-----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, WlvWVmbneznYykCJlqFR/ae7mr5YIrnzV/1ZFRr7V0Gc8eQ+sAJm3QUaF3F47I9g FiLPbTG+rtQrER013jmMgA== 0000950135-97-001453.txt : 19970401 0000950135-97-001453.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14680 FILM NUMBER: 97568493 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-K 1 GENZYME CORPORATION FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 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 02139 CAMBRIDGE, MASSACHUSETTS (Zip Code) (Address of principal executive offices) (617) 252-7500 (Registrant's telephone number, including area code) ----------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: GENERAL DIVISION COMMON STOCK, PAR VALUE $0.01 ("GGD STOCK") TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("GTR STOCK") GGD STOCK PURCHASE RIGHTS GTR STOCK PURCHASE RIGHTS 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 twelve 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 1, 1997: $2,098,604,234 Number of shares of the Registrant's GGD Stock outstanding as of March 1, 1997: 75,682,805 Number of shares of the Registrant's GTR Stock outstanding as of March 1, 1997: 13,188,459 ----------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 29, 1997 are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 NOTE REGARDING FORWARD-LOOKING STATEMENTS: This Annual Report on Form 10-K for Genzyme Corporation ("Genzyme" or the "Company") contains forward-looking statements concerning, among other things, the Company's expected future revenues, operations and expenditures, estimates of the potential markets for the Company's products and services, assessments of competitors and potential competitors, projected timetables for the preclinical and clinical development, regulatory approval and market introduction of the Company's products and services and estimates of the capacity of manufacturing and other facilities to support such products and services. These forward-looking statements represent the expectations of Genzyme's management as of the filing date of this Form 10-K. The Company's actual results could differ materially from those anticipated by the forward-looking statements due to a number of factors, including (i) the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and patent and other proprietary rights protection for its products and services, (ii) decisions, and the timing of decisions, made by the U.S. Food and Drug Administration and other agencies regarding the indications for which the Company's products may be approved, (iii) the actual size and characteristics of markets to be addressed by the Company's products and services, (iv) market acceptance of the Company's products and services, (v) the Company's ability to obtain reimbursement for its products from third-party payers, where appropriate, (vi) the accuracy of the Company's information concerning the products and resources of competitors and potential competitors, and (vii) the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART I ITEM 1. BUSINESS. INTRODUCTION Genzyme is a biotechnology and health care products company engaged in the development of innovative products and services for major unmet medical needs. The Genzyme General Division ("Genzyme General") develops and markets specialty therapeutic, surgical and diagnostic products, pharmaceuticals and genetic diagnostic services. The Company's activities to develop, manufacture and market biological products for the treatment of cartilage damage, severe burns, chronic skin ulcers and neurodegenerative diseases are conducted through the Genzyme Tissue Repair Division ("Genzyme Tissue Repair"). Genzyme currently has two classes of common stock outstanding: General Division Common Stock ("GGD Stock") and Tissue Repair Division Common Stock ("GTR Stock"). The GGD Stock and the GTR Stock are intended to reflect the value and track the performance of Genzyme General and Genzyme Tissue Repair, respectively. In January 1997, Genzyme signed a merger agreement providing for the merger of PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the research and development of pharmaceuticals for the treatment of cancer, into Genzyme in exchange for shares of a new Genzyme security to be designated Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). The GMO Stock is intended to reflect the value and track the performance of Genzyme Molecular Oncology, a new division proposed by Genzyme to develop and market novel products and services for the diagnosis and treatment of cancer. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Subsequent Events. For purposes of financial statement presentation, all of the Company's programs, products, assets and liabilities are allocated to either Genzyme General or Genzyme Tissue Repair. Notwithstanding this allocation, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of GGD Stock and GTR Stock have no specific claim against the assets attributed to the division whose performance is associated with the class of stock they hold. Liabilities or contingencies of either division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of both divisions. Ceredase(R), Cerezyme(R), InSight(R), Pleur-evac(R), Tevdek(R), Thora-Klex(R), Thyrogen(R) and Vianain(R) are registered trademarks of the Company. CARTICEL(R) is a registered service mark of Genzyme. Contrast(TM), Direct LDL(TM), EndoCABG(TM), HAL-S(TM), MelaPure(TM), N-geneous(TM), Sepracoat(TM), Seprafilm(TM), and Sepragel(TM) are trademarks and Epicel(SM), 3 Epicel ASAP(SM) and MASDA(SM) are service marks of the Company. NeuroCell(TM)-PD and NeuroCell(TM)-HD are trademarks of Diacrin, Inc. ("Diacrin"). Provisc(R) is a registered trademark of Alcon Laboratories, Inc. ("Alcon"). Pulmozyme(R) is a registered trademark of Genentech, Inc. GENZYME GENERAL OVERVIEW Genzyme General's Specialty Therapeutics business unit markets Ceredase(R) enzyme and Cerezyme(R) enzyme, products for the treatment of Gaucher disease. The Company's results of operations are highly dependent on sales of these products which, for 1996, totaled $264.6 million. Other specialty therapeutic products under development include Thyrogen(R) hormone for use in the diagnosis and treatment of thyroid cancer and gene therapy products for the treatment of cystic fibrosis ("CF"), cancer, Gaucher disease and cardiovascular disease. Genzyme General's Surgical Products business unit was formed in July 1996 by combining the business of Deknatel Snowden Pencer, Inc. ("DSP"), a privately-held company acquired in July by Genzyme that specializes in the development, manufacture and marketing of cardiovascular devices, precision surgical instruments and specialty surgical products, with Genzyme General's line of biomaterial products based on hyaluronic acid ("HA") for use in limiting the formation of post-operative adhesions (the "Sepra Products"). Genzyme General's Diagnostic Services business unit ("Genzyme Genetics") applies advanced biotechnology to develop and provide high quality, sophisticated genetic diagnostic services to health care providers throughout the U.S. and internationally. Genzyme General's Diagnostic Products business unit ("Genzyme Diagnostics") is a primary supplier of diagnostic components (enzymes, substrates, antibodies and antigens), bulk reagents and devices (including infectious disease kits, the Direct LDL(TM) and N-geneous(TM) HDL cholesterol test kits and rapid tests for detection of pregnancy, Strep A and mononucleosis) to manufacturers of clinical diagnostic reagents and kits as well as directly to clinical reference laboratories. Genzyme Diagnostics also manufacturers and sells a broad line of antibody and antigen based ELISA test kits. In addition, Genzyme Diagnostics distributes a broad line of cytokine and apoptosis research products to academic, industrial and governmental laboratories. Genzyme General's Pharmaceuticals business unit ("Genzyme Pharmaceuticals") develops, manufactures and sells a range of active drug substances, pharmaceutical intermediates, synthetic phospholipids, peptides and chemicals to the pharmaceutical and health care industries. Genzyme Pharmaceuticals also markets MelaPure(TM) brand melatonin, a dietary supplement. RELATED ENTITIES GENZYME DEVELOPMENT PARTNERS, L.P. In 1989, Genzyme sponsored Genzyme Development Partners, L.P. ("GDP"), a research and development limited partnership that raised $36.75 million through the private placement of limited partnership interests and warrants to purchase shares of the Company's common stock. A wholly-owned subsidiary of Genzyme is the general partner of GDP and holds a 1% partnership interest therein. The Company entered into a contract with GDP to perform research and development of the Sepra Products for which the Company was reimbursed its costs plus a 10% fee. The program to develop and market the Sepra Products is allocated to Genzyme General. All of GDP's capital available to fund development of the Sepra Products was spent by the end of the first quarter of 1994. Additional funds will be required to complete the development and clinical testing of Sepracoat(TM) and Sepragel(TM). While Genzyme is not obligated to fund additional development of the Sepra Products, it has funded such development since the first quarter of 1994 and will continue such funding during 1997. Under the terms of the various agreements between GDP and Genzyme, GDP has the exclusive right to sell Seprafilm(TM), Sepracoat(TM), Sepragel(TM), HAL-S(TM) and other HA-based surgical products in the U.S. and Canada through a joint venture with Genzyme (the "Joint Venture"). Genzyme was granted back an exclusive license to sell these products outside the U.S. and Canada subject to a royalty on European sales of these products under certain circumstances. The Joint Venture was formed in 1989 for the purpose of manufacturing and marketing GDP's products and commenced operations in 1996 following approval in August by the U.S. Food and Drug Administration (the "FDA") to market Seprafilm(TM) in the U.S. (the "Business Commencement Date"). Under the agreement between GDP and Genzyme governing the Joint Venture (the "Joint Venture Agreement"), GDP has contributed to the Joint Venture the use of its technology and $200,000, and Genzyme has contributed its agreement to manufacture and market the Sepra Products, to make non-interest bearing loans to the Joint Venture in the amount of any working capital deficiency, to make capital contributions to the extent deemed necessary by the two venturers in connection with the business of the Joint Venture and to allow the use of such trademarks, tradenames and logos as the venturers shall determine to be necessary and advisable for manufacturing and marketing the Sepra Products. The cost of Sepra Products purchased by the Joint Venture from Genzyme is determined pursuant to a formula in the Joint Venture Agreement. 2 4 The Joint Venture Agreement calls for GDP and Genzyme to determine, following the Business Commencement Date, the allocation of profits and losses between the parties and the level of reimbursement to Genzyme for providing general and administrative services to the Joint Venture. In March 1997, GDP and Genzyme amended and restated the Joint Venture Agreement (as so amended and restated, the "Amended and Restated Joint Venture Agreement") to address matters the original Joint Venture Agreement provided were to be agreed upon on or about the Business Commencement Date and to address certain other matters. The Amended and Restated Joint Venture Agreement is retroactive to August 17, 1996, the date of the first commercial sale of Seprafilm(TM), and provides that: (1) losses generated by the Joint Venture are allocated (a) the first $200,000 to GDP and then (b) 40% to GDP and 60% to Genzyme, provided however, that to the extent a loss allocated to GDP would, pursuant to the terms of GDP partnership agreement, be allocated to the general partner rather than the limited partners, such loss is allocated 100% to Genzyme; and (2) profits are allocated (a) the first $5.6 million to GDP, (b) the next $8.4 million to Genzyme and (c) thereafter, 40% to GDP and 60% to Genzyme. The Amended and Restated Joint Venture Agreement also provides that Genzyme will receive no reimbursement for the general and administrative services it provides to the Joint Venture until the first year in which the Joint Venture is projected to generate revenues in excess of $25 million at which time, Genzyme will receive a quarterly commission equal to 10% of the Joint Venture's revenues for such quarter. In connection with arriving at agreement on the foregoing matters, the parties also agreed to amend the Joint Venture Agreement to provide GDP with enhanced oversight mechanisms, including an audit right, and to eliminate Genzyme's unilateral right to withdraw from the Joint Venture. In connection with negotiating the Amended and Restated Joint Venture Agreement, the Joint Venture entered into an exclusive marketing and distribution agreement (the "Marketing and Distribution Agreement") with Genzyme whereby Genzyme will act as sole distributor of the Sepra Products for the Joint Venture. The Joint Venture agreed to sell Sepra Products to Genzyme at the price at which Genzyme is selling the applicable products to the end user less a distributor's discount (subject to a minimum purchase price) and also agreed to reimburse Genzyme for certain costs incurred in connection with market introduction of the Sepra Products. The economic terms of the proposed Marketing and Distribution Agreement are intended to be substantially similar to those applicable if Genzyme provided such services in its capacity as a venturer rather than as a distributor. At the request of a special committee of directors of the general partner consisting of the two directors who are not affiliated with Genzyme, Genzyme also entered into a tax indemnification agreement (the "Tax Indemnification Agreement") with GDP in which Genzyme agreed, subject to certain limitations, to indemnify the limited partners against loss of the benefits of certain research and development deductions certain limited partners have taken (net of potential tax savings due to any resultant higher tax basis in the limited partnership interests). The Tax Indemnification Agreement can be waived by GDP in connection with a purchase of GDP by Genzyme. 2A 5 The Joint Venture will be dissolved (a) upon purchase by Genzyme of all of the limited partnership interests (as described below), (b) if Genzyme does not exercise its option to purchase the limited partnership interests (i) upon the sale, license or other disposition of all or a substantial part of its technology by GDP or (ii) upon 90 days' notice by either venturer at any time after the expiration of a one-year period commencing after the option to purchase the limited partnership interests expires, whichever shall first occur, (c) by operation of law, (d) upon the bankruptcy, retirement, withdrawal or dissolution of Genzyme, (e) upon mutual consent of Genzyme and GDP or (f) upon the election by GDP if Genzyme fails to establish to the satisfaction of GDP that it is capable of and has undertaken to manufacture the Joint Venture's requirements for the products for a specified period. Genzyme has the option to buy all of the limited partnership interests in GDP for an initial payment of either cash or GGD Stock or a combination thereof, at its option, equal to $25.7 million (which amount will be recovered by Genzyme as a credit against subsequent royalty payments) and quarterly royalty payments for a period of ten years after the buy-out date equal to 10% of product sales in the U.S. and Canada (and 6% of such sales in Europe, but only to the extent necessary to meet certain projections made in connection with the initial capitalization of GDP) and 5% of any revenues derived by Genzyme from sales in the U.S. and Canada (and 3% in Europe, but only in the instances cited above) of non-HA-based products that are competitive with GDP's products. The option to purchase all of the limited partnership interests is exercisable during a 90-day period commencing on August 31, 2001, but such commencement date will be accelerated under certain circumstances. GENZYME TRANSGENICS CORPORATION. In February 1993, Genzyme formed Genzyme Transgenics Corporation ("GTC") and transferred to it all assets and liabilities of its business in the field of transgenic technology as applied to the development and production of recombinant proteins for therapeutic and diagnostic uses in exchange for shares of GTC's stock. In addition, Genzyme exclusively licensed to GTC all patents, licenses and other intellectual property in the field (excluding that related to a CF-related protein). As of December 31, 1996, Genzyme owned approximately 43% of GTC. In March 1996, Genzyme and GTC entered into a Convertible Debt and Development Funding Agreement under which (i) Genzyme has made available to GTC a $10 million credit line of 7% debt payable on March 31, 1998 and convertible by either party into shares of GTC common stock, (ii) Genzyme has agreed to fund the development costs associated with transgenic recombinant antithrombin III ("ATIII"), and (iii) in exchange for funding such development costs and for making available the credit line, Genzyme has received the right to co-market ATIII with GTC throughout the world, other than Asia. The agreement to fund the ATIII program was due to expire on March 31, 1997. The parties have agreed to extend the agreement until June 30, 1997 and are negotiating an agreement to provide for long-term development of the AT-III program. There can be no assurance that Genzyme and GTC will reach a definitive agreement to provide for such development and, if no agreement is reached, Genzyme's co-marketing rights will terminate. 3 6 Under other contractual arrangements between Genzyme and GTC, Genzyme General may engage GTC to perform transgenic research and development on proteins of interest to Genzyme. GTC has contracted with Genzyme for purification and protein chemistry research and development services to be performed by Genzyme General. Genzyme leases laboratory and office space to GTC and provides it with certain administrative and support services for which GTC pays fees based on Genzyme's costs. NEOZYME II CORPORATION. Neozyme II Corporation ("Neozyme II") was formed in March 1992 to contract with Genzyme to conduct research, development and clinical testing of biotherapeutic products for the treatment of CF. In May 1992, Genzyme and Neozyme II completed an initial public offering of units which resulted in gross proceeds to Neozyme II of approximately $84.5 million. On October 28, 1996, Genzyme completed a tender offer for the outstanding units of Neozyme II for $45 per unit in cash in which 98.8% of the units were tendered and accepted for payment at an aggregate purchase price of $107.4 million. Each unit consisted of one share of callable common stock of Neozyme II ("Callable Common Stock") and one warrant to purchase two shares of GGD Stock and .135 share of GTR Stock. On December 6, 1996, Neozyme II was merged with a subsidiary of Genzyme and the remaining outstanding shares of Callable Common Stock were cancelled and converted into the right to receive $29.00 per share in cash. The Callable Warrants included in the untendered units separated from the shares of Callable Common Stock converted in the merger and became exercisable on December 6, 1996. SPECIALTY THERAPEUTICS Genzyme General's strategy is to use its technological strengths, particularly its ability to modify and produce DNA and proteins and its expertise in fermentation, carbohydrate engineering and gene therapy, to develop safe and effective therapeutic products to address major unmet medical needs. Genzyme General is currently selling Ceredase(R) enzyme and Cerezyme(R) enzyme and has several therapeutic products in various stages of the research, development, clinical testing and regulatory review processes. There can be no assurance that any of the products under development will be successfully completed or that FDA approval of any of these product will be obtained. SPECIALTY THERAPEUTICS PRODUCT PORTFOLIO
============================================================================================================= Partners and Product/Program Indication/Application Status(1) Collaborators - --------------- ---------------------- --------- ------------- Ceredase(R) enzyme/ Treatment of Gaucher Commercial sales Cerezyme(R) enzyme disease - ------------------------------------------------------------------------------------------------------------- Thyrogen(R) recombinant Diagnosis and treatment Phase III clinical trial human thyroid stimulating of thyroid cancer hormone metastases - ------------------------------------------------------------------------------------------------------------- Transgenic antithrombin Control of blood clotting Phase I/II clinical trial Genzyme Transgenics III during coronary artery Corporation bypass surgery - ------------------------------------------------------------------------------------------------------------- Gene therapy CFTR/adenovirus Cystic fibrosis Pilot clinical study vector CFTR/lipid vector Cystic fibrosis Pilot clinical study MART 1/adenovirus Metastatic malignant Pilot clinical study National Cancer Institute vector melanoma gp100/adenovirus Metastatic malignant Pilot clinical study National Cancer Institute vector melanoma
4 7
Partners and Product/Program Indication/Application Status(1) Collaborators - --------------- ---------------------- --------- ------------- Ex vivo stem Gaucher disease Pilot clinical study University of Pittsburgh, cells/retrovirus IntroGene B.V. vector Various proprietary Cardiovascular disease Research Duke University, vectors for gene University of California therapy at San Diego - ------------------------------------------------------------------------------------------------------------------- [alpha]-galactosidase Fabry disease Preclinical development - ------------------------------------------------------------------------------------------------------------------- Prolactin Maintenance of immune Preclinical development system function - ------------------------------------------------------------------------------------------------------------------- Chitinase Anti-fungal agent Preclinical development - ------------------------------------------------------------------------------------------------------------------- (1) Research status indicates work up to and including small scale production of the targeted product. Preclinical development status includes work done to increase yields and standardize manufacturing processes and studies in animals to support an application to the FDA to commence clinical testing in humans. Human clinical trials for products classified by the FDA as "drugs" or "biologics" are generally conducted in three phases: Phase I, to determine safety and pharmacokinetics in healthy subjects; Phase II, to provide preliminary evidence of efficacy in the patient population targeted by the product; and Phase III, sometimes referred to as pivotal trials, to provide data for proof of safety and effectiveness. Pilot clinical studies are clinical trials for novel therapies, such as gene therapies, where the product is initially tested in the patient population targeted by the product for safety, pharmacokinetics and preliminary evidence of efficacy. Following completion of the pivotal clinical studies, an application for marketing approval of a new drug (an "NDA") or licensure of a biological product (a "PLA") is submitted to the FDA. ===================================================================================================================
CEREDASE(R) ENZYME (ALGLUCERASE INJECTION) AND CEREZYME(R) ENZYME (IMIGLUCERASE INJECTION). Treatment with Ceredase(R) enzyme or Cerezyme(R) enzyme replacement therapy currently represents the only safe and effective treatment for Gaucher disease, a seriously debilitating, sometimes fatal genetic disorder caused by a deficiency in an important enzyme in the body called glucocerebrosidase ("GCR"). This deficiency results in the accumulation of the lipid glucocerebroside in the body. The disease is characterized by an enlarged liver or spleen, anemia, bleeding problems, bone and joint pain, fatigue and orthopedic complications such as repeated fractures and bone erosion. Ceredase(R) enzyme is a modified form of human GCR in which glycoprotein remodeling technology has been used to target GCR to the cells where the lipid accumulation occurs. Cerezyme(R) enzyme is a recombinant form of GCR which has been remodeled in a similar manner. Genzyme General is marketing these products directly to physicians, hospitals and treatment centers worldwide through a highly trained sales force. This marketing effort is directed at identifying and initiating treatment for the 5,000 Gaucher patients Genzyme General believes exist worldwide. Currently, approximately one-third of these patients are receiving treatment. Ceredase(R) enzyme and Cerezyme(R) enzyme, together, are available in approximately 50 countries worldwide. Ceredase(R) enzyme has received marketing approval in 14 countries, most recently Japan and Belgium, with applications pending in two other countries. Genzyme is the first biotechnology company to obtain drug approval in Japan without a partner. Cerezyme(R) enzyme has received marketing approval in four countries, most recently in Canada and Portugal, with applications pending in the European Union and other countries. Genzyme General produces Ceredase(R) enzyme from an extract of human placental tissue supplied by Pasteur Merieux, a French company that is the only significant commercial source of this material. The current supply available is not sufficient to produce enough Ceredase(R) enzyme to supply all present patients. To address supply constraints, Genzyme developed Cerezyme(R) enzyme. In October of 1996, Genzyme General received FDA approval to manufacture Cerezyme(R) enzyme in a new, large-scale manufacturing plant located in Boston, Massachusetts. Once an uninterrupted supply of Cerezyme(R) enzyme can be produced by the new plant, patients receiving Ceredase(R) enzyme will be converted 5 8 to Cerezyme(R) enzyme. Genzyme General will be required to continue manufacturing Ceredase(R) enzyme until the process of patient conversions is completed, which is expected to occur during the fourth quarter of 1998. Any disruption in the supply or manufacturing process of Ceredase(R) enzyme during the conversion period or in the supply or manufacturing process of Cerezyme(R) enzyme may have a material adverse effect on revenue. THYROGEN(R) HORMONE. Genzyme General is developing Thyrogen(R) hormone, a recombinant form of human thyroid stimulating hormone, for use as an adjunct to the approximately 100,000 to 200,000 diagnostic and therapeutic procedures undertaken each year to detect and treat metastases of thyroid cancer. Genzyme General believes that the administration of Thyrogen(R) hormone may increase the effectiveness and result in fewer adverse side effects for patients undergoing current standard medical procedures for thyroid cancer. Thyrogen(R) hormone was demonstrated to be safe and effective in stimulating the uptake of radioiodine for whole body scanning in a 1992 Phase I/II clinical study. A Phase III multi-center clinical study completed late in 1993 provided evidence that the use of Thyrogen(R) hormone prior to diagnostic scanning greatly improved the quality of life in 94% of thyroid cancer patients tested and was effective in producing scans that were as good as or better than conventional scans in 86% of those patients. To confirm the results of this study, Genzyme General is conducting a second Phase III study, results from which are expected to be available in mid-1997. If the current study confirms the prior results, marketing applications are expected to be filed by the end of 1997 in the U.S. and Europe and by early 1998 in Canada. Following its NDA filing, Genzyme plans to make Thyrogen(R) hormone available to patients in the U.S. who meet certain criteria under a treatment IND that allows Genzyme to gather additional information regarding use of the product while recovering appropriate costs of the product and the treatment. TRANSGENIC ANTITHROMBIN III. ATIII is a human blood protein that acts as an anticoagulant. Depressed levels of ATIII can lead to increased risk of thrombosis (clotting) in patients with either hereditary ATIII deficiency or an acquired ATIII deficiency often associated with multiple disease states, such as sepsis, various surgeries, multiple trauma and liver disease. Natural ATIII derived from donated human plasma currently is sold worldwide for multiple indications. GTC is developing a transgenic source for ATIII to address anticipated growth in the market to treat ATIII deficiency by protein replacement therapy. Genzyme General and GTC believe that current sources of plasma derived ATIII will be inadequate to address this growth. In combination with Tufts University School of Veterinary Medicine and SMI Genzyme Limited, a joint venture between GTC and Sumitomo Metal Industries, Ltd., GTC has developed a herd of transgenic goats at its production facility in central Massachusetts that produce active recombinant ATIII. In October 1996, GTC announced that the results of a Phase I trial conducted in the United Kingdom showed transgenic ATIII was well tolerated in healthy subjects. In December 1996, GTC commenced a Phase I/II clinical trial of transgenic ATIII in the U.S.. In this trial, the product will be administered to 27 patients undergoing coronary artery bypass grafting in a dose-escalating study to determine the safety of transgenic ATIII in this patient population. GTC expects to complete the trial during the first half of 1997. Genzyme General is funding the development of transgenic ATIII pursuant to an agreement with GTC under which Genzyme General has obtained co-marketing rights for the product outside of Asia. See "Related Entities -- Genzyme Transgenics Corporation." GENE THERAPY OVERVIEW. Gene therapy is an innovative technology being developed by Genzyme General to treat CF, cancer, Gaucher disease and cardiovascular disease. Gene therapy involves the delivery of a gene responsible for production of a particular protein of interest into cells of a patient in order to trigger the cell to produce the encoded protein for some therapeutic purpose. Genzyme General's gene therapy research began in 1991 as part of its efforts to develop novel treatments for CF on behalf of Neozyme I Corporation ("Neozyme I"). Genzyme acquired the CF program from Neozyme I and transferred it to Neozyme II in 1992. Genzyme acquired Neozyme II in October 1996. See "Business-- Related Entities." Since 1991, Genzyme General has expended over $60 million in gene therapy research and has established a broad proprietary core technology base that includes gene delivery systems, in vitro and in vivo model systems, production capabilities and a dedicated clinical and regulatory staff. 6 9 Because of the innovative nature of gene therapy and public policy issues surrounding the insertion of new genetic information into cells, Genzyme General expects that early clinical evaluation will continue to entail especially careful testing in a limited number of patients. Genzyme General is currently conducting pilot clinical studies of gene therapy products. The timing and results of these initial studies will determine whether and when pivotal trials to determine safety and effectiveness will be undertaken. These pivotal trials may involve large groups of patients for lengthy periods of time in order to address the uncertainties surrounding insertion of new genetic information into humans and to show clinical effectiveness in the treatment of a progressive disease. CYSTIC FIBROSIS. CF is the most common fatal genetic disease affecting the Caucasian population. Approximately one in every 2,500 infants in the U.S. is born with the disease and there currently are approximately 30,000 cystic fibrosis patients in North America. CF is caused by a mutation in the gene responsible for determining the molecular structure of a protein called cystic fibrosis transmembrane conductance regulator ("CFTR"). Although improvements have been made over the last 20 years in alleviating certain symptoms of the disease and delaying its progress, the underlying disease remains untreated and patients have an average life expectancy of only 29 years. Genzyme General's work has concentrated on a gene therapy approach to correct the basic defect in CF cells whereby the mutant genes are augmented with genes that would enable the patient's cells to produce normal CFTR protein. Genzyme General's scientists have demonstrated that the defective ion transport mechanism present in airway cells taken from CF patients can be corrected in vitro by the insertion of normal CFTR genes into the cells. The techniques for inserting genetic material into cells outside the body are not expected to be useful in gene therapy for CF, however, because there is no practical way to remove, treat and implant the treated cells in the airways of CF patients. For this reason, Genzyme General's proposed gene therapy product will likely need to be administered directly to the airways of the lung. Genzyme General also believes that its gene therapy product would need to be readministered periodically as the transferred gene ceases to function or is lost and as the treated cells naturally die and are replaced. Viral Vectors. In 1993, Genzyme General and collaborators at the University of Iowa conducted a small study in CF patients using an adenovirus-gene product administered to nasal epithelium. Results collected from the study showed that it is possible to correct the biochemical defect in CF cells in nasal epithelium in vivo. The study results, published in October 1993, were the first published report of a successful gene transfer in CF patients and the first successful application of an adenovirus vector in gene therapy. In a 1995 publication reporting the results of a similar study, however, researchers from the University of North Carolina questioned the efficacy of gene transfer using adenovirus. In addition, data from a study involving repeat administration of Genzyme's second generation adenovirus vector to the nasal epithelium of CF patients showed that, although the virus appeared safe, a complex immune response to the adenovirus was measured in almost all patients. This and other data obtained in animals and submitted for publication in 1995 suggest that immune response may limit the efficacy of repeat dose therapy with adenovirus. During the fourth quarter of 1994, Genzyme General received Recombinant DNA Advisory Committee ("RAC") approval and submitted a protocol to the FDA for a two part safety study involving administration of its second generation adenovirus vector to the lungs of up to 40 CF patients via bronchoscope and aerosol. Bronchoscopic administration commenced in the first quarter of 1995, and aerosol administration commenced in September 1995. Additionally, in September 1995, Genzyme switched to the use of a third-generation adenovirus vector with an improved safety profile as part of this same study. The study is currently ongoing. In parallel with these clinical studies, Genzyme General is conducting extensive research into proving the safety and efficacy of adenovirus. Particular emphasis is being placed on immunology, since it now appears that new vectors or methods need to be developed so as to reduce the patient's immune response and to increase the efficacy of adenovirus vectors. Such improvements may be necessary in order for adenovirus vectors to be clinically useful in chronic therapy. Non-Viral Vectors. In addition to pursuing adenovirus and other viral vectors, Genzyme General is developing lipid-DNA complexes as vectors for gene therapy. Genzyme General believes that lipid-based vectors may offer advantages due to their reduced immunogenicity and ease of manufacture relative to viral vectors. Genzyme General has synthesized, evaluated and filed patent applications on numerous new lipids. Several of these have shown significantly greater activity in vivo than commercially available lipids. To augment its internal efforts, Genzyme has entered into arrangements with third parties to gain access to non-viral gene delivery technologies. To date, the most significant such arrangement is an exclusive license agreement with Vical, Inc. executed in October 1996 for Vical's 7 10 cytofectins for use as non-viral gene delivery vectors for treating CF. The plasmid expression system containing the DNA also affects expression efficiency, and Genzyme General has designed various new plasmid constructs to enhance expression. Although substantial progress has been made in both lipid and plasmid constructs, currently the optimal formulation of the best lipid-DNA complex is still less efficient than adenovirus as measured in single dose in vivo experiments. In December 1993, a Genzyme General collaborator received RAC approval for a CF nasal protocol utilizing a lipid-DNA complex containing DMRIE, one of Vical's proprietary cytofectins. This study commenced in September 1995 and is currently ongoing. In December 1994, Genzyme General also initiated a collaboration with a British academic group for purposes of further studying Genzyme General's proprietary lipid-DNA complexes. In December 1995, Genzyme General submitted an IND to the FDA for a nasal study using a proprietary lipid-DNA complex developed by Genzyme General. The study was initiated in January 1996 by Genzyme and its collaborators at the University of Iowa and completed in the second quarter of 1996. The study entailed the administration of the lipid-DNA complex to one nostril of nine CF patients and administration of the DNA plasmid alone to the patients' other nostril as a control. Although the results showed that the lipid-DNA compound was well tolerated, they did not demonstrate the lipid-DNA compound to be superior to the plasmid DNA in improving ion exchange across the cell membrane. Also in the second quarter of 1996, Genzyme General completed a safety study in which the lipid alone was delivered in aerosol form to the lungs of 15 non-CF volunteers. The study showed that aerosolized delivery of the lipid to the lung was well tolerated. Based on these results, a pilot study involving aerosol administration of a lipid- DNA complex to the lungs of CF patients was initiated in the fourth quarter in the United Kingdom. This study is ongoing. CANCER. There are currently several approaches that can be taken to treat cancer using gene therapy. Some of these approaches are limited by the inability of current gene delivery technology to affect every cell in a tissue. To address these limitations, Genzyme General has focused on two approaches that it believes may be effective with the current generation of gene delivery vehicles: immunotherapy and cytotoxic or "suicide" genes. Genzyme General believes that combinatorial strategies employing two or more gene therapy approaches, or a gene therapy approach with traditional chemotherapeutic or radiological therapy, will be useful in treating aggressive forms of the disease, particularly metastatic cancer. Immunotherapy - MART-1 and gp100 for Melanoma. Melanoma is a cancer of the skin affecting melanocytes, the normal cells that color the skin, and is commonly associated with overexposure to the sun. Melanoma is far more serious than other types of skin cancer, accounting for three quarters of all deaths from skin cancer despite representing only 5% of all such cases. The incidence of melanoma is increasing at a faster rate than that of any other type of cancer in the U.S. Over 38,000 new cases of melanoma will be diagnosed and more than 7,000 deaths from this disease are projected to occur in the U.S. during 1997. Worldwide, incidence of melanoma is estimated to be 90,000 new cases per year. Genzyme General's melanoma gene therapy program has centered on the delivery of the MART-1 and gp100 genes to dendritic cells to elicit systemic anti-melanoma T cell responses. Under a Collaborative Research and Development Agreement ("CRADA") with the National Cancer Institute ("NCI"), Genzyme General has constructed, in conjunction with Dr. Steven Rosenberg at the NCI, adenoviral vectors incorporating the MART-1 or gp100 tumor antigen genes. In vitro studies have demonstrated that cells which do not express either tumor antigen become targets for destruction by antigen specific T cells following infection with an adenovirus incorporating the appropriate tumor antigen genes. Subsequent preclinical animal studies at the NCI demonstrated that: (i) prior immunization with an adenovirus incorporating the gp100 tumor antigen gene can provide protection against melanoma cells; (ii) adoptive transfer of spleen cells derived from animals immunized with the adenovirus carrying the gene incorporating gp100 can confer protection against melanoma tumor cells, suggesting that the virus is indeed able to elicit T cell response and (iii) immunization with the gp100 virus can dramatically reduce the number of lung metastases in a model of established melanoma particularly when co-administered with interleukin-2, a T cell growth factor. These promising preclinical results led to the initiation of two pilot clinical studies, designed by Dr. Rosenberg and which are currently underway at the NCI. In these studies, adenovirus vectors carrying either the MART-1 (Ad2/MART-1) or gp100 (Ad2/gp100) gene are being evaluated for safety, immunologic reactivity and potential 8 11 therapeutic effect when administered alone or in conjunction with recombinant interleukin-2. Patients in these studies have metastatic melanoma and have not received alternative therapies during the four weeks prior to administration. Preliminary results from these studies indicate that the adenoviral vectors are safe and well tolerated, and that a small but significant number of the 34 patients immunized with Ad2/MART-1 have shown significant tumor regression following administration of the adenovirus. Clinical evaluation is in process to determine whether immunization with the adenoviral vector leads to the generation of an anti-melanoma antigen specific cytotoxic T cell response. Data gathered from these studies should enable Genzyme General to identify baseline clinical parameters that correlate with a favorable response to the vaccine and establish patient inclusion criteria for a Phase II clinical trial. Genzyme General has the option to license the MART-1 and gp100 genes from the NCI for use in adenoviral gene therapy for melanoma. Suicide Gene Therapy for Liver Cancer. Approximately 18,000 new cases of primary liver cancer are diagnosed in the U.S. each year, and the disease accounts for approximately 14,000 deaths in the U.S. annually. The annual number of deaths worldwide from liver cancer is estimated to exceed 250,000, with the five-year survival rate for localized liver cancer being only 15%. If detected at an early stage, surgical removal (resection) of the affected portion of the liver is possible, but diagnosis usually occurs too late for this treatment to be of benefit. The median survival for patients with non-resectable liver cancer is about six months. Genzyme General is collaborating with Dr. Jack Wands at Massachusetts General Hospital on the development of gene therapies to treat liver cancer. Dr. Wands has developed proprietary antibodies that can be utilized to target the delivery of a gene therapy vector to hepatocellular carcinoma ("HCC") cells. Genzyme General and Dr. Wards are also exploring the use of antibody targeted vectors to deliver suicide genes to HCC cells. Genzyme General has an option to license Dr. Ward's technology for gene therapy of HCC. GAUCHER DISEASE. Genzyme General is collaborating with the University of Pittsburgh and IntroGene, B.V., in the development of a hematopoietic stem cell gene therapy for Gaucher disease. A pilot clinical study is in process at the University of Pittsburgh to determine the safety of an ex vivo retroviral vector approach. Two patients have completed the treatment protocol to date. Both of the treated patients have detectable levels of circulating GCR enzyme activity. The study is currently ongoing. CARDIOVASCULAR DISEASE. In December 1996, Genzyme General entered into collaborations with scientists at Duke University and the University of California, San Diego ("UCSD"), to develop gene therapies for congestive heart failure, vein graft failure, and restenosis. Additionally, through its collaboration with UCSD, Genzyme General will be developing a gene therapy application to protect heart tissue from oxygen damage that can occur during various types of cardiac procedures. Each collaboration calls for Genzyme General to provide vectors and research funding to support pre-clinical research by the academic collaborator and future clinical trials in exchange for rights to any products resulting from the collaboration. Other Specialty Therapeutics [ALPHA]-GAL. Genzyme General is developing a recombinant form of the human enzyme [alpha]-galactosidase ("[alpha]-Gal") as a treatment for Fabry disease, a usually fatal inherited disorder of lipid metabolism estimated to afflict between 2,000 and 4,000 people worldwide. Fabry disease patients experience clinical symptoms which include pain, numbness, cardiac disease, cerebrovascular complications and deterioration of kidney function; death general occurs between 40 and 50 years of age. There is no known treatment for the underlying disease and current medical practice involves pain management and kidney dialysis and/or transplantation to reduce symptoms. Genzyme General believes that protein replacement therapy is a rational approach to the treatment of Fabry disease. To date, it has successfully produced the recombinant [alpha]-Gal enzyme in mammalian cells and has shown it can reduce lipid levels in the plasma and tissues of a Fabry mouse model. The development program is currently focused on producing sufficient quantities of enzyme for pilot clinical studies, which are expected to begin in late 1997 or early 1998. PROLACTIN. Genzyme General is developing a recombinant form of the human hormone prolactin for use as an immune stimulant. Prolactin acts as a cytokine on a broad array of immune cell types including lymphocytes, macrophages, bone marrow and natural killer cells. Potential clinical applications include immunologic/hematopoietic reconstitution for myelosuppressed and immunocompromised patient populations and as a vaccine adjuvant. 9 12 To date, Genzyme General has demonstrated the utility of prolactin in several in vitro and in vivo models and has produced sufficient quantities of prolactin from mammalian cells to begin pilot clinical studies. Its development program is currently focused on initiating a Phase I safety/pharmacokinetic study in the second half of 1997 and identifying a lead clinical indication for evaluation in 1998. CHITINASE. Genzyme General is evaluating recombinant human chitinase as a therapeutic agent for treating systemic fungal infections. These types of infections are often observed in immunosuppressed individuals such as patients with AIDS. Fungi contain the polysaccharide chitin as a component in their cell walls. It is believed that chitinase, a chitin degrading enzyme produced by human macrophages, may normally play a role in fighting fungal infections. It is believed that by augmenting chitinase levels systemically, it may be possible to significantly enhance the body's capacity to eliminate these type of microbial infections in immunosuppressed patients. Current therapies for fighting fungal infections such as amphotericin B are moderately effective but exhibit significant dose-limiting toxicities. The U.S. market size for a new safe and effective anti-fungal agent is estimated to be between $250 million and $500 million per year. Genzyme General has produced recombinant human chitinase in a mammalian expression system, purified significant quantities of the protein and is in the process of screening its antifungal activity in a number of different well characterized cell culture and animal model systems. Data from these studies are expected to be available in fourth quarter of 1997. SURGICAL PRODUCTS The Surgical Products business unit develops, manufactures and markets four principal product lines: the Sepra Products, cardiovascular fluid management systems (chest drainage and autotransfusion systems), surgical closure systems (sutures and needles) and surgical instruments (cardiovascular punches and other cardiovascular, plastic surgery, endoscopic and general instruments). The fluid management, closure, and instrument product lines were acquired in 1996 through Genzyme's acquisition of DSP. DSP employs a 110-person sales force, 60 of which are located in the U.S., to market products directly to cardiac, general, gynecologic, colon and rectal surgeons and hospital purchasing departments throughout the U.S. and Europe. Genzyme General plans to increase the number of DSP sales representatives in the U.S. to 100 by the end of 1997. SEPRA PRODUCTS. Genzyme General is developing and selling the Sepra Products to be used during surgical procedures to limit the formation of postoperative adhesions. Adhesions are fibrous structures that connect tissues or organ surfaces that are not normally joined. They are an undesirable side effect of the body's normal healing process following damage to tissue. Adhesions can cause significant complications such as bowel obstruction following abdominal surgery, infertility and pain following gynecological surgery and restricted limb motion following musculoskeletal surgery. Adhesions that form as a result of cardiac surgery can increase the complexity, duration and risk of subsequent cardiac surgery. The Sepra Products portfolio is comprised of the following products: * SEPRAFILM(TM) BIORESORBABLE MEMBRANE is a solid formulation of modified HA and is used to separate and protect tissues and organs that have been damaged by surgery. The membrane is designed to last several days in the body. * SEPRACOAT(TM) COATING SOLUTION is a liquid formulation of HA that, when used to coat tissues and organ surfaces at the start of and throughout surgical procedures, forms a temporary physical barrier that may protect tissues during surgery. * SEPRAGEL(TM) BIORESORBABLE GEL is a highly viscous gel form of modified HA and is intended to be used to separate and protect tissues and organs that have been damaged by surgery. Sepragel(TM) is intended to be used in laparoscopic procedures and on tissue surfaces that are inaccessible to Seprafilm(TM). Similar to Seprafilm(TM), the gel is designed to last several days in the body. The programs to develop the Sepra Products achieved a number of significant milestones in 1996. During the third quarter of 1996, the FDA granted approval to market Seprafilm(TM) in any open abdominal or pelvic surgery. On behalf of the Joint Venture with GDP, Genzyme General launched Seprafilm(TM) broadly in the U.S. during the fourth quarter through the DSP sales force. The U.S. sales force is focusing its efforts on the top 1,000 hospitals that perform 80% of the targeted procedures for Seprafilm(TM) and the chiefs of surgery at key institutions and the clinical investigator group and their associates who are familiar with the product. Genzyme General believes the market opportunity for Seprafilm(TM) in the U.S. comprises an estimated 3.1 million surgeries annually: 1.8 million open abdominal and 1.3 million open pelvic procedures that carry a risk of postoperative adhesion-related complications. At the end of February in the U.S., 476 hospitals had purchased Seprafilm(TM), an increase of 37 percent from the end of December, and the reorder rate for the product had increased to 39 percent. Revenues from Seprafilm(TM) sales during 1996 were not material. In February 1996, Seprafilm(TM) was granted the Approval of Conformity Certificate (the "CE Mark") in accordance with the European Medical Devices Directive. The CE Mark signifies that a product meets quality standards necessary for marketing in the 18 countries of the European Union and the European Economic Area. Genzyme General launched Seprafilm(TM) in Europe during the second quarter of 1996. Genzyme General believes the number of open 10 13 abdominal and open pelvic procedures that carry a risk of postoperative adhesion-related complications in Europe is approximately 2 million surgeries per year. In February 1997, Genzyme signed an agreement with Kaken Pharmaceutical Co., Ltd. ("Kaken"), Tokyo, to market the Sepra Products in Japan. Under the terms of this agreement, Kaken was granted co-marketing rights for Seprafilm(TM) and Sepracoat(TM) in Japan in exchange for a distribution rights fee and milestone payments to Genzyme. Kaken was also granted an option to acquire co-marketing rights to Sepragel(TM) in Japan. Genzyme and Kaken will share equally in the profits of all Sepra Products sold by Kaken. In January 1996, Genzyme filed a PMA to market Sepracoat(TM) for use in abdominal, pelvic and cardio-thoracic surgical procedures. In February 1997, the FDA notified Genzyme that an advisory panel meeting will be held on May 5, 1997 to review the PMA for Sepracoat(TM). The advisory panel will make a recommendation to the FDA regarding approval of the PMA. The panel's recommendation will be considered in the FDA's final review of the PMA, but is not binding on the FDA. Sepracoat(TM) was also granted the CE Mark in 1996 and Genzyme General initiated marketing efforts for Sepracoat(TM) in Europe during the fourth quarter of 1996. Sepracoat(TM) is being marketed in Denmark, France, German, Italy, the Netherlands, Sweden and the United Kingdom as a complement to Seprafilm(TM). During the third quarter, Genzyme General received an IDE from the FDA for Sepragel(TM) and commenced Phase I/II studies of the product for use in abdominal and gynecological procedures. A clinical trial for HAL-S(TM) synovial fluid replacement was completed in November 1995. HAL-S(TM) is a liquid formulation of HA intended to be used during arthroscopic surgery to maintain normal joint function and reduce pain and inflammation following surgery. The study evaluated patients undergoing arthroscopic surgery for repair of meniscal tears, a type of knee damage. The data from the study showed some improvement in the rehabilitation rate of patients that received HAL-S(TM). In light of the relatively modest improvement and small potential market size, however, further development of HAL-S(TM) has been suspended. Genzyme General believes that successful initial market penetration and subsequent maintenance of market share for Seprafilm(TM) and Sepracoat(TM) require a specialized hospital-based sales force and has deployed the DSP sales force to accelerate the market introduction of these products in the U.S. and Europe. Substantial additional efforts to educate surgeons and hospital administrators as to the benefits of these products will be required, however, in order for the products to penetrate target markets and gain broad market acceptance. There can be no assurance that Genzyme General will be successful in its efforts to implement a commercialization strategy for the Sepra Products. Funding for the development of the Sepra Products has been provided by GDP, which has the exclusive right to commercialize these products in the U.S. and Canada through the Joint Venture. GDP also has the right to a royalty on the Genzyme General's European sales of these products under certain circumstances. Since the first quarter of 1994, Genzyme General has funded development of the Sepra Products on behalf of GDP on an annual basis and is continuing such funding during 1997. See "Related Entities--GDP." CARDIOVASCULAR FLUID MANAGEMENT SYSTEMS. This product line consists primarily of self-contained, disposable chest drainage devices used to drain blood from the chest cavity following open heart surgery, other surgical procedures and trauma. If the chest cavity is not properly drained, the patient may suffer collapsed lungs, which often results in death. In 1967, DSP introduced the first self-contained, disposable chest drainage unit, Pleur- evac(R), which quickly became the market leader in chest drainage devices, a position it still holds today. DSP also sells autotransfusion devices that allow the collection of blood shed by the patient and its reinfusion postoperatively, thus eliminating the risks associated with blood transfusions. In December 1995, DSP acquired a line of dry suction- controlled chest drainage and autotransfusion devices sold under the Thora-Klex(R) brand name. These products offer certain advantages over the existing systems sold by DSP and command higher per unit prices. SURGICAL CLOSURE SYSTEMS. Surgical sutures, which are sold in packs consisting of suture/needle combinations, are DSP's oldest product line. DSP developed Tevdek(R) surgical sutures in 1950, the first coated Dacron-based suture, followed by Silky Polydek, a softer, easier to handle and tie suture. DSP emphasizes high quality specialty sutures for cardiovascular and plastic surgery, utilizing special materials, advanced metallurgy and packaging innovations. Approximately 50% of DSP's U.S. sales are attributable to high margin "specials" in which individual surgeons order nonstandard products and customized suture/needle combinations for specific procedures. 11 14 SURGICAL INSTRUMENTS. DSP sells cardiovascular punches, which are used during coronary artery bypass surgery to make cleanly cut holes, and hand-held, reusable instruments such as needleholders, scissors, forceps, graspers, dissectors and retractors. DSP's instruments are used in cardiovascular, plastic, endoscopic and general surgery and are sold directly to the surgeon, the key decision maker on purchases of specialty instruments. In January 1997, DSP launched a full line of instruments for use in endoscopic coronary artery bypass graft ("CABG") procedures. This new line is being marketed under the brand name EndoCABG(TM) System and was the first full line of instruments for this type of surgery approved by the FDA. The EndoCABG System includes both disposable and reusable instruments and includes the complete set of instruments required to perform cardiac bypass grafting endoscopically. Traditional cardiac surgery requires the surgeon to saw open the breastbone to gain access to the heart. Patients who undergo these procedures have severe scarring, an increased risk of infection, and long recovery periods following surgery. The new field of minimally invasive cardiac surgery allows the surgeon to work on the heart through a relatively small incision without cutting the breastbone. Through the use of endoscopes and specially designed forceps, scissors, and retractors, the surgeon can perform the same procedure without exposing the patient to as much pain, trauma, and postoperative risk. A less-invasive alternative to open heart surgery, balloon angioplasty, was introduced in the 1980s. Although this procedure offers patients less pain, trauma and a shorter recovery period, the disadvantage is that a high rate of arteries becoming blocked again so that patients often need repeat treatment, sometimes as soon as six months after the initial procedure. About 500,000 single bypass and balloon angioplasty procedures are performed annually in the U.S. By the year 2000, DSP believes that at least half of these procedures could be replaced by minimally invasive CABG procedures in which the EndoCABG(TM) System could be used. In conjunction with the introduction of the EndoCABG(TM) System, DSP entered into two agreements to expand the product line and to extend its use to other cardiac procedures. Under one agreement, the EndoCABG(TM) System will be expanded so that surgeons can stop the heart with the aid of an aortic occlusion balloon developed by the Cook Group of Bloomington, Indiana. Under this agreement, Cook will manufacture the balloons and DSP will market them exclusively. DSP expects to begin offering the balloons as part of the EndoCABG(TM) System in the first half of 1998. The other agreement covers a product development and marketing alliance with CarboMedics, Inc. of Austin, Texas, a leading manufacturer of mechanical heart valves. Together, the companies are developing a system of instrumentation and supplies which will allow cardiac surgeons to introduce CarboMedics's mechanical heart valves through a small incision in the patient's chest wall. The companies expect to launch instruments for valve replacement procedures later this year. During 1996, DSP also signed agreements with leading endoscopic training centers in the U.S. and Europe. Both centers will use the EndoCABG(TM) System for minimally invasive cardiac surgery. Since September 1996, the Advanced Laproscopic Training Center in Atlanta has trained 40 surgeons to perform the new minimally invasive cardiac surgery using DSP's EndoCABG(TM) System. Beginning in February 1997, the European Institute of Telesurgery of Strasbourg, France, has provided European surgeons with the same training offered in the U.S. DIAGNOSTIC SERVICES Genzyme Genetics applies advanced biotechnology to develop and provide high quality, sophisticated genetic diagnostic services to physicians, hospitals, universities, medical centers, clinical laboratories, genetic centers and managed care organizations in the U.S. and internationally through a national network of laboratories. Testing services currently marketed by Genzyme Genetics include prenatal genetic diagnostic services, DNA-based diagnosis of a number of genetic diseases, including some cancers. Genzyme Genetics also employs over 70 board certified genetics professionals who interpret results and provide genetic counseling and support services to medical practitioners and their patients. 12 15 DIAGNOSTIC SERVICES PORTFOLIO
Product/Program Indication/Application Status - --------------- ---------------------- ------ Biochemical testing Screening for certain fetal Commercial chromosomal abnormalities service Prenatal cytogenetics Detection of fetal chromosomal Commercial abnormalities service InSight(R) molecular genetic testing Rapid detection of selected fetal Commercial chromosomal abnormalities service DNA testing Detection of single gene Commercial disorders (CF, Fragile X, service Huntington's Disease, Gaucher Disease, etc.) MASDA(SM) Service Detection of CF mutations Commercial Genetic profiling service Cancer Testing -- cancer Applications used singly or in Commercial cytogenetics, fluorescent in-situ tandem for detection and service hybridization "FISH", DNA prognosis of various forms of cancer Fetal cell separation Detection of fetal chromosomal Preclinical abnormalities development CLAMSS Detection of unknown mutation Research
PRENATAL AND POSTNATAL GENETIC DIAGNOSTIC SERVICES. Genzyme Genetics offers three types of genetic diagnostic services: biochemical testing, classical and molecular cytogenetic testing, and DNA testing. Biochemical testing services consist primarily of a widely used screening test (AFP3) to determine if further prenatal genetic testing is appropriate. Classical and molecular cytogenetic testing involves the analysis of fetal cells obtained through amniocentesis or chorionic villi sampling ("CVS") to evaluate chromosomal abnormalities. DNA testing is performed to determine the likelihood that the subject has, or is a carrier for, a specific genetic disorder. Genzyme Genetics's strategy is to expand its genetic diagnostics business by providing a comprehensive range of high quality testing services in a timely, accurate and convenient manner; by aggressively marketing its services through a direct sales force; and by maintaining an active research and development program that enables it to introduce additional testing services based on new technologies. Genzyme Genetics also has an active program to expand its laboratory operations through acquisitions. In furtherance of this strategy, Genzyme Genetics acquired Genetrix, Inc., a Phoenix-based network of prenatal and cancer genetic testing laboratories, in May 1996. The InSight(R) test, a faster cytogenetic test based on in situ hybridization of chromosome-specific DNA probes, was introduced by Genzyme Genetics in 1991. This technology permits identification of the most frequently occurring chromosomal abnormalities within 48 hours, as compared to the one to three weeks required to perform classical cytogenetic testing (karyotyping). The InSight(R) analysis is provided in conjunction with a complete karyotype. Genzyme Genetics's cancer diagnostic services based on cytogenetics and a series of supporting tests currently focus primarily on various forms of leukemias and lymphomas. Genzyme Genetics also provides testing for numerous genetic diseases including, fragile X syndrome, spinal muscular atrophy, Huntington's disease, polycystic kidney disease, sickle cell anemia, and hemophilia. 13 16 MASDA(SM) SERVICE. Accurate tests for detection of the genetic components of disease are likely to require the analysis of multiple genes as well as multiple mutations within these genes. For example, defects in any one of at least four genes can result in hereditary nonpolyposis colon cancer, and in just two of those genes more than 100 mutations have been reported. There is, therefore, a crucial need for methods of rapidly detecting mutations in genes of known sequence. To meet this need, Genzyme Genetics developed its patented Multiplex Allele-Specific Diagnostic Assay (the "MASDA(SM) Service"), which can analyze in a single assay up to 500 samples simultaneously for over 100 known mutations. To use the MASDA(SM) Service, a mixture of hundreds of probes is constructed with each probe specific to one mutation. Individual DNA samples from numerous patients are then placed in a specific location in an array and exposed to the probe mixture. Patient samples that contain at least one mutation will be detected with a positive "signal." By identifying which probe(s) bind to the patient sample, the exact mutation(s) are revealed. Positive samples are also treated to produce a visual banding pattern that is unique for each mutation. This pattern is automatically interpreted by computer analysis to provide results. The MASDA(SM) Service not only analyzes different patient samples with different disease indications in a single assay, it also identifies multiple mutations in one or more genes in a single patient's DNA sample. In addition, only those samples with a positive signal need to be tested further in the mutation identification step. Eliminating samples that lack mutations from further analysis produces considerable cost savings when compared to conventional testing methods in which each sample has to undergo extensive analysis before a negative report can be confirmed. Genzyme Genetics is pursuing a number of commercialization strategies for the MASDA(SM) Service. In February 1997, Genzyme Genetics launched a 70-mutation CF test. Previous CF tests could only identify 32 or fewer mutations, thereby producing negative results for people with rare mutations. In addition, the MASDA(SM) Service is also being used to provide genetic profiling services for clinical trials being conducted by pharmaceutical companies. Genzyme Genetics has established a federally certified clinical trials laboratory to support diagnostic assay development using the MASDA(SM) Service. Ongoing oncology studies in this laboratory include studies of colorectal cancer with Kaiser Permanente of Northern California and the University of California, San Francisco and of hereditary breast cancer with the Dana Farber Cancer Institute. In addition, the laboratory provides population segmentation services for internal drug development programs and external customers. These studies are designed to identify genetic markers that might provide information about the severity of a disease as well as the likelihood that a patient might respond either favorably or adversely to a therapy. DEVELOPMENT PROGRAMS. Genzyme Genetics maintains an active program aimed at identifying and developing new technologies and methods of performing genetic tests and applying these methods to improve and expand its menu of testing services. In its own research laboratories and in collaboration with others, Genzyme Genetics is developing additional platforms for complex mutational analysis and conducts major research and development programs in such areas as genomics and rare cell separation and analysis methods. The MASDA(SM) Service is designed to detect known mutations. Genzyme Genetics is also developing related technology, called cleavage- and ligation associated mutation specific sequencing or "CLAMSS," to detect and identify unknown mutations. These techniques address situations where many different mutations in a gene give rise to a disease state, but where no single mutation is responsible for a significant percentage of disease. In 1995, Genzyme Genetics, together with its collaborators, announced the full identification of the PKD1 gene, which causes polycystic kidney disease, a common genetic disorder that leads to renal failure by middle age in most affected individuals. This group is also involved in the discovery of the gene for the most common cause of inherited cardiac arrhythmia, long QT syndrome, also known as "sudden death syndrome." Genzyme Genetics also continues its efforts to develop methods and procedures to isolate and genetically analyze fetal cells obtained from maternal blood samples. The program has demonstrated the feasibility of a separation technology involving the use of combinations of antibodies that bind selectively to specific cell types and has developed appropriate immobilization and analytical methods. At this point, however, the process does not meet Genzyme Genetics consistency standards well enough to commercialize it as a diagnostic test. 14 17 Fetal cells obtained from maternal blood serum could potentially be used in lieu of cells derived from amniotic fluid or chorionic villi for genetic testing, thereby avoiding the risk associated with amniocentesis or CVS. Genzyme Genetics believes that successful development of techniques which permit prenatal genetic testing of samples obtained from mothers on a low risk basis, using rapid low cost detection methods, can result in a substantial expansion of the market for prenatal testing. Significant resources continue to be focused on this research program. DIAGNOSTIC PRODUCTS Genzyme Diagnostics is a primary supplier of diagnostic components (enzymes, substrates, antibodies and antigens), bulk reagents and devices to manufacturers of clinical diagnostic reagents and kits as well as directly to clinical reference laboratories. It also manufactures and sells a broad line of antibody and antigen based ELISA test kits. In addition, Genzyme Diagnostics distributes a broad product line of research products to academic, industrial and governmental laboratories for use in immunology and cell biology and has developed manufacturing expertise in enzyme fermentation, purification, reagent formulation and immunoassay test development. DIAGNOSTIC PRODUCTS PORTFOLIO Product/Program Indication/Application Status - --------------- ---------------------- ------ Cardiovascular products -- Direct Clinical diagnostic testing Product sales LDL(TM), N-geneous(TM) HDL, ApoE Elisa and Lp(a) Cholesterol Tests Diagnostic enzymes, substrates and Raw materials for clinical chemistry Product sales antibodies and immunoassays for diagnostic manufacturers OEM reagents and kits Immunodiagnostic and clinical Product sales chemistry kits for diagnostic manufacturers Research products Research in immunology and cell Product sales biology, primarily for apoptosis and cytokines Rapid tests OEM sales and end-user distribution Product sales for pregnancy and infectious disease tests
CARDIOVASCULAR PRODUCTS. Genzyme Diagnostics sells devices and reagents for the quantification of LDL and HDL cholesterol levels. In October 1996, Genzyme Diagnostics launched the N-geneous HDL(TM) cholesterol test in the U.S. The new test, which is being distributed by Genzyme Diagnostics under a worldwide agreement with the manufacturer of the test, Daiichi Pure Chemicals Co., Ltd., of Tokyo, measures how much high-density lipoprotein cholesterol is present in a patient's serum. Because the N-geneous HDL(TM) test can be conducted completely on an automated clinical chemistry analyzer, it is simpler than other HDL cholesterol tests currently on the market, which require manual pretreatment of patient samples. The automation of HDL testing with the N-geneous(TM) test will provide laboratories with significant operational benefits and enable them to improve results by reducing the probability of error introduced by sample handling and manual sample pretreatment. Genzyme Diagnostics estimates the U.S. market for the N-geneous HDL(TM) test to be between 50 and 100 million tests per year and the global market at approximately 200 million tests per year. In addition to the U.S., Genzyme Diagnostics is the exclusive marketing partner for the N-geneous HDL(TM) test in Europe and the rest of the world, with the exception of Asia, where Genzyme holds co-exclusive distribution rights. Genzyme Diagnostics has also developed and commercialized an in vitro diagnostic test kit (the Direct LDL(TM) test kit) for the direct measurement of LDL cholesterol in blood samples. The correlation between elevated blood cholesterol levels and increased risk of coronary heart disease, one of the leading causes of death in the U.S., is well established. A high level of LDL cholesterol in the blood indicates an increased risk of coronary heart disease. Prior to the approval of the Direct LDL(TM) test kit, there was no routine direct standardized test for measuring LDL cholesterol and LDL cholesterol levels were derived using several indirect measurements and estimates, each contributing a potential source of error to the calculation. Genzyme Diagnostics is working to replace the Direct LDL(TM) test kit with a homogeneous method similar to HDL. DIAGNOSTIC INTERMEDIATES. Genzyme Diagnostics produces and sells critical components such as diagnostic enzymes, substrates and reagents for use in diagnostic kits used for blood analysis in clinical chemistry 15 18 laboratories. One primary area of emphasis is pancreatic function, where Genzyme Diagnostics provides enzymes, substrates, bulk reagents and patented methodologies for amylase and lipase determination to diagnostic kit manufacturers. Genzyme Diagnostics is also a primary supplier of cholesterol enzymes used in testing for coronary heart disease. Sales of its diagnostic intermediates are made to over 200 manufacturers and users of diagnostic kits worldwide through its own technical sales representatives in the U.S. and Europe and through distributors in Japan. ELISA TEST KITS. Genzyme Diagnostics manufactures and sells a broad range of ELISA test kits for infectious disease and endocrinology determinations. In addition, it supplies monoclonal and polyclonal antibodies plus other immunoassay raw materials to immunodiagnostic kit manufacturers. Patented Contrast(TM) rapid tests for pregnancy, Strep A and infectious mononucleosis determination are also becoming key contributors to Genzyme Diagnostics's product portfolio. RESEARCH PRODUCTS. Genzyme Diagnostics research products consist of a comprehensive line of cytokines, growth factors, antibodies, proteins and cytokine and apoptosis ELISA systems which play an integral role in activating and modulating the body's immune system. These research products are used primarily to conduct research in the areas of immunology and cellular biology. PHARMACEUTICALS Genzyme Pharmaceuticals develops, manufactures and sells a range of active drug substances, pharmaceutical intermediates, synthetic phospholipids, peptides, biomolecules and chemicals to the pharmaceutical and health care industries. These products utilize the division's capabilities in multi-step organic chemical synthesis, fermentation, enzymology and carbohydrate technology. PHARMACEUTICALS PRODUCT PORTFOLIO
Product/Program Indication/Application Status - --------------- ---------------------- ------ MelaPure(TM) melatonin Dietary supplement Product sales Clindamycin phosphate Treatment of serious infections Product sales Hyaluronic acid Ophthalmic products & research Product sales applications Active drug substances and Production of oral, topical and Product sales pharmaceutical intermediates parenteral drugs Fine chemicals Production of pharmaceutical Product sales intermediates and electronic chemicals Synthetic phospholipids Drug delivery systems and Product sales pharmaceutical components Synthetic peptides Production of final dosage form Product sales therapeutics Amino acid derivatives Production of synthetic peptides Product sales
