Landlord in writing (such approval not to be unreasonably withheld, delayed or conditioned). Contractors may be approved in one of two ways. First, Tenant may submit to Landlord in writing from time to time a list (or a revised list) of contractors that Tenant anticipates using from time to time to perform Tenant's Work. If Landlord fails to object to any of the contractors identified on such list within ten (10) days after receipt of such list from Tenant, all contractors identified on such list shall be deemed "Approved Contractors". Second, Tenant may submit to Landlord from time to time requests for Landlord to approve specific contractors (not already on the list of Approved Contractors) to perform Tenant's Work. Landlord shall have the right, upon written notice to Tenant to withdraw its approval of any previously Approved Contractors at any time for any cause as determined in Landlord's reasonable judgment. A contractor's failure to provide or maintain adequate insurance levels shall be a reasonable basis for Landlord to withhold or withdraw approval unless Tenant notifies Landlord in writing that such contractor shall be covered by insurance then being maintained by Tenant and if Tenant provides documentary evidence that said Contractor is covered and of the amount of coverage. Additionally, Landlord may withhold or withdraw approval of any contractor proposed by Tenant or previously approved by Landlord to perform any Tenant's Work if Landlord determines, in Landlord's sole but reasonable discretion, that any contractor proposed or previously approved by Landlord by Tenant for the performance of any Tenant's Work does not have a sufficient bonding capacity or may cause picketing, labor unrest, strikes, protests or similar activities (collectively "Labor Unrest"). If after approval of an Approved Contractor by Landlord, any Labor Unrest shall occur or be threatened on account of any Tenant's Work, Landlord shall have the right to require cessation of Tenant's Work until resolution of such Labor Unrest. Except as set forth in Sections 3.2.1 and 5.1.10 hereof, all initial Tenant's Work which may constitute a fixture, part of the real estate, a part of a Building system or Building utilities shall become a part of the Premises and upon termination of this Lease shall be considered to be the property of the Landlord. Unless Tenant agrees to readapt the Premises for a typical general office layout prior to the expiration or termination of the Lease, Tenant shall not effect any Tenant's Work (or any alterations or additions to the Premises after performance of the initial Tenant's Work) that might require any unusual expense to reuse the Premises for any general office use. Tenant's Work shall be performed in accordance with complete, consistent, final construction drawings and specifications ("Construction Documents") approved by Landlord in writing, which approval shall not be unreasonably withheld, conditioned or delayed. The Construction Documents shall be prepared and stamped by Tenant's Architect. Landlord reserves the right to reject, in whole or in part, any or all of the Construction Documents which in its reasonable opinion fail to comply with Sections 3.2.1, 3.3 and 5.1.5 of this Lease within fifteen (15) business days of its receipt thereof (the "Review Period"). The Review Period shall not commence unless and until Tenant delivers a complete set of Construction Documents. If Landlord shall disapprove the Construction Documents, it shall state specifically the reasons therefor, and Tenant shall promptly revise and resubmit the Construction Documents. If Landlord fails to respond to Tenant's request for approval of the Construction Documents within the Review Period, then the Construction Documents shall be deemed approved. Upon completion of Tenant's Work to prepare the Premises for Tenant's initial occupancy, -30- Tenant shall provide Landlord with a set of as-built plans, and operating and maintenance manuals therefor. Tenant shall be solely responsible for the liabilities of and expenses of all architectural and engineering services relating to Tenant's Work and for the adequacy, accuracy, and completeness of the Construction Documents approved by Landlord. The Construction Documents (i) shall set forth in detail the requirements for construction of the Tenant's Work (including all architectural, mechanical, electrical and structural drawings and detailed specifications), (ii) shall be fully coordinated with one another and with field conditions as they exist in the Premises and elsewhere in the Building, and (iii) shall show all work necessary to complete the Tenant's Work including all cutting, fitting, and patching and all connections to the mechanical and electrical systems and components of the Building. Tenant agrees to indemnify and hold Landlord harmless if any Tenant's Work described in the Construction Documents (a) fails to comply with all applicable laws, regulations, building codes, building design standards, the Development Approvals and Subsequent Approvals, (b) in any manner affects any structural component of the Building (including, without limitation, exterior walls, exterior windows, core walls, roofs or floor slabs), (c) in any respect is incompatible with the electrical and mechanical components and systems of the Building, (d) affects the exterior of the Building, (e) fails to conform to floor loading limits, and (f) with respect to all materials, equipment and special designs, processes or products, infringes any patent or other proprietary rights of others. Landlord's approval or deemed approval of the Construction Documents and the performance of Tenant's Work pursuant to the Construction Documents shall not result in any liability of Landlord, and Landlord's approval of Construction Documents shall signify only Landlord's consent to Tenant's Work shown thereon and shall not result in any responsibility of Landlord concerning compliance of Tenant's Work with laws, regulations, or codes, coordination of any aspect of Tenant's Work with any other aspect of Tenant's Work, or the feasibility of constructing Tenant's Work without material damage or harm to the Building, all of which shall be the sole responsibility of Tenant. If Tenant enters into a contract with Landlord's Contractor for the performance of Tenant's Work to prepare the Premises for Tenant's initial occupancy, Landlord agrees that Tenant shall have a license to enter the Premises at such time or times prior to the Term Commencement Date as Landlord, in its sole but reasonable discretion, may permit to enable Tenant to carry out Tenant's Work. Upon any such entry by Tenant prior to the Term Commencement Date, Tenant shall be subject to, and perform all of its obligations under this Lease except for the obligation to pay Rent, which obligation shall not arise until the Term Commencement Date occurs. An Approved Contractor may be used by Tenant until Landlord notifies Tenant that an Approved Contractor is no longer approved due to such Approved Contractor's failure to comply in any material respect with the requirements of the Construction Documents and/or this Lease. Tenant shall procure all necessary governmental permits, licenses and approvals before undertaking any Tenant's Work. When any Tenant's Work is in progress, Tenant shall cause to be maintained insurance as may be required by Landlord covering any additional hazards due to such Tenant Work, for the benefit of Landlord. It shall be a condition of Landlord's approval of any Tenant's Work that certificates of such insurance issued by a responsible insurance company qualified to do business in Massachusetts and having a Best's Insurance Rating of A- or better, -31- shall have been deposited with Landlord, that Tenant has provided Tenant's certification of the insurable value of the work in question for casualty insurance purposes, and that all of the other conditions of the Lease have been satisfied. Tenant shall reimburse Landlord for up to $25,000 of the reasonable, out-of-pocket, third party costs of reviewing proposed Construction Documents and Tenant's Work and inspecting installation of the same. At all times while performing Tenant's Work, Tenant shall require each Approved Contractor performing Tenant's Work to comply with all applicable laws, regulations, permits and policies relating to such work. In performing Tenant's Work, each Approved Contractor shall comply with Landlord's requirements set forth in Section 3.2.1, Section 3.3, Section 5.1.5 and Section 5.2.3 hereof relating to the time and methods for such work, use of delivery elevators and other Building facilities and each Approved Contractor shall not interfere with or disrupt Landlord's Contractor. Each Approved Contractor shall in all events work on the Premises without causing labor disharmony, coordination difficulties, or delay or impairment of any guaranties, warranties or obligations of any contractors of Landlord and without causing unreasonable interference with the rights of other tenants in the Building. If any Approved Contractor uses any Building services or facilities prior to the Commencement Date, such Contractor, jointly and severally with Tenant, shall agree to reimburse Landlord for the cost thereof based on Landlord's schedule of charges established from time to time (and if no such charges have been established, then based on Landlord's reasonable charge established at the time). Tenant shall include a provision in each contract with each Approved Contractor whereby such Approved Contractor shall, by entry into the Building or onto the Lot or Complex, agree to indemnify and hold Landlord harmless from any claim, loss or expense arising in whole or in part out of any act or neglect committed by such person while in the Building or on the Lot or Complex, to the same extent as Tenant has so agreed in this Lease, which indemnities of Tenant and Approved Contractor shall be joint and several. Subject to Tenant's right to contest amounts due to any Approved Contractor, Tenant shall pay on or prior to date when any such payment is due the entire cost of all Tenant's Work so that the Premises shall always be free of liens for labor or materials. If any mechanic's lien (which term shall include all similar liens relating to the furnishing of labor and materials) is filed against the Premises, the Building, the Lot or the Complex or any part thereof (regardless of whether Tenant contests the same) which is claimed to be attributable to Tenant, its agents, employees or contractors, Tenant shall promptly discharge the same by payment or filing any necessary bond within thirty (30) days after Tenant has notice (from any source) of such mechanic's lien. Tenant shall prepare and complete not less than seventy-five percent (75%) of the Rentable Square Footage of Premises for Tenant's occupancy within nine (9) months after the Substantial Completion Date. If Tenant does not prepare and complete the entire Premises for Tenant's occupancy within nine (9) months after the Substantial Completion Date, Tenant shall deposit with Landlord on or before the end of such nine-month period a completion bond, letter of credit or similar security in the amount of Landlord's reasonable estimate of the cost to so complete the Premises. The form and substance of such bond, letter of credit or similar security shall be subject to Landlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed. After the performance of Tenant's Work to prepare the Premises for Tenant's initial occupancy, (i) all Tenant's Work shall be subject to all provisions of this Lease relating to Tenant's Work to prepare the Premises for Tenant's initial occupancy, except as expressly set -32- forth herein, and (ii) Landlord and Tenant shall agree in writing, at the time Landlord approves any alteration or addition, whether Tenant will be required to, permitted to or forbidden to, at Tenant's sole cost and expense, remove any such alteration or addition and/or to readapt, repair or restore the Premises to substantially the condition the same were in prior to such alteration or addition upon the expiration or termination of this Lease. Landlord's approval of any alteration or addition which is not a Minor Alteration (as hereinafter defined in this Section 3.2) shall be deemed to have been given if Landlord fails to notify Tenant of its objection thereto within fifteen (15) business days after Tenant's request for such approval. In circumstances in which Tenant desires the right to remove additions or alterations at the expiration or termination of this Lease, Landlord shall reasonably agree, and such agreement shall not be unreasonably withheld, conditioned or delayed (and shall be deemed to have been given if Landlord fails to notify Tenant of its objection thereto within fifteen (15) business days after Tenant's request for such agreement), to permit such removal where items installed by Tenant are in the nature of equipment, but are so affixed to Building that such items may be construed as fixtures. Tenant's rights to remove additions or alterations hereunder shall not apply to replacement of items included in Tenant's Work that are replaced due to the fact that such items have worn out or become substantially obsolete. After the performance of Tenant's Work, all changes and additions shall be part of the Building except such items as by writing at the time of approval the parties agree either shall be removed or left by Tenant on termination of this Lease, or shall be removed or left at Tenant's election. Notwithstanding the foregoing, the parties hereby agree that for any non-structural alterations or additions to the Premises which do not involve modifications to the Building operating systems and for which the cost may be reasonably estimated to be less than $100,000 (each a "Minor Alteration"): (i) Landlord's prior written consent shall not be required unless such Minor Alteration requires a building permit from the City of Cambridge, in which case Landlord's reasonable consent shall be required, provided that such consent shall be deemed to have been given if Landlord fails to notify Tenant of its objection to such Minor Alteration within five (5) days after Tenant's request for Landlord's consent with respect thereto, and (ii) if Landlord's consent was not obtained therefor, upon the expiration or termination of this Lease, Tenant shall readapt, repair and restore the affected portion of the Premises to substantially the condition the same were in prior to such Minor Alteration. Additionally, Tenant shall give prior written notice to Landlord of any Minor Alteration for which the cost may be reasonably estimated to be less than $100,000 but greater than $25,000 and regardless of whether Landlord's consent is required. The parties further agree that after the performance of Tenant's Work to prepare the Premises for Tenant's initial occupancy (a) any request for Landlord's consent to any alteration or addition (including, without limitation, any Minor Alteration) shall be accompanied by drawings and specifications in reasonable detail given the size and scope of the proposed alteration or addition, and (b) Tenant shall furnish Landlord as-built drawings showing any and all alterations or additions (including, without limitation, any and all Minor Alterations) made by Tenant or any assignee, sublessee or licensee of Tenant within 30 days after completion of the same. -33- 3.3 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION. All construction work required or permitted by this Lease, whether by Landlord or by Tenant, shall be done at the sole risk of the party performing such work, in a good and workmanlike manner employing new materials of good quality, and in compliance with all Development Approvals, Subsequent Approvals, applicable laws, codes, ordinances, regulations and orders of any governmental authority or insurer of the Building, including the Americans with Disabilities Act (42 U.S.C. ss. 12101 ET SEQ.) and the regulations and Accessibility Guidelines for Buildings and Facilities issued pursuant thereto (collectively, the "ADA Requirements"). Either party may inspect the work of the other at reasonable times and shall give notice of observed defects. Landlord shall not be responsible for any loss, damage, or injury resulting from the installation of any components, fixtures, or equipment provided they were appropriately specified and installed in accordance with the manufacturer's or supplier's instructions; provided, however, that Landlord shall assign any and all contractor's, manufacturer's and supplier's warranties with respect to the Base Building Improvements, including, without limitation, Landlord's Contractor's warranty as set forth in the Construction Contract, to Tenant for the Term of this Lease, upon the expiration or sooner termination of which such warranties shall automatically revert to Landlord. 3.4 REPRESENTATIVES. Each party authorizes the other to rely in connection with their respective rights and obligations under this Article III upon approval and other actions on the party's behalf by Landlord's Representative in the case of Landlord and Tenant's Lease Representative in the case of Tenant lease matters and Tenant's Construction Representative, in the case of Tenant design and construction matters, or by any person hereafter designated in substitution or addition by notice to the party relying. 3.5 LANDLORD INDEMNITY AND CORRECTION OF LANDLORD'S WORK. Landlord agrees to indemnify and hold Tenant harmless if any of Landlord's Work described in the Final Design Documents (a) fails to comply with all applicable laws, regulations, building codes, building design standards, the Development Approvals and Subsequent Approvals and (b) with respect to all materials, equipment and special designs, processes or products, infringes any patent or other proprietary rights of others. If within one year after the Substantial Completion Date (i) any item of Base Building Improvements does not conform with the Final Design Documents or (ii) there is any latent defect or any other defect in the Base Building Improvements caused by faulty workmanship performed on behalf of Landlord or materials installed on behalf of Landlord, Landlord, upon written notice thereof from Tenant prior to the expiration of such one-year period, shall forthwith cause such nonconformity or defect to be corrected without cost or expense to Tenant. -34- ARTICLE IV RENT 4.1 FIXED RENT. (a) MONTHLY INSTALLMENTS; DEFINITIONS. Commencing on the Commencement Date, Tenant covenants and agrees to pay Fixed Rent (as hereinafter defined) for the Premises to Landlord by wire transfer as Landlord may from time to time direct in writing, without any offset or reduction whatsoever (except as may be made in accordance with the express provisions of this Lease), or in the absence of wire transfer instructions from Landlord, at the Original Address of Landlord or at such other place or to such other person or entity as Landlord may by notice to Tenant from time to time direct, in the amount of (x) the Annual Fixed Rent Rate set forth in Article I multiplied by (y) the Rentable Square Footage of the Premises, and subject to adjustment as set forth in Sections 4.1(b), 5.1.2, 10.11 and 10.12 hereof (collectively "Fixed Rent" or "Annual Fixed Rent"), in equal installments equal to 1/12th of the Fixed Rent in advance on the first day of each calendar month included in the Term; and for any portion of a calendar month at the beginning or end of the Term, at that rate payable in advance for such portion. (b) ADJUSTMENT OF ANNUAL FIXED RENT. On the tenth anniversary of the Commencement Date, each of the Annual Fixed Rent for the Premises (as initially demised to Tenant) determined pursuant to Section 1.1 hereof, and the Annual Fixed Rent for the Expansion Spaces as determined pursuant to Section 10.11 hereof, shall be increased by an amount determined by multiplying the Annual Fixed Rent for the first Lease Year by twenty-one and nine tenths percent (21.9%). For example, if for the first Lease Year the Annual Fixed Rent for the Premises (as initially demised to Tenant) is *****, such increase shall equal ***** and if the Annual Fixed Rent (including the TI Factor) for both the Expansion Spaces as determined pursuant to Section 10.11(c) is *****, such increase shall equal *****. The respective Annual Fixed Rent for the Premises (as initially demised to Tenant) and the Expansion Spaces, increased as aforesaid, shall be effective from the tenth anniversary of the Commencement Date through the end of the fifteenth Lease Year. (c) Landlord shall send advance written notice to Tenant on a monthly basis of the amount of Fixed Rent and Additional Rent due pursuant to this Lease; such advance written notice shall be given not later than five (5) business days prior to the first day of each calendar month. 4.2 ADDITIONAL RENT. As used herein, the term "Additional Rent" shall mean all rent, charges and other sums, other than Fixed Rent, due Landlord pursuant to this Lease. All regularly recurring items of Additional Rent, such as the Annual Maintenance Charge, shall be paid by Tenant to Landlord by wire transfer as Landlord may from time to time direct in writing, or in the absence of wire transfer instructions from Landlord, at the Original Address of Landlord. Nonrecurring items of Additional Rent shall be paid by Tenant to Landlord by check or wire transfer as Tenant may from time to time elect. In order that the Fixed Rent shall be absolutely net to Landlord, * Confidential Treatment has been requested for the marked portion pursuant to Rule 24b-2 and filed separately with the Commission. -35- commencing on the Commencement Date, Tenant covenants and agrees to pay, as Additional Rent, without any offset or reduction whatsoever except as expressly set forth in this Lease, taxes, municipal or state betterment assessments, insurance costs, utility charges and the Annual Maintenance Charge with respect to the Premises as provided in this Section 4.2 as follows: As used herein, the term "Estimated Annual Additional Rent" shall mean and refer to Landlord's estimate of the total amount of Additional Rent which may be due from Tenant for any particular Lease Year with respect to the Building, Lot and Complex. Landlord shall furnish Tenant with a statement within sixty (60) days after the commencement of each Lease Year setting forth the amount of Landlord's Estimated Annual Additional Rent for such Lease Year. Landlord's good faith estimate of the Estimated Annual Additional Rent for the first "fiscal year" (as such term is defined in Section 4.2.4 hereof) of the Term is set forth in Section 1.1 as the "Initial Estimated Annual Additional Rent for Building" and "Initial Estimated Annual Additional Rent for Complex". 4.2.1 REAL ESTATE TAXES. Tenant shall pay directly to the Landlord: (i) Tenant's Proportionate Fraction for Building and Tenant's Proportionate Fraction for Complex, respectively, of all taxes, assessments (special or otherwise), levies, fees, water and sewer rents and charges, and all other government levies and charges, general and special, ordinary and extraordinary, foreseen and unforeseen, which are, at any time during the Term hereof, imposed or levied upon or assessed against the Premises, the Building, the Lot or the Complex, and (ii) the full amount of any tax or assessment imposed or levied upon or against (A) any Fixed Rent, Additional Rent or other sum payable hereunder, (B) this Lease, or the leasehold estate hereby created, or which arise in respect of the operation, possession or use of the Premises; (C) all gross receipts or similar taxes imposed or levied upon, assessed against or measured by any Fixed Rent, Additional Rent or other sum payable hereunder; and (D) all sales, value added, use and similar taxes at any time levied, assessed or payable on account of the acquisition, leasing or use of the Premises (and Tenant's Proportionate Fraction for Building and Tenant's Proportionate Fraction for Complex, respectively, of any such taxes if they are levied, assessed or payable on account of the acquisition, leasing or use of the entire Building Lot or the Complex) which may become a lien on the Building, the Lot, the Premises or the Complex (collectively "taxes and assessments" or if singular "tax or assessment"). For each tax or assessment period, or installment period thereof, wholly included in the Term, all such payments shall be made by Tenant not more than twenty (20) days after receipt of an invoice therefor. For any fraction of a tax or assessment period, or installment period thereof, included in the Term at the beginning or end thereof, Tenant shall pay to Landlord, within twenty 20 days after receipt of an invoice therefor, Tenant's Proportionate Fraction for Building and Tenant's Proportionate Fraction for Complex, as applicable, of taxes and assessments so levied or assessed or becoming payable which is allocable to such included period. At Landlord's option, Tenant shall pay taxes and assessments in accordance with Section 4.2.5 hereof. Subject to Tenant's payment to Landlord of taxes and assessments as and when required by this Section 4.2.1, Landlord agrees to pay such tax and assessments to the proper authorities prior to delinquency and to provide Tenant with evidence of such payment upon request therefor. Anything herein to the contrary notwithstanding, if and to the extent that the Lot is not a separately assessed parcel, Landlord shall make reasonable allocation of any taxes and assessments between the Lot and the Building and the Complex of which the Lot is a part. -36- Tenant may apply for any abatement of, or otherwise contest, any tax or assessment, provided that the expenses of such proceedings, including, without limitation, any penalties, interest, late fees or charges, and attorneys' fees incurred as a result thereof, shall be paid by Tenant. Landlord and Tenant shall discuss and may mutually agree upon any other tax initiatives available for the Lot or Building. Nothing contained in this Lease shall, however, require Tenant to pay any income taxes, excess profits taxes, excise taxes, franchise taxes, or any taxes or assessments with respect to the Garage and other buildings leased or available for lease (and the parcels of land upon which such buildings are situated), other than the Building, the Lot and any building or portion of a building in the Complex which is not designed and available for lease to third parties (and the parcel(s) of land on which the same may be located) in the Complex ("Excluded Taxes"), estate, succession, inheritance or transfer taxes, provided, however, that if at any time during the Term the present system of ad valorem taxation of real property shall be changed so that in lieu of the whole or any part of the ad valorem tax on real property, there shall be assessed on Landlord a capital levy or other tax on the gross rents received with respect to the Building, the Lot, or the Complex or all of them, or a federal, state, county, municipal, or other local income, franchise, excise or similar tax, assessment, levy or charge (distinct from any now in effect) measured by or based, in whole or in part, upon gross rents, then any and all of such taxes, assessments, levies or charges, to the extent so measured or based ("Substitute Taxes"), Tenant's Proportionate Fraction for Building and Tenant's Proportionate Fraction for Complex, respectively, of Substitute Taxes shall be payable by Tenant; provided, however, that (i) Tenant's obligation with respect to the aforesaid Substitute Taxes shall be limited to the amount thereof as computed at the rates that would be payable if the Building and Lot and buildings not available for lease (and the parcel(s) of land on which the same may be located) were the only property of Landlord, and (ii) only that portion of the Substitute Taxes in excess of the Excluded Taxes shall be payable by Tenant. Landlord shall furnish to Tenant a copy of any notice of any public, special or betterment assessment received by Landlord concerning the Building and Lot. 4.2.2 INSURANCE. 4.2.2.1 INSURANCE TAKEN OUT BY TENANT. Tenant shall take out and maintain throughout the Term of this Lease the following insurance: (a) Comprehensive general liability insurance indemnifying Landlord and Tenant against all claims and demands for (i) injury to or death of any person or damage to or loss of property, on the Premises, in the Building or on the Lot or adjoining walks, streets or ways, or connected with the use, condition or occupancy of any thereof unless caused by the negligence of Landlord or its servants or agents, (ii) violation of this Lease, or (iii) any act, fault or omission, or other misconduct of Tenant or its agents, contractors, licensees, sublessees or invitees, in amounts which shall, at the beginning of the Term, be at least equal to the limits set forth in Section 1.1, and, from time to time during the Term, shall be for such higher limits, if any, as are customarily carried in the area in which the Premises, Building and Lot are located for property similar to the Premises, Building and Lot and used for similar purposes, PROVIDED, HOWEVER, Landlord shall not require an increase in such limits more frequently than once every -37- three years, and in no event shall such limits exceed the limits required for buildings in Cambridge similar to the Building, and shall be written on the "Occurrence Basis"; and (b) Worker's compensation insurance with statutory limits covering all of the Tenant's employees working on the Premises. All insurance required to be carried by Tenant pursuant to this Lease may be provided under one or more "blanket" insurance policies covering other locations and facilities operated by Tenant or any Affiliate of Tenant, provided that such blanket policies otherwise comply with the provisions of this Section. In addition, Tenant may satisfy the $10,000,000 per occurrence liability insurance coverage, as the same may be increased pursuant to Section 4.2.2.1(a) hereof, with excess liability (so-called "umbrella") coverage, so long as Tenant maintains primary liability coverage of not less than $5,000,000, as the same may be increased pursuant to Section 4.2.2.1(a) hereof. (c) Landlord acknowledges that Tenant shall have the right, at its sole election, and at Tenant's sole expense, independently to obtain all risk fire and casualty and boiler/sprinkler damage insurance similar to that described in Sections 4.2.2.2(b) and (c) below for the purpose of providing Tenant with insurance proceeds to fund any Tenant's Restoration Fund described in Section 6.1(h) below. However, Tenant shall not be obligated to file any claim or use any proceeds from such insurance for the benefit of Landlord. 4.2.2.2 INSURANCE TAKEN OUT BY LANDLORD. Landlord shall take out and maintain throughout the Term of this Lease the following insurance: (a) Comprehensive general liability insurance for the Building, the Lot and the Complex of the same nature and type as described in Section 4.2.2.1(a) of this Lease, and with the same policy limits or such higher policy limits as Landlord may reasonably determine; and (b) All risk, fire and casualty insurance on a one hundred percent (100%) replacement cost basis, together with rental loss coverage and, if the Building is located in a flood zone, flood coverage to the extent the same is available, insuring the Building and its rental value, and Complex Common Areas; and (c) Insurance against loss or damage from sprinklers and from leakage or explosions or cracking of boilers, pipes carrying steam or water, or both, pressure vessels or similar apparatus, in the so-called "broad form", in such amounts as are customary and commercially reasonable for buildings in the Cambridge, Massachusetts area which are of like kind and quality to the Building and have office uses, and insurance against such other hazards and in such amounts as may from time to time be required by any bank, insurance company or other lending institution holding a first mortgage on the Building, the Lot or the Complex. Landlord shall have no obligation to insure Tenant's personal property or chattels, including without limitation, Tenant's trade fixtures. -38- 4.2.2.3 TENANT REIMBURSEMENT OF INSURANCE TAKEN OUT BY LANDLORD. Tenant shall from time to time reimburse Landlord within thirty (30) days of Landlord's invoice for Tenant's Proportionate Fraction for Building and Tenant's Proportionate Fraction for Complex of Landlord's costs incurred in providing the insurance provided pursuant to Section 4.2.2.2 of this Lease, equitably prorated in the case of blanket policies to reflect the insurance coverage reasonably attributable to the Premises, the Building, the Lot, other buildings in the Complex, and Complex Common Areas, and provided further that Tenant shall reimburse Landlord for all of Landlord's costs incurred in providing such insurance which is attributable to any special endorsement or increase in premium resulting from the business or operations of Tenant, and any special or extraordinary risks or hazards resulting therefrom. At Landlord's option, Tenant shall reimburse Landlord for insurance costs in accordance with Section 4.2.5 hereof. 4.2.2.4 CERTAIN REQUIREMENTS APPLICABLE TO INSURANCE POLICIES. Policies for insurance provided for under the provisions of Sections 4.2.2.2(b) and 4.2.2.2(c) shall, in case of loss, be first payable to the holders of any mortgages on the Building, the Lot or the Complex under a standard mortgagee's clause, and shall be deposited with the holder of any mortgage or with Landlord, as Landlord may elect. All policies for insurance required to be obtained by either party under the provisions of Section 4.2.2 shall be obtained from responsible companies qualified to do business in the Commonwealth of Massachusetts and in good standing therein, which companies and the amount of insurance allocated thereto shall be subject to Landlord's approval. Each party agrees to furnish the other with certificates of all such insurance which such party is obligated to obtain pursuant to Section 4.2.2 prior to the beginning of the Term hereof and with renewal certificates at least thirty (30) days prior to the expiration of the policy they renew. In addition, Tenant agrees to furnish Landlord with any policies of insurance which Tenant is obligated to obtain hereunder, including any renewal policies, upon request of any of Landlord's mortgagees (provided that Tenant may redact from such policies any Confidential Information, as defined in Section 10.15 hereof). Each such policy required to be maintained by Tenant shall name Landlord and Landlord's Managing Agent (and such mortgagees of Landlord and members or shareholders of Landlord if such mortgagees, members and/or shareholders may be named as additional insureds without additional premium charges to Tenant or, if additional premium charges are required, if Landlord reimburses Tenant for such additional premium charges) as additional insureds and shall be noncancellable with respect to the interest of Landlord, Landlord's Managing Agent and such additional insureds without at least thirty (30) days' prior written notice thereto. 4.2.2.5 WAIVER OF SUBROGATION. All insurance which is carried by either party with respect to the Premises, the Building, the Lot or the Complex or with respect to furniture, furnishings, fixtures or equipment therein or alterations or improvements thereto, whether or not required, shall include provisions which either designate the other party as one of the insured or deny to the insurer acquisition by subrogation of rights of recovery against the other party to the extent such rights have been waived by the insured party prior to occurrence of loss or injury, insofar as, and to the extent that such provisions may be effective without making it impossible to obtain insurance coverage -39- from responsible companies qualified to do business in the state in which the Premises are located (even though extra premium may result therefrom) and without voiding the insurance coverage in force between the insurer and the insured party. In the event that extra premium is payable by either party as a result of this provision, the other party shall reimburse the party paying such premium the amount of such extra premium. If at the request of one party, this non-subrogation provision is waived, then the obligation of reimbursement shall cease for such period of time as such waiver shall be effective, but nothing contained in this Section 4.2.2.5 shall derogate from or otherwise affect releases elsewhere herein contained of either party for claims. Each party hereby waives all rights of recovery against the other for loss or injury against which the waiving party is protected by insurance containing said provisions, reserving, however, any rights with respect to any excess of loss or injury over the amount recovered from such insurance. Tenant shall not acquire as insured under any insurance carried by Landlord on the Premises, the Building, the Lot or the Complex under the provisions of this Section 4.2.2 any right to participate in the adjustment of loss or to receive insurance proceeds and agrees upon request promptly to endorse and deliver to Landlord any checks or other instruments in payment of loss in which Tenant is named as payee. 