-----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, Aox2uEU8aFetg965htE7eHwtiKtQ6oiTIxSrbdVOlzpmSazc+nc2QpzjL2TfA6Zi AvOqjY9cA6u/5Oj6T3d2Iw== 0000950135-96-002629.txt : 19960617 0000950135-96-002629.hdr.sgml : 19960617 ACCESSION NUMBER: 0000950135-96-002629 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960614 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-05979 FILM NUMBER: 96580852 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 S-3 1 GENZYME CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1996. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- GENZYME CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 06-1047163 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139 (617) 252-7500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- HENRI A. TERMEER CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER GENZYME CORPORATION ONE KENDALL SQUARE CAMBRIDGE, MASSACHUSETTS 02139 (617) 252-7500 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- WITH COPIES TO: MAUREEN P. MANNING GEOFFREY E. LIEBMANN PALMER & DODGE LLP CAHILL GORDON & REINDEL ONE BEACON STREET 80 PINE STREET BOSTON, MASSACHUSETTS 02108 NEW YORK, NEW YORK 10005 (617) 573-0100 (212) 701-3000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. --------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM OFFERING MAXIMUM AGGREGATE TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PRICE PER OFFERING AMOUNT OF TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(1)(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- % Convertible Subordinated Notes Due 2001......................... $250,000,000 100% $250,000,000 $86,207 - ---------------------------------------------------------------------------------------------------------- General Division Common Stock.... (3) (3) (3) (3) - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Includes $25,000,000 principal amount of Notes which the Underwriter has the option to purchase to cover over-allotments, if any. (2) Estimated solely for purposes of calculating the registration fee. (3) An indeterminate number of shares of General Division Common Stock issuable upon conversion of the Notes registered hereby are also being registered. Pursuant to Rule 457(i), no additional filing fee is being paid. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE , 1996 $225,000,000 genzyme % Convertible Subordinated Notes Due 2001 Interest is payable and Due , 2001 ------------------ The Notes will be convertible at any time prior to maturity, unless previously redeemed, into shares of Genzyme General Division Common Stock ("General Division Stock") of Genzyme Corporation ("Genzyme" or the "Company") at a conversion price of $ per share, subject to adjustment in certain circumstances. The reported last sale price of the General Division Stock on The Nasdaq Stock Market's National Market on June , 1996 was $ per share. The Notes will be redeemable at the option of the Company, in whole or in part, on or after , 1999 at the redemption prices set forth herein, plus accrued interest. If a Fundamental Change (as defined herein) occurs, each holder of Notes will have the right, at the holder's option, to require the Company to repurchase all or a portion of such holder's Notes at a price equal to 100% of the principal amount thereof, plus accrued interest. The Notes will be unsecured general obligations of the Company subordinated to all existing and future Senior Indebtedness (as defined herein). In addition, the Notes will be subordinated to third party indebtedness of the Company's subsidiaries. As of March 31, 1996, as adjusted to give effect to this offering and the anticipated use of the net proceeds therefrom, the Company and its subsidiaries would have had an aggregate of $34,648,000 of consolidated indebtedness and other obligations effectively ranking senior to the Notes. See "Description of Notes." The General Division Stock is common stock of the Company and is intended to reflect the value and track the performance of the Genzyme General Division (the "General Division"). The General Division Stock is one of two classes of the Company's common stock, the other being Genzyme Tissue Repair Division Common Stock ("TR Stock"). The relative voting power of one share of General Division Stock and one share of TR Stock will fluctuate based upon the relative Fair Market Values (as defined herein) of one share of General Division Stock and one share of TR Stock as set forth herein. Dividends on the General Division Stock will be payable when, as and if declared by the Board of Directors of the Company out of the lesser of funds of the Company legally available therefor and specified funds available to the General Division. Upon a liquidation of Genzyme (other than in connection with a merger, business combination or sale of substantially all assets), holders of outstanding General Division Stock and TR Stock are entitled to receive the assets, if any, remaining for distribution to common stockholders on a per share basis in proportion to the respective per share liquidation units of such class (as described herein). See "Description of Genzyme Capital Stock." ------------------ FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE HEREIN. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Price to Discounts and Proceeds to Public(1) Commissions Company(1)(2) -------------- -------------- -------------- Per Note........................................... % % % Total(3)........................................... $ $ $
(1) Plus accrued interest, if any, from , 1996. (2) Before deduction of expenses payable by the Company estimated at $600,000. (3) The Company has granted the Underwriter an option, exercisable for 30 days from the date of this Prospectus, to purchase an additional $25,000,000 aggregate principal amount of the Notes to cover over-allotments of Notes. If the option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ and Proceeds to Company will be $ . ------------------ The Notes are offered by the Underwriter, when, as and if issued by the Company, delivered to and accepted by the Underwriter and subject to its right to reject orders in whole or in part. It is expected that delivery of the Notes, in book-entry form, will be made through the facilities of The Depository Trust Company ("DTC") on or about , 1996. CS First Boston The date of this Prospectus is , 1996. 3 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OR THE GENERAL DIVISION STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING THE UNDERWRITER (AND SELLING GROUP MEMBERS) AND THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE GENERAL DIVISION STOCK ON THE NASDAQ STOCK MARKET -- NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. (SEE "UNDERWRITING.") DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE NOTES OR THE GENERAL DIVISION STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7 AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with the Exchange Act files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Company has filed a registration statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with the Commission with respect to the Notes offered hereby and the shares of General Division Stock issuable upon conversion of the Notes. This Prospectus, which constitutes part of the Registration Statement, does not contain all the information set forth in the Registration Statement and reference is made to the Registration Statement and the exhibits thereto for further information. Such reports, proxy statements, Registration Statement and exhibits and other information omitted from this Prospectus can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549 and at the Commission's Regional Offices located at Seven World Trade Center, Suite 1300, New York, NY 10048 and 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company hereby incorporates in this Prospectus by reference the following documents heretofore filed with the Commission pursuant to the Exchange Act (File No. 0-14680): (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on April 1, 1996; (ii) the Company's Current Report on Form 8-K dated February 22, 1996 filed with the Commission on February 23, 1996; (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 filed with the Commission on May 15, 1996; (iv) the description of General Division Stock contained in the Company's Registration Statement on Form 8-B filed with the Commission on February 28, 1992, as amended by Form 8-B/A, filed with Commission on March 31, 1995; and (v) the description of General Division Common Stock Purchase Rights contained in the Company's Registration Statement on Form 8-A, filed with the Commission on March 23, 1989, as amended by Form 8-A/A, filed with the Commission on November 28, 1994. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to termination of the offering made hereby shall be deemed to be incorporated in this Prospectus by reference and to be a part hereof from the respective dates of the filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is, or is deemed to be, incorporated by reference herein, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered, upon the written or oral request of any such person, a copy of any and all of the documents referred to above which have been or may be incorporated in this Prospectus by reference, other than exhibits to such documents which are not specifically incorporated by reference into such documents. Requests for such copies should be directed to the executive offices of the Company, One Kendall Square, Cambridge, Massachusetts 02139, Attention: Shareholder Services, telephone (617) 252-7526. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements appearing elsewhere in this Prospectus and in the documents incorporated into this Prospectus by reference. Unless otherwise indicated or the context otherwise requires, (i) information in this Prospectus assumes that the Underwriter's over-allotment option will not be exercised and (ii) all references herein to shares of General Division Stock and TR Stock also include the associated Preferred Stock Purchase Rights represented by the same certificates. See "Description of Genzyme Capital Stock." The Notes offered hereby involve a high degree of risk. Investors should carefully consider the information set forth under the heading "Risk Factors." GENZYME CORPORATION Genzyme is a diversified, integrated human health care company operating in six major business areas. The Company's business activities in the areas of therapeutics, surgical products, diagnostic services, diagnostic products and pharmaceuticals are organized as the General Division. Genzyme's activities to develop, produce and market technologically advanced products and services for the treatment and prevention of serious tissue damage are conducted through the Genzyme Tissue Repair Division ("GTR"). Genzyme currently has two classes of common stock outstanding, General Division Stock and TR Stock, which are intended to reflect the value and track the performance of the General Division and GTR, respectively. Holders of both classes of common stock are stockholders of Genzyme, which owns all of the assets and is responsible for all liabilities of the Company, including the Notes. Genzyme's principal executive offices are located at One Kendall Square, Cambridge, Massachusetts 02139. Its telephone number is (617) 252-7500. THE GENERAL DIVISION The General Division's therapeutics business markets Ceredase(R) enzyme and Cerezyme(TM) enzyme, products for the treatment of Gaucher disease. The General Division's results of operations are highly dependent on sales of these products which, for 1995, totaled $215 million. Other therapeutic products under development include Thyrogen(R) hormone for use in the diagnosis and treatment of thyroid cancer and products for the treatment of cystic fibrosis ("CF"). The CF products are being developed on behalf of Neozyme II Corporation ("Neozyme II"), a special purpose accelerated research corporation. The General Division's surgical products business includes a line of biomaterial products (which include Seprafilm(TM), Sepracoat(TM) and Sepragel(TM)) based on hyaluronic acid ("HA") to limit the formation of postoperative adhesions and to replace synovial fluid (collectively, the "HA Products"). The HA Products are being developed on behalf of Genzyme Development Partners, L.P. ("Genzyme Development Partners"), a research and development limited partnership, and will be sold in the United States by a joint venture between Genzyme and Genzyme Development Partners. In May 1996, Genzyme agreed to acquire Deknatel Snowden Pencer, Inc. ("DSP"), a specialty surgical products company with a 70-person sales force that will be utilized by Genzyme to market Seprafilm(TM) and Sepracoat(TM), once these products are approved by the United States Food and Drug Administration (the "FDA"). Genzyme believes that the acquisition of DSP represents a significant opportunity for near term growth and will provide it with a base for building a specialty surgical products business that will enhance long term shareholder value. See "Recent Developments" below. The General Division's diagnostic services business applies advanced biotechnology to develop and provide high quality, sophisticated genetic diagnostic services to physicians, hospitals, clinical laboratories, genetic centers and managed care organizations throughout the United States and internationally. The General Division also provides identity testing services to state and local government agencies, attorneys and various courts in the United States, as well as donor typing services to bone marrow registries. The General Division's diagnostic products business is a supplier of diagnostic components (enzymes, substrates, antibodies and antigens), bulk reagents and devices (including the Company's Direct LDL(TM) test 3 5 kit) to manufacturers of clinical diagnostic reagents and kits as well as directly to clinical reference laboratories. The division also manufactures and sells a broad line of antibody and antigen based ELISA test kits. In addition, the division distributes a broad product line of research products to academic, industrial and governmental laboratories for use in immunology and cell biology. The General Division's pharmaceuticals business develops, manufactures and sells a range of active drug substances, pharmaceutical intermediates, synthetic phospholipids, peptides, biomolecules and chemicals to the pharmaceutical and health care industries. In 1995, the General Division introduced MelaPure(TM) brand melatonin, a dietary supplement. RECENT DEVELOPMENTS On May 24, 1996, Genzyme agreed to acquire DSP, a privately held specialty surgical products company, for approximately $250 million in cash. DSP designs, manufactures and markets cardiovascular devices, precision surgical instruments and other specialty surgical products. Headquartered in Fall River, Massachusetts, DSP had net sales of approximately $95 million in its fiscal year ended September 30, 1995. Assuming receipt of necessary regulatory clearances, the acquisition is expected to be completed by the end of June. DSP employs a 70-person sales force, 52 of which are located in the United States, that calls directly on surgeons and hospitals throughout the United States and Europe. Genzyme plans to utilize DSP's United States sales force to accelerate the market introduction of its Seprafilm(TM) and Sepracoat(TM) products in the United States following FDA approval. The General Division began marketing Seprafilm(TM) bioresorbable membrane in the Netherlands in November 1995 and in the United Kingdom, France and Germany in April 1996. In March 1996, an advisory panel to the FDA recommended that approval be granted to market Seprafilm(TM) for use in reducing postoperative adhesion formation at the locations in the body and in the abdominal and gynecological surgeries studied in the Company's pivotal clinical trials of the product. Genzyme is working with the FDA to develop appropriate labeling for Seprafilm(TM) and expects to receive approval to market the product in the near future. A Pre-Market Approval ("PMA") application was filed for Sepracoat(TM) in January 1996 and has been accepted for expedited review by the FDA. On May 1, 1996, Genzyme acquired Genetrix, Inc., a privately held genetic testing laboratory located in Phoenix, Arizona, in a tax-free exchange of General Division Stock. Approximately 690,000 shares of General Division Stock valued at approximately $36.5 million were issued. The excess of the purchase price over the fair market value of the net assets acquired, approximately $35 million, was allocated to goodwill and will be amortized over 11 years. On June 7, 1996, Genzyme announced a two-for-one stock split of the General Division Stock payable July 25, 1996 to stockholders of record on July 11, 1996. Consummation of the stock split is subject to stockholder approval of an increase in the authorized number of shares of General Division Stock to 200 million at a special meeting to be held on July 24, 1996. 4 6 THE OFFERING Securities Offered......... $225,000,000 principal amount of % Convertible Subordinated Notes due 2001 (the "Notes"). Principal and Interest Payments................. Interest payable on and , commencing on , 1996. Although the Notes are general obligations of the Company, principal and interest will be paid from funds allocated for financial statement presentation purposes to the General Division. Conversion Rights.......... Convertible at the option of the holder at any time prior to maturity, unless previously redeemed, into shares of General Division Stock at a conversion price of $ per share, subject to adjustment in certain circumstances. Company's Redemption Option..................... Redeemable for cash at the option of the Company, in whole or in part, on or after , 1999 at the redemption prices set forth herein, plus accrued interest. Fundamental Change......... If a Fundamental Change (as defined herein) occurs, each holder of Notes will have the right, at the holder's option, to require the Company to repurchase all or a portion of such holder's Notes, at a purchase price equal to 100% of the principal amount thereof, plus accrued interest. Subordination.............. The Notes will be subordinated to all existing and future Senior Indebtedness. The Notes will also be subordinated to third party indebtedness of the Company's subsidiaries. The Indenture (as defined herein) does not restrict the incurrence of indebtedness, including Senior Indebtedness (as defined herein), by the Company or its subsidiaries. Use of Proceeds............ Net proceeds from the sale of the Notes will be allocated in full to the General Division and used to finance the acquisition of DSP, including the repayment of $200 million of short-term indebtedness that may be incurred to finance such acquisition. Nasdaq Symbol for General Division Stock........... The General Division Stock is quoted on the Nasdaq National Market under the symbol "GENZ". 