MELAPURE(TM) MELATONIN. In 1995, melatonin, a synthetic human hormone present in a variety of foods and marketed as a dietary supplement, became the largest selling chemical product manufactured by Genzyme Pharmaceuticals. Genzyme Pharmaceuticals supplies bulk quantities of melatonin to manufacturers of final dosage form product and is marketing its MelaPure(TM) brand melatonin outside the U.S. in a finished dosage form product. 16 19 Although total melatonin revenues in 1996 increased over 1995, sales declined materially during the second half of 1996 due to declining market demand. Genzyme Pharmaceuticals does not expect that melatonin sales will return to the levels experienced during the first half of 1996 during 1997. Melatonin is regulated as a drug in many countries and, therefore, cannot be marketed without prior regulatory approval in those countries. Genzyme Pharmaceuticals plans to start a clinical trial of MelaPure(TM) melatonin for a sleep disorder indication, which if successful will broaden the market opportunity for MelaPure(TM) as a regulated product. CLINDAMYCIN PHOSPHATE. Genzyme Pharmaceuticals currently produces and sells clindamycin phosphate, an off-patent antibiotic widely used by hospitals for the treatment of infections. Clindamycin phosphate is sold to pharmaceutical companies in the U.S., Europe, Japan and the Middle East through Genzyme Pharmaceuticals' worldwide sales organization. HYALURONIC ACID. Genzyme Pharmaceuticals currently produces and sells bulk hyaluronic acid (HA) for a number of applications. Under an agreement with Alcon, Genzyme Pharmaceuticals supplies pharmaceutical grade HA powder to Alcon for incorporation into Provisc(R), an HA-based ophthalmic surgical aid product, which Alcon introduced in 1994. Genzyme Pharmaceuticals also receives a royalty based on Alcon's product sales. Hyaluronic acid is also sold to a number of customers for various research and development applications. ACTIVE DRUG SUBSTANCES AND PHARMACEUTICAL INTERMEDIATES. Genzyme Pharmaceuticals currently produces drug substances for leading ethical pharmaceutical companies for formulation into a variety of dosage forms. It also supplies various pharmaceutical intermediaries which are converted to active drug substances by the customer. FINE CHEMICALS. Genzyme Pharmaceuticals has developed a range of high value fine chemicals and chiral intermediates based on its proprietary technology in complex organic chemistry. These products include various synthetic starting materials and liquid crystal chemicals for the electronics industry. It markets these products through its own sales force directly to chemical and pharmaceutical companies worldwide. SYNTHETIC PHOSPHOLIPIDS. Phospholipids are the major structural components of cell membranes. They are useful in drug delivery systems, emulsion formulations and as components of pharmaceutical products such as liposomes. Genzyme Pharmaceuticals has developed proprietary technology for the large scale manufacture of synthetic phospholipids with high purity and consistency and currently produces and sells synthetic phospholipids to pharmaceutical and biotechnology companies for use in the formulation and delivery of certain of their products. SYNTHETIC PEPTIDES AND AMINO ACID DERIVATIVES. Synthetic peptides are a class of biologically active compounds comprised of chains of amino acids. Many of these compounds have applications as active drug compounds and are used by the pharmaceutical industry in final dosage form preparations. Genzyme Pharmaceuticals is a commercial scale GMP manufacturer of synthetic peptides for many such applications. Amino acid derivatives are the materials used in the production of synthetic peptides. In addition to producing these materials for use in its own peptide manufacturing processes, Genzyme Pharmaceuticals sells amino acid derivatives to the pharmaceutical industry for use in the manufacture of peptides. COMPETITION Genzyme General is engaged in a segment of the human health care products industry that is extremely competitive. Competitors in the U.S. and elsewhere are numerous and include major pharmaceutical, chemical, surgical device and biotechnology companies, many of which have substantially greater resources than Genzyme. These companies may succeed in developing products that are more effective than any that have been or may be developed by Genzyme General and may also prove to be more successful than Genzyme General in producing and marketing their products. Each of Genzyme General's business units faces different competitive challenges: SPECIALTY THERAPEUTICS 17 20 CEREDASE(R) ENZYME AND CEREZYME(R) ENZYME. Although Genzyme General is not aware of any current effective alternative to its products for the treatment for Gaucher disease (Ceredase(R) enzyme and Cerezyme(R) enzyme), competition potentially could come from other protein replacement therapies or gene therapy. Genzyme General believes that its proprietary production techniques, exclusive raw material source for Ceredase(R) enzyme and, to a certain extent, the orphan drug status of its products give it a number of advantages over potential competitors using protein replacement therapy for the treatment of Gaucher disease. Gene therapy techniques are still in experimental stages. Genzyme General believes that the principal factors that will affect competition for Ceredase(R) enzyme and Cerezyme(R) enzyme will be clinical effectiveness and absence of adverse side effects. One company is attempting to develop an alternative form of recombinant GCR by producing the enzyme in insect cells and modifying it by applying a coating of polyethylene glycol. CF. There are a number of organizations, both academic and commercial, engaged in developing therapies to treat either the symptoms of CF or the cause of the disease. Several groups are developing gene therapy approaches to the disease and also have received FDA and RAC approval to initiate limited human studies of CF gene therapy. In addition, other organizations are investigating pharmacological and biological agents that would treat CF. One such product, Pulmozyme(R), which was developed by Genentech, Inc., currently is on the market. These groups may succeed in developing gene therapy products before Genzyme General, in obtaining patent protection that may effectively block Genzyme General from commercializing its gene therapy products or in developing other drug therapies that relieve the symptoms of CF and, thus, compete with products under development by Genzyme General. CANCER. Competition in the field of cancer diagnostics and therapeutics is intense. Many competitors in this field have greater financial and human resources, more experience in research, preclinical and clinical development, superior expertise in obtaining regulatory approvals and more extensive production and marketing infrastructure than Genzyme General. Genzyme General is aware of clinical trials sponsored by Rhone-Poulenc Rorer relating to gene therapy for cancer and expects that other large companies will be initiating gene therapy clinical trials in the near future. Genzyme General also relies on its collaborators for support in some of its cancer research and development programs and intends to rely on these partners for preclinical evaluation and clinical development of its potential products and services. Certain of its collaborators are conducting multiple product development programs in fields similar to those that are the subject of the partner's alliance with Genzyme General. For instance, the NCI, with whom Genzyme General is collaborating regarding the use of adenoviral vectors incorporating the MART1 and gp100 tumor antigen genes for the treatment of melanoma, is currently working with others on non-adenoviral vector delivery systems for these antigens. Any product candidate of Genzyme General, therefore, may be subject to competition with a potential product under development by a third party, including Genzyme General's collaborators. SURGICAL PRODUCTS SEPRA PRODUCTS. Genzyme General believes that its expertise in developing proprietary fermentation processes and its access to proprietary strains of micro-organisms used in its HA production process will give it a competitive advantage in the marketing of the Sepra Products. Its anti-adhesion products may face significant competition, however, from other HA-based products, from non-HA-based products and from changes in surgical techniques that would obviate the use of HA. Genzyme General believes that the principal factor that will affect competition in this area is acceptance of the product by surgeons, which depends, in large part, upon product performance, safety and price. DSP. DSP competes in three medical device categories: cardiovascular fluid management systems, surgical closure systems and surgical instruments. In each of these categories, DSP's principal methods of competing are continued innovative product development, the performance and breadth of its product lines, brand name recognition, sales force training and educational services, including sponsorship of training programs in advanced surgical techniques. DSP's key product in the cardiovascular fluid management category is the Pleur-evac(R) chest drainage product. DSP believes that it leads the chest drainage category with a majority share and that this position is sustainable due to a broad product line possessing patented features and brand name recognition. The surgical closure category is dominated by Ethicon, a subsidiary of Johnson & Johnson, and Sherwood, a division of American Home Products Corporation. DSP had focused on the cardiovascular suture market within this category and believes that favorable demographics such as the aging population and lengthening life expectancies will provide continued growth in this market. Competition within the surgical instruments category varies by segment, such as cardiovascular, endoscopic and plastic surgery instruments, with no one company dominating the entire category. Unique features and product innovation within its surgical instruments line, such as the recently launched EndoCABG(TM) System, have allowed DSP to compete effectively across this category and to hold a majority share of the cardiovascular punch segment. 18 21 DIAGNOSTIC SERVICES. The U.S. market for prenatal cytogenetic and biochemical testing is divided among approximately 500 laboratories, many of which offer both types of testing. Of this total group, less than 20 laboratories market their services nationally. Genzyme Genetics believes that the industry as a whole is still quite fragmented, with the top 20 laboratories accounting for approximately 50% of market revenues, and with no individual company, including Genzyme Genetics, accounting for more than 18% of the total. Competitive factors in the genetic diagnostics services business generally include reputation of the laboratory, range of services offered, pricing, convenience of sample collection and pick-up, quality of analysis and reporting and timeliness of delivery of completed reports. Genzyme Genetics believes that its research and development program, which has enabled it to develop and introduce testing services based on new technology, and its active sales and marketing force have played significant roles in the rapid growth of its genetic diagnostics services business. In addition to Genzyme Genetics, several companies and academic groups are attempting to develop fetal cell separation techniques. Genzyme Genetics believes that its combination of separation and analytical technologies will give it a competitive advantage. DIAGNOSTIC PRODUCTS. Genzyme Diagnostics acts as a primary supplier of enzymes and substrates, and generally does not compete with its customers in the sale of complete diagnostic kits. This philosophy enables Genzyme Diagnostics to maintain unique relationships with major diagnostic kit manufacturers and to engage with them in development efforts to produce new or improved kits. The market in the diagnostic products industry is mature and competition is based on price, reliability of supply and the purity and specific activity of products. PHARMACEUTICALS. Competition in the pharmaceuticals business is affected primarily by production efficiency, product quality and price. Genzyme Pharmaceuticals believes that its success in this market is due to its technical expertise and selection of high-value, small volume products that minimize direct competition with larger production operations in commodity products. PATENTS AND PROPRIETARY TECHNOLOGY Genzyme General pursues a policy of obtaining patent protection both in the U.S. and in selected foreign countries for subject matter considered patentable and important to its business. In addition, a portion of Genzyme's proprietary position is based upon patents that Genzyme has licensed from others. These license agreements generally require Genzyme to pay royalties upon commercialization of products covered by the licensed technology. In general, patents issued in the U.S. are effective for a period of seventeen years from date of issue, although the GATT legislation changes this to twenty years from the filing date for applications filed after June 8, 1995. The duration of foreign patents varies in accordance with applicable local law. Genzyme General also relies on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in its product areas. Genzyme's employees, consultants and corporate partners who have access to its proprietary information have signed confidentiality agreements. Genzyme General's patent position and proprietary technology are subject to certain risks and uncertainties. See "Factors Affecting Future Operating Results--Uncertainty Regarding Patents and Protection of Proprietary Technology" under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. GOVERNMENT REGULATION Governmental regulation, in the U.S. and other countries, is a significant factor in the production and marketing of many of Genzyme General's products and in its ongoing research and development activities. FDA REGULATION. In the U.S., products that do not achieve their principal intended purpose through chemical action within or on the body and which are not dependent upon being metabolized by the patient's body in order to be effective are classified by the FDA as "devices" while other products are classified as "drugs" or "biologics." Ceredase(R) enzyme and Cerezyme(R) enzyme are regulated in the U.S. as drugs, as are Thyrogen(R) hormone, Prolactin and Chitinase. Its gene therapy products, [alpha]-Gal and ATIII are regulated as biologics. The Sepra Products and DSP's products are regulated as devices. The Direct LDL(TM) and N-geneous(TM) HDL cholesterol tests are classified as an in vitro diagnostic devices. The activities required before drugs or biologics may be marketed in the U.S. include (i) preclinical laboratory tests, in vitro and in vivo preclinical studies and formulation and stability studies, (ii) the submission to the FDA and 19 22 approval of an application for human clinical testing (an "IND"), (iii) adequate and well controlled human clinical trials to prove the safety and effectiveness of the drug or biologic, (iv) the submission of a New Drug Application ("NDA") for a drug or a Product License Application ("PLA") for a biologic or a BLA for biologics identified by the FDA as "Specified Biologics" and (v) the approval by the FDA of the NDA, BLA or PLA. In addition to product approval, the manufacturer of the product may have to obtain an establishment license (for a biologic that is not considered well characterized) or a pre-approval Good Manufacturing Practices ("GMP") inspection (for a drug or well-characterized biologic) from the FDA. Since any license granted by the FDA is both site and process specific, any material change by a company in the manufacturing process, equipment or location necessitates additional FDA review and approval. Products that are classified as devices also require FDA approval prior to marketing. Devices are classified as Class I, II or III, depending upon the information available to assure their safety and effectiveness. In general, Class I and Class II devices are devices whose safety and effectiveness can reasonably be assured through general or specific controls, respectively. Class III devices are life sustaining, life supporting or implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices. The steps required for approval of a Class III device include (i) preclinical laboratory tests and in vitro and in vivo preclinical studies, (ii) the submission to the FDA and approval of an investigational device exemption (an "IDE") to allow initiation of clinical testing, (iii) human clinical studies to prove safety and effectiveness of the device, (iv) the submission of a PMA and (v) the approval by the FDA of the PMA. Typically, clinical testing of devices involves initial testing to evaluate safety and feasibility and expanded trials to collect sufficient data to prove safety and effectiveness. In addition, the procedures and the facilities used to manufacture the device are subject to review and approval by the FDA. A device (other than a Class III device) which is proved to be substantially equivalent to a device marketed prior to May 28, 1976, when government regulations for devices were first introduced, can be marketed after approval of a 510(k) application rather than the filing of an IDE and a PMA. The 510(k) application must contain a description of the device, its methods of manufacture and quality control procedures and the results of testing to demonstrate that the device is substantially equivalent to the device already marketed. The time and expense required to perform the clinical testing necessary to obtain FDA approval can far exceed the time and expense of the research and development initially required to create the product. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. In addition, use of these products during testing and after marketing approval has been obtained could reveal side effects which, if serious, could delay, impede or prevent marketing approval, limit uses, force a recall of the product or expose Genzyme General to product liability claims. REGULATION OUTSIDE THE U.S.. For marketing outside the U.S., Genzyme General is subject to foreign regulatory requirements governing human clinical testing and marketing approval for its products. These requirements vary by jurisdiction, differ from those in the U.S. and may necessitate additional pre-clinical or clinical testing whether or not FDA approval has been obtained. Generally, Genzyme General's initial focus for obtaining marketing approval outside the U.S. is Europe. European Union ("EU") Directives ("regulations") generally classify products either as medicinal products or devices. For medicinal products, like those produced by Genzyme, marketing approval may be sought using either the centralized procedure of the Committee for Proprietary Medicine or Products (the "CPMP") or the decentralized (mutual recognition) process. The CPMP centralized procedure results in a recommendation in all member states, while the EU multi-state process involves country by country approval. EU regulations for products classified as devices have been implemented for some devices. Devices such as Genzyme's Sepra Products must receive market approval through a centralized procedure, where the device receives a CE mark allowing distribution to all member states of the European Union. For those devices where EU regulations have not been implemented, marketing approval must be obtained on a country by country basis. The CE mark certification requires the company to receive International Standards Organization (ISO) certification for each facility involved in the manufacture or distribution of the device. This certification only comes after the development of an all inclusive quality system which is reviewed for compliance to International Quality Standards by a licensed "Notified Body" working within the EU. After certification is received a product dossier is reviewed which attests to the product's compliance with EU directive 93/42/EEC for medical devices. Only after this point is a CE mark granted 20 23 Ceredase(R) enzyme has been registered for sale in the EU through a CPMP centralized procedure. Genzyme General expects Cerezyme(R) enzyme, Thyrogen(R) hormone, [alpha]-Gal, Prolactin, Chitinase and the gene therapy products also will be regulated through centralized CPMP procedure. Seprafilm(TM) and Sepracoat(TM) have been granted the CE Mark. Genzyme will apply for a CE Mark for all products sold by DSP. ORPHAN DRUG ACT. The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of application for orphan drug designation. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven-year exclusive marketing period in the U.S. for that product. However, a drug that is considered by the FDA to be clinically superior to or different from another approved orphan drug, even though for the same indication, is not barred from sale in the U.S. during the seven-year exclusive marketing period. Genzyme General has been accorded orphan drug status for Ceredase(R) enzyme and Cerezyme(R) enzyme and has received orphan drug designation for a number of other products currently under development, including gene therapy products and Thyrogen(R) hormone. Legislation has been periodically introduced in recent years, however, to amend the Orphan Drug Act. Such legislation has generally been directed to shortening the period of automatic market exclusivity and granting certain marketing rights to simultaneous developers of a drug. The effect on Genzyme of any amendments ultimately adopted cannot be assessed at this time. It believes that the commercial success of these products including Ceredase(R) enzyme and Cerezyme(R) enzyme will depend more significantly on the associated safety and efficacy profile and on the price relative to competitive or alternative treatments and other marketing characteristics of each product than on the exclusivity afforded by the Orphan Drug Act. Additionally, these products may be protected by patents, exclusive raw material supply contracts and other means. OTHER GOVERNMENT REGULATION. Genzyme General's operations are or may be subject to various laws, regulations and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents used in connection with its research work. The extent of government regulation which might result from future legislation or administrative action cannot be predicted. GENZYME TISSUE REPAIR OVERVIEW Genzyme Tissue Repair is a leading developer of biological products for the treatment of cartilage damage, severe burns, chronic skin ulcers, and neurodegenerative diseases. Genzyme Tissue Repair believes that strong capabilities in three groups of core technologies -- cell processing, therapeutic protein development and biomaterials engineering -- enhance its ability to successfully develop and market a portfolio of novel products and services for unmet medical needs in the field of tissue repair. Two services, the CARTICEL(R) Autologous Chondrocyte Service (the "CARTICEL(R) Service") for repair of knee cartilage damage and the Epicel(SM) Service for permanent skin replacement for burn victims, and currently are on the market. Development programs to improve the performance and expand the applications of each of these services are ongoing. In addition, Genzyme Tissue Repair is developing recombinant human transforming growth factor beta2 ("TGF-(beta)2") for the treatment of chronic skin ulcer. Genzyme Tissue Repair further expanded its product pipeline in 1996 through a joint venture with Diacrin to develop and commercialize two cellular therapies neurodegenerative diseases -- NeuroCell(TM)-PD for the treatment of Parkinson's disease and NeuroCell(TM)-HD for the treatment of Huntington's disease. These programs are in Phase I clinical trials and involve implantation of porcine fetal cells to regenerate damaged brain tissue. The joint venture combines Diacrin's expertise in developing populations of tranplantable porcine fetal cells with Genzyme Tissue Repair's expertise in cell-based therapies. Genzyme Tissue Repair will provide 80% of the first $50 million in funding for these programs and by the joint venture. CARTILAGE REPAIR THE CARTICEL(SM) SERVICE 21 24 BACKGROUND AND MARKET OPPORTUNITY. Once damaged, joint cartilage does not normally regenerate in the body. In addition to causing pain and restricted mobility, chronic injuries to joint cartilage over time may lead to debilitating osteoarthritis and can severely hinder a person's normal activities and occupation. Many patients with joint cartilage damage undergo arthroscopic surgery to smooth the surface of the damaged area. Other surgical procedures, such as microfracture, drilling, and abrasion, allow bone marrow cells to infiltrate the defect, resulting in the formation of a fibrous cartilage tissue that is less durable and resilient than normal articular cartilage. These procedures may provide symptomatic relief, but the benefit usually lasts only a few years, especially if the patient's pre-injury activity level is maintained. More severe and chronic forms of knee cartilage damage can lead to greater deterioration of the joint cartilage and may eventually lead to total knee joint replacements. Approximately 200,000 total knee replacement operations are performed annually at a cost of about $25,000 each. The artificial joint generally lasts only 10 to 15 years and is considered a poor option for people under the age of 50. DESCRIPTION OF THE CARTICEL(R) SERVICE. The CARTICEL(R) Service employs a proprietary process to grow a patient's own cartilage cells for use in treating damaged knee cartilage. The treatment, also called autologous chondrocyte implantation ("ACI"), was initially developed at the University of Gotenburg and Sahlgrenska University Hospital, Gotenburg, Sweden, in an effort to provide a better therapy for people with joint cartilage damage. The new treatment is used primarily in patients with cartilage damage to the femoral condyle, an area of the knee formed by the end of the thigh bone. Patients with this type of damage generally display symptoms which include locking, catching, localized pain, and swelling. The CARTICEL(R) Service starts when an orthopedic surgeon provides Genzyme Tissue Repair with a biopsy of healthy cartilage from the patient. Technicians at the company's cell processing facilities in Cambridge and Framingham, Massachusetts, use proprietary methods to grow millions of new cells for that patient. The cells are then delivered to the hospital, where the surgeon implants them into the defect using the ACI procedure. In this procedure, the physician removes damaged tissue and prepares the defect for introduction of the cultured cells. A small piece of the periosteum, the membrane covering a bone, is taken from the patient's lower leg and sutured over the defect to hold the cells in place. The cultured cells are then implanted under the periosteum in the defect, where they form a matrix that integrates with surrounding cartilage to fill the defect. In addition to standardized cartilage cell processing, the CARTICEL(R) Service includes an integrated program of surgeon training and rigorous collection and analysis of outcomes data, which is aimed at providing broad surgeon access and achieving and maintaining high quality patient outcomes. In order to gain access to the service, surgeons must complete comprehensive training in the ACI procedure. Genzyme Tissue Repair's training programs include clinical, technical and practical orientation modules, providing a concentrated exposure to ACI technology. Physician training consists of lectures, practice of the surgical technique and an orientation regarding reimbursement and billing procedures. As of December 31, 1996, Genzyme Tissue Repair had trained 1,463 surgeons in this program. CLINICAL RESULTS. At a meeting of the American Academy of Orthopedic Surgeons ("AAOS"), Genzyme Tissue Repair's academic collaborator, Lars Peterson, M.D., Ph.D., of the University of Gotenburg, reported results of a study of 92 patients treated more than two years ago with ACI. The results showed that 96% of those with a single defect on the femoral condyle had good to excellent results in 22 25 a clinical assessment using five different rating scales. The new data also support the addition of osteochondritis dissecans ("OCD") as an indication for ACI. OCD is the separation of a fragment of cartilage and underlying bone from the articular surface. Of patients treated for this type of lesion, 89% had good to excellent results. Good to excellent results were also reported in 75% of patients who had concurrent repair of damage to their anterior cruciate ligament, in addition to treatment of a cartilage defect on the femoral condyle. Patients with lesions on the knee cap showed less improvement, however, as only 62% of these patients had good to excellent results. A retrospective analysis of the medical records of the patients in this study, using the five rating scales, revealed that their knees were, on average, in poor condition before treatment. As part of the study, Peterson and his colleagues took 25 biopsies of the ACI grafts from 14 of the 92 patients. Treatment failures were over-represented among these biopsies, because patients with good clinical outcomes generally did not want to undergo the invasive biopsy-collection procedure. In a blinded fashion, an independent investigator examined the overall tissue appearance and cellular appearance and evaluated the biopsies using polarized light and immunohistochemical techniques. The evaluation revealed that 13 of the 25 biopsies were composed of hyaline-like cartilage (the kind normally found on joint surfaces) with a surface layer of fibrous cartilage (the remnants of a tissue cap used to hold the autologous cells in place). Six biopsies were composed of combined hyaline and fibrous cartilage. Six were composed of fibrous cartilage. Correlation of the histological results with the clinical data showed that hyaline-like repair tissue was associated with improved clinical outcomes, while fibrous repair tissue was associated with poor outcomes. The results of this study confirmed those published two years ago in the NEW ENGLAND JOURNAL OF MEDICINE, in which Peterson reported on the first 23 patients to undergo 2-year follow-up evaluations. Genzyme Tissue Repair believes that clinical data collection for analysis of surgical outcomes will be critical to document and expand the use of the CARTICEL(R) Service. Accordingly, Genzyme Tissue Repair has established a registry of patients who receive cells from the CARTICEL(R) Service and requires that each surgeon obtain consent from the surgeon's institutional review board ("IRB") to collect outcomes data under a protocol developed by Genzyme Tissue Repair. Data from the registry on 42 patients who had been treated more than 12 months prior to the time of data collection and 121 patients who had been treated six months prior to data collection were presented at the AAOS meeting held in February 1997. The registry data showed statistically significant improvement at both six months and 12 months following ACI treatment with cells grown by the CARTICEL(R) Service. These improvements were seen in four key measures: clinician and patient evaluations of overall knee condition, patient reports of symptoms, and knee examination results. Genzyme Tissue Repair is also planning a five-year post-marketing evaluation study that will compare the safety and effectiveness of the CARTICEL(R) Service to other treatment options available to repair damaged knee cartilage. GOVERNMENT REGULATION. Based on discussions with the Center for Devices and Radiological Health, Genzyme Tissue Repair introduced the CARTICEL(R) Service in March 1995 as an unregulated device. In the absence of specific regulation, Genzyme Tissue Repair developed a comprehensive manufacturing process that established rigorous quality standards for autologous cell services. These standards included internal and external assessments of the manufacturing and quality system. This system was recently inspected by the FDA in connection with the Biologics License Application submitted by Genzyme Tissue Repair described below. In April 1995, the FDA contacted Genzyme Tissue Repair and asked for more information regarding the regulatory status of the CARTICEL(R) Service. Following this request, Genzyme Tissue Repair filed a formal request in May of 1995 with the FDA Commissioner's office to review the regulatory status of the CARTICEL(R) Service and determine appropriate regulatory jurisdiction. The FDA was provided with information regarding Genzyme Tissue Repair's quality standards and the policies that Genzyme Tissue Repair established for the CARTICEL(R) Service, as well as answers to specific technical questions. The FDA responded to Genzyme Tissue Repair's request for designation in July 1995, confirming in its response Genzyme Tissue Repair's belief that a formal regulatory framework appropriate to the CARTICEL(R) Service had not yet been established. Furthermore, the FDA informed Genzyme Tissue Repair that it intended to hold a public hearing to explore the public health impact of and consider appropriate regulatory controls for autologous cell implants. The FDA also informed Genzyme Tissue Repair that it would not regulate the provision of the CARTICEL(R) Service or the Epicel(R) Service prior to the hearing and development of regulations, and would allow Genzyme Tissue Repair sufficient time to comply with any new regulations that may be promulgated. In November 1995, the FDA held a public hearing on the subject of autologous cells for structural purposes as a starting point for the development of new regulations. Genzyme Tissue Repair participated in this hearing, presenting information regarding the development, clinical application and processing related to the CARTICEL(R) and Epicel(SM) Services. Genzyme Tissue Repair also advocated the development of appropriate regulations to guide further development of products and services in this area. Following a public comment period that closed in February 1996, the FDA announced that it would review its position and determine if regulations were required in the area of autologous cells for structural and reconstructive purposes. In February 1997, the FDA issued regulations that will bring products and services such as the CARTICEL(R) Service under regulation by November of 1997. Companies already marketing products and services subject to the regulations are allowed a transition period ending on November 30, 1997 in which to file and obtain approval of a Biologics License Application (a "BLA") or an IND, while continuing to market their products and services. Genzyme Tissue Repair submitted a BLA for the CARTICEL(R) Service in March 1996 in anticipation of the regulations. In March 1997, an FDA advisory panel determined by a vote of 11 to zero, with one abstention, that the ACI procedure using the CARTICEL(R) Service provided a clinical benefit to patients with damage to the articular cartilage in 23 26 the knee. The panel also made several recommendations concerning Genzyme Tissue Repair's proposed post-approval study of the CARTICEL(R) Service with regard to randomization and appropriate controls and endpoints. The FDA did not ask the panel to make and the panel did not make a recommendation concerning whether to approve the BLA for the CARTICEL(R) Service. The panel's recommendations will be considered in the FDA's review of the BLA, but are not binding on the FDA. Although Genzyme Tissue Repair expects the FDA to complete its review of the BLA before of the end of November 1997, there can be no assurance that the review will be completed by then or that the FDA will not require additional data concerning the safety and efficacy of the CARTICEL(R) Service. A delay in the approval of the BLA for the CARTICEL(R) Service beyond the transition period could materially and adversely affect the commercialization of the CARTICEL(R) Service. SALES AND MARKETING. Genzyme Tissue Repair is making a substantial effort to establish the ACI procedure using the CARTICEL(R) Service as the new standard of care for repair of cartilage damage to the femoral condyle. As part of these efforts, Genzyme Tissue Repair shifted its focus in 1996 to increasing the rate of reimbursement approvals by establishing an educational program third-party payers. As a result of this program, several payers have established protocols for selecting patients and determining eligibility. Genzyme Tissue Repair's reimbursement experience has demonstrated that payers with such protocols have higher approval rates and typically complete reviews in three to four days, compared to three to four months for payers without protocols. In addition, one-third of Genzyme Tissue Repair's 60-person U.S. sales and reimbursement staff is involved directly in claims processing and educating insurers about the appropriate uses of the CARTICEL(R) Service. Genzyme Tissue Repair also believes that successful commercialization of the CARTICEL(R) Service is dependent on its being accepted by and incorporated into routine use by a large number of orthopedic surgeons. Genzyme Tissue Repair markets the CARTICEL(R) Service directly to orthopedic surgeons in the U.S. and Europe. Genzyme Tissue Repair's sales force promotes the CARTICEL(R) Service by contacting and educating orthopedic surgeons about the service and maintaining an ongoing relationship with each surgeon who receives training from Genzyme Tissue Repair; assisting physicians with administrative, clinical and reimbursement issues involved in arranging to perform the biopsy and implantation procedures at hospitals; and assisting physicians in obtaining the necessary approval from the hospital's IRB to collect outcomes data in accordance with Genzyme Tissue Repair's protocol. Genzyme Tissue Repair further supports its sales and marketing efforts by attendance at and participation in orthopedic congresses and symposia. DEVELOPMENT PROGRAMS. Genzyme Tissue Repair currently has a number of ongoing development programs relating to the CARTICEL(R) Service, including work on arthroscopic implantation procedures and development of the CARTICEL(R) Service for other applications. The primary objectives of these programs are to: (i) improve Genzyme Tissue Repair's general knowledge of cartilage repair, (ii) improve the regenerative ability of the implanted, autologous chondrocytes and (iii) expand the application of the CARTICEL(R) Service to the repair of large surface area defects. NEURODEGENERATIVE DISEASES DIACRIN/GENZYME LLC. In October 1996, Diacrin/Genzyme LLC was established as a joint venture between Genzyme Tissue Repair and Diacrin to develop and commercialize two cellular therapies neurodegenerative diseases -- NeuroCell(TM)-PD for the treatment of Parkinson's disease and NeuroCell(TM)-HD for the treatment of Huntington's disease. These programs are in Phase I clinical trials and involve implantation of porcine fetal cells to regenerate damaged brain tissue. With both products, rejection of the porcine cells can be prevented with the immunosuppressive drug cyclosporin. The joint venture also has a license to patented technology being developed at Massachusetts General Hospital, Boston, which is designed to protect donor cells from the host's immune system without the need for immunosuppressive drugs. In December 1996, the FDA granted orphan drug designation to NeuroCell(TM)-PD for in advanced Parkinson's patients and to NeuroCell(TM)-HD for all Huntington's patients. Each received the designation for use with an antibody pretreatment to prevent rejection. Genzyme Tissue Repair and Diacrin estimate that the patient population with advanced Parkinson's disease ranges from 115,000 to 155,000 in the United States and that the U.S. patient population with Huntington's disease is approximately 25,000. Under the terms of the joint venture agreement, Genzyme Tissue Repair will provide 80% of the first $50 million in funding for products to be developed by the joint venture. Thereafter, all costs will be shared equally between Genzyme Tissue Repair and Diacrin. Profits from the joint venture will be shared equally by the two parties. In order to provide 24 27 initial funding for Diacrin/Genzyme LLC, the Genzyme Board of Directors (the "Genzyme Board") has approved the allocation of up to $20 million in cash from Genzyme General to Genzyme Tissue Repair (the "GTR Equity Line") in exchange for an increase in the number of GTR Designated Shares at a rate determined by dividing the amount of cash so allocated by the average of the daily closing prices of one share of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. The Company intends to make monthly allocations of cash under the GTR Equity Line in an amount corresponding to the funding commitment of Genzyme Tissue Repair under the joint venture agreement for such month. NEUROCELL(TM)-PD. Parkinson's disease is a degenerative disease characterized by the death of nerve cells in the area of the brain involved with smoothing and coordinating movement. The loss of these nerve cells results in a variety of motor symptoms such as rigidity and slowed movements, tremors, falls, and difficulties with speech and swallowing. Therapy with the drug L-dopa is initially effective, but begins to lose its efficacy in 6 to 12 years and provides little benefit in the late stages of the disease. The resulting medical expenses, early retirement, and nursing home care are estimated to be $5.6 billion a year. NeuroCell(TM)-PD is aimed at these late-stage patients. Enrollment in a Phase I study of 12 patients conducted at Lahey Hitchcock Clinic, Burlington, Massachusetts, and Boston University Medical Center has been completed and all 12 patients have been treated. The initial results of the Phase I trial are similar to those obtained in Parkinson's patients treated with human fetal cells, some of whom showed marked improvement in symptoms and restored efficacy of L-dopa. Commercialization of treatments using human fetal cells is not practical, because of supply constraints, ethical concerns, and inconsistent quality of the human cells. Based upon these results, the joint venture is seeking approval from the FDA to start a pivotal Phase II/III trial in 1997. Separately, a histological study published in the March issue of NATURE MEDICINE showed that NeuroCell(TM)-PD cells transplanted into one of the patients in the Phase I trial survived for more than seven months and showed signs of reconnecting nerve tissue damaged by the disease. The study marks the first documentation of survival of cells transplanted from another species into the human brain and of the appropriate growth of non-human neurons for a potential therapeutic response. The patient, a 69-year-old man, died suddenly of a pulmonary embolism. An autopsy showed that his death was not related to treatment with NeuroCell-PD. NEUROCELL(TM)-HD. Huntington's disease is a fatal genetic disorder that is usually not evident until middle age. It causes uncontrolled movements, gait and postural defects, and dementia. Approximately 20,000 Americans are in the late stages of this disease, and an additional 1,500 are diagnosed each year. NeuroCell-HD is in a 12-patient Phase I clinical trial at Lahey Hitchcock Clinic, Boston University Medical Center, and Brigham and Women's Hospital in Boston. All 12 patients were treated as of the end of the first quarter of 1997. SKIN REPAIR THE EPICEL(SM) SERVICE. Each year approximately 2,000,000 people in the United States suffer burn injuries. According to the National Center for Health Services, approximately 70,000 of these patients are admitted to hospitals for serious burn injuries. Genzyme Tissue Repair estimates that approximately 25,000 of the most severely burned patients in the United States are admitted to one of the 140 specialized burn centers. Industry analysts estimate that approximately $1 billion is spent in the United States annually for the treatment of burns. Skin grafts produced using the Epicel(SM) Service are a life-saving product indicated for patients who suffer severe, full-thickness burns and need permanent skin replacement. These epidermal grafts are grown from a patient's own skin cells and, therefore, are not rejected by the patient's immune system. Starting with a patient biopsy about the size of a postage stamp, Genzyme Tissue Repair can grow enough skin grafts in three to four weeks to cover a patient's entire body surface area. Each skin graft consists of a sheet of cultured skin cells, approximately 25 square centimeters in size and ranging from two to eight cell layers thick, attached to a piece of surgical dressing material. A 48 hour shelf life allows these grafts to be delivered anywhere in the U.S., Europe or Japan from Genzyme Tissue Repair's production laboratories in Cambridge, Massachusetts. 25 28 Skin grafts produced using the Epicel(SM) Service were first introduced in 1988 and remain the only commercially available laboratory grown skin grafts shown to provide permanent skin replacement. Most burn wounds involving less than 60% body surface area are covered with conventional skin grafts within the three to four weeks it currently takes to grow skin grafts produced using the Epicel(SM) Service. Therefore, Genzyme Tissue Repair believes that the primary candidates for the Epicel(SM) Service are the approximately four hundred patients each year in the U.S. who survive burn injuries covering more than 60% of their body surface area. Genzyme Tissue Repair markets the Epicel(SM) Service to burn centers throughout the U.S. and in parts of Europe through its own direct sales force. Genzyme Tissue Repair also markets the Epicel(SM) Service in Japan through a distributor. Genzyme Tissue Repair is currently evaluating alternative approaches for use of the Epicel(SM) Service which will represent improvements over certain limitations that have been identified in its clinical utility and production methods. Methods being evaluated by Genzyme Tissue Repair include use of synthetic membranes and composite skin grafts. Genzyme Tissue Repair believes that advances in the field of autologous keratinocyte grafting coupled with one or both of these technologies may allow the expanded use of autologous keratinocyte grafting for the treatment of smaller burns as well as for treatment of cutaneous ulcers which involve large surface areas of the skin. In the latter case, Genzyme Tissue Repair believes an improved autologous keratinocyte graft could effectively and economically provide final wound closure following effective debridement and induction of granulation tissue deposition at the wound site. TGF-(BETA)2. Chronic skin ulcers are open, often painful wounds found predominantly on the lower extremities of elderly patients. Genzyme Tissue Repair estimates that approximately 2,600,000 cases of chronic or slow healing skin ulcers are treated in the United States each year at a cost of more than $7 billion, with individual treatments costing up to $40,000 per year. TGF-(BETA)2 is one of a family of proteins that plays an important role in the body's ability to promote normal wound healing by stimulating the growth of connective tissue. Genzyme Tissue Repair has licensed recombinant TGF-(beta)2 from Celtrix Pharmaceuticals, Inc. ("Celtrix") and is collaborating with Celtrix on the use of TGF-(beta)2 to promote the healing of chronic skin ulcers by supplementing the body's own production of TGF-(beta)2. The product will consist of an easy-to-use collagen sponge which serves as a delivery vehicle permitting the release of a consistent dose of TGF-(beta)2 to the wound surface over time. In January 1994, Celtrix announced that the results of the Phase II study of the TGF-(beta)2 wound healing product in the treatment of venous ulcers were consistent with previous findings which indicated a positive trend in wound healing. These results also allowed Celtrix to reach several important conclusions: (i) topically applied TGF-(beta)2 is safe at the doses tested; (ii) the delivery vehicle is well tolerated and (iii) the ease of treatment enables patients to apply TGF-(beta)2 therapy themselves. Due to variability in patient response in placebo groups, however, combined with a greater-than-expected placebo effect, statistical significance was not achieved in this study. In the fourth quarter of 1995, Genzyme Tissue Repair began a 12 center, double-blinded, randomized Phase II clinical trial. The study groups 200 diabetic patients suffering from neurotrophic diabetic foot ulcers into one of three TGF-(beta)2 impregnated collagen sponge dose groups, a placebo group or a standard of care control group. The study is currently ongoing. During the first half of 1995, Genzyme Tissue Repair concentrated its efforts on refining the formulation and manufacturing process for the TGF-(beta)2 collagen sponges at Genzyme's Allston, Massachusetts facility for use in Phase II clinical trials. Genzyme successfully produced 10,000 sponges using bulk TGF-(beta)2 from Celtrix and collagen slurry from an outside source. Genzyme plans to manufacture TGF-(beta)2 for phase III clinical trials in its own facilities. Upon commercialization, Genzyme Tissue Repair will make royalty payments to Celtrix based on cumulative product sales. Genzyme Tissue Repair is also obligated to make milestone payments to Celtrix for product development related achievements. Genzyme Tissue Repair is also developing recombinant TGF-(beta)2 for formulation as an intravenous injectable product for administration to multiple sclerosis ("MS") patients for the prevention of autoimmune damage of nerve tissue. This program continues work begun by Celtrix on TGF-(beta)2 in people suffering from MS. In April 1994, Celtrix initiated a Phase I clinical study with recombinant TGF-(beta)2 in individuals with MS. The study is being conducted by the National Institute of Neurological Disorders and Stroke. The initial clinical evaluation of TGF-(beta)2 in patients with MS is an open-label, ascending-dose safety 26 29 study involving 15 patients with the progressive form of the disease. Genzyme Tissue Repair continues to conduct toxicity studies of TGF-(beta)2 to support future Phase II clinical trials. Genzyme Tissue Repair has not committed to a development and commercialization strategy for TGF-(beta)2 for MS and has begun exploratory discussions regarding the future grant of a license to a third party for this indication. TGF-(beta)2 has also been shown to promote wound healing in animal models of hard tissue repair. Genzyme Tissue Repair has been approached by a number of companies in the orthopedic implant market to evaluate the use of TGF-(beta)2 in conjunction with accelerating the healing process in segmental defect repair and general use of implants. Genzyme Tissue Repair may grant a license for use of TGF-(beta)2 for this indication to a third party. Genzyme Tissue Repair's rights with respect to TGF-(beta)2 derive from a license and development agreement which Genzyme and Celtrix entered into in June 1994. The agreement provides for a collaboration between the parties to develop and commercialize TGF-(beta)2 for any therapeutic uses for any clinical indication (excluding soft tissue augmentation, vascular prostheses, and all ophthalmic and mucositis indications). Genzyme's rights and obligations under the agreement with Celtrix have been allocated to Genzyme Tissue Repair. Pursuant to the license agreement, Genzyme Tissue Repair has worldwide commercialization rights, excluding Asia, for all systemic indications and select other indications of TGF-(beta)2. Celtrix has retained the right to acquire rights to indications not pursued by Genzyme Tissue Repair. VIANAIN(R) Debriding Product. Vianain(R) Debriding Product is a proprietary enzyme preparation designed to remove necrotic tissue from the wound site. Vianain(R) Debriding Product is formulated in a hydrophilic cream delivery vehicle so that it is highly viscous and easy to apply to and cleanse from the wound site. Since Vianain(R) Debriding Product is designed to be applied at the bedside by a nurse or technician, Genzyme Tissue Repair believes it may also be more cost effective to use than currently available debridement methods. Genzyme Tissue Repair intends to use the same proprietary preparation of Vianain(R) Debriding Product to remove necrotic tissue from both burn and skin ulcers. In October 1995, Genzyme Tissue Repair completed a Phase II clinical trial of Vianain(R) Debriding Product in burn patients. The results of this multi-center study indicate that (i) Vianain(R) Debriding Product is a safe and effective debriding agent; (ii) multiple applications of Vianain(R) Debriding Product are required to effectively debride the burn wound; (iii) a significantly higher number of patients treated with Vianain(R) Debriding Product achieved acceptable debridement of the wound compared to patients treated with the vehicle alone; (iv) there was insufficient information to determine if the use of Vianain(R) Debriding Product can speed the determination of early burn depth; and (v) there was a trend toward decreased time to wound closure in the Vianain(R) Debriding Product treatment group as compared to the control group, but this difference was not statistically significant. A Phase II single-center study evaluating the ability to transplant skin grafts to full thickness burn injuries directly following treatment with Vianain(R) Debriding Product in ten patients was completed in May 1995. Clinical results indicate that the use of Vianain(R) Debriding Product does not yield an immediately graftable bed in full thickness burns. It appears, however, to be an effective debulking agent. Phase I clinical studies for the Vianain(R) Debriding Product for the treatment of chronic skin ulcers were completed in June 1995. A total of 15 chronic ulcer patients (8 venous, 5 diabetic, 2 pressure) were treated. Preliminary results indicate that Vianain(R) Debriding Product is a safe and effective debriding agent. The product appears to be most effective in venous ulcers; six out of eight patients experienced at least 90% debridement (the remaining 2 patients showed 50-89% debridement) and seven patients showed a significant increase in the amount of healthy granulation tissue present. Genzyme Tissue Repair has not committed to a development and commercialization strategy for Vianain(R) Debriding Product for chronic skin ulcers and has begun exploratory discussions regarding the future grant of a license to a third party for this indication. PRODUCTION 27 30 Genzyme Tissue Repair has developed and validated a commercial scale, proprietary chondrocyte processing system for the CARTICEL(R) Service. A total of 54 validation studies were conducted as part of this process. In addition, Genzyme Tissue Repair has developed hundreds of standard operating procedures to ensure the safety and quality of the CARTICEL(R) Service. These procedures incorporate Genzyme Tissue Repair's quality assurance program, consisting of facility controls, process controls and final product testing. Furthermore, each technician undergoes three months of training prior to handling patient cells. All production and quality control procedures are intended to ensure traceability of operations. These systems and procedures will require FDA approval as part of the BLA for the CARTICEL(R) Service. See "The CARTICEL(R) Service--Government Regulation." During 1996, Genzyme Tissue Repair's process development efforts are directed toward expanding autologous chondrocyte culture capacity, streamlining processing, improving quality at lower production costs and strengthening Genzyme Tissue Repair's proprietary position. This work includes improving yields, reducing labor associated with harvesting chondrocytes from cartilage biopsies, developing methods for extending the viability of both biopsy specimens and final product cell suspensions, and identifying cell culture systems that will enable Genzyme Tissue Repair to automate much of the production process for the CARTICEL(R) Service. Genzyme Tissue Repair produces materials for its Epicel(SM) Service and CARTICEL(R) Service in a specialized facility designed for the production of cell based therapies. During the second half of 1995, Genzyme Tissue Repair upgraded and increased the processing capacity of that plant for the CARTICEL(R) Service to approximately 5,000 patients per year. In January 1996, Genzyme Tissue Repair acquired two adjacent buildings in Framingham, Massachusetts which it is developing as a CARTICEL(R) Service production facility with annual capacity of approximately 13,000 patients. This project was completed in 1996. To avoid excess capacity due to manufacturing process improvements and a lower than expected rate of reimbursement approvals, however, one of the facilities acquired by Genzyme Tissue Repair was reallocated to Genzyme General in exchange for cash. In addition, beginning in January 1997, Genzyme Tissue Repair leased approximately half of the second facility to Genzyme General for a term of three years. Genzyme Tissue Repair expects that Vianain(R) and TGF-(beta)2 will be manufactured for Genzyme Tissue Repair by the Genzyme General on terms and conditions to be negotiated between the divisions. COMPETITION Genzyme Tissue Repair is engaged in a segment of the human health care products industry that is extremely competitive. Competitors in the U.S. and elsewhere are numerous and include major pharmaceutical, chemical, surgical device and biotechnology companies, many of which have substantially greater resources than Genzyme. These companies may succeed in developing products and services that are more effective than any that have been or may be developed by Genzyme Tissue Repair and may also prove to be more successful than Genzyme Tissue Repair in producing and marketing their products and services. Each of Genzyme Tissue Repair's products and services faces different competitive challenges: THE CARTICEL(R) SERVICE. Genzyme Tissue Repair is aware of four companies, Advanced Tissue Sciences, Inc. ("ATS"), in conjunction with Smith and Nephew PLC, Integra LifeSciences Corp. ("Integra"), LifeCell Corp. and Verigen, Inc. that are engaged in research on cultured cartilage products. EPICEL(SM) SERVICE. Genzyme Tissue Repair is the only commercial provider of cultured skin grafts that have been shown to provide permanent skin replacement for burn patients in the U.S. However, Genzyme Tissue Repair may face competition from companies using other approaches to culture skin tissue. Integra is marketing a collagen-based dermal replacement product for severely burned patients. This product will still require a skin graft from the patient or the Epicel(SM) Service to close a full-thickness wound, however, and therefore will not compete directly with the Epicel(SM) Service. ATS also has received approval for a temporary wound covering for burns. Organogenesis, Inc. has submitted a PMA for a product to be used for the closure of venous stasis ulcers. LifeCell Corp. currently has freeze-dried enzymatically processed human cadaver dermis on the market. TGF-(BETA)2. The use of growth factors is emerging as a treatment for partial-thickness or very small full-thickness wounds. A number of companies are currently conducting or planning to conduct clinical trials with growth factors, although to date, no recombinant growth factor product has received FDA approval. Potential competitors include Chiron Corp., in collaboration with the Ethicon division of Johnson & Johnson, Curative Technologies, Inc., and Scios Novo, Inc.. Curative Technologies, Inc., also has one product on the market which does not require FDA approval. Such growth 28 31 factors may prove to be complementary to, as well as competitive with, TGF-(beta)2. Genzyme Tissue Repair does not believe, however, that growth factors can provide permanent skin replacement to compete with the Epicel(SM) Service. Additionally, TGF-(beta)2 will compete with interferon-based immunomodulators produced by Chiron Corp. and Biogen Inc. for the treatment of MS. VIANAIN(R) DEBRIDING PRODUCT. Vianain(R) will compete primarily with surgical debridement of necrotic tissue or mechanical debridement using hydrotherepy and daily dressing changes to remove necrotic tissue and, to a lesser extent, with currently available enzymatic debridement products. Surgical and mechanical debridement procedures are painful, labor intensive and remove viable tissue along with necrotic tissue while the enzymatic debridement products on the market are slow-acting and of limited efficacy. Enzymatic debridement products currently available commercially include products manufactured by Knoll Pharmaceuticals, Parke-Davis, Boots-Flinte, Inc., Lederle Laboratories and Rystan. PATENTS AND PROPRIETARY RIGHTS Genzyme Tissue Repair pursues a policy of obtaining patent protection both in the U.S. and in selected foreign countries for subject matter considered patentable and important to its business. In addition, a portion of Genzyme Tissue Repair's proprietary position is based upon patents licensed by Genzyme. These license agreements generally require Genzyme Tissue Repair to pay royalties upon commercialization of products covered by the licensed technology. Genzyme Tissue Repair's patent position and proprietary technology are subject to certain risks and uncertainties. See "Factors Affecting Future Operating Results--Uncertainty Regarding Patents and Protection of Proprietary Technology" under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Genzyme Tissue Repair received its first patent in October 1995 for its method of freezing cells. In addition, Genzyme Tissue Repair has filed and is preparing several patent applications covering its work in cartilage repair. Genzyme Tissue Repair possesses substantial know-how in the field of autologous cell development generally, and for the CARTICEL(R) Service in particular. Such know-how includes the production of biopsy kits and packaging materials, procedures for quality control, sterility, segregation and manufacturing, and product delivery, and the method by which Genzyme Tissue Repair validates assays for future development. Genzyme Tissue Repair believes that this significant technological know-how places it in a competitively advantageous position. Genzyme Tissue Repair's proprietary position in the culturing of epidermal tissues was originally exclusively licensed from Harvard University and has been augmented by recently obtained additional patents covering cool storage technology and packaging of skin grafts produced using the Epicel(SM) Service. Genzyme Tissue Repair has also exclusively licensed, on a worldwide basis except for Italy, recent patents covering cryopreservation of such skin grafts. Genzyme Tissue Repair has extended this basic cryopreservation technology by patenting additional developments and improvements in the U.S.. Genzyme Tissue Repair also possesses know-how relating to the large-scale production of cultured epidermal grafts, the growth of other types of mammalian cells including fibroblasts and epithelial cells, and the formulation of various types of biomaterials, including HA. In addition to HA know-how, Genzyme Tissue Repair has rights to a series of issued U.S. patents in tissue repair covering modified forms of HA. Genzyme Tissue Repair has pending and issued patents in the U.S. and other countries covering the enzymatic formulation of the Vianain(R) Debriding Product and hydrophilic cream delivery vehicle for the product. Celtrix has obtained patents and filed patent applications in the U.S. and foreign countries on the composition of TGF-(beta)2, its formulation and its therapeutic applications in wound healing, cancer, immune therapy and bone therapy. Genzyme allocated the rights under its license with Celtrix to Genzyme Tissue Repair at the time of Genzyme Tissue Repair's creation in December 1994. While Genzyme Tissue Repair seeks a strong patent position, it believes that its competitive position will also depend on its ability to maintain its trade secrets and proprietary know-how, to achieve market leadership in key product areas and to obtain successful clinical results. Genzyme Tissue Repair's employees, advisors and consultants who have access to Genzyme Tissue Repair proprietary information are required to sign confidentiality agreements. GOVERNMENT REGULATION 29 32 Material developments in respect of the regulation of the CARTICEL(R) Service are described under the caption "The CARTICEL(R) Service--Government Regulation." A federal criminal statute that prohibits the transfer of any human organ for valuable consideration for use in human transplantation, but which permits recovery of reasonable costs associated with such activities, has not been applied to the CARTICEL(R) Service or Epicel(SM) Service. Certain states have laws requiring the licensure of tissue and organ banks and laws governing the sale of human organs and the safety and efficacy of drugs, devices and biologics, including skin, all of which could be interpreted to apply to Genzyme Tissue Repair's production and distribution of cultured tissue products. Provisions in certain states' statues prohibit the receipt of valuable consideration in connection with the sale of human tissue by a tissue bank but permit licensed tissue banks, including companies, to recover their reasonable costs associated with such sales. Federal or state regulation could result in significant expense to Genzyme Tissue Repair, limit Genzyme Tissue Repair's reimbursement for its services, and otherwise materially adversely affect Genzyme Tissue Repair's results of operations. Autologous products are specifically exempt from the European Device Directive and Pharmaceutical Directive promulgated by the European Union. Therefore, each European country is free to impose its own regulations on the marketing of such products. To date, Genzyme Tissue Repair has not encountered any local registration requirements for market introduction of the CARTICEL(R) Service. Genzyme Tissue Repair is currently assessing the regulatory requirements for commercialization of the CARTICEL(R) Service in Japan. The FDA has issued draft regulatory guidelines to reduce the risk of contamination of xenotransplanted cellular products with infectious agents. Although Genzyme Tissue Repair's management believes the processes used to produce the porcine cell products under development by the joint venture would comply with the guidelines as drafted, such guidelines may undergo substantial revision before definitive guidelines are issued by the FDA. There can be no assurance that definitive guidelines will be issued by the FDA or that the processes used by the joint venture will comply with any guidelines that may be issued. Genzyme Tissue Repair is also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices and the use and disposal of hazardous or potentially hazardous safety procedures used in connection with Genzyme Tissue Repair's research work and production operations. Although Genzyme Tissue Repair believes that its safety procedures comply with the standards prescribed by federal, state and local regulations, the risk of contamination, injury or other accidental harm cannot be completely eliminated. In the event of such an accident, Genzyme Tissue Repair could be held liable for any damages that result and any liabilities could exceed Genzyme Tissue Repair's resources. EMPLOYEES OF THE REGISTRANT As of December 31, 1996, Genzyme (including all consolidated subsidiaries and excluding GTC) had approximately 3,516 employees. Doctorate degrees are held by 182 of the Company's employees. Of the Company's employees, 2,908 are located in the U.S. and Canada, 292 in the United Kingdom, 296 in the rest of Europe and 20 in Japan and the Far East. None of the Company's employees are covered by collective bargaining agreements. The Company considers its employee relations to be excellent. RESEARCH AND DEVELOPMENT COSTS The information required by Item 101(c)(xi) of Regulation S-K is incorporated by reference from Part II, Item 8 "Consolidated Financial Statements and Supplementary Schedules" and specifically to the "Consolidated Statements of Operations" and to Note J of "Notes to Consolidated Financial Statements." SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS 30 33 The information required by Items 101(c)(1)(i) and (vii) and 101(d) of Regulation S-K is incorporated by reference from Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note N of "Notes to Consolidated Financial Statements." 31 34 ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT. The current executive officers of Genzyme are as follows:
NAME AGE TITLE - ---- --- ----- Henri A. Termeer 50 Chairman of the Board, President and Chief Executive Officer Geoffrey F. Cox, Ph.D. 52 Executive Vice President David J. McLachlan 57 Executive Vice President, Finance and Chief Financial Officer Gregory D. Phelps 47 Executive Vice President Peter Wirth 45 Executive Vice President and Chief Legal Officer David D. Fleming 47 Group Senior Vice President, Diagnostics John V. Heffernan 57 Senior Vice President, Human Resources Richard A. Moscicki, M.D. 44 Senior Vice President, Clinical, Medical and Regulatory Affairs and Chief Medical Officer Alan E. Smith, Ph.D. 51 Senior Vice President, Research and Chief Scientific Officer G. Jan van Heek 46 Group Senior Vice President, Therapeutics
Each officer's term of office extends until the meeting of the Genzyme Board following the next annual meeting of stockholders and until a successor is elected and qualified or until his or her earlier resignation or removal. MR. TERMEER has served as President of Genzyme since October 1983, Chief Executive Officer since December 1985 and Chairman of the Board since May 1988. For ten years prior to joining Genzyme, Mr. Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human health care products. Mr. Termeer is Chairman of the Board of Genzyme Transgenics Corporation ("GTC") and, until its acquisition by Genzyme in December 1996, was Chairman of the Board of Neozyme II Corporation ("Neozyme II"). Mr. Termeer is also a director of Abiomed, Inc., AutoImmune Inc., Diacrin, Inc. and GelTex Pharmaceuticals, Inc., and a trustee of Hambrecht & Quist Healthcare Investors and of Hambrecht & Quist Life Sciences Investors. DR. COX joined Genzyme in June 1984 and has served as Executive Vice President since September 1996. From May 1988 until September 1996, he served as Senior Vice President, Operations of Genzyme. Dr. Cox also is responsible for Genzyme's diagnostic businesses and global manufacturing operations. For 11 years prior to joining Genzyme, Dr. Cox worked for the manufacturing division of British Fermentation Products, Ltd., a division of Gist-Brocades N.V. Dr. Cox is also a director of Aronex Pharmaceuticals, Inc. MR. MCLACHLAN joined Genzyme in December 1989 and has served as Executive Vice President, Finance since September 1996. Mr. McLachlan served as Senior Vice President, Finance from 1989 to September 1996 and has held the position of Chief Financial Officer since 1989. Prior to joining Genzyme, he served for more than five years as Vice President of Finance for Adams-Russell Electronics Inc., a defense electronics manufacturer, and Adams-Russell Co., Inc., a cable television company. Mr. McLachlan also serves as a director of HearX, Ltd., a company providing products and services to the hearing impaired. MR. PHELPS joined Genzyme in November 1991 and has served as Executive Vice President since September 1996. Mr. Phelps held the position of Senior Vice President of Genzyme from November 1991 to September 1996. From December 16, 1994 to September 1996, he also served as President of GTR. Prior to joining Genzyme, Mr. Phelps served as President and Chief Executive Officer of Viagene, Inc. from October 1988 to June 1990 and of ZymoGenetics, Inc. from May 1986 to August 1988, and held various positions at Baxter Travenol Laboratories, Inc. from 1975 to 1986. Mr. Phelps was a director of Neozyme II prior to its acquisition by Genzyme in December 1996. MR. WIRTH joined Genzyme in January 1996 and has served as Executive Vice President, Legal Affairs and Chief Legal Officer since September 1996. From January 1996 to September 1996, Mr. Wirth served as Senior Vice President and General Counsel of Genzyme. Mr. Wirth was also a partner of Palmer & Dodge LLP, a Boston, Massachusetts law firm, from 1982 through September 1996. Mr. Wirth remains of counsel to Palmer & Dodge LLP. 32 35 MR. FLEMING joined Genzyme in April 1984 and has served as Group Senior Vice President, Diagnostics since September 1996. Prior to that date he served as President of Genzyme's diagnostics division beginning in January 1989 and as a Senior Vice President of Genzyme beginning in August 1989. For 11 years prior to joining Genzyme, he worked for Baxter Travenol Laboratories, Inc. MR. HEFFERNAN joined Genzyme as Vice President, Human Resources in October 1989 and has served as Senior Vice President, Human Resources since May 1992. Prior to joining Genzyme, he served for more than five years as Vice President, Human Resources Corporate Staff of GTE Corporation, a diversified communications and electronics company. DR. MOSCICKI joined Genzyme in March 1992 as Medical Director, became Vice President, Medical Affairs in early 1993 and was named Vice President, Clinical, Medical and Regulatory Affairs in December 1993. Since September 1996, he has served as Senior Vice President, Clinical Medical and Regulatory Affairs and Chief Medical Officer. Since 1979, he has also been a physician staff member at the Massachusetts General Hospital and a faculty member at the Harvard Medical School. DR. SMITH joined Genzyme in August 1989 as Senior Vice President, Research and has also served as Chief Scientific Officer since September 1996. Prior to joining Genzyme, he served as Vice President-Scientific Director of Integrated Genetics, Inc. from November 1984 until its merger with Genzyme in August 1989. From October 1980 to October 1984, Dr. Smith was head of the Biochemistry Division of the National Institute for Medical Research, Mill Hill, London, England and from 1972 to October 1980, he was a member of the scientific staff at the ICRF. Dr. Smith also serves as a director of GTC. MR. VAN HEEK joined Genzyme in September 1991 as General Manager of its wholly-owned subsidiary, Genzyme, B.V., and became a Genzyme Vice President and the President of Genzyme Therapeutics Division in December 1993. Since September 1996, Mr. van Heek has served as Group Senior Vice President, Therapeutics. Prior to joining Genzyme, he was, since 1988, Vice President/General Manager of the Fenwal Division of Baxter Healthcare Corporation. Mr. van Heek also served as President and Treasurer of Neozyme II from March 1992 to December 1995. 33 36 ITEM 2. PROPERTIES. Genzyme's operations are conducted in manufacturing, warehousing, pilot plant, clinical laboratories, and research and office facilities principally in the United States, United Kingdom, Netherlands, Switzerland and Germany. All properties are leased except for certain properties in Haverhill and West Malling, England, and Coventry, Connecticut, Fall River, Massachusetts, Framingham, Massachusetts, Allston, Massachusetts and Santa Fe, New Mexico. Genzyme's principal properties are, for Genzyme General, its manufacturing facilities for the large scale production of its therapeutic proteins, biomaterials, diagnostic products and pharmaceuticals and its genetic diagnostic facilities and, for Genzyme Tissue Repair, its state-of-the art cell processing facilities for the CARTICEL[R] Service and the Epicel[SM] Service. GENZYME GENERAL SPECIALTY THERAPEUTICS Ceredase[R] enzyme is produced under GMP conditions at Genzyme's FDA inspected therapeutic products manufacturing facility located in Cambridge, Massachusetts. The facility, which is owned by the Company, is built on land held under a 60 year lease. Ceredase[R] enzyme is manufactured under GMP conditions in the Company's small-scale manufacturing facility in Framingham, Massachusetts. This facility is also used to make Thryogen[R] hormone for clinical trial use and, if approved by the FDA, for distribution to patients under a treatment IND. SURGICAL PRODUCTS Genzyme has manufacturing capacity at two UK facilities to produce commercial quantities of HA powder for its family of HA-based products currently under development on behalf of the Partnership. Seprafilm[TM] bioresorbable membrane is produced at commercial scale from the HA powder in the Company's manufacturing facility in Framingham, Massachusetts. In July 1996 in connection with the acquisition of DSP, the Company acquired or assumed the leases for certain office, laboratory and manufacturing facilities in Fall River, Massachusetts, Coventry, Connecticut, Tucker, Georgia and Germany for use in manufacturing and warehousing its Surgical Products. GENZYME GENETICS The Company's genetic testing business primarily conducts operations in clinical laboratory and administrative facilities which the Company's owns in Framingham, Massachusetts and Santa Fe, New Mexico. The Company maintains certain small-scale laboratories in Florida and California. DIAGNOSTIC PRODUCTS Immunobiological products, diagnostic test kits and reagents are produced in manufacturing facilities in San Carlos, California, Cambridge, Massachusetts and Russelsheim, Germany. Diagnostic enzymes and other fermentation products are produced in a multi-purpose fermentation facility in Maidstone, England and a protein purification plant in West Malling, England. In 1996, the Company began construction of a new fermentation facility and warehousing facility in West Malling, England. PHARMACEUTICALS A multi-use pharmaceutical facility in Haverhill, England is used to produce commercial quantities of active pharmaceutical products, including phospholipids. A second multi-use pharmaceutical facility in Liestal, Switzerland is used to produce peptides. TISSUE REPAIR DIVISION Production for the CARTICEL[R] Service and Epicel[SM] Service currently occurs primarily in the Company's cell processing facilities in Cambridge, Massachusetts. The facility has the capacity to provide the CARTICEL[R] Service to approximately 5,000 patients per year. In 1996, the Company established a surgeon training center at its facility in the Netherlands in conjunction with the CARTICEL[R] program. Selling and marketing activities for both Genzyme General and Genzyme Tissue Repair are concentrated at facilities leased by the Company in Cambridge, Massachusetts and the Netherlands. The Company conducts its research and development activities primarily at its laboratory facilities in the United States. Leases for the Company's facilities contain typical commercial lease provisions including renewal options, rent escalators and tenant responsibility for operating expenses. The Company believes that it has or is in the process of developing adequate manufacturing capacity to support its requirements for the next several years. ITEM 3. LEGAL PROCEEDINGS. As of the filing date of this Form 10-K, there are no pending legal proceedings deemed material by the Company to which Genzyme or any of its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the security holders of Genzyme during the fourth quarter of the fiscal year ended December 31, 1996. 34 37 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company has two classes of common stock: GGD Stock and GTR Stock. The GGD Stock and the GTR Stock are intended to reflect the value and track the performance of Genzyme General and Genzyme Tissue Repair, respectively. The GGD Stock and the GTR Stock are traded on the over-the-counter market and prices are quoted on the Nasdaq National Market under the symbols GENZ and GENZL, respectively. On June 7, 1996 the Company declared a 2-for-1 stock split of shares of the GGD Stock, which was paid in the form of a stock dividend on July 25, 1996. All share and per share amounts have been re-stated to reflect this split. As of March 1, 1997, there were 2,908 and 3,665 shareholders of record of GGD Stock and GTR Stock, respectively. The following table sets forth, for the periods indicated, the high and low sale prices for the GGD Stock and the GTR Stock as reported by Nasdaq.