4.2.3 UTILITIES FOR PREMISES. Landlord and Tenant agree that the Design Documents shall include separate metering or submetering of all or certain Utility Services (as hereinafter defined) for the Premises and the Expansion Spaces. Accordingly, to the extent such Utility Services are separately metered or submetered, Tenant shall pay directly to the proper authorities charged with the collection thereof all charges for water, sewer, gas, electricity, telephone and other utilities or services (singularly, "Utility Service" and collectively, "Utility Services") used or consumed on the Premises, whether called charge, tax, assessment, fee or otherwise, including, without limitation, water and sewer use charges and taxes, if any, all such charges to be paid as the same from time to time become due. Landlord shall be under no obligation to furnish any utilities to the Premises except as may be shown on the Final Design Documents and Landlord shall not be liable for any interruption or failure in the supply of any such Utility Services to the Premises; provided, however, that in the event such loss or failure is due to Landlord's negligence or willful misconduct, Landlord shall be responsible for restoring the supply of such Utility Services to the Premises but otherwise shall have no liability to Tenant. To the extent permitted by law, Landlord shall have the right at any time and from time to time during the Term to contract for or purchase one or more Utility Services from any company or third party, including without limitation, electricity, steam, chilled water and natural gas (collectively "Utilities") providing Utilities (the "Utility Service Provider" or "Utility Service Providers"), which contracts or purchases, in Landlord's reasonable opinion, are likely to result in a reduction in costs for Utility Services to the occupants of the Building or of the Complex taken as a whole. Tenant, at no cost to Tenant, agrees to reasonably cooperate with Landlord and the Utility Service Providers and at all times and, as reasonably necessary, and on reasonable advance notice, shall allow Landlord and the Utility Service Providers reasonable access to any utility lines, equipment, feeders, risers, fixtures, wiring and any other such machinery or personal property within the Premises and associated with the delivery of Utility Services. Tenant may, but shall not be required to, purchase Utilities from respective Utility Service Providers. -40- 4.2.4 COMMON AREA MAINTENANCE AND EXPENSES. Landlord shall maintain the interior and exterior common areas and facilities of the Building and the Lot (collectively, "Building Common Areas") and interior and exterior common areas and facilities of the Complex (collectively, "Complex Common Areas") in the same quality and condition as other comparable first class office buildings in Cambridge, including without limitation, keeping the Building Common Areas and the Complex Common Areas clean and free of debris, keeping the sidewalks, driveways and parking areas reasonably clear of snow and ice, maintaining the exterior landscaping, lighting, parking areas and sidewalks of the Lot and Complex, maintaining passenger elevator service, providing Utility Services to the Premises (if any of such Utility Services are not separately metered or submetered), Building Common Areas and Complex Common Areas, including hot water for lavatory purposes and cold water (at temperatures supplied by the provider thereof) for drinking, lavatory and toilet purposes, providing cleaning and janitorial services to the Premises on Monday through Friday, excluding holidays, provided the same are kept in order by Tenant in accordance with cleaning standards from time to time agreed upon by Landlord and Tenant, and providing security services for the Building, Lot and Complex to a standard comparable to security services provided at other first class office buildings in Cambridge. Landlord's obligations with respect to the foregoing shall be subject to Tenant's right to self-manage the Building as set forth in Section 10.11(h) hereof. Tenant shall maintain the interior of the Premises, including the mechanical, electrical and plumbing systems of the Premises in good order, repair and condition (provided that if Tenant shall fail to effect such repairs or maintenance or Tenant shall elect to have Landlord perform such repairs or maintenance, Landlord may or shall, as applicable, effect such repairs or maintenance and charge the entire cost thereof to Tenant as Additional Rent). Notwithstanding the foregoing, it is expressly understood and agreed that Landlord shall have no liability or responsibility for the storage, containment or disposal of any hazardous or medical waste generated, stored or contained by Tenant, Tenant hereby agreeing to store, contain and dispose of any and all such hazardous or medical waste at Tenant's sole cost and expense in accordance with the provisions of Article V hereof. Tenant shall pay to Landlord as Additional Rent the Annual Maintenance Charge computed and payable as follows: (1) The Annual Maintenance Charge shall be equal to the sum of the "Annual Building Maintenance and Operation Charge", the "Annual Complex Maintenance and Operation Charge" and the "Nonstandard Charge" as hereinafter defined. (a) The "Annual Building Maintenance and Operation Charge" shall be equal to Tenant's Proportionate Fraction for Building on account of all costs incurred by Landlord during the then current fiscal year in operating the Building and Lot and providing maintenance, including without limitation maintenance, operation and repair of the Lot and the Building and all heating, plumbing, electrical, air conditioning and mechanical fixtures and equipment serving Building Common Areas, Utility Services for Building Common Areas, maintenance of Lot and Building signage, elevators, landscaping, snow removal, trash dumpster rental, trash removal, management fees (which management fees shall have a -41- commercially reasonably relationship to the scope of services to be provided by such manager and which may be based upon a percentage of rent payable by tenants of the Building), amortization of equipment to the extent used for Building or Lot operation and maintenance, and all costs incurred by Landlord in order for Landlord to comply with the Development Approvals and Subsequent Approvals and which are recurring or properly categorized as operating or maintenance costs ("Impositions") and equitably attributable or allocated to the Building or Lot. (b) The "Annual Complex Maintenance and Operation Charge" shall be equal to Tenant's Proportionate Fraction for Complex on account of all costs incurred by Landlord during the then current fiscal year in operating the Complex Common Areas and providing Complex Common Areas maintenance, including without limitation, maintenance, operation and repair of all heating, plumbing, electrical, air conditioning and mechanical fixtures and equipment serving Complex Common Areas, Utility Services for Complex Common Areas, maintenance of Complex Common Area signage, elevators, landscaping, snow removal, trash dumpster rental, trash removal, management fees (which management fee shall have a commercially reasonable relationship to the scope of services to be provided by such manager and which may be based upon a percentage of rent payable by tenants of the Complex), amortization of equipment to the extent used for Complex Common Areas operation and maintenance and all Impositions equitably attributable to or allocated to the Complex. (c) Anything herein to the contrary notwithstanding, the Annual Maintenance Charge shall not include (1) leasing and sales commissions for the Building or any portion thereof or any other building in the Complex, (2) fees paid in connection with any tenant improvement costs for the Building or any other building in the Complex, (3) such other fees and commissions paid in connection with the leasing, re-leasing, extension or renewal of leases for the Building or any other building in the Complex, (4) costs incurred with respect to the operation and maintenance of any other building in the Complex which is leased or available for lease, any rentable space therein or any common areas or facilities in such buildings (except to the extent that Landlord maintains a management office therein or in the Building, in which event Tenant shall pay Tenant's Proportionate Fraction for Complex of the fair market rental value thereof as equitably determined by Landlord), (5) any cost or expense attributable to the underground garage(s) within the Complex, (6) costs and expenses which are properly attributable to a particular building (other than the Building) or a particular tenant thereof, (7) third party management fees for the Building and Complex included in the Annual Maintenance Charge to the extent such fees exceed market rate fees, (8) any management or supervisory fee of Landlord if a third party is managing the Building or Complex (but if Landlord is self-managing the Building or Complex, -42- Landlord shall be entitled to reimbursement of its reasonable costs for managing the Building and Complex provided that in no event may Landlord's costs and fees for self-managing the Building or Complex exceed the costs and fees that a market-rate third party management company would charge for providing comparable services), (9) in the event that any capital repair, improvement or replacement to the Building Common Areas or the Complex Common Areas made by Landlord has a useful life of over one year (as determined in accordance with generally accepted accounting practices consistently applied), then only the amortized cost of such repair, improvement or replacement over said useful life shall be included in the Annual Building Maintenance and Operation Charge or Annual Complex Maintenance and Operation Charge, as applicable, provided that replacement of a capital item shall be of substantially the same quality and/or usefulness as the capital item being replaced or shall be expected to reduce the Annual Maintenance Charge or otherwise provide some other economic benefit to the operation of the Premises, Building, Lot or Complex, as applicable, such as conserving energy or environmental resources, or if such capital item is required by any law enacted after the date hereof, (10) wages, salaries, or other compensation or benefits paid to any persons above the grade of Building manager and Complex manager (or equivalent position), (11) debt service, (12) capital expenditures (except to the extent expressly permitted under this Section), (13) depreciation and amortization (except to the extent expressly permitted under this Section), (14) legal and accounting fees relating to (A) disputes with occupants of the Building or Complex, or (B) disputes with purchasers, prospective purchasers, mortgages or prospective mortgagees, (15) any rent under any ground or underlying lease, (16) any fines or penalties incurred due to violations of law by Landlord or any tenant or other occupant of the Building or Complex, (17) any amount incurred to any entity affiliated with Landlord to the extent the same exceeds the amount which would have been incurred on an arm's length basis in the absence of such affiliation, (18) any interest, fines or penalties incurred or resulting from late payment by Landlord of any operating expense, (19) costs incurred in connection with the Environmental Remediation, (20) any amounts incurred for repairs or other work occasioned by fire, windstorm or other casualty to the extent Landlord is reimbursed by insurance or would have been reimbursed by insurance had Landlord maintained the insurance it is required to maintain under this Lease, (21) costs incurred in connection with the permitting, financing or construction of the Building and Complex, and (22) any so-called asset management fees. (d) Notwithstanding anything herein to the contrary, if Landlord furnishes or makes available any service, utility or facility to less than all of the tenants of the Building or Complex, as applicable, Landlord shall allocate all costs incurred by Landlord on account of such services, utilities or facilities to the tenants of the Building or Complex, as -43- applicable, to whom or to which such services, utilities or facilities are furnished or made available (all such costs being herein referred to as the "Nonstandard Costs"). The "Nonstandard Charge" shall be equal to Tenant's share of Nonstandard Costs equitably allocated to Tenant by Landlord. By way of example, if Landlord furnishes trash services and/or cleaning services to office tenants of the Building, but not to retail tenants, Landlord shall allocate the cost thereof to office tenants and Tenant shall pay Tenant's share thereof as equitably allocated by Landlord. In no event shall any cost incurred by Landlord and payable by Tenant for insurance, Utility Services for the Premises which are separately metered or submetered, and taxes and assessments be included in the Annual Maintenance Charge payable by Tenant. Attached hereto as Exhibit B-2 is a list of the Annual Maintenance Charge categories for the Building Common Areas and the Complex Common Areas, insurance, Mitigation Expenses and taxes and assessments. Landlord shall not make any change in the categories set forth thereon without obtaining Tenant's prior consent thereto, which consent shall not be unreasonably withheld, delayed or conditioned. Tenant, however, shall have no right to approve the amount of any costs which may be incurred by Landlord with respect to such categories, except to the extent set forth in Section 10.11(h) hereof. At the beginning of every fiscal year, Landlord shall deliver to Tenant its reasonable estimate of the Annual Maintenance Charge (the "Estimated Annual Maintenance Charge") for the said fiscal year, which estimate may include a reasonable contingency of up to five percent (5%), and Tenant shall make payments on account of the Annual Maintenance Charge monthly in advance on the first day of each calendar month during the Term in the amount of one-twelfth of the Estimated Annual Maintenance Charge. Landlord reserves the right to reasonably re-estimate and modify the Estimated Annual Maintenance Charge by notice to Tenant once annually in each Lease Year (the "Additional Rent Adjustment Date"), and Tenant's payments shall thereupon be adjusted accordingly. Not later than ninety (90) days after the end of each fiscal year during the Term and after Lease termination, Landlord shall render a statement ("Landlord's Statement"), in reasonable detail and according to usual accounting practices, certified by Landlord and showing for the preceding fiscal year or fraction thereof, as the case may be, the actual Annual Maintenance Charge for the said fiscal year or fraction thereof, and thereupon any balance owed by Tenant shall be paid to Landlord within twenty (20) days after Tenant receives written notice thereof, and any excess paid by Tenant under this Section shall be paid to Landlord, or credited to Tenant, on the next rent payment date. Tenant shall have the right for a period of one (1) year following its receipt of Landlord's Statement to examine Landlord's books and records concerning the Annual Maintenance Charge. Such examination may be made only by an independent certified public accounting firm approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. Landlord may withhold its approval of any examiner of Tenant who or which is being paid by Tenant, in whole or in part, on a contingent fee basis. As a condition to performing any such examination, Tenant and its examiner shall be required to execute and deliver to Landlord an agreement, in form acceptable to Landlord, agreeing to keep confidential any information which it discovers about Landlord, the Building or the Complex in connection with such examination. If the Annual Maintenance Charge due was less than the Annual Maintenance Charge paid by Tenant, Landlord shall either promptly refund to Tenant the difference or credit same against rent next due from Tenant. -44- If the Annual Maintenance Charge due was less than ninety-five percent (95%) of the Annual Maintenance Charge paid by Tenant, Landlord shall reimburse Tenant for the reasonable third-party costs of reviewing Landlord's books and records. For purposes of this Lease, the first "fiscal year" shall be the annual period commencing on the Commencement Date and ending on December 31 of the year in which the Commencement Date occurs; subsequently, the term "fiscal year, shall mean each consecutive annual period thereafter, commencing on the day following the end of the preceding fiscal year. Landlord shall have the right from time to time to change the periods of accounting under this Section 4.2.4 to any annual period other than a fiscal year, and upon any such change all items referred to in this Section shall be appropriately apportioned, provided that any such change in the fiscal year shall not result in any inequitable shifting of, or increase in, amounts payable to Landlord by Tenant. In all Landlord's Statements rendered under this Section, amounts for periods partially within and partially without the accounting periods shall be appropriately apportioned, and any items which are not determinable at the time of a Landlord's Statement shall be included therein on the basis of Landlord's estimate, and with respect thereto Landlord shall render promptly after determination a supplemental Landlord's Statement, and appropriate adjustment shall be made according thereto. All of Landlord's Statements shall be prepared on an accrual basis of accounting. Notwithstanding any other provision of this Section 4.2.4, if the Term expires or is terminated as of a date other than the last day of a fiscal year, then for such fraction of a fiscal year at the end of the Term, Tenant's last payment to Landlord under this Section 4.2.4 shall be made on the basis of Landlord's best estimate of the items otherwise includable in Landlord's Statement and shall be made on or before twenty (20) days after Landlord delivers such estimate to Tenant. Landlord shall thereafter prepare a Landlord's Statement showing the actual Annual Maintenance Charge for such fiscal year, as hereinabove provided, and an appropriate payment or refund shall thereafter promptly be made upon submission of such Landlord's Statement to Tenant. 4.2.5 PAYMENTS ON ACCOUNT OF TAXES, INSURANCE AND UTILITIES. Tenant shall make payments on account of the Annual Tax, Insurance and Utility Charge (as hereinafter defined) monthly in advance on the first day of each calendar month during the Term, which payments shall initially be in the amount of the sum of the Initial Tax Charge, the Initial Insurance Charge and the Initial Utility Charge (the "Estimated Initial Tax, Insurance and Utility Charges"). At the beginning of every fiscal year, Landlord shall deliver to Tenant its reasonable estimate of the Annual Tax, Insurance and Utility Charge ("the Estimated Annual Tax, Insurance and Utility Charge") for said fiscal year, and, in lieu of payments of one twelfth of the Estimated Initial Tax, Insurance and Utility Charge, Tenant shall make payments on account of the Annual Tax, Insurance and Utility Charge monthly in advance on the first day of each calendar month during the Term in the amount of one-twelfth of the Estimated Annual Tax, Insurance and Utility Charge. Landlord reserves the right to reasonably re-estimate and modify the Estimated Annual Tax, Insurance and Utility Charge by notice to Tenant once annually on the Additional Rent Adjustment Date (as defined in Section 4.2.4 hereof), and Tenant's payments shall thereupon be adjusted accordingly. -45- Not later than ninety (90) days after the end of each fiscal year during the Term and after Lease termination, Landlord shall render a statement in reasonable detail and according to usual accounting practices certified by Landlord and showing for the preceding fiscal year or fraction thereof, as the case may be, the actual Annual Tax, Insurance and Utility Charge for the said fiscal year or fraction thereof, and thereupon any balance owed by Tenant or excess paid by Tenant under this Section shall be paid to Landlord, or credited to Tenant, as the case may be, within twenty (20) days thereafter. As used herein, the term "Annual Tax, Insurance and Utility Charge" shall mean and refer to the amount of funds paid by Tenant pursuant to Section 4.2.1, 4.2.2 and 4.2.3 for the fiscal year in question for costs actually incurred by Landlord (without any mark-up for Landlord's overhead or profit). All payments under this Section shall to the extent thereof relieve Tenant of its obligations under said Sections 4.2.1, 4.2.2 and 4.2.3 hereof. Landlord shall have the right from time to time to change the periods of accounting under this Section 4.2.5 to any annual period other than a fiscal year (but not more frequently than once every three years), and upon any such change all items referred to in this Section shall be appropriately apportioned, provided that any such change in accounting periods shall not result in any inequitable shifting of, or increase in, amounts payable to Landlord by Tenant. In all Landlord's annual statements rendered under this Section, amounts for periods partially within and partially without the accounting periods shall be appropriately apportioned, and any items which are not determinable at the time of such a statement shall be included therein on the basis of Landlord's estimate, and with respect thereto Landlord shall render promptly after determination a supplemental statement, and an appropriate adjustment shall be made according thereto. All of landlord's statements under this Section shall be prepared on an accrual basis of accounting. Notwithstanding any other provision of this Section 4.2.5, if the Term expires or is terminated as of a date other than the last day of a fiscal year, then for such fraction of a fiscal year at the end of the Term, Tenant's last payment to Landlord under this Section 4.2.5 shall be made on the basis of Landlord's best estimate of the items otherwise includable in the annual statement rendered by Landlord under this Section and shall be made on or before the later of (a) twenty (20) days after Landlord delivers such estimate to Tenant or (b) the last day of the Term, with an appropriate payment or refund to be made upon submission of Landlord's statement. 4.3 LATE PAYMENT OF RENT. If any installment of rent is paid after the date the same was due (or if such due date is not a business day, on the first business day after such due date), at Landlord's election it shall bear interest from the due date (or if such due date is not a business day, from the first business day after such due date) at the higher of (a)(i) the annual rate of interest payable by Landlord to its mortgagee(s) or (ii) the prime commercial rate of Fleet National Bank or its successor(s), as it may be adjusted from time to time, plus (b) four percent (4%) per annum, but in no event more than the highest rate of interest allowed by applicable law. Any amounts due under this Section 4.3 shall be Additional Rent. -46- ARTICLE V TENANT'S ADDITIONAL COVENANTS 5.1 AFFIRMATIVE COVENANTS. Tenant covenants at its expense at all times during the Term and for such further time as Tenant occupies the Premises or any part thereof: 5.1.1 PERFORM OBLIGATIONS. To perform promptly all of the obligations of Tenant set forth in this Lease; and to pay when due the Fixed Rent and Additional Rent and all charges, rates and other sums which by the terms of this Lease are to be paid by Tenant. 5.1.2 OCCUPANCY AND USE. Except for (i) the period of time permitted by this Lease for Tenant to perform Tenant's Work to prepare the Premises for Tenant's initial occupancy as set forth in Section 3.2.1 and (ii) a period of six (6) months at the end of the Term, and (iii) temporary vacancies of not more than forty percent (40%) of the Premises at any one time, continuously from the Commencement Date, to use and occupy the Premises only for the Permitted Uses, and from time to time, to procure all licenses and permits necessary therefor at Tenant's sole expense, and to the extent set forth in Section 10.21 hereof, with Landlord's cooperation. Without limitation, Tenant shall comply in all material respects with all federal, state, and municipal laws, ordinances, and regulations governing, and all Development Approvals, Subsequent Approvals and Title Exceptions applicable to, Tenant's particular use or manner of use of the Premises. Tenant shall be solely responsible for procuring and complying at all times with any and all necessary permits directly relating or incident to: the conduct of its office activities on the Premises; its, transportation, storage, handling, use and disposal of any chemical or radioactive or bacteriological or pathological substances or organisms or other hazardous wastes or environmentally dangerous substances or materials or medical waste. Within thirty (30) days of a request by Landlord, which request shall be made not more than once during each period of twelve (12) consecutive months during the Term hereof, unless otherwise requested by any mortgagee of Landlord, Tenant shall furnish Landlord with copies of all such permits which Tenant possesses or has obtained together with a certificate certifying that such permits are all of the permits which Tenant possesses or has obtained with respect to the Premises. Tenant shall be entitled to redact any Confidential Information from the copies of such permits and accompanying certificates of Tenant. Tenant shall promptly give notice to Landlord of any warnings or violations relative to the matters described in this Section 5.1.2 received from any federal, state, or municipal agency or by any court of law and shall promptly cure the conditions causing any such violations. Tenant shall not be deemed to be in default of its obligations under the preceding sentence to promptly cure any condition causing any such violation in the event that, in lieu of such cure, Tenant shall contest the validity of such violation by appellate or other proceedings permitted under applicable law, provided that: (i) any such contest is made reasonably and in good faith, (ii) Tenant makes provisions, including, without limitation, posting bond(s) or giving other security, acceptable to Landlord to protect Landlord, the Building, the -47- Lot and the Complex from any liability, costs, damages or expenses arising in connection with such violation and failure to cure, (iii) Tenant shall agree to indemnify, defend (with counsel reasonably acceptable to Landlord) and hold Landlord harmless from and against any and all liability, costs, damages, or expenses arising in connection with such condition and/or violation, (iv) Tenant shall promptly cure any violation in the event that its appeal of such violation is overruled or rejected, and (v) Tenant shall certify to Landlord's satisfaction that Tenant's decision to delay such cure shall not result in any actual or threatened bodily injury or property damage to Landlord, any tenant or occupant of the Building, the Lot or the Complex, or any other person or entity. Landlord agrees that any Confidential Information gained or obtained by Landlord pursuant to this Section 5.1.2 shall be kept confidential in accordance with Section 10.15 hereof. 5.1.3 REPAIR AND MAINTENANCE. Except as otherwise provided in Article VI, to keep the Premises including, without limitation, all fixtures and equipment now or hereafter on the Premises, or exclusively serving the Premises, but excluding the exterior (exclusive of glass and doors) and structural elements of the Building and the grounds of the Lot, which Landlord shall maintain and repair unless such repairs are required because of Tenant's willful misconduct or negligence, in good order, condition and repair and at least as good order, condition and repair as they are in on the Commencement Date or may be put in during the Term, reasonable use and wear, damages by fire or other insurable casualty or eminent domain, and any damage directly caused by failure of Landlord to perform any of its obligations only excepted; to keep in a safe, secure and sanitary condition all trash and rubbish temporarily stored at the Premises; and to make all repairs and replacements and to do all other work necessary for the foregoing purposes whether the same may be ordinary or extraordinary, foreseen or unforeseen. Unless otherwise agreed to by Landlord and Tenant, Tenant shall be responsible for Utility Services systems serving the Premises to the extent that such systems are not a part of Base Building Improvements, and Tenant shall secure, pay for and keep in force contracts with appropriate and reputable service companies providing for the regular maintenance of the heating, air conditioning and other utility systems exclusively serving the Premises to the extent that such systems are not a part of Base Building Improvements, and copies of such contracts shall be furnished to Landlord. It is further agreed that the exception of reasonable use and wear shall not apply so as to permit Tenant to keep the Premises in anything less than suitable, tenantlike, and efficient and usable condition considering the nature of the Premises and the use reasonably made thereof, or in less than good and tenantlike repair. 5.1.4 COMPLIANCE WITH LAW. To make all repairs, alterations, additions or replacements to the Premises required by any law or ordinance or any order or regulation of any public authority other than major capital repairs, alterations, additions or replacements to the foundations and structural elements of the Building which are the responsibility of Landlord pursuant to the terms of this Lease and unless required because of Tenant's failure to comply with the provisions of Section 5.1.3 hereof; to keep the Premises equipped with all safety appliances so required; to pay all municipal, county, or state taxes assessed against the leasehold interest hereunder, or against Tenant's personal property of any kind on or about the Premises; and to comply with the orders -48- and regulations of all governmental authorities with respect to zoning, building, fire, health and other codes, regulations, ordinances or laws applicable to the Premises. To the extent that applicable law requires Tenant to make any capital repair, alteration, addition or replacement to the Premises, Tenant may implement such capital repair, alteration, addition or replacement over the longest period provided by applicable law. Except for typical office operating and cleaning supplies which are stored, used and disposed of in compliance with all applicable laws, Tenant shall not use, generate, manufacture, produce, handle, store, release, discharge or dispose of in, on, under or about the Premises or transport to or from the Premises, or allow its employees, agents, contractors, invitees or any other person or entity to do so, any oil, hazardous or toxic materials or hazardous or toxic wastes or medical waste (collectively, "hazardous materials") except to the extent that the following conditions regarding the use, generation, manufacture, production, handling, storing, releasing, discharging, disposal or transport (individually or collectively, the "Use") of hazardous materials shall be satisfied: (i) the Use shall be directly related to the operation of Tenant's business as permitted herein, (ii) Tenant shall first provide Landlord with the list of the types and quantities of such proposed hazardous materials which Tenant is required to furnish to the applicable governmental authorities for purposes of compliance with the Resource Conservation and Recovery Act, as amended (42 U.S.C. ss. 9601, ET seq.) (the "RCRA List") (or, in the event that the RCRA List ceases to be required to be filed under such law, a list containing the same information required to be listed on the RCRA List as of the date hereof), and shall update such list as necessary for continuing accuracy, and such other information reasonably satisfactory to Landlord as Landlord may reasonably require concerning such Use, and (iii) such Use shall be in strict compliance (at Tenant's expense) with all applicable laws, regulations, licenses and permits. Landlord hereby covenants and agrees that the information contained in any list, or update thereof, referred to in the foregoing clause (ii) shall be kept confidential in accordance with Section 10.15 hereof. Notwithstanding the foregoing, Tenant hereby agrees to consult and coordinate with Landlord prior to transporting any hazardous materials to or from the Premises whenever (i) such transportation is not of the kind regularly made during the ordinary course of business by a person or entity operating a facility for the storage or disposal of such hazardous materials or (ii) Tenant has reason to believe that such transportation may result in a public demonstration, protest or other similar disturbance at the Building, the Lot or the Complex. If the use of any hazardous materials anywhere on the Premises in connection with the Tenant's use of the Premises results in (1) contamination of the soil, surface or ground water or (2) injury, loss or damage to person(s) or property, then Tenant agrees to respond in accordance with the following paragraph: Tenant agrees (i) to notify Landlord immediately of any contamination, claim of contamination, injury, loss or damage, (ii) after consultation and approval by Landlord, to clean up the contamination in full compliance with all applicable statutes, regulations and standards, and (iii) to indemnify, defend (with counsel acceptable to Landlord) and hold Landlord harmless from and against any claims, suits, causes of action, costs and fees, including attorneys' fees, arising from or connected with any such contamination, claim of contamination, injury, loss or damage. No consent or approval of Landlord shall in any way be construed as imposing upon Landlord any liability for the means, methods, or manner -49- of removal, containment or other compliance with applicable law for and with respect to the foregoing. Tenant shall promptly notify Landlord upon Tenant's receipt of any inquiry, notice, or threat to give notice by any government authority or any other third party with respect to any hazardous materials. Notwithstanding the foregoing, Tenant shall not be liable to Landlord hereunder for any contamination, claim of contamination, injury, loss or damage arising in connection with hazardous materials to the extent the same is the result of (A) hazardous materials existing in the Building or on or under the Lot or Complex prior to the date hereof, (B) migration of hazardous materials from any site onto or under the Lot or Complex not caused by Tenant, (C) the use of any hazardous materials at the Building, the Lot or Complex by Landlord, any other tenant or occupant, or any so-called "midnight dumpers" or (D) the Use by any party other than Tenant of hazardous materials at the Building, the Lot or Complex after the date upon which Tenant has completely vacated the same, including removal of all of its property (to the extent permitted herein) and hazardous materials. Tenant's indemnification obligations under this Section shall survive the expiration or earlier termination of this Lease. Nothing herein contained shall be construed to limit or impair Tenant's obligation to comply with any law, code, rule or regulation which requires Tenant to notify any governmental authority or any other person concerning the Use of hazardous materials by Tenant at the Premises. 