-----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, SmtqfRO/I9Z9cH48PHbV/GKrA9H30EUHJHikpaEyF5w4s0n9qveC93HQjVjFmMZY o+lE9+bMBh5kI4jkW3+E3w== 0000950135-97-002888.txt : 19970701 0000950135-97-002888.hdr.sgml : 19970701 ACCESSION NUMBER: 0000950135-97-002888 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970630 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-14680 FILM NUMBER: 97633383 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/A 1 GENZYME CORPORATION 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K/A 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, $0.01 PAR VALUE ("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 the Registrant's Form 10-K amended hereby. ================================================================================ 2 This report on Form 10-K/A constitutes Amendment No. 1 to the registrant's Form 10-K for the year ended December 31, 1996. The items hereby amended are as follows: - Item 6 is deleted in its entirety and replaced with the following. - Item 7 is deleted in its entirety and replaced with the following. - Item 14 is hereby amended as follows: - Exhibit 23.2, Consent of Coopers & Lybrand L.L.P., independent accountants relating to the Annual Report of Genzyme Corporation Retirement Savings Plan (the "Plan") is filed herewith. - Exhibit 99.1 to include information, financial statements and exhibits required by Form 11-K related to the Plan is filed herewith. 2 3 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) ======== ======== ======== ======== ======== 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 60,185 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 ======== ======== ======== ======== ========
3 4 SELECTED FINANCIAL DATA (CONTINUED) GENZYME CORPORATION (CONTINUED) 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. (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. 4 5 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) ======== ======== ======== ======== ======== 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 60,185 52,338 52,500 44,740 ======== ======== ======== ======== ========
5 6 SELECTED FINANCIAL DATA (CONTINUED) GENERAL DIVISION (CONTINUED) 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. (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. 6 7 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 ======== ======== ======== ======== ====== (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. 7 8 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% 8 9 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 47% 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 $110.4 million, an increase of 36% 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. 9 10 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 $6.8 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. 10 11 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 39% 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. 11 12 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 25% 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. 12 13 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 $97.5 million, an increase of 22% 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. 13 14 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 $4.6 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. 14 15 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 $256.7 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 million in 1995 and $33.0 million 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 $292.2 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 $85.3 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 $80.2 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 $115.1 million, an increase of $28.0 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 15 16 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 $275.7 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 $78.9 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 $40.2 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, a decrease 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. 16 17 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 17 18 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. 18 19 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 $275 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 19 20 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. 20 21 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. 21 22 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. (C) EXHIBITS
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 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. *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). *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. Filed herewith. 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). 99.1 Information, financial statements and exhibits required by Form 11-K with respect to the Genzyme Corporation Retirement Savings Plan. Filed herewith.