High Low GGD Stock 1996: First Quarter .............. $38 1/2 25 5/8 Second Quarter ............. 31 1/4 23 1/2 Third Quarter .............. 26 3/4 21 3/8 Fourth Quarter ............. 26 1/8 19 3/4 1995: First Quarter .............. 20 3/4 13 5/8 Second Quarter ............. 22 18 Third Quarter .............. 32 1/8 19 3/4 Fourth Quarter ............. 35 1/50 24 GTR Stock 1996: First Quarter .............. $28 3/4 $13 7/8 Second Quarter ............. 17 1/8 10 7/8 Third Quarter .............. 11 7/8 6 5/8 Fourth Quarter ............. 11 1/8 6 1/2 1995: First Quarter .............. 7 3/4 3 1/2 Second Quarter ............. 7 5/8 5 1/8 Third Quarter .............. 16 5/8 6 1/2 Fourth Quarter ............. 18 1/2 11 3/4
No cash dividends have been paid to date on the GGD Stock or the GTR Stock and the Company does not anticipate paying cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA GENZYME CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS DATA (1)
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues: Net product sales ................................ $424,483 $304,373 $238,645 $183,366 $139,568 Net service sales ................................ 68,950 52,450 50,010 50,511 40,400 Revenues from research and development contracts: Related parties ................................ 23,011 26,758 20,883 34,162 35,412 Other .......................................... 2,310 202 1,513 2,332 3,699 -------- -------- -------- -------- -------- 518,754 383,783 311,051 270,371 219,079 Operating costs and expenses: Cost of products sold ............................ 155,930 113,964 92,226 64,704 52,514 Cost of services sold ............................ 54,082 35,868 32,403 34,558 27,254 Selling, general and administrative .............. 162,264 110,447 80,990 72,752 56,667 Research and development (including research and development related to contracts) ........... 80,849 68,845 55,334 48,331 39,675 Amortization of intangibles ...................... 8,849 4,647 4,741 5,964 3,037 Purchase of in-process research and development(2) ................................. 130,639 14,216 11,215 49,000 51,100 Goodwill impairment and restructuring(3) ......... 1,465 - 26,517 - Charge for purchase options and financing exercises(4) .................................... - - - - 16,905 -------- -------- -------- -------- -------- 594,078 347,987 276,909 301,826 247,152 -------- -------- -------- -------- -------- Operating income (loss) ............................. (75,324) 35,796 34,142 (31,455) (28,073) Other income and (expenses): Minority interest in net loss of subsidiaries .... - 1,608 1,659 9,892 1,678 Equity in loss of unconsolidated subsidiaries .... (4,360) (1,810) (1,353) - - Gain on investments and charges for impaired investments..................................... 1,711 - (9,431) (700) - Settlement of lawsuit ............................ - - (1,980) - - Investment income ................................ 15,341 8,814 9,101 12,209 21,981 Interest expense ................................. (6,990) (1,109) (1,354) (2,500) (7,099) -------- -------- -------- -------- -------- 5,702 7,503 (3,358) 18,901 16,560 -------- -------- -------- -------- -------- Income (loss) before income taxes ................... (69,622) 43,299 30,784 (12,554) (11,513) Benefit (provision) for income taxes ................ (3,195) (21,649) (14,481) 6,459 (18,804) -------- -------- -------- -------- -------- Net income (loss) ................................... $(72,817) $ 21,650 $ 16,303 $ (6,095) $(30,317) ======== ======== ======== ======== ========
35 38 SELECTED FINANCIAL DATA (CONTINUED) GENZYME CORPORATION (CONTINUED) CONSOLIDATED STATEMENT OF OPERATIONS DATA (CONTINUED)(1)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- COMMON SHARE DATA: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ATTRIBUTABLE TO THE GENERAL DIVISION: Net income (loss) (5,6) ........................ $ (30,502) $ 43,680 $ 32,054 $ 18,020 $(29,809) ========== ======== ======== ======== ======== Per common and common equivalent share (5,6): Net income (loss) ........................... $ (0.45) $ 0.73 $ 0.61 $ 0.34 $ (0.67) ========== ======== ======== ======== ======== Average shares outstanding .................. 68,289 60,184 52,338 52,500 44,740 ========== ======== ======== ======== ======== ATTRIBUTABLE TO THE TISSUE REPAIR DIVISION: Net loss (5) ................................... $ (42,315) $(22,030) $(15,751) $(24,115) $ (508) ========== ======== ======== ======== ======== Per common share (5) ........................... $ (3.38) $ (2.28) $ (4.40) $ (7.43) $ (0.17) ========== ======== ======== ======== ======== Average shares outstanding ............... 12,525 9,659 3,578 3,245 3,019 ========== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA (1): DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Cash and investments (7) ........................... $ 187,955 $326,236 $153,460 $168,953 $248,325 Working capital .................................... 395,605 352,410 103,871 99,605 166,324 Total assets ....................................... 1,270,508 905,201 658,408 542,052 481,896 Long-term debt and capital lease obligations excluding current portion (8) ..................... 241,998 124,473 126,729 144,674 105,369 Stockholders' equity (9) ........................... 902,309 705,207 418,964 334,072 322,613
There were no cash dividends paid. - ------------------------ (1) In October 1992, Genzyme acquired all the outstanding common shares of Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling of interests. Accordingly, Genzyme's financial data has been restated to include Vivigen for all periods presented. (2) In 1992, 1993, 1994 ,1995 and 1996, respectively, Genzyme acquired all of the rights to four of the Neozyme I Corporation ("Neozyme I") development programs and Medix Biotech, Inc. ("Medix"); all of the rights to the remaining two Neozyme I development programs; all of the outstanding stock of BioSurface Technology, Inc. ("BioSurface"); the publicly-held, minority interest in IG; and the assets of Deknatel Snowden Pencer, Inc. ("DSP") and all of the Callable Common Stock of Neozyme II Corporation ("Neozyme II"). In connection with these transactions, all of which were accounted for as purchases, Genzyme charged to operations the following amounts which represented the purchase of in-process research and development: 1992, $51.1 million; 1993, $49.0 million, 1994, $11.2 million, 1995, $14.2 million and in 1996, $130.6 million. (3) In 1993, the Company incurred restructuring charges of $2.8 million related to the consolidation of laboratory operations in its diagnostic services business and wrote off $23.7 million for the value of impaired goodwill associated primarily with IG's acquisition of Genetic Design, Inc. ("GDI") in 1992. In 1996, the Company incurred additional restructuring charges of $1.0 million related to the consolidation of laboratory operations in its diagnostic services business and $0.5 million related to the consolidation of foreign operations in its surgical products business in connection with certain acquisitions. (4) In 1992, Genzyme sponsored formation of Neozyme II. In connection with this transaction, Genzyme obtained the option to acquire all of the equity of Neozyme II under certain circumstances in exchange for the issuance of warrants to acquire the Company's stock. The value assigned to this option ($16.9 million) was charged to operations in the period the option was obtained due to uncertainty as to Genzyme's future exercise of this option. (5) Net income (loss) attributable to the General Division and the Tissue Repair Division and net income (loss) per share for the years ended December 31, 1992, and 1993 give effect to the management and accounting policies adopted by the Board in connection with the creation of GTR and, accordingly, are pro forma presentations. 36 39 (6) Reflects July 25, 1996 2-for-1 stock split of General Division Stock effected by means of a 100% stock dividend paid to stockholders of record on July 11, 1996. A total of 34,669,435 shares of General Division Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. (7) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (8) In October 1991, the Company issued $100.0 million of 6 3/4% convertible subordinated notes due October 2001 and received net proceeds of $97.3 million. The notes were converted into shares of GGD Stock in March 1996. In June 1996, the Company's $15.0 million credit line with a commerical was increased to $215.0 million in connection with the acquisition of Deknatel Snowden Pencer, Inc. ("DSP") in July 1996. In November 1996, this credit line was re-financed with a syndicated group of banks and the revolving line of credit was increased to $225.0 million. As of December 1996, the Company borrowed $218.0 million under this credit facility of which $200.0 million was allocated to the General Division and $18.0 million to GTR to finance operations. In July 1996, Genzyme made a final payment of approximately $7.6 million for a company acquired in 1994. (9) In December 1994, the outstanding shares of Genzyme common stock were redesignated as General Division Common Stock on a share-for-share basis and a second class of common stock designated as Tissue Repair Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's previous common stock held by shareholders of record on December 16, 1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock valued at $25.3 million in connection with the acquisition of BioSurface. In September 1995, GTR completed the sale of 3,000,000 shares of TR Stock for net proceeds of $42.3 million. In October 1995, the General Division completed the sale of 5,750,000 shares of General Division Stock for net proceeds of $141.3 million. 37 40 SELECTED FINANCIAL DATA (CONTINUED) GENERAL DIVISION COMBINED STATEMENT OF OPERATIONS DATA (1)
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues: Net product sales ........................................ $424,483 $304,373 $238,645 $183,366 $139,568 Net service sales ........................................ 61,638 47,230 49,686 50,511 40,400 Revenues from research and development contracts: Related parties ........................................ 23,011 26,758 20,883 29,478 32,746 Other .................................................. 2,310 202 1,513 2,332 3,699 -------- -------- -------- -------- -------- 511,442 378,563 310,727 265,687 216,413 Operating costs and expenses: Cost of products sold .................................... 155,930 113,964 92,226 64,704 52,514 Cost of services sold .................................... 42,889 31,137 32,116 34,558 27,254 Selling, general and administrative ...................... 135,153 97,520 80,026 72,051 55,844 Research and development (including research and development related to contracts) .......... 69,969 57,907 51,696 45,526 37,324 Amortization of intangibles .............................. 8,849 4,647 4,741 5,964 3,037 Purchase of in-process research and development (2) ......................................... 130,639 14,216 - 24,000 51,100 Goodwill impairment and restructuring charges (3) ........ 1,465 - - 26,517 - Charge for purchase options and financing exercises (4) ........................................... - - - - 16,905 -------- -------- -------- -------- -------- 544,894 319,391 260,805 273,320 243,978 -------- -------- -------- -------- -------- Operating income (loss) ...................................... (33,452) 59,172 49,922 (7,633) (27,565) Other income and (expenses): Minority interest in net loss of subsidiaries ............ - 1,608 1,659 9,892 1,678 Equity in loss of unconsolidated subsidiary .............. (2,633) (1,810) (1,353) - - Gain on investments and charges for impaired investments.. 1,711 - (9,431) (700) - Settlement of lawsuit .................................... - - (1,980) - - Investment income ........................................ 13,909 7,428 9,072 12,209 21,981 Interest expense ......................................... (6,842) (1,069) (1,354) (2,500) (7,099) -------- -------- -------- -------- -------- 6,145 6,157 (3,387) 18,901 16,560 -------- -------- -------- -------- -------- Income (loss) before income taxes ............................ (27,307) 65,329 46,535 11,268 (11,005) Provision for income taxes ................................... (20,122) (30,506) (16,341) (2,812) (19,007) -------- -------- -------- -------- -------- Net income (loss) ............................................ (47,513) 34,823 30,194 8,456 (30,012) Tax benefit allocated from Tissue Repair Division ............ 17,011 8,857 1,860 9,564 203 -------- -------- -------- -------- -------- Net income (loss) attributable to General Stock (5,6) ........ $(30,502) $ 43,680 $ 32,054 $ 18,020 $(29,809) ======== ======== ======== ======== ========
38 41 SELECTED FINANCIAL DATA (CONTINUED) GENERAL DIVISION (CONTINUED) COMBINED STATEMENT OF OPERATIONS DATA (CONTINUED)(1)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- GENERAL DIVISION COMMON SHARE DATA: Net income (loss) attributable to General Stock (5,6) ... $ (30,502) $ 43,680 $ 32,054 $ 18,020 $(29,809) ========== ======== ======== ======== ======== Per General Division Common and common equivalent share (5,6): Net income (loss) ................................... $ (0.45) $ 0.73 $ 0.61 $ 0.34 $ (0.67) ========== ======== ======== ======== ======== Average shares outstanding .......................... 68,289 60,184 52,338 52,500 44,740 ========== ======== ======== ======== ========
COMBINED BALANCE SHEET DATA (1): DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Cash and investments (7) ................................ $ 171,725 $278,663 $128,652 $168,953 $248,325 Working capital ......................................... 381,373 308,036 83,314 99,503 166,101 Total assets ............................................ 1,229,519 854,586 630,144 532,357 481,896 Long-term debt and capital lease obligations excluding current portion (8) .......................... 223,998 124,473 126,555 144,674 105,369 Division equity (9) ..................................... 884,225 659,281 395,651 324,391 322,390
There were no cash dividends paid. - ------------------ (1) In October 1992, the General Division acquired all the outstanding common shares of Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling of interests. Accordingly, the General Division's financial data has been restated to include Vivigen for all periods presented. (2) In 1992, 1993, 1994 and 1995, respectively, the General Division acquired all of the rights to four of the Neozyme I Corporation ("Neozyme I") development programs and Medix Biotech, Inc. ("Medix"); all of the rights to one of the two remaining Neozyme I development programs; all of the outstanding stock of BioSurface Technology, Inc. ("BioSurface"); the publicly-held, minority interest in IG; and the assets of Deknatel Snowden Pencer, Inc. ("DSP") and all of the Callable Common Stock of Neozyme II Corporation ("Neozyme II"). In connection with these transactions, all of which were accounted for as purchases, Genzyme charged to operations the following amounts which represented the purchase of in-process research and development: 1992, $51.1 million; 1993, $49.0 million, 1994, $11.2 million, 1995, $14.2 million and in 1996, $130.6 million. (3) In 1993, the General Division incurred restructuring charges of $2.8 million related to the consolidation of laboratory operations in its diagnostic services business and wrote off $23.7 million for the value of impaired goodwill associated primarily with IG's acquisition of Genetic Design, Inc. ("GDI") in 1992. In 1996, the General Division incurred additional restructuring charges of $1.0 million related to the consolidation of laboratory operations in its diagnostic services business and $0.5 million related to the consolidation of foreign operations in its surgical products business in connection with certain acquisitions. (4) In 1992, the General Division sponsored formation of Neozyme II. In connection with this transaction, the General Division obtained the option to acquire all of the equity of Neozyme II under certain circumstances in exchange for the issuance of warrants to acquire the General Division's stock. The value assigned to this option ($16.9 million) was charged to operations in the period each option was obtained due to uncertainty as to the General Division's future exercise of this option. (5) Net income (loss) attributable to General Division Stock and net income (loss) per common and common equivalent share for the years ended December 31, 1992, and 1993 give effect to the provisions of Management and Accounting Policies adopted by the Board in connection with the creation of GTR and accordingly, are pro forma presentations. (6) Reflects July 25, 1996 2-for-1 stock split of General Division Stock effected by means of a 100% stock dividend paid to stockholders of record on July 11, 1996. A total of 34,669,435 shares of General Division Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. (7) Cash and investments includes cash, cash equivalents, and short- and long-term investments. 39 42 (8) In October 1991, the Company issued $100.0 million of 6 3/4% convertible subordinated notes due October 2001 and received net proceeds of $97.3 million. The notes were converted into shares of GGD Stock in March 1996. In June 1996, the Company's $15.0 million credit line with a commerical was increased to $215.0 million in connection with the acquisition of Deknatel Snowden Pencer, Inc. ("DSP") in July 1996. In November 1996, this credit line was re-financed with a syndicated group of banks and the revolving line of credit was increased to $225.0 million. As of December 1996, the Company borrowed $218.0 million under this credit facility of which $200.0 million was allocated to the General Division and $18.0 million to GTR to finance operations. In July 1996, Genzyme made a final payment of approximately $7.6 million for a company acquired in 1994. (9) In December 1994, the outstanding shares of Genzyme common stock were redesignated as General Division Common Stock on a share-for-share basis and a second class of common stock designated as Tissue Repair Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's previous common stock held by shareholders of record on December 16, 1994. In October 1995, the General Division completed the sale of 5,750,000 shares of General Division Stock for net proceeds of $141.3 million. 40 43 SELECTED FINANCIAL DATA (CONTINUED) TISSUE REPAIR DIVISION COMBINED STATEMENT OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues: Net service sales ........................................ $ 7,312 $ 5,220 $ 324 $ - $ - Related party revenues: Technology license fee(1) .............................. - - - 2,000 - Revenues from research and development contracts: ......................................... - - - 2,684 2,666 -------- -------- -------- -------- ------ 7,312 5,220 324 4,684 2,666 Operating costs and expenses: Cost of services sold .................................... 11,193 4,731 287 - - Selling, general and administrative ...................... 27,111 12,927 964 701 823 Research and development (including research and development related to contracts) .......... 10,880 10,938 3,638 2,805 2,351 Purchase of in-process research and development (2) ......................................... - - 11,215 25,000 - -------- -------- -------- -------- ------ 49,184 28,596 16,104 28,506 3,174 -------- -------- -------- -------- ------ Operating loss ............................................... (41,872) (23,376) (15,780) (23,822) (508) Other income and (expenses): Equity in loss of joint venture .......................... (1,727) - - - - Investment income ........................................ 1,432 1,386 29 - - Interest expense ......................................... (148) (40) - - - -------- -------- -------- -------- ------ (443) 1,346 29 - - -------- -------- -------- -------- ------ Loss before income taxes ..................................... (42,315) (22,030) (15,751) (23,822) (508) Provision for income taxes ................................... - - - (38) - -------- -------- -------- -------- ------ Tax benefit allocated to General Division .................... - - - (255) - -------- -------- -------- -------- ------ Net loss attributable to Tissue Repair Division stock (4) .... $(42,315) $(22,030) $(15,751) $(24,115) $ (508) -------- -------- -------- -------- ------ Per Tissue Repair Division common share: Net loss(4) .............................................. $ (3.38) $ (2.28) $ (4.40) $ (7.43) $(0.17) -------- -------- -------- -------- ------ Weighted average shares outstanding(4) ................... 12,525 9,659 3,578 3,245 3,019 -------- -------- -------- -------- ------
41 44 SELECTED FINANCIAL DATA (CONTINUED) TISSUE REPAIR DIVISION (CONTINUED) (DOLLARS IN THOUSANDS) DECEMBER 31, - -----------------------------------------------------------------------------------------
COMBINED BALANCE SHEET DATA (1): 1996 1995 1994 1993 1992 Cash and investments (5)............ $16,230 $47,573 $24,808 $ - $ - Working capital .................... 14,232 44,374 20,557 - (149) Total assets ....................... 42,593 52,649 28,435 - - Long-term debt(6) .................. 18,000 - - - - Division equity(7) ................. 18,084 45,926 23,313 - (149)
There were no cash dividends paid. - -------------------- NOTES TO SELECTED FINANCIAL DATA: (1) GTR received a $2.0 million technology license fee from Neozyme I in July 1993 related to the expansion of the Vianain(R) debriding product. (2) GTR acquired (a) the rights to the Neozyme Corporation ("Neozyme I") Vianain(R) development program in 1993, and (b) all of the outstanding stock of BioSurface Technology, Inc. ("BioSurface") in 1994. These acquisitions were accounted for as purchases. In-process research and development acquired in connection with the acquisitions was charged to operations. (3) In 1996, GTR entered into a joint venture with Diacrin, Inc., Diacrin/ Genzyme Ltd. and received $1.9 million in cash from the General Division to find the joint venture in exchange for 231,645 TR Designated Shares. GTR realized a net loss of $1.7 million from the joint venture in 1996. (4) Net loss attributable to the Tissue Repair Division and net loss per share for the years ended December 31, 1992 and 1993 give effect to the management and accounting policies adopted by the Genzyme Board in connection with the creation of GTR and, accordingly, are pro forma presentations. (5) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (6) In December 1996, GTR borrowed $18.0 million under Genzyme's $225.0 million revolving credit facility to fund operations. (7) In December 1994, the outstanding shares of Genzyme common stock were redesignated as General Division Common Stock on a share-for-share basis and a second class of common stock designated as Tissue Repair Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's previous common stock held by shareholders of record on December 16, 1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock valued at $25.3 million in connection with the acquisition of BioSurface. In September 1995, GTR completed the sale of 3,000,000 shares of TR Stock for net proceeds of $42.3 million. In June 1996, GTR received $10 million from the General Division in exchange for 1,000,000 TR Designated Shares issued pursuant to the terms of the purchase option agreement between the General Division and GTR. 42 45 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the expectations of Genzyme's management as of the filing date of this Form 10-K. The Company's actual results could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results". Stockholders and potential investors should consider carefully these risks and uncertainties in evaluating Genzyme's financial condition and results of operations. Genzyme provides its stockholders with three separate sets of financial statements: one for the Company and its subsidiaries on a consolidated basis and one for each of Genzyme General and Genzyme Tissue Repair. The financial statements of each division include the financial position, results of operations and cash flows of programs and products allocated to the division under the Company's Articles of Organization, as amended (the "Genzyme Charter"), and the management and accounting policies adopted by the Genzyme Board of Directors (the "Genzyme Board") to govern the relationship of the divisions. The financial information of Genzyme General and Genzyme Tissue Repair, taken together, include all accounts which comprise the consolidated financial information presented for Genzyme and its subsidiaries. For purposes of financial statement presentation, all of the Company's programs, products, assets and liabilities are allocated to either Genzyme General or Genzyme Tissue Repair. Notwithstanding this allocation, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of Genzyme General Stock and Genzyme Tissue Repair Stock have no specific claim against the assets attributed to the division whose performance is associated with the class of stock they hold. Liabilities or contingencies of either division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of both divisions. Stockholders and potential investors should, therefore, read this discussion and analysis of financial position and results of operations in conjunction with the financial statements and related notes of Genzyme, Genzyme General and Genzyme Tissue Repair included with this Form 10-K. RESULTS OF OPERATIONS GENZYME CORPORATION AND SUBSIDIARIES Since the operating results of Genzyme and its subsidiaries reflect the combined operations of Genzyme General and Genzyme Tissue Repair, this discussion summarizes the key factors management considers necessary in reviewing Genzyme's consolidated results of operations. Detailed discussion and analysis of each division's results of operations are provided below under separate headings. 1996 COMPARED TO 1995 REVENUES. Total revenues for 1996 were $518.8 million, an increase of 35% over 1995. Product revenues consist of product sales by Genzyme General and increased 39% to $424.5 million in 1996. The increase resulted primarily from the addition of sales from DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Service revenues consist of sales of genetic testing services by Genzyme Genetics and sales of Genzyme Tissue Repair's CARTICEL(R) and EpicelSM Services. Service revenues in 1996 increased 31% to $69.0 million, resulting largely from higher unit volumes at Genzyme Genetics, due primarily to the acquisition of Genetrix. Revenues from research and development contracts for 1996 were attributable entirely to Genzyme General and decreased 6% to $25.3 million due to the loss of revenues from Neozyme II as a result of its acquisition by the Company in the fourth quarter. MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 57%, compared to 58% for 1995. Product margins for 1996 were 63%, level with 1995, as increased sales of higher margin products from the Company's existing product lines were offset by lower margin product lines acquired with DSP. Service margins for 1996 decreased to 22% 43 46 from 32% due primarily to increased costs associated with Genzyme Tissue Repair's sales of the CARTICEL(R) Service and increased costs during the consolidation period associated with Genzyme General's acquisition of Genetrix. Selling, general and administrative ("SG&A") expenses for 1996 were $162.3 million, an increase of 41% over 1995. The increase resulted primarily from the acquisitions of DSP and Genetrix and increased staffing in support of the growth in several product lines and the growth in sales of the CARTICEL(R) Service. Research and development expenses for 1996 were $80.8 million, an increase of 17% over 1995 due to Genzyme General's commitment to fund development costs of the ATIII program being conducted by GTC and increased spending on internal programs. Genzyme recorded the following acquisition-related charges in 1996: $24.2 million and $106.5 million for the purchase of in-process research and development in connection with the acquisitions of DSP and Neozyme II, respectively; $8.8 million for the amortization of intangible assets including goodwill recorded in connection with the acquisitions of DSP, Genetrix and, in 1995, the publicly-held, minority interest in IG Laboratories, Inc. ("IG"); and $1.5 for restructuring charges incurred in connection with the acquisitions of DSP and Genetrix. OTHER INCOME AND EXPENSES. Other income and expenses decreased 24% to $5.7 million, as increases in interest expenses and Genzyme's equity in the net loss of GTC offset a 74% increase in investment income. Interest expense for 1996 was $7.0 million, compared to $1.1 million in 1995. The increase resulted from interest on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II. The tax provision for 1996 varies from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible intangible amortization, losses of unconsolidated affiliates, benefits from operating loss carryforwards and nondeductible charges in connection with tax-free acquisitions. In 1996, the effective tax rate before these acquisitions was 41%, compared to 37% in 1995. The increase in the rate was due to higher nondeductible intangible amortization in 1996 and to lower benefits from operating loss carryforwards available in 1996. The tax provision in 1996 resulted from taxes on foreign earnings and taxes on earnings before acquisition-related charges comprising charges for intangible amortization and incomplete technologies accruing from the acquisitions of DSP and Genetrix. 1995 COMPARED TO 1994 REVENUES. Total revenues for 1995 were $383.8 million, an increase of 23% over 1994. Product revenues from Genzyme General in 1995 increased 28% to $304.4 million. The increase resulted primarily from increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme and increased product sales by the Pharmaceuticals and Diagnostic Products business units. Service revenues in 1995 increased 4.9% to $52.5 million, as the addition of a full year of revenues from the acquisition of BioSurface Technology, Inc. ("BioSurface"), acquired in December 1994, offset a 5% decline in Genzyme General's sales of genetic testing services. Revenues from research and development contracts for 1995 were $27.0 million, an increase of 20% from 1994. Revenues from Neozyme II increased 36% to $24.2 million due primarily to increased activity from collaborations with third parties and increased clinical trial activity. MARGINS AND OPERATING EXPENSES. Gross margins for 1995 were 58%, compared to 57% for 1994. Product margins for 1995 increased to 63% from 61% in 1994 due primarily to higher margins on Ceredase(R) enzyme and to the sale of higher margin products and cost reductions by the Genzyme General's Pharmaceuticals business unit. Service margins for 1995 decreased to 32% from 35% due primarily to increased costs associated with introduction of the CARTICEL(R) Service by Genzyme Tissue Repair and price pressure on genetic testing services at Genzyme General. SG&A expenses for 1995 were $115.1 million, an increase of 34% over 1994. The increase resulted primarily from increased staffing in support of the growth in several product lines, the launch of the CARTICEL(R) Service by Genzyme Tissue Repair and ongoing operating expenses associated with Sygena A.G. ("Sygena"), a Swiss pharmaceutical company acquired by Genzyme General in July 1994. 44 47 Research and development expenses for 1995 were $68.8 million, an increase of 24% over 1994 due to increased efforts on behalf of Neozyme II and increased spending on internal programs. Genzyme recorded a charge in 1995 of $14.2 million for the purchase of in-process research and development in connection with the acquisition of IG. OTHER INCOME AND EXPENSES. Other income (expenses) were $7.5 million, compared to of ($3.4 million) in 1994 that was attributable to the write-off of impaired value of certain equity investments in the amount of $9.4 million and the settlement of a lawsuit with a payment of $2.0 million. Interest expense for 1995 was $1.1 million, net of capitalized interest of $9.0 million. Interest relating to Genzyme's 6 3/4% convertible subordinated notes was $6.7 million. These notes were converted to General Division Stock and GTR Stock in March 1996. The tax provision for 1995 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of majority-owned subsidiaries which generated no current tax benefit, tax credits and taxes on foreign earnings. The effective tax rate for 1995 was 50%, compared to 47% in 1994, largely due to the non-deductibility of the charges for in-process research and development of $14.2 and $11.2 in 1995 and 1994, respectively. The remainder of the increase was due to changes in U.S. versus foreign taxable income. GENZYME GENERAL 1996 COMPARED TO 1995 REVENUES. Total revenues for 1996 were $511.4 million, an increase of 35% over 1995. Product and service revenues were $486.1 million, an increase of 38% over 1995. Revenues from research and development contracts for 1996 were $25.3 million, a decrease of 6% from 1995. Product revenues in 1996 increased 39% to $424.5 million, due primarily to the addition of sales through the acquisition DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Increases in sales by each of the Diagnostic Products and Pharmaceuticals business units accounted for the remainder of the increase in product revenues in 1996. Sales of Specialty Therapeutic products in 1996 consisted entirely of sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1996 increased 23% to $264.6 million due to increased shipments resulting from the introduction of these products in Japan and continued growth in new patient accruals in existing markets. Genzyme General's results of operations are highly dependent on sales of Ceredase(R) enzyme and Cerezyme(R) enzyme, which together represented 62% of consolidated product sales in 1996 compared to 71% in 1995. In October 1996, Genzyme General received FDA approval to manufacture Cerezyme(R) enzyme in a new, large-scale manufacturing plant located in Boston, Massachusetts. Conversion of patients receiving Ceredase(R) enzyme to Cerezyme(R) enzyme commenced in the fourth quarter of 1996. Genzyme General will be required to continue manufacturing Ceredase(R) enzyme until the process of patient conversions is completed, which is expected to occur during the fourth quarter of 1998. Genzyme General may be required to record a charge to earnings for the inventory of Ceredase(R) enzyme remaining upon completion of the patient conversion process, if any. The Surgical Products business unit was formed in July 1996 by combining the business of DSP with Genzyme General's Sepra Products. Product sales by the Surgical Products business unit for the period beginning with the DSP acquisition on July 1, 1996 and ending December 31, 1996 were $50.7 million and were generated primarily from sales by DSP. DSP's product sales for the first half of 1996 and for the years ending December 31, 1995 and 1994, which are not included in the results of Genzyme General, were $53.2 million, $95.2 million and $90.5 million, respectively. During the third quarter of 1996, the FDA granted approval to market Seprafilm(TM) in the United States. Seprafilm(TM) is the first Sepra Product to obtain FDA marketing approval and was launched broadly in the United States during the fourth quarter. Seprafilm(TM) is being marketed in the United States and Canada by Genzyme General on behalf of the Joint Venture between Genzyme and GDP. In March 1997, Genzyme and GDP reached agreement concerning the operation of and allocations of profits and losses from the Joint Venture. Under the terms of this agreement, Genzyme will act as the sole distributor of the Sepra Products for the Joint Venture, purchasing products from the joint venture at a distributor discount, earning reimbursement for market introduction costs and, in the first year in which the Joint Venture generates revenues in excess of $25 million, reimbursement for general and administrative expense. Genzyme has agreed to indemnify the limited partners against loss of tax benefits from research and development deductions certain limited partners have taken. (See "Business--Related Entities--Genzyme Development Partners, L.P."). Genzyme consolidates 100% of the losses generated by the Joint Venture. 45 48 GDP will receive the first $5.6 million in profits generated by the Joint Venture, Genzyme will receive the next $8.4 million in profits and, thereafter, Genzyme and GDP will receive 60% and 40% shares, respectively, in the profits of the Joint Venture. Product sales by the Diagnostic Products and Pharmaceuticals business units increased 15% and 45%, respectively, over 1995. The increase in Diagnostic Products sales resulted from growth in each of its product lines, most notably in sales of the Direct LDL[TM] test and diagnostic intermediates. The increase in Pharmaceuticals sales was generated primarily from sales of Melatonin during the first half of 1996 and from sales of pharmaceutical grade HA Powder. Melatonin sales declined materially during the second half of 1996 due to declining market demand. Genzyme General does not expect that Melatonin sales will return to the levels experienced during the first half of 1996. Revenues for Genzyme Genetics in 1996 increased 31% to $61.6 million, due to higher unit volumes that were primarily attributable to the acquisition of Genetrix, which was included in Genzyme General's results of operations from May 1, 1996 forward, and to changes in service pricing. On November 1, 1996, the assets of Genzyme General's identity testing services laboratory, Genetic Design, Inc. ("GDI"), were sold. GDI contributed $11.6 in Genzyme Genetics revenues through October 31, 1996. International sales as a percentage of total sales in 1996 decreased to 35% from 36% in 1995, as the addition of domestic sales by DSP offset a 35% increase in combined international sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Revenues from research and development contracts for 1996 decreased 6% to $25.3 million, as a decrease in revenues from Neozyme II was partially offset by an increase in revenues from research and development contracts with other third parties. Revenues from Neozyme II decreased 18% to $19.8 million in 1996 due to the acquisition of Neozyme II in the fourth quarter. Genzyme General expects that revenues from research and development contracts in 1997 will decrease from 1996 due to the absence of revenues from Neozyme II unless Genzyme General establishes additional collaborations that will provide significant research and development funding in 1997. MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 59%, level with 1995. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for 1996 were 63%, level with 1995, as sales of higher margin products and cost reductions by both the Pharmaceuticals and Diagnostic Products business units and higher margins on Ceredase(R) enzyme resulting from manufacturing process improvements were offset by lower margin product lines acquired with DSP. Service margins for 1996 decreased to 30% from 34% in 1995 due to the consolidation of Genzyme Genetics with Genetrix, which require the operation of redundant facilities and staffing until the consolidation is completed. Genzyme General expects service margins to improve during 1997 due to the sale of GDI and the realization of economies of scale from the consolidation of testing operations. SG&A expenses for 1996 were $135.2 million, an increase of 32% over 1995. The increase was due primarily to the acquisitions of DSP and Genetrix and increased staffing in support of the growth in several product lines, most notably in support of the North American introduction of the SeprafilmTM. DSP added $12.1 million in SG&A expenses in 1996. For the first half of 1996 and for 1995 and 1994, DSP incurred SG&A expenses of $15.7 million, $25.3 million and $27.6 million, respectively, which are not included in the results of Genzyme General. Genetrix did not contribute materially to SG&A expenses in 1996 due to the consolidation of its operations with Genzyme Genetics. Research and development expenses for 1996 were $70.0 million, an increase of 21% over 1995 due to Genzyme General's funding of development costs of the ATIII program being conducted by GTC and increased spending on internal programs, most notably Thyrogen(R). Genzyme recorded charges related to the following acquisitions completed in 1996: GENETRIX. On May 1, 1996, Genzyme acquired Genetrix in exchange for approximately 1,380,000 shares of Genzyme General Stock valued at approximately $36.5 million. Genzyme General recorded a charge in 1996 of $1.5 million for amortization of goodwill and a restructuring charge of $1.0 million in connection with the Genetrix acquisition. 46 49 DSP. On July 1, 1996, Genzyme acquired DSP for cash in the amount of $192.0 million, incurred acquisition costs in the amount of $4.6 million and assumed debt obligations of DSP of approximately $55.6 million. Genzyme General recorded charges of $24.2 million for the purchase of in-process research and development and $0.5 million for restructuring in connection with the acquisition of DSP. NEOZYME II. On October 28, 1996, Genzyme, through a wholly-owned subsidiary ("Acquisition Corp.") completed a tender offer for outstanding Units of Neozyme II for $45 per Unit in cash. A total of 2,385,686 Units, or 98.8%, were tendered and accepted for payment. Each Neozyme II Unit consisted of one share of Callable Common Stock and one Callable Warrant to purchase two shares of Genzyme General Stock and 0.135 share of Genzyme Tissue Repair Stock. On December 6, 1996, Neozyme II was merged with Acquisition Corp. and the remaining outstanding shares of Callable Common Stock (other than shares held by Acquisition Corp.) were thereby cancelled and converted into the right to receive $29.00 per share in cash. The Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger and became exercisable on December 6, 1996. Genzyme General recorded a charge of $106.5 million for the purchase of in- process research and development in connection with the acquisition of Neozyme II. OTHER INCOME AND EXPENSES. Other income (expense) decreased less than 1% to $6.1 million, as increases in interest expenses offset an 87% increase in investment income. Investment income for 1996 was $13.9 million, compared with $7.4 million for 1995. The increase resulted from higher average cash and investment balances. Investment income for 1996 did not include any material gain or loss on sales of securities. Interest expense for 1996 was $6.8 million, compared to $1.1 million in 1995. The increase resulted from interest on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II and lower capitalized interest in 1996 than in 1995. The tax provision for 1996 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of unconsolidated affiliates, nondeductible intangible amortization, benefits from operating loss carryforwards and nondeductible charges in connection with tax-free acquisitions. In 1996, the effective tax rate before these acquisitions was 41%, compared to 38% in 1995. The increase in the rate was due to higher nondeductible intangible amortization in 1996 and to lower benefits from operating loss carryforwards available in 1996. The tax provision in 1996 resulted from taxes on foreign earnings and taxes on earnings before acquisition-related charges comprising charges for intangible amortization and incomplete technologies accruing from the acquisitions of DSP of Genetrix. The allocated tax benefit generated by Genzyme Tissue Repair of $17.0 million in 1996 and $8.9 million in 1995 reduced Genzyme General's tax rate to (12%) and 33%, respectively. 1995 COMPARED TO 1994 REVENUES. Total revenues for 1995 were $378.6 million, an increase of 22% over 1994. Product and service revenues were $351.6 million, an increase of 22% over 1994. Revenues from research and development contracts for 1996 were $27.0 million, an increase of 20% from 1994. Product revenues for 1995 increased 28% to $304.4 million, due primarily to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Increases in sales by each of the Diagnostic Products and Pharmaceuticals business units accounted for the remainder of the increase in product revenues in 1995. Sales of Specialty Therapeutic products in 1995 consisted primarily of sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. HA Powder sales were reclassified as Pharmaceuticals product sales beginning in the fourth quarter of 1995. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1995 increased 24% to $215.4 million due to increased shipments of these products, for which the rate of new patient accruals more than offset dosage reductions. Ceredase(R) enzyme and Cerezyme(R) enzyme, together, represented 71% of consolidated product sales in 1995 compared to 72% in 1994. Product sales by the Diagnostic Products and Pharmaceuticals business units increased 22% and 72%, respectively, over 1994. The increase in Diagnostic Products sales resulted from growth in each of its product lines, most notably in sales of the Direct LDLTM test sales. The increase in Pharmaceuticals sales was generated primarily from sales of Melatonin during the second half of 1995 and a full year of operations of Sygena. Revenues for the Diagnostic Services business unit in 1995 decreased 5% to $47.2 million from $49.7 million for 1994. The drop in service revenues resulted from declines in identity testing revenues at GDI and the impact of increasing price pressures on the public paternity testing services performed by GDI. Medical testing also experienced increased price competition due to increases in the number of HMO contracts. 47 50 International sales represented approximately 36% of total sales in 1995 compared with 31% in 1994. This increase was due primarily to a 49% increase in the combined international sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Revenues from research and development contracts for 1995 were $27.0 million, an increase of 20% from 1994. Revenues from Neozyme II increased 36% to $24.2 million for 1995 due primarily to increased activity relating to collaborations with third parties that began in 1993 along with the production of clinical trial material. MARGINS AND OPERATING EXPENSES. Gross margins for 1995 were 59%, compared to 57% for 1994. Product margins for 1995 increased to 63% from 61% in 1994 due to higher margins on Ceredase(R) enzyme resulting from raw material yield improvements and to sales of higher margin products and cost reductions by the Pharmaceuticals business unit. Service margins for 1995 decreased to 34% from 35% as economies achieved in the consolidation of testing activities did not fully offset lower sales volume and the effects of price competition. SG&A expenses for 1995 were $102.2 million, an increase of 21% over 1994. The increase was due primarily to increased staffing in support of the growth in several product lines, most notably in support of the European introduction of the Sepra Products, and to the ongoing operating expenses associated with Sygena. Research and development expenses for 1995 were $57.9 million, an increase of 12% over 1994 due to increased efforts on behalf of Neozyme II and increased spending on internal programs, including the Sepra Products. In October 1995, Genzyme General acquired the publicly-held, minority interest in IG for 770,000 shares of Genzyme General Stock valued at approximately $22.5 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired was approximately $18.6 million of which $14.2 million was attributed to incomplete technology and charged to operations and the balance to goodwill to be written off over 11 years. OTHER INCOME AND EXPENSES. Other income and expenses were $6.2 million, compared to a loss of $3.4 million in 1994 that was attributable to the write-off of impaired value of certain equity investments in the amount of $9.4 million and to settlement of a lawsuit for $2.0 million. In September 1995, Genzyme General recorded a gain of $950,000 representing the sale of certain assets by GTC. Investment income for 1995 was $7.4 million, compared with $9.1 million for 1994. The decrease resulted from lower average cash and investment balances. Investment income for 1995 included a loss of $0.1 million and 1994 included gains of $1.4 million on sales of securities. Interest expense for 1995 was $1.1 million, net of capitalized interest of $9.0 million. Interest relating to the Company's 6 3/4% convertible subordinated notes was $6.7 million. These notes were converted into General Division and Tissue Repair Division Stock in March, 1996. The tax provision for 1995 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of majority-owned subsidiaries which generate no current tax benefit, tax credits and taxes on foreign earnings. The effective tax rate was 47% for 1995 compared to 35% for 1994. The increase was due to changes in U.S. versus foreign taxable income and to certain charges recorded in 1995 for which Genzyme General received no tax benefit. The allocated tax benefit generated by Genzyme Tissue Repair of $8.9 million in 1995 and $1.9 million in 1994 reduced Genzyme General's tax rate to 33% and 31%, respectively. GENZYME TISSUE REPAIR 1996 COMPARED TO 1995 REVENUES. Revenues in 1996 increased 40% to $7.3 million from $5.2 million in 1995. Sales of the CARTICEL(R) Service were $3.1 million, compared to $0.6 million in 1995, the year in which the Service was launched. The increase in CARTICEL(R) Service sales resulted primarily from the increase in the number of surgeons trained in the procedure utilizing the service. Sales of the Epicel(SM) Service in 1996 decreased 9% to $4.2 million, due to a decrease in the number of burn incidents requiring the Service. 48 51 MARGINS AND OPERATING EXPENSES. Genzyme Tissue Repair's costs of services sold exceeded revenues by 53% in 1996, compared to a gross profit of 9% in 1995, due to increased spending for the expansion of manufacturing capacity. SG&A expenses in 1996 were $27.1 million, an increase of 110% over 1995. The increase resulted from the expenses and staffing to support revenue growth and increased surgeon training costs related to the CARTICEL(R) Service. Genzyme Tissue Repair incurs direct SG&A expenses as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of Genzyme Tissue Repair. In 1996, $9.1 million of SG&A services were provided by Genzyme General, compared to $4.4 million in 1995, due to an increase in the level of operations related to the CARTICEL(R) Service. Research and development expenses were $10.9 million in each of 1996 and 1995. Increases in expenses associated with the TGF-(beta)2 program were offset by decreases in the Vianain(R) program. In 1996, $6.9 million of research and development services were provided by Genzyme General to Genzyme Tissue Repair, compared to $4.7 million in 1995. OTHER INCOME AND EXPENSES. Investment income was $1.4 million in each of 1996 and 1995, due primarily to level average cash balances during the year. Interest expense in 1996 was $.1 million, net of capitalized interest on construction in progress of $.2 million, compared to $.05 million in 1995. Interest expense increased in 1996 due to interest on borrowings. See "Liquidity and Capital Resources--Genzyme Tissue Repair Division" for a description of the borrowings. On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between Genzyme Tissue Repair and Diacrin to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. Under the terms of the joint venture agreement, Genzyme Tissue Repair is required to provide 80% of the first $50 million in funding for products to be developed by the joint venture. Thereafter, all costs will be shared equally between Genzyme Tissue Repair and Diacrin. Profits from the joint venture will be shared by the two parties. As of December 31, 1996, Genzyme Tissue Repair had provided $1.9 million of funding to the joint venture and realized a net loss of $1.7 million from the joint venture. Genzyme Tissue Repair's funding commitment to the joint venture is expected to be approximately $10 million for each of 1997 and 1998. 1995 COMPARED TO 1994 REVENUES. Revenues for 1995 were $5.2 million compared to $0.3 million in 1994. Revenues in 1994 consisted solely of revenues from the sale of the Epicel(SM) Service for the period from December 16, 1994, the acquisition date of BioSurface, through December 31, 1994. Revenues for 1995 consisted primarily of $4.2 million in sales of Epicel(SM) Service and $0.6 million from sales of the CARTICEL(R) Service. MARGINS AND OPERATING EXPENSES. Gross margins decreased to 9% in 1995 from 11% in 1994 due to costs associated with the launch of the CARTICEL(R) Service. SG&A expenses for 1995 were $12.9 million, compared to $1.0 million in 1994 comprised solely of expenses from BioSurface. In 1995, $4.4 million of SG&A services were provided by Genzyme General to Genzyme Tissue Repair compared to $0.8 million in 1994. The increases in SG&A expenses and services provided by Genzyme General were due to a full year of operations from BioSurface and to the launch in both the United States and Europe of the CARTICEL(R) Service. Research and development expenses for 1995 were $10.9 million compared to $3.6 million in 1994 which included $0.3 million from the operations of BioSurface. The increase resulted from accelerated clinical trials activity for certain tissue repair products and increased efforts relating to the CARTICEL(R) Service. In 1995, $4.7 million of research and development services were provided by Genzyme General to Genzyme Tissue Repair compared to $3.3 million in 1994. OTHER INCOME AND EXPENSES. Investment income for 1995 was $1,386,000 compared to $29,000 for 1994. The increase over 1994 was due to higher average cash balances from the allocation of $10 million from Genzyme General and the net proceeds from a public offering in October 1995. In 1994, $11.2 million of incomplete technology from the BioSurface acquisition was charged to operations as in-process research and development. 49 52 LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES At December 31, 1996, Genzyme had cash, cash equivalents and marketable securities of $188.0 million, excluding $87.0 million outstanding in respect of certain warrants exercised immediately prior to year end and received by Genzyme during the first week of January 1997, compared with $256.6 million at December 31, 1995, excluding long term investments of $69.6 million at December 31, 1995. Genzyme generated $40.0 million of cash from operations in 1996, compared to $44.7 in 1995 and $33.0 in 1994. The decrease from 1995 resulted primarily from increased losses at Genzyme Tissue Repair partially offset by lower working capital requirements in Genzyme General. Investing activities required cash of $291.4 million in 1996. Investing activities included the acquisition of DSP and Neozyme II for net cash of $303.3 million and $63.8 million of spending for property, plant and equipment, a 28% increase from 1995. This increase was primarily to build processing capability in Genzyme Tissue Repair for the CARTICEL service and in Genzyme General for completion of manufacturing capacity for Cerezyme(R), and for office and laboratory equipment. Turnover of the investment portfolio provided $89.6 million in funding for these activities with the balance financed by a revolving line of credit and the exercise of options and warrants. In March 1996, Genzyme completed the conversion of its 6 3/4% convertible notes in the principal amount of $100 million. Holders of the notes received 18.183 shares of Genzyme General stock and 2.553 shares of Genzyme Tissue Repair Stock upon conversion of each $1,000 note. In November 1996, Genzyme refinanced its existing $215 million line of credit (the "Credit Line") with a revolving credit facility (the "Revolving Facility") in the amount of $225 million made available through a syndicate of commercial banks administered by Fleet National Bank. Amounts drawn under the facility may be allocated to either Genzyme General or Genzyme Tissue Repair depending upon which division uses the loan proceeds. At December 31, 1996, $218 million had been drawn under the Revolving Facility, of which $200 million was allocated to Genzyme General to refinance amounts borrowed under the Credit Line to fund portions of the DSP and Neozyme II acquisitions and $18 million was allocated to Genzyme Tissue Repair to finance operations and manufacturing capacity. Amounts borrowed under the Revolving Facility are payable on November 15, 1999. In December 1996, the Company entered into a $100 million interest rate swap contract ("the Swap Contract") to effectively convert the variable interest rate on borrowings under the Revolving Facility to fixed interest rates. Net proceeds made or received under the Swap Contract are recorded as adjustments to interest expense. At December 31, 1996 the Swap Contract had a termination value gain of $125,000. Genzyme holds an option to acquire all of the partnership interests in GDP for approximately $26 million plus a continuing royalty payment for a period of ten years on certain sales of Sepra Products. Genzyme's decision regarding the exercise of this option will be based, in part, on the progress in the development and Genzyme's evaluation of the potential commercial success of the Sepra Products. The exercise price for the purchase option is payable in cash, shares of Genzyme General Stock or a combination of the two, as determined by Genzyme at the time the option is exercised. Genzyme expects that its available cash, investments, cash flow from research contracts and product and service sales and amounts available under the Revolving Facility will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Genzyme's capital requirements could differ materially from those currently anticipated by management due to the factors described under the "Factors Affecting Future Operating Results--Future Capital Needs". GENZYME GENERAL At December 31, 1996, Genzyme General had cash, cash equivalents and marketable securities of $171.7 million, excluding $87.0 million outstanding in respect of certain warrants exercised immediately prior to year end and received by Genzyme during the first week of January 1997, compared with $209.1 million, excluding $69.6 million in long-term investments at December 31, 1995. Genzyme General generated $80.0 million of cash from operations in 1996, compared to $64.1 million in 1995. The increase in 1996 over 1995 resulted from higher profits prior to non-cash charges for incomplete technology and other acquisition related, non-cash charges, and to lower increases in working capital. At December 31, 1996, Genzyme General had accounts receivable of $115.9 million, an increase of $28.7 million from December 31, 1995 due primarily to the DSP and Genetrix acquisitions and growth in each of the General Division's businesses. Accounts receivable at December 31, 1995 were $87.1 million, an increase of $10.5 million from December 50 53 31, 1994 due primarily to the growth in product sales by Specialty Therapeutics and Pharmaceuticals business units. At December 31, 1996, inventories increased 136% to $123.4 million, due primarily to the acquisition of DSP, increases in Ceredase(R) enzyme and Cerezyme(R) enzyme inventories and Sepra Product inventories in support of the launch Seprafilm(TM). Inventories at December 31, 1995 increased 42% to $52.3 million, compared to $36.8 million at December 31, 1994. The increase was due primarily to support of increased business operations, most notably in the Specialty Therapeutics business unit to build Ceredase(R) enzyme inventories, in the Pharmaceuticals business unit to meet high demand for Melatonin and in anticipation of the launch of Seprafilm(TM). Investing activities required cash of $286.5 million in 1996 and $145.8 million in 1995. The increase resulted from the acquisition of DSP and Neozyme II for net cash of $303.3 million and spending for property, plant and equipment of $42.5 million, a decrease of 13% from 1995 and 58% from 1994. The decreases are due to lower rates of manufacturing capacity expansion and to the completion of the large-scale Cerezyme(R) manufacturing capacity in Boston, Massachusetts. Turnover of the investment portfolio provided $83.1 million in funding for these activities with the balance financed by a revolving line of credit and the exercise of options and warrants. Proceeds from the exercise of stock options, warrants and stock issued through the employee stock purchase plan increased to $39.1 million in 1996, compared to $38.3 million in 1995. The increase was due primarily to exercises of certain warrants, issued in connection with the formation of GDP and Neozyme II, prior to the scheduled termination of such warrants in October and December, respectively. In March 1996, Genzyme entered into a Convertible Debt and Development Funding Agreement with GTC under which Genzyme agreed to provide through Genzyme General a revolving line of credit in the amount of $10 million through December 31, 1998 and to fund development costs of the AT-III program through March 31, 1997. The line of credit carries a rate of 7% and is convertible into GTC's common stock at the average market price for the 20-trading day period ending two days before the conversion (i) at GTC's option only to the extent necessary to maintain GTC's tangible net worth at the end of each quarter at a level between $4.0 million and $4.2 million or (ii) by Genzyme General at any time for up to the full amount outstanding. Pursuant to the terms of this agreement, GTC borrowed $4.3 million in 1996 from Genzyme General and converted $1.7 million of this debt plus accrued interest into 219,565 shares of GTC stock. In addition, on July 31, 1996, GTC sold 3,000,000 shares of its common stock to the public for $4.00 per share. Genzyme General purchased 900,000 shares in the offering. Genzyme General expects that its available cash, investments and cash flow from research contracts and product and service sales will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Genzyme General's capital requirements could differ materially from those currently anticipated by management due to the factors described under the "Factors Affecting Future Operating Results--Future Capital Needs". GENZYME TISSUE REPAIR As of December 31, 1996, Genzyme Tissue Repair had cash and cash equivalents of $16.2 million, a decrease of $31.3 million from December 31, 1995. In 1996, Genzyme Tissue Repair used $20.6 million of cash for operations and $18 million for increased manufacturing capacity . These expenditures were financed by the issuance of common stock through exercises of stock options and warrants, $56 million from borrowings under the Revolving Facility, of which $38 million was repaid in 1996 and the allocation of $10 million from Genzyme General as described below. As of December 31, 1996, Genzyme Tissue Repair had accounts receivable of $1.7 million, an increase of $.2 million from December 31, 1995. Inventories increased $1 million to $1.8 million as of December 31, 1996 compared to December 31, 1995. The increase resulted from an increase in the number of in-process biopsies for the CARTICEL(R) Service. Under the terms of the BioSurface acquisition agreement, the Genzyme Board may elect to allocate up to $30 million from Genzyme General to Genzyme Tissue Repair in exchange for an increase in the Genzyme Tissue Repair Designated Shares at a price of $10 per share. In June 1996, the Genzyme Board voted to allocate $10 million under the agreement in exchange for an increase in the Genzyme Tissue Repair Designated Shares of 1,000,000 shares. 51 54 In August 1996, the Genzyme Board approved the reallocation of certain of Genzyme Tissue Repair's Framingham real estate (land, buildings and leasehold improvements) to Genzyme General for cash of $5.2 million, which was the fair market value of the property as determined by the Genzyme Board and approximated the property's cost. In order to provide initial funding for the joint venture with Diacrin, the Genzyme Board has approved the allocation of up to $20 million in cash from Genzyme General to Genzyme Tissue Repair (the "Genzyme Tissue Repair Equity Line") in exchange for an increase in the number of Genzyme Tissue Repair Designated Shares at a rate determined by dividing the amount of cash so allocated by the average of the daily closing prices of one share of Genzyme Tissue Repair Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. The Company intends to make monthly allocations of cash under the Genzyme Tissue Repair Equity Line in an amount corresponding to the funding commitment of Genzyme Tissue Repair under the joint venture agreement for such month. As of December 31, 1996 the Company had allocated $1.9 million from Genzyme General to Genzyme Tissue Repair under the Genzyme Tissue Repair Equity Line. Genzyme Tissue Repair does not expect its available cash and investments will be sufficient to finance planned operations and capital requirements through the end of 1997 and must raise significant additional capital in order to continue operations at current levels. Genzyme Tissue Repair's plans to raise additional capital include consideration of the sale of additional equity securities, strategic alliances with third parties to fund further development and marketing of the CARTICEL(R) Service and other business transactions that would generate capital resources to assure continuation of Genzyme Tissue Repair's operations and research programs. Pursuant to these initiatives, Genzyme Tissue Repair raised $13 million in March 1997 in a private placement of a 5% note convertible into Genzyme Tissue Repair Stock. See "Subsequent Events". Significant additional funds will be required to continue operations at current levels through year end, however, and Genzyme Tissue Repair may be required to delay, scale back or eliminate certain of its programs or to license third parties to commercialize technologies or products that the division would otherwise undertake itself if it is not successful in raising additional capital. SUBSEQUENT EVENTS In January 1997, Genzyme signed a merger agreement providing for the merger of PharmaGenics, Inc., a company engaged in the research and development of pharmaceuticals for the treatment of cancer, into Genzyme in exchange for approximately 4,000,000 shares of a new Genzyme security to be designated Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). The GMO Stock is intended to reflect the value and track the performance of Genzyme Molecular Oncology, a new division proposed by Genzyme to develop and market novel products and services for the diagnosis and treatment of cancer. The shares of GMO Stock to be issued in the merger represent 40% of the initial equity interest in Genzyme Molecular Oncology. The remaining 60% will be allocated to Genzyme General in the form of 6,000,000 GMO Designated Shares. The merger is subject to the approval of the stockholders of Genzyme and PharmaGenics. On February 27, 1997, Genzyme Tissue Repair raised $13 million through the private placement with an institutional investor of a 5% convertible note due February 27, 2000. The note is an unsecured obligation of Genzyme and is convertible into Genzyme Tissue Repair Stock. The number of shares of Genzyme Tissue Repair Stock into which principal of, and interest on, the note are convertible depends on when a conversion occurs. For conversions occurring during the period beginning August 28, 1997 and ending May 25, 1998, the conversion shares are valued at a discount to an average of recent market prices at the time of conversion. This discount increases monthly from 2% on August 28, 1997 to 11% on May 25, 1998. For conversions occurring after May 25, 1998, the conversion shares are valued at an 11% discount to the lower of (i) the average of recent market prices at the time of conversion and (ii) the average of the market prices during the 25 trading days prior to May 25, 1998. Genzyme agreed to file a resale registration statement covering sales of Genzyme Tissue Repair Stock received upon conversion. FACTORS AFFECTING FUTURE OPERATING RESULTS DEPENDENCE ON CEREDASE(R) AND CEREZYME(R) ENZYME SALES. Genzyme's results of operations are highly dependent upon the sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1996 were $264.6 million, representing 62% of consolidated product sales in 1996. Genzyme produces Ceredase(R) enzyme from an extract of human placental tissue supplied by a French company that is the only significant commercial source of this 52 55 material. The current supply available is not sufficient to produce enough Ceredase(R) enzyme to supply all present patients. To address supply constraints, Genzyme has developed Cerezyme(R) enzyme, a recombinant form of the enzyme. In October of 1996, Genzyme General received FDA approval to manufacture Cerezyme(R) enzyme in a new, large-scale manufacturing plant located in Boston, Massachusetts. Once an uninterrupted supply of Cerezyme(R) enzyme can be produced by the new plant, patients receiving Ceredase(R) enzyme will be converted to Cerezyme(R) enzyme. Genzyme General will be required to continue manufacturing Ceredase(R) enzyme until the process of patient conversions is completed, which is expected to occur during the fourth quarter of 1998. Any disruption in the supply or manufacturing process of Ceredase(R) enzyme during the conversion period or in the supply or manufacturing process of Cerezyme(R) enzyme may have a material adverse effect on revenue. NO ASSURANCE OF COMMERCIAL SUCCESS OF THE SEPRA PRODUCTS. The successful commercialization of the Sepra Products will depend on many factors, including (i) the response of surgeons to the data from clinical trials, (ii) Genzyme General's ability to deploy the sales force of DSP to market the Sepra Products, (iii) Genzyme General's ability to supply sufficient product to meet market demand and (iv) the number and relative efficacy of competitive products that may subsequently enter the market. There can be no assurance that Genzyme General will be successful in its efforts to implement a commercialization strategy for the Sepra Products. NO ASSURANCE OF COMMERCIAL SUCCESS OF THE CARTICEL(R) SERVICE. Genzyme Tissue Repair's future success depends in large part on the successful commercialization of the CARTICEL(R) Service. The FDA has issued regulations that will bring products and services such as the CARTICEL(R) Service under regulation by November of 1997. Companies already marketing products and services subject to the regulations are allowed a transition period ending on November 30, 1997 in which to file and obtain approval of a Biologics License Application (a "BLA"), while continuing to market their products and services. Genzyme Tissue Repair submitted a BLA for the CARTICEL(R) Service in March 1996 in anticipation of the regulations. Although Genzyme Tissue Repair expects the FDA to complete its review of the BLA before of the end of November 1997, there can be no assurance that the review will be completed by then or that the FDA will not require additional data concerning the safety and efficacy of the CARTICEL(R) Service. A delay in the approval of the BLA for the CARTICEL(R) Service beyond the transition period could materially and adversely affect the commercialization of the CARTICEL(R) Service. The successful commercialization of the CARTICEL(R) Service will depend materially on the ability of Genzyme Tissue Repair to obtain approval for reimbursement of the CARTICEL(R) Service from third party payers. To date, approvals for reimbursement applications have been lower than anticipated by Genzyme Tissue Repair and, pending FDA approval of the BLA for the CARTICEL(R) Service, there can be no assurance that the rate of such approvals will improve or will not decline. There can also be no assurance that the approval rate will improve if the BLA is approved. If the approval rate does not improve, the commercialization of the CARTICEL(R) Service and Genzyme Tissue Repair's future success may be adversely affected. COLLABORATION WITH DIACRIN; NO CURRENTLY APPROVED XENOTRANSPLANTATION-BASED PRODUCTS; RELIANCE ON CELL TRANSPLANTATION TECHNOLOGY. Genzyme Tissue Repair has formed a joint venture with Diacrin, Inc. to develop and commercialize populations of transplantable porcine cells for the treatment of Parkinson's and Huntington's diseases. Products based on xenotransplantation such as the porcine cells being developed by the joint venture represent a novel therapeutic approach that has not been subject to extensive clinical testing and pose a risk that viruses or other animal pathogens will be unintentionally transmitted to a human patient. The FDA has issued draft regulatory guidelines to reduce the risk of contamination of xenotransplanted cellular products with infectious agents. Although Genzyme Tissue Repair's management believes the processes used to produce the porcine cell products under development by the joint venture would comply with the guidelines as drafted, such guidelines may undergo substantial revision before definitive guidelines are issued by the FDA. There can be no assurance that definitive guidelines will be issued by the FDA or that the processes used by the joint venture will comply with any guidelines that may be issued. No xenotransplantation-based therapeutic product has been approved for sale by the FDA and there can be no assurance that any products developed by the joint venture will be approved by the FDA or regulatory authorities in other countries. There can also be no assurance that xenotransplantation-based products, including the joint venture's product candidates, will be accepted by the medical community or third party payers or that the degree of such acceptance will not limit the size of the market for such products. 53 56 The success of the joint venture will also be dependent upon the successful development of cell transplantation technology. This technology currently has limited clinical applications and there can be no assurance that it will result in the development of any therapeutic products. If the cell transplantation technology does not result in the development of such products, the joint venture may be required to change dramatically the scope and direction of its product development activities. FUTURE CAPITAL NEEDS. Although Genzyme currently has substantial cash resources, it has committed to utilize a portion of such funds for certain purposes, such as (i) completing the market introduction in the United States and Europe of the Sepra Products, (ii) completing the market introduction of Genzyme Tissue Repair's CARTICEL(R) Service and developing, producing and marketing other products through Genzyme Tissue Repair and (iii) making certain payments to third parties in connection with strategic collaborations. At December 31, 1996, Genzyme had approximately $265 million in cash and cash equivalents and marketable securities, which amount includes $87.0 million in respect of certain warrants exercised immediately prior to year end that was received by Genzyme during the first week of January 1997, and approximately $218 million outstanding under the Revolving Facility, $200 million of which was allocated to Genzyme General. Amounts borrowed under this Revolving Facility are payable on November 15, 1999. Genzyme's cash resources will be diminished upon repayment of amounts borrowed, plus accrued interest, under the Revolving Facility. In addition, should Genzyme exercise its option to acquire the partnership interests in GDP using cash to pay some or all the exercise price, its cash resources will be diminished. As a result, Genzyme may have to obtain additional financing. There can be no assurance that such financing will be available on terms reasonably acceptable to Genzyme. TISSUE REPAIR DIVISION OPERATING LOSSES AND CASH REQUIREMENTS. Genzyme Tissue Repair is expected to experience significant operating losses at least through the end of 1998 as the market introduction of the CARTICEL(R) Service continues and as its research and development and clinical trial programs expand, including its commitment to fund the operations of Diacrin/Genzyme LLC. There can be no assurance that Genzyme Tissue Repair ever will achieve a profitable level of operations or that profitability, if achieved, can be sustained on an ongoing basis. The liabilities or contingencies of Genzyme Tissue Repair affect Genzyme's resources or financial condition and could affect the financial condition or results of operations of Genzyme General. POTENTIAL GENZYME TISSUE REPAIR STOCK DILUTION. Under the terms of the BioSurface acquisition agreement, the Genzyme Board may elect to allocate up to $30 million from Genzyme General to Genzyme Tissue Repair in exchange for an increase in the Genzyme Tissue Repair Designated Shares at a price of $10 per share. In June 1996, the Genzyme Board voted to allocate $10,000,000 under the agreement in exchange for an increase in the Genzyme Tissue Repair Designated shares of 1,000,000 shares. Although these shares have not yet been issued, Genzyme may issue these and any additional Genzyme Tissue Repair Designated Shares as a stock dividend to the holders of Genzyme General Stock or in a public or private sale without any allocation of proceeds to Genzyme Tissue Repair. In addition, in connection with the formation of the joint venture between Genzyme Tissue Repair and Diacrin, Inc., the Genzyme Board authorized the allocation of up to $20 million in cash from Genzyme General to Genzyme Tissue Repair. Such allocations will result in an increase in the Genzyme Tissue Repair Designated Shares by a number of shares determined by dividing (i) the amount of cash allocated by (ii) the average of the daily closing prices of Genzyme Tissue Repair Stock as reported by the Nasdaq National Market (or the appropriate exchange on which such shares are then traded) for the 20 consecutive trading days commencing on the 30th day prior to the date of allocation of such funds. The Genzyme Board has also adopted a policy for the distribution of Genzyme Tissue Repair Designated shares providing that if, as of May 31 of each year starting May 31, 1997, the number of Genzyme Tissue Repair Designated Shares on such date (not including those reserved for issuance with respect to stock options, stock purchase rights, warrants or other securities convertible into or exercisable for shares of Genzyme General Stock outstanding on such date ("Genzyme General Convertible Securities") as a result of anti-dilution adjustments required by the terms of such instruments or approved by the Genzyme Board) exceeds ten percent (10%) of the number of shares of Genzyme Tissue Repair Stock then issued and outstanding, then substantially all Genzyme Tissue Repair Designated Shares will be distributed to holders of record of Genzyme General Stock subject to reservation of a number of such shares equal to the sum of (a) the number of Genzyme Tissue Repair Designated Shares reserved for issuance upon the exercise or conversion of Genzyme General Convertible Securities and (b) the number of Genzyme Tissue Repair Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to the General Division. UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. Genzyme's success depends, to a large extent, on its ability to maintain a competitive technological position in its product areas. Proprietary rights relating to Genzyme's products are protected from unauthorized use by third parties only to the extent that they are covered by 54 57 patents or are maintained in confidence as trade secrets. Genzyme has filed for patents and has rights to numerous patents and patent applications worldwide. While certain of Genzyme's patents have been allowed or issued, there can be no assurance that any additional patents will be allowed or will issue or that, to the extent issued, such patents will effectively protect the proprietary technology of Genzyme. In addition, Genzyme Tissue Repair does not yet have significant patent protection covering the methodologies used in providing the CARTICEL(R) Service. Consequently, Genzyme Tissue Repair is unable to prevent a competitor from developing the ability to grow cartilage cell cultures and from offering a service that is similar or superior to the CARTICEL(R) Service. Genzyme Tissue Repair's results of operations could be materially and adversely affected if a competitor were to develop such know-how. Genzyme has also relied upon trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position. There can be no assurance that others will not independently develop such know-how or otherwise obtain access to Genzyme's technology. While Genzyme's employees, consultants and corporate partners with access to proprietary information are generally required to enter into confidentiality agreements, there can be no assurance that these agreements will be honored. Certain of Genzyme's consultants have developed portions of Genzyme's proprietary technology at their respective universities or in governmental laboratories. There can be no assurance that such universities or governmental authorities will not assert rights to intellectual property arising out of university or government based research conducted by such consultants. Parties not affiliated with Genzyme may hold pending or issued patents relating to technology utilized by Genzyme in its products presently available or under development. Genzyme may, depending on the final formulation of such products, need to acquire licenses to, or contest the validity of, such patents or any other similar patents that may be issued. The extent to which Genzyme may need to license such rights or contest the validity of such patents depends on the scope and validity of such patents and ultimately on the final design or formulation of its products under development. The cost and ability to license any such rights and the likelihood of successfully contesting the validity of such patents are uncertain. UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of Genzyme's products are currently in clinical trials to test safety and efficacy in humans for various conditions. There can be no assurance that Genzyme will not encounter problems in clinical trials that will cause it to delay or suspend clinical trials. In addition, there can be no assurance that such clinical testing, if completed, will ultimately show these products to be safe and efficacious. REGULATION BY GOVERNMENT AGENCIES. Most of the products Genzyme plans to manufacture and sell will require approval by governmental agencies in the United States and elsewhere. In particular, human therapeutic and diagnostic products are subject to pre-marketing approval by the FDA and comparable agencies in foreign countries. The process of obtaining these approvals varies according to the nature and use of the product and can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. There can be no assurance that any of the required approvals will be granted on a timely basis, if at all. Certain of Genzyme's products, including Ceredase(R) enzyme and Cerezyme(R) enzyme, have been designated as orphan drugs under the Orphan Drug Act, which provides incentives to manufacturers to develop and market drugs for rare diseases. The Orphan Drug Act generally entitles the first developer to receive FDA marketing approval for an orphan drug to a seven-year exclusive marketing period in the United States for that product. Legislation has been periodically introduced in recent years, however, to amend the Orphan Drug Act. Such legislation has generally been directed to shortening the period of automatic market exclusivity and granting certain marketing rights to simultaneous developers of a drug. The effect on Genzyme of any amendments ultimately adopted cannot be assessed at this time. A federal criminal statute prohibits the transfer of any human organ for valuable consideration for use in human transplantation but permits recovery of reasonable costs associated with such activities. To date, this statute has not been applied to the CARTICEL(R) Service or the EpicelSM Service. In addition, certain states have laws requiring the licensure of tissue and organ banks and laws governing the sale of human organs and the safety and efficacy of drugs, devices and biologics, including skin, all of which could be interpreted to apply to Genzyme Tissue Repair's production and distribution of cultured tissue products. Provisions in certain states' statutes prohibit the receipt of valuable consideration in connection with the sale of human tissue by a tissue bank but permit licensed tissue banks, including companies, to recover their reasonable costs associated with such sales. 55 58 RISKS INHERENT IN INTERNATIONAL OPERATIONS. Foreign operations of Genzyme accounted for 35% of net sales in 1996 and 1995, compared to 31% in 1994. Financial results of Genzyme could be adversely or beneficially affected by fluctuations in foreign exchange rates. Fluctuations in the value of foreign currencies affect the dollar value of Genzyme's net investment in foreign subsidiaries, with related effects included in a separate component of stockholders' equity. Operating results of foreign subsidiaries are translated into U.S. dollars at average monthly exchange rates. In addition, the U.S. dollar value of transactions based in foreign currency (collections on foreign sales or payments for foreign purchases) also fluctuates with exchange rates. The largest foreign currency exposure results from activity in British pounds, French francs, Swiss francs, Dutch guilders, German marks, Japanese yen, Spanish pesetas and Italian lire. Genzyme attempts to manage this exposure by entering into forward contracts with banks to the extent that the timing of currency flows can reasonably be anticipated and by offsetting matching foreign currency denominated assets with foreign currency denominated liabilities. Although to date Genzyme has not hedged net foreign investments, the Company may engage in hedging transactions to manage and reduce the Company's foreign exchange risk, subject to certain restrictions imposed by the Genzyme Board, including that any such transaction will be effected or disposed of on a securities exchange or board of trade regulated under the laws of the United States, or with a counterparty approved in accordance with certain financial strength criteria, will be liquidated promptly after the purpose for which it is being maintained is no longer applicable and will not be effected or maintained for the purpose of speculation. There can be no assurance that Genzyme's attempts to manage its foreign currency exchange risk will be successful. THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES. A majority of Genzyme's revenues are attributable directly or indirectly to payments received from third party payers, including government health administration authorities and private health insurers. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third party payers are increasingly challenging the prices charged for medical products and services. Third party payers are also increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. There can be no assurance that any third party insurance coverage will be available for any products or services developed by Genzyme. If adequate coverage and reimbursement levels are not provided by government and other third party payers for Genzyme's products and services, the market acceptance of these products may be reduced and, accordingly, Genzyme's revenues and profitability may be adversely affected. In addition, Congress has from time to time discussed the possible implementation of broad based health care cost containment measures. While these discussions have not led to the enactment of any specific health care cost containment legislation, it is likely that health care measures will again be proposed in Congress. The effects on Genzyme of any such measures that are ultimately adopted cannot be measured at this time. PRODUCT LIABILITY AND LIMITATIONS OF INSURANCE. Genzyme may be subject to product liability claims in connection with the use or misuse of its products during testing or after commercialization. While Genzyme has taken, and continues to take, what it believes are appropriate precautions, there can be no assurance that Genzyme will avoid significant liability exposure. Genzyme has only limited amounts of product liability insurance and there can be no assurance that such insurance will provide sufficient coverage against any or all potential product liability claims. If Genzyme attempts to obtain additional insurance in the future, there can be no assurance that it will be able to do so on acceptable terms, if at all, or that such insurance will provide adequate coverage against claims asserted. POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS. The market prices for securities of biotechnology companies have been volatile. Factors such as announcements of technological innovations or new commercial products by Genzyme or its competitors, governmental regulation, patent or proprietary rights developments, public concern as to the safety or other implications of biotechnology products and market conditions in general may have a significant impact on the market price of each series of Genzyme common stock. No cash dividends have been paid to date on Genzyme common stock, nor does Genzyme anticipate paying cash dividends on such stock in the foreseeable future. 56 59 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
Form 10-K Page No. -------- GENZYME CORPORATION AND SUBSIDIARIES Report of Independent Accountants ....................................................................... 54 Consolidated Statements of Operations - For the Years Ended December 31, 1996, 1995 and 1994 ............ 55-56 Consolidated Balance Sheets - December 31, 1996 and 1995 ................................................ 57-58 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996, 1995 and 1994 ............ 59-60 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 .... 61-62 Notes to Consolidated Financial Statements .............................................................. 63-83 Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1996, 1995 and 1994 .. 84 GENZYME GENERAL DIVISION Report of Independent Accountants ....................................................................... 85 Combined Statements of Operations - For the Years Ended December 31, 1996, 1995 and 1994 ................ 86-87 Combined Balance Sheets - December 31, 1996 and 1995 .................................................... 88 Combined Statements of Cash Flows - For the Years Ended December 31, 1996, 1995 and 1994 ................ 89-90 Notes to Combined Financial Statements .................................................................. 91-115 Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1996, 1995 and 1994 .. 116 GENZYME TISSUE REPAIR DIVISION Report of Independent Accountants ....................................................................... 117 Combined Statements of Operations - For the Years Ended December 31, 1996, 1995 and 1994 ................ 118 Combined Balance Sheets - December 31, 1996 and 1995 .................................................... 119 Combined Statements of Cash Flows - For the Years Ended December 31, 1996, 1995 and 1994 ................ 120 Notes to Combined Financial Statements .................................................................. 121-134 Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1996, 1995 and 1994 .. 135
All other schedules are omitted since the required information is inapplicable or has been presented in the related financial statements and the related notes. 57 60 EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION Although the financial statements of the General Division and Tissue Repair Division separately report the assets, liabilities and stockholders' equity of Genzyme attributable to each such group, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among the General Division and Tissue Repair Division does not affect legal title to such assets or responsibility for such liabilities. Holders of General Division Stock and Tissue Repair Stock are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Financial impacts arising from one Division that affect the overall cost of Genzyme's capital could affect the results of operations and financial condition of the other Division. Accordingly, the consolidated financial information of Genzyme should be read in connection with the financial information of each Division. 58 61 GENZYME CORPORATION AND SUBSIDIARIES REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: We have audited the accompanying consolidated balance sheets of Genzyme Corporation and Subsidiaries as of December 31, 1996 and 1995, the related consolidated statements of operations, cash flows and stockholders' equity, and the consolidated financial statement schedule for each of the three years in the period ended December 31, 1996. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genzyme Corporation and Subsidiaries as of December 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the consolidated financial statement schedule taken as a whole presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts February 27, 1997 59 62 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 ---- ---- ---- Revenues Net product sales ............................................. $424,483 $304,373 $238,645 Net service sales ............................................. 68,950 52,450 50,010 Revenues from research and development contracts: Related parties .............................................. 23,011 26,758 20,883 Other ........................................................ 2,310 202 1,513 -------- -------- -------- 518,754 383,783 311,051 Operating costs and expenses: Cost of products sold ......................................... 155,930 113,964 92,226 Cost of services sold ......................................... 54,082 35,868 32,403 Selling, general and administrative ........................... 162,264 110,447 80,990 Research and development (including research and development related to contracts) ............................ 80,849 68,845 55,334 Amortization of intangibles ................................... 8,849 4,647 4,741 Purchase of in-process research and development ............... 130,639 14,216 11,215 Restructuring charges ......................................... 1,465 - - -------- -------- -------- 594,078 347,987 276,909 -------- -------- -------- Operating income (loss) ........................................... (75,324) 35,796 34,142 Other income and (expenses): Minority interest in net loss of subsidiaries ................. - 1,608 1,659 Equity in net loss of unconsolidated subsidiaries ............. (4,360) (1,810) (1,353) Gain on investments and charge for impaired investments ....... 1,711 - (9,431) Settlement of lawsuit ......................................... - - (1,980) Investment income ............................................. 15,341 8,814 9,101 Interest expense .............................................. (6,990) (1,109) (1,354) -------- -------- -------- 5,702 7,503 (3,358) -------- -------- -------- Income (loss) before income taxes ................................. (69,622) 43,299 30,784 Provision for income taxes ........................................ (3,195) (21,649) (14,481) -------- -------- -------- Net income (loss) ................................................. $(72,817) $ 21,650 $ 16,303 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
60 63 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- ATTRIBUTABLE TO THE GENERAL DIVISION: Net income (loss) ................................................. $(47,513) $ 34,823 $ 30,194 Tax benefit allocated from Tissue Repair Division ................. 17,011 8,857 1,860 -------- -------- -------- Net income (loss) attributable to General Division Stock ...... $(30,502) $ 43,680 $ 32,054 ======== ======== ======== Per common and common equivalent share: Net income (loss) .............................................. $ (0.45) $ 0.73 $ 0.61 ======== ======== ======== Average shares outstanding ..................................... 68,289 60,185 52,338 ======== ======== ======== Per common share assuming full dilution: Net income (loss) .............................................. $ (0.45) $ 0.66 $ 0.57 ======== ======== ======== Average shares outstanding ..................................... 68,289 66,621 56,318 ======== ======== ======== ATTRIBUTABLE TO THE TISSUE REPAIR DIVISION: Net loss attributable to TR Stock ................................. $(42,315) $(22,030) $(15,751) ======== ======== ======== Per common share: Net loss ....................................................... $ (3.38) $ (2.28) $ (4.40) ======== ======== ======== Average shares outstanding ..................................... 12,525 9,659 3,578 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
61 64 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) DECEMBER 31, - -------------------------------------------------------------------------------------------------------------- 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents ................................................... $ 93,132 $144,372 Short-term investments ...................................................... 56,608 112,303 Accounts receivable, less allowance of $16,508 in 1996 and $8,159 in 1995 ... 116,833 88,959 Inventories ................................................................. 125,265 53,042 Prepaid expenses and other current assets ................................... 100,287 12,531 Deferred tax assets - current ............................................... 17,493 7,729 ---------- -------- Total current assets ...................................................... 509,618 418,936 Property, plant and equipment, net ............................................. 393,839 329,423 Other Assets: Long-term investments ....................................................... 38,215 69,561 Note receivable - related party ............................................. - 262 Intangibles, net of accumulated amortization of $26,189 in 1996 and $17,340 in 1995 ............................................................ 247,745 29,934 Deferred tax assets - noncurrent ............................................ 42,221 23,645 Other noncurrent asset ......................................................... 38,870 33,440 ---------- -------- 367,051 156,842 ---------- -------- $1,270,508 $905,201 ========== ======== The accompanying notes are an integral part of these consolidated financial statements.