5 7 GENZYME CORPORATION AND SUBSIDIARIES SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------- -------- Consolidated Statement of Operations Data(1): Net revenues.................................. $121,916 $219,079 $270,371 $311,051 $383,783 $88,189 $113,497 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses.................... 112,483 176,110 220,345 260,953 329,094 75,450 99,168 Amortization expense.......................... 1,200 3,037 5,964 4,741 4,677 1,086 1,071 Other expenses(2)............................. -- 68,005 75,517 11,215 14,216 -- -- -------- -------- -------- -------- -------- ------- -------- 113,683 247,152 301,826 276,909 347,987 76,536 100,239 -------- -------- -------- -------- -------- ------- -------- Operating income (loss)......................... 8,233 (28,073) (31,455) 34,142 35,796 11,653 13,258 Other income and (expenses): Investment income............................. 12,371 21,981 12,209 9,101 8,814 1,765 4,492 Interest expense.............................. (2,088) (7,099) (2,500) (1,354) (1,109) (47) (213) Other......................................... 6,427 1,678 9,192 (11,105) (202) (584) (937) -------- -------- -------- -------- -------- ------- -------- 16,710 16,560 18,901 (3,358) 7,503 1,134 3,342 -------- -------- -------- -------- -------- ------- -------- Income (loss) before income taxes and extraordinary credit.......................... 24,943 (11,513) (12,554) 30,784 43,299 12,787 16,600 Benefit (Provision) for income taxes............ (12,484) (18,804) 6,459 (14,481) (21,649) (4,731) (6,308) Income (loss) before extraordinary credit....... 12,459 (30,317) (6,095) 16,303 21,650 8,056 10,292 -------- -------- -------- -------- -------- ------- -------- Extraordinary credit resulting from utilization of operating loss carryforwards............... 8,387 -- -- -- -- -- -- -------- -------- -------- -------- -------- ------- -------- Net income (loss)............................... $ 20,846 $(30,317) $ (6,095) $ 16,303 $ 21,650 $ 8,056 $ 10,292 ======== ======== ======== ======== ======== ======= ======== Common Share Data: Attributable to General Division Stock: Net income (loss)........................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $11,998 $ 19,034 ======== ======== ======== ======== ======== ======= ======== Per common and common equivalent share: Income (loss) before extraordinary credit.................................. $ 0.54 $ (1.33) $ 0.69 $ 1.22 $ 1.45 $ 0.43 $ 0.53 Extraordinary credit...................... 0.36 -- -- -- -- -- -- -------- -------- -------- -------- -------- ------- -------- Net income (loss)......................... $ 0.90 $ (1.33) $ 0.69 $ 1.22 $ 1.45 $ 0.43 $ 0.53 ======== ======== ======== ======== ======== ======= ======== Average shares outstanding.................. 23,554 22,370 26,250 26,169 30,092 27,945 35,691 ======== ======== ======== ======== ======== ======= ======== Attributable to TR Stock: Net loss.................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $(3,942) $ (8,742) ======== ======== ======== ======== ======== ======= ======== Per common share............................ $ (0.10) $ (0.17) $ (7.43) $ (4.40) $ (2.28) $ (0.45) $ (0.71) ======== ======== ======== ======== ======== ======= ======== Average shares outstanding.................. 2,739 3,019 3,245 3,578 9,659 8,751 12,246 ======== ======== ======== ======== ======== ======= ======== Ratio of earnings to fixed charges, consolidated(3)............................... 5.7x 0.0x (0.6)x 2.5x 3.7x 3.6x 5.3x ======== ======== ======== ======== ======== ======= ======== Ratio of EBITDA to interest costs, consolidated(4)............................... 16.1x 0.9x 0.9x 4.8x 6.6x 6.7x 11.5x ======== ======== ======== ======== ======== ======= ======== EBITDA(4)....................................... $ 34,501 $ 6,632 $ 6,767 $ 50,364 $ 62,046 $18,304 $ 22,482 ======== ======== ======== ======== ======== ======= ========
MARCH 31, 1996 --------- Consolidated Balance Sheet Data: Cash and investments(5)........................................................ $337,303 Working capital................................................................ 378,124 Total assets................................................................... 938,100 Long-term debt, capital lease obligations, excluding current portion, and other noncurrent liabilities............................................. 33,070 Stockholders' equity(6)........................................................ 831,797
- --------------- (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) Includes charges related to the purchase of in-process research and development totaling $51.1 million, $49.0 million, $11.2 million and $14.2 million, respectively, for the years ended December 31, 1992, 1993, 1994 and 1995; impaired goodwill and restructuring costs totaling $26.5 million for the year ended December 31, 1993, and charges for purchase options and financing expenses totaling $16.9 million, for the year ended December 31, 1992. (3) The ratio of earnings to fixed charges is calculated by dividing the sum of (i) net income (loss) before income taxes and extraordinary credits and (ii) fixed charges, by fixed charges. Fixed charges consist of interest (expensed and capitalized), amortization of debt issuance costs and the estimated interest portion of rent expense. Fixed charges exceeded earnings for the years ended December 31, 1992 and 1993 by $12.4 million and $17.6 million, respectively. (4) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization and extraordinary items. Interest costs include interest expensed and interest capitalized. EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. The ratio of EBITDA to interest costs is included herein to provide additional information related to the Company's ability to service debt. (5) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (6) 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 General Division Stock in March 1996. 6 8 GENZYME CORPORATION AND SUBSIDIARIES SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) The pro forma statement of operations data and ratios has been prepared as if the acquisition of Genetrix, Inc. (the "Genetrix Acquisition") for approximately 690,000 shares of General Division Stock and the acquisition of DSP (the "DSP Acquisition") financed with debt of $225 million occurred as of January 1, 1995. The pro forma balance sheet data has been prepared as if the Genetrix Acquisition and DSP Acquisition occurred on March 31, 1996. The pro forma summary financial data do not purport to represent what the results of operations or financial position of the Company would have been if such transactions had occurred at the date indicated and do not purport to project results of the Company for any future periods.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ Pro Forma Consolidated Statement of Operations Data: Net revenues...................................................................................... $501,048 $146,619 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses.......................................................................... 428,841 125,803 Amortization expense............................................................................ 13,104 3,177 Other expenses(1)............................................................................... 17,801 546 -------- -------- 459,746 129,526 -------- -------- Operating income.................................................................................. 41,302 17,093 Other income and (expenses): Investment income............................................................................... 8,839 4,492 Interest expense................................................................................ (21,746) (4,772) Other........................................................................................... (1,556) (1,038) -------- -------- (14,463) (1,318) -------- -------- Income before income taxes........................................................................ 26,839 15,775 Provision for income taxes........................................................................ (18,516) (5,872) -------- -------- Net income........................................................................................ $ 8,323 $ 9,903 ======== ======== Attributable to General Division Stock: Net income...................................................................................... $ 30,353 $ 15,148 ======== ======== Per common and common equivalent share.......................................................... $ 0.99 $ 0.51 ======== ======== Average shares outstanding...................................................................... 30,782 36,381 ======== ======== Attributable to TR Stock: Net loss........................................................................................ $(22,030) $ (8,742) ======== ======== Per common share................................................................................ $ (2.28) $ (0.71) ======== ======== Average shares outstanding...................................................................... 9,659 12,246 ======== ======== Ratio of earnings to fixed charges(2), consolidated............................................... 1.6x 2.6x ======== ======== Ratio of EBITDA to interest costs(3), consolidated................................................ 2.8x 4.5x ======== ======== EBITDA(3)......................................................................................... 82,189 29,241
MARCH 31, 1996 ------------ Pro Forma Consolidated Balance Sheet Data: Cash and investments(4)........................................................................ $ 309,451 Working capital................................................................................ 367,251 Total assets................................................................................... 1,221,098 Long-term debt, capital lease obligations excluding current portion, and other recurrent liabilities.............................................................. 258,761 Stockholders' equity(5)........................................................................ 852,318
- --------------- (1) Includes charges related to the purchase of in-process research and development of $14.2 million for the year ended December 31, 1995. (2) The ratio of earnings to fixed charges is calculated by dividing the sum of (i) net income (loss) before income taxes and extraordinary credits and (ii) fixed charges, by fixed charges. Fixed charges consist of interest (expensed and capitalized), amortization of debt issuance costs and the estimated interest portion of rent expense. (3) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization and extraordinary items. Interest costs include interest expensed and interest capitalized. EBITDA should not be considered an alternative measure of the Company's net income, operating performance, cash flow or liquidity. The ratio of EBITDA to interest costs is included herein to provide additional information related to the Company's ability to service debt. (4) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (5) 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 General Division Stock in March 1996. 7 9 GENZYME GENERAL DIVISION SUMMARY HISTORICAL COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------- -------- Combined Statement of Operations Data(1): Net revenues............................... $119,624 $216,413 $265,687 $310,727 $378,563 $87,159 $111,783 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses...... 109,930 172,936 216,839 256,064 300,498 70,159 88,142 Amortization expense..................... 1,200 3,037 5,964 4,741 4,677 1,086 1,071 Other expenses(2)........................ -- 68,005 50,517 -- 14,216 -- -- -------- -------- -------- -------- -------- ------- -------- 111,130 243,978 273,320 260,805 319,391 71,245 89,213 -------- -------- -------- -------- -------- ------- -------- Operating income (loss).................... 8,494 (27,565) (7,633) 49,922 59,172 15,914 22,570 Other income and (expenses): Investment income........................ 12,371 21,981 12,209 9,072 7,428 1,446 3,918 Interest expense......................... (2,088) (7,099) (2,500) (1,354) (1,069) (47) (209) Other.................................... 6,427 1,678 9,192 (11,105) (202) (584) (937) -------- -------- -------- -------- -------- ------- -------- 16,710 16,560 18,901 (3,387) 6,157 815 2,772 -------- -------- -------- -------- -------- ------- -------- Income (loss) before income taxes and extraordinary credit..................... 25,204 (11,005) 11,268 46,535 65,329 16,729 25,342 Provision for income taxes................. (12,589) (19,007) (2,812) (16,341) (30,506) (6,358) (9,805) -------- -------- -------- -------- -------- ------- -------- Income (loss) before extraordinary credit................................... 12,615 (30,012) 8,456 30,194 34,823 10,371 15,537 Extraordinary credit resulting from utilization of operating loss carryforwards............................ 8,323 -- -- -- -- -- -- -------- -------- -------- -------- -------- ------- -------- Net income (loss).......................... 20,938 (30,012) 8,456 30,194 34,823 10,371 15,537 Tax benefit allocated from GTR............. 169 203 9,564 1,860 8,857 1,627 3,497 -------- -------- -------- -------- -------- ------- -------- Net income (loss) attributable to General Division Stock................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $11,998 $ 19,034 ======== ======== ======== ======== ======== ======= ======== Per General Division common and common equivalent share: Income (loss) before extraordinary credit................................. $ 0.54 $ (1.33) $ 0.69 $ 1.22 $ 1.45 $ 0.43 $ 0.53 Extraordinary credit..................... 0.36 -- -- -- -- -- -- -------- -------- -------- -------- -------- ------- -------- Net income (loss)........................ $ 0.90 $ (1.33) $ 0.69 $ 1.22 $ 1.45 $ 0.43 $ 0.53 ======== ======== ======== ======== ======== ======= ======== Average shares outstanding............... 23,554 22,370 26,250 26,169 30,092 27,945 35,691 ======== ======== ======== ======== ======== ======= ========
MARCH 31, 1996 --------- Combined Balance Sheet Data: Cash and investments(3)................................................. $302,196 Working capital......................................................... 351,253 Total assets............................................................ 888,363 Long-term debt and capital lease obligations excluding current portion, and other noncurrent liabilities...................................... 32,325 Division equity(4)...................................................... 793,766
- --------------- (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) Includes charges related to the purchase of in-process research and development totaling $51.1 million, $24.0 million and $14.2 million, respectively, for the years ended December 31, 1992, 1993, and 1995; impaired goodwill and restructuring costs totaling $26.5 million for the year ended December 31, 1993, and charges for purchase options and financing expenses totaling $16.9 million, for the year ended December 31, 1992. (3) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (4) 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 General Division Stock in March 1996. 8 10 GENZYME GENERAL DIVISION SUMMARY PRO FORMA COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The pro forma statement of operations data has been prepared as if the Genetrix Acquisition for approximately 690,000 shares of General Division Stock and the DSP Acquisition financed with debt of $225 million occurred as of January 1, 1995. The pro forma balance sheet data has been prepared as if the Genetrix Acquisition and DSP Acquisition occurred on March 31, 1996. The pro forma summary financial data do not purport to represent what the results of operations or financial position of the General Division would have been if such transactions had occurred at the date indicated and do not purport to project results of the General Division for any future periods.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ Pro Forma Combined Statement of Operations Data: Net revenues............................................................ $495,828 $144,905 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses................................... 400,245 114,777 Amortization expense.................................................. 13,104 3,177 Other expenses(1)..................................................... 17,801 546 -------- -------- 431,150 118,500 -------- -------- Operating income........................................................ 64,678 26,405 Other income and (expenses): Investment income..................................................... 7,453 3,918 Interest expense...................................................... (21,706) (4,768) Other................................................................. (1,556) (1,038) -------- -------- (15,809) (1,888) -------- -------- Income before income taxes.............................................. 48,869 24,517 Provision for income taxes.............................................. (27,373) (9,369) -------- -------- Net income.............................................................. 21,496 15,148 Tax benefit allocated from GTR.......................................... 8,857 3,497 -------- -------- Net income attributable to General Division Stock....................... $ 30,353 $ 18,645 ======== ======== Per common and common equivalent share: Net income............................................................ $ 0.99 $ 0.51 ======== ======== Average shares outstanding............................................ 30,782 36,381 ======== ========
MARCH 31, 1996 ------------ Pro Forma Combined Balance Sheet Data: Cash and investments(2).............................................. $ 274,344 Working capital...................................................... 340,380 Total assets......................................................... 1,171,361 Long-term debt, capital lease obligations excluding current portion, and other noncurrent liabilities................................... 258,016 Division equity(3)................................................... 814,287