5.1.5 TENANT'S WORK. To procure at Tenant's sole expense all necessary permits and licenses (but subject to Section 10.21 hereof) before Tenant undertakes any work on the Premises; to do all such work in compliance with the applicable provisions of Sections 3.2.1, 3.3 and 5.2.3 hereof; to do all such work in a good and workmanlike manner employing new materials of good quality and so as to conform with all applicable zoning, environmental, building, fire, health and other codes, regulations, ordinances and laws and the ADA Requirements; to keep the Premises at all times free of liens for labor and materials; to employ for such work one or more responsible contractors whose labor will work without interference with other labor working on the Premises, in the Building, on the Lot or in the Complex; to require such contractors employed by Tenant to carry worker's compensation insurance in accordance with statutory requirements and comprehensive public liability insurance covering any general contractors on or about the Premises in amounts that at least equal the limits agreed to by Landlord for an Approved Contractor and to submit certificates evidencing such coverage to Landlord prior to the commencement of such work; and to save Landlord harmless and indemnified from all injury, loss, claims or damage to any person or property occasioned by or growing out of such work. 5.1.6 INDEMNITY. To defend, with counsel reasonably approved by Landlord, all actions against Landlord, any officer, director, member, manager or stockholder of Landlord, or a partner, trustee, stockholder, officer, director, employee, agent or beneficiary of any member of Landlord, holders of mortgages secured by the Premises, the Building or Lot and any other party having an interest in the Premises ("Indemnified Parties") with respect to, and to pay, protect, indemnify -50- and save harmless, to the extent permitted by law, all Indemnified Parties from and against, any and all liabilities, losses, damages, costs, (including reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising from (i) injury to or death of any person, or damage to or loss of property, on the Premises, the Lot or Complex or on adjoining streets or ways connected with the use or occupancy thereof by Tenant or its agents, contractors, licensees, employees, sublessees or invitees, unless and to the extent caused by the negligence of Landlord or its servants or agents, (ii) violation of this Lease by Tenant or its agents, contractors, licensees, employees, sublessees or invitees, or (iii) any act, fault, omission, or other misconduct of Tenant or its agents, contractors, licensees, employees, sublessees or invitees. 5.1.7 LANDLORD'S RIGHT TO ENTER. To permit Landlord and its agents to enter into the Premises at reasonable times and upon at least twenty-four (24) hours advance notice (except in case of emergency in which event no prior notice shall be required) to examine the Premises, make such repairs and replacements as Landlord may be authorized or required to perform pursuant to this Lease, and show the Premises to prospective purchasers and lenders, and, during the last eighteen (18) months of the Term, to show the Premises to prospective tenants and to keep affixed in suitable places notices of availability of the Premises. Landlord's right to enter the Premises in accordance with the foregoing shall be subject to Landlord's obligations pursuant to Section 10.15 hereof. Notwithstanding the foregoing, Landlord agrees that in the event that Landlord shows the Premises to any prospective purchaser or tenant, Landlord shall: (i) provide at least three (3) days' notice to Tenant identifying the prospective purchaser or tenant, (ii) only show the Premises to such purchaser or tenant if Landlord believes in good faith that such person or entity is a bona fide prospective purchaser or tenant, and (iii) conduct such showing in compliance with such reasonable requests and instructions as Tenant may make for purposes of protecting Tenant's Confidential Information. 5.1.8 PERSONAL PROPERTY AT TENANT'S RISK. All of the furnishings, fixtures, equipment, effects and property of every kind, nature and description owned or leased by Tenant or by any person claiming by, through or under Tenant which, during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may be on the Premises (collectively, "Tenant's Property"), shall, as between the parties, be at the sole risk and hazard of Tenant and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, by theft or from any other cause, no part of said loss or damage is to be charged to or to be borne by Landlord, except that Landlord shall in no event be indemnified or held harmless or exonerated from any liability to Tenant or to any other person, for any injury, loss, damage or liability to the extent (i) such injury, loss, damage or liability is the result of the negligence or willful misconduct of Landlord, its contractors, agents or employees, or (ii) such indemnification, agreement to hold harmless or exoneration is prohibited by law. -51- 5.1.9 PAYMENT OF LANDLORD'S COST OF ENFORCEMENT. To pay on demand Landlord's expenses, including reasonable attorney's fees, incurred in enforcing any obligation of Tenant under this Lease or in curing any default by Tenant under this Lease as provided in Section 7.4. 5.1.10 YIELD UP. Subject to Section 3.2.1 hereof, at the expiration of the Term or earlier termination of this Lease: to surrender all keys to the Premises; to remove all of its trade fixtures and personal property in the Premises; to remove such installations and improvements made by Tenant as Landlord may request at the time of Landlord's approval of such installation (but excluding any Tenant's Work performed to prepare the Premises for Tenant's initial occupancy) and all Tenant's signs wherever located; to repair all damage caused by such removal; and to yield up the Premises (including all installations and improvements made by Tenant except for trade fixtures and such of said installations or improvements as Landlord shall request Tenant to remove), broom-clean and in the same good order and repair in which Tenant is obliged to keep and maintain the Premises by the provisions of this Lease, reasonable wear and tear, damage by fire or other insured casualty or eminent domain, and damage directly caused by failure of Landlord to perform any of its obligations only excepted. Subject to Section 3.2.1 hereof, any property not so removed shall be deemed abandoned and may be removed and disposed of by Landlord in such manner as Landlord shall determine and Tenant shall pay Landlord the entire cost and expense incurred by Landlord in effecting such removal and disposition and in making any incidental repairs and replacements to the Premises and for use and occupancy during the period after the expiration of the Term and prior to Tenant's performance of its obligations under this Section 5.1.10. Tenant shall further indemnify Landlord against all loss, cost and damage resulting from Tenant's failure and delay in surrendering the Premises as above provided. 5.1.11 ESTOPPEL CERTIFICATE. Upon not less than fifteen (15) days' prior notice by Landlord, to execute, acknowledge and deliver to Landlord, any prospective purchaser or mortgagee of the Premises, Building, Lot or Complex a statement in writing certifying that this Lease is unmodified and in full force and effect and that except as stated therein Tenant has no knowledge of any defenses, offsets or counterclaims against its obligations to pay the Fixed Rent and Additional Rent and any other charges and to perform its other covenants under this Lease (or, if there have been any modifications that the Lease is in full force and effect as modified and stating the modifications and, if there are any defenses, offsets or counterclaims, setting them forth in reasonable detail), the dates to which the Fixed Rent and Additional Rent and other charges have been paid and a statement that, to the best of Tenant's knowledge, Landlord is not in default hereunder (or if in default, the nature of such default, in reasonable detail) and such other matters reasonably required by Landlord or any prospective purchaser or mortgagee of the Premises, the Building, Lot or Complex. Any such statement delivered pursuant to this Section 5.1.11 may be relied upon by any such prospective purchaser or mortgagee of the Premises, or any prospective assignee of any such mortgage. -52- 5.1.12 LANDLORD'S EXPENSES RE: CONSENTS. To reimburse Landlord promptly on demand for all reasonable legal expenses incurred by Landlord in connection with all requests by Tenant for consent or approval under this Lease. Notwithstanding the foregoing, except for consents or approvals pursuant to Section 5.2.1 hereof, Tenant shall not be liable for any reasonable legal expenses incurred by Landlord for the first two (2) such requests made by Tenant during each period of twelve (12) consecutive calendar months during the Term. 5.1.13 RULES AND REGULATIONS. To comply with the Rules and Regulations set forth in Exhibit C, as the same may be amended from time to time by Landlord to provide for the beneficial operation of the Building, Lot and or the Complex, provided that such amendments do not materially interfere with Tenant's right of use and enjoyment of the Premises, the Lot or the Complex pursuant to this Lease. So long as Tenant and Tenant's Affiliates are occupying at least sixty percent (60%) of the r.s.f. in the Building or Tenant, Tenant's Affiliates or Tenant's subtenants are occupying all of the r.s.f. in the Building, in each case excluding the Retail Space, all such amendments shall be subject to Tenant's prior approval, which shall not be unreasonably withheld, conditioned or delayed. 5.1.14 LOADING. Not to place Tenant's Property, as defined in Section 5.1.8, upon the Premises so as to exceed the floor load limits to be set forth in the Design Documents and not to move any safe, vault or other heavy equipment in, about or out of the Premises except in such manner and at such times as Landlord shall in each instance approve; Tenant's business machines and mechanical equipment which cause vibration or noise that may be detectable outside of the Premises shall be placed or maintained by Tenant in settings of cork, rubber, spring, or other types of vibration or noise eliminators sufficient to reduce such vibration or noise to a level reasonably acceptable to Landlord. 5.1.15 HOLDOVER. To pay to Landlord (i) the greater of twice (a) the then fair market rent as reasonably determined by Landlord or (b) the total of the Fixed Rent, Additional Rent, and all other payments then payable hereunder, for each month or portion thereof Tenant shall retain possession of the Premises or any part thereof after the termination of this Lease, whether by lapse of time or otherwise, and (ii) all damages sustained by Landlord on account thereof; provided, however, that any payments made by Tenant under the foregoing clause (i) in excess of the then fair market rent for the Premises as so reasonably determined by Landlord shall be applied against any damages under the foregoing clause (ii). The provisions of this subsection shall not operate as a waiver by Landlord of the right of re-entry provided in this Lease. 5.2 NEGATIVE COVENANTS. Tenant covenants at all times during the Term and for such further time as Tenant occupies the Premises or any part thereof: -53- 5.2.1 ASSIGNMENT AND SUBLETTING. Not without the prior written consent of Landlord to assign this Lease, to make any sublease, or to permit occupancy of the Premises or any part thereof by anyone other than Tenant, voluntarily or by operation of law, except as hereinafter provided; as Additional Rent, to reimburse Landlord promptly for reasonable legal and other expenses incurred by Landlord in connection with any request by Tenant for consent to assignment or subletting; no assignment or subletting (including any assignment or sublease not requiring Landlord's consent) shall affect the continuing primary liability of Tenant (which, following assignment, shall be joint and several with the assignee); and no consent to any of the foregoing in a specific instance shall operate as a waiver in any subsequent instance. Landlord's consent to any proposed assignment or subletting is required both as to the terms and conditions thereof and as to the consistency of the proposed assignee's or subtenant's business with other uses and tenants in the Building and Complex. Tenant shall not assign this Lease or sublease any portion of the Premises to any other tenant in the Complex (unless such assignee or subtenant is an Affiliate of Tenant) if Landlord has or expects to have (within two years of the date of the proposed assignment or sublease) vacant space in the Complex for the Permitted Uses or if the proposed assignee or subtenant (other than an Affiliate of Tenant) has been shown space in the Complex within six months prior to the date of the proposed assignment or sublease. In addition, as to any assignee or subtenant of all or substantially all of the Premises, Landlord's consent shall be required as to the creditworthiness of the proposed assignee or subtenant in view of market conditions then prevailing for leases having terms and conditions comparable to this Lease and the obligations of such assignee or subtenant pursuant to this Lease. If Tenant requests Landlord's consent to (i) assign this Lease or sublet any portion of the Premises to any entity which is not an Affiliate of Tenant (as herein defined) for the remainder of the Term or substantially all of the remainder of the Term or (ii) sublease more than twenty-five percent (25%) of the r.s.f. of the Premises for a sublease term of more than five years, Landlord shall have the option, exercisable by written notice to Tenant given within thirty (30) days after receipt of such request, to terminate this Lease (in the event of a proposed assignment of the Lease ) or to terminate this Lease only as to the portion of the Premises proposed to be subleased (in the event of a sublease), in each case as of the date of commencement of the proposed sublease or assignment. If Landlord does not exercise such right to terminate this Lease as to, and recapture, the portion of the Premises affected by such assignment or sublease, Tenant shall have the right to consummate the assignment or sublease at such rent as Tenant may determine, provided however, that Tenant shall pay to Landlord fifty percent (50%) of Sublease Profits (as herein defined) on account thereof. Provided that Tenant is not then in default under this Lease beyond any applicable notice, grace or cure period, Tenant shall have the right, without Landlord's consent, to sublease up to twenty-five percent (25%) of the r.s.f of the Premises, in the aggregate, to subtenants, provided that no such sublease shall be for a term greater than the lesser of (x) five (5) years (including any extensions provided for in such sublease) and (y) the remaining term of this Lease (including any Extension Term previously exercised), and provided further that in such case Tenant shall pay to Landlord fifty percent (50%) of the Sublease Profits (as herein defined) with respect to all such subleases. All other subleases by Tenant shall require Landlord's consent. -54- In the event that any assignee or subtenant pays to Tenant any amounts in excess of the Fixed Rent, Additional Rent, and all other payments then payable hereunder, or pro rata portion thereof on a square footage basis for any portion of the Premises (such excess being hereinafter referred to as "Sublease Profits"), Tenant shall promptly pay fifty percent (50%) of said Sublease Profits to Landlord as and when received by Tenant after deduction of Tenant's Sublease Costs (as hereinafter defined). The term "Sublease Costs" shall mean and refer to Tenant's reasonable legal, brokerage and construction costs and expenses incurred in good faith in view of the size and expected term of any applicable sublease or assignment and the then unamortized costs of Tenant's Work incurred by Tenant to prepare the Premises for Tenant's initial occupancy of the Premises. Sublease Costs shall be amortized on a straight line basis over the term of the applicable sublease or assignment, except that the costs of Tenant's Work incurred by Tenant to prepare the Premises for Tenant's initial occupancy of the Premises shall be amortized on a straight line basis over the initial Term of this Lease. Notwithstanding the foregoing provisions of this Section 5.2.1, Tenant may assign this Lease or sublet any portion of the Premises without Landlord's consent and without payment of Sublease Profits to Landlord to (i) any successor of Tenant resulting from an acquisition of all or substantially all of Tenant's assets or a merger or consolidation of Tenant and (ii) any Affiliate of Tenant (as hereinafter defined), provided that Tenant provides Landlord at least thirty (30) days prior notice of such assignment or subletting pursuant to either of the foregoing clauses (i) or (ii) and the assignee or sublessee executes an assignment and assumption agreement reasonably satisfactory to Landlord prior to taking occupancy. From and after any sublease or assignment, Genzyme Corporation shall continue to be primarily liable pursuant to this Lease. As used herein, the term "Affiliate of Tenant" shall mean and refer to any entity controlled by, controlling or under common control with Tenant. 5.2.2 NUISANCE. Not to injure, deface or otherwise harm the Premises; nor commit any nuisance; nor permit the emission of any noise, vibration or odor which is contrary to any law or ordinance; nor make, allow or suffer any waste; nor make any use of the Premises which is improper, offensive or contrary to any law or ordinance or which will invalidate any of Landlord's insurance; nor to serve or allow the consumption of alcoholic beverages in the Premises unless Tenant maintains Host Liquor liability insurance with an insurance company and with limits of coverage satisfactory to Landlord. 5.2.3 INSTALLATION, ALTERATIONS OR ADDITIONS. Except for Tenant's Work approved or deemed approved by Landlord pursuant to this Lease or any Minor Alteration, not to make any installations, alterations, or additions in, to or on the Premises nor to permit the making of any openings in the walls, partitions, ceilings or floors of the Premises. -55- ARTICLE VI CASUALTY OR TAKING 6.1 DAMAGE BY FIRE. In the event of loss of, or damage to, the Premises or the Building or the Garage by fire or other casualty, the rights and obligations of the parties hereto shall be as follows: (a) (i) If the Premises, or any part thereof, shall be damaged by fire or other casualty, Tenant shall give prompt notice thereof to Landlord, and Landlord, upon receiving such notice, shall proceed promptly and with due diligence, subject to Force Majeure Events, to repair, or cause to be repaired, such damage except as otherwise provided herein. With respect to portions of the Building or Lot outside of the Premises that shall be damaged by fire or other casualty, Landlord shall proceed promptly and with due diligence, subject to Force Majeure Events, to repair, or to cause to be repaired, such damage after such damage occurs except as otherwise provided herein; and (ii) if the Garage, or any part thereof, shall be damaged by fire or other casualty and if the Garage is then owned by Landlord or an Affiliate of Landlord (as defined in Section 10.14 hereof) Landlord shall cause the Garage Owner to proceed promptly and with due diligence, subject to Force Majeure Events, to repair or cause to be repaired, such damage except as otherwise provided herein. If Landlord or an Affiliate of Landlord is not the Garage Owner at the time of such damage by fire or other casualty, Landlord shall use all reasonable efforts to cause the Garage Owner to proceed promptly to repair such damage. (b)(i) If the Premises, or any part thereof, shall be rendered untenantable by reason of such damage, whether to the Premises or to the Building or if such damage materially interferes with Tenant's access to the Premises, Annual Fixed Rent and Additional Rent shall proportionately (i.e., based on rentable square footage) abate for that portion of the Premises which is untenantable for the period from the date of such damage or from the date when material interference with Tenant's access due to such damage commences to the date when such damage shall have been repaired or such access shall have been restored, as applicable; and (ii) if the Garage or any part thereof shall be rendered untenantable by reason of such damage or if such damage prevents Tenant's access to the Garage then to the extent that Landlord does not provide Tenant with substitute parking spaces in the Complex or within a reasonable walking distance of the Premises ("Substitute Parking Spaces"), the Parking Fee (as defined in Section 10.14) and/or the Valet Parking Fee (as defined in Section 10.14), as applicable, shall proportionately abate (based upon the number of Tenant's Parking Spaces or Valet Parking Spaces) for each of the Garage Parking Spaces (as defined in Section 10.14) in excess of the Substitute Parking Spaces which are unavailable to Tenant for the period from the date of such damage or from the date when access to the Garage ceases due to such damage to the date when such damage shall have been repaired or such access shall have been restored, as applicable. (c)(i) If, as a result of fire or other casualty, the whole or a substantial part of the Building is rendered untenantable, Landlord, within ninety (90) days from the date of such fire or casualty, may terminate this Lease by notice to Tenant, specifying a date not less than twenty (20) nor more than forty (40) days after the giving of such notice on which the Term of this Lease shall terminate. If Landlord does not so elect to terminate this Lease, then Landlord shall -56- proceed with diligence to repair the damage to the Building and Premises and all facilities serving the same, and the Annual Fixed Rent and Additional Rent shall meanwhile proportionately abate, all as provided in Paragraph (b)(i) of this Section 6.1. Landlord within one hundred twenty (120) days after the fire or other casualty shall notify Tenant in writing whether or not, in its reasonable judgment, the Building and the Premises can be restored to substantially their condition prior to such damage and Utility Services restored within twelve (12) months of the date of the casualty. If such notification shall state that such restoration cannot be so accomplished, then Tenant may terminate this Lease within thirty (30) days from Tenant's receipt of such notification. Furthermore, if Tenant does not so terminate this Lease and if such damage is not repaired, Utility Services are not restored and the Premises and the remainder of the Building are not restored to substantially the same condition as they were prior to such damage within twelve (12) months from the date of such damage, Tenant within thirty (30) days from the expiration of such twelve (12) month period or from the expiration of any extension thereof by reason of Force Majeure Events (the "Casualty Restoration Completion Date"), may terminate this Lease by notice to Landlord, specifying a date not more than forty-five (45) days after the giving of such notice on which the term of this Lease shall terminate. The period within which the required repairs may be accomplished shall be extended by the number of days lost as a result of Force Majeure Events, provided however that such period shall in no event be extended beyond six (6) months from the Casualty Restoration Completion Date. Substantial part for purposes of this Section 6.1(c)(i) and section 6.1(d) shall mean thirty-three and one-third percent (33 1/3%) or more of the Building; and (ii) if as a result of fire or other casualty, the whole or a substantial part of the Garage is rendered untenantable, Landlord, within ninety (90) days from the date of such fire or casualty, shall notify Tenant whether the Garage Owner will repair the damage to the Garage. If the Garage Owner is unwilling to repair such damage and Landlord does not provide substitute parking in the Complex or within reasonable walking distance of the Premises, then Tenant may terminate this Lease by notice to Landlord, specifying a date not less than twenty (20) nor more than forty (40) days after the giving of such notice on which the Term of this Lease shall terminate. "Substantial part" for this Section 6.1(c)(ii) shall mean thirty-three and one-third percent (33 1/3%) or more of Tenant's Parking Spaces. If Tenant fails to terminate in accordance within the foregoing time periods set forth in this Section 6.1, Tenant shall have waived its right to terminate. (d) If a substantial part of the Premises shall be rendered untenantable by fire or other casualty during the last eighteen (18) months of the then current Term of this Lease and Tenant has not exercised an Option to Extend (as set forth in Section 10.12 hereof), Landlord may terminate this Lease effective as of the date of such fire or other casualty upon notice to Tenant given within sixty (60) days after such fire or other casualty. (e) With respect to Sections 6.1 and 6.2 hereof, Landlord shall not be required to repair or replace any of Tenant's trade fixtures, business machinery, equipment, cabinet work, furniture, personal property or other installations or improvements not originally installed by Landlord or otherwise required to be insured by Tenant under the terms of this Lease, or any damage to the Premises or Building caused by Tenant, or any damage to the Premises or Building not covered by insurance proceeds or condemnation proceeds, or any damage or destruction which Landlord is unable to restore due to Landlord's inability, after exercising -57- reasonable and diligent efforts, to obtain final approval therefor from applicable governmental authorities, and no damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or of the Building. (f) The provisions of this Section 6.1 shall be considered an express agreement governing any instance of damage or destruction of the Building, the Premises or the Garage by fire or other casualty, and any law now or hereafter in force providing for such contingency in the absence of express agreement shall have no application. (g) In the event of any termination of this Lease pursuant to this Section 6.1, the Term of this Lease shall expire as of the effective termination date as fully and completely as if such date were the date herein originally scheduled as the Term Expiration Date; provided that Landlord shall within thirty (30) days thereafter refund any prepaid Rent. (h) If less than fifty percent (50%) of the Building shall be rendered untenantable by fire or other casualty and Landlord reasonably determines that the net proceeds of insurance recovered for such damage are not adequate to restore the Building (or Premises or Utility Service) to substantially their condition immediate prior to the damage or Landlord's mortgagee refuses to release to Landlord sufficient insurance proceeds to restore the Building (or Premises or Utility Service) to such condition, Landlord shall so notify Tenant within ninety (90) days following such fire or other casualty (the "Insurance Shortfall Notice"). Within thirty (30) days after Tenant's receipt of an Insurance Shortfall Notice, Tenant may elect to (i) terminate this Lease or (ii) (x) to require Landlord to restore the Building (or Premises or Utility Service) to substantially their condition immediately prior to the occurrence of such fire or other casualty and (y) to pay the difference between the net proceeds of insurance recovered and the total cost of restoration (the "Tenant Deficiency Election"). If Tenant does not give Landlord notice of Tenant's Deficiency Election within such thirty (30) day period, Landlord may terminate this Lease or Landlord may elect to restore the Building, in each case pursuant to Section 6.1(c)(i) of this Lease. For purposes of this Lease, the phrase "restored to substantially their condition immediately prior to the occurrence of such fire or casualty" shall mean Landlord's Base Building Improvements without the restoration of the improvements to the Premises that constitute Tenant's Work, in respect to which Tenant acknowledges that Tenant, and not Landlord, bears the risk of loss in respect to such fire or other casualty. If Tenant makes Tenant's Deficiency Election, Tenant shall promptly deposit with Landlord's mortgagee (or another "restoration trustee" mutually acceptable to Landlord and Tenant) the amount reasonably estimated by Landlord's architect to fund the estimated cost of the total restoration of the Building (or Premises or Utility Service) to substantially their condition immediately prior to the occurrence of the fire or other casualty after application of the net proceeds of insurance recovered (the "Reconstruction Fund"); all amounts so deposited by Tenant into the Reconstruction Fund shall be referred to herein as "Tenant's Restoration Funds". Tenant shall have the right to approve the construction cost for the restoration of the Building (or Premises or Utility Service), which approval shall not be unreasonably withheld, conditioned or delayed. Landlord's mortgagee (or another "restoration trustee" mutually acceptable to Landlord and Tenant) shall advance proceeds from the Reconstruction Fund, as needed, to prosecute the restoration as herein provided, and any funds remaining in the Reconstruction Fund after final -58- completion and payment in full of all of the costs of restoration shall be repaid to Tenant. If there is a shortfall in the funding of such restoration, Tenant shall promptly deposit the required additional funds in the Reconstruction Fund after Tenant's receipt of notice from Landlord or Landlord's mortgagee (or another "restoration trustee" mutually acceptable to Landlord and Tenant) stating the amount of the required additional funds and a description of the restoration work related thereto. Landlord shall have no obligation to repay to Tenant any portion of the Reconstruction Fund. During the period of such restoration, Fixed Rent and Additional Rent shall proportionately abate as set forth in Section 6.1(b)(i) hereof. (i) Landlord's architect's certificate, given in good faith, shall be deemed conclusive of the statements therein contained and binding upon Tenant with respect to the extent of the damage to the Building and the performance and completion of any repair or restoration work undertaken by Landlord pursuant to Sections 6.1 or 6.2 hereof. 6.2 CONDEMNATION. In the event that the whole or any substantial part of the Building shall be taken or appropriated by eminent domain or shall be condemned for any public or quasi-public use, or (by virtue of any such taking, appropriation or condemnation) shall suffer any damage (direct, indirect or consequential) for which Landlord or Tenant shall be entitled to compensation, then (and in any such event) this Lease and the Term hereof may be terminated at the election of Landlord by a notice in writing of its election so to terminate which shall be given by Landlord to Tenant within ninety (90) days following the date on which Landlord shall have received notice of such taking, appropriation or condemnation. In the event that a substantial part of the Premises or of the means of access thereto or of the Garage Parking Spaces (as such term is defined in Section 10.14 hereof) (unless replaced without undue delay by substitute facilities within a reasonable walking distance from the Building) shall be so taken, appropriated or condemned so as to substantially interfere with the Permitted Uses of the Premises, then this Lease and the Term hereof may be terminated at the election of Tenant by a notice in writing of its election so to terminate which shall be given by Tenant to Landlord within sixty (60) days following the date on which Tenant shall have received notice of such taking, appropriation or condemnation. Substantial part for purposes of this Section 6.2 shall mean thirty-three and one-third percent (33 1/3%) or more of the Premises or thirty-three and one-third percent (33 1/3%) or more of the Garage Parking Spaces, as applicable. Upon giving of any such notice of termination (either by Landlord or Tenant), this Lease and the Term hereof shall terminate as of the date on which Tenant shall be required to vacate any part of the Premises or shall be deprived of a substantial part of the means of access thereto. In the event of any such termination, this Lease and the Term hereof shall expire as of the effective termination date as fully and completely as if such date were the date herein originally scheduled as the Term Expiration Date. If neither party elects to terminate, Landlord will with reasonable diligence and at Landlord's expense, restore the remainder of the Premises and Building, or the remainder of the means of access and Garage Parking Spaces, to substantially the same condition as practicable as existed prior to such taking, appropriation or condemnation in which event a just proportion of the Annual Fixed Rent and Additional Rent, according to the nature and extent of the taking, appropriation or condemnation and the resultant injury sustained by the Premises and the means of access thereto, shall be abated until what remains of the -59- Premises and the means of access thereto shall have been restored as fully as may be for permanent use and occupancy by Tenant hereunder. In the event of any taking of the Premises or any part thereof for temporary use, (i) this Lease shall be and remain unaffected thereby, and (ii) Tenant shall be entitled to receive for itself any award made for such use, provided, that if any taking is for a period extending beyond the Term of this Lease, such award shall be apportioned between Landlord and Tenant as of the Term Expiration Date. 6.3 AWARD. Irrespective of the form in which recovery may be had by law, all rights to damages or compensation payable pursuant to Section 6.2 hereof shall belong to Landlord in all cases except as set forth below in this Section 6.3 or in Section 6.2 hereof. Tenant hereby grants to Landlord all of Tenant's rights to such damages and compensation and covenants to deliver such further assignments thereof as Landlord may from time to time request. It is agreed and understood, however, that Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for (i) movable trade fixtures installed by Tenant or anybody claiming under Tenant, at Tenant's cost and expense, (ii) relocation expenses or damages for loss of business (in excess of any such damages attributable to the value of this lease) and (iii) the then unamortized cost of Tenant's Work, in each case recoverable by Tenant from such authority in a separate action. ARTICLE VII DEFAULTS 7.1 EVENTS OF DEFAULT. (a) If Tenant shall default in the performance of any of its obligations to pay the Fixed Rent or Additional Rent hereunder and, in the case of the Fixed Rent or regularly recurring items of Additional Rent, such as monthly payments of the Annual Maintenance Charge, if such default shall continue for five (5) days after written notice from Landlord to Tenant or, in the case of nonrecurring items of Additional Rent, such as self-help costs incurred by Landlord or amounts due as the result of the annual reconciliation of Annual Maintenance Charge, if such default shall continue for twenty (20) days after written notice from Landlord to Tenant (provided, however, that in all cases Landlord shall not be required to provide such notice more than two (2) times in any period of twelve (12) consecutive calendar months) or if within 30 days after written notice from Landlord to Tenant specifying any other default or defaults Tenant has not commenced diligently to correct the default or defaults so specified or has not thereafter diligently pursued such correction to completion, or (b) if any assignment for the benefit of creditors shall be made by Tenant, or by any guarantor of Tenant, or (c) if Tenant's leasehold interest shall be taken on execution or other process of law in any action against Tenant, or (d) if a lien or other involuntary encumbrance is filed against Tenant's leasehold interest, and is not discharged within thirty (30) days thereafter, or (e) if a petition is filed by Tenant or any guarantor of Tenant for liquidation, or for reorganization or an arrangement or any other relief under any provision of the Bankruptcy Code as then in force and effect, or (f) if an involuntary petition under any of the provisions of said Bankruptcy Code is filed against Tenant or any guarantor of Tenant and such involuntary petition is not dismissed within ninety (90) days -60- thereafter, or (g) if Tenant fails to maintain the insurance required under Section 4.2.2.1 hereof, (individually, an "Event of Default" and collectively, "Events of Default") then, and in any of such cases, Landlord and the agents and servants of Landlord lawfully may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter prior to such time, if any, as Landlord has accepted a cure of such Event of Default and without demand or notice, at Landlord's election, do any one or more of the following: (1) give Tenant written notice stating that the Lease is terminated, effective upon the giving of such notice or upon a date stated in such notice, as Landlord may elect, in which event the Lease shall be irrevocably extinguished and terminated as stated in such notice without any further action, or (2) with or without process of law, in a lawful manner and without illegal force, enter and repossess the Premises as of Landlord's former estate, and expel Tenant and those claiming through or under Tenant, and remove its and their effects, without being guilty of trespass, in which event the Lease shall be irrevocably extinguished and terminated at the time of such entry, or (3) pursue any other rights or remedies permitted by law. Any such termination of the Lease shall be without prejudice to any remedies which might otherwise be used for arrears of rent or prior breach of covenant, and in the event of such termination Tenant shall remain liable under this Lease as hereinafter provided. Tenant hereby waives all statutory rights of redemption and Landlord, without notice to Tenant, may store Tenant's effects, and those of any person claiming through or under Tenant, at the expense and risk of Tenant, and, if Landlord so elects, may sell such effects at public auction or private sale and apply the net proceeds to the payment of all sums due to Landlord from Tenant, if any, and pay over the balance, if any, to Tenant. 