62 65 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands) DECEMBER 31, - -------------------------------------------------------------------------------------------------------------- 1996 1995 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ............................................................ $ 22,271 $ 21,980 Accrued expenses ............................................................ 70,124 39,418 Income taxes payable ........................................................ 17,926 1,316 Deferred revenue ............................................................ 2,693 1,367 Current portion of long-term debt and capital lease obligations ............. 999 2,445 ---------- -------- Total current liabilities ............................................... 114,013 66,526 Noncurrent Liabilities: Long-term debt and capital lease obligations ................................ 241,998 124,473 Other noncurrent liabilities ................................................ 12,188 8,995 ---------- -------- 254,186 133,468 Commitments and Contingencies See Notes Stockholders' Equity: Preferred Stock, $.01 par value, authorized 10,000,000 shares; no shares issued and outstanding Preferred Stock, Series A Junior participating, $.01 par value authorized 1,000,000 shares; no shares issued and outstanding Preferred Stock, Series B Junior participating, $.01 par value authorized 400,000 shares; no shares issued and outstanding Common Stocks: General Division Common Stock, $0.01 par value, authorized 200,000,000 shares; 75,537,300 and 62,371,700 issued at December 31, 1996 and 1995, respectively .............................. 755 624 Tissue Repair Division Common Stock, $0.01 par value, authorized 40,000,000 shares; 13,161,500 and 12,112,700 issued at December 31, 1996 and 1995, respectively .............................. 132 121 Treasury common stock, at cost: General Division Common Stock, 105,941 and 52,770 shares at December 31, 1996 and 1995, respectively ................................. (890) (882) Additional paid-in capital - General Division ............................... 871,020 616,096 Additional paid-in capital - Tissue Repair Division ......................... 122,385 107,934 Accumulated deficit.......................................................... (89,975) (17,158) Foreign curency translation adjustments...................................... (745) (3,590) Unrealized gains/(losses) on investments..................................... (373) 2,062 ---------- -------- 902,309 705,207 ---------- -------- $1,270,508 $905,201 ========== ======== The accompanying notes are an integral part of these consolidated financial statements.
63 66 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) ................................................ $(72,817) $ 21,650 $ 16,303 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................. 30,192 22,638 18,226 (Gain) loss on sale of investments ............................ (1,663) 110 (1,430) Loss on disposal of fixed assets .............................. 101 903 - Non-cash compensation expense ................................. 460 1,013 - Write-off of impaired equity investments ...................... - - 9,431 Accrued interest/amortization on bonds ........................ 1,195 (355) (2,116) Provision for bad debts ....................................... 8,332 5,415 4,331 Purchase of in-process research and development for stock ..... 130,639 14,216 11,215 Deferred income taxes ......................................... (28,558) 4,428 1,439 Minority interest in net loss of subsidiaries ................. - (1,608) (1,659) Equity in net loss of unconsolidated subsidiary ............... 4,360 1,810 1,353 Other ......................................................... 105 1,458 386 Increase (decrease) in cash from working capital changes net of acquired assets: Accounts receivable ......................................... (18,395) (15,069) (14,916) Inventories ................................................. (40,182) (15,906) (10,549) Prepaid expenses and other current assets ................... (527) (1,680) (1,769) Accounts payable, accrued expenses and deferred revenue ..... 26,775 5,679 2,782 -------- --------- --------- Net cash provided by operating activities ................... 40,017 44,702 33,027 INVESTING ACTIVITIES: Purchases of investments ......................................... (122,093) (142,522) (210,274) Purchases of restricted investments .............................. - (4,418) (10,000) Maturities of investments ........................................ 207,399 57,055 265,851 Acquisitions of property, plant and equipment .................... (63,802) (49,988) (101,707) Acquisitions, net of cash acquired and liabilities assumed ....... (299,078) (322) 5,359 Additional investment in unconsolidated subsidiaries ............. (5,511) (4,428) (1,465) Loans to affiliates .............................................. (1,676) - - Other noncurrent assets and other noncurrent liabilities ......... (7,470) (1,265) (3,221) -------- --------- --------- Net cash used by investing activities ....................... (292,231) (145,888) (55,457) FINANCING ACTIVITIES: Proceeds from issuance of common stock ........................... 41,556 223,139 45,926 Proceeds from issuance of common stock by subsidiary ............. - 1,107 319 Proceeds from issuance of debt ................................... 536,000 - 21,819 Payments of long-term debt and capital lease obligations ......... (378,502) (41,449) (4,793) -------- --------- --------- Net cash provided by financing activities ................... 199,054 182,797 63,271 Effect of exchange rate changes on cash ............................. 1,920 (781) (274) -------- --------- --------- Increase (decrease) in cash and cash equivalents .................... (51,240) 80,830 40,567 Cash and cash equivalents at beginning of period .................... 144,372 63,542 22,975 -------- --------- --------- Cash and cash equivalents at end of period .......................... $ 93,132 $ 144,372 $ 63,542 ======== ========= ========= Supplemental disclosures of cash flows: Cash paid during the year for: Interest......................................................... $ 6,285 $ 9,944 $ 9,634 Income taxes..................................................... 14,149 19,581 13,506
Supplemental Disclosures of Non-Cash Transactions: Acquisition liability -- Note B Additional investment in unconsolidated affiliate -- Note D Settlement of note receivable -- Note F Exercise of warrants -- Note I Debt conversion -- Note I The accompanying notes are an integral part of these consolidated financial statements. 64 67 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS ---------------------------- ------------------------ 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- COMMON STOCKS: GENERAL DIVISION COMMON STOCK: Balance at beginning of year ................. 62,372 52,894 48,584 $ 624 $ 529 $ 486 Exercise of stock options .................... 1,371 1,916 136 13 19 1 Issuance from employee stock purchase plan ... 291 286 252 3 3 3 Exercise of warrants ......................... 6,341 686 3,922 63 7 39 Shares issued in public offering ............. - 5,750 - - 58 - Issuance of General Division Common Stock in connection with conversion of convertible subordinated notes .............. 3,782 - - 38 - - Issuance of General Division Common Stock in connection with acquisitions ............ 1,380 840 - 14 8 - ------ ------ ------ ----- ----- ----- Balance at end of year ...................... 75,537 62,372 52,894 $ 755 $ 624 $ 529 ====== ====== ====== ===== ===== ===== TISSUE REPAIR DIVISION COMMON STOCK: Balance at beginning of year ................. 12,113 8,675 - $ 121 $ 87 $ - Issued to BioSurface shareholders ............ - - 5,000 - - 50 Issued at conversion ......................... - - 3,357 - - 34 Exercise of stock options .................... 124 122 - 1 1 - Issuance from employee stock purchase plan ... 325 270 4 3 3 - Exercise of warrants ......................... 345 46 314 4 - 3 Shares issued in public offering ............. - 3,000 - - 30 - Issuance of Tissue Repair Division Common Stock in connection with conversion of the General Division's convertible subordinated notes .......................... 255 - - 3 - - ------ ------ ------ ----- ----- ----- Balance at end of year ....................... 13,162 12,113 8,675 $ 132 $ 121 $ 87 ====== ====== ====== ===== ===== ===== TREASURY COMMON STOCK (AT COST): GENERAL DIVISION COMMON STOCK: Balance at beginning of year ................. (106) (100) (100) $(882) $(755) $(755) Purchases .................................... - (6) - (8) (127) - ------ ------ ------ ----- ----- ----- Balance at end of year ......................... (106) (106) (100) $(890) $(882) $(755) ====== ====== ====== ===== ===== =====
ADDITIONAL PAID IN CAPITAL - GENERAL DIVISION: Balance at beginning of year.................................................. $616,096 $406,991 $397,229 Exercise of stock options .................................................... 13,870 27,903 1,188 Issuance from employee stock purchase plan ................................... 4,695 4,158 2,989 Exercise of warrants ......................................................... 106,101 6,257 41,691 Common Stock issued in public offering ....................................... - 141,218 - Issuance of Common Stock in connection with conversion of convertible subordinated notes .......................................................... 101,362 - - Issuance of General Division Common Stock in connection with acquisitions .... 36,508 23,813 - Callable Warrants issued in connection with acquisition of Neozyme II ....... 469 - - Allocation to GTR for designated shares....................................... (11,714) - (38,330) Tax benefit from disqualified dispositions ................................... 3,500 5,500 2,224 Non-cash compensation expense ................................................ 123 131 - Treasury Stock acquired....................................................... 10 125 - -------- -------- -------- Balance at end of year ....................................................... $871,020 $616,096 $406,991 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
66 68 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
DOLLARS IN THOUSANDS --------------------------------------- 1996 1995 1994 ---- ---- ---- ADDITIONAL PAID IN CAPITAL-TISSUE REPAIR DIVISION: Balance at beginning of year ................................................. $ 107,934 $ 63,573 $ - Tissue Repair Division Common Stock issued to BioSurface shareholders ........ - - 25,266 Tissue Repair Division Common Stock issued at conversion ..................... - - (34) Exercise of stock options .................................................... 539 240 - Issuance from employee stock purchase plan ................................... 1,893 980 14 Exercise of warrants ......................................................... (4) (3) (3) Tissue Repair Division Common Stock issued in public offering ................ - 42,262 - Issuance of Tissue Repair Division Common Stock in connection with the conversion of the General Division's convertible subordinated notes .... (3) - - Allocation from General Division for designated shares........................ 11,714 - 38,330 Non-cash compensation expense ................................................ 312 882 - -------- -------- -------- Balance at end of year ....................................................... $ 122,385 $107,934 $ 63,573 ========= ======== ======== ACCUMULATED DEFICIT: Balance at beginning of year ................................................. $ (17,158) $(38,808) $(55,111) Net income (loss) ............................................................ (72,817) 21,650 16,303 --------- -------- -------- Balance at end of year ....................................................... $ (89,975) $(17,158) $(38,808) ========= ======== ======== Foreign currency translation adjustment: Balance at beginning of year ................................................. $ (3,590) $ (4,915) $ (7,776) Translation adjustments ...................................................... 2,845 1,325 2,861 --------- -------- -------- Balance at end of year ....................................................... $ (745) $ (3,590) $ (4,915) ========= ======== ======== Unrealized gains (losses) on investments: Balance at beginning of year ................................................. $ 2,062 $ (7,735) $ -- Adjustments .................................................................. (2,435) 9,797 (7,735) --------- -------- -------- Balance at end of year ....................................................... $ (373) $ 2,062 $ (7,735) ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 67 69 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Corporation (the "Company" or "Genzyme"), is a diversified human healthcare business with product development, manufacturing and marketing capabilities in therapeutic and diagnostic products, pharmaceuticals, diagnostic services and tissue repair. BASIS OF PRESENTATION The approval effective December 16, 1994 (the "Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994 resulted in the redesignation of Genzyme's common stock. The outstanding shares of Genzyme common stock were redesignated as General Division Common Stock ("General Division Stock") on a two-for-one basis and a second class of common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's common stock. General Division Stock and TR Stock provide stockholders with separate securities which are intended to reflect the performance of the General Division and Tissue Repair Division ("GTR"), respectively, and the allocation of tax benefits between the divisions pursuant to the management and accounting policies adopted by the Board of Directors (the "Board") of Genzyme Corporation. The approval of the Genzyme Stock Proposal did not result in any transfer of assets and liabilities of the Company or its subsidiaries. The Company prepares separate financial statements for the General Division and GTR in addition to consolidated financial statements of the Company. Although the financial statements of the General Division and Tissue Repair Division separately report the assets, liabilities and stockholders' equity of Genzyme attributable to each such group, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among the General Division and Tissue Repair Division does not affect legal title to such assets or responsibility for such liabilities. Holders of General Division Stock and Tissue Repair Stock are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Liabilities or contingencies of the General Division or GTR could affect the results of operations and financial condition of the other Division. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in companies and joint ventures in which the Company has a substantial ownership interest of approximately twenty-percent to fifty-percent, or in which the Company participates in policy decisions are accounted for using the equity method. Accordingly, the Company's share of the earnings of these entities is included in consolidated net income. Investments of less than 20% are reported at fair value (see "Investments"). All significant intercompany items and transactions have been eliminated in consolidation. Certain items in the consolidated financial statements for the years ended December 31, 1994 and 1995 have been reclassified to conform with the December 31, 1996 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash equivalents, consisting principally of money market funds and municipal notes purchased with initial maturities of three months or less, are valued at cost plus accrued interest, which approximates market. INVESTMENTS Short-term investments include all investments with remaining maturities of twelve months or less. Long-term investments include all investments with remaining maturities greater than twelve months. The Company classifies its equity investments as available-for-sale and its investments in debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time the investments are purchased. Equity investments are included in "Other noncurrent assets" on the consolidated balance sheet. As of December 31, 1996 and 1995, the Company classified all investments in debt securities as available-for-sale. 68 70 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These investments are reported at fair value as of the balance sheet date with unrealized holding gains and losses (the adjustment to fair value) included in "Other Equity Adjustments" in Stockholders' equity. If the adjustment to fair value reflects a decline in the value of the investment, management considers all available evidence to evaluate the extent to which the decline is "other than temporary" and marks the investment to market through a charge to the income statement. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of investments is obtained from market quotations. The fair value of foreign currency forward contracts is based on forward rates in effect at December 31, 1996 and is disclosed below (see -- Hedging). INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Provision for depreciation is computed using the straight-line method over the estimated useful lives of the assets (three to ten years for plant and equipment, five to seven years for furniture and fixtures, and twenty to forty years for buildings). Certain specialized manufacturing equipment allocated to the General Division (with a net book value of $174.6 million at December 31, 1996) is depreciated over its remaining useful life using the units-of-production method. The remaining life and recoverability of such equipment is evaluated periodically based on the appropriate facts and circumstances. Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. For products expected to be commercialized, the Company capitalizes, to construction in-progress, the costs of manufacturing process validation and optimization incurred beginning when the product is deemed to have demonstrated technological feasibility and ending when the asset is substantially complete and ready for its intended use. Qualified costs include incremental labor and direct material, and incremental fixed overhead and interest. These costs are depreciated using the units of production method. ISSUANCE OF STOCK BY A SUBSIDIARY Gains on the issuance of stock by a subsidiary are included in net income unless the subsidiary is a research and development, start-up or development stage company or an entity whose viability as a going concern is under consideration. In those situations the Company accounts for the change in its proportionate share of subsidiary equity resulting from the additional equity raised by the subsidiary as an equity transaction. INTANGIBLES Intangible assets consist of goodwill, covenants not to compete, customer lists, patents, trademarks and trade-names and are being amortized using the straight-line method over useful lives of five to forty years. Management's policy regarding intangible assets is to evaluate the recoverability of its intangible assets when the facts and circumstances suggest that these assets may be impaired. Evaluations consider factors including operating results, business plans, economic projections, strategic plans and market emphasis. Evaluations also compare expected cumulative, un-discounted operating incomes or cash flows with net book values of related intangible assets. Unrealizable intangible asset values are charged to operations if these evaluations indicate an impairment in value. TRANSLATION OF FOREIGN CURRENCIES The financial statements of the Company's foreign subsidiaries are translated from local currency into U.S. dollars using the current exchange rate at the balance sheet date for assets and liabilities and the average exchange rate prevailing during the period for revenues and expenses. The local currency for all Company foreign subsidiaries is considered to be the functional currency for each entity and accordingly, translation adjustments for these subsidiaries are included in "Other Equity Adjustments" in Stockholder equity. Exchange gains and losses on intercompany balances of a long-term investment nature are also recorded as a charge or credit to Stockholder equity. Transaction gains and losses are recorded in income and totaled net losses of $(0.9) million and $(0.8 million) for the years ended December 31, 1996 and 1995, respectively. Net transaction losses information for 1994 were not material. Stockholders' equity includes cumulative foreign currency translation adjustments of $(0.7) million and $(3.6) million at December 31, 1996 and 1995. HEDGING FORWARD CONTRACTS 69 71 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company enters into forward contracts to reduce foreign currency exchange risk. Such contracts are revalued using current exchange rates at the balance sheet date. All gains and losses on revaluation of forward contracts are included in net income. At December 31, 1996 and 1995, the Company had currency contracts valued at approximately $0.9 million and $1.2 million, respectively. Related gains and losses were not material to the financial statements. INTEREST RATE HEDGE AGREEMENTS Interest rate hedge agreements are used to reduce interest rate risks and costs inherent in the Company's debt portfolio. The Company enters into these agreements to change the fixed/variable interest rate mix of the portfolio to reduce the Company's aggregate risk to movements in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. The differentials to be received or paid under contracts designated as hedges are recognized in income over the life of the contracts as adjustments to interest expense. The fair values of interest rate contracts is estimated based on the estimated amount necessary to terminate the agreements. REVENUE RECOGNITION Revenues from product sales are recognized when goods are shipped and are net of third party contractual allowances and rebates, as applicable. Revenues from service sales are recognized when the service procedures have been completed. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract. RESEARCH AND DEVELOPMENT Research and development costs are expensed in the period incurred. Costs of purchased technology which management believes has not demonstrated technological feasibility and for which there is no alternative future use, are charged to expense in the period of purchase. INCOME TAXES The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The Company has not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. At December 31, 1996, such undistributed foreign earnings were approximately $9.0 million. Based on the Company's policy of indefinite reinvestment in non-U.S. operations, it is not currently practicable to determine the tax liability associated with the repatriation of these earnings. NET INCOME (LOSS) PER SHARE Net income (loss) per share attributable to the General Division and the Tissue Repair Division give effect to the management and accounting policies adopted by the Board in connection with re-designation of Genzyme common stock as General Division Stock and the creation of GTR Stock and are reported in lieu of consolidated per share data. The Company computes earnings (loss) per share for each Division by dividing the earnings attributable to each class of stock by the weighted average number of shares of that stock and dilutive common stock equivalents and other potentially dilutive securities outstanding during the applicable period. Earnings (loss) attributable to General Division Stock and TR Stock equals the respective division's net income or loss for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from either division pursuant to the management and accounting policies adopted by the Board of Directors (the "Genzyme Board"). Income per share assuming full dilution is determined by dividing net income plus subordinated debenture interest (net of capitalized amounts) by the weighted average number of common shares outstanding during the year after giving effect for common stock equivalents arising from stock options and warrants and for subordinated debentures assumed converted to common stock. Net income attributable to General Division and GTR Stock and net income per share and net income per share assuming full dilution for the year ended December 31, 1994, give effect to the provisions of the accounting policies adopted by the Genzyme Board in connection with the creation of the General Division and, accordingly, are pro forma presentations. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected the disclosure-only alternative permitted under SFAS 123, "Accounting for Stock-Based Compensation". The Company has disclosed herein pro forma net income and pro forma earnings per share in the footnotes using the fair value based method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, current and non-current investments and accounts receivable. The Company generally invests its cash investments in investments-grade securities to mitigate risk. UNCERTAINTIES The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, 70 72 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS protection of proprietary technology, estimation by the Company of the size and characteristics of the markets for the Company's products, acceptance of the Company's products and services, health care cost containment initiatives, product liability and compliance with the government regulations, including those of the U.S. Department of Health and Human Services and the U.S. Food and Drug Administration. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), which is effective for fiscal years ending after December 15, 1997, including interim periods. Earlier adoption is not permitted. However, an entity is permitted to disclose pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The Statement requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share and is substantially similar to the standard recently issued by the International Accounting Standards Committee entitled International Accounting Standards, Earnings Per Share. The Company plans to adopt SFAS in 1997 and has not yet determined the impact. NOTE B. ACQUISITIONS The Company allocates all acquisitions to either the General Division or Tissue Repair Division depending on the nature of the acquired business. ALLOCATED TO THE GENERAL DIVISION: SYGENA A.G. In July 1994, the Company paid approximately $6,100,000 for newly-issued shares of common stock representing 51% of the outstanding common stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance chemicals used in the development of pharmaceuticals. Based on certain put and call options in the Acquisition Agreement, the Company accounted for the acquisition as a purchase of all of the outstanding shares of Sygena, and recorded a deferred liability at a present value of approximately $9.0 million Swiss francs for the purchase of the remaining shares. The excess purchase price over the net assets acquired was approximately $5.0 million Swiss francs (approximately $4.0 million) and was recorded as goodwill with a life of ten years. In July 1996, Genzyme paid $7.6 million (9.2 Swiss Francs) in settlement of the deferred liability and related accrued interest. The net assets and operations of Sygena have been included in the Company's financial statements from the date of acquisition. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. IG LABORATORIES, INC. In October 1995, Genzyme acquired the publicly-held minority interest in its majority-owned subsidiary, IG Laboratories, Inc. ("IG"), a genetic testing business, by issuing approximately 770,510 shares of General Division Stock, valued at approximately $22.5 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $18.6 million, was allocated $14.2 million to in-process research and development and charged to operations, and $4.4 million to goodwill to be amortized over 11 years. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. GENETRIX, INC. On May 1, 1996, the Company acquired Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Stock. In the aggregate, approximately 1,380,000 shares of General Division Stock valued at approximately $36.5 million were issued for all the outstanding shares of Genetrix preferred stock and Genetrix common stock. The acquisition was accounted for as a purchase. The purchase price was allocated to the assets and liabilities of Genetrix based on their respective estimated fair values at the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, approximately $39 million, was allocated to goodwill to be amortized over 15 years. The Company incurred restructuring costs of $1.0 million. DEKNATEL SNOWDEN PENCER, INC. On July 1, 1996, Genzyme completed the acquisition of Deknatel Snowden Pencer, Inc. ("DSP"), a privately held surgical products company. The purchase price of $252.2 million consisted of cash of approximately $192.0 million, acquisition costs of approximately $4.6 million, and assumed debt obiligations of DSP of approximately $55.6 million. The excess of the purchase price over the fair market value of the net assets acquired, approximately $128.3 million, was allocated to goodwill to be amortized over 40 years. Funds for the acquisition, the repayment of the debt and the payment of the acquisition costs were provided by borrowings of $200.0 million under a revolving credit facility from Fleet National Bank, due 71 73 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 1, 1997, with interest payable at LIBOR plus 5/8% and General Division cash balances. The Company incurred restructuring charges of $0.5 million. The purchase price was allocated to the assets and liabilities of DSP based on their estimated respective fair values on the date of acquisition. Completed technology that has reached technological feasibility was valued using a risk adjusted cash flow model under which future cash flows were discounted, taking into account risks related to existing and future markets and assessments of the life expectancy of the completed technology. In-process technology that has not reached technological feasibility and that has no alternative future use was valued using the same method. Expected future cash flows associated with in-process technology are discounted considering risks and uncertainties related to viability of and to the potential changes in future target markets and to the completion of the products expected to be ultimately marketed by Genzyme. The amount allocated to in-process technology of $24.2 million was charged to operations in July 1996 upon completion of the acquisition. NEOZYME II CORPORATION On October 28, 1996, Genzyme, through Neozyme II Acquisition Corporation ("Acquisition Corp."), a wholly-owned subsidiary, completed its tender offer for the outstanding units (the "Units") of Neozyme II Corporation ("Neozyme II"), each Unit consisting of (i) one share of Neozyme II Callable Common Stock ("Callable Common Stock"), $1.00 par value per share, and (ii) one Callable Warrant (the "Callable Warrants") to purchase two shares of General Division Stock and 0.135 share of GTR Stock, $0.01 par value per share of Genzyme for $45 per Unit in cash. A total of 2,385,686 Units, or 98.8 percent, were tendered and accepted for payment resulting in payment of $107.4 million in December of 1996. On December 6, 1996, Neozyme II was merged with and into Acquisition Corp. and as a result of the merger, all outstanding shares of Callable Common Stock (other than shares held by Genzyme and its subsidiaries) were cancelled and converted into the right to receive $29.00 in cash per share, for an aggregate merger consideration of $0.9 million. The Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger and accordingly 29,314 of such warrants became exercisable on December 6, 1996. The exercise price of the Callable Warrants is $44.202 and was determined by the average closing price of two shares of General Division Stock and .135 share of GTR Stock for the 20 trading days prior to December 6, 1996. The Callable Warrants will expire on December 31, 1998. The aggregate purchase price of $111.3 million consisted of $108.2 million of cash, warrants valued at $0.5 million and acquisition costs of $2.6 million. The excess purchase price was allocated to Neozyme II's only remaining assets which were technologies still in the development stage. These technologies consisted of specific programs for the treatment of cystic fibrosis and have no alternative future use. Accordingly the statement of operations for the year ended December 31, 1996 reflects a $106.5 million charge for in-process technology and a related deferred tax benefit of $21.7 million which were recorded upon consummation of the acquisition. ALLOCATED TO THE TISSUE REPAIR DIVISION: BIOSURFACE TECHNOLOGY, INC. On December 15, 1994, Genzyme acquired BioSurface Technology, Inc. ("BioSurface") a developer of tissue repair technologies by issuing .575 of one share of GTR Stock for each share of BioSurface common stock. In the aggregate, 5,000,000 shares of GTR Stock, valued at $25,312,500, were issued representing 50% of the initial equity interest in GTR. The acquisition was accounted for as a purchase. Accordingly, the associated net assets and operations of BioSurface have been included in the Company's financial statements since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, $11,215,000, was allocated to in-process research and development and charged to operations. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. PRO FORMA FINANCIAL INFORMATION The following pro forma information presents the results of operations of Genzyme, Genetrix, DSP and Neozyme II for the years ended December 31, 1996 and 1995, as if the acquisitions had been consummated on January 1, 1995. This pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future. The pro forma financial information does not include charges for in-process technology of $24.2 million and $106.5 million, related to the DSP and Neozyme II acquisitions, respectively which were recognized as expense upon consummation of each acquisition in 1996. 72 74 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) ------------------------------------------------------------------------------------------ Revenues..................................................... $563,586 $476,850 Pro forma net income (loss).................................. 22,831 (7,557) Attributable to General Division Stock: Pro forma net income........................................ 65,136 14,473 Pro forma net income per General Division common and common equivalent shares.............................. $ 0.89 $ 0.24 ======== ======== Pro forma weighted average and common equivalent shares outstanding............................................... 73,492 61,565 ======== ======== Pro forma net income (loss) per Tissue Repair Division common and common equivalent share......................... $ (3.38) $ (2.28)
NOTE C. MAJORITY-OWNED SUBSIDIARIES Investments in the Company's majority-owned subsidiaries were attributed to the General Division on the Effective Date, December 16, 1994. IG LABORATORIES, INC. IG was an approximately 70%-owned subsidiary for the year ended December 31, 1994 and for the period from January 1, 1995 through October 1, 1995. (See Note B). GENZYME TRANSGENICS CORPORATION Genzyme Transgenics Corporation ("GTC") was a majority-owned subsidiary for the period from January 1, 1994 through September 30, 1994. (See Note D). NOTE D. INVESTMENTS Consolidated investments in marketable securities at December 31 consisted of the following:
1996 1995 ------------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE -------------------------------------------------------------------------------------------- Short Term: Certificates of deposit........... $ 1,882 $ 1,882 $ 1,870 $ 1,870 Federal agency notes............... - - 26,731 26,767 Corporate notes.................... 54,732 54,726 80,576 80,646 U.S. Treasury notes................ - - 3,031 3,020 ------- ------- -------- ------- $56,614 $56,608 $112,208 $112,303 ======= ======= ======== ======== Long Term: Federal agency notes............... - - $ 4,047 4,053 Corporate notes.................... 16,481 16,485 42,518 42,845 U.S. Treasury notes................ 22,010 21,730 22,351 22,663 ------- ------- -------- ------- $38,491 $38,215 $ 68,916 $69,561 ======= ======= ======== ========
Information regarding the range of contractual maturities of investments in debt securities at December 31, 1996 is as follows:
MARKET (DOLLARS IN THOUSANDS) COST VALUE ---------------------------------------------------------------------------- Within 1 year................................... $56,614 $56,608 After 1 year through 2 years.................... 11,399 11,415 After 2 years through 10 years.................. 27,092 26,800 ------- ------- $95,105 $94,823 ======= =======
Cash and cash equivalents, consisting principally of money market funds and munipal notes are valued at cost plus accrued interest. 73 75 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's investments in unconsolidated entities may be attributed to either the General Division or Tissue Repair Division. As of December 31, 1996, all such investments were attributed to the General Division. The following is a summary of the allocation of these investments: INVESTMENT IN NABI In August 1993, the Company acquired 502,512 shares of the Series E Convertible Preferred Stock (the "Series E Stock") of Univax Biologics, Inc., for $5.0 million in connection with an agreement to develop and commercialize certain products. In November 1995, Univax merged with North American Biologicals, Inc.("NABI") and in connection with the merger the Company received 526,315 shares of NABI common stock in exchange for the Series E Stock. In April 1996, the Company recorded a realized gain of approximately $1.7 million on the sale of the entire investment in NABI. INVESTMENT IN ARONEX, INC. In September 1993, the Company acquired 714,286 shares of common stock of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in connection with an agreement to develop and commercialize certain products. Upon the achievement of certain specified clinical milestones, the Company is committed to making future milestone payments and an additional $5.0 million investment in Argus. In August 1994, Argus delivered to the Company an additional 132,325 shares resulting in a total of 846,611 shares held by the Company. The investment is classified as available-for-sale and is included in "Other noncurrent assets" in the consolidated balance sheets of Genzyme at fair market value. At December 31, 1994, the fair value of the Argus stock was approximately $1.7 million. The Company believed that a portion of the impairment in the value of the investment in Argus was "other than temporary" and accordingly, a loss of approximately $3.3 million was charged to the Company's operations in 1994. In September 1995, Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex, Inc. and as a result, the Argus shares were redesignated as Aronex shares. At December 31, 1996 and 1995, the investment in Aronex was recorded at its fair market value of approximately $4.0 million and $3.7 million, respectively. INVESTMENT IN CELTRIX In June 1994, the Company acquired 1,550,388 restricted shares of Celtrix Pharmaceuticals, Inc. ("Centrix'), approximately 11.5% of the common stock of Celtrix outstanding after the acquisition, for $10.0 million. The announcement of certain adverse events by Celtrix resulted in a decline in the fair market value of the Company's investment. The Company believed that a portion of the impairment in the value of the investment in Celtrix was "other than temporary". Accordingly, a loss of approximately $6.1 million was charged to the Company's operations in 1994. In 1995, Celtrix exercised its option to require the Company to purchase additional shares of Celtrix at fair market value. As a result in December 1995, the Company acquired an additional 1,472,829 shares at $3 per share. The investment is classified as available-for-sale and is included in "Other noncurrent assets" in the consolidated balance sheets for Genzyme. At December 31, 1996 and 1995, the Company's investment in Celtrix had a fair market value of approximately $6.0 million and $7.7 million, respectively. REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY INVESTMENTS Investment income for 1996 and 1995 includes gross realized losses of $47,000 and $110,000, respectively. Gross realized gains included in investment income for 1995 and 1994 were $1.4 million, respectively. The realized gain on the investment in NABI was reported in the gain on investments line item in the Company's statement of operations for 1996. Gross unrealized holding losses of $2.7 million and gross unrealized holding gains of $2.3 million were recorded at December 31, 1996 in Stockholders' equity as compared to unrealized holding gains of $2.1 million at December 31, 1995 of which $0.7 million represented an unrealized holding gain on the Company's investment in NABI which was sold in 1996. INVESTMENT IN GTC As of October 1994, the Company's percentage ownership of GTC Common Stock ("GTC Stock") declined from approximately 73% to approximately 40% due primarily to GTC's acquisition of TSI Corporation for Stock and accordingly, the Company began accounting for its investment in GTC under the equity method. 74 76 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company acquired approximately 2,308,800 of the 3,260,800 shares of GTC Stock issued in 1995 which increased the Company's equity interest in GTC to 48% as of December 31, 1995. In March 1996, GTC entered into a Convertible Debt and Development Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving line of credit (the "GTC Revolving Line of Credit") in the amount of $10 million and has agreed to fund development costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under the agreement, GTC granted to the Company co-marketing rights to AT-III in all territories other than Asia subject to negotiation and execution of a development and supply agreement between the parties prior to March 31, 1997. Pursuant to the terms of this agreement, GTC borrowed $4.3 million in 1996 from the General Division, of which $1.7 million of this debt was converted into 219,565 shares of GTC Stock, $1.2 million was offset against amounts owed by the General Division to GTC for services provided in relation to the AT-III program and $1.4 million was repaid by GTC with accrued interest. As of December 31, 1996, GTC had no amounts outstanding under the GTC Revolving Line of Credit. On July 31, 1996, GTC sold 3,000,000 shares of GTC common stock to the public for $4.00 per share. The General Division purchased 900,000 shares in the offering. The offering resulted in an increase in the book value of the Company's investment in GTC and the resulting gain was recorded in income in 1996. As of December 31, 1996, the Company's equity interest in GTC had declined to 43%, primarily due to the issuance of shares of GTC Stock in the public offering and as a result of option and warrant exercises. The fair market value of the GTC shares, based on quoted market prices, was $45.5 million and $27.6 million at December 31, 1996 and 1995, respectively. GTC reported a net loss of approximately $7.7 million for the year ended December 31, 1996. The Company reported equity in GTC's net losses of $2.4 million, $1.8 and $1.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. Following are condensed statements of operations and balance sheet data of GTC:
YEAR ENDED DECEMBER 31, -------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 1994 --------------------------------------------------------------------- Revenues......................... $46,834 $32,421 $9,471 Operating loss................... (7,253) (7,855) (5,434) Net loss......................... (7,746) (4,133) (5,284) DECEMBER 31, --------------------- (DOLLARS IN THOUSANDS) 1996 1995 -------------------------------------------------------- Current assets................... $24,642 $16,564 Noncurrent assets................ 42,062 41,478 Current liabilities.............. 24,758 23,575 Noncurrent liabilities........... 6,742 7,179
NOTE E. INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------------ Raw materials................ $ 30,379 $12,634 Work-in-process.............. 38,203 14,821 Finished products............ 56,683 25,587 -------- ------- $125,265 $53,042 ======== =======
NOTE F. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1996 1995 ----------------------------------------------------------------------- Plant and equipment.......................... $164,817 $109,035
75 77 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Land and buildings........................... 175,620 46,456 Leasehold improvements....................... 58,215 52,803 Furniture and fixtures....................... 14,714 7,530 Construction in progress..................... 69,286 178,083 -------- -------- 482,652 393,907 Less accumulated depreciation.............. (88,813) (64,484) -------- -------- Property, plant and equipment, net........... $393,839 $329,423 ======== ========
Depreciation and amortization expense was $23.1 million, $18.0 million, and $13.5 million in 1996, 1995 and 1994, respectively. The Company attributes its property, plant and equipment to either the General Division or Tissue Repair Division based on use. The Company has completed construction of a manufacturing facility at Allston Landing in Boston, Massachusetts to produce a recombinant form of Ceredase(R) enzyme ("Cerezyme(R)") and other products. The facility cost approximately $154.1 million plus an additional $22.3 million of process validation and optimization costs. On October 24, 1996, Genzyme received FDA approval to manufacture the drug Cerezyme[R] in the Allston Landing facility. As of December 31, 1996, the Company had capitalized approximately $154.1 million of expenditures related to this building and approximately $33.3 million of gross process validation and optimization costs with related accumulated amortization of $1.0 million related to other facilities. In 1996, 1995 and 1994, the Company capitalized approximately $2.2 million, $9.0 million and $9.2 million of interest costs, respectively, relating to this and other facility construction. Upon receipt of FDA approval for the facility, the Company began production and transferred the cost out of construction in progress and began depreciating this facility in July 1996 using the units of production method of depreciation. Depreciation expense for 1996 related to this facility was $1.7 million. NOTE G. ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------------------------------ Professional fees...................................... $ 4,402 $ 2,679 Compensation........................................... 22,626 12,951 Royalties.............................................. 8,323 6,702 Rebates................................................ 7,604 2,693 Interest............................................... 1,681 1,857 Other.................................................. 25,488 12,536 -------- -------- $ 70,124 $ 39,418 ======== ========
NOTE H. LONG-TERM DEBT AND LEASES LONG-TERM DEBT Although the Company retains responsibility for the re-payment of all long-term debt obligations, such debt and leases are allocated to either the General Division or Tissue Repair Division for reporting purposes based on the intended use of the funds borrowed under each instrument or facilities or equipment leased. Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------------------------------ Revolving credit facility.............................. $218,000 $ - Convertible subordinated notes......................... - 100,000 Mortgage note payable, matures June 13, 1999........... 20,375 20,863
76 78 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Mortgage note payable, matures November 2014........... 3,298 3,356 Mortgage note payable, matures January 1, 2008......... 685 747 Term notes payable..................................... - 1,626 -------- -------- 242,358 126,592 Less current portion................................... (999) (2,243) -------- -------- $241,359 $124,349 ======== ========
CREDIT FACILITIES In November 1996, Genzyme refinanced its existing $215.0 million line of credit (the "Credit Line") with a revolving credit facility (the "Revolving Facility") made available through a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under this facility may be allocated to either the General Division or Tissue Repair Division. As of December 31, 1996, the Company had $218.0 million of debt outstanding under the Revolving Facility, due in November 1999, which had been allocated $200.0 million to the General Division and $18.0 million to GTR. The Company had an interest-rate swap agreement with a notional amount of $100 million. REVOLVING FACILITY The Company may obtain loans up to a maximum aggregate principal amount outstanding at any time of $225.0 million under the terms of the Revolving Facility. Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and conditions defined in the Credit Agreement. The notes have certain covenants which require the Company to, among other things, maintain certain levels of earnings and liquidity ratios. The stock of Genzyme Securities Corporation, a Massachusetts Securities Corporation, is pledged as collateral for this facility. CREDIT LINE On June 28, 1996, Genzyme's credit line with Fleet National Bank was increased from $15.0 million to an aggregate of $215.0 million in connection with the Company's acquisition of DSP (See Note D. - Acquisitions). Until refinanced with the Revolving Facility in November 1996, borrowings under the Credit line were allocated $200.0 million to the General Division to finance the acquisition of DSP and $15.0 million to GTR to fund operations, each with interest payable at LIBOR plus 5/8%. All funds outstanding under the Credit Line were repaid before December 31, 1996 with funds borrowed under the Revolving Facility. 6 3/4% CONVERTIBLE SUBORDINATED NOTES In 1991, the Company issued 6 3/4% Convertible Subordinated Notes due October 1, 2001 in the aggregate principal amount of $100.0 million for net proceeds of $97.3 million. Deferred financing costs of $2.7 million, classified as "Other noncurrent assets" on the combined balance sheets, were amortized to expense over the term of the debt issue. Such Notes were allocated to the General Division on the Effective Date, December 16, 1994. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after December 16, 1994, would receive, in addition to the shares of General Division Stock into which the Note was convertible, the same number of shares of GTR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. In March 1996, holders of the Notes converted such notes into General Division Stock and TR Stock pursuant to the amended terms of the notes. Holders of the Notes received 37.826 shares of General Division Stock and 2.553 shares of GTR Stock in conversion of each $1,000 Note. As a result of the conversion, $101.4 million, the face value of the debt less the unamortized debt financing costs was credited to equity. MORTGAGE NOTES The Company's three mortgage notes have been attributed to the General Division. The mortgage note due June 1999 is collateralized by land and buildings with a net book value of $28.5 million at December 31, 1996, bears interest at 7.73% annually, and is payable monthly based on a twenty year direct reduction amortization schedule, with the remaining principal due June 13, 1999. The mortgage note maturing November 2014 is collateralized by land and buildings with a net book value of $5.1 million at December 31, 1996 and bears interest at 10.5%. The mortgage note maturing January 2008 provides the bank with a "call or review" feature at the end of the first 60 month period, allowing the bank to adjust the note under specific circumstances. This note bears interest at a variable rate of prime plus 1% and is collateralized by land and fixtures. Principal and interest are payable monthly on both of these notes. 77 79 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTEREST RATE HEDGE AGREEMENTS In December 1996, the Company entered into a $100 million interest rate swap contract (the "Swap Contract") to effectively convert the variable interest rate on borrowings under the Revolving Facility to fixed interest rates. Net payments made or received under the Swap Contract are recorded as adjustments to interest expense. At December 31, 1996 the Swap Contract had a termination value gain of $125,000. OPERATING LEASES Total rent expense under operating leases was $12.8 million, $10.0 million, and $8.7 million in 1996, 1995 and 1994 respectively. The Company leases facilities and personal property under certain operating leases in excess of one year. Future minimum payments due under the Company's long-term obligations and capital and operating leases are as follows:
LONG-TERM CAPITAL OPERATING (DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES ----------------------------------------------------------------------- 1997............................... $ 3,200 $338 $ 13,033 1998............................... 2,637 316 12,557 1999............................... 277,805 14 11,326 2000............................... 510 - 10,176 2001............................... 504 - 9,222 Thereafter......................... 5,795 - 49,283 -------- ---- -------- Total minimum payments.......... 290,451 668 105,597 Less: interest..................... (48,093) (29) - -------- ---- -------- $242,358 $639 $105,597 ======== ==== ========
In January 1997, the General Division elected to re-pay $100.0 million of its outstanding debt plus accrued interest of $0.5 million. NOTE I. STOCKHOLDERS' EQUITY Immediately prior to the Effective Date, as defined in Note A, approximately 31,582,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the "Warrants"), and the conversion of the 6 3/4% Convertible Subordinated Notes Due 2001 (the "Notes"). Pursuant to antidilution provisions in the agreements covering the options, Genzyme has adjusted each option outstanding on the Effective Date to provide for separation of the option into an option exercisable for General Division Stock and an option exercisable for the number of shares of GTR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date. The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of General Division Stock and GTR Stock upon exercise of the Warrant that the holder would have received if the holder had exercised the Warrant immediately prior to the Effective Date. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after the Effective Date would receive, in addition to the shares of General Division Stock into which the Note is convertible, the same number of shares of GTR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. In March 1996, holders of the notes converted such notes into General Division Stock and GTR Stock. Holders of the notes received 37.826 shares of General Division Stock and 2.553 shares of GTR Stock in conversion of each $1,000 note. 78 80 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In September 1995, Genzyme sold 3,000,000 shares of Tissue Repair Common Stock to the public at a price of $15 per share for net proceeds of $42.3 million after underwriting discounts and commissions. In October 1995, Genzyme sold 5,750,000 shares of General Division Common Stock to the public for $25.63 per share for net proceeds of $141.3 million. At December 31, 1996, approximately 15,768,006 shares of General Division Stock and 3,664,585 shares of GTR Stock were reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as amended, and upon the exercise of outstanding warrants. PREFERRED STOCK Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the preferences, voting powers, qualifications and special or relative rights or privileges of any such series before the issuance of any shares of that series. The Board of Directors shall determine the number of shares constituting each series of Preferred Stock and each series shall have a distinguishing designation. STOCK SPLIT In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of General Division Stock to be effected by means of a 100% stock dividend payable on July 25, 1996 to stockholders of record on July 11, 1996, subject to increasing the authorized shares of General Division Stock from 100,000,000 to 200,000,000 shares (the "Amendment"). The Amendment was approved by holders of a majority in interest of the outstanding General Division Stock and TR Stock, voting together as a single class, at a special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a total of 34,669,435 shares of General Division Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. DEFERRED COMPENSATION PLAN The Company's Directors' Deferred Compensation Plan (the "Deferred Compensation Plan") allows each member of the Genzyme Board who is not also an officer or employee of Genzyme to defer receipt of all or a portion of the cash compensation payable to him or her as a director of Genzyme. Compensation may be deferred until the termination of services as a director or, subject to certain restrictions, such other date as may be specified by the director. All of the current director of Genzyme, other than Mr. Termeer, are eligible to participate in the plan and as of December 31, 1996, six of the directors have elected to participate in the plan. The Company has reserved 50,000 shares of GGD Stock and 100,000 shares of GTR Stock to cover distributions of shares credited to stock accounts under the Deferred Compensation Plan (subject in each case to adjustment for stock splits, stock dividends and certain transactions affecting Genzyme's capital stock). As of December 31, 1996, no shares of General Division Stock or GTR Stock credited to stock accounts under the Deferred Compensation Plan have been distributed to participants in the Deferred Compensation Plan. STOCK OPTIONS Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"), options may be granted to purchase an aggregate of 19,800,000 shares of General Division Stock and 3,300,000 shares of GTR Stock. The Plan allows the granting of stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, the Company's has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 200,000 shares and 70,000 shares, respectively, of General Division Stock and GTR Stock are automatically granted at fair market value to members of the Board of Directors of the Company upon their election or reelection as Directors. For each year of a director's term of office, he or she receives an option to purchase 4,000 shares of General Division Stock and a number of GTR Stock options with a market value equal to one-quarter of the market value of the stock subject to the General Division Stock options. All options expire no later than ten years after the initial grant date and vest over various periods. At the Effective Date of the Genzyme Stock Proposal, Genzyme granted initial options to purchase a total of 939,851 shares of GTR Stock to employees of the Company who will devote a substantial portion of their efforts to GTR. These options, (i) had an exercise price of $4.75, the closing price of GTR Stock on the first date such shares were traded on the NASDAQ National Market System or the closing price of such shares on the six-month anniversary of such date, (ii) become exercisable 20% on the effective date of the grant and 20% on each of the next four anniversaries thereof and (iii) have a term of ten years. At the six month anniversary date the closing price of the GTR Stock was $6.25 and accordingly, compensation expense equal to 939,851 shares multiplied by the difference in the exercise price of $4.75 and $6.25, the six month anniversary price, will be recognized over the period of service of the holders. In 1996, GTR recorded $285,000 of related compensation expense and will record the balance of $220,000 over the next 2 years Stock option activity is summarized below:
SHARES WEIGHTED AVERAGE UNDER OPTION EXERCISE PRICE EXERCISABLE ------------ ---------------- ----------- GENZYME CORPORATION COMMON STOCK Outstanding at December 31, 1993.............. 7,690,708 15.35 Granted..................................... 3,238,728 14.93 Exercised................................... (132,756) 8.83 Forfeited and cancelled..................... (423,526) 19.08 Converted at Effective Date................. (10,373,154) 15.15 ---------- Outstanding at December 31, 1994.............. - ========== GENERAL DIVISION STOCK Converted at Effective Date................. 10,373,154 15.15 Granted..................................... 133,348 14.03 Exercised................................... (2,500) 5.85 Forfeited and cancelled..................... (22,302) 17.40 ---------- Outstanding at December 31, 1994.............. 10,481,700 15.13 4,683,967 Granted..................................... 4,141,502 23.25
79 81 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Exercised................................... (2,007,654) 13.97 Forfeited and cancelled..................... (442,882) 14.96 ---------- Outstanding at December 31, 1995.............. 12,172,666 17.79 5,138,502 Granted..................................... 3,442,484 29.16 Exercised................................... (906,041) 15.70 Forfeited and cancelled..................... (643,626) 22.81 ---------- Outstanding at December 31, 1996.............. 14,065,483 20.48 6,505,835 ========== TR STOCK Converted at Effective Date................. 464,824 5.01 Granted..................................... 940,976 4.75 ---------- Outstanding at December 31, 1994.............. 1,405,800 4.84 207,583 Granted..................................... 1,153,053 12.86 Exercised................................... (63,608) 5.15 Forfeited and cancelled..................... (76,202) 4.96 ---------- Outstanding at December 31,1995............... 2,419,043 8.66 713,584 Granted..................................... 830,916 12.88 Exercised................................... (102,921) 5.23 Forfeited and cancelled..................... (159,702) 9.50 ---------- Outstanding at December 31,1996............... 2,987,336 9.92 1,031,373 ==========
The total exercise proceeds for all options outstanding at December 31, 1996 is approximately $288,120,000 and $29,646,000 for General Division Stock and TR Stock, respectively. Information regarding the range of option prices as of December 31, 1996 is as follows: GENERAL DIVISION STOCK:
EXERCISABLE ----------- RANGE OF WEIGHTED WEIGHTED WEIGHTED EXERCISE PRICES AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE OUTSTANDING CONTRACTUAL PRICE OF OPTIONS PRICE LIFE - ----------------------------------------------------------------------------------------------------------- $ 3.79 - $12.09 1,583,744 3.04 $ 7.87 1,583,344 $ 7.87 $12.38 - $14.53 1,508,927 7.36 $14.03 438,382 $13.53 $14.56 - $15.14 1,497,478 7.27 $14.97 587,858 $14.92 $15.19 - $19.38 1,775,540 6.01 $17.74 1,370,438 $17.69 $19.42 - $21.00 1,553,430 8.17 $19.55 591,411 $19.59 $21.07 - $24.88 1,499,327 6.69 $23.73 1,016,437 $23.50 $25.00 - $28.00 2,035,931 8.84 $26.99 417,938 $25.81 $28.06 - $30.25 2,346,646 9.24 $30.16 447,401 $30.11 $30.31 - $37.25 257,676 8.90 $33.35 52,626 $31.64 $38.00 - $38.00 6,784 9.09 $38.00 0 $38.00 - ----------------------------------------------------------------------------------------------------------- $ 3.79 - $38.00 14,065,483 7.27 $20.48 6,505,835 $17.34
TISSUE REPAIR STOCK:
EXERCISABLE ----------- RANGE OF WEIGHTED WEIGHTED WEIGHTED EXERCISE PRICES AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE OUTSTANDING CONTRACTUAL PRICE OF OPTIONS PRICE LIFE - ----------------------------------------------------------------------------------------------------------- $ 1.32 - $ 4.25 157,420 4.48 $ 3.14 122,017 $ 2.83 $ 4.34 - $ 4.75 766,711 7.95 $ 4.75 461,056 $ 4.75 $ 4.78 - $ 5.49 153,148 6.70 $ 5.19 59,292 $ 5.29 $ 5.50 - $ 6.00 331,471 8.25 $ 5.97 130,277 $ 5.97 $ 6.00 - $11.88 250,390 7.71 $ 8.99 101,236 $ 7.96
80 82 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $12.25 - $12.25 466,284 9.30 $12.25 87,799 $12.25 $12.38 - $17.31 248,694 8.75 $15.10 55,398 $15.64 $17.50 - $17.50 537,207 8.96 $17.50 8,576 $17.50 $17.63 - $25.50 68,136 9.09 $20.77 5,722 $17.71 $25.75 - $25.75 7,875 7.66 $25.75 0 $ 0.00 - ----------------------------------------------------------------------------------------------------------- $ 1.32 - $25.75 2,987,336 8.20 $ 9.92 1,031,373 $ 6.42
EMPLOYEE STOCK PURCHASE PLAN The Company's 1990 Employee Stock Purchase Plan allows full-time employees, as defined in this plan, to purchase the Company's stock at 85% of fair market value. Under this plan, 1,500,000 shares of the General Division Stock are authorized, of which 291,053, 285,868 and 259,876 shares were issued in 1996, 1995 and 1994, respectively, and 600,000 shares of TR Stock are authorized, of which 325,300, 269,920, and 3,906 shares of TR Stock were issued in 1996, 1995 and 1994, respectively. STOCK COMPENSATION PLANS The Company applies APB Opinion 25 and related Interpretations in accounting for its three stock-based compensation plans, the 1990 Equity Incentive Plan (a stock option plan), the 1990 Employee Stock Purchase Plan (a stock purchase plan) and the 1988 Director Plan and accordingly, no compensation expense has been recognized for options granted and shares purchased under the plans provisions of these plans. Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the method of Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-based Compensation", the net (loss) income and (loss) earnings per share would have been as follows:
DECEMBER 31, ---------------------- (Amounts in thousands, except per share data) 1996 1995 - --------------------------------------------------------------------------- CONSOLIDATED Net income (loss): as reported ............................... $(72,817) $ 21,650 pro forma ................................. $(86,293) $ 17,261 GENERAL DIVISION Net income (loss): As reported ............................... $(30,502) $ 43,680 Pro forma ................................. $(40,558) $ 40,429 Primary earnings per share: As reported ............................... $ (0.45) $ 0.73 Pro forma ................................. $ (0.59) $ 0.67 Fully diluted earnings per share: As reported ............................... $ (0.45) $ 0.66 Pro forma ................................. $ (0.59) $ 0.61 TISSUE REPAIR Net income (loss): As reported ............................... $(42,315) $(22,030) Pro forma ................................. $(45,735) $(23,168) Primary and fully diluted loss per share: As reported ............................... $ (3.38) $ (2.28) Pro forma ................................. $ (3.65) $ (2.40)
81 83 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995 and additional awards are anticipated in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. In computing these pro forma amounts, the General Division has assumed a risk-free interest rate equal to approximately 6.37% and 6.33%, expected volatility of 45%, zero dividend yields and expected lives of four years for 1996 and 1995, respectively. The average fair value of the options granted during 1996 and 1995 is estimated as $11.98 and $11.52, respectively on the date of grant. In computing these pro forma amounts, the Tissue Repair Division has assumed a risk-free interest rate equal to approximately 6.37% and 6.33%, expected volatility of 80%, zero dividend yields and expected lives of four years for 1996 and 1995, respectively. The average fair value of the options granted during 1996 and 1995 is estimated as $9.23 and $10.06, respectively on the date of grant. STOCK RIGHTS In 1989, the Company's Board issued a dividend of one preferred stock purchase right (a "Common Stock Right") on each share of Common Stock. At the Effective Date, the Rights Agreement under which the rights were issued was amended and restated to reflect the change in the capital structure of the Company and the Board declared a distribution to holders of GTR Stock of a right (a "GTR Stock Right") on each outstanding share of GTR Stock. The Restated Rights Agreement provides that each General Division Stock Right, which replaced the Common Stock Right, and each GTR Stock Right, when it becomes exercisable, will entitle the holder to purchase from the Company (i) in the case of a General Division Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $26, subject to adjustment, and (ii) in the case of a GTR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $25, subject to adjustment. The rights expire on March 28, 1999. STOCK WARRANTS The Company has issued warrants which, when exercised, grant the holders two shares of General Division Stock and .135 share of GTR Stock for each warrant exercised. These warrants were granted in exchange for the receipt of options to purchase the partnership interests of Genzyme Development Partners, L.P. ("GDP"), the callable common stock of Neozyme II Corporation ("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc. ("IG") in exchange for IG warrants. All proceeds from the exercise of these warrants will be attributed to the General Division (see "GTR Designated Shares"). The outstanding warrants were issued under the following terms:
EXERCISE ISSUE NUMBER OF PRICE DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD - ---- ------------------------ --------- --------- --------------- 1992 Investors in Neozyme II: Callable Warrants 29,314 $44.202 December 6, 1996 to December 31, 1998 1995 Dr. Richard Warren 6,005 $42.670 Through September 30, 2000
The warrants granted in exchange for the receipt of options to purchase the partnership units of GDP expired on October 31, 1996. On October 28, 1996, the Company completed a tender offer for the outstanding Units of Neozyme II and acquired 2,385,686 of the 2,415,000 Units outstanding (See Note B. Acquisitions). On December 6, 1996, Neozyme II was merged with and into a subsidiary of Genzyme, and the remaining 29,314 Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger and became exercisable. Warrant activity is summarized below:
WARRANTS WARRANT PRICE -------- ------------- Outstanding at December 31, 1993.............. 8,156,004 16.01 - 38.25 Exercised................................. (2,197,774) 16.01 - 22.91 Expired................................... (23,849) 16.01 - 22.91 --------- Outstanding at December 31, 1994.............. 5,934,381 16.01 - 38.25
82 84 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Granted................................... 6,005 42.67 Exercised................................. (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995.............. 5,597,241 16.01 - 42.67 --------- Exercised................................. (3,170,551) 16.01 - 38.25 Tendered.................................. (2,385,686) N/A Expired................................... (5,685) 16.01 - 38.25 --------- Outstanding at December 31, 1996.............. 35,319 42.67 - 44.20 =========
Included in other current assets is $87.0 million for proceeds from warrant exercises at the end of the year. GTR DESIGNATED SHARES Pursuant to Genzyme's Articles of Organization, as amended, GTR Designated Shares are authorized shares of GTR Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GTR. GTR Designated Shares are created in certain circumstances when cash or other assets are transferred from the General Division to the Tissue Repair Division. The number of GTR Designated Shares will be decreased by the number of shares of GTR Stock issued by Genzyme, the proceeds of which are allocated to the General Division; the number of shares of GTR Stock issued as a dividend to holders of General Division stock; and the number of shares of GTR Stock issued upon the conversion of convertible securities, including the Notes, attributed to the General Division. In addition, the number of GTR Designated Shares can be increased as a result of certain inter-division transactions. At the Effective Date, December 14, 1994, 5,000,000 GTR Designated Shares were established. As a result of the distribution of approximately 3,300,000 shares of GTR Stock to holders of General Division Stock, the number of GTR Designated Shares were reduced by a corresponding amount. The remaining 1,700,000 GTR Designated Shares were reserved for issuance upon the exercise of Genzyme stock options and warrants and the conversion of Genzyme's convertible notes which were outstanding on the Effective Date. 83 85 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to the stock proposal Genzyme retains an option to allocate to GTR, at $10 per GTR Designated Share, up to $30 million from the General Division (the "Purchase Option") in exchange for a maximum of 3,000,000 of GTR Designated Shares to be issued in connection with the exercise of the Purchase Option. In June 1996, pursuant to the terms of the Purchase Option, the Genzyme Board elected to allocate $10 million in cash from the General Division to the Tissue Repair Division in exchange for 1,000,000 GTR Designated Shares which were reserved for issuance at the sole discretion of the Genzyme Board for the benefit of the General Division stockholders. In October 1996, the Genzyme Board approved the allocation of up to $20 million in cash from the General Division to the Tissue Repair Division (the "GTR Equity Line") to provide initial funding for the joint venture with Diacrin, in exchange for an increase in the number of GTR Designated Shares at a rate determined by dividing the amount of cash so allocated by the average of the daily closing prices of one share of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. As of December 31, 1996, the Company had allocated $1.9 million from the General Division to the Tissue Repair Division under the GTR Equity Line and 231,645 GTR Designated Shares were reserved for issuance at the Genzyme Board's discretion. If, as of May 31 of each year starting May 31, 1997, the number of GTR Designated Shares on such date (not including those reserved for issuance with respect to General Division convertible securities as a result of anti-dilution adjustments required by the terms of such instruments by the Genzyme Board) exceeds ten percent (10%) of the number of shares of GTR Stock then issued and outstanding, then substantially all GTR Designated Shares will be distributed to holders of record of General Division Stock, subject to reservation of a number of such shares equal to the sum of (a) the number of GTR Designated Shares reserved for issuance upon the exercise or conversion of General Division convertible securities and (b) the number of GTR Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to the General Division. DIVIDEND POLICY The Company has never paid any cash dividends on shares of its capital stock. Genzyme currently intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends on Genzyme Common Stock in the foreseeable future. GTR Designated Shares activity is summarized below:
TR DESIGNATED SHARES ------------- Established at Effective Date........................... 5,000,000 Stock dividend to holders of Genzyme Common Stock....... (3,356,713) Stock options exercised................................. (168) Stock warrants exercised................................ (233,412) --------- Balance at December 31, 1994..................... 1,409,707 Stock options exercised................................. (72,942) Stock warrants exercised................................ (46,244) ESPP shares issued...................................... (3,613) Balance at December 31, 1995..................... 1,286,908 --------- Stock options exercised................................. (42,728) Stock warrants exercised............................ (426,984) Convertible notes conversion........................ (255,249) Increase from equity line........................... 231,645 Exercise of call.................................... 1,000,000 --------- Balance at December 31, 1996..................... 1,793,592 =========
NOTE J. RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following:
(DOLLARS IN THOUSANDS) 1996 1995 1994 -------------------------------------------------------------------------------- Fees for research and development activities: Surgical Aids Partnership ................ -- -- 913 Neozyme II ............................... 19,799 24,198 17,785 GTC ...................................... 3,212 2,560 2,185 ------- ------- ------- $23,011 $26,758 $20,883 ======= ======= =======
The Company's allocates all research and development agreements ("R&D Agreements") with unconsolidated affiliates to either the General Division or Tissue Repair Division based upon the business nature of such agreements. GENZYME GENERAL: - ---------------- THE SURGICAL AIDS PARTNERSHIP Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme, is the General Partner of Genzyme Development Partners, L.P. (the "Partnership" or the "Surgical Aids Partnership"), a Delaware limited partnership which was formed in September 1989 with the objective to develop, produce and derive income from the sale of products (the "Surgical Products") based on hyaluronic acid ("HA"). Such Surgical Products are intended to be used to limit the incidence and severity of postoperative adhesions and, in arthroscopic procedures of the joints, as a synovial fluid replacement. In September 1989, the Company entered into a development contract valued at approximately $37.0 million with the Surgical Aids Partnership to perform research and development of the Products and received a technology license fee of $1.5 million in November 1989 from the Partnership. The Company was reimbursed for its development costs plus 10% through the first quarter of 1994 when the Partnership's funds were exhausted. The Company has an option (the "Purchase Option") to purchase all of the outstanding partnership interests for a payment of approximately $26.0 million in cash, General Division Stock or a combination thereof determined at Genzyme's sole discretion, plus future royalty payments. The Purchase Option does not become exercisable until at least twenty-four months after the first commercial sale of a product of the Partnership and certain returns have been earned by the Partnership. Upon exhaustion of the Partnership's available funds, the terms of the Purchase Option provided that the Purchase Option would terminate, and the Partnership would be free to sell, license or otherwise realize upon the value of its technology, unless Genzyme committed on an annual basis to provide funding for continuation of the research and development programs for the next twelve month period or until receipt of FDA marketing approval for one of the HAL(TM) products is obtained, whichever was shorter. Genzyme elected without obligation to fund these activities in 1994, 1995, 1996 using General Division cash and spent approximately $6.5 million, $6.4 million and $6.0 million on the Partnership's programs in 1994, 1995 and 1996, respectively. On August 13, 1996, the U.S. Food and Drug Administration ("FDA") granted approval to market Seprafilm[R] for use in any open abdominal or pelvic surgery at 38 86 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS which time Genzyme was no longer required to commit on an annual basis to provide additional funding for the development programs as a condition of maintaining its Purchase Option. The Company has agreed to fund the Partnership's research and development programs through 1997 but, as General Partner, believes that additional funds will be required to complete the development, clinical testing and commercialization of the Partnership's products. The Company and the Partnership formed a joint venture (the "Joint Venture"), in September 1989 for the purpose of manufacturing and marketing the Surgical Products in the United States and Canada for use in human clinical trials or human surgical procedures, other than in ophthalmic surgery. In December 1994, the Company allocated its interests in the Joint Venture to the General Division which acts as General Partner in the Partnership on behalf of the Company. The Partnership has contributed its technology and $0.2 million to the Joint Venture and the General Division has contributed its agreement to manufacture and market the Surgical Products, to make non-interest bearing loans to the Joint Venture in the amount of any working capital deficiency, agreed to make capital contributions to the extent deemed necessary by the two venturers in connection with the business of the Joint Venture and to allow the use of such trademarks, tradenames and logos as the venturers shall determine to be necessary and advisable for manufacturing and marketing the Surgical Products within the United States and Canada. The Joint Venture began to engage in active business after receipt of FDA marketing approval for Seprafilm[TM] in August 1996. For the year ended December 31, 1996, the Joint Venture earned revenues of $0.5 million from the sale of Surgical Products and incurred net losses of $3.4 million, primarily attributable to costs associated with the introduction of the Surgical Products to the healthcare marketplace. The losses were allocated $3.2 million directly to the General Division as a joint venturer and $0.2 million to the General Division as the General Partner of the Partnership, the latter representing both the General Partner's 1% interest in the losses of the Joint Venture and the re-allocation of the limited partners' 99% share of the Partnership's portion of the Joint Ventures losses to the General Partner pursuant to the terms of the Partnership agreement. Joint Venture financial statements are not presented as the impact of the Joint Venture's activities on the Company's statement of operations for the year ended December 31, 1996 is not considered to be material. NEOZYME II In 1992, the Company entered into a development contract with Neozyme II Corporation ("Neozyme II") whereby the Company was engaged to perform all research, development and clinical testing activities related to products and programs for which Neozyme II was licensed. Pursuant to the terms of the Development Agreement between Genzyme and Neozyme II, Neozyme II was required to reimburse the Company for research and development expenses incurred by Genzyme on behalf of the Neozyme II development programs and fulfilled this obligation through October 1996, at which time Genzyme acquired 98.8 percent outstanding Neozyme II Units through a tender offer. (See Note B. Acquisitions) GTC See "Note D. Investments" for a complete description of the research and development funding agreement between the Company and GTC. TISSUE REPAIR DIVISION: - ----------------------- DIACRIN/GENZYME LLC On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between the GTR and Diacrin to develop and commercialize products and processes for use in the treatment of Parkinson's disease and Huntington's disease in humans using porcine fetal cells. Under the terms of the joint venture agreement, GTR will provide 80% of the next $50 million in funding for products to be developed by the joint venture. After that, all costs will be shared equally between GTR and Diacrin. Profits from the joint venture will be shared by the two parties. The General Division has agreed to provide funding to GTR in support of GTR's joint venture efforts in exchange for GTR Designated Shares. In 1996, the General Division allocated $1.9 million in cash and 231,645 GTR Designated Shares were reserved for issuance at the Genzyme Board's discretion. As of December 31, 1996, GTR provided $1.9 million of funding to the joint venture and GTR realized a net loss of $1.7 million from the joint venture. Joint Venture financial statements are not presented as the impact of the Joint Venture's activities on the Company's statement of operations for the year ended December 31, 1996 is not considered to be material. NOTE K. COMMITMENTS AND CONTINGENCIES In December 1994, the Company fully settled litigation brought by Granada BioSciences, Inc., Houston, Texas, by payment of $2.0 million in cash. The dispute arose out of a contract between Granada R&D Ventures, a predecessor of Granada BioSciences, and Integrated Genetics, prior to its merger with the Company in 1989, regarding development of recombinant fertility hormones for cows and other animals. 39 87 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS From time to time the Company has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1996, there were no asserted claims against the Company which, in the opinion of management, if adversely decided would have a material adverse effect on the Company's financial position and results of operations. NOTE L. INCOME TAXES Income (loss) before income taxes and the related income tax expense (benefit) are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1996 1995 1994 ------------------------------------------------------------------------------------------------------ Domestic (includes $130.3 million in charges for purchased research and development and acquisition expenses in 1996, and includes $15.2 million and $11.2 million in charges for purchased research and development in 1995 and 1994, respectively) ................................................ $(37,615) $ 40,551 $ 27,217 Foreign ........................................................ 10,308 2,748 3,567 -------- -------- -------- Total .......................................................... $(27,307) $ 43,299 $ 30,784 ======== ======== ======== (DOLLARS IN THOUSANDS) 1996 1995 1994 ------------------------------------------------------------------------------------------------------ Currently payable: Federal ..................................................... $ 23,174 $ 11,051 $ 8,565 State ....................................................... 4,689 4,803 3,627 Foreign ..................................................... 3,616 1,367 850 -------- -------- -------- Total current ............................................ 31,479 17,221 13,042 Deferred: Federal ..................................................... (28,448) 4,507 1,092 State ....................................................... 164 (79) 347 -------- -------- -------- Total deferred ........................................... (28,284) 4,428 1,439 -------- -------- -------- Provision for income taxes $ 3,195 $ 21,649 $ 14,481 ======== ======== ========
Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following reasons:
1996 1995 1994 ------------------------------------------------------------------------------------------------------ Tax at U.S. statutory rate ...................................... 35.0% 35.0% 35.0 % Losses in foreign subsidiary and less than 80%-owned subsidiaries with no current tax benefit ....................... 1.4 1.0 2.5 State taxes, net ................................................ 5.2 5.2 5.7 Foreign sales corporation ....................................... (3.6) (2.0) (4.3) Nondeductible amortization ...................................... 3.6 1.9 2.2 Benefit of tax credits .......................................... -- -- (2.9) Other, net ...................................................... 3.7 1.1 (6.3) Utilization of operating loss carryforwards ..................... (4.5) (5.2) -- ----- ---- ---- Effective tax rate before certain charges expense ............. 40.8 37.0 31.9 Charge for purchased research and development net of related tax benefits ........................................... (36.3) 13.0 14.9 ----- ---- ---- Effective tax rate expense .................................... 4.5% 50.0% 46.8 % ===== ==== ====
At December 31 the components of net deferred tax assets were as follows : 40 88 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 10,427 $ 10,216 Intangible amortization 47,988 32,161 Realized and unrealized capital losses 10,798 10,581 Reserves and other 19,670 9,609 -------- -------- Gross deferred tax asset 88,883 62,567 Valuation allowance (15,299) (20,637) -------- -------- Net deferred tax asset 73,584 41,930 Deferred tax liabilities: Depreciable assets (13,871) (10,556) -------- -------- Net deferred tax asset $ 59,713 $ 31,374 ======== ========
Due to uncertainty surrounding the realization of certain favorable tax attributes primarily relating to capital losses and the purchase of in-process research and development, the Company placed a valuation allowance of $15.3 million and $20.6 million for December 31, 1996 and December 31, 1995, respectively, against otherwise recognizable deferred tax assets. During 1996, the Company determined that it is more likely than not that certain deferred tax assets will be realized and, accordingly, eliminated the related valuation allowance of approximately $4.3 million, of which approximately $1.5 million was recorded as a reduction of goodwill. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At December 31, 1996, the Company had U.S. net operating loss carryforwards of $26.4 million for income tax purposes. These carryforwards expire from 2000 to 2010. Utilization of tax net operating loss carryforwards may be limited under section 382 of the internal Revenue Code of 1986. At December 31, 1996 the Company had U.S. net operating loss carryforwards of $27 million for income tax purposes. These carryforwards expire from 2001 to 2011. Utilization of tax net operating loss carryforwards may be limited under Section 382 of the Internal Revenue code of 1986. At December 31, 1996 the Company also had UK operating loss carryforwards for income tax purposes of approximately $2.9 million which are indefinitely available to offset future taxable income in the UK. NOTE M. BENEFIT PLANS Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of the Company with the exception of employees of DSP which have a separate retirement savings plan. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by the Company. The Company contributed $1.1 million, $0.7 million, and $0.6 million to the plan in 1996, 1995 and 1994, respectively. The Company has defined-benefit pension plans covering substantially all the employees of DSP and its foreign subsidiaries. Pension expense for 1996, 1995 and 1994 was $601,000, $498,000 and $266,000, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans except for the plan of DSP and its subsidiary in Germany are not presented because they are not material. DSP has a defined benefit pension plan, which covers substantially all U.S. employees of DSP, excluding those employed by DSP's Snowden Pencer Inc. subsidiary. Plan assets consist primarily of U.S. government and corporate securities. The funded status of the pension plan at December 31, 1996 was as follows (in thousands):
1996 ------- Actual present value of accumulated benefit obligation: Vested........................................................ $ 4,720 Nonvested..................................................... 481 ------- $ 5,201 ======= Projected benefit obligation.................................... $ 5,201 Plan assets at market value..................................... 4,338 ------- Funded status -- plan assets less projected benefit obligation.. $ (863) Unrecognized net loss from past experience different from that assumed and changes in actuarial assumptions.................. (94) ------- Accrued pension cost.......................................... $ (957) ======= Assumptions used in computation of 1996 are as follows: 1996 ------- Weighted average discount....................................... 7.75% Expected long-term rate of return on assets..................... 9.00% Rate of increase in future compensation levels.................. Plan Frozen Benefits under the pension plan are generally based on years of service and the employee's career earnings. Employees become fully vested after five years. A summary of the components of net periodic pension cost for 1996 is as follows (thousands): 1996 ------- Service cost.................................................... $ 0 Interest cost................................................... 195 Actual return on plan assets.................................... (276) Net amortization and deferral................................... 94 ------- Net periodic pension cost..................................... $ 13 ======= DSP's German subsidiary also has a defined benefit pension plan for its employees. The funded status of the pension plan at December 31, 1996 was as follows (in thousands): 1996 ------- Actual present value of accumulated benefit obligation: Vested........................................................ $ 1,592 Nonvested..................................................... 140 ------- $ 1,732 ======= Projected benefit obligation.................................... $ 1,998 Plan assets at market value..................................... -- ------- Funded status -- plan assets less projected benefit obligation.. $(1,998) Unrecognized net loss from past experience different from that assumed and changes in actuarial assumptions.................. (353) ------- Accrued pension cost.......................................... $(2,351) ======= Assumptions used in computation of 1996 are as follows: 1996 ------- Expected long-term rate of return on assets..................... 6.5% Rate of increase in future compensation levels.................. N/A Weighted average discount....................................... 3.0% Benefits under the pension plan are generally based on years of service and the employee's career earnings. Employees become fully vested after five years. A summary of the components of net periodic pension cost for 1996 is as follows (thousands): 1996 ------- Service cost.................................................... $ 129 Interest cost................................................... 129 Net amortization and deferral................................... (20) ------- Net periodic pension cost..................................... $ 238 =======
DSP has a savings and investment plan for all U.S. employees. Employee contributions to the savings plan can be made both on a pre-tax (salary deferral) and after-tax basis. DSP may make a matching contribution in an amount equal to 100% of the first 2% of employee salary deferral contributions and 50% of the next 4% of employee salary deferrals (subject to certain limitations as defined in the plan). DSP matched pre-tax salary deferrals totaling $332,000 in fiscal 1996. Employees of Snowden Pencer, Inc., a subsidiary of DSP, also participate in a noncontributory profit sharing plan. The plan provides for discretionary contributions to be determined annually. In 1996, DSP recorded $100,000 charge for contributions to the plan. NOTE N. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS The Company operates in the human healthcare industry and manufactures and markets its products in two major geographic areas, the United States and Europe. The Company's principal manufacturing facilities are located in the United States, United Kingdom, Switzerland and Germany. The Company purchases products from its British, Swiss and German subsidiaries for sale to customers in the United States. Transfer prices from the foreign subsidiaries are intended to allow the United States parent to produce profit margins commensurate with its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary European distributor of the Company's therapeutic products. Certain information by geographic area follows (dollars in thousands): 41 89 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNITED STATES NETHERLANDS OTHER ELIMINATION COMBINATION ------ ----------- ----- ----------- ----------- 1996 ---- Net sales-unaffiliated customers ... $ 361,635 $56,865 $ 74,933 $ -- $ 493,433 Transfers between geographic areas . 101,786 33,659 34,050 (169,495) -- ---------- ------- -------- --------- ---------- 463,421 90,524 108,983 (169,495) 493,433 Pre-tax income (loss) .............. (72,439) 920 10,156 (8,259) (69,622) Net income (loss) .................. (51,661) 520 9,193 (30,869) (72,817) Assets ............................. 1,210,534 33,500 110,890 (85,636) 1,270,508 Liabilities ........................ 306,618 31,930 29,651 368,199 1995 ---- Net sales unaffiliated customers . $ 252,358 $70,532 $ 33,933 $ -- $ 356,823 Transfers between geographic areas.. 74,697 -- 23,658 (98,355) -- ---------- ------- -------- --------- ---------- 327,055 70,532 57,591 (98,355) 356,823 Pre-tax income (loss) .............. 43,911 836 1,852 (3,300) 43,299 Net income (loss) .................. 23,826 540 584 (3,300) 21,650 Assets ............................. 923,867 27,703 80,287 (126,656) 905,201 Liabilities ........................ 161,338 26,652 12,004 -- 199,994 1994 ---- Net sales unaffiliated customers . $ 224,655 $38,535 $ 25,465 $ -- $ 288,655 Transfers between geographic areas . 38,590 -- 12,784 (51,374) -- ---------- ------- -------- --------- ---------- 263,245 38,535 38,249 (51,374) 288,655 Pre-tax income (loss) .............. 28,544 578 3,155 (1,493) 30,784 Net income (loss) .................. 14,736 417 2,643 (1,493) 16,303 Assets ............................. 637,024 16,384 69,130 (64,130) 658,408 Liabilities ........................ 212,027 15,704 11,713 -- 239,444
All revenue from research and development contracts is earned in the United States. Entities comprising Other include the Company's operations in the United Kingdom, Belgium, France, Japan, Sweden, Switzerland, Italy and Germany. Export sales from the United States were $27.4 million, $20.5 million, and $23.9 million in 1996, 1995 and 1994, respectively. Export sales by the Netherlands subsidiary amounted to $56.9 million and $66.2 million in 1996 and 1995, respectively. The Company's results of operations are highly dependent upon the sales of Ceredase(R)/Cerezyme(R) enzyme. In 1996, 1995 and 1994, the Company marketed its Ceredase(R)/Cerezyme(R) enzyme product directly to physicians, hospitals and treatment centers, and sold products representing approximately 12%, 14% and 17%, respectively, of net revenue to an unaffiliated distributor. Otherwise, the credit risk associated with trade receivables is mitigated due to the large number of customers and their broad dispersion over different industries and geographic areas. NOTE O. QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1996, 1995, and 1994 are displayed in the following table.
