-----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, FiJlbPTBjBis0ZUn2QqLMJGcT6L36IEoPovIC79G64iTTm9cSltqC5io4mPnWhjB XLXQ1Q0wnS2ydXukgr8qyw== 0000912057-01-538511.txt : 20020410 0000912057-01-538511.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-538511 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14680 FILM NUMBER: 1780048 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 a2061919z10-q.txt FORM 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, 2001 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, MASSACHUSETTS 02139 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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, 2001: Genzyme General Division Common Stock....................... 212,188,951 Genzyme Biosurgery Division Common Stock.................... 39,479,457 Genzyme Molecular Oncology Division Common Stock............ 16,722,572
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE REGARDING FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements, including statements regarding our: - planned divestiture of the Snowden-Pencer-Registered Trademark- surgical product lines and the expected timing of the transaction; - planned completion of our acquisition of certain assets of Pharming N.V. and the expected timing of the transaction; - potential additional payments in connection with the acquisition of Novazyme Pharmaceuticals, Inc.; - expected future revenues, operations and expenditures; - product development and commercialization plans and expected timetables; and - projected cash needs. These statements 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 and successfully enforce our proprietary rights; - the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services, including growth projections; - market acceptance of our products and services; - the accuracy of our information regarding the products and resources of our competitors and potential competitors; - the content and timing of submissions to and decisions made by the Food and Drug Administration, commonly referred to as the FDA, and other regulatory agencies; - the impact of the May 2001 expiration of the orphan drug status of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes on our revenues from these products; - our ability to satisfy the FDA's request for additional data and information in connection with our Biologics License Application submission for Fabrazyme-TM- enzyme; - our ability to obtain reimbursement for our products and services from third-party payors, and the extent of such coverage; - our ability to expand manufacturing capacity for sevelamer hydrochloride for Renagel-Registered Trademark- capsules and tablets; - our ability to optimize dosing and improve patient compliance with Renagel-Registered Trademark- capsules and tablets; - our ability to establish and maintain strategic license, collaboration and distribution arrangements; i - the continued funding of our joint ventures by our partners; - our ability to successfully increase market penetration for Synvisc-Registered Trademark- viscosupplementation product as a treatment for osteoarthritis of the knee and to expand its use in other joints; - the success of our Fabrazyme-TM- and Thyrogen-Registered Trademark- product launches in Europe; - our ability to successfully negotiate purchase and sale agreements for our Snowden-Pencer-Registered Trademark- surgical product lines; - the impact of Pharming Group N.V.'s receivership on the realizable value of amounts due to us arising out of our joint ventures with Pharming and on our Pompe disease research and development activities; - our ability to complete our acquisition of certain assets of Pharming N.V. and to prevail in any appeal related to that acquisition; - the ability to successfully develop and receive FDA approval for products for the treatment of lysosomal storage disorders that employ certain of Novazyme's technologies, and the timing thereof; - the possible disruption of our operations due to terrorist activities and armed conflict, including as a result of the disruption of operations of our subsidiaries and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites; and - the operational integration and other risks associated with acquisitions. For a further description of these risks and other uncertainties, we encourage you to 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, 2000, as amended (our "2000 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 three operating divisions as follows: - Genzyme General Division = "Genzyme General;" - Genzyme Biosurgery Division = "Genzyme Biosurgery;" and - Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology." We currently have three 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 Biosurgery Division Common Stock = "Biosurgery Stock;" and - Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology Stock." Holders of Genzyme General Stock, Biosurgery Stock and Molecular Oncology 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 2000 Form 10-K. ii NOTE REGARDING INCORPORATION BY REFERENCE The Securities and Exchange Commission, commonly referred to as 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-, CARTICEL-Registered Trademark-, EPICEL-Registered Trademark- and SNOWDEN-PENCER-Registered Trademark- are registered trademarks of Genzyme. SAGE-TM-, SEPRA-TM-, SEPRAFILM-TM-, SEPRAMESH-TM-, SEPRAGEL-TM- and FABRAZYME-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. SYNVISC-Registered Trademark-, HYLAFORM-Registered Trademark- and HYLAGEL-Registered Trademark- are registered trademarks of Genzyme Biosurgery Corporation. FOCALSEAL-Registered Trademark- is a registered trademark of Focal, Inc. NEUROCELL-TM- is a trademark of Diacrin/Genzyme LLC. ALDURAZYME-TM- is a trademark of BioMarin/Genzyme LLC. WELCHOL-TM- is a trademark of Sankyo Pharma Inc. iii GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2001 TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000.................................................... 1 Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 4 Unaudited, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000........... 5 Notes to Unaudited, Consolidated Financial Statements..... 6 GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000....... 26 Combined Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 27 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................ 28 Notes to Unaudited, Combined Financial Statements......... 29 GENZYME BIOSURGERY Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000....... 42 Combined Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 43 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................ 44 Notes to Unaudited, Combined Financial Statements......... 45 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000....... 50 Combined Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000....................... 51 Unaudited, Combined Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................ 52 Notes to Unaudited, Combined Financial Statements......... 53 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 54 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................... 105 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds........... 106 ITEM 6. Exhibits and Reports on Form 8-K.................... 106 Signatures.................................................. 107
iv PART 1. 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, -------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- -------- Revenues: Net product sales......................................... $ 291,959 $206,645 $ 816,262 $592,505 Net service sales......................................... 23,988 19,967 71,983 62,280 Revenues from research and development contracts: Related parties......................................... 1,043 -- 2,726 -- Other................................................... 2,505 747 7,426 4,617 --------- -------- --------- -------- Total revenues........................................ 319,495 227,359 898,397 659,402 --------- -------- --------- -------- Operating costs and expenses: Cost of products sold..................................... 75,462 63,729 231,594 165,631 Cost of services sold..................................... 14,041 12,068 40,890 35,886 Selling, general and administrative....................... 122,030 66,379 316,810 195,358 Research and development (including research and development related to contracts)....................... 69,127 39,678 188,651 123,954 Amortization of intangibles............................... 30,950 3,409 90,115 15,191 Purchase of in-process research and development........... 86,800 -- 95,568 -- --------- -------- --------- -------- Total operating costs and expenses.................... 398,410 185,263 963,628 536,020 --------- -------- --------- -------- Operating income (loss)..................................... (78,915) 42,096 (65,231) 123,382 --------- -------- --------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (8,110) (11,420) (28,921) (30,866) Gain on affiliate sale of stock........................... 212 2,419 212 22,689 Gain (loss) on investments in equity securities........... (24,464) 8,544 (25,996) 22,709 Minority interest in net loss of subsidiary............... 260 977 2,259 3,185 Other..................................................... (1,192) (10) (5,035) 5,185 Investment income......................................... 13,718 12,758 36,359 33,333 Interest expense.......................................... (8,739) (5,010) (30,875) (12,785) --------- -------- --------- -------- Total other income (expenses)......................... (28,315) 8,258 (51,997) 43,450 --------- -------- --------- -------- Income (loss) before income taxes........................... (107,230) 50,354 (117,228) 166,832 Benefit from (provision for) income taxes................... 4,554 (15,933) 7,288 (51,101) --------- -------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle...................................... (102,676) 34,421 (109,940) 115,731 Cumulative effect of change in accounting principle, net of tax....................................................... -- -- 4,167 -- --------- -------- --------- -------- Net income (loss)........................................... $(102,676) $ 34,421 $(105,773) $115,731 ========= ======== ========= ======== Comprehensive income (loss), net of tax: Net income (loss)......................................... $(102,676) $ 34,421 $(105,773) $115,731 --------- -------- --------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ 17,267 (10,273) (577) (20,628) Unrealized loss on derivatives, net of tax.............. (1,444) -- (1,733) -- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... (8,675) 44,223 (9,661) 48,597 Reclassification adjustment for (gains) losses included in net income.............................. 15,535 -- 16,507 (5,501) --------- -------- --------- -------- Unrealized gains on securities, net................... 6,860 44,223 6,846 43,096 --------- -------- --------- -------- Other comprehensive income................................ 22,683 33,950 4,536 22,468 --------- -------- --------- -------- Comprehensive income (loss)................................. $ (79,993) $ 68,371 $(101,237) $138,199 ========= ======== ========= ========
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, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Net income (loss) before cumulative effect of change in accounting principle.................. $(81,706) $ 50,973 $(34,843) $160,272 Cumulative effect of change in accounting principle, net of tax........................... -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income (loss)................. (81,706) 50,973 (30,676) 160,272 Tax benefit allocated from Genzyme Biosurgery..... 2,918 6,455 20,661 16,291 Tax benefit allocated from Genzyme Molecular Oncology........................................ 2,687 2,021 9,367 5,558 -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock........................................... $(76,101) $ 59,449 $ (648) $182,121 ======== ======== ======== ======== Net income (loss) per share of Genzyme General Stock: Basic: Net income (loss) per share before cumulative effect of change in accounting principle...... $ (0.37) $ 0.34 $ (0.02) $ 1.07 Per share cumulative effect of change in accounting principle, net of tax.............. -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock................................. $ (0.37) $ 0.34 $ 0.00 $ 1.07 ======== ======== ======== ======== Diluted: Net income (loss) per share before cumulative effect of change in accounting principle...... $ (0.37) $ 0.32 $ (0.02) $ 0.99 Per share cumulative effect of change in accounting principle, net of tax.............. -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock................................. $ (0.37) $ 0.32 $ 0.00 $ 0.99 ======== ======== ======== ======== Weighted average shares outstanding: Basic............................................. 208,350 172,759 198,841 170,553 ======== ======== ======== ======== Diluted........................................... 208,350 194,148 198,841 191,229 ======== ======== ======== ======== ALLOCATED TO BIOSURGERY STOCK: Net loss.......................................... $(21,525) $(94,460) Allocated tax benefit............................. 2,444 11,434 -------- -------- Net loss allocated to Biosurgery Stock............ $(19,081) $(83,026) ======== ======== Net loss per share of Biosurgery Stock--basic and diluted......................................... $ (0.48) $ (2.22) ======== ======== Weighted average shares outstanding............... 39,376 37,479 ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss.......................................... $ (7,494) $ (5,504) $(22,099) $(17,924) ======== ======== ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................ $ (0.45) $ (0.37) $ (1.36) $ (1.28) ======== ======== ======== ======== Weighted average shares outstanding............... 16,679 14,884 16,225 14,002 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 2 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, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET INCOME (LOSS) PER SHARE (CONTINUED): ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................................... $(13,936) $(34,346) ======== ======== Net loss per share of Surgical Products Stock--basic and diluted....................... $ (0.93) $ (2.30) ======== ======== Weighted average shares outstanding.............. 14,959 14,907 ======== ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................................... $ (5,588) $(14,590) ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted.................................... $ (0.19) $ (0.51) ======== ======== Weighted average shares outstanding.............. 28,795 28,664 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 223,420 $ 236,213 Short-term investments.................................... 113,582 104,586 Accounts receivable, net.................................. 239,276 205,094 Inventories............................................... 173,952 170,341 Prepaid expenses and other current assets................. 37,477 37,681 Deferred tax assets--current.............................. 47,074 46,836 ---------- ---------- Total current assets.................................... 834,781 800,751 Property, plant and equipment, net.......................... 595,028 504,412 Long-term investments....................................... 746,583 298,841 Notes receivable-related party.............................. -- 10,350 Intangibles, net............................................ 1,561,037 1,539,782 Investments in equity securities............................ 78,279 121,251 Other noncurrent assets..................................... 47,563 42,713 ---------- ---------- Total assets............................................ $3,863,271 $3,318,100 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 41,119 $ 26,165 Accrued expenses.......................................... 147,298 139,683 Income taxes payable...................................... 51,502 46,745 Deferred revenue.......................................... 3,667 8,609 Current portion of long-term debt and capital lease obligations............................................. 8,135 19,897 ---------- ---------- Total current liabilities............................... 251,721 241,099 Long-term debt and capital lease obligations................ 244,037 381,560 Convertible notes and debentures............................ 585,000 283,680 Deferred tax liabilities.................................... 168,723 230,384 Other noncurrent liabilities................................ 25,456 6,236 ---------- ---------- Total liabilities....................................... 1,274,937 1,142,959 ---------- ---------- Stockholders' equity: Genzyme General Stock, $0.01 par value.................... 2,119 956 Biosurgery Stock, $0.01 par value......................... 395 364 Molecular Oncology Stock, $0.01 par value................. 167 159 Treasury Stock--Genzyme General--at cost.................. (901) (901) Additional paid-in capital-Genzyme General Stock.......... 1,747,042 1,269,284 Additional paid-in capital-Biosurgery Stock............... 846,368 823,353 Additional paid-in capital-Molecular Oncology Stock....... 116,204 111,484 Deferred compensation..................................... (5,132) (9,943) Notes receivable from stockholders........................ (11,836) (14,760) Accumulated deficit....................................... (111,511) (5,738) Accumulated other comprehensive income.................... 5,419 883 ---------- ---------- Total stockholders' equity.............................. 2,588,334 2,175,141 ---------- ---------- Total liabilities and stockholders' equity.............. $3,863,271 $3,318,100 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $(105,773) $ 115,731 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 125,203 45,374 Non-cash compensation expense........................... 7,375 -- Provision for bad debts................................. 2,246 5,574 Note received from a collaborator....................... -- (10,175) Write-off of note received from a collaborator.......... 10,159 -- Charges for in-process research and development......... 95,568 -- Equity in net loss of unconsolidated affiliates......... 28,921 30,866 Gain on affiliate sale of stock......................... (212) (22,689) (Gain) loss on investments in equity securities......... 25,996 (22,709) Minority interest in net loss of subsidiary............. (2,259) (3,185) Deferred income tax expense (benefit)................... (17,165) 4,668 Other................................................... (2,564) 2,224 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (36,104) (30,053) Inventories........................................... 10,551 (15,185) Prepaid expenses and other current assets............. (1,800) (1,970) Accounts payable, accrued expenses, income taxes payable and deferred revenue........................ 30,453 19,109 --------- --------- Net cash provided by operating activities............. 170,595 117,580 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (750,075) (498,916) Sales and maturities of investments....................... 314,233 433,150 Purchases of equity securities............................ (8,318) (5,000) Proceeds from sale of investments in equity securities.... 36 15,773 Purchases of property, plant and equipment................ (123,229) (52,263) Acquisitions, net of acquired cash........................ (78,379) (342) Investments in unconsolidated affiliates.................. (31,298) (19,639) Other..................................................... 5,679 (1,521) --------- --------- Net cash used in investing activities................. (671,351) (128,758) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 74,488 104,122 Payments of notes receivable from stockholders............ 2,896 -- Proceeds from issuance of debt............................ 562,062 -- Payments of debt and capital lease obligations............ (155,128) (5,000) Bank overdraft............................................ 2,111 -- Other..................................................... 3,237 1,276 --------- --------- Net cash provided by financing activities............. 489,666 100,398 --------- --------- Effect of exchange rate changes on cash..................... (1,703) (3,808) --------- --------- Increase (decrease) in cash and cash equivalents............ (12,793) 85,412 Cash and cash equivalents at beginning of period............ 236,213 130,156 --------- --------- Cash and cash equivalents at end of period.................. $ 223,420 $ 215,568 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 5 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, statements 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 these rules, we condense or omit certain footnotes and other financial information normally required by generally accepted accounting principles. We have reclassified certain 2000 data to conform to our 2001 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 2000 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. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations be accounted for under the purchase method and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by us in fiscal year 2002. However, for goodwill and intangible assets acquired after June 30, 2001, certain provisions of SFAS 142 will be effective from the date of acquisition. For the nine months ended September 30, 2001, we had approximately $37.6 million of goodwill amortization, however, the full impact of SFAS 141 and SFAS 142 on our financial statements has not been determined. 3. ACQUISITIONS AND DISPOSITION CLASS A AND CLASS B LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT PARTNERS, L.P. In January 2001, we purchased all of the outstanding Class A limited partnership interests of Genzyme Development Partners, L.P., which we refer to as GDP, for a payment of approximately $25.7 million in cash plus royalties payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. Accordingly, we included the results of operations of GDP in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001. 6 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) We allocated the purchase prices to the fair value of the intangible assets acquired as follows (amounts in thousands):
CLASS A CLASS B LIMITED LIMITED PARTNERSHIP PARTNERSHIP INTERESTS INTERESTS TOTAL ----------- ----------- -------- Patents (to be amortized over 8 years)........ $ 5,909 $ -- $ 5,909 Trademarks (to be amortized over 10 years).... 2,755 -- 2,755 Technology (to be amortized over 10 years).... 8,827 -- 8,827 Goodwill (to be amortized over 10 years)...... 8,234 180 8,414 ------- ---- ------- Total....................................... $25,725 $180 $25,905 ======= ==== =======
WYNTEK DIAGNOSTICS, INC. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, we included the results of operations of Wyntek in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Cash paid................................................... $ 65,000 Acquisition costs........................................... 234 -------- Total purchase price...................................... $ 65,234 ======== Cash and cash equivalents................................... $ 4,974 Other current assets........................................ 4,966 Property, plant and equipment............................... 1,843 Deferred tax assets......................................... 2,312 Intangible assets (to be amortized over 5 to 10 years)...... 39,444 In-process research and development......................... 8,768 Goodwill (to be amortized over 10 years).................... 19,908 Deferred tax liability...................................... (14,197) Assumed liabilities......................................... (2,784) -------- Allocated purchase price.................................. $ 65,234 ========
In connection with the acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to in-process research and development or IPR&D. Our management assumed responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate 7 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) the present value of these cash flows, which was consistent with the risks of the project. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. In the allocation of purchase price to IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the nine months ended September 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenue from the sale of this product. Wyntek is currently developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The device will be used to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process and file an application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. FOCAL, INC. In January 2001, Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued 2,086,151 shares of Biosurgery Stock as merger consideration. We also assumed all of the outstanding options to purchase Focal common stock and exchanged them for options to purchase Biosurgery Stock on an as-converted basis. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. 8 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Issuance of 2,086,151 shares of Biosurgery Stock............ $ 9,450 Issuance of options to purchase 231,566 shares of Biosurgery Stock..................................................... 351 Acquisition costs........................................... 638 Existing equity investment in Focal......................... 5,488 Cash paid to selling security holder........................ 11 ------- Total purchase price...................................... $15,938 ======= Cash and cash equivalents................................... $ 2,331 Other current assets........................................ 6,003 Property, plant and equipment............................... 1,818 Notes receivable from related party......................... 168 Intangible assets (to be amortized over 3 to 12 years)...... 7,909 Goodwill (to be amortized over 12 years).................... 1,115 Assumed liabilities......................................... (3,773) Notes receivable from stockholders.......................... 367 ------- Allocated purchase price.................................. $15,938 =======
ATIII LLC In July 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics Corporation for the development and commercialization of ATIII, to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of any of Genzyme Transgenics' products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. Prior to the transfer, we consolidated the results of ATIII LLC because we had control of ATIII LLC through our combined, direct and indirect ownership interest in the joint venture. NOVAZYME PHARMACEUTICALS, INC. In September 2001, we acquired all of the outstanding capital stock of Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock and exchanged them for options, warrants and rights to purchase Genzyme General Stock, on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. 9 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Issuance of 2,562,182 shares of Genzyme General Stock....... $110,584 Issuance of options to purchase 158,840 shares of Genzyme General Stock............................................. 6,274 Issuance of warrants to purchase 25,338 shares of Genzyme General Stock............................................. 894 Issuance of rights to purchase 66,846 shares of Genzyme General Stock............................................. 1,839 Acquisition costs........................................... 951 -------- Total purchase price...................................... $120,542 ======== Cash and cash equivalents................................... $ 5,194 Other current assets........................................ 63 Property, plant and equipment............................... 4,475 Goodwill.................................................... 17,336 In-process research and development......................... 86,800 Deferred tax asset.......................................... 8,161 Other assets................................................ 62 Assumed liabilities......................................... (2,795) Liabilities for exit activities and integration............. (1,740) Deferred tax liability...................................... (960) Deferred compensation....................................... 2,630 Notes receivable from stockholders.......................... 1,316 -------- Allocated purchase price.................................. $120,542 ========
Because our acquisition of Novazyme was completed after June 30, 2001, the provisions of SFAS 141 and certain provisions of SFAS 142 apply from the date of acquisition. Accordingly, we will not ratably amortize the goodwill resulting from the acquisition of Novazyme. Instead we will test the goodwill's impairment on a periodic basis in accordance with the provisions of SFAS 142. The 2,562,182 shares of Genzyme General Stock that we issued to Novazyme's shareholders were valued at $110.6 million using the average trading price of Genzyme General Stock for the 4 day trading period ending September 26, 2001, the date of acquisition. Options, warrants and rights to purchase shares of Genzyme General Stock were valued at $9.0 million using the Black-Scholes model. In accordance with Financial Accounting Standards Board Interpretation No. 44, which is referred to as FIN 44, at the acquisition date we allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation in stockholders equity. We are amortizing the unvested portion to operating expense over the remaining vesting period of approximately 22 months. In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. 10 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. UNAUDITED PRO FORMA FINANCIAL SUMMARY In December 2000, we acquired GelTex Pharmaceuticals, Inc., a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. In December 2000, we also acquired Biomatrix, Inc., a public company engaged in the development and manufacture of viscoelastic and viscosupplementation biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. The following unaudited pro forma financial summary is presented as if the acquisitions of GelTex, Biomatrix, Wyntek, Focal and Novazyme were completed as of January 1, 2001 and 2000. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated at those dates, or of the future operations of the combined entities. Material nonrecurring charges related to these acquisitions, such as the acquired IPR&D charges of $118.0 million resulting from the acquisition of GelTex, $82.1 million resulting from the acquisition of 11 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) Biomatrix, $8.8 million resulting from the acquisition of Wyntek and $86.8 million resulting from the acquisition of Novazyme, are not reflected in the following pro forma financial summary:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenues.............................................. $906,957 $778,085 Income (loss) before extraordinary items and cumulative effect of change in accounting principle.................. (39,818) 20,754 Net income (loss)........................................... (35,651) 20,754 Net income allocated to Genzyme General Stock: Net income allocated to Genzyme General Stock before cumulative effect of change in accounting principle..... $ 75,861 $121,008 Cumulative effect of change in accounting principle, net of tax.................................................. 4,167 -- -------- -------- Net income allocated to Genzyme General Stock............. $ 80,028 $121,008 ======== ======== Net income per share allocated to Genzyme General Stock: Basic: Net income per share before cumulative effect of change in accounting principle............................... $ 0.38 $ 0.64 Per share cumulative effect of change in accounting principle, net of tax................................. 0.02 -- -------- -------- Net income per share allocated to Genzyme General Stock................................................. $ 0.40 $ 0.64 ======== ======== Diluted: Net income per share before cumulative effect of change in accounting principle............................... $ 0.36 $ 0.60 Per share cumulative effect of change in accounting principle, net of tax................................. 0.02 -- -------- -------- Net income per share allocated to Genzyme General Stock................................................. $ 0.38 $ 0.60 ======== ======== Net loss allocated to Biosurgery Stock...................... $(93,580) $(82,799) ======== ======== Net loss per share allocated to Biosurgery Stock--basic and diluted................................................... $ (2.41) $ (2.15) ======== ========
4. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) Raw materials....................................... $ 53,102 $ 51,545 Work-in-process..................................... 90,206 73,520 Finished products................................... 30,644 45,276 -------- -------- Total............................................. $173,952 $170,341 ======== ========
12 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner in two joint ventures for the development of therapies for Pompe disease, and certain of its subsidiaries filed for receivership in order to seek protection from creditors. In the quarter ended September 30, 2001, we recorded pre-tax charges of $23.4 million related to the Pharming Group receivership, including $10.2 million for the write-off of the principal and accrued interest due to us under the 7% convertible senior note issued to us by Pharming Group, $8.5 million for the write-down of our equity investment in Pharming Group because we consider the decline in value of this investment to be other than temporary, and $4.7 million for the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but are obligated to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. We expect to complete transition of these patients to the CHO-cell product by the end of 2003. In September 2001, we recorded a pre-tax charge of $17.2 million, of which $16.8 million was charged to selling, general and administrative expenses representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. On September 18, 2001, we signed a conditional agreement to acquire certain assets of Pharming N.V., the Belgian subsidiary of Pharming Group N.V., including manufacturing facilities in Geel, Belgium. The conditional agreement is subject to the approval of the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium, and our board of directors, as well as to the receipt of a favorable soil attestation for the land. If all of the conditions are satisfied, we expect to complete the purchase by mid-November. 6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustment. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash component of the consideration for the GelTex acquisition. We expect to utilize the 13 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) remaining proceeds from the sale of the debentures for Genzyme General's working capital and general corporate purposes. 7. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES In June 2001, we completed the redemption of our $250.0 million in principal of 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date, holders of the notes elected to convert substantially all of the principal of the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes using cash allocated to Genzyme General. 8. REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES In August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. 9. INTERDIVISIONAL FINANCING ARRANGEMENTS In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology designated shares are 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 10. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a Phase 3 clinical trial of 14 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. NEUROCELL-TM- JOINT VENTURE REFUND (CONTINUED) NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. 11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, we recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics Corporation, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments 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 each of these investments. In August 2001, Pharming Group filed for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, we recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. In April 2001, Antigenics, Inc. announced that it had entered into a definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was completed in July 2001. Under the terms of the merger agreement, we received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, we recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, we recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, we recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. We also recognized a realized gain of $7.6 million resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged on a one-for-one basis for shares of Insmed common stock. 12. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our consolidated balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, 15 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship. In accordance with the transition provisions of SFAS 133, we recorded a cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statement of operations for the nine months ended September 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts were not significant. For the three months ended September 30, 2001, we recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, we recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. We also recorded a charge of $1.7 million in other comprehensive income for the nine months ended September 30, 2001 to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. 13. TAX BENEFIT (PROVISION)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ---------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Benefit from (provision for) income taxes............................. $4,554 $(15,933) (129)% $7,288 $(51,101) (114)% Effective tax rate.................. 4% 32% 6% 31%
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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in our effective tax rate for both the three and nine months ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisitions of GelTex and Biomatrix in December 2000. The tax benefit for the nine months ended September 30, 2001 includes a $2.2 million benefit resulting from the release of excess tax reserves. 16 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. TAX BENEFIT (PROVISION) (CONTINUED) We calculate earnings per share for each series of common stock using the two-class method. To calculate basic earnings per share for each series of stock, we divide the earnings allocated to each series of stock by the weighted average number of outstanding shares of that series of stock during the applicable period. When we calculate diluted earnings per share, we also include in the denominator all potentially dilutive securities outstanding during the applicable period. We allocate our earnings to each series of our common stock based on the earnings attributable to that series of stock. The earnings attributable to Genzyme General Stock, as defined in our charter, is equal to the net income or loss of Genzyme General determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme General in accordance with our management and accounting policies. Earnings attributable to Biosurgery Stock and Molecular Oncology Stock are defined similarly and, as such, are based on the net income or loss of the corresponding division as adjusted for the allocation of tax benefits. 14. NET INCOME (LOSS) PER SHARE We calculate the income tax provision of each division as if that division were a separate taxpayer, which includes assessing realizability of deferred tax assets at the division level. Our management and accounting policies provide that if, as of the end of any fiscal quarter, a division cannot use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, we may allocate the tax benefit to other divisions in proportion to their taxable income without compensating payment or allocation to the division generating the benefit. The tax benefits allocated to Genzyme General, which are included in earnings attributable to Genzyme General Stock, were:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Tax benefits allocated from: Genzyme Biosurgery.................. $2,918 $6,455 $20,661 $16,291 Genzyme Molecular Oncology.......... 2,687 2,021 9,367 5,558 ------ ------ ------- ------- Total............................. $5,605 $8,476 $30,028 $21,849 ====== ====== ======= =======
In the three and nine months ended September 30, 2001, we allocated $2.4 million and $11.4 million of tax benefits to Genzyme Biosurgery that resulted from our acquisition of Biomatrix in December 2000, for which there are no similar amounts in the same periods of last year. 17 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) In future periods, Genzyme Biosurgery or Genzyme Molecular Oncology may recognize deferred tax assets in the calculation of their respective tax provisions determined on a separate division basis in accordance with generally accepted accounting principles. However, to the extent the benefit of those deferred tax assets has been previously allocated to Genzyme General in accordance with the management and accounting policies, the benefit will be reflected as a reduction of net income to determine net income attributable to Biosurgery Stock or Molecular Oncology Stock. As of September 30, 2001, the total tax benefits previously allocated to Genzyme General were (in thousands): Genzyme Biosurgery.......................................... $189,380 Genzyme Molecular Oncology.................................. 33,891
GENZYME GENERAL STOCK TWO-FOR-ONE STOCK SPLIT At our annual meeting on May 31, 2001, our shareholders approved an amendment to our charter which increased the total number of authorized shares of Genzyme common stock from 390,000,000 to 690,000,000 and increased the number of such shares designated as Genzyme General Stock from 200,000,000 to 500,000,000. On June 1, 2001, we completed a two-for-one split of Genzyme General Stock by means of a 100% stock dividend paid to holders of Genzyme General Stock of record on May 24, 2001. We distributed a total of 97,184,967 shares of Genzyme General Stock to holders of Genzyme General Stock in connection with the stock split. All share and per share amounts for 18 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) Genzyme General Stock have been retroactively revised for all periods presented to reflect the two-for-one split.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Genzyme General net income (loss) before cumulative effect of change in accounting principle............... $(81,706) $ 50,973 $(34,843) $160,272 Cumulative effect of change in accounting principle, net of tax(1).............................................. -- -- 4,167 -- -------- -------- -------- -------- Genzyme General net income (loss)........................ (81,706) 50,973 (30,676) 160,272 Tax benefit allocated from Genzyme Biosurgery............ 2,918 6,455 20,661 16,291 Tax benefit allocated from Genzyme Molecular Oncology.... 2,687 2,021 9,367 5,558 -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock--basic........................................... (76,101) 59,449 (648) 182,121 Effect of dilutive securities, net of tax(2): 5 1/4% convertible subordinated notes: Interest expense................................... -- 2,285 -- 6,643 Amortization of purchasers' discount and offering costs(3)......................................... -- 161 -- 472 5% convertible subordinated debentures: Interest expense................................... -- 181 -- 531 Amortization of debt offering costs(4)............. -- 30 -- 90 -------- -------- -------- -------- Net income (loss) allocated to Genzyme General Stock--diluted......................................... $(76,101) $ 62,106 $ (648) $189,857 ======== ======== ======== ======== Shares used in computing net income (loss) per common share--basic........................................... 208,350 172,759 198,841 170,553 Effect of dilutive securities(2,6): Stock options(5)..................................... -- 7,503 -- 6,790 5 1/4% convertible subordinated notes................ -- 12,626 -- 12,626 5% convertible subordinated debentures............... -- 1,260 -- 1,260 -------- -------- -------- -------- Dilutive potential common shares................... -- 21,389 -- 20,676 -------- -------- -------- -------- Shares used in computing net income (loss) per share-- diluted(2,6)........................................... 208,350 194,148 198,841 191,229 ======== ======== ======== ======== Net income (loss) per share of Genzyme General Stock: Basic: Net income (loss) per share before cumulative effect of change in accounting principle.................. $ (0.37) $ 0.34 $ (0.02) $ 1.07 Per share cumulative effect of change in accounting principle, net of tax(1)........................... -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock...................................... $ (0.37) $ 0.34 $ 0.00 $ 1.07 ======== ======== ======== ========
19 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Diluted(2): Net income (loss) per share before cumulative effect of change in accounting principle.................. $ (0.37) $ 0.32 $ (0.02) $ 0.99 Per share cumulative effect of change in accounting principle, net of tax(1)........................... -- -- 0.02 -- -------- -------- -------- -------- Net income (loss) per share allocated to Genzyme General Stock...................................... $ (0.37) $ 0.32 $ 0.00 $ 0.99 ======== ======== ======== ========
- ------------------------ (1) This represents a cumulative effect adjustment resulting from the January 1, 2001 required adoption of SFAS 133 to record the fair value of certain derivative assets held on January 1, 2001. (2) The net loss per share allocated to Genzyme General Stock on a diluted basis and weighted average shares-diluted for the three and nine months ended September 30, 2001 excludes the dilutive effect of shares issuable for options, warrants and stock purchase rights as the effect in each period would be anti-dilutive. The shares excluded from the calculation are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2001 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable for options............................. 5,161 3,671 Shares of Genzyme General Stock issuable for warrants............................ 9 9 Shares of Genzyme General Stock issuable upon the exercise of stock purchase rights.................................. 35 35 ------ ------ Total................................... 5,205 3,715 ====== ======
(3) We had been amortizing the debt discount and offering costs of approximately $7.0 million over the term of the 5 1/4% convertible subordinated notes, until they were converted or redeemed in the second quarter of 2001. (4) We had been amortizing the debt offering costs of approximately $0.9 million over the term of the 5% convertible subordinated debentures, until they were converted in the third quarter of 2001. 20 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) (5) 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 following periods:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2000 2000 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable for options............................. 50 2,210 ===== =====
(6) We did not include the potentially dilutive effect of the assumed conversion of the $575.0 million in principal of 3% convertible subordinated debentures allocated to Genzyme General in the computation of Genzyme General's dilutive earnings per share for the three and nine months ended September 30, 2001 because the conditions for conversion had not been met. The debentures are convertible into shares of Genzyme General Stock at an initial conversion price of $70.30 per share, which was greater than the average market price of Genzyme General Stock for the three and nine months ended September 30, 2001. The following table describes the weighted average shares that would have been included in the computation of Genzyme General's diluted earnings per share if the conditions for conversion had been met and the average market price of Genzyme General Stock during each period was greater than or equal to $70.30 per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2001 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Genzyme General Stock issuable upon conversion of the 3% convertible subordinated debentures allocated to Genzyme General......................... 8,179 4,194 ===== =====
BIOSURGERY STOCK We created Biosurgery Stock on December 18, 2000. We created the Genzyme Biosurgery Division by combining the businesses of our former Genzyme Surgical Products and Genzyme Tissue Repair divisions as well as the acquired business of Biomatrix. Accordingly, we amended our charter to create Biosurgery Stock and to eliminate Genzyme Surgical Products Division common stock, which we refer to as "Surgical Products Stock," and Genzyme Tissue Repair Division common stock, which we refer to as "Tissue Repair Stock." Each outstanding share of, and option to purchase, Surgical Products Stock was converted into the right to receive 0.6060 of a share of, or option to purchase, Biosurgery Stock, and each outstanding share of, and option to purchase, Tissue Repair Stock was converted into the right to receive 0.3352 of a share of, or option to purchase, Biosurgery Stock. Prior to December 18, 2000, the net losses of Genzyme Surgical Products and Genzyme Tissue Repair were allocated to Surgical Products Stock and Tissue Repair Stock. For all periods presented, basic and diluted net loss per share of Biosurgery Stock are the same. We did not include the securities described in the following table in the computation of Biosurgery 21 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INCOME (LOSS) PER SHARE (CONTINUED) 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 Biosurgery Stock.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2001 2001 ------------------ ----------------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Biosurgery Stock issuable for options................................................. 4,103 5,130 Warrants to purchase Biosurgery Stock..................... 8 8 Biosurgery designated shares reserved for options......... 95 95 Biosurgery designated shares.............................. 3,104 3,104 Shares issuable upon conversion of 6.9% convertible subordinated note allocated to Genzyme Biosurgery....... 358 358 ----- ----- Total shares excluded from the calculation of diluted net loss per share of Biosurgery Stock...................... 7,668 8,695 ===== =====
MOLECULAR ONCOLOGY STOCK 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 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, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Shares of Molecular Oncology Stock issuable for options..... 1,639 1,083 1,306 783 Warrants to purchase Molecular Oncology Stock............... -- 10 -- 10 Molecular Oncology designated shares issuable upon conversion of 5 1/4% convertible subordinated notes allocated to Genzyme General.............................. -- 682 -- 682 Molecular Oncology designated shares........................ 1,651 1,318 1,651 1,318 ----- ----- ----- ----- Total shares excluded from the calculation of diluted net loss per share of Molecular Oncology Stock................ 3,290 3,093 2,957 2,793 ===== ===== ===== =====
15. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. We have four reportable segments: - Therapeutics, which as part of Genzyme General develops, manufactures and sells human therapeutic products with an expanding focus on products that treat patients suffering from LSDs and other specialty therapeutics. The business derives substantially all its revenue from sales of Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder; - Diagnostic products, which as part of Genzyme General provides diagnostic products to niche markets focusing on IN VITRO diagnostics; 22 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) - Genzyme Biosurgery, which develops, manufactures and sells instruments, devices, biomaterials and biotherapeutic products to improve or replace surgery, with an emphasis on the orthopaedics and cardiothoracic markets; and - Genzyme Molecular Oncology, which utilizes its functional genomics and antigen discovery technology platforms to develop novel cancer products focused on cancer vaccines and angiogenesis inhibitors and to generate partnering revenue developing cancer products. We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Genzyme General: Therapeutics(1,2).............. $ 205,345 $153,840 $ 570,675 $436,220 Diagnostic products(3)......... 20,572 15,824 54,786 46,601 Other.......................... 28,126 22,343 88,590 66,191 Eliminations/Adjustments(4).... 1,009 158 2,692 473 --------- -------- --------- -------- Total Genzyme General........ 255,052 192,165 716,743 549,485 Genzyme Biosurgery(5)............ 63,219 34,607 177,739 105,812 Genzyme Molecular Oncology....... 1,224 635 3,915 4,153 Elimination/Adjustments.......... -- (48) -- (48) --------- -------- --------- -------- Total........................ $ 319,495 $227,359 $ 898,397 $659,402 ========= ======== ========= ======== Net income (loss): Genzyme General: Therapeutics(1,2).............. $ (30,537) $ 43,050 $ 41,495 $126,565 Diagnostic products(3)......... 832 865 (3,263) 2,395 Other.......................... 975 (260) 5,847 (1,056) Eliminations/Adjustments(4).... (52,976) 7,318 (78,922) 32,368 --------- -------- --------- -------- Net income (loss) for Genzyme General before cumulative effect of change in accounting principle...................... (81,706) 50,973 (34,843) 160,272 Cumulative effect of change in accounting principle, net of tax(6)......................... -- -- 4,167 -- --------- -------- --------- -------- Net income (loss) for Genzyme General........................ (81,706) 50,973 (30,676) 160,272 Genzyme Biosurgery(5)............ (21,525) (19,524) (94,460) (48,936) Genzyme Molecular Oncology....... (7,494) (5,504) (22,099) (17,924) Eliminations/Adjustments(7)...... 8,049 8,476 41,462 22,319 --------- -------- --------- -------- Total........................ $(102,676) $ 34,421 $(105,773) $115,731 ========= ======== ========= ========
- ------------------------ (1) In December 2000, we acquired GelTex and allocated the acquisition to Genzyme General. The operations of GelTex are included in our Therapeutics segment for the three and nine months ended September 30, 2001. 23 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) (2) In September 2001, we acquired Novazyme and allocated the acquisition to Genzyme General. The results of operations of Novazyme are included in our Therapeutics segment from September 26, 2001, the date of acquisition. (3) In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme General. The results of operations of Wyntek are included in our Diagnostic products segment from June 1, 2001, the date of acquisition. (4) Includes primarily amounts related to Genzyme General's research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme General. The amount for the nine months ended September 30, 2000 also includes a gain of $20.3 million relating to a public offering of common stock by Genzyme Transgenics, an unconsolidated affiliate, which we recognized in accordance with our policy pertaining to affiliate sales of stock. (5) In December 2000, we acquired Biomatrix and allocated the acquisition to Genzyme Biosurgery. The operations of Biomatrix are included in our Genzyme Biosurgery segment for the three and nine months ended September 30, 2001. On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery. The results of operations of Focal are included in the results of our Genzyme Biosurgery segment from the date of acquisition. (6) On January 1, 2001, in connection with the adoption of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, to recognize the fair value of certain common stock warrants held on January 1, 2001. (7) Includes income tax benefits that have not been recognized in the tax provisions of the divisions. SEGMENT ASSETS (AMOUNTS IN THOUSANDS):
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) Genzyme General(1): Therapeutics(2)................................... $1,381,118 $1,341,656 Diagnostic products(3)............................ 171,509 89,236 Other............................................. 82,909 77,153 Eliminations/Adjustments(4)....................... 1,496,192 991,008 ---------- ---------- Total Genzyme General........................... 3,131,728 2,499,053 Genzyme Biosurgery(5)............................... 775,344 811,600 Genzyme Molecular Oncology.......................... 12,105 30,752 Eliminations/Adjustments(6)......................... (55,906) (23,305) ---------- ---------- Total........................................... $3,863,271 $3,318,100 ========== ==========