- --------------- * 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. 22 23 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. GENZYME CORPORATION Date: June 30, 1997 By: /s/David J. McLachlan David J. McLachlan Duly Authorized Officer and Executive Vice President, Finance; Chief Financial Officer 23 24 GENZYME CORPORATION FORM 10-K/A Amendment No. 1 Exhibit Index -------------
Sequential Exhibit Description Page - ------- ----------- ---------- 23.2 - Consent of Coopers & Lybrand L.L.P., independent accountants 29 relating to the Annual Report of Genzyme Corporation Retirement Savings Plan as reported in Exhibit 99.1 to Genzyme's 1996 Form 10-K/A. Filed herewith. 99.1 - Information, financial statements and exhibits required by Form 11-K with respect to the Genzyme Corporation Retirement Savings Plan. Filed herewith. 31
1 EX-23.2 2 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS To the Retirement Savings Plan Committee of the Genzyme Corporation Retirement Savings Plan: We consent to the incorporation by reference in the registration statement of Genzyme Corporation and the Genzyme Corporation Retirement Savings Plan on Form S-8 (File No. 33-21241) of our report, which includes an explanatory paragraph regarding the omitted disclosure of historical cost information for the supplemental schedule of reportable transactions, dated May 29, 1997, on our audits of the financial statements and supplemental schedules of the Genzyme Corporation Retirement Savings Plan as of December 31, 1996 and 1995 and for the years then ended, which report is included in this Annual Report on Form 10-K/A. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts June 30, 1997 2 EX-99.1 3 FORM 11-K RETIREMENT SAVINGS PLAN 1 Exhibit 99.1 GENZYME CORPORATION RETIREMENT SAVINGS PLAN FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES TO ACCOMPANY 1996 FORM 5500 ANNUAL REPORT OF EMPLOYEE BENEFIT PLAN UNDER ERISA OF 1974 for the years ended December 31, 1996 and 1995 1 2 GENZYME CORPORATION RETIREMENT SAVINGS PLAN INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants............................................................................. 3 Financial Statements: Statements of Net Assets Available for Plan Benefits as of December 31, 1996 and 1995...................... 4 Statement of Changes in Net Assets Available for Plan Benefits, with Fund Information for the Year Ended December 31, 1996............................................................................ 5 Notes to Financial Statements.............................................................................. 6-9 Supplemental Schedules: Line 27(a) - Schedule of Assets Held for Investment Purposes, December 31, 1996............................ 10 Line 27(d) - Schedule of Reportable Transactions for the Year Ended December 31, 1996...................... 11
Certain supplemental schedules required by the regulations of the Employee Retirement Income Security Act of 1974 have been omitted for the reason that they are not applicable. 2 3 REPORT OF INDEPENDENT ACCOUNTANTS To the Retirement Savings Plan Committee of the Genzyme Corporation Retirement Savings Plan: We have audited the accompanying statements of net assets available for plan benefits of the Genzyme Corporation Retirement Savings Plan as of December 31, 1996 and 1995 and the related statement of changes in net assets available for plan benefits, with fund information for the year ended December 31, 1996. We previously audited and reported on the statement of changes in net assets available for plan benefits, with fund information for the year ended December 31, 1995, which condensed statement is presented for comparative purposes. These financial statements are the responsibility of the Plan Administrator. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the Genzyme Corporation Retirement Savings Plan as of December 31, 1996 and 1995, and the changes in its net assets available for plan benefits for the year ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed in the index on page 4 are presented for purposes of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The fund information in the statement of changes in net assets available for plan benefits is presented for purposes of additional analysis rather than to present the changes in net assets available for plan benefits of each fund. The supplemental schedule and fund information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The schedule of reportable transactions that accompany the Plan's financial statements do not disclose the historical cost of certain plan assets held by the plan trustee. Disclosure of this information is required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. Boston, Massachusetts May 29, 1997 3 4 GENZYME CORPORATION RETIREMENT SAVINGS PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