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1996 - ---- Net sales ............................... $113,497 $115,635 $142,883 $146,739 Gross profit ............................ 63,459 65,451 73,212 81,299 Net income (loss) (2) ................... 10,292 9,784 (15,840) (77,053) Income per share (1):
42 90 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Attributable to General Division Stock: Primary ............................... 0.27 0.27 (0.09) (0.91) Fully diluted ......................... 0.25 0.27 (0.09) (0.91) Attributable to GTR Stock .............. (0.71) (0.83) (0.78) (1.02) 1995 - ---- Net sales ................................. $ 88,189 $ 93,605 $ 95,919 $106,070 Gross profit .............................. 47,683 48,433 53,185 57,690 Net income (3) ............................ 8,056 7,940 10,710 (5,056) Income (loss) per share (1): Attributable to General Division Stock: Primary ............................... 0.22 0.23 0.26 0.04 Fully diluted ......................... 0.20 0.22 0.24 0.04 Attributable to GTR Stock .............. (0.45) (0.57) (0.59) (0.64) 1994 - ---- Net sales ................................. $ 73,282 $ 75,378 $ 79,180 $ 83,211 Gross profit .............................. 40,049 40,101 41,407 42,469 Net income (4) ............................ 9,062 8,493 9,006 (10,258) Income (loss) per share (1): Attributable to General Division Stock: Primary ............................... 0.19 0.19 0.18 0.04 Fully diluted ......................... 0.18 0.18 0.17 0.04 Attributable to GTR Stock .............. (0.25) (0.34) (0.32) (3.56) (1) Cumulative quarterly income per share data does not equal the annual amounts due to changes in the average common and common equivalent shares outstanding. (2) Includes charges in the third quarter and fourth quarter of 1996 of $24.2 million and $106.5 million, respectively, for acquired incomplete technology. (See "Note B Acquisitions"). (3) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired incomplete technology. (See Note B). (4) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes D and K) for the write down of investments and the settlement of a lawsuit and an $11.2 million charge for acquired incomplete technology related to the acquisition of Bio Surface Technology, Inc.
NOTE P. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments represent various degrees and types of risk to the Company, including credit, interest rate and liquidity risk. In the normal course of its business the Company enters into interest rate swap contracts to hedge its interest rate risk related to its variable rate notes payable. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments under the contract are based. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties based on a common notional principal amount and maturity date. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. At December 31, 1996, the Company has one swap agreement with a notional value of approximately $100,000,000. The agreement matures in 1999. NOTE Q. SUBSEQUENT EVENTS In January 1997, Genzyme signed a merger agreement providing for the merger of PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the research and development of pharmaceuticals for the treatment of cancer, into Genzyme in exchange for 4,000,000 shares of a new Genzyme security to be designated Genzyme Molecular Oncology Common Stock ("GMO Stock"). The GMO Stock is intended to reflect the value and track the performance of the Molecular Oncology Division, a new division proposed by Genzyme to develop and market novel products for the diagnosis and treatment of cancer. The 4,000,000 shares of GMO Stock to be issued in the merger represent 40% of the initial equity interest in the Molecular Oncology Division. The remaining 60% will be allocated to the General Division in the form of 6,000,000 GMO Designated Shares. The merger is subject to the approval of the stockholders of Genzyme and PharmaGenics. In January 1997, the Tissue Repair Division leased to the General Division certain laboratory and office space in the building located at the Tissue Repair Division's Framingham, Massachusetts facility for a 3-year term commencing January 1, 1997. The General Division will lease approximately half of the facility at a cost of $839,808 per year. Beginning on July 1, 1997, the Tissue Repair Division has the option of requiring the General Division to assume responsibility for an additional 20% of the facility at a cost of $424,056 per year. In February 1997, the Tissue Repair Division raised $13 million through the private placement of a 5% convertible note to Credit Suisse First Boston due February 27, 2000. The note is convertible beginning May 29, 1997 into shares of GTR stock at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 43 91 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price preceding the conversion date or the date 15 months after the date of issue. 44 92 GENZYME CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
========================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------------------------------------------------------------------- ADDITIONS ----------------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ------------------------------------------------------------------------------------------------------------ Year ended December 31, 1996: Allowance for doubtful accounts $8,158,800 $8,331,600 $2,534,000(2) $2,516,000(1) $16,508,400 Inventory Reserve $3,082,200 $1,426,600 $1,261,600 $ 3,247,200 Year ended December 31, 1995: Allowance for doubtful accounts $6,169,100 $5,390,000 $3,400,100(1) $ 8,159,000 Inventory Reserve $1,131,000 $2,920,700 $ 969,500 $ 3,082,200 Year ended December 31, 1994: Allowance for doubtful accounts $5,317,600 $4,330,800 $ 176,800(2) $3,656,100(1) $ 6,169,100 Inventory Reserve $1,321,500 $ 514,000 $ 704,500 $ 1,131,000 (1) Uncollectible accounts written off, net of recoveries. (2) Reserve acquired in acquisition.
45 93 EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION Although the financial statements of the General Division and Tissue Repair Division separately report the assets, liabilities and stockholders' equity of Genzyme attributable to each such group, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among the General Division and Tissue Repair Division does not affect legal title to such assets or responsibility for such liabilities. Holders of General Division Stock and Tissue Repair Stock are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Financial impacts arising from one Division that affect the overall cost of Genzyme's capital could affect the results of operations and financial condition of the other Division. Accordingly, the Genzyme consolidated financial information should be read in connection with the financial information of each Division. 46 94 GENZYME GENERAL DIVISION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: We have audited the accompanying combined balance sheets of Genzyme General Division (as described in Note A) as of December 31, 1996 and 1995, the related combined statements of operations and cash flows, and the combined financial statement schedule for each of the three years in the period ended December 31, 1996. The combined financial statements and financial statement schedule are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements of Genzyme General Division present fairly, in all material respects, the financial position of Genzyme General Division as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the combined financial statement schedule taken as a whole presents fairly, in all material respects, the information required to be included therein. As more fully described in Note A to these financial statements, Genzyme General Division is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme General Division should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. Coopers & Lybrand L.L.P. Boston, Massachusetts February 27, 1997 47 95 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------ 1996 1995 1994 ---- ---- ---- Revenues: Net product sales ........................................... $424,483 $304,373 $238,645 Net service sales ........................................... 61,638 47,230 49,686 Revenues from research and development contracts: Related parties ........................................... 23,011 26,758 20,883 Other ..................................................... 2,310 202 1,513 -------- -------- -------- 511,442 378,563 310,727 Operating costs and expenses: Cost of products sold ....................................... 155,930 113,964 92,226 Cost of services sold ....................................... 42,889 31,137 32,116 Selling, general and administrative ......................... 135,153 97,520 80,026 Research and development (including research and development related to contracts) .......................... 69,969 57,907 51,696 Amortization of intangibles.................................. 8,849 4,647 4,741 Purchase of in-process research and development ............. 130,639 14,216 -- Restructuring charges ....................................... 1,465 -- -- -------- -------- -------- 544,894 319,391 260,805 ------- ------- -------- Operating income (loss) ......................................... (33,452) 59,172 49,922 Other income and (expenses): Minority interest in net loss of subsidiaries ............... -- 1,608 1,659 Equity in net loss of unconsolidated subsidiaries ........... (2,633) (1,810) (1,353) Gain on investments and charge for impaired investments ..... 1,711 -- (9,431) Settlement of lawsuit ....................................... -- -- (1,980) Investment income ........................................... 13,909 7,428 9,072 Interest expense ............................................ (6,842) (1,069) (1,354) -------- -------- -------- 6,145 6,157 (3,387) -------- -------- -------- Income (loss) before income taxes ............................... (27,307) 65,329 46,535 Provision for income taxes ...................................... (20,206) (30,506) (16,341) -------- -------- -------- Net income (loss) ............................................... (47,513) 34,823 30,194 Tax benefit allocated from Tissue Repair Division ............... 17,011 8,857 1,860 -------- -------- -------- Net income (loss) attributable to Genzyme General Division Stock $(30,502) $ 43,680 $ 32,054 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. 48 96 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------ 1996 1995 1994 ---- ---- ---- Net income (loss) attributable to Genzyme General Division Stock ...... $(30,502) $ 43,680 $ 32,054 ======== ======== ======== Income (loss) per General Division common and common equivalent share: Net income (loss)...................................................... $ (0.45) $ 0.73 $ 0.61 ======== ======== ======== Weighted average shares outstanding................................ 68,289 60,185 52,338 ======== ======== ======== Income (loss) per General Division common share assuming full dilution: Net income (loss).................................................. $ (0.45) $ 0.66 $ 0.57 ======== ======== ======== Weighted average shares outstanding................................ 68,289 66,621 56,318 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. 97 GENZYME GENERAL DIVISION COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------------------------------- 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents................................................. $ 77,220 $ 103,631 Short-term investments.................................................... 56,290 105,471 Accounts receivable, less allowance of $16,100 in 1996 and $7,833 in 1995 115,156 87,121 Inventories............................................................... 123,442 52,281 Prepaid expenses and other current assets................................. 99,953 12,345 Due from Tissue Repair Division........................................... 1,604 2,034 Deferred tax assets - current............................................. 17,493 7,729 ---------- ---------- Total current assets....................................................... 491,158 370,612 Property, plant and equipment, net........................................... 371,610 327,461 Other Assets: Long-term investments..................................................... 38,215 69,561 Note receivable - related party........................................... - 262 Intangibles, net of accumulated amortization of $26,189 in 1996 and $17,340 in 1995....................................................... 247,745 29,934 Deferred tax assets - noncurrent.......................................... 42,221 23,645 Other noncurrent assets................................................... 38,570 33,111 ---------- ---------- 366,751 156,513 ---------- ---------- $1,229,519 $ 854,586 ========== ========== LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable.......................................................... $ 20,522 $ 19,548 Accrued expenses.......................................................... 67,645 38,069 Income taxes payable...................................................... 17,926 1,316 Deferred revenue - related parties and unaffiliated entities.............. 2,693 1,367 Current portion of long-term debt and capital lease obligations........... 999 2,276 ---------- ---------- Total current liabilities............................................... 109,785 62,576 Noncurrent Liabilities: Long-term debt and capital lease obligations.............................. 223,998 124,473 Other noncurrent liabilities.............................................. 11,511 8,256 ---------- ---------- 235,509 132,729 Commitments and Contingencies (See Notes) Division equity (Note C)..................................................... 884,225 659,281 ---------- ---------- $1,229,519 $ 854,586 ========== ==========
The accompanying notes are an integral part of these combined financial statements. 51 98 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1996 1995 1994 Net income............................................................... $ (47,513) $ 34,823 $ 30,194 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization......................................... 29,257 22,010 18,200 Gain (loss) on sale of investments.................................... (1,663) 110 (1,430) Loss on disposal of fixed assets...................................... 42 743 - Non-cash compensation expense......................................... 148 131 - Write-off of impaired equity investments.............................. - - 9,431 Accrued interest/amortization on bonds................................ 1,110 (279) (2,072) Provision for bad debts............................................... 8,094 5,184 4,331 Purchase of in-process research and development....................... 130,639 14,216 - Deferred income taxes................................................. (28,558) 4,428 1,439 Minority interest in net loss of subsidiaries......................... - (1,608) (1,659) Equity in net loss of unconsolidated subsidiary....................... 3,646 1,810 1,353 Gain on investment in unconsolidated affiliate........................ (1,013) - - Other................................................................. 105 1,458 386 Increase (decrease) in cash from working capital changes net of acquired assets: Accounts receivable................................................ (18,318) (14,486) (14,712) Inventories........................................................ (39,120) (15,221) (10,858) Prepaid expenses and other current assets.......................... (379) (1,778) (1,958) Accounts payable, accrued expenses and income taxes payable........ 43,342 14,423 2,976 Due from Genzyme Tissue Repair Division............................ 430 (1,863) - --------- --------- --------- Net cash provided by operating activities.......................... 80,249 64,101 35,621 INVESTING ACTIVITIES: Purchases of investments................................................. (117,089) (125,835) (210,274) Purchases of restricted investments...................................... - (4,418) (10,000) Sales and maturities of investments...................................... 195,952 39,064 265,851 Acquisition of property, plant and equipment............................. (42,540) (48,694) (101,707) Acquisition, net of acquired cash and assumes liabilities................ (299,078) (322) (222) Additional investment in unconsolidated subsidiary....................... (3,600) (4,428) (1,465) Loans to affiliates...................................................... (1,676) - - Other noncurrent assets and other non current liabilities................ (7,621) (1,172) (3,221) --------- --------- --------- Net cash used by investing activities.............................. (275,652) (145,805) (61,038) FINANCING ACTIVITIES: Proceeds from issuance of common stock................................... 39,119 179,623 45,040 Proceeds from issuance of TR Stock....................................... - - 872 Proceeds from issuance of common stock by subsidiary..................... - 1,107 319 Issuance of debt......................................................... 480,000 - 21,819 Payments of debt and capital lease obligations........................... (340,333) (41,163) (4,793) Net cash allocated to GTR................................................ (11,714) - (13,993) --------- --------- --------- Net cash provided by financing activities.......................... 167,072 139,567 49,264 Effect of exchange rate changes on cash...................................... 1,920 (781) (273) --------- --------- --------- Increase (decrease) in cash and cash equivalents............................. (26,411) 57,082 23,574 Cash and cash equivalents, beginning of period............................... 103,631 46,549 22,975 --------- --------- --------- Cash and cash equivalents, end of period..................................... $ 77,220 $ 103,631 $ 46,549 ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. 51 99 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Supplemental cash flow information: Cash paid during the year for: Interest..................................................... $ 6,169 $ 9,944 $ 9,634 Income taxes.................................................. $14,133 19,581 13,506 Supplemental disclosures of non-cash transactions: Acquisition liability -- Note D Allocation of tax benefit -- Note B Warrant Exercises -- Note C Debt Conversion -- Note C
The accompanying notes are an integral part of these combined financial statements. 100 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme General Division (the "General Division"), a division of Genzyme Corporation (the "Company" or "Genzyme"), is a diversified human health care business with product development, manufacturing and marketing capabilities in therapeutic and diagnostic products, pharmaceuticals, and diagnostic services. BASIS OF PRESENTATION The combined financial statements of the General Division include the balance sheets, results of operations and cash flows of Genzyme's diagnostic products, pharmaceuticals, surgical products, specialty therapeutics and corporate operations during the periods presented. The General Division's financial statements are prepared using the amounts included in Genzyme's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be reasonable. PRINCIPLES OF COMBINATION The combined financial statements include the accounts of all of the wholly-owned subsidiaries of Genzyme, except for the accounts of the Tissue Repair Division ("GTR"). The equity method is used to account for investments in companies and joint ventures in which the General Division has a substantial ownership interest (20% to 50%), or in which the General Division participates in policy decisions. Investments of less than 20% are reported at fair value. All significant intercompany items and transactions have been eliminated in combination. ACCOUNTING POLICIES AND FINANCIAL INFORMATION The Company prepares consolidated financial statements of Genzyme Corporation and Subsidiaries and separate combined financial statements for the General Division and Tissue Repair Division (the "Divisions"). Although the financial statements of each Division separately report the assets, liabilities and stockholders' equity of Genzyme attributable to each such group, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among the Divisions does not affect legal title to such assets or responsibility for such liabilities. Holders of General Division Stock and TR Stock are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Liabilities or contingencies of the General Division GTR could affect the results of operations and financial condition of the other division. Accordingly, the combined financial statements of the General Division and Tissue Repair Division should be read in conjunction with the consolidated financial statements of Genzyme Corporation and Subsidiaries (the "Consolidated Financial Statements"). Accounting policies and financial information specific to the General Division are presented in these General Division combined financial statements. Accounting policies and financial information relevant to Genzyme, the General Division and the Tissue Repair Division are presented in the consolidated financial statements of Genzyme Corporation and Subsidiaries. The Company prepares the financial statements of the Divisions in accordance with generally accepted accounting principles, the accounting policies of Genzyme (see Note A. Summary of Significant Accounting Polices to the 52 101 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Consolidated Financial Statements which is incorporated herein by reference) and the divisional accounting policies approved by the Company's Board of Directors (the "Genzyme Board"). TRANSLATION OF FOREIGN CURRENCIES Exchange gains and losses on intercompany balances of a long-term investment nature are charged to division equity. Transaction gains and losses are included in the results of operations. Net transaction losses were $1.0 million in 1996 and $0.8 million in 1995. Net transaction loss information for 1994 is not presented as such losses did not have a material impact on the statement of operations for the year ended December 31, 1994. Division equity includes deficit cumulative foreign currency translation adjustments of $(0.7) million and $(3.6) million at December 31, 1996 and 1995. HEDGING FORWARD CONTRACTS The General Division had currency contracts valued at $0.9 million and $1.2 million at December 31, 1996 and 1995. Related gains and losses were not material to the consolidated financial statements. 54 102 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE B. RELATED PARTY TRANSACTIONS Genzyme allocates certain corporate general and administrative expenses, research and development expenses and income taxes in accordance with the policies described below. The divisional accounting policies require transactions between the Divisions be developed and accounted for as if the transactions were at arm's length between unrelated parties. The following policies may be further modified or rescinded by action of the Genzyme Board, or the Genzyme Board may adopt additional policies, without approval of the stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme stockholders, although the Genzyme Board has no present intention to do so. Financial Matters As a matter of policy, the Company manages the financial activities of the General Division and GTR on a centralized basis. These financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt and the issuance and repurchase of common stock. In preparing these financial statements for each of the three years in the period ended December 31, 1996, transactions primarily related to investments, short-term and long-term debt (including convertible debt), related net interest and other financial costs have been attributed to the General Division based upon its cash flows and the specific purpose for which the debt was incurred for the periods presented. The Company believes this method of allocation to be equitable and a reasonable estimate of such costs as if the General Division operated on a stand-alone basis. Loans may be made from time to time between divisions. Any such loan of $1 million or less will mature within 18 months and interest will accrue at the lowest borrowing rate available to Genzyme for a loan with similar terms and duration. Amounts borrowed in excess of $1 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. To date no such borrowings have occurred. 55 103 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS INTERDIVISION ASSET TRANSFERS The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations will be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likelihood and timing of any such realization and other matters that the Genzyme Board and its financial advisors deem relevant. The consideration for such reallocation may be paid by one division to another in cash or other consideration, in lieu of cash, with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from the General Division to the GTR, the Genzyme Board may elect to account for such reallocation of assets as an increase in GTR Designated Shares. Notwithstanding the foregoing, no Key GTR Program, as defined in the management and accounting policies, may be transferred out of GTR without a class vote of the holders of GTR Stock. SHARED SERVICES AND OTHER INTERDIVISION TRANSACTIONS The General Division operates as a division of Genzyme with its own personnel and financial resources, however, the General Division has access to Genzyme's extensive research and development capabilities, manufacturing facilities, worldwide clinical development and regulatory affairs staffs, marketing, infrastructure and experience in raising capital. Operating activities transacted directly by the General Division are recorded by the General Division, however, from time to time, the General Division may engage in transactions with the Tissue Repair Division or with the Tissue Repair Division and one or more third parties. Such transactions may include agreements by one division to provide products and services for use by the other division and joint ventures or other collaborative arrangements involving one or both divisions to develop new products and services jointly and with third parties. Research and development performed by one division for the benefit of the other division will be charged to the division for which work is performed on a cost basis. The division performing the research will not recognize revenue as a result of performing such research. Genzyme's corporate and general and administrative expenses, which are performed primarily by the General Division, or other indirect costs are allocated to each division on a cost basis based on utilization by the division of the services to which such costs relate. Other interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated at arm's length with unaffiliated third parties. Any interdivisional transaction to be performed on terms and conditions other than those previously set forth and that is material to one or more of the participating divisions will require the approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each division. If a division (the "Purchasing Division") requires any product or service from which the other division ( the "Selling Division") derives revenues from sales to third parties (a "Commercial Product or Service"), the Purchasing Division may solicit from the Selling Division a bid to provide such Commercial Product or Service in addition to any bids solicited by the Purchasing Division from third parties. Subject to determination by the Genzyme Board that the bid of the Selling Division is fair and reasonable to each division and to their respective stockholders and that the Purchasing Division is willing to accept the Selling Division's bid, the Purchasing Division may accept any bid deemed to offer the most favorable terms and conditions for providing the Commercial Product or Service sought by the Purchasing Division. Genzyme's corporate general and administrative functions and certain selling and marketing efforts are performed by the General Division. General and administrative and selling and marketing expenses have been allocated to GTR based upon utilization of such services as if GTR and General Division operated on a stand-alone basis. General Division allocations to GTR for general and administrative and selling and marketing expenses (incurred mostly in connection with developing European markets) were $9.1 million in 1996, $4.4 million in 1995 and $0.8 million in 1994. General Division allocations to GTR for research and development expenses were $6.9 million in 1996, $4.7 million in 1995 and $3.3 million in 1994. Amounts due from GTR for operating activities were $1.6 million and $2.0 million at December 31, 1996 and 1995. INTER-DIVISION INCOME TAX ALLOCATIONS The General Division and Tissue Repair are included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions by determining the tax provision of each division, in accordance with generally accepted accounting principles, as if it were a separate taxpayer. The realizability of deferred tax assets is assessed at the Division level. The sum of division tax provisions may not equal the consolidated tax provision under this approach. Pursuant to the management and accounting policies adopted by the Genzyme Board, as of the end of any fiscal quarter of Genzyme, any projected tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to any other division without any compensating payment or allocation. The treatment of such allocation for purposes of earnings per share computation is discussed in Note A, "Net Income (Loss) Per Share" in the Consolidated Financial Statements. 56 104 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE C DIVISION EQUITY The following analyzes the Division equity of the General Division for the periods presented:
(DOLLARS IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Balance at beginning of period .............................. $ 659,281 $ 395,649 $ 324,391 Net income (loss) ........................................... (47,429) 34,823 30,194 Allocation of tax benefits generated by Tissue Repair Division ................................................... 16,927 8,857 11,423 Exercise of options ......................................... 13,883 27,922 1,189 Shares issued in connection with Employee Stock Purchase Plan .............................................. 4,698 4,161 2,992 Exercise of warrants ........................................ 106,164 6,264 41,730 Shares issued in public offering ............................ -- 141,276 -- Issuance of Common Stock in connection with the conversion of $100M 6 3/4% Convertible Subordinated Notes ............. 101,400 -- -- Shares issued in connection with acquisitions ............... 36,991 23,821 -- Allocation to GTR ........................................... (11,714) -- (13,874) Tax benefit of disqualified dispositions .................... 3,500 5,500 2,224 Compensation expense ........................................ 123 131 Foreign currency translation ................................ 2,846 1,325 2,860 Unrealized gain/(loss) on investments ....................... (2,445) 9,552 (7,480) --------- --------- --------- $ 884,225 $ 659,281 $ 395,649 ========= ========= =========
In October 1995, Genzyme sold 5,750,000 shares of General Division Common Stock to the public for $25.63 per share for net proceeds of $141.3 million. Included in Division Equity is the cumulative foreign currency translation adjustments of $(0.7) million and $(3.6) million at December 31, 1996, and 1995 respectively. Immediately prior to the Effective Date, as defined in Note A to the consolidated financial statements, approximately 31,582,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, and upon the exercise of outstanding warrants (the "Warrants"), and the conversion of the 6 3/4% Convertible Subordinated Notes Due 2001 (the "Notes"). Pursuant to antidilution provisions in the agreements covering the options, Genzyme has adjusted each option outstanding on the Effective Date to provide for separation of the option into an option exercisable for General Division Stock and an option exercisable for the number of shares of GTR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date. The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of General Division Stock and GTR Stock upon exercise of the Warrant that the holder would have received if the holder had exercised the Warrant immediately prior to the Effective Date. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after the Effective Date would receive, in addition to the shares of General Division Stock into which the Note is convertible, the same number of shares of GTR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. In March 1996, holders of the notes converted such notes into General Division Stock and GTR Stock. Holders of the notes received 37.826 shares of General Division Stock and 2.553 shares of TR Stock in conversion of each $1,000 note. 57 105 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS At December 31, 1996, approximately 15,768,006 shares of General Division Stock were reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as amended, and upon the exercise of outstanding warrants. PREFERRED STOCK Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the preferences, voting powers, qualifications and special or relative rights or privileges of any such series before the issuance of any shares of that series. The Board of Directors shall determine the number of shares constituting each series of Preferred Stock and each series shall have a distinguishing designation. STOCK SPLIT In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of General Division Stock to be effected by means of a 100% stock dividend payable on July 25, 1996 to stockholders of record on July 11, 1996, subject to increasing the authorized shares of General Division Stock from 100,000,000 to 200,000,000 shares (the "Amendment"). The Amendment was approved by holders of a majority in interest of the outstanding General Division Stock and GTR Stock, voting together as a single class, at a special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a total of 34,669,435 shares of General Division Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. DEFERRED COMPENSATION PLAN The Company's Directors' Deferred Compensation Plan (the "Deferred Compensation Plan") allows each member of the Genzyme Board who is not also an officer or employee of Genzyme to defer receipt of all or a portion of the cash compensation payable to him or her as a director of Genzyme. Compensation may be deferred until the termination of services as a director or, subject to certain restrictions, such other date as may be specified by the director. All of the current directors of Genzyme, other than Mr. Termeer, are eligible to participate in the plan and as of December 31, 1996, six of the directors have elected to participate in the plan. The Company has reserved 50,000 shares of GGD Stock and 100,000 shares of GTR Stock to cover distributions of shares credited to stock accounts under the Deferred Compensation Plan (subject in each case to adjustment for stock splits, stock dividends and certain transactions affecting Genzyme's capital stock). As of December 31, 1996, no shares of General Division Stock or GTR Stock credited to stock accounts under the Deferred Compensation Plan have been distributed to participants in the Deferred Compensation Plan. STOCK OPTIONS Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"), options may be granted to purchase an aggregate of 19,800,000 shares of General Division Stock and 3,300,000 shares of TR Stock. The Plan allows the granting of stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, the Company has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 200,000 shares and 70,000 shares, respectively, of General Division Stock and TR Stock, are automatically granted at fair market value to members of the Board of Directors of the Company upon their election or reelection as Directors. For each year of a director's term of office, he or she receives an option to purchase 4,000 shares of General Division Stock and a number of TR Stock options with a market value equal to one-quarter of the market value of the stock subject to the General Division Stock options. All options expire ten years after the initial grant date and vest over various periods. Stock option activity is summarized below:
SHARES WEIGTED AVERAGE UNDER OPTION EXERCISE PRICE EXERCISABLE ------------ --------------- ----------- GENZYME CORPORATION COMMON STOCK -------------------------------- Outstanding at December 31, 1993..... 7,690,708 15.35 Granted............................ 3,238,728 14.93 Exercised.......................... (132,756) 8.83 Forfeited and cancelled............ (423,526) 19.07 Converted at Effective Date........ (10,373,154) 15.15 ----------- ----- Outstanding at December 31, 1994..... - - =========== ===== GENERAL DIVISION STOCK ---------------------- Converted at Effective Date........ 10,373,154 15.15 Granted............................ 133,348 14.03 Exercised.......................... (2,500) 5.85 Forfeited and cancelled............ (22,302) 17.40 ----------- ----- Outstanding at December 31, 1994..... 10,481,700 15.13 4,683,967 =========== ===== ========= Granted............................ 4,141,502 23.25 Exercised.......................... (2,007,654) 13.97 Forfeited and cancelled............ (442,882) 14.96 ----------- ----- Outstanding at December 31, 1995..... 12,172,666 17.79 5,138,502 =========== ===== ========= Granted............................ 3,442,484 29.16 Exercised.......................... (906,041) 15.70 Forfeited and cancelled............ (643,626) 22.81 ----------- ----- Outstanding at December 31, 1996..... 14,065,483 20.48 6,505,835 =========== ===== =========
The total proceeds for all options outstanding at December 31, 1996 is approximately $288,120,000. 58 106 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Information regarding the range of option prices as of December 31, 1996 is as follows:
Exercisable --------------------------- Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price of options Price - ------------------ ---------- ------------ -------- --------- -------- $ 3.79 - 12.09 1,583,744 3.04 $7.87 1,583,344 $ 7.87 12.38 - 14.53 1,508,927 7.36 14.03 438,382 13.53 14.56 - 15.14 1,497,478 7.27 14.97 587,858 14.92 15.19 - 19.38 1,775,540 6.01 17.74 1,370,438 17.69 19.42 - 21.00 1,553,430 8.17 19.55 591,411 19.59 21.07 - 24.88 1,499,327 6.69 23.73 1,016,437 23.50 25.00 - 28.00 2,035,931 8.84 26.99 417,938 25.81 28.06 - 30.25 2,346,646 9.24 30.16 447,401 30.11 30.31 - 37.25 257,676 8.90 33.35 52,626 31.64 38.00 - 38.00 6,784 9.09 38.00 0 38.00 - ------------------ ---------- ---- -------- --------- -------- $ 3.79 38.00 14,065,483 7.27 $20.48 6,505,835 $17.34
EMPLOYEE STOCK PURCHASE PLAN The Company's 1990 Employee Stock Purchase Plan allows full-time employees, as defined in this plan, to purchase the Company's stock at 85% of fair market value. Under this plan, 1,500,000 shares of the General Division Stock are authorized of which 291,053, 285,868 and 259,876 shares were issued in 1996, 1995 and 1994, respectively. STOCK COMPENSATION PLANS The Company applies APB Opinion 25 and related Interpretations in accounting for its three stock-based compensation plans, the 1990 Equity Incentive Plan (a stock option plan), the 1990 Employee Stock Purchase Plan (a stock purchase plan) and the 1998 Director's plan and accordingly, no compensation expense has been recognized for options granted and shares purchased under the plans provisions of these plans. Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the method of Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-based Compensation", the General Division's net (loss) income and (loss) earnings per share would have been as follows:
DECEMBER 31, ------------------ (Amounts in thousands, except per share data) 1996 1995 - ------------------------------------------------------------------------- GENERAL DIVISION Net (loss) income: As reported $(30,502) $43,680 Pro forma $(40,558) $40,429 Primary (loss) earnings per share: As reported $ (0.45) $ 0.73 Pro forma $ (0.59) $ 0.67 Fully diluted (loss) earnings per share: As reported $ (0.45) $ 0.66 Pro forma $ (0.59) $ 0.61
The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995 and additional awards are anticipated in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. In computing these pro forma amounts, the General Division has assumed a risk-free interest rate equal to approximately 6.37% and 6.33%, expected volatility of 45%, zero dividend yields and expected lives of four years for 1996 and 1995, respectively. 59 107 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS The average fair value of the options granted during 1996 and 1995 is estimated as $11.98 and $11.53, respectively on the date of grant. STOCK RIGHTS In 1989, the Company's Board issued a dividend of one preferred stock purchase right (a "Common Stock Right") on each share of Common Stock. At the Effective Date, the Rights Agreement under which the rights were issued was amended and restated to reflect the change in the capital structure of the Company and the Board declared a distribution to holders of GTR Stock of a right (a "GTR Stock Right") on each outstanding share of GTR Stock. The Restated Rights Agreement provides that each General Division Stock Right, which replaced the Common Stock Right, and each GTR Stock Right, when it becomes exercisable, will entitle the holder to purchase from the Company (i) in the case of a General Division Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $26, subject to adjustment, and (ii) in the case of a GTR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $25, subject to adjustment. The rights expire on March 28, 1999. STOCK WARRANTS The Company has issued warrants which, when exercised, grant the holders two shares of General Division Stock and .135 share of GTR Stock for each warrant exercised. These warrants were granted in exchange for the receipt of options to purchase the partnership interests of Genzyme Development Partners, L.P. ("GDP"), the callable common stock of Neozyme II Corporation ("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc. ("IG") in exchange for IG warrants. All proceeds from the exercise of these warrants will be attributed to the General Division (see "TR Designated Shares"). The outstanding warrants were issued under the following terms:
EXERCISE ISSUE NUMBER OF PRICE DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD - ---- --------- -------- --------- --------------- 1992 Investors in Neozyme II: Callable Warrants 29,314 $44.202 December 6, 1996 to December 31, 1998 1995 Dr. Richard Warren 6,005 $42.670 Through September 30, 2000
The warrants granted in exchange for the receipt of options to purchase the partnership units of GDP expired on October 31, 1996. On October 28, 1996, the Company completed a tender offer for the outstanding Units of Neozyme II and acquired 2,385,686 of the 2,415,000 Units outstanding (see Note B Acquisition). On December 6, 1996, Neozyme II was merged with and into Genzyme, and the remaining 29,314 Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger and became exercisable. Warrant activity is summarized below:
WARRANTS WARRANT PRICE -------- ------------- Outstanding at December 31, 1993....... 8,156,004 16.01 - 38.25 Exercised.......................... (2,197,774) 16.01 - 22.91 Expired............................ (23,849) 16.01 - 22.91 ---------- Outstanding at December 31, 1994....... 5,934,381 16.01 - 38.25 Granted............................ 6,005 42.67 Exercised.......................... (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995....... 5,597,241 16.01 - 42.67 ---------- Exercised.......................... (3,170,551) 16.01 - 38.25 Tendered........................... (2,385,686) N/A Expired............................ (5,685) 16.01 - 38.25 ---------- Outstanding at December 31, 1996....... 35,319 42.67 - 44.20 ==========
Included in other current assets at December 31, 1996 is $87 million for proceeds from warrant exercises at the end of the year. GTR DESIGNATED SHARES 60 108 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Pursuant to Genzyme's Articles of Organization, as amended, GTR Designated Shares are authorized shares of GTR Stock which are not issued and outstanding, but which the Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to the Tissue Repair Division. At the Effective Date, 5,000,000 GTR Designated Shares were established. As a result of the distribution of approximately 3,300,000 shares of GTR Stock to holders of General Division Stock, the number of GTR Designated Shares were reduced by a corresponding amount. The remaining 1,700,000 GTR Designated Shares were reserved for issuance upon the exercise of Genzyme stock options and warrants and the conversion of Genzyme's convertible notes which were outstanding on the Effective Date. GTR: The number of GTR Designated Shares will be decreased by the number of shares of GTR Stock issued by Genzyme, the proceeds of which are allocated to the General Division; the number of shares of GTR Stock issued as a dividend to holders of General Division stock; and the number of shares of GTR Stock issued upon the conversion of convertible securities, including the Notes, attributed to the General Division. In addition, the number of GTR Designated Shares can be increased as a result of certain inter-division transactions. The number of GTR Designated Shares will be decreased by the number of shares of GTR Stock issued by Genzyme, the proceeds of which are allocated to the General Division; the number of shares of GTR Stock issued as a dividend to holders of General Division stock; and the number of shares of GTR Stock issued upon the conversion of convertible securities, including the Notes, attributed to the General Division. In addition, the number of GTR Designated Shares can be increased as a result of certain inter-division transactions. In October 1996, the Genzyme Board approved the allocation of up to $20 million in cash from the General Division to the Tissue Repair Division (the "GTR Equity Line") to provide initial funding for the joint venture with Diacrin, in exchange for an increase in the number of GTR Designated Shares at a rate determined by dividing the amount of cash so allocated by the average of the daily closing prices of one share of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. As of December 31, 1996, the Company had allocated $1.9 million from the General Division to the Tissue Repair Division under the Equity Line and 231,645 GTR Designated Shares were reserved for issuance at the Genzyme Board's discretion. If, as of May 31 of each year starting May 31, 1997, the number of GTR Designated Shares on such date (not including those reserved for issuance with respect to General Division convertible securities as a result of anti-dilution adjustments required by the terms of such instruments by the Genzyme Board) exceeds ten percent (10%) of the number of shares of GTR Stock then issued and outstanding, then substantially all GTR Designated Shares will be distributed to holders of record of General Division Stock, subject to reservation of a number of such shares equal to the sum of (a) the number of GTR Designated Shares reserved for issuance upon the exercise or conversion of General Division convertible securities and (b) the number of GTR Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to the General Division. GTR Designated Share activity is summarized below:
GTR DESIGNATED SHARES ------------- Established at Effective Date ............................................... 5,000,000 Stock dividend to holders of Genzyme Common Stock ........................... (3,356,713) Stock options exercised ..................................................... (168) Stock warrants exercised .................................................... (233,412) ---------- Balance at December 31, 1994 ............................................. 1,409,707 Stock options exercised ..................................................... (72,942) Stock warrants exercised .................................................... (46,244) ESPP shares issued .......................................................... (3,613) ---------- Balance at December 31, 1995 ............................................. 1,286,908 ---------- Stock options exercised ..................................................... (42,728) Stock warrants exercised .................................................... (426,984) Convertible notes conversion ................................................ (255,249) Increase from equity line ................................................... 231,645 Exercise of call ............................................................ 1,000,000 ---------- Balance at December 31, 1996 ............................................. 1,793,592 ==========
DIVIDEND POLICY The General Division has never paid any cash dividends on shares of its capital stock. The General Division currently intends to return its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on General Division common stock in the foreseeable future. NOTE D ACQUISITIONS Incorporated by reference herein are the disclosures related to the acquisitions of Sygena A.G., I.G. Laboratories, Genetrix, Inc., Deknatel Snowden Pencer, Inc. and Neozyme II included in Note B, Acquisitions included in the Consolidated Financial Statements. 61 109 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS 110 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS PRO FORMA FINANCIAL INFORMATION The following pro forma information presents the results of operations of the General Division, Genetrix, DSP and Neozyme II for the years ended December 31, 1996 and 1995, with pro forma adjustments as if the acquisitions had been consummated as of January 1, 1995. This pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future. The pro forma financial information does not include charges for in-process technology of $24.2 million and $106.5 million, related to the DSP and Neozyme II acquisitions, respectively which were recognized as expense upon consummation of each acquisition in 1996.
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) --------------------------------------------------------------------------------- Pro forma revenues .................................. $556,274 $471,630 Pro forma net income attributable to General Division Stocks.......... ......................... 65,136 14,473 Pro forma net income per General Division common and common equivalent share ................ $ 0.89 $ 0.24
NOTE E MAJORITY-OWNED SUBSIDIARIES INTEGRATED GENETICS, INC. IG was an approximately seventy-percent-owned subsidiary for the year ended December 31, 1994 and for the period from January 1, 1995 through October 1, 1995. (See Note D). GENZYME TRANSGENICS CORPORATION Genzyme Transgenics Corporation ("GTC") was a majority-owned subsidiary through September 30, 1994. (See Note F). NOTE F INVESTMENTS INVESTMENTS Investments in marketable securities at December 31 consisted of the following:
1996 1995 ------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE --------------------------------------------------------------------------------------------------- Short Term: Certificates of deposit.......................... $ 1,564 $ 1,564 $ 1,870 $ 1,870 Federal agency notes............................. -- -- 25,696 25,731 Corporate notes.................................. 54,732 54,726 77,800 77,870 ------- ------- -------- -------- $56,296 $56,290 $105,366 $105,471 ======= ======= ======== ======== Long Term: Federal agency notes............................. -- -- 4,047 4,053 Corporate notes.................................. 16,481 16,485 42,518 42,845 U.S. Treasury notes.............................. 22,010 21,730 22,351 22,663 ------- ------- -------- -------- $38,491 $38,215 $ 68,916 $ 69,561 ======= ======= ======== ========
Cash and cash equivalents, consisting principally of money market funds and municipal notes are valued at cost plus accrued interest. 63 111 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Information regarding the range of contractual maturities of investments in debt securities at December 31, 1996 is as follows:
MARKET (DOLLARS IN THOUSANDS) COST VALUE -------------------------------------------------------------------------------------- Within 1 year........................................ $56,296 $56,290 After 1 year through 2 years......................... 11,399 11,415 After 2 years through 10 years....................... 27,092 26,800 ------- ------- $94,787 $94,505 ======= =======
The disclosures relating to the Investments in NABI, Avonex, Inc., Celtrix, Inc., and G.T.C. are included in Note D to the Consolidated Financial Statements and are incorporated by reference herein. REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY INVESTMENTS Investment income for 1996 and 1995 includes gross realized losses of $47,000 and $110,000, respectively. Gross realized gains included in investment income for 1995 were $1.4 million. The realized gain on the investment in NABI was reported as a separate line item in the Company's statement of operations for 1996. Gross unrealized holding losses of $2.7 million and unrealized holding gains of $2.3 million, were recorded at December 31, 1996 in Division equity as compared to unrealized holding gains of $2.1 million at December 31, 1995, of which $0.7 million represented an unrealized holding gain on the Company's investment in NABI which was sold in 1996, at December 31, 1995. 64 112 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENT NOTE G INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------------------ Raw materials..................................... $ 30,243 $12,527 Work-in-process................................... 36,516 14,167 Finished products................................. 56,683 25,587 -------- ------- $123,442 $52,281
NOTE H PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31 includes the following 65 113 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1996 1995 ---------------------------------------------------------------------------------------- Plant and equipment................................................ $163,413 $106,877 Land and buildings................................................. 173,296 46,456 Leasehold improvements............................................. 55,828 52,521 Furniture and fixtures............................................. 12,996 7,530 Construction in progress........................................... 53,298 177,903 -------- -------- 458,831 391,287 Less accumulated depreciation.................................... (87,221) (63,826) -------- -------- Property, plant and equipment, net................................. $371,610 $327,461 ======== ========
Depreciation expense was $22.1 million, $17.3 million, and $13.5 million in 1996, 1995 and 1994, respectively. The Company attributes its property, plant and equipment to either the General Division or Tissue Repair Division based on use. The General Division has completed construction of the Company's manufacturing facility at Allston Landing in Boston to produce a recombinant form of Ceredase(R) enzyme ("Cerezyme(R)") and other products. The facility cost approximately $154.1 million plus an additional $22.3 million of process validation and optimization costs. On October 24, 1996, Genzyme received FDA approval to manufacture the drug Cerezyme[R] in the Allston Landing facility. As of December 31, 1996, the Company had capitalized, approximately $154.1 million of expenditures related to this building and approximately $33.3 million of gross process validation and optimization costs related to this and other facilities. In 1996, 1995 and 1994, the Company capitalized approximately $2.2 million, $9.0 million and $9.2 million of interest costs, respectively, relating to this and other facility construction. Upon receipt of FDA approval for the facility, the Company began production and transferred the costs out of construction in progress and began depreciating this facility in July 1996 using the units of production method of depreciation. Depreciation expense for 1996 related to this facility was $1.7 million. In August 1996, GTR effected an interdivisional transfer of certain land and a building in Framingham, Massachusetts, acquired in January 1996, to the General Division for $5.2 million, which represented the cost and approximate fair market value of the property at the date of the sale. NOTE I ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------- Professional fees........................ $ 3,757 $ 2,472 Compensation............................. 21,252 12,025 Royalties................................ 8,210 6,606 Rebates.................................. 7,604 2,693 Interest................................. 1,677 1,857 Other.................................... 25,145 12,416 ------- ------- $67,645 $38,069 ======= =======
NOTE J. LONG-TERM DEBT AND LEASES LONG-TERM DEBT Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1996 1995 ----------------------------------------------------------------------------------- Revolving Credit Facility..................................... $200,000 $ Convertible subordinated notes................................ - 100,000 Mortgage note payable, matures June 13, 1999.................. 20,375 20,863 Mortgage note payable, matures November 2014.................. 3,298 3,356 Mortgage note payable, matures January 1, 2008................ 685 747 Term notes payable............................................ - 1,626 ------- ------- 224,358 126,592 Less current portion.......................................... (999) (2,243) ------- ------- $223,359 $124,349 ======== ========
66 114 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS CREDIT FACILITIES In November 1996, the General Division refinanced its existing $215.0 million line of credit (the "Credit Line") with a revolving credit facility (the "Revolving Facility") made available through a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under this facility may be allocated to either the General Division or Tissue Repair Division. As of December 31, 1996, outstanding debt of $218.0 million under the Revolving Facility had been allocated $200.0 million to the General Division and $18.0 million to GTR. REVOLVING FACILITY The General Division may obtain loans up to a maximum aggregate principal amount outstanding at any time of $225.0 million under the terms of the Revolving Facility. Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and conditions defined in the Credit Agreement. The notes have certain covenants which require the Company to, among other things, maintain certain levels of earnings and liquidity ratios. The Stock of Genzyme Securities Corporation, a Massachusetts Securities Corporation, is pledged as collateral for this facility. CREDIT LINE On June 28, 1996, Genzyme's credit line with Fleet National Bank was increased from $15.0 million to an aggregate of $215.0 million in connection with the Company's acquisition of DSP (See Note D. Acquisitions). Until refinanced with the Revolving Facility in November 1996, borrowings under the Credit line were allocated $200.0 million to the General Division to finance the acquisition of DSP and $15.0 million to GTR to fund operations, each with interest payable at LIBOR plus 5/8%. All funds outstanding under the Credit Line were repaid before December 31, 1996 with funds borrowed under the Revolving Facility. $100M 6 3/4% CONVERTIBLE SUBORDINATED NOTES In 1991, the General Division issued 6 3/4% Convertible Subordinated Notes due October 1, 2001 in the aggregate principal amount of $100.0 million for net proceeds of $97.3 million. Deferred financing costs of $2.7 million, classified as "Other noncurrent assets" on the combined balance sheets, were amortized to expense over the term of the debt issue. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after December 16, 1994, would receive, in addition to the shares of General Division Stock into which the Note was convertible, the same number of shares of GTR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. In March 1996, holders of the Notes converted such notes into General Division Stock and GTR Stock pursuant to the amended terms of the notes. Holders of the Notes received 37.826 shares of General Division Stock and 2.553 shares of TR Stock in conversion of each $1,000 Note. As a result of the conversion $101.4 million, the face value of the debt less the unamortized debt financing costs was credited to Division Equity. MORTGAGE NOTES The Company's three mortgage notes have been attributed to the General Division. The mortgage note due June 1999 is collateralized by land and buildings with a net book value of $28.5 million at December 31, 1996, bears interest at 7.73% annually, and is payable monthly based on a twenty year direct reduction amortization schedule, with the remaining principal due June 13, 1999. The mortgage note maturing November 2014 is collateralized by land and buildings with a net book value of $5.1 million at December 31, 1996 and bears interest at 10.5%. The mortgage note maturing January 2008 provides the bank with a "call or review" feature at the end of the first 60 month period, allowing the bank to adjust the note under specific circumstances. This note bears interest at a variable rate of prime plus 1% and is collateralized by land and fixtures. Principal and interest are payable monthly on both of these notes. 67 115 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS INTEREST RATE HEDGE AGREEMENTS In December 1996, the Company entered into a $100 million interest rate swap contract (the "Swap Contract") to effectively convert the variable interest rate on borrowings under the Revolving Facility to fixed interest rates. Net payments made or received on these Swap Contracts are recorded as adjustments to interest expense. At December 31, 1996 the Swap Contract had a termination value gain of $125,000. OPERATING LEASES Total rent expense under operating leases was $10.7 million, $8.6 million, and $8.7 million in 1996, 1995 and 1994 respectively. The General Division leases facilities and personal property under certain operating leases in excess of one year. In January 1997, the General Division repaid $100.0 million of its outstanding debt plus accrued interest of $0.5 million. Future minimum payments due under the General Division's long-term obligations and capital and operating leases are as follows:
LONG-TERM CAPITAL OPERATING (DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES ---------------------------------------------------------------------- 1996.............................. $ 2,643 $338 $11,240 1997.............................. 2,637 316 10,798 1998.............................. 256,565 14 9,678 1999.............................. 510 - 8,553 2000.............................. 504 - 7,601 Thereafter........................ 5,795 - 44,107 -------- ---- ------- Total minimum payments......... 268,654 668 91,977 Less: interest.................... (44,296) (29) - -------- ---- ------- $224,358 $639 $91,977 ======== ==== =======
NOTE K RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following:
(DOLLARS IN THOUSANDS) 1996 1995 1994 --------------------------------------------------------------------------------------------------- Fees for research and development activities: Surgical Aids Partnership...................................... - - 913 Neozyme II..................................................... 19,799 24,198 17,785 GTC............................................................ 3,212 2,560 2,185 ------- ------- ------- $23,011 $26,758 $20,883 ======= ======= =======
The disclosures relating to the Surgical Aids Partnership and Neozyme II are included in Note J to the Consolidated Financial Statements and are incorporated by reference herein. 68 116 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE L. COMMITMENTS AND CONTINGENCIES 69 117 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS In December 1994, the General Division fully settled litigation brought by Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash. The dispute arose out of a contract between Granada R&D Ventures, a predecessor of Granada BioSciences, and Integrated Genetics, prior to its merger with the General Division in 1989, regarding development of recombinant fertility hormones for cows and other animals. From time to time the General Division has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1996, there were no asserted claims against the General Division which, in the opinion of management, if adversely decided would have a material adverse effect on the General Division's financial position and results of operations. NOTE M. INCOME TAXES Income (loss) before income taxes and the related income tax expense (benefit) are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1996 1995 1994 ------------------------------------------------------------------------------------------------------- Domestic (includes $130.6 million and $15.2 million in charges for purchased research and development and acquisition expenses in 1996 and 1995, respectively)......................... $(37,615) $62,633 $42,968 Foreign........................................................... 10,308 2,696 3,567 -------- ------- ------- Total....................................................... $(27,307) $65,329 $46,535 ======== ======= ======= Currently payable: Federal........................................................ $37,985 $18,780 $10,727 State.......................................................... 6,889 5,949 3,965 Foreign........................................................ 3,616 1,349 850 -------- ------- ------- Total current............................................... 48,490 26,078 15,542 Deferred: Federal........................................................ (28,448) 4,507 518 State.......................................................... 164 (79) 281 -------- ------- ------- Total deferred.............................................. (28,284) 4,428 799 -------- ------- ------- Provision for income taxes........................................ $ 20,206 $30,506 $16,341 ======== ======= =======
Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following reasons:
1996 1995 1994 - -------------------------------------------------------------------------------------------- Tax at U.S. statutory rate......................................... 35.0% 35.0% 35.0% Losses in foreign subsidiary and less than 80%-owned subsidiaries with no current tax benefit.......................... 0.8 0.8 1.6 State taxes, net................................................... 5.2 5.2 5.8 Foreign sales corporation.......................................... (2.1) (1.4) (2.8) Nondeductible amortization......................................... 2.1 1.4 1.5 Benefit of tax credits............................................. - - (1.9) Other, net......................................................... 2.2 0.7 (4.2) Utilization of operating loss carryforwards........................ (2.6) (3.8) - ------ ---- ---- Effective tax rate before certain charges........................ 40.6 37.9 35.0 Charge for purchased research and development
70 118 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS net of related deferred tax benefits............................... 33.4 8.8 - ------ ---- ---- 74.0 46.7 35.0 Allocated tax benefits generated by Tissue Repair Division ........ (62.3) (13.6) (4.0) ------ ---- ---- Effective tax rate attributable to General Division Stockholders. 11.7% 33.1% 31.0% ====== ==== ====
At December 31 the components of net deferred tax assets were as follows :
(DOLLARS IN THOUSANDS) 1996 1995 - --------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards .................... $ 10,427 $ 10,216 Intangible amortization ............................. 36,706 23,746 Realized and Unrealized capital losses .............. 10,798 10,581 Reserves and other .................................. 17,687 9,609 Allocation of tax benefit from Tissue Repair Division 13,265 8,415 -------- -------- Gross deferred tax asset ........................ 88,883 62,567 Valuation allowance ................................. (15,299) (20,637) -------- -------- Net deferred tax asset .......................... 73,584 41,930 Deferred tax liabilities: Depreciable assets .................................. (13,871) (10,556) -------- -------- Net deferred tax asset .......................... $ 59,713 $ 31,374 ======== ========
Due to uncertainty surrounding the realization of certain favorable tax attributes primarily relating to capital losses and the purchase of in-process research and development, the Company placed a valuation allowance of $15.3 million and $20.6 million for December 31, 1996 and December 31, 1995, respectively, against otherwise recognizable deferred tax assets. During 1996, the Company determined that it is more likely than not that certain deferred tax assets will be realized and, accordingly, eliminated the related valuation allowance of approximately $4.3 million, of which approximately $1.5 million was recorded as a reduction of goodwill. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At December 31, 1996 the Company had U.S. net operating loss carryforwards of $27 million for income tax purposes. These carryforwards expire from 2001 to 2011. Utilization of tax net operating loss carryforwards may be limited under Section 382 of the Internal Revenue code of 1986. At December 31, 1996 the Company also had UK operating loss carryforwards for income tax purposes of approximately $2.9 million which are indefinitely available to offset future taxable income in the UK. NOTE O. BENEFIT PLANS Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of the General Division except for the employees of DSP which have a separate retirement savings plan. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by the General Division. The General Division contributed $1.1 million, $0.7 million, and $0.6 million to the plan in 1996, 1995 and 1994, respectively. The General Division has defined-benefit pension plans covering substantially all the employees of DSP and its foreign subsidiaries. Pension expense for 1996, 1995 and 1994 was $601,000, $498,000 and $266,000, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans, except for the plan of DSP and its subsidiary in Germany, are not presented because they are not material. DSP has a defined benefit pension plan, which covers substantially all U.S. employees of DSP, excluding those employed by DSP's Snowden Pencer Inc. subsidiary. Plan assets consist primarily of U.S. government and corporate securities. The funded status of the pension plan at December 31, 1996 was as follows (in thousands):
1996 ------- Actual present value of accumulated benefit obligation: Vested........................................................ $ 4,720 Nonvested..................................................... 481 ------- $ 5,201 ======= Projected benefit obligation.................................... $ 5,201 Plan assets at market value..................................... 4,338 ------- Funded status -- plan assets less projected benefit obligation.. $ (863) Unrecognized net loss from past experience different from that assumed and changes in actuarial assumptions.................. (94) ------- Accrued pension cost.......................................... $ (957) ======= Assumptions used in computation of 1996 are as follows: 1996 ------- Weighted average discount....................................... 7.75% Expected long-term rate of return on assets..................... 9.00% Rate of increase in future compensation levels.................. Plan Frozen Benefits under the pension plan are generally based on years of service and the employee's career earnings. Employees become fully vested after five years. A summary of the components of net periodic pension cost for 1996 is as follows (thousands): 1996 ------- Service cost.................................................... $ 0 Interest cost................................................... 195 Actual return on plan assets.................................... (276) Net amortization and deferral................................... 94 ------- Net periodic pension cost..................................... $ 13 ======= DSP's German subsidiary also has a defined benefit pension plan for its employees. The funded status of the pension plan at December 31, 1996 was as follows (in thousands): 1996 ------- Actual present value of accumulated benefit obligation: Vested........................................................ $ 1,592 Nonvested..................................................... 140 ------- $ 1,732 ======= Projected benefit obligation.................................... $ 1,998 Plan assets at market value..................................... -- ------- Funded status -- plan assets less projected benefit obligation.. $(1,998) Unrecognized net loss from past experience different from that assumed and changes in actuarial assumptions.................. (353) ------- Accrued pension cost.......................................... $(2,351) ======= Assumptions used in computation of 1996 are as follows: 1996 ------- Expected long-term rate of return on assets..................... 6.5% Rate of increase in future compensation levels.................. N/A Weighted average discount....................................... 3.0% Benefits under the pension plan are generally based on years of service and the employee's career earnings. Employees become fully vested after five years. A summary of the components of net periodic pension cost for 1996 is as follows (thousands): 1996 ------- Service cost.................................................... $ 129 Interest cost................................................... 129 Net amortization and deferral................................... (20) ------- Net periodic pension cost..................................... $ 238 =======
DSP has a savings and investment plan for all U.S. employees. Employee contributions to the savings plan can be made both on a pre-tax (salary deferral) and after-tax basis. DSP may make a matching contribution in an amount equal to 100% of the first 2% of employee salary deferral contributions and 50% of the next 4% of employee salary deferrals (subject to certain limitations as defined in the plan). DSP matched pre-tax salary deferrals totaling $332,000 in fiscal 1996. Employees of Snowden Pencer, Inc., a subsidiary of DSP, also participate in a noncontributory profit sharing plan. The plan provides for discretionary contributions to be determined annually. In 1996, DSP recorded $100,000 charge for contributions to the plan. NOTE P. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS The General Division operates in the human healthcare industry and manufactures and markets its products in two major geographic areas, the United States and Europe. The General Division's principal manufacturing facilities are located in the United States, United Kingdom, Switzerland and Germany. The General Division purchases products from its British, Swiss and German subsidiaries for sale to customers in the United States. Transfer prices from the foreign subsidiaries are intended 71 119 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS to allow the United States parent to produce profit margins commensurate with its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary European distributor of the General Division's therapeutic products. Certain information by geographic area follows (dollars in thousands):
UNITED STATES NETHERLANDS OTHER ELIMINATION COMBINATION ------ ----------- ----- ----------- ----------- 1996 - ---- Net sales - unaffiliated customers ................. $ 354,323 $56,865 $74,933 $ - $ 486,121 Transfers between geographic areas ..... 101,786 33,659 34,050 (169,495) - ---------- ------- ------- --------- ---------- 456,109 90,524 108,983 (169,495) 486,121 Pre-tax income (loss)................... (30,124) 920 10,156 (8,259) (27,307) Net income (loss)....................... (9,346) 520 9,193 (30,869) (30,502) Assets ................................. 1,167,545 33,500 110,890 (85,697) 1,226,238 Liabilities ............................ 283,713 31,930 29,651 345,294 1995 - ---- Net sales unaffiliated customers ................. $ 247,138 $70,532 $33,933 $ - $ 351,603 Transfers between geographic areas...... 74,697 - 23,658 (98,355) - ---------- ------- ------- --------- ---------- 321,835 70,532 57,591 (98,355) 351,603 Pre-tax income (loss)................... 65,941 836 1,852 (3,300) 65,329 Net income (loss)....................... 45,856 540 584 (3,300) 43,680 Assets ................................. 873,252 27,703 80,287 (126,656) 854,586 Liabilities ............................ 156,650 26,652 12,003 - 195,305 1994 - ---- Net sales unaffiliated customers ................. $ 224,331 $38,535 $25,465 $ - $ 288,331 Transfers between geographic areas ..... 38,590 - 12,784 (51,374) - ---------- ------- ------- --------- ---------- 262,921 38,535 38,249 (51,374) 288,331 Pre-tax income (loss)................... 44,295 578 3,155 (1,493) 46,535 Net income (loss)....................... 28,627 417 2,643 (1,493) 30,194 Assets ................................. 608,760 16,384 69,130 (64,130) 630,144 Liabilities ............................ 204,766 15,704 11,713 - 232,183
All revenue from research and development contracts is earned in the United States. Entities comprising Other include the General Division's operations in the United Kingdom, Belgium, France, Japan, Sweden, Switzerland, Italy and Germany. Export sales from the United States were $27.4 million, $20.5 million, and $23.9 million in 1996, 1995 and 1994, respectively. Export sales by the Netherlands subsidiary amounted to $56.9 million and $66.2 million in 1996 and 1995, respectively. The General Division's results of operations are highly dependent upon the sales of Ceredase(R)/Cerezyme(R) enzyme. In 1996, 1995 and 1994, the General Division marketed its Ceredase(R)/Cerezyme(R) enzyme product directly to physicians, hospitals and treatment centers, and sold products representing approximately 12%, 14% and 17%, respectively, of net revenue to an unaffiliated distributor. Otherwise, the credit risk associated with trade receivables is mitigated due to the large number of customers and their broad dispension over different industries and geographic areas. NOTE Q. QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1996, 1995 and 1994 are displayed in the following table. 72 120 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1996 - ---- Net sales ................. $111,783 $113,988 $141,022 $144,649 Gross profit .............. 64,171 67,260 73,867 82,004 Net income (loss) (2) ..... 19,034 20,284 (5,908) (63,912) Income (loss) per share(1): Primary (1)............... 0.27 0.27 (0.09) (0.91) Fully Diluted............. 0.25 0.27 (0.09) (0.91) 1995 - ---- Net sales ................. $87,159 $92,358 $94,484 $104,562 Gross profit .............. 47,378 48,066 53,100 57,958 Net income (3) ............ 11,998 12,967 16,092 2,623 Income per share (1): Primary ............... 0.22 0.23 0.26 0.04 Fully diluted ......... 0.20 0.22 0.24 0.04 1994 - ---- Net sales ................. $73,282 $75,378 $79,180 $ 82,887 Gross profit .............. 40,049 40,101 41,407 42,432 Net income (4) ............ 9,877 9,622 10,065 2,490 Income per share (1): Primary ............... 0.19 0.19 0.18 0.04 Fully diluted ......... 0.18 0.18 0.17 0.04 - ------------------ (1) Cumulative quarterly income per share data does not equal the annual amounts due to changes in the average common and common equivalent shares outstanding. (2) Includes charges in the third quarter of 1996 and fourth quarter of $24.2 million and $106.5 million for acquired incomplete technology (See Note B. Acquisitions). (3) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired incomplete technology. (See Note B Acquisitions). (4) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes F and L) for the write down of investments and the settlement of a lawsuit and an $11.2 million charge for acquired incomplete technology. NOTE R OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments represent various degrees and types of risk to the General Division, including credit, interest rate and liquidity risk. In the normal course of its business the General Division enters into interest rate swap contracts to hedge its interest rate risk related to its variable rate notes payable. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments under the contract are based. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties based on a common notional principal amount and maturity date. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of the counterparties to meet the terms of the contracts. At December 31, 1996, the Company has one swap agreement with a notional value of approximately $100,000,000. The agreement matures in 1999.