- ------------------------ (1) Segment assets for Genzyme General primarily include accounts receivable, inventory and certain fixed and intangible assets. (2) Segment assets for Therapeutics as of September 30, 2001 include $27.1 million of additional assets resulting from the acquisition of Novazyme in September 2001, including $17.3 million of goodwill. (3) Segment assets for Diagnostic products as of September 30, 2001 include $71.1 million of additional assets resulting from the acquisition of Wyntek in June 2001, including $19.9 million of goodwill and $39.4 million of other intangible assets. 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SEGMENT REPORTING (CONTINUED) (4) Segment assets for Eliminations/Adjustments for Genzyme General consists of the difference between the total assets for Genzyme General's segments and total combined assets for Genzyme General. Eliminations/Adjustments for September 30, 2001 include the allocation of net proceeds of $562.1 million from the private placement of $575.0 million in principal of 3% convertible subordinated debentures which was completed in May 2001. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash component of the consideration for the GelTex merger. (5) Segment assets for Genzyme Biosurgery at September 30, 2001 include: - $25.9 million of additional assets resulting from the acquisition of the Class A and Class B limited partnership interests of GDP, including $8.4 million of goodwill and $17.5 million of other intangible assets; and - $19.3 million of additional assets resulting from the acquisition of Focal, Inc., including $7.9 million of intangible assets. (6) Represents the elimination of inter-divisional balances. 16. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review by the FDA under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 25 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, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Net product sales......................................... $234,875 $176,891 $656,121 $503,700 Net service sales......................................... 17,853 15,115 54,390 45,296 Revenues from research and development contracts: Related parties......................................... 1,043 -- 2,726 245 Other................................................... 1,281 159 3,506 244 -------- -------- -------- -------- Total revenues........................................ 255,052 192,165 716,743 549,485 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 48,334 45,190 143,697 114,461 Cost of services sold..................................... 10,893 9,165 31,794 26,937 Selling, general and administrative....................... 92,386 41,780 217,475 122,974 Research and development (including research and development related to contracts)....................... 49,726 25,567 132,317 83,701 Amortization of intangibles............................... 19,221 1,983 55,073 5,962 Purchase of in-process research and development........... 86,800 -- 95,568 -- -------- -------- -------- -------- Total operating costs and expenses.................... 307,360 123,685 675,924 354,035 -------- -------- -------- -------- Operating income (loss)..................................... (52,308) 68,480 40,819 195,450 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (8,110) (11,420) (27,605) (30,866) Gain on affiliate sale of stock........................... 212 2,419 212 22,689 Gain (loss) on investments in equity securities........... (24,464) 8,544 (25,996) 22,709 Minority interest in net loss of subsidiary............... 260 977 2,259 3,185 Other..................................................... (1,227) (43) (5,115) 5,110 Investment income......................................... 13,125 11,072 34,136 27,798 Interest expense.......................................... (5,699) (4,647) (19,379) (11,639) -------- -------- -------- -------- Total other income (expenses)......................... (25,903) 6,902 (41,488) 38,986 -------- -------- -------- -------- Income (loss) before income taxes........................... (78,211) 75,382 (669) 234,436 Provision for income taxes.................................. (3,495) (24,409) (34,174) (74,164) -------- -------- -------- -------- Division net income (loss) before cumulative effect of change in accounting principle............................ (81,706) 50,973 (34,843) 160,272 Cumulative effect of change in accounting principle, net of tax....................................................... -- -- 4,167 -- -------- -------- -------- -------- Division net income (loss).................................. $(81,706) $ 50,973 $(30,676) $160,272 ======== ======== ======== ======== Comprehensive income (loss), net of tax: Division net income (loss)................................ $(81,706) $ 50,973 $(30,676) $160,272 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments................ 18,201 (10,340) 554 (20,737) Unrealized loss on derivatives, net of tax.............. (1,444) -- (1,733) -- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period... (8,675) 44,394 (9,758) 51,179 Reclassification adjustment for (gains) losses included in division net income (loss).............. 15,535 -- 16,507 (5,501) -------- -------- -------- -------- Unrealized gains on securities, net..................... 6,860 44,394 6,749 45,678 -------- -------- -------- -------- Other comprehensive income................................ 23,617 34,054 5,570 24,941 -------- -------- -------- -------- Comprehensive income (loss)................................. $(58,089) $ 85,027 $(25,106) $185,213 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 26 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 170,710 $ 135,841 Short-term investments.................................... 113,582 96,644 Accounts receivable, net.................................. 194,538 165,911 Inventories............................................... 116,712 108,767 Prepaid expenses and other current assets................. 26,954 28,012 Due from Genzyme Biosurgery............................... 50,497 18,645 Due from Genzyme Molecular Oncology....................... 5,409 4,660 Deferred tax assets--current.............................. 47,074 46,836 ---------- ---------- Total current assets.................................... 725,476 605,316 Property, plant and equipment, net.......................... 537,702 446,759 Long-term investments....................................... 746,583 298,841 Notes receivable-related party.............................. -- 10,350 Intangibles, net............................................ 998,457 977,147 Investments in equity securities............................ 78,279 119,648 Other noncurrent assets..................................... 45,231 40,992 ---------- ---------- Total assets............................................ $3,131,728 $2,499,053 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 29,077 $ 20,091 Accrued expenses.......................................... 112,417 98,201 Income taxes payable...................................... 43,913 40,442 Deferred revenue.......................................... 1,958 6,401 Current portion of long-term debt and capital lease obligations............................................. 7,171 1,448 ---------- ---------- Total current liabilities............................... 194,536 166,583 Long-term debt and capital lease obligations................ 25,110 180,556 Convertible notes and debentures............................ 575,000 273,680 Deferred tax liability...................................... 74,387 124,613 Other noncurrent liabilities................................ 23,827 3,341 ---------- ---------- Total liabilities....................................... 892,860 748,773 ---------- ---------- Division equity............................................. 2,238,868 1,750,280 ---------- ---------- Total liabilities and division equity................... $3,131,728 $2,499,053 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. 27 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net income (loss)................................ $ (30,676) $ 160,272 Reconciliation of division net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 77,828 32,834 Non-cash compensation expense........................... 7,375 -- Provision for bad debts................................. 1,784 5,303 Notes received from a collaborator...................... -- (10,175) Write-off of notes received from a collaborator......... 10,159 -- Charges for in-process research and development......... 95,568 -- Equity in net loss of unconsolidated affiliates......... 27,605 30,866 Gain on affiliate sale of stock......................... (212) (22,689) (Gain) loss on investments in equity securities......... 25,996 (22,709) Minority interest in net loss of subsidiary............. (2,259) (3,185) Deferred income tax expense (benefit)................... (17,165) 5,882 Other................................................... (3,241) 722 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (30,106) (28,776) Inventories........................................... 1,029 (7,813) Prepaid expenses and other current assets............. (891) (813) Due from Genzyme Biosurgery........................... (31,852) (3,544) Due from Genzyme Molecular Oncology................... (749) (295) Accounts payable, accrued expenses, income taxes payable and deferred revenue........................ 76,445 35,600 --------- --------- Net cash provided by operating activities........... 206,638 171,480 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. (750,075) (389,549) Sales and maturities of investments....................... 306,441 298,344 Purchases of equity securities............................ (3,318) -- Proceeds from sale of investments in equity securities.... 36 15,773 Purchase of property, plant and equipment................. (113,078) (49,973) Acquisitions, net of acquired cash........................ (54,832) (342) Investments in unconsolidated affiliates.................. (31,298) (19,639) Other..................................................... 5,962 3,161 --------- --------- Net cash used in investing activities............... (640,162) (142,225) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Genzyme General Stock................................................... 72,584 80,064 Allocated proceeds from issuance of debt.................. 562,062 -- Payments of debt.......................................... (154,625) -- Net cash allocated to Genzyme Biosurgery.................. (11,993) (9,910) Net cash allocated to Genzyme Molecular Oncology.......... (4,040) (15,000) Bank overdraft............................................ 1,434 -- Other..................................................... 3,974 1,276 --------- --------- Net cash provided by financing activities........... 469,396 56,430 --------- --------- Effect of exchange rate changes on cash..................... (1,003) (3,892) --------- --------- Increase in cash and cash equivalents....................... 34,869 81,793 Cash and cash equivalents at beginning of period............ 135,841 94,523 --------- --------- Cash and cash equivalents at end of period.................. $ 170,710 $ 176,316 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. 28 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, statements 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 2000 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, 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 these rules, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles. We have reclassified certain 2000 data to conform to our 2001 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 2000 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. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 2, "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 3. ACQUISITIONS AND DISPOSITION WYNTEK DIAGNOSTICS, INC. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, we included the results of operations of Wyntek in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. 29 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Cash paid................................................... $ 65,000 Acquisition costs........................................... 234 -------- Total purchase price...................................... $ 65,234 ======== Cash and cash equivalents................................... $ 4,974 Other current assets........................................ 4,966 Property, plant and equipment............................... 1,843 Deferred tax assets......................................... 2,312 Intangible assets (to be amortized over 5 to 10 years)...... 39,444 In-process research and development......................... 8,768 Goodwill (to be amortized over 10 years).................... 19,908 Deferred tax liability...................................... (14,197) Assumed liabilities......................................... (2,784) -------- Allocated purchase price.................................. $ 65,234 ========
In connection with the acquisition of Wyntek we allocated approximately $8.8 million of the purchase price to IPR&D. Our management assumed responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate the present value of these cash flows, which was consistent with the risks of the project. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. In the allocation of purchase price to IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the nine months ended September 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek is currently developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial 30 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The device will be used to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process and file an application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. ATIII LLC In July 2001, we transferred our 50% ownership interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of any of Genzyme Transgenics' products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. Prior to the transfer, we consolidated the results of ATIII LLC because we had control of ATIII LLC through our combined, direct and indirect ownership interest in the joint venture. NOVAZYME PHARMACEUTICALS, INC. In September 2001, we acquired all of the outstanding capital stock of Novazyme, a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock and exchanged them for options, warrants and rights to purchase Genzyme General Stock, on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. 31 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Issuance of 2,562,182 shares of Genzyme General Stock....... $110,584 Issuance of options to purchase 158,840 shares of Genzyme General Stock..................................................... 6,274 Issuance of warrants to purchase 25,338 shares of Genzyme General Stock............................................. 894 Issuance of rights to purchase 66,846 shares of Genzyme General Stock............................................. 1,839 Acquisition costs........................................... 951 -------- Total purchase price...................................... $120,542 ======== Cash and cash equivalents................................... $ 5,194 Other current assets........................................ 63 Property, plant and equipment............................... 4,475 Goodwill.................................................... 17,336 In-process research and development......................... 86,800 Deferred tax asset.......................................... 8,161 Other assets................................................ 62 Assumed liabilities......................................... (2,795) Liabilities for exit activities and integration............. (1,740) Deferred tax liability...................................... (960) Deferred compensation....................................... 2,630 Notes receivable from stockholders.......................... 1,316 -------- Allocated purchase price.................................. $120,542 ========
Because our acquisition of Novazyme was completed after June 30, 2001, the provisions of SFAS 141 and certain provisions of SFAS 142 apply from the date of acquisition. Accordingly, we will not ratably amortize the goodwill resulting from the acquisition of Novazyme. Instead, we will test the goodwill's impairment on a periodic basis in accordance with the provisions of SFAS 142. 32 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) The 2,562,182 shares of Genzyme General Stock that we issued to Novazyme's shareholders were valued at $110.6 million using the average trading price of Genzyme General Stock for the 4 day trading period ending on September 26, 2001, the date of acquisition. Options, warrants and rights to purchase shares of Genzyme General Stock were valued at $9.0 million using the Black-Scholes model. In accordance with FIN 44, at the date of acquisition we allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation in division equity. We are amortizing the unvested portion to operating expense over the remaining vesting period of approximately 22 months. In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. UNAUDITED PRO FORMA FINANCIAL SUMMARY In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. The following unaudited pro forma financial summary is presented as if the acquisitions of GelTex, Wyntek and Novazyme were completed as of January 1, 2001 and 2000. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisitions been consummated on those dates, or of the future operations of the combined entities. Material nonrecurring charges related to these acquisitions, such as acquired IPR&D charges of $118.0 million resulting from the acquisition of GelTex, $8.8 million resulting from 33 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS AND DISPOSITION (CONTINUED) the acquisition of Wyntek and $86.8 million resulting from the acquisition of Novazyme, are not reflected in the following pro forma financial summary:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2001 2000 -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues....................................... $725,156 $601,419 Income before extraordinary items and cumulative effect of change in accounting principle, net of tax................................................ 41,990 96,975 Division net income.................................. 46,157 96,975
4. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) Raw materials....................................... $ 36,218 $ 30,275 Work-in-process..................................... 59,936 47,880 Finished products................................... 20,558 30,612 -------- -------- Total............................................. $116,712 $108,767 ======== ========
5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS On August 10, 2001, Pharming Group, N.V., a public company in the Netherlands and our partner in two joint ventures for the development of therapies for Pompe disease, and certain of its subsidiaries filed for receivership in order to seek protection from creditors. In the quarter ended September 30, 2001, we recorded pre-tax charges of $23.4 million related to the Pharming Group receivership, including $10.2 million for the write-off of the principal and accrued interest due to us under the 7% convertible senior note issued to us by Pharming Group, $8.5 million for the write-down of our equity investment in Pharming Group because we consider the decline in value of this investment to be other than temporary, and $4.7 million for the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but are obligated to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. We expect to complete transition of these patients to the CHO-cell product by the end of 2003. In September 2001, we recorded a pre-tax charge of $17.2 million, of which, $16.8 million was charged to selling, general and administrative expenses representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. 34 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. PHARMING GROUP, N.V. RECEIVERSHIP AND OUR ACQUISITION OF CERTAIN ASSETS (CONTINUED) On September 18, 2001, we signed a conditional agreement to acquire certain assets of Pharming N.V., the Belgian subsidiary of Pharming Group N.V., including manufacturing facilities in Geel, Belgium. The conditional agreement is subject to the approval of the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium, and our board of directors, as well as to the receipt of a favorable soil attestation for the land. If all of the conditions are satisfied, we expect to complete the purchase by mid-November. 6. PRIVATE PLACEMENT OF $575.0 MILLION 3% CONVERTIBLE SUBORDINATED DEBENTURES In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustment. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash component of the consideration for the GelTex acquisition. We expect to utilize the remaining proceeds from the sale of the debentures for Genzyme General's working capital and general corporate purposes. 7. REDEMPTION OF $250.0 MILLION 5 1/4% CONVERTIBLE SUBORDINATED NOTES In June 2001, we completed the redemption of our $250.0 million in principal of 5 1/4% convertible subordinated notes due 2005. Prior to the redemption date, holders of the notes elected to convert substantially all of the principal of the notes into approximately 12,597,000 shares of Genzyme General Stock, 685,000 shares of Biosurgery Stock and 682,000 shares of Molecular Oncology Stock. On June 15, 2001, the redemption date, we redeemed the remaining notes using cash allocated to Genzyme General. 8. REDEMPTION OF $21.2 MILLION 5% CONVERTIBLE SUBORDINATED DEBENTURES In August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. 35 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. INTERDIVISIONAL FINANCING ARRANGEMENT In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology designated shares are 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 10. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. 11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, Genzyme General recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics Corporation, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments 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 each of these investments. 36 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 11. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES (CONTINUED) In August 2001, Pharming Group filed for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, Genzyme General recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. In April 2001, Antigenics, Inc. announced that it had entered into a definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was completed in July 2001. Under the terms of the merger agreement, we received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, Genzyme General recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, Genzyme General recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, Genzyme General recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. Genzyme General also recognized a realized gain of $7.6 million resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged on a one-for-one basis for shares of Insmed common stock. 12. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our combined balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship. In accordance with the transition provisions of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, in its unaudited, combined statement of operations for the nine months ended September 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended September 30, 2001, Genzyme General recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, Genzyme General recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. Genzyme General also recorded a charge of $1.7 million in division equity for the nine months ended September 30, 2001, to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Any change in the value of our derivative instruments would be 37 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 12. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. 13. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes........... $(3,495) $(24,409) (86)% $(34,174) $(74,164) (54)% Effective tax rate................... (4)% 32 % (5,108)% 32 %
Genzyme General's tax rates for all 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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in Genzyme General's effective tax rate for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisition of GelTex in December 2000. The tax provision for the nine months ended September 30, 2001 also includes a $2.2 million benefit resulting from our release of excess tax reserves. 14. SEGMENT REPORTING We present segment information for Genzyme General 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 sells human therapeutic products with an expanding focus on products that treat patients suffering from lysosomal storage disorders and other specialty therapeutics. The business derives substantially all its revenue from sales of Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder; and - Diagnostic products, which provides diagnostic products to niche markets focusing on IN VITRO diagnostics. 38 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 14. SEGMENT REPORTING (CONTINUED) We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues: Therapeutics(1,2)................................. $205,345 $153,840 $570,675 $436,220 Diagnostic products(3)............................ 20,572 15,824 54,786 46,601 Other............................................. 28,126 22,343 88,590 66,191 Eliminations/Adjustments(4)....................... 1,009 158 2,692 473 -------- -------- -------- -------- Total........................................... $255,052 $192,165 $716,743 $549,485 ======== ======== ======== ======== Division net income: Therapeutics(1,2)................................. $(30,537) $ 43,050 $ 41,495 $126,565 Diagnostic products(3)............................ 832 865 (3,263) 2,395 Other............................................. 975 (260) 5,847 (1,056) Eliminations/Adjustments(4)....................... (52,976) 7,318 (78,922) 32,368 -------- -------- -------- -------- Division net income (loss) before cumulative effect of change in accounting principle........ (81,706) 50,973 (34,843) 160,272 Cumulative effect of change in accounting principle, net of tax (5)....................... -- -- 4,167 -- -------- -------- -------- -------- Division net income (loss)...................... $(81,706) $ 50,973 $(30,676) $160,272 ======== ======== ======== ========
- ------------------------ (1) In December 2000, we acquired GelTex and allocated the acquisition to Genzyme General. The operations of GelTex are included in our Therapeutics segment for the three and nine months ended September 30, 2001. (2) In September 2001, we acquired Novazyme and allocated the acquisition to Genzyme General. The results of operations of Novazyme are included in our Therapeutics segment from September 26, 2001, the date of acquisition. (3) In June 2001, we acquired Wyntek and allocated the acquisition to Genzyme General. The results of operations of Wyntek are included in our Diagnostic products segment from June 1, 2001, the date of acquisition. (4) Includes primarily amounts related to Genzyme General's research and development and administrative activities that we do not specifically allocate to a particular segment of Genzyme General. The amount for the nine months ended September 30, 2000 also includes a gain of $20.3 million relating to a public offering of common stock by Genzyme Transgenics, an unconsolidated affiliate, which we recognized in accordance with our policy pertaining to affiliate sales of stock. (5) On January 1, 2001, in connection with the adoption of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, to recognize the fair value of certain common stock warrants held on January 1, 2001. 39 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 14. SEGMENT REPORTING (CONTINUED) SEGMENT ASSETS (AMOUNTS IN THOUSANDS)(1):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) Therapeutics(2)..................................... $1,381,118 $1,341,656 Diagnostic products(3).............................. 171,509 89,236 Other............................................... 82,909 77,153 Eliminations/Adjustments(4)......................... 1,496,192 991,008 ---------- ---------- Total........................................... $3,131,728 $2,499,053 ========== ==========
- ------------------------ (1) Segment assets for Genzyme General primarily include accounts receivable, inventory and certain fixed and intangible assets. (2) Segment assets for Therapeutics as of September 30, 2001 include $27.1 million of additional assets resulting from the acquisition of Novazyme in September 2001, including $17.3 million of goodwill. (3) Segment assets for Diagnostic products as of September 30, 2001 include $71.1 million of additional assets resulting from the acquisition of Wyntek in June 2001, including $39.4 million of intangible assets and $19.9 million of goodwill. (4) Segment assets for Eliminations/Adjustments for Genzyme General consists of the difference between the total assets for Genzyme General's segments and total combined assets for Genzyme General. Eliminations/Adjustments for September 30, 2001 include the allocation of net proceeds of $562.1 million from the private placement of $575.0 million in principal of 3% convertible subordinated debentures which was completed in May 2001. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility and allocated to Genzyme General in December 2000 to finance a portion of the cash component of the consideration for the GelTex merger. 15. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint 40 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 15. SUBSEQUENT EVENTS (CONTINUED) venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review by the FDA under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 41 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Net product sales.................................. $ 57,084 $ 29,754 $160,141 $ 88,805 Net service sales.................................. 6,135 4,852 17,593 16,984 Revenues from research and development contracts... -- 1 5 23 -------- -------- -------- -------- Total revenues................................... 63,219 34,607 177,739 105,812 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold.............................. 27,128 18,539 87,897 51,170 Cost of services sold.............................. 3,148 2,903 9,096 8,949 Selling, general and administrative................ 27,827 23,288 93,816 68,095 Research and development........................... 12,352 8,935 35,027 26,230 Amortization of intangibles........................ 11,729 1,426 35,042 4,279 -------- -------- -------- -------- Total operating costs and expenses............... 82,184 55,091 260,878 158,723 -------- -------- -------- -------- Operating loss....................................... (18,965) (20,484) (83,139) (52,911) -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliate..... -- -- (1,316) -- Other.............................................. 35 33 80 75 Investment income.................................. 431 1,274 1,370 4,873 Interest expense................................... (3,026) (347) (11,455) (973) -------- -------- -------- -------- Total other income (expenses).................... (2,560) 960 (11,321) 3,975 -------- -------- -------- -------- Division net loss.................................... $(21,525) $(19,524) $(94,460) $(48,936) ======== ======== ======== ======== Comprehensive loss, net of tax: Division net loss.................................. $(21,525) $(19,524) $(94,460) $(48,936) -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments......... (934) 67 (1,131) 109 Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period......................................... -- (268) 97 (4,050) -------- -------- -------- -------- Unrealized gains (losses) on securities, net... -- (268) 97 (4,050) -------- -------- -------- -------- Other comprehensive loss........................... (934) (201) (1,034) (3,941) -------- -------- -------- -------- Comprehensive loss................................... $(22,459) $(19,725) $(95,494) $(52,877) ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 42 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 41,553 $ 78,163 Accounts receivable, net.................................. 44,448 38,952 Inventories............................................... 57,240 61,574 Prepaid expenses and other current assets................. 10,015 9,543 -------- -------- Total current assets.................................... 153,256 188,232 Property, plant and equipment, net.......................... 57,176 57,409 Intangibles, net............................................ 562,580 562,635 Investment in equity securities............................. -- 1,603 Other noncurrent assets..................................... 2,332 1,721 -------- -------- Total assets............................................ $775,344 $811,600 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................................... $ 12,042 $ 6,074 Accrued expenses.......................................... 41,267 46,245 Due to Genzyme General.................................... 50,497 18,645 Current portion of long-term debt and capital lease obligations............................................. 964 18,449 -------- -------- Total current liabilities............................... 104,770 89,413 Long-term debt and capital lease obligations................ 218,927 201,004 Convertible notes........................................... 10,000 10,000 Other noncurrent liabilities................................ -- 77 -------- -------- Total liabilities....................................... 333,697 300,494 Division equity............................................. 441,647 511,106 -------- -------- Total liabilities and division equity................... $775,344 $811,600 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 43 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(94,460) $(48,936) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 47,281 7,474 Provision for bad debts................................. 462 271 Equity in net loss of unconsolidated affiliate.......... 1,316 -- Other................................................... 524 1,793 Increase (decrease) in cash from working capital changes: Accounts receivable................................... (5,939) (1,135) Inventories........................................... 9,522 (7,372) Prepaid expenses and other current assets............. (527) (1,104) Accounts payable, accrued expenses and income taxes payable............................................. (2,505) 4,234 Due to Genzyme General................................ 31,852 3,544 -------- -------- Net cash used in operating activities............... (12,474) (41,231) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- (84,084) Sales and maturities of investments....................... -- 125,084 Purchase of equity securities............................. (5,000) (5,000) Purchases of property, plant and equipment................ (10,151) (2,290) Acquisitions, net of acquired cash........................ (23,547) (4,405) Other..................................................... (283) (277) -------- -------- Net cash provided by (used in) investing activities........................................ (38,981) 29,028 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Biosurgery Stock...... 1,219 1,652 Payments of capital lease obligations..................... (503) -- Payments of notes receivable from stockholders............ 2,896 -- Net cash allocated from Genzyme General................... 11,993 9,910 Bank overdraft............................................ 677 -- Other..................................................... (737) -- -------- -------- Net cash provided by financing activities........... 15,545 11,562 Effect of exchange rate changes on cash..................... (700) 84 -------- -------- Decrease in cash and cash equivalents....................... (36,610) (557) Cash and cash equivalents at beginning of period............ 78,163 32,046 -------- -------- Cash and cash equivalents at end of period.................. $ 41,553 $ 31,489 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 44 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited, combined financial statements of Genzyme Biosurgery for each period include the balance sheets, statements of operations and cash flows of the businesses we allocate to Genzyme Biosurgery. We also allocate a portion of our corporate operations to Genzyme Biosurgery using methods described in our allocation policy included in Exhibit 99.1 to our 2000 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements included in this Form 10-Q. We prepared these unaudited, combined financial statements for Genzyme Biosurgery following the requirements of the SEC for interim reporting. As permitted under those rules, we condense or omit certain footnotes and other financial information normally required by generally accepted accounting principles. We have reclassified certain 2000 data to conform to our 2001 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Biosurgery's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Biosurgery included in our 2000 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. In December 2000, we acquired Biomatrix, Inc. and accounted for the acquisition as a purchase. Immediately prior to the acquisition, we combined two of our operating divisions, Genzyme Surgical Products and Genzyme Tissue Repair, to form a new division called Genzyme Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to the book values of the net assets of the divisions because they remained divisions of the same corporation. We present the financial statements of Genzyme Biosurgery as though the divisions had been combined for all periods presented, and include the operations of Biomatrix from the date of acquisition. 2. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 2., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 3. ACQUISITIONS CLASS A AND CLASS B LIMITED PARTNERSHIP INTERESTS OF GENZYME DEVELOPMENT PARTNERS, L.P. In January 2001, we purchased all of the outstanding Class A limited partnership interests of GDP for a payment of approximately $25.7 million in cash plus royalties payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. Accordingly, we included the results of operations of GDP in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from January 9, 2001. 45 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) We allocated the purchase prices to the fair value of the intangible assets acquired as follows (amounts in thousands):
CLASS A CLASS B LIMITED LIMITED PARTNERSHIP PARTNERSHIP INTERESTS INTERESTS TOTAL ----------- ----------- -------- Patents (to be amortized over 8 years)........... $ 5,909 $ -- $ 5,909 Trademarks (to be amortized over 10 years)....... 2,755 -- 2,755 Technology (to be amortized over 10 years)....... 8,827 -- 8,827 Goodwill (to be amortized over 10 years)......... 8,234 180 8,414 ------- ---- ------- Total.......................................... $25,725 $180 $25,905 ======= ==== =======
FOCAL, INC. In January 2001, Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, exercised its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated this investment to Genzyme Biosurgery. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. Focal shareholders received 0.1545 of a share of Biosurgery Stock for each share of Focal common stock they held. We issued 2,086,151 shares of Biosurgery Stock as merger consideration. We also assumed all of the outstanding options to purchase Focal common stock and exchanged them for options to purchase Biosurgery Stock on an as-converted basis. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. The purchase price and the allocation of the purchase price to the fair value of the acquired tangible and intangible assets and liabilities is as follows (amounts in thousands): Issuance of 2,086,151 shares of Biosurgery Stock............ $ 9,450 Issuance of options to purchase 231,566 shares of Biosurgery Stock..................................................... 351 Acquisition costs........................................... 638 Existing equity investment in Focal......................... 5,488 Cash paid to selling security holder........................ 11 ------- Total purchase price...................................... $15,938 ======= Cash and cash equivalents................................... $ 2,331 Other current assets........................................ 6,003 Property, plant and equipment............................... 1,818 Notes receivable from related party......................... 168 Intangible assets (to be amortized over 3 to 12 years)...... 7,909 Goodwill (to be amortized over 12 years).................... 1,115 Assumed liabilities......................................... (3,773) Notes receivable from stockholders.......................... 367 ------- Allocated purchase price.................................. $15,938 =======
46 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) UNAUDITED PRO FORMA FINANCIAL SUMMARY In December 2000, we acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic and viscosupplementation biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. The following unaudited pro forma financial summary is presented as if the acquisitions of Biomatrix and Focal were completed as of January 1, 2001 and 2000. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at that date, or of the future operations of the combined entities. Material nonrecurring charges related to these acquisitions, such as the acquired IPR&D of $82.1 million resulting from the acquisition of Biomatrix, are not reflected in the following pro forma financial summary:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- (UNAUDITED, AMOUNTS IN THOUSANDS) Total revenues........................................ $ 177,886 $ 172,561 Division net loss..................................... (105,014) (94,233)
4. INVENTORIES (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) Raw materials....................................... $16,884 $21,271 Work-in-process..................................... 30,270 25,640 Finished products................................... 10,086 14,663 ------- ------- Total........................................... $57,240 $61,574 ======= =======
5. INTERDIVISIONAL FINANCING ARRANGEMENT In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. 47 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. NEUROCELL-TM- JOINT VENTURE REFUND Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. 7. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. Genzyme Biosurgery has three reportable segments: - Cardiothoracic, which includes chest drainage systems, lung sealants, instruments and closures used in coronary artery bypass, valve replacement, lung surgery and other cardiothoracic surgeries; - Orthodpaedics, which includes Synvisc-Registered Trademark- viscosupplementation product and Carticel-Registered Trademark- chondrocytes; and - Biosurgical Specialties, which includes the Sepra-TM- products, derived supplementation products, instruments for general and plastic surgery, and Epicel-Registered Trademark- skin grafts. We have provided information concerning the operations in these reportable segments in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS) Revenues(1): Cardiothoracic(2)................... $16,386 $18,804 $ 52,042 $ 58,240 Orthopaedics........................ 29,656 4,021 76,561 13,130 Biosurgical specialties............. 17,177 11,781 49,131 34,419 Other(3)............................ -- 1 5 23 ------- ------- -------- -------- Total............................. $63,219 $34,607 $177,739 $105,812 ======= ======= ======== ======== Gross Profit(1): Cardiothoracic(2)................... $ 4,937 $ 6,809 $ 17,392 $ 23,529 Orthopaedics........................ 20,982 3,638 53,928 11,519 Biosurgical specialties............. 7,024 2,717 9,422 10,622 Other(3)............................ -- 1 4 23 ------- ------- -------- -------- Total............................. $32,943 $13,165 $ 80,746 $ 45,693 ======= ======= ======== ========
- ------------------------ (1) In December 2000, we acquired Biomatrix and allocated the acquisition to Genzyme Biosurgery. The operations of Biomatrix are included in the results of Genzyme Biosurgery for the three and nine months ended September 30, 2001. 48 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (CONTINUED) 7. SEGMENT REPORTING (CONTINUED) (2) On June 30, 2001, we acquired Focal and allocated the acquisition to Genzyme Biosurgery's Cardiothoracic segment. The results of operations of Focal are included in the results of Genzyme Biosurgery from the date of acquisition. (3) The Other category includes revenue from Genzyme Biosurgery's research and development contracts which we do not allocate to a particular segment of Genzyme Biosurgery. We do not allocate assets within Genzyme Biosurgery for purposes of segment information. Total assets for Genzyme Biosurgery at September 30, 2001 of $775.3 million include: - $25.9 million of additional assets resulting from the acquisition of the Class A and Class B limited partnership interests of GDP, including $8.4 million of goodwill and $17.5 million of other intangible assets; and - $19.3 million of additional assets resulting from the acquisition of Focal, including $7.9 million of intangible assets. 8. SUBSEQUENT EVENTS NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. 49 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, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues: Licensing revenue.................................... $ 484 $ 576 $ 1,696 $ 4,046 Royalty revenue...................................... 36 59 109 107 Research and development revenue..................... 704 -- 2,110 -- ------- ------- -------- -------- Total revenues..................................... 1,224 635 3,915 4,153 ------- ------- -------- -------- Operating costs and expenses: Cost of revenues..................................... 668 104 1,697 299 Selling, general and administrative.................. 1,817 1,311 5,519 4,289 Research and development............................. 6,381 5,120 19,610 13,772 Amortization of intangibles.......................... -- -- -- 5,420 ------- ------- -------- -------- Total operating costs and expenses................. 8,866 6,535 26,826 23,780 ------- ------- -------- -------- Operating loss......................................... (7,642) (5,900) (22,911) (19,627) ------- ------- -------- -------- Other income (expenses): Interest income...................................... 162 412 853 662 Interest expense..................................... (14) (16) (41) (173) ------- ------- -------- -------- Total other income (expenses)...................... 148 396 812 489 ------- ------- -------- -------- Loss before income taxes............................... (7,494) (5,504) (22,099) (19,138) Tax benefit............................................ -- -- -- 1,214 ------- ------- -------- -------- Division net loss...................................... $(7,494) $(5,504) $(22,099) $(17,924) ======= ======= ======== ======== Comprehensive loss, net of tax: Division net loss.................................... $(7,494) $(5,504) $(22,099) $(17,924) Other comprehensive loss, net of tax: Unrealized gains (losses) on securities arising during the period................................ -- -- -- -- ------- ------- -------- -------- Comprehensive loss..................................... $(7,494) $(5,504) $(22,099) $(17,924) ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 50 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2001 2000 -------------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $11,157 $22,209 Short-term investments.................................... -- 7,942 Accounts receivable, net.................................. 290 231 Prepaid expenses and other current assets................. 508 126 ------- ------- Total current assets.................................... 11,955 30,508 Equipment, net.............................................. 150 244 ------- ------- Total assets............................................ $12,105 $30,752 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses.......................................... $ 1,203 $ 1,540 Due to Genzyme General.................................... 5,409 4,660 Deferred revenue--current portion......................... 1,709 2,208 ------- ------- Total current liabilities............................... 8,321 8,408 Deferred revenue--long-term portion......................... 1,629 2,818 ------- ------- Total liabilities....................................... 9,950 11,226 Division equity............................................. 2,155 19,526 ------- ------- Total liabilities and division equity................... $12,105 $30,752 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 51 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Division net loss......................................... $(22,099) $(17,924) Reconciliation of division net loss to net cash used in operating activities: Depreciation and amortization........................... 94 5,536 Deferred income tax benefit............................. -- (1,214) Other................................................... 153 (291) Increase (decrease) in cash from working capital changes: Accounts receivable................................... (59) (142) Prepaid expenses and other current assets............. (382) (53) Accrued expenses, deferred revenue and other.......... (2,025) 1,124 Due to Genzyme General................................ 749 295 -------- -------- Net cash used in operating activities............... (23,569) (12,669) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments.................................. -- (25,283) Sales and maturities of investments....................... 7,792 9,722 -------- -------- Net cash provided by (used in) investing activities........................................ 7,792 (15,561) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Allocated proceeds from issuance of Molecular Oncology Stock................................................... 685 22,406 Repayment of debt......................................... -- (5,000) Net cash allocated from Genzyme General................... 4,040 15,000 -------- -------- Net cash provided by financing activities........... 4,725 32,406 -------- -------- Increase (decrease) in cash and cash equivalents............ (11,052) 4,176 Cash and cash equivalents at beginning of period............ 22,209 3,587 -------- -------- Cash and cash equivalents at end of period.................. $ 11,157 $ 7,763 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 52 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, statements 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 2000 Form 10-K. These unaudited, combined financial statements are prepared using amounts included in our unaudited, consolidated financial statements 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 these rules, we condense or omit certain footnotes and other financial information that are normally required by generally accepted accounting principles. We have reclassified certain 2000 data to conform to our 2001 presentation. These financial statements include all normal and recurring adjustments that we consider 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 2000 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. NEW ACCOUNTING PRONOUNCEMENTS We have included the impact that recently issued accounting standards will have on our financial statements in Note 2., "New Accounting Pronouncements," to our unaudited, consolidated financial statements, which we incorporate by reference into this note. 3. INTERDIVISIONAL FINANCING ARRANGEMENT In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology designated shares are 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 53 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains forward-looking statements. Actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described in the section of this report on Form 10-Q entitled "Note Regarding Forward-Looking Statements" and in Exhibit 99.2 to our 2000 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 three 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 lipid and peptide products for drug delivery. - Genzyme Biosurgery, which develops, manufactures and sells instruments, devices, biomaterials and biotherapeutic products to improve or replace surgery, with an emphasis on the orthopaedics and cardiothoracic markets; and - Genzyme Molecular Oncology, which utilizes its functional genomics and antigen discovery technology platforms to develop novel cancer products focused on cancer vaccines and angiogenesis inhibitors and to generate partnering revenue. We currently have three designated series of common stock--Genzyme General Division common stock, which we refer to as "Genzyme General Stock," Genzyme Biosurgery Division common stock, which we refer to as "Biosurgery Stock" and Genzyme Molecular Oncology Division common stock, which we refer to as "Molecular Oncology Stock." We also refer to our series of stock 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 the operations and assets of our entire company. The chief mechanisms intended to cause each tracking stock to "track" the financial performance of each division are provisions in our charter governing the 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 Biosurgery Stock or Molecular Oncology 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 average market price of the exchanged stock following the announcement of the sale). To determine earnings per share, we allocate our 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 that division in accordance with our management and accounting policies. Our charter also requires that all of our income and expenses be allocated among our divisions in a reasonable and consistent manner. However, subject to its fiduciary duties, our board of directors can, at its discretion, 54 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 2000 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 for the corporation as well as for each of our divisions to aid investors in evaluating our performance and the performance of each of our 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 a legal entity, and therefore does not and 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 stock holders in the combined assets of Genzyme. As market or competitive conditions warrant, we may create a new series of tracking stock or change our earnings allocation methodology. At the present time we have no plans to do so. We provide separate financial statements for each of our divisions as well as consolidated statements that include the consolidated results of each of our divisions and our corporate operations taken as a whole. You should read this discussion of 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 September 2001, we acquired all of the outstanding capital stock of Novazyme Pharmaceuticals, Inc., a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in our consolidated financial statements and the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. In June 2001, we acquired the remaining 78% of Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, that we did not already own for a payment of 2,086,151 shares of Biosurgery Stock. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. Accordingly, the results of operations of Focal are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from June 30, 2001, the date of acquisition. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek Diagnostics, Inc., for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General 55 and accounted for the acquisition as a purchase. Accordingly, we include the results of operations of Wyntek in our consolidated financial statements and the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. In December 2000, we acquired Biomatrix, Inc., a public company that develops, manufactures, markets and sells a series of proprietary viscoelastic and viscosupplementation products based on hyaluronan technology that are used in therapeutic medical applications and skin care for an aggregate purchase price of $426.2 million. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Accordingly, the results of operations of Biomatrix are included in our consolidated financial statements and the combined financial statements of Genzyme Biosurgery from December 18, 2000, the date of acquisition. In December 2000, we acquired GelTex Pharmaceuticals, Inc., a public company engaged in developing therapeutic products based on polymer technology for an aggregate purchase price of approximately $1 billion, which we paid primarily in shares of Genzyme General Stock. We accounted for the acquisition as a purchase and allocated it to Genzyme General. Accordingly, the results of operations of GelTex are included in our consolidated financial statements and the combined financial statements of Genzyme General from December 14, 2001, the date of acquisition. As part of the acquisition of GelTex, we acquired all of GelTex's interest in RenaGel LLC, our joint venture with GelTex. Our consolidated financial statements and the combined financial statements for Genzyme General reflect the consolidation of RenaGel LLC from the date of acquisition of GelTex. Prior to the acquisition of GelTex, we accounted for our investment in RenaGel LLC under the equity method. 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) 2001 2000 % CHANGE 2001 2000 % CHANGE --------- -------- ---------- --------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues....................... $ 319,495 $227,359 41% $ 898,397 $659,402 36% --------- -------- --------- -------- Cost of products and services sold... 89,503 75,797 18% 272,484 201,517 35% Selling, general and administrative..................... 122,030 66,379 84% 316,810 195,358 62% Research and development (including research and development related to contracts)......................... 69,127 39,678 74% 188,651 123,954 52% Amortization of intangibles.......... 30,950 3,409 808% 90,115 15,191 493% Purchase of in-process research and development........................ 86,800 -- N/A 95,568 -- N/A --------- -------- --------- -------- Total operating costs and expenses..................... 398,410 185,263 115% 963,628 536,020 80% --------- -------- --------- -------- Operating income (loss).............. (78,915) 42,096 (287)% (65,231) 123,382 (153)% Other income (expenses), net......... (28,315) 8,258 (443)% (51,997) 43,450 (220)% --------- -------- --------- -------- Income (loss) before income taxes.... (107,230) 50,354 (313)% (117,228) 166,832 (170)% Benefit from (provision for) income taxes.............................. 4,554 (15,933) (129)% 7,288 (51,101) (114)% --------- -------- --------- -------- Net income (loss) before cumulative effect of change in accounting principle.......................... (102,676) 34,421 (398)% (109,940) 115,731 (195)% Cumulative effect of change in accounting principle, net of tax... -- -- N/A 4,167 -- N/A --------- -------- --------- -------- Net income (loss).................... $(102,676) $ 34,421 (398)% $(105,773) $115,731 (191)% ========= ======== ========= ========
56 REVENUES The components of our revenues are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue.......................... $291,959 $206,645 41% $816,262 $592,505 38% Service revenue.......................... 23,988 19,967 20% 71,983 62,280 16% -------- -------- -------- -------- Total product and service revenue...... 315,947 226,612 39% 888,245 654,785 36% Research and development revenue......... 3,548 747 375% 10,152 4,617 120% -------- -------- -------- -------- Total revenues..................... $319,495 $227,359 41% $898,397 $659,402 36% ======== ======== ======== ========
PRODUCT REVENUE We derive product revenue from sales by Genzyme General of therapeutic products, including Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes and Renagel-Registered Trademark- phosphate binder, diagnostic products and other products, and sales by Genzyme Biosurgery of cardiothoracic products, including FocalSeal-Registered Trademark--L surgical sealant, orthopaedic products, including Synvisc-Registered Trademark- viscosupplementation product, and biosurgical specialties products, including Seprafilm-TM- bioresorbable membrane. The following table sets forth our product revenue on a segment basis:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General: Therapeutics: Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes.......................... $143,048 $136,744 5% $423,991 $400,203 6% Renagel-Registered Trademark- phosphate binder................. 52,356 13,814 279% 121,359 24,032 405% Other therapeutic products......... 6,718 3,282 105% 17,834 12,001 49% -------- -------- -------- -------- Total Therapeutics............... 202,122 153,840 31% 563,184 436,236 29% Diagnostic products.................. 20,572 15,824 30% 54,786 46,601 18% Other................................ 12,181 7,227 69% 38,151 20,863 83% -------- -------- -------- -------- Total product revenue-- Genzyme General.............. 234,875 176,891 33% 656,121 503,700 30% -------- -------- -------- -------- Genzyme Biosurgery: Cardiothoracic....................... 16,386 18,804 (13)% 52,042 58,240 (11)% Orthopaedics......................... 25,492 -- N/A 63,269 -- N/A Biosurgical specialties.............. 15,206 10,950 39% 44,830 30,565 47% -------- -------- -------- -------- Total product revenue-- Genzyme Biosurgery........... 57,084 29,754 92% 160,141 88,805 80% -------- -------- -------- -------- Total product revenues......... $291,959 $206,645 41% $816,262 $592,505 38% ======== ======== ======== ========
57 Product revenue continued to increase in both the three and nine month periods ended September 30, 2001 as compared to the same periods a year ago, due primarily to increased sales of Renagel-Registered Trademark- phosphate binder, which is used to reduce serum phosphorus levels in patients with end-stage renal disease on dialysis, and continued growth in sales of Cerezyme-Registered Trademark- enzyme for the treatment of Type I Gaucher disease. We began recording revenues from Renagel-Registered Trademark- phosphate binder during the second quarter of 2000 under an amended distribution arrangement with GelTex, which we acquired in December 2000. Prior to this amendment, revenues from Renagel-Registered Trademark- phosphate binder were recorded by RenaGel LLC, our joint venture with GelTex, and were $8.0 million for the three month period ended March 31, 2000. Sales of Renagel-Registered Trademark- phosphate binder in both the three and nine months ended September 30, 2001 include sales of capsules and the 800 mg tablet formulation. We launched the tablet formulation in the United States during the third quarter of 2000. In the first quarter of 2001, the higher-than-anticipated demand for the 800 mg tablet formulation and certain production constraints resulted in a temporary shortage of this dosage form of Renagel-Registered Trademark- phosphate binder. Patients taking the 800 mg tablets were shifted to an equivalent dose of 400 mg Renagel-Registered Trademark- tablets or 403 mg Renagel-Registered Trademark- capsules while we built an inventory of 800 mg tablets to support our re-launch of this dosage form in June 2001. Despite the temporary shortage of the 800 mg tablet formulation, sales of Renagel-Registered Trademark- phosphate binder increased significantly in each of the three and nine months ended September 30, 2001 in comparison to the same periods of 2000 due to accelerating adoption of the product by nephrologists, as evidenced by significant increases in both renewal prescriptions and new prescriptions. The steady growth in sales of Cerezyme-Registered Trademark- enzyme in the three and nine months ended September 30, 2001 was attributable to our continued identification of new Gaucher disease patients worldwide, coupled with significant investment in our global infrastructure that has continued to increase international sales of this product. Additionally, we continue to market Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, although 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. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. We are aware of companies that have initiated efforts to develop competitive products, including one company that recently has applied for marketing approval for its product in the U.S. Other companies may attempt to develop competitive products in the future. Although orphan drug status for Cerezyme-Registered Trademark- enzyme, which provided us with exclusive marketing rights for Cerezyme-Registered Trademark- enzyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme-Registered Trademark- enzyme until 2010 and the composition of Cerezyme-Registered Trademark- enzyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status in May 2001 will likely subject Cerezyme-Registered Trademark- enzyme to increased competition, which may decrease the amount of revenue we receive from this product or the growth of that revenue. The following table provides information regarding the change in sales of our Gaucher disease therapies as a percentage of total product revenue during the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes..... $143,048 $136,744 5% $423,991 $400,203 6% % of total product revenue................... 49% 66% 52% 68%
58 Although sales of Genzyme General's Gaucher disease therapies continue to increase, the decline as a percentage of total product revenue is a trend we expect will continue in the future. We expect that growth in the sales of Renagel-Registered Trademark- phosphate binder will continue to increase. Revenue from sales of Renagel-Registered Trademark- phosphate binder represented approximately 18% of our total product revenue for the three month period ended September 30, 2001 as compared to 7% for the same period a year ago. For the nine month period ended September 30, 2001, sales of Renagel-Registered Trademark- phosphate binder represented approximately 15% of our total product revenue as compared to 4% for the same period a year ago. Other therapeutics revenue for each period includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer. Revenue for Thyrogen-Registered Trademark- hormone increased for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, due primarily to increased market penetration. Other therapeutics revenue also increased due to increased sales of Fabrazyme-TM- enzyme in France under an Authorisation Temporaire d'utilisation from the French Medicines Agency. Diagnostic products revenue increased for the three and nine month periods ended September 30, 2001, as compared to the same periods in 2000, due primarily to increased sales of infectious disease testing products and HDL and LDL cholesterol testing products. Also contributing to the increase for both periods is the addition of sales of point of care rapid diagnostic tests for pregnancy and infectious diseases that we obtained through our acquisition of Wyntek, which we acquired in June 2001. Diagnostic products revenue also includes royalties on product sales by Techne Corporation's biotechnology group. The increase in other product revenue for the three and nine months ended September 30, 2001, as compared to the same periods in 2000, was primarily attributable to increased sales of lipids and peptides for drug delivery. The decrease in cardiothoracic revenue for the three and nine months ended September 30, 2001, as compared to the same periods of 2000, was due to decreased sales of chest drainage systems resulting from competitive pricing pressures in that market, as well as our withdrawal from certain commodity suture lines in Europe. The decrease in each period was offset, in part, by the continued growth in sales of minimally invasive cardiac surgery products and sales revenue from the FocalSeal-Registered Trademark--L surgical sealant. We added FocalSeal-Registered Trademark--L surgical sealant to the cardiothoracic product category in the third quarter of 2000 pursuant to a distribution and marketing agreement with Focal which, prior to our acquisition of Focal in June 2001, provided us with exclusive distribution rights for this product in North America. The orthopaedics product revenue increased for the three and nine months ended September 30, 2001 as compared to the same periods of 2000 due primarily to the sales of Synvisc-Registered Trademark- viscosupplementation product, which we added to the orthopaedics product category in December 2000 through our acquisition of Biomatrix. The increase in biosurgical specialties product revenue in the three and nine months ended September 30, 2001, as compared to the same periods of 2000, was due primarily to increases in sales of Seprafilm-TM- bioresorbable membrane and Sepramesh-TM- biosurgical composite. An increase in sales to original equipment manufacturers and sales generated from Hylaform-Registered Trademark- and skin care products, which were added to the biosurgical specialties product category in December 2000, also contributed to the overall increase in biosurgical specialties product revenue. SERVICE REVENUE We derive service revenues from three principal sources: - genetic testing services performed by Genzyme General; - Genzyme Biosurgery's Carticel-Registered Trademark- chondrocytes for the treatment of cartilage damage; and - Genzyme Biosurgery's Epicel-Registered Trademark- skin grafts for the treatment of severe burns. 59 The following table sets forth our service revenues on a segment basis:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General..................... $17,853 $15,115 18% $54,390 $45,296 20% Genzyme Biosurgery.................. 6,135 4,852 26% 17,593 16,984 4% ------- ------- ------- ------- Total service revenues............ $23,988 $19,967 20% $71,983 $62,280 16% ======= ======= ======= =======