December 31, -------------------------- 1996 1995 ----------- ----------- ASSETS Investments at market value (Notes A and B): American Express Trust Income Fund ........... $ 3,749,726 $ 3,798,662 Fidelity Investment Grade Bond Fund .......... 599,574 -- Fidelity Low Priced Stock Fund ............... 3,620,524 -- Fidelity Magellan Fund ....................... 13,343,715 9,991,497 Fidelity Puritan Fund ........................ 9,583,748 7,254,378 Genzyme General Division Stock Fund .......... 3,842,594 4,429,872 Genzyme Tissue Repair Division Stock Fund .... 172,560 -- Participant Loan Fund ........................ 1,316,239 963,790 ----------- ----------- Total investments ......................... 36,228,680 26,438,199 Cash and cash equivalents ........................ 53,641 29,237 Receivables: Employer contribution ........................ 313,466 226,433 Employee contributions ....................... 56,177 286,135 Accrued interest ............................. 3,500 349 Loan repayments .............................. 1,580 15,547 ----------- ----------- Total receivables ......................... 374,723 528,464 ----------- ----------- Total assets ............................ 36,657,044 26,995,900 ----------- ----------- Net assets available for plan benefits (Note E) .. $36,657,044 $26,995,900 =========== ===========
The accompanying notes are an integral part of the financial statements. 4 5
GENZYME CORPORATION RETIREMENT SAVINGS PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS, WITH FUND INFORMATION for the year ended December 31, 1996 (with comparative totals for the year ended December 31, 1995) Fund Information ---------------------------------------------------------------------------------------------- American Fidelity Fidelity Genzyme Genzyme Express Investment Low General Tissue Trust Grade Priced Fidelity Fidelity Division Repair Income Bond Stock Magellan Puritan Stock Stock Fund Fund Fund Fund Fund Fund Fund ----------- --------- ----------- ------------ ----------- ----------- --------- Additions: Employer contributions $ 67,241 $ 20,692 $ 103,631 $ 325,574 $ 173,339 $ 156,532 $ 166,386 Employee contributions 551,435 186,726 1,053,483 2,718,975 1,538,784 761,340 -- Rollovers (Note A) 166,180 109,621 232,857 489,753 430,421 224,951 -- Investment income 1,061 23,288 253,723 1,839,119 916,775 1,503 140 Net appreciation (depreciation) in market value of investments 222,341 1,761 268,193 (478,519) 159,460 (1,414,174) (163,455) ----------- --------- ----------- ------------ ----------- ----------- --------- Total additions 1,008,258 342,088 1,911,887 4,894,902 3,218,779 (269,848) 3,071 Deductions: Benefit payments and withdrawals (183,486) (8,355) (94,511) (616,688) (382,273) (203,358) (4,144) ----------- --------- ----------- ------------ ----------- ----------- --------- Total deductions (183,486) (8,355) (94,511) (616,688) (382,273) (203,358) (4,144) Net increase prior to interfund transfers 824,772 333,733 1,817,376 4,278,214 2,836,506 (473,206) (1,073) Interfund transfers (918,594) 277,343 1,850,428 (1,040,996) (589,529) (138,398) 252,119 ----------- --------- ----------- ------------ ----------- ----------- --------- Net increase (93,822) 611,076 3,667,804 3,237,218 2,246,977 (611,604) 251,046 Net assets available for plan benefits at beginning of year 3,891,858 -- -- 10,218,647 7,405,515 4,516,090 -- ----------- --------- ----------- ------------ ----------- ----------- --------- Net assets available for plan benefits at end of year $ 3,798,036 $ 611,076 $ 3,667,804 $ 13,455,865 $ 9,652,492 $ 3,904,486 $ 251,046 =========== ========= =========== ============ =========== =========== ========= Fund Information Total ------------ --------------------------- Participant Loan Fund 1996 1995 ----------- ------------ ------------ Additions: Employer contributions $ -- $ 1,013,395 $ 753,882 Employee contributions -- 6,810,743 4,644,746 Rollovers (Note A) -- 1,653,783 1,657,931 Investment income 82,381 3,117,990 988,479 Net appreciation (depreciation) in market value of investments -- (1,404,393) 4,694,308 ----------- ------------ ------------ Total additions 82,381 11,191,518 12,739,346 Deductions: Benefit payments and withdrawals (37,559) (1,530,374) (1,187,180) ----------- ------------ ------------ Total deductions (37,559) (1,530,374) (1,187,180) Net increase prior to interfund transfers 44,822 9,661,144 11,552,166 Interfund transfers 307,627 -- -- ----------- ------------ ------------ Net increase 352,449 9,661,144 11,552,166 Net assets available for plan benefits at beginning of year 963,790 26,995,900 15,443,734 ----------- ------------ ------------ Net assets available for plan benefits at end of year $ 1,316,239 $ 36,657,044 $ 26,995,900 =========== ============ ============