NOTE S SUBSEQUENT EVENTS In January 1997, Genzyme signed a merger agreement providing for the merger of PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the research and development of pharmaceuticals for the treatment of cancer, into Genzyme in exchange for 4,000,000 shares of a new Genzyme security to be designated Genzyme Molecular Oncology Common Stock ("GMO Stock"). The GMO Stock is intended to reflect the value and track the performance of the Molecular Oncology Division, a new division proposed by Genzyme to develop and market novel products for the diagnosis and treatment of cancer. The 4,000,000 shares of GMO Stock to be issued in the merger represent 40% of the initial equity interest in the Molecular Oncology Division. The remaining 60% will be allocated to the General Division in the form of 6,000,000 GMO Designated Shares. The merger is subject to the approval of the stockholders of Genzyme and PharmaGenics. In January 1997, the Tissue Repair Division leased to the General Division certain laboratory and office space in the building located at the Tissue Repair Division's Framingham, Massachusetts facility for a 3-year term commencing January 1, 1997. The General Division will lease approximately half of the facility at a cost of $839,808 per year. Beginning on July 1, 1997, the Tissue Repair Division has the option of requiring the General Division to assume responsibility for an additional 20% of the facility at a cost of $424,056 per year. 73 121 GENZYME GENERAL DIVISION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
========================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------------------------------------------------------------------- ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ---------------------------------------------------------------------------------------------------------- Year ended December 31, 1996: Allowance for doubtful accounts ... $7,833,800 $8,093,600 $2,534,000(2) $2,361,000(1) $16,100,400 Inventory Reserve ................. $3,082,200 $1,426,600 - $1,261,600 $ 3,247,200 Year ended December 31, 1995: Allowance for doubtful accounts ... $5,992,300 $5,180,000 - $3,338,500(1) $ 7,833,800 Inventory Reserve ................. $1,131,000 $2,920,700 - $ 969,500 $ 3,082,200 Year ended December 31, 1994: Allowance for doubtful accounts ... $5,317,600 $4,330,800 - $3,656,100(1) $ 5,992,300 Inventory Reserve ................. $1,321,500 $ 514,000 - $ 704,500 $ 1,131,000 - ---------- (1) Uncollectible accounts written off, net of recoveries. (2) Reserve acquired in acquisition.
74 122 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION Although the financial statements of the General Division and Tissue Repair Division separately report the assets, liabilities and stockholders' equity of Genzyme attributable to each such group, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among the General Division and Tissue Repair Division does not affect legal title to such assets or responsibility for such liabilities. Holders of General Division Stock and Tissue Repair Stock are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Financial impacts arising from one Division that affect the overall cost of Genzyme's capital could affect the results of operations and financial condition of the other Division. Accordingly, the Genzyme consolidated financial information should be read in connection with the financial information of the Tissue Repair Division. 75 123 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS GENZYME TISSUE REPAIR DIVISION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: We have audited the accompanying combined balance sheets of Genzyme Tissue Repair Division (as described in Note A) as of December 31, 1996 and 1995, the related combined statements of operations and cash flows, and the combined financial statement schedule for each of the three years in the period ended December 31, 1996. The combined financial statements and financial statement schedule are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements of Genzyme Tissue Repair Division present fairly, in all material respects, the financial position of Genzyme Tissue Repair Division as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the combined financial statement schedule taken as a whole presents fairly, in all material respects, the information required to be included therein. As more fully described in Note A to these financial statements, Genzyme Tissue Repair Division is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Tissue Repair Division should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. Coopers & Lybrand L.L.P. Boston, Massachusetts February 27, 1997 76 124 GENZYME TISSUE REPAIR DIVISION COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Revenues: Net service sales ................................... $ 7,312 $ 5,220 $ 324 Operating costs and expenses: Cost of services sold ............................... 11,193 4,731 287 Selling, general and administrative ................. 27,111 12,927 964 Research and development expense .................... 10,880 10,938 3,638 Purchase of in-process research and development ..... - - 11,215 -------- -------- -------- 49,184 28,596 16,104 -------- -------- -------- Operating loss .......................................... (41,872) (23,376) (15,780) Other income and (expenses): Equity in net loss of joint venture ................. (1,727) - - Investment income ................................... 1,432 1,386 29 Interest expense .................................... (148) (40) - -------- -------- -------- (443) 1,346 29 -------- -------- -------- Net loss attributable to Genzyme Tissue Repair Stock .... $(42,315) $(22,030) $(15,751) ======== ======== ======== Loss per Tissue Repair Division common share: Net loss ................................................ $ (3.38) $ (2.28) $ (4.40) ======== ======== ======== Weighted average shares outstanding ................. 12,525 9,659 3,578 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. 125 GENZYME TISSUE REPAIR DIVISION COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------------------ 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents .......................................... $15,912 $40,741 Short-term investments ............................................. 318 6,832 Accounts receivable less allowance of $408 in 1996 and $325 in 1995. 1,677 1,838 Inventories ........................................................ 1,823 761 Prepaid expenses and other current assets .......................... 334 186 ------- ------- Total current assets .................................................. 20,064 50,358 Property, plant and equipment, net .................................... 22,229 1,962 Noncurrent assets: Other .............................................................. 300 329 ------- ------- $42,593 $52,649 ======= ======= LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable ................................................... $ 1,749 2,432 Accrued expenses ................................................... 2,479 1,349 Payable to Genzyme General Division ........................................................... 1,604 2,034 Current portion of capital lease obligations........................ 169 ------- ------- Total current liabilities ........................................ 5,832 5,984 Noncurrent Liabilities: Long-term debt...................................................... 18,000 - Other .............................................................. 677 739 ------- ------- 18,677 739 Commitments and Contingencies (See Notes) Division equity (Note C) .............................................. 18,084 45,926 ------- ------- $42,593 $52,649 ======= =======
The accompanying notes are an integral part of these combined financial statements 78 126 GENZYME TISSUE REPAIR DIVISION COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: 1996 1995 1994 -------- -------- -------- Net loss ..................................................... $(42,315) $(22,030) $(15,751) Reconciliation of net income to net cash used by operating activities: Depreciation and amortization ............................. 935 628 26 Loss on disposal of property, plant and equipment ........... 59 160 - Non-cash compensation expense ............................. 312 882 - Accrued interest/amortization on bonds .................... 85 (76) (45) Provision for bad debts ................................... 238 210 - Equity in net loss of joint venture ....................... 1,727 - - Purchase of in-process research and development ........... - - 11,215 Increase (decrease) in cash from working capital: Accounts receivable .................................... (77) (562) (204) Inventories ............................................ (1,062) (685) 309 Prepaid expenses and other current assets .............. (148) 98 18 Accounts payable, accrued expenses and other current liabilities .................................. 444 33 1,666 Payable to Genzyme General Division .................... (430) 1,863 171 -------- -------- -------- Net cash used by operating activities .................. (40,232) (19,479) (2,595) INVESTING ACTIVITIES: Purchases of investments ..................................... (5,004) (16,687) - Sales and maturities of investments .......................... 11,447 17,991 - Purchase of property, plant and equipment .................... (26,573) (1,294) - Sale of property, plant and equipment ........................ 5,311 - - Investment in joint venture .................................. (1,911) - - Cash from acquisition of BioSurface Technology, Inc. ......... - - 5,581 Other noncurrent assets and liabilities ...................... 151 (13) - -------- -------- -------- Net cash (used) provided by investing activities ....... (16,579) (3) 5,581 FINANCING ACTIVITIES: Proceeds from issuance of common stock ....................... 2,437 43,516 14 Proceeds from issuance of debt ............................... 56,000 - - Payments of debts ............................................ (38,000) - - Payments of capital lease obligations ........................ (169) (286) - Allocation from General Division.............................. 11,714 - 13,993 -------- -------- -------- Net cash provided by financing activities .............. 31,982 43,230 14,007 Increase (decrease) in cash and cash equivalents ................. (24,829) 23,748 16,993 Cash and cash equivalents, beginning of period ................... 40,741 16,993 - -------- -------- -------- Cash and cash equivalents, end of period ......................... $ 15,912 $ 40,741 $ 16,993 ======== ======== ======== Supplemental cash flow information: Cash paid during the year for: Interest ................................................... $ 334 $ 40 $ -
The accompanying notes are an integral part of these combined financial statements. 79 127 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Tissue Repair Division ("GTR"), a division of Genzyme Corporation (the "Company" or "Genzyme"), develops and commercializes products and services for the prevention or repair of tissue injury as a consequence of accidental or disease related trauma. GTR uses cell, enzyme, growth factor and matrix technologies to develop products that will augment or positively modify naturally-occurring biological processes involved in tissue repair. BASIS OF PRESENTATION The combined financial statements of the Tissue Repair Division include the balance sheets, results of operations and cash flows of the tissue repair operations of Genzyme during the periods presented. GTR's financial statements are prepared using the amounts which are also included in Genzyme's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be reasonable. PRINCIPLES OF COMBINATION The accompanying combined financial statements reflect the combined accounts of all of Genzyme's tissue repair businesses. All material intradivisional items and transactions have been eliminated in combination. The equity method is used to account for investments in companies and joint ventures in which GTR has a substantial ownership interest (20% to 50%), or in which the Tissue Repair Division participates in policy decisions. Accordingly, GTR's share of the earnings or losses of such entities is included in computation of GTR's net income (loss). Investments of less than 20% are reported at fair value. ACCOUNTING POLICIES AND FINANCIAL INFORMATION The Company prepares the consolidated financial statements of Genzyme Corporation and Subsidiaries and separate combined financial statements for the General Division and the Tissue Repair Division (the "Divisions"). Although the financial statements of each division separately reports the assets, liabilities and stockholders' equity of Genzyme attributable to each such group, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among the Divisions does not affect legal title to such assets or responsibility for such liabilities. Holders of Genzyme General Division Common Stock ("General Division Stock") and Genzyzme Tissue Repair Common Stock ("GTR Stock") are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Financial impacts arising from one division that affect the overall cost of Genzyme's capital could affect the results of operations and financial condition of the other division. Accordingly, the combined financial statements of the General Division and the Tissue Repair Division, should each be read in conjunction with the consolidated financial statements of Genzyme Corporation and Subsidiaries (the "Consolidated Financial Statements"). Accounting policies and financial information specific to the Tissue Repair Division are presented in these Tissue Repair Division combined financial statements. Accounting policies and financial information relevant to Genzyme, the General Division and the Tissue Repair Division are presented in the consolidated financial statements of Genzyme Corporation and Subsidiaries. The Company preparing the financial statements of the Divisions in accordance with generally accepted accounting principles, the accounting policies of Genzyme (see Note A, Summary of Significant Accounting Policies to the Consolidated Financial Statements which is incorporated herein by reference), and the divisional accounting policies approved by the Company's Board of Directors (the "Genzyme Board"). 80 128 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS REVENUE RECOGNITION GTR's two commercial tissue repair services are autologous epidermal skin grafts produced using the Epicel[SM] Service and the culturing of autologous cartilage cells using the CARTICEL[SM] Service. GTR recognizes service revenue at the time skin grafts or cartilage cells are shipped. Cancellation charges may be assessed upon the cancellation of an Epicel[SM] order. These charges are dependent upon order size and stage of skin graft growth and are recognized upon order cancellation and when collection is determined to be probable. 81 129 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE B. - RELATED PARTY TRANSACTIONS Genzyme allocates certain corporate general and administrative expenses, research and development expenses and income taxes in accordance with the policies described below. The divisional accounting policies require transactions between the Divisions be developed and accounted for as if the transactions were at arm's length between unrelated parties. The following policies may be further modified or rescinded by action of the Genzyme Board, or the Genzyme Board may adopt additional policies, without approval of the stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme stockholders, although the Genzyme Board has no present intention to do so. ACCESS TO TECHNOLOGY AND KNOW-HOW GTR has free access to all technology and know-how of Genzyme that may prove useful in GTR's business, subject to any obligations or limitations applicable to Genzyme. The costs of developing this technology remain in the business unit responsible for its development. FINANCIAL MATTERS As a matter of policy, the Company manages the financial activities of the General Division and Tissue Repair Division on a centralized basis. These financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt and the issuance and repurchase of common stock. At December 31, 1996, the Company attributed $18 million of its long-term debt plus related interest costs to GTR based upon the specific purpose for which the debt was incurred and the cash flow requirements of GTR. The Company believes this method of allocation to be equitable and a reasonable estimate of such costs as if GTR operated on a stand-alone basis. Loans may be made from time to time between divisions. Any such loan of $1 million or less will mature within 18 months and interest will accrue at the lowest borrowing rate available to Genzyme for a loan with similar terms and duration. Amounts borrowed in excess of $1 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. To date no such borrowings have occurred, however at December 31, 1996, GTR owed the General Division $1.6 million for services rendered in the normal course of business. SHARED SERVICES AND OTHER INTERDIVISION TRANSACTIONS The Tissue Repair Division operates as a division of Genzyme with its own personnel and financial resources, however, GTR has access to Genzyme's extensive research and development capabilities, manufacturing facilities, worldwide clinical development and regulatory affairs staffs, marketing, infrastructure and experience in raising capital. Operating activities transacted directly by the Tissue Repair Division are recorded by GTR, however, from time to time, the Tissue Repair Division may engage in transactions with the General Division or with the General Division and one or more third parties. Such transactions may include agreements by one division to provide products and services for use by the other division and joint ventures or other collaborative arrangements involving one or both divisions to develop new products and services jointly and with third parties. Research and development performed by one division for the benefit of the other division will be charged to the division for which work is performed on a cost basis. The division performing the research will not recognize revenue as a result of performing such research. Genzyme's corporate and general and administrative expenses, which are performed primarily by the General Division, or other indirect costs are allocated to each division on a cost basis based on utilization by the division of the services to which such costs relate. Other interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated at arm's length with unaffiliated third parties. Any interdivisional transaction to be performed on terms and conditions other than those previously set forth and that is material to one or more of the participating divisions will require the approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each division. If a division (the "Purchasing Division") requires any product or service from which the other division ( the "Selling Division") derives revenues from sales to third parties (a "Commercial Product or Service"), the Purchasing Division may solicit from the Selling Division a bid to provide such Commercial Product or Service in addition to any bids solicited by the Purchasing Division from third parties. Subject to determination by the Genzyme Board that the bid of the Selling Division is fair and reasonable to each division and to their respective stockholders and that the Purchasing 82 130 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Division is willing to accept the Selling Division's bid, the Purchasing Division may accept any bid deemed to offer the most favorable terms and conditions for providing the Commercial Product or Service sought by the Purchasing Division. General and administrative, selling and marketing and research and development expenses have been allocated to GTR as if GTR operated on a stand-alone basis. Management believes that such allocation is a reasonable estimate of such expenses. General Division allocations to GTR for general and administrative and selling and marketing expenses (incurred mostly in connection with developing European markets) were $9.1 million in 1996, $4.4 million in 1995 and $0.8 million in 1994. General Division allocations to GTR for research and development expenses were $6.9 million in 1996, $4.7 million in 1995 and $3.3 million in 1994. Amounts payable by GTR to the General Division for operating activities were $1.6 million and $2.0 million at December 31, 1996 and 1995. INCOME TAXES GTR is included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to the Divisions using the asset and liability method of accounting for income taxes and as if the Divisions were separate taxpayers. Accordingly, the realizability of deferred tax assets is assessed at the division level. The sum of the amounts calculated for individual divisions of Genzyme may not equal the consolidated amount under this approach. The accounting policies provide that, as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be attributed to the other division without any compensating payment or allocation. INTER-DIVISION ASSET TRANSFERS The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations will be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likehood and timing of any such realization and other matters that the Genzyme Board and its financial advisors deem relevant. The consideration for such reallocation may be paid by one division to another in cash or other consideration, in lieu of cash, with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from the General Division to the Tissue Repair Division, the Genzyme Board may elect to account for such reallocation of assets as an increase in GTR Designated Shares. Notwithstanding the foregoing, no key GTR Program, as defined in the management and accounting policies, may be transferred out of GTR without a class vote of the holders of GTR Stock. NOTE C. DIVISION EQUITY The following analyzes the equity of GTR for the periods presented:
(AMOUNTS IN THOUSANDS) DECEMBER 31, - ----------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Balance at beginning of period .................. $ 45,926 $ 23,313 $ - Net loss ........................................ (42,315) (22,030) (15,751) Shares issued in connection with acquisition of BioSurface Technology, Inc. .................... - - 25,313 Exercise of stock options ....................... 540 241 - Shares issued in connection with Employee Stock Purchase Plan .................................. 1,896 983 14 Shares issued in public offering ................ - 42,292 - Allocation from General Division ................ 11,714 - 13,993 Non-cash compensation expense ................... 312 882 - Unrealized gain (loss) on investments ........... 11 245 (256) -------- -------- -------- Balance at end of period ........................ $ 18,084 $ 45,926 $ 23,313 ======== ======== ========
83 131 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Immediately prior to the Effective Date, as defined in Note A to the Consolidated Financial Statements, approximately 31,582,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the "Warrants"), and conversion of the 6 3/4% Convertible Subordinated Notes Due 2001 (the "Notes"). Pursuant to antidilution provisions in the agreements covering the options, Genzyme has adjusted each option outstanding on the Effective Date to provide for separation of the option into an option exercisable for General Division Stock and an option exercisable for the number of shares of GTR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date (with any resultant fractional shares of GTR Stock rounded down to the nearest whole number). Upon exercise of these options, all proceeds will be allocated to the General Division (See GTR Designated Shares). The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of General Division Stock and GTR Stock upon exercise of the Warrant that the holder would have received if the holder had exercised the Warrant immediately prior to the Effective Date. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after the Effective Date will receive, in addition to the shares of General Division Stock into which the Note is convertible, the same number of shares of GTR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. At December 31, 1996, approximately 3,664,585 shares of GTR Stock were reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as amended, and upon the exercise of outstanding warrants. PREFERRED STOCK Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the preferences, voting powers, qualifications and special or relative rights or privileges of any such series before the issuance of any shares of that series. The Board of Directors shall determine the number of shares constituting each series of Preferred Stock and each series shall have a distinguishing designation. DEFERRED COMPENSATION PLAN The Company's Directors' Deferred Compensation Plan (the "Deferred Compensation Plan") allows each member of the Genzyme Board who is not also an officer or employee of Genzyme to defer receipt of all or a portion of the cash compensation payable to him or her as a director of Genzyme. Compensation may be deferred until the termination of services as a director or, subject to certain restrictions, such other date as may be specified by the director. All of the current directors of Genzyme, other than Mr. Termeer, are eligible to participate in the plan and as of December 31, 1996, six of the directors have elected to participate in the plan. The Company has reserved 50,000 shares of GGD Stock and 100,000 shares of GTR Stock to cover distributions of shares credited to stock accounts under the Deferred Compensation Plan (subject in each case to adjustment for stock splits, stock dividends and certain transactions affecting Genzyme's capital stock). As of December 31, 1996, no shares of General Division Stock or GTR Stock credited to stock accounts under the Deferred Compensation Plan have been distributed to participants in the Deferred Compensation Plan. STOCK OPTIONS Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"), options may be granted to purchase an aggregate of 3,300,000 shares of GTR Stock. The Plan allows the granting of stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, the Company has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 70,000 shares TR Stock, are automatically granted at fair market value to members of the Board of Directors of the Company upon their election or reelection as Directors. For each year of a director's term of office, he or she receives an option to purchase 4,000 shares of General Division Stock and a number of GTR Stock options with a market value equal to one-quarter of the market value of the stock subject to the General Division Stock options. All options expire ten years after the initial grant date and vest over various periods. At the Effective Date of the Genzyme Stock Proposal, Genzyme granted initial options to purchase a total of 939,851 shares of GTR Stock to employees of the Company who will devote a substantial portion of their efforts to GTR. These options, (i) had an exercise price of $4.75, the closing price of GTR Stock on the first date such shares were traded on the NASDAQ National Market System or the closing price of such shares on the six-month anniversary of such date, (ii) become exercisable 20% on the effective date of the grant and 20% on each of the next four anniversaries thereof and (iii) have a term of ten years. At the six month anniversary date the closing price of the GTR Stock was $6.25 and accordingly, compensation expense equal to 939,851 shares multiplied by the difference in the exercise price of $4.75 and $6.25, the six month anniversary price, will be recognized over the period of service of the holders. In 1996, GTR recorded $285,000 of related compensation expense and will record the remaining balance of $220,000 over the next 2 years. 84 132 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Stock option activity is summarized below:
SHARES WEIGHTED AVERAGE UNDER OPTION EXERCISE PRICE EXERCISABLE ------------ -------------- ----------- GENZYME CORPORATION COMMON STOCK Outstanding at December 31, 1993.......................... 7,690,708 $15.35 Granted ...................... 3,238,728 14.93 Exercised .................... (132,756) 8.83 Forfeited and cancelled ...... (423,526) 19.08 Converted at Effective Date .. (10,373,154) 15.15 ----------- Outstanding at December 31, 1994.......................... - =========== GTR STOCK Converted at Effective Date .. 464,824 5.01 Granted ...................... 940,976 4.75 ----------- Outstanding at December 31, 1994.......................... 1,405,800 4.84 207,583 Granted ...................... 1,153,053 12.86 Exercised .................... (63,608) 5.15 Forfeited and cancelled ...... (76,202) 4.69 ----------- Outstanding at December 31, 1995.......................... 2,419,043 8.66 713,584 Granted ...................... 830,916 12.88 Exercised .................... (102,921) 5.23 Forfeited and cancelled ...... (159,702) 9.50 ----------- Outstanding at December 31, 1996.......................... 2,987,336 $ 9.92 1,031,373 ===========
The total exercise proceeds for all options outstanding at December 31, 1996 is approximately $29,646,000. Information regarding the range of option prices as of December 31, 1996 is as follows:
EXERCISABLE ----------------------------- RANGE OF NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE OF OPTIONS AVERAGE REMAINING EXERCISE EXERCISE PRICE CONTRACTUAL PRICE LIFE - ----------------------------------------------------------------------------------------------------------- 1.32 - 4.25 157,420 4.48 3.14 122,017 2.83 4.34 - 4.75 766,711 7.95 4.75 461,056 4.75 4.78 - 5.49 153,148 6.70 5.19 59,292 5.29 5.50 - 6.00 331,471 8.25 5.97 130,277 5.97 6.00 - 11.88 250,390 7.71 8.99 101,236 7.96 12.25 - 12.25 466,284 9.30 12.25 87,799 12.25 12.38 - 17.31 248,694 8.75 15.10 55,398 15.64 17.50 - 17.50 537,207 8.96 17.50 8,576 17.50 17.62 - 25.50 68,136 9.09 20.77 5,722 17.71 25.75 - 25.75 7,875 7.66 25.75 0 0.00 - ----------------------------------------------------------------------------------------------------------- 1.32 - 25.75 2,987,336 8.20 9.92 1,031,373 6.42
EMPLOYEE STOCK PURCHASE PLAN. The Company's 1990 Employee Stock Purchase Plan allows employees to purchase the Company's stock at 85% of fair market value. Under this plan 600,000 shares of GTR Stock are authorized, of which 325,300, and 269,920 and 3,906 shares of GTR Stock were issued in 1996, 1995 and 1994, respectively. STOCK COMPENSATION PLANS The Company applies APB Opinion 25 and related Interpretations in accounting for its three stock-based compensation plans, the 1990 Equity Incentive Plan (a stock option plan), the 1990 Employee Stock Purchase Plan (a stock purchase plan) and the 1988 Directors' Stock Option Plan (a stock purchase plan) and accordingly no compensation expense was recognized for options granted on the effective date of the Genzyme stock proposal. 85 133 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Compensation expense has not been recognized for subsequent grants and shares purchased under the provisions of these plans. Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the method of Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-based Compensation", the Tissue Repair Division's net loss and loss earnings per share would have been as follows:
DECEMBER 31, ---------------------- (Amounts in thousands, except per share data) 1996 1995 - ----------------------------------------------------------------------------- TISSUE REPAIR DIVISION Net loss: As reported...................................... $(42,315) $(22,030) Pro forma........................................ $(45,735) $(23,168) Primary and fully diluted loss per share: As reported...................................... $ (3.38) $ (2.28) Pro forma........................................ $ (3.65) $ (2.40)
The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995 and additional awards are anticipated in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. In computing these pro forma amounts, the Tissue Repair Division has assumed a risk-free interest rate equal to approximately 6.37% and 6.33%, expected volatility of 80%, zero dividend yields and expected lives of four years for 1996 and 1995, respectively. The average fair value of the options granted during 1996 and 1995 is estimated as $9.23 and $10.06, respectively on the date of grant. STOCK RIGHTS. In 1989, the Company's Board of Directors issued a dividend of one preferred stock purchase right (a "Common Stock Right") on each share of Common Stock. At the Effective Date, the Rights Agreement under which the rights were issued was amended and restated to reflect the change in the capital structure of the Company and the Board declared a distribution to holders of GTR Stock of a right (a "GTR Stock Right") on each outstanding share of GTR Stock. The Restated Rights Agreement provides that each General Division Stock Right, which replaced the Common Stock Right, and each GTR Stock Right, when it becomes exercisable, will entitle the holder to purchase from the Company (i) in the case of a General Division Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $52, subject to adjustment, and (ii) in the case of a GTR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $25, subject to adjustment. The rights expire on March 28, 1999. STOCK WARRANTS. The Company has issued warrants which, when exercised, grant the holders two shares of General Division Stock and .135 shares of GTR Stock for each warrant exercised. These warrants were granted in exchange for the receipt of options to purchase the partnership interests of Genzyme Development Partners, L.P. (the "Surgical Aids Partnership") the callable common stock of Neozyme II Corporation ("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds from the exercise of these warrants will be allocated to the General Division (see "GTR Designated Shares"). The outstanding warrants as of December 31, 1996 were issued under the following terms:
EXERCISE ISSUE NUMBER OF PRICE DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD - ---- --------- -------- --------- --------------- 1992 Investors in Neozyme II: Callable Warrants 29,314 $44.202 December 6, 1996 December 31, 1998 1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
The warrants granted in exchange for the receipt of options to purchase the partnership units of GDP expired on October 31, 1996. On October 28, 1996, the Company completed a tender offer for the outstanding Units of Neozyme II and acquired 2,385,686 of the 2,415,000 Units outstanding. On December 6, 1996, 86 134 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS Neozyme II was merged with and into a subsidiary of Genzyme, and the remaining 29,314 Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger and became exercisable. Warrant activity is summarized below:
WARRANTS WARRANT PRICE -------- ------------- Outstanding at December 31, 1993.............. 8,156,004 $16.01 - $38.25 Exercised................................. (2,197,774) 16.01 - 22.91 Expired................................... (23,849) 16.01 - 22.91 ---------- Outstanding at December 31, 1994.............. 5,934,381 16.01 - 38.25 Granted................................... 6,005 42.67 Exercised................................. (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995.............. 5,597,241 16.01 - 42.67 ---------- Exercised................................. (3,170,551) 42.67 Tendered.................................. (2,385,686) N/A Expired................................... (5,685) 16.01 - 38.25 ---------- Outstanding at December 31, 1996.............. 35,319 $42.67 - $44.20 ==========
GTR DESIGNATED SHARES. Pursuant to Genzyme's Articles of Organization, as amended, GTR Designated Shares are authorized shares of GTR Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GTR. GTR Designated Shares are created in certain circumstances when cash or other assets are transferred from the General Division to the Tissue Repair Division. The number of GTR Designated Shares will be decreased by the number of shares of GTR Stock issued by Genzyme, the proceeds of which are allocated to the General Division; the number of shares of GTR Stock issued as a dividend to holders of General Division stock; and the number of shares of GTR Stock issued upon the conversion of convertible securities, including the Notes, attributed to the General Division. In addition, the number of GTR Designated Shares can be increased as a result of certain inter-division transactions. 87 135 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS At the Effective Date, December 14, 1994, 5,000,000 TR Designated Shares were established. As a result of the distribution of approximately 3,300,000 shares of TR Stock to holders of General Division Stock, the number of TR Designated Shares were reduced by a corresponding amount. The remaining 1,700,000 TR Designated Shares were reserved for issuance upon the exercise of Genzyme stock options and warrants and the conversion of Genzyme's convertible notes which were outstanding on the Effective Date. Genzyme's former obligation to allocate up to $30 million in cash from the General Division to GTR in the period through June 1998 (the "Funding Commitment") was eliminated by the consummation of GTR's public offering on September 22, 1995, which provided GTR with $42.3 million in net proceeds from the offering after underwriting discounts. Genzyme retains an option to allocate to GTR, at $10 per GTR Designated Share, up to $30 million from the General Division (the "Purchase Option") in exchange for a maximum of 3,000,000 of TR Designated Shares to be issued in connection with the exercise of the Purchase Option. In June 1996, pursuant to the terms of the Purchase Option, the Genzyme Board approved the allocation of $10 million in cash from the General Division to the Tissue Repair Division in exchange for 1,000,000 GTR Designated Shares which were reserved for issuance at the sole discretion of the Genzyme Board for the benefit of the General Division stockholders. If, as of May 31 of each year starting May 31, 1997, the number of TR Designated Shares on such date (not including those reserved for issuance with respect to General Division convertible securities as a result of anti-dilution adjustments required by the terms of such instruments by the Genzyme Board) exceeds ten percent (10%) of the number of shares of GTR Stock then issued and outstanding, then substantially all TR Designated Shares will be distributed to holders of record of General Division Stock, subject to reservation of a number of such shares equal to the sum of (a) the number of TR Designated Shares reserved for issuance upon the exercise or conversion of General Division convertible securities and (b) the number of TR Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to the General Division. In October 1996, the Genzyme Board approved the allocation of up to $20 million in cash from the General Division to the Tissue Repair Division (the "GTR Equity Line") to provide initial funding for the joint venture with Diacrin, Inc. ("Diacrin") (See Note D), in exchange for an increase in the number of GTR Designated Shares at a rate determined by dividing the amount of cash so allocated by the average of the daily closing prices of one share of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. As of December 31, 1996, the Company had allocated $1.9 million from the General Division to the Tissue Repair Division under the GTR Equity Line and 231,645 GTR Designated Shares were reserved for issuance at the Genzyme Board's discretion. GTR Designated Shares activity is summarized below:
GTR DESIGNATED SHARES ---------- Established at Effective Date........................... 5,000,000 Stock dividend to holders of Genzyme Common Stock....... (3,356,713) Stock options exercised................................. (168) Stock warrants exercised................................ (233,412) ---------- Balance at December 31, 1994........................ 1,409,707 Stock options exercised................................. (72,942) Stock warrants exercised................................ (46,244) ESPP shares issued...................................... (3,613) --------- Balance at December 31, 1995........................ 1,286,908 --------- Stock options exercised................................. (42,728) Stock warrants exercised................................ (426,984) Convertible notes conversion............................ (255,249) Increase from equity line............................... 231,645 Exercise of purchase option............................. 1,000,000 --------- Balance at December 31, 1996........................ 1,793,592 =========
DIVIDEND POLICY The Company has never paid any cash dividends on shares of its capital stock. Genzyme currently intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends on GTR Common Stock in the foreseeable future. NOTE D. INVESTMENTS AND OTHER NONCURRENT ASSETS Investments in marketable securities at December 31 consisted of the following:
1996 1995 -------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - -------------------------------------------------------------------------------- Short Term: Certificates of deposit... $318 $318 $ - $ - Federal agency notes ..... - - 1,035 1,036 Corporate notes .......... - - 2,776 2,776 U.S. Treasury notes ...... - - 3,031 3,020 ---- ---- ------ ------ $318 $318 $6,842 $6,832 ==== ==== ====== ======
Cash and cash equivalents, consisting principally of money market funds and municipal notes are valued at cost plus accrued interest. Gross unrealized losses in GTR's investment portfolio at December 31, 1995 were $10,000. GTR held no investments in marketable securities as of December 31, 1996. 88 136 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS As of December 31, 1996, the Tissue Repair Division retained a $318,000 certificate of deposit related to certain leased equipment which was subsequently converted into cash in March 1997. DIACRIN/GENZYME LLC On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between the Tissue Repair Division and Diacrin to develop and commercialize products and processes for use in the treatment of Parkinson's disease and Huntington's disease in humans using porcine fetal cells. Under the terms of the joint venture agreement, the Tissue Repair Division will provide 80% of the first $50 million in funding for products to be developed by the joint venture. After that, all costs will be shared equally between GTR and Diacrin. Profits from the joint venture will be shared equally by the two parties. In order to provide initial funding for the joint venture with Diacrin, the Genzyme Board has approved the monthly allocations in an amount corresponding to the funding commitment of GTR under the joint venture of up to an aggregate total of $20 million in cash from the General Division to the Tissue Repair Division pursuant to the terms of the GTR Equity Line (See Note C. Division Equity, GTR Designated Shares). As of December 31, 1996, $1.9 million of General Division cash had been allocated to the Tissue Repair Division under the GTR Equity Line and 231,645 GTR Designated Shares have been reserved for issuance at the sole discretion of the Genzyme Board. As of December 31, 1996, GTR provided $1.9 million of funding to the joint venture and realized a net loss of $1.7 million from the joint venture. NOTE E. ACQUISITION OF BIOSURFACE TECHNOLOGY, INC. On December 15, 1994, Genzyme acquired BioSurface Technology, Inc. ("BST") by issuing .575 of one share of TR Stock for each share of BST common stock. In the aggregate, 5,000,000 shares of GTR Stock, valued at $25.3 million, were issued representing 50% of the initial equity interest in GTR. The acquisition was accounted for as a purchase. Accordingly, the associated net assets and operations of BST have been included in GTR's financial statements since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, $11.2 million, was charged to in-process research and development. NOTE F. INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1996 1995 -------------------------------------------------------- Raw materials......................... $ 136 $107 Work-in-process....................... 1,687 654 ------ ---- $1,823 $761 ====== ====
NOTE G. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------ Plant and equipment .................... $ 1,404 $1,180 Land and buildings ..................... 2,324 - Leasehold improvements ................. 2,387 282 Furniture and fixtures ................. 1,718 978 Construction in progress ............... 15,988 179 ------- ------ 23,821 2,619 Less accumulated depreciation ........ (1,592) (657) ------- ------ Property, plant and equipment, net .... $22,229 $1,962 ======= ======
Depreciation expense was $935,000 in 1996, $628,000 in 1995, and $26,000 in 1994. The net book value of laboratory, computer and office equipment under capital leases at December 31, 1996, 1995 and 1994 totaled $0, $146,000 and $470,000, respectively. 89 137 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS In January 1996, GTR acquired certain real estate in Framingham, Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to buildings and $1.1 million was allocated to land based on appraised values. In August 1996, GTR effected an interdivisional transfer of certain land and a building to the General Division for $5.2 million, which represented the approximate fair market value of the property at the date of the sale. NOTE H. - ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1996 1995 ----------------------------------------------- Professional fees ....... $ 743 $ 207 Compensation ............ 1,375 926 Royalties ............... 113 96 Interest ................ 3 - Other ................... 245 120 ------ ------ $2,479 $1,349 ====== ======
NOTE I. - LONG-TERM DEBT AND LEASES Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1996 1995 ------------------------------------------------------------------------------ Revolving Credit Facility ............................. $ 18,000 $ -
Although the Company retains responsibility for the re-payment of all long-term debt obligations, such debt is allocated to either the General Division or Tissue Repair Division for reporting purposes based on the intended use of the funds borrowed under each instrument. CREDIT FACILITIES In November 1996, Genzyme refinanced its existing $215.0 million line of credit (the "Credit Line") with a revolving credit facility (the "Revolving Facility") made available through a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under each facility could be allocated to either the General Division or Tissue Repair Division. In December 1996, GTR borrowed $18.0 million to finance operations. REVOLVING FACILITY The Company may request loans up to a maximum aggregate principal amount outstanding at any time of $225.0 million under the terms of the Revolving Facility. Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and conditions defined in the credit agreement. The notes have certain covenants which require the Company to, among other things, maintain certain levels of earnings and liquidity ratios. The Stock of Genzyme Securities Corporation, a Massachusetts Securities Corporation, is pledged as collateral for this facility. CREDIT LINE Until November 1996, Genzyme maintained a $225.0 million Credit Line with Fleet National Bank with interest payable at LIBOR plus 5/8% until November 1996. Prior to the November re-financing of the Credit Line, GTR borrowed a total of $38 million to finance operations and planned manufacturing capacity expansion, all of which was repaid with accrued interest of $302,527 by December 31, 1996. 90 138 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS OPERATING LEASES GTR rents facilities and equipment under noncancellable operating leases expiring through 2001. Rent expense under all operating leases was $2.1 million in 1996 and $1.4 million in 1995. Future minimum payments due under the Tissue Repair Division's long-term debt and non-cancellable operating leases are as follows:
LONG-TERM OPERATING (DOLLARS IN THOUSANDS) DEBT LEASES ------------------------------------------------------------------- 1997........................................ $ - $1,749 1998........................................ - 1,637 1999........................................ 21,240 1,612 2000........................................ - 1,610 2001........................................ - 222 Thereafter.................................. - - ------- ------ Total minimum payments.................... 21,240 $6,830 Less: Interest............................ (3,240) - ------- ------ $18,000 $6,830 ======= ======
NOTE J. - COMMITMENTS AND CONTINGENCIES From time to time the Tissue Repair Division has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1996, there were no asserted claims against the Tissue Repair Division which, in the opinion of management, if adversely decided would have a material adverse effect on the Tissue Repair Division's financial position and results of operations. NOTE K. - INCOME TAXES The following summarizes GTR's provision for (benefit from) income taxes (in thousands):
YEAR ENDED DECEMBER 31, -------------------------- (Dollars in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------- Federal income taxes: Current.............................................. $ - $ - $(132) Deferred............................................. - - 132 State income taxes: Current.............................................. - - - Deferred............................................. - - - ----- ---- ----- Total income tax expense (benefit)........................ $ - $ - $ - ===== ===== =====
The differences between the effective tax rates and the U.S. federal statutory tax rates were as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------- U.S. Federal income tax statutory rate.................... (35.0)% (35.0)% (35.0)% State income taxes, net of federal benefit................ (5.2) (5.2) (6.0) Deductions subject to deferred tax valuation allowance.... 40.2 40.2 41.0 ----- ----- ----- Effective tax rate........................................ - - % - % ===== ===== =====
At December 31, 1996 and 1995, the components of deferred tax assets and liabilities were as follows (in thousands): 91 139 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS
1996 1995 ---- ---- Deferred assets Net operating loss carryforward..................... $24,802 $11,511 Intangible amortization............................. 11,282 8,415 Reserves and other.................................. 1,983 354 ------- ------- Total deferred tax assets........................ 38,067 20,280 Valuation allowance................................. (38,067) (20,280) ------- ------- Net deferred tax assets.......................... $ - $ - ======= =======
Due to uncertainty surrounding the realization of certain favorable tax attributes primarily relating to capital losses and the purchase of in-process research and development, the Company placed a valuation allowance of $38.1 million and $20.3 million for December 31, 1996 and December 31, 1995, respectively, against otherwise recognizable deferred tax assets. The deferred tax assets of GTR cannot be utilized by the Division to offset or reduce current or deferred income tax expense. Accordingly, the deferred tax assets have been allocated to the General Division in accordance with the management and accounting policies. NOTE L. - BENEFIT PLANS Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of GTR. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by GTR. GTR made $165,000, $36,000 and $0 in contributions to the plan in 1996, 1995 and 1994, respectively. NOTE M. - QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1996, 1995 and 1994 are displayed in the following table.
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1996 - ---- Net sales............................ $ 1,714 $ 1,647 $ 1,861 $ 2,090 Gross profit......................... (712) (1,809) (655) (705) Net loss............................. (8,742) (10,500) (9,932) (13,141) Loss per share....................... $ (.71) $ (.83) $ (.78) $ (1.02) 1995 - ---- Net sales............................ $ 1,030 $ 1,247 $ 1,435 $ 1,508 Gross profit......................... 305 367 85 (268) Net loss............................. (3,942) (5,027) (5,382) (7,679) Loss per share....................... $ (0.45) $ (0.57) $ (0.59) $ (0.64)
92 140 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1994 - ---- Net sales............................ $ - $ - $ - $ 324 Gross profit......................... - - - 37 Net loss (1)......................... (815) (1,129) (1,059) (12,747) Loss per share (1):.................. $ (0.25) $ (0.34) $(0.32) $ (3.56)
- ------------------ (1) Includes charges related to the purchase of in-process research and development in the fourth quarter of $11.2 million related to the acquisition of BioSurface Technology, Inc.(See Note E). NOTE N. - SUBSEQUENT EVENTS In January 1997, the Tissue Repair Division leased to the General Division certain laboratory and office space in the building located at the Tissue Repair Division's Framingham, Massachusetts facility for a 3-year term commencing January 1, 1997. The General Division will lease approximately half of the facility at a cost of $839,808 per year. Beginning on July 1, 1997, the Tissue Repair Division has the option of requiring the General Division to assume responsibility for an additional 20% of the facility at a cost of $424,056 per year. In February 1997, the Tissue Repair Division completed a $13 million private placement of a 5% convertible note to Credit Suisse First Boston due February 27, 2000. The note is convertible beginning May 29, 1997 into shares of GTR stock at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price, as defined, preceding the conversion date or the date 15 months after the date of issue. 93 141 GENZYME TISSUE REPAIR DIVISION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
========================================================================================================= COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - --------------------------------------------------------------------------------------------------------- Year ended December 31, 1996: Allowance for doubtful accounts $325,000 $238,000 - $155,000(1) $408,000 Year ended December 31, 1995: Allowance for doubtful accounts $176,800 $210,000 - $ 61,600(1) $325,200 Year ended December 31, 1994: Allowance for doubtful accounts $ - $ - $176,800(2) $ - $176,800 - ---------- (1) Uncollectible accounts written off, net of recoveries. (2) Reserve acquired in acquisition.