The increase in service revenue in each of the three and nine months ended September 30, 2001 is due to increased sales by Genzyme General of genetic testing services attributable to expanded presence in the prenatal market and a broader test menu in oncology, as well as increased sales by Genzyme Biosurgery of Carticel-Registered Trademark- chondrocytes services and Epicel-Registered Trademark- skin graft services in each period. RESEARCH AND DEVELOPMENT REVENUE The following table sets forth our research and development revenues on a segment basis:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Genzyme General................................ $2,324 $159 1,362% $ 6,232 $ 489 1,174% Genzyme Biosurgery............................. -- 1 (100)% 5 23 (78)% Genzyme Molecular Oncology..................... 1,224 587 109% 3,915 4,105 (5)% ------ ---- ------- ------ Total research and development revenues........ $3,548 $747 375% $10,152 $4,617 120% ====== ==== ======= ======
The increase in research and development revenue in the three months ended September 30, 2001 is primarily attributable to $1.3 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product for which there were no similar amounts in the same period of 2000 and $1.0 million of additional research and development services performed on behalf of Genzyme Transgenics. For the nine months ended September 30, 2001 research and development revenue increased primarily due to $3.5 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product and $3.3 million recognized by Genzyme Molecular Oncology under our development agreement with Purdue Pharma L.P., for which there are no similar amounts in the same period of 2000. In addition, in the nine months ended September 30, 2001, we recorded $2.7 million of additional revenue from research and development services we performed on behalf of Genzyme Transgenics. The increases in research and development revenue under these contracts for the nine months ended September 30, 2001 were offset in part by a $2.0 million development milestone payment received under a license agreement with Schering-Plough Ltd. in the nine months ended September 30, 2000, for which there is no similar amount in 2001. INTERNATIONAL PRODUCT AND SERVICE REVENUE A substantial portion of our revenue was generated outside of the United States, as described in the following table. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme. International sales of Cerezyme-Registered Trademark- enzyme increased 9% to $73.8 million in the three month period ended September 30, 2001 from $67.7 million in the same period last year. International sales of 60 Cerezyme-Registered Trademark- enzyme increased 10% to $223.0 million for the nine month period ended September 30, 2001 from $203.5 million for the same period last year. Despite an approximate 1% decline in the average exchange rate of the euro for the three month period ended September 30, 2001, as compared to a year ago, and an approximate 5% decline in the average exchange rate of the euro for the nine month period ended September 30, 2001, as compared to a year ago, international sales of Cerezyme-Registered Trademark- enzyme increased for both periods due primarily to the continued identification of new Gaucher disease patients worldwide, coupled with significant investment in our global infrastructure. International product and service revenue as a percent of total product and service revenue decreased in both the three and nine months ended September 30, 2001 due primarily to increased sales of Renagel-Registered Trademark- phosphate binder and Synvisc-Registered Trademark- viscosupplementation product in the United States. The following table provides information regarding the change in international product and service sales as a percentage of total product and service revenue during the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue............................. $105,638 $89,297 18% $315,417 $264,484 19% % of total product and service revenue............................. 33% 39% 36% 40%
MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin: Genzyme General........................ $186,541 $131,701 42% $512,424 $389,239 32% % of total product revenue............. 64% 64% 63% 66% Genzyme Biosurgery..................... 29,956 11,215 167% 72,244 37,635 92% % of total product revenue............. 10% 5% 9% 6% Total product margin................... $216,497 $142,916 51% $584,668 $426,874 37% % of total product revenue............. 74% 69% 72% 72% Service margin: Genzyme General........................ $ 6,960 $ 5,950 17% $ 22,596 $ 18,359 23% % of total service revenue............. 29% 30% 31% 29% Genzyme Biosurgery..................... 2,987 1,949 53% 8,497 8,035 6% % of total service revenue............. 12% 10% 12% 13% Total service margin................... $ 9,947 $ 7,899 26% $ 31,093 $ 26,394 18% % of total service revenue............. 41% 40% 43% 42% Total gross margin: Genzyme General........................ $193,501 $137,651 41% $535,020 $407,598 31% % of total product and service revenue.............................. 61% 61% 60% 62% Genzyme Biosurgery..................... 32,943 13,164 150% 80,741 45,670 77% % of total product and service revenue.............................. 10% 6% 9% 7% Total gross margin..................... $226,444 $150,815 50% $615,761 $453,268 36% % of total product and service revenue.............................. 72% 67% 69% 69%
We provide a broad range of healthcare products and services. As a result, our 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 surgical or diagnostic products. 61 PRODUCT MARGIN Product margin for products allocated to Genzyme General increased for the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, primarily as a result of increased sales of Renagel-Registered Trademark- phosphate binder and Cerezyme-Registered Trademark- enzyme. This increase was partially offset by charges to cost of products sold of $8.2 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000 and the growth in sales of Renagel-Registered Trademark- phosphate binder, a lower margin product. Product margin for products allocated to Genzyme General as a percentage of total product revenue for the three months ended September 30, 2001 was consistent with the same period a year ago due primarily to a 41% increase in our total product revenue which largely offset the 42% increase in Genzyme General's product margin for the period. Product margin for products allocated to Genzyme General as a percentage of product revenue for the nine month period ended September 30, 2001 decreased, as compared to the same periods a year ago due primarily to a 36% increase in our total product revenue which offset the 32% increase in Genzyme General's product margin for the period. We expect that in the future margins for products allocated to Genzyme General as a percentage of total product revenue will trend slightly lower, primarily due to the lower margins normally attributable to Renagel-Registered Trademark- phosphate binder, combined with our building of additional manufacturing capacity in both the United Kingdom and Ireland as we experience a product mix shift as sales of diagnostic products and services continue to increase. Product margin for products allocated to Genzyme Biosurgery increased for the three and nine months ended September 30, 2001 due to increased sales of higher margin products such as Synvisc-Registered Trademark- viscosupplementation product and devices for minimally invasive cardiac surgery. This increase was partially offset by charges to cost of products sold of $11.3 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of Biomatrix in December 2000. SERVICE MARGIN Service margin for services allocated to Genzyme General for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, continued to increase primarily as a result of increased sales of our higher margin DNA and cancer testing services. Service margin for services allocated to Genzyme Biosurgery increased for the three months ended September 30, 2001 as compared to the same period a year ago due primarily to growth in sales of Epicel-Registered Trademark- skin graft services for the treatment of severe burns. Service margins for services allocated to Genzyme Biosurgery increased for the nine months ended September 30, 2001 in comparison to the same period last year due primarily to increased sales of Epicel-Registered Trademark- skin graft services and a reduction in manufacturing personnel. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, is attributable 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, to drive the growth in sales of Renagel-Registered Trademark- phosphate binder and Thyrogen-Registered Trademark- hormone, and to prepare for the commercialization of Fabrazyme-TM- enzyme; and - the addition of expenses from GelTex, Biomatrix, Wyntek and Focal. 62 Selling, general and administrative expenses for the three and nine months ended September 30, 2001 included $27.0 million of charges resulting from Pharming Group, N.V.'s decision to file for and operate under a court supervised receivership. Included was a write-off of the $10.2 million in principal and accrued interest due to us under the 7% senior convertible note issued to us by Pharming Group and a charge of $16.8 million representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but have committed to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. The increase in research and development expenses for both the three and nine month periods ended September 30, 2001 as compared to the same period a year ago is attributable to: - the cost of post-marketing clinical development efforts for Renagel-Registered Trademark- phosphate binder, which was included in equity in net loss of unconsolidated affiliates before we purchased GelTex; - the addition of spending on the C. DIFFICILE colitis, DENSPM, iron chelation, oral mucositis, anti-obesity, and GT102-279 programs as a result of our acquisition of GelTex; - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; and - increased spending on other internal programs. Research and development expenses for the three and nine months ended September 30, 2001, reflects a charge of $4.7 million, representing the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. Research and development expenses for the nine months ended September 30, 2000 included a charge of $19.5 million representing initial amounts payable to Synpac (North Carolina), Inc. under a license granted to us by Synpac to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease which was offset in part by a $10.3 million research and development reimbursement from Pharming Group. In connection with our acquisition of GelTex on December 14, 2000, we converted options to purchase shares of GelTex common stock into options to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we allocated the intrinsic value for the unvested portion of these options of $10.2 million to deferred compensation, a component of stockholders' equity. We are amortizing this amount to operating expense over the remaining vesting period of one year from the date of acquisition. We are allocating the expense to the appropriate expense categories of our statements of operations based on the functional responsibility of each employee or option holder. For the three months ended September 30, 2001, we recorded $2.4 million of compensation expense related to these options, of which $1.9 million was charged to research and development expense and $0.5 million was charged to selling, general and administrative expense. For the nine months ended September 30, 2001, we recorded $7.3 million of compensation expense related to these options, of which $6.0 million was charged to research and development expense and $1.3 million was charged to selling, general and administrative expense. At September 30, 2001, $2.4 million remained in deferred compensation, all of which we will fully amortize by December 31, 2001. In connection with our acquisition of Novazyme on September 26, 2001, we converted options, warrants and rights to purchase shares of Novazyme common stock into options, warrants and rights to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we 63 allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation. We are amortizing this amount to operating expense over the remaining vesting period of 22 months from the date of acquisition. We are allocating the expense to the appropriate expense categories of our consolidated statements of operations based on the functional responsibility of each option holder. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for both the three and nine month periods ended September 30, 2001 is primarily attributable to intangible assets acquired in connection with the acquisitions of GelTex and Biomatrix in December 2000, the GDP Class A limited partnership interests in January 2001, Wyntek in June 2001 and the GDP Class B limited partnership interests in August 2001. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT NOVAZYME In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. We currently estimate that it will take approximately three years and an investment of approximately $75 million-$100 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform. However, our current estimates of the time and investment required to develop the technology platform may change depending on the different applications of the technology we may choose to pursue. We cannot guarantee that any projects based on these technology platforms will ever reach feasibility or develop into products that we can profitably market. In addition, we cannot give you any assurances that we will be able to develop and commercialize products based on these technology platforms before our competitors develop and commercialize products for the same indications. If we do not successfully develop and commercialize products based on these technology platforms, our results of operations could be materially affected. WYNTEK In connection with our acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to IPR&D. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to 64 present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate the present value of these cash flows, which is consistent with the risks of the project. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. In the allocation of purchase price to IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the nine months ended September 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek currently is developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The intended use of the device is to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process and file an application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. GELTEX AND BIOMATRIX In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology. We accounted for the acquisition as a purchase and allocated it to Genzyme General. In connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which we recorded as a charge to expense in our consolidated statement of operations for the year ended December 31, 2000. In December 2000, we also acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic and viscosupplementation biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. In connection with the purchase of Biomatrix, we allocated approximately $82.1 million to IPR&D, which we recorded as a charge to expense in our consolidated statement of operations for the year ended December 31, 2000. As of September 30, 2001, the technological feasibility of both the GelTex and Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred. Substantial additional research and development will be required prior to any products reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and receive FDA or other regulatory approval prior to commercialization. We cannot guarantee that these projects will ever reach feasibility or develop into products that can be marketed profitably, nor can we guarantee that we will be able to develop and commercialize these products before our competitors develop and commercialize products for these indications. If these products are not successfully developed and do not become commercially viable, our results of operations could be materially affected. 65 Below is a brief description of the significant GelTex and Biomatrix IPR&D projects, including an estimation of when management believes we may realize revenues from the sales of these products in the respective application:
ESTIMATED COST TO VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - --------------------- ----------------------------- ----------------------------- ----------- -------------- (IN MILLIONS) GELTEX: Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies scheduled $ 19.7 $ 13.2 phosphate binder phosphate binder for the for completion in 2002, 2003 treatment of hyperphospatemia and 2004 C. DIFFICILE colitis Program to develop a toxin- - Phase 2 studies initiated 37.4 31.1 binding polymer for the in 2000 treatment and prevention of - U.S. marketing approval for antibiotic induced C. this product is expected by DIFFICILE colitis 2006 Oral Mucositis Focuses on the development of - IND expected to be filed in 17.8 22.3 a topical mouth rinse that the fourth quarter of 2002 combines barrier material and - Product launch expected in antimicrobial polymers to 2006 create an anti-infective mechanism against oral mucositis, a common side effect of radiation therapy and chemotherapy DENSPM Focuses on the development of - Phase 1 safety study and 3.4 28.9 a compound for the treatment dose-ranging studies of mild to moderate psoriasis scheduled for the fourth quarter of 2001 - No further development planned Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 27.8 treatment of transfusional or the fourth quarter of 2001 hereditary iron overload - Product launch expected in 2006 Anti-Obesity Builds on GelTex's expertise - Expected to file an IND in 17.8 35.9 in non-absorbed polymers and late 2002 focuses on the development of - Product launch expected in a compound that will inhibit 2007 lipase and bind fat GT102-279 Second generation lipid- - Development on hold 6.2 N/A(1) lowering compound with attributes of GelTex's Welchol-TM- lipid lowering agent ------ ------ $118.0 $159.2 ====== ======
- -------------------------- (1) Future development costs will be funded by our collaboration partner. 66
ESTIMATED COST TO VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - --------------------- ----------------------------- ----------------------------- ----------- ------------- (IN MILLIONS) BIOMATRIX: Visco-supplement- Use of elastoviscous - European marketing approval $33.8 $ 6.7 ation solutions and viscoelastic for gels in disease conditions to Synvisc-Registered Trademark- supplement tissues and body for use in the hip expected fluids, alleviating pain and by the end of 2001. U.S. restoring normal function trial scheduled for 2002. Initiation of a next generation Synvisc-Registered Trademark- program expected in the fourth quarter of 2001 with possible U.S. market approval in the second half of 2004 Visco-augmentation Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.2 provide scaffolding for Hylaform-Registered Trademark- tissue regeneration or as an expected to start in the inert elastic filler for fourth quarter of 2001 with tissues of the skin and the market launch expected in subcutaneous and the second half of 2003 intermuscular connective tissues - We expect to engage a development partner for Hylagel-Registered Trademark- Uro in 2002 Visco-separation Use of viscoelastic gels and - Clinical studies have been 39.7 6.6 membranes to separate tissues initiated in the U.S., and to decrease formation of Germany, France, the United adhesions and excessive scars Kingdom and Belgium for after surgery Sepragel-TM- Spine (formerly Hylagel-Registered Trademark- Nuro). Completion of patient enrollment is expected by the first quarter of 2002. Patient follow up expected to be completed by the first quarter of 2003 with U.S. marketing approval anticipated in the first half of 2004. European marketing approval expected in the second half of 2003 with submissions for regulatory approvals in the U.S., Canada and Europe thereafter - Expected product launch in Europe by the second quarter of 2002 and in the U.S. by the fourth quarter of 2002 ----- ----- $82.1 $$19.5 ===== =====
67 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates...... $ (8,110) $(11,420) (29)% $(28,921) $(30,866) (6)% Gain on affiliate sale of stock.......................... 212 2,419 (91)% 212 22,689 (99)% Gain (loss) on investments in equity securities.............. (24,464) 8,544 (386)% (25,996) 22,709 (214)% Minority interest in net loss of subsidiary..................... 260 977 (73)% 2,259 3,185 (29)% Other............................ (1,192) (10) 11,820% (5,035) 5,185 (197)% Investment income................ 13,718 12,758 8% 36,359 33,333 9% Interest expense................. (8,739) (5,010) 74% (30,875) (12,785) 141% -------- -------- -------- -------- Total other income (expenses).... $(28,315) $ 8,258 (443)% $(51,997) $ 43,450 (220)% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES We have recorded the results of the following joint ventures in equity in net loss of unconsolidated affiliates:
JOINT VENTURE PARTNER EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION - --------------------- -------------------------- -------------- -------------------------- ------------------- RenaGel LLC GelTex (1) June 1997 Renagel-Registered Trademark- Genzyme General phosphate binder for the reduction of serum phosphorus in patients with end-stage renal disease BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Aldurazyme-TM- enzyme for Genzyme General Inc. the treatment of mucopolysaccharidosis-I Pharming/ Genzyme LLC Pharming Group, N.V.(2,3) October 1998 Human alpha-glucosidase Genzyme General for the treatment of Pompe disease (transgenic product) Genzyme/ Pharming Pharming Group, N.V.(2,4) June 2000 Human alpha-glucosidase Genzyme General Alliance LLC for the treatment of Pompe disease (produced using CHO cells) Diacrin/ Genzyme LLC Diacrin, Inc. October 1996 Products using porcine Genzyme Biosurgery fetal cells for the (until May 1999); treatment of Parkinson's Genzyme General and Huntington's diseases (after May 1999)
- -------------------------- (1) We acquired GelTex and the remaining 50% interest in RenaGel LLC in December 2000. RenaGel LLC was merged into GelTex effective October 1, 2001. (2) Since August 2001, Pharming Group, N.V. has been operating under court ordered receivership. (3) In August 2001, we agreed to fund 100% of the costs to produce transgenic human alpha-glucosidase enzyme and related clinical trial costs through 2003. We consolidate the results of Pharming/Genzyme LLC effective August 2001. (4) In August 2001, we terminated our strategic alliance agreement with Pharming Group, N.V. and certain of its subsidiaries for the development of a CHO-cell product for Pompe disease and have assumed full operational and financial responsibility for the development of the CHO-cell product. We currently own approximately 26% of the common stock of Genzyme Transgenics and record our portion of its results in equity in net loss of unconsolidated affiliates. 68 We have recorded in equity in net loss of unconsolidated affiliates our portion of the results of our joint ventures with BioMarin, Pharming Group and Diacrin. Included in the nine months ended September 30, 2001 are losses from Focal, which we acquired in June 2001, for which there was no similar amounts in the same period of 2000. Included in the three and nine month periods ended September 30, 2000 are losses from RenaGel LLC, in which we and GelTex each owned a 50% interest. We acquired GelTex, including its 50% interest in RenaGel LLC, in December 2000. In connection with the merger, we allocated our 50% interest in RenaGel LLC to GelTex. We have consolidated the results of RenaGel LLC in our consolidated financial statements from the date of acquisition. RenaGel LLC was merged into GelTex effective October 1, 2001. Prior to our acquisition of the remaining 50% interest in RenaGel LLC, we included our proportionate share of the results of RenaGel LLC in equity in net loss of unconsolidated affiliates. Our equity in the net losses of RenaGel LLC was $4.1 million in the three months ended September 30, 2000 and $10.1 million in the nine months ended September 30, 2000. Excluding these losses, our equity in net loss of unconsolidated affiliates increased in both the three and nine months ended September 30, 2001, due primarily to increased losses from our joint venture with BioMarin, our joint ventures with Pharming, and our equity position in Genzyme Transgenics, which were offset in part by decreased losses from our joint venture with Diacrin. Also included in the three and nine month periods ended September 30, 2001 are losses from Genzyme/Pharming Alliance LLC, which was the vehicle for our joint venture with Pharming Group for the development of a CHO-cell derived product for the treatment of Pompe disease. We terminated our strategic alliance agreement with Pharming covering this joint venture in August 2001. As a result, we have included 100% of the losses of Genzyme/Pharming Alliance LLC since August 23, 2001. GAIN ON AFFILIATE SALE OF STOCK During the nine months ended September 30, 2000, in accordance with our policy pertaining to affiliate sales of stock, we recognized gains of $22.7 million due to the issuance by Genzyme Transgenics, an unconsolidated affiliate, of additional shares of Genzyme Transgenics common stock. GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, we recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics Corporation, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments 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 each of these investments. In August 2001, Pharming Group filed for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, we recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. In April 2001, Antigenics, Inc. announced that it had entered into a definitive merger agreement with Aronex Pharmaceuticals, Inc. The merger was completed in July 2001. Under the terms of the merger agreement, we received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, we recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, we recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, we 69 recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. We also recognized a realized gain of $7.6 million resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged on a one-for-one basis for shares of Insmed common stock. MINORITY INTEREST IN NET LOSS OF SUBSIDIARY Due to our combined direct (until July 2001) and indirect interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, we consolidated the results of ATIII LLC and recorded Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest increased in the three and nine months ended September 30, 2001 due to a change in the funding agreement for the joint venture in March 2001, retroactive to January 1, 2001, which increased Genzyme Transgenics's portion of the losses incurred by ATIII LLC to 50% until July 2001 and 100% thereafter as compared to 26% for the same periods a year ago. In July 2001, we transferred our 50% ownership interest in ATIII LLC to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. INVESTMENT INCOME Our investment income increased for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, due primarily to higher average invested cash balances. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due 2021. Net proceeds from the offering were approximately $562.1 million. We allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General. A portion of the net proceeds from the private placement of the debentures was used to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General. INTEREST EXPENSE Our interest expense increased for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, primarily due to additional interest expense resulting from the $150.0 million of debt drawn on our revolving credit facility in December 2000 as part of the financing of the GelTex acquisition, and the private placement of $575.0 million in principal of 3% convertible debentures issued in May 2001. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Benefit from (provision for) income taxes.............................. $4,554 $(15,933) (129)% $7,288 $(51,101) (114)% Effective tax rate................... 4% 32% 6% 31%
70 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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in our effective tax rate for both the three and nine months ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisitions of GelTex and Biomatrix in December 2000. The tax benefit for the nine months ended September 30, 2001 includes a $2.2 million benefit resulting from our release of excess tax reserves. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our consolidated balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship and, if it is, the type of hedge relationship. In accordance with the transition provisions of SFAS 133, we recorded a cumulative-effect adjustment of $4.2 million, net of tax, in our unaudited, consolidated statements of operations for the nine months ended September 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts were not significant. For the three months ended September 30, 2001, we recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, we recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. We also recorded a charge of $1.7 million in other comprehensive income for the nine months ended September 30, 2001 to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. 71 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION The following discussion summarizes key factors our management believes necessary for an understanding of Genzyme General's financial statements. In September 2001, we acquired all of the outstanding capital stock of Novazyme, a privately-held developer of biotherapies for the treatment of lysosomal storage disorders, or LSDs, for an initial payment of 2,562,182 shares of Genzyme General Stock. Novazyme shareholders received 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock they held. We will be obligated to make two additional payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for two products for the treatment of LSDs that employ certain of Novazyme's technologies. In connection with the merger, we also assumed all of the outstanding options, warrants and rights to purchase Novazyme common stock on an as-converted basis. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Novazyme are included in the combined financial statements of Genzyme General from September 26, 2001, the date of acquisition. In June 2001, we acquired all of the outstanding capital stock of privately-held Wyntek for $65.0 million in cash. Wyntek is a provider of high quality point of care rapid diagnostic tests for pregnancy and infectious diseases. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Accordingly, the results of operations of Wyntek are included in the combined financial statements of Genzyme General from June 1, 2001, the date of acquisition. In December 2000, we acquired GelTex, a public company engaged in developing therapeutic products based on polymer technology, for an aggregate purchase price of approximately $1 billion, which we paid primarily in shares of Genzyme General Stock. We accounted for the acquisition as a purchase and allocated it to Genzyme General. Accordingly, the results of operations of GelTex are included in the combined financial statements of Genzyme General from December 14, 2000, the date of acquisition. As part of the acquisition of GelTex, we acquired GelTex's interest in RenaGel LLC, our joint venture with GelTex. Our consolidated financial statements and the combined financial statements of Genzyme General reflect the consolidation of RenaGel LLC from the date of acquisition of GelTex. Prior to the acquisition of GelTex, we accounted for our investment in RenaGel LLC under the equity method. 72 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) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues.................. $255,052 $192,165 33% $716,743 $549,485 30% -------- -------- -------- -------- Cost of products and services sold.......................... 59,227 54,355 9% 175,491 141,398 24% Selling, general and administrative................ 92,386 41,780 121% 217,475 122,974 77% Research and development (including research and development related to contracts).................... 49,726 25,567 94% 132,317 83,701 58% Amortization of intangibles..... 19,221 1,983 869% 55,073 5,962 824% Purchase of in-process research and development............... 86,800 -- N/A 95,568 -- N/A -------- -------- -------- -------- Total operating costs and expenses.................. 307,360 123,685 149% 675,924 354,035 91% -------- -------- -------- -------- Operating income (loss)......... (52,308) 68,480 (176)% 40,819 195,450 (79)% Other income (expenses), net.... (25,903) 6,902 (475)% (41,488) 38,986 (206)% -------- -------- -------- -------- Income (loss) before income taxes......................... (78,211) 75,382 (204)% (669) 234,436 (100)% Provision for income taxes...... (3,495) (24,409) (86)% (34,174) (74,164) (54)% -------- -------- -------- -------- Division net income (loss) before cumulative effect of change in accounting principle..................... (81,706) 50,973 (260)% (34,843) 160,272 (122)% Cumulative effect of change in accounting principle, net of tax........................... -- -- -- 4,167 -- N/A -------- -------- -------- -------- Division net income (loss)...... $(81,706) $ 50,973 (260)% $(30,676) $160,272 (119)% ======== ======== ======== ========
REVENUES The components of Genzyme General's total revenues are described in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue................. $234,875 $176,891 33% $656,121 $503,700 30% Service revenue................. 17,853 15,115 18% 54,390 45,296 20% -------- -------- -------- -------- Total product and service revenue................... 252,728 192,006 32% 710,511 548,996 29% Research and development revenue....................... 2,324 159 1,362% 6,232 489 1,174% -------- -------- -------- -------- Total revenues.............. $255,052 $192,165 33% $716,743 $549,485 30% ======== ======== ======== ========
73 PRODUCT AND SERVICE REVENUE The following table sets forth Genzyme General's product and service revenue on a segment basis:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue: Therapeutics: Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes................... $143,048 $136,744 5% $423,991 $400,203 6% Renagel-Registered Trademark- phosphate binder.......... 52,356 13,814 279% 121,359 24,032 405% Other therapeutic products.................. 6,718 3,282 105% 17,834 12,001 49% -------- -------- -------- -------- Total Therapeutics........ 202,122 153,840 31% 563,184 436,236 29% Diagnostic products........... 20,572 15,824 30% 54,786 46,601 18% Other......................... 12,181 7,227 69% 38,151 20,863 83% -------- -------- -------- -------- Total product revenue....... 234,875 176,891 33% 656,121 503,700 30% Service revenue: Other......................... 17,853 15,115 18% 54,390 45,296 20% -------- -------- -------- -------- Total product and service revenue....................... $252,728 $192,006 32% $710,511 $548,996 29% ======== ======== ======== ========
THERAPEUTICS Genzyme General's continued increase in product revenue for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, was primarily due to increased sales of Renagel-Registered Trademark- phosphate binder, which is used to reduce serum phosphorus levels in patients with end-stage renal disease on dialysis, and continued growth in sales of Cerezyme-Registered Trademark- enzyme for the treatment of Type I Gaucher disease. Genzyme General began recording revenues from Renagel-Registered Trademark- phosphate binder during the second quarter of 2000 under an amended distribution arrangement with GelTex, which we acquired in December 2000. Prior to this amendment, revenues from Renagel-Registered Trademark- phosphate binder were recorded by RenaGel LLC, our joint venture with GelTex, and were $8.0 million for the three month period ended March 31, 2000. Sales of Renagel-Registered Trademark- phosphate binder in both the three and nine months ended September 30, 2001 include sales of capsules and the 800 mg tablet formulation. Genzyme General launched the tablet formulation in the United States during the third quarter of 2000. In the first quarter of 2001, the higher-than-anticipated demand for the 800 mg tablet formulation and certain production constraints resulted in a temporary shortage of this dosage form of Renagel-Registered Trademark- phosphate binder. Patients taking the 800 mg tablets were shifted to an equivalent dose of 400 mg Renagel-Registered Trademark- tablets or 403 mg Renagel-Registered Trademark- capsules while Genzyme General built an inventory of 800 mg tablets to support our re-launch of this dosage form in June 2001. Despite the temporary shortage of the 800 mg tablet formulation, sales of Renagel-Registered Trademark- phosphate binder increased significantly in each of the three and nine months ended September 30, 2001 in comparison to the same periods of 2000 due to accelerating adoption of the product by nephrologists, as evidenced by significant increases in both renewal prescriptions and new prescriptions. The steady growth in sales of Cerezyme-Registered Trademark- enzyme in the three and nine months ended September 30, 2001 was attributable to Genzyme General's continued identification of new Gaucher disease patients worldwide, coupled with significant investment in our global infrastructure that has continued to increase international sales of this product. Additionally, Genzyme General continues to 74 market Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, although we have 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. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. Genzyme General is aware of companies that have initiated efforts to develop competitive products, including one company that recently has applied for marketing approval for its product in the U.S. Other companies may attempt to develop competitive products in the future. Although orphan drug status for Cerezyme-Registered Trademark- enzyme, which provided us with exclusive marketing rights for Cerezyme-Registered Trademark- enzyme in the United States, expired in May 2001, we continue to have patents protecting our method of manufacturing Cerezyme-Registered Trademark- enzyme until 2010 and the composition of Cerezyme-Registered Trademark- enzyme as made by that process until 2013. The expiration of market exclusivity and orphan drug status in May 2001 will likely subject Cerezyme-Registered Trademark- enzyme to increased competition which may decrease the amount of revenue we receive from this product or the growth of that revenue. 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 the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes....................... $143,048 $136,744 5% $423,991 $400,203 6% % of total product revenue...... 61% 77% 65% 79%
Although sales of Genzyme General's Gaucher disease therapies continue to increase, the decline as a percentage of total product revenue is a trend we expect will continue in the future. Genzyme General expects that growth in the sales of Renagel-Registered Trademark- phosphate binder will continue to increase. Revenue from sales of Renagel-Registered Trademark- phosphate binder represented approximately 22% of Genzyme General's total product revenue for the three month period ended September 30, 2001, as compared to 8% for the same period a year ago. For the nine-month period ended September 30, 2001, sales of Renagel-Registered Trademark- phosphate binder represented approximately 18% of Genzyme General's total product revenue as compared to 5% for the same period a year ago Other therapeutics revenue for each period includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well-differentiated thyroid cancer. Revenue for Thyrogen-Registered Trademark- hormone increased for the three months and nine months ended September 30, 2001, as compared to the same periods a year ago, due primarily to increased market penetration. Other therapeutics revenue also increased due to increased sales of Fabrazyme-TM- enzyme in France under an Authorisation Temporaire d'utilisation from the French Medicines Agency. DIAGNOSTIC PRODUCTS Diagnostic products revenues increased for the three and nine-month periods ended September 30, 2001, as compared to the same periods in 2000, due primarily to increased sales of infectious disease testing products and HDL and LDL cholesterol testing products. Also contributing to the increase for both periods is the addition of sales of point of care rapid diagnostic tests for pregnancy and infectious diseases that we obtained through our acquisition of Wyntek, which we acquired in June 2001. Diagnostic product revenue also includes royalties on product sales by Techne Corporation's biotechnology group. 75 OTHER PRODUCT AND SERVICE REVENUE The increase in other product revenue for the three and nine months ended September 30, 2001, as compared to the same periods in 2000, was primarily attributable to increased sales of lipids and peptides for drug delivery. The increase in service revenue in each of the three and nine months ended September 30, 2001 is due to increased sales of genetic testing services attributable to expanded presence in the prenatal market and a broader test menu in oncology. RESEARCH AND DEVELOPMENT REVENUE The increase in research and development revenue in the three months ended September 30, 2001 was primarily attributable to $1.3 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product, for which there were no similar amounts in the same period of 2000, and $1.0 million of additional research and development services Genzyme General performed on behalf of Genzyme Transgenics. For the nine months ended September 30, 2001, research and development revenue increased primarily due to $3.5 million of revenue recognized by Genzyme General in connection with our collaboration agreements for the development of a second-generation lipid-altering product for which there were no similar amounts in the same period of 2000 and $2.7 million of additional revenue from research and development services we performed on behalf of Genzyme Transgenics. INTERNATIONAL PRODUCT AND SERVICE REVENUE A substantial portion of Genzyme General's revenue was generated outside of the United States. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme. International sales of Cerezyme-Registered Trademark- enzyme increased 9% to $73.8 million in the three month period ended September 30, 2001 from $67.7 million in the same period last year. International sales of Cerezyme-Registered Trademark- enzyme increased 10% to $223.0 million for the nine month period ended September 30, 2001 from $203.5 million for the same period last year. Despite an approximate 1% decline in the average exchange rate of the euro for the three month period ended September 30, 2001, as compared to a year ago, and an approximate 5% decline in the average exchange rate of the euro for the nine month period ended September 30, 2001, as compared to a year ago, international sales of Cerezyme-Registered Trademark- enzyme increased for both periods due primarily to the continued identification of new Gaucher disease patients worldwide, coupled with significant investment in our global infrastructure. International product and service revenue as a percent of total product and service revenue decreased in both the three and nine months ended September 30, 2001 due primarily to increased sales of Renagel-Registered Trademark- phosphate binder in the United States. The following table provides information regarding the change in international product and service sales as a percentage of total product and service revenue during the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue......................... $94,555 $80,585 17% $280,022 $237,592 18% % of total product and service revenue......................... 37% 42% 39% 43%
76 MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin....................... $186,541 $131,701 42% $512,424 $389,239 32% % of product revenue................. 79% 74% 78% 77% Service margin....................... 6,960 5,950 17% 22,596 18,359 23% % of service revenue................. 39% 39% 42% 41% Total gross margin................... $193,501 $137,651 41% $535,020 $407,598 31% % of total product and service revenue............................ 77% 72% 75% 74%
Genzyme General provides a broad range of healthcare products and services. As a result, Genzyme General's gross margin may vary significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic products. PRODUCT MARGIN Product margin for the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, increased primarily as a result of increased sales of Renagel-Registered Trademark- phosphate binder and Cerezyme-Registered Trademark- enzyme. This increase was partially offset by charges to cost of products sold of $8.2 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of GelTex in December 2000. Product margin as a percentage of product revenue increased for the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago. The increase for the three months ended September 30, 2001 as compared to the same period a year ago was primarily attributable to a 33% increase in product revenue, driven by increased sales of both Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder, partially offset by a 7% increase in the cost of products sold for the same period. The increase for the nine months ended September 30, 2001 as compared to the same period a year ago was primarily attributable to a 30% increase in product revenue, driven by increased sales of both Cerezyme-Registered Trademark- enzyme and Renagel-Registered Trademark- phosphate binder, partially offset by a 26% increase in the cost of products sold for the same period. We expect that in the future Genzyme General's product margin as a percentage of product revenue will trend slightly lower, primarily due to the lower margins normally attributable to Renagel-Registered Trademark- phosphate binder, combined with our building of additional manufacturing capacity in both the United Kingdom and Ireland and as we experience a product mix shift as sales of diagnostics products and services continue to increase. SERVICE MARGIN Service margin for the three and nine month periods ended September 30, 2001 increased, as compared to the same periods a year ago, primarily due to increased sales of higher margin DNA and cancer testing services. While this trend continued, service margin as a percentage of service revenue was unchanged for the three month period ending September 30, 2001, as compared to the same period a year ago, and increased only slightly for the nine month period ended September 30, 2001. This was primarily attributable to service revenue increasing at a rate greater than the rate of increase for cost of services sold for both periods of 2001. For the three month period ending September 30, 2001, a service revenue increase of 18% was offset by a 19% increase in the cost of services sold as compared to the same period a year ago. For the nine month period ending September 30, 2001, a service revenue increase of 20% was offset by a 18% increase in the cost of services sold as compared to the same period a year ago. 77 OPERATING EXPENSES The increase in selling, general and administrative expenses for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, 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, to drive the growth in sales of Renagel-Registered Trademark- phosphate binder and Thyrogen-Registered Trademark- hormone, and to prepare for the commercialization of Fabrazyme-TM- enzyme; and - the addition of expenses from GelTex and Wyntek. Selling, general and administrative expenses for the three and nine months ended September 30, 2001 included $27.0 million of charges resulting from Pharming Group, N.V.'s decision to file for and operate under a court supervised receivership. Included was a write-off of the $10.2 million in principal and accrued interest due to us under the 7% senior convertible note issued to us by Pharming Group and a charge of $16.8 million representing our obligation to fund the continued production of transgenic human alpha-glucosidase enzyme through 2003. As a result of Pharming Group's failure to make payments to fund our joint venture for the development of a CHO-cell product for Pompe disease under a strategic alliance agreement, we terminated this agreement in August and have assumed full operational and financial responsibility for the development of the CHO-cell product. Our joint venture with Pharming Group covering a transgenic product for Pompe disease remains in place. We do not intend to commercialize this product, but have committed to fund its production for the nine patients participating in a clinical trial extension until those patients can be transitioned to a CHO-cell product. The increase in research and development expenses for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, is attributable to: - the cost of post-marketing clinical development efforts for Renagel-Registered Trademark- phosphate binder, which was included in equity in net loss of unconsolidated affiliates before we purchased GelTex; - the addition of spending on the C. DIFFICILE colitis, DENSPM, iron chelation, oral mucositis, anti-obesity, and GT102-279 programs as a result of our acquisition of GelTex; - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; and - increased spending on other internal programs. Research and development expenses for the three and nine months ended September 30, 2001, reflects a charge of $4.7 million, representing the net amount owed by Pharming Group to the CHO-cell product joint venture we previously formed with Pharming Group that we believe is uncollectable. Research and development expenses for the nine months ended September 30, 2000 included a charge of $19.5 million representing initial amounts payable to Synpac (North Carolina), Inc. under a license granted to us by Synpac to develop and commercialize a human alpha-glucosidase enzyme replacement therapy for Pompe disease, which was offset in part by a $10.3 million research and development reimbursement from Pharming Group. In connection with our acquisition of GelTex on December 14, 2000, we converted options to purchase shares of GelTex common stock into options to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we allocated the intrinsic value for the unvested portion of these options of $10.2 million to deferred compensation, a component of division equity. We are amortizing this amount to operating expense over the remaining vesting period of one year from the date of acquisition. We are allocating the expense to the appropriate expense categories of Genzyme General's statements of operations based on the functional responsibility of each employee or 78 option holder. For the three months ended September 30, 2001, Genzyme General recorded $2.4 million of compensation expense related to these options, of which $1.9 million was charged to research and development expense and $0.5 million was charged to selling, general and administrative expense. For the nine months ended September 30, 2001, Genzyme General recorded $7.3 million of compensation expense related to these options, of which $6.0 million was charged to research and development expense and $1.3 million was charged to selling, general and administrative expense. At September 30, 2001, $2.4 million remained in deferred compensation, all of which we will fully amortize by December 31, 2001. In connection with our acquisition of Novazyme on September 26, 2001, we converted options, warrants and rights to purchase shares of Novazyme common stock into options, warrants and rights to purchase shares of Genzyme General Stock. In accordance with FIN 44, at the date of acquisition we allocated the $2.6 million intrinsic value of the portion of the unvested options related to the future service period to deferred compensation. We are amortizing this amount to operating expense over the remaining vesting period of 22 months from the date of acquisition. We are allocating the expense to the appropriate expense categories of Genzyme General's combined statements of operations based on the functional responsibility of each option holder. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for both the three and nine month periods ended September 30, 2001 is primarily attributable to intangible assets acquired in connection with the acquisition of GelTex in December 2000 and Wyntek in June 2001. PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT NOVAZYME In connection with our acquisition of Novazyme, we acquired a technology platform that we believe can be leveraged in the development of treatments for various LSDs. As of the acquisition date, the technology platform had not achieved technological feasibility and would require significant further development to complete. Accordingly, we have allocated to IPR&D and charged to expense $86.8 million, representing the portion of the purchase price attributable to the technology platform. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the probability-adjusted net cash flows expected to result once the technology has reached technological feasibility and is utilized in the treatment of certain LSDs. A discount rate of 16% was applied to estimate the present value of these cash flows and is consistent with the overall risks of the platform technology. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology and adjusted the future cash flows to reflect the contribution of value from these assets. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered. The platform technology is specific to LSDs and there is currently no alternative use for the technology in the event that it fails as a platform for enzyme replacement therapy for the treatment of LSDs. We currently estimate that it will take approximately three years and an investment of approximately $75 million-$100 million to complete the development of, obtain approval for and commercialize the first product based on this technology platform. However, our current estimates of the time and investment required to develop the technology platform may change depending on the different applications of the technology we may choose to pursue. We cannot guarantee that any projects based on these technology platforms will ever reach feasibility or develop into products that we can profitably market. In addition, we cannot give you any assurances that we will be able to develop and commercialize products based on these technology 79 platforms before our competitors develop and commercialize products for the same indications. If we do not successfully develop and commercialize products based on these technology platforms, our results of operations could be materially affected. WYNTEK In connection with our acquisition of Wyntek, we allocated approximately $8.8 million of the purchase price to IPR&D. Our management assumes responsibility for determining the IPR&D valuation and engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. We estimated the fair value assigned to purchased IPR&D by discounting, to present value, the cash flows expected to result from the project once it has reached technological feasibility. We applied a discount rate of 25% to estimate the present value of these cash flows, which is consistent with the risks of the project. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from the purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The value assigned to purchased IPR&D was the amount attributable to the efforts of Wyntek up to the time of acquisition. In the allocation of purchase price to IPR&D, the concept of alternative future use was specifically considered for the program under development. The acquired IPR&D consists of Wyntek's work to complete the program. There are no alternative uses for the in-process program in the event that the program fails in clinical trials or is otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for us as defined by generally accepted accounting principles. Consequently, in accordance with generally accepted accounting principles, the amount allocated to IPR&D was charged as an expense in our financial statements for the nine months ended September 30, 2001. We are amortizing the remaining acquired intangible assets arising from the acquisition on a straight-line basis over their estimated lives, which range from 5 years to 10 years. Below is a brief description of the IPR&D program associated with Wyntek's cardiovascular disease diagnostic product, including an estimation of when management believes we may realize revenues from the sale of this product. Wyntek currently is developing a cardiovascular product to rapidly measure the quantitative levels of cardiac marker proteins. These are the leading markers for the diagnosis of acute myocardial infarction. The product consists of a mobile, stand-alone, quantitative diagnostic device and a reaction strip that detects disease specific marker proteins. The intended use of the device is to read reaction strips at the patient's bedside or in an emergency room setting. We expect to complete the regulatory review process and file an application for marketing approval in early 2002 and begin selling the product during the second half of 2002. Studies to date have demonstrated the viability of this product but there can be no assurance that the regulatory authorities will approve this product. GELTEX In December 2000, in connection with the acquisition of GelTex, we allocated approximately $118.0 million of the purchase price to IPR&D, which Genzyme General recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of September 30, 2001, the technological feasibility of the projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred. Substantial additional research and development will be required prior to reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and receive FDA or other regulatory approval prior to commercialization. We cannot guarantee that these projects will ever reach feasibility or develop into products that can be marketed profitably, nor can we guarantee that Genzyme General will be able to develop and commercialize these products before our competitors 80 develop and commercialize products for these indications. If these products are not successfully developed and do not become commercially viable, our results of operations could be materially affected. Below is a brief description of the GelTex IPR&D projects, including an estimation of when management believes Genzyme General may realize revenues from the sales of these products in the respective application:
ESTIMATED COST TO VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - --------------------- ----------------------------- ----------------------------- ----------- ------------- (IN MILLIONS) Renagel-Registered Trademark- Non-absorbed polymer - Clinical studies scheduled $ 19.7 $ 13.2 phosphate binder phosphate binder for the for completion in 2002, 2003 treatment of hyperphospatemia and 2004 C. DIFFICILE colitis Program to develop a toxin- - Phase 2 studies initiated 37.4 31.1 binding polymer for the in 2000 treatment and prevention of - U.S. marketing approval for antibiotic induced C. this product is expected by DIFFICILE colitis 2006 Oral Mucositis Focuses on the development of - IND expected to be filed in 17.8 22.3 a topical mouth rinse that the fourth quarter of 2002 combines barrier material and - Product launch expected in antimicrobial polymers to 2006 create an anti-infective mechanism against oral mucositis, a common side effect of radiation therapy and chemotherapy DENSPM Focuses on the development of - Phase 1 safety study and 3.4 28.9 a compound for the treatment dose-ranging studies of mild to moderate psoriasis scheduled for the fourth quarter of 2001 - No further development planned Iron Chelation Focuses on the prevention and - Expected to file an IND in 15.7 27.8 treatment of transfusional or the fourth quarter of 2001 hereditary iron overload - Product launch expected in 2006 Anti-Obesity Builds on GelTex's expertise - Expected to file an IND in 17.8 35.9 in non-absorbed polymers and late 2002 focuses on the development of - Product launch expected in a compound that will inhibit 2007 lipase and bind fat GT102-279 Second generation lipid- - Development on hold 6.2 N/A(1) lowering compound with attributes of GelTex's WelChol-TM- lipid lowering agent ------ -------- $118.0 $ 159.2 ====== ========