The accompanying notes are an integral part of the financial statements. 5 6 GENZYME CORPORATION RETIREMENT SAVINGS PLAN NOTES TO FINANCIAL STATEMENTS A. PLAN DESCRIPTION: The following description of the Genzyme Corporation Retirement Savings Plan (the "Plan") provides only general information. Participants should refer to the plan agreement for a more complete description of the Plan's provisions. GENERAL The Plan, a defined contribution plan pursuant to the authorization of the Board of Directors of Genzyme Corporation ("Genzyme" or the "Company"), was established effective January 1, 1988 to provide a long-range program of systematic savings for eligible employees ("Participants"). Employees of all Genzyme's wholly-owned United States subsidiaries are eligible to participate in the Plan, with the exception of Deknatel Snowden Pencer, Inc. ("DSP"), an entity acquired by Genzyme during 1996, which has its own retirement plans that are still active. The Company expects to integrate the DSP plans into the Plan during 1997. As of December 31, 1996, all consolidated subsidiaries of Genzyme Corporation were 100% owned by the Corporation therefore making the Plan a plan for a controlled group of corporations. Employees who are 21 years of age or older become eligible to participate on their first day of employment. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Plan Administrator is the Retirement Savings Plan Committee of the Genzyme Corporation Retirement Savings Plan. INVESTMENT OPTIONS At December 31, 1996, Participants may direct contributions into any of seven investment fund alternatives. The options are as follows: The Genzyme General Division Stock Fund is currently invested solely in shares of common stock of Genzyme General Division Common Stock ("Genzyme General Stock"). Amounts contributed to the Genzyme Stock Fund may be invested in other short-term investments pending the purchase of Genzyme General Stock. The Plan held 176,671 and 142,040 shares of Genzyme General Stock with market values of $3,842,594 and $4,429,872, and historical cost of $3,556,946 and $2,624,171 at December 31, 1996 and 1995, respectively. The Genzyme Tissue Repair Division Stock Fund is currently invested solely in shares of common stock of Genzyme Tissue Repair Division Common Stock ("GTR Stock"). This fund is available as an investment option of the company match only. Amounts contributed to the Genzyme Tissue Repair Division Stock Fund may be invested in other short-term investments pending the purchase of GTR stock. The Plan began offering the GTR Stock as an investment alternative as of January 1, 1996. At December 31, 1996, the Plan held 24,219 shares of GTR Stock with a market value of $172,560, and historical cost of $326,602. The American Express Trust Income Fund is a common/collective trust that invests principally in guaranteed investment contracts. The American Express Trust Income Fund was invested in 88,301 and 95,278 shares of the American Express Fund with market values of $3,749,726 and $3,798,662, and historical cost of $3,422,326 and $3,623,048 at December 31, 1996 and 1995, respectively. The Fidelity Puritan Fund is a mutual fund managed by Fidelity Investments, holding both stocks and bonds. The investment objective emphasizes income and stability. The Fidelity Puritan Fund was invested in 555,902 and 426,472 shares of the Puritan Fund with market values of $9,583,748 and $7,254,378, and historical cost of $8,901,650 and $6,653,456 at December 31, 1996 and 1995, respectively. The Fidelity Magellan Fund is a mutual fund managed by Fidelity Investments, holding both stocks and bonds. The investment objective emphasizes long-term appreciation. The Fidelity Magellan Fund was invested in 165,452 and 116,207 shares of the Magellan Fund with market values of $13,343,715 and $9,991,497, and historical cost of $12,302,773 and $8,445,771 at December 31, 1996 and 1995, respectively. The Fidelity Investment Grade Bond Fund is a mutual fund managed by Fidelity Investments. The fund invests at least 80% of its assets in debt securities of all types. The balance of assets may be invested in preferred stocks. The plan began offering the Grade Bond Fund to Plan participants as of January 1, 1996. The Fidelity Investment Grade Bond Fund was invested in 84,210 shares of the Grade Bond Fund with a market value of $599,574, and historical cost of $597,763 at December 31, 1996. The Fidelity Low Priced Stock Fund is a mutual fund managed by Fidelity Investments, holding aggressive "small-cap" equities. The plan began offering the Low Priced Stock Fund to Plan participants as of January 1, 1996. The Fidelity Low Priced Stock Fund was invested in 169,580 shares of the Low Priced Stock Fund with a market value of $3,620,524, and historical cost of $3,356,680 at December 31, 1996. 