- --------------- (1) Includes charges related to the purchase of in-process research and development $14.2 million for the year ended December 31, 1995. (2) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (3) 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 General Division Stock in March 1996. 9 11 DSP SUMMARY HISTORICAL FINANCIAL DATA (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED ------------------- SEPTEMBER 30, MARCH MARCH -------------------- 26, 24, 1994 1995 1995 1996 -------- ------- ------- ------- Consolidated Statement of Operations Data: Net sales........................................ $ 85,410 $95,259 $45,509 $49,696 Operating costs and expenses: Cost of products sold and selling, general, administrative, research and development expenses...................................... 71,795 79,146 38,420 38,149 Amortization expense............................. 3,832 2,750 1,594 1,702 Other expenses................................... 1,483 3,585 504 1,300 ------- ------- ------- ------- 77,110 85,481 40,518 41,151 ------- ------- ------- ------- Operating income................................... 8,300 9,778 4,991 8,545 Other income and (expenses): Interest expense................................. (6,339) (6,937) (3,395) (2,905) Other............................................ (1,510) (1,354) (683) 1,074 ------- ------- ------- ------- (7,849) (8,291) (4,078) (1,831) ------- ------- ------- ------- Income before income taxes and extraordinary loss............................................. 451 1,487 913 6,714 Provision for income taxes......................... (188) (172) (303) (1,447) ------- ------- ------- ------- Income before extraordinary loss................... 263 1,315 610 5,267 Extraordinary loss from debt refinancing........... (2,360) -- -- -- ------- ------- ------- ------- Net income......................................... $ (2,097) $ 1,315 $ 610 $ 5,267 ======= ======= ======= =======
MARCH 24, 1996 -------- Consolidated Balance Sheet Data: Cash and cash equivalents........................ $ 3,107 Working capital.................................. 12,528 Total assets..................................... 112,776 Long-term debt, capital lease obligations excluding current portion, and other long-term liabilities................................... 50,028 Stockholders' equity............................. 31,497
10 12 RISK FACTORS Statements made in this Prospectus relating to a pending acquisition, plans for sales and marketing, and the timing of regulatory approvals, or that otherwise relate to future periods, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ materially from those anticipated in the forward-looking statements as a result of certain risks described below or elsewhere in this Prospectus (including the Company's Annual Report on Form 10-K for 1995 and other documents incorporated herein by reference). Such risks should be considered carefully in evaluating an investment in the Notes. RISKS RELATED TO GENERAL DIVISION The Notes are convertible only into shares of General Division Stock. Accordingly, the following risk factors relating to the General Division should be considered carefully in contemplating an investment in the Notes. Dependence on Ceredase(R) and Cerezyme(TM) Enzyme Sales; Limited Supply of Raw Material. Genzyme's results of operations and cash flows are highly dependent upon sales of its Ceredase(R) enzyme, a biotherapeutic product for the treatment of Gaucher disease, and Cerezyme(TM) enzyme, a recombinant form of the enzyme. During 1995, sales from these two products totaled approximately $215 million, or 71% of the General Division's product sales. 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 material. During 1994, Genzyme experienced a major increase in the cost of the raw material used to produce Ceredase(R) enzyme when its supplier raised the cost to Genzyme by approximately $20 million per year. To achieve a partial recovery of the cost increase, Genzyme, early in 1994, increased the price of Ceredase(R) enzyme. The supply of starting material available for the production of Ceredase(R) enzyme effectively limits the amount of product that can be produced. During 1995, Genzyme and its supplier were successful in improving the yield of enzyme obtained from the starting material thereby increasing the amount of product which could be produced. Nonetheless, the current supply available is not sufficient to produce enough Ceredase(R) enzyme to supply all present patients. Any disruption in the supply or manufacturing process of Ceredase(R) enzyme may have a material adverse effect on revenue in any period. To address supply constraints, Genzyme has developed Cerezyme(R) enzyme, a recombinant form of the enzyme. Genzyme received approval to market this product in the U.S. and Israel in 1994. In 1995, Genzyme received approval in Sweden and currently is working to expedite the foreign approvals needed to market Cerezyme(R) enzyme elsewhere abroad. Manufacturing capacity constraints on Cerezyme(R) enzyme, presently produced in Genzyme's small scale cell culture plant, will limit the availability of the product for new patients pending receipt of regulatory approval to use Genzyme's large-scale mammalian cell culture manufacturing plant in Boston, Massachusetts for production of Cerezyme(R) enzyme. The Ceredase(R) and Cerezyme(TM) products have each been given orphan drug status by the FDA, which entitles Genzyme to market exclusivity for these products until April 1998 and May 2001, respectively. Legislation has been periodically introduced in recent years to amend the Orphan Drug Act to limit market exclusivity in certain situations. No Assurance of Commercial Success of the HA Products. The successful commercialization of the HA Products in both the United States and Europe will depend on many factors, including the breadth of labeling claims allowed by the FDA, the response of surgeons to the data from clinical trials, the General Division's ability to retain and deploy the DSP sales force to market the HA Products, the General Division's ability to supply sufficient product to meet market demand, and the number and relative efficacy of competitive products that may subsequently enter the market. There can be no assurance that the General Division will be successful in its efforts to develop and implement a commercialization strategy for the HA Products. 11 13 The HA Products will require FDA approval prior to marketing in the United States. PMA applications have been submitted and are pending before the FDA for Seprafilm(TM) and Sepracoat(TM). In March 1996, an advisory panel to the FDA recommended that approval be granted to market Seprafilm(TM) for use in reducing postoperative adhesion formation at the locations in the body and in the abdominal and gynecological surgeries studied in the Company's pivotal clinical trials of the product. Genzyme is working with the FDA to develop appropriate labeling for Seprafilm(TM) and expects to receive approval to market the product in the near future. There can be no assurance that the FDA will allow the General Division's labeling claims and permit the marketing of Seprafilm(TM) for a broad range of applications, if at all. In addition, the successful commercialization of the HA Products will require that surgeons become convinced of the efficacy of the products in preventing the formation of postoperative adhesions and incorporate the products as standard surgical practice in procedures where adhesions are a potential postoperative complication. There can be no assurance that the HA Products will be widely accepted by surgeons and used to the extent anticipated by the General Division. The General Division plans to utilize DSP's 52-person United States sales force to market the HA Products. Loss of the services of a significant number of DSP's sales personnel or unforeseen delays in training and deploying such sales force to market the HA Products may have an adverse effect on the commercialization of the HA Products. The General Division presently maintains a 30-person European sales force to market the HA Products. Loss of the services of a significant number of the European sales personnel may have an adverse effect on the commercialization of the HA Products in Europe. The General Division has developed manufacturing facilities in the United Kingdom for bulk production of HA powder, from which Seprafilm(TM) and Sepracoat(TM) are produced. Seprafilm(TM) production facilities have been built in Framingham, Massachusetts with a capacity sufficient for the market introduction and initial commercialization of the product. The General Division will need to expand its manufacturing capacity for Seprafilm(TM) in order to meet any additional market demand over and above its present capacity, and initial planning for that expansion is underway. Although the General Division has successfully produced finished product in its existing manufacturing facilities, the General Division has not operated these facilities at a capacity anticipated to be required for commercial production of the HA Products. There can be no assurance that the General Division will be successful in producing material at such capacity that conforms to established product specifications while maintaining production efficiency. The HA Products will also face significant competition both from other HA-based products and from non-HA-based products intended to reduce adhesions resulting from surgical trauma. Risks in Product Development. Product development involves a high degree of risk, and returns to investors are dependent upon successful development of Genzyme's products. There can be no assurance that development of any product will be successfully completed or that FDA approval of any of Genzyme's products under development will be obtained. In addition, because of the length of time and expense associated with bringing new products through development and regulatory approval to the marketplace, Genzyme places considerable importance on obtaining patent and trade secret protection for its significant technologies, products and processes. There can be no assurance that any pending patent applications filed by Genzyme will mature into issued patents. Furthermore, there can be no assurance that Genzyme's existing or pending patent claims will offer protection against competition, or will not be designed around or infringed upon by others. Technology Transferred to Genzyme Development Partners and Neozyme II. Genzyme organized two special purpose research and development entities, Genzyme Development Partners and Neozyme II, to which it transferred technology and commercial rights to certain products that Genzyme previously had under development. Genzyme has options to purchase the limited partnership interests in Genzyme Development Partners under certain circumstances and to acquire all of the outstanding shares of the callable common stock of Neozyme II. Genzyme's option to acquire the callable common stock of Neozyme II expires on December 31, 1996. 12 14 On January 31, 1996, Genzyme made an offer to a special committee of the independent directors of the general partner of Genzyme Development Partners to acquire substantially all the assets of Genzyme Development Partners for $93 million in shares of General Division Stock. Such offer was made in lieu of Genzyme's option to purchase the limited partnership interests of Genzyme Development Partners. In May 1996, Genzyme announced the withdrawal of this offer to purchase the assets of Genzyme Development Partners. It is uncertain at this time whether Genzyme will exercise its option to purchase the limited partnership interests in Genzyme Development Partners or whether Genzyme will exercise its option to purchase the outstanding shares of Neozyme II callable common stock. If Genzyme does not exercise these options or otherwise reach agreements to acquire the rights to products of Genzyme Development Partners or Neozyme II, it will have no rights to the related products of Neozyme II and limited rights in revenues generated from the sale of the Genzyme Development Partners' products. If Genzyme does exercise these options, it will be required to make substantial cash payments or to issue shares of General Division Stock, or both. Cash payments will diminish Genzyme's capital resources. Payments in General Division Stock could result in dilution to holders of General Division Stock and could negatively affect the market price of such stock. Risks Inherent in International Operations. Foreign operations of Genzyme accounted for 41% of net product sales in 1995 as compared to 37% and 29% in 1994 and 1993, respectively. In addition, Genzyme has direct investments in 8 subsidiaries in foreign countries (primarily in Europe and Japan) and purchases certain raw materials from a European supplier. 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 and Italian lire. Genzyme's long-term operating strategies are formulated to minimize the impact of foreign currency fluctuations on non-U.S. dollar denominated purchases its sales. Genzyme manages its foreign exchange exposure primarily by entering into forward contracts with banks to the extent that the timing of the currency flows can reasonably be anticipated and by offsetting matching foreign currency denominated assets with foreign currency denominated liabilities. Genzyme does not hedge net foreign investments. Genzyme has no material unhedged monetary assets, liabilities or commitments denominated in foreign currencies. 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 payors. Genzyme's revenues and profitability may be affected by ongoing efforts of third party payors to contain such costs. 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 the present or future Congressional sessions. 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. 13 15 RISKS RELATED TO THE NOTES An investment in the Notes involves a high degree of risk. Accordingly, the following risk factors should be considered carefully in contemplating such an investment. 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 completing validation of the manufacturing facility in Boston, Massachusetts, completing its commitment to develop manufacturing capacity sufficient to meet the requirements for commercialization of the HA Products, introducing the HA Products to the United States market and completing their market introduction in Europe, completing the market introduction of the CARTICEL(TM) Autologous Chondrocyte Service and developing, producing and marketing other products through GTR, making certain payments to third parties in connection with strategic collaborations and making the final payment for a company acquired in 1994. In addition, should Genzyme exercise its option to acquire Neozyme II callable common stock or its option to acquire the partnership interests in Genzyme Development Partners 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. If available, Genzyme may elect to obtain such financing in the form of Senior Indebtedness to which the Notes would be subordinated in right of payment. Absence of Public Market; Volatility of Prices. There is currently no public market for the Notes. There can be no assurance that an active trading market will develop for the Notes. There can be no assurance as to the liquidity of investments in the Notes and the General Division Stock into which the Notes are convertible, or as to the price holders may realize upon the sale of such securities. These prices are determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the Notes and the General Division Stock, the market price of the General Division Stock, interest rates, investor perception of the Company and general economic and market conditions. The market prices for securities of Genzyme 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 industry and market conditions in general may have a significant impact on the market price of Genzyme's securities, including the Notes and the General Division Stock. Subordination. The Notes will be general, unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company. Under the Indenture, generally, the Company will not be permitted to pay the principal of, or premium, if any, or interest on or repurchase, redeem or otherwise retire any Notes in the event of a default in the payment of any principal of, premium, if any, or interest on any Senior Indebtedness of the Company when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise, unless and until such payment default has been cured or waived, or in the event of certain other defaults with respect to Senior Indebtedness which would entitle the holder thereof to accelerate such Senior Indebtedness. In addition, the Notes are effectively subordinated to all of the creditors of the Company's subsidiaries, including trade creditors. As of March 31, 1996, as adjusted to give effect to this offering and the anticipated use of the net proceeds therefrom, the Company and its subsidiaries would have had an aggregate of $34,648,000 of consolidated indebtedness and other obligations effectively ranking senior to the Notes. The Indenture will not restrict the incurrence of Senior Indebtedness or other indebtedness by the Company or any of its subsidiaries. See "Description of Notes -- Subordination." RISKS RELATED TO TWO CLASSES OF COMMON STOCK Genzyme currently has two classes of common stock outstanding: General Division Stock and TR Stock. The General Division Stock and the TR Stock are intended to reflect the value and track the performance of the General Division and GTR, respectively. The Notes are convertible only into shares of General Division Stock. Accordingly, prospective purchasers of the Notes should carefully consider the following factors in evaluating an investment in the Notes. 