7.2 REMEDIES. In the event that this Lease is terminated under any of the provisions contained in Section 7.1 or shall be otherwise terminated for breach of any obligation of Tenant, Tenant covenants to pay forthwith to Landlord, as compensation, the excess of the total rent reserved for the residue of the Term over the fair market rental value of the Premises for said residue of the Term. In calculating the rent reserved there shall be included, in addition to the Fixed Rent and Additional Rent, the value of all other considerations agreed to be paid or performed by Tenant during said residue. Tenant further covenants (as additional and cumulative obligations) after any such termination to pay punctually to Landlord all the sums and to perform all the obligations which Tenant covenants in this Lease to pay and to perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated. In calculating the amounts to be paid by Tenant pursuant to the next preceding sentence Tenant shall be credited with any amount paid to Landlord as compensation as in this Section 7.2 provided and also with the net proceeds of any rent obtained by Landlord by reletting the Premises, after deducting all of the Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, fees for legal services and expenses of preparing the Premises for such reletting, it being agreed by Tenant that Landlord may (i) relet the Premises or any part or parts thereof, for a term or terms which may at Landlord's option be equal to or less than or exceed the period which would otherwise have constituted the balance of the Term and may grant such concessions and free rent as Landlord in its reasonable judgment considers advisable or necessary to relet the same and (ii) make such alterations, repairs and decorations in the Premises as Landlord in its reasonable judgment considers commercially advisable or necessary to relet the same, and no action of Landlord in accordance with the foregoing or failure -61- to relet or to collect rent under reletting shall operate or be construed to release or reduce Tenant's liability as aforesaid. In lieu of any other damages or indemnity and in lieu of full recovery by Landlord of all sums payable under all the foregoing provisions of this Section 7.2, Landlord may by notice to Tenant, at any time after this Lease is terminated under any of the provisions contained in Section 7.1 or is otherwise terminated for breach of any obligation of Tenant and before such full recovery, elect to recover, and Tenant shall thereupon pay, as liquidated damages, an amount equal to the aggregate of the Fixed Rent and Additional Rent for the twelve (12) months ended next prior to such termination, plus the amount of rent of any kind accrued and unpaid at the time of termination and less the amount of any recovery from Tenant by Landlord under the foregoing provisions of this Section 7.2 up to the time of payment of such liquidated damages. Nothing contained in this Lease shall, however, limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether the amount be greater than, equal to, or less than the amount of the loss or damages referred to above. 7.3 REMEDIES CUMULATIVE. Any and all rights and remedies which either Landlord or Tenant may have under this Lease, and at law and equity, shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time insofar as permitted by law. 7.4 LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but shall not be obligated to, cure, at any time, following ten (10) days' prior notice to Tenant, except in cases of emergency when no notice shall be required, any default by Tenant under this Lease; and whenever Landlord so elects, all costs and expenses incurred by Landlord, including reasonable attorneys' fees, in curing a default shall be paid by Tenant to Landlord as Additional Rent within twenty (20) days after Tenant's receipt of a written demand therefor, together with interest thereon at the rate provided in Section 4.3 from the date of payment by Landlord to the date of payment by Tenant. 7.5 EFFECT OF WAIVERS OF DEFAULT. Any consent or permission by Landlord or Tenant to any act or omission by the other party which otherwise would be a breach of any covenant or condition herein, or any waiver by Landlord or Tenant of the breach of any covenant or condition herein by the other party, shall not in any way be held or construed (unless expressly so declared) to operate so as to impair the continuing obligation of any covenant or condition herein, or otherwise, except as to the specific instance, operate to permit similar acts or omissions. The failure of Landlord or Tenant to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease by the other party shall not be -62- deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord, or the payment by Tenant, as the case may be, of rent with knowledge of the breach of any covenant of this Lease shall not be deemed to have been a waiver of such breach by Landlord or Tenant, as the case may be. No consent or waiver, express or implied, by Landlord or Tenant, as the case may be, to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. 7.6 NO ACCORD AND SATISFACTION. No acceptance by Landlord of a lesser sum than the Fixed Rent, Additional Rent or any other charge then due shall be deemed to be other than on account of the earliest installment of such rent or charge due, unless Landlord elects by notice to Tenant to credit such sum against the most recent installment due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent or other charge be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided. ARTICLE VIII MORTGAGES 8.1 RIGHTS OF MORTGAGE HOLDERS. The word "mortgage" as used herein includes mortgages, deeds of trust or other similar instruments evidencing other voluntary liens or encumbrances, and modifications, consolidations, extensions, renewals, replacements and substitutes thereof. The word "holder" shall mean a mortgagee, and any subsequent holder or holders of a mortgage. Until the holder of a mortgage shall enter and take possession of the Premises for the purpose of foreclosure, such holder shall have only such rights of Landlord as are necessary to preserve the integrity of this Lease as security. Upon entry and taking possession of the Premises for the purpose of foreclosure, such holder shall have all the rights of Landlord. Notwithstanding any other provision of this Lease to the contrary, including without limitation Section 10.5, no such holder of a mortgage shall be liable either as mortgagee or as assignee to perform, or be liable in damages for failure to perform, any of the obligations of Landlord unless and until such holder shall enter and take possession of the Premises for the purpose of foreclosure or is otherwise deemed to be a mortgagee-in-possession under applicable law, and such holder shall not in any event be liable to perform or for failure to perform the obligations of Landlord under Article III. Upon entry for the purpose of foreclosure, such holder shall be liable to perform all of the obligations of Landlord (except for the obligations under Article III), subject to and with the benefit of the provisions of Section 10.5, provided that a discontinuance of any foreclosure proceeding shall be deemed a conveyance under said provisions to the owner of the equity of the Premises. No Fixed Rent, Additional Rent or any other charge shall be paid more than 10 days prior to the due dates thereof and payments made in violation of this provision shall (except to the extent that such payments are actually received by a mortgagee in possession or in the -63- process of foreclosing its mortgage) be a nullity as against such mortgagee and Tenant shall be liable for the amount of such payments to such mortgagee. The covenants and agreements contained in this Lease with respect to the rights, powers and benefits of a holder of a mortgage (including, without limitation, the covenants and agreements contained in this Section 8.1) constitute a continuing offer to any person, corporation or other entity, which by accepting a mortgage subject to this Lease, assumes the obligations herein set forth with respect to such holder; such holder is hereby constituted a party of this Lease as an obligee hereunder to the same extent as though its name were written hereon as such; and such holder shall be entitled to enforce such provisions in its own name. Tenant agrees on request of Landlord to execute and deliver from time to time a Subordination, Non-disturbance and Attornment Agreement ("SNDA"), substantially in the form of Exhibit D hereto or any other reasonable agreement which may be necessary to implement the provisions of this Section 8.1 and Section 8.2 hereof. 8.2 SUPERIORITY OF LEASE; OPTION TO SUBORDINATE. This Lease shall be superior to and shall not be subordinate to any future mortgage or other voluntary lien or other encumbrance of the Lot, the Building or the Complex; provided, however, that Landlord shall have the option to subordinate this Lease to any such mortgage of the Lot, the Building or the Complex provided that Landlord obtains from the holder of record of any existing or future mortgage an SNDA substantially in the form of Exhibit D hereto or another form of agreement with Tenant and reasonably acceptable to Tenant by the terms of which such holder will agree (a) to recognize the rights of Tenant under this Lease, (b) to perform Landlord's obligations hereunder arising after the date of such holder's acquisition of title as hereinafter described, expressly excluding, however, Landlord's obligations under Article III of this Lease, and (c) to accept Tenant as tenant of the Premises under the terms and conditions of this Lease in the event of acquisition of title by such holder through foreclosure proceedings or otherwise, provided that Tenant will agree to recognize the holder of such mortgage as Landlord in such event, which agreement shall be made expressly to bind and inure to the benefit of the successors and assigns of Tenant and of the holder and upon anyone purchasing said Premises at any foreclosure sale. Tenant and Landlord agree to execute and deliver any appropriate instruments necessary to carry out the agreements contained in this Section 8.2. Any such mortgage to which this Lease shall be subordinate may contain such terms, provisions and conditions as the holder deems usual or customary. 8.3 LEASE AMENDMENTS. Tenant agrees to make such changes in this Lease as may be reasonably required by the holder of any mortgage of which the Premises are a part, or any institution which may purchase all or a substantial part of Landlord's interest in the Premises, provided that such changes may not increase the Fixed Rent or other payments due hereunder or otherwise materially affect the obligations of Tenant hereunder, and provided further that such changes do not (i) materially interfere with Tenant's right of use and enjoyment of the Premises pursuant to this Lease, (ii) limit, impair or delay Tenant's rights to sublease or assign all or portion of this Lease pursuant to Section 5.2.1 hereof, (iii) limit, impair or delay Tenant's right to obtain a reduction or abatement of rent pursuant to Section 6.2, (iv) limit, impair or delay Tenant's right to terminate this Lease -64- pursuant to Section 3.2 or Section 6.2 or (v) otherwise unreasonably limit, impair or delay Tenant's rights hereunder. Tenant's failure or refusal to make any such changes shall not constitute an Event of Default by Tenant pursuant to this Lease. ARTICLE IX LANDLORD'S ADDITIONAL COVENANTS 9.1 AFFIRMATIVE COVENANTS. Landlord covenants at all times during the Term: 9.1.1 PERFORM OBLIGATIONS. To perform promptly all of the obligations of Landlord set forth in this Lease, including, without limitation, furnishing, through Landlord's employees or independent contractors, the services required to be furnished by Landlord pursuant to this Lease (the cost of which is to be included in the Annual Maintenance Charge). 9.1.2 REPAIRS. Except as otherwise provided in Article VI, to make such repairs (the cost of which is to be included in the Annual Maintenance Charge) to the foundations, roof, exterior walls, exterior windows and waterproofing, floor slabs, other structural columns, beams and other components, parking areas, walks, landscaping, courtyard and any other Building Common Areas and Complex Common Areas as may be necessary to keep them in the condition required by Section 4.2.4 hereof. Landlord shall be responsible for the maintenance and repair of the Utility Services systems and the components thereof serving the Building to the extent that such systems and components are included in Base Building Improvements. 9.1.3 COMPLIANCE WITH LAW. To make all repairs, alterations, additions or replacements to the Building, the Lot and the Complex (the appropriate costs of which are to be included in the Annual Maintenance Charge) required by any law, ordinance or order or regulation of any public authority including repairs, alterations, additions or replacements to the foundations and structural elements of the Building, except as required because of Tenant's failure to comply with the provisions of Section 5.1.3 hereof; to keep the Building equipped with all safety appliances so required (the costs of which are to be included in the Annual Maintenance Charge); subject to Section 4.2.1, to pay all municipal, county, or state taxes assessed against the Building or the Lot, or against Landlord's personal property of any kind on or about the Building or the Lot; and to comply with the orders and regulations of all governmental authorities with respect to zoning, building, fire, health and other codes, regulations, ordinances or laws applicable to the Building or the Lot, including the ADA Requirements (as defined in Section 3.3 hereof) and any codes, regulations, ordinances or laws relating to hazardous materials (as defined in Section 5.1.4), subject to, and without limitation of, Tenant's obligations with respect to such codes, regulations, ordinances or laws. The appropriate costs incurred by Landlord in connection with the foregoing compliance obligations shall be included in the Annual Maintenance Charge. All of the foregoing covenants -65- and obligations are subject to, and without limitation of, all of Tenant's obligations under this Lease, including, without limitation, those set forth in Sections 4.2 and 5.1.4. 9.1.4 INDEMNITY. To defend, with counsel reasonably approved by Tenant, all actions against Tenant, any partner, trustee, stockholder, officer, director, employee or beneficiary of Tenant ("Tenant's Indemnified Parties") with respect to, and to pay, protect, indemnify and save harmless, to the extent permitted by law, all Tenant's Indemnified Parties from and against any and all liabilities, losses, damages, costs, expenses (including reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature to which any of Tenant's Indemnified Parties is subject arising from and to the extent of any negligent or willful act, fault, omission, or other misconduct of Landlord or its agents, contractors or employees. 9.1.5 ESTOPPEL CERTIFICATE. Upon not less than fifteen (15) days' prior notice from Tenant, to execute, acknowledge and deliver to Tenant a statement in writing certifying that this Lease is unmodified and in full force and effect and that except as stated therein Landlord has no knowledge of any defenses, offsets or counterclaims against its obligations under this Lease (or, if there have been any modifications that the Lease is in full force and effect as modified and stating the modifications and, if there are any defenses, offsets or counterclaims, setting them forth in reasonable detail), the dates to which the Fixed Rent and Additional Rent and other charges have been paid and a statement that, to the best of Landlord's knowledge, Tenant is not in default hereunder (or if in default, the nature of such default, in reasonable detail) and such other matters reasonably required by Tenant or any prospective assignee of Tenant. Any such statement delivered pursuant to this Section 9.1.5 may be relied upon by any prospective assignee. 9.1.6 SUBDIVISION. The Lot is currently a portion of the Complex and Landlord may subdivide the Complex so as to, INTER ALIA, establish the Lot as a separate taxable parcel and establish easements which benefit and/or burden the Lot and remaining portions of the Complex (collectively, the "Subdivision"). Upon or after the Subdivision, Landlord may convey the Lot and assign this Lease to an Affiliate of Landlord (the "Transfer"). Tenant agrees to cooperate with Landlord in connection with such Subdivision and Transfer, including without limitation, the execution, acknowledgment and delivery of an instrument pursuant to which this Lease shall be subordinated to easements reasonably established in connection with the Subdivision and Transfer and such other documents as Landlord reasonably may request so long as such Subdivision and Transfer do not materially interfere with Tenant's use of the Premises or any of Tenant's rights under this Lease to other portions of the Complex. After the Substantial Completion Date, Landlord may convey the Lot and the Building and assign this Lease to any person or entity. -66- ARTICLE X MISCELLANEOUS PROVISIONS 10.1 NOTICES FROM ONE PARTY TO THE OTHER. All notices required or permitted hereunder shall be in writing and addressed, if to the Tenant, at the Original Address of Tenant or such other address as Tenant shall have last designated by notice in writing to Landlord, with a copy to Genzyme Corporation, One Kendall Square, Building 1400, Cambridge, Massachusetts 02139, Attention: General Counsel, and, if to Landlord, at Landlord's Address or such other address as Landlord shall have last designated by notice in writing to Tenant, with a copy to Patrick C. Toomey, Esquire, Gadsby Hannah LLP, 225 Franklin Street, Boston, Massachusetts 02110. Any notice shall be deemed duly given if mailed to such address postage prepaid, registered or certified mail, return receipt requested, when deposited with the U.S. Postal Service, or if delivered by a recognized courier service (e.g. Federal Express) when deposited with such courier service, or if delivered to such address by hand, when so delivered. 10.2 QUIET ENJOYMENT. Landlord agrees that upon Tenant's paying the rent and performing and observing the terms, covenants, conditions and provisions on its part to be performed and observed, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises during the Term without any manner of hindrance or molestation from Landlord or anyone claiming under Landlord, subject, however, to the terms of this Lease. 10.3 EASEMENTS; CHANGES TO LOT LINES. Landlord reserves the right, from time to time, to grant easements affecting the Building, the Lot or the Complex and to change or alter existing boundaries of the Lot or Complex for purpose of developing and using the Lot and the Complex so long as such easements or such changes or alterations to existing boundaries of the Lot or the Complex do not materially interfere with Tenant's use of the Premises or any of Tenant's rights under this Lease to other portions of the Complex. 10.4 LEASE NOT TO BE RECORDED. Neither party shall record this Lease. Both parties shall execute and deliver a notice of this Lease in such form, as may be permitted by applicable statute. If this Lease is terminated before the Term Expiration Date the parties shall execute, deliver and record an instrument acknowledging such fact and the actual date of termination of this Lease, and Tenant hereby appoints Landlord its attorney-in-fact, coupled with an interest, with full power of substitution to execute such instrument in the event that Tenant fails to do so within five (5) days after Landlord's request therefor. -67- 10.5 BIND AND INURE; LIMITATION OF LANDLORD'S LIABILITY. The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No owner of the Premises shall be liable under this Lease except for breaches of Landlord's obligations occurring while owner of the Premises. The obligations of Landlord shall be binding upon the assets of Landlord which comprise the Premises, Building and Lot, but not upon other assets of Landlord. Without limiting the generality of the foregoing, upon any assignment of this Lease by Kendall Square, LLC to an Affiliate of Landlord, Kendall Square, LLC shall have no further liability or obligation pursuant to this Lease. No member, partner, trustee, stockholder, officer, director, employee or beneficiary (or the members, partners, trustees, stockholders, officers, directors or employees of any such beneficiary) of Landlord shall be personally liable under this Lease and Tenant shall look solely to Landlord's interest in the Building and Lot, including insurance proceeds and eminent domain awards and the proceeds of any sale of the Building or Lot, and any rents and profits from the Building in pursuit of its remedies upon an event of default hereunder, and the general assets of the members, partners, trustees, stockholders, officers, employees or beneficiaries (and the members, partners, trustees, stockholders, officers, directors or employees of any such beneficiary) of Landlord shall not be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Tenant; provided that the foregoing provisions of this sentence shall not constitute a waiver of any obligation evidenced by this Lease and provided further that the foregoing provisions of this sentence shall not limit the right of Tenant to name Landlord or any individual partner or trustee thereof as party defendant in any action or suit in connection with this Lease so long as no personal money judgment shall be asked for or taken against any individual partner, trustee, stockholder, officer, employee or beneficiary of Landlord. 10.6 ACTS OF GOD. In any case where either party hereto is required to do any act (other than the payment of money), delays caused by or resulting from the occurrence of one or more Force Majeure Events shall not be counted in determining the time during which work shall be completed, whether such time be designated by a fixed date, a fixed time or a "reasonable time", and such time shall be deemed to be extended by the period of such delay. 10.7 LANDLORD'S DEFAULT. Landlord shall not be deemed to be in default in the performance of any of its obligations hereunder unless it shall fail to perform such obligations and such failure shall continue for a period of thirty (30) days following receipt of written notice from Tenant or such additional time as is reasonably required to correct any such default, or such other time as may be set forth in Section 3.2 hereof, after written notice has been given by Tenant to Landlord specifying the nature of Landlord's alleged default. Landlord shall not be liable in any event for incidental or consequential damages to Tenant by reason of any default by Landlord hereunder, whether Landlord is notified that such damages may occur. Except as expressly set forth in Section 3.2 and Section 6.2 hereof, Tenant shall have no right to terminate this Lease for any default by Landlord hereunder and no right, for any such default, to offset or counterclaim against any rent due hereunder. -68- Notwithstanding the foregoing, if any repairs to the Premises required by this Lease, or any maintenance, cleaning, or lighting of the common areas of the Building or the Lot, are not performed by Landlord within thirty (30) days after notice from Tenant (or such longer period as may be reasonably required in the event that any such repair, maintenance, cleaning or lighting cannot be completed within said thirty (30) day period), Tenant shall have the right to perform such obligation of Landlord. If Tenant performs any such obligation of Landlord, Landlord shall pay to Tenant the reasonable cost thereof within thirty (30) days after notice from Tenant, provided, however, that in no event shall Tenant have the right to offset or deduct the amount thereof against any payment of rent due hereunder. If an emergency occurs where a repair is required to be done immediately in order to avoid imminent danger to persons or material damage to the Premises, Tenant shall have the right to self-help consistent with the immediately preceding paragraph of this Section 10.7 after giving Landlord only such notice as is reasonable under the circumstances, provided, however, that formal notice shall be promptly given thereafter. However, the right of self-help afforded to Tenant in this Section 10.7 shall be carefully and judiciously exercised by Tenant, it being understood and agreed that except in the case of an emergency, Landlord shall be given sufficient opportunity to take the action required of Landlord to avoid such default, in order to avoid any conflict with respect to whether self-help should have been availed of by Tenant, or with respect to the reasonableness of the expenses incurred by Tenant. Subject to the foregoing provisions of this Section 10.7, Landlord agrees to pay on demand Tenant's expenses, including reasonable attorneys' fees, incurred by Tenant in enforcing any obligation of Landlord under this Lease or in curing any default by Landlord. 10.8 BROKERAGE. Each party warrants and represents to the other party that it has had no dealings with any broker or agent in connection with this Lease other than Trammel Crow Company and Insignia/ESG (the "Brokers") and covenants to defend with counsel reasonably approved by such other party, hold harmless and indemnify such other party from and against any and all cost, expense or liability arising from any breach of the foregoing warranty and representation. Landlord shall pay to the Brokers the real estate commission or fee due such Brokers with respect to the transactions contemplated herein as and when due pursuant to separate agreement(s) between Landlord and the Brokers. 10.9 APPLICABLE LAW AND CONSTRUCTION. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. If any term, covenant, condition or provision of this Lease or the application thereof to any person or circumstances shall be declared invalid, or unenforceable by the final ruling of a court of competent jurisdiction having final review, the remaining terms, covenants, conditions and provisions of this Lease and their application to persons or circumstances shall not be affected thereby and shall continue to be enforced and recognized as valid agreements of the parties, and in the place of such invalid or unenforceable provision, there shall be substituted a like, but valid and enforceable provision which comports to the findings of the aforesaid court and most nearly accomplishes the original intention of the parties. -69- There are no prior oral or written agreements between Landlord and Tenant affecting this Lease. The Letter of Intent dated January 5, 2000 from Tenant to Mr. David Clem of Lyme Properties, LLC shall be of no further force or effect. This Lease may be amended, and the provisions hereof may be waived or modified, only by instruments in writing executed by Landlord and Tenant. The titles of the several Articles and Sections contained herein are for convenience only and shall not be considered in construing this Lease. Unless repugnant to the context, the words "Landlord" and "Tenant" appearing in this Lease shall be construed to mean those named in Article I above and their successors and assigns, and those claiming through or under them respectively. If there be more than one tenant the obligations imposed by this Lease upon Tenant shall be joint and several. 10.10 SUBMISSION NOT AN OFFER. The submission of a draft of this Lease or a summary of some or all of its provisions does not constitute an offer to lease or demise the Premises, it being understood and agreed that neither Landlord nor Tenant shall be legally bound with respect to the leasing of the Premises unless and until this Lease has been executed by both Landlord and Tenant and a fully executed copy delivered to each of them. 10.11 EXPANSION OF PREMISES. (a) On the condition that this Lease is in full force and effect as of the commencement of the fourth Lease Year, then, effective as of the commencement of the fourth Lease Year, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, subject to and with the benefit of the terms, covenants, conditions and provisions of this Lease, approximately 25,000 r.s.f. in the Building (the "First Expansion Space") in its then "AS IS" condition but subject to Section 10.11(e) hereof, and on the condition that this Lease is in full force and effect as of the commencement of the sixth Lease Year, then effective as of the commencement of the sixth Lease Year, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, subject to and with the benefit of the terms, covenants, conditions and provisions of this Lease, approximately 25,000 r.s.f. in the Building (the "Second Expansion Space") in its then "AS IS" condition but subject to Section 10.11(e) hereof. Landlord and Tenant agree that the Premises initially demised to Tenant by Landlord pursuant to this Lease, together with the First Expansion Space and the Second Expansion Space, will constitute all of the Rentable Square Footage in the Building except for the Retail Space. (b) On or prior to the date upon which Tenant is required to approve the Schematic Design Documents, Landlord and Tenant shall mutually agree on the location in the Building of the Premises initially demised to Tenant pursuant to this Lease and the location in the Building of the First Expansion Space and the Second Expansion Space (the "Expansion Spaces"). At such time as the parties have agreed upon the location of the Expansion Spaces, the parties shall attach hereto as Exhibit A-4 a plan showing such locations. The actual Rentable Square Footage of the Expansion Spaces shall be determined pursuant to Section 2.3 hereof. (c) The Annual Fixed Rent Rate for each of the First Expansion Space and the Second Expansion Space shall be calculated separately for each Expansion Space and shall be (i) the Annual Fixed Rent Rate for the Premises initially demised to Tenant plus (ii) the TI Factor -70- (as hereinafter defined) and shall be payable in each instance starting on the later of the date on which possession of the First Expansion Space or the Second Expansion Space, as applicable, is delivered to Tenant or the commencement of the Term with respect thereto as set forth in Section 10.11(a) hereof. The "TI Factor" shall mean the product of (1) the lesser of (A) all hard and soft costs, determined on a Rentable Square Footage basis, incurred by Landlord for tenant improvements to the First Expansion Space or the Second Expansion Space, as applicable, or (B) $45.00 per r.s.f., multiplied by (2) twelve percent (12%). For example, if Landlord incurs $45.00 per r.s.f. for tenant improvements to the First Expansion Space, the TI Factor will be $5.40 per r.s.f. ($45.00 per r.s.f. x .12 = $5.40 per r.s.f.). Except as set forth in Section 10.11(e) hereof, Landlord shall have no obligation to make any tenant improvements to the Expansion Spaces for Tenant. Notwithstanding any other provision of this Lease, Tenant shall not be required to pay rent on either of the Expansion Spaces prior to the respective dates determined above in this Section 10.11(c). (d) Commencing as of the tenth anniversary of the Commencement Date, the Annual Fixed Rent (including the TI Factor) for the First Expansion Space and the Second Expansion Space shall be increased by an amount determined by multiplying such Annual Fixed Rent by twenty-one and nine tenths percent (21.9%), as provided in Section 4.1(b) hereof. (e) Tenant improvements made to the Expansion Spaces by Landlord for the initial tenants thereof shall be consistent with first class office space and not overly partitioned with small or large offices and conference/training rooms. Tenant may make alterations to the Expansion Spaces after the respective commencement of the Term with respect thereto, but only in accordance with the provisions of this Lease applicable to Tenant's Work, and Tenant shall occupy the Expansion Spaces within six (6) months after the respective commencement of the Term with respect thereto. (f) The term of this Lease with respect to the Expansion Spaces shall be coterminous with the Term Expiration Date, such that the Lease of the Expansion Spaces will terminate as of the Term Expiration Date. (g) Upon commencement of the Term with respect to the First Expansion Space and the Second Expansion Space, as applicable, (i) the term "Premises" as used herein shall mean the Premises initially demised to Tenant and the First Expansion Space and Second Expansion Space, as applicable, and (ii) Tenant's Proportionate Fraction for Building and Tenant's Proportionate Fraction for Complex shall be recalculated as set forth in Section 2.3 hereof. (h) If upon commencement of the Term with respect to the Second Expansion Space, and so long thereafter as Genzyme Corporation, Affiliate(s) of Tenant or subtenants of Tenant occupy all of the r.s.f. of the Building, other than the Retail Space, (i) Tenant shall have line item approval rights, not to be unreasonably withheld, delayed or conditioned, with respect to major operating expense categories for the Building set forth in EXHIBIT B-2 hereto or (ii) Tenant may self-manage the Building, including the Retail Space, PROVIDED, HOWEVER, that during any period of self-management, Tenant shall be obligated to manage, maintain and repair the Building in the same condition and to the same extent required of Landlord pursuant to Section 4.2.4 and 9.1.2 hereof and PROVIDED FURTHER, that Landlord shall have the right to approve any and all contracts -71- and contractors to be retained by Tenant, such approval not to be unreasonably withheld, delayed or conditioned. (i) Notwithstanding Section 10.11(a) hereof, Tenant shall have the option to (i) lease the First Expansion Space as of the Commencement Date or (ii) both Expansion Spaces as of the Commencement Date (as so determined, the "Early Occupancy Space") by giving Landlord written notice thereof on or prior to that date which is one (1) year prior to the Scheduled Substantial Completion Date. In such event, (a) the Annual Fixed Rent for the Early Occupancy Space shall be determined on the basis of the Annual Fixed Rent Rate set forth in Section 1.1 and not pursuant to Section 10.11(c) hereof and (b) Landlord shall have no obligation to make any tenant improvements to the Early Occupancy Space. 