6 7 The American Express Trust Income Fund, the Fidelity Puritan Fund, the Fidelity Magellan Fund, the Fidelity Low Priced Stock Fund and the Genzyme General Division Stock Fund are each greater than 5% of the Plan's net assets. EMPLOYEE CONTRIBUTIONS The Plan is a defined contribution plan. Eligible employees may elect, through salary reduction agreements, to have up to 18.75% or a maximum of $9,500 of their compensation contributed on a pre-tax basis to the Plan each year on their behalf. A Participant's salary reduction contribution for a plan year may be further limited by the administration rules of the Internal Revenue Code (the "Code") if the Participant is considered to be a highly compensated employee within the meaning of the Code. EMPLOYER CONTRIBUTIONS Genzyme makes contributions to the Plan on behalf of a Participant for each quarter in an amount equal to at least 25% of the Participant's contribution through salary reductions in that quarter; however, employer matching contributions will not be made for contributions that exceed, in the aggregate, 5% of the Participant's annual compensation. Certain employees of one subsidiary are limited to 4% of annual compensation. Genzyme's contributions amounted to $1,013,395 and $753,882 for the years ended December 31, 1996 and 1995, respectively. Eligible Participants may invest their contributions in any fund or funds in increments determined at their own discretion. Employer contributions are invested as directed by the Participants. If a Participant does not provide direction with respect to the investment of the Participant's contribution, all contributions will automatically be invested in the American Express Trust Income Fund. VESTING Participants have a 100% non-forfeitable interest in both employee and employer contributions at all times. Upon termination of employment or total and permanent disability, a Participant, or a Participant's beneficiary in the case of the Participant's death, is entitled to receive the full amount in the Participant's account. BENEFITS Distributions upon retirement at age 65 or later, or death, are either made in a lump-sum payment or installments. If the benefits are distributed in installments, the installments may not extend over a period of time longer than the life expectancy of the Participant or, if longer, the joint and last survivor life expectancy of the Participant and designated beneficiary. Distributions upon termination are made in lump-sum payments. Changes in allocation of future investments and reallocation of account balances among investment funds are permitted as of the last day of each quarter of the Plan year. Contributions may be withdrawn from the Plan only upon a demonstration of hardship, as defined, unless the Participant requesting such withdrawal has attained age 59 1/2. New employees with funds held under a previous employer's qualified plan are permitted to invest such funds into the Plan. These investments are classified as "rollovers." LOANS Participants may obtain a loan from the Plan collateralized by the Participant's vested interest in the Plan. No loan may exceed the lesser of one half of the vested interest of a Participant, or $50,000; and must be at least $1,000. A Participant may not obtain a loan unless the Plan Administrator approves the transaction. All loans bear interest determined by the Plan Administrator at the time of the loan. At December 31, 1996, the loans bear interest rates between 6% and 9% and mature through June 2016. A written repayment schedule specifies the date and payment amount necessary to amortize the loan. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Plan considers cash equivalents to be short-term, highly liquid investments, with initial maturities of less than three months. INVESTMENT VALUATION AND INCOME RECOGNITION Investments in the Fidelity Investment Grade Bond Fund, Fidelity Low Priced Stock Fund, Fidelity Magellan Fund, Fidelity Puritan Fund, Genzyme General Division Stock Fund and the Genzyme Tissue Repair Division Stock Fund are stated at market value, based on quoted market prices in an active market on the last business day of the plan 7 8 year. The American Express Trust Income Fund investments are stated at net asset value prices as reported by the American Express Trust Company Collective Investment Fund. Participant loans are valued at cost which approximates fair value. The Plan presents in the statement of changes in net assets available for plan benefits the net appreciation (depreciation) in the fair value of its investments which consists of the realized gains or losses and the unrealized appreciation (depreciation) on those investments. Security transactions are accounted for on the trade date. Gain or loss on sales of investments is based on average cost. INVESTMENT INCOME Dividend and interest income are recorded as of the payable date. Interest income is recorded as earned on the accrual basis. CONTRIBUTIONS AND BENEFIT PAYMENTS Employee contributions and matching employer contributions are recorded in the period the payroll deductions are made. Benefits are recorded when paid. USE OF ESTIMATES The preparation of the plan's financial statements in conformity with generally accepted accounting principles requires the plan administrator to make significant estimates and assumptions that affect the reported amounts of net assets available for