- -------------------------- (1) Future development costs will be funded by our collaboration partner. 81 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates...... $ (8,110) $(11,420) (29)% $(27,605) $(30,866) (11)% Gain on affiliate sale of stock.......................... 212 2,419 (91)% 212 22,689 (99)% Gain (loss) on investments in equity securities.............. (24,464) 8,544 (386)% (25,996) 22,709 (214)% Minority interest in net loss of subsidiary..................... 260 977 (73)% 2,259 3,185 (29)% Other............................ (1,227) (43) 2,753% (5,115) 5,110 (200)% Investment income................ 13,125 11,072 19% 34,136 27,798 23% Interest expense................. (5,699) (4,647) 23% (19,379) (11,639) 67% -------- -------- -------- -------- Total other income (expenses)................. $(25,903) $ 6,902 (475)% $(41,488) $ 38,986 (206)% ======== ======== ======== ========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES Genzyme General recorded in equity in net loss of unconsolidated affiliates its portion of the results of our joint ventures with BioMarin, Pharming Group and Diacrin. Included in the three and nine month periods ended September 30, 2000 are losses from RenaGel LLC, in which we and GelTex each owned a 50% interest. We acquired GelTex, including its 50% interest in RenaGel LLC, in December 2000. In connection with the merger, we allocated our 50% interest in RenaGel LLC to GelTex. We have consolidated the results of RenaGel LLC in Genzyme General's combined financial statements from the date of acquisition. RenaGel LLC was merged into GelTex effective October 1, 2001. Prior to our acquisition of the remaining 50% interest in RenaGel LLC, we included our proportionate share of the results of RenaGel LLC in equity in net loss of unconsolidated affiliates. Genzyme General's equity in the net losses of RenaGel LLC was $4.1 million in the three months ended September 30, 2000 and $10.1 million in the nine months ended September 30, 2000. Excluding these losses, Genzyme General's equity in net loss of unconsolidated affiliates increased in both the three and nine months ended September 30, 2001, due primarily to increased losses from our joint venture with BioMarin, our joint ventures with Pharming Group (one of which we terminated in August 2001), and our equity position in Genzyme Transgenics, which were offset in part by decreased losses from our joint venture with Diacrin. Also included in the three and nine month periods ended September 30, 2001 are losses from Genzyme/Pharming Alliance LLC, which was the vehicle for our joint venture with Pharming Group for the development of a CHO-cell derived product for the treatment of Pompe disease. We terminated our strategic alliance agreement with Pharming covering this joint venture in August 2001. As a result, we have included 100% of the losses of Genzyme/ Pharming Alliance LLC since August 23, 2001. GAIN ON AFFILIATE SALE OF STOCK During the nine months ended September 30, 2000, in accordance with our policy pertaining to affiliate sales of stock, Genzyme General recognized gains of $22.7 million due to the issuance by Genzyme Transgenics, an unconsolidated affiliate, of additional shares of Genzyme Transgenics Corporation common stock. 82 GAIN (LOSS) ON INVESTMENTS IN EQUITY SECURITIES In the quarter ended September 30, 2001, Genzyme General recorded charges of $11.8 million in connection with our investment in the ordinary shares of Cambridge Antibody Technology Group plc and $4.5 million in connection with our investment in the common stock of Targeted Genetics, because we considered the decline in the value of these investments to be other than temporary. Given the significance and duration of the declines as of the end of the quarter, we concluded that it was unclear over what period the recovery of the stock price for each of these investments would take place and that, accordingly, any evidence suggesting that the investments 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 each of these investments. In August 2001, Pharming Group announced that it would file for receivership in order to seek protection from its creditors. In the quarter ended September 30, 2001, Genzyme General recorded a charge of $8.5 million, representing an at cost write-off of our investment in Pharming common stock. In April 2001, Antigenics announced that it had entered into a definitive merger agreement with Aronex. The merger was completed in July 2001. Under the terms of the merger agreement, we received 0.0594 of a share of Antigenics common stock for each share of Aronex common stock that we held. As a result of this merger, Genzyme General recorded a $1.2 million charge to reflect the fair market value of our investment in Aronex at June 30, 2001. In the third quarter of 2000, Genzyme General recorded a realized gain of $10.9 million upon the sale of a portion of our investment in Genzyme Transgenics common stock. In the second quarter of 2000, Genzyme General recorded a realized gain of $5.5 million upon the sale of a portion of our investment in Genzyme Transgenics common stock that was offset by the reversal of a $1.9 million valuation allowance related to previously recognized capital losses. Genzyme General also recognized a realized gain of $7.6 million resulting from the acquisition of Celtrix Pharmaceuticals, Inc. by Insmed Pharmaceuticals, Inc. in which our shares of Celtrix common stock were exchanged on a one-for-one basis for shares of Insmed common stock. MINORITY INTEREST IN NET LOSS OF SUBSIDIARY Due to our combined direct (until July 2001) and indirect interest in ATIII LLC, our joint venture with Genzyme Transgenics for the development and commercialization of ATIII, Genzyme General consolidated the results of ATIII LLC and recorded Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest increased in the three and nine months ended September 30, 2001 due to a change in the funding agreement for the joint venture in March 2001, retroactive to January 1, 2001, which increased Genzyme Transgenics's portion of the losses incurred by ATIII LLC to 50% until July 2001 and 100% thereafter as compared to 26% for the same periods a year ago. In July 2001, we transferred our 50% ownership interest in ATIII LLC to Genzyme Transgenics. In exchange for our interest in the joint venture, we will receive a royalty on worldwide net sales (excluding Asia) of its products based on ATIII beginning three years after the first commercial sale of each such product up to a cumulative maximum amount of $30.0 million. INVESTMENT INCOME Genzyme General's investment income increased for the three and nine months ended September 30, 2001 due primarily to higher average cash balances as compared to the same periods a year ago. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due 2021. Net proceeds from the offering were approximately $562.1 million. We allocated the principal balance of the debentures and the net proceeds from the offering to Genzyme General. Genzyme General used a portion of the net proceeds from the private 83 placement of the debentures to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General. INTEREST EXPENSE Genzyme General's interest expense increased for the three and nine months ended September 30, 2001, as compared to the same periods a year ago, primarily due to additional interest expense resulting from the $150.0 million of debt drawn on our revolving credit facility in December 2000 as part of the financing of the GelTex acquisition, and the private placement of $575.0 million in principal of 3% convertible debentures issued in May 2001. TAX PROVISION
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ -------------------- (DECREASE) ---------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE --------- -------- ---------- ---------- --------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes..................... $(3,495) $(24,409) (86)% $(34,174) $(74,164) (54)% Effective tax rate.......... (4)% 32% (5,108)% 32%
Genzyme General's tax rates for all 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 charges for IPR&D; - nondeductible amortization of intangibles; and - use of tax credits. The decrease in Genzyme General's effective tax rate for both the three and nine month periods ended September 30, 2001, as compared to the same periods a year ago, was primarily attributable to nondeductible charges for IPR&D resulting from our acquisitions of Wyntek in June 2001 and Novazyme in September 2001 and nondeductible amortization of intangibles consisting largely of goodwill resulting from our acquisition of GelTex in December 2000. The tax benefit for the nine months ended September 30, 2001 includes a $2.2 million benefit resulting from our release of excess tax reserves. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2001, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that we recognize all derivative instruments as either assets or liabilities in our combined balance sheet and measure those instruments at fair value. Subsequent changes in fair value are reflected in current earnings or other comprehensive income, depending on whether a derivative instrument is designated as part of a hedge relationship, and, if it is, the type of hedge relationship. In accordance with the transition provisions of SFAS 133, Genzyme General recorded a cumulative-effect adjustment of $4.2 million, net of tax, in its unaudited, combined statements of operations for the nine months ended September 30, 2001 to recognize the fair value of certain common stock warrants held on January 1, 2001. Transition adjustments pertaining to interest rate swaps designated as cash-flow hedges and foreign currency forward contracts allocated to Genzyme General were not significant. For the three months ended September 30, 2001, Genzyme General recorded a pre-tax charge of $1.2 million in other expense to reflect the change in value of certain 84 common stock warrants from July 1, 2001 to September 30, 2001. For the nine months ended September 30, 2001, Genzyme General recorded a pre-tax charge of $5.0 million in other expense to reflect the change in value of certain common stock warrants from January 1, 2001 to September 30, 2001. Genzyme General also recorded a charge of $1.7 million in division equity for the nine months ended September 30, 2001, to reflect the change in value of our interest rate swap contract during the period, net of tax. In the normal course of business, we manage risks associated with foreign exchange rates, interest rates and equity prices through a variety of strategies, including the use of hedging transactions, executed in accordance with our policies. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure. Any change in the value of our derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. We do not use derivative instruments for trading or speculative purposes. 85 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION The following discussion summarizes key factors our management believes necessary for an understanding of Genzyme Biosurgery's financial statements. In June 2001, we acquired the remaining 78% of Focal, Inc., a public company and developer of synthetic biopolymers used in surgery, that we did not already own for a payment of 2,086,151 shares of Biosurgery Stock. We allocated the acquired assets and liabilities to Genzyme Biosurgery and accounted for the acquisition as a purchase. Accordingly, the results of operations of Focal are included in the results of Genzyme Biosurgery from June 30, 2001, the date of acquisition. In December 2000, we acquired Biomatrix, Inc., a public company that develops, manufactures, markets and sells a series of proprietary viscoelastic and viscosupplementation products based on hyaluronan technology that are used in therapeutic medical applications and skin care for an aggregate purchase price of $426.2 million. We accounted for the acquisition as a purchase and allocated it to Genzyme Biosurgery. Immediately prior to the acquisition, we combined two of our operating divisions, Genzyme Surgical Products and Genzyme Tissue Repair, to form a new division called Genzyme Biosurgery. We allocated the acquired assets and liabilities of Biomatrix to Genzyme Biosurgery. The combination of Genzyme Surgical Products and Genzyme Tissue Repair to form Genzyme Biosurgery did not result in any adjustments to the book values of the net assets of the divisions because they remained divisions of the same corporation. We present the financial statements of Genzyme Biosurgery as though the divisions had been combined for all periods presented, and include the operations of Biomatrix from December 18, 2000, the date of acquisition. The components of Genzyme Biosurgery'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) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA) Total revenues....................... $ 63,219 $ 34,607 83% $177,739 $105,812 68% -------- -------- -------- -------- Cost of products and services sold... 30,276 21,442 41% 96,993 60,119 61% Selling, general and administrative..................... 27,827 23,288 19% 93,816 68,095 38% Research and development............. 12,352 8,935 38% 35,027 26,230 34% Amortization of intangibles.......... 11,729 1,426 723% 35,042 4,279 719% -------- -------- -------- -------- Total operating costs and expenses........................... 82,184 55,091 49% 260,878 158,723 64% -------- -------- -------- -------- Operating loss....................... (18,965) (20,484) (7)% (83,139) (52,911) 57% Other income (expenses), net......... (2,560) 960 (367)% (11,321) 3,975 (385)% -------- -------- -------- -------- Division net loss.................... $(21,525) $(19,524) 10% $(94,460) $(48,936) 93% ======== ======== ======== ========
86 REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue: Cardiothoracic..................... $16,386 $18,804 (13)% $ 52,042 $ 58,240 (11)% Orthopaedics....................... 25,492 -- N/A 63,269 -- N/A Biosurgical specialties............ 15,206 10,950 39% 44,830 30,565 47% ------- ------- -------- -------- Total product revenue............ 57,084 29,754 92% 160,141 88,805 80% ------- ------- -------- -------- Service revenue: Orthopaedics....................... 4,164 4,021 4% 13,292 13,130 1% Biosurgical specialties............ 1,971 831 137% 4,301 3,854 12% ------- ------- -------- -------- Total service revenue............ 6,135 4,852 26% 17,593 16,984 4% ------- ------- -------- -------- Research and development revenue: Biosurgical specialties............ -- 1 (100)% 5 23 (78)% ------- ------- -------- -------- Total research and development revenue........................ -- 1 (100)% 5 23 (78)% ------- ------- -------- -------- Total revenues................... $63,219 $34,607 83% $177,739 $105,812 68% ======= ======= ======== ========
The decrease in cardiothoracic revenue for the three and nine months ended September 30, 2001 as compared to the same periods of 2000, was due to decreased sales of chest drainage systems resulting from competitive pricing pressures in that market, as well as our withdrawal from certain commodity suture lines in Europe. The decrease in each period was offset, in part, by the continued growth in sales of minimally invasive cardiac surgery products and the sales revenue from the FocalSeal-Registered Trademark--L surgical sealant. We added FocalSeal-Registered Trademark--L surgical sealant to the cardiothoracic product category in the third quarter of 2000 pursuant to a distribution and marketing agreement with Focal which, prior to our acquisition of Focal in June 2001, provided us with exclusive distribution rights for this product in North America. The orthopaedics product revenue increased for the three and nine months ended September 30, 2001, as compared to the same periods of 2000, due primarily to sales of Synvisc-Registered Trademark- viscosupplementation product, which we added to the orthopaedics product category in December 2000 through our acquisition of Biomatrix. The increase in biosurgical specialties product revenue in the three and nine months ended September 30, 2001, as compared to the same periods of 2000, was due primarily to increases in sales of Seprafilm-TM- bioresorbable membrane and Sepramesh-TM- biosurgical composite. An increase in sales to original equipment manufacturers and sales generated from Hylaform-Registered Trademark- and skin care products, which were added to the biosurgical specialties product category in December 2000, also contributed to the overall increase in biosurgical specialties product revenue. International revenue as a percentage of total revenue for the three months ended September 30, 2001 was 18%, as compared to 25% in the same period of 2000. International revenue as a percentage of total revenue for the nine months ended September 30, 2001 was 20%, as compared to 25% in the same period of 2000. International product and service revenue as a percent of total product and service revenue decreased in both the three and nine months ended September 30, 2001 due primarily to the addition of sales of Synvisc-Registered Trademark- viscosupplementation product, which is sold predominantly in the United States. In addition, the average exchange rate for the euro declined 1% for the three months ended September 30, 2001 and 5% for the nine months ended September 30, 2001, as compared to the same periods a year ago. 87 MARGINS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin...................... $29,956 $11,215 167% $72,244 $37,635 92% % of product revenue.............. 52% 38% 45% 42% Service margin...................... $ 2,987 $ 1,949 53% $ 8,497 $ 8,035 6% % of service revenue.............. 49% 40% 48% 47% Total gross margin.................. $32,943 $13,164 150% $80,741 $45,670 77% % of total product and service revenue......................... 52% 38% 45% 43%
Genzyme Biosurgery provides a broad range of healthcare products and services. As a result, Genzyme Biosurgery's gross margins vary significantly depending on the category of product or service. Genzyme Biosurgery recorded a charge to cost of products sold of $11.3 million for the nine months ended September 30, 2001 relating to the increased basis of the inventory obtained in connection with our acquisition of Biomatrix in December 2000. Additionally, Genzyme Biosurgery included a $1.0 million charge related to the underfunding of an acquired retirement plan in cost of products sold. Excluding the adjustments described above, product margins increased in the three and nine months ended September 30, 2001, as compared to the same periods in 2000, as a result of an increase in sales of higher margin products such as Synvisc-Registered Trademark- viscosupplementation product and devices for minimally invasive cardiac surgery in each period of 2001. Service margins for services allocated to Genzyme Biosurgery increased for the three months ended September 30, 2001, as compared to the same period a year ago, due primarily to growth in sales of Epicel-Registered Trademark- skin graft services for the treatment of severe burns. Service margins for services allocated to Genzyme Biosurgery increased for the nine months ended September 30, 2001, in comparison to the same period last year, due primarily to sales of Epicel-Registered Trademark- skin graft services and a reduction in manufacturing personnel. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2001, as compared to the same period in 2000, was due to the additional selling, general and administrative expenses related to the Biomatrix business, which we purchased in December 2000 and an increase in patent litigation costs which were $1.0 million for the three months ended September 30, 2001 and $2.2 million for the nine months ended September 30, 2001. In addition, for the nine months ended September 30, 2001, Genzyme Biosurgery recorded $5.5 million in costs associated with the consolidation of European operations. Genzyme Biosurgery's research and development expenses increased during the three and nine months ended September 30, 2001 as compared to the same period in 2000 due to an increase in spending for orthopaedics development programs. This increase in spending was primarily a result of the addition of the Synvisc-Registered Trademark- viscosupplementation product to the orthopaedics line in December 2000 through our acquisition of Biomatrix. AMORTIZATION OF INTANGIBLES The increase in amortization of intangibles for the three and nine months ended September 30, 2001 was primarily attributable to intangible assets acquired since year end in connection with our acquisitions of Biomatrix in December 2000, the GDP Class A limited partnership interests in January 2001, and Class B limited partnership interests in August 2001. 88 PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT In December 2000, we acquired Biomatrix, a public company engaged in the development and manufacture of viscoelastic and viscosupplementation biomaterials for use in orthopaedic and other medical applications. We accounted for this acquisition as a purchase and allocated it to Genzyme Biosurgery. In connection with the acquisition of Biomatrix, we allocated approximately $82.1 million to IPR&D, which Genzyme Biosurgery recorded as a charge to expense in its combined statement of operations for the year ended December 31, 2000. As of September 30, 2001, the technological feasibility of the Biomatrix IPR&D projects had not yet been reached and no significant departures from the assumptions included in the valuation analysis had occurred. Substantial additional research and development will be required prior to the projects reaching technological feasibility. In addition, each product needs to successfully complete a series of clinical trials and receive FDA or other regulatory approval prior to commercialization. We cannot guarantee that these projects will ever reach feasibility or develop into products that can be marketed profitably, nor can we guarantee that we will be able to develop and commercialize these products before our competitors develop and commercialize products for these indications. If these products are not successfully developed and do not become commercially viable, our results of operations could be materially affected. 89 Below is a brief description of the Biomatrix IPR&D projects, including an estimation of when management believes we may realize revenues from the sales of these products in the respective application:
ESTIMATED COST TO VALUE AT COMPLETE AT ACQUISITION SEPTEMBER 30, PROGRAM PROGRAM DESCRIPTION DEVELOPMENT STATUS DATE 2001 - --------------------- ----------------------------- ----------------------------- ----------- ------------- (IN MILLIONS) Visco- Use of elastoviscous - European marketing approval $33.8 $ 6.7 supplementation solutions and viscoelastic for gels in disease conditions to Synvisc-Registered Trademark- supplement tissues and body for use in the hip expected fluids, alleviating pain and by the end of 2001. U.S. restoring normal function trial scheduled for 2002. Initiation of a next generation Synvisc-Registered Trademark- program expected in fourth quarter of 2001 with possible U.S. market approval in the second half of 2004. Visco-augmentation Use of viscoelastic gels to - U.S. clinical studies of 8.6 6.2 provide scaffolding for Hylaform-Registered Trademark- tissue regeneration or as an expected to start in the inert elastic filler for fourth quarter of 2001 with tissues of the skin and the market launch expected in subcutaneous and the second half of 2003 intermuscular connective tissues - We expect to engage a development partner for Hylagel-Registered Trademark- Uro in 2002 Visco-separation Use of viscoelastic gels and - Clinical studies have been 39.7 6.6 membranes to separate tissues initiated in the U.S., and to decrease formation of Germany, France, the United adhesions and excessive scars Kingdom and Belgium for after surgery. Sepragel-TM- Spine (formerly Hylagel-Registered Trademark- Nuro). Completion of patient enrollment is expected by the first quarter of 2002. Patient follow-up expected to be completed by the first quarter of 2003 with U.S. marketing approval anticipated in first half of 2004. European marketing approval expected in the second half of 2003, with submissions for regulatory approvals in the U.S., Canada and Europe thereafter - Expected product launch in Europe by the second quarter of 2002 and in the U.S. by the fourth quarter of 2002. ----- ----- $82.1 $19.5 ===== =====
90 OTHER INCOME AND EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ---------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliate.......................... $ -- $ -- N/A $ (1,316) $ -- N/A Other................................ 35 33 6% 80 75 7% Investment income.................... 431 1,274 (66)% 1,370 4,873 (72)% Interest expense..................... (3,026) (347) 772% (11,455) (973) 1,077% ------- ------ -------- ------ Total other income (expenses)...... $(2,560) $ 960 (367)% $(11,321) $3,975 (385)% ======= ====== ======== ======
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATE In January 2001, Focal completed the exercise of its option to require us to purchase $5.0 million in Focal common stock at a price of $2.06 per share. After that purchase we held approximately 22% of the outstanding shares of Focal common stock and began accounting for our investment under the equity method of accounting. We allocated our investment in Focal to Genzyme Biosurgery. Genzyme Biosurgery recorded in equity in net loss of unconsolidated affiliate its portion of the results of Focal. Genzyme Biosurgery's equity in net loss of unconsolidated affiliate increased for the nine months ended September 30, 2001 when compared to the same period in 2000 because Genzyme Biosurgery did not own an equity interest in Focal in 2000. On June 30, 2001, we acquired the remaining 78% of the outstanding shares in an exchange of shares of Biosurgery Stock for shares of Focal common stock. INVESTMENT INCOME Investment income decreased in the three and nine months ended September 30, 2001 when compared to the same periods of 2000 as a result of lower average cash balances. INTEREST EXPENSE Interest expense increased primarily as a result of the $218.0 million of indebtedness outstanding as of September 30, 2001, under the portion of our revolving credit facility that we allocated to Genzyme Biosurgery. In December, 2000, we drew $200.0 million under this facility and allocated the proceeds to Genzyme Biosurgery to finance a portion of the cash component of the Biomatrix merger consideration. 91 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION The following discussion summarizes key factors our management believes necessary for an understanding of Genzyme Molecular Oncology's financial statements. 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) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues..................... $ 1,224 $ 635 93% $ 3,915 $ 4,153 (6)% ------- ------- -------- -------- Cost of revenues................... 668 104 542% 1,697 299 468% Selling, general and administrative................... 1,817 1,311 39% 5,519 4,289 29% Research and development........... 6,381 5,120 25% 19,610 13,772 42% Amortization of intangibles........ -- -- N/A -- 5,420 (100)% ------- ------- -------- -------- Total operating costs and expenses..................... 8,866 6,535 36% 26,826 23,780 13% ------- ------- -------- -------- Operating loss..................... (7,642) (5,900) 30% (22,911) (19,627) 17% Other income (expenses), net....... 148 396 (63)% 812 489 66% ------- ------- -------- -------- Loss before taxes.................. (7,494) (5,504) 36% (22,099) (19,138) 15% Tax benefit........................ -- -- N/A -- 1,214 (100)% ------- ------- -------- -------- Division net loss.................. $(7,494) $(5,504) 36% $(22,099) $(17,924) 23% ======= ======= ======== ========
REVENUES The components of Genzyme Molecular Oncology's revenues are described in the following table:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, INCREASE/ SEPTEMBER 30, INCREASE/ ------------------- (DECREASE) ------------------- (DECREASE) 2001 2000 % CHANGE 2001 2000 % CHANGE -------- -------- ---------- -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Licensing revenue......................... $ 484 $576 (16)% $1,696 $4,046 (58)% Royalty revenue........................... 36 59 (39)% 109 107 2% Research and development revenue.......... 704 -- N/A 2,110 -- N/A ------ ---- ------ ------ Total revenues........................ $1,224 $635 93% $3,915 $4,153 (6)% ====== ==== ====== ======
Licensing revenue in the three and nine months ended September 30, 2001 included revenue recognized from a technology access fee associated with the cancer antigen discovery agreement with Purdue Pharma, L.P. that began in the fourth quarter of 2000 and from payments received under cancer diagnostic and SAGE-TM- license agreements. Licensing revenue decreased as compared to the same periods of 2000, due to a $2.0 million development milestone payment received in the first quarter of 2000 under a license agreement with Schering-Plough Ltd. for which no similar payment was received in 2001. Research and development revenue in the three and nine month periods ended September 30, 2001 was solely attributable to research performed on behalf of the cancer antigen discovery agreement with Purdue Pharma. 92 COST OF REVENUE Genzyme Molecular Oncology's cost of revenue includes: - work performed on the cancer antigen discovery agreement with Purdue Pharma; and - royalties paid to third parties. Cost of revenue increased in the three and nine months ended September 30, 2001 primarily as a result of the work performed under the Purdue Pharma cancer antigen discovery agreement that began in the fourth quarter of 2000. OPERATING EXPENSES Genzyme Molecular Oncology's selling, general and administrative expenses increased for the three and nine months ended September 30, 2001 as compared to the same periods a year ago as a result of enhanced business development efforts and increased expenses related to information technology, legal, accounting and general management services. Research and development expenses increased for the three and nine months ended September 30, 2001 as compared to the same periods of last year. The increase was primarily attributable to growth in the number of Genzyme Molecular Oncology's cancer vaccine clinical trials from two to five, additional investment in its dendritic-tumor cell fusion program and increased activity in its antigen discovery and anti-angiogenesis programs. AMORTIZATION OF INTANGIBLES Genzyme Molecular Oncology's amortization of intangibles was 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 income decreased in the three months ended September 30, 2001 due to a decrease in interest income that is attributable to lower average cash balances. Interest expense was relatively level for the three month periods ended September 30, 2001 and 2000. Other income increased for the nine months ended September 30, 2001, as compared to the same period of 2000, due to an increase in interest income that is attributable to higher average cash balances. Interest expense decreased in the nine months ended September 30, 2001, as compared to the same period of 2000, due to the May 2000 repayment of $5.0 million that Genzyme Molecular Oncology borrowed under our revolving credit facility. This amount was outstanding during the first quarter of 2000. TAX BENEFIT As part of the acquisition of PharmaGenics in 1997, Genzyme Molecular Oncology recorded a deferred tax liability of $7.6 million resulting from the difference between the book and tax basis of the acquired completed technology. Amortization of this deferred tax benefit was completed in the second quarter of 2000. 93 B. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION At September 30, 2001, we had cash, cash equivalents, and short- and long-term investments of $1.1 billion, an increase of $443.9 million from December 31, 2000. Our operating activities generated $170.6 million of cash for the nine months ended September 30, 2001. Operating activities were impacted by a net loss of $105.8 million offset primarily by: - $125.2 million of depreciation and amortization, of which $35.1 million resulted from the depreciation of property, plant and equipment and $90.1 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of GelTex, Biomatrix, Wyntek and Focal; - $95.6 million of charges for IPR&D, of which $86.8 million was attributable to our acquisition of Novazyme and $8.8 million was attributable to our acquisition of Wyntek; - $28.9 million from the equity in net losses of unconsolidated affiliates; and - $26.0 million from the loss on investments in equity securities. Our investing activities utilized $671.4 million in cash for the nine months ended September 30, 2001. Investing activities used: - $435.8 million for our net purchases of investments; - $123.2 million to fund purchases of property, plant and equipment of which, $43.0 million resulted from our manufacturing capacity expansion in both Ireland and the United Kingdom, $8.8 million resulted from an initial payment towards our acquisition of a large-scale manufacturing facility in Ireland, $12.4 million resulted from our manufacturing capacity expansion in the United States and $11.1 million representing an aggregate of other manufacturing relocations, expansions and rehabilitations world-wide; - $23.5 million as payment for our purchase of all of the GDP Class A and Class B limited partnership interests, net of $2.3 million of cash acquired in connection with our acquisition of Focal; - $54.8 million to fund the acquisition of Wyntek, net of cash acquired and net of $5.2 million of cash acquired in connection with our acquisition of Novazyme; - $5.0 million of cash to purchase additional shares of Focal common stock; and - $31.3 million to fund our investments in unconsolidated affiliates. During the nine months ended September 30, 2001, we received $74.5 million of cash from the exercise of stock options and the purchase of shares under our employee stock plans. Our financing activities used $2.1 million of cash to repay bank overdrafts. In January 2001, we purchased all of the outstanding Class A limited partnership interests of GDP for a payment of approximately $25.7 million in cash plus royalties payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. We allocated the purchase prices to the fair value of the intangible assets acquired and goodwill, which we will amortize over eight or ten years depending upon the asset classification. 94 In June 2001, we acquired all of the outstanding capital stock of Wyntek for $65.0 million in cash. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. We have access to a $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million Genzyme General had drawn under this facility in December 2000 to finance a portion of the cash component of the GelTex merger consideration. At September 30, 2001, $218.0 million remained outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due May 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 of each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustments. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash consideration for the GelTex acquisition. Genzyme General expects to utilize the remaining proceeds from the sale of the debentures for working capital and general corporate purposes. In August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our 95 charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology designated shares are 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. Prior to our acquisition of Biomatrix, Biomatrix sold 744,000 shares of its common stock to certain of its employees, directors and consultants in exchange for ten-year, full recourse promissory notes. The notes accrue interest at rates ranging from 5.30% to 7.18% and mature at various dates from May 2007 through September 2009, upon which all outstanding principal and accrued interest becomes payable. As a result of the acquisition, these shares were converted into 532,853 shares of Biosurgery Stock and we recorded $14.7 million of outstanding principal and accrued interest to stockholders' equity because the notes were received in exchange for the issuance of stock. As of September 30, 2001, the outstanding balance of these notes was $10.2 million. Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. 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 will be further reduced to pay principal and interest on the following debt: - $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which are convertible into shares of Genzyme General Stock; - $218.0 million in principal outstanding under our revolving credit facility with a syndicate of commercial banks; and - $10.0 million in principal under our 6.9% convertible subordinated note in favor of UBS Warburg LLC that matures in May 2003 and is convertible into shares of Biosurgery Stock. If we use cash to pay or redeem any of the debt described above, including principal and interest due on it, our cash reserves will be diminished. To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. 96 NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations be accounted for under the purchase method and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic tests of the goodwill's impairment and that other intangible assets be amortized over their useful lives. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by us in fiscal year 2002. However, for goodwill and intangible assets acquired after June 30, 2001, certain provisions of SFAS 142 will be effective from the date of acquisition. For the nine months ended September 30, 2001, we had approximately $37.6 million of goodwill amortization, however, the full impact of SFAS 141 and SFAS 142 on our financial statements has not been determined. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 97 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION At September 30, 2001, Genzyme General had cash, cash equivalents, and short- and long-term investments of $1.0 billion, an increase of $499.5 million from December 31, 2000. Genzyme General's operating activities generated $206.6 million of cash for the nine months ended September 30, 2001. Operating activities were impacted by Genzyme General's division net loss of $30.7 million, which was offset primarily by: - $77.8 million of depreciation and amortization, of which $22.7 million resulted from the depreciation of property, plant and equipment and $55.1 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of GelTex and Wyntek; - $95.6 million of charges for IPR&D, of which $86.8 million was attributable to our acquisition of Novazyme and $8.8 million was attributable to our acquisition of Wyntek; - $27.6 million from the equity in net losses of unconsolidated affiliates; - $26.0 million from the loss on investments in equity securities; and - $13.9 million attributable to the net change in working capital. Genzyme General's investing activities utilized $640.2 million in cash for the nine months ended September 30, 2001. Investing activities used: - $443.6 million for Genzyme General's net purchases of investments; - $113.1 million to fund purchases of property, plant and equipment, of which, $43.0 million resulted from our manufacturing capacity expansion in both Ireland and the United Kingdom, $8.8 million resulted from an initial payment towards our acquisition of a large-scale manufacturing facility in Ireland, $12.4 million resulted from our manufacturing capacity expansion in the United States and $11.1 million representing an aggregate of other manufacturing relocations, expansions and rehabilitations world-wide; - $54.8 million to fund the acquisition of Wyntek, net of cash acquired and net of $5.2 million of cash acquired in connection with our acquisition of Novazyme; and - $31.3 million to fund Genzyme General's investments in unconsolidated affiliates. During the nine months ended September 30, 2001, Genzyme General received $72.6 million in cash from the exercise of stock options and purchase of shares under our employee stock plans. Our financing activities used $1.4 million of cash to repay bank overdrafts. In June 2001, we acquired all of the outstanding capital stock of Wyntek for $65.0 million in cash. We allocated the acquisition to Genzyme General and accounted for the acquisition as a purchase. Genzyme General, together with our other operating divisions, has access to our $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million it had drawn under this facility in December 2000 to finance a portion of the cash component of the GelTex merger consideration. At September 30, 2001, $218.0 million remained outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. 98 In May 2001, we completed the private placement of $575.0 million in principal of 3% convertible subordinated debentures due 2021. Net proceeds from the offering were approximately $562.1 million. We have allocated the principal amount of the debentures and the net proceeds from the offering to Genzyme General. We will pay interest on these debentures on May 15 and November 15 each year using cash allocated to Genzyme General. The first interest payment will be made on November 15, 2001. The debentures are convertible, upon the satisfaction of certain conditions, into shares of Genzyme General Stock at an initial conversion price of $70.30 per share. The conversion price is subject to adjustment. Holders of the debentures may require us to repurchase all or part of their debentures for cash on May 15, 2006, 2011 or 2016, at a price equal to 100% of the principal amount of the debentures plus accrued interest through the date prior to the date of repurchase. Additionally, if certain fundamental changes occur, each holder may require us to repurchase, for cash, all or a portion of the holder's debentures. On or after May 20, 2004, we may redeem for cash all or part of the debentures that have not previously been converted or repurchased. Genzyme General used a portion of these proceeds to repay the $150.0 million we had drawn under our revolving credit facility in December 2000 and allocated to Genzyme General to finance a portion of the cash consideration for the GelTex acquisition. Genzyme General expects to utilize the remaining proceeds from the sale of the debentures for working capital and general corporate purposes. In August 2001, we completed the redemption of our $21.2 million in principal of 5% convertible subordinated debentures due 2003. Prior to the redemption date, the holders of the debentures elected to convert all of the principal of the debentures into approximately 1,305,000 shares of Genzyme General Stock. We paid approximately $3.2 million in cash for the accrued interest on the debentures through the date of conversion using cash allocated to Genzyme General. In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology designated shares are 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery received notification from Genzyme 99 General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery designated shares or both. The refund is due and payable within 90 days after Genzyme Biosurgery received the notice from Genzyme General. 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 will be further reduced to pay principal and interest on the $575.0 million in principal under our 3% convertible subordinated debentures due May 15, 2021, which are convertible into shares of Genzyme General Stock. If Genzyme General uses cash to pay or redeem any of this debt, including 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 Biosurgery or Genzyme Molecular Oncology affect our consolidated results of operations. To satisfy these and other commitments, Genzyme General may have to obtain additional financing. We cannot guarantee that Genzyme General will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. SUBSEQUENT EVENTS ACQUISITION OF CERTAIN ASSETS OF PHARMING N.V. We have satisfied all of the conditions to closing on our acquisition of certain assets of Pharming N.V. that are set forth in the conditional agreement, including receipt of approvals from the Commercial Court in Turnhout, Belgium, the Province of Antwerp, Belgium and our board of directors, as well as a favorable soil attestation for the land. We anticipate completing the acquisition by mid-November and will allocate the purchase to Genzyme General. As part of the purchase price for this acquisition, we have agreed to pay approximately 6.5 million euros to trade creditors of Pharming N.V. We have also agreed to assume certain liabilities related to governmental grants and the lease for the land on which the manufacturing facilities in Geel, Belgium sit. Pharming Group has publicly announced its intention to appeal the decision of the Commercial Court in Turnhout, Belgium. NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. FABRAZYME-TM- BIOLOGICS LICENSE APPLICATION On October 22, 2001, we received a complete response letter from the FDA related to our application to market Fabrazyme-TM- enzyme, an investigational enzyme replacement therapy for Fabry disease, in the U.S. The letter specifies additional data and information the FDA requires to complete its review of our Biologics License Application for Fabrazyme-TM- enzyme. We submitted our BLA for Fabrazyme-TM- enzyme to the FDA in June 2000 and the application was accepted for review by the FDA under an accelerated approval mechanism. We received an initial complete response letter from the FDA in December 2000 and submitted our response to that letter in April 2001. 100 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION At September 30, 2001, Genzyme Biosurgery had cash, and cash equivalents, of $41.6 million, a decrease of approximately $36.6 million from December 31, 2000. Genzyme Biosurgery's operating activities used $12.5 million of cash for the nine months ended September 30, 2001. Operating activities were impacted by Genzyme Biosurgery's division net loss of $94.5 million offset primarily by: - $47.3 million of depreciation and amortization, of which, $12.3 million resulted from the depreciation of property, plant and equipment and $35.0 million resulted from the amortization of intangible assets, including intangible assets acquired in connection with our acquisitions of Biomatrix and Focal; and - $32.4 million attributable to the net change in working capital. Genzyme Biosurgery's investing activities utilized $39.0 million in cash for the nine months ended September 30, 2001. Investing activities used: - $10.2 million of cash to fund capital expenditures; - $23.5 million of cash as a payment for our purchase of all of the GDP Class A and Class B limited partnership interests as described below, net of $2.3 million of cash acquired in connection with our acquisition of Focal; and - $5.0 million of cash to purchase Focal common stock. During the nine months ended September 30, 2001, we received $1.2 million in cash from the exercise of stock options and the purchase of shares under our employee stock plans. We also received $2.9 million from the partial payment of notes receivable from our stockholders, see below for more information. Our financing activities used $0.7 million of cash to repay bank overdrafts. In January 2001, we purchased all of the outstanding Class A limited partnership interests of GDP for a payment of approximately $25.7 million in cash plus royalties payable over ten years on sales of certain Sepra-TM- products. In August 2001, we purchased the two outstanding GDP Class B limited partnership interests for a payment of $70,000 per Class B limited partnership interest plus $40,000 of related costs, and undertook the obligation to pay additional royalties over ten years on sales of certain Sepra-TM- products. We allocated the acquired limited partnership interests of our GDP to Genzyme Biosurgery and accounted for the acquisitions as purchases. We allocated the purchase prices to the fair value of the intangible assets acquired and goodwill, which we will amortize over eight or ten years depending upon the asset classification. Genzyme Biosurgery, together with our other operating divisions, has access to our $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At December 31, 2000, $368.0 million was outstanding under this facility, $150.0 million of which was allocated to Genzyme General and $218.0 million of which was allocated to Genzyme Biosurgery. In May 2001, Genzyme General repaid the $150.0 million it had drawn under this facility in December 2000 to finance the cash component of the GelTex merger consideration. At September 30, 2001, $218.0 million remained outstanding under the portion of the facility that matures in December 2003, all of which was allocated to Genzyme Biosurgery. Borrowings under this facility bear interest at LIBOR plus an applicable margin. Genzyme Biosurgery will use a large part of its cash flow to make principal and interest payments on this debt. If Genzyme Biosurgery's cash flow from operations is insufficient to meet these obligations, it may need to borrow additional funds to make these payments. 101 In connection with our acquisition of Biomatrix, we assumed a 6.9% convertible subordinated note in favor of UBS Warburg LLC that matures in May 2003. At September 30, 2001, $10.0 million of the principal of this note remained outstanding. Genzyme Biosurgery will use a part of its cash flow to satisfy debt service on this note. If all or a portion of the note is not converted at the option of the holder into Biosurgery Stock, at maturity Genzyme Biosurgery's cash reserves will be diminished by the amount necessary to repay the outstanding principal of the note. In July 2001, Genzyme Biosurgery drew down $12.0 million of the $15.0 million still available to it under the $25.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 1,902,949 Biosurgery designated shares. Genzyme Biosurgery used $8.5 million of the proceeds to pay a portion of the amounts it owes to Genzyme General. Under the terms of this arrangement, Genzyme Biosurgery may draw down funds as needed each quarter in exchange for Biosurgery designated shares based on the fair market value (as defined in our charter) of Biosurgery Stock at the time of the draw. Biosurgery designated shares are shares of Biosurgery Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Biosurgery. At September 30, 2001, $3.0 million remained available to Genzyme Biosurgery under this arrangement. Prior to our acquisition of Biomatrix, Biomatrix sold 744,000 shares of its common stock to certain of its employees, directors and consultants in exchange for ten-year, full recourse promissory notes. The notes accrue interest at rates ranging from 5.30% to 7.18% and mature at various dates from May 2007 through September 2009, upon which all outstanding principal and accrued interest becomes payable. As a result of the acquisition, these shares were converted into 532,853 shares of Biosurgery Stock and Genzyme Biosurgery recorded $14.7 million of outstanding principal and accrued interest to division equity because the notes were received in exchange for the issuance of stock. As of September 30, 2001, the outstanding balance of these notes was $10.2 million. Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize NeuroCell-TM--PD as a treatment for Parkinson's disease, did not initiate a Phase 3 clinical trial of NeuroCell-TM--PD by June 30, 2001. Because a Phase 3 trial of the product was not initiated by June 30, 2001, Genzyme General had the right to elect to receive a refund of $20.0 million of the $25.0 million Genzyme Biosurgery received from Genzyme General in connection with the transfer to Genzyme General of Genzyme Biosurgery's interest in the joint venture plus accrued interest thereon at a rate of 13.5% per annum. On August 2, 2001, Genzyme Biosurgery received notification from Genzyme General of its election to receive the refund. Genzyme Biosurgery can pay the refund amount in cash, Biosurgery Stock designated shares or both. The refund is due and payable 90 days after Genzyme Biosurgery received the notice from Genzyme General. We believe that Genzyme Biosurgery's cash resources, together with revenues generated from its products and distribution agreements and from the anticipated sale of certain assets, will be sufficient to finance its planned operations and capital requirements through 2001. Genzyme Biosurgery intends to use substantial portions of its available cash for: - research and development; - product development and marketing, including for Synvisc-Registered Trademark- viscosupplementation product; - expanding facilities; and - working capital. Genzyme Biosurgery's cash needs may differ from those planned, however, as a result of many factors, including the: - results of research and development efforts; 102 - ability to establish and maintain strategic alliances; - ability to enter into and maintain licensing arrangements and additional distribution arrangements; - ability to share costs of product development with research and marketing partners; - costs involved in enforcing patent claims and other intellectual property rights; - market acceptance of novel approaches and therapies; - success of its initiatives to reduce expenses and streamline its operations; - development of competitive products; - ability to satisfy regulatory requirements of the FDA and other governmental authorities; and - ability to sell its Snowden-Pencer-Registered Trademark- product lines. Genzyme Biosurgery's cash reserves may be further reduced to pay principal and interest on the following debt: - $218.0 million in principal outstanding under our revolving credit facility with a syndicate of commercial banks; and - $10.0 million in principal under our 6.9% convertible subordinated note in favor of UBS Warburg LLC that matures in May 2003 and is convertible into shares of Biosurgery Stock. If we use cash to pay or redeem this debt, including principal and interest on it, our cash reserves will be diminished. In February 2001, Genzyme Biosurgery announced its intention to divest the Snowden-Pencer-Registered Trademark- surgical instruments product lines. These product lines include hand-held reusable instruments and endoscopic instruments for general, plastic, gynecological and cardiovascular surgery. In May 2001, Genzyme Biosurgery terminated the production of Synvisc-Registered Trademark- viscosupplementation product in Canada. Genzyme Biosurgery will require significant additional financing to continue operations at anticipated levels. We cannot guarantee that Genzyme Biosurgery will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that we consider favorable. If Genzyme Biosurgery has insufficient funds or is unable to raise additional funds, it may delay, scale back or eliminate certain of its programs. Genzyme Biosurgery may also have to sell to, or co-develop with third parties, rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. SUBSEQUENT EVENT NEUROCELL-TM- JOINT VENTURE REFUND Genzyme General and Genzyme Biosurgery have agreed to extend Genzyme Biosurgery's deadline to refund $20.0 million to Genzyme General in connection with the Diacrin/Genzyme LLC joint venture. This refund obligation arose because a Phase 3 clinical trial for NeuroCell-TM--PD was not initiated by June 30, 2001. The deadline has been extended to February 1, 2002. Genzyme Biosurgery has agreed to pay the refund and accrued interest in cash. 103 GENZYME MOLECULAR ONCOLOGY A DIVISION OF GENZYME CORPORATION At September 30, 2001, Genzyme Molecular Oncology had cash and cash equivalents of $11.2 million, a decrease of $19.0 million from cash, cash equivalents and short-term investments of $30.2 million at December 31, 2000. Genzyme Molecular Oncology's operating activities used $23.6 million of cash for the first nine months of 2001. This is primarily due to Genzyme Molecular Oncology's division net loss of $22.1 million for the nine months ended September 30, 2001. Genzyme Molecular Oncology's investing activities in the first nine months of 2001 provided $7.8 million from the sales and maturities of investments. During the nine months ended September 30, 2001, Genzyme Molecular Oncology received $0.7 million in cash from the exercise of stock options and the purchase of shares under our employee stock plans. Genzyme Molecular Oncology, together with our other operating divisions, has access to our $500.0 million revolving credit facility, $150.0 million of which matures in December 2001 and $350.0 million of which matures in December 2003. At September 30, 2001, $150.0 million was available under the portion of the facility that matures in December 2001, and $132.0 million was available under the portion of the facility that matures in December 2003. None of the $218.0 million currently outstanding under these facilities is allocated to Genzyme Molecular Oncology. Borrowings under this facility bear interest at LIBOR plus a margin. In August 2001, Genzyme Molecular Oncology drew down $4.0 million of the $15.0 million still available to it under the $30.0 million interdivisional financing arrangement with Genzyme General in exchange for an additional reserve of 333,333 Molecular Oncology designated shares. Under the terms of this arrangement, Genzyme Molecular Oncology may draw down funds as needed each quarter in exchange for Molecular Oncology designated shares based on the fair market value (as defined in our charter) of Molecular Oncology Stock at the time of the draw. Molecular Oncology designated shares are 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. At September 30, 2001, $11.0 million remained available to Genzyme Molecular Oncology under this arrangement. 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. - anticipated revenues generated from license agreements; - committed research funding from collaborators; - the $11.0 million remaining under the interdivisional financing arrangement with Genzyme General; and - amounts available to Genzyme Molecular Oncology under our revolving credit facilities. Genzyme Molecular Oncology plans to spend substantial amounts of funds on, among other things: - research and development; - pre-clinical and clinical testing; - pursuing regulatory approvals; and - working capital. 104 Genzyme Molecular Oncology's cash needs may differ from those planned, however, 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 collaborations and licensing arrangements; - costs involved in enforcing patent claims and other intellectual property rights; - market acceptance of novel approaches and therapies; - development of competitive products and services; and - ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Molecular Oncology may require significant additional financing to continue operations at anticipated levels. It cannot be guaranteed that Genzyme Molecular Oncology will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on terms that are considered favorable. 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 sell to, or co-develop with, third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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, 2000. 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--Euro--The New European Currency;" "--Market Risk;" "--Interest Rate Risk;" "--Foreign Exchange Risk;" and "--Equity Price Risk" in Exhibit 13.1 to our 2000 Form 10-K. 105 PART II ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On September 26, 2001, we completed the acquisition of Novazyme Pharmaceuticals, Inc., a privately-held Delaware corporation. The acquisition was structured as a merger of a wholly-owned subsidiary of ours with and into Novazyme pursuant to an Agreement and Plan of Merger dated as of August 6, 2001 among us, Rodeo Merger Corp. and Novazyme. Under the terms of the merger agreement, we made an initial payment of 2,562,182 shares of Genzyme General Stock to Novazyme shareholders, based on an exchange ratio of 0.5714 of a share of Genzyme General Stock for each share of Novazyme common stock held at the effective time of the merger (the "Initial Merger Consideration"), with cash being paid in lieu of issuing any fractional shares of Genzyme General Stock. The shares of Genzyme General Stock constituting the Initial Merger Consideration were issued in a private placement under Section 4(2) of the Securities Act of 1933. In connection with the acquisition, we delivered to all Novazyme shareholders an information statement describing the proposed acquisition and the companies involved. The Novazyme stock was held primarily by accredited investors. The Novazyme stockholders that were not accredited investors represented to us that they were either sophisticated or represented by a sophisticated investor representative. Novazyme shareholders are also eligible to receive two subsequent payments totaling $87.5 million, payable in shares of Genzyme General Stock, if we receive U.S. marketing approval for the first two products employing certain Novazyme technology within specified dates. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the Exhibit Index immediately following the signature page to this report on Form 10-Q. (b) Reports on Form 8-K We filed a Current Report on Form 8-K dated June 30, 2001 on July 12, 2001 to announce the completion of our acquisition of Focal, Inc. We filed a Current Report on Form 8-K dated August 6, 2001 on August 22, 2001 to announce that we had entered into an Agreement and Plan of Merger with Novazyme Pharmaceuticals, Inc. We filed a Current Report on Form 8-K dated June 1, 2001 on August 28, 2001 to include the unaudited pro forma combined financial information which describes the pro forma effect of our acquisitions of Focal, Inc. and Wyntek Diagnostics, Inc. on the unaudited financial statements of operations of Genzyme Corporation, Genzyme General, the division to which we allocated the assets, liabilities and operations of Wyntek, and Genzyme Biosurgery, the division to which we allocated the assets, liabilities and operations of Focal, for the six months ended June 30, 2001. We filed a Current Report on Form 8-K dated September 7, 2001 on September 7, 2001 to include (1) the audited financial statements of Novazyme as of December 31, 2000 and 1999 and for the year ended December 31, 2000 and the periods from inception (April 16, 1999) to December 31, 1999 and 2000, including the report of independent public accountants dated February 26, 2001 and (2) the unaudited financial statements of Novazyme as of June 30, 2001 and December 31, 2000 and for the six months ended June 30, 2001 and 2000 and the period from inception (April 16, 1999) to June 30, 2001. We filed a Current Report on Form 8-K dated September 20, 2001 on September 20, 2001 to include the unaudited pro forma combined financial information which describes the pro forma effect of our acquisition of Novazyme on the unaudited statements of operations for the six months ended June 30, 2001 and the year ended December 31, 2000 and the unaudited balance sheet as of June 30, 2001 of both Genzyme Corporation and Genzyme General, the division to which we allocated the assets, liabilities and operations of Novazyme. 106 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2001 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 9, 2001 By: /s/ MICHAEL S. WYZGA ------------------------------------------ Michael S. Wyzga SENIOR VICE PRESIDENT, FINANCE, CHIEF FINANCIAL OFFICER; AND CHIEF ACCOUNTING OFFICER
107 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 2001 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ *2 Agreement and Plan of Merger, dated as of August 6, 2001, among Genzyme, Rodeo Merger Corp. and Novazyme Pharmaceuticals, Inc. Filed as Exhibit 2.1 to Genzyme's Current Report on Form 8-K filed on August 22, 2001. *3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 3 to Genzyme's Current Report on Form 8-K filed on June 6, 2001. *3.2 By-laws of Genzyme, as amended. Filed as Exhibit 3.2 to Genzyme's Form 10-Q for the quarter ended September 30, 1999. 4.1 Warrant to purchase common stock issued by Novazyme Pharmaceuticals, Inc. (f/k/a Targeted Therapy, Inc.). Filed herewith. 4.2 Securities Purchase Agreement, dated as of April 17, 2001 and amended on September 26, 2001, by and among Novazyme Pharmaceuticals, Inc. and several purchasers. Filed herewith. 10.1 Contract for Sale, dated June 25, 2001, for the premises located at the Industrial Development Authority Industrial Park, Waterford County, Dublin, Ireland, (comprised in folio 4141L County Waterford) by and between Luxottica Ireland Limited and Genzyme Ireland Limited (f/n/a Gosfend Limited). Filed herewith. 10.2 Lease, dated September 3, 1990, for the land located at the Industrial Development Authority Industrial Park, Waterford Country, Dublin, Ireland (comprised in folio 4917 & 324IF County Waterford) by and between the Industrial Development Authority and Bausch & Lomb Ireland. Filed herewith 10.3 Deed of Transfer, dated July 2, 2001, between Luxottica Ireland Limited and Genzyme Ireland Limited, related to the Lease dated September 3, 1990 for the premises located at the Industrial Development Authority Industrial Park, Waterford, Dublin, Ireland (comprised in folio 4141L County Waterford). Filed herewith. 10.4 Contract for Sale, dated August 2, 2001, for the land located at the Industrial Development Authority Industrial Park, Waterford County, Dublin, Ireland (comprised in folio 4917 County of Waterford) by the Industrial Development Agency (Ireland) and Genzyme Ireland Limited. Filed herewith. 10.5 Lease, dated August 24, 2001, for the land located at the Industrial Development Authority Industrial Park, Waterford County, Dublin, Ireland (comprised in folio 4917 County of Waterford) by the Industrial Development Agency (Ireland) and Genzyme Ireland Limited. Filed herewith.