10.12 OPTIONS TO EXTEND. (a) Tenant shall have two (2) options to extend the Term of this Lease (the "Options to Extend") for successive periods of ten (10) years each (the "Extension Periods"), subject to and on the terms set forth herein. Tenant may only exercise the Options to Extend with respect to the entire Premises (including the Expansion Spaces). If Tenant shall desire to exercise either Option to Extend, it shall give Landlord a notice (the "Inquiry Notice") of such desire not later than twenty-one (21) months prior to the expiration of the Initial Term of this Lease or the preceding Extension Period, as the case may be. Thereafter, the Fair Market Rent (as defined in Subsection (b) below) for the applicable Extension Period shall be determined in accordance with Subsection (e) below. After the applicable Fair Market Rent has been so determined, Tenant may exercise each Option to Extend by giving Landlord written notice (the "Exercise Notice") of its election to do so not later than (x) the date by which Fair Market Rent has been determined pursuant to this Section 10.12 or (y) eighteen (18) months prior to the expiration of the Initial Term of this Lease, or the preceding Extension Period, as the case may be, whichever is earlier. If Tenant fails to timely give either the Inquiry Notice or the Exercise Notice to Landlord with respect to any Option to Extend, at the sole election of Landlord, Tenant shall be conclusively deemed to have waived such Option to Extend hereunder. (b) For purposes of this Section 10.12, "Fair Market Rent" shall mean the average of (1) ninety-five percent (95%) of the fair market rental value for unfinished, shell office space in a comparable office building in the Kendall Square, Cambridge, Massachusetts office market area (the "Relevant Market") and (2) ninety-five percent (95%) of the fair market rental value for the Premises, including the Expansion Spaces, and shall take into account all other relevant factors in the Relevant Market, including the ten (10) year term of the applicable Extension Period. In no event shall the Fair Market Rent for the first Extension Period be less than the Annual Fixed Rent for the Premises, including the Expansion Spaces, for the fifteenth Lease Year and in no event shall the Fair Market Rent for the second Extension Period be less than the Annual Fixed Rent for the Premises, including the Expansion Spaces, for the twenty-fifth Lease Year. (c) Notwithstanding any contrary provision of this Lease, each Option to Extend and any exercise by Tenant thereof shall be void and of no force or effect unless on the dates Tenant gives Landlord its Inquiry Notice and Exercise Notice for each Option to Extend and on the date of commencement of each Extension Period (i) this Lease is in full force and effect, (ii) there is no uncured Event of Default of Tenant under this Lease, (iii) Tenant has not assigned this Lease -72- (or agreed to assign this Lease) or subleased (or agreed to sublease) more than forty percent (40%) of the Rentable Floor Area of the Premises, in either case to any person or entity other than an Affiliate of Tenant. (d) All of the terms, provisions, covenants, and conditions of this Lease shall continue to apply during each Extension Period, except that (i) the Annual Fixed Rent during each Extension Period (the "Extension Rent") shall be equal to the Fair Market Rent for the Premises determined in accordance with Subsection (b) above and the procedure set forth in Subsection (e) below and (ii) Tenant shall not have any other Options to Extend. (e) The Fair Market Rent for each Extension Period shall be determined as follows: Within five (5) days after Tenant gives Landlord its Inquiry Notice with respect to either Option to Extend, Landlord shall give Tenant notice of Landlord's determination of the Fair Market Rent for the applicable Extension Period. Such determination shall separately identify the two factors used to calculate Fair Market Rent. Within ten (10) days after Tenant receives such notice, Tenant shall notify Landlord of its agreement with or objection to Landlord's determination of the Fair Market Rent. If Tenant shall notify Landlord of Tenant's objection to Landlord's determination of Fair Market Rent, the Fair Market Rent shall be determined by appraisal in the manner set forth below. If Tenant does not notify Landlord within such ten (10) day period of Tenant's agreement with or objection to Landlord's determination of the Fair Market Rent, then the Fair Market Rent for the applicable Extension Period shall be deemed to be Landlord's determination of the Fair Market Rent as set forth in the notice from Landlord described in this subsection. If Tenant notifies Landlord of Tenant's objection to Landlord's determination of Fair Market Rent under the preceding subsection, such notice shall also set forth a request for appraisal and Tenant's appointment of a commercial real estate broker having at least ten (10) years experience in the commercial leasing market in the City of Cambridge, Massachusetts (an "Appraiser"). Within five (5) days thereafter, Landlord shall by notice to Tenant appoint a second Appraiser. In determining the Fair Market Rent, each of the Appraisers appointed by Landlord and Tenant shall separately identify the two separate factors used to calculate Fair Market Rent. Each Appraiser shall determine the Fair Market Rent for the applicable Extension Period within thirty (30) days after Landlord's appointment of the second Appraiser. On or before the expiration of such thirty (30) day period, the two Appraisers shall confer to compare their respective determinations of the Fair Market Rent. If the difference between the amounts so determined by the two Appraisers is less than or equal to ten percent (10%) of the lower of said amounts, then the final determination of the Fair Market Rent shall be equal to the average of said amounts. If such difference between said amounts is greater than ten percent (10%), then the two Appraisers shall have ten (10) days thereafter to appoint a third Appraiser (the "Third Appraiser"), who shall be instructed to determine the Fair Market Rent for the applicable Extension Period within ten (10) days after its appointment by selecting one of the amounts determined by the other two Appraisers. If the two Appraisers are unable to agree upon the Third Appraiser within such ten (10) day period, such Third Appraiser shall be appointed by the then President of the Greater Boston Real Estate Board upon request of either Landlord or Tenant. Each party shall bear the cost of the Appraiser selected by such party. The cost for the Third Appraiser, if any, shall be shared equally by Landlord and Tenant. Each Appraiser and -73- Landlord shall be given reasonable access to the Premises for purposes of determining Fair Market Rent. 10.13 ARBITRATION. All disputes arising from or related to the performance of Landlord's Work or the interpretation of the Design Documents shall be submitted to and resolved in arbitration under the Construction Industry Rules of the American Arbitration Association, before the Arbitrator (as hereinafter defined), in Boston, Massachusetts. Any award entered by the Arbitrator shall be final and binding upon the parties thereto. Judgment upon any award rendered by the Arbitrator may be entered in any court having competent jurisdiction. Notwithstanding the foregoing, disputes with respect to whether (i) the Schematic Design Documents are in compliance with the Preliminary Design Concept, (ii) the Design Development Documents are in compliance with the Schematic Design Development Documents, or (iii) the Final Design Documents are in compliance with the Design Development Documents, shall be summarily decided by the Arbitrator and disputes concerning the achievement of the Substantial Completion Date shall be determined by the Arbitrator, in each case without resort to formal arbitration under the Construction Industry Rules of the American Arbitration Association, and the Arbitrator's decision thereon shall be binding on the parties. Otherwise, such disputes shall be resolved in arbitration as set forth herein. Arbitration proceedings under this Section 10.13 shall, upon motion of any party, be consolidated with arbitration proceedings pending between other parties relating to the Landlord's Work, the same transaction, the same subject matter, and/or involving related substantive rights. All parties hereby consent to such consolidation. In addition to the foregoing, any party to any agreement, whose rights or performance is involved in an arbitration proceeding hereunder, may be joined as a party in any arbitration proceeding instituted hereunder. Consolidation and joinder hereunder shall be by order of the Arbitrator. If the Arbitrator shall fail, upon motion, to make such an order, any party may apply to the Superior Court for Middlesex County, Massachusetts for such an order. Neither party nor the Arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of both parties. All administrative fees and expenses of the arbitration shall be borne equally by the parties. Each party shall bear the expense of its own counsel, experts, witnesses, and preparation and presentation of proofs. There shall be a single arbitrator, who shall be experienced as an arbitrator and who shall be either a registered engineer, architect, or general contractor engaged in business in Massachusetts, for at least ten (10) years, and familiar with issues generally similar to those in dispute, and who shall not have had any dealings with either party within the five-year period immediately preceding such dispute (the "Arbitrator"). If Landlord and Tenant are unable to agree upon the Arbitrator within ten (10) days after submission of a dispute to arbitration, then either Landlord or Tenant may request that the then President of the Boston Bar Association select the Arbitrator. Each party shall bear half the cost of the Arbitrator. The right to arbitrate shall not be deemed to be a limitation of the rights or remedies of either party in aid of arbitration under any and all applicable laws, unless expressly waived, by such party hereto. All arbitration proceedings shall be conducted in Boston, Massachusetts. -74- 10.14 PARKING. Tenant shall pay monthly, in advance, as Additional Rent the then fair market value (the "Parking Fee") (adjusted no more frequently than annually) for each of Tenant's Parking Spaces to be leased to Tenant. In no event shall the Parking Fee exceed the lowest monthly rate being charged to tenants of the Complex by Landlord or any Affiliate of Landlord for parking in the Garage. After the Commencement Date, all of Tenant's Parking Spaces leased hereby may only be utilized by Tenant's employees, visitors, sublessees of the Premises or assignees of the Lease, visiting or working at the Premises. All of Tenant's Parking Spaces and Valet Parking Spaces (as hereinafter defined) shall be located in the underground parking structure to be constructed and/or owned by Landlord or an Affiliate of Landlord (as hereinafter defined) south of Kendall Street, as shown on EXHIBIT A hereto (the "Garage"). As used herein, the term "Affiliate of Landlord" shall mean a person or entity controlled by, controlling or under common control with Landlord. The owner of the Garage from time to time is herein referred to as the "Garage Owner", and the Tenant's Parking Spaces and the Valet Parking Spaces are herein referred to collectively as the "Garage Parking Spaces." Landlord covenants and agrees that if the Garage is conveyed by Landlord to any other person or entity, including an Affiliate of Landlord, such conveyance shall be subject to a lease, permanent easement or similar instrument by and between Landlord and the Garage Owner so that the Tenant shall have, throughout the Term, the right to use the Garage Parking Spaces, subject to the terms of this Lease. Landlord shall also lease to Tenant and Tenant shall lease from Landlord one valet parking space per 1,000 r.s.f. of the Rentable Square Footage as determined from time to time (the "Valet Parking Spaces") at a rate per space equal to (i) the Parking Fee plus (ii) the incremental costs associated with valet parking services for the Garage, which incremental costs shall be pro-rated if valet parking spaces are provided to other tenants of the Complex (as so determined, the "Valet Parking Fee"). Tenant shall pay monthly, in advance, as Additional Rent the Valet Parking Fee for each Valet Parking Space. Employees of Tenant visiting the Complex from other facilities may use the Garage, subject to availability, at the daily rate charged by the Garage Owner, PROVIDED, HOWEVER, Landlord and Tenant agree to implement a parking ticket validation system so that employees of Tenant visiting the Complex from other facilities of Tenant may use any unused Valet Parking Spaces. The Garage Owner shall have the right, from time to time but not more often than every six (6) months, to relocate, on a temporary basis as may be necessary to effect repairs and improvements to the Garage or for other business reasons, parking spaces located in the Garage to another location within 1000 feet of the Lot, provided that in each instance such other location may be lawfully used for accessory parking, and provided further that the monthly rent to be paid by Tenant for each temporarily relocated parking space shall be an amount equal to the fair market value thereof but in no event more than the rent then being paid by Tenant for a parking space in the Garage. Anything herein to the contrary notwithstanding, Landlord shall have the right to relocate all or any number of the Garage Parking Spaces to a garage which may be constructed by Landlord or an Affiliate of Landlord in the northerly portion of the Complex provided that access from the Building to such other garage is substantially as convenient as access between the Building and the Garage, whereupon provisions of this Lease applicable to the Garage, the Garage Owner and the Garage Parking Spaces shall apply, MUTATIS MUTANDIS, to such garage, garage owner and the Garage Parking Spaces located therein. -75- Neither Landlord nor the Garage Owner shall be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the Garage, regardless of whether such loss or theft occurs when the Garage or other areas therein are locked or otherwise secured against entry, or liable for any loss, injury or damage to persons using the Garage or automobiles or other property therein, it being agreed that the use of the Garage and the Garage Parking Spaces shall be at the sole risk of Tenant and its employees, visitors and guests. Landlord and the Garage Owner shall have the right from time to time to promulgate reasonable rules and regulations regarding the Garage, the Garage Parking Spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like, which rules and regulations and any additions and amendments thereto Garage Owner shall use reasonable efforts to consistently apply to all users of the Garage. Tenant shall comply with and cause its employees, visitors and guests to comply with all such rules and regulations as well as all reasonable additions and amendments thereto. Except for emergency repairs using authorized repair services, no person using the Garage Parking Spaces shall perform any work on any automobiles while located in the Garage. Except in connection with an approved assignment of the Lease or an approved subletting of all or a portion of the Premises in accordance with the terms hereof, Tenant shall not assign or sublease any of the Garage Parking Spaces. Landlord shall have the right to terminate this Lease with respect to any Garage Parking Spaces that Tenant sublets or assigns in violation of the foregoing sentence. Landlord or the Garage Owner may elect to provide parking cards or keys to control access to the Garage. In such event, Landlord or the Garage Owner shall provide Tenant with one card or key for each Garage Parking Space that Tenant is leasing hereunder, provided that Landlord or the Garage Owner shall have the right to require Tenant or its employees to place a reasonable deposit on such access cards or keys and to pay a reasonable fee for any lost or damaged cards or keys. Tenant, at its sole cost and expense, may obtain extra cards and keys from Landlord or the Garage Owner if any cards are lost, stolen or destroyed. 10.15 CONFIDENTIAL INFORMATION. Landlord hereby agrees that any and all knowledge, information, data, materials, trade secrets, and other work product of a confidential nature gained, obtained, derived, produced, generated or otherwise acquired by Landlord with respect to Tenant's business (collectively "Confidential Information") shall be kept confidential. Landlord shall use diligent efforts to ensure that no Confidential Information is revealed, divulged, communicated, related, or described to any person or entity without the written consent of Tenant, except as may be required by applicable law. 10.16 SIGNAGE. Landlord shall provide a standard building directory in the office lobby of the Building listing Tenant as a tenant of the Building. Tenant shall have the exclusive right, at its sole cost and expense, to install and maintain signs on the exterior of the Building provided that: (i) the size, location, quality, color and style of such signs shall be subject to Landlord's approval, such approval not to be unreasonably withheld or delayed, and (ii) such signs shall be subject to limitations of applicable law, including, without limitation, the Cambridge Zoning Ordinance, as -76- amended from time to time and the PUD Permit. Tenant shall secure all permits necessary for the installation of such signs at its sole cost and expense. Upon the expiration or sooner termination of the Term of this Lease, Tenant shall remove such signs and repair any damage resulting therefrom at Tenant's sole cost and expense. Notwithstanding the foregoing, Landlord shall have the right to install, and to allow tenants of the Retail Space to install, signage on the windows and doors of the Retail Space and additional signage on the exterior of the Building at a height of up to fifteen (15) feet above ground level, subject to limitations of applicable law, including, without limitation, the Cambridge Zoning Ordinance and the Permits and Approvals. 10.17 BUILDING B LEASE. Simultaneously with the execution hereof, Landlord and Tenant shall enter into an option to lease approximately 150,000 r.s.f in a building to be constructed by Landlord now known as Building B in the area of the Complex approximately shown on EXHIBIT A hereto (the "Option to Lease") in accordance with and subject to the terms of the Option to Lease. 10.18 RIGHT OF FIRST REFUSAL. Provided that at the time Tenant exercises its rights under this Section 10.18: (i) this Lease remains in full force and effect, (ii) there is not then outstanding an uncured Event of Default of Tenant under this Lease, and (iii) Tenant and/or Tenant's Affiliates are occupying at least seventy-five percent (75%) of the r.s.f of the Premises, then Tenant shall have a continuing right of first refusal ("ROFR") to lease any office, research or laboratory space in the Complex then owned by Landlord or Landlord's Affiliate (collectively, the "ROFR Space"), (a) which may become available for lease after the initial term of any lease(s) for the ROFR Space, as any of such lease(s) may be extended or renewed pursuant to the terms of the initial lease(s) thereof or (b) which may become available for lease upon the expiration or termination of lease(s), including extensions and renewals thereof, entered into by Landlord after Tenant has failed or declined to enter into a lease of such ROFR Space. Landlord shall notify Tenant in writing (the "Availability Notice") at least ten (10) months in advance of the expected date upon which the ROFR Space will become available, provided however, that if ROFR Space becomes available due to a termination of a lease for ROFR Space prior to the stated termination of a lease for ROFR Space, Landlord's Availability Notice shall be sent to Tenant promptly after Landlord becomes aware of the expected date of availability of such ROFR Space. Upon receipt by Tenant of an Availability Notice, Tenant shall have ten (10) business days within which to send to Landlord notice of the exercise of Tenant's ROFR (the "ROFR Notice"), in which event Landlord and Tenant shall negotiate in good faith for a period of fifteen (15) days (the "ROFR Negotiation Period") after the date of such ROFR Notice with respect to the terms by which Tenant would lease the ROFR Space from Landlord. If Tenant fails or refuses to send the ROFR Notice or if Landlord and Tenant are unable to agree on the lease terms for the ROFR Space within such fifteen (15) day period, thereupon Landlord may, at any time during the one hundred eighty (180) day period following the expiration of the ROFR Negotiation Period, lease all or any portion of the ROFR Space which was the subject of the Availability Notice to any third party on terms and conditions no more favorable to such third party -77- than the final terms offered by Landlord to Tenant during the ROFR Negotiation Period. If Landlord has not leased the ROFR Space to a third party within such 180-day period, or if Landlord proposes to offer the ROFR Space for lease to a third party on terms and conditions more favorable to such third party than the final terms offered to Tenant during the ROFR Negotiation Period, Landlord shall first re-offer the ROFR Space to Tenant hereunder before Landlord may offer the ROFR Space to any third party, and Tenant shall have five (5) business days within which to accept such offer. Any person dealing with ROFR Space may without further inquiry conclusively rely upon a representation in a certificate of Landlord or Landlord's Affiliate as to whether the provisions of this Section have been satisfied. 10.19 RETAIL TENANTS. Provided that Tenant or an Affiliate of Tenant is occupying at least sixty percent (60%) of the Rentable Square Footage of the Premises, Tenant shall have the right to approve tenant(s) of the Retail Space, which approval shall not be unreasonably conditioned, withheld or delayed. 10.20 ACCESS Commencing on the Commencement Date, Tenant shall have access to the Building twenty-four (24) hours per day, 365/366 days per year and during those hours that the Building is not accessible to the general public, via a security card system provided by Landlord. Tenant agrees to use and comply with any security systems including the security card systems employed by Landlord from time to time during the Term. Landlord may provide a manned security desk within the lobby of the Building comparable to that of other buildings in the Complex, it being understood by Tenant that the provision of a security desk and security card systems are no warranty, representation or guaranty by Landlord as to the safety or security of persons and property within the Building or the Premises. Notwithstanding the foregoing sentence, Tenant shall be solely responsible for the security of all persons and property within the Premises and for access to the Premises including any security card system serving the Premises. Landlord and Tenant agree to use good faith efforts to coordinate any security card system from time to time implemented by Landlord for the Building and/or Complex and any security card system implemented from time to time by Tenant for the Premises and other premises of Tenant outside of the Complex. 10.21 COOPERATION. Landlord agrees that it shall, at Tenant's expense, cooperate with, support, consult with, and provide information in its possession to Tenant in seeking, applying for and obtaining any and all consents, permits, licenses, certificates, waivers, special permits, approvals and the like required, or deemed necessary or appropriate by Tenant, in connection with (a) Tenant's use and occupancy of the Premises for the Permitted Use and/or (b) Tenant's exercise of its rights and/or performance of its obligations under this Lease. Landlord agrees that such cooperation shall include, without limitation, the co-signing of applications, the providing of support and information that can reasonably be made available by the record owner of the Premises but not by other parties; providing letters of support or other supporting information or evidence for submission to hearings or proceedings before any zoning, planning, land use, or regulatory board or authority, or any license or permit-granting or permitting office, board or authority. Notwithstanding the foregoing, Landlord shall not be required to take any action (and Landlord may oppose any action proposed by Tenant) if Landlord determines, in its sole discretion, that any action or series of actions proposed by Tenant could have an adverse impact on the Building, -78- Lot or Complex or any of the Development Approvals, Subsequent Approvals or any rights or obligations of Landlord thereunder or under this Lease. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] WITNESS the execution hereof under seal as of the 28th day of August, 2000. LANDLORD: KENDALL SQUARE, LLC By: Lyme Properties LLC, a New Hampshire limited liability company, its Manager By: /s/ David E. Clem --------------------------------------- David E. Clem, Member TENANT: GENZYME CORPORATION By: /s/ Henri A. Termeer --------------------------------------- Henri Termeer, President and Chief Executive Officer EXHIBIT A Plan Showing Complex (attached) EXHIBIT A-1 Legal Description of Lot (to be provided by Landlord) EXHIBIT A-2 Plan Showing Lot (to be provided by Landlord) EXHIBIT A-3 CONFIRMATION OF COMMENCEMENT DATE AND RENTABLE SQUARE FOOTAGE Reference is made to that certain Lease dated February ____, 2000 (the "Lease") by and between KENDALL SQUARE, LLC ("Landlord"), a Delaware limited liability company, and GENZYME CORPORATION ("Tenant"), a Massachusetts corporation, for certain space in Building D located at Cambridge Research Park, Cambridge, Massachusetts (the "Premises"). In accordance with the terms and provisions of the above-referenced Lease, Landlord and Tenant hereby confirm the following as of the date hereof: The Commencement Date of the Lease is ___________ ____, 2001. A. The rentable square footage of the Premises is _______ square feet. B. The rentable square footage of the Building is _______ square feet. C. The rentable square footage of the First Expansion Space is ________ square feet. D. The rentable square footage of the Second Expansion Space is ________ square feet. E. Tenant's Proportionate Fraction for Building is ___%. F. Tenant's Proportionate Fraction for Complex is ___%. Agreed and Accepted as of the Commencement Date: GENZYME CORPORATION By: ----------------------------------------------- Title: -------------------------------------------- Date of Execution: , 2001 -------------------------- KENDALL SQUARE, LLC By: ----------------------------------------------- Title: -------------------------------------------- Date of Execution , 2001 -------------------------- EXHIBIT A-4 CONFIRMATION OF LOCATION OF EXPANSION SPACES (to be agreed upon by Landlord and Tenant as provided in Section 10.11)
EXHIBIT B Progress Schedule ITEM COMPLETION DATE ---- ------------------ 1. Selection of Landlord's Architect and agreement upon Completed prior to Preliminary Design Concept Lease execution 2. Execution of Contract for Landlord's Architect and selection Completed prior to of Landlord's Design Team, to the extent then identified Lease execution 3. Selection of Landlord's Contractor Completed prior to Lease Execution 4. Execution of Construction Contract July 14, 2000 5. Plans Preliminary Schematic Design Documents delivered To Tenant and Landlord July 17, 2000 Tenant's Response to Preliminary Schematic Design Documents July 21, 2000 Final Schematic Design Documents and gross floor area and r.s.f. calculations delivered to Tenant and Landlord August 11, 2000 Planning Board Design Review Hearing August 1, 2000 Planning Board Design Review Approval August 15, 2000 Tenant's Approval of Final Schematic Design Documents August 25, 2000 Preliminary Project Cost Budget delivered to Tenant and Landlord September 11, 2000 Preliminary Design Development Documents and gross floor area and r.s.f. calculations delivered to Tenant and Landlord October 16, 2000 Tenant's Response to Preliminary Design Development Documents October 20, 2000 Final Design Development Documents and gross floor area and r.s.f. calculations delivered to Tenant and Landlord November 10, 2000 Tenant's Approval of Final Design Development Documents and gross floor area and r.s.f. calculations November 17, 2000 Updated Preliminary Project Budget delivered to Tenant (Proposed GMP) December 11, 2000 Final Design Documents delivered to Tenant and Landlord February 19, 2001 Tenant's Approval of Final Design Documents and gross floor area and r.s.f. calculations February 26, 2001 Solicitation of Bids from general contractors or construction managers March 2, 2001 Tenant's Approval of final GMP and Project Budget March 9, 2001 Building Permit Issued March 23, 2001* Commencement of Construction of Base Building Improvements March 26, 2001 Substantial Completion of Base Building Improvements September 1, 2002* 4. Environmental Remediation Commencement of Environmental Remediation of Lot June 26, 2000* File Response Action Outcome Statement for Lot pursuant to MCP January 1, 2002* Indemnity Expiration Date (as defined in Release and Indemnity Agreement) June 1, 2002 Certification of Landlord's LSP and Estoppel Certificates of COM/Energy (as required under Paragraphs 2(b) and 3 of Environmental Agreement) July 1, 2002 *indicates Landlord Milestone Date
EXHIBIT B-1 PROJECT BUDGET FORM BUDGET ACTUAL PROJECT COST ------ ------------------- Land & Environmental Remediation $ $60.00 per r.s.f. HARD COSTS Base Building Tenant Improvement Allowance -0- -0- Sitework Contingency TOTAL HARD COSTS SOFT COSTS Architecture & Engineering Civil Engineering Architectural Phase I MEPFP Engineering Phase I Structural Engineering Phase I Legal General & Administrative -0- Title Insurance & Recording Permits & Fees (including permitting consultant) Impact Fees Interest on Landlord's Equity Construction Insurance & Taxes Operating Expenses Survey & Appraisal Fees Contingency Developer's Fee not to exceed 5% of Project Cost exclusive of this line item and the Land + Enviornmental Remediation line item Brokerage Fee not to exceed $7.50 per r.s.f. TOTAL SOFT COSTS TOTAL PROJECT COSTS
EXHIBIT B-2 Annual Maintenance Charge, Insurance, Mitigation Expenses and Taxes and Assessments Categories BUDGET FOR BUILDING BUDGET FOR COMPLEX COMMON AREAS COMMON AREAS $ P.S.F. $ TOTAL $ P.S.F. $ TOTAL -------- ------- -------- ------- CLEANING: Daily Cleaning Service 0.71 166,850 0.00 - Window Cleaning 0.02 4,700 0.00 - Trash Removal - Routine 0.09 21,150 0.00 - Trash Removal - Other 0.01 2,350 0.00 - Exterminating 0.01 2,350 Other Cleaning 0.00 - 0.00 - TOTAL CLEANING 0.84 197,400 0.00 - REPAIRS & MAINTENANCE: Maintenance Salaries 0.54 126,900 0.00 - Elevator Service Contracts 0.14 32,900 0.00 - Elevator Repairs 0.03 7,050 0.00 - HVAC - System Contracts 0.39 91,650 0.00 - HVAC - Extra Repairs 0.14 32,900 0.00 - Electrical Repairs 0.08 18,800 0.00 - Plumbing Repairs 0.05 11,750 0.00 - Roofing Repairs 0.03 7,050 0.00 - Alarm Systems Maintenance 0.05 11,750 0.00 - Alarm Systems Inspections 0.02 4,700 0.00 - Other Maintenance & 0.11 25,850 0.00 - Supplies (including architectural repairs, finishes, hardware, etc.) TOTAL MECHANICAL SYSTEMS 1.58 371,300 0.00 - UTILITIES: Electricity 0.00 - 0.00 - Gas 0.68 159,800 0.00 - Water & Sewer 0.16 37,600 0.00 - Steam 0.00 - 0.00 - Telephone 0.00 - 0.00 - Data 0.00 - 0.00 - Other 0.00 - 0.00 - TOTAL UTILITIES NET OF TENANT ELEC 0.84 197,400 0.00 - ROADS/GROUNDS/SECURITY Landscaping Contracts 0.11 25,850 0.30 393,900 Snowplowing Contracts 0.07 16,450 0.40 525,200 Other Roads/Grounds Expenses 0.00 - 0.00 - Skating Rink Expenses 0.00 - 0.10 131,300
BUDGET FOR BUILDING BUDGET FOR COMPLEX COMMON AREAS COMMON AREAS $ P.S.F. $ TOTAL $ P.S.F. $ TOTAL -------- ------- -------- ------- Small Boat Ramp Expenses 0.00 - 0.05 65,650 Security Payroll 0.00 - 0.00 - Security Contracts 0.24 56,400 0.00 - TOTAL ROADS/GROUNDS/SECURITY 0.42 98,700 0.85 1,116,050 ADMINISTRATIVE: Admin Salaries 0.24 56,400 0.00 - Management Fee 0.97 227,950 0.00 - Monitoring Fee 0.07 16,450 0.00 - Legal Expense 0.03 7,050 0.00 - Office Supplies 0.04 9,400 0.00 - Postage & Delivery 0.01 2,350 0.00 - Telephone Expense 0.03 7,050 0.00 - Office Rent 0.25 58,750 0.00 - Other Admin Expenses 0.01 2,350 0.00 - TOTAL ADMIN EXPENSES 1.65 387,750 0.00 - MITIGATION EXPENSES: PTDM Fees 0.03 7,050 0.00 - Other Mitigation Expenses 0.00 - 0.00 - TOTAL MITIGATION EXPENSES 0.03 7,050 0.00 - INSURANCE: General Liability 0.11 25,850 0.05 65,650 Property Insurance 0.18 42,300 0.05 65,650 Rental Interruption 0.02 4,700 0.00 - Other Insurance 0.00 - 0.00 - TOTAL INSURANCE 0.31 72,850 0.10 131,300 TOTAL EXPENSES BEFORE TAXES 5.67 1,332,450 0.95 1,247,350 TAXES AND ASSESSMENTS: Real Estate Taxes 4.83 1,135,050 0.55 722,150 Other Taxes 0.00 - 0.00 - TOTAL EXPENSES 10.50 2,467,500 1.50 1,969,500