94 142 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the period from January 1, 1995 to the filing date of this Form 10-K, no independent accountant who was previously engaged as the principal accountant to audit Genzyme's financial statements has resigned, indicated it has declined to stand for re-election after completion of the current audit or was dismissed. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is contained in part under the caption "Executive Officers of the Registrant" in Part I, Item 1A hereof and the remainder is incorporated herein by reference from the discussion responsive thereto under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated herein by reference from the discussion responsive thereto under the following captions in the Company's Proxy Statement relating to the 1997 Annual Meeting of Stockholders: "Election of Directors - Director Compensation", "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Share Ownership" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated herein by reference from (1) the discussion responsive thereto under the caption "Certain Transactions" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Stockholders, and (2) from the discussion herein under Item 1 "Business-Related Entities." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The financial statements are listed under Part II, Item 8 of this Report. 2. FINANCIAL STATEMENT SCHEDULES The financial statement schedules are listed under Part II, Item 8 of this Report. 3. EXHIBITS The exhibits are listed below under Part IV, Item 14(c) of this report. (B) REPORTS ON FORM 8-K A report on Form 8-K was filed with the Commission during the fourth quarter of 1996 to report the following items as of the date indicated: Genzyme filed a report on Form 8-K dated November 5, 1996 reporting under Item 2 of Form 8-K the completion of a tender offer for the outstanding units of Neozyme II for $45 per unit in cash in which 98.8% of the units were tendered and accepted for payment. The report also incorporated by reference under Item 5 unaudited pro forma financial statements and the related notes thereto filed as Exhibit 99.1 to such report on Form 8-K for both Genzyme and Genzyme General giving effect to the acquisition by Genzyme of Genetrix on May 1, 1996 (the "Genetrix Acquisition"), the acquisition of DSP on July 1, 1996 (the "DSP Acquisition"), and the acquisition of Neozyme II (the "Neozyme II Acquisition") (collectively, the "Acquisitions"), including: (1) Pro forma condensed statements of operations for both Genzyme and Genzyme General assuming that the Acquisitions occurred as of January 1, 1995, using the purchase accounting method, (2) Pro forma balance sheets for both Genzyme and Genzyme General assuming that the DSP Acquisition and Neozyme II Acquisition each occurred as of June 30, 1996, which also reflected the effect of the Genetrix Acquisition which was completed on May 1, 1996, (3) Historical balance sheets for DSP as of December 31, 1994 and 1995 and June 30, 1996 (unaudited), and (4) Historical statements of operations for DSP have been presented for the years ended September 30, 1994 and 1995 and for the nine-months ended June 30, 1995 and 1996 (unaudited) In addition, historical financial statements and notes thereto of DSP and Neozyme II were filed therewith as Exhibits 99.2 and 99.3, respectively, to such report on Form 8-K and incorporated by reference into Item 5. 95 143 (C) EXHIBITS 96 144 EXHIBIT NO. DESCRIPTION - ------- ----------- *3.1 Restated Articles of Organization of Genzyme. Filed as Exhibit 3.1 to Genzyme's Form 10-Q for the quarter ended June 30, 1996. *3.2 By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated December 31, 1991. *4.1 Amended and Restated Rights Agreement, dated as of October 13, 1994 between Genzyme and American Stock Transfer and Trust Company. Filed as Exhibit 4 to Genzyme's Form 8-K dated December 29, 1994. *4.2 Specimen Callable Warrant to purchase Genzyme Common Stock issued to shareholders of Neozyme II. Filed as Exhibit 28.6 to Genzyme's Form 10-Q for the quarter ended March 31, 1992. *4.3 Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4 to the Form 8-K of IG Laboratories, Inc., dated October 11, 1990, Commission File No. 0-18439. *10.1 Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration Statement on Form S-1, File No. 33-4904. *10.2 Lease dated as of September 15, 1989 for 95-111 Binney Street, Cambridge, Massachusetts between Genzyme and the Trustees of the Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1992, and incorporated herein by reference. First amendment of lease dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1993. *10.3 Lease dated December 20, 1988 for Building 1400, One Kendall Square, Cambridge, Massachusetts between Genzyme and the Trustees of Old Binney Realty Trust, as amended by letters dated December 20, 1988, January 19, 1989 and January 31, 1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K for 1988, and incorporated herein by reference. Addendum dated September 20, 1991 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 19.1 to Genzyme's Form 10-Q dated September 30, 1991, and incorporated herein by reference. Addenda dated August 2, 1990 and April 6, 1993 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to Genzyme's Form 10-K for 1993. *10.4 Lease dated December 20, 1988 for Building 700, One Kendall Square, Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall Realty Trust, as amended by letters dated December 20, 1988 and January 31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for 1988. *10.5 Lease dated September 30, 1985 for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990, and incorporated herein by reference. Amendment No. 1, dated '97 145 EXHIBIT NO. DESCRIPTION - ------- ----------- October 11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to Genzyme's Form 10-K for 1993. *10.6 Lease dated April 30, 1990 for 64 Sidney Street, Cambridge, Massachusetts between BioSurface Technology, Inc. ("BioSurface") and Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to BioSurface's Registration Statement on Form S-1, File No. 33-55874. *10.7 Sublease Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Prime Computer, Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993. *10.8 Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Mark L. Fins, David J. Winstanley and Bruce A. Gurall, tenants in common. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1993. *10.9 Lease dated June 1, 1992 for land at Allston Landing, Allston, Massachusetts between Allston Landing Limited Partnership and the Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's Form 10-K for 1993. *10.10 Underlease for Block 13 building at Kings Hill Business Park West Malling Kent among Rouse and Associates Block 13 Limited, Genzyme (UK) Limited and Genzyme Corporation. Filed as Exhibit 10.11 to Genzyme's Registration Statement on Form 8-B dated December 31, 1991, filed on March 2, 1992. *10.11 Agreement of Limited Partnership dated as of September 13, 1989 between Genzyme Development Corporation II, as General Partner, and each of the Limited Partners named therein. Filed as Exhibit 10(aa) to Genzyme's Registration Statement on Form S-4, File No. 33-32343. *10.12 Cross License Agreement dated as of September 13, 1989 between Genzyme Corporation and Genzyme Development Partners, L.P. Filed as Exhibit 10(bb) to Genzyme's Registration Statement on Form S-4, File No. 33-32343. *10.13 Development Agreement dated as of September 13, 1989 between Genzyme Corporation and Genzyme Development Partners, L.P. Filed as Exhibit 10(cc) to Genzyme's Registration Statement on Form S-4, File No. 33-32343. *10.14 Amendment No. 1 dated January 4, 1994 to Development Agreement dated as of September 13, 1989 between Genzyme and Genzyme Development Partners, L.P. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993. *10.15 Notice dated January 4, 1994 from Genzyme to Genzyme Development Partners, L.P. Filed as Exhibit 10.15 to Genzyme's Form 10-K for 1993. *10.16 Notice dated January 13, 1995 from Genzyme to Genzyme Development Partners, L.P. Filed as Exhibit 10.16 to Genzyme's Form 10-K for 1994. *10.17 Notice dated February 22, 1996 from Genzyme to Genzyme Development Partners, L.P. Filed as Exhibit 10.17 to Genzyme's Form 10-K for 1995. *10.18 Partnership Purchase Option Agreement dated as of September 13, 1989 between Genzyme Corporation, Genzyme Development Corporation II, Genzyme Development Partners, L.P. each Class A Limited Partner and the Class B Limited Partner. Filed as Exhibit 10(dd) to Genzyme's Registration Statement on Form S-4, File No. 33-32343. *10.19 Partnership Purchase Agreement, undated and unexecuted, between Genzyme Corporation, Genzyme Development Corporation II, Genzyme Development Partners, L.P., each Class A Limited Partner and the Class B Limited Partner, as the case may be. Filed as Exhibit 10(ee) to Genzyme's Registration Statement on Form S-4, File No. 33-32343. 98 146 EXHIBIT NO. DESCRIPTION - ------- ----------- *10.20 Joint Venture Agreement dated as of September 13, 1989 between Genzyme Corporation and Genzyme Development Partners, L.P. Filed as Exhibit 10(ff) to Genzyme's Registration Statement on Form S-4, File No. 33-32343. *10.21 Technology License and Supply Agreement dated as of September 8, 1989 between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form 10-K for 1990.** *10.22 1988 Director Stock Option Plan. Filed as Annex VIII to Genzyme's Registration Statement on Form S-4, File No. 33-83346. *10.23 1990 Equity Incentive Plan. Filed as Annex VII to Genzyme's Registration Statement on Form S-4, File No. 33-83346. *10.24 1990 Employee Stock Purchase Plan. Filed as Annex IX to Genzyme's Registration Statement on Form S-4, File No. 33-83346. *10.25 Executive Employment Agreement dated as of January 1, 1990 between Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's Form 10-K for 1990. *10.26 Form of Severance Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.33 to Genzyme's Form 10-K for 1990, and incorporated herein by reference. Current schedule identifying the executives filed as Exhibit 10.32 to Genzyme's Form 10-K for 1993. *10.27 Form of Indemnification Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.34 to Genzyme's Form 10-K for 1990, and incorporated herein by reference. Current schedule identifying the executives filed as Exhibit 10.33 to Genzyme's Form 10-K for 1993. *10.28 Consulting Agreement dated March 1, 1993 between Genzyme and Henry E. Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for 1992, and incorporated herein by reference. Consulting Agreement dated February 3, 1994 between Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to Genzyme's Form 10-K for 1993. *10.29 Technology Transfer Agreement between Genzyme and Genzyme Transgenics Corporation ("GTC") dated as of May 1, 1993. Filed as Exhibit 2.1 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). 99 147 EXHIBIT NO. DESCRIPTION - ------- ----------- *10.30 Research and Development Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.31 Services Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.32 Series A Convertible Preferred Stock Purchase Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.5 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.33 Convertible Debt and Development Funding Agreement dated as of March 29, 1996 between Genzyme and GTC. Filed as Exhibit 10.39 to Genzyme's Form 10-K for 1995. *10.34 Common Stock Purchase Agreement between Argus Pharmaceuticals, Inc. and Genzyme Corporation dated as of September 10, 1993. Filed as Exhibit A to Schedule 13D filed by Genzyme on September 20, 1993.* * *10.35 Agreement and Plan of Reorganization dated as of July 25, 1994, as amended, among Genzyme Corporation, Phoenix Acquisition Corporation and BioSurface Technology, Inc. Filed as Annex X to Genzyme's Registration Statement on Form S-4, File No. 33-83346. *10.36 Agreement and Plan of Merger dated as of January 11, 1996 among Genzyme, Genetrix, Inc and the Principal Stockholders of Genetrix. Filed as Exhibit 2 to Genzyme's Registration Statement on Form S-4, File No. 333-1105. *10.37 License and Development Agreement between Celtrix Pharmaceuticals, Inc. ("Celtrix") and Genzyme Corporation dated as of June 24, 1994. Filed as Exhibit 10.42 to Celtrix's Annual Report on Form 10-K for the fiscal year ended March 31, 1994.** *10.38 Common Stock Purchase Agreement dated as of June 24, 1994 between Celtrix and Genzyme Corporation. Filed as Exhibit A to Schedule 13D filed by Genzyme on July 5, 1994. 10.39 Credit Agreement dated November 14, 1996 among Genzyme and those of its subsidiaries party thereto, Fleet National Bank, as Administrative Agent, and The First National Bank of Boston, as Documentation Agent. Filed herewith. 11 Computation of weighted average shares used in computing per share amounts. Filed herewith. 21 Subsidiaries of the Registrant. Filed herewith. 23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith. 23.2 Consent of Coopers & Lybrand L.L.P. relating to the Annual Report of Genzyme Corporation Retirement Savings Plan on Form 11-K. To be filed by amendment. 27.1 Financial Data Schedule for Genzyme General Division (for EDGAR filing purposes only). 27.2 Financial Data Schedule for Genzyme Tissue Repair Division (for EDGAR filing purposes only). 99 Information, financial statements and exhibits required by Form 11-K with respect to the Genzyme Corporation Retirement Savings Plan. To be filed by amendment. * Indicates exhibit previously filed with the Securities and Exchange Commission and incorporated by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K or 8-B of Genzyme Corporation were filed under Commission File No. 0-14680. * * Confidential treatment has been granted for the deleted portions of Exhibits 10.21, 10.34 and 10.37. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Exhibits 10.22 through 10.28 above are management contracts or compensatory plans or arrangements in which the executive officers or directors of Genzyme participate. 100 148 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Dated: March 28, 1997 By: /s/ David J. McLachlan ------------------------------- David J. McLachlan Executive Vice President, Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated. SIGNATURES TITLE DATE - ---------- ----- ---- /s/ Henri A. Termeer Director and Principal March 28, 1997 - ----------------------------------- Executive Officer Henri A. Termeer Director March 28, 1997 - ----------------------------------- Constantine E. Anagnostopoulos /s/ Douglas A. Berthiaume Director March 28, 1997 - ----------------------------------- Douglas A. Berthiaume /s/ Henry E. Blair Director March 28, 1997 - ----------------------------------- Henry E. Blair /s/ Charles L. Cooney Director March 28, 1997 - ----------------------------------- Charles L. Cooney /s/ Henry R. Lewis Director March 28, 1997 - ----------------------------------- Henry R. Lewis /s/ Robert J. Carpenter Director March 28, 1997 - ----------------------------------- Robert J. Carpenter /s/ David J. McLachlan Principal Financial and March 28, 1997 - ----------------------------------- Accounting Officer David J. McLachlan 101 EX-10.39 2 CREDIT AGREEMENT 1 CREDIT AGREEMENT AMONG GENZYME CORPORATION, THE SUBSIDIARY GUARANTORS PARTY HERETO, THE LENDERS PARTY HERETO, FLEET NATIONAL BANK, AS ADMINISTRATIVE AGENT AND THE FIRST NATIONAL BANK OF BOSTON, AS DOCUMENTATION AGENT DATED: NOVEMBER 14, 1996 2 TABLE OF CONTENTS ----------------- SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS .......................... 1 1.1 Certain Defined Terms ........................................... 1 1.2 Accounting Terms and Determinations ............................. 14 1.3 Types of Loans .................................................. 15 SECTION 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS ................... 15 2.1 Revolving Credit Loans .......................................... 15 2.2 Borrowings of Revolving Credit Loans ............................ 15 2.3 Changes of Commitments .......................................... 15 2.4 Commitment Fee .................................................. 16 2.5 Lending Offices ................................................. 16 2.6 Several Obligations; Remedies Independent ....................... 16 2.7 Notes ........................................................... 16 2.8 Optional Prepayments and Conversions or Continuations of Loans .. 17 2.9 Extension to Revolving Credit Commitment Termination Date ....... 17 SECTION 3. PAYMENTS OF PRINCIPAL AND INTEREST .......................... 18 3.1 Repayment of Loans .............................................. 18 3.2 Interest ........................................................ 18 SECTION 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. ............ 19 4.1 Payments ........................................................ 19 4.2 Pro Rata Treatment .............................................. 19 4.3 Computations .................................................... 20 4.4 Minimum Amounts ................................................. 20 4.5 Certain Notices ................................................. 20 4.6 Non-Receipt of Funds by the Administrative Agent ................ 21 4.7 Sharing of Payments, Etc. ....................................... 22 SECTION 5. YIELD PROTECTION, ETC. ...................................... 23 5.1 Additional Costs ................................................ 23 5.2 Limitation on Types of Loans .................................... 25 5.3 Illegality ...................................................... 26 5.4 Treatment of Affected Loans ..................................... 26 5.5 Compensation .................................................... 26 SECTION 6. GUARANTEE ................................................... 27 6.1 Guarantee ....................................................... 27 6.2 Obligations Unconditional ....................................... 28 6.3 Reinstatement ................................................... 28 6.4 Subrogation ..................................................... 29 6.5 Remedies ........................................................ 29 6.6 Continuing Guarantee ............................................ 29 3 6.7 Rights of Contribution .......................................... 29 6.8 Limitation on Guarantee Obligations ............................. 30 SECTION 7. CONDITIONS PRECEDENT ........................................ 30 7.1 Initial Loan .................................................... 30 7.2 Initial and Subsequent Extensions of Credit ..................... 32 SECTION 8. REPRESENTATIONS AND WARRANTIES .............................. 32 8.1 Existence ....................................................... 32 8.2 Financial Condition ............................................. 33 8.3 Litigation ...................................................... 33 8.4 No Breach ....................................................... 33 8.5 Action .......................................................... 34 8.6 Approvals ....................................................... 34 8.7 Use of Credit ................................................... 34 8.8 ERISA ........................................................... 34 8.9 Taxes ........................................................... 34 8.10 Investment Company Act ......................................... 35 8.11 Public Utility Holding Company Act ............................. 35 8.12 Borrowing Agreements and Liens ................................. 35 8.13 Compliance with Laws Including Environmental and Safety Matters ........................................................ 35 8.14 Subsidiaries, Etc. ............................................. 36 8.15 Title to Assets; Etc. .......................................... 36 8.16 Intellectual Property Rights ................................... 36 8.17 True and Complete Disclosure ................................... 36 SECTION 9. COVENANTS OF THE COMPANY .................................... 37 9.1 Financial Statements Etc. ....................................... 37 9.2 Litigation ...................................................... 38 9.3 Existence, Etc. ................................................. 38 9.4 Insurance ....................................................... 39 9.5 Prohibition of Fundamental Changes .............................. 40 9.6 Limitation on Liens ............................................. 41 9.7 Indebtedness .................................................... 42 9.8 Investments ..................................................... 43 9.9 Financial Covenants ............................................. 43 9.10 Lines of Business .............................................. 44 9.11 Use of Proceeds ................................................ 45 9.12 Certain Obligations Respecting Subsidiaries .................... 45 9.13 Additional Subsidiary Guarantors ............................... 46 SECTION 10. EVENTS OF DEFAULT .......................................... 46 SECTION 11. THE AGENTS ................................................. 48 11.1 Appointment, Powers and Immunities ............................. 48 11.2 Reliance by Agents ............................................. 49 4 11.3 Defaults ....................................................... 50 11.4 Rights as a Lender ............................................. 50 11.5 Indemnification ................................................ 50 11.6 Non-Reliance on Agents and Other Lenders ....................... 50 11.7 Failure to Act ................................................. 51 11.8 Resignation or Removal of Agents ............................... 51 11.9 Consents under Other Loan Documents ............................ 51 SECTION 12. MISCELLANEOUS .............................................. 52 12.1 Waiver ........................................................ 52 12.2 Notices ....................................................... 52 12.3 Expenses, Etc. ................................................ 52 12.4 Indemnification ............................................... 53 12.5 Amendments, Etc. .............................................. 53 12.6 Successors and Assigns ........................................ 54 12.7 Assignments and Participations ................................ 54 12.8 Survival ...................................................... 56 12.9 Captions ...................................................... 56 12.10 Counterparts .................................................. 56 12.11 Governing Law; Submission to Jurisdiction ..................... 56 12.12 Waiver of Jury Trial .......................................... 56 12.13 Confidentiality ............................................... 57 Schedules: Schedule 7.1 Indebtedness to be paid at closing Schedule 8.3 Litigation Schedule 8.12A Credit Agreements, Indentures, Guarantees, Letters of Credit, Etc. Schedule 8.12B Liens Securing Indebtedness Schedule 8.14 Subsidiaries Exhibits: Exhibit A Form of Revolving Credit Note Exhibit B Form of Legal Opinion Exhibit C Form of Compliance Certificate Exhibit D Form of Joinder Agreement Exhibit E Form of Notice of Assignment Exhibit F Form of Pledge Agreement 5 CREDIT AGREEMENT CREDIT AGREEMENT ("Agreement" or "Credit Agreement") dated as of November 14, 1996 among and between: GENZYME CORPORATION, a corporation duly organized and validly existing under the laws of The Commonwealth of Massachusetts (together with its permitted successors and assigns, the "Company"); Each of the Subsidiaries of the Company identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages hereto or that may hereafter become a "SUBSIDIARY GUARANTOR" pursuant to Section 9.13 hereof (together with its permitted successors and assigns, individually, a "SUBSIDIARY GUARANTOR" and, collectively, the "Subsidiary Guarantors" and, together with the Company, the "OBLIGORS"); Each of the lenders identified under the caption "LENDERS" on the signature pages hereto or that may hereafter become a "Lender" pursuant to Section 12.7(b) hereof (together with its successors and permitted assigns, individually, a "Lender" and, collectively, the "LENDERS"); FLEET NATIONAL BANK ("FLEET") as administrative agent for the Lenders (in such capacity, together with the successors in such capacity, the "ADMINISTRATIVE AGENT"); THE FIRST NATIONAL BANK OF BOSTON ("BANKBOSTON") as documentation agent for the Lenders (in such capacity, together with the successors in such capacity, the "Documentation Agent" and together with the Administrative Agent, the "AGENT" or "AGENTS"); The Company has requested that the Lenders extend credit to the Company in an aggregate principal or stated amount not exceeding $225,000,000; and To induce the Lenders to extend such credit, the Obligors, the Lenders and the Agents propose to enter into this Agreement pursuant to which, INTER ALIA, (1) the Lenders will make loans to the Company and (2) each Subsidiary Guarantor will guarantee the credit so extended to the Company. Each of the Obligors expects to derive benefit, directly or indirectly, from the credit so extended to the Company, both in its separate capacity and as a member of the integrated group, since the successful operation of each of the Obligors is dependent on the continued successful performance of the functions of the integrated group as a whole. Accordingly, the parties hereto agree as follows: Section 1. Definitions and Accounting Matters ---------------------------------- 1.1. CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.1 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and vice versa). "Accounts Receivable" shall mean, on any date, the net amount of accounts receivable of Company and its Consolidated Subsidiaries, excluding any such accounts which are more than -1- 6 120 days old, after deducting all returns, discounts and allowances thereon and reserves relating thereto, determined in accordance with GAAP. "ADJUSTED LIBO RATE" shall mean, for any LIBOR Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the Administrative Agent to be equal to the rate of interest specified in the definition of "LIBO Rate" in this Section 1.1 for the Interest Period for such Loan divided by 1 minus the Reserve Requirement (if any) for such Loan for such Interest Period. "ADMINISTRATIVE AGENT" shall have the meaning given such term in the preamble hereto, as it may be amended, modified, or changed from time to time. "Affiliate" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Company and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "control" (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), or that, in any event, any Person that owns directly or indirectly securities having 33% or more of the voting power for the election of directors or other governing body of a corporation or 33% or more of the partnership or other ownership interests of any other Person will be deemed to control such corporation, partnership or other Person. Notwithstanding the foregoing, (a) the Company and its Subsidiaries shall not be Affiliates of each other and (b) neither any Agent nor any Lender shall be an Affiliate of the Company or any of its Subsidiaries. "AGENTS" shall have the meaning given in the preamble hereto, as it may be amended, modified or changed from time to time. "APPLICABLE COMMITMENT FEE RATE" shall mean, for any period set forth below, the percentage set forth below opposite such period under the caption "APPLICABLE COMMITMENT FEE RATE", and "APPLICABLE MARGIN" shall mean, for any period set forth below for either Type of Loan set forth below, the percentage set forth below opposite such period under the caption "APPLICABLE MARGIN" and under the caption for such Type of Loan: -2- 7
- ---------------------------------------------------------------------------- Applicable Margin ============================================================================ Applicable Period Commitment Fee Rate Prime Rate Loans LIBOR Loans - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Level I Period 0.150% 0.000% 0.375% - ---------------------------------------------------------------------------- Level II Period 0.200% 0.000% 0.500% - ---------------------------------------------------------------------------- Level III Period 0.250% 0.000% 0.625% - ---------------------------------------------------------------------------- Level IV Period 0.375% 0.000% 0.875% - ----------------------------------------------------------------------------
"APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each Type of Loan, the "Lending Office" of such Lender (or of an affiliate of such Lender) designated for such Type of Loan on the signature pages hereof or such other office of such Lender (or of an affiliate of such Lender) as such Lender may from time to time specify to the Administrative Agent and the Company as the office by which its Loans of such Type are to be made and maintained. "BANKRUPTCY CODE" shall mean the Federal Bankruptcy Code of 1978, as amended from time to time. "BASLE ACCORD" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. "BUSINESS DAY" shall mean (a) any day on which commercial banks are not authorized or required to close in Boston, Massachusetts and (b) if such day relates to the giving of notices or quotes in connection with a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, or an Interest Period for, a LIBOR Loan or a notice by the Company with respect to any such borrowing, payment, prepayment, Conversion or Interest Period, then any day referred to in clause (a) that is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "CAPITAL EXPENDITURES" shall mean, for any period, expenditures (including, without limitation, the aggregate amount of Capital Lease Obligations incurred during such period) made by the Company or any of its Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, but excluding repairs) during such period computed in accordance with GAAP. "CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. -3- 8 "CASH EQUIVALENTS" shall mean any interest bearing investment of Company and its Wholly Owned Subsidiaries which meets the definition of a "cash equivalent" under GAAP (i.e., purchased with a remaining maturity of 90 days or less). Such investments shall be at least investment grade (A1/P1 for commercial paper, BBB or better for bonds and similar investments). "CLOSING DATE" the date upon which the initial Loans hereunder are made. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENTS" shall mean the Revolving Credit Commitments. "COMPANY" shall have the meaning given in the preamble, and its successors and permitted assigns hereunder. "COMPLIANCE CERTIFICATE" shall mean the compliance certificate provided for under Section 9.1(c)(ii) in substantially the form of Exhibit C. "CONSOLIDATED" shall mean, when used with reference to any term, that term (or the term "combined" in the case of partnerships, joint ventures and Affiliates that are not Subsidiaries) as applied to the accounts of Company (or any other specified Person) and all of its Subsidiaries (or other specified Persons) or such of its Subsidiaries as may be specified, consolidated (or combined) in accordance with GAAP and with appropriate deductions for minority interests in Subsidiaries, if required by GAAP. "CONSOLIDATED EBITDA" shall mean, for any period, the sum, for the Company, of the following: (a) Consolidated Operating Income for such period PLUS (b) depreciation and amortization, but only to the extent deducted in determining Consolidated Operating Income for such period. "CONSOLIDATED DEBT COVERAGE RATIO" shall mean, at any date, the ratio, for the Company and its Consolidated Subsidiaries, of (a) the sum of (i) Unrestricted Cash on such date plus (ii) Marketable Investments on such date to (b) Consolidated Funded Debt on such date. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" shall mean, for any period, the ratio of (a) the sum of (i) Consolidated EBITDA for such period LESS (ii) the aggregate amount of Capital Expenditures made during such period LESS (iii) the amount of the taxes paid during such period less (iv) the aggregate amount of all Dividend Payments made during such period to (b) all Interest expense for such period. "CONSOLIDATED FUNDED DEBT" shall mean, at any time, the outstanding balance of all Indebtedness in respect of borrowed money, Capital Lease Obligations, letters of credit and trade acceptances for the Company and its Consolidated Subsidiaries. "CONSOLIDATED NET INCOME" shall mean, for any period, net income (or loss) for the Company and its Consolidated Subsidiaries (determined in accordance with GAAP), PROVIDED, HOWEVER, that Consolidated Net Income shall not include amounts included in computing net -4- 9 income (or loss) in respect of (a) the write-up of assets (other than Marketable Investments) after December 31, 1995 and (b) extraordinary and non-recurring gains or losses. "CONSOLIDATED NET WORTH" shall mean, as at any date, the shareholder's equity of the Company and its Consolidated Subsidiaries. "CONSOLIDATED OPERATING INCOME" shall mean, for any period, the Consolidated Net Income of the Company for such period, provided, however, that, to the extent the following items have been included in determining Consolidated Net Income, they shall NOT be considered in computing Consolidated Operating Income: provision for income taxes, interest expense, equity in the operating results of unconsolidated Subsidiaries and non-operating, non-cash items including, but not limited to, write-off of acquired technology or acquired, in-process research and development which, in accordance with GAAP, must be charged to income. Furthermore, all charges arising from the acquisition of Neozyme II Corporation and/or Deknatel Snowden Pencer, Inc. which are included in the determination of Consolidated Net Income for any period shall be excluded from the computation of Consolidated Operating Income whether such charges be of a cash or non-cash nature. "CONSOLIDATED QUICK RATIO" shall mean, at any date, the ratio, for the Company and its Consolidated Subsidiaries, of (a) the sum of (i) Unrestricted Cash on such date plus (ii) Marketable Investments on such date plus (iii) Accounts Receivable on such date to (b) the sum of (i) Current Liabilities on such date plus (ii) $50,000,000. "CONSOLIDATED TANGIBLE NET WORTH" shall mean, as at any date, for the Company and its Consolidated Subsidiaries, the Consolidated Net Worth of the Company and its Consolidated Subsidiaries less all intangible assets of the Company and its Consolidated Subsidiaries. "CONSOLIDATED TOTAL LIABILITIES" shall mean, as at any date, the sum, for the Company and its Consolidated Subsidiaries, of all Indebtedness and other liabilities, in each case, that should be classified as liabilities on a balance sheet, including, without limitation, all reserves and all deferred taxes and other deferred items. "CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the continuation pursuant to Section 2.8 hereof of a LIBOR Loan from one Interest Period to the next Interest Period. "CONVERT", "CONVERSION" and "CONVERTED" shall refer to a conversion pursuant to Section 2.8 hereof of one Type of Loans into another Type of Loans, which may be accompanied by the transfer by a Lender (at its sole discretion, but subject to Section 5.1(d) hereof) of a Loan from one Applicable Lending Office to another. "CURRENT LIABILITIES" shall mean any liability that in accordance with GAAP would be classified as such. "DEFAULT" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. -5- 10 "DIVIDEND PAYMENT" shall mean dividends (in cash, Property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares of any class of stock of, or any partnership or other equity interest issued by, the Company or of any warrants, options or other rights to acquire the same (or to make any payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market or equity value of the Company or any of its Subsidiaries), but excluding dividends payable solely in shares of common stock of the Company. "DOLLARS" and "$" shall mean lawful money of the United States of America. "ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, any written or oral notice, claim, demand or other communication (collectively, a "claim") by any other Person alleging or asserting such Person's liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other Property, personal injuries, fines or penalties arising out of, based on or resulting from (a) the presence, or Release into the environment, of any Hazardous Material at any location, whether or not owned by such Person, or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include, without limitation, any claim by any governmental authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or arising from alleged injury or threat of injury to the environment. "ENVIRONMENTAL LAWS" shall mean any and all present and future Federal, state, local and foreign laws, rules or regulations, and any orders or decrees, in each case as now or hereafter in effect, relating to the regulation or protection of the environment or to emissions, discharges, releases or threatened releases of pollutants, contaminants or toxic or hazardous substances or wastes into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or toxic or hazardous substances or wastes. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" shall mean any corporation or trade or business that is a member of any group of organizations (a) described in Section 414(b) or (c) of the Code of which the Company is a member and (b) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Company is a member. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Section 10 hereof. -6- 11 "FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate charged to Fleet on such Business Day on such transactions as determined by the Administrative Agent. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those that, in accordance with the last sentence of Section 1.2(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement. "GUARANTEE" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a correlative meaning. "GUARANTEED OBLIGATIONS" shall have the meaning assigned to such term in Section 6.1 hereof. "HAZARDOUS MATERIAL" shall mean, collectively, (a) any petroleum or petroleum products, explosives, radioactive materials, asbestos, urea formaldehyde foam insulation, and transformers or other equipment that contain polychlorinated biphenyls ("PCB's") in concentrations that are regulated under the Toxic Substances Control Act, as amended, or any other Environmental Law, (b) any chemicals or other materials or substances that are now or hereafter become defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", "contaminants", "pollutants" or words of similar import under any Environmental Law and (c) any other chemical or other material or substance, exposure to which is now or hereafter prohibited, limited or regulated under any Environmental Law. "INDEBTEDNESS" shall mean, for the Company and its Consolidated Subsidiaries: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of -7- 12 Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 120 days of the date the respective goods or services are delivered or rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person, contingent or otherwise, in respect of letters of credit, bankers' acceptances or similar instruments issued or accepted by banks and other financial institutions for account of such person; (e) Capital Lease Obligations of such Person; and (f) Guarantees by such Person of Indebtedness of others. "INTELLECTUAL PROPERTY" shall mean "Intellectual Property," as defined in Section 101(60) of the Bankruptcy Code, now or hereafter owned by Company or any of its Subsidiaries, together with all of the following property now or hereafter owned by Company or any of its Subsidiaries: all domestic and foreign patents and patent applications; inventions, discoveries and improvements, whether or not patentable; trademarks, trademark applications and registrations; service marks, service mark applications and registrations; copyrights, copyright applications and registrations; all licenses therefor; trade secrets and all other proprietary information. "INTEREST" shall mean, for any period, the sum, for the Company and its Consolidated Subsidiaries, of the following: (a) all interest in respect of Indebtedness (including, without limitation, the interest component of any payments in respect of Capital Lease Obligations) accrued or capitalized during such period (whether or not actually paid during such period); and (b) all other amounts that would be accrued or capitalized during such period as "interest expense" in accordance with GAAP. "INTEREST PERIOD" shall mean: with respect to any LIBOR Loan, each period commencing on the date such LIBOR Loan is made or Converted from a Loan of another Type or the day after the last day of the next preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in Section 4.5 hereof, except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month; PROVIDED, THAT, notwithstanding the foregoing: (i) if any Interest Period for any Revolving Credit Loan would otherwise end after the Revolving Credit Commitment Termination Date, such Interest Period shall not be available hereunder; (ii) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day); and (iii) notwithstanding clauses (i) and (ii) above, no Interest Period for -8- 13 any LIBOR Loan shall have a duration of less than one month and, if the Interest Period for any LIBOR Loan would otherwise be a shorter period, such Loan shall not be available as a LIBOR Loan hereunder for such period. "INVESTMENT" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person), but excluding any such advance, loan or extension of credit arising in connection with the sale of inventory or supplies by such Person in the ordinary course of business so long as such advance, loan or extension of credit is made on terms (including as to maturity) consistent with those terms offered by the Company on the date hereof; and (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person. "LEVEL I PERIOD" shall mean any period (a) from and including the Business Day immediately following the Business Day on which a senior financial officer of the Company shall have delivered to the Administrative Agent a Compliance Certificate, together with the related financial statements referred to in Section 9.1 hereof, demonstrating in reasonable detail that the Consolidated Debt Coverage Ratio, as of the last day of the fiscal quarter of the Company most recently ended, is greater than or equal to 2.0 to 1.0 or that the Consolidated Fixed Charge Coverage Ratio for such period was greater than 5.5 to 1.0, to but excluding the next succeeding Reporting Date and (b) during which no Event of Default shall have occurred and be continuing. "LEVEL II PERIOD" shall mean any period, other than a Level I Period, (a) from and including the Business Day immediately following the Business Day on which a senior financial officer of the Company shall have delivered to the Administrative Agent a Compliance Certificate, together with the related financial statements referred to in Section 9.1 hereof, demonstrating in reasonable detail that the Consolidated Debt Coverage Ratio, as of the last day of the fiscal quarter of the Company most recently ended, is less than to 2.0 to 1.0 and greater than or equal to 1.0 to 1.0 or that the Consolidated Fixed Charge Coverage Ratio for such period was greater than or equal to 4.5 to 1.0 and less than or equal to 5.5 to 1.0, to but excluding the next succeeding Reporting Date and (b) during which no Event of Default shall have occurred and be continuing. "LEVEL III PERIOD" shall mean any period, other than a Level I Period or Level II Period, (a) from and including the Business Day immediately following the Business Day on which a senior financial officer of the Company shall have delivered to the Administrative Agent a Compliance Certificate, together with the related financial statements referred to in Section 9.1 hereof, demonstrating in reasonable detail that the Consolidated Debt Coverage Ratio, as of the last day of the fiscal quarter of the Company most recently ended, is less than to 1.0 to 1.0 and that the Consolidated Fixed Charge Coverage Ratio for such period was greater than or equal to 3.5 to 1.0 and less than 4.5 to 1.0, to but excluding the next succeeding Reporting Date and (b) during which no Event of Default shall have occurred and be continuing. -9- 14 "LEVEL IV PERIOD" shall mean any period, other than a Level I Period, Level II Period or Level III Period. "LIBO RATE" shall mean, with respect to any LIBOR Loan for any Interest Period therefor, the simple average (rounded upwards, if necessary, to the nearest 1/32 of 1%), as determined by the Administrative Agent, of the rates per annum quoted to Fleet at approximately 11:00 a.m. London time (or as soon thereafter as practicable) on the date two Business Days prior to the first day of such Interest Period for the offering by leading banks in the London interbank market of Dollar deposits having a term comparable to such Interest Period and in an amount comparable to the principal amount of the LIBOR Loan to be made by the Lenders for such Interest Period. "LIBOR LOANS" shall mean loans bearing interest at the rate determined under Section 3.2(b). "LIEN" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such property. For purposes of this Agreement and the other Loan Documents, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. "LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Pledge Agreement and all other agreements, instruments and documents entered into pursuant hereto or thereto as such may be amended, modified or changed from time to time. "LOANS" shall mean Prime Rate Loans and LIBOR Loans. "MARGIN STOCK" shall mean "margin stock" within the meaning of Regulations U and X. "MARKETABLE INVESTMENTS" shall mean any interest-bearing debt obligations owned by Company and its Wholly-Owned Subsidiaries (excluding directors' qualifying shares and items included as Cash Equivalents) which meet the definition of marketable securities under GAAP. Such amounts shall exclude common or preferred stock. Such securities shall include obligations issued by the U.S. Treasury and other agencies of the U.S. government, corporate bonds, bank notes, mortgage and asset backed securities, finance company securities and auction rate preferred stocks. Such securities shall be rated investment grade (BBB or better for bonds or similar securities, A1/P1 for commercial paper and notes) and shall otherwise be reasonably liquid investments. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the business, operations or financial condition or material Property of the Company and its Subsidiaries, taken as a whole, (b) the validity or enforceability of any of the Loan Documents or the rights and remedies of the Lenders and the Agents thereunder or (c) the ability of the Obligors to perform their obligations hereunder including the timely payment of the principal of or interest on the Loans or other amounts in connection therewith. -10- 15 "MATERIAL SUBSIDIARY" shall mean any Subsidiary of the Company, the value of the assets of which exceeds five percent (5%) of the consolidated assets of the Company and its Subsidiaries, taken as a whole, and, for the purposes of Sections 6 and 9.13 hereof means such a Subsidiary of the Company that is organized under the laws of the United States, provided that Genzyme Securities Corporation shall not be deemed to be a Material Subsidiary for purposes of Sections 6 and 9.13 hereof. "MULTIEMPLOYER PLAN" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA. "NET EQUITY PROCEEDS" shall mean the aggregate amount of all cash payments and the fair market value of any non-cash consideration received by the Company and its Subsidiaries directly or indirectly in connection with any Investment in the Company or any Subsidiary; PROVIDED that Net Equity Proceeds shall be net of the amount of any legal expenses, commissions other fees and expenses paid by the Company and its Subsidiaries to any non-Affiliated Person in connection with such Investment. "NOTES" shall mean the Revolving Credit Notes. "OBLIGATIONS" shall mean any and all of the Revolving Credit Loans, including any principal, interest, charges, fees, costs and expenses (including interest arising after the filing of any bankruptcy petition and notwithstanding any law to the contrary) and all other obligations liabilities and indebtedness of the Company or any Obligor of any kind, nature or description arising under this Agreement, the Notes or any other Loan Documents. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERSON" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "PLAN" shall mean an employee benefit or other plan established or maintained by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "PLEDGE AGREEMENT" shall mean the Pledge Agreement provided under Section 7.1(f) as the same such shall be modified, amended and supplemented from time to time. "POST-DEFAULT RATE" shall mean a rate per annum equal to 4% PLUS the interest rate for a Loan as provided in one of the lettered paragraphs of Section 3.2 for a Level IV Period. "PRIME RATE" shall mean for any day the rate equal to the higher from time to time of (A) the rate of interest announced by Fleet at the Principal Office from time to time as its prime rate; and (B) a rate equal to 1/2 of 1% per annum above the weighted average of the rates on overnight -11- 16 federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as determined on any day by Fleet. "PRIME RATE LOANS" shall mean loans bearing interest at the rate determined under Section 3.2(a). "PRINCIPAL OFFICE" shall mean the principal office of Fleet, located on the date hereof at 75 State Street, Boston, Massachusetts 02109. "PROPERTY" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "QUARTERLY DATES" shall mean the last Business Day of March, June, September and December of each year, the first of which shall be the first such day after the date hereof. "REGULATIONS A, D, U AND X" shall mean, respectively, Regulations A, D, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "REGULATORY CHANGE" shall mean, with respect to any Lender, any change after the date hereof in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks including such Lender of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "RELEASE" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata. "REPLACEMENT LENDERS" shall mean any Lender acceptable to the Administrative Agent that becomes a Lender pursuant to the Company's right to replace Lenders under Section 2.9. "REPORTING DATE" shall mean the first to occur of (i) the Business Day following the Business Day that the Administrative Agent receives a Compliance Certificate of the Company providing the information required to determine whether a period is a Level I Period, Level II Period, Level III Period or Level IV Period and (ii) the first Business Day after the date on which the quarterly or annual financial statement and Compliance Certificate is required to be delivered to the Lenders pursuant to Section 9.1(a) or (b) and (c). "REQUIRED LENDERS" shall mean Lenders having at least 51% of the aggregate amount of the Commitments or, if the Commitments shall have terminated, Lenders holding at least 51% of the aggregate unpaid principal amount of the Loans. -12- 17 "RESERVE REQUIREMENT" shall mean, for any Interest Period for a LIBOR Loan, the average maximum rate at which reserves (including, without limitation, any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion Dollars against "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall include any other reserves required to be maintained by such member banks by reason of any Regulatory Change with respect to (i) any category of liabilities that includes deposits by reference to which the LIBOR Loan is to be determined or (ii) any category of extensions of credit or other assets that includes LIBOR Loans. "REVOLVING CREDIT COMMITMENT" shall mean, for each Revolving Credit Lender, the obligation of such Lender to make Revolving Credit Loans in an aggregate principal amount at any one time outstanding up to but not exceeding (a) in the case of any such Lender originally party hereto, the sum of (i) the amount set opposite the name of such Lender on the signature pages hereto under the caption "Revolving Credit Commitment" plus (ii) the aggregate amount of Revolving Credit Commitments acquired by such Lender from other Lenders pursuant to Section 12.7(b) hereof minus (iii) the aggregate amount of Revolving Credit Commitments transferred by such Lender to one or more other Lenders pursuant to Section 12.7(b) hereof and (b) in the case of any such Lender that was not originally party hereto, (i) the aggregate amount of Revolving Credit Commitments acquired by such Lender from other Lenders pursuant to Section 12.7(b) hereof minus (ii) the aggregate amount of Revolving Credit Commitments transferred by such Lender to one or more other Lenders pursuant to Section 12.7(b) hereof, in each case, as such obligation may be reduced from time to time pursuant to Section 2.3 hereof. "REVOLVING CREDIT COMMITMENT PERCENTAGE" shall mean, with respect to any Revolving Credit Lender, the ratio of (a) the amount of the Revolving Credit Commitment of such Lender to (b) the aggregate amount of the Revolving Credit Commitments of all of the Lenders. "REVOLVING CREDIT COMMITMENT TERMINATION DATE" shall be November 15, 1999, which date is subject to extension as provided in Section 2.9. "REVOLVING CREDIT LENDERS" shall mean the Lenders from time to time holding Revolving Credit Loans and/or Revolving Credit Commitments. "REVOLVING CREDIT LOANS" shall mean the loans provided for in Section 2.1 hereof, which may be Prime Rate Loans and/or LIBOR Loans. "REVOLVING CREDIT NOTES" shall mean the promissory notes provided for by Section 2.7(a) hereof and all promissory notes delivered in substitution or exchange for any thereof, in each case as the same shall be modified and supplemented and in effect from time to time. "SUBORDINATED DEBT" shall mean Indebtedness of Company and its Subsidiaries that by its terms is fully subordinated to the payment and enforcement of the Loans in a manner satisfactory to the Required Lenders. -13- 18 "SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency), or of which at least a majority of the limited partnership interests or other similar ownership interests issued by any limited partnership or other similar entity, is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "TAXES" shall mean any present or future tax (including, without limitation, any income, documentary, sales, stamp, registration, property or excise tax), assessment or other charge, levy, impost, fee, compulsory loan, charge or withholding. "TYPE" shall have the meaning given such term in Section 1.3 hereof. "UNRESTRICTED CASH" shall mean cash and Cash Equivalents of the Company and its Wholly Owned Subsidiaries that are readily available to Company and not subject to any limitation or restriction on their use by the Company. "U.S. PERSON" shall mean a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under any laws of the United States of America or any State thereof, or any estate or trust that is subject to Federal income taxation regardless of the source of its income. "WHOLLY OWNED SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity to which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares or, in the case of a limited partnership, not more than 1% of the aggregate partnership interests issued by such limited partnership) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 1.2O Accounting Terms and Determinations. ----------------------------------- (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall (unless otherwise disclosed to the Lenders in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with GAAP applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Lenders hereunder (which, prior to the delivery of the first annual or quarterly financial statements under Section 9.1 hereof, shall mean the audited financial statements as at December 31, 1995 referred to in Section 8.2 hereof). -14- 19 (b) To enable the ready and consistent determination of compliance with the covenants set forth in Section 9 hereof, the Company will not change its fiscal year. 1.3 TYPES OF LOANS Loans hereunder are distinguished by "Type". The "Type" of a Loan refers to whether such Loan is a Prime Rate Loan or a LIBOR Loan. Section 2. Commitments, Loans, Notes and Prepayments. ----------------------------------------- 2.1O REVOLVING CREDIT LOANS. Each Lender severally agrees, on the terms and conditions of this Agreement, to make loans to the Company in Dollars during the period from and including the Closing Date to but not including the Revolving Credit Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Revolving Credit Commitment of such Lender as in effect from time to time (such Loans being herein called "REVOLVING CREDIT LOANS"); PROVIDED THAT in no event shall the Revolving Credit Loans at any time outstanding exceed the aggregate amount of the Revolving Credit Commitments as in effect from time to time. Subject to the terms and conditions of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Revolving Credit Commitments by means of Prime Rate Loans and LIBOR Loans and may Convert Revolving Credit Loans of one Type into Revolving Credit Loans of another Type (as provided in Section 2.8 hereof) or Continue Revolving Credit Loans of one Type as Revolving Credit Loans of the same Type (as provided in Section 2.8 hereof); and PROVIDED FURTHER that no more than five separate Interest Periods in respect of LIBOR Loans may be outstanding at any one time. 2.2. BORROWINGS OF REVOLVING CREDIT LOANS. The Company shall give the Administrative Agent notice of each borrowing hereunder as provided in Section 4.5 hereof. Not later than 1:00 p.m. Boston, Massachusetts time on the date specified for each borrowing of Revolving Credit Loans hereunder, each Lender shall make available the amount of the Loan or Loans to be made by it on such date to the Administrative Agent, at account number 1510351 maintained by the Administrative Agent with Fleet at the Principal Office, in immediately available funds, for the account of the Company. The amount so received by the Administrative Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company maintained with Fleet at the Principal Office designated for the Company. 2.3. Changes of Commitments. ---------------------- (a) The aggregate amount of the Revolving Credit Commitments shall be automatically reduced to zero on the Revolving Credit Commitment Termination Date. (b) The Company shall have the right at any time or from time to time to reduce the aggregate unused amount of the Revolving Credit Commitments (for which purpose the Revolving Credit Commitments shall be deemed to be utilized by the amount of the Revolving Credit Loans); PROVIDED that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.5 hereof and (y) each partial -15- 20 reduction shall be in an aggregate amount at least equal to $5,000,000 (or any integral multiple of $1,000,000 in excess thereof). (c) The Commitments once terminated or reduced may not be reinstated. 2.4. COMMITMENT FEE. The Company shall pay to the Administrative Agent for the account of each Lender a commitment fee on the daily average unused amount of such Lender's Commitment, for the period from and including the date hereof to but not including the date such Commitment is terminated or expires, at a rate per annum equal to the Applicable Commitment Fee Rate. Accrued commitment fees shall be payable in arrears on each Quarterly Date and on the date the Revolving Credit Commitments are terminated or expire. Notwithstanding the foregoing, on any day during the period prior to the Reporting Date occurring in March, 1997, the Applicable Commitment Fee Rate shall be the percentage set forth in the definition of Applicable Commitment Fee Rate opposite the designation "Level II Period". 2.5 LENDING OFFICES. The Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. 2.6. SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT. The failure of any Lender to make any Loan to be made by it on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan on such date, but neither any Lender nor any Agent shall be responsible for the failure of any other Lender to make a Loan to be made by such other Lender, and (except as otherwise provided in Section 4.6 hereof) no Lender shall have any obligation to any Agent or any other Lender for the failure by such Lender to make any Loan required to be made by such Lender. The amounts payable by the Company at any time hereunder and under the Note to each Lender shall be a separate and independent debt and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes, and it shall not be necessary for any other Lender or any Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.7. Notes. ----- (a) The Revolving Credit Loans made by each Lender shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A hereto, dated the date hereof, payable to such Lender in a principal amount equal to the amount of its Revolving Credit Commitment as originally in effect and otherwise duly completed. (b) The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Lender to the Company, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books and, prior to any transfer of any Note evidencing the Loans held by it, endorsed by such Lender on the schedule attached to such Note or any continuation thereof; PROVIDED that the failure of such Lender to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing hereunder or under such Note in respect of such Loans. -16- 21 (c) No Lender shall be entitled to have its Notes substituted or exchanged for any reason, or subdivided for promissory notes of lesser denominations, except in connection with a permitted assignment of all or any portion of such Lender's relevant Commitment, Loans and Note pursuant to Section 12.7 hereof (and, if requested by any Lender, the Company agrees to so exchange any Note). 2.8. OPTIONAL PREPAYMENTS AND CONVERSIONS OR CONTINUATIONS OF LOANS. Subject to Section 4.4 hereof, the Company shall have the right to prepay Loans or to Convert Loans of one Type into Loans of another Type or Continue Loans of one Type as Loans of the same Type, at any time or from time to time, PROVIDED that: (a) the Company shall give the Administrative Agent notice of each such prepayment, Conversion or Continuation as provided in Section 4.5 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder); and (b) any prepayment or Conversion of LIBOR Loans on any day other than the last day of an Interest Period for such Loans shall be subject to the payment of any compensation payable pursuant to Section 5.5 hereof. Notwithstanding the foregoing, and without limiting the rights and remedies of the Lenders under Section 10 hereof, in the event that any Event of Default shall have occurred and be continuing, the Administrative Agent may (and at the request of the Required Lenders shall) suspend the right of the Company to Convert any Loan into a LIBOR Loan, or to make or Continue any Loan as a LIBOR Loan, in which event all Loans shall be Converted (on the last day(s) of the respective Interest Periods therefor) or made or Continued, as the case may be, as Prime Rate Loans. 2.9. EXTENSION TO REVOLVING CREDIT COMMITMENT TERMINATION DATE. The Company may by notice to the Lenders given at least ninety (90) days prior to the first and second anniversary of the Closing Date, request that the Revolving Credit Commitment Termination Date be extended by one year for each such request, for total extensions not to exceed two years. The Revolving Credit Commitment of any Lender that declines to accept such a request for an extension or does not respond within the forty-five (45) days after the date of such request will terminate on the Revolving Credit Commitment Termination Date as then in effect (without regard to any extensions granted by the other Lenders). The Company may substitute a Replacement Lender for any such Lender that so declines the Company's extension request; PROVIDED that prior to contacting any potential Replacement Lender, the Company shall notify the Lenders that have agreed to the requested extension which notification shall state the amount of available Commitments and any extending Lender shall have the right, exercised by notice to the Company within fifteen (15) days after such notification by the Company, to increase its Revolving Credit Commitment, up to an aggregate amount equal to the available Commitments provided that if more than one extending Lender exercises such right, the available Commitments shall be allocated among such extending Lenders in such manner as the Administrative Agent and Company shall determine. No extension shall be granted unless Commitments from the extending Lenders and Replacement Lenders, if any, equal the aggregate Commitments requested by the Company (which shall be in an aggregate amount not less than $175,000,000, or, if prior to the -17- 22 request for any such extension, the aggregate Commitments have been reduced to less than $175,000,000 pursuant to the exercise of the Company's rights in Section 2.3 hereof, such lesser amount), are given within the foregoing period and the Company may, at any time during such period, terminate its request for an extension by notice to the Lenders and Administrative Agent. Section 3. Payments of Principal and Interest. ---------------------------------- 3.1. REPAYMENT OF LOANS. The Company hereby promises to pay to the Administrative Agent for account of each Lender the entire outstanding principal amount of such Lender's Revolving Credit Loans, and each Revolving Credit Loan shall mature, on the Revolving Credit Commitment Termination Date. 3.2. INTEREST. The Company hereby promises to pay to the Administrative Agent for account of each Lender interest on the unpaid principal amount of each Revolving Credit Loan made by such Lender for the period from and including the date of such Loan to but excluding the date such Revolving Credit Loan shall be paid in full, at the following rates per annum: (a) if such Loan is outstanding as a Prime Rate Loan, the Prime Rate (as in effect from time to time) PLUS the Applicable Margin; and (b) if such Loan is outstanding as a LIBOR Loan, for each Interest Period relating thereto, the Adjusted LIBO Rate for such Loan for such Interest Period PLUS the Applicable Margin. Notwithstanding the foregoing, on any day during the period prior to the Reporting Date occurring in March, 1997, the Applicable Margin shall mean the respective percentages set forth in the definition of "Applicable Margin" opposite the designation "Level II Period". During any period when an Event of Default shall have occurred and be continuing and upon notice from the Administrative Agent of an election to charge interest at the applicable Post-Default Rate, the Company hereby promises to pay to the Administrative Agent for account of each Lender interest at the applicable Post-Default Rate on (i) each Loan and (ii) any amount owing hereunder (other than overdue principal of a Loan) that is not paid when due (whether at stated maturity, by acceleration, by mandatory or voluntary prepayment or otherwise). Accrued interest on each Loan shall be payable in arrears (i) in the case of a Prime Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a LIBOR Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than three months, at three-month intervals following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Administrative Agent shall give notice thereof to the Lenders to which such interest is payable and to the Company. -18- 23 Section 4. Payments; Pro Rata Treatment; Computations; Etc. ----------------------------------------------- 4.1. Payments. -------- (a) Except to the extent otherwise provided in this Agreement, all payments of principal, interest, and other amounts to be made by the Company under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by the Obligors under any other Loan Document, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Administrative Agent at account number 58386988 maintained by the Company with Fleet at the Principal Office, not later than 1:00 p.m. Boston, Massachusetts time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Obligors authorize the Administrative Agent to debit such account for all such payments. (b) If any such payment owing to any Lender is not made when due (beyond any applicable grace period), such Lender may (but shall not be obligated to) debit the amount of any such payment to any ordinary deposit account of the Company with such Lender (with notice to the Company and the Administrative Agent). (c) The Company shall, at the time of making each payment under this Agreement or any Note for account of any Lender, subject to Section 4.2 specify to the Administrative Agent(which shall so notify the intended recipient(s) thereof) the amount payable on the Loans, or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Administrative Agent may distribute such payment to the Lenders for application in such manner as it, subject to Section 4.2 hereof, may determine to be appropriate). (d) Each payment received by the Administrative Agent under this Agreement or any Note for account of any Lender shall be paid by the Administrative Agent promptly to such Lender, in immediately available funds, for account of such Lender's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. (f) Any payment of principal or interest on the Loans not paid within ten (10) days after the date such payment is due shall be subject to a late charge equal to five percent (5%) of the amount overdue. 4.2. PRO RATA TREATMENT. Except to the extent otherwise provided herein: -19- 24 (a) each borrowing of Loans from the Lenders under Section 2.1 hereof shall be made from the Lenders, each payment of commitment fee under Section 2.4 hereof in respect of Commitments shall be made for account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.3 hereof shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (b) except as otherwise provided in Section 5.4 hereof, LIBOR Loans having the same Interest Period shall be allocated pro rata among the Lenders according to the amounts of their respective Revolving Credit Commitments (in the case of the making of Loans) or their respective Revolving Credit Loans (in the case of Conversions and Continuations of Loans); (c) each payment or prepayment of principal of Revolving Credit Loans by the Company shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans held by them; and (d) each payment of interest on Revolving Credit Loans by the Company shall be made for account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders. 4.3. COMPUTATIONS. Interest on Loans and commitment fees shall be computed on the basis of a year of 360 days and actual days elapsed, including the first day but excluding the last day occurring in the period for which payable. 4.4. MINIMUM AMOUNTS. Except for Conversions or prepayments made pursuant to Section 5.4 hereof, each borrowing, Conversion and partial prepayment of principal of Loans shall be in an aggregate amount equal to $5,000,000 or an integral multiple of $1,000,000 in excess thereof (borrowings, Conversions or prepayments of or into Loans of different Types or, in the case of LIBOR Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings, Conversions and prepayments for purposes of the foregoing, one for each Type or Interest Period). 4.5. CERTAIN NOTICES. Notices by the Company to the Administrative Agent of terminations or reductions of the Commitments, of borrowings, Conversions, Continuations and optional prepayments of Loans and of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Administrative Agent not later than 10:00 a.m. Boston, Massachusetts time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: Number of Business Notice Days Prior ------ ---------- Termination or reduction -20- 25 of Commitments 3 Borrowing or prepayment of, or Conversion into, Prime Rate Loans next Business Day Borrowing or prepayment of, Conversions into, Continuations as, or duration of Interest Period for, LIBOR Loans 3 Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or optional prepayment shall specify the amount to be borrowed, Converted, Continued or prepaid (subject to Section 4.4 hereof) and Type of each Loan to be borrowed, Converted, Continued or prepaid and the date of borrowing, Conversion, Continuation or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Administrative Agent shall promptly notify the Lenders of the contents of each such notice. In the event that the Company fails to select the Type of Loan, or the duration of any Interest Period for any LIBOR Loan, within the time period and otherwise as provided in this Section 4.5, such Loan (if outstanding as a LIBOR Loan) will be automatically Converted into a Prime Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Prime Rate Loan) will remain as, or (if not then outstanding) will be made as, a Prime Rate Loan. 4.6. RECEIPT OF FUNDS BY THE ADMINISTRATIVE AGENT. Unless the Administrative Agent shall have been notified by a Lender or the Company (the "PAYOR") prior to the date on which the Payor is to make payment to the Administrative Agent of (in the case of a Lender) the proceeds of a Loan to be made by such Lender hereunder or (in the case of the Company) a payment to the Administrative Agent for account of one or more of the Lenders hereunder (such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Administrative Agent, the Administrative Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Administrative Agent and the Administrative Agent has made the payment to the recipient(s), the recipient(s) of such payment shall, on demand, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "ADVANCE DATE") such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Administrative Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, PROVIDED that if neither the recipient(s) nor the Payor shall return the Required Payment to the Administrative Agent within -21- 26 three Business Days of the date of the notice from the Administrative Agent, then the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Lenders, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Post-Default Rate (without duplication of the obligation of the Company under Section 3.2 hereof to pay interest on the Required Payment at the Post-Default Rate), it being understood that the return by the recipient(s) of the Required Payment to the Administrative Agent shall not limit such obligation of the Company under said Section 3.2 to pay interest at the Post-Default Rate in respect of the Required Payment; and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Lenders to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment pursuant to Section 3.2 hereof (without duplication of the obligation of the Company under Section 3.2 hereof to pay interest on the Required Payment), it being understood that the return by the Company of the Required Payment to the Administrative Agent shall not limit any claim the Company may have against the Payor in respect of such Required Payment. 4.7. Sharing of Payments, Etc. ------------------------ (a) Each Obligor agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Lender may otherwise have, each Lender shall be entitled, at its option (to the fullest extent permitted by law), to set off and apply any deposit (general or special, time or demand, provisional or final), or other indebtedness, held by it for the credit or account of such Obligor at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender's Loans, or any other amount payable to such Lender hereunder, that is not paid when due (regardless of whether such deposit or other indebtedness are then due to such Obligor and of the existence or adequacy of any security therefor), in which case it shall promptly notify such Obligor and the Administrative Agent thereof, PROVIDED that such Lender's failure to give such notice shall not affect the validity thereof. (b) If any Lender shall obtain from any Obligor payment of any principal of or interest on any Loan owing to it or payment of any other amount under this Agreement or any other Loan Document through the exercise any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Administrative Agent as provided herein), and, as a result of such payment, such Lender shall have received a greater percentage of the principal of or interest on the Loans or such other amounts then due hereunder or thereunder by such Obligor to such Lender than the percentage received by any other Lender, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans or such other amounts, respectively, owing to such other Lenders (or in interest due thereon, as -22- 27 the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses that may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans or such other amounts, respectively, owing to each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Lender so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be) owing to such Lender in the amount of such participation. (d) Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of any Obligor. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set-off to which this Section 4.7 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.7 to share in the benefits of any recovery on such secured claim. Section 5. Yield Protection, Etc. --------------------- 5.1. Additional Costs. ---------------- (a) The Company shall pay directly to each Lender from time to time such amounts as such Lender may determine to be necessary to compensate such Lender for any costs that such Lender determines are attributable to its making or maintaining of any LIBOR Loans or its obligation to make any LIBOR Loans hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), resulting from any Regulatory Change that: (i) shall subject any Lender (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or its Note or changes the basis of taxation of any amounts payable to such Lender under this Agreement or its Note in respect of any of such Loans (excluding any Taxes based on net income or in lieu of net income imposed on such Lender by the jurisdiction in which such Lender has its principal office or its Applicable Lending Office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than any thereof, including, without limitation, the -23- 28 Reserve Requirement, utilized in the determination of the Adjusted LIBO Rate or LIBO Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including, without limitation, any of such Loans or any deposits referred to in the definition of "LIBO Rate" in Section 1.1 hereof), or any commitment of such Lender (including, without limitation, the Commitments of such Lender hereunder); or (iii) imposes any other condition affecting this Agreement or its Note (or any of such extensions of credit or liabilities) or its Commitment. If any Lender requests compensation from the Company under this Section 5.1(a), the Company may, by notice to such Lender (with a copy to the Administrative Agent), suspend the obligation of such Lender thereafter to make or Continue LIBOR Loans, or to Convert Prime Rate Loans into LIBOR Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.4 hereof shall be applicable), PROVIDED that such suspension shall not affect the right of such Lender to receive the compensation so requested. (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.1, in the event that, by reason of any Regulatory Change, any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender that includes deposits by reference to which the interest rate on LIBOR Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender that includes LIBOR Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Lender so elects by notice to the Company (with a copy to the Administrative Agent), the obligation of such Lender to make or Continue, or to Convert Prime Rate Loans into, LIBOR Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.4 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.1 (but without duplication), the Company shall pay directly to each Lender from time to time on request such amounts as such Lender may determine to be necessary to compensate such Lender (or, without duplication, the bank holding company of which such Lender is a subsidiary) for any costs that it determines are attributable to the maintenance by such Lender (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord, of capital in respect of its Commitments or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office or such bank holding company) to a level below that -24- 29 which such Lender (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). (d) Each Lender shall notify the Company of any event occurring after the date hereof entitling such Lender to compensation under paragraph (a) or (c) of this Section 5.1 as promptly as practicable, but in any event within 45 days, after such Lender obtains actual knowledge thereof; PROVIDED that if (i) any Lender fails to give such notice within 45 days after it obtains actual knowledge of such an event, such Lender shall, with respect to compensation payable pursuant to this Section 5.1 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.1 for costs incurred from and after the date 45 days prior to the date that such Lender does give such notice and (ii) each Lender will designate a different Applicable Lending Office for the Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable opinion of such Lender, be disadvantageous to such Lender (including, without limitation, by reason of any economic, legal or regulatory cost or disadvantage that such Lender may bear or suffer by reason of such designation). Each Lender will furnish to the Company a certificate setting forth in reasonable detail the basis and amount of each request by such Lender for compensation under paragraph (a) or (c) of this Section 5.1. Determinations and allocations by any Lender for purposes of this Section 5.1 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.1, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.1, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Lender under this Section 5.1, shall be conclusive, PROVIDED that such determinations and allocations are made on a reasonable basis. 5.2. LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any LIBO Rate for any Interest Period: (a) the Administrative Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "LIBO Rate" in Section 1.1 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for LIBOR Loans as provided herein; or (b) the Required Lenders determine which determination shall be conclusive, and notify (or notifies, as the case may be) the Administrative Agent that the relevant rates of interest referred to in the definition of "LIBO Rate" in Section 1.1 hereof upon the basis of which the rate of interest for LIBOR Loans for such Interest Period is to be determined do not adequately and accurately reflect the cost to such Lenders of making or maintaining LIBOR Loans for such Interest Period; then the Administrative Agent shall give the Company and each Lender prompt notice thereof and, so long as such condition remains in effect, the Lenders shall be under no obligation to make additional LIBOR Loans, to Continue LIBOR Loans or to Convert Prime Rate Loans into -25- 30 LIBOR Loans, and the Company shall, on the last day(s) of the then current Interest Period(s) for the outstanding LIBOR Loans, either prepay such Loans or Convert such Loans into Prime Rate Loans in accordance with Section 2.8 hereof. 5.3. ILLEGALITY. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain LIBOR Loans hereunder (and, in the sole opinion of such Lender, the designation of a different Applicable Lending Office would either not avoid such unlawfulness or would be disadvantageous to such Lender), then such Lender shall promptly notify the Company thereof (with a copy to the Administrative Agent) and such Lender's obligation to make or Continue, or to Convert Loans of any other Type into, LIBOR Loans shall be suspended until such time as such Lender may again make and maintain LIBOR Loans (in which case the provisions of Section 5.4 hereof shall be applicable). 5.4. TREATMENT OF AFFECTED LOANS. If the obligation of any Lender to make LIBOR Loans or to Continue, or to Convert Prime Rate Loans into, LIBOR Loans shall be suspended pursuant to Section 5.1 or 5.3 hereof, such Lender's LIBOR Loans shall be automatically Converted into Prime Rate Loans on the last day(s) of the then current Interest Period(s) for LIBOR Loans (or, in the case of a Conversion required by Section 5.1(b) or 5.3 hereof, on such earlier date as is required pursuant to applicable law or regulation and as such Lender may specify to the Company with a copy to the Administrative Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 5.1 or 5.3 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's LIBOR Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's LIBOR Loans shall be applied instead to its Prime Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as LIBOR Loans shall be made or Continued instead as Prime Rate Loans, and all Prime Rate Loans of such Lender that would otherwise be Converted into LIBOR Loans shall remain as Prime Rate Loans. If such Lender gives notice to the Company with a copy to the Administrative Agent that the circumstances specified in Section 5.1 or 5.3 hereof that gave rise to the Conversion of such Lender's LIBOR Loans pursuant to this Section 5.4 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when LIBOR Loans made by other Lenders are outstanding, such Lender's Prime Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding LIBOR Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding LIBOR Loans and by such Lender are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. 5.5. COMPENSATION. The Company shall pay to the Administrative Agent for account of each Lender, upon the request of such Lender through the Administrative Agent, such -26- 31 amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense that such Lender determines is attributable to: (a) any payment, mandatory or optional prepayment or Conversion of a LIBOR Loan made by such Lender for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 10 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 7 hereof to be satisfied) to borrow, Continue or Convert a LIBOR Loan from such Lender on the date for such borrowing, Continuation or Conversion specified in the relevant notice given pursuant to Sections 2.2 and 4.5 hereof. Without limiting the effect of the preceding sentence, such compensation shall, if so requested, include an amount equal to the product of: (a) the amount so paid, prepaid, Converted or not borrowed times (b) the excess of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid, Converted or not borrowed for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein (excluding, however, any Applicable Margin included therein) less (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Lender would have bid in the London interbank market (for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender), which product shall be multiplied by a fraction the numerator of which is the number of days from the date of such occurrence to the last day of the applicable Interest Period and the denominator of which is 360 days. Section 6. Guarantee. --------- 6.1 GUARANTEE. The Subsidiary Guarantors hereby jointly and severally guarantee to each Lender and each Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loans made by the Lenders to, and the Notes held by each Lender of, the Company and all other amounts from time to time owing to the Lenders or any Agent by the Company under this Agreement and under the Notes and by any Obligor under any of the other Loan Documents, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "GUARANTEED OBLIGATIONS"). The Subsidiary Guarantors hereby further jointly and severally agree that if the Company shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Subsidiary Guarantors will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. -27- 32 6.2. OBLIGATIONS UNCONDITIONAL. The obligations of the Subsidiary Guarantors under Section 6.1 hereof are absolute and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Company under this Agreement, the Notes, the other Loan Documents or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 6.2 that the obligations of the Subsidiary Guarantors hereunder shall be absolute and unconditional, joint and several, under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Subsidiary Guarantors hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Subsidiary Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement or the Notes or any other agreement or instrument referred to herein or therein shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or the Notes or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (iv) any lien or security interest granted to, or in favor of, any Agent or Agents or any Lender or Lenders as security for any of the Guaranteed Obligations shall fail to be perfected. The Subsidiary Guarantors hereby expressly waive diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that any Agent or any Lender exhaust any right, power or remedy or proceed against the Company under this Agreement or the Notes or the other Loan Documents or any other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 6.3. REINSTATEMENT. The obligations of the Subsidiary Guarantors under this Section 6 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Company in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any -28- 33 proceedings in bankruptcy or reorganization or otherwise and the Subsidiary Guarantors jointly and severally agree that they will indemnify each Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by such Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 6.4. SUBROGATION. Each Subsidiary Guarantor hereby agrees that, until the payment and satisfaction in full of all Guaranteed Obligations and the expiration and termination of the Commitments of the Lenders under this Agreement, such Subsidiary Guarantor shall not exercise any right or remedy arising by reason of any performance by such Subsidiary Guarantor of its guarantee in Section 6.1 hereof, whether by subrogation or otherwise, against the Company or any other Obligor or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. 6.5. REMEDIES. The Subsidiary Guarantors jointly and severally agree that, as between the Subsidiary Guarantors and the Lenders, the obligations of the Company under this Agreement and the Notes may be declared to be forthwith due and payable as provided in Section 10 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 10(g) or (h)) for purposes of Section 6.1 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against the Company and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by the Company) shall forthwith become due and payable by the Subsidiary Guarantors for purposes of said Section 6.1. 6.6. CONTINUING GUARANTEE. The guarantee in this Section 6 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 6.7. RIGHTS OF CONTRIBUTION. The Subsidiary Guarantors hereby agree, as between themselves, that if any Subsidiary Guarantor (an "EXCESS FUNDING GUARANTOR") shall pay Guaranteed Obligations in excess of such Excess Funding Guarantor's Pro Rata Share (as defined below) of such Guaranteed Obligations (such excess payment, an "EXCESS PAYMENT"), each other Subsidiary Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the next sentence hereof), pay to such Excess Funding Guarantor an amount equal to such other Subsidiary Guarantor's Pro Rata Share (such Pro Rata Share, for the purpose of determining the amount due to the Excess Funding Guarantor under this Section 6.7, to be determined without reference to the Excess Funding Guarantor) of such Excess Payment. The payment obligation of each other Subsidiary Guarantor to an Excess Funding Guarantor under this Section 6.7 shall be subordinate and subject in right of payment to the prior payment in full of the Obligations, and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such Excess Payment until payment and satisfaction in full of the Obligations. For the purposes hereof, "PRO RATA SHARE" shall mean, with respect to each Subsidiary Guarantor, the ratio (expressed as a percentage) of (a) the net worth of such Subsidiary Guarantor (determined on an unconsolidated basis in accordance with GAAP as of the last day of the fiscal quarter of such Subsidiary -29- 34 Guarantor most recently ended prior to the date such Person became a Subsidiary Guarantor) to (b) the sum of the amounts determined pursuant to clause (a) for all of the Subsidiary Guarantors. 