- ------------------------ * Indicates an exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 8-K and 10-Q of Genzyme Corporation were filed under Commission File No. 0-14680. EX-4.1 3 a2061919zex-4_1.txt EXHIBIT 4.1 Exhibit 4.1 THIS WARRANT AND THE COMMON STOCK ISSUABLE WITH RESPECT HERETO HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE BLUE SKY ACTS AND MAY BE TRANSFERRED OR SOLO ONLY PURSUANT TO REGISTRATION UNDER SUCH ACTS, OR TO EXEMPTIONS THEREUNDER. TARGETED THERAPY, INC. an Oklahoma corporation (the "Company") May 5, 2000 For the Purchase of 2,000 Shares of the Company's Common Stock, $.01 par value COMMON STOCK PURCHASE WARRANT NO. 001 This certifies that Acceleration Venture Management LLC, an Oklahoma limited liability company, or such person's registered assigns (the "Warrant Holder"), is entitled, subject to the terms and conditions hereinafter set forth at any time on or before May 5, 2005, to purchase from time to time up to a total of Two Thousand (2,000) shares of the Company's common stock, $.01 par value (the "Common Stock"), at a price per share of $7.50 (the "Purchase Price"). The number of shares of Common Stock purchasable under this Common Stock Purchase Warrant (the "Warrant") and the Purchase Price thereof shall be subject to adjustment as hereinafter provided. Upon presentation and surrender of this Warrant, together with payment of the Purchase Price for the shares of Common Stock thereby purchased, at the office of the Company's Transfer Agent for the transfer of such stock or, if at any time there is no such Transfer Agent, at the principal office of the Company, the Warrant Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased (the "Shares"). All Shares that may be issued upon the exercise of this Warrant will, upon issuance, be fully paid, nonassessable, and free from all taxes, liens, and charges with respect thereto. This Warrant is subject to the following additional terms and conditions: 1. EXERCISE OF WARRANT. 1.1. AT WARRANT HOLDER'S OPTION. This Warrant may be exercised at any time on or before May 5, 2005 (the "Termination Date"), and the purchase rights represented hereby are exercisable solely at the Warrant Holder's option. If the Warrant Holder does not exercise its right to purchase the number of shares of Common Stock designated herein, this Warrant shall automatically expire on the Termination Date. In the event the Warrant Holder purchases less than all the shares purchasable under this Warrant, the Company shall cancel this Warrant upon the surrender hereof and execute and deliver a new Warrant of like tenor for the balance of the shares purchasable hereunder. 1.2. PAYMENT OF PURCHASE PRICE. The Purchase Price shall be payable in any one of the following ways, or in any combination thereof: (i) CASH. The Purchase Price is payable in cash or by certified or bank cashier's check in lawful funds of the United States of America. (ii) CANCELLATION OF INDEBTEDNESS. The Purchase Price is payable through the cancellation of indebtedness owed by the Company to the Warrant Holder. (iii) COMMON STOCK. The Purchase Price is payable by delivery to the Company of shares of the Company's Common Stock owned by the Warrant Holder. The shares of Common Stock constituting such payment shall be valued at Fair Market Value on the date of delivery. For purposes of this Warrant, "Fair Market Value" of a share of Common Stock on a given day means the average of one of the following prices for the five trading days immediately preceding such given day of valuation: (i) if the Common Stock is listed on an established stock exchange or exchanges or the Nasdaq National Market System, the highest closing sales price of Common Stock as reported thereon; or if not so reported, (ii) the average of the bid and asked prices, as quoted on the Nasdaq Small Cap Market, Nasdaq Bulletin Board, or by the National Quotations Bureau. If the Common Stock shall not be so quoted, the Fair Market Value shall be determined by the Board of Directors of the Company taking into account all relevant facts and circumstances, but in no event shall the Fair Market Value so determined by the Board of Directors be less than the price per share of Common Stock in the Company's equity financing most recently consummated prior to the valuation date, with total proceeds to the Company in excess of $1,000,000. (iv) NET-ISSUANCE. In addition to the foregoing methods of payment, the Warrant Holder may exercise this Warrant, or a portion thereof, and the Purchase Price shall be payable in connection therewith, by relinquishing the right under this Warrant to purchase an Exercise Block and, in exchange therefor, the Warrant Holder shall receive that number of shares of Common Stock equal to the number of shares constituting the Exercise Block, less a number of shares equal to the quotient of (i) the aggregate Purchase Price for the Exercise Block, divided by (ii) the Fair Market Value per share of Common Stock (determined as of the date of relinquishment). For purposes of this Section 1.2(d), "Exercise Block" shall mean that total number of shares covered by this Warrant for which the Warrant Holder desires to relinquish as provided herein. 2. ADJUSTMENTS. 2.1. ADJUSTMENT TO PURCHASE PRICE. The Purchase Price of the Common Stock issuable upon exercise of this Warrant shall be subject to adjustment, from time to time, as follows: (i) (A) If the Company shall issue any Additional Stock (as hereinafter defined) after the date hereof for a consideration (the "New Consideration") per shareless than the Purchase Price for the Common Stock issuable upon exercise of the Warrant in 2 effect immediately prior to the issuance of such Additional Stock, the Purchase Price shall be reduced so as to be equal to such New Consideration. (B) No adjustment of the Purchase Price for the Common Stock issuable upon the exercise of this Warrant shall be made in an amount less than one cent ($.01) per share, and (except to the limited extent provided for in subparagraphs (i)(E)(y) and (i)(E)(z) of this Section 2.1) no adjustment of such Purchase Price shall have the effect of increasing the Purchase Price above the Purchase Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions, or other expenses allowed, paid, or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Company's Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities that by their terms are convertible into or exchangeable for Common Stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities (which are not excluded from the definition of Additional Stock): (w) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subparagraphs (i)(C) and (i)(D) of this Section 2.1), if any, received by the Company upon the issuance of such options or rights, plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (x) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such convertible or exchangeable securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such convertible or exchangeable securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subparagraphs (i)(C) and (i)(D) of this Section 2.1); 3 (y) upon any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or conversion of or exchange for such convertible or exchangeable securities, the Purchase Price as then in effect shall forthwith be readjusted to such Purchase Price as would have been obtained had the adjustment made upon the issuance of such options, rights, or securities not convened prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; (z) upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Purchase Price shall forthwith be readjusted to such Purchase Price as would have been obtained had the adjustment made upon the issuance of such options, rights, or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities, or upon the exercise of the options or rights related to such securities. (ii) "Additional Stock" for purposes of this Warrant shall mean any shares of the Company's Common Stock issued by the Company in conjunction with or after the determination of the Purchase Price as specified hereinabove, other than: (A) Common Stock issued pursuant to a transaction described in Section (iii) hereof; (B) Common Stock issuable or issued to officers, directors, employees, or consultants of the Company, whether directly or pursuant to the exercise of options, on terms that have been approved by the Company's Board of Directors; and (C) Common Stock issued or issuable upon conversion of any shares of the Company's outstanding Preferred Stock or upon exercise of this Warrant or any other stock warrants issued contemporaneously herewith or issued and outstanding as of the date hereon. (iii) If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable in shares of Common Stock or by a subdivision payable in shares of Common Stock or by a subdivision or split-up of shares of the Company's Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision, or split-up, the Purchase Price for the Common Stock issuable upon the exercise of this Warrant shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise of this Warrant will be increased in proportion to such increase in the number of outstanding shares of the Company's Common Stock. (iv) If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination or reverse stock split of the outstanding 4 shares of the Company's Common Stock, then, following the record date of such combination or reverse stock split, the Purchase Price for the Common Stock shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise of this Warrant will be decreased in proportion to such decrease in the number of outstanding shares of Common Stock. 2.2. ADJUSTMENT TO NUMBER OF SHARES PURCHASABLE UNDER WARRANT. Upon any adjustment to the Purchase Price, the number of shares purchasable under this Warrant shall be adjusted to equal the product of (i) the number of shares of Common Stock purchasable under this Warrant immediately prior to such adjustment to the Purchase Price and (ii) the quotient of (A) the Purchase Price in effect immediately prior to such adjustment divided by (B) the Purchase Price in effect immediately after such adjustment. 2.3. WARRANT NEED NOT BE CHANGED TO REFLECT ADJUSTMENTS. This Warrant need not be changed to reflect any adjustment or changes in the Purchase Price. 2.4. REORGANIZATION, MERGER, ETC. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation or entity, or the sale or conveyance of all or substantially all of the Company's assets to another corporation or entity shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, or conveyance, lawful and adequate provision shall be made whereby the Warrant Holder shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger, sale, or conveyance not taken place, and, in any such case, appropriate provision shall be made with respect to the rights and interests of the Warrant Holder such that the provisions hereof (including, without limitation, provisions for adjustment of the Purchase Price) shall thereafter be applicable, as nearly as may be, to any stock, securities, or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any consolidation, merger, or sale of all or substantially all of its assets to any other corporation or entity, unless prior to or simultaneously with the consummation thereof the successor corporation or entity (if other than the Company) resulting from such consolidation or merger, or the corporation or entity purchasing such assets, shall assume, by written instrument executed and mailed or delivered to the Warrant Holder at the address indicated in Section 7 hereof, the obligation of such corporation or entity to deliver to such Warrant Holder shares of stock, securities, or assets as, in accordance with the provisions of this Warrant, such Warrant Holder may be entitled to purchase, and to perform and observe each and every covenant and condition of this Warrant to be performed and observed by the Company. 5 2.5. NOTICE TO WARRANT HOLDER OR WARRANT HOLDERS. (i) Upon any adjustment of the Purchase Price, the Company, within thirty (30) days thereafter, shall give written notice thereof, pursuant to Section 7 hereof, which notice shall state the adjusted Purchase Price setting forth in reasonable detail the method of calculation and the facts (including a statement of the consideration received or deemed to have been received by the Company for any additional shares or convertible or exchangeable securities or rights or options) upon which such calculations are based. Where appropriate, such notice may be given in advance and be included as part of the notice required to be mailed pursuant to the provisions of paragraph (b) of this Section 2.5. (ii) In case at any time: (A) the Company shall declare any dividend upon its Common Stock payable otherwise than in cash or in the Common Stock of the Company or payable otherwise than out of net income for a twelve (12) month period ending not earlier than ninety (90) days prior to the date of payment of such dividend; or (B) the Company shall offer for subscription to the holders of its Common Stock any additional shares of stock of any class or any other securities convertible into or exchangeable for shares of stock or any rights or options to subscribe thereto; or (C) there shall be any capital reorganization or reclassification of the capital stock of the Company, or a sale or conveyance of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another corporation or entity; or (D) there shall be a voluntary or involuntary dissolution, liquidation, or winding up of the Company; or (E) the Company intends to issue or has issued any Common Stock or rights convertible into Common Stock for a per share consideration of less than the Purchase Price, then, in any one or more of said cases, the Company shall give written notice, pursuant to Section 7 hereof, at the earliest time legally practicable (and, unless otherwise impossible for a legal reason, not less than thirty (30) days before any record date or other date set for definitive action) of the date as of which (y) the books of the Company shall close or a record date shall be taken for such dividend, distribution, or subscription rights or options, or (z) such reorganization, reclassification, sale, conveyance, consolidation, merger, dissolution, liquidation, or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution, subscription rights, or options or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, conveyance, consolidation, merger, dissolution, liquidation, or winding up, as the case may be (on which date, in the event of voluntary or involuntary dissolution, liquidation, or winding up of the Company, the right to exercise this Warrant shall cease and terminate). 2.6. CONDITIONS NOT SPECIFICALLY COVERED. In case at any time conditions shall arise by reason of action taken by the Company, which, in the good faith judgment of the 6 Company's Board of Directors, are not adequately covered by the limited antidilution provisions of this Warrant so as to potentially materially and adversely affect the rights of the Warrant Holder or Warrant Holders, or, in case at any time any such conditions are expected to arise by reason of any action contemplated by the Company, its Board of Directors shall appoint a firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the Company's financial statements), who shall give an opinion as to the adjustment, if any (not inconsistent with the standards established in this Section 2 hereof), of the Purchase Price, which is, or would be, required to preserve, without dilution, the rights of the Warrant Holder or Warrant Holders to the extent provided herein. The Company's Board of Directors shall make the adjustment recommended forthwith upon the receipt of such opinion or the taking of any such action contemplated, as the case may be. 3. STATUS OF WARRANT HOLDERS. This Warrant does not entitle the Warrant Holder or Warrant Holders hereof to any rights as a shareholder of the Company. 4. REMEDIES. The Company stipulates that the remedies at law of the Warrant Holder or Warrant Holders in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 5. RESERVATION OF SHARES. The Company shall reserve and keep available a sufficient number of shares of Common Stock to satisfy the requirements of this Warrant. Before taking any action that would cause a reduction of the Purchase Price below the then current par value of the shares of Common Stock issuable upon exercise of this Warrant, the Company will take any corporate action that may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Purchase Price. 6. ASSIGNMENT. This Warrant shall be binding upon and inure to the benefit of the Company, the Warrant Holder, and their respective successors and assigns. 7. NOTICES. All notices, requests, consents, and other communications hereunder shall be in writing and shall be deemed to have been given when personally delivered, mailed first class (postage prepaid), or delivered to a telegraph office: (i) if to the Warrant Holder, at the address of such Warrant Holder as shown on the books of the Company. (ii) if to the Company, at 800 Research Parkway, Suite 200, Oklahoma City, Oklahoma 73104, to the attention of the corporate Secretary, or at such other address as may have been furnished to the Warrant Holder in writing. 8. HEADINGS. The headings of the Sections and subsections of this Warrant are inserted for convenience only and shall not be deemed to constitute a part of this Warrant. 7 IN WITNESS WHEREOF, this Warrant has been duly executed by its duly authorized officer as of the date first above written. TARGETED THERAPY, INC. an Oklahoma corporation By: /s/ JOHN F. CROWLEY ------------------------------------- John F. Crowley President and Chief Executive Officer 8 EX-4.2 4 a2061919zex-4_2.txt EXHIBIT 4.2 Exhibit 4.2 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") dated as of April 17, 2001, as amended on September 26, 2001, among NOVAZYME PHARMACEUTICALS, INC., a Delaware corporation (the "COMPANY") and THE SEVERAL PURCHASERS NAMED IN SCHEDULE 2.1 (each a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS, the Company wishes to issue and sell to the Purchasers, an aggregate of up to 1,780,000 shares of the Company's authorized but unissued Series B Convertible Participating Preferred Stock (collectively, the "PURCHASED SECURITIES") and WHEREAS, the Purchasers, severally and not jointly, wish to purchase such securities on the terms and subject to the conditions set forth in this Agreement; NOW THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS For all purposes of this Agreement the following terms shall have the meanings set forth in this Article I: "ACCREDITED INVESTOR" means an "accredited investor" as defined in Rule 501 of the Securities Act (as defined herein). "ADDITIONAL PURCHASER(S)" means the Purchasers identified as "Additional Purchasers" on SCHEDULE 2.1 to this Agreement. "ADDITIONAL PURCHASER CLOSING" has the meaning specified in Section 2.1(b) of this Agreement. "ADDITIONAL PURCHASER CLOSING DATES" has the meaning specified in Section 2.2(b) of this Agreement. "ADDITIONAL PURCHASER AGREEMENT" has the meaning specified in Section 2.1(b) of this Agreement. "AFFILIATE" means, as applied to the Company or any other specified Person, any Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company (or other specified Person) and shall also include (a) any Person who is a director or beneficial owner of at least 5% of the Company's then outstanding Capital Securities (or other specified Person) and Family Members of any such Person, (b) any Person of which the Company (or other specified Person) or an Affiliate, as defined in clause (a) above, of the Company (or other specified Person) shall, directly or indirectly, either beneficially own at least 10% of the Company's then outstanding Capital Securities or constitute at least a 10% equity participant, and (c) in the case of a specified Person who is an individual, any Family Member of such Person. Notwithstanding the foregoing, the Purchasers shall not be considered "Affiliates" of the Company under this Agreement. "BLUE SKY FILINGS" has the meaning specified in Section 3.5 of this Agreement. "BUDGET" means the budget approved by the Board of Directors in accordance with the Certificate of Designation. "BUSINESS DAY" means any day other than a Saturday, Sunday or a legal holiday in Boston, Massachusetts or any other day on which commercial banks in such State are authorized by law or government decree to close. "CAPITAL SECURITIES" means, as to any Person that is a corporation, the authorized shares of such Person's capital stock, including all classes of common, preferred, voting and nonvoting capital stock, and, as to any Person that is not a corporation or an individual, the ownership shares in such Person, including, without limitation, the right to share in profits and losses, the right to receive distributions of cash and property, and the right to receive allocations of items of income, gain, less, deduction and credit and similar items from such Person, whether or not such shares include voting or similar rights entitling the holder thereof to exercise control over such Person. "CERTIFICATE OF DESIGNATION" means the Amended Certificate of Designation of Series A Convertible Participating Preferred Stock and Certificate of Designation of Series B Convertible Participating Preferred Stock of Novazyme Pharmaceuticals, Inc., as filed with the Delaware Secretary of State on or before the date hereof, in the form of EXHIBIT A hereto. "CHARTER" means, as to a corporation, the articles or certificate of incorporation, as to a general or limited partnership, the joint venture or partnership agreement or articles or other organizational document, as to a limited liability company, the operating or limited liability company agreement or articles or certificate of formation, and as to any other Person other than an individual, any statute, articles or other organizational document, each as from time to time amended or modified. "CLINICAL TRIAL CLEARANCE AMOUNT" means the number of shares of Series B Preferred Stock specified in SCHEDULE 2.1 to be purchased by a Purchaser pursuant to Section 2.1(a)(iv). In the case of the Initial Purchasers, such amount shall equal fifty percent (50%) of the Initial Purchased Securities, and in the case of the Additional Purchasers, such amount shall not exceed the number of shares to which such Additional Purchasers shall have the right to purchase under Section 5.2 of the Stockholders' Agreement. "CLINICAL TRIAL CLEARANCE NOTICE" means the date upon which the Company gives written notice to the Purchasers that the Company has received clearance under U.S. Food and Drug Administration regulations and controlling statutory provisions to commence human clinical trials for a therapeutic for Pompe Disease. 2 "CLOSING" shall mean, collectively, the Initial Closing and any Subsequent Closings and/or Additional Purchaser Closings (each as defined herein). "CLOSING DATE" shall mean, collectively, the Initial Closing Date and any of the Subsequent Closing Dates or Additional Purchaser Closing Dates (each as defined herein). "CODE" means the Internal Revenue Code of 1986, as amended. "COMMON STOCK" has the meaning specified in Section 3.4 of this Agreement. "COMPANY" has the meaning specified in the introduction to this Agreement. "CONSOLIDATED" or "CONSOLIDATED" means, with reference to any term defined herein, that term as applied to the Company's accounts and all of its Subsidiaries' accounts that may in accordance with GAAP be consolidated with the Company. "CONTRACTS" has the meaning specified in Section 3.12 of this Agreement. "CONVERTIBLE DEBENTURES" means any of the series of 8% convertible debentures of the Company issued to Neose pursuant to that certain Securities Purchase Agreement dated as of May 18, 2000 by and between the Company and Neose. "CONVERTIBLE SECURITIES" means securities or obligations, that are exercisable for, convertible into or exchangeable for shares of Common Stock, including without limitation all shares of the Series B Preferred Stock, shares of the Series A Preferred Stock, Convertible Debentures, options, warrants or other rights to subscribe for or purchase Common Stock or to subscribe for or purchase other Capital Securities or obligations that are, directly or indirectly, convertible into or exchangeable for Common Stock. "DAMAGES" has the meaning specified in Section 9.1 of this Agreement. "DELIVERY DATE" has the meaning specified in Section 16.2 of this Agreement. "DOLLARS" and the sign "$" mean lawful money of the United States of America. "EFFECTIVE TIME" shall have the meaning set forth in the Merger Agreement. "EMPLOYEE BENEFIT PLAN" means any employee benefit plan within the meaning of Section 3(3) of ERISA maintained or contributed to by the Company or any ERISA Affiliate, other than a Multiemployer Plan. "EMPLOYEE OPTIONS" has the meaning specified in Section 3.4(e) of this Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, any successor statute of similar import, and the rules and regulations thereunder, collectively, and from time to time amended and in effect. "ERISA AFFILIATE" means any Person, which is treated as a single employer with the Company under Section 414 of the Code. 3 "FAMILY MEMBER" means, as applied to any individual, such individual's spouse, child (including a stepchild or an adopted child) grandchild, parent, brother or sister thereof or any spouse of any of the foregoing, and each trust created for the exclusive, benefit of one or more of them. "FOUNDER" means William M. Canfield, M.D., Ph.D. "FULLY DILUTED BASIS" has the meaning specified in Section 3.4(1) of this Agreement. "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" or "GAAP" means accounting principles which are (a) consistent with the principles promulgated or adopted by the United States Financial Accounting Standards Board and its predecessors and other recognized principle setting bodies, in effect from time to time, (b) applied on a basis consistent with prior periods, and (c) such that a certified public accountant would, insofar as the use of accounting principles is pertinent, be in a position to base an opinion as to financial statements in which such principles have been properly applied. "GENZYME" shall mean Genzyme Corporation, a Massachusetts corporation. "GENZYME TRANSACTION" shall mean the acquisition of the Company by Genzyme through a merger of a wholly owned subsidiary of Genzyme with and into the Company in accordance with the terms and conditions of the Merger Agreement. "GUARANTEED PENSION PLAN" means any employee pension benefit plan within the meaning of Section 3(2) of ERISA maintained or contributed to by the Company or any ERISA Affiliate, the benefits of which are guaranteed on termination in full or in part by the Pension Benefit Guaranty Corporation pursuant to Title IV of ERISA, other than a Multiemployer Plan. "HISTORICAL FINANCIAL STATEMENTS" means, on a consolidated and consolidating basis for each of the Company and its Subsidiaries, the audited balance sheet and statement of operations, statement of cash flows and statement of stockholders' equity for the year ended December 31, 2000, and the unaudited balance sheet and statement of operations, statement of cash flows and. statement of stockholders' equity for the two months ended February 28, 2001. "IND FILING NOTICE" means the date upon which the Company gives written notice to the Purchasers that the Company has filed an Investigational New Drug Application with the U.S. Food and Drug Administration for a therapeutic for Pompe Disease. "IND FILING PURCHASE AMOUNT" means the number of shares of Series B Preferred Stock specified in SCHEDULE 2.1 to be purchased by a Purchaser pursuant to Section 2.1(a)(iii). In the case of the Initial Purchasers, such amount shall equal fifty percent (50%) of the Initial Purchased Securities for such Initial Purchaser, and in the case of the Additional Purchasers, such amount shall not exceed the number of shares to which such Additional Purchasers shall have the right to purchase under Section 5.2 of the Stockholders' Agreement. "INDEBTEDNESS" means all obligations, contingent and otherwise, which in accordance with GAAP should be classified on the obligor's balance sheet as liabilities, or to which reference should be made by footnote thereto, including without limitation, in any event and 4 whether or not so classified: (i) all debt and similar monetary obligations, whether direct or indirect; (ii) all liabilities secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not the liability secured thereby shall have been assumed; (iii) all guaranties, endorsements and other contingent obligations whether direct or indirect in respect of Indebtedness or performance of others, including any obligation to supply funds to or in any manner to invest in, directly or indirectly, the debtor, to purchase Indebtedness, or to assure the owner of Indebtedness against loss, through an agreement to purchase goods, supplies or services for the purpose of enabling the debtor to make payment of the indebtedness held by such owner or otherwise; and (iv) obligations to reimburse issuers of any letters of credit. "INDEMNITEE" has the meaning specified in Section 9.1 of this Agreement. "INITIAL CLOSING" has the meaning specified in Section 2.2(a) of this Agreement. "INITIAL CLOSING DATE" has the meaning specified in Section 2.2(a) of this Agreement. "INITIAL PURCHASED SECURITIES" has the meaning specified in Section 2.1 (a) of this Agreement. "INITIAL PURCHASER" means those Purchasers identified as "Initial Purchasers" on SCHEDULE 2.1 to this Agreement. "INTANGIBLE PROPERTY" has the meaning specified in Section 3.15 of this Agreement. "KNOWLEDGE" or "KNOWLEDGE" means, the good faith actual knowledge of such Person, after due and proper inquiry and such due diligence as is reasonably required for such Person to make an informed representation or warranty as to such Person's "knowledge" of a matter. "LETTER" has the meaning specified in Section 16.2 of this Agreement. "LICENSES" has the meaning specified in Section 3.17 of this Agreement. "LIEN" means (a) any encumbrance, mortgage, pledge, lien, charge or other security interest of any kind upon any property or assets of any character, or upon the income or profits therefrom; (b) any acquisition of or agreement to have an option to acquire any property or assets upon conditional sale or other title retention agreement, device or arrangement (including a capitalized lease); or (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles or chattel paper, with or without recourse. "MATERIAL ADVERSE EFFECT" means (a) an adverse effect on the validity or enforceability of this Agreement or any of the Related Agreements in any material respect; (b) an adverse effect on the condition (financial or other), business, results of operations, ability to conduct business or properties of the Company and its Subsidiaries, taken as a whole; or (c) an impairment of the ability of the Company to fulfill its obligations under this Agreement or any of the Related Agreements in any material respect. 5 "MERGER AGREEMENT" shall mean that certain Agreement and Plan of Merger, by and among the Company, Genzyme and Rodeo Merger Corp, a wholly owned subsidiary of Genzyme, dated as of August 6, 2001, a copy of which is attached hereto as EXHIBIT A. "MULTIEMPLOYER PLAN" means a multiemployer plan within the meaning of Section 3(37) of ERISA. "NEOSE" means Neose Technologies, Inc., a Delaware corporation. "NEOSE RIGHTS AGREEMENT" means that certain Amended and Restated Rights Agreement between the Company and Neose dated February 26, 2001. "OPTIONAL PURCHASE NOTICE" has the meaning specified in Section 2.1(a) of this Agreement. "PARENT COMMON STOCK" shall have the meaning set forth in the Merger Agreement. "PER SHARE PRICE" has the meaning specified in Section 2.1(a) of this Agreement. "PERSON" means an individual, partnership, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof. "PURCHASED SECURITIES" has the meaning specified in the introduction to this Agreement. "PURCHASERS" means the several purchasers named in SCHEDULE 2.1, including the Initial Purchasers and any Additional Purchasers subsequently named therein, and a "PURCHASER" means any one of them. "REGISTRABLE SECURITIES" means those shares of Common Stock issuable upon conversion of the Series B Preferred Stock. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement dated as of September 13, 2000, among the Company and the holders named therein, as amended by Amendment No. 1 to Registration Rights Agreement dated April 17, 2001, in the form of Exhibit C hereto. "RELATED AGREEMENTS" means the Registration Rights Agreement, the Stockholders' Agreement, the Certificate of Designation and any Additional Purchaser Agreements. "SECURITIES ACT" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Securities and Exchange Commission thereunder, all as the same shall be in effect at the time. "SERIES A PREFERRED STOCK" has the meaning specified in Section 3.4(a) of this Agreement. 6 "SERIES A PURCHASE AGREEMENT" has the meaning specified in Section 3.10 of this Agreement. "SERIES B PREFERRED STOCK" has the meaning specified in Section 3.4(a) of this Agreement. "STOCK OPTION PLAN" has the meaning specified in Section 3.4(e) of this Agreement. "STOCKHOLDERS' AGREEMENT" means the Amended and Restated Stockholders' Agreement dated as of April 17, 2001, among the Company and each of the parties named therein as "Holders", a copy of which is attached as EXHIBIT B hereto. "SUBSEQUENT CLOSINGS" has the meaning specified in Section 2.2(c) of this Agreement. "SUBSEQUENT CLOSING DATES" has the meaning specified in Section 2.2(c) of this Agreement. "SUBSIDIARY" means any Person of which the Company or other specified Person now or hereafter shall at the time own directly or indirectly through a Subsidiary or another Person at least a majority of the outstanding Capital Securities (or other shares of beneficial interest) entitled to vote generally; and the term "Subsidiaries" means all such Persons collectively. "TAXES" or "TAX" means (a) all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, or other taxes of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) upon the Company with respect to all periods or portions thereof ending on or before the date hereof, and/or (b) any liability of the Company for the payment of any amounts of the type described in the immediately preceding clause (a) as a result of being a member of an affiliated or combined group. "THIRD PARTY CLAIMS" has the meaning specified in Section 9.1 of this Agreement. "USRPHC" has the meaning specified in Section 16.2 of this Agreement. ARTICLE II SALE AND PURCHASE OF PURCHASED SECURITIES SECTION 2.1. SALE AND PURCHASE OF PURCHASED SECURITIES. (a) PREVIOUS PURCHASES. Each Purchaser has previously purchased, and the Company has previously issued to such Purchaser, the number of shares of Series B Preferred Stock set forth on SCHEDULE 2.1 in the column captioned "Initial Purchased Securities" (the "INITIAL PURCHASED SECURITIES") opposite the name of such Purchaser. Each Purchaser hereby acknowledges that except as provided in this Section 2.1, such Purchaser has no other rights to purchase by additional shares of Series B Preferred Stock. 7 (b) FUTURE PURCHASES. (i) MANDATORY IND FILING PURCHASES. No later than fifteen (15) days following the IND Filing Notice, each Purchaser shall purchase (the "REQUIRED IND PURCHASE") the number of shares of Series B Preferred Stock (subject to appropriate adjustment for any stock split, stock dividend, split-up, subdivision, reverse stock split, combination or reclassification of Series B Preferred Stock) set forth on SCHEDULE 2.1 in the column captioned "IND Filing Purchase Amount" opposite the name of such Purchaser (the "IND FILING PURCHASE AMOUNT"), at a price per share of $10.399 (the "PER SHARE PRICE"). Notwithstanding anything to the contrary stated above, the IND Filing Purchase Amount shall be reduced by the number of shares of Series B Preferred Stock that shall equal the difference of (A) the Clinical Trial Clearance Amount (as defined in 2.1(b)(ii) below) less (B) the number of shares of Series B Preferred Stock, if any, that such Purchaser purchased pursuant to 2.1(b)(iii) below, such number not to be less than zero. (ii) MANDATORY CLINICAL TRIAL CLEARANCE PURCHASES. No later than fifteen (15) days following the Clinical Trial Clearance Notice, each Purchaser shall purchase (the "REQUIRED CLINICAL TRIAL PURCHASE") the number of shares of Series B Preferred Stock (subject to appropriate adjustment for any stock split, stock dividend, split-up, subdivision, reverse stock split, combination or reclassification of Common Stock) set forth on SCHEDULE 2.1 in the column captioned "Clinical Trial Clearance Amount" opposite the name of such Purchaser (the "CLINICAL TRIAL CLEARANCE AMOUNT"), less any number of shares of Series B Preferred Stock purchased pursuant to 2.1(b)(i) and 2.1(b)(iii), at the Per Share Price, such number not to be less than zero; (iii) VOLUNTARY PURCHASES. Notwithstanding any of the foregoing, at any time or from time to time, each Purchaser shall have the option (the "OPTIONAL PURCHASE RIGHT") to require the Company, by delivering written notice to the Company (the "OPTIONAL PURCHASE NOTICE") set forth as EXHIBIT B-1 (if before the Effective Time of the Genzyme Transaction) or EXHIBIT B-2 (if after the Effective Time of the Genzyme Transaction), attached hereto, as applicable, to issue and sell to such Purchaser on a date mutually agreed upon by the Company and such Purchaser, but in no event later than 5 business days following the date of the Optional Purchase Notice, the number of shares of Series B Preferred Stock, subject to Section 2(c), (subject to appropriate adjustment for any stock split, stock dividend, split-up, subdivision, reverse stock split, combination or reclassification of Common Stock) set forth on SCHEDULE 2.1 in the column captioned "Voluntary Purchase Amount" opposite the name of such Purchaser (the "VOLUNTARY PURCHASE AMOUNT"), less any number of shares of Series B Preferred Stock purchased pursuant to 2.1(b)(i) and 2.1(b)(ii), at the Per Share Price, such number not to be less than zero. (iv) LIMITATION ON NUMBER OF SHARES. No Purchaser shall be required to, nor have the right to, purchase pursuant to this Section 2.1 more than that number of shares of Series B Preferred Stock equal to the Voluntary Purchase Amount. (c) RIGHT TO ACQUIRE PARENT COMMON STOCK FOLLOWING THE GENZYME TRANSACTION. Notwithstanding any of the foregoing, immediately following the Effective Time of the Genzyme Transaction, and pursuant to the terms of the Merger Agreement, the Required IND Purchase, the Required Clinical Trial Purchase and the Optional Purchase Right shall, 8 automatically and without any action by the Company or any Purchaser, become the right (the "ASSUMED PREFERRED STOCK PURCHASE RIGHT") to purchase shares of Parent Common Stock, and, upon exercise of such Assumed Preferred Stock Purchase Right, Genzyme shall issue, that number of shares of Parent Common Stock in each case, as determined pursuant to Section 1.7(e) of the Merger Agreement (the "ASSUMED PURCHASE RIGHT SHARES"), at a purchase price per share as determined pursuant to Section 1.7(e) of the Merger Agreement (the "ASSUMED PREFERRED STOCK PURCHASE PRICE"). (d) ADJUSTMENT UPON CERTAIN EVENTS. If after the Effective Time there is a change in the number of issued and outstanding shares of Parent Common Stock as the result of a reclassification, subdivision, recapitalization, combination, exchange, stock split (including reverse stock split), stock dividend or distribution or other similar transaction, the number of shares of Parent Common Stock a Purchaser shall have the obligation or the right to purchase pursuant to this Agreement shall be equitably adjusted to give effect to such event. (e) NET EXERCISE. In lieu of making a cash payment for the Exercise Price (as defined below) of an Assumed Preferred Stock Purchase Right, the Purchaser may pay all or such portion of such Exercise Price by electing not to receive all of such Assumed Purchase Right Shares but only to receive that number of such Assumed Purchase Right Shares as shall be determined in accordance with the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Parent Common Stock to be issued to the Purchaser pursuant to this Section 2.1(e) Y = the number of Assumed Purchase Right Shares for which the Assumed Preferred Stock Purchase Right is being exercised as of the date the Assumed Preferred Stock Purchase Right is being exercised (the "EXERCISE DATE") A = the closing price per share of Parent Common Stock as reported by The Nasdaq National Market, rounded to the fourth decimal place as of the applicable Exercise Date of a share of Parent Common Stock constituting such Assumed Purchase Right Shares B = the exercise price in effect as of the applicable Exercise Date of a share of Parent Common Stock constituting such Assumed Purchase Right Shares For purposes of this Section 2(e), the "Exercise Price" for all or any portion of the Assumed Purchase Right Shares held by a Purchaser shall equal (a) the Assumed Preferred Stock Purchase Price, multiplied by (b) the number of Assumed Purchase Right Shares payable in respect of the number of shares of Parent Common Stock for which the Assumed Preferred Stock Purchase Right is being exercised. 9 The Purchaser may elect to make payment of all or any portion of such aggregate Exercise Price pursuant to, and in the manner set forth in this Section 2.1(e) by submitting to Genzyme after the Effective Time at its principal office a notice of such net issue exercise, which is attached hereto as EXHIBIT C. [Remainder of Page Intentionally Left Blank] 10 IN WITNESS WHEREOF, this Securities Purchase Agreement has been executed under seal by the parties hereto as of the day and year first above written. "COMPANY": NOVAZYME PHARMACEUTICALS, INC. f/k/a Targeted Therapy, Inc. By: /s/ JOHN F. CROWLEY ------------------------------------- John F. Crowley President and Chief Executive Officer "PURCHASERS": By: ------------------------------------- Name: Title: 11 EX-10.1 5 a2061919zex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 THE LAW SOCIETY OF IRELAND GENERAL CONDITIONS OF SALE (1995 EDITION) WILLIAM FRY Solicitors Fitzwilton House Wilton Place Dublin 2 014090.0003.DW THE LAW SOCIETY OF IRELAND GENERAL CONDITIONS OF SALE (1995 EDITION) PARTICULARS and CONDITIONS OF SALE OF PREMISES SITUATED AT OLD KILMEADEN ROAD, IDA WATERFORD INDUSTRIAL ESTATE, WATERFORD Auctioneer: Hamilton Osborne King Address: 32 Molesworth Street Vendor: Luxottica Ireland Limited Vendor's Solicitors: William Fry Address: Fitzwilton House Wilton Place Dublin 2 Reference: 014090.0003.DW Warning: It is recommended that the within should not be completed without prior legal advice. MEMORANDUM OF AGREEMENT made on 25 June 2001 BETWEEN: LUXOTTICA IRELAND LIMITED ("VENDOR") OF IDA Industrial Park, Old Kilmeaden Road, Waterford, Co Waterford Dublin and GOSFEND LIMITED ("PURCHASER") OF whereby it is agreed that the Vendor shall sell and the Purchaser shall purchase in accordance with the annexed Special and General Conditions of Sale the property described in the within Particulars at the purchase price mentioned below Purchase Price: IR[POUND SYMBOL]4,250,O00 Interest Rate: 13% per annum Less Deposit: IR[POUND SYMBOL] 425,000 Closing Date: 27 June 2001 ------------------ Balance: IR[POUND SYMBOL]3,825,000 SIGNED: /s/ Roberto Chemello SIGNED: /s/ Michael S. Wyzga ----------------------- --------------------------------- Vendor Purchaser Vendor's RSI No. Purchaser's RSI No. -------------- ------------- Witness [ILLEGIBLE] Witness [ILLEGIBLE] ----------------------- ------------------------- Occupation Employee Occupation Solicitor ------------------- ---------------------- Address Milan, Italy Address [ILLEGIBLE] ---------------------- ------------------------- As Stakeholder We acknowledge receipt of Bank Draft/Cheque for IR[POUND SYMBOL] in respect of deposit. Signed: /s/ William Ty ----------------------- PARTICULARS AND TENURE ALL THAT AND THOSE the lands comprised in Folio 4141L Co. Waterford HELD under Indenture of Lease dated 3 September 1990 (the "Lease) between (1) Industrial Development Authority and (2) Bausch and Lomb Ireland for a term of 999 years from the 1 January 1990 subject to the covenants and conditions therein contained. DOCUMENTS SCHEDULE TITLE 1. Certified Copy Folio 4141L County Waterford together with file plan in relation thereto. 2. Original Lease dated 3 September 1990 between (1) Industrial Development Authority and (2) Bausch and Lomb Ireland. 3. Copy Folio 3241F, County Waterford together with file plan relating thereto. 4. Copy Folio 4917, County Waterford together with file plan relating thereto. 5. Certified Copy Letter from Bausch and Lomb to the IDA dated 28 May 1999 with the IDA consent endorsed thereon. PLANNING 6. Copy Notification of Grant of Permission Register Reference No. 7802 dated 27 July 1990. 7. Original Architects Opinion on Compliance with Planning dated 18 June 1999 (re original construction of factory). 8. Original Architects Opinion on Exemption from Building Regulations dated 18 June 1999 (re original construction of factory). 9. Original Architects Opinion on Compliance with Building Regulations dated 18 June 1999 (re new processes). 10. Copy Declaration of Identity of Olive McGloin. 11. Copy certificate of Barry Fanin re roadway. 5 12. Copy Effluent Discharge Licence No. W.P.(S) 8/98/2 13. Copy Magazine Licence re Potassium Nitrate and Sodium Nitrate. 14. Copy Letter from Waterford Corporation dated 15 May 1996 re new processes. CORPORATE DOCUMENTATION 15. Certificate of Incorporation together with Certificate of Incorporation on Change of Name to Luxottica Ireland Limited together with Memorandum and Articles of Association. 16. Copy letter from Vendor dated 18th May 2001. SEARCHES SCHEDULE None SPECIAL CONDITIONS 1. Save where the context otherwise requires or implies or the text hereof expresses to the contrary, the definitions and provisions as to interpretation set forth in the within General Conditions shall be applied for the purposes of these Special Conditions. 2. The said General Conditions shall:- (a) apply to the sale in so far as the same are not hereby altered or varied, and these Special Conditions shall prevail in case of any conflict between them and the General Conditions. (b) be read and construed without regard to any amendment therein, unless such amendment shall be referred to specifically in these Special Conditions. 3. VAT In addition to the purchase price, the Purchaser shall pay to the Vendor an amount equivalent to such Value Added Tax as shall be exigible in relation to the sale, same to be calculated in accordance with the provisions of the Value-Added Tax Act, 1972, and to be paid on completion of the sale or forthwith upon receipt by the Purchaser of an appropriate Invoice (whichever shall be the later). 4. TITLE (a) The Title to the subject property shall consist of an up to date certified copy Folio 4141L County Waterford together with the file plan. (b) The Purchaser is furnished with the documents referred to at Items 3 and 4 of the Documents Schedule as evidence of the Industrial Development Authority's (the "IDA") title to grant the Lease. The Purchaser shall not enquire into the title of the Industrial Development Authority to grant the Lease but shall assume that same was well granted. 7 (c) The Purchaser shall be furnished on closing with a certified copy only of the document referred to at No. 5 of the Documents Schedule as evidence of the IDA's consent to the assignment of the Lease to the Vendor. 5. IDENTITY (a) General Condition 14 is hereby deleted. (b) No objection, requisition or enquiry shall be raised to discrepancies (if any) which may arise as between the Land Registry Map and the boundaries of the property on the ground. (c) The Purchaser shall be deemed to have satisfied itself of the identity of the Property prior to entering into this Agreement. 6. CONDITION The Purchaser shall be deemed to buy with full notice of the actual state and condition of the subject property and shall take it as it stands and subject to all rights of way, water, light, drainage and other easements, rights and privileges and liabilities and to all rent, outgoings and incidents of tenure mentioned in the Particulars or any Special Conditions. 7. PLANNING (a) General Condition 36 is hereby deleted in its entirety and the Vendor gives no warranty or representation whatsoever with regard to compliance or otherwise of the Property with the Planning and Developments Acts, Building By-Laws, the Building Control Act 1990 and the Regulations made thereunder, the Fire Services Act 1981 or the Safety Health and Welfare at Work (Construction) Regulations 1995. (b) Strictly without prejudice to Special Condition 7(a) the Purchaser has been provided with the planning and related documents specified in the Documents Schedule for information purposes only and shall not raise any objection 8 requisition or enquiry with regard thereto. The Purchaser shall rely on its own independent survey and enquires with regard to compliance or otherwise of the property with the aforesaid Acts. Without prejudice to the foregoing, the Vendor has also furnished the Purchaser with the letter referred to at No. 16 of the Documents Schedule. 8. ENVIRONMENTAL The Vendor is not aware of any environmental problems in relation to the subject property for which the Vendor is liable however it is the responsibility of the Purchaser to carry out any investigations or make any enquires its deems necessary in relation to environmental matters and the Vendor will on prior reasonable notice make the subject property available for all investigations and inspections requested by the Purchaser. No warranties are given by the Vendor that the Property complies with environmental laws and no liability shall attach to the Vendor for any breach or non-compliance of same. No objection, requisition or enquiry shall be raised or made the Purchaser in relation to same. Without prejudice to the foregoing, the Vendor has furnished the Purchaser with one letter referred to at No. 16 of the Documents Schedule. 9. COMPLETION This transaction shall be completed and the Purchaser will pay the balance of the purchase price by bank draft at 12 noon on the Closing Date in order to enable the Vendor to achieve full value of the Purchase Price on the date of actual completion. The provisions of General Condition 25 are varied accordingly. 