EXHIBIT C RULES AND REGULATIONS 1. The common entrances, lobbies, elevators, sidewalks, and stairways of the Building, the Lot and the Complex shall not be encumbered or obstructed by Tenant, Tenant's agents, servants, employees, licensees or visitors or used by them for any purposes other than ingress or egress to and from the Building. 2. Landlord reserves the right to have Landlord's structural engineer review Tenant's floor loads on the Building at Tenant's expense. 3. Tenant, or the employees, agents, servants, visitors or licensees of Tenant shall not at any time place, leave or discard any rubbish, paper, articles, or objects of any kind whatsoever outside of the Building. Bicycles shall not be permitted in the Building unless Landlord provides for the parking thereof in the Building. 4. Tenant shall not place objects against glass partitions or doors or windows or adjacent to any common space which would be unsightly from the exterior of the Building and will promptly remove the same upon notice from Landlord. 5. Tenant shall not make noises, cause disturbances, create vibrations, odors or noxious fumes or use or operate any electric or electrical devices or other devices that emit sound waves or that would interfere with the operation of any device or equipment or radio or television broadcasting or reception from or within the Building or elsewhere, or with the operation of roads or highways in the vicinity of the Building and shall not place or install any projections, antennae, receivers, transmitters, aerials, or similar devices inside or outside of the Building, without the prior written approval of Landlord. 6. Tenant shall not: (a) use the Building for lodging, or for any immoral or illegal purposes; (b) use the Building to engage in the manufacture or sale of spirituous, fermented, intoxicating or alcoholic beverages; (c) use the Building to engage in the manufacture or sale of, or permit the use of, any illegal drugs. 7. No awning or other projections shall be attached to the outside walls or windows. No curtains, blinds, shades, screens or signs, other than those, if any, furnished by Landlord, shall be attached to, hung in, or used in connection with any exterior window or door of the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. No sign, advertisement, object, notice or other lettering shall be exhibited, inscribed, painted or affixed on any part of the outside or inside of the Building if visible from outside of the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. 8. Door keys, pass cards or similar devices for doors in the Building will be furnished by Landlord or Tenant, based upon the agreements reached between the parties regarding Building security systems. If Tenant shall affix additional locks on doors then Tenant shall furnish Landlord with copies of keys for pass cards or similar devices said locks. 10. Tenant shall cooperate and participate in all reasonable security programs affecting the Building and the Complex. 11. Tenant assumes full responsibility for protecting its space from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to its space in the Building closed and secured. 12. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. 13. Discharge of industrial sewage shall only be permitted if Tenant, at its sole expense, shall have obtained all necessary permits and licenses therefor, including without limitation permits from state and local authorities having jurisdiction thereof. 14. The use of asbestos containing cement or other similar asbestos containing adhesive material is expressly prohibited. 15. In the event of any conflict between the provisions of this EXHIBIT C and the provisions of the Lease, the provisions of the Lease shall govern. EXHIBIT D FORM OF SNDA (attached) SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ("Agreement") is entered into this ____ day of ___________, 200__, between _____________________ ("Lender"), and Genzyme Corporation, a Massachusetts corporation ("Tenant"). R E C I T A L S: A. Lender is the owner and the holder of a Promissory Note (the "Note") dated ______________, 200__, in the face amount of $____________ payable to the order of Lender. The Note is secured by a Mortgage, Security Agreement and Fixture Filing with Assignment of Leases and Rents (hereinafter called the "Mortgage") dated of even date with said Note, secured by the real property described in EXHIBIT "A" attached hereto and by reference made part hereof (the "Property"). B. Tenant is the tenant under that certain Lease dated ____________, 2000 (the "Lease"), between Tenant, as tenant, and Kendall Square, LLC, a Delaware limited liability company, as landlord (said landlord and its successors and assigns under the Lease hereinafter called "Landlord"), covering all or part of the Property as set forth in the Lease (the "Demised Premises"). C. Tenant and Lender desire to confirm their understanding with respect to the Lease and the Mortgage. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good valuable consideration, the receipt and sufficiency of which are hereby acknowledged by all parties, Lender and Tenant hereby agree and covenant as follows: 1. SUBORDINATION. The Lease now is, and shall at all times and for all purposes continue to be, subject and subordinate, in each and every respect, to the Mortgage, with the provisions of the Mortgage (including but not limited to the provisions of the Mortgage pertaining to the application of insurance proceeds and condemnation awards) controlling in all respects over the provisions of the Lease; moreover the Lease is subordinate and subject, in each and every respect, to any and all increases, renewals, modifications, extensions, and/or consolidations of the Mortgage, and all other loan documents securing the Note, provided that any and all such increases, renewals, modifications, extensions and/or consolidations shall nevertheless be subject to the terms of this Agreement. 2. NON-DISTURBANCE. So long as Tenant is not in default (beyond any period given Tenant to cure such default in the Lease) in the payment of rent or additional rent or in the performance of any of the terms, covenants or conditions of the Lease on Tenant's part to be performed, (i) Tenant's possession, occupancy, use and quiet enjoyment of the Demised Premises and Tenant's other rights and options under the Lease, or any extensions or renewals thereof or acquisition of additional space, which may be effected in accordance with any option therefor in the Lease, shall not be terminated or interfered with by Lender in the exercise of any of its rights under the Mortgage, or as may otherwise be provided for at law or in equity and (ii) Lender will not join Tenant as a party defendant in any action or proceeding for the purpose of terminating Tenant's interest and estate under the Lease because of any default under the Mortgage. 3. ATTORNMENT. If any proceedings are brought for the foreclosure of the Mortgage or if the Property is sold pursuant to a power of sale under the Mortgage, or Lender shall succeed to the interest of Landlord under the Lease in any manner, Tenant shall attorn and be bound to such party (whether Lender or another party) upon any such succession in interest or foreclosure sale and shall recognize such party as the Landlord under the Lease. Such attornment shall be effective and self-operative without the execution of any further instrument on the part of any of the parties hereto. Tenant agrees, however, to execute and deliver at any time and from time to time, upon the request of Lender or of any holder(s) of any of the indebtedness or other obligations secured by the Mortgage or any purchaser of the Property at a foreclosure sale, any instrument or certificate which may be necessary or appropriate (in any such foreclosure proceeding or otherwise) to evidence such attornment. In the event of any such attornment, Tenant further waives the provisions of any statute or rule of law, now or hereafter in effect, which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect the Lease and the obligation of Tenant thereunder as a result of any such foreclosure proceeding. 4. OBLIGATIONS OF LENDER. If Lender shall succeed to the interest of the Landlord under the Lease, or if any purchaser acquires the Property, upon any foreclosure of the Mortgage, Lender or such purchaser, as the case may be, shall have the same remedies by entry, action or otherwise in the event of any default by Tenant (beyond any period given Tenant to cure such default) in the payment of rent or additional rent by Tenant or in the performance of any of the terms, covenants and conditions of the Lease on Tenant's part to be performed that the Landlord under the Lease had or would have had if Lender or such purchaser had not succeeded to the interest of Landlord. From and after any such attornment, Lender or such purchaser shall be bound to Tenant under all of the terms, covenants, and conditions of the Lease, and Tenant shall, from and after the succession to the interest of Landlord under the Lease by Lender or such purchaser, have the same remedies against Lender or such purchaser for the breach of any agreement contained in the Lease that Tenant might have had under the Lease against the Landlord if Lender or such purchaser had not succeeded to the interest of Landlord; provided further, however, that Lender or such purchaser shall not be liable or bound to Tenant as follows: (a) for any act or omission of any prior landlord (including Landlord) provided, however, that nothing in this clause (a) shall release Lender or any such purchaser, after such attornment, from any obligation of a prior landlord to: (i) reconstruct or repair the Property following any fire, casualty or condemnation which may have occurred prior to such attornment, to the extent that insurance proceeds or condemnation awards are available -2- and otherwise as required under Article VI of the Lease; or (ii) perform any on-going maintenance, repair and/or Building operation obligations of the prior landlord under the Lease even if the need for such item of repair, maintenance or Building operation arose prior to such attornment; and provided further, nothing in this clause (a) shall affect or limit Tenant's express rights to terminate the Lease under Sections 3.1.1, 3.2 and 6.1 of the Lease under the applicable circumstances set forth in each such section; or (b) for any offsets or defenses which Tenant might have against any landlord (including Landlord); or (c) for or by any rent or additional rent which Tenant has paid for more than the current month or the next succeeding month to any prior landlord (including Landlord) unless such rent payment is actually paid or credited to Lender or such purchaser by the prior landlord; or (d) by any amendment or modification of the Lease made without Lender's written consent, which consent shall not be unreasonably withheld, conditioned or delayed if Lender determines that such amendment or modification will not materially and adversely affect the value of the Lease as collateral security for the Note; or (e) for any security deposit, rental deposit or other deposit paid by Tenant to a prior landlord (including Landlord) unless such deposit is actually paid over or credited to Lender or such purchaser by the prior landlord; (f) by any notice of a landlord default given by Tenant to a prior landlord (including Landlord) unless a copy thereof was also then given to Lender in accordance with this Agreement; or (g) under any indemnification provisions set forth in the lease or for any damages Tenant may suffer as a result of any false representation set forth in the Lease, the breach of any warranty set forth in the Lease, or any act of, or failure to act by any party other than Lender or such purchaser, as applicable. Further, in such event any insurance proceeds or condemnation awards relating to the Property shall be applied in accordance with the terms of the Mortgage and not the Lease. The person or entity to whom Tenant attorns shall be liable to Tenant under the Lease only to the extent of the interest of such person or entity in the Premises, the Building and the Lot (as such terms are defined in the Lease) and only for matters arising during such person's or entity's period of ownership, and such liability shall terminate upon the transfer by such person or entity of its interest in the Lease and the Property and the assumption of such liability by the transferee. Lender hereby agrees that if at the time of such attornment (x) Landlord has commenced but not substantially completed Landlord's Work and (y) Tenant has -3- commenced Tenant's Work, then in order to complete Landlord's Work, (i) Lender may elect to complete Landlord's Work, (ii) Lender may elect to advance to Tenant, in accordance with the terms of the Mortgage or the other loan documents executed in connection therewith, the then undisbursed proceeds of Lender's loan evidenced by the Note, in which event such loan proceeds shall be included in Project Cost (as such term is defined in the Lease) for purposes of calculating Annual Fixed Rent (as such term is defined in the Lease) payable by Tenant, or (iii) if Lender does not elect to substantially complete Landlord's Work or advance such loan proceeds, Tenant may advance funds to complete Landlord's Work, in which event Tenant shall receive an abatement of Annual Fixed Rent, commencing on the Rent Commencement Date, in an amount equal to the funds so advanced from time to time by Tenant with interest thereon at the non-default rate of interest set forth in the Note on the outstanding amount of such advances and continuing until such abatement is exhausted. If Lender does not elect to complete Landlord's Work or if Lender elects to complete Landlord's Work but fails to substantially complete Landlord's Work by the Outside Completion Date, Tenant, shall have the right to terminate the Lease in accordance with the last paragraph of Section 3.2 of the Lease. If, however, Lender elects to advance to Tenant the then undisbursed proceeds of Lender's loan in accordance with clause (ii) hereof or Tenant advances funds to complete Landlord's Work in accordance with clause (iii) hereof, Tenant shall have no right to terminate this Lease pursuant to the last paragraph of Section 3.2 of the Lease if Landlord's Work is not substantially complete by the Outside Completion Date. 5. RENT PAYMENT. Tenant agrees to pay all rents directly to Lender in accordance with the Lease immediately upon receipt of written notice of Lender's succeeding to the Landlord's interest under the Lease or upon receipt of written notice that Lender is exercising its rights under the Mortgage or any other loan documents which secure the Note following a default by Landlord or other applicable party. Tenant shall be entitled to full credit under the Lease to the extent of all rents paid to Lender pursuant to this paragraph of this Agreement. By its signature to and consent to this Agreement, Landlord agrees to this paragraph and releases Tenant from any liability to Landlord to the extent of the payment of all rents delivered to Lender under this provision. 6. NOTICE OF MORTGAGE. To the extent that the Lease shall entitle the Tenant to notice of any mortgage or security agreement, this Agreement shall constitute such notice to the Tenant with respect to the Mortgage. 7. SUCCESSOR OF LENDER. The term "Lender" as used throughout this Agreement includes any successor, assigns or holder(s) in interest of the indebtedness secured by the Mortgage. 8. LANDLORD DEFAULTS. Tenant agrees with Lender that effective as of the date of this Agreement: (i) that Tenant shall not take any steps to terminate the Lease for any default by Landlord or any succeeding owner of the Property until after giving Lender written notice of such default, stating the nature of the default and giving Lender thirty (30) days from receipt of such notice to effect a cure of the same, or if a cure cannot be effected within said thirty (30) days due to the nature of the default, Lender shall have a reasonable -4- time to cure provided that it commences to cure within said thirty (30) day period of time and diligently pursues such cure to completion; and (ii) that notice to the Landlord under the Lease (oral or written) shall not constitute notice to Lender. Notwithstanding any provisions in this Section 8 to the contrary: (x) Tenant shall be entitled to exercise its express rights to terminate the Lease under Section 3.1.1 and its express rights to terminate the Lease under Section 3.2 on account of the failure of the Landlord to have achieved any of the Landlord Milestone Dates, as the same may be extended by any Tenant Delay (as such term is defined in the Lease), upon giving Lender the same notice and right to cure as Tenant is required to give to Landlord pursuant to Sections 3.1.1 and 3.2 of the Lease; and (y) with respect to Tenant's other express rights to terminate the Lease under Section 3.2, the period of time specified above in this Section during which Lender may diligently seek to cure shall in no event extend beyond the Outside Completion Date. 9. NO ABRIDGMENT. Nothing herein contained is intended, nor shall it be, construed to abridge or adversely affect any right or remedy of the Landlord under the Lease in the event of any default by Tenant (beyond any period given Tenant to cure such default) in the payment of rent or additional rent or in the performance of any of the terms, covenants or conditions of the Lease on Tenant's part to be performed. 10. NO AMENDMENT OR TERMINATION OF LEASE. Lender and Tenant agree that Tenant's interest in and obligations under the Lease shall not be (i) altered or modified without the prior written consent of Lender, which consent shall not be unreasonably withheld, delayed or conditioned if Lender determines that such amendment or modification will not materially and adversely affect the value of the Lease as collateral security for the Note or (ii) terminated (other than in accordance with the express terms of the Lease and this Agreement) without the prior written consent of Lender. Lender and Tenant also agree that Tenant shall neither assign the Lease or allow it to be assigned in any manner nor sublet the Demised Premises or any part thereof without the prior written consent of Lender in any situation where Landlord's consent to any such action is required under the Lease. Lender agrees that its consent to any such assignment or subletting shall not be unreasonably withheld, conditioned or delayed if Lender determines that such assignment or subletting will not materially and adversely affect the value of the Lease as collateral security for the Note. 11. INTERPRETATION. This Agreement may not be modified orally or in any manner other than by an agreement in writing signed by the parties hereto or their respective successors in interest. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors and assigns, and any purchaser or purchasers at foreclosure of the Property, and their respective heirs, personal representatives, successors and assigns. This Agreement is subject to the laws of the Commonwealth of Massachusetts. -5- IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement to be duly executed as of the day and year first above written. LENDER: By ------------------------------------ Name: ---------------------------------- Title: --------------------------------- TENANT: GENZYME CORPORATION By ------------------------------------ Name: ---------------------------------- Title: --------------------------------- LANDLORD: Landlord consents to this Agreement and Landlord's obligations under Paragraph 5 hereof, as of , 200 . ------------------------ -- KENDALL SQUARE, LLC By: Lyme Properties LLC, a New Hampshire limited liability company, its Manager By: ---------------------------------------- David E. Clem, Member -6- EXHIBIT A DESCRIPTION OF PROPERTY (to be provided) EXHIBIT E Environmental Agreement (attached) ENVIRONMENTAL AGREEMENT THIS ENVIRONMENTAL AGREEMENT, ("AGREEMENT"), is entered into as of the 28th day of August, 2000 by and between KENDALL SQUARE, LLC a Delaware limited liability company, having an address at 101 Main Street, 18th Floor, Cambridge, Massachusetts 02142 ("LANDLORD"), and GENZYME CORPORATION, a Massachusetts corporation having an address of One Kendall Square, Building 1400, Cambridge, Massachusetts 02139 ("TENANT"), and is made in conjunction with a Lease dated the date hereof (the "LEASE") by and between Landlord and Tenant, regarding the Lot, as described and defined in the Lease, located in Cambridge, Middlesex County, Massachusetts (the Lot is hereinafter referred to as the "PROPERTY"). RECITALS A. Landlord is the current owner of the Property, having acquired the right, title and interest of Com/Energy Research Park Realty ("COM/ENERGY") in the Property, together with certain other real property (approximately ten acres of land, including the Property, hereinafter the "CAMBRIDGE RESEARCH PARK SITE"). In connection with the acquisition of the Cambridge Research Park Site by Landlord, Landlord entered into a Release and Indemnity Agreement and a Remediation Agreement, both of which are by and between Com/Energy and CRP and dated August 18, 1998 (hereinafter the "RELEASE AND INDEMNITY AGREEMENT" and the "REMEDIATION AGREEMENT"), which govern certain rights, responsibilities, releases, indemnities and remediation obligations with respect to the Cambridge Research Park Site, including the Property. B. Landlord and Com/Energy have made commitments to each other pursuant to the Release and Indemnity Agreement and the Remediation Agreement, including commitments with respect to the Property. These commitments include, among others, (1) the commitment by Landlord to release and indemnify Com/Energy for certain matters relating to the environmental condition of the Cambridge Research Park Site, including the Property, and the remediation thereof, and (2) the commitment by Landlord to require its lessees to agree to be bound by certain terms of the Release and Indemnity Agreement and the Remediation Agreement. In consideration of the Recitals stated above and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and solely with respect to the Property (and no other properties), the parties agree as follows: 1. DEFINITIONS. All terms not otherwise defined herein shall have the definitions set forth in the Release and Indemnity Agreement and the Remediation Agreement, as indicated herein. 2. RELEASE AND INDEMNITY AGREEMENT. A copy of the Release and Indemnity Agreement is attached hereto as Exhibit A. (a) RELEASE. Tenant acknowledges that it is a Releasing Party as that term is defined in the Release and Indemnity Agreement and expressly understands and agrees that the Release and Indemnity Agreement runs with the land, which includes the Property, and is binding upon Tenant, except as otherwise provided herein. (b) INDEMNITY. The parties acknowledge that Paragraph 5 of the Release and Indemnity Agreement provides in part that Landlord may perform remediation and subsequent development at the Cambridge Research Park Site, including the Property, on a phased-basis and that for each such phase, the Indemnity Expiration Date (as that term is defined in the Release and Indemnity Agreement) with respect to Releasing Parties (as that term is defined in the Release and Indemnity Agreement) which are owners, successors or assigns to such remediated phases of the Cambridge Research Park Site shall occur on the later to occur of the RAO Date or the Foundation Date (as those terms are defined in the Release and Indemnity Agreement), for claims made thereafter. Prior to the Substantial Completion Date (as such term is defined in the Lease) Landlord will deliver to Tenant (i) the certification of Landlord's Licensed Site Professional certifying that the RAO has been completed in accordance with the MCP with respect to the Property and (ii) an estoppel certificate of COM/Energy pursuant to Paragraph 15 of the Release and Indemnity Agreement certifying, to the best of COM/Energy's knowledge, there is no default on the part of Landlord under the Release and Indemnity Agreement and further stating that the Indemnity Expiration Date has occurred with respect to the Property. 3. REMEDIATION AGREEMENT. A copy of the Remediation Agreement is attached hereto as Exhibit B. The parties acknowledge that the Remediation Agreement provides in part that: The Remediation Agreement shall be binding upon Landlord, its successors, heirs, administrators and assigns and with respect to the remediation obligations set forth therein, the Remediation Agreement shall run with the land, consisting of all or any portion of the Cambridge Research Park Site, including the Property, be binding upon any and all subsequent owners, ground tenants, and mortgagees of the Cambridge Research Park Site, including the Property, or any portion thereof or interest therein. The Remediation Agreement further provides that notwithstanding the preceding sentence, that (a) Landlord may, at its election, perform its remediation and development obligations under the Remediation Agreement in phases and (b) with respect to any subsequent owner, ground tenant or mortgagee of any such phase or any portion thereof, the remediation obligation set forth in the Remediation Agreement shall not be binding upon any such subsequent owner, ground tenant or mortgagee, provided the obligations under the Remediation Agreement have been satisfied with respect to such phase. Prior to the Substantial Completion Date Landlord shall deliver to Tenant (i) the certification of Landlord's Licensed Site Professional certifying that the RAO has been completed in accordance with the MCP with respect to the Property and (ii) an estoppel certificate of COM/Energy pursuant to Paragraph 14 of the Remediation Agreement certifying, to the best of COM/Energy's knowledge, there is no default on the part of Landlord under the Remediation Agreement and further stating that COM/Energy has approved the RAO and that Landlord has satisfied Landlord's obligations under the Remediation Agreement with respect to the Property. 4. LANDLORD INDEMNITY OF TENANT. Effective as of the date hereof, Landlord agrees to defend, hold harmless and indemnify Tenant from and against any and all claims, fees, costs, -2- disbursements and expenses that may be imposed upon, incurred by or asserted or awarded against Tenant that relate to or arise from the presence, release or threatened release of, or the mitigation or remediation of, any HAZARDOUS MATERIALS (as defined herein) on, at or below the Property, including migration onto the Property from the Cambridge Research Park Site, for which Landlord is responsible or liable pursuant to the terms and provisions of the Remediation Agreement or the Release and Indemnity Agreement or for which Landlord is responsible or liable pursuant to the operation of the Massachusetts Oil and Hazardous Materials Release Prevention and Response Act, Massachusetts General Laws Chapter 21E, as amended ("Chapter 21E"). HAZARDOUS MATERIALS as used herein shall mean "hazardous materials" and "oils" as defined in Chapter 21E and regulations adopted pursuant to said act, including, but not limited to, the Massachusetts Contingency Plan, 310 CMR 40.0000 ET SEQ. as amended (the "MCP") and "hazardous substances" shall mean "hazardous substances" as defined in the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, and regulations adopted pursuant to said act; and "hazardous wastes" as defined in the Resource Conservation and Recovery Act, as amended, the Massachusetts Hazardous Waste Management Act, Massachusetts General Laws Chapter 21C, as amended, and regulations adopted pursuant to said acts. Landlord's obligation to indemnify Tenant as set forth in this Section 4 shall not include indemnification for any claims, fees, costs, disbursements or expenses that relate to the release or threatened release of Hazardous Materials on, at or from the Property which release or threatened release first occurs on or after the date hereof. 5. TENANT INDEMNITY OF LANDLORD. Tenant, for itself and for each of the other Transferring Parties (as hereinafter defined), jointly and severally, agrees to defend, hold harmless and indemnify Landlord from and against any and all claims, fees, costs, disbursements and expenses that may be imposed upon, incurred by or asserted or awarded against Tenant that relate to or arise from the presence, release or threatened release of any HAZARDOUS MATERIALS on, at or from the Property which release or threatened release is due to the act, omission or neglect of Tenant. 6. SITE ACCESS UPON MADEP AUDIT OF RAO. The parties acknowledge that pursuant to Chapter 21E and the MCP, the Massachusetts Department of Environmental Protection ("MADEP") may perform an audit of the RAO documentation submitted to MADEP for the Property. It is the intention of the parties that in the event that such audit occurs, Landlord shall be solely responsible for providing response to such audit and shall be solely responsible for providing response to any inquiries raised by MADEP in such audit and curing any deficiencies or defects which may be revealed during such audit. Tenant hereby agrees to cooperate with Landlord to the extent reasonably necessary to respond to any audit by MADEP. 7. EXHIBITS. The Exhibits to this Agreement are incorporated by reference as if fully set forth in this Agreement. 8. NOTICES. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered or mailed if delivered personally or mailed by registered or certified mail (postage prepaid, return receipt requested), or sent by facsimile transmission, (confirmation received) to the parties at the following addresses and facsimile transmission numbers (or at such other number for a party as -3- shall be specified by like notice), except that notices after the giving of which there is a designated period within which to perform an act and notices of changes of address or number shall be effective only upon receipt: i. if to Landlord: Kendall Square, LLC 101 Main Street, 18th Floor Cambridge, MA 02142 Attention: Robert L. Green Fax No. (617) 225-2133 with copies to: Lyme Properties LLC 16 On The Common Post Office Box 266 Lyme, NH 03678 Attention: David E. Clem Fax No. (603) 795-4789 Gadsby Hannah LLP 225 Franklin Street Boston, MA 02110 Attention: Leigh A. Gilligan, Esq. Patrick C. Toomey, Esq. Fax No. (617) 345-7050 ii. if to Tenant: Genzyme Corporation One Kendall Square Building 1400 Cambridge, MA 02139 Attention: General Counsel Fax No. (617)374-7368 with a copy to: Palmer & Dodge LLP One Beacon Street Boston, MA 02108 Attention: Thomas G. Schnorr, Esquire Fax No. (617) 227-4420 9. SUCCESSORS AND PERMITTED ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties to this Agreement and their successors and permitted assigns; PROVIDED, HOWEVER, that this Agreement may not be assigned by Tenant without Landlord's -4- express written consent, which shall not be unreasonably withheld if this Agreement is to be assigned in connection with an assignment of the Lease. Tenant shall further require that any party to whom Tenant assigns this Agreement acknowledge its acceptance of this Agreement (as well as said Assignee's agreement to enter into and be bound by this Agreement) in writing to Landlord. Tenant shall further require any party to whom Tenant subleases all or any portion of the Premises (as such term is defined in the Lease) to enter into and be bound by this Agreement or a similar agreement acceptable to Landlord. Tenant, its successors and assigns, and all other parties referred to in this Paragraph 9 (specifically excluding Landlord and its successors and assigns) shall be referred to herein as the "Transferring Parties". 10. NO THIRD PARTY BENEFICIARIES. This Agreement is for the sole benefit of the parties hereto, and their permitted assigns and nothing herein expressed or implied shall give or be construed to give any person or entity, other than the parties hereto, and their permitted assigns, any legal or equitable rights hereunder. 11. AMENDMENT OR MODIFICATION. This Agreement may not be amended or modified except by an instrument in writing signed by Landlord and Tenant. 12. DRAFTING OF AGREEMENT. This Agreement is the joint product of the parties and each provision hereof has been subject to the mutual consultation, negotiation and agreement of those parties and shall not be construed for or against any party hereto. 13. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts (without giving effect to its choice of law principles). 14. DISPUTE RESOLUTION. Any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance, breach or damages, including claims in tort, whether arising before or after the termination of this Agreement, shall be settled only by binding arbitration pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"), subject to the following: i. The arbitration shall take place in Boston, Massachusetts. ii. There shall be three arbitrators, who shall be selected under the normal procedures prescribed in the Rules, except that one such arbitrator shall be a certified public accountant and one arbitrator (who shall chair the arbitration panel) shall be a member of the American Board of Trial Advocates or the American College of Trial Lawyers. The arbitrator so designated shall not be an employee, consultant, officer, director or stockholder of any party hereto or any affiliate of any party to this Agreement. iii. Subject to legal privileges, each party shall be entitled to discovery in accordance with the Federal Rules of Civil Procedure. iv. At the arbitration hearing, each party may make written and oral presentations to the arbitrator, present testimony and written evidence and examine witnesses. -5- v. The arbitrators' decision shall be in writing, shall be binding and final and may be entered and enforced in any court of competent jurisdiction. vi. The arbitrators shall have the authority to grant injunctive relief and order specific performance. vii. No party shall be eligible to receive, and the arbitrators shall not have the authority to award, exemplary or punitive damages. viii. The arbitrators shall have the authority to allocate the fees and expenses of the arbitrators and the American Arbitration Association as well as the fees and expenses of the parties based upon the arbitrators' determination as to the merits of the parties' respective position in the arbitration. If the arbitrators fail to make a specific determination as to fees and expenses, then such fees and expenses of the arbitrators and the American Arbitration Association shall be paid by the parties in equal amounts and the parties shall each bear their own fees and expenses. ix. The arbitrators shall adhere to paragraph 13. Within 15 days after the designation of the arbitrators, the arbitrators (or chair of the arbitration panel), Tenant and Landlord shall meet, at which time Landlord and Tenant shall be required to set forth in writing all disputes, controversies or claims under and a proposed ruling on each such dispute, controversy or claim. The arbitrators (or chair of the arbitration panel) shall set a date for the arbitration hearing to discuss each dispute, controversy or claim identified by the Tenant and Landlord, which hearing shall commence no later than 30 days after the submittal of written proposals pursuant to the immediately preceding sentence. The arbitrators shall use best efforts to rule on each dispute, controversy or claim within 30 days after the completion of the arbitration hearing described in the immediately preceding sentence. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 16. INTEGRATION. This Agreement, together with Exhibits hereto, and the documents and instruments and other agreements among the parties delivered pursuant hereto, constitute the entire agreement and supersede all prior agreements and undertakings, both written and oral, among Landlord and Tenant with respect to the subject matter hereof and are not intended to confer upon any other Person any rights or remedies hereunder, except as otherwise expressly provided herein. Without limiting the foregoing, the parties acknowledge that this Agreement shall survive the termination or expiration of the Lease. The terms of this Agreement may not be terminated, modified or waived except by a written agreement signed by Landlord and Tenant. -6- IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed under seal. KENDALL SQUARE, LLC By: Lyme Properties LLC, a New Hampshire limited liability company, its Manager By: /s/ David E. Clem ----------------------------------- David E. Clem, Member GENZYME CORPORATION By: /s/ Henri A. Termeer ----------------------------------------- Name: Henri Termeer Title: President and Chief Executive Officer -7- EXHIBIT E-1 LIST OF REMEDIATION DOCUMENTS o Draft Release Abatement Measure Plan, NAPL Stabilization, Cambridge Research Park, 364 Third Street, Cambridge, prepared by ThermoRetec Consulting Corporation ("ThermoRetec") and dated February, 2000; o Draft Phase II - Comprehensive Site Assessment, Buildings C and D Area, Cambridge Research Park, 364 Third Street, Cambridge, prepared by ThermoRetec and dated February, 2000; o Draft Phase III - Remedial Action Plan, Buildings C and D Area, Cambridge Research Park, 364 Third Street, Cambridge, prepared by ThermoRetec and dated January, 2000; and o Environmental Response, Compensation and Liability Insurance Policy issued by Kemper Environmental, Ltd. to Cambridge Research Park, LLC and The Lyme Timber Company (Policy No. 4LY000169). -8- EX-10.2 3 a2029877zex-10_2.txt EXHIBIT 10.2 LEASE BY AND BETWEEN FAFARD REAL ESTATE AND DEVELOPMENT CORP. (LANDLORD) AND GENZYME CORPORATION (TENANT) DATED AS OF August 4, 2000 -1- TABLE OF CONTENTS ARTICLES I - REFERENCE DATA 1.1 Subjects Referred to.................................. 5 1.2 Exhibits.............................................. 7 ARTICLE II - PREMISES AND TERM 2.1 Premises.............................................. 7 2.2 Term.................................................. 7 ARTICLE III - IMPROVEMENTS 3.1 Performance of Work and Approval of Landlord's Work....................................... 9 3.2 Pre-Commencement Work by Tenant....................... 10 3.3 General Provisions Applicable to Construction......... 10 3.4 Construction Representatives.......................... 10 ARTICLE IV - RENT 4.1 The Fixed Rent........................................ 11 4.2 Additional Rent....................................... 11 4.2.1 Real Estate Taxes........................... 11 4.2.2 Insurance................................... 12 4.2.3 Utilities................................... 13 4.2.4 Maintenance and Expenses.................... 14 4.2.5 Payments on Account of Taxes, Insurance and Operating Expenses...................... 14 4.3 Late Payment of Rent.................................. 14 -2- ARTICLE V - TENANT'S ADDITIONAL COVENANTS 5.1 Affirmative Covenants................................. 14 5.1.1 Perform Obligations......................... 14 5.1.2 Use......................................... 15 5.1.3 Repair and Maintenance...................... 15 5.1.4 Compliance with Law......................... 15 5.1.5 Tenant's Work............................... 15 5.1.6 Indemnity................................... 16 5.1.7 Landlord's Right to Enter................... 16 5.1.8 Personal Property at Tenant's Risk.......... 16 5.1.9 Payment of Landlord's Cost of Enforcement... 16 5.1.10 Yield Up.................................... 17 5.1.11 Estoppel Certificate........................ 17 5.1.12 Landlord's Expenses re Consents............. 17 5.1.13 Protective Covenants........................ 17 5.2 Negative Covenants.................................... 18 5.2.1 Assignment and Subletting................... 18 5.2.2 Overloading and Nuisance.................... 18 5.2.3 Installation, Alterations or Additions...... 19 ARTICLE VI - CASUALTY OR TAKING 6.1 Termination........................................... 19 6.2 Restoration........................................... 19 6.3 Award................................................. 20 ARTICLE VII - DEFAULTS 7.1 Events of Default..................................... 20 7.2 Remedies.............................................. 21 7.3 Remedies Cumulative................................... 22 7.4 Landlord's Right to Cure Defaults..................... 22 7.5 Effect of Waivers of Default.......................... 22 7.6 No Accord and Satisfaction............................ 22 -3- ARTICLE VIII - MORTGAGES 8.1 Rights of Mortgage Holders............................ 23 8.2 Superiority of Lease; Option to Subordinate........... 23 8.3 Lease Amendments...................................... 24 ARTICLE IX - MISCELLANEOUS PROVISIONS 9.1 Notices from One Party to the Other................... 24 9.2 Quiet Enjoyment....................................... 24 9.3 Lease Not Be Recorded................................. 24 9.4 Bind and Inure; Limitation of Landlord's Liablity..... 25 9.5 Acts of God........................................... 25 9.6 Landlord's Default.................................... 25 9.7 Brokerage............................................. 26 9.8 Security Deposit...................................... 26 9.9 Applicable Law and Construction....................... 26 9.10 Submission Not an Offer............................... 26 9.11 No Hazardous Waste ................................... 27 9.12 Authority to Sign .................................... 