14 16 Stockholders of One Company; Financial Impacts on One Division Could Affect the Other. Notwithstanding the allocation of the Company's assets and liabilities between divisions for financial statement presentation purposes, Genzyme continues to hold title to all of its assets and is responsible for all of its liabilities. Holders of General Division Stock (including shares thereof issued upon conversion of the Notes) and the TR Stock have no specific claim against the assets attributed for financial statement presentation purposes 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. Prospective purchasers of the Notes should, therefore, read Genzyme's consolidated financial statements in conjunction with the financial statements of the General Division. No Rights or Additional Duties With Respect to the Divisions; Potential Conflicts. Holders of General Division Stock and TR Stock have only the rights of stockholders of Genzyme, and, except in limited circumstances, do not have any rights specifically related to the General Division or GTR, respectively. The existence of separate classes of common stock may give rise to occasions when the interests of holders of General Division Stock and holders of TR Stock may diverge or appear to diverge. Although Genzyme is aware of no precedent concerning the manner in which Massachusetts law would be applied to the duties of a board of directors in the context of two classes of common stock with divergent interests, Genzyme believes that a Massachusetts court would hold that a board of directors owes an equal duty to all stockholders regardless of class and does not have separate or additional duties to any group of stockholders. That duty is the fiduciary duty to act in good faith and in a manner it reasonably believes to be in the best interests of the corporation. Genzyme believes that, under Massachusetts law, a good faith determination by a disinterested and adequately informed board of directors that an action is in the best interests of the corporation should represent an appropriate defense to any challenge by or on behalf of the holders of any class of stock that such action could have a disparate effect on different classes of common stock. Disproportionate ownership interests of members of the Board of Directors of Genzyme (the "Board") in either class of common stock or disparities in the value of such stock could create or appear to create potential conflicts of interest when directors are faced with decisions that could have different implications for each class of stock. Nevertheless, Genzyme believes that a director would be able to discharge his or her fiduciary responsibilities even if his or her interests in shares of such classes were disproportionate or had disparate values. The Board may also from time to time establish one or more committees to review matters presented to it that raise conflict issues, which committee(s) would report to the full Board on such matters. No Additional Separate Voting Rights. Holders of General Division Stock and holders of TR Stock vote together as a single class on all matters as to which common stockholders generally are entitled to vote. Except in certain limited circumstances provided under Massachusetts law, in Genzyme's Articles of Organization, and in the management and accounting policies adopted by the Board, holders of each class of common stock have no rights to vote on matters as a separate class. Accordingly, except in limited circumstances, holders of shares of one class of common stock could not bring a proposal to a vote of the holders of that class of common stock only, but would be required to bring any proposal to a vote of both classes of common stock. On all matters as to which common stockholders generally are entitled to vote, each share of General Division Stock has one vote, and each share of TR Stock will, through December 31, 1996, have .29 votes. On January 1, 1997 and on January 1 every two years thereafter, the number of votes to which each share of TR Stock is entitled will be adjusted to equal the ratio of the Fair Market Value of one share of TR Stock to the Fair Market Value of one share of General Division Stock as of such date. The term "Fair Market Value" is defined in Genzyme's Articles of Organization and under the heading "Description of Genzyme Capital Stock -- Exchange of TR Stock" herein. Certain matters as to which the holders of common stock are entitled to vote may involve a divergence or the appearance of a divergence in the interests of holders of General Division Stock and holders of TR Stock. If, when a stockholder vote is taken on any matter as to which a separate vote by either class is not required and the holders of either class of common stock would have more than the number of votes required to approve any such matter, the holders of that class would control the outcome of the vote on such matter. As of 15 17 May 31, 1996, holders of General Division Stock and holders of TR Stock had approximately 90.4% and 9.6%, respectively, of the total voting power of Genzyme. As a result, on matters which are submitted to a vote of the holders of both classes of common stock, the preferences of the holders of General Division Stock are likely to dominate and determine the outcome of such vote unless and until the relative number of shares outstanding and/or the market value of General Division Stock and TR Stock materially changes. No Adjustment to Liquidating Distributions. In the event of a voluntary or involuntary dissolution, liquidation or winding up of the affairs of Genzyme (other than pursuant to a merger, business combination or sale of substantially all assets), holders of outstanding shares of General Division Stock and TR Stock would receive the assets, if any, remaining for distribution to common stockholders on a per share basis in proportion to the respective per share liquidation units of such class. Currently, each share of General Division Stock has one liquidation unit and each share of TR Stock has .29 liquidation units. Because the liquidation units will not be adjusted to reflect changes in the relative market value or performance of the General Division and GTR, the per share liquidating distribution to a holder of General Division Stock or TR Stock is not likely to correspond to the value of the assets of the General Division or GTR, respectively, at the time of a dissolution, liquidation or winding up of Genzyme. Management and Accounting Policies Subject to Change. The Board has adopted certain management and accounting policies applicable to the preparation of the financial statements of both divisions, the allocation of corporate expenses, assets and liabilities and other accounting matters, the reallocation of assets between divisions and other matters. These policies may, except as stated therein, be modified or rescinded in the sole discretion of the Board without the approval of Genzyme's stockholders, subject to the Board's fiduciary duty to all holders of Genzyme's capital stock, although there is no present intention to do so. The Board may also adopt additional policies depending upon the circumstances. See "Management and Accounting Policies Governing the Relationship of Genzyme Divisions." Limited Trading History. As discussed above, the General Division Stock and the TR Stock are intended to reflect the value and track the performance of the General Division and GTR, respectively. Since the General Division Stock and the TR Stock have only a limited trading history, there can be no assurance as to the degree to which the market price of such classes of common stock will reflect the value and track the performance of the General Division and GTR as reflected in their respective financial statements. In addition, Genzyme cannot predict the impact that certain terms of the securities, such as the ability of Genzyme to exchange each share of TR Stock for cash and/or shares of General Division Stock, will have on the market prices of each class of common stock. 16 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the Notes offered hereby are estimated to be $ ($ if the Underwriter's over-allotment option is exercised in full) and will be allocated in full to the General Division. The Company intends to utilize the net proceeds to finance the acquisition of DSP, including the repayment of short-term indebtedness that may be incurred to finance such acquisition. Such short-term indebtedness, if incurred, will be in the principal amount of approximately $200 million, bearing interest at a rate equal to LIBOR or the lender's cost of funds, plus 5/8% (if paid within 90 days of the date incurred), and payable on or before September 1, 1997. 17 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 on an actual basis, on a pro forma basis to reflect the Genetrix Acquisition and the DSP Acquisition and on a pro forma as adjusted basis to reflect the issuance of the Notes and application of the net proceeds of the offering.
MARCH 31, 1996 --------------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- ---------- ----------- (DOLLARS IN THOUSANDS) % Convertible Subordinated Notes Due 2001.......... $ -- $ -- $ 225,000 Long-term debt and notes payable(1)..................... 33,070 233,761 33,761 Stockholders' equity(2), (3)............................ 831,797 852,318 852,318 -------- -------- ---------- Total capitalization.......................... $864,867 $1,086,079 $ 1,111,079 ======== ======== ==========
- --------------- (1) As adjusted to include pro forma adjustments for long-term debt of $413,000 to effect the Genetrix Acquisition and $278,000 to effect the DSP Acquisition. (2) Excludes 8,804,311 shares of General Division Stock reserved for issuance upon exercise of outstanding options and warrants and 2,415,000 shares reserved for issuance upon exercise of warrants that will become exercisable if Genzyme fails to purchase the callable common stock of Neozyme II by December 31, 1996. (3) Includes pro forma adjustments to reflect the issuance of 689,995 shares of General Division Stock to effect the Genetrix Acquisition and charges related to the purchase of in-process research and development totaling $16 million expensed in connection with the DSP Acquisition. 18 20 PRICE RANGE OF GENERAL DIVISION STOCK AND DIVIDEND POLICY The General Division Stock commenced trading on December 16, 1994 following the redesignation of the then existing common stock of Genzyme ("Genzyme Common Stock") and the creation of the TR Stock. The General Division Stock is traded in the over-the-counter market and prices are quoted on the Nasdaq National Market under the symbol GENZ. The following tables set forth, for the periods indicated, the high and low sale prices for Genzyme Common Stock and General Division Stock as reported by Nasdaq. GENZYME COMMON STOCK
HIGH LOW ---- --- 1994: First Quarter...................................................... 34 1/2 25 3/4 Second Quarter..................................................... 31 24 Third Quarter...................................................... 38 1/2 25 1/4 Fourth Quarter (through December 15, 1994)......................... 34 1/2 26 1/4 GENERAL DIVISION STOCK 1994: Fourth Quarter (commencing December 16, 1994)...................... 31 3/4 26 3/4 1995: First Quarter...................................................... 41 1/2 27 1/4 Second Quarter..................................................... 44 36 Third Quarter...................................................... 64 1/4 39 1/2 Fourth Quarter..................................................... 703/64 48 1996: First Quarter...................................................... 77 51 1/4 Second Quarter (through June , 1996).............................
On June , 1996, the closing sale price of General Division Stock as reported by Nasdaq was $ per share. There were approximately 2,529 holders of record of General Division Stock as of June 1, 1996. Genzyme has never paid a cash dividend on any class of its capital stock and currently intends to retain all earnings for use in its business. On June 7, 1996, Genzyme announced a two-for-one stock split of the General Division Stock payable July 25, 1996 to stockholders of record on July 11, 1996, subject to stockholder approval of an increase in the authorized number of shares of General Division Stock. See "Business -- Recent Developments." The stock prices set forth above do not reflect the proposed stock split. 19 21 DSP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS (IN THOUSANDS) The following table represents historical consolidated statement of operations data for DSP and is presented for purposes of additional information. This information should be read in conjunction with the DSP historical consolidated financial statements and notes thereto in this Prospectus.
SIX MONTHS ENDED YEAR ENDED ------------------- SEPTEMBER 30, MARCH MARCH ------------------- 26, 24, 1994 1995 1995 1996 ------- ------- ------- ------- Consolidated Statement of Operations Data: Net sales........................................... $85,410 $95,259 $45,509 $49,696 Cost of products sold............................... 43,873 48,191 23,362 23,663 ------- ------- ------- ------- Gross margin........................................ 41,537 47,068 22,147 26,033 ------- ------- ------- ------- Operating costs and expenses: Selling, general, administrative, research and development expenses........................... 27,922 30,955 15,058 14,486 Amortization expense.............................. 3,832 2,750 1,594 1,702 Severance and other charges....................... 1,483 3,585 504 1,300 ------- ------- ------- ------- 33,237 37,290 17,156 17,488 ------- ------- ------- ------- Operating income.................................... $ 8,300 $ 9,778 $ 4,991 $ 8,545 ======= ======= ======= =======
RESULTS OF OPERATIONS Six Months ended March 24, 1996 and March 26, 1995 Net sales grew by 9.2% from $45.5 million in 1995 to $49.7 million in 1996. DSP's December 1995 acquisition of the Thora-Klex product line accounted for approximately $2.9 million of the increase. DSP's United States suture business which increased by approximately $0.9 million in 1996 over 1995 accounted for the majority of the remaining growth. The gross margin percentage increased from 48.7% in 1995 to 52.4% in 1996. This increase resulted mainly from improvement in DSP's margin on its surgical closure products. The 1995 closure of DSP's former manufacturing facility in Germany and the consolidation of production into DSP's United States manufacturing facilities accounted for the majority of this improvement. Operating expenses increased by 1.9% to $17.5 million in 1996 from $17.2 million in 1995. This increase resulted primarily from the inclusion of higher severance and other charges in 1996 than in 1995. The 1996 charges include primarily $800,000 incurred in the completion of the consolidation of suture manufacturing in the United States as a result of the 1995 plant closure in Germany. Excluding the impact of the severance and other charges, operating expenses as a percentage of sales decreased from 36.6% of sales in 1995 to 32.6% of sales in 1996 as a result of cost containment programs. Operating income increased in 1996 to $8.5 million from $5 million in 1995. Operating income before severance and other charges increased from $5.5 million in 1995 to $9.8 million in 1996. Fiscal Years ended September 30, 1995 and September 30, 1994 Net sales increased revenues grew by 11.6% from $85.4 million in 1994 to $95.3 million in 1995. DSP's April 1994 acquisition of Snowden Pencer, Inc. accounted for the majority of this growth with post-acquisition instrument sales in 1994 totaling $7.5 million as compared to full year 1995 sales of $17.5 million. DSP's cardiovascular fluid management sales grew by $1.1 million in 1995, with the majority of the growth achieved in Europe. The establishment of a direct sales effort in France during 1995 accounted for the majority of this 20 22 increase. Offsetting this growth was a $1.7 million decrease in surgical closure sales, principally in DSP's domestic market. The gross margin percentage increased from 48.6% in 1994 to 49.4% in 1995. This increase resulted mainly from the larger percentage of DSP's surgical instrument sales in 1995 than in 1994. DSP's manufacturing cost savings programs contributed to the margin. Operating expenses increased by 12.2% to $37.3 million in 1995 from $33.2 million in 1994. The full year effect of DSP's 1994 acquisition of Snowden-Pencer, Inc. was the primary cause of this increase. Also contributing to this increase is the inclusion of $3.6 million of severance and other charges in 1995 as compared to $1.5 million in 1994. The 1995 charges included approximately $1.7 million of severance costs and $0.9 million of travel and other costs associated with the closure of DSP's former manufacturing facility in Germany and $0.7 million of costs associated with the consolidation of DSP's domestic sales and marketing efforts. Excluding the impact of severance and other charges, operating expenses as a percentage of sales decreased from 37.2% of sales in 1994 to 35.4% of sales in 1995 as a result of cost containment programs and the impact of work force reductions in 1994 and 1995. Operating income increased in 1995 to $9.8 million from $8.3 million in 1994. Operating income before severance and other charges increased from $9.8 million in 1994 to $13.4 million in 1995. 21 23 BUSINESS Genzyme is a diversified, integrated human health care company operating in six major business areas. The Company's business activities in the areas of therapeutics, surgical products, diagnostic services, diagnostic products and pharmaceuticals are organized as the General Division. Genzyme's activities to develop, produce and market technologically advanced products and services for the treatment and prevention of serious tissue damage are conducted through GTR. The business of Genzyme is described in Genzyme's Annual Report on Form 10-K for the year ended December 31, 1995, which is incorporated herein by reference. See "Incorporation of Certain Documents by Reference." RECENT DEVELOPMENTS On May 24, 1996, Genzyme agreed to acquire DSP, a privately held specialty surgical products company, for approximately $250 million in cash. DSP designs, manufactures and markets cardiovascular devices, precision surgical instruments and specialty surgical products. Headquartered in Fall River, Massachusetts, DSP had net sales of approximately $95 million in its fiscal year ended September 30, 1995. Assuming receipt of necessary regulatory clearances, the acquisition is expected to be completed by the end of June. Genzyme believes that the acquisition of DSP represents a significant opportunity for near term growth and will provide it with a base for building a specialty surgical products business that will enhance long term shareholder value. DSP employs a 70-person sales force, 52 of which are located in the United States, to market its products directly to cardiovascular, general and gynecologic surgeons and hospital purchasing departments throughout the United States and Europe. Genzyme plans to utilize DSP's United States sales force to accelerate the market introduction of its Seprafilm(TM) and Sepracoat(TM) products in the United States. The General Division began marketing Seprafilm(TM) bioresorbable membrane in the Netherlands in November 1995 and in the United Kingdom, France and Germany in April 1996. In March 1996, an advisory panel to the FDA recommended that approval be granted to market Seprafilm(TM) for use in reducing postoperative adhesion formation at the locations in the body and in the abdominal and gynecological surgeries studied in the Company's pivotal clinical trials of the product. Genzyme is working with the FDA to develop appropriate labeling for Seprafilm(TM) and expects to receive approval to market the product in the near future. A PMA application was filed for Sepracoat(TM) in January 1996 and has been accepted for expedited review by the FDA. BUSINESS OF DSP Founded in 1868 and with a product portfolio that includes hundreds of surgical products, DSP is an established brand name in the surgical specialty market. DSP's products can be categorized into three principal product lines: cardiovascular fluid management systems (chest drainage and autotransfusion systems), surgical closure systems (sutures and needles) and surgical instruments (cardiovascular punches and other cardiovascular, plastic surgical and endoscopic instruments). Within each of its product lines, DSP competes primarily on the basis of quality and innovation. Cardiovascular Fluid Management Systems. This product line, which accounted for approximately 44% of DSP's annual revenues for its 1995 fiscal year, consists primarily of self-contained, disposable chest drainage devices used to drain blood from the chest cavity following open heart surgery, other surgical procedures and trauma. If the chest cavity is not properly drained, the patient may suffer collapsed lungs, which often results in death. In 1967, DSP introduced the first self-contained, disposable chest drainage unit, Pleur-evac(R), and in December 1995, DSP acquired a line of dry suction-controlled chest drainage and