6.8. LIMITATION ON GUARANTEE OBLIGATIONS. In any action or proceeding involving any state corporate or partnership law, or any state or Federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Subsidiary Guarantor under Section 6.1 hereof would otherwise, taking into account the provisions of Section 6.7 hereof, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under said Section 6.1, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Subsidiary Guarantor, any Lender, any Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding. Section 7. Conditions Precedent. -------------------- 7.1 INITIAL LOAN. The obligation of any Lender to make its initial Loan hereunder is subject to the satisfaction of each of the following conditions (with each document being satisfactory to each Agent and each Lender in form and substance): (a) CORPORATE DOCUMENTS. The receipt by the Administrative Agent of (i) certified copies of the charter and by-laws (or equivalent constitutional documents) of each Obligor and GSC, (ii) a long-form good standing certificate issued by the Secretary of State of the jurisdiction of incorporation or organization of each Obligor and GSC and (iii) certified copies of all corporate or partnership authority for each Obligor (including, without limitation, board of director resolutions and evidence of the incumbency, including specimen signatures, of officers) with respect to the execution, delivery and performance of such of the Loan Documents to which such Obligor is intended to be a party and each other document to be delivered by such Obligor from time to time in connection herewith and the extensions of credit hereunder (and each Agent and each Lender may conclusively rely on such certificate until it receives notice in writing from such Obligor to the contrary). (b) OFFICER'S CERTIFICATE. The receipt by the Administrative Agent of a certificate of a senior officer of the Company, dated the Closing Date, to the effect set forth in the first sentence of Section 7.2 hereof. (c) BORROWING NOTICE. The receipt by the Administrative Agent of the notice of borrowing required by Sections 2.2 and 4.5 hereof, which notice of borrowing shall specify a borrowing date. (d) OPINIONS OF COUNSEL TO THE OBLIGORS. The receipt by the Administrative Agent of an opinion, dated the Closing Date, of Palmer & Dodge, special counsel to the Obligors, substantially in the form of Exhibit B hereto and covering such other matters as any Agent or any Lender may reasonably request. -30- 35 (e) NOTES. The receipt by the Administrative Agent of Notes, duly completed and executed for each Lender. (f) PLEDGE AGREEMENT. The receipt by the Administrative Agent of the Pledge Agreement in the form of Exhibit F, together with the certificates for all shares of capital stock of Genzyme Securities Corporation pledged thereunder and undated executed stock powers. (g) SEARCH RESULTS. The receipt by the Administrative Agent of results satisfactory to the Administrative Agent of UCC, Federal and state tax lien and judgment searches conducted by a search firm acceptable to the Administrative Agent with respect to each Obligor in each jurisdiction specified by the Administrative Agent. (h) INSURANCE. The receipt by the Administrative Agent of (i) certificates of insurance evidencing the existence of all insurance required to be maintained pursuant to Section 9.4 hereof and (ii) a certificate of a senior financial officer of the Company stating that the insurance obtained by it in accordance with the requirements of said Section 9.4 is in full force and effect and that all premiums then due and payable thereon have been paid. (i) REPAYMENT OF EXISTING INDEBTEDNESS. Evidence that the principal of and interest on, and all other amounts owing in respect of, the Indebtedness (including, without limitation, any contingent or other amounts payable in respect of letters of credit) indicated on Schedule 7.1 hereto that is to be repaid on the Closing Date shall have been (or shall be simultaneously) paid in full, that any commitments to extend credit under the agreements or instruments relating to such Indebtedness shall have been canceled or terminated and that all Guarantees in respect of, and all Liens securing, any such Indebtedness shall have been released (or arrangements for such release satisfactory to the Required Lenders shall have been made); in addition, the Administrative Agent shall have received from any Person holding any Lien securing any such Indebtedness, such Uniform Commercial Code termination statements, mortgage releases and other instruments, in each case in proper form for recording, as the Administrative Agent shall have requested to release and terminate of record the Liens securing such Indebtedness (or arrangements for such release and termination satisfactory to the Required Lenders shall have been made). (j) NO ADVERSE LITIGATION OR PROCEEDING. The receipt by the Administrative Agent of a certificate of a senior officer of the Company to the effect that, on and as of the Closing Date and except as disclosed in Schedule 8.3 hereto, no litigation or proceeding shall exist or (to the Company's knowledge) be threatened against the Company or any of its Subsidiaries, and, to the Company's knowledge, no law or regulation shall have been proposed (unless withdrawn) that could reasonably be expected to (i) have a Material Adverse Effect, (ii) materially and adversely affect the ability of the Obligors to perform their respective obligations under this Agreement or the other Loan Documents, (iii) materially and adversely affect the rights and remedies of the Agents and the Lenders under this Agreement or the Loan Documents or (iv) purport to adversely affect the Revolving Credit Loans or Commitments. -31- 36 (k) CONSENTS, ETC. The receipt by the Administrative Agent of a certificate of a senior officer of the Company to the effect that, on and as of the Closing Date, all necessary governmental and third party consents and approvals in connection with the transactions contemplated by this Agreement have been obtained and remain in effect and that all applicable waiting periods have expired. (l) PAYMENT OF FEES. The payment by the Company of such fees as the Company shall have agreed to pay or deliver to any Lender or any Agent in connection herewith, including, without limitation, the reasonable fees and expenses of Brown, Rudnick, Freed & Gesmer, special counsel to Fleet in connection with the negotiation, preparation, execution and delivery of this Agreement and the Notes and the other Loan Documents and the making of the extensions of credit hereunder (to the extent that statements for such fees and expenses have been delivered to the Company). (m) OTHER DOCUMENTS. Such other documents as any Agent or any Lender or special counsel to Fleet may reasonably request. 7.2. INITIAL AND SUBSEQUENT EXTENSIONS OF CREDIT. The obligation of any Lender to make any Loan or otherwise extend any credit to the Company upon the occasion of each borrowing or other extension of credit hereunder is subject to the further conditions precedent that, both immediately prior to such borrowing or other extension of credit and also after giving effect thereto and to the intended use thereof: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 8 hereof, and by each Obligor in each of the other Loan Documents to which it is a party, shall be true and complete in all material respects on and as of the date of the making of such Loan or other extension of credit with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Each notice of borrowing by the Company hereunder shall constitute a certification by the Company to the effect set forth in the preceding sentence (both as of the date of such notice or request and, unless the Company otherwise notifies the Administrative Agent prior to the date of such borrowing or issuance, as of the date of such borrowing or issuance). Section 8. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Agents and the Lenders that: 8.1 EXISTENCE. Each of the Company and the Material Subsidiaries: (a) is a corporation, partnership, limited liability company or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate, partnership or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except to the extent that the failure to have any such license, -32- 37 authorization, consent or approval would not reasonably be expected (either individually or in the aggregate) to have a Material Adverse Effect; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would not reasonably be expected (either individually or in the aggregate) to have a Material Adverse Effect. 8.2. FINANCIAL CONDITION. The Company has heretofore furnished to each of the Lenders the audited Consolidated balance sheet of the Company as at December 31, 1995 and the related Consolidated statements of earnings, shareholders' equity and cash flows of the Company for the fiscal year ended on said date, with the report thereon of Coopers & Lybrand, and the unaudited Consolidated balance sheet of the Company as at June 30, 1996, and the related unaudited Consolidated statements of income and cash flows for the period ended on said date. All such financial statements fairly present in all material respects the Consolidated financial position of the Company as at said dates and the Consolidated results of its operations for the fiscal year and period ended on said dates (subject, in the case of such financial statements as at June 30, 1996, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis. The Company does not on the date hereof have any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said balance sheets or the notes thereto as at said dates. Since June 30, 1996, there has been no material adverse change in the business, operations or financial condition of the Company from that set forth in said financial statements as at said date. 8.3. LITIGATION. Except as disclosed in Schedule 8.3 hereto, there are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company) threatened against the Company, or any of its Subsidiaries that, if adversely determined could (either individually or in the aggregate) be reasonably expected to have a Material Adverse Effect. 8.4. NO BREACH. The execution and delivery of this Agreement and the Notes and the other Loan Documents, the consummation of the transactions herein and therein contemplated and the compliance with the terms and provisions hereof and thereof do not and will not: (a) conflict with, violate or result in a breach of, or require any consent under the charter or by-laws (or equivalent constitutional documents) of any Obligor; (b) violate or result in a breach of any applicable law or regulation; (c) conflict with, violate or result in a breach of, or require any consent under any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject; (d) constitute a default, or result in the termination of any commitment to extend credit, under any such agreement or instrument; or (e) result in the creation or imposition of any Lien upon any Property of the Company or any of its Subsidiaries pursuant to the terms of any such agreement or instrument (except for any Lien created by the Pledge Agreement); except to the extent, with respect to the foregoing clauses (c) and (d), any such conflict, violation, breach or default, or the failure to have any such consent, (i) could not reasonably be expected (either individually or in the aggregate) to have a Material Adverse Effect and (ii) does not and will not result in any liability of -33- 38 the Administrative Agent or any Lender or in the acceleration or required prepayment of any Indebtedness or the termination of any commitments to extend credit. 8.5. ACTION. Each Obligor has all necessary corporate or partnership power, authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents to which it is a party; the execution, delivery and performance by each Obligor of each of the Loan Documents to which it is a party have been duly authorized by all necessary corporate or partnership action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by each Obligor and constitutes, and each of the Notes and the other Loan Documents to which it is a party when executed and delivered by such Obligor (in the case of the Notes, for value) will constitute, its legal, valid and binding obligation, enforceable against each Obligor in accordance with its terms. 8.6. APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by any Obligor of the Loan Documents to which it is a party or for the legality, validity or enforceability hereof or thereof, except for approvals, authorizations, consents, filings and registrations that have already been obtained or made. 8.7. USE OF CREDIT. None of the Obligors is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of the Loans or other extensions of credit hereunder will be used to buy or carry any Margin Stock. 8.8. ERISA. Each Plan, and, to the knowledge of the Company, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law, and no event or condition has occurred and is continuing as to which the Company would be under an obligation to furnish a report to the Lenders under Section 9.1(e) hereof. 8.9. TAXES. The Company and its Subsidiaries have filed all income tax returns and all other material tax returns in all jurisdictions in which such returns are required to have been filed by any of them and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments in any material amount payable by any of them pursuant to any assessment received by the Company or any of its Subsidiaries, except for any such taxes and assessments (x) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and (y) with respect to which the Company or one of its Subsidiaries (as the case may be) has set aside on its books adequate reserves in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of the Company, adequate. The Company has not given or been requested to give a waiver of the statute of limitations relating to the payment of any Federal, state, local and foreign taxes or other impositions in respect of the Company or any of its Subsidiaries. -34- 39 8.10. INVESTMENT COMPANY ACT. None of the Obligors is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 8.11. PUBLIC UTILITY HOLDING COMPANY ACT. None of the Obligors is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended, or an "electric company," within the meaning of Massachusetts General Laws, Chapter 164, as amended. 8.12. Borrowing Agreements and Liens. ------------------------------ (a) Part A of Schedule 8.12 hereto includes a complete and correct list, as of the date hereof, of each credit agreement, loan agreement, indenture, purchase agreement, guarantee, letter of credit or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or guarantee by, the Company or any of its Subsidiaries the aggregate principal or stated amount of which equals or exceeds (or may equal or exceed) $1,000,000, and the aggregate principal or stated amount outstanding or that may become outstanding under each such arrangement is, as of the date hereof, correctly described in Part A of said Schedule 8.12. (b) Part B of Schedule 8.12 hereto is a complete and correct list, as of the date hereof, of each Lien securing Indebtedness of any Person the aggregate principal or stated amount of which equals or exceeds (or may equal or exceed) $1,000,000 and covering any property of the Company or any of its Subsidiaries, and the aggregate Indebtedness secured (or that may be secured) by each such Lien and the property covered by each such Lien is, as of the date hereof, correctly described in said Schedule 8.12. 8.13. COMPLIANCE WITH LAWS INCLUDING ENVIRONMENTAL AND SAFETY MATTERS. Each of the Company and its Subsidiaries is in compliance in all material respects with all applicable federal, state, county and local statutes, laws, rules, regulations, codes and ordinances and orders and directives including, without limitation, all Environmental Laws, health and safety statutes and regulations and specifically the Federal Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the effect of the non-compliance with which would have a Material Adverse Effect. To the knowledge of the Company, the Company and its Subsidiaries are not subject to any material judicial or administrative proceedings alleging the violation of any applicable law or regulation and neither the Company or its Subsidiaries is the subject of any federal, state or local investigation regarding, among other matters, the Release of any Hazardous Material into the environment, the results of which would reasonably be likely to materially and adversely affect the Company and its Subsidiaries' financial condition, operations, business or prospects, taken as a whole. Neither the Company or its Subsidiaries has any contingent liabilities in connection with any Release of any Hazardous Material into the environment which would reasonably be likely to materially and adversely affect the Company and its Subsidiaries' financial condition, operations, businesses or prospects, taken as a whole. -35- 40 8.14. SUBSIDIARIES, ETC. Set forth on Schedule 8.14 hereto is a complete and correct list of all of the Subsidiaries of the Company as of the date hereof together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests except as disclosed in Schedule 8.14 hereto, (x) each of the Company and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Schedule 8.14 hereto, and (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable. 8.15. TITLE TO ASSETS; ETC. The Company and its Subsidiaries own and have on the date hereof good and marketable or merchantable title (subject only to Liens permitted by Section 9.6 hereof) to the material Properties shown to be owned in the audited financial statements referred to in Section 8.2 hereof (other than properties disposed of in the ordinary course of business or otherwise permitted to be disposed of pursuant to Section 9.5 hereof). The Company and its Subsidiaries own and have on the date hereof good and marketable or merchantable title to, or lease, and enjoy on the date hereof peaceful and undisturbed possession of, all material Properties (subject only to Liens permitted by Section 9.6 hereof) that are necessary for the operation and conduct of its businesses. 8.16. INTELLECTUAL PROPERTY RIGHTS. Except with respect to events or matters which are not reasonably expected to have a Material Adverse Effect, (a) the Company and its Subsidiaries own or license all material Intellectual Property necessary for the conduct of its business as presently conducted; (b) all material agreements pursuant to which the Company and its Subsidiaries license the manufacture, marketing or sale of products employing its Intellectual Property are in full force and effect; (c) no claims, demands, suits, or proceedings are pending or, to the knowledge of the Company and its Subsidiaries, threatened which impair their rights in any material Intellectual Property used in the conduct of their business or any material agreement relating thereto; and (d) the Company and its Subsidiaries have not infringed (without any license therefor) any Intellectual Property of any other Person, and the present conduct of the Company and its Subsidiaries' business does not infringe any such rights in any way which would have a Material Adverse Effect. 8.17. TRUE AND COMPLETE DISCLOSURE. The reports, financial statements, exhibits, schedules and other documents furnished by or on behalf of the Obligors to the Administrative Agent or any Lender in connection with the negotiation, preparation or delivery of this Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by the Company and its Subsidiaries to the Administrative Agent and the Lenders in connection with this Agreement and the other Loan Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to the Company that could reasonably -36- 41 be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Lenders for use in connection with the transactions contemplated hereby or thereby. Section 9. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Lenders and the Agents that, so long as any Commitment, or Loan is outstanding and until payment in full of all amounts payable by the Company hereunder: 9.1. FINANCIAL STATEMENTS ETC.: The Company shall deliver to each of the Lenders: (a) as soon as available and in any event within 45 days after the end of the first three quarterly fiscal periods of each fiscal year of the Company, Consolidated statements of earnings, shareholders' equity and cash flows of the Company and its Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related Consolidated balance sheets of the Company and its Subsidiaries as at the end of such period, setting forth in each case in comparative form, to the extent such figures appear therein, the corresponding Consolidated figures for the corresponding periods in the preceding fiscal year accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said Consolidated financial statements present fairly in all material respects the Consolidated financial position and results of operations of the Company and its Subsidiaries, in accordance with GAAP, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, Consolidated statements of earnings, shareholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year and the related Consolidated balance sheets of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form, to the extent such figures appear therein, the corresponding Consolidated figures for the preceding fiscal year, and accompanied by a report thereon of independent certified public accountants of recognized national standing, which report shall state that said Consolidated financial statements present fairly in all material respects the Consolidated financial position and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP, consistently applied; (c) simultaneously with the delivery of the financial statements required under Section 9.1(a) and (b) above, (i) a copy of the Company's Form 10-Q or 10-K filing made for the periods covered by such financial statements or, if such filings are not available, a brief narrative description of material businesses and financial trends and developments and significant transactions that have occurred in the period or periods covered thereby, together with (ii) a Compliance Certificate as of the date of such financial statements, in the form attached as Exhibit C hereto; -37- 42 (d) promptly upon their becoming available, copies of all (i) regular, periodic and special reports that the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) pursuant to the Securities Exchange Act of 1934, as amended (ii) financial statements, reports, notices or proxy or other statements sent to shareholders of the Company, and (iii) press releases and other statements generally made available by the Company to the public concerning material developments in the business of the Company; (e) as soon as possible and in any event within five (5) days after any officer of Company obtains knowledge thereof: (i) Company's failure to make any required payment to any Plan in sufficient amount to comply with ERISA and the Code on or before the due date for such payment; (ii) the occurrence or expected occurrence of any "reportable event" under ERISA, "prohibited transaction" or "accumulated funding deficiency" with respect to any Plan; (iii) receipt by Company of any notice (A) from a Multiemployer Plan regarding the imposition of withdrawal liability; or (B) of the institution, or expectancy of the institution, of any proceeding or any other action which may result in the termination of any Plan, or Company's withdrawal or partial withdrawal from any Plan; (f) promptly after the Company knows that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto (a "Notice of Default"); (g) within thirty (30) days of obtaining knowledge thereof, the Company shall provide Lender with a written notice and reasonable description of any events or conditions which, if they existed and were known to the Company on the date of this Agreement, would have violated the warranty and representation made in Section 8.16 (dealing with Intellectual Property Rights); and (h) from time to time such other information regarding the Property, operations, business, financial condition or prospects of the Company or any of its Subsidiaries as any Lender or any Agent may reasonably request. 9.2. LITIGATION. Promptly after the Company obtains knowledge thereof, the Company will give notice to each Lender of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings that, if adversely determined, would not (either individually or in the aggregate) reasonably be expected to have a Material Adverse Effect. 9.3. EXISTENCE, ETC. The Company: (a) will, and will cause each of its Material Subsidiaries to, preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises -38- 43 (PROVIDED that nothing in this Section 9.3 shall prohibit any transaction expressly permitted under Section 9.5 hereof); (b) will, and will cause each of its Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could reasonably be expected (either individually or in the aggregate) to have a Material Adverse Effect; (c) will, and will cause each of its Subsidiaries to, pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained in accordance with generally accepted accounting principles consistently applied, and except for any such tax, assessment, charge or levy the failure to pay which would not have a Material Adverse Effect; (d) will, and will cause each Obligor to, maintain all of its Properties used or useful in its business in good working order and condition, ordinary wear and tear excepted; (e) will, and will cause each of its Subsidiaries to, keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; and (f) will, and will cause each of its Material Subsidiaries to, permit representatives of any Lender or any Agent, upon reasonable advance notice to the Company or such Material Subsidiary and during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Administrative Agent (as the case may be); PROVIDED THAT (i) the Agents and the Lenders will endeavor to cooperate with the Company or such Material Subsidiary in order to minimize any interference with its normal business operations that may result from any such inspection and (ii) except as otherwise provided in Section 12.3 hereof, all expenses of the Agents and the Lenders in connection with the exercise of their rights under this Section 9.3(f) shall be for their own account. 9.4. INSURANCE. The Company will, and will cause each of its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies, and with respect to Property and risks of a character usually maintained by corporations engaged in the same or similar business similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations. -39- 44 9.5. Prohibition of Fundamental Changes. ---------------------------------- (a) MERGER, CONSOLIDATION, ETC. The Company will not, nor will it permit any of its Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). (b) ACQUISITIONS. The Company will not, nor will it permit any of its Subsidiaries to, acquire any business or Property from, or capital stock of, or be a party to any acquisition of, any Person. (c) SALE OF ASSETS. The Company will not, nor will it permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, any part of its business or Property, whether now owned or hereafter acquired (including, without limitation, receivables and leasehold interests) other than the sale of inventory in the course of business. (d) EXCEPTIONS. Notwithstanding the foregoing provisions of this Section 9.5: (i) any Subsidiary of the Company may be merged or consolidated with or into, or have its assets liquidated and distributed to, the Company or any other Subsidiary of the Company; PROVIDED that (x) if any such merger or consolidation shall be with the Company, the Company shall be the Person surviving such merger or consolidation, (y) if any such merger or consolidation shall be between any Subsidiary of the Company and a Wholly Owned Subsidiary of the Company, such Wholly Owned Subsidiary shall be the Person surviving such merger or consolidation and (z) if any such merger or consolidation shall be between a Subsidiary Guarantor and a Subsidiary of the Company that is not a Subsidiary Guarantor, and such Subsidiary Guarantor is not the continuing or surviving Person, then the continuing or surviving Person shall have assumed all of the obligations of such Subsidiary Guarantor hereunder and under the other Loan Documents; (ii) the Company and its Subsidiaries may acquire any assets used or useful in the lines of business permitted under Section 9.10 or the stock or other equity interests of any Person that is engaged in a line of business permitted to the Company under Section 9.10 or merge any Person that is in a line or lines of business permitted under Section 9.10 with a Subsidiary or a Subsidiary with any such Person (provided that the conditions in the provisos in Section 9.5(d)(i) are satisfied with respect to such merger) provided that at the time of the consummation of any such transaction and after giving effect thereto, the Company shall be in compliance with the covenants in Section 9.9 as of the end of the most recent fiscal quarter or annual period of the Company and the transaction will not be reasonably likely to result in the noncompliance with such financial covenants; -40- 45 (iii) the Company or any of its Subsidiaries may purchase inventory and other Property to be sold or used in the ordinary course of business, make Investments permitted by Section 9.8 hereof and make Capital Expenditures in the ordinary course of its business; (iv) the Company or any Subsidiary of the Company may convey, sell, lease, transfer or otherwise dispose of any or all of its Property to the Company or any other Subsidiary of the Company (and the Company or such other Subsidiary may acquire such Property); PROVIDED that if any such conveyance, sale, lease, transfer or other disposition is to a Subsidiary that is not a Subsidiary Guarantor and relates to all or any material part of the Property of the Company or a Subsidiary Guarantor, then the transferee Subsidiary shall have assumed all of the obligations of the Company or such Subsidiary Guarantor hereunder and under the other Loan Documents; and PROVIDED, further, that the Company or such Subsidiary Guarantor shall remain fully obligated as an Obligor hereunder; (v) the Company or any Subsidiary may convey, sell, lease, transfer or otherwise dispose of any non-material Property (of the Company and its Subsidiaries, taken as a whole) including equity interests in any Person and the licensing of patents and product rights; and (vi) the Company or any Subsidiary may lease or sublease any of its real Property. 9.6. LIMITATION ON LIENS. The Company will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except: (a) Liens in existence on the date hereof, including, without limitation, Liens required to be listed on Schedule 8.12 (parts A and B) hereto (excluding, however, Liens securing Indebtedness to be repaid with the proceeds of Loans hereunder, as indicated on said Schedule 8.12 (parts A and B), from and after the date of such repayment); (b) Liens imposed by any governmental authority for taxes, assessments or charges not in excess of $1,000,000 or not yet due or that are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or the affected Subsidiaries, as the case may be, in accordance with GAAP; (c) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business that are not overdue or that are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained or the books of the Company or the affected Subsidiaries, as the case may be, in accordance with GAAP; (d) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; -41- 46 (e) (i) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business and (ii) Liens arising from a seller's title retention provisions with respect to goods or services acquired in the ordinary course of business; (f) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or imperfections in title thereto that, in the aggregate, are not material in amount, and that do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (g) Liens on Property of any Person that becomes a Subsidiary of the Company after the date hereof, PROVIDED that such Liens are in existence at the time such Person becomes a Subsidiary of the Company and were not created in anticipation thereof; (h) Liens upon fixed or capital assets to secure purchase money Indebtedness or Capital Lease Obligations of the Company or a Subsidiary; PROVIDED, THAT, (i) such Lien does not extend to or cover any other Property of the Company or such Subsidiary and (ii) such Lien does not secure any Indebtedness other than the Indebtedness so incurred; (i) Liens on the Genzyme Tissue Repair manufacturing facility and equipment securing the repayment of Indebtedness permitted under Section 9.7(i); (j) Liens on the Genzyme (UK) Limited manufacturing facility and equipment securing the repayment of the Indebtedness permitted under Section 9.7(i); (k) Liens arising from or upon any judgment or award, provided that such judgment or award is being contested in good faith by proper appeal proceedings, such judgment or award is not secured by any Lien which is not discharged within thirty (30) days, and only so long as execution thereon shall be stayed; (l) Liens securing Indebtedness otherwise permitted under Section 9.7 that does not exceed, in the aggregate, $1,000,000 at any one time outstanding; and (m) Liens now or hereafter granted to the Agents or Lenders under the Loan Documents. 9.7. INDEBTEDNESS. The Company will not, nor will it permit any of its Subsidiaries to, create, incur or suffer to exist any Indebtedness except: (a) Indebtedness to the Lenders hereunder and under the other Loan Documents; -42- 47 (b) Indebtedness outstanding on the date hereof including Indebtedness in excess of $1,000,000 that is required to be listed on Schedule 8.12 hereto (excluding however, the Indebtedness to be repaid with the proceeds of Loans hereunder, as indicated on said Schedule 8.12, from and after the date of such repayment); (c) Indebtedness of (i) Subsidiaries of the Company to the Company, (ii) the Company to any of its Subsidiaries or (iii) of Subsidiaries to Subsidiaries; (d) Indebtedness constituting Capital Lease Obligations incurred in the ordinary course of Company's or such Subsidiaries' business; (e) Indebtedness under or in respect of currency exchange contracts or interest rate protection obligations incurred in the ordinary course of business; (f) Indebtedness in connection with performance bonds or letters of credit obtained and issued in the ordinary course of business, including letters of credit related to insurance associated with claims for work-related injuries; (g) Subordinated Debt; (h) Indebtedness incurred to renew, extend, refinance or refund any Indebtedness expressly permitted by any of the clauses of this Section 9.7; and (i) additional Indebtedness of the Company and its Subsidiaries, including Indebtedness incurred to finance the construction of manufacturing facilities and the acquisition of the equipment for the Genzyme Tissue Repair Division and for Genzyme (UK) Limited, up to but not exceeding $35,000,000 at any one time outstanding. 9.8. INVESTMENTS. The Company will not, nor will it permit any of its Subsidiaries to, make or permit to remain outstanding any Investments except Investments made in the ordinary course of business of the Company o9.9ts SubFinancial Covenants.uld be permitted under the terms of Section 9.5 9.9. Financial Covenants. ------------------- (a) CONSOLIDATED QUICK RATIO. The Company will not permit the Consolidated Quick Ratio on the last day of any fiscal quarter of the Company to be less than 1.50 to 1.00 (commencing with the fiscal quarter of the Company ending in December, 1996). (b) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. The Company will not permit the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters of the Company (commencing with the period of four consecutive fiscal quarters of the Company ending in December, 1996) to be less than the amount set forth -43- 48 below opposite such quarter end. Fiscal Quarter Ending In Ratio ------------------------ ----- December, 1996 1.25 to 1.00 March, 1997 1.50 to 1.00 June, 1997 1.75 to 1.00 September, 1997 2.00 to 1.00 December, 1997 2.25 to 1.00 March, 1998 2.50 to 1.00 June, 1998 2.75 to 1.00 September, 1998 and 3.00 to 1.00 thereafter (c) CONSOLIDATED FUNDED DEBT TO EBITDA RATIO. The Company will not permit, as of the last day of any fiscal quarter (commencing with the fiscal quarter of the Company ending in December, 1996), the ratio of Consolidated Funded Debt to Consolidated EBITDA of the Company for the period of four consecutive fiscal quarters then ended to exceed 2.25 to 1.00 at each fiscal quarter end through the fiscal quarter ending in September, 1998, and 2.00 to 1.00 at each fiscal quarter end thereafter. (d) CONSOLIDATED TANGIBLE NET WORTH. The Company will not permit the Consolidated Tangible Net Worth on the last day of any fiscal quarter of the Company to be less than the amount set forth below opposite such quarter end: Fiscal Quarter Ending In Amount ------------------------ ------ December, 1996 $400,000,000 Each fiscal quarter thereafter The minimum amount at the end of the prior fiscal quarter plus 50% of the Company's Consolidated Net Income for the current fiscal quarter (but without taking into account any Consolidated Net Income that is less than zero) plus 50% of the Company's Net Equity Proceeds received during the current fiscal quarter. 9.10. LINES OF BUSINESS. The Company will not, and will not permit any of its Subsidiaries to, engage to any significant extent in any line or lines of business activity other than the biotechnology, pharmaceutical, medical devices, medical products, and medical services and diagnostic services businesses. -44- 49 9.11. USE OF PROCEEDS. The Company will use the proceeds of the Loans hereunder to finance transactions permitted under Section 9.5 and to finance the ongoing working capital and other general corporate needs of the Company and its Subsidiaries (in each case, in compliance with all applicable legal and regulatory requirements, including, without limitation, Regulations U and X and the Securities Act of 1933 and the Securities Exchange Act of 1934); PROVIDED that neither any Agent nor any Lender shall have any responsibility as to the use of any of such proceeds. 9.12. Certain Obligations Respecting Subsidiaries. ------------------------------------------- (a) Except as permitted under Section 9.5 hereof, the Company will, and will cause each of its Subsidiaries to, take such action from time to time as shall be necessary to ensure that the Company and each of its Subsidiaries at all times collectively own (subject to no Lien other than the Lien granted under the Pledge Agreement) at least the same percentage of the issued and outstanding shares of each class of stock or other equity ownership interests of each of its Subsidiaries as is collectively owned by the Company and its Subsidiaries on the Closing Date. (b) The Company will not, and will not permit any of its Material Subsidiaries to, enter into, after the Closing Date, any indenture, agreement, instrument or other arrangement (other than entering into one or more of the Loan Documents) that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of Indebtedness, the granting of Liens, the declaration or payment of dividends, the making of loans, advances or other Investments or the sale, assignment, transfer or other disposition of Property, other than (i) any indenture, agreement, instrument or other arrangement relating to Indebtedness of a Subsidiary of the Company acquired by the Company after the date hereof which was entered into by such Subsidiary prior to the date on which the Company acquired such Subsidiary (and which was not entered into in contemplation of such acquisition), provided that the terms and conditions thereof only relate to such Subsidiary and not the Company or its other Subsidiaries and are no more restrictive than the terms and conditions hereof, (ii) any indenture, agreement, instrument or other arrangement effecting the refinancing of any Indebtedness referred to in clause (i) above so long as the prohibitions and restrictions contained in the documents relating to such refinancing are as a whole no less favorable to the Lenders or the obligor in respect of such Indebtedness than the prohibitions and restrictions contained in the documents relating to the Indebtedness being refinanced, (iii) customary non-assignment provisions in leases governing leasehold interests to the extent such provisions restrict transfer of rights under the related lease, (iv) restrictions on the transfer of or the granting of Liens on Property of the Company or any of its Subsidiaries subject to a Lien expressly permitted by Section 9.6 hereof securing Indebtedness expressly permitted by Section 9.7 hereof to the extent such restrictions are contained in documents evidencing or relating to such Indebtedness and (v) restrictions on the transfer of Property of the Company or any of its Subsidiaries that is the subject of a disposition expressly permitted by Section 9.5 hereof to the extent such restrictions are contained in the documents relating to such disposition. -45- 50 9.13. ADDITIONAL SUBSIDIARY GUARANTORS. In the event that the Company shall, after the date of this Agreement, hold or acquire any Material Subsidiary that is not already a Subsidiary Guarantor, the Company will, and will cause each of its other Subsidiaries to, cause such Material Subsidiary (a) to execute and deliver to each Agent and each Lender a joinder agreement in the form of Exhibit D hereto, (b) to execute and deliver to the Administrative Agent and each Lender a written instrument in form and substance satisfactory to the Required Lenders and the Administrative Agent pursuant to which such Material Subsidiary shall become an "Obligor" hereunder and (c) to deliver such proof of corporate action, incumbency of officers, opinions of counsel (it being agreed that any such opinion may be an opinion of internal counsel qualified to practice law in the jurisdiction(s) relevant to such opinion) and other documents as are consistent with those delivered by the Company pursuant to Section 7.1 hereof or as the Administrative Agent shall have reasonably requested. Upon execution and delivery by such Material Subsidiary of any agreement referred to in the foregoing clauses, each of the representations and warranties in Section 8 hereof with respect to such Material Subsidiary and each Loan Document to which it shall have become a party shall be deemed made by the Company. Section 10. EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) The Company shall default in the payment when due (whether at stated maturity or upon mandatory or optional prepayment) of any principal of or interest on any Loan, provided, however, that as to the non-payment of interest, there shall be a one (1) Business Day grace period without any requirement of notice, but the Company shall not be entitled to such grace period more than once in any consecutive twelve-month period; or (b) The Company shall default in the payment of any fee or any other amount (other than principal of or interest on any Loan) payable by it hereunder or under any other Loan Document and such default shall continue unremedied for a period of five (5) days after notice to the Company from the Administrative Agent; or (c) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Indebtedness aggregating to at least $1,000,000 (after the expiration of any grace period originally provided for); or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity; or (d) Any representation, warranty or certification made or deemed made herein or in any other Loan Document (or in any modification or supplement hereto or thereto) by any Obligor, or any certificate furnished to any Lender or any Agent pursuant -46- 51 to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (e) (i) The Company shall default in the performance of any of its obligations under any of Sections 9.1(c), 9.1 (e), 9.1(f), 9.5, 9.6, 9.7, 9.9, 9.10, 9.11, 9.12, and 9.13 hereof; or (ii) Any Obligor shall default in the performance of any of its other obligations in this Agreement or any other Loan Document and such default (if remediable) shall continue unremedied for a period of 30 or more days after notice thereof to the Company by the Administrative Agent or any Lender (through the Agent); or (f) The Company or any of its Material Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (g) The Company or any of its Material Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to convert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, (vi) cause or be subject to any event with respect to it which, under the applicable laws of any foreign jurisdiction, has an analogous effect to any of the events specified in the foregoing clauses (i) to (v) or (vii) take any corporate action for the purpose of effecting any of the foregoing; or (h) A proceeding or case shall be commenced, without the application or consent of the Company or any of its Material Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or such Material Subsidiary or of all or any substantial part of its Property, (iii) similar relief in respect of the Company or such Material Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days or (iv) relief with respect to it which, under the applicable laws of any foreign jurisdiction, has an analogous effect to any of the actions specified in foregoing clauses (i) to (iii); or an order for relief against the Company or such Material Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (i) A final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate (exclusive of judgment amounts fully covered by insurance where the insurer has a claims paying ability rated AA- or better from S&P or a financial -47- 52 strength rating of AA or better from Moody's) shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge) or vacated, or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or the relevant Subsidiary shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (j) An event or condition specified in Section 9.1(e) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Required Lenders shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) that, in the determination of the Required Lenders, would (either individually or in the aggregate) have a Material Adverse Effect; or (k) There shall have been asserted against the Company or any of its Subsidiaries an Environmental Claim that, in the judgment of the Required Lenders is reasonably likely to be determined adversely to the Company or any of its Subsidiaries, and the amount thereof (either individually or in the aggregate) is reasonably likely to have a Material Adverse Effect (insofar as such amount is payable by the Company or any of its Subsidiaries but after deducting any portion thereof that is reasonably expected to be paid by other creditworthy Persons jointly and severally liable therefor); THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (g) or (h) of this Section 10 with respect to any Obligor, upon request of the Required Lenders, (A) the Administrative Agent shall, by notice to the Company, terminate the Commitments and they shall thereupon terminate, and (B) the Administrative Agent shall, by notice to the Company declare the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Obligors hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.5 hereof) to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor; and (2) in the case of the occurrence of an Event of Default referred to in clause (g) or (h) of this Section 10 with respect to any Obligor, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans and all other amounts payable by the Obligors hereunder and under the Notes (including, without limitation, any amounts payable under Section 5.5 hereof) shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor. Section 11. The Agents ---------- 11.1. APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby appoints and authorizes each Agent to act as its agent hereunder and under the other Loan Documents with -48- 53 such powers as are specifically delegated to each such Agent by the terms of this Agreement and of the other Loan Documents, together with such other powers as are reasonably incidental thereto. Each Agent (which term as used in this sentence and in Section 11.5 and the first sentence of Section 11.6 hereof shall include reference to their respective affiliates and their own and their affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Loan Documents, and shall not by reason of this Agreement or any other Loan Document be a trustee for any Lender; (b) shall not be responsible to the Lenders for any recitals, statements, presentations or warranties contained in this Agreement or in any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Loan Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not, except to the extent expressly instructed by the Required Lenders, be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Loan Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence, bad faith or willful misconduct. Each Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. Each Agent may deem and treat the payee of a Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Agent, together with the consent of the Company to such assignment or transfer (to the extent provided in Section 12.7(b) hereof). 11.2. RELIANCE BY AGENTS. Each Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by such Agent. As to any matters not expressly provided for by this Agreement or any other Loan Document, each Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Required Lenders or, if provided herein, in accordance with the instructions given by all of the Lenders as is required in such circumstance, and such instructions of such Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. -49- 54 11.3. DEFAULTS. No Agent shall be deemed to have knowledge or notice of the occurrence of a Default unless the Administrative Agent has received notice from a Lender or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that an Agent receives such a notice of the occurrence of a Default, such Agent shall give prompt notice thereof to the other Agent and the Lenders. The Administrative Agent shall (subject to Sections 11.1 and 11.7 hereof) take such action with respect to such Default as shall be directed by the Required Lenders, PROVIDED that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may but shall not be obligated to take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the other Agent and the Lenders except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Required Lenders or all of the Lenders. 11.4. RIGHTS AS A LENDER. With respect to its Commitments and the Loans made by it, Fleet (and any successor acting as Administrative Agent) and BankBoston (and any successor acting as Documentation Agent) in their capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as an Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include any such Agent in its individual capacity. Fleet (and any successor acting as Administrative Agent) and The First National Bank of Boston (and any successor acting as Documentation Agent) and their respective affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Obligors (and any of their Subsidiaries or Affiliates) as if they were not acting as an Agent, and Fleet (and any such successor) and BankBoston (and any such successor) and their respective affiliates may accept fees and other consideration from the Obligors for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. 11.5. INDEMNIFICATION. The Lenders agree to indemnify each of the Agents (to the extent not reimbursed under Section 12.3 hereof, but without limiting the obligations of the Company under said Section 12.3) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against any Agent (including by any Lender) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Loan Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 12.3 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, PROVIDED that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the person to be indemnified. 11.6. NON-RELIANCE ON AGENTS AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on the Agents or any other Lender, and based on such -50- 55 documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agents or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or under any other Loan Document. No Agent shall be required to keep itself informed, as to the performance or observance by any Obligor of this Agreement or any of the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agents hereunder, the Agents shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) that may come into the possession of an Agent or any of their respective affiliates. 11.7. FAILURE TO ACT. Except for action expressly required of any Agent hereunder and under the other Loan Documents, each Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 11.5 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 11.8. RESIGNATION OR REMOVAL OF AGENTS. Subject to the appointment and acceptance of a successor Agent as provided below, an Agent may resign at any time by giving notice thereof to the Lenders and the Company. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Agent to such capacity (and in that connection, so long as no Event of Default shall have occurred and be continuing, subject to the consent of the Company, not to be unreasonably withheld or delayed). If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent to such capacity, that shall be a bank with a combined capital and surplus of at least $250,000,000 (and in that connection, so long as no Event of Default shall have occurred and be continuing, subject to the consent of the Company, not to be unreasonably withheld or delayed)). Upon the acceptance of any appointment as an Agent hereunder by a successor Agent, (a) such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and (b) the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as an Agent, the provisions of this Section 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. 11.9. CONSENTS UNDER OTHER LOAN DOCUMENTS. Except as otherwise provided in Section 12.5 hereof with respect to this Agreement, the Administrative Agent may, with the prior consent of the Required Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the other Loan Documents, PROVIDED that, without the prior consent of each Lender, the Administrative Agent shall not (except as provided herein) release any collateral or -51- 56 any Obligor or otherwise terminate any Lien under any Loan Document providing for collateral security, or agree to additional obligations being secured by such collateral security. Section 12. Miscellaneous ------------- 12.1 WAIVER. No failure on the part of any Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Each Obligor irrevocably waives, to the fullest extent permitted by applicable law, any claim that any action or proceeding commenced by any Agent or any Lender relating in any way to this Agreement should be dismissed or stayed by reason, or pending the resolution, of any action or proceeding commenced by any Obligor relating in any way to this Agreement whether or not commenced earlier. To the fullest extent permitted by applicable law, the Obligors shall take all measures necessary for any such action or proceeding commenced by any Agent or any Lender to proceed to judgment prior to the entry of judgment in any such action or proceeding commenced by any Obligor. 12.2. NOTICES. All notices, requests and other communications provided for herein and under the Security Documents (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telecopy), or, with respect to notices given pursuant to Section 2.3 hereof or Section 4.5 hereof, by telephone, confirmed in writing by telecopier by the close of business on the day the notice is given, delivered (or telephoned, as the case may be) to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof (below the name of the Company, in the case of any Subsidiary Guarantor); or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 12.3. EXPENSES, ETC. The Company agrees to pay or reimburse each of the Lenders and each of the Agents for: (a) all reasonable out-of-pocket costs and expenses of the Agents (including, without limitation, the reasonable fees and expenses of Brown, Rudnick, Freed & Gesmer, special counsel to Fleet) in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the other Loan Documents and the extensions of credit hereunder, (ii) the syndication of the Commitments and the Loans and (iii) the negotiation or preparation of any modification, supplement or waiver of any of the terms of this Agreement or any of the other Loan Documents (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of each of the Lenders and each of the Agents (including, without limitation, the reasonable fees and expenses of legal counsel) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, -52- 57 foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 12.3; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any of the other Loan Documents or any other document referred to herein or therein and all reasonable costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by any Loan Document or any other document referred to therein. 12.4. INDEMNIFICATION. The Company hereby agrees to indemnify each Agent, each Lender, their affiliates and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by any Agent to any Lender, whether or not any Agent or any Lender is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the extensions of credit hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the extensions of credit hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). Without limiting the generality of the foregoing, the Company will indemnify each Agent and each Lender from, and hold each Agent and each Lender harmless against, any losses, liabilities, claims, damages or expenses described in the preceding sentence (but excluding, as provided in the preceding sentence, any loss, liability, claim, damage or expense incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified) arising under any Environmental Law as a result of (i) the past, present or future operations of the Company or any of its Subsidiaries (or any predecessor in interest to the Company or any of its Subsidiaries), (ii) the past, present or future condition of any site or facility owned, operated or leased at any time by the Company or any of its Subsidiaries (or any such predecessor in interest) or (iii) any Release or threatened Release of any Hazardous Materials at or from any such site or facility, including any such Release or threatened Release that shall occur during any period when any Agent or any Lender shall be in possession of any such site or facility following the exercise by the Administrative Agent or any Lender of any of its rights and remedies hereunder. 12.5. AMENDMENTS, ETC.. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company, the Administrative Agent and the Required Lenders, or by the Company and the Administrative Agent acting with the consent of the Required Lenders, and any provision of this Agreement may be waived by the Required Lenders or by the Administrative Agent acting with the consent of the Required Lenders; PROVIDED that: (a) no modification, supplement or waiver shall, unless by an instrument signed by all of the Lenders or by the Administrative Agent acting with the consent of all of the Lenders: (i) increase, or extend the term of any of the Commitments, or extend the time or waive any requirement for the reduction or termination of any of the Commitments, (ii) extend the date fixed for the payment -53- 58 of principal of or interest on any Loan, or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of the Company to prepay Loans, (vi) alter the terms of Section 4.2, 4.7 or 11.9 hereof or this Section 12.5, (vii) modify the definition of the term "Required Lenders", or modify in any other manner the number or percentage of the Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof, (viii) release any Obligor hereunder, or (ix) waive any of the conditions precedent set forth in Section 7.1 hereof; (b) any modification or supplement of Section 11 hereof shall require the consent of the Administrative Agent; and (c) any modification or supplement of Section 6 hereof shall require the consent of each Subsidiary Guarantor (PROVIDED that any Subsidiary of the Company may become a party to this Agreement as a "Subsidiary Guarantor" hereunder as provided in Section 9.13 hereof). 12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 12.7. Assignments and Participations. ------------------------------ (a) No Obligor may assign any of its rights or obligations hereunder or under the Notes without the prior consent of all of the Lenders and the Agent. (b) Each Lender may assign any of its Loans, its Note and its Commitment but only with the consent of the Company and the Administrative Agent; PROVIDED THAT (i) no such consent by the Company or the Administrative Agent shall be required in the case of any assignment to another Lender, and no such consent by the Company shall be required in the case of any assignment effected while an Event of Default has occurred and is continuing; (ii) except to the extent the Company and the Administrative Agent shall otherwise consent, any such partial assignment (other than to another Lender) shall be in an amount at least equal to $5,000,000; (iii) upon each such assignment, the assignor and assignee shall deliver to the Company and the Administrative Agent a Notice of Assignment in the form of Exhibit E hereto; and (iv) no consent required of the Company or the Administrative Agent under this Section 12.7(b) shall be unreasonably withheld or delayed. Upon execution and delivery by the assignor and the assignee to the Company and the Administrative Agent of such Notice of Assignment and upon the consent thereto by the Company and the Administrative Agent, the assignee shall have, to the extent of such assignment (unless otherwise consented to by the Company and the Administrative Agent), the obligations, rights and benefits of a Lender hereunder holding the Commitment(s) and Loans (or portions thereof) assigned to it and specified in such Notice -55- 59 of Assignment (in addition to the Commitment(s) and Loans, if any, theretofore held by such assignee) and the assigning Lender shall, to the extent of such assignment, be released from the Commitment(s) (or portion(s) thereof) so assigned. Upon each such assignment the assigning Lender shall pay the Administrative Agent an assignment fee of $3,000. (c) A Lender may sell or agree to sell to one or more other Persons a participation in all or any part of any Loans held by it, or in its Commitments, in which event each purchaser of a participation (a "Participant"), except with respect to a Lender as otherwise provided in Section 4.7(c) hereof, shall not have any rights or benefits under this Agreement or any Note or any other Loan Document (the Participant's rights against such Lender in respect of such participation to be those set forth in the agreements executed by such Lender in favor of the Participant). All amounts payable by the Company to any Lender under Section 5 hereof in respect of Loans held by it, and its Commitments, shall be determined as if such Lender had not sold or agreed to sell any participations in such Loans and Commitments, and as if such Lender were funding each of such Loan and Commitments in the same way that it is funding the portion of such Loan and Commitments in which no participations have been sold. In no event shall a Lender that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Loan Document except that such Lender may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of such Lender's related Commitment, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans, or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee, (v) alter the rights or obligations of the Company to prepay the related Loans or (vi) consent to any modification, supplement or waiver hereof or of any of the other Loan Documents to the extent that the same, under Section 11.9 or 12.4 hereof, requires the consent of each Lender. (d) In addition to the assignments and participations permitted under the foregoing provisions of this Section 12.7, any Lender may (without notice to the Company, the Administrative Agent or any other Agent or Lender and without payment of any fee) (i) assign and pledge all or any portion of its Loans, and Notes to any Federal Reserve Lender as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Lender and (ii) assign all or any portion of its rights under this Agreement and its Loans, and Note to an Affiliate provided that the Company shall not be required to pay anyincrease in the cost of borrowing as a result of such assignment and LIBOR Loans must continue to be made available by such Assignee. Unless the Administrative Agent and the Company shall otherwise consent thereto, no such assignment shall release the assigning Lender from its obligations hereunder. (e) A Lender may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Lender from time to time to assignees and -56- 60 participants (including prospective assignees and participants), subject, however, to the provisions of Section 12.13 hereof. (f) Anything in this Section 12.7 to the contrary notwithstanding, no Lender may assign or participate any interest in any Commitment or Loan held by it hereunder to the Company or any of its Affiliates or Subsidiaries, and the Company shall not, and shall not permit any of its Subsidiaries to, acquire any such interest in any Commitment or Loan, without the prior consent of each Lender. 12.8. SURVIVAL. The obligations of the Company under Sections 5.1, 5.5, and 12.3 hereof, the obligations of each Subsidiary Guarantor under Section 6.3 hereof, and the obligations of the Lenders under Section 11.5 hereof, shall survive the repayment of the Loans and the termination of the Commitments and, in the case of any Lender that may assign any interest in its Commitments or Loans hereunder, shall survive the making of such assignment, notwithstanding that such assigning Lender may cease to be a "Lender" hereunder. In addition, each representation and warranty made, or deemed to be made by a notice of borrowing herein or pursuant hereto shall survive the making of such representation and warranty, and no Lender shall be deemed to have waived, by reason of making any extension of credit, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that such Lender or any Agent may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such extension of credit was made. 12.9. CAPTIONS. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12.10. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and the Notes shall be governed by, and construed12.11ccorGoverning Law; Submission to Jurisdiction of The Commonwealth of Massachusetts. Each Obligor hereby submits to the nonexclusive jurisdiction of the United States District Court for the District of Massachusetts and of the Superior Court of the Commonwealth of Massachusetts sitting in Suffolk County, and any appellate court in the Commonwealth of Massachusetts, for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Obligor hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 12.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENTS AND THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN -56- 61 ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY. 12.13. Confidentiality. --------------- (a) The Company acknowledges that from time to time financial advisory, investment banking and other services may be offered or provided to the Company or one or more of its Subsidiaries (in connection with this Agreement or otherwise) by any Lender or by one or more subsidiaries or affiliates of such Lender and the Company hereby authorizes each Lender to share any information delivered to such Lender by the Company and its Subsidiaries pursuant to this Agreement and the other Loan Documents, or in connection with the decision of such Lender to enter into this Agreement, to any such subsidiary or affiliate, it being understood that any such subsidiary or affiliate receiving such information shall be bound by the provisions of paragraph (b) below as if it were a Lender hereunder. Such authorization shall survive the repayment of the Loans and the termination of the Commitments. (b) Each Lender and each Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement and the other Documents, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Lenders or the Agents, (iii) to bank examiners, auditors or accountants, (iv) to any other Agent or any other Lender, (v) in connection with any litigation to which any one or more of the Lenders or one or more of the Agents is a party in which such Lender or Agent has been required or, in the opinion of its legal counsel, deems it necessary to produce such information, (vi) to a subsidiary or affiliate of such Lender as provided in paragraph (a) above or (vii) to any assignee or participant (or prospective assignee or participant) assignee or participant (or prospective assignee or participant); provided, further, that (x) unless specifically prohibited by applicable law or court order, each Lender and each Agent shall, prior to disclosure thereof, notify the Company of any request for disclosure of any such non-public information, except when the request is (A) made by any governmental agency or representative thereof or (B) pursuant to legal process and (y) that in no event shall any Lender or any Agent be obligated to return any materials furnished by the Company. The obligations of each Lender under this Section 12.13 shall supersede and replace the obligations of such Lender under the confidentiality letter in respect of this financing signed and delivered by such Lender to the Company prior to the date hereof. -57- 62 IT WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as an instrument under seal as of the day and year first above written. GENZYME CORPORATION ------------------- By: ------------------------------------ Title: Address for Notices: Genzyme Corporation One The Mountain Road Framingham, Massachusetts 01701 Attention: Evan M. Lebson, Treasurer Telecopier No.: (508) 872-0827 Telephone No.: (508) _________ SUBSIDIARY GUARANTORS --------------------- DEKNATEL SNOWDEN PENCER, INC. ----------------------------- By: ------------------------------------ Title: Address for Notices: c/o Genzyme Corporation One Mountain Road Framingham, MA 01701 Attention: Evan M. Lebson, Treasurer Telecopier No.: (508) 872-0827 Telephone No.: (508) --------------------------------------- --------------------------------------- --------------------------------------- -58- 63 DSP WORLDWIDE, INC. By: ------------------------------------ Title: Address for Notices: -------------------- c/o Genzyme Corporation One Mountain Road Framingham, MA 01701 Attention: Evan M. Lebson, Treasurer Telecopier No.: (508) 872-0827 Telephone No.: (508) --------------------------------------- --------------------------------------- --------------------------------------- ALLSTON LANDING LIMITED PARTNERSHIP By: Allston Landing Corporation, its General Partner By: ------------------------------------ Title: Address for Notices: -------------------- c/o Genzyme Corporation One Mountain Road Framingham, MA 01701 Attention: Evan M. Lebson, Treasurer Telecopier No.: (508) 872-0827 Telephone No.: (508) --------------------------------------- --------------------------------------- --------------------------------------- -59- 64 ADMINISTRATIVE AGENT -------------------- FLEET NATIONAL BANK By: ------------------------------------ Title: Address For Notices: -------------------- Fleet National Bank 75 State Street Boston, MA 02109 Telecopier No.: (617) 346-1633 Telephone No.: (617) 346-4668 Attention: High Tech Group Documentation Agent ------------------- THE FIRST NATIONAL BANK OF BOSTON By: ------------------------------------ Title: Address For Notices: -------------------- 100 Federal Street Mail Stop 010806 Boston, MA 02110 Telecopier No.: Telephone No.: Attention: High Tech Division -60- 65 LENDERS ------- Revolving Credit Commitment FLEET NATIONAL BANK - --------------------------- $35,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- Fleet National Bank 75 State Street Boston, MA 02109 Telecopier No.: (617) 346-1633 Telephone No.: (617) 346-4668 Attention: High Tech Group Lending Office For All Loans ---------------------------- Fleet National Bank 75 State Street Boston, MA 02109 Telecopier No.: (617) 346-1633 Telephone No.: (617) 346-4668 Attention: High Tech Group -61- 66 Revolving Credit Commitment THE FIRST NATIONAL BANK OF BOSTON - --------------------------- $22,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- The First National Bank of Boston 100 Federal Street Mail Stop 01-08-04 Boston, MA 02110 Telecopier No.: 617-434-9820 Telephone No.: 617-434-9625 Attention: Commercial Loan Services Lending Office For All Loans: ----------------------------- The First National Bank of Boston 100 Federal Street Mail Stop 01-08-04 Boston, MA 02110 Telecopier No.: 617-434-9820 Telephone No.: 617-434-9625 Attention: Commercial Loan Services -62- 67 Revolving Credit Commitment BANK OF TOKYO-MITSUBISHI TRUST COMPANY - --------------------------- $13,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- Bank of Tokyo-Mitsubishi Trust Company 125 Summer Street Boston, MA 02110 Attention: Michael J. Cronin Telecopier No.: 617-330-7422 Telephone No.: 617-330-1059 Lending Office For All Loans: ----------------------------- Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas New York, NY 10116-3138 Attention: Loan Operations Department Telecopier No.: 201-413-8225 Telephone No.: 201-413-8515 -63- 68 Revolving Credit Commitment CREDIT LYONNAIS NEW YORK BRANCH - --------------------------- $13,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, NY 10019 Attention: David O'Connell Telecopier No.: 617-723-4883 Telephone No.: 617-723-2615 Lending Office For All Loans: ----------------------------- Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, NY 10019 Attention: David O'Connell Telecopier No.: 212-459-3187 Telephone No.: 212-261-7050 -64- 69 Revolving Credit Commitment THE FUJI BANK, LIMITED, NEW YORK BRANCH - --------------------------- $13,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- The Fuji Bank, Limited, New York Branch Two World Trade Center, 79th Floor New York, NY 10048 Telecopier No.: 212-488-8216 Telephone No.: 212-898-2065 Attention: Kathleen Barsotti Lending Office For All Loans: ----------------------------- The Fuji Bank, Limited, New York Branch Two World Trade Center, 79th Floor New York, NY 10048 Telecopier No.: 212-488-8216 Telephone No.: 212-898-2065 Attention: Kathleen Barsotti -65- 70 Revolving Credit Commitment MELLON BANK, N.A. - --------------------------- $13,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- Mellon Bank, N.A. One Boston Place Sixth Floor Boston, MA 02108 Telecopier No.: 617-722-3516 Telephone No.: 617-722-7994 Attention: Rita C. Long Lending Office For All Loans: ----------------------------- Mellon Bank, N.A. 3 Mellon Bank Center Room 2303 Pittsburgh, PA 15229 Telecopier No.: 412-236-2027 Telephone No.: 412-234-3699 Attention: Sandra A. Castelli -66- 71 Revolving Credit Commitment NATIONSBANK, N.A. - --------------------------- $13,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- NationsBank, N.A. 101 North Tyron Street, 15th Floor Charlotte, NC 28225 Telecopier No.: 704-386-8694 Telephone No.: 704-388-1111 Attention: Jacquetta Banks Lending Office For All Loans: ----------------------------- NationsBank, N.A. 101 North Tyron Street, 15th Floor Charlotte, NC 28225 Telecopier No.: 704-386-8694 Telephone No.: 704-388-1111 Attention: Jacquetta Banks -67- 72 Revolving Credit Commitment REPUBLIC NATIONAL BANK OF NEW YORK - --------------------------- $13,000,000.00 - -------------- By: ------------------------------------ Title: Address For Notices: -------------------- Republic National Bank of New York 450 5th Avenue, 25th Floor New York, NY 10018 Telecopier No.: 212-525-8370 Telephone No.: 212-525-5758 Attention: Patrick Hildreth Lending Office For All Loans: ----------------------------- Republic National Bank of New York 450 5th Avenue, 25th Floor New York, NY 10018 Telecopier No.: 212-525-8370 Telephone No.: 212-525-5758 Attention: Patrick Hildreth -68- 73 Revolving Credit Commitment ABN AMRO BANK N.V. - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: By: ------------------------------------ Title: Address For Notices: -------------------- ABN AMRO Bank N.V. One Post Office Square, 39th Floor Boston, MA 02109 Telecopier No.: 617-988-7910 Telephone No.: 617-988-7908 Attention: Donna Connolly Lending Office For All Loans: ----------------------------- ABN AMRO Bank N.V. One Post Office Square, 39th Floor Boston, MA 02109 Telecopier No.: 617-988-7910 Telephone No.: 617-988-7908 Attention: Donna Connolly -69- 74 Revolving Credit Commitment Bank Leumi Trust Company Of New York - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- Bank Leumi Trust Company of New York 562 Fifth Avenue New York, NY 10036 Telecopier No.: 212-626-1329 Telephone No.: 212-626-1376 Attention: John Koenigsberg Lending Office For All Loans: ----------------------------- Bank Leumi Trust Company of New York 562 Fifth Avenue New York, NY 10036 Telecopier No.: 212-626-1329 Telephone No.: 212-626-1376 Attention: John Koenigsberg -70- 75 Revolving Credit Commitment THE BANK OF NOVA SCOTIA - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- The Bank of Nova Scotia 600 Peachtree Street, Northeast Atlanta, GA 30308 Telecopier No.: 404-888-8998 Telephone No.: 404-871-1558 Attention: Ruth Alexander Lending Office For All Loans: ----------------------------- The Bank of Nova Scotia 600 Peachtree Street, Northeast Atlanta, GA 30308 Telecopier No.: 404-888-8998 Telephone No.: 404-871-1558 Attention: Ruth Alexander -71- 76 Revolving Credit Commitment CITIZENS BANK OF MASSACHUSETTS - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- Citizens Bank of Massachusetts 55 Summer Street Boston, MA 02110 Telecopier No.: 617-422-8854 Telephone No.: 617-422-8293 Attention: Anne Forbes Van Nest Lending Office For All Loans: ----------------------------- Citizens Bank of Massachusetts 55 Summer Street Boston, MA 02110 Attention: Anne Forbes Van Nest Telecopier No.: 617-422-8854 Telephone No.: 617-422-8293 -72- 77 Revolving Credit Commitment CORESTATES BANK, N.A. - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- CoreStates Bank, N.A. 1339 Chestnut Street P.O. Box 7618 Philadelphia, PA 19101-7618 Telecopier No.: 215-973-6745 Telephone No.: 212-786-2162 Lending Office For All Loans: ----------------------------- CoreStates Bank, N.A. 1339 Chestnut Street P.O. Box 7618 Philadelphia, PA 19101-7618 Telecopier No.: 215-973-6745 Telephone No.: 212-786-2162 -73- 78 REvolving Credit Commitment CREDIT SUISSE - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: By: ------------------------------------ Title: Address For Notices: -------------------- Credit Suisse Tower 49, 12 East 49th Street New York, NY 10017 Telecopier No.: 212-238-5441 Telephone No.: 212-238-5473 Attention: Andreas Tschopp Lending Office For All Loans: ----------------------------- Credit Suisse Tower 49, 12 East 49th Street New York, NY 10017 Telecopier No.: 212-238-5441 Telephone No.: 212-238-5473 Attention: Andreas Tschopp -74- 79 Revolving Credit Commitment KREDIETBANK, N.V. - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: By: ------------------------------------ Title: Address For Notices: -------------------- Kredietbank, N.V. 125 West 55th Street New York, NY 10019 Telecopier No.: 212-956-5580 Telephone No.: 212-541-0704 Attention: Robert Surdam Lending Office For All Loans: ----------------------------- Kredietbank, N.V. 125 West 55th Street New York, NY 10019 Telecopier No.: 212-956-5580 Telephone No.: 212-541-0704 Attention: Robert Surdam -75- 80 Revolving Credit Commitment LTCB TRUST CO. - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- LTCB Trust Co. 165 Broadway, 49th Floor New York, NY 10006 Telecopier No.: 212-608-2371 Telephone No.: 212-335-4551 Attention: David Manheim Lending Office For All Loans: ----------------------------- LTCB Trust Co. 165 Broadway, 49th Floor New York, NY 10006 Telecopier No.: 212-608-2371 Telephone No.: 212-335-4551 Attention: David Manheim -76- 81 Revolving Credit Commitment THE NORTHERN TRUST COMPANY - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- The Northern Trust Company 50 South LaSalle Street Chicago, IL 60675 Telecopier No.: 312-444-3508 Telephone No.: 312-444-3504 Attention: James McCall Lending Office For All Loans: ----------------------------- The Northern Trust Company 50 South LaSalle Street Chicago, IL 60675 Telecopier No.: 312-444-3508 Telephone No.: 312-444-3504 Attention: James McCall -77- 82 Revolving Credit Commitment THE SAKURA BANK, LIMITED - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- The Sakura Bank, Limited 277 Park Avenue 45th Floor New York, NY 10172 Attention: Koji Suzuki Telecopier No.: 212-888-7651 Telephone No.: 212-756-6814 Lending Office For All Loans: ----------------------------- The Sakura Bank, Limited 277 Park Avenue 45th Floor New York, NY 10172 Attention: Koji Suzuki Telecopier No.: 212-888-7651 Telephone No.: 212-756-6814 -78- 83 Revolving Credit Commitment THE SANWA BANK, LIMITED - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- The Sanwa Bank, Limited Park Avenue Plaza 55 East 52nd Street New York, NY 10055 Telecopier No.: 212-754-2368 Telephone No.: 212-339-6390 Attention: Renko Hara Lending Office For All Loans: ----------------------------- The Sanwa Bank, Limited: Park Avenue Plaza 55 East 52nd Street New York, NY 10055 Telecopier No.: 212-754-2368 Telephone No.: 212-339-6390 Attention: Renko Hara -79- 84 Revolving Credit Commitment THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH - --------------------------- $7,500,000.00 - ------------- By: ------------------------------------ Title: Address For Notices: -------------------- The Sumitomo Bank, Limited, New York Branch 277 Park Avenue New York, NY 10172 Attention: Thomas Miressi Telecopier No.: 212-224-5188 Telephone No.: 212-224-4128 Lending Office For All Loans: ----------------------------- The Sumitomo Bank, Limited, New York Branch 277 Park Avenue New York, NY 10172 Attention: Thomas Miressi Telecopier No.: 212-224-5188 Telephone No.: 212-224-4128 -80- 85 EXHIBIT A [Form of Revolving Credit Note] PROMISSORY NOTE $______________ __________ __, 199_ Boston, Massachusetts FOR VALUE RECEIVED, GENZYME CORPORATION, a Massachusetts corporation (the "COMPANY"), hereby promises to pay to _______________ (the "LENDER"), for account of its respective Applicable Lending Offices provided for by the Credit Agreement referred to below, at the principal office of Fleet National Bank, Boston, Massachusetts 02109, the principal sum of ________________ Dollars (or such lesser amount as shall equal the aggregate unpaid principal amount of the Revolving Credit Loans made by the Lender to the Company under the Credit Agreement), in lawful money of the United States of America and in immediately available funds, on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount of each such Revolving Credit Loan, at such office, in like money and funds, for the period commencing on the date of such Revolving Credit Loan until such Revolving Credit Loan shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Revolving Credit Loan made by the Lender to the Company, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof, PROVIDED that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Company to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Revolving Credit Loans made by the Lender. This Note is one of the Revolving Credit Notes referred to in the Credit Agreement dated as of ________ __, 1996 (as modified and supplemented and in effect from time to time, the "CREDIT AGREEMENT") between the Company, the Subsidiary Guarantors party thereto, the Lenders party thereto and Fleet National Bank, as Administrative Agent and The First National Bank of Boston, as Documentation Agent, and evidences Revolving Credit Loans made by the Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 12.7 of the Credit Agreement, this Note may not be assigned by the Lender to any other Person. 1 86 This Note shall be deemed to be an instrument under seal governed by, and construed in accordance with, the law of The Commonwealth of Massachusetts. ATTEST: GENZYME CORPORATION By: - ------------------------------ -------------------------------- Title: 2 87 SCHEDULE OF REVOLVING CREDIT LOANS This Note evidences Revolving Credit Loans made, Continued or Converted under the within-described Credit Agreement to the Company, on the dates, in the principal amounts, of the Types, bearing interest at the rates and having Interest Periods (if applicable) of the durations set forth below, subject to the payments, Continuations, Conversions and prepayments of principal set forth below:
- ------------------------------------------------------------------------------------------------------------ Amount Date Paid, Made, Prepaid, Continued or Principal Duration of Continued Unpaid Converted Amount of Type of Loan Interest Rate Interest or Principal Notation Loan Period Converted Amount Made By - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
1 88 EXHIBIT C TO CREDIT AGREEMENT ----------------------------- FORM OF COMPLIANCE CERTIFICATE ------------------------------ COMPLIANCE CERTIFICATE ---------------------- This Compliance Certificate is provided pursuant to Section [_______] [________] [________] of that certain Credit Agreement (the "Agreement") dated as of __________, 1996, between Genzyme Corporation ("Company"), the Subsidiary Guarantors party thereto, the Lenders party thereto and Fleet National Bank ("Administrative Agent") and The First National Bank of Boston ("Documentation Agent"). The capitalized terms used herein shall have the meanings ascribed to such terms in the Agreement. The undersigned hereby certifies as follows as of this date: 1. The representations and warranties made by the Company in the Agreement and by the Company and each Obligor in each certificate, document or financial or other statement furnished under or in connection therewith are true and accurate in all material respects. 2. The financial information and calculations shown on the attached Schedule A are true and accurate as of the date hereof and the Company is in compliance with the financial covenants set forth in Section 9.9 of the Agreement. 3. No Default or Event of Default under the Agreement has occurred. IN WITNESS WHEREOF, this Certificate has been duly executed and delivered as a sealed instrument at Boston, Massachusetts on this ____ day of ________, 199_. GENZYME CORPORATION By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- 1 89 SCHEDULE A ---------- TO EXHIBIT C ------------ Section 9.9(a) Consolidated Quick Ratio - -------------- ------------------------ cash -- $__________ Cash Equivalents -- $___________ Marketable Investments -- $____________ Accounts Receivable -- $___________ Current Liabilities + $50,000,000 -- $____________ Actual Ratio -- ____________ Minimum Ratio -- 1.50 to 1.00 SECTION 9.9(b) CONSOLIDATED FIXED CHARGE COVERAGE RATIO Consolidated EBITDA -- $___________ Capital Expenditures -- $____________ Taxes -- $___________ Dividend Payments -- $___________ Interest Expense -- $___________ Actual Ratio -- ___________ Minimum Ratio -- ___________ SECTION 9.9(c) CONSOLIDATED FUNDED DEBT TO EBITDA RATIO Consolidated Funded Debt -- $_________ Consolidated EBITDA -- $___________ Actual Ratio -- ___________ Maximum Ratio -- __________ 1 90 SECTION 9.9(d) CONSOLIDATED TANGIBLE NET WORTH - -------------- ------------------------------- Consolidated Net Worth -- $__________ Intangible Assets -- $__________ Consolidated Tangible Net Worth -- $__________ Actual Ratio -- __________ Minimum Ratio -- __________ LEVEL CALCULATION - ----------------- CONSOLIDATED DEBT COVERAGE RATIO - -------------------------------- cash -- $__________ Cash Equivalents -- $__________ Marketable Investments -- $__________ Consolidated Funded Debt -- $__________ Ratio -- __________ CONSOLIDATED FIXED CHARGE COVERAGE RATIO - ---------------------------------------- Consolidated EBITDA -- $__________ Capital Expenditures -- $__________ Taxes -- $__________ Dividend Payments -- $__________ Interest Expense -- $__________ Ratio -- __________ Level Period (I, II, III or IV) for Applicable Margin and Applicable Commitment Fee determination: ------------------- 2 91 EXHIBIT D [Form of Joinder Agreement] This Joinder Agreement is delivered pursuant to Section 9.13 of the Credit Agreement dated as of ___________________, 1996 (the "CREDIT AGREEMENT") between Genzyme Corporation Incorporated (the "COMPANY"), the Subsidiary Guarantors party thereto, the Lenders party thereto, Fleet National Bank, as Administrative Agent, and The First National Bank of Boston, as Documentation Agent. The undersigned hereby agrees to become a "Subsidiary Guarantor" as such term is used in the Credit Agreement and, by virtue of its execution and delivery of this Joinder Agreement, agrees to assume all of the obligations and liabilities of a Subsidiary Guarantor under the Credit Agreement and the other Loan Documents. IN WITNESS WHEREOF, the undersigned has caused this Joinder Agreement to be duly executed on this _____ day of _____________, _____. [NAME OF SUBSIDIARY] By: ----------------------------------- Title: Address for Notices: [Address] 1 92 EXHIBIT E [Form of Notice of Assignment] NOTICE OF ASSIGNMENT [Date] Genzyme Corporation One Mountain Road Framingham, Massachusetts 01701 Attention: Mr. Evan M. Lebson, Treasurer Fleet National Bank, as Administrative Agent 75 State Street Boston, Massachusetts 02109 Attention: High Tech Group Re: Credit Agreement dated as of _________________, 1996 (the "CREDIT AGREEMENT"), between Genzyme Corporation (the "COMPANY"), the Subsidiary Guarantors party thereto, the Lenders party thereto and Fleet National Bank, as Administrative Agent and The First National Bank of Boston, as Documentation Agent Ladies and Gentlemen: We hereby give notice that, effective as of the date hereof, [Name of Assignor] (the "ASSIGNOR") has assigned its rights and obligations with respect to _____% (representing $__________ of the Assignor's outstanding Revolving Credit Commitment and Revolving Credit Loans (such interest in such rights and obligations being hereinafter referred to as the "ASSIGNED INTEREST") under the Credit Agreement to [Name of Assignee] (the "ASSIGNEE"). The Assignee hereby agrees (a) to become a "Lender" pursuant to Section 12.7(b) of the Credit Agreement (if not already a Lender under the Credit Agreement) and (b) to assume all the obligations of the Assignor thereunder with respect to the Assigned Interest. The address for notices, Applicable Lender Office(s) and payment instructions for the Assignee are as follows: Address for Notices: ------------------------ ------------------------ ------------------------ 1 93 Attention: Telephone: Telecopier: Lending Office for Prime Rate Loans and LIBOR Loans: ------------------------ ------------------------ ------------------------ Payment Instructions: ------------------------ ------------------------ ------------------------ Please sign and return the enclosed copy of this letter to the undersigned to indicate your receipt hereof, and your consent to or notice of (as applicable) the above-mentioned assignment and assumption, and your agreement to the release of the Assignor from its obligations under the Credit Agreement with respect to the Assigned Interest. As a condition to the effectiveness of the above-mentioned assignment and assumption, the Assignee hereby agrees to pay to the Administrative Agent on the date hereof an assignment fee of $3,000. Very truly yours, [NAME OF ASSIGNOR] By: --------------------------- Title [NAME OF ASSIGNEE] By: --------------------------- Title ACKNOWLEDGED OR CONSENTED TO (AS APPLICABLE): GENZYME CORPORATION 2 94 By: ------------------------ Title: FLEET NATIONAL BANK, as Administrative Agent By: ------------------------ Title: 3 EX-11 3 COMPUTATION OF WEIGHTED AVERAGE 1 GENZYME CORPORATION AND SUBSIDIARIES EXHIBIT 11 -- COMPUTATION OF WEIGHTED AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---------------------- ---------------------- ---------------------- COMMON COMMON COMMON AND ASSUMING AND ASSUMING AND ASSUMING COMMON FULL COMMON FULL COMMON FULL EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT SHARE DILUTION SHARE DILUTION SHARE DILUTION ---------- ---------- ---------- ---------- ---------- ---------- APPLICABLE TO GENERAL DIVISION STOCK (PRO FORMA): Common stock outstanding, beginning of year............ 62,372 62,372 52,894 52,894 24,292 24,292 Weighted average common stock issued during the year... 5,917 5,917 2,640 4,882 178 178 Weighted average common stock assuming exercise of options........................................... -- -- 2,756 3,012 546 596 Weighted average common stock assuming exercise of warrants.......................................... -- -- 2,052 1,153 1,202 Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes............. -- -- (A) 3,782 (A) 1,891 ------ ------ ------ ------ ------ ------ Weighted average number of shares outstanding.......... 68,289 68,289 60,186 66,622 26,169 28,159 ====== ====== ====== ====== ====== ====== APPLICABLE TO TR STOCK (PRO FORMA): Common stock outstanding, beginning of year............ 12,113 8,675 3,279 Weighted average common stock issued during the year... 1,048 984 299 Weighted average common stock assuming exercise of options........................................... (B) (B) (B) Weighted average common stock assuming exercise of warrants.......................................... (B) (B) (B) Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes............. (A) (A) (A) ------ ------ ------ Weighted average number of shares outstanding.......... 13,161 9,659 3,578 ====== ====== ======
(A) These securities are "other potentially dilutive" securities which effect is included, to the extent such effect is dilutive, in the determination of weighted average shares assuming full dilution. (B) The effect of assumed conversion is antidilutive. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES OF GENZYME
JURISDICTION OF NAME DIRECT PARENT OWNERSHIP INCORPORATION - ---- ------------- --------- ------------- Allston Landing Genzyme Corporation 100% Massachusetts Corporation Allston Landing Genzyme Corporation 100% Massachusetts Corporation II Deknatel Snowden Genzyme Corporation 100% Delaware Pencer, Inc. Genzyme B.V. Genzyme Corporation 100% Netherlands Genzyme GmbH Genzyme B.V. 100% Germany Genzyme Finance S.A. Genzyme B.V. 100% France Genzyme Japan K.K. Genzyme Corporation 100% Japan Genzyme Limited Genzyme Corporation 100% U.K. Genzyme Limited Genzyme Corporation 100% Israel Genzyme Securities Genzyme Corporation 100% Massachusetts Corporation Genzyme Transgenics Genzyme Corporation 43% Massachusetts Corporation Genzyme Virotech GmbH Genzyme Corporation 100% Germany Medix Biotech, Inc. Genzyme Corporation 100% California Sygena A.G. Genzyme Corporation 100% Switzerland
EX-23.1 5 CONSENT OF COOPERS & LYBRAND LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329, 33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003, 33-30007, 33-68208, 33-58351, 333-10005, 33-22464, 33-29440, 33-51416, 33-68186, 33-58353, 33-58355, 33-60435, 33-21241) and on Form S-3 (File Nos. 33-61853, 333-15597) of our reports, dated February 27, 1997 on our audits of the consolidated financial statements and financial statement schedule of Genzyme Corporation, the combined financial statements and financial statement schedule of Genzyme General Division and the combined financial statements and financial statement schedule of Genzyme Tissue Repair Division as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which reports are included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 28, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS PRESENTED IN THE 1996 ANNUAL REPORT ON FORM-10K FOR GENZYME CORPORATION. U.S. DOLLAR YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 93,132 56,608 116,833 16,508 125,265 509,618 393,839 20,172 1,270,508 114,013 241,998 887 0 0 901,422 1,270,508 424,483 518,754 155,930 210,012 384,066 8,338 6,990 (69,622) (3,195) (72,817) 0 0 0 (72,817) (0.45) (0.45) THE COMPANY HAS TWO CLASSES OF TRACKING STOCK WHICH ARE INTENDED TO REFLECT THE VALUE AND TRACK THE PERFORMANCE OF GENZYME'S GENERAL DIVISION AND TISSUE REPAIR DIVISION. EARNINGS (LOSS) PER SHARE IS REPORTED AS ATTRIBUTABLE TO EITHER GENERAL DIVISION COMMON STOCK OR TISSUE REPAIR DIVISION COMMON STOCK. CONSOLIDATED EPS IS NOT APPLICABLE FOR THE YEAR ENDED DECEMBER 31, 1996, THE GENERAL DIVISION'S CAPITAL NET LOSS OF $0.45 PER GENERAL DIVISION COMMON SHARE AND GTR REPORTED A NET LOSS OF $3.38 PER SHARE OF GTR STOCK.
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