27 -4- S P A C E L E A S E ARTICLE I REFERENCE DATA 1.1 SUBJECTS REFERRED TO. Each reference in this Lease to any of the following subjects shall be construed to incorporate the data stated for that subject in this Section 1.1. Date of this Lease: August 4, 2000 PREMISES: That approximately 25,200 sq. ft. office building (the "Building") under construction on an approximately 68,297 sq. ft. parcel of land at 11 Pleasant St. Connector, Framingham, Massachusetts, as shown in Exhibit A attached hereto (the "Lot") and including parking for 101 vehicles. (The Lot and Building are sometimes referred to together as The "Project".) Promptly after completion of Landlord's work in accordance with Article III and other applicable provisions of this Lease, the premises shall be re-measured by a licensed architect in accordance with the Building Owners and Managers Association ("BOMA"), Gross Building Area June 7, 1996 standards applicable to office buildings. The re-measured area of the Premises shall be conclusively binding on the parties for all purposes under this Lease, including, without limitation, the calculation of annual fixed Rent. TENANT PROPERTY: Furnishings, fixtures, equipment and other personal property purchased or leased by Tenant with its own funds, not affixed to the Building or Land, or which Landlord has agreed in writing that Tenant remove at the expiration of the Term. LANDLORD: Fafard Real Estate and Development Corp., a Massachusetts Corporation -5- ORIGINAL ADDRESS OF LANDLORD: 290 Eliot Street Ashland, Massachusetts 01721 LANDLORD'S CONSTRUCTION REPRESENTATIVE: Joseph Trolla, Vice President 290 Eliot Street Ashland, MA 01721 TENANT: GENZYME CORPORATION, a Massachusetts Corporation ORIGINAL ADDRESS OF TENANT: One Kendall Square Building 1400 Cambridge, MA 02139 Attention: Evan M. Lebson Vice President and Treasurer TENANT'S CONSTRUCTION REPRESENTATIVE: Henry Fitzgerald TERM: Five Years 1 month OPTION PERIOD: One (1) option to Renew for one (1) Five (5) Year Period exercised by Tenant in writing to Landlord one hundred and eighty (180) days prior to the end of the Term, as described in Section 2.3 LANDLORD WORK SUBSTANTIAL COMPLETION DATE: October 1, 2000 LANDLORD WORK OUTSIDE DELIVERY DATE: November 1, 2000 COMMENCEMENT DATE: December 15, 2000 ANNUAL FIXED RENT RATE: $17.50 p.s.f. triple net (net of real estate taxes, maintenance, insurance, and utilities) Building measurement exterior wall to exterior wall per June 7, 1996 BOMA Standards. OPTION PERIOD RENT: 95 per cent of prevailing fair market value rent (triple net as above) using Three (3) appraisers mechanism, so called in accordance with the provisions set forth in Section 2.3 Rent shall not be less than the rent in effect from the last day of the previous term. -6- PERMITTED USES: General Office use and such other uses approved by Landlord in advance, such approval not to be unreasonably withheld, provided such uses are permitted as a matter of right under Town of Framingham Zoning By Law. INSURANCE: Combined Single Limit: Bodily Injury and Property Damage: $5,000,000.00 1.2. Exhibits. Exhibits listed below in this Section are incorporated in this Lease by reference and are to be construed as a part of this Lease: EXHIBIT "A" Plan showing the Premises EXHIBIT "B-1 Description of Landlord's work EXHIBIT B -2 Description of Tenant's work (to be added after Lease Execution) EXHIBIT "C" Protective Covenants ARTICLE II PREMISES AND TERM 2.1 PREMISES. Landlord hereby leases and demises to Tenant and Tenant hereby leases from Landlord, subject to and with the benefit of the terms, covenants, conditions and provisions of this Lease, the Premises. 2.1.2. APPURTENANT RIGHTS Tenant shall have, as a appurtenant to the Premises, the exclusive right to use, and permit its invitees to use, parking areas, public or common lobbies, hallways, stairways, elevators and common walkways necessary for access to the Premises and Building. 2.2 TERM. TO HAVE AND TO HOLD for a term beginning December 15, 2000 (the "Commencement Date") and continuing for the Term, unless sooner terminated as hereinafter provided. Landlord will have substantially completed the work to be performed by Landlord pursuant to Exhibit B-1 ("Landlord's Work") -7- by October 1, 2000. The term "substantially completed" as used herein shall mean that Landlord's Work has been completed substantially in accordance with plans and specifications for Landlord's Work with the exception of minor items which can be fully completed and other items which because of the season or weather or the nature of the item are not practicable to do at the time. Landlord shall be obligated to complete the minor items in accordance with Exhibit B-1. When the dates of the beginning and end of the Term have been determined such dates shall be evidenced by a document in form for recording executed by Landlord and Tenant and delivered each to the other. 2.3 EXTENSION OPTION Provided Tenant is not then in default continuing beyond any applicable notice or cure periods, Tenant is hereby granted one (1) option to extend the Term of this Lease for an additional period of five (5) years to be exercised by written notice no later than one hundred and eighty (180) days prior to the expiration of the Term hereof Such extension of the Term shall be upon all the same terms and conditions as are set forth in this Lease, except that the Annual Fixed Rent Rate shall be the greater of (a) the Annual Fixed Rent Rate as set forth in Section 1.1, or (b) an amount equal to ninety-five (95%) percent of the "Fair Market Rental" of the Premises, as hereinafter defined, upon the first day of the extension period of the Term. The term "Fair Market Rental" as used in this Lease shall mean the fair market rental of the Premises in its then condition unencumbered by this Lease, determined using the standards then commonly used by professional appraisers in determining fair market rental of similarly improved real property in the Suburban Boston-Route 495 area. Fair Market Rent shall measure the Fair Market Value of the base building (i.e., Landlord's Work) and the "standard" build out of the base building assuming the $15.00 p.s.f Tenant Improvements Allowance. If Tenant elects to make substantial "above standard" build out improvements at its expense, it will not have to pay again during the option term. If the parties hereto fail to agree as to the Fair Market Rental by the date within thirty (30) days after Tenant's notice, such question shall be submitted upon the request of either party to a board of brokers, two in number, one named by Landlord and one named by Tenant, each of whom shall be a qualified member with more than seven years experience of the Greater Boston Real Estate Board, or any successor of such Board, or if such organization or successor shall no longer be in existence, a recognized association or institute of brokers. Each broker shall be appointed within 10 days of the request for determination of Fair Market Rental, and each broker so appointed shall be instructed to determine independently the Fair Market Rental in accordance with the definition of such term contained herein and within 20 days after the making of such request. If two brokers shall have been appointed and shall have made their determinations within the respective requisite periods set forth above and if the difference between the amounts so determined shall not exceed ten percent (10%) of the lesser of such amounts, then the Fair Market Rental shall be an amount equal to the arithmetic average of the amounts so determined. If the difference between the amounts so determined shall exceed ten percent (10%) of the lesser of such amounts, then such two brokers shall have 10 days to appoint a third broker, similarly qualified, but if such brokers fail to do so, then either party may request the American Arbitration Association or any successor organization thereto to appoint a broker within 10 days of such request, -8- and both parties shall be bound by any appointment so made within such 10-day period. If no such broker shall have been appointed within such 10 days or within 40 days of the original request for a determination of Fair Market Rental, whichever is earlier, either Landlord or Tenant may apply to any court having jurisdiction to have such appointment made by such court. Any broker appointed by the original brokers, by the American Arbitration Association or by such court shall be instructed to determine the Fair Market Rental in accordance with the definition of such term contained herein and within 10 days after his appointment. If the third determination of Fair Market Rental shall exceed the higher of the first two determinations, the Fair Market Rental shall be the higher of the first two determinations; if the third determination shall be less than the lower of such determinations, the Fair Market Rental shall be the lower of the first two determinations. In all other cases, the Fair Market Rental shall be equal to the third determination. All such determinations of Fair Market Rental shall be final and binding upon Landlord and Tenant. These provisions for determination of Fair Market Rental shall be specifically enforceable to the extent such remedy is available under applicable law, and any determination hereunder shall be final and binding upon the parties except as otherwise provided by applicable law. Landlord and Tenant shall each bear the cost of the brokers appointed by them hereunder; the costs of the third broker and his determination of Fair Market Rental shall be borne equally by Landlord and Tenant. Until the Fair Market Rental is determined, Tenant shall continue to pay the Annual Fixed Rent as set forth in Section 1.1, on account. Upon determination of the Fair Market Rental, rental under this Lease shall be adjusted retroactively to the first day of the extension period and any additional rental thereupon owed by Tenant shall be due and payable 10 days after demand therefor on Tenant by Landlord. Promptly after the Annual Fixed Rent Rate is determined for the Extension Option term, Landlord and Tenant shall enter into an Amendment of this Lease confirming the extension of the Term and the new Annual Fixed Rent Rate. ARTICLE III IMPROVEMENTS 3.1 PERFORMANCE OF WORK AND APPROVAL OF LANDLORD'S WORK. Landlord shall cause to be performed the work required by Exhibit B-1 ("Landlord's Work") substantially in accordance with said Exhibit. Tenant agrees that Landlord may make any changes in such work which may become reasonably necessary or advisable, other than substantial changes, without approval of Tenant, provided notice is promptly given to Tenant and Landlord may make substantial changes in such work, with the written approval of Tenant, which Tenant agrees will not be unreasonably withheld. Landlord shall use reasonable efforts to cause Landlord's Work to be substantially completed by the Landlord Work Substantial Completion Date, subject to the provisions of Section 9.5 hereof. If Landlord shall for any reason other than acts or failures to act of tenant or acts of God or -9- other causes described in Section 9.5 fail to have substantially completed Landlord's Work on or before the Outside Delivery Date, then, while either such failure continues but in no event later than the 30th day following the Landlord Work Outside Delivery Date, Tenant shall have the right to terminate this Lease by giving notice of such termination to Landlord, and this Lease shall thereupon terminate. Such right of termination shall be the only remedy, either at law or in equity, available to Tenant in the event of Landlord's failure to complete Landlord's work at the time above specified. Landlord shall provide a one-year warranty or all aspects of Landlord's Work. In addition, upon notice from Tenant, Landlord will allow Tenant to avail itself and obtain the benefit of any of Landlord's unexpired manufacturer's warranties, and will reasonably cooperate with Tenant in so doing. 3.2 TENANT WORK. Tenant will prepare and submit to Landlord plans for Tenant's buildout. Landlord will have reasonable approval rights (e.g. Landlord can disapprove only if the improvements conflict with base building or laws, ordinances or codes governing the building). Tenant may select the contractor, who will be subject to Landlord's reasonable approval. Landlord may also bid for this work under a separate contract. If Landlord is the successful bidder it will give Tenant a $15.00 p.s.f. credit on the buildout contract. Upon substantial completion of Tenant's Work, Landlord will pay to Tenant (or credit its account) a Tenant Improvement Allowance of Fifteen Dollars ($15.00) per square foot) if Landlord is not selected as Tenant improvement contractor. During the period of occupancy of the Premises by Tenant prior to the Commencement Date, no rent shall accrue or be payable, but otherwise such occupancy shall be subject to the terms, covenants, conditions and provisions contained in this Lease, including without limitation requirements with respect to insurance. 3.3 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION. All construction work required or permitted by this Lease, whether by Landlord or by Tenant, shall be done in a good and workmanlike manner and in compliance with all applicable laws and all lawful ordinances, regulations and orders of governmental authority and insurers of the Building. Either party may inspect the work of the other at reasonable times and shall promptly give notice of observed defects. 3.4 CONSTRUCTION REPRESENTATIVES. Each party authorizes the other to rely in connection with plans and construction upon approval and other actions on the party's behalf by any Construction Representative of the party named in Section 1.1 or any person hereafter designated in substitution or addition by notice to the party relying. -10- ARTICLE IV RENT 4.1 THE FIXED RENT. Tenant covenants and agrees to pay Fixed Rent to Landlord at the Original Address of Landlord or at such other place or to such other person or entity as Landlord may by notice to Tenant from time to time direct, at the Annual Fixed Rent Rate, in equal installments of 1/12th of the Annual Fixed Rent Rate in advance on the first day of each calendar month included in the Term; and for any portion of a calendar month at the beginning or end of the Term, at that rate payable in advance for such portion. Tenant's obligation to pay Fixed Rent and other payments hereunder is not subject to any deduction or setoff. 4.2 ADDITIONAL RENT. In order that the Fixed Rent shall be absolutely net to Landlord, Tenant covenants and agrees to pay, as Additional Rent, the taxes, betterment assessments, insurance costs, maintenance costs and utility charges with respect to the Premises and the Building as provided in this Section 4.2 Any delay in billings does not eliminate the obligation of Tenant to pay such items of Additional Rent. Landlord will provide to Tenant reasonable documentation necessary for Tenant to pay and evaluate such billings. 4.2.1 REAL ESTATE TAXES. Landlord will request that the Project be assessed by the Town of Framingham as a Separate tax lot. Tenant shall pay as Additional Rent, directly to the Landlord: all taxes, assessments (special or otherwise), levies, fees, water and sewer rents and charges, and all other government levies and charges, general and special, ordinary and extraordinary, forseen and unforseen, which are, at any time during the Term hereof, imposed or levied upon or assessed against (A) the Project, (B) any Fixed Rent, Additional Rent or other sum payable hereunder or (C) this Lease, or the leasehold estate hereby created, or which arise in respect to the operation, possession or use of the Premises; (ii) all gross receipts or similar taxes imposed or levied upon, assessed against or measured by any Fixed Rent, Additional Rent or other sum payable hereunder; (iii) all sales, value added, use and similar taxes at any time levied, assessed or payable on account of the acquisition, leasing or use of the Premises; and (iv) all charges for utilities furnished to the Premises which may become a lien on the Premises (collectively "taxes and assessments" or if singular "tax or assessment"). Betterment assessments and interest thereon shall be apportioned equally over the longest period permitted by law. For purposes hereof, the taxes and assessments imposed against the Premises shall be Tenant's Proportionate Fraction of the taxes imposed against the Land and Building as of the date of assessment for the particular tax year. For each tax or assessment period wholly included in the Term, all such payments shall be made by Tenant not less than ten days prior to the last date on which the same may be paid without interest or penalty; provided that Landlord promptly provides to tenant a copy of the notice of the amount of such payment due (which notice shall include a copy of the invoice from the applicable municipal or other government authority); and also provided that for any fraction of a tax or assessment period, or installment period thereof, included in the Term at the beginning or end thereof, Tenant shall pay to Landlord, within ten (10) days after receipt of invoice with a copy of municipal bill attached therefor, the fraction of taxes and assessments so levied or assessed or becoming payable which is allocable to such included period. Tenant shall promptly after -11- payment thereof furnish Landlord proof of payment of all items in this Section 4.2.1 which are payable by Tenant. Tenant shall have the right to contest the Town of Framingham's Valuation of the Project and Landlord will cooperate generally with Tenant in so doing. Nothing contained in this Lease shall, however, require Tenant to pay any franchise, corporate, estate, inheritance, succession, capital levy or transfer tax of Landlord, or any income, profits or revenue tax or charge upon the rent payable by Tenant under this Lease (other than any tax referred to in clause (ii) above) unless (a) such tax is imposed, levied or assessed in substitution for any other tax or assessment which Tenant is required to pay pursuant to this Section 4.2.1, or (b) if at any time during the term of this Lease, the method of taxation shall be such that there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received from the Premises and/or any tax or assessment measured by or based, in whole or in part, upon such rents or measured in whole or in part by income from the Premises, or upon the value of the Premises or any present or future improvement or improvements on the Premises, then all such taxes and assessments or the part thereof so measured or based ("Substitute Taxes"), shall be payable by Tenant, Tenant's obligation with respect to the aforesaid Substitute Taxes shall be limited to the amount thereof as computed at the rates that would be payable if the Premises were the only property of Landlord. Landlord shall promptly furnish to Tenant a copy of any notice of any public, special or betterment assessment received by Landlord concerning the Premises. 4.2.2 INSURANCE. Tenant shall, as Additional Rent, take out and maintain throughout the Term commercial general liability insurance and insurance against loss of rents indemnifying Landlord and Tenant against all claims and demand for any injury to person or property which may be claimed to have occurred on the Premises, in amounts which shall, at the beginning of the Term, be at least equal to the limits set forth in Section 1.1 and, from time to time during the Term, shall be for such higher limits, if any, as are customarily carried in the area in which the Premises are located on property similar to the Premises and used for purposes similar to those of Tenant's; and workmen's compensation insurance with statutory limits covering all of Tenant's employees working on the Premises. 4.2.2.1 Landlord shall take out and maintain during the Term, property insurance in the amount of the full replacement lost of the Project including Base Building Work and Tenant Work after notice from Tenant as to the cost of same. Tenant shall reimburse Landlord for the cost of Landlord's property insurance in the amount of the full replacement cost of the Project, Liability Insurance, and the cost of insurance against such other hazards as may from time to time be reasonably required by Landlord or any bank, insurance company or other lending institution holding a mortgage on the Project, provided that such insurance is customarily carried in the area in which the Project is located on property similar to the Project and used for similar purposes. (The Landlord's deductible under such policies must be commercially reasonable). -12- 4.2.2.2 Policies for insurance required under the provisions of Section 4.2.2 shall, in case of loss, be first payable to the holders of any mortgages on the Project under a standard of any mortgage or with Landlord, as Landlord may elect. All policies for insurance required under the provisions of Section 4.2.2 shall be obtained from responsible companies qualified to do business in the Commonwealth of Massachusetts (best rated-A or better) and in good standing therein, which companies and the amount of insurance allocated thereto shall be subject to Landlord's reasonable approval. Tenant agrees to furnish Landlord with policies of all such insurance or certificates thereof prior to the beginning of the Term hereof, and renewal policies or certificates thereof at least thirty (30) days prior to the expiration of the policy it renews. Each such policy shall be non-cancellable with respect to the interest of Landlord and mortgagees without at least thirty (30) days prior written notice thereto. 4.2.2.3 All insurance which is carried by Tenant or Landlord with respect to the Premises or to furniture, furnishings, fixtures or equipment or other Tenant therein or alterations or improvements thereto, whether or not required, shall include provisions which either designate the other party as one of the insured or deny to the insurer acquisition by subrogation of rights of recovery against the other party to the extent such rights have been waived by the insured party prior to occurrence of loss or injury, insofar as, and to the extent that, such provisions may be effective without making it impossible to obtain insurance coverage from responsible companies qualified to do business in the Commonwealth of Massachusetts (even though extra premium may result therefrom). In the event that extra premium is payable by either party as a result of this provision, the other party shall reimburse the party paying such premium the amount of such extra premium. If at the request of one party, this non-subrogation provision is waived, then the obligation of reimbursement under the preceding sentence shall cease for such period of time as such waiver shall be effective, but nothing contained in this Section 4.2.2.3 shall derogate from or otherwise affect releases elsewhere herein contained of either party for claims. Each party shall be entitled to have duplicates or certificates of any policies containing such provisions. Each party hereby waives all rights of recovery against the other for loss of injury against which the waiving party is protected by insurance containing said provisions, reserving, however, any rights with respect to any excess of loss or injury over the amount recovered by such insurance. Tenant shall not acquire as insured under any insurance carried on the Building or the Premises any right to participate in the adjustment of loss or to receive insurance proceeds and agrees upon request promptly to endorse and deliver to Landlord any checks or other instruments in payment of loss in which Tenant is named as payee. 4.2.3 UTILITIES. Tenant shall pay as Additional Rent directly to the proper authorities charged with the collection thereof all charges for water, sewer, gas, electricity, telephone and other utilities or services used or consumed on the Premises, whether called charge, tax, assessment, fee or otherwise, including, without limitation, water and sewer use charges and taxes, if any, all such charges to be paid as the same from time to time become due. -13- Except as otherwise provided in Exhibit B for the installation thereof, it is understood and agreed that Tenant shall make its own arrangements for such utilities and that Landlord shall be under no obligation to furnish any utilities to the Premises and shall not be liable for any interruption or failure in the supply of any such utilities to the Premises, provided, however, that Landlord shall act with due diligence to restore utilities to the Premises as soon as is reasonably possible after interruption. 4.2.4 MAINTENANCE AND EXPENSES. Tenant shall pay as Additional Rent directly to contractors of its choice all payments relating to the maintenance and operation of the grounds, services, and physical plant of the Project, including without limitation the cost of operating, maintaining and repairing the grounds and facilities within the Project (such as, but not limited to, snow plowing of parking areas including the parking lot and sidewalks of the Building, landscaping, and lighting, with respect to the Project, air duct, heating, electrical, plumbing and other utility systems serving the Project, the maintenance and repair of the Building exterior and structure) and all other reasonable and necessary expenses paid in connection with the operation, cleaning, maintenance, repair and operation of the Project, provided, however, that maintenance and expenses shall exclude all capital improvements and any repair and maintenance obligations of Landlord under this Lease. Landlord will bill Tenant directly for Landlord's Liability and Property Insurance in regard to the Project and Tenant shall pay all such sums billed to Tenant within Twenty (20) days thereof. 4.2.5 PAYMENTS ON ACCOUNT OF TAXES, INSURANCE. Tenant shall pay to Landlord as Additional Rent, within Thirty (30) days of billing by Landlord, such amounts as Landlord may reasonably determine will be sufficient to provide in the aggregate funds adequate to pay all amounts to be paid by Tenant pursuant to Section 4.2.2 as and when such amounts become due and payable, and all such payments under this Section shall to the extent thereof relieve Tenant of its obligations under said Section. 4.3 LATE PAYMENT OF RENT. If any installment of Fixed Rent is paid more than five (5) days after the date the same was due ("Late Payment"), and this late payment of Fixed Rent hall occur more than twice during the twelve consecutive months, then all future late Fixed Rent payments within the next twelve (12) month period shall bear interest from the due date at the prime commercial rate of Fleet Bank, as it may be adjusted from time to time, plus two percent per annum, or, in the event of Tenant's default under clauses (b) through (f) inclusive of Section 7.1 plus four percent per annum, but in no event more than the maximum rate of interest allowed by law, the payment of which shall be Additional Rent. ARTICLE V TENANT'S ADDITIONAL COVENANTS 5.1 AFFIRMATIVE COVENANTS. Tenant covenants at its expense at all times during the Term and for such further time as Tenant occupies the Premises or any part thereof: 5.1.1 PERFORM OBLIGATIONS. To perform promptly all of the obligations of Tenant set forth in this Lease; and to pay when due the Fixed Rent and Additional -14- Rent and all charges, rates and other sums which by the terms of this Lease are to be paid by Tenant. 5.1.2 USE. To use the Premises only for the Permitted Uses, and from time to time to procure all licenses and permits necessary therefor, at Tenant's sole expense. 5.1.3 REPAIR AND MAINTENANCE. Except as otherwise in Article VI, to keep the Premises and all heating, plumbing, electrical, air-conditioning, mechanical and other fixtures and equipment now or hereafter on the Premises, or servicing the Premises exclusively, in the same order, condition and repair as delivered to Tenant on the Commencement Date, reasonable use and wear, damage by fire and casualty or by eminent domain only excepted; and to make all repairs and replacements and to do all other work necessary for the foregoing purposes whether the same may be ordinary or extraordinary, forseen or unforseen. Landlord shall be responsible for repairs and maintenance and replacement of the roof, the exterior load bearing walls, the building's structural columns and beams, elevators and the Building's base building utility systems built by Landlord. Tenant shall pay for routine maintenance and repairs of all those items, but not for any costs of replacing them. Tenant shall secure, pay for and keep in force contracts with appropriate and reputable service companies and/or utilize qualified employees providing for the regular maintenance of the heating and air-conditioning systems and copies of any such contracts shall be furnished to Landlord. 5.1.4 COMPLIANCE WITH LAW. To make all repairs, alterations, additions or replacements to the Premises required by law or ordinance or any order or regulation of any public authority; to keep the Premises equipped with all safety appliances so required; to pay all municipal, county, or state taxes assessed against the leasehold interest hereunder, or against personal property of any kind on or about the Premises; and to comply with the orders and regulations of all governmental authorities with respect to zoning, building, environmental, fire, health and other codes, regulations, ordinances or laws applicable to the Premises and Tenant's use thereof. 5.1.5 TENANT'S WORK. To procure at Tenant's sole expense all necessary permits and licenses before undertaking any work on the Premises; to do all such work in compliance with the applicable provisions of Section 3.2 and 5.2.3 hereof; to do all such work in a good and workmanlike manner employing materials of good quality and so as to conform with all applicable zoning, building, environmental, fire, health and other codes, regulations, ordinances and laws; to pay promptly when due the entire cost of any work on the Premises undertaken by Tenant so that the Premises shall at all times be free of liens for labor and materials; to employ for such work one or more responsible contractors whose labor will work without interference with other labor working on the Premises; to require such contractors employed by Tenant to carry workmen's compensation insurance in accordance with statutory requirements and comprehensive public liability insurance covering such contractors on or about the Premises in amounts that at least equal the limits set forth in Section 1.1 and to submit certificates evidencing such coverage to Landlord prior to the commencement of such work; -15- and to save Landlord harmless and indemnified from all injury, loss, claims or damage to any person or property occasioned by or growing out of such work. 5.1.6 INDEMNITY. Tenant shall defend, with Counsel approved by Landlord which consent of Landlord shall not be unreasonably withheld, all actions, against Landlord, any partner, trustee, stockholder, officer, director, employee or beneficiary of Landlord, holders of mortgages secured by the Premises and any other party having an interest in the Premises (indemnified Parties) with respect to, and shall pay, protect, indemnify and save harmless, to the extent permitted by law, all Indemnified Parties from and against, any and all liabilities, losses, damages, costs, expenses (including reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature (a) to which any Indemnified Party is subject because of its estate or interest in the Premises as a result of Tenant's negligence or the negligence of Tenant's agents, contractors, licensees, sublessees or invitees or (b) arising from (i) injury to or death of any person, or damage to or loss of property, on the Premises, or connected with the use, condition or occupancy occasioned by Tenant's negligence or the negligence of its agents, contractors, licensees, sublessees or invitees, (ii) violation of this Lease, and (iii) any act, fault, omission, or other misconduct of Tenant (or its agents, contractors, licensees, sublessees or invitees. In no event shall Tenant be obligated to indemnify Landlord or any indemnified party to the extent the liability arose due to the negligent acts or omission of Landlord or such indemnified party. 5.1.7 LANDLORD'S RIGHT TO ENTER. To permit Landlord and its agents to enter into the Premises upon reasonable prior notice at reasonable times to examine the Premises, to make such repairs and replacements as Landlord may elect, without however, any obligation to do so, and to show the Premises to prospective purchasers and lenders, and, during the last six months of the Term, to keep affixed in suitable places notices of availability of the Premises and to show the Premises to prospective tenants. 5.1.8 PERSONAL PROPERTY AT TENANT'S RISK. All of the furnishings, fixtures, equipment, effects and property of every kind, nature and description of Tenant and of all persons claiming by, through or under Tenant which, during the continuance of this Lease or any occupancy of the Premises by Tenant or anyone claiming under Tenant, may be on the Premises, shall be at the sole risk and hazard of Tenant and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, by theft or from any other cause, no part of said loss or damage is to be charged to or to be borne by Landlord, except that Landlord shall in no event be indemnified or held harmless or exonerated from any liability to Tenant or to any other person, for any injury, loss, damage or liability to the extent prohibited by law. 5.1.9 PAYMENT OF LANDLORD'S COST OF ENFORCEMENT. To pay on demand Landlord's expenses, including reasonable attorneys' fees, incurred in enforcing any obligation of Tenant under this Lease or in curing any default by Tenant under this Lease as provided in Section 7.4. -16- 5.1.10 YIELD UP. At the expiration of the Term or earlier termination of this Lease: to surrender all keys to the Premises, to remove all of its trade fixtures and personal property in the Premises (exclusive of installations and improvements to the Premises), to remove such installations and improvements made by Tenant as Landlord may request and all Tenant's signs wherever located, to repair all damage caused by such removal (including capping or otherwise securing electrical and plumbing lines) and to yield up the Premises (including all installations and improvements made by Tenant except for trade fixtures and such of said installations or improvements as Landlord shall request Tenant to remove at the time Landlord approves the installation or improvement) broom-clean and in the same order and repair in which Tenant is obliged to keep and maintain the Premises by the provisions of this Lease, reasonable wear and tear , damage by fire and casualty or by eminent domain or by failure of Landlord to perform its explicit repair and maintenance obligations under the Lease only excepted. Any property not so removed shall be deemed abandoned and may be removed and disposed of by Landlord in such manner as Landlord shall determine and Tenant shall pay Landlord the entire cost and expense incurred by it in effecting such removal and disposition and in making any incidental repairs and replacements to the Premises and for use and occupancy during the period after the expiration of the Term and prior to Tenant's performance of its obligations under this Section 5.1.10. Tenant shall further indemnify Landlord against all loss, cost and damage resulting from Tenant's failure and delay in surrendering the Premises as above provided. 5.1.11 ESTOPPEL CERTIFICATE. Upon not less than fifteen (15) days' prior notice by Landlord, to execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect and that Tenant has no defenses, offsets or counterclaims against its obligations to pay the Fixed Rent and Additional Rent and any other charges and to perform its other covenants under this Lease (or, if there have been any modifications, that the same is in full force and effect as modified and stating the modifications, and, if there are any defenses, offsets or counterclaims, setting them forth in reasonable detail), the dates to which the Fixed Rent and Additional Rent and other charges have been paid and a statement that Landlord is not in default hereunder to the best of Tenant's knowledge (or if in default, the nature of such default, in reasonable detail). Any such statement delivered pursuant to this Section 5.1.12 may be relied upon by any prospective purchaser or mortgagee of the Premises, or any prospective assignee of any such mortgage. Landlord will use reasonable efforts to provide to Tenant on Tenant's Lender a similar Estoppel document provided however, that Landlord's failure to so provide shall not be deemed a default of Landlord under this Lease. 5.1.12 LANDLORD'S EXPENSES RE CONSENTS. To reimburse Landlord promptly on demand for all reasonable legal expenses and costs incurred by Landlord in connection with all requests by Tenant for consent or approval hereunder. 