10. REPRESENTATIONS The Purchaser hereby expressly declares, warrants and admits that it has not been induced or persuaded or influenced to enter into this Agreement by any representation or warranty whether expressed or implied made or given by the Vendor or its servants or agents either at or before the time of the making of this Agreement. This Agreement alone contains the entire Agreement between the parties hereto and any other document, statement, representation or agreement is expressly excluded. This Agreement, including the documents referred herein constitute the entire Agreement between the parties and supersedes all prior representations, arrangements or agreements in connection with the subject matter and sets forth the entire, complete and exclusive Agreement and 9 understanding between the parties hereto relating to the subject matter hereto, no Director, employee or agent of the Vendor is authorised to make any representation warranty not contained in this Agreement and Purchaser agrees that it/he has not relied on any such oral or written or writing representation no variation or waiver to the provision of this Agreement shall be binding unless in writing and signed by the duly authorised Director or employee of the Vendor. 11. GENERAL CONDITION 40 General Condition 40 is hereby modified by the deletion of the words "28 days" in paragraphs (b), (f), (g)(ii) respectively of that condition and the replacement of the words "14 days". 10 NOTE: These General Conditions are not to be altered in any manner. Any required variation or addition should be dealt with by way of Special Condition. Special Conditions should be utilised in instances where it is required to adopt Recommendations or Advices of the Law Society or of any Committee associated with it, where such Recommendations or Advices are at variance with provisions expressed in the General Conditions. GENERAL CONDITIONS OF SALE DEFINITIONS 1. In these General Conditions: "THE CONDITIONS" means the attached Special Conditions and these General Conditions "THE DOCUMENTS SCHEDULE", "THE SEARCHES SCHEDULE" and "THE SPECIAL CONDITIONS" mean respectively the attached Documents Schedule, Searches Schedule and Special Conditions. "THE MEMORANDUM" means the Memorandum of Agreement on Page 1 hereof "THE PARTICULARS" means the Particulars and Tenure on Page 2 hereof and any extension of the same "THE PURCHASER" means the party identified as such in the Memorandum "THE SALE" means the transaction evidenced by the Memorandum, the Particulars and the Conditions "THE SUBJECT PROPERTY" means the property or interest in property which is the subject of the sale "THE VENDOR" means the party identified as such in the Memorandum. 2. In the Conditions save where the context otherwise requires or implies: "APPORTIONMENT DATE" means either (a) the later of (i) the closing date (as defined hereunder) and (ii) such subsequent date from which delay in completing the sale shall cease to be attributable to default on the part of the Vendor or (b) in the event of the Vendor exercising the right referred to in Condition 25 (a) (ii) hereunder, the date of actual completion of the sale or (c) such other date as may be agreed by the Vendor and the Purchaser to be the Apportionment Date for the purpose of this definition "ASSURANCE" means the document or documents whereby the sale is to be carried into effect "CLOSING DATE" means the date specified as such in the Memorandum, or, if no date is specified, the first working day after the expiration of five weeks computed from the date of sale "COMPETENT AUTHORITY" includes the State, any Minister thereof, Government Department, State Authority, Local Authority, Planning Authority, Sanitary Authority, Building Control Authority, Fire Authority, Statutory Undertaker or any Department, Body or person by statutory provision or order for the time being in force authorised directly or indirectly to control, regulate, modify or restrict the development, use or servicing of land or buildings, or empowered to acquire land by compulsory process "DATE OF SALE" means the date of the auction when the sale shall have been by auction, and otherwise means the date upon which the contract for the sale shall have become binding on the Vendor and the Purchaser "DEVELOPMENT" has the same meaning as that conferred by the Local Government (Planning and Development) Act, 1963 "LEASE" includes (a) a fee farm grant and every contract (whether or not in writing or howsoever effected, derived or evidenced) whereby the relationship of Landlord and Tenant is or is intended to be created and whether for any freehold or leasehold estate or interest and (b) licences and agreements relating to the occupation and use of land, cognate words being construed accordingly "PURCHASED CHATTELS" means such chattels, fittings, tenant's fixtures and other items as are included in the sale "PURCHASE PRICE" means the purchase price specified in the Memorandum PROVIDED HOWEVER that, if the sale provides for additional moneys to be paid by the Purchaser for goodwill, crops or purchased chattels, the expression "PURCHASE PRICE" shall be extended to include such additional moneys "REQUISITIONS" include Requisitions on the title or titles as such of the subject property and with regard to rents, outgoings, rights, covenants, conditions, liabilities (actual or potential), planning and kindred matters and taxation issues material to such property "STIPULATED INTEREST RATE" means the interest rate specified in the Memorandum, or, if no rate is so specified, such rate as shall equate to 4 per centum per annum over the rate (as annualised) of interest payable upon tax chargeable under the Capital Acquisitions Tax Act, 1976 and ruling at the date from which interest hereunder is to run "WORKING DAY" does not include any Saturday, Sunday nor any Bank or Public Holiday nor any of the seven days immediately succeeding Christmas Day. INTERPRETATION 3. In the Conditions save where the context otherwise requires or implies: Words importing the masculine gender only include the feminine, neuter and common genders, and words importing the singular number only include the plural number and vice versa The words "Vendor" and "Purchaser" respectively include (where appropriate) parties deriving title under them or either of them and shall apply to any one or more of several Vendors and Purchasers as the case may be and so that the stipulations in the Conditions contained shall be capable of being enforced on a joint and several basis Unless the contrary appears, any reference hereunder: (a) to a particular Condition shall be to such of these General Conditions of Sale as is identified by said reference (b) to a Statute or Regulation or a combination of Statutes or Regulations shall include any extension, amendment, modification or re-enactment thereof, and any Rule, Regulation, Order or Instrument made thereunder, and for the time being in force Headings and marginal notes inserted in the Conditions shall not affect the construction thereof nor shall the same have any contractual significance. AUCTION 4. Where the sale is by auction, the following provisions shall apply: (a) the Vendor may divide the property set forth in the Particulars into lots and subdivide, consolidate or alter the order of sale of any lots (b) there shall be a reserve price for the subject property whether the same shall comprise the whole or any part of the property set forth in the Particulars and the Auctioneer may refuse to accept any bid. If any dispute shall arise as to any bidding, the Auctioneer shall (at his option) either determine the dispute or again put up the property in question at the last undisputed bid. No person shall advance at a bidding a sum less than that fixed by the Auctioneer, and no accepted bid shall be retracted. Subject to the foregoing, the highest accepted bidder shall be the Purchaser (c) the Vendor may: (i) bid himself or by an agent up to the reserve price (ii) withdraw the whole of the property set forth in the Particulars or, where such property has been divided into lots, withdraw any one or more of such lots at any time before the same has been sold without disclosing the reserve price (d) the Purchaser shall forthwith pay to the Vendor's Solicitor as stakeholder a deposit of ten per centum (10%) of the purchase price in part payment thereof, and shall execute an agreement in the form of the Memorandum to complete the purchase of the subject property in accordance with the Conditions. PRIVATE TREATY SALE 5. (a) where the sale is by private treaty, the Purchaser shall on or before the date of the sale pay to the Vendor's Solicitor as stakeholder a deposit of the amount stated in the Memorandum in part payment of purchase price (b) if notwithstanding Condition 5(a), a part of such deposit has been or is paid to any other person appointed or nominated by the Vendor that other person shall be deemed to receive or to have received said part as stakeholder THE FOLLOWING CONDITIONS APPLY WHETHER THE SALE IS BY AUCTION OR BY PRIVATE TREATY PURCHASER ON NOTICE OF CERTAIN DOCUMENTS 6. The documents specified in the Documents Schedule or copies thereof have been available for inspection by the Purchaser or his Solicitor prior to the sale. If all or any of the subject property is stated in the Particulars or in the Special Conditions to be held under a lease or to be subject to any covenants, conditions, rights, liabilities or restrictions, and the lease or other document containing the same is specified in the Documents Schedule, the Purchaser, whether availing of such opportunity of inspection or not, shall be deemed to have purchased with full knowledge of the contents thereof, notwithstanding any partial statement of such contents in the Particulars or in the Conditions. DELIVERY OF TITLE 7. Within seven working days from the date of sale, the Vendor shall deliver or send by post to the Purchaser or his Solicitor copies of the documents necessary to vouch the title to be shown in accordance with the Conditions. TITLE 8. (a) The Title to be shown to the subject property shall be such as is set forth in the Special Conditions (b) Where the title to be shown to the whole or any part of the subject property is based on possession, the Vendor shall, in addition to vouching that title and dealing with such further matters as are required of him by the Conditions, furnish to the Purchaser on or before completion of the sale a certificate from the Revenue Commissioners to the effect (i) that the subject property or (as the case may be) such part of the same as aforesaid is not charged with any of the taxes covered by the provisions of Section 146. Finance Act, 1994 or (ii) that the Revenue Commissioners are satisfied that any such charge will be discharged within a time considered by them to be reasonable (c) Save as stipulated in the Special Conditions the Vendor shall, prior to or at the completion of the sale, discharge all mortgages and charges for the payment of money (other than items apportionable under Condition 27(b)) which affect the subject property. 9. Where any of the subject property is held under a lease, the Purchaser shall not call for or investigate the title of the grantor or lessor to make the same, but shall conclusively assume that it was well and validly made, and is a valid and subsisting lease. 10. Where any of the subject property is stated to be held under a lease or an agreement therefor then: (a) no Objection or Requisition shall be made or indemnity required on account of such lease or agreement being (if such is the case) a sub-lease or agreement therefor, or on account of any superior lease comprising other property apart from the subject property or reserving a larger rent, or on the ground of any superior owner not having concurred in any apportionment or exclusive charge of rent (b) no Objection or Requisition shall be made by reason of any discrepancy between the covenants, conditions and provisions contained in any sub-lease and those in any superior lease, unless such as could give rise to forfeiture or a right of re-entry (c) the production of the receipt for the last gale of rent reserved by the lease or agreement therefor, under which the whole or any part of the subject property is held, (without proof of the title or authority of the person giving such receipt) shall (unless the contrary appears) be accepted as conclusive evidence that all rent accrued due has been paid and all covenants and conditions in such lease or agreement and in every (if any) superior lease have been duly performed and observed or any breaches thereof (past or continuing) effectively waived or sanctioned up to the actual completion of the sale, whether or not it shall appear that the lessor or reversioner was aware of such breaches. If the said rent (not being a rack rent) shall not have been paid in circumstances where the party entitled to receive the same is not known to the Vendor, or if the subject property is indemnified against payment of rent, the production of a Statutory Declaration so stating shall (unless the contrary appears) be accepted as such conclusive evidence, provided that the Declaration further indicates that no notices or rent demands have been served on or received by the Vendor under the lease or agreement on foot of which the subject property is held; that the Vendor has complied with all the covenants (other than those in respect of payment of rent) on the part of the lessee and the conditions contained in such lease or agreement, and that he is not aware of any breaches thereof either by himself or by any of his predecessors in title (d) if any of the subject property is held under a lease or agreement for lease requiring consent to alienation, the Vendor shall apply for and endeavour to obtain such consent, and the Purchaser shall deal expeditiously and constructively with and shall satisfy all reasonable requirements of the lessor in relation to the application therefor, but the Vendor shall not be required to institute legal proceedings to enforce the issue of any such consent or otherwise as to the withholding of the same. If such consent shall have been refused or shall not have been procured and written evidence of the same furnished to the Purchaser on or before the closing date, or if any such consent is issued subject to a condition, which the Purchaser on reasonable grounds refuses to accept, either party may rescind the sale by seven days prior notice to the other. PRIOR TITLE 11. (a) The title to the subject property prior to the date of the instrument specified in the Special Conditions as the commencement of title, whether or not appearing by recital, inference or otherwise, shall not be required, objected to or investigated. (b) In the case of registered freehold or leasehold land registered under the Registration of Title Acts, 1891 to 1942 or the Registration of Title Act, 1964 the provisions of subparagraph (a) of this Condition shall apply without prejudice to Sections 52 and 115 of the last mentioned Act and shall not disentitle the Purchaser from investigating the possibility of there having been a voluntary disposition on the title within the period of twelve years immediately preceding the date of sale or a disposition falling within Section 121, Succession Act, 1965 and the Vendor shall be required to deal with all points properly taken in or arising out of such investigation. INTERMEDIATE TITLE 12. Where in the Special Conditions it is provided that the title is to commence with a particular instrument and then to pass to a second instrument or to a specified event, the title intervening between the first instrument and the second instrument or the specified event, whether or not appearing by recital, inference or otherwise, shall not be required, objected to or investigated. REGISTERED LAND 13. Where all or any of the subject property consists of freehold or leasehold registered land registered under the Registration of Title Acts, 1891 to 1942 ("the Acts of 1891 to 1942") or the Registration of Title Act, 1964 ("the Act of 1964") then: (a) if the registration is subject to equities under the Acts of 1891 to 1942, the Purchaser shall not require the equities to be discharged, but the Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish sufficient evidence of title prior to first registration or otherwise to enable the Purchaser to procure their discharge (b) if the registration is with a possessory title under the Act of 1964 the Purchaser shall not require the Vendor to be registered with an absolute title, but the Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish sufficient evidence of the title prior to such registration or otherwise to enable the Purchaser to be registered with an absolute title (c) the Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish to the Purchaser a copy of the Land Registry Folio or Folios relating to the subject property written up-to-date (or as nearly as practicable up-to-date), together with a copy of the relevant Land Registry map or file plan (d) the Vendor shall furnish a Statutory Declaration, by some person competent to make it, confirming that there are not an existence any burdens which under the Act of 1964 affect registered land without registration, save such (if any) as are specifically mentioned in the Particulars or the Special Conditions (e) if the Land Certificate has been issued to the Land Commission or if no such Certificate has been issued, the Purchaser shall not be entitled to require such Certificate to be produced, handed over on completion or issued (f) the Purchaser shall procure himself to be registered as owner of the subject property at his own expense (g) In the event of the subject property being subject to a Land Purchase Annuity the Vendor shall, prior to completion, redeem the same or (as the case may be) such proportion thereof as may be allocated to the subject property IDENTITY 14. The Purchaser shall accept such evidence of identity as may be gathered from the descriptions in the documents of title plus (if circumstances require) a Statutory Declaration to be made by a competent person, at the Purchaser's expense, that the subject Property has been held and enjoyed for at least twelve years in accordance with the title shown. The Vendor shall be obliged to furnish such information as is in his possession relative to the identity and extent of the subject property, but shall not be required to define exact boundaries, fences, ditches, hedges or walls or to specify which (if any) of the same are of a party nature, nor shall the Vendor be required to identify parts of the subject property held under different titles. RIGHTS - LIABILITIES - CONDITION OF SUBJECT PROPERTY 15. The Vendor shall disclose before the sale, in the Particulars, the Special Conditions or otherwise, all easements, rights, reservations, privileges, taxes and other liabilities (not already known to the Purchaser or apparent from inspection) which are known by the Vendor to affect the subject property or which are likely to affect it. 16. Subject to Condition 15, the Purchaser shall be deemed to buy: (a) with full notice of the actual state and condition of the subject property and (b) subject to (i) all leases (if any) mentioned in the Particulars or in the Special Conditions and (ii) all easements, rights, reservations, privileges, liabilities, covenants, rents, outgoings and all incidents of tenure. REQUISITIONS 17. The Purchaser shall, within fourteen working days after the delivery of the copy documents of title in accordance with Condition 7, send to the Vendor's Solicitor a written statement of his Objections (if any) on the title and his Requisitions. Any Objection or Requisition not made within the time aforesaid and not going to the root of the title shall be deemed to have been waived. The Vendor's Replies to any Objections or Requisitions shall be answered by the Purchaser in writing within seven working days after the delivery thereof and so on toties quoties, and, if not so answered, shall be considered to have been accepted as satisfactory. In all respects time shall be deemed to be of the essence of this Condition. 18. If the Purchaser shall make and insist on any Objection or Requisition as to the title, the Assurance to him or any other matter relating or incidental to the sale, which the Vendor shall, on the grounds of unreasonable delay or expense or other reasonable ground, be unable or unwilling to remove or comply with, the Vendor shall be at liberty (notwithstanding any intermediate negotiation or litigation or attempts to remove or comply with the same) by giving to the Purchaser or his Solicitor not less than five working days notice to rescind the sale. In that case, unless the Objection or Requisition in question shall in the meantime have been withdrawn, the sale shall be rescinded at the expiration of such notice. SEARCHES 19. The Purchaser shall be furnished with the searches (if any) specified in the Searches Schedule and any searches already in the Vendor's possession, which are relevant to the title or titles on offer. Any other searches required by the Purchaser must be obtained by him at his own expense. Where the Special Conditions provide that the title shall commence with a particular instrument and then pass to a second instrument or to a specified event, the Vendor shall not be obliged to explain and discharge any act which appears on a search covering the period between such particular instrument and the date of the second instrument or specified event, unless same goes to the root of the title. Subject as aforesaid the Vendor shall explain and discharge any acts appearing on Searches covering the period from the date stipulated or implied for the commencement of the title to the date of actual completion. ASSURANCE 20. Subject to the provisions of Paragraph 11, Schedule 4, Capital Gains Tax Act, 1975 (as substituted), and (if relevant) to those contained in Section 107, Finance Act, 1993 (in relation to Residential Property Tax) on payment of all moneys payable by him in respect of the sale, the Purchaser shall be entitled to a proper Assurance of the subject property from the Vendor and all other (if any) necessary parties, such Assurance to be prepared by and at the expense of the Purchaser. The draft thereof shall be submitted to the Vendor's Solicitor not less than seven working days, and the engrossment not less than four working days, before the closing date. The delivery of the said draft or engrossment shall not prejudice any outstanding Objection or Requisition validly made. VACANT POSSESSION 21. Subject to any provision to the contrary in the Particulars or in the Conditions or implied by the nature of the transaction, the Purchaser shall be entitled to vacant possession of the subject property on completion of the sale. LEASES 22. Where the subject property is sold subject to any lease, a copy of the same (or, if the provisions thereof have not been reduced to writing, such evidence of its nature and terms as the Vendor shall be able to supply) together with copies of any notices in the Vendor's possession served by or on the lessee shall, prior to the sale, be made available for inspection by the Purchaser or his Solicitor. 23. Unless the Special Conditions provide to the contrary, the Purchaser shall be entitled to assume that, at the date of sale, the Lessee named in any such Lease (as is referred to in Condition 22) is still the Lessee; that there has been no variation in the terms and conditions of said Lease (other than such as may be evident from an inspection of the subject property or apparent from the Particulars or the documents furnished to the Purchaser prior to the sale), and that the said terms and conditions (save those pertaining to the actual state and condition of the subject property) have been complied with. COMPLETION AND INTEREST 24. (a) The sale shall be completed and the balance of the purchase price paid by the Purchaser on or before the closing date (b) Completion shall take place at the Office of the Vendor's Solicitor. 25. (a) If by reason of any default on the part of the Purchaser, the purchase shall not have been completed on or before the later of (a) the closing date or (b) such subsequent date whereafter delay in completing shall not be attributable to default on the part of the Vendor (i) the Purchaser shall pay interest to the Vendor on the balance of the purchase price remaining unpaid at the stipulated interest rate for the period between the closing date (or as the case may be such subsequent date as aforesaid) and the date of actual completion of the sale. Such interest shall accrue from day to day and shall be payable before and after any judgment and (ii) the Vendor shall in addition to being entitled to receive such interest, have the right to take the rents and profits less the outgoings of the subject property up to the date of the actual completion of the sale (b) If the Vendor by reason of his default shall not be able, ready and willing to complete the sale on the closing date he shall thereafter give to the Purchaser at least five working days prior notice of a date upon which he shall be so able ready and willing and the Purchaser shall not before the expiration of that notice be deemed to be in default for the purpose of this Condition provided that no such notice shall be required if the Vendor is prevented from being able and ready to complete or to give said notice by reason of the act or default of the Purchaser. 26. The submission of an Apportionment Account made up to a particular date or other corresponding step taken in anticipation of completing the sale shall not per se preclude the Vendor from exercising his rights under the provisions of Condition 25 and in the event of such exercise the said Apportionment Account or the said other corresponding step shall (if appropriate) be deemed not to have been furnished or taken, and the Vendor shall be entitled to furnish a further Apportionment Account. APPORTIONMENT AND POSSESSION 27. (a) Subject to the stipulations contained in the Conditions, the Purchaser, on paying the purchase price, shall be entitled to vacant possession of the subject property or (as the case may be) the rents and profits thereout with effect from the Apportionment Date (b) All rents, profits, rates, taxes, outgoings and moneys (including rent, outgoings and money payable in advance but not including impositions derived from hypothecation) referable to the subject property shall for the purpose of this Condition, be apportioned (whether apportionable by law or not) on a day to day basis as at the Apportionment Date, up to which the liability for or the entitlement to the same shall (subject to apportionment as aforesaid to accord with the position obtaining as to moneys paid or due at such date) be for the account of the Vendor and thereafter for that of the Purchaser provided that if completion shall have been delayed through the default of the Vendor the Purchaser may opt for apportionment under this Condition as at the closing date or at the date at which the Purchaser (if also in default) shall have ceased to have been so in default whichever shall be the later (c) In the implementation of this Condition the Vendor shall be regarded as being the owner of the subject property until midnight on such date as is appropriate for apportionment purposes (d) The balance of the purchase price shall (where appropriate) be adjusted upwards or downwards to accommodate apportionments calculated pursuant to this Condition and the expression "balance of the purchase price" where used in the Conditions shall be construed accordingly (e) To the extent that same shall be unknown at the Apportionment Date (or shall not then be readily ascertainable) amounts to be apportioned hereunder - including any amount apportionable pursuant to Condition 27 (f) - shall be apportioned provisionally on a fair estimate thereof, and, upon ascertainment of the actual figures, a final apportionment shall be made, and the difference between it and the provisional apportionment shall be refunded by the Vendor or the Purchaser (as the case may be) to the other within ten working days of the liable party becoming aware of the amount of such difference (f) Excise and kindred duties payable in respect of the subject property or any licence attached thereto shall be apportioned on a day to day basis as at the Apportionment Date up to which the liability for the same shall be for the account of the Vendor and thereafter for that of the Purchaser and Condition 27(c) shall apply for the purposes of such apportionment. SECTION 45, LAND ACT, 1965 28. Where Section 45, Land Act, 1965 applies, the Purchaser shall, at his own expense, procure any such Certificate or Consent as may be necessary thereunder for the vesting of the subject property in him or his nominee and the sale is not conditional upon such consent being obtained. COMPULSORY REGISTRATION 29. (a) If all or any of the subject property is unregistered land the registration of which was compulsory prior to the date of sale the Vendor shall be obliged to procure such registration prior to completion of the sale (b) If all or any of the subject property is unregistered land, the registration of which shall become compulsory at or subsequent to the date of sale, the Vendor shall not be under any obligation to procure such registration but shall at or prior to such completion furnish to the Purchaser a Map of the subject property complying with the requirements of the Land Registry as then recognised and further the Vendor shall, if so requested within two years after completion of the sale, by and at the expense of the Purchaser, supply any additional information, which he may reasonably be able to supply, and produce and furnish any documents in his possession that may be required to effect such registration. SIGNING "IN TRUST" OR "AS AGENT" 30. A Purchaser who signs the Memorandum "in Trust", "as Trustee" or "as Agent", or with any similar qualification or description without therein specifying the identity of the principal or other party for whom he so signs, shall be personally liable to complete the sale, and to fulfil all such further stipulations on the part of the Purchaser as are contained in the Conditions, unless and until he shall have disclosed to the Vendor the name of his principal or other such party. FAILURE TO PAY DEPOSIT 31. The failure by the Purchaser to pay an full the deposit hereinbefore specified as payable by him shall constitute a breach of condition entitling the Vendor to terminate the sale or to sue the Purchaser for damages or both but such entitlement shall be without prejudice to any rights otherwise available to the Vendor. 32. In case a cheque taken for the deposit (having been presented and whether or not it has been re-presented) shall not have been honoured, then and on that account the Vendor may (without prejudice to any rights otherwise available to him) elect either: (a) to treat the Contract evidenced by the Memorandum, the Particulars and the Conditions as having been discharged by breach thereof on the Purchaser's part or (b) to enforce payment of the deposit as a deposit by suing on the cheque or otherwise. DIFFERENCES - ERRORS 33. (a) In this Condition "error" includes any omission, non-disclosure, discrepancy, difference, inaccuracy, mis-statement or mis-representation made in the Memorandum, the Particulars or the Conditions or in the course of any representation, response or negotiations leading to the sale, and whether in respect of measurements, quantities, descriptions or otherwise (b) The Purchaser shall be entitled to be compensated by the Vendor for any loss suffered by the Purchaser in his bargain relative to the sale as a result of an error made by or on behalf of the Vendor provided however that no compensation shall be payable for loss of trifling materiality unless attributable to recklessness or fraud on the part of the Vendor nor in respect of any matter of which the Purchaser shall be deemed to have had notice under Condition 16(a) nor in relation to any error in a location or similar plan furnished for identification only (c) Nothing in the Memorandum, the Particulars or the Conditions shall: (i) entitle the Vendor to require the Purchaser to accept property which differs substantially from the property agreed to be sold whether in quantity, quality, tenured or otherwise, if the Purchaser would be prejudiced materially by reason of any such difference or (ii) affect the right of the Purchaser to rescind or repudiate the sale where compensation for a claim attributable to a material error made by or on behalf of the Vendor cannot be reasonably assessed (d) Save as aforesaid, no error shall annul the sale or entitle the Vendor or the Purchaser (as the case maybe) to be discharged therefrom. DOCUMENTS OF TITLE RELATING TO OTHER PROPERTY 34. (a) Documents of title relating to other property as well as to the subject property shall be retained by the Vendor or other person entitled to the possession thereof (b) where the property is sold in lots, all documents of title relating to more than one lot shall be retained by the Vendor, until the completion of the sales of all the lots comprised in such documents, and shall then (unless they also relate to any property retained by the Vendor) be handed over to such of the Purchasers as the Vendor shall consider best entitled thereto (c) the Vendor shall give to the Purchaser (and where the property is sold in lots, to the Purchaser of each lot) certified copies of all documents retained under this Condition and pertinent to the title to be furnished (other than documents of record, of which plain copies only will be given) (d) subject as hereinafter provided, the Vendor shall give the usual statutory acknowledgement of the right of production and undertaking for safe custody of all documents (other than documents of record) retained by him under this Condition and pertinent to the title to be furnished. Such acknowledgement and undertaking shall be prepared by and at the expense of the Purchaser (e) if the Vendor is retaining any unregistered land held wholly or partly under the same title as the subject property, the Assurance shall be engrossed in duplicate by and at the expense of the Purchaser, who shall deliver to the Vendor the Counterpart thereof, same having been stamped and registered and (if appropriate) executed by the Purchaser. DISCLOSURE OF NOTICES 35. Where prior to the sale (a) any closing, demolition or clearance Order or (b) any notice (not being of the contents of the Development Plan other than an actual or proposed designation of all or any part of the subject property for compulsory acquisition) made or issued by or at the behest of a Competent Authority in respect of the subject property and affecting same at the date of sale has been notified or given to the Vendor (whether personally or by advertisement or posting on the subject property or in any other manner) or is otherwise known to the Vendor or where the subject property is at the date of sale affected by any award or grant which is or may be repayable by the Vendor's successor in title then if the Vendor fails to show (i) that, before the sale, the Purchaser received notice or was aware of the matter in question or (ii) that same is no longer applicable or material or (iii) that same does not prejudicially affect the value of the subject property or (iv) that the subject thereof can and will be dealt with fully in the Apportionment Account the Purchaser may by notice given to the Vendor rescind the sale. DEVELOPMENT 36. (a) Unless the Special Conditions contain a provision to the contrary, the Vendor warrants: [SIDEBAR ILLEGIBLE] (1) either (i) that there has been no development (which term includes material change of use) of, or execution of works on or to, the subject property since the 1st day of October, 1964, for which Planning Permission or Building Bye-Law Approval was required by law or (ii) that all Planning Permissions and Building Bye-Law Approvals required by law for the development of, or the execution of works on or to, the subject property as at the date of sale, or for any change in the use thereof at that date were obtained (save in respect of matters of trifling materiality), and that, where implemented, the conditions thereof and the conditions expressly notified with said Permissions by any Competent Authority in relation to and specifically addressed to such development or works were complied with substantially AND (2) that no claim for compensation has ever been made under Part III, Local Government (Planning and Development) Act, 1990 provided however that the foregoing warranty shall not extend to (and the Vendor shall not be required to establish) the obtaining of Approvals under the Building Bye-Laws or compliance with such Bye-Laws in respect of development or works executed prior to the 1st day of October, 1964. (b) The Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish to the Purchaser copies of all such Permissions and Approvals as are referred to in Condition 36(a) other than in the proviso thereto, and (where relevant) copies of all Fire Safety Certificates and (if available) Commencement Notices issued under Regulations made pursuant to the Building Control Act, 1990 and referable to the subject property. (c) The Vendor shall, on or prior to completion of the sale, furnish to the Purchaser (i) written confirmation from the Local Authority of compliance with all conditions involving financial contributions or the furnishing of bonds in any such Permission or Approval (other than those referred to in the said proviso) or alternatively formal confirmation from the Local Authority that the roads and other services abutting on the subject property have been taken in charge by it without requirement for payment of moneys in respect of the same (ii) a Certificate or Opinion by an Architect or an Engineer (or other professionally qualified person competent so to certify or opine) confirming that, in relation to any such Permission or Approval (other than those referred to in the proviso aforesaid) the same relates to the subject property; that the development of the subject property has been carried out in substantial compliance therewith and that all conditions (other than financial conditions) thereof and all conditions expressly notified with said Permission by any Competent Authority and specifically directed to and materially affecting the subject property or any part of the same have been complied with substantially (and, in the event of the subject property forming part of a larger development, so far as was reasonably possible in the context of such development). (d) Unless the Special Conditions contain a stipulation to the contrary, the Vendor warrants in all cases where the provisions of the Building Control Act, 1990 or of any Regulations from time to time made thereunder apply to the design or development of the subject property or any part of the same or any activities in connection therewith, that there has been substantial compliance with the said provisions in so far as they shall have pertained to such design development or activities and the Vendor shall, on or prior to completion of the sale, furnish to the Purchaser a Certificate or Opinion by an Architect or an Engineer (or other professionally qualified person competent so to certify or opine) confirming such substantial compliance as aforesaid. RESCISSION 37. Upon rescission of the sale in accordance with any of the provisions herein or in the Special Conditions contained or otherwise: (a) the Purchaser shall be entitled to a return of his deposit (save where it shall lawfully have been forfeited) but without interest thereon (b) the Purchaser shall remit to the Vendor all documents in his possession belonging to the Vendor and the Purchaser shall at his expense (save where Special Conditions otherwise provide) procure the cancellation of any entry relating to the sale in any register. 38. If any such deposit as is to be returned pursuant to Condition 37 shall not have been returned to the Purchaser within five working days from the date upon which the sale shall have been rescinded, the Purchaser shall be entitled to interest thereon at the stipulated interest rate from the expiration of the said period of five working days to the date upon which the deposit shall have been so returned. 39. The right to rescind shall not be lost by reason only of any intermediate negotiations or attempts to comply with or to remove the issue giving rise to the exercise of such right. COMPLETION NOTICES 40. Save where time is of the essence in respect of the closing date, the following provisions shall apply: (a) if the sale be not completed on or before the closing date either party may on or after that date (unless the sale shall first have been rescinded or become void) give to the other party notice to complete the sale in accordance with this condition, but such notice shall be effective only if the party giving it shall then either be able, ready and willing to complete the sale or is not so able, ready or willing by reason of the default or misconduct of the other party (b) upon service of such notice the party upon whom it shall have been served shall complete the sale within a period of twenty-eight days after the date of such service (as defined in Condition 49 and excluding the date of service), and in respect of such period time shall be of the essence of the contract but without prejudice to any intermediate right of rescission by either party (c) the recipient of any such notice shall give to the party serving the same reasonable advice of his readiness to complete (d) if the Purchaser shall not comply with such a notice within the said period (or within any extension thereof which the Vendor may agree) he shall be deemed to have failed to comply with these Conditions in a material respect and the Vendor may enforce against the Purchaser, without further notice, such rights and remedies as may be available to the Vendor at law or in equity, or (without prejudice to such rights and remedies) may invoke and impose the provisions of Condition 41 (e) if the Vendor does not comply with such a notice within the said period (or within any extension thereof which the Purchaser may agree), then the Purchaser may elect either to enforce against the Vendor, without further notice, such rights and remedies as may be available to the Purchaser at law or in equity or (without prejudice to any right of the Purchaser to damages) to give notice to the Vendor requiring a return to the Purchaser of all moneys paid by him, whether by way of deposit or otherwise, on account of the purchase price. Condition 38 shall apply to all moneys so to be returned, the period of five working days therein being computed from the date of the giving of such last mentioned notice. If the Purchaser gives such a notice and all the said moneys and interest (if any) are remitted to him, the Purchaser shall no longer be entitled to specific performance of the sale, and shall return forthwith all documents in his possession belonging to the Vendor, and (at the Vendor's expense) procure the cancellation of any entry relating to the sale in any register (f) the party serving a notice under this Condition may, at the request of or with the consent of the other party, by written communication to the other party extend the term of such notice for one or more specified periods of time, and, in that case, the term of the notice shall be deemed to expire on the last day of such extended period or periods, and the notice shall operate as though such extended period or periods, had been specified in this Condition in lieu of the said period of twenty-eight days, and time shall be of the essence in relation to such extended period (g) the Vendor shall not be deemed to be other than able, ready and willing to complete for the purposes of this Condition: (i) by reason of the fact that the subject property has been mortgaged or charged, provided that the funds (including the deposit) receivable on completion shall (after allowing for all prior claims thereon) be sufficient to discharge the aggregate of all amounts payable in satisfaction of such mortgages and charges to the extent that they relate to the subject property or (ii) by reason of being unable, not ready or unwilling at the date of service of such notice to deliver vacant possession of the subject property provided that (where it is a term of the sale that vacant possession thereof be given) the Vendor is, upon being given reasonable advice of the other party's intention to close the sale on a date within the said period of twenty-eight days or any extension thereof pursuant to Condition 40(f), able, ready and willing to deliver vacant possession of the subject property on that date. FORFEITURE OF DEPOSIT AND RESALE 41. If the Purchaser shall fail in any material respect to comply with any of these Conditions, the Vendor (without prejudice to any rights or remedies available to him at law or in equity) shall be entitled to forfeit the deposit and shall be at liberty (without being obliged to tender an Assurance) to re-sell the subject property, with or without notice to the Purchaser, either by public auction or private treaty. In the event of the Vendor re-selling the subject property within one year after the closing date (or within one year computed from the expiration of any period by which the closing may have been extended pursuant to Condition 40) the deficiency (if any) arising on such re-sale and all costs and expenses attending the same or on any attempted re-sale shall (without prejudice to such damages to which the Vendor shall otherwise be entitled) be made good to the Vendor by the Purchaser, who shall be allowed credit against same for the deposit so forfeited. Any increase in price obtained by the Vendor on any re-sale, whenever effected, shall belong to the Vendor. DAMAGES FOR DEFAULT 42. Neither the Vendor nor the Purchaser, in whose favour an order for specific performance has been made, shall be precluded from an award of damages at law or in equity, in the event of such order not being complied with. RISK 43. Subject as hereinafter provided, the Vendor shall be liable for any loss or damage howsoever occasioned (other than by the Purchaser or his Agent) to the subject property (and the purchased chattels) between the date of sale and the actual completion of the sale BUT any such liability (including liability for consequential or resulting loss) shall not as to the amount thereof exceed the purchase price. 44. The liability imposed on the Vendor by Condition 43 shall not apply: (a) to inconsequential damage or insubstantial deterioration from reasonable wear and tear in the course of normal occupation and use, and not materially affecting value (b) to damage occasioned by operations reasonably undertaken by the Vendor in his removal from, and vacation of the subject property, provided that the same are so undertaken with reasonable care (c) where any such loss or damage has resulted from a requirement restriction or obligation imposed by a Competent Authority after the date of sale. 45. Nothing in Conditions 43 and 44 shall affect: (a) the Purchaser's right to specific performance in an appropriate case (b) the Purchaser's right to rescind or repudiate the sale upon the Vendor's failure to deliver the subject property substantially in its condition at the date of sale (save where such failure shall have been occasioned by the Purchaser or his Agent) (c) the operation of the doctrine of conversion (d) the Purchaser's right to gains accruing to the subject property (or the purchased chattels) after the date of sale (e) the Purchaser's right to effect on or after the date of sale his own insurance against loss or damage in respect of the subject property or any part of the same (or the purchased chattels) (f) the rights and liabilities of parties other than the Vendor and the Purchaser (g) the rights and liabilities of the Purchaser on foot of any lease subsisting at the date of sale, or of any arrangement whereby the Purchaser shall prior to the actual completion of the sale have been allowed into occupation of the subject property or any part thereof (or into possession of the purchased chattels). CHATTELS 46. Unless otherwise disclosed to the Purchaser prior to the sale the Vendor warrants that, at the actual completion of the sale, all the purchased chattels shall be his unencumbered property and that same shall not be subject to any lease, rental hire, hire-purchase or credit sale agreement or chattel mortgage. INSPECTION 47. The Vendor shall accede to all such requests as may be made by the Purchaser for the inspection on a reasonable number of occasions and at reasonable times of the subject property (and the purchased chattels). NON-MERGER 48. Notwithstanding delivery of the Assurance of the subject property to the Purchaser on foot of the sale, all obligations and provisions designed to survive completion of the sale and all warranties in the Conditions contained, which shall not have been implemented by the said Assurance, and which shall be capable of continuing or taking effect after such completion, shall enure and remain in full force and effect. NOTICES 49. Unless otherwise expressly provided, any notice to be given or served on foot of the Conditions shall be in writing, and may (in addition to any other prescribed mode of service) be given: (a) by handing same to the intended recipient, and shall be deemed to have been delivered when so handed (b) by directing it to the intended recipient, and delivering it by hand, or sending same by prepaid post to: (i) such address as shall have been advised by him to the party serving the notice as being that required by the intended recipient for the service of notices, or (ii) (failing such last mentioned advice) the address of the intended recipient as specified in the Memorandum, or (iii) (in the event of the intended recipient being a Company) its Registered Office for the time being, or (iv) the office of the Solicitor representing the intended recipient in relation to the sale and any such notice shall be deemed to have been given or served, when delivered, at the time of delivery, and, when posted, at the expiration of three working days after the envelope containing the same, and properly addressed, was put in the post. TIME LIMITS 50. Where the last day for taking any step on foot of the Conditions or any Notice served thereunder would, but for this provision, be a day other than a working day, such last day shall instead be the next following working day provided that for the purpose of this Condition the expression "working day" shall not be deemed to include (i) any Saturday, Sunday, Bank or Public Holiday nor (ii) any of the seven days immediately succeeding Christmas Day nor (iii) any day on which the registers or records wherein it shall be appropriate to make searches referable to the sale shall not be available to the public nor (iv) any day which shall be recognised by the Solicitors' Profession at large as being a day on which their offices are not open for business. ARBITRATION 51. All differences and disputes between the Vendor and the Purchaser as to: (a) whether a rent is or is not a rack rent for the purpose of Condition 10 (c), or (b) as to whether any interest is payable pursuant to Condition 25 or as to the rate or amount thereof or the date from which it shall be exigible, or (c) the identification of the Apportionment Date, or the treatment or quantification of any item pursuant to the provisions for apportionment in the Conditions, or (d) any issue on foot of Condition 33, including the applicability of said Condition, and the amount of compensation payable thereunder, or (e) the materiality of any matter for the purpose of Condition 36 (a), or (f) The materiality of damage or any other question involving any of the provisions in Conditions 43, 44 and 45, including the amount of compensation (if any) payable, or (g) whether any particular item or thing is or is not included in the sale, or otherwise as to the nature or condition thereof shall be submitted to arbitration by a sole Arbitrator to be appointed (in the absence of agreement between the Vendor and the Purchaser upon such appointment and on the application of either of them) by the President (or other Officer endowed with the functions of such President) for the time being of the Law Society of Ireland or (in the event of the President or other Officer as aforesaid being unable or unwilling to make the appointment) by the next senior Officer of that Society who is so able and willing to make the appointment and such arbitration shall be governed by the Arbitration Acts, 1954 and 1980 provided however that if the Arbitrator shall relinquish his appointment or die, or if it shall become apparent that for any reason he shall be unable or shall have become unfit or unsuited (whether because of bias or otherwise) to complete his duties, or if he shall be removed from office by Court Order, a substitute may be appointed in his place and in relation to any such appointment the procedures herein-before set forth shall be deemed to apply as though the substitution were an appointment de novo which said procedures may be repeated as many times as may be necessary. LAW SOCIETY OF IRELAND PARTICULARS and CONDITIONS OF SALE (1995 Edition) Copyright in, and obtainable only from, the Law Society of Ireland. EX-10.2 6 a2061919zex-10_2.txt EXHIBIT 10.2 Exhibit 10.2 THIS INDENTURE made the 3rd day of September 1990 BETWEEN INDUSTRIAL DEVELOPMENT AUTHORITY having its Principal Office at Wilton Park House, Wilton Place in the City of Dublin (hereinafter called "the Authority" which expression shall include its successors and assigns) of the one part and BAUSCH & LOMB IRELAND having its registered office at 1 Earlsfort Centre, Hatch Street in the City of Dublin (hereinafter called "the Lessee" which which expression shall include its successors and permitted assigns) of the other part. WITNESSETH: 1. In consideration of the sum of (pound)450,000 by the Lessee to the Authority (the receipt of which is hereby acknowledged) the Authority hereby demises to the Lessee ALL THAT AND THOSE the premises described in the First Schedule hereto (hereinafter referred to as "the demised premises") TO HOLD the same unto the Lessee for a term of 999 years from the 1st day of January 1990 subject to the rent set out in the First Schedule hereto to the terms and conditions set out in the Second and Third Schedules hereto. 