autotransfusion devices sold under the Thora-Klex(R) brand name. DSP's autotransfusion devices allow the collection of blood shed by the patient and its reinfusion postoperatively, thus eliminating the risks associated with blood transfusions. Surgical Closure Systems. Surgical sutures, which are sold in kits consisting of suture/needle combinations, are DSP's oldest product line and accounted for approximately 31% of DSP's fiscal 1995 revenues. The 22 24 company developed Tevdek(R) surgical sutures in 1950, the first coated Dacron-based suture, followed by Silky Polydek, a softer, easier to handle and tie suture. DSP emphasizes high quality specialty sutures for cardiovascular and plastic surgery, utilizing special materials, advanced metallurgy and packaging innovations. Approximately 42% of DSP's United States sales are attributable to high margin "specials" in which individual surgeons order nonstandard products and customized suture/needle combinations for specific procedures. Surgical Instruments. DSP's surgical instruments product line accounted for approximately 25% of fiscal 1995 revenues. The company sells cardiovascular punches, which are used during coronary artery bypass surgery to make cleanly cut holes, and hand-held, reusable instruments such as needleholders, scissors, forceps, graspers, dissectors and retractors. The company's instruments are used in cardiovascular, plastic, endoscopic and general surgery. In April 1994, DSP acquired Snowden-Pencer, Inc., a manufacturer of specialty surgical instruments and accessories that was well known in the surgical community in part due to its history of working directly with leading surgeons to design and develop new surgical instruments. In addition to expanding DSP's product line with technologically advanced products, the Snowden-Pencer, Inc. acquisition provided DSP with a strong marketing focus. DSP's surgical instruments are sold directly to the surgeon, the key decision maker on purchases of specialty instruments. DSP manufactures its products at facilities located in Fall River, Massachusetts, Tucker, Georgia and Coventry, Connecticut and has sales offices in Germany and France. The company has approximately 585 employees. GENETRIX ACQUISITION On May 1, 1996, Genzyme acquired Genetrix, Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Stock. Approximately 690,000 shares of General Division Stock, valued at approximately $36.5 million, were issued. The acquisition will be accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $35 million, was allocated to goodwill and will be amortized over 11 years. STOCK SPLIT On June 7, 1996, Genzyme announced a two-for-one stock split of the General Division Stock payable July 25, 1996 to stockholders of record on July 11, 1996. Consummation of the stock split is subject to stockholder approval of an increase in the authorized number of shares of General Division Stock to 200 million at a special meeting to be held on July 24, 1996. 23 25 DESCRIPTION OF NOTES The Notes will be issued under an Indenture to be dated as of , 1996 (the "Indenture"), between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"). The Indenture will be substantially in the form filed as an exhibit to the Registration Statement of which this Prospectus is a part. The statements under this caption relating to the Indenture and the Notes are summaries and do not purport to be complete. Such summaries make use of certain terms defined in the Indenture and are qualified in their entirety by express reference to the Indenture. The terms of the Notes will also include those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended. For purposes of this section, the term "Company" means only Genzyme Corporation and not its subsidiaries. GENERAL The Notes will be general unsecured obligations of the Company limited to an aggregate principal amount of $225,000,000 ($250,000,000 if the Underwriter's over-allotment option is exercised in full). The Notes will bear interest from the closing date ( , 1996) at the rate set forth on the cover page of this Prospectus, will mature on , 2001 (unless earlier redeemed at the option of the Company, converted into General Division Stock at the option of the holder or repurchased by the Company at the option of the holder upon a Fundamental Change) and will be subordinated obligations of the Company. Interest will be payable semiannually, on and , commencing , 1996, to the registered holders of record on the preceding and , respectively. Although the Notes are general obligations of the Company, principal and interest will be paid from funds allocated for financial statement presentation purposes to the General Division. Holders of the Notes will have no specific claim against the assets attributable to the General Division. The Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and integral multiples thereof. As described below under "-- Book-Entry, Delivery and Form," the Notes will be represented by one or more global notes (the "Global Notes") registered in the name of or held by DTC or its nominee. Payments of principal of and premium, if any, and interest on the Global Notes will be made in immediately available funds to DTC or its nominee, as the case may be, as the registered holder of such Global Notes. See "-- Settlement and Payment." The Indenture will not contain any restrictions on the payment of dividends or the repurchase of securities of the Company or any financial covenants. The Indenture will contain no covenants or other provisions to afford protection to holders of Notes in the event of a highly leveraged transaction or a change in control of the Company except to the extent described under "-- Repurchase at Option of Holder Upon a Fundamental Change." CONVERSION RIGHTS The Notes will be convertible at their principal amount into General Division Stock at any time prior to redemption, repurchase or maturity, in whole or from time to time in part (in denominations of $1,000 and integral multiples thereof), at the option of the holder thereof, initially at the conversion price stated on the cover page of this Prospectus, subject to adjustment as described below. The right to convert Notes which are called for redemption will terminate at the close of business on the business day immediately preceding the redemption date (unless, in any case, the Company defaults in payment of the redemption price, in which case the conversion right will terminate on the date such default is cured) and will be lost if not exercised prior to that time, even if redemption occurs at a time when conversion of the Notes or portion thereof is in the best interests of the holder. The right of conversion attaching to any Note may be exercised (a) if such Note is represented by a Global Note, by book-entry transfer to the conversion agent (which will initially be the Trustee) through the facilities of DTC, or (b) if definitive Notes have been issued, by delivery at the specified office of a conversion agent, accompanied, in either case, by a duly signed and completed notice of conversion. The conversion date shall be the date on which the Note and the duly signed and completed notice of conversion shall have been so delivered. A holder delivering a Note for conversion will not be required to pay any taxes or duties payable in 24 26 respect of the issue or delivery of General Division Stock upon conversion, but will be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue or delivery of the General Division Stock in a name other than the holder of the Note. Certificates representing shares of General Division Stock will not be issued or delivered unless all taxes and duties, if any, payable by the holder have been paid. The conversion privilege and price will be subject to adjustment upon the occurrence of certain events, including (i) the issuance of capital stock of the Company as a dividend (or other distribution) on the General Division Stock, (ii) the distribution to all holders of General Division Stock of rights or warrants entitling them to subscribe for or purchase General Division Stock at less than the current market price (as defined in the Indenture) on the record date for such issuance, (iii) subdivisions, combinations and certain reclassifications of General Division Stock, (iv) the distribution to all holders of General Division Stock of cash, debt or other securities (other than General Division Stock) or other assets (excluding dividends or distributions for which an adjustment is required to be made under (ii) above or (v) below), (v) a dividend or other distribution consisting exclusively of cash to all holders of General Division Stock, excluding (A) cash dividends that do not exceed the per share amount of the immediately preceding regular cash dividend (as adjusted to reflect any of the events referred to in clauses (i) through (vi) of this sentence) and (B) cash dividends if the annualized per share amount thereof does not exceed 15% of the current market price of General Division Stock as of the trading day immediately preceding the date of declaration of such dividend; and (vi) payment to holders of General Division Stock in respect of a tender or exchange offer (other than an odd-lot offer) by the Company or any subsidiary of the Company for General Division Stock at a price in excess of 110% of the current market price of General Division Stock as of the trading day next succeeding the last date tenders or exchanges may be made pursuant to such tender or exchange offer. No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment will be made with respect to clause (iv) above if, in lieu of such adjustment, the holders of the Notes, upon conversion, will be entitled to receive, in addition to the shares of General Division Stock into which such Notes are convertible, the kind and amount of shares, evidences of indebtedness or assets comprising the distribution that such holders would have received had they converted their Notes immediately prior to the record date for determining the stockholders entitled to receive such distribution. The Company from time to time may voluntarily reduce the conversion price for a period of at least twenty days. Fractional shares of General Division Stock will not be issued upon conversion, but, in lieu thereof, the Company will pay a cash adjustment based upon the market price of the General Division Stock. No payment or adjustment will be made for interest accrued on a converted Note or for dividends or distributions on any General Division Stock issued upon conversion of any Note. Subject to the rights of holders of the Notes described below under "-- Repurchase at Option of Holder Upon a Fundamental Change," if the Company consolidates with or merges into or transfers or leases all or substantially all of its assets to any person, or is a party to a merger that reclassifies or changes its outstanding General Division Stock, the holder of each Note then outstanding shall after such consolidation, merger, transfer or lease have the right to convert such Note into the kind and amount of shares of stock, other securities or property (which may include cash), that such holder would have been entitled to receive upon such consolidation, merger, transfer or lease if such holder had held the General Division Stock issuable upon the conversion of such Note immediately prior to such consolidation, merger, transfer or lease (assuming, in a case in which the Company's stockholders may exercise rights of election, that a holder of Notes would not have exercised any rights of election as to the stock, other securities or other property or assets receivable in connection therewith and received per share the kind and amount received per share by a plurality of non-electing shares). 25 27 REDEMPTION AT THE COMPANY'S OPTION The Notes may not be redeemed prior to , 1999 and are redeemable on such date and thereafter at the option of the Company, as a whole or from time to time in part, at the following prices (expressed as percentages of the principal amount) plus accrued interest to, but not including, the redemption date, if redeemed during the twelve-month period beginning of the years indicated below:
YEAR PERCENTAGE -------------------------------------------------------------------------- ---------- 1999...................................................................... % 2000 and thereafter....................................................... %
Notice of redemption at the Company's option will be mailed at least 30 days, but not more than 60 days, before the redemption date to the registered address of each holder of Notes to be redeemed. If fewer than all the Notes are to be redeemed, selection of Notes for redemption will be made by the Trustee by lot, or in its discretion, on a pro rata basis. If any Notes are to be redeemed in part only, the notice of redemption relating to such Notes shall state the portion of the principal amount (in integral multiples of $1,000) to be redeemed. In that case, new Notes in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender to the Trustee of the original Notes. No sinking fund is provided for the Notes. REPURCHASE AT OPTION OF HOLDER UPON A FUNDAMENTAL CHANGE If a Fundamental Change occurs, each holder of Notes shall have the right, at the holder's option, to require the Company to repurchase all of such holder's Notes, or any portion thereof that is an integral multiple of $1,000, on the date (the "Repurchase Date") selected by the Company that is not less than ten nor more than 30 days after the Final Surrender Date (as defined below), at a price equal to 100% of the principal amount of the Notes, plus accrued interest to the Repurchase Date. Within 30 days after the occurrence of a Fundamental Change, the Company is obligated to mail to all holders of record of the Notes a notice (the "Company Notice") describing, among other things, the occurrence of such Fundamental Change and of the repurchase right arising as a result thereof. The Company must deliver a copy of the Company Notice to the Trustee and cause a copy of such notice to be published in a newspaper of general circulation in the Borough of Manhattan, The City of New York. To exercise the repurchase right, a holder of Notes must surrender, on or before the date which is, subject to any contrary requirements of applicable law, 60 days after the date of mailing of the Company Notice (the "Final Surrender Date"), irrevocable written notice to the Company (or an agent designated by the Company for such purpose) and the Trustee of the holder's exercise of such right together with the Notes (if such Note is represented by a Global Note, by book-entry transfer to the conversion agent through the facilities of DTC) with respect to which the right is being exercised, duly endorsed for transfer to the Company, together with a written notice of election. The submission of such notice together with such Notes pursuant to the exercise of a repurchase right will be irrevocable on the part of the holder (unless the Company fails to repurchase the Notes on the repurchase date) and the right to convert the Notes will expire upon such submission. The term "Fundamental Change" shall mean any of the following: (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Shares (as defined below) of the Company entitled to exercise more than 50% of the total voting power of all outstanding Voting Shares of the Company (including any Voting Shares that are not then outstanding of which such person or group is deemed the beneficial owner); or (ii) a change in the Board of Directors of the Company in which the individuals who constituted the Board of Directors of the Company at the beginning of the two-year period immediately preceding such change (together with any other director whose election by the Board of Directors of the Company or whose nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds of the directors then in office who either were directors at the beginning of such period or 26 28 whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office; or (iii) any consolidation of the Company with, or merger of the Company into, any other person, any merger of another person into the Company, or any sale or transfer of all or substantially all of the assets of the Company to another person (other than (a) a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of General Division Stock, (b) a merger which is effected solely to change the jurisdiction of incorporation of the Company or (c) any consolidation with or merger of the Company into a wholly owned subsidiary of the Company, or any sale or transfer by the Company of all or substantially all of its assets to one or more of its wholly owned subsidiaries, in any one transaction or a series of transactions, provided, in any such case, that the resulting corporation or each such subsidiary assumes or guarantees the Company's obligations under the Notes); provided, however, that a Fundamental Change shall not occur with respect to any such transaction if either (i) the last sale price of the General Division Stock for any five trading days during the ten trading days immediately preceding the public announcement by the Company of such transaction is at least equal to 105% of the conversion price in effect on such trading day or (ii) the consideration in such transaction to the holders of General Division Stock consists of cash, securities that are, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, shall be equal to the average of the last sale prices of such securities during the ten consecutive trading days commencing with the sixth trading day following consummation of the transaction) is at least 105% of the conversion price in effect on the date immediately preceding the closing date of such transaction. "Voting Shares" is defined to mean all outstanding shares of any class or classes (however designated) of capital stock entitled to vote generally in the election of members of the Board of Directors and includes, without limitation, the General Division Stock and the TR Stock. The right to require the Company to repurchase the Notes as a result of the occurrence of a Fundamental Change could create an event of default under existing or future Senior Indebtedness of the Company, as a result of which any repurchase could, absent a waiver, be blocked by the subordination provisions of the Notes. See "Description of Notes -- Subordination." Failure by the Company to repurchase the Notes when required will result in an Event of Default with respect to the Notes whether or not such repurchase is permitted by the subordination provisions. The holders' repurchase right upon the occurrence of a Fundamental Change could, in certain circumstances, make more difficult or discourage a potential takeover of the Company and, thus, removal of incumbent management. The Fundamental Change repurchase right, however, is not the result of management's knowledge of any specific effort to accumulate shares of General Division Stock or to obtain control of the Company by means of a merger, tender offer, solicitation or otherwise. Instead, the Fundamental Change