benefits at the date of the financial statements and the changes in net assets available for benefits during the reporting period and, when applicable, disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The plan provides for various investment options in any combination of stocks, bonds, fixed income securities, mutual funds, and other investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants' account balances and the amounts reported in the statement of net assets available for plan benefits. C. ADMINISTRATION FEES Administration fees associated with the Plan are paid by Genzyme and were approximately $224,000 and $134,000 in 1996 and 1995, respectively. D. QUALIFICATION UNDER THE INTERNAL REVENUE CODE The Internal Revenue Service has determined and informed the Company by a letter dated May 25, 1995, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. E. AMENDMENT OR TERMINATION Genzyme intends to continue the Plan indefinitely but reserves the right to terminate it at any time or amend it in any manner advisable. No amendment may adversely affect the nonforfeitable interests of Participants in their accounts or permit the use or diversion of any part of the Plan other than for the exclusive benefit of the Participants or their beneficiaries (subject to plan provisions permitting payment of fees an expenses). No merger, consolidation, or transfers of assets or liabilities of the Plan may reduce any Participant's interest accrued to the date of the merger, consolidation, or transfer. If Genzyme discontinues its contributions or if the Plan is fully or partially terminated, the affected Participants' rights to benefits will remain fully vested. F. SUBSEQUENT EVENTS Effective April 1, 1997, the Plan changed its administrator and trustee. The Plan changed the frequency of the Company match which is now deposited bi-weekly or semi-monthly based on regular pay, rather than on a quarterly basis. Two new investment options were added to the Plan. These consist of a fixed income fund (CIGNA Guaranteed Income Fund) and an international investment fund (Templeton Foreign Account). The Plan held no shares of these new investment options as of December 31, 1996. Additionally, certain investment options were replaced with new investment options, both the American Express Trust Income Fund and the Fidelity Investment Grade Bond Fund were replaced by the CIGNA Guaranteed Securities Separate Fund; 8 9 the Fidelity Magellan Fund was replaced by the CIGNA Stock Market Index Fund. The Fidelity Low Priced Stock Fund was replaced with the PBHG Growth Fund; and the Fidelity Puritan Fund remains an investment option in the Plan. 9 10 GENZYME CORPORATION RETIREMENT SAVINGS PLAN LINE 27(a) - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES December 31, 1996
Historical Market Identity of Issue Description of Investment Shares Cost Value - ------------------------------------------ --------------------------------------- --------- ---------- ------------- American Express Trust Income Fund Guaranteed Collective Income Fund 88,301 $ 3,422,326 $ 3,749,726 Fidelity Investment Grade Bond Fund Conservative Bond Fund 84,210 597,763 599,574 Fidelity Low Priced Stock Fund Aggressive "Small Cap" Equity Fund 169,580 3,356,680 3,620,524 Fidelity Magellan Fund Aggressive Equity Fund 165,452 12,302,773 13,343,715 Fidelity Puritan Fund Balanced Equity Fund 555,902 8,901,650 9,583,748 *Genzyme General Division Stock Fund Common Stock 176,671 3,556,946 3,842,594 *Genzyme Tissue Repair Division Stock Fund Common Stock 24,219 326,602 172,560 *Participant Loan Fund Loans with interest rates between 6% 1,316,239 1,316,239 and 9% maturing through June 2016 ----------- ----------- $33,780,979 $36,228,680 =========== ===========
* Denotes party-in-interest. 10 11 GENZYME CORPORATION RETIREMENT SAVINGS PLAN LINE 27d - SCHEDULE OF REPORTABLE TRANSACTIONS for the year ended December 31, 1996
Historical Current Value Number of Purchase Selling Cost of at Date of Gain Transactions Description of Assets Price Price Assets Transaction (Loss) in the Series - ------------------------------------------ ---------- --------- --------- ------------- --------- ------------- Series of transactions in excess of 5% of the current value of plan assets at the beginning of the plan year: American Express Trust Income Fund $1,107,948 $863,585 ** $ 863,585 ** 24 Fidelity Puritan Fund 2,861,602 691,606 691,606 60 Fidelity Magellan Fund 4,724,086 894,225 894,225 61 Fidelity Investment Grade Bond Fund 603,834 6,021 6,021 68 Fidelity Low Priced Stock Fund 3,434,179 81,849 81,849 61 Genzyme General Division Stock Fund 1,099,218 272,323 272,323 36 Genzyme Tissue Repair Division Stock Fund 354,510 18,496 18,496 17 Single transaction in excess of 5% of the current value of plan assets at the beginning of the plan year: Fidelity Magellan Fund $1,329,466 N/A ** $1,329,466 **
** Historical cost and gain/(loss) information not provided. 11 -----END PRIVACY-ENHANCED MESSAGE-----