2. The Lessee hereby covenants with the Authority that it will observe all the terms and conditions contained in the First, Second and Third Schedules hereto as if each term and condition applicable to the Lessee was incorporated as a separate covenant with the Authority. 3. The Authority covenants with the Lessee that it will observe all the terms and conditions contained in the First, Second and Third Schedules hereto insofar as the same are binding upon the Authority as if each term and condition applicable to the Authority was incorporated herein as a separate covenant with the Lessee. FIRST SCHEDULE PREMISES 1. ALL THAT AND THOSE part of the lands of knockhouse lower situate at the Authority's Industrial Estate in the County of Waterford more particularly described on the map annexed hereto and thereon surrounded by a red verge line being part of the lands comprised in Folio 4917 & 3241F of the Register County of Waterford with all buildings fences sewers and other works which may from time to time be thereon or thereunder TOGETHER WITH firstly a right of way for the Lessee, its servants, agents, invitees and licencees for all purposes to pass and repass with or without a means of transport over the estate roads serving the demised premises coloured yellow on the map annexed hereto and secondly the free and uninterrupted passage and running of water, soil and effluent drainage, gas, water, oil, electricity, steam, telephone or any other services supplied to or from the demised premises over the lands the property of the Authority through sewers, drains watercourses, conduits, pipes, wires and cables which now or hereafter within the period of twenty one years from the date of this lease during the term hereby granted be in or over, under of upon the said lands the property of the authority together with full and free right and liberty to the Lessee its servants and agents to enter upon the said lands the property of the Authority for the purpose of connecting, laying, inspecting, repairing cleaning, maintaining, altering, replacing or renewing the installations, structures, fixtures or other works providing the said services or any of them and other services to the demised premises causing as little inconvenience to the Authority and the Lessee making good any damage thereby occasioned. EXCEPTING AND RESERVING unto the Authority its successors and assigns: (a) the free and uninterrupted passage and running of water soil and effluent drainage gas water oil electricity steam telephone or any other service or supply to and from the other buildings and lands the property of the Authority and its tenants adjoining or near to the demised premises through the sewers drains watercourses conduits pipes wires and cables which now are or may hereafter within the period of 21 years from the date of this Lease during the term hereby granted be in or over under of upon the demised premises; (b) at any time hereafter and from time to time full right and liberty to execute works services and erections and buildings upon or to alter or rebuild any of the erections services and buildings erected on its adjoining and neighbouring land and to use the same as it may think fit; (c) the full and free right and liberty to the Lessor its servants and agents to enter after at least two days notice (except in the case of emergency) upon the demised premises at all reasonable times for the purpose of connecting, laying, inspecting, repairing, cleaning, maintaining, altering, replacing, or renewing any sewer drain, main, pipe, wire, cable, watercourse, channel, conduit or subway and to erect, construct or lay in, over under or across the demised premises not built upon any sewers, drains, main, pipes, wires, cables, poles structures, fixtures or other works for the drainage of or for the supply of water gas electricity oil telephone heating steam radio and television signals and other services to other premises of the Authority causing as little inconvenience as possible to the Lessee and the Authority making good any damage thereby occasioned; (d) all rights easements and privileges now belonging to or enjoyed by any adjoining property. MINING RIGHTS 2. All mines, minerals, quarries and royalties whatsoever in or under the demised premises during the term of the demise are excepted and reserved out of the demise. RENT AND GALE DAYS 3. The rent of the demised premises shall be payable in advance without any deductions whatsoever on the 1st day of January in each year with the exception of the first instalment which shall be paid on the execution hereof. In the first to the fifth year inclusive of the term of the demise the annual rent shall be IR[POUND SYMBOL]10 per acre. From the commencement of the sixth year of the term of the demise and for the residue of the term hereby created the annual rent shall be determined as specified in the Third Schedule hereto. SECOND SCHEDULE 1. The Lessee shall pay the rent hereby reserved without any deductions whatsoever on the dates hereinbefore provided for. 2. In addition to the said rent the Lessee shall pay and discharge all taxes, rates, duties, charges, assessments and impositions whatsoever including Value Added Tax whether Parliamentary, Municipal, County, Union, District or any other description which may now or at any time hereafter be assessed, charged or imposed on the premises or any part thereof of the Rent Payable thereout and whether payable by owner or occupier. 3. As the demised premises are situate upon an Industrial Estate, to bear with the owners or occupiers of each other unit in the said Industrial Estate and such share of the cost and expense of all necessary maintenance, repair and up-keep (and operating cost where applicable) of access roads, footpaths, common areas, drainage and water services and public lighting as in the same proportion as the gross floor area of the buildings erected on the demised premises bears to: (a) In the case of a completed estate the total gross floor areas of all the industrial units in the estate and (b) in the case of a non completed or part completed estate the total gross floor areas of all the completed units in the estate and where roads and services have been provided to un-developed areas of the estate, the gross floor area of buildings in the course of erection and proposed buildings fronting on to such services until such time as same are taken in charge by the Local Authority 4. To bear with the owners or occupiers of each other unit in the said Industrial Estate such share of cost and expense of all necessary estate security as in the same proportion as the gross floor area of the buildings erected on the demised premises bears to the gross floor areas of all the completed units in the said estate; 5.(1) The lessee shall on or prior to the 31st day of December 1990 have substantially commenced to build and erect upon the demised premises a factory premises in accordance the plans and specifications first approved of in writing by the Authority and in accordance with all statutory requirements regulations and bye-laws applicable thereto. For the purpose of this Clause "substantially commenced" shall mean the pouring of foundations and the erection of the main structure support for the said factory premises. (ii) If the Lessee fails to fully and completely comply with this clause the Authority shall be entitled to repurchase at the expense of the Lessee and demised premises including any partially erected buildings thereon for the sum of IR(pound)450.000 free from incumbrances; (iii) The Lessee hereby irrevocably constitutes and appoints the Secretary for the time being of the Authority for the purpose of this clause only to be the Attorney of the Lessee for it and on its behalf and in its name and as its act and at its expense to re-assign or surrender this Lease from the name of the Lessee its successors or permitted assigns to the Authority; (iv) The Lessee shall do and execute all acts, instruments and things which the Authority considers necessary or expedient for reassigning or surrendering the demised premises as aforesaid; (v) The Authority may from time to time in writing under hand or seal substitute and appoint any person or persons to act under or in place of the said Attorney in all or any of the matters aforesaid and from time to time revoke any such substitution and appointment; (vi) The Lessee shall not be entitled to erect any buildings on the site demised other than those referred to in the approved plans and specifications as mentioned in Clause 5 (i) hereof without the prior consent in writing of the Authority such consent not to be unreasonably withheld. LOCAL AUTHORITY REQUIREMENTS 6. The Lessee shall execute all such works which any County or District Council or other Local or Public Authority may require to be carried out in respect of the demised premises either by the Authority or by the Lessee and immediately after the receipt of any notice requiring such works to be carried out the Lessee shall send a copy thereof to the Authority. 7. Without prejudice to the generality of Clause 6 the Lessee shall: -- 7.1 on receipt of any notice, order or request pursuant to provisions of the Local Government (Planning and Development) Acts 1963 and 1976 or any Act or Acts amending extending or replacing the same or any regulation made thereunder forthwith notify the Authority of this fact and furnish to the Authority a copy of any such notice, Order of Request. 7.2 indemnify the Authority from and against all actions, claims, suits, demands, penalties or fines for or in respect of any failure to satisfactorily and completely comply with the requirements of such notice, order of request. REPAIRS 8. The Lessee will at all times well and sufficiently repair maintain cleanse and keep the entire of the demised premises in good and substantial repair, condition and state of exterior decoration. The Lessee's obligations under this Clause shall include all fences, drains, sewers or other conveniences and appurtenances belonging to the demised premises. The Lessee shall keep and maintain the lands of the demised premises not covered by buildings in a neat and tidy condition in a manner reasonably satisfactory to the Authority. MAINTENANCE OF SERVICES 9. During the term of this Lease or until they are taken in charge by the Local Authority (whichever is the lesser period) the Authority shall construct and maintain in good order, repair and condition the roads and footpaths coloured yellow on the map annexed hereto and shall maintain the sewers, drains and watermains (outside the perimeter of the demised premises) which serve the demised premises unless and until the same have been taken in charge by the Local Authority. USE OF PREMISES 10. The Lessee shall use the demised premises only for manufacturing and ancillary purposes. 11. The Lessee shall not discharge or permit to be discharged into the sewer serving the demised premises any liquid matter of thing which is or may be liable to set or congeal at average sewer temperature or is capable of giving off any inflammable of explosive gas of any acid, alkali or other substance in sufficient concentration to cause corrosion to sewer pipes penstocks, gratings and sewer fittings 12. The Lessee shall not discharge or permit to be discharged any effluent into the surface water drainage system. 13. The Lessee shall not do or permit to be done any act of thing which might be or grow to be a nuisance or to the annoyance, damage or inconvenience of the neighbourhood or the property adjoining or near to the demised premises or of the owners or occupiers of any such property. INSURANCE 14. The Lessee shall keep the demised premises insured against loss or damage by fire, storm, tempest, flood, explosion, aircraft or other aerial devices or articles dropped therefrom. The insurance shall be for the sum of money sufficient to cover the full cost of reinstating the premises including architect's fees in the event of total destruction thereof and the Authority shall be noted therein as an interested party. 15. If the premises or any part thereof shall at any time during the term be destroyed of damaged by any of the risks mentioned in Clause 14, the Lessee shall apply all monies received in respect of such insurance with all reasonable speed in the building, repairing and otherwise reinstating the premises according to the original plan or elevation thereof as otherwise agreed with the Authority. Any deficiency in such monies shall be provided by the Lessee out of its own funds. 16. The Lessee shall not carry on any business on the demised premises or store any material thereon which might render any such insurance void or voidable. TERMINATION 17. Notwithstanding anything hereinbefore contained it is expressly agreed by the Lessee and declared that if the Rent herein reserved of any part thereof shall at any time be in arrears and unpaid for 21 days after it shall become due (whether the same shall have been lawfully demanded or not) or shall be guilty of any breach of the conditions of this Lease and fail to make good any such breach within reasonable time after receiving notice from the Authority it shall be lawful for the Authority to enter upon the demised premises or any part thereof in the name of the whole and peaceably to hold and enjoy the demised premises thenceforth as if these presents had not been made without prejudice however to any claim of the Authority against the Lessee arising out of any antecedent breach of any condition of this Lease. THIRD SCHEDULE 1. The yearly rent payable by the Lessee shall be subject to adjustment at the end of the first period of 5 years and at the end of the Second period of 5 years of the term of this Lease in the manner hereinafter provided and after the first adjustment the Tenant shall pay the amount of the Rent as so adjusted in respect of the next following 5 years period of the said term and thereafter the yearly rent so adjusted for the residue of the said term PROVIDED THAT the yearly minimum rent payable by the Tenant throughout the said term shall be IR1O.00 per annum per acre and no adjustment made under the provisions of this Schedule shall take effect so as to reduce the said Rent below the said figure. 2. Subject to the provisions of this Schedule, the said adjustment at the end of each of the said periods of 5 years hereinbefore mentioned shall be calculated by reference to the change in the cost of living as indicated by the Consumer Price Index (hereinafter referred to as "the index") issued by the authority of the Central Statistics Office of the Republic of Ireland and at present officially published in the Irish Statistical Bulletin and shall be made by increasing the yearly rent payable at the end of the said periods of 5 years in proportion to the rise or fall in the respective Index Figures current on the 1st day of each of the said periods of 5 years compared with the Index Figures current on the last day of each of the said periods. 3. For the purpose of this paragraph, the Index figure current on the date aforementioned shall be that published on either of the said dates in the Irish Statistical Bulletin of other official publication, or if not published on either or the said days, then last published in the said Bulletin of publication immediately before either of them. 4. If during the said periods of 5 years, the basis of the Index shall be changed by substituting a new basic or starting Index figure or otherwise the adjustment of the rent to be paid for the period following the expiration of the said periods of 5 years shall be in default of agreement between the parties be determined by a Professional Valuer to be nominated be the President for the time being of the Irish Auctioneers & Valuers Institute and his determination shall be that of an Expert and not of an Arbitrator and shall be binding upon the parties and in making his determination the said person shall have regard to any official publication relating to the change in the cost of living during the said period issued by the authority of the Government of the Republic of Ireland or by any responsible organisation. PROVIDED THAT the adjustment in the rent to be made at the end of the said periods of 5 years during which the basis of any new or revised Index remains unchanged shall continue to be made in accordance with the provisions or Paragraph 1 and 2 hereof and FURTHER PROVIDED that notwithstanding anything hereinbefore provided the amount of any adjustment in Rent shall not exceed 10% of the Rent payable immediately prior to such adjustment. QUIET ENJOYMENT 5. On the Lessee paying the Rent hereby reserved and performing and observing the conditions and agreements of this Lease, the Lessee shall and may peaceably hold and enjoy the demised premises during the term of the Lease without interruption by the Authority or any person lawfully claiming under or in trust for it. The Authority hereby assents to the registration of this Lease and the rights hereby granted as a burden on Folio 4917 & 3241F of the Register County Waterford and consents to the use of the Land Certificate of the said Folio for the purposes of such registration. IT IS HEREBY CERTIFIED by the Lessee that it is the person becoming entitled to the entire beneficial interest in the interest hereby created and that all necessary consents under Section 12 and 45 of the Land Act 1965 have been obtained and that all conditions attached thereto have been complied with. IN WITNESS whereof the above named parties have hereunto set their hands and affixed their Seals this day and year first herein written. PRESENT when the Seal of the INDUSTRIAL DEVELOPMENT AUTHORITY was affixed hereto:- /s/ [ILLEGIBLE] - ------------------------------- Authorised Officer /s/ [ILLEGIBLE] - ------------------------------- Authorised Officer PRESENT when the Seal of Bausch & Lomb Ireland was affixed hereto: /s/ Thomas F. Gray - ------------------------------- Director [SEAL OF BAUSCH & LOMB IRELAND] /s/ Greta Peters - ------------------------------- 7 Ocean Avenue Devonshire Bermuda Company Secretary [MAP OF THE DEMISED PREMISES] Dated the day of 19 ------------------------------------------ INDUSTRIAL DEVELOPMENT AUTHORITY One Part --with-- MION INNSTE TUGTHA V4893 NA COIMISINEIRIIONCAIM BAILE ATHA CLIATH LAND REGISTRY Registered as a burden in Folios 4917 & 3241F of the Register County Waterford. The Ownership of this Lease is Registered in Folio 4141C of the Register County Waterford The Deposit of this Lease will not create a lien on the Registered Owner Interest under it. Bausch & Lomb Ireland Other Part ------------------------------------------ 999 YEAR LEASE ------------------------------------------ INDUSTRIAL DEVELOPMENT AUTHORITY Wilton Park House Wilton Place /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] EX-10.3 7 a2061919zex-10_3.txt EXHIBIT 10.3 Exhibit 10.3 Dated 2nd July, 2001 TRANSFER of Lands at Waterford A & L Goodbody Solicitors nsdc1201.06y LAND REGISTRY COUNTY WATERFORD FO LIO 4141L TRANSFER dated the 2nd day of July 2001 1 Luxottica Ireland Limited the registered owner (hereinafter called "the Transferor") as beneficial owner in consideration of IRL4,250,000 (four million two hundred and fifty thousand pounds) (the receipt of which is hereby acknowledged) HEREBY TRANSFERS all of the lands described in Folio 4141L of the Register, County Waterford to Genzyme Ireland Limited (hereinafter called "the Transferee"). 2 The address of the Transferee in the State for service of notices and and the Transferee's description are: North Wall Quay, Dublin 1. Limited Liability Company. 3 The Transferee HEREBY COVENANTS with the Transferor that the Transferee will henceforth during the continuance of the term thereby demised pay the yearly rent reserved by the Lease dated the 3rd day of September 1990 and made between the Industrial Development Authority of the one part and Bausch & Lomb Ireland of the other part and observe and perform the covenants on the lessee's part and conditions therein contained and will keep the Transferor effectually indemnified from and against all actions, proceedings, costs, damages, expenses, claims and demands whatsoever by reason or on account of the non-payment of the said rent or any part thereof or the breach, non-performance or non-observance of the said covenants or conditions or any of them. 4 IT IS HEREBY CERTIFIED as follows:- 4.1 That the amount or value of the consideration (other than rent) for the sale is wholly attributable to property which is not residential property. 4.2 That Section 29 (Conveyance on sale combined with building agreement for dwellinghouse/apartment) of the Stamp Duties Consolidation Act, 1999, does not apply to this instrument. 4.3 By the Transferee being the person becoming entitled to the entire beneficial interest in the premises hereby transferred that the Transferee is a body corporate incorporated in a member state of the European Communities and having its registered office, central administration or principal place of business within the territory of those states and as such a qualified person within the meaning of Section 45 of the Land Act, 1965. /s/ Roberto Chemello PRESENT when the Common Seal of LUXOTTICA IRELAND LIMITED was affixed hereto:- /s/ [illegible] PRESENT when the Common Seal of GENZYME IRELAND LIMITED was affixed hereto:- Director /s/ Mark Bamforth EX-10.4 8 a2061919zex-10_4.txt EXHIBIT 10.4 Exhibit 10.4 THE INCORPORATED LAW SOCIETY OF IRELAND GENERAL CONDITIONS OF SALE (1995 EDITION) PARTICULARS and CONDITIONS OF SALE of Site at Waterford Industrial Estate, part folio 4917 County Waterford. SALE BY PRIVATE TREATY Vendor: INDUSTRIAL INDUSTRIAL DEVELOPMENT AGENCY (IRELAND) Vendor's Solicitor: GALLAGHER SHATTER Address: 4 UPPER ELY PLACE, DUBLIN 2 Reference: BG/ET *Delete, if inappropriate WARNING: It is recommended that the within should not be completed without prior legal advice. MEMORANDUM OF AGREEMENT made this 2nd day of August 2001 BETWEEN: INDUSTRIAL DEVELOPMENT AGENCY (IRELAND) Of: Wilton Park House, Wilton Place, Dublin 2. VENDOR And Genzyme Ireland Limited Of: PURCHASERS whereby it is agreed that the Vendor shall sell and the Purchaser shall purchase in accordance with the annexed Special and General conditions of Sale the property described in the within Particulars at the purchase price mentioned below. Purchase Price (pound)2,076,100-00 less deposit (pound) 212,017-00 Balance (pound)1,864,083-00 Closing Date: 24th August of 2001 Interest Rate: 12 per cent per annum SIGNED /s/ Richard Ryan SIGNED /s/ Michael S. Wyzga ----------------------- ---------------------- (Vendor) (Purchaser) /s/ [ILLEGIBLE] - ----------------------------- RSI No. MEMBER/AUTHORISED OFFICER --------------------- RSI No ---------------------- Witness /s/ [ILLEGIBLE] --------------------- Witness /s/ Martin Cronin ---------------------- Occupation /s/ Solicitor /s/ [ILLEGIBLE] ------------------ - ----------------------------- MEMBER/AUTHORISED OFFICER Address , Dublin --------------------- Occupation ------------------- Address ---------------------- As Stakeholder I/We acknowledge receipt of Bank Draft/Cheque for, in respect of deposit. SIGNED ---------------------- PARTICULARS AND TENURE ALL THAT AND THOSE the lands comprising an area of 15.97 acres or thereabouts statute measure situate at the Waterford Industrial Estate in the County of Waterford being portion of the property comprised in folio 4917 County Waterford as more particularly delineated on the map annexed hereto and thereon hatched in red. DOCUMENTS SCHEDULE 1. Copy folio 4917 County Waterford 2. Copy Land Registry Map folio 4917 County Waterford 3. Draft 999 year lease. SEARCHES SCHEDULE None SPECIAL CONDITIONS 1. Save where the context otherwise requires or implies or the text hereof expresses to the contrary, the definitions and provision as to interpretation set forth in the within General Conditions shall be applied for the purposes of these Special Conditions. 2. The said General Conditions shall: (a) apply to the sale in so far as the same are not hereby altered or varied, and these Special Conditions shall prevail in case of any conflict between them and the General Conditions, (b) be read and construed without regard to any amendment therein, unless such amendment shall be referred to specifically in these Special Conditions. 3. In addition to the purchase price, the purchaser shall pay to the Vendor an amount equivalent to such Value Added Tax as shall be eligible in relation to the sale or (as the case may be) the Assurance same to be calculated in accordance with the provisions of the Value Added Tax Act, 1972, and to be paid on completion of the sale forthwith upon receipt by the Purchaser of an appropriate invoice (whichever shall be the later). 4. On the exchange of contracts, the Vendor shall furnish the Purchasers with the C.O.R.T. system of Requisitions on Title with replies endorsed. General Condition 17 shall apply to any further requisitions raised by the Purchasers and the Vendor's replies to the C.O.R.T requisitions and to any further requisitions raised by the purchaser's solicitors. 5. The title to the lands in sale shall consist of the certified copy folio set out in the documents schedule hereto. The vendor sells as statutory successor in title to Industrial Development Authority and Forfas pursuant to Section 3(2) of the Industrial Development 1995. 6. The sale shall be carried out by way of the 999 year lease in the form of the draft specified in the documents schedule hereto. 7. This sale is conditional upon: (A) The purchaser completing the appropriate portions of the V.A.T. form 4A in connection with the lease to be granted hereunder and the issuing of a V.A.T. form 4B. (B) Approval by the Board of the Vendor of the purchaser's overall project proposal. (C) The purchaser successfully completing the purchase of the adjoining Luxottica facility at Waterford Industrial Estate on or before the closing date. (D) THE PURCHASE PRICE IS AGREED AT (pound)130,000 PER ACRE. THE VENDOR HAS MEASURED THE AREA ON THE MAP ATTACHED HERETO AT 15.97 ACRES. (E) The purchaser and the vendor (prior to the closing date) entering in to a grant agreement on terms satisfactory to the vendor in respect of an industrial undertaking on the property in sale. (F) The purchaser complying with the terms and conditions of such grant agreement insofar as they can be complied with up to the closing date. (G) The vendor being satisfied prior to completion with the purchasers proposals for the environmental control and prevention of pollution in the purchasers proposed industrial undertaking on the property in sale. (H) DRAWINGS AND SPECIFICATIONS OF THE PROPOSED BUILDING TO BE EXAMINED AND APPROVED BY THE VENDOR PRIOR TO THE PURCHASER UNDERTAKING THE WORK IN RELATION THERETO. THIS EXAMINATION SHALL BE FOR THE SOLE PURPOSE OF ASSESSING THE COMPATIBILITY OF THE PROPOSED BUILDING WITH THE ADJOINING INDUSTRIAL ESTATE. (I) Stock proof temporary fencing to be erected by the purchasers within a reasonable period following the closing date and maintained at the purchasers expense on the appropriate boundaries of the site for the duration of the construction contract. (J) Boundaries of the site to be clearly defined by permanent markers such as concrete posts set in concrete. Boundaries to be in accordance with the site survey prepared by the purchasers engineers and approved by the Vendor prior to the closing date. The permanent markers are to be erected by the purchaser within a reasonable period following the closing date. Permanent stock proof fencing to be provided by the purchaser where necessary at the purchasers expense (K) The purchaser to be responsible for liaising with all utility companies (for example Electricity Supply Board, Eircom and Bord Gais) regarding underground services on or near the site in sale. 8. If all or any of the above special conditions have not been complied with prior to completion the vendor shall be entitled (without prejudice to any other remedy available to the Vendor under the general conditions of sale herein) to rescind the sale hereby contemplated whereupon the deposit shall be returned to the purchaser but without interest costs or compensation. [Site Plan of Proposed New Genzyme Facility at Waterford] NOTE: These General Conditions are not to be altered in any manner. Any required variation or addition should be dealt with by way of Special Condition. Special Conditions should be utilised in instances where it is required to adopt Recommendations or Advices of the Law Society or of any Committee associated with it, where such Recommendations or Advices are at variance with provisions expressed in the General Conditions. GENERAL CONDITIONS OF SALE DEFINITIONS 1. In these General Conditions: "THE CONDITIONS" means the attached Special Conditions and these General Conditions "THE DOCUMENTS SCHEDULE", "THE SEARCHES SCHEDULE" and "THE SPECIAL CONDITIONS" Mean respectively the attached Documents Schedule, Searches Schedule and Special Conditions. "THE MEMORANDUM" means the Memorandum of Agreement on Page 1 hereof "THE PARTICULARS" means the Particulars and Tenure on Page 2 hereof and any extension of the same "THE PURCHASER" means the party identified as such in the Memorandum "THE SALE" means the transaction evidenced by the Memorandum, the Particulars and the Conditions "THE SUBJECT PROPERTY" means the property or interest in property which is the subject of the sale "THE VENDOR" means the party identified as such in the Memorandum. 2. In the Conditions save where the context otherwise requires or implies: "APPORTIONMENT DATE" means either (a) the later of (i) the closing date (as defined hereunder) and (ii) such subsequent date from which delay in completing the sale shall cease to be attributable to default on the part of the Vendor or (b) in the event of the Vendor exercising the right referred to in Condition 25 (a) (ii) hereunder, the date of actual completion of the sale or (c) such other date as may be agreed by the Vendor and the Purchaser to be the Apportionment Date for the purpose of this definition "ASSURANCE" means the document or documents whereby the sale is to be carried into effect "CLOSING DATE" means the date specified as such in the Memorandum, or, if no date is specified, the first working day after the expiration of five weeks computed from the date of sale "COMPETENT AUTHORITY" includes the State, any Minister thereof, Government Department, State Authority, Local Authority, Planning Authority, Sanitary Authority, Building Control Authority, Fire Authority, Statutory Undertaker or any Department, Body or person by statutory provision or order for the time being in force authorised directly or indirectly to control, regulate, modify or restrict the development, use or servicing of land or buildings, or empowered to acquire land by compulsory process 5 "DATE OF SALE" means, the date of the auction when the sale shall have been by auction, and otherwise means the date upon which the contract for the sale shall have become binding on the Vendor and the Purchaser "DEVELOPMENT" has the same meaning as that conferred by the Local Government (Planning and Development) Act, 1963 "LEASE" includes (a) a fee farm grant and every contract (whether or not in writing or howsoever effected, derived or evidenced) whereby the relationship of Landlord and Tenant is or is intended to be created and whether for any freehold or leasehold estate or interest and (b) licences and agreements relating to the occupation and use of land, cognate words being construed accordingly "PURCHASED CHATTELS" means such chattels, fittings, tenant's fixtures and other items as are included in the sale "PURCHASE PRICE" means the purchase price specified in the Memorandum PROVIDED HOWEVER that, if the sale provides for additional moneys to be paid by the Purchaser for goodwill, crops or purchased chattels, the expression "PURCHASE PRICE" shall be extended to include such additional moneys "REQUISITIONS" include Requisitions on the title or titles as such of the subject property and with regard to rents, outgoings, rights, covenants, conditions, liabilities (actual or potential), planning and kindred matters and taxation issues material to such property "STIPULATED INTEREST RATE" means the interest rate specified in the Memorandum, or, if no rate is so specified, such rate as shall equate to 4 per centum per annum over the rate (as annualised) of interest payable upon tax chargeable under the Capital Acquisitions Tax Act, 1976 and ruling at the date from which interest hereunder is to run "WORKING DAY" does not include any Saturday, Sunday nor any Bank or Public Holiday nor any of the seven days immediately succeeding Christmas Day. INTERPRETATION 3. In the Conditions save where the context otherwise requires or implies: Words importing the masculine gender only include the feminine, neuter and common genders, and words importing the singular number only include the plural number and vice versa The words "Vendor" and "Purchaser" respectively include (where appropriate) parties deriving title under them or either of them and shall apply to any one or more of several Vendors and Purchasers as the case may be and so that the stipulations in the Conditions contained shall be capable of being enforced on a joint and several basis Unless the contrary appears, any reference hereunder: (a) to a particular Condition shall be to such of these General Conditions of Sale as is identified by said reference (b) to a Statute or Regulation or a combination of Statutes or Regulations shall include any extension, amendment, modification or re-enactment thereof, and any Rule, Regulation, Order or Instrument made thereunder, and for the time being in force Headings and marginal notes inserted in the Conditions shall not affect the construction thereof nor shall the same have any contractual significance. 6 AUCTION 4. Where the sale is by auction, the following provisions shall apply: (a) the Vendor may divide the property set forth in the Particulars into lots and subdivide, consolidate or alter the order of sale of any lots (b) there shall be a reserve price for the subject property whether the same shall comprise the whole or any part of the property set forth in the Particulars and the Auctioneer may refuse to accept any bid. If any dispute shall arise as to any bidding, the Auctioneer shall (at his option) either determine the dispute or again put up the property in question at the last undisputed bid. No person shall advance at a bidding a sum less than that fixed by the Auctioneer, and no accepted bid shall be retracted. Subject to the foregoing, the highest accepted bidder shall be the Purchaser (c) the Vendor may: (i) bid himself or by an agent up to the reserve price (ii) withdraw the whole of the property set forth in the Particulars or, where such property has been divided into lots, withdraw any one or more of such lots at any time before the same has been sold without disclosing the reserve price (d) the Purchaser shall forthwith pay to the Vendor's Solicitor as stakeholder a deposit of ten per centum (10%) of the purchase price in part payment thereof, and shall execute an agreement in the form of the Memorandum to complete the purchase of the subject property in accordance with the Conditions. PRIVATE TREATY SALE 5. (a) where the sale is by private treaty, the Purchaser shall on or before the date of the sale pay to the Vendor's Solicitor as stakeholder a deposit of the amount stated in the Memorandum in part payment of purchase price (b) if notwithstanding Condition 5(a), a part of such deposit has been or is paid to any other person appointed or nominated by the Vendor that other person shall be deemed to receive or to have received said part as stakeholder THE FOLLOWING CONDITIONS APPLY WHETHER THE SALE IS BY AUCTION OR BY PRIVATE TREATY PURCHASER ON NOTICE OF CERTAIN DOCUMENTS 6. The documents specified in the Documents Schedule or copies thereof have been available for inspection by the Purchaser or his Solicitor prior to the sale. If all or any of the subject property is stated in the Particulars or in the Special Conditions to be held under a lease or to be subject to any covenants, conditions, rights, liabilities or restrictions, and the lease or other document containing the same is specified in the Documents Schedule, the Purchaser, whether availing of such opportunity of inspection or not, shall be deemed to have purchased with full knowledge of the contents thereof, notwithstanding any partial statement of such contents in the Particulars or in the Conditions. 7 DELIVERY OF TITLE 7. Within seven working days from the date of sale, the Vendor shall deliver or send by post to the Purchaser or his Solicitor copies of the documents necessary to vouch the title to be shown in accordance with the Conditions. TITLE 8. (a) The Title to be shown to the subject property shall be such as is set forth in the Special Conditions (b) Where the title to be shown to the whole or any part of the subject property is based on possession, the Vendor shall, in addition to vouching that title and dealing with such further matters as are required of him by the Conditions, furnish to the Purchaser on or before completion of the sale a certificate from the Revenue Commissioners to the effect (i) that the subject property or (as the case may be) such part of the same as aforesaid is not charged with any of the taxes covered by the provisions of Section 146, Finance Act, 1994 or (ii) that the Revenue Commissioners are satisfied that any such charge will be discharged within a time considered by them to be reasonable (c) Save as stipulated in the Special Conditions the Vendor shall, prior to or at the completion of the sale, discharge all mortgages and charges for the payment of money (other than items apportionable under Condition 27(b)) which affect the subject property. 9. Where any of the subject property is held under a lease, the Purchaser shall not call for or investigate the title of the grantor or lessor to make the same, but shall conclusively assume that it was well and validly made, and is a valid and subsisting lease. 10. Where any of the subject property is stated to be held under a lease or an agreement therefor then: (a) no Objection or Requisition shall be made or indemnity required on account of such lease or agreement being (if such is the case) a sub-lease or agreement therefor, or on account of any superior lease comprising other property apart from the subject property or reserving a larger rent, or on the ground of any superior owner not having concurred in any apportionment or exclusive charge of rent (b) no Objection or Requisition shall be made by reason of any discrepancy between the covenants, conditions and provisions contained in any sub-lease and those in any superior lease, unless such as could give rise to forfeiture or a right of re-entry (c) the production of the receipt for the last gale of rent reserved by the lease or agreement therefor, under which the whole or any part of the subject property is held, (without proof of the title or authority of the person giving such receipt) shall (unless the contrary appears) be accepted as conclusive evidence that all rent accrued due has been paid and all covenants and conditions in such lease or agreement and in every (if any) superior lease have been duly performed and observed or any breaches thereof (past or continuing) effectively waived or sanctioned up to the actual completion of the sale, whether or not it shall appear that the lessor or reversioner was aware of such breaches. If the said rent (not being a rack rent) shall not have been paid in circumstances where the party entitled to receive the same is not known to the Vendor, or if the subject property is indemnified against payment of rent, the production of a Statutory Declaration so stating shall (unless the contrary appears) be accepted as such conclusive evidence, provided that the Declaration further indicates that no notices or rent demands have been served on or received by 8 the Vendor under the lease or agreement on foot of which the subject property is held; that the Vendor has complied with all the covenants (other than those in respect of payment of rent) on the part of the lessee and the conditions contained in such lease or agreement, and that he is not aware of any breaches thereof either by himself or by any of his predecessors in title (d) if any of the subject property is held under a lease or agreement for lease requiring consent to alienation, the Vendor shall apply for and endeavour to obtain such consent, and the Purchaser shall deal expeditiously and constructively with and shall satisfy all reasonable requirements of the lessor in relation to the application therefor, but the Vendor shall not be required to institute legal proceedings to enforce the issue of any such consent or otherwise as to the withholding of the same. If such consent shall have been refused or shall not have been procured and written evidence of the same furnished to the Purchaser on or before the dosing date, or if any such consent is issued subject to a condition, which the Purchaser on reasonable grounds refuses to accept, either party may rescind the sale by seven days prior notice to the other. PRIOR TITLE 11. (a) The title to the subject property prior to the date of the instrument specified in the Special Conditions as the commencement of title, whether or not appearing by recital, inference or otherwise, shall not be required, objected to or investigated. (b) In the case of registered freehold or leasehold land registered under the Registration of Title Acts, 1891 to 1942 or the Registration of Title Act, 1964 the provisions of subparagraph (a) of this Condition shall apply without prejudice to Sections 52 and 115 of the last mentioned Act and shall not disentitle the Purchaser from investigating the possibility of there having been a voluntary disposition on the title within the period of twelve years immediately preceding the date of sale or a disposition falling within Section 121, Succession Act, 1965 and the Vendor shall be required to deal with all points properly taken in or arising out of such investigation. INTERMEDIATE TITLE 12. Where in the Special Conditions it is provided that the title is to commence with a particular instrument and then to pass to a second instrument or to a specified event, the title intervening between the first instrument and the second instrument or the specified event, whether or not appearing by recital, inference or otherwise, shall not be required, objected to or investigated. REGISTERED LAND 13. Where all or any of the subject property consists of freehold or leasehold registered land registered under the Registration of Title Acts, 1891 to 1942 ("the Acts of 1891 to 1942") or the Registration of Title Act, 1964 ("the Act of 1964") then: (a) if the registration is subject to equities under the Acts of 1891 to 1942, the Purchaser shall not require the equities to be discharged, but the Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish sufficient evidence of title prior to first registration or otherwise to enable the Purchaser to procure their discharge (b) if the registration is with a possessory title under the Act of 1964 the Purchaser shall not require the Vendor to be registered with an absolute title, but the Vendor shall, 9 with the copy documents to be delivered or sent in accordance with Condition 7, furnish sufficient evidence of the title prior to such registration or otherwise to enable the Purchaser to be registered with an absolute title (c) the Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish to the Purchaser a copy of the Land Registry Folio or Folios relating to the subject property written up-to-date (or as nearly as practicable up-to-date), together with a copy of the relevant Land Registry map or file plan (d) the Vendor shall furnish a Statutory Declaration, by some person competent to make it, confirming that there are not in existence any burdens which under the Act of 1964 affect registered land without registration, save such (if any) as are specifically mentioned in the Particulars or the Special Conditions (e) if the Land Certificate has been issued to the Land Commission or if no such Certificate has been issued, the Purchaser shall not be entitled to require such Certificate to be produced, handed over on completion or issued (f) the Purchaser shall procure himself to be registered as owner of the subject property at his own expense (g) In the event of the subject property being subject to a Land Purchase Annuity the Vendor shall, prior to completion, redeem the same or (as the case may be) such proportion thereof as may be allocated to the subject property IDENTITY 14. The Purchaser shall accept such evidence of identity as may be gathered from the descriptions in the documents of title plus (if circumstances require) a Statutory Declaration to be made by a competent person, at the Purchaser's expense, that the subject property has been held and enjoyed for at least twelve years in accordance with the title shown. The Vendor shall be obliged to furnish such information as is in his possession relative to the identity and extent of the subject property, but shall not be required to define exact boundaries, fences, ditches, hedges or walls or to specify which (if any) of the same are of a party nature, nor shall the Vendor be required to identify parts of the subject property held under different titles. RIGHTS - LIABILITIES - CONDITION OF SUBJECT PROPERTY 15. The Vendor shall disclose before the sale, in the Particulars, the Special Conditions or otherwise, all easements, rights, reservations, privileges, taxes and other liabilities (not already known to the Purchaser or apparent from inspection) which are known by the Vendor to affect the subject property or which are likely to affect it. 16. Subject to Condition 15, the Purchaser shall be deemed to buy: (a) with full notice of the actual state and condition of the subject property and (b) subject to (i) all leases (if any) mentioned in the Particulars or in the Special Conditions and (ii) all easements, rights, reservations, privileges, liabilities, covenants, rents, outgoings and all incidents of tenure. 10 REQUISITIONS 17. The Purchaser shall, within fourteen working days after the delivery of the copy documents of title in accordance with Condition 7, send to the Vendor's Solicitor a written statement of his Objections (if any) on the title and his Requisitions. Any Objection or Requisition not made within the time aforesaid and not going to the root of the title shall be deemed to have been waived. The Vendor's Replies to any Objections or Requisitions shall be answered by the Purchaser in writing within seven working days after the delivery thereof and so on toties quoties, and, if not so answered, shall be considered to have been accepted as satisfactory. In all respects time shall be deemed to be of the essence of this Condition. 18. If the Purchaser shall make and insist on any Objection or Requisition as to the title, the Assurance to him or any other matter relating or incidental to the sale, which the Vendor shall, on the grounds of unreasonable delay or expense or other reasonable ground, be unable or unwilling to remove or comply with, the Vendor shall be at liberty (notwithstanding any intermediate negotiation or litigation or attempts to remove or comply with the same) by giving to the Purchaser or his Solicitor not less than five working days notice to rescind the sale. In that case, unless the Objection or Requisition in question shall in the meantime have been withdrawn, the sale shall be rescinded at the expiration of such notice. SEARCHES 19. The Purchaser shall be furnished with the searches (if any) specified in the Searches Schedule and any searches already in the Vendor's possession, which are relevant to the title or titles on offer. Any other searches required by the Purchaser must be obtained by him at his own expense. Where the Special Conditions provide that the title shall commence with a particular instrument and then pass to a second instrument or to a specfied event, the Vendor shall not be obliged to explain and discharge any act which appears on a search covering the period between such particular instrument and the date of the second instrument or specified event, unless same goes to the root of the title. Subject as aforesaid the Vendor shall explain and discharge any acts appearing on Searches covering the period from the date stipulated or implied for the commencement of the title to the date of actual completion. ASSURANCE 20. Subject to the provisions of Paragraph 11, Schedule 4, Capital Gains Tax Act, 1975 (as substituted), and (if relevant) to those contained in Section 107, Finance Act, 1993 (in relation to Residential Property Tax) on payment of all moneys payable by him in respect of the sale, the Purchaser shall be entitled to a proper Assurance of the subject property from the Vendor and all other (if any) necessary parties, such Assurance to be prepared by and at the expense of the Purchaser. The draft thereof shall be submitted to the Vendor's Solicitor not less than seven working days, and the engrossment not less than four working days, before the closing date. The delivery of the said draft or engrossment shall not prejudice any outstanding Objection or Requisition validly made. VACANT POSSESSION 21. Subject to any provision to the contrary in the Particulars or in the Conditions or implied by the nature of the transaction, the Purchaser shall be entitled to vacant possession of the subject property on completion of the sale. 11 LEASES 22. Where the subject property is sold subject to any lease, a copy of the same (or, if the provisions thereof have not been reduced to writing, such evidence of its nature and terms as the Vendor shall be able to supply) together with copies of any notices in the Vendor's possession served by or on the lessee shall, prior to the sale, be made available for inspection by the Purchaser or his Solicitor. 