purchase feature is a standard term contained in other similar debt offerings and the terms of such feature have resulted from negotiations between the Company and the Underwriter. The Indenture does not permit the Company's Board of Directors to waive the Company's obligation to purchase Notes at the option of a holder in the event of a Fundamental Change. The Company could, however, in the future, enter into certain transactions, including highly leveraged recapitalizations, that would not constitute a Fundamental Change and would, therefore, not provide the holders with the protection of requiring the Company to repurchase the Notes. Rule 13e-4 under the Exchange Act requires the dissemination of certain information to security holders in the event of an issuer tender offer and may apply in the event that the repurchase option becomes available to holders of the Notes. The Company will comply with this rule to the extent applicable at that time. 27 29 SUBORDINATION The payment of the principal of, and premium, if any, and interest on, the Notes will be subordinated in right of payment to the extent set forth in the Indenture to the prior payment in full of amounts then due on all Senior Indebtedness, as defined in the Indenture. In addition, the Notes are effectively subordinated in right of payment to third party indebtedness of the Company's subsidiaries. As of March 31, 1996, as adjusted to give effect to this offering and the anticipated use of the net proceeds therefrom, the Company and its subsidiaries would have had an aggregate of $34,648,000 of consolidated indebtedness and other obligations effectively ranking senior to the Notes. Upon the maturity of Senior Indebtedness, whether by acceleration or otherwise, or any distribution of assets of the Company resulting from any liquidation, dissolution, winding up, reorganization or any insolvency proceedings of the Company, the holders of all Senior Indebtedness will first be entitled to receive payment in full before the holders of the Notes will be entitled to receive any payment of the principal of, or premium, if any, or interest on, the Notes. During the continuance of any default with respect to Senior Indebtedness entitling the holders thereof to accelerate the maturity thereof, or if any such default would be caused by any payment upon or in respect of the Notes, no payment may be made by the Company upon or in respect of the Notes. By reason of such subordination, in the event of insolvency, holders of the Notes may recover less, ratably, than other creditors of the Company. "Senior Indebtedness" is defined to mean: (a) the principal of, interest on and any other amounts owing with respect to (i) any indebtedness of the Company, now or hereafter outstanding, in respect of borrowed money (other than the Notes), (ii) any indebtedness of the Company, now or hereafter outstanding, evidenced by a bond, note, debenture, capitalized lease, letter of credit or other similar instrument, (iii) any other written obligation of the Company, now or hereafter outstanding, to pay money issued or assumed as all or part of the consideration for the acquisition of property, assets or securities and (iv) any guaranty or endorsement (other than for collection or deposit in the ordinary course of business) or discount with recourse of, or other agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire, to supply or advance funds or to become liable with respect to (directly or indirectly), any indebtedness or obligation of any person of the type referred to in the preceding subclauses (i), (ii) and (iii) now or hereafter outstanding, and (b) any refundings, renewals or extensions of any indebtedness or other obligation described in clause (a); unless, in the case of any of the foregoing, the instrument, lease or other document creating or evidencing the same expressly provides that such indebtedness or obligation by its terms is not senior in right of payment to the Notes. The Indenture does not contain any limitation or restriction on the issuance of Senior Indebtedness or other indebtedness or securities of the Company or its subsidiaries. The Indenture permits the Trustee to become a creditor of the Company and does not preclude the Trustee from enforcing its rights as a creditor, including rights as a holder of Senior Indebtedness. See "Concerning the Trustee." In the event that the Trustee or any holder of Notes receives any payment or distribution of assets of the Company of any kind in contravention of any of the terms of the Indenture, whether in cash, property or securities, including, without limitation, by way of set-off or otherwise, in respect of the Notes before all Senior Indebtedness is paid in full, then such payment or distribution will be held by the recipient in trust for the benefit of holders of Senior Indebtedness of the Company or their representative or representatives to the extent necessary to make payment in full of all Senior Indebtedness of the Company remaining unpaid, after giving effect to any concurrent payment or distribution, or provision therefor, to or for the holders of Senior Indebtedness of the Company. Any right of the Company to receive assets of any of its subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Notes to participate in these assets) will be effectively subordinated to the claims of that subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinate to any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company and would be subject to judicial power to subordinate the Company's claim to those of other creditors of such subsidiary in certain cases. 28 30 The Company will be obligated to pay reasonable compensation to the Trustee and to indemnify the Trustee against any losses, liabilities or expenses incurred by it in connection with its duties relating to the Notes. The Trustee's claims for such payments will be senior to those of holders of the Notes in respect of all funds collected or held by the Trustee. EVENTS OF DEFAULT AND NOTICE THEREOF The following are Events of Default: (a) a default in the payment of any interest on the Notes continued for 30 days, (b) a default in the payment of principal of or premium, if any, on the Notes or of the repurchase price in respect of any Note when due, (c) a default in the performance of any other covenant or agreement of the Company in the Indenture continued for 60 days after written notice to the Company by the Trustee or the holders of at least 25% in principal amount of outstanding Notes, (d) failure by the Company to make any payment when due, including any applicable grace period, in respect of indebtedness for borrowed money of the Company, which payment is in an amount in excess of $20 million, (e) default by the Company with respect to any indebtedness for borrowed money of the Company, which default results in acceleration of any such indebtedness which is in an amount in excess of $20 million, and (f) certain events of bankruptcy, insolvency or reorganization. If an Event of Default shall occur and be continuing and if it is known to the Trustee, the Trustee is required to mail to each holder of the Notes a notice of the Event of Default within 90 days after such default occurs. Except in the case of a default in payment of the principal of or premium, if any, or interest on any Note, the Trustee may withhold the notice if and so long as the Trustee in good faith determines that withholding the notice is in the interests of the holders of the Notes. If an Event of Default shall occur and be continuing, the Trustee or the holders of not less than 25% in principal amount of outstanding Notes may declare the principal of, and accrued interest on, all the Notes to be due and payable immediately. Holders of the Notes may not enforce the Indenture or Notes except as provided in the Indenture. Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any holders of the Notes, unless the holders shall have offered the Trustee indemnity reasonably satisfactory to it. Subject to the indemnification provisions and certain limitations contained in the Indenture, the holders of a majority in principal amount of the Notes at the time outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Those holders may, in certain cases, waive any default except a default in payment of principal of, or premium, if any, or interest on, the Notes or a failure to comply with certain provisions of the Indenture relating to conversion of the Notes. The Company is required to furnish the Trustee annually with a certificate as to the compliance with the conditions and covenants provided for in the Indenture. DISCHARGE The Indenture provides that the Company may terminate its obligations under the Indenture at any time by delivering all outstanding Notes to the Trustee for cancellation. At any time within one year of the maturity of the Notes or the redemption of all the Notes, the Company may terminate its substantive obligations under the Indenture, other than its obligations to pay the principal of, and interest on, the Notes at any time, by depositing with the Trustee, money or U.S. Government obligations sufficient to pay all remaining indebtedness on the Notes when due. MERGER AND CONSOLIDATION The Company may not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets to, another corporation, person or entity unless (i) the Company is the 29 31 surviving person or the successor or transferee is a corporation organized under the laws of the United States, any state thereof or the District of Columbia, or a corporation or comparable legal entity organized under the laws of a foreign jurisdiction and whose equity securities are listed on a national securities exchange in the United States or authorized for quotation on the Nasdaq National Market, (ii) the successor assumes all the obligations of the Company under the Notes and the Indenture and (iii) after such transaction no Event of Default exists. MODIFICATION AND WAIVER Subject to certain exceptions, supplements of and amendments to the Indenture or the Notes may be made by the Company and the Trustee with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding Notes and any existing default of compliance with any provisions may be waived with the consent of the holders of a majority in aggregate principal amount of the outstanding Notes. Without the consent of any holders of the Notes, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to holders of the Notes in case of a merger or acquisition otherwise in compliance with the Indenture or to make any change that does not materially adversely affect the rights of any holder of the Notes. Without the consent of the holder of each Note affected thereby, an amendment, supplement or waiver may not (a) change the stated maturity date of the principal of, or interest on, any Note, or adversely affect the right to convert any Note, (b) reduce the principal or repurchase price of, or interest or premium, if any, on, any Note, (c) change the currency for payment of principal of, or interest on, any Note, (d) impair the right to institute suit for the enforcement of any payment on or with respect to any Note, (e) modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the holders, (f) reduce the above stated percentage of outstanding Notes necessary to amend or supplement the Indenture or waive defaults or compliance or (g) modify (with certain exceptions) any provisions of the Indenture relating to modification and amendment of the Indenture or waiver of compliance with conditions and defaults thereunder. CONCERNING THE TRUSTEE State Street Bank and Trust Company, the Trustee under the Indenture, has been appointed by the Company as the initial paying agent, conversion agent and registrar with regard to the Notes. The Company and its subsidiaries may maintain deposit accounts and conduct other banking transactions with the Trustee or its affiliates in the ordinary course of business, and the Trustee and its affiliates may from time to time in the future provide the Company with banking and financial services in the ordinary course of their business. In case an Event of Default shall occur (and shall not be cured) and holders of the Notes have notified the Trustee, the Trustee will be required to exercise its powers with the degree of care and skill of a prudent person in the conduct of such person's own affairs. Subject to such provisions, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of Notes, unless they shall have offered to the Trustee security and indemnity satisfactory to it. BOOK-ENTRY, DELIVERY AND FORM Upon issuance, the Notes will be represented by a Global Note or Notes. Each Global Note will be deposited with, or on behalf of, DTC and registered in the name of a nominee of DTC. Except under the limited circumstances described below, Global Notes will not be exchangeable for definitive certificated Notes. Ownership of beneficial interests in a Global Note will be limited to institutions that have accounts with DTC or its nominee ("participants") or persons that may hold interests through participants. In addition, ownership of beneficial interests by participants in such Global Note will be evidenced only by, and the transfer of that ownership interest will be effected only through, records maintained by DTC or its nominee for such Global Note. Ownership of beneficial interests in such Global Note by persons that hold through participants will be evidenced only by, and the transfer of that ownership interest within such participant will 30 32 be effected only through, records maintained by such participant. DTC has no knowledge of the actual beneficial owners of the Notes. Beneficial owners will not receive written confirmation from DTC of their purchase, but beneficial owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the participants through which the beneficial owners entered the transaction. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer beneficial interests in such Global Note. Payment of principal of and premium, if any, and interest on Notes represented by a Global Note registered in the name of or held by DTC or its nominee will be made to DTC or its nominee, as the case may be, as the registered holder of the Global Note representing such Notes. The Company has been advised by DTC that upon receipt of any payment of principal of or premium, if any, or interest on a Global Note, DTC will immediately credit, on its book-entry registration and transfer system, accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown in the records of DTC. Payments by participants to owners of beneficial interests in a Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the sole responsibility of such participants, subject to any statutory or regulatory requirements as may be in effect from time to time. None of the Company, the Trustee or any other agent of the Company or the Trustee will have any responsibility or liability for any aspect of the records of DTC, any nominee or any participant relating to, or payments made on account of, beneficial interests in a Global Note or for maintaining, supervising or reviewing any of the records of DTC, any nominee or any participant relating to such beneficial interests. A Global Note is exchangeable for definitive Notes registered in the name of, and a transfer of a Global Note may be registered to, any person other than DTC or its nominee, only if: (a) DTC notifies the Company that it is unwilling or unable to continue as depository for such Global Note or if at any time DTC ceases to be a clearing agency registered under the Exchange Act; or (b) the Company in its sole discretion determines that such Global Note shall be exchangeable for definitive Notes in registered form. Any Global Note that is exchangeable pursuant to the preceding sentence will be exchangeable in whole for definitive Notes in registered form, of like tenor and of an equal aggregate principal amount as the Global Note, in denominations of $1,000 and integral multiples thereof. Such definitive Notes will be registered in the name or names of such persons as DTC shall instruct the Trustee. The principal, premium, if any, and interest with respect to definitive Notes will be payable, the transfer of the definitive Notes will be registrable, the definitive Notes will be exchangeable, and the definitive Notes may be presented for conversion, at the office or agency of the Company maintained for such purposes, which shall initially be the Corporate Trust Office of the Trustee located in the Borough of Manhattan, The City of New York. In addition, payment of interest on definitive Notes may, at the option of the Company, be made by check mailed to the address of the person entitled thereto as it appears in the Note register. Interest payable to any holder of such Notes having an aggregate principal amount in excess of $5,000,000 shall, at the election of such holder in writing to the Trustee at least 10 days prior to the date of payment, be paid by wire transfer in immediately available funds. The Company will not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the date of the mailing of a notice of redemption and ending at the close of business on the date of such mailing, or (ii) to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of Notes being redeemed in part. Except as provided above, owners of beneficial interests in a Global Note will not be entitled to receive physical delivery of Notes in definitive form and will not be considered the holders thereof for any purpose under the Indenture, and no Global Note shall be exchangeable except for another Global Note of like denomination and tenor to be registered in the name of DTC or its nominee. Accordingly, each person owning 31 33 a beneficial interest in such Global Note must rely on the procedures of DTC and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the Global Note. The Company understands that, under existing industry practices, in the event that the Company requests any action of holders, or an owner of a beneficial interest in such Global Note desires to give or take any action that a holder is entitled to give or take under the Notes, DTC would authorize the participants holding the relevant beneficial interests to give or take such action, and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. DTC has advised the Company that DTC is a limited purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under the Exchange Act. DTC was created to hold securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. DTC's participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its participants and by the New York Stock Exchange, the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. The rules applicable to DTC and its participants are on file with the Commission. SETTLEMENT AND PAYMENT Settlement for the Notes will be made in immediately available funds on the closing date ( , 1996). So long as the Notes are represented by a Global Note or Notes, all payments of principal, premium, if any, and interest will be made by the Company in immediately available funds. GOVERNING LAW The Indenture and Notes will be governed by and construed in accordance with the laws of the State of New York, without giving effect to such State's conflicts of law principles. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of certain United States federal income tax considerations relevant to holders of the Notes. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations thereunder, Internal Revenue Service ("IRS") rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or to different interpretations. This discussion does not purport to deal with all aspects of federal income taxation that may be relevant to a particular investor's decision to purchase the Notes, and it is not intended to be wholly applicable to all categories of investors, some of which (such as dealers in securities, banks, insurance companies, tax-exempt organizations and non-United States persons) may be subject to special rules. In addition, this discussion is limited to persons that purchase the Notes pursuant to this Prospectus and hold the Notes as "capital assets" within the meaning of Section 1221 of the Code. PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE GENERAL DIVISION STOCK. 32 34 CONVERSION OF NOTES INTO GENERAL DIVISION STOCK In general, no gain or loss will be recognized for income tax purposes on a conversion of the Notes into shares of General Division Stock. However, cash paid in lieu of a fractional share of General Division Stock will result in taxable gain (or loss), which will be capital gain (or loss) to the extent that the amount of such cash exceeds (or is exceeded by) the portion of the adjusted basis of the Note allocable to such fractional share. The adjusted basis of shares of General Division Stock received on conversion will equal the adjusted basis of the Note converted, reduced by the portion of adjusted basis allocated to any fractional share of General Division Stock exchanged for cash. The holding period of an investor in the General Division Stock received on conversion will include the period during which the converted Note was held. The conversion price of the Notes is subject to adjustment under certain circumstances. See "Description of Notes -- Conversion Rights." Section 305 of the Code and the Treasury Regulations issued thereunder may treat the holders of the Notes as having received a constructive distribution, resulting in ordinary income to the extent of the Company's current earnings and profits, if and to the extent that certain adjustments in the conversion price that may occur in limited circumstances (particularly an adjustment to reflect a taxable dividend to holders of General Division Stock) increase the proportionate interest of a holder of Notes in the fully diluted General Division Stock, whether or not such holder ever exercises its conversion privilege. Moreover, if there is not a full adjustment to the conversion price of the Notes to reflect a stock dividend or other event increasing the proportionate interest of the holders of outstanding General Division Stock in the assets or earnings and profits of the Company, then such increase in the proportionate interest of the holders of the General Division Stock generally will be treated as a distribution to such holders, taxable as ordinary income to the extent of the Company's earnings and profits. The Company believes that the General Division Stock should be treated as common stock of the Company. Holders should be aware, however, that there are no federal income tax regulations, court decisions or published IRS rulings bearing directly on the characterization of the General Division Stock. In addition, the IRS announced in 1987 that it was studying the federal income tax consequences of stock that has certain voting and liquidation rights in an issuing corporation, but whose dividend rights are determined by reference to the earnings and profits of a segregated portion of the issuing corporation's assets, and would not issue any advance rulings regarding such stock. During 1995, the IRS withdrew such stock from its list of matters under consideration and reiterated that is would not issue advance rulings regarding such stock. It is possible that the IRS might take the position that the General Division Stock represents property other than stock of the Company, with the result that (i) a portion of the purchase price of the Notes could be allocated to the conversion right, potentially resulting in the Notes being issued with original issue discount, and (ii) the conversion of Notes into shares of General Division Stock would be a taxable transaction. MARKET DISCOUNT Under the market discount rules, if a holder purchases a Note at market discount (i.e., at a price below its stated redemption price at maturity) in excess of a statutorily-defined de minimis amount and thereafter recognizes gain upon a disposition or retirement of the Note, then the lesser of the gain recognized or the portion of the market discount that accrued on a ratable basis (or, if elected, on a constant interest rate basis) generally will be treated as ordinary income at the time of the disposition. Any accrued market discount not previously taken into income prior to a conversion of a Note, however, should (under Treasury Regulations not yet issued) carry over to the General Division Stock received on conversion and be treated as ordinary income upon a subsequent disposition of such General Division Stock to the extent of any gain recognized on such disposition. In addition, absent an election to include market discount in income as it accrues, a holder of a market discount debt instrument may be required to defer a portion of any interest expense that otherwise may be deductible on any indebtedness incurred or maintained to purchase or carry such debt instrument until the holder disposes of the debt instrument in a taxable transaction. 33 35 SALE, EXCHANGE OR RETIREMENT OF NOTES Each holder of Notes generally will recognize gain or loss upon the sale, exchange, redemption, repurchase, retirement or other disposition of the Notes (not including a conversion of the Notes into General Division Stock) measured by the difference (if any) between (i) the amount of cash and the fair market value of any property received (except to the extent that such cash or other property is attributable to the payment of accrued interest not previously included in income, which amount will be taxable as ordinary income) and (ii) the holder's adjusted tax basis in those Notes (including any market discount previously included in income by the holder). Each holder of General Division Stock into which the Notes are converted, in general, will recognize gain or loss upon the sale, exchange or other disposition of the General Division Stock measured under rules similar to those described in the preceding sentence for the Notes. Any such gain or loss recognized on the sale, exchange, repurchase, retirement or other disposition of a Note or share of General Division Stock should be capital gain or loss (except as discussed under "-- Market Discount" above), and would be long-term capital gain or loss if the Note or the General Division Stock had been held for more than one year at the time of the sale or exchange. An investor's initial basis in a Note will be the cash price paid therefor. BACKUP WITHHOLDING A holder of Notes or General Division Stock may be subject to backup withholding at a rate of 31% with respect to certain reportable payments, including interest payments, dividend payments and, under certain circumstances, principal payments on the Notes. These backup withholding rules apply if the holder, among other things, (i) fails to furnish a social security number or other taxpayer identification number ("TIN") certified under penalties of perjury within a reasonable time after the request therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly interest or dividends or (iv) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that the TIN furnished is the correct number and that such holder is not subject to backup withholding. A holder who does not provide the Company with its correct TIN also may be subject to penalties imposed by the IRS. Any amount withheld from a payment to a holder under the backup withholding rules is creditable against the holder's federal income tax liability, provided the required information is furnished to the IRS. Backup withholding will not apply, however, with respect to payments made to certain holders, including corporations, tax-exempt organizations and certain foreign persons, provided their exemption from backup withholding is properly established. The Company will report to the holders of Notes and General Division Stock and to the IRS the amount of any reportable payments for each calendar year and the amount of tax withheld, if any, with respect to such payments. DESCRIPTION OF GENZYME CAPITAL STOCK The following descriptions are qualified in their entirety by reference to the Articles of Organization of Genzyme Corporation. GENERAL Genzyme is authorized to issue 150 million shares of capital stock, consisting of 100 million shares of General Division Stock, 40 million shares of TR Stock and 10 million shares of Preferred Stock. On July 24, 1996 a special meeting of Genzyme's stockholders will be held for the purpose of voting on an amendment to Genzyme's Articles of Organization that would increase the number of shares of General Division Stock Genzyme is authorized to issue to 200 million. See "Business -- Recent Developments." Each class of common stock has the voting powers, qualifications and rights described below. DIVIDENDS Genzyme's Articles of Organization provide that dividends on the General Division Stock may be declared and paid only out of the lesser of (a) funds of Genzyme legally available therefor and (b) the 34 36 Available General Dividend Amount, as defined below, and that dividends on the TR Stock may be paid out of the lesser of (a) funds of Genzyme legally available therefor and (b) the Available Tissue Repair Dividend Amount, as defined below. Under the Massachusetts Business Corporations Law (the "MBCL"), the payment of dividends is permitted if the corporation is not insolvent, the dividend payment does not render the corporation insolvent, and the dividend payment does not violate the corporation's Articles of Organization. Subject to such limitations, the Board may, in its sole discretion, declare and pay dividends exclusively on either class of common stock, or both, in equal or unequal amounts, notwithstanding the amounts available for the payment of dividends on each class, the respective voting and liquidation rights of each class, the amounts of prior dividends declared on each class or any other factor. Genzyme has never paid a cash dividend on any class of its capital stock and currently intends to retain all earnings for use in its business. As stated above, in addition to the statutory limitations under the MBCL, dividends on the General Division Stock and TR Stock would be limited to an amount not in excess of the Available General Dividend Amount or the Available Tissue Repair Dividend Amount, respectively. The "available dividend amount" for each of the General Division Stock and the TR Stock is defined to mean generally the greater of (A) the excess of (1) the greater of (a) the fair value of the net assets allocated to the division represented by such class of common stock and (b) an amount equal to stockholders' equity allocated to such division as of June 30, 1994, increased or decreased, as appropriate, to reflect, after June 30, 1994, (i) the net income or loss of such division, (ii) any dividends or other distributions (including by reclassification or exchange) declared or paid with respect to, or repurchases or issuances of, any shares of capital stock attributed to such division, but excluding dividends or other distributions paid in shares of capital stock attributed to such division to the holders thereof, and (iii) any other adjustments to the stockholders' equity of such division made in accordance with generally accepted accounting principles, over (2) the aggregate par value of all outstanding shares of capital stock attributed to such division or (B) the amount legally available for the payment of dividends determined in accordance with the MBCL applied as if such division were a separate corporation. EXCHANGE OF TR STOCK Genzyme's Articles of Organization do not provide for either mandatory or optional exchange or redemption of the General Division Stock, but do provide that TR Stock may be exchanged for any combination of cash and/or General Division Stock upon the terms described below. Genzyme cannot predict the impact of its ability to effect such exchanges on the market prices of the General Division Stock and TR Stock. Optional Exchange. At any time after the later of (A) December 31, 1995 or (B) the date on which equity investments in TR Stock by third-party investors or the allocation of cash or cash equivalents from the General Division to GTR, or any combination of such equity investments and allocations, equals an aggregate of at least $10 million, the Board may determine to exchange all outstanding shares of TR Stock for any combination of cash and/or General Division Stock having a Fair Market Value equal to 130% of the Fair Market Value of TR Stock as determined by the trading prices during a specified period prior to the first public announcement by Genzyme of such exchange. Equity investments in TR Stock have exceeded $10 million, and, as a result, the Board could elect to make such an exchange at any time. The foregoing provision allows Genzyme the flexibility to redeem all outstanding shares of TR Stock and leave outstanding one class of common stock that would represent the residual equity interest in all of Genzyme's businesses. Subject to the limitations described above, the optional exchange could be exercised at any future time if the Board determined that, under the facts and circumstances then existing, an equity structure consisting of two classes of common stock was no longer in the best interests of all of Genzyme's stockholders (including holders of General Division Stock and holders of TR Stock). Mandatory Exchange. In the event of the Disposition, in one transaction or a series of related transactions, by Genzyme of all or substantially all of the properties and assets allocated to GTR (other than in connection with the Disposition by Genzyme of all or substantially all of its properties and assets in one transaction or a series of related transactions) to any person, entity or group (other than (A) any entity in which Genzyme, directly or indirectly, owns all of the equity interest or (B) certain entities formed in 35 37 connection with obtaining financing for the programs or products of GTR), Genzyme is required, on or prior to the first business day following the 90th day following the consummation of such Disposition, to exchange each outstanding share of TR Stock for any combination of cash and/or General Division Stock having a Fair Market Value equal to 130% of the Fair Market Value of TR Stock as determined by the trading prices during a specified period prior to the first public announcement by Genzyme of such disposition. Consequently, holders of TR Stock may receive a greater or lesser premium for their shares than any premium paid by a third-party buyer of the assets of GTR. In addition, any such exchange for shares of General Division Stock could be made at a time that is disadvantageous to the holders of either General Division Stock or the holders of TR Stock. Certain Other Exchange Terms. "Fair Market Value" as of any date means the average of the daily closing prices as reported by the Nasdaq National Market (or the appropriate exchange on which such shares are then traded) for the 20 consecutive days commencing on the 30th trading day prior to such date. In the event such closing prices are unavailable, Fair Market Value will be determined by the Board. Genzyme's Articles of Organization contain the definitions of "Disposition" and "Substantially all of the properties and assets of GTR," as well as certain provisions with regard to required notices of exchanges of TR Stock, treatment of fractional shares, rights to dividends, surrender and exchange of stock certificates, payment of issue and transfer taxes and the treatment of Convertible Securities. VOTING RIGHTS Genzyme's Articles of Organization provide that holders of shares of General Division Stock and TR Stock vote together as a single class on all matters as to which common stockholders generally are entitled to vote. On all such matters, each share of General Division Stock has one vote, and through December 31, 1996 each share of TR Stock has .29 votes. As of May 31, 1996, holders of outstanding General Division Stock and TR Stock had approximately 90.4% and 9.6%, respectively, of the total voting power of Genzyme. On January 1, 1997 and on January 1 every two years thereafter, the number of votes to which each share of TR Stock is entitled would be adjusted to equal the ratio of the Fair Market Value of one share of TR Stock to the Fair Market Value of one share of General Division Stock as of such date. The voting rights of TR Stock will also be appropriately adjusted so as to avoid dilution in the aggregate voting rights of either class in the event the outstanding shares of either class are subdivided (by stock split, reclassification or otherwise) or combined (by reverse stock split, reclassification or otherwise), or in the event of the issuance of shares of either class as a dividend or a distribution to holders of shares of that class. If shares of only one class of common stock are outstanding, or if shares of any class of common stock are entitled to vote separately as a class, each share of that class would have one vote. The relative voting rights of General Division Stock and TR Stock are adjusted from time to time as described above so that a holder's voting rights may more closely reflect the market value of such holder's equity investment in Genzyme. Adjustments in the relative voting rights of General Division Stock and TR Stock may influence an investor interested in acquiring and maintaining a fixed percentage of Genzyme's voting power to acquire such percentage of both classes of common stock, and will limit the ability of investors in one class to acquire for the same consideration relatively greater or lesser voting power per share than investors in the other class. To the extent the relative market values of General Division Stock and TR Stock change prior to the first scheduled adjustment or in between any scheduled adjustments, however, an investor in one class of common stock may acquire relatively more or less voting power for the same consideration when compared with investors in the other class of common stock. In addition to matters on which the holders of the General Division Stock and the TR Stock vote together as a single class of stock, Genzyme's Articles of Organization require the approval by the holders of the affected class of common stock at a meeting at which a quorum