5.1.13 PROTECTIVE COVENANTS. To comply with the Protective Covenants set forth in Exhibit C. -17- 5.2 NEGATIVE COVENANTS. Tenant covenants at all times during the Term and for such further time as Tenant occupies the Premises or any part thereof: 5.2.1 ASSIGNMENT AND SUBLETTING. Not to assign, transfer, mortgage or pledge this Lease or to grant a security interest in Tenant's rights hereunder or in any installations or improvements which are or may become part of the Premises or the Building, or to sublease (which term shall be deemed to include the granting of concessions and licenses and the like) all or any part of the Premises or suffer or permit this Lease or the leasehold estate hereby created or any other rights arising under this Lease to be assigned, transferred or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the occupancy of the Premises by anyone other than Tenant; provided however that Tenant may assign this Lease or sublet any portion or all of the Premises provided Tenant obtains the prior written approval of Landlord, which shall not be unreasonably withheld, and notwithstanding the foregoing Landlord's consent shall not be required for any assignment or sublet of the Lease to any corporation, partnership, trust, association or other business organization directly or indirectly controlling or controlled by or under common control with Tenant or to any successor by merger, consolidation or acquisition of all or substantially all of the assets or captial stock of Tenant. Any attempted assignment, transfer, mortgage, pledge, grant of security interest, sublease or other encumbrance, except as permitted by the immediately preceding sentence shall be void. No assignment, transfer, mortgage, grant of security interest, sublease or other encumbrance, whether or not approved, and no indulgence granted by Landlord to any assignee or sublessee, shall in any way impair the continuing primary liability (which after an assignment shall be joint and several with the assignee) of Tenant hereunder, and no approval in a particular instance shall be deemed to be a waiver of the obligation to obtain Landlord's approval in any other case. If for any assignment or sublease Tenant receives rent or other consideration, either initially or over the term of the assignment or sublease, in excess of the rent called for hereunder, or in case of sublease of part, in excess of such rent fairly allocable to the part, after appropriate adjustments to assure that all other payments called for hereunder are appropriately taken into account, to pay to Landlord as Additional Rent one half (1/2) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. Tenant shall reimburse Landlord promptly for its expenses, if any, including reasonable attorneys' fees, in reviewing any proposed sublease or assignment hereunder. 5.2.2 OVERLOADING AND NUISANCE. Not to injure, overload, deface or otherwise harm the Premises; nor install any fixture or equipment which would overload or unduly burden the electrical or other mechanical services of the Building; nor commit any nuisance; nor permit the emission of any objectionable noise or odor; nor make, allow or suffer any waste; nor make any use of the Premises which is improper, offensive or contrary to any law or ordinance or which will invalidate any of Landlord's insurance. -18- 5.2.3 INSTALLATION, ALTERATIONS OR ADDITIONS. Not to make any installations, alterations or additions in, to or on the Premises other than those items installed pursuant to Tenant's initial approved Improvements under this Lease nor to permit the making of any holes in the walls, partitions, ceilings or floors costing in excess of $50,000.00 (which cost shall not exceed $50,000.00) without on each occasion obtaining the prior written consent of Landlord, and then only pursuant to plans and specifications approved by Landlord in advance in each instance. Notwithstanding the foregoing, to the extent any alteration, addition, or installation to the Premises which costs $50,000.00 or less is inconsistent or incompatible with the use of the Premises for its permitted use or as typical suburban first class office building, Tenant shall bear the sole cost and expense of removing such inconsistent or incompatible installations, alterations and addition at the end of the Lease term or earlier termination thereof. ARTICLE VI CASUALTY OR TAKING 6.1 TERMINATION. In the event that the Premises, or any material part of the Premises or the Building shall be taken by any public authority or for any public use, or shall be destroyed or damaged by fire or casualty, or by the action of any public authority, then this Lease may be terminated at the election of Landlord. Such election, which may be made notwithstanding the fact that Landlord's entire interest may have been divested, shall be made by the giving of written notice by Landlord to Tenant within sixty (60) days after the right of election accrues. In the event Landlord does not give said notice to Tenant within said sixty (60) day period, and Tenant makes at least one written inquiry during the thirty (30) day period following Landlord's sixty (60) day decision period and Tenant still receives no written decisions from Landlord, then in that event, Tenant shall have the right to terminate this Lease. 6.2 RESTORATION. If Landlord does not exercise said election, this Lease shall continue in force and a just proportion of the rent reserved, according to the nature and extent of the damages or taking sustained by the Premises, but not in excess of the net proceeds of insurance recovered by Landlord under the insurance carried by Landlord pursuant to Section 4.2.2.l, and made available to Landlord for restoration. If Landlord's lender receives all Landlord's insurance proceeds, Tenant shall be able to terminate this Lease if Landlord or Landlord's Lender does not rebuild. If Landlord or Landlord's Lender does not terminate, they must restore the building within six months from issuance of a building permit, or Tenant may terminate. If any material damage occurs during the last year of the Lease Term, either Landlord or Tenant can terminate this Lease. The loss of Twenty (20%) percent or more of parking spaces should be deemed "material damage". The minimum rental due and payable shall be suspended or abated until the Premises, or what may remain thereof, shall be restored to substantially the condition the Premises were in prior to the damages today which Landlord covenants to do with reasonable diligence to the extent permitted by the net proceeds of insurance recovered or damages awarded for such taking, destruction or damage and subject to applicable laws, ordinances, codes and regulations then in existence. "Net proceeds of insurance recovered or damages awarded" refers to the gross amount of such insurance or damages less the reasonable expenses of -19- Landlord in connection with the collection of the same, including without limitation, fees and expenses for legal and appraisal services. 6.3 AWARD Irrespective of the form in which recovery may be had by law, except for Tenant's relocation expenses and any award for Tenant's personal property and fixtures, all rights to damages or compensation shall belong to Landlord in all cases whether or not the Lease is terminated. Tenant hereby grants to Landlord all of Tenant's rights to such damages and covenants to deliver such further assignments thereof as Landlord may from time to time request. ARTICLE VII DEFAULTS - Subject to further comment 7.1 EVENTS OF DEFAULT. (a) If Tenant shall default in the performance of any of its obligations to pay the Fixed Rent hereunder, and such failure shall continue for Five (5) business days, or Additional Rent hereunder within twenty (20) days of invoice, provided however, that Tenant may pay Fixed Rent ten (10) days after the date such fixed rent payment is due twice in any twelve (12) month period without being in default, or if within thirty (30) days after notice from Landlord to Tenant specifying any other default or defaults Tenant has not commenced diligently to correct the default or defaults so specified or has not thereafter diligently pursued such correction to completion, or (b) if any assignment shall be made by Tenant or any guarantor of Tenant for the benefit of creditors, or (c) if Tenant's leasehold interest shall be taken on execution, or (d) if a lien or other involuntary encumbrance is filed against Tenant's leasehold interest or Tenant's other property, including said leasehold interest, and is not discharged within sixty (60) days thereafter or (e) if a petition is filed by Tenant or any guarantor of Tenant for liquidation, or for reorganization or an arrangement under any provision of the Bankruptcy Code as then in force and effect, or (f) if an involuntary petition under any of the provisions of said Bankruptcy Code is filed against tenant or any guarantor of Tenant and such involuntary petition is not dismissed within sixty (60) days thereafter, then, and in any of such cases, Landlord and the agents and servants of Land lawfully may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or any time thereafter for so long as the Event of Default remains uncured during cure period and with or without process of law enter into and upon the Premises or any part thereof in the name of the whole or mail a notice of termination addressed to Tenant, and repossess the same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant and remove its and their effects without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used for arrears of rent or prior breach of covenant, and upon such entry or mailing as aforesaid this Lease shall terminate, Tenant hereby waiving all statutory rights (including without limitation rights of redemption, if any, to the extent such rights may be lawfully waived) and Landlord, without notice to Tenant, may store Tenant's effects, and those of any person claiming through or under Tenant at the expense and risk of tenant, and, if Landlord so elects, may sell such effects at public auction or private sale and apply the net proceeds to the payment of all sums due to Landlord from Tenant, if any, and pay over the balance, if any, to Tenant. In addition, Landlord -20- must attempt to relet the space to third parties in order to mitigate Tenant's damages. 7.2 REMEDIES. In the event that this Lease is terminated under any of the provisions contained in Section 7.1 or shall be otherwise terminated for breach of any obligation of tenant, Tenant covenants to pay forthwith to Landlord, as compensation, the excess of the total rent reserved for the residue of the Term over the fair rental value of the Premises for the said residue of the Term, if leased. In calculating the rent reserved there shall be included, in addition to the Fixed Rent and Additional Rent, the value of all other considerations agreed to be paid or performed by Tenant for said residue. Tenant further covenants as additional and cumulative obligations after any such termination to pay punctually to Landlord all the sums and to perform all the obligations which Tenant covenants in this Lease to pay and to perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated. In calculating the amounts to be paid by Tenant pursuant to the next preceding sentence Tenant shall be credited with any amount paid to Landlord as compensation as in this section 7.2 provided and also with the net proceeds of any rent obtained by Landlord by reletting the Premises, after deducting all Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, rental payments for fixturing periods or other free rental periods, if any, under this lease, brokerage commissions, fees for legal services and expenses of preparing the Premises for such reletting, it being agreed by tenant that Landlord may (i) relet the Premises or any part or parts thereof, for a term or terms which may at Landlord's option be equal to or less than or exceed the period which would otherwise have constituted the balance of the Term and may grant such concessions and free rent as Landlord in its reasonable judgment considers advisable or necessary to relet the same and (ii) make such alterations, repairs and decorations in the Premises as Landlord in its reasonable judgment considers advisable or necessary to relet the same, and no action of Landlord in accordance with the foregoing or failure to relet or to collect rent under reletting shall operate or be construed to release or reduce Tenant's liability as aforesaid. In lieu of any other damages or indemnity and in lieu of full recovery by Landlord of all sums payable under all the foregoing provisions of this Section 7.2, Landlord may by notice to Tenant, at any time after this Lease is terminated under any of the provisions contained in Section 7.1 or is otherwise terminated for breach of any obligation of Tenant and before such full recovery, elect to recover, and Tenant shall thereupon pay, as liquidated damages, an amount equal to the aggregate of the Fixed Rent accrued in the shorter of (a) the twelve (12) months ended next prior to such termination or(b) the number of months remaining in the Term, plus the amount of rent of any kind accrued and unpaid at the time of termination and less the amount of any recovery by Landlord under the foregoing provisions of this Section 7.2 up to the time of payment of such liquidated damages. Nothing contained in this Lease shall, however, limit or prejudice the right of Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the -21- proceedings in which, the damages are to be proved, whether or not the amount be greater than, equal to, or less than the amount of the loss or damages referred to above. 7.3 REMEDIES CUMULATIVE. Any and all rights and remedies which Landlord may have under this Lease, and at law and equity, shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time insofar as permitted by law. 7.4 LANDLORD'S RIGHT TO CURE DEFAULTS - Landlord may, but shall not be obligated to, cure, at any time, following ten (10) days' prior notice to Tenant, except in cases of emergency when no notice shall be required, any default by Tenant under this Lease; and whenever Landlord so elects, all costs and expenses incurred by Landlord, including reasonable attorneys' fees, in curing a default shall be paid by Tenant to Landlord as Additional Rent on demand, together with interest thereon at the rate provided in Section 4.3 from the date of payment by Landlord to the date of payment by Tenant. 7.5 EFFECT OF WAIVERS OF DEFAULT. Any consent or permission by Landlord to any act or omission which otherwise would be a breach of any covenant or condition herein, or any waiver by Landlord of the breach of any covenant or condition herein, shall not in any way be held or construed (unless expressly so declared) to operate so as to impair the continuing obligation of any covenant or condition herein, or otherwise, except as to the specific instance, operate to permit similar acts or omissions. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease shall not be deemed a waiver of such violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed to have been a waiver of such breach by Landlord, or by Tenant, unless such waiver be in writing signed by the party to be charged. No consent of waiver, express or implied, by Landlord to or of any breach of any agreement or duty shall be construed as a waiver or consent to or of any other breach of the same or any other agreement or duty. 7.6 NO ACCORD AND SATISFACTION. No acceptance by Landlord of a lesser sum than the Fixed Rent, Additional Rent or any other charge then due shall be deemed to be other than on account of the earliest installment of such rent or charge due, unless Landlord elects by notice to Tenant to credit such sum against the most recent installment due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent or other charge be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided. -22- ARTICLE VIII 8.1 RIGHTS OF MORTGAGE HOLDERS. The word "mortgage" as used herein includes mortgages, deeds of trust or other similar instruments evidencing other voluntary liens or encumbrances, and modifications, consolidations, extensions, renewals, replacements and substitutes thereof. The word "holder" shall mean a mortgagee, and any subsequent holder or holders of a mortgage. Until the holder of a mortgage shall enter and take possession of the Premises for the purpose of foreclosure, such holder shall have only such rights of Landlord as are necessary to preserve the integrity of this Lease as security. Upon entry and taking possession of the Premises for the purpose of foreclosure, such holder shall have all the rights of Landlord. Notwithstanding any other provision of this Lease to the contrary, including without limitation Section 9.4, no such holder of a mortgage shall be liable either as mortgagee or as assignee, to perform, or be liable in damages for failure to perform, any of the obligations of Landlord unless and until such holder shall enter and take possession of the Premises for the purpose of foreclosure, or shall be deemed to be a Mortgagee in possession under Massachusetts Law and such holder shall not in any event be liable to perform or for failure to perform the obligations of Landlord under Section 3.1. Upon entry for the purpose of foreclosure or shall be deemed to be a mortgagee possession under Massachusetts Laws, and such holder shall be liable to perform all of the obligations of Landlord (except for the obligations under Section 3.1), subject to and with the benefit of the provisions of Section 9.4, provided that a discontinuance of any foreclosure proceeding shall be deemed a conveyance under said improvisions to the owner of the equity of the Premises. No Fixed Rent, Additional Rent or any other charge shall be paid more than thirty (30) days prior to the due dates thereof and payments made in violation of this provision shall (except to the extent that such payments are actually received by a mortgagee in possession or in the process or foreclosing its mortgage) be a nullity as against such mortgagee and Tenant shall be liable for the amount of such payments to such mortgagee. The covenants and agreements contained in this Lease with respect to the rights, powers and benefits of holder of a mortgage (including, without limitation, the covenants and agreements contained in this Section 8.1) constitute a continuing offer to any person, corporation or other entity, which by accepting a mortgage subject to this Lease, assumes the obligations herein set forth with respect to such holder; such holder is hereby constituted a party of this Lease as an obligee hereunder to the same extent as though its name were written hereon as such; and such holder shall be entitled to enforce such provisions in its own name. Tenant agrees on request of Landlord to execute and deliver from time to time any agreement which may be necessary to implement the provisions of this Section 8.1. 8.2 SUPERIORITY OF LEASE; OPTION TO SUBORDINATE. This Lease shall be subordinate to any construction mortgage, at the option of the construction mortgagee, and to any other voluntary lien or other encumbrance on the Premises. This Lease will be superior to any such construction mortgage only after the Commencement Date of this Lease. Landlord shall have the option to subordinate this lease to any permanent first mortgage of the Premises provided that the holder of record thereof enters into an agreement with Tenant by the terms of which such holder will agree to recognize the rights of Tenant under this Lease and to accept -23- Tenant as tenant of the Premises under the terms and conditions of this Lease in the event of acquisition of title by such holder through foreclosure proceedings or otherwise and Tenant will agree to recognize the holder of such mortgage as Landlord in such event, which agreement shall be made expressly to bind and inure to the benefit of the successors and assigns of Tenant and of the holder and upon anyone purchasing said Premises at any foreclosure sale. Tenant and Landlord agree to execute and deliver any appropriate instruments necessary to carry out the agreements contained in this Section 8.2. Any such mortgage to which this Lease shall be subordinated may contain such terms, provisions and conditions as the holder deems usual or customary. Landlord agrees to provide Tenant evidence of such from Landlord's Lender within a reasonable time of the execution of this Lease, or refinancing of the Project by a Subordination Non Disturbance and Attornment Agreement mutually agreed to between Tenant and Landlord's Lender. 8.3 LEASE AMENDMENTS. Tenant agrees to make such changes in this Lease as may be reasonably required by the holder of any mortgage upon the Project, or any institution which may purchase all or a substantial part of Landlord's interest in the Project, provided that such changes may not increase the Fixed Rent or other payments due hereunder or otherwise materially affect the obligations of Tenant hereunder. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1 NOTICES FROM ONE PARTY TO THE OTHER. All notices required or permitted hereunder shall be in writing and addressed, if to the Tenant, at the Original Address of Tenant (with a copy to such address to the attention of General Counsel), or such other address as Tenant shall have last designated by notice in writing to Landlord and, if to Landlord, at the Original Address of Landlord or such other address as Landlord shall have last designated by notice in writing to Tenant. Any notice shall be deemed duly given when mailed to such address postage prepaid, registered or certified mail, return receipt requested, or when delivered to such address by hand, with proper receipt received from Tenant. 9.2 QUIET ENJOYMENT. Landlord agrees that upon Tenant's paying the rent and performing and observing the terms, covenants, conditions and provisions on its part to be performed and observed, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises during the Term without any manner of hindrance or molestation from Landlord or anyone claiming under Landlord, subject, however, to the terms of this Lease. 9.3 LEASE NOT TO BE RECORDED. Tenant agrees that it will not record this Lease. Both parties shall, upon the request of either, execute and deliver a notice or short form of this Lease in such form, if any, as may be permitted by applicable statute. If this Lease is terminated before the Term expires the parties shall execute, deliver and record an instrument acknowledging such fact and the actual date of termination of this Lease, if Tenant fails to execute such instrument within Twenty (20) days after a request from the Landlord therefor, Tenant should be deemed to have appointed Landlord its Attorney in fact, coupled with an interest, -24- with full power of substitution to execute such instrument. Tenant shall reimburse Landlord for all expenses and costs which Landlord may incur if Tenant fails to execute an instrument acknowledging any termination of this Lease. 9.4 BIND AND INURE; LIMITATION OF LANDLORD'S LIABILITY. The obligations of this Lease shall run with the Premises, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No owner of the Premises shall be liable under this Lease except for breaches of Landlord's obligations occuring while owner of the Premises. The obligations of Landlord shall be binding upon the assets of Landlord which comprise the Project but not upon other assets of Landlord. Neither Landlord nor any individual partner, trustee, stockholder, officer, director, employee or beneficiary of Landlord shall be liable under this Lease and Tenant shall look solely to Landlord's interest in the project in pursuit of its remedies upon an event of default hereunder, and the general assets of the individual partners, trustees, stockholders, officers, employees or beneficiaries of Landlord shall not be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Tenant; provided that the foregoing provisions of this sentence shall not constitute a waiver of any obligation evidenced by this Lease and provided further that the foregoing provisions of this sentence shall not limit the right of Tenant to name Landlord or any individual partner or trustee thereof as party defendant in any action or suit in connection with this Lease so long as no personal money judgment shall be asked for or taken against Landlord or any individual partner, trustee, stockholder, officer, employee or beneficiary of Landlord. 9.5 ACTS OF GOD. In any case where either party hereto is required to do any act, delays caused by or resulting from Acts of God, war, civil commotion, fire, flood or other casualty, labor difficulties, shortages of labor, materials or equipment, government regulations, unusually severe weather, or other causes beyond such party's reasonable control shall not be counted in determining the time during which work shall be completed, whether such time be designated by a fixed date, a fixed time or a "reasonable time", and such time shall be deemed to be extended by the period of such delay. 9.6 LANDLORD 'S DEFAULT. Landlord shall not be deemed to be in default of the performance of any of its obligations hereunder unless it shall fail to perform such obligations and such failure shall continue for a period of thirty (30) days or such additional time as is reasonably required to correct any such default after notice has been given by Tenant to Landlord specifying the nature of Landlord's alleged default. Tenant may terminate this Lease upon said thirty (30) days written notice to Landlord. Except as provided in the preceding sentence, Tenant shall have no right to terminate this Lease for any default by Landlord. Tenant shall have no right; however, for any such default, to offset or counterclaim against any rent due hereunder, and no right or claim to any indirect or consequential damages relating to any such default. 9.7 BROKERAGE. Tenant warrants and represents that it has had no dealings with any broker or agent in connection with this Lease except CB Richard Ellis/ Whittier Partners and covenants to defend with counsel reasonably approved by Landlord, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any -25- broker or agent with respect to Tenant's dealings in connection with this Lease or the negotiation thereof. Landlord shall be responsible for payment of the brokerage commission to CB Richard Ellis/Whittier Partners in connection with this Lease. 9.8 SECURITY DEPOSIT. Intentionally Omitted 9.9 APPLICABLE LAW AND CONSTRUCTION. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. If any term, covenant, condition or provision of this Lease or the application thereof to any person or circumstances shall be declared invalid, or unenforceable by the final ruling of a court of competent jurisdiction having final review, the remaining terms, covenants, conditions and provisions of this Lease and their application to persons or circumstances shall not be affected thereby and shall continue to be enforced and recognized as valid agreements of the parties, and in the place of such invalid or unenforceable provision, there shall be substituted a like, but valid and enforceable provision which comports to the findings of the aforesaid court and most nearly accomplishes the original intention of the parties. There are no oral or written agreements between Landlord and Tenant affecting this Lease. This Lease may be amended, and the provisions hereof may be waived or modified, only by instruments in writing executed by Landlord and Tenant. The titles of the several Articles and Sections contained herein are for convenience only and shall not be considered in construing this Lease. Unless repugnant to the context, the words "Landlord" and "Tenant" appearing in this Lease shall be construed to mean those named above and their respective heirs, executors, administrators, successors and assigns, and those claiming through or under them respectively. If there be more than one tenant the obligations imposed by this Lease upon Tenant shall be joint and several. 9.10 SUBMISSION NOT AN OFFER. The submission of a draft of this Lease or a summary of some or all of its provisions does not constitute an offer to lease or demise the Premises, it being understood and agreed that neither Landlord nor Tenant shall be legally bound with respect to the leasing of the Premises unless and until this Lease has been executed by both Landlord and Tenant and a fully executed copy delivered. Landlord agrees that it shall, at Tenant's expense, cooperate with, support, consult with, and provide information in its possession to Tenant in seeking, applying for and obtaining any and all consents, permits, licenses, certificates, waivers, special permits, approvals and the like required, or deemed necessary or appropriate by Tenant, in connection with (a) Tenant's use and occupancy of the Premises for the Permitted Use and/or (b) Tenant's exercise of its rights and/or performance of its obligations under this Lease. Landlord agrees that such cooperation shall include, without limitation, the co-signing of applications, the providing of support and information that can reasonably be made available by the record owner of the -26- Premises but not by other parties, providing letters of support or other supporting information or evidence for submission to hearings or proceedings before any zoning, planning, land use or regulatory board or authority or any license or permit granting board or authority. 9.11 NO HAZARDOUS WASTE. Landlord represents and warrants that neither Landlord, nor, to the best of Landlord's knowledge, any prior owner of the Premises, has generated, stored or disposed of any oil, hazardous waste or hazardous materials on or under the Premises on or before the Commencement Date. Landlord shall indemnify and hold harmless Tenant against any and all loss, damage, cost or expense (including reasonable attorney's fees) incurred by Tenant by reason of the discharge of or the presence of oil, hazardous waste or hazardous materials on or under the Premises as of the Commencement Date. Tenant covenants that Tenant shall not cause or permit the discharge of oil, hazardous waste or hazardous materials upon the Premises during the Term, and Tenant shall indemnify and hold harmless Landlord against any and all loss, damage, cost or expense (including reasonable attorney's fees) incurred by Landlord by reason of the discharge of such materials on or under the Premises by Tenant. 9.12 AUTHORITY TO SIGN: No employee or agent of Landlord or Landlord's broker, if any, has authority to make a lease or any other warranty representation, agreement or undertaking prior to or after the signing of the lease. The submission of this document for examination and negotiation does not constitute an offer to lease or a reservation of or option for the Demised Premises, and this document will become effective and binding only upon execution and delivery by Landlord and an authorized officer of Tenant. All negotiation, considerations, representations and understandings between the parties are incorporated in this document and may be modified or altered only by agreement in writing between the parties, and no act or omission of any employee or agent of the parties or any broker, if any shall alter, change or modify any of the provisions of this lease. WITNESS the execution hereof under seal on the day and year first above written. -27- WITNESS the execution hereof under seal on the day and year first above written. "LANDLORD": FAFARD REAL ESTATE AND DEVELOPMENT CORP. BY /s/ Richard E. Terrill --------------------------------------- hereunto duly authorized "TENANT": GENZYME CORPORATION BY /s/ Evan M. Lebson --------------------------------------- hereunto duly authorized -28- EXHIBIT "C" A. AFFIRMATIVE OBLIGATIONS Tenant agrees that it shall: 1. Keep Premises Clean: Keep the Premises (including without limitation exterior and interior portions of all windows, doors, and all other glass, if any), in a neat and clean condition; 2. Comply with Laws: Promptly comply with all laws, ordinances rules and regulations of governmental authorities (including zoning laws and building codes) affecting the Premises, but this Clause "2" shall not be construed to require Tenant to comply such laws, ordinances, rules or regulations which require structural changes in the Premises or the building, if any unless the same are made necessary by any act or work performed by Tenant or by the nature of Tenant's business, or the manner of operation thereof; 3. Dispose of Garbage: Handle and dispose of all rubbish, garbage and waste from Tenant's operations in accordance with regulations established by the seller and not permit the accumulation (unless in concealed metal containers), or burning, of any rubbish or garbage in, on or about any part of the Premises. B. NEGATIVE OBLIGATIONS Tenant agrees that it shall not at any time: 1. Change Exterior Architecture: Change (whether any alteration, replacement, rebuilding, or otherwise) the exterior color and/or architectural treatment of the Premises or of the building in which same are located, or any part thereof which consent shall not be unreasonably withheld; 2. Permit Odors, etc.: Suffer, allow or permit any offensive or obnoxious vibration, noise, odor, or other undesirable effect to emanate from the Premises, or any machine or other installation therein, or otherwise suffer, allow, or permit the same to constitute a nuisance or otherwise unreasonably interfere with the safety, comfort or convenience of Landlord or any Landlords or their customers, agents, or invitees, or any other lawfully in or upon the Premises; upon notice by Landlord to Tenant that any of the aforesaid is -29- occurring Tenant shall forthwith (but in all events within five (5) days) remove or control the same. 3. Injure Reputation: Use or occupy the Premises for any purpose calculated to injure the reputation of said Premises and/or the or of the neighborhood in which the same are located or to, presently or in the future, impair the value of said Premises. C. GENERAL CONDITIONS 1. Signs a. Tenant shall not without Landlord's prior consent, place or install any sign on the roof or on any exterior wall of any building on the parcel (including, without limitation, both the interior and exterior surfaces or windows and doors) except that Tenant may install and maintain at its own cost and expense, including payments for permits, a front sign, subject to approval of Landlord as to dimensions, content, material, location and design, which approval shall not be unreasonably withheld. Tenant agrees that no signs will be manufactured or installed on the Premises are located until all approvals and permits are first obtained and copies thereof delivered to Landlord together with evidence of payment for fees pertaining to Tenant's signs. Tenant shall have the right to construct, at its expense, a monument sign, the design and materials for which shall be subject to Landlord's approval in advance of construction. b. Tenant shall not place in any area visible to public view from the outside of the parcel (i) and so-called "flashing" or "animated" sign or one which otherwise has variations in the intensity of illumination without first obtaining Landlord's approval as to the number, size, type, intensity (if illuminated) and location thereof. Tenant shall not, after obtaining any such approval, change any sign in any respect whatsoever without first obtaining from Landlord a further such approval. c. As used in this Section C.I., the word "sign" shall be construed to include any placard, light or other advertising symbol or object irrespective of whether same be temporary or permanent. -30- EX-27 4 a2029877zex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (a) THE UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (b) FINANCIAL STATEMENTS AS INCLUDED IN THE FORM 10-Q FOR GENZYME CORPORATION DATED SEPTEMBER 30, 2000. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 215,568 592,732 207,079 23,300 123,878 758,762 614,463 213,833 2,076,546 175,549 0 0 0 1,459 1,597,618 2,076,546 654,785 659,402 165,631 201,517 272,694 5,574 12,785 166,832 51,101 115,731 0 0 0 115,731 2.14 1.99 GENZYME CORPORATION REPORTS EARNINGS PER SHARE FOR EACH OF ITS FOUR SERIES OF COMMON STOCK. THE EARNINGS PER SHARE INFORMATION PRESENTED ON THIS SCHEDULE REPRESENTS THE EARNINGS PER SHARE DATA FOR NET INCOME ALLOCATED TO GENZYME GENERAL STOCK. FOR THE PERIOD PRESENTED, NET INCOME ALLOCATED TO GENZYME GENERAL STOCK WAS $182,121. FOR THE PERIOD PRESENTED, NET LOSS ALLOCATED TO MOLECULAR ONCOLOGY STOCK WAS $(17,924) OR $(1.28) PER BASIC AND DILUTED SHARE OF MOLECULAR ONCOLOGY STOCK, NET LOSS ALLOCATED TO SURGICAL PRODUCTS STOCK WAS $(34,346) OR $(2.30) PER BASIC AND DILUTED SHARE OF SURGICAL PRODUCTS STOCK, AND NET LOSS ALLOCATED TO TISSUE REPAIR STOCK WAS $(14,590) OR $(0.51) PER BASIC AND DILUTED SHARE OF TISSUE REPAIR STOCK.
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