23. Unless the Special Conditions provide to the contrary, the Purchaser shall be entitled to assume that, at the date of sale, the Lessee named in any such Lease (as is referred to in Condition 22) is still the Lessee; that there has been no variation in the terms and conditions of said Lease (other than such as may be evident from an inspection of the subject property or apparent from the Particulars or the documents furnished to the Purchaser prior to the sale), and that the said terms and conditions (save those pertaining to the actual state and condition of the subject property) have been complied with. COMPLETION AND INTEREST 24. (a) The sale shall be completed and the balance of the purchase price paid by the Purchaser on or before the closing date (b) Completion shall take place at the Office of the Vendor's Solicitor. 25. (a) If by reason of any default on the part of the Purchaser, the purchase shall not have been completed on or before the later of (a) the closing date or (b) such subsequent date whereafter delay in completing shall not be attributable to default on the part of the Vendor (i) the Purchaser shall pay interest to the Vendor on the balance of the purchase price remaining unpaid at the stipulated interest rate for the period between the closing date (or as the case may be such subsequent date as aforesaid) and the date of actual completion of the sale. Such interest shall accrue from day to day and shall be payable before and after any judgment and (ii) the Vendor shall in addition to being entitled to receive such interest, have the right to take the rents and profits less the outgoings of the subject property up to the date of the actual completion of the sale (b) If the Vendor by reason of his default shall not be able, ready and willing to complete the sale on the closing date he shall thereafter give to the Purchaser at least five working days prior notice of a date upon which he shall be so able ready and willing and the Purchaser shall not before the expiration of that notice be deemed to be in default for the purpose of this Condition provided that no such notice shall be required if the Vendor is prevented from being able and ready to complete or to give said notice by reason of the act or default of the Purchaser. 26. The submission of an Apportionment Account made up to a particular date or other corresponding step taken in anticipation of completing the sale shall not per se preclude the Vendor from exercising his rights under the provisions of Condition 25 and in the event of such exercise the said Apportionment Account or the said other corresponding step shall (if appropriate) be deemed not to have been furnished or taken, and the Vendor shall be entitled to furnish a further Apportionment Account. APPORTIONMENT AND POSSESSION 27. (a) Subject to the stipulations contained in the Conditions, the Purchaser, on paying the 12 purchase price, shall be entitled to vacant possession of the subject property or (as the case may be) the rents and profits thereout with effect from the Apportionment Date (b) All rents, profits, rates, taxes, outgoings and moneys (including rent, outgoings and money payable in advance but not including impositions derived from hypothecation) referable to the subject property shall for the purpose of this Condition, be apportioned (whether apportionable by law or not) on a day to day basis as at the Apportionment Date, up to which the liability for or the entitlement to the same shall (subject to apportionment as aforesaid to accord with the position obtaining as to moneys paid or due at such date) be for the account of the Vendor and thereafter for that of the Purchaser provided that if completion shall have been delayed through the default of the Vendor the Purchaser may opt for apportionment under this Condition as at the closing date or at the date at which the Purchaser (if also in default) shall have ceased to have been so in default whichever shall be the later (c) In the implementation of this Condition the Vendor shall be regarded as being the owner of the subject property until midnight on such date as is appropriate for apportionment purposes (d) The balance of the purchase price shall (where appropriate) be adjusted upwards or downwards to accommodate apportionments calculated pursuant to this Condition and the expression "balance of the purchase price" where used in the Conditions shall be construed accordingly (e) To the extent that same shall be unknown at the Apportionment Date (or shall not then be readily ascertainable) amounts to be apportioned hereunder - including any amount apportionable pursuant to Condition 27 (f) - shall be apportioned provisionally on a fair estimate thereof, and, upon ascertainment of the actual figures, a final apportionment shall be made, and the difference between it and the provisional apportionment shall be refunded by the Vendor or the Purchaser (as the case may be) to the other within ten working days of the liable party becoming aware of the amount of such difference (f) Excise and kindred duties payable in respect of the subject property or any licence attached thereto shall be apportioned on a day to day basis as at the Apportionment Date up to which the liability for the same shall be for the account of the Vendor and thereafter for that of the Purchaser and Condition 27(c) shall apply for the purposes of such apportionment. SECTION 45, LAND ACT, 1965 28. Where Section 45, Land Act, 1965 applies, the Purchaser shall, at his own expense, procure any such Certificate or Consent as may be necessary thereunder for the vesting of the subject property in him or his nominee and the sale is not conditional upon such consent being obtained. COMPULSORY REGISTRATION (a) If all or any of the subject property is unregistered land the registration of which was compulsory prior to the date of sale the Vendor shall be obliged to procure such registration prior to completion of the sale (b) If all or any of the subject property is unregistered land, the registration of which shall become compulsory at or subsequent to the date of sale, the Vendor shall not be under any obligation to procure such registration but shall at or prior to such 13 completion furnish to the Purchaser a Map of the subject property complying with the requirements of the Land Registry as then recognised and further the Vendor shall, if so requested within two years after completion of the sale, by and at the expense of the Purchaser, supply any additional information, which he may reasonably be able to supply, and produce and furnish any documents in his possession that may be required to effect such registration. SIGNING "IN TRUST" OR "AS AGENT" 30. A Purchaser who signs the Memorandum "in Trust", "as Trustee" or "as Agent", or with any similar qualification or description without therein specifying the identity of the principal or other party for whom he so signs, shall be personally liable to complete the sale, and to fulfil all such further stipulations on the part of the Purchaser as are contained in the Conditions, unless and until he shall have disclosed to the Vendor the name of his principal or other such party. FAILURE TO PAY DEPOSIT 31. The failure by the Purchaser to pay in full the deposit hereinbefore specified as payable by him shall constitute a breach of condition entitling the Vendor to terminate the sale or to sue the Purchaser for damages or both but such entitlement shall be without prejudice to any rights otherwise available to the Vendor. 32. In case a cheque taken for the deposit (having been presented and whether or not it has been re-presented) shall not have been honoured, then and on that account the Vendor may (without prejudice to any rights otherwise available to him) elect either: (a) to treat the Contract evidenced by the Memorandum, the Particulars and the Conditions as having been discharged by breach thereof on the Purchaser's part or (b) to enforce payment of the deposit as a deposit by suing on the cheque or otherwise. DIFFERENCES - ERRORS 33. (a) In this Condition "error" includes any omission, non-disclosure, discrepancy, difference, inaccuracy, mis-statement or mis- representation made in the Memorandum, the Particulars or the Conditions or in the course of any representation, response or negotiations leading to the sale, and whether in respect of measurements, quantities, descriptions or otherwise (b) The Purchaser shall be entitled to be compensated by the Vendor for any loss suffered by the Purchaser in his bargain relative to the sale as a result of an error made by or on behalf of the Vendor provided however that no compensation shall be payable for loss of trifling materiality unless attributable to recklessness or fraud on the part of the Vendor nor in respect of any matter of which the Purchaser shall be deemed to have had notice under Condition 16(a) nor in relation to any error in a location or similar plan furnished for identification only (c) Nothing in the Memorandum, the Particulars or the Conditions shall: (i) entitle the Vendor to require the Purchaser to accept property which differs substantially from the property agreed to be sold whether in quantity, quality, tenure or otherwise, if the Purchaser would be prejudiced materially by reason 14 of any such difference or (ii) affect the right of the Purchaser to rescind or repudiate the sale where compensation for a claim attributable to a material error made by or on behalf of the Vendor cannot be reasonably assessed (d) Save as aforesaid, no error shall annul the sale or entitle the Vendor or the Purchaser (as the case maybe) to be discharged therefrom. DOCUMENTS OF TITLE RELATING TO OTHER PROPERTY 34. (a) Documents of title relating to other property as well as to the subject property shall be retained by the Vendor or other person entitled to the possession thereof (b) where the property is sold in lots, all documents of title relating to more than one lot shall be retained by the Vendor, until the completion of the sales of all the lots comprised in such documents, and shall then (unless they also relate to any property retained by the Vendor) be handed over to such of the Purchasers as the Vendor shall consider best entitled thereto (c) the Vendor shall give to the Purchaser (and where the property is sold in lots, to the Purchaser of each lot) certified copies of all documents retained under this Condition and pertinent to the title to be furnished (other than documents of record, of which plain copies only will be given) (d) subject as hereinafter provided, the Vendor shall give the usual statutory acknowledgement of the right of production and undertaking for safe custody of all documents (other than documents of record) retained by him under this Condition and pertinent to the title to be furnished. Such acknowledgement and undertaking shall be prepared by and at the expense of the Purchaser (e) if the Vendor is retaining any unregistered land held wholly or partly under the same title as the subject property, the Assurance shall be engrossed in duplicate by and at the expense of the Purchaser, who shall deliver to the Vendor the Counterpart thereof, same having been stamped and registered and (if appropriate) executed by the Purchaser. DISCLOSURE OF NOTICES 35. Where prior to the sale (a) any closing, demolition or clearance Order or (b) any notice (not being of the contents of the Development Plan other than an actual or proposed designation of all or any part of the subject property for compulsory acquisition) made or issued by or at the behest of a Competent Authority in respect of the subject property and affecting same at the date of sale has been notified or given to the Vendor (whether personally or by advertisement or posting on the subject property or in any other manner) or is otherwise known to the Vendor or where the subject property is at the date of sale affected by any award or grant which is or may be repayable by the Vendor's 15 successor in title then if the Vendor fails to show (i) that, before the sale, the Purchaser received notice or was aware of the matter in question or (ii) that same is no longer applicable or material or (iii) that same does not prejudicially affect the value of the subject property or (iv) that the subject thereof can and will be dealt with fully in the Apportionment Account the Purchaser may by notice given to the Vendor rescind the sale. DEVELOPMENT 36. (a) Unless the Special Conditions contain a provision to the contrary, the Vendor warrants: [SIDEBAR] In cases where property is affected by an unauthorised development or a breach of Condition/Conditions in a Permission/Approval amounting to a non-conforming development or where the Bye-Law Amnesty covered by Section 22(7), Building Control Act, 1990 is relevant, it is recommended that same be dealt with expressly by Special Condition. [END SIDEBAR] (1) either (i) that there has been no development (which term includes material change of use) of, or execution of works on or to, the subject property since the 1st day of October, 1964, for which Planning Permission or Building Bye-Law Approval was required by law or (ii) that all Planning Permissions and Building Bye-Law Approvals required by law for the development of, or the execution of works on or to, the subject property as at the date of sale, or for any change in the use thereof at that date were obtained (save in respect of matters of trifling materiality), and that, where implemented, the conditions thereof and the conditions expressly notified with said Permissions by any Competent Authority in relation to and specifically addressed to such development or works were complied with substantially AND (2) that no claim for compensation has ever been made under Part III, Local Government (Planning and Development) Act, 1990 provided however that the foregoing warranty shall not extend to (and the Vendor shall not be required to establish) the obtaining of Approvals under the Building Bye-Laws or compliance with such Bye-Laws in respect of development or works executed prior to the 1st day of October, 1964. (b) The Vendor shall, with the copy documents to be delivered or sent in accordance with Condition 7, furnish to the Purchaser copies of all such Permissions and Approvals as are referred to in Condition 36(a) other than in the proviso thereto, and (where relevant) copies of all Fire Safety Certificates and (if available) Commencement Notices issued under Regulations made pursuant to the Building Control Act, 1990 and referable to the subject property. 16 (c) The Vendor shall, on or prior to completion of the sale, furnish to the Purchaser (i) written confirmation from the Local Authority of compliance with all conditions involving financial contributions or the furnishing of bonds in any such Permission or Approval (other than those referred to in the said proviso) or alternatively formal confirmation from the Local Authority that the roads and other services abutting on the subject property have been taken in charge by it without requirement for payment of moneys in respect of the same (ii) a Certificate or Opinion by an Architect or an Engineer (or other professionally qualified person competent so to certify or opine) confirming that, in relation to any such Permission or Approval (other than those referred to in the proviso aforesaid) the same relates to the subject property; that the development of the subject property has been carried out in substantial compliance therewith and that all conditions (other than financial conditions) thereof and all conditions expressly notified with said Permission by any Competent Authority and specifically directed to and materially affecting the subject property or any part of the same have been complied with substantially (and, in the event of the subject property forming part of a larger development, so far as was reasonably possible in the context of such development). (d) Unless the Special Conditions contain a stipulation to the contrary, the Vendor warrants in all cases where the provisions of the Building Control Act, 1990 or of any Regulations from time to time made thereunder apply to the design or development of the subject property or any part of the same or any activities in connection therewith, that there has been substantial compliance with the said provisions in so far as they shall have pertained to such design development or activities and the Vendor shall, on or prior to completion of the sale, furnish to the Purchaser a Certificate or Opinion by an Architect or an Engineer (or other professionally qualified person competent so to certify or opine) confirming such substantial compliance as aforesaid. RESCISSION 37. Upon rescission of the sale in accordance with any of the provisions herein or in the Special Conditions contained or otherwise: (a) the Purchaser shall be entitled to a return of his deposit (save where it shall lawfully have been forfeited) but without interest thereon (b) the Purchaser shall remit to the Vendor all documents in his possession belonging to the Vendor and the Purchaser shall at his expense (save where Special Conditions otherwise provide) procure the cancellation of any entry relating to the sale in any register. 38. If any such deposit as is to be returned pursuant to Condition 37 shall not have been returned to the Purchaser within five working days from the date upon which the sale shall have been rescinded, the Purchaser shall be entitled to interest thereon at the stipulated interest rate from the expiration of the said period of five working days to the date upon which the deposit shall have been so returned. 39. The right to rescind shall not be lost by reason only of any intermediate negotiations or attempts to comply with or to remove the issue giving rise to the exercise of such right. 17 COMPLETION NOTICES 40. Save where time is of the essence in respect of the closing date, the following provisions shall apply: (a) if the sale be not completed on or before the closing date either party may on or after that date (unless the sale shall first have been rescinded or become void) give to the other party notice to complete the sale in accordance with this condition, but such notice shall be effective only if the party giving it shall then either be able, ready and willing to complete the sale or is not so able, ready or willing by reason of the default or misconduct of the other party (b) upon service of such notice the party upon whom it shall have been served shall complete the sale within a period of twenty-eight days after the date of such service (as defined in Condition 49 and excluding the date of service), and in respect of such period time shall be of the essence of the contract but without prejudice to any intermediate right of rescission by either party (c) the recipient of any such notice shall give to the party serving the same reasonable advice of his readiness to complete (d) if the Purchaser shall not comply with such a notice within the said period (or within any extension thereof which the Vendor may agree) he shall be deemed to have failed to comply with these Conditions in a material respect and the Vendor may enforce against the Purchaser, without further notice, such rights and remedies as may be available to the Vendor at law or in equity, or (without prejudice to such rights and remedies) may invoke and impose the provisions of Condition 41 (e) if the Vendor does not comply with such a notice within the said period (or within any extension thereof which the Purchaser may agree), then the Purchaser may elect either to enforce against the Vendor, without further notice, such rights and remedies as may be available to the Purchaser at law or in equity or (without prejudice to any right of the Purchaser to damages) to give notice to the Vendor requiring a return to the Purchaser of all moneys paid by him, whether by way of deposit or otherwise, on account of the purchase price. Condition 38 shall apply to all moneys so to be returned, the period of five working days therein being computed from the date of the giving of such last mentioned notice. If the Purchaser gives such a notice and all the said moneys and interest (if any) are remitted to him, the Purchaser shall no longer be entitled to specific performance of the sale, and shall return forthwith all documents in his possession belonging to the Vendor, and (at the Vendor's expense) procure the cancellation of any entry relating to the sale in any register (f) the party serving a notice under this Condition may, at the request of or with the consent of the other party, by written communication to the other party extend the term of such notice for one or more specified periods of time, and, in that case, the term of the notice shall be deemed to expire on the last day of such extended period or periods, and the notice shall operate as though such extended period or periods, had been specified in this Condition in lieu of the said period of twenty-eight days, and time shall be of the essence in relation to such extended period (g) the Vendor shall not be deemed to be other than able, ready and willing to complete for the purposes of this Condition: (i) by reason of the fact that the subject property has been mortgaged or charged, provided that the funds (including the deposit) receivable on completion shall (after allowing for all prior claims thereon) be sufficient to discharge the aggregate of all amounts payable in satisfaction of such mortgages and charges to the extent that they relate to the subject property 18 or (ii) by reason of being unable, not ready or unwilling at the date of service of such notice to deliver vacant possession of the subject property provided that (where it is a term of the sale that vacant possession thereof be given) the Vendor is, upon being given reasonable advice of the other party's intention to close the sale on a date within the said period of twenty-eight days or any extension thereof pursuant to Condition 40 (f), able, ready and willing to deliver vacant possession of the subject property on that date. FORFEITURE OF DEPOSIT AND RESALE 41. If the Purchaser shall fail in any material respect to comply with any of these Conditions, the Vendor (without prejudice to any rights or remedies available to him at law or in equity) shall be entitled to forfeit the deposit and shall be at liberty (without being obliged to tender an Assurance) to re-sell the subject property, with or without notice to the Purchaser, either by public auction or private treaty. In the event of the Vendor re-selling the subject property within one year after the closing date (or within one year computed from the expiration of any period by which the closing may have been extended pursuant to Condition 40) the deficiency (if any) arising on such re-sale and all costs and expenses attending the same or on any attempted re-sale shall (without prejudice to such damages to which the Vendor shall otherwise be entitled) be made good to the Vendor by the Purchaser, who shall be allowed credit against same for the deposit so forfeited. Any increase in price obtained by the Vendor on any re-sale, whenever effected, shall belong to the Vendor. DAMAGES FOR DEFAULT 42. Neither the Vendor nor the Purchaser, in whose favour an order for specific performance has been made, shall be precluded from an award of damages at law or in equity, in the event of such order not being complied with. RISK 43. Subject as hereinafter provided, the Vendor shall be liable for any loss or damage howsoever occasioned (other than by the Purchaser or his Agent) to the subject property (and the purchased chattels) between the date of sale and the actual completion of the sale BUT any such liability (including liability for consequential or resulting loss) shall not as to the amount thereof exceed the purchase price. 44. The liability imposed on the Vendor by Condition 43 shall not apply: (a) to inconsequential damage or insubstantial deterioration from reasonable wear and tear in the course of normal occupation and use, and not materially affecting value (b) to damage occasioned by operations reasonably undertaken by the Vendor in his removal from, and vacation of the subject property, provided that the same are so undertaken with reasonable care (c) where any such loss or damage has resulted from a requirement restriction or obligation imposed by a Competent Authority after the date of sale. 45. Nothing in Conditions 43 and 44 shall affect: (a) the Purchaser's right to specific performance in an appropriate case 19 (b) the Purchaser's right to rescind or repudiate the sale upon the Vendor's failure to deliver the subject property substantially in its condition at the date of sale (save where such failure shall have been occasioned by the Purchaser or his Agent) (c) the operation of the doctrine of conversion (d) the Purchaser's right to gains accruing to the subject property (or the purchased chattels) after the date of sale (e) the Purchaser's right to effect on or after the date of sale his own insurance against loss or damage in respect of the subject property or any part of the same (or the purchased chattels) (f) the rights and liabilities of parties other than the Vendor and the Purchaser (g) the rights and liabilities of the Purchaser on foot of any lease subsisting at the date of sale, or of any arrangement whereby the Purchaser shall prior to the actual completion of the sale have been allowed into occupation of the subject property or any part thereof (or into possession of the purchased chattels). CHATTELS 46. Unless otherwise disclosed to the Purchaser prior to the sale the Vendor warrants that, at the actual completion of the sale, all the purchased chattels shall be his unencumbered property and that same shall not be subject to any lease, rental hire, hire-purchase or credit sale agreement or chattel mortgage. INSPECTION 47. The Vendor shall accede to all such requests as may be made by the Purchaser for the inspection on a reasonable number of occasions and at reasonable times of the subject property (and the purchased chattels). NON-MERGER 48. Notwithstanding delivery of the Assurance of the subject property to the Purchaser on foot of the sale, all obligations and provisions designed to survive completion of the sale and all warranties in the Conditions contained, which shall not have been implemented by the said Assurance, and which shall be capable of continuing or taking effect after such completion, shall enure and remain in full force and effect. NOTICES 49. Unless otherwise expressly provided, any notice to be given or served on foot of the Conditions shall be in writing, and may (in addition to any other prescribed mode of service) be given: (a) by handing same to the intended recipient, and shall be deemed to have been delivered when so handed 20 (b) by directing it to the intended recipient, and delivering it by hand, or sending same by prepaid post to: (i) such address as shall have been advised by him to the party serving the notice as being that required by the intended recipient for the service of notices, or (ii) (failing such last mentioned advice) the address of the intended recipient as specified in the Memorandum, or (iii) (in the event of the intended recipient being a Company) its Registered Office for the time being, or (iv) the office of the Solicitor representing the intended recipient in relation to the sale and any such notice shall be deemed to have been given or served, when delivered, at the time of delivery, and, when posted, at the expiration of three working days after the envelope containing the same, and properly addressed, was put in the post. TIME LIMITS 50. Where the last day for taking any step on foot of the Conditions or any Notice served thereunder would, but for this provision, be a day other than a working day, such last day shall instead be the next following working day provided that for the purpose of this Condition the expression "working day" shall not be deemed to include (i) any Saturday, Sunday, Bank or Public Holiday nor (ii) any of the seven days immediately succeeding Christmas Day nor (iii) any day on which the registers or records wherein it shall be appropriate to make searches referable to the sale shall not be available to the public nor (iv) any day which shall be recognised by the Solicitors' Profession at large as being a day on which their offices are not open for business. ARBITRATION 51. All differences and disputes between the Vendor and the Purchaser as to: (a) whether a rent is or is not a rack rent for the purpose of Condition 10 (c), or (b) as to whether any interest is payable pursuant to Condition 25 or as to the rate or amount thereof or the date from which it shall be exigible, or (c) the identification of the Apportionment Date, or the treatment or quantification of any item pursuant to the provisions for apportionment in the Conditions, or (d) any issue on foot of Condition 33, including the applicability of said Condition, and the amount of compensation payable thereunder, or (e) the materiality of any matter for the purpose of Condition 36 (a), or (f) the materiality of damage or any other question involving any of the provisions in Conditions 43,44 and 45, including the amount of compensation (if any) payable, or 21 (g) whether any particular item or thing is or is not included in the sale, or otherwise as to the nature or condition thereof shall be submitted to arbitration by a sole Arbitrator to be appointed (in the absence of agreement between the Vendor and the Purchaser upon such appointment and on the application of either of them) by the President (or other Officer endowed with the functions of such President) for the time being of the Law Society of Ireland or (in the event of the President or other Officer as aforesaid being unable or unwilling to make the appointment) by the next senior Officer of that Society who is so able and willing to make the appointment and such arbitration shall be governed by the Arbitration Acts, 1954 and 1980 provided however that if the Arbitrator shall relinquish his appointment or die, or if it shall become apparent that for any reason he shall be unable or shall have become unfit or unsuited (whether because of bias or otherwise) to complete his duties, or if he shall be removed from office by Court Order, a substitute may be appointed in his place and in relation to any such appointment the procedures herein-before set forth shall be deemed to apply as though the substitution were an appointment de novo which said procedures may be repeated as many times as may be necessary. 22 LAW SOCIETY OF IRELAND PARTICULARS AND CONDITIONS OF SALE (1995 EDITION) Copyright in, and obtainable only from, the Law Society of Ireland. EX-10.5 9 a2061919zex-10_5.txt EXHIBIT 10.5 Exhibit 10.5 THIS INDENTURE made the 24th day of August 2001 BETWEEN INDUSTRIAL DEVELOPMENT AGENCY (IRELAND) having its Principal Office at Wilton Park House, Wilton Place in the City of Dublin (hereinafter called "IDA" which expression shall include its successors and assigns) of the one part and Genzyme Ireland Limited having its registered office at c/o A&L Goodbody, North Wall Quay, IFSC, in the City of Dublin ("hereinafter called "the Lessee" which expression shall include its successors and permitted assigns) of the other part. WITNESSETH: 1. In consideration of the sum of lR(Pound) 2,076, 100-00 paid by the Lessee to IDA (the receipt of which is hereby acknowledged) IDA demises to the Lessee ALL THAT AND THOSE the premises described in the First Schedule hereto (hereinafter referred to as "the demised premises") TO HOLD the same unto the Lessee for a term of 999 years from the 1st day of January 2001 subject to the rent set out in the First Schedule hereto and to the terms and conditions set out in the Second and Third Schedules hereto. 2. The Lessee hereby covenants with IDA that it will observe all the terms and conditions contained in the First, Second and Third Schedules hereto as if each term and condition applicable to the Lessee was incorporated as a separate covenant with IDA. 3. IDA covenants with the Lessee that it will observe all the terms and conditions contained in the First, Second and Third Schedules hereto insofar as the same are binding upon IDA as if each term and condition applicable to IDA was incorporated herein as a separate covenant with the Lessee. FIRST SCHEDULE PREMISES 1. ALL THAT AND THOSE part of the lands at Waterford Industrial Estate situate at IDA's Industrial Estate in the County of Waterford comprising an area of 15.97 acres or thereabouts statute measure more particularly described on the map annexed hereto and thereon surrounded by a red verge line being part of the lands comprised in Folio 4917 of the Register County of Waterford. TOGETHER WITH the free and uninterrupted passage and running of water, soil, and effluent, drainage, gas, water, oil, electricity, steam, telephone or any other services supplied to or from the demised premises, in common with IDA, it's successors and assigns, over the lands the property of IDA through sewers, drains, water courses, conduits, pipes, wires and cables which now or hereafter within the period of 21 years from the date of this lease during the term hereby granted may be in or over, under or upon the said lands the property of IDA together with full and free right and liberty for the lessee, its servants and agents of IDA, to enter upon the said lands the property of IDA for the purpose of connecting, laying, inspecting, repairing, cleaning, maintaining, altering, replacing or renewing the installations, structures, fittings or any other works providing the said services of any of them and other services to the demised premises causing as little inconvenience as possible to IDA, it's successors and assigns, and the lessee making good any damage thereby occasioned. EXCEPTING AND RESERVING unto IDA, its successors and assigns: 1. (a) the free and uninterrupted passage and running of water, soil and effluent drainage, gas, water, oil, electricity, steam, telephone or any other service or supply to and from the other buildings and lands the property of IDA and its tenants adjoining or near to the demised premises through the sewers, drains, watercourses, conduits, pipes, wires and cables which now are or may hereafter within the period of 21 years from the date of this Lease during the term hereby granted be in or over, under or upon the demised premises; 1. (b) at any time hereafter and from time to time full right and liberty to execute works, services and erections and buildings upon or to alter or rebuild any of the erections, services and buildings erected on its adjoining and neighbouring land and to use the same as it may think fit; 1. (c) the full and free right and liberty to the Lessor, its servants and agents to enter after at least two days notice (except in the case of emergency) upon the demised premises at all reasonable times for the purpose of connecting, laying, inspecting, repairing, cleaning, maintaining, altering, replacing or renewing any sewer drain, main, pipe, wire, cable, watercourse, channel, conduit or subway and to erect, construct or lay in, over, under or across the demised premises not built upon any sewers, drains, main, pipes, wires, cables, poles, structures, fixtures or other works for the drainage of or for the supply of water, gas, electricity, oil, telephone, heating, steam, radio and television signals and other services to other premises of IDA causing as little inconvenience as possible to the Lessee and IDA making good any damage thereby occasioned; 1. (d) all rights, easements and privileges now belonging to or enjoyed by any adjoining property. MINING RIGHTS 2. All mines, minerals, quarries and royalties whatsoever in or under the demised premises during the term of the demise are excepted and reserved out of the demise. RENT AND GALE DAYS 3. The rent of the demised premises shall be payable in advance without any deductions whatsoever on the 1st day of January in each year with the exception of the first installment which shall be paid on the execution hereof. In the first to the fifth year inclusive of the term of the demise the annual rent shall be IR(Pound) 175-00 per hectare (or part thereof) per annum. From the commencement of the sixth year of the term of the demise and for the residue of the term hereby created the annual rent shall be determined as specified in the Third Schedule hereto. SECOND SCHEDULE 1. The Lessee shall pay the rent hereby reserved without any deductions whatsoever on the dates hereinbefore provided for. 2. In addition to the said rent the Lessee shall pay and discharge all taxes, rates, duties, charges, assessments and impositions whatsoever including Value Added Tax whether Parliamentary, Municipal, County, Union, District or any other description which may now or at any time hereafter be assessed, charged or imposed on the premises or any part thereof or the rent payable thereout and whether payable by owner or occupier. 3. As the demised premises are situate upon an Industrial Estate, to bear with the owners or occupiers of each other unit in the said Industrial Estate the cost and expense of all necessary maintenance, repair and upkeep (and operating cost where applicable) of access roads, footpaths, common areas, drainage and water services and public lighting in the same proportion as the gross floor area of the buildings erected on the demised premises bears to: 3. (A) In the case of a completed estate the total gross floor areas of all the industrial units in the estate and 3. (B) In the case of a non completed or part completed estate the total gross floor areas of all the completed units in the estate and where roads and services have been provided to undeveloped areas of the estate, the gross floor area of buildings in the course of erection and proposed buildings fronting on to such services until such time as same are taken in charge by the Local Authority; 4. To bear with the owners or occupiers of each other unit in the said Industrial Estate the cost and expense of all necessary estate security in the same proportion as the gross floor area of the buildings erected on the demised premises bears to the gross floor areas of all the completed units in the said estate; 5. (i) The Lessee shall on or prior to the 31st day of March 2003 have substantially commenced to build and erect upon the demised premises a factory premises in accordance with plans and specifications first approved of in writing by IDA and in accordance with all statutory requirements, regulations and bye-laws applicable thereto. For the purpose of this Clause "substantially commenced" shall mean the pouring of foundations and the erection of the main structure support for the said factory premises; 5. (ii) If the Lessee fails to fully and completely comply with this Clause IDA shall be entitled to repurchase at the expense of the Lessee the demised premises including any partially erected buildings thereon for the sum of IR(Pound) 2,076,100-00 free from encumbrances; 5. (iii) The Lessee hereby irrevocably constitutes and appoints the Secretary for the time being of IDA to be the Attorney of the Lessee for it and on its behalf and in its name and as its act and at its expense to re-assign or surrender this Lease from the name of the Lessee, its successors or permitted assigns to IDA; 5. (iv) The Lessee shall do and execute all acts, instruments and things which IDA considers necessary or expedient for reassigning or surrendering the demised premises as aforesaid; 5. (v) IDA may from time to time in writing under hand or seal substitute and appoint any person or persons to act under or in place of the said Attorney in all or any of matters aforesaid and from time to time revoke any such substitution and appointment; 5. (vi) The Lessee shall not be entitled to erect any buildings on the site demised other than those referred to in the approved plans and specifications as mentioned in Clause 5 (i) hereof without the prior consent in writing of IDA such consent not to be unreasonably withheld. LOCAL AUTHORITY REQUIREMENTS 6. The Lessee shall execute all such works which any County or District Council or other Local or Public Authority may require to be carried out in respect of the demised premises either by IDA or by the Lessee and immediately after the receipt of any notice requiring such works to be carried out the Lessee shall send a copy thereof to IDA. 7. Without prejudice to the generality of Clause 6, the Lessee shall:- 7-1 on receipt of any notice, order or request pursuant to provisions of the Local Government (Planning and Development) Acts 1963 to 1999 and the Planning and Development Act 2001 or any Act or Acts amending, extending or replacing the same or any regulation made thereunder forthwith notify IDA of this fact and furnish to IDA a copy of any such notice, Order or Request; 7-2 indemnify IDA from and against all actions, claims, suits, demands, penalties or fines for or in respect of any failure to satisfactorily and completely comply with the requirements of such notice, order or request. REPAIRS 8. The Lessee will at all times well and sufficiently repair, maintain, cleanse and keep the entire of the demised premises in good and substantial repair, condition and state of exterior decoration. The Lessee's obligations under this Clause shall include all fences, drains, sewers or other conveniences and appurtenances belonging to the demised premises. The Lessee shall keep and maintain the lands of the demised premises not covered by buildings in a neat and tidy condition in a manner satisfactory to IDA. MAINTENANCE OF SERVICES 9. During the term of this Lease or until they are taken in charge by the Local Authority (whichever is the lesser period) IDA shall construct and maintain in good order, repair and condition the roads and footpaths and shall maintain the sewers, drains and water mains (outside the perimeter of the demised premises) which serve the demised premises unless and until the same have been taken in charge by the Local Authority. USE OF PREMISES 10. The Lessee shall use the demised premises only for manufacturing and ancillary purposes. 11. The Lessee shall not discharge or permit to be discharged into the sewer serving the demised premises any liquid, matter or thing which is or may be liable to set or congeal at average sewer temperature or is capable of giving off any inflammable or explosive gas or any acid, alkali or other substance in sufficient concentration to cause corrosion to sewer pipes, penstocks, gratings and sewer fittings. 12. The Lessee shall not discharge or permit to be discharged any effluent into the surface water drainage system. 13. The Lessee shall not do or permit to be done any act or thing which might be or grow to be a nuisance or to the annoyance, damage or inconvenience of the neighbourhood or the property adjoining or near to the demised premises or of the owners or occupiers of any such property. INSURANCE 14. The Lessee shall keep the demised premises insured against loss or damage by fire, storm, tempest, flood, explosion, aircraft or other aerial devices or articles dropped therefrom. The insurance shall be for the sum of money sufficient to cover the full cost of reinstating the premises including architects' fees in the event of total destruction thereof and IDA shall be noted therein as an interested party. 15. If the premises or any part thereof shall at any time during the term be destroyed or damaged by any of the risks mentioned in Clause 14, the Lessee shall apply all monies received in respect of such insurance with all reasonable speed in the building, repairing and otherwise reinstating the premises according to the original plan or elevation thereof or as otherwise agreed with IDA. Any deficiency in such monies shall be provided by the Lessee out of its own funds. 16. The Lessee shall not carry on any business on the demised premises or store any material thereon which might render any such insurance void or voidable. 17. No clause. TERMINATION 18. Notwithstanding anything hereinbefore contained it is expressly agreed by the Lessee and declared that if the Rent herein reserved or any part thereof shall at any time be in arrears and unpaid for 21 days after it shall become due (whether the same shall have been lawfully demanded or not) or shall be guilty of any breach of the conditions of this Lease and fail to make good any such breach within reasonable time it shall be lawful for IDA to enter upon the demised premises or any part thereof in the name of the whole and peaceably to hold and enjoy the demised premises thenceforth as if these presents had not been made without prejudice however to any claim of IDA against the Lessee arising out of any antecedent breach of any condition of this Lease. THIRD SCHEDULE 1. The yearly rent payable by the Lessee shall be subject to adjustment at the end of the first period of 5 years and at the end of the second period of 5 years of the term of this Lease in the manner hereinafter provided and after the first adjustment the Tenant shall pay the amount of the Rent as so adjusted in respect of the next following 5 year period of the said term and thereafter the yearly rent so adjusted for the residue of the said term PROVIDED THAT the yearly minimum rent payable by the Tenant throughout the said term shall be IR(Pound)l0 per acre per annum and no adjustment made under the provisions of this Schedule shall take effect so as to reduce the said rent below the said figure. 2. Subject to the provisions of this Schedule, the said adjustment at the end of the said periods of 5 years hereinbefore mentioned shall be calculated by reference to the change in the cost of living as indicated by the Consumer Price Index (hereinafter referred to as "the Index") issued by the authority of the Central Statistics Office of the Republic of Ireland and at present officially published in the Irish Statistical Bulletin and shall be made by increasing the yearly rent payable at the end of the said periods of 5 years in proportion to the rise or fall in the respective Index Figures current on the 1st day of each of the said periods of 5 years compared with the Index figures current on the last day of each of the said periods. 3. For the purpose of this paragraph, the Index figure current on the date aforementioned shall be that published on either of the said dates in the Irish Statistical Bulletin or other official publication, or if not published on either of the said days, then last published in the said Bulletin or publication immediately before either of them. 4. If during the said periods of 5 years, the basis of the Index shall be changed by substituting a new basic or starting Index figure or otherwise the adjustment of the rent to be paid for the period following the expiration of the said periods of 5 years shall in default of agreement between the parties be determined by a Professional Valuer to be nominated by the President for the time being of the Irish Auctioneers and Valuers Institute and his determination shall be that of an Expert and not of an Arbitrator and shall be binding upon the parties and in making his determination the said person shall have regard to any official publication relating to the change in the cost of living during the said period issued by the authority of the Government of the Republic of Ireland or by any responsible organisation. PROVIDED THAT the adjustment in the rent to be made at the end of the said periods of 5 years during which the basis of any new or revised Index remains unchanged shall continue to be made in accordance with the provisions of Paragraphs I and 2 hereof and FURTHER PROVIDED that notwithstanding anything hereinbefore provided the amount of any adjustment in Rent shall not exceed 10% of the Rent payable immediately prior to such adjustment. QUIET ENJOYMENT 5. On the Lessee paying the rent hereby reserved and performing and observing the conditions and agreements of this Lease, the Lessee shall and may peaceably hold and enjoy the demised premises during the term of the Lease without interruption by IDA or any person lawfully claiming under or in trust for it. IDA hereby assents to the registration of this Lease and the rights hereby granted as a burden on Folio 4917 of the Register County Waterford and consents to the use of the Land Certificate of the said Folio for the purposes of such registration. IT IS HEREBY FURTHER CERTIFIED by the Lessee that it is the person becoming entitled to the entire beneficial interest in the interest hereby created and that all necessary consents under Sections 12 and 45 of the Land Act, 1965 have been obtained and that all conditions attached thereto have been complied with. IT IS HEREBY FURTHER CERTIFIED that the consideration (other than rent) of the Lease is wholly attributable to property which is not residential property. IT IS HEREBY FURTHER CERTIFIED that Section 53 (Lease Combined With Building Agreement For Dwellinghouse /Apartment) of the Stamp Duties Consolidation Act 1999 does not apply to this Instrument. IN WITNESS whereof the above named parties have hereunto set their hands and affixed their Seals the day and year first herein written. PRESENT when the Seal of INDUSTRIAL DEVELOPMENT AGENCY (IRELAND) was affixed hereto: /s/ Richard Ryan ------------------ Authorised Officer AUTHORIZED OFFICER /s/ Martin Cronin ------------------ Authorised Officer AUTHORIZED OFFICER PRESENT when the Common Seal Of GENZYME IRELAND LIMITED. was affixed hereto: [ILLEGIBLE] /s/ Mark Bamforth Mark Bamforth Dated the day of 2001 INDUSTRIAL DEVELOPMENT AGENCY (IRELAND) One Part Genzyme Ireland Limited Other Part 999 YEAR LEASE -------------- GALLAGHER SHATTER, Solicitors, 4, Upper Ely Place, Dublin 2. Genzyme 999 lease/ida dir -----END PRIVACY-ENHANCED MESSAGE-----