is present and the votes cast in favor of the proposal exceed those cast against to: (1) allow any proceeds from the disposition of the properties or assets allocated to either division to be used in the business of the other division without fair compensation; 36 38 (2) allow any properties or assets allocated to either division to be used in the business of the other division or for the declaration or payment of any dividend or distribution on any class of common stock not attributed to such division without fair compensation; (3) issue shares of either class of common stock without allocating the proceeds of such issuance to the division represented by such class of common stock (provided, however, that Genzyme may without such approval issue General Designated Shares and TR Designated Shares, as each such term is defined below under the heading "TR Designated Shares and General Designated Shares"); (4) change the rights or preferences of any class of common stock so as to affect the class adversely; or (5) effect any merger or business combination involving Genzyme as a result of which (a) the holders of all classes of common stock of Genzyme shall no longer own, directly or indirectly, at least fifty percent (50%) of the voting power of the surviving corporation and (b) the holders of all classes of common stock of Genzyme do not receive the same form of consideration, distributed among such holders in proportion to the market capitalization of each class of common stock as of the date of the first public announcement of such merger or business combination. In addition to the voting rights provided in Genzyme's Articles of Organization, the approval of the holders of a majority of the outstanding shares of each class of common stock, voting separately as a class, is required under the current MBCL to approve any amendment to the Articles of Organization that would alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. The MBCL does not currently provide for any other separate voting rights for a class of common stock. Consequently, because most matters brought to a stockholder vote will only require the approval of a majority of all of Genzyme's outstanding capital stock entitled to vote on such matters (including both classes of common stock) voting together as a single class and because the holders of General Division Stock currently have more than the number of votes required to approve any such matter, such holders would be in a position to control the outcome of the vote on such a matter. See "Risk Factors -- Risks Related to Two Classes of Common Stock -- No Additional Separate Voting Rights." LIQUIDATION RIGHTS Genzyme's Articles of Organization provide that holders of outstanding shares of General Division Stock and TR Stock will receive the assets, if any, remaining for distribution to common stockholders on a per share basis in proportion to the respective per share liquidation units of each class and such holders will have no direct claim against any particular assets of Genzyme or any of its subsidiaries. Each share of General Division Stock will have one liquidation unit and each share of TR Stock will have .29 liquidation units (equal to the number of votes to which each share of TR Stock was entitled on December 16, 1994). The liquidation units of TR Stock will be appropriately adjusted so as to avoid dilution in the aggregate liquidation rights of either class in the event the outstanding shares of either class are subdivided (by stock split, reclassification or otherwise) or combined (by reverse stock split, reclassification or otherwise), or in the event of the issuance of shares of either class as a dividend or a distribution to holders of shares of that class, but will not otherwise be adjusted. A merger or business combination involving Genzyme or a sale of all or substantially all of the assets of Genzyme will not be treated as a liquidation. However, Genzyme may not, without approval by the holders of the affected class of Common Stock at a meeting at which a quorum is present and the votes cast in favor of the action exceed those cast against, effect any merger or business combination involving Genzyme as a result of which (a) the holders of all classes of common stock of Genzyme shall no longer own, directly or indirectly, at least fifty percent of the voting power of the surviving corporation, and (b) the holders of all classes of common stock of Genzyme do not receive the same form of consideration, distributed among such holders in proportion to the market capitalization of each class of common stock as of the date of the first public announcement of such merger or business combination. 37 39 TR DESIGNATED SHARES AND GENERAL DESIGNATED SHARES Prior to the formation of GTR in December 1994, the Board determined that the initial pro forma equity interest in GTR would be represented by 10 million shares of TR Stock. This number of shares of TR Stock was established based on the desired initial trading range of TR Stock, prevailing market conditions, financial and operating information of GTR and the price-earnings ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of GTR. 5 million shares of TR Stock, representing 50% of the initial pro forma equity interest in GTR, were issued in connection with Genzyme's acquisition of BioSurface Technology, Inc. ("BioSurface") to holders of BioSurface Common Stock. The other 50% of the initial pro forma equity interest in GTR was represented by 5 million "TR Designated Shares." TR Designated Shares are authorized shares of TR Stock which are not issued and outstanding, but which the Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GTR. Genzyme issued approximately 3.3 million of such TR Designated Shares as a stock dividend to holders of General Division Stock of record on December 16, 1994, the date of the acquisition of BioSurface. The remaining initial TR Designated Shares were reserved for issuance upon the exercise of General Division stock options and warrants and the conversion of convertible notes outstanding on December 16, 1994. As of June 1, 1996, there were 1,971,122 TR Designated Shares, 1,002,782 of which were reserved for issuance upon the exercise or conversion of outstanding stock options, warrants and notes that are exercisable or convertible into General Division Stock. The shares of TR Stock that are issuable with respect to the TR Designated Shares are not outstanding shares of TR Stock, are not eligible to receive dividends, and cannot be voted by Genzyme. The number of TR Designated Shares is subject to adjustment. The number will be (A) adjusted as appropriate to reflect subdivisions (by stock split or otherwise) and combinations (by reverse stock split or otherwise) of TR Stock and dividends or distributions of shares of TR Stock to holders of TR Stock and other reclassifications of TR Stock, (B) decreased by (1) the number of shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the General Division, (2) the number of shares of TR Stock issued upon the exercise or conversion of options, warrants and other securities attributed to the General Division, and (3) the number of any shares of TR Stock issued by Genzyme as a dividend or distribution or by reclassification, exchange or otherwise to holders of General Division Stock (including the 3.3 million shares of TR Stock distributed to holders of General Division Stock in December 1994 as described above), and (C) increased by (1) the number of any outstanding shares of TR Stock repurchased by Genzyme, the consideration for which was allocated to the General Division, (2) one for each $10.00 reallocated from the General Division to GTR from time to time upon an exercise by the General Division of its option to allocate to GTR up to $30 million in exchange for TR Designated Shares (of which $10 million was allocated by the General Division to GTR on June 14, 1996, resulting in the creation of an additional 1 million TR Designated Shares), and (3) the number equal to the fair value (as determined by the Board) of assets or properties allocated to the General Division that are reallocated to GTR (other than reallocations that represent sales at fair value between such divisions or reallocations described in the foregoing clause (C)(2)) divided by the Fair Market Value of one share of TR Stock as of the date of the reallocation; Genzyme is prohibited by the Articles of Organization from taking any action which would have the effect of reducing the number of TR Designated Shares to a number which is less than zero. Genzyme's Articles of Organization also contain provisions for "General Designated Shares," which are authorized shares of General Division Stock that Genzyme may issue without allocating any consideration to the General Division. Currently, there are no General Designated Shares. However, General Designated Shares may be created if, for example, the Board determines that programs or other assets reallocated from GTR to the General Division will be accounted for as an increase in General Designated Shares rather than as a transfer of cash or other assets of the General Division having a fair value equal to GTR assets reallocated. Notwithstanding the foregoing, by agreement with BioSurface, Genzyme adopted a policy that no Key TR Program (as defined in "Management and Accounting Policies Covering the Relationship of Genzyme Divisions -- Inter-Division Asset Transfers") may be transferred out of GTR without a class vote of the holders of TR Stock except in certain limited circumstances, and no reallocation of other programs or assets of GTR may be accounted for as an increase in General Designated Shares without a class vote of the holders of 38 40 TR Stock. Genzyme has also agreed that this policy will not be changed without a class vote of the holders of TR Stock. Consequently, any decision by the Board to account for a reallocation of any programs or assets of GTR as an increase in General Designated Shares would require a class vote of the holders of TR Stock. The number of General Designated Shares will be subject to adjustment in a manner substantially similar to adjustments to the number of TR Designated Shares. Whenever additional shares of any class of common stock are issued and sold by Genzyme, Genzyme will identify (i) the number of such shares issued and sold for the account of the division to which they relate, the proceeds of which will be allocated to and reflected in the financial statements of such division and (ii) the number of such shares issued and sold from the TR Designated Shares or the General Designated Shares, which shall reduce the number of TR Designated Shares or General Designated Shares, as the case may be, and the proceeds of which may be used for any proper corporate purpose. In the event Genzyme repurchases outstanding shares of any class of common stock, it will identify the number of shares that are repurchased for consideration that was allocated to the General Division and the number of shares that are repurchased for consideration that was allocated to GTR and the number of TR Designated Shares or General Designated Shares may increase accordingly. "ANTI-TAKEOVER" PROVISIONS Contractual Measures. The Articles of Organization and By-Laws of Genzyme contain provisions that could discourage potential takeover attempts and prevent stockholders from changing the Genzyme's management, including authorization of the Board to issue shares of preferred stock in series, enlarge the size of the Board and fill any vacancies on the Board, and restrictions on the ability of stockholders to call a special meeting of stockholders, bring business before an annual meeting and nominate candidates for election as directors. Genzyme also has agreements with certain officers containing change of control provisions. In addition, Genzyme has a stockholder rights plan. Under this plan, each outstanding share of General Division Stock and TR Stock also represents a right that, under certain circumstances, may trade separately from the General Division Stock and TR Stock, respectively. The rights, which are not currently exercisable, under certain circumstances will permit their holders (other than an acquiror) to purchase at a favorable price large amounts of General Division Stock, TR Stock or securities of a successor to Genzyme with the result that an acquiror's interest in Genzyme would be substantially diluted. The description and terms of the rights are set forth in an Amended and Restated Rights Agreement between Genzyme and American Stock Transfer and Trust Company as Rights Agent. Business Combination Statute. Massachusetts' "Business Combination" statute provides that, if a person acquires 5% or more of the stock of a Massachusetts corporation without the approval of its board of directors (an "interested stockholder"), he may not engage in certain transactions with the corporation for a period of three years. There are certain exceptions to this prohibition; for example, if the board of directors approves the acquisition of stock or the transaction prior to the time that the person became an interested stockholder, or if the interested stockholder acquires 90% of the voting stock of the corporation (excluding voting stock owned by directors who are also officers and certain employee stock plans) in one transaction, or if the transaction is approved by the board of directors and by the affirmative vote of two-thirds of the outstanding voting stock which is not owned by the interested stockholder, the prohibition does not apply. Genzyme is subject to the Massachusetts Business Combination statute unless it elects not to be governed by the statute in its Articles of Organization or By-laws. Genzyme has not made such election and does not currently intend to make such an election. Control Share Acquisition Statute. The Massachusetts Control Share Acquisition statute provides that a person (hereinafter, the "acquiror") who makes a bona fide offer to acquire, or acquires, shares of stock of a corporation that when combined with shares already owned, would increase the acquiror's ownership to at least 20%, 33 1/3%, or a majority of the voting stock of the corporation, must obtain the approval of a majority in interest of the shares held by all stockholders, excluding shares held by the acquiror and the officers and inside 39 41 directors of the corporation, in order to vote the shares acquired. The statute does not require the acquiror to consummate the purchase before the stockholder vote is taken. The Control Share Acquisition statute permits a Massachusetts corporation to elect not to be governed by these provisions by including such an election in its articles of organization or by-laws. The Genzyme By-Laws contain a provision pursuant to which Genzyme elected not to be governed by the Massachusetts Control Share Acquisition statute. However, if at a future date the Board determines that it is in the best interests of Genzyme and its stockholders that Genzyme be governed by the statute, Genzyme's By-Laws may be amended to permit it to be governed by such statute. Any such amendment, however, would apply only to acquisitions crossing the thresholds which occur after the effective date of such amendment. 40 42 MANAGEMENT AND ACCOUNTING POLICIES GOVERNING THE RELATIONSHIP OF GENZYME DIVISIONS Genzyme has adopted the following policies to govern the management of GTR and its relationship to the General Division. Except as otherwise stated below, the policies may be modified or rescinded in the sole discretion of the Board without approval of Genzyme stockholders, subject only to the Board's fiduciary duty to Genzyme's stockholders. The Board may also adopt additional policies depending upon the circumstances. Any determination of the Board to modify or rescind such policies, or to adopt additional policies, including any such decision that would have disparate impacts upon holders of the two classes of common stock, would be governed by the principles of Massachusetts law discussed under "Risk Factors -- Risks Related to Two Classes of Common Stock -- No Rights or Additional Duties with Respect to the Divisions; Potential Conflicts." In addition, generally accepted accounting principles require that any change in policy be preferable (in accordance with such principles) to the previous policy. Purpose of GTR. The purpose of GTR is to create a business with a comprehensive approach to the field of tissue repair by developing and commercializing a portfolio of novel products for the treatment and prevention of serious tissue injury (excluding products developed on behalf of Genzyme Development Partners). In addition to the programs initially assigned to GTR, it is expected that the GTR portfolio will expand through the addition of complementary products and programs developed either internally or externally to the division, including acquiring or in-licensing from outside of Genzyme. Other than the method of financing, GTR is operated and managed similarly to other Genzyme divisions. Revenue Allocation. Revenues from the sale of a division's products are credited to that division. The cost of research done by one division for the benefit of another division is charged to the division for which the work is done in the manner described in the following paragraph. The division performing the research does not recognize revenue as a result of such research. Expense Allocation. All direct expenses are charged to the division for the benefit of which they are incurred. Corporate and general and administrative expenses and other shared services or other indirect costs are allocated to each division in a reasonable and consistent manner based on utilization by the division of the services to which such costs relate. To the extent borrowings are deemed to occur between divisions, inter-division accounts will be established with interest imputed at the rate then available to Genzyme for short-term borrowings. Tax Allocations. Income taxes are allocated to each division based upon the financial statement income, taxable income, credits and other amounts properly allocable to such division under generally accepted accounting principles as if each division were a separate taxpayer; provided, however, that as of the end of any fiscal quarter of Genzyme, any projected tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to any other division without any compensating payment or allocation. Acquisitions of Programs, Products or Assets. Upon the acquisition by Genzyme from a third party of any additional programs, products or assets (whether by acquisition of assets or stock, merger, consolidation or otherwise), the aggregate cost of the acquisition and the programs, products or assets acquired will be allocated among the divisions to which such programs, products or assets are assigned. Such assignment and allocation will be made by the Board taking into account such matters as the Board and its financial advisors, if any, deem relevant. Any such determination by the Board will be final and binding on all holders of all classes of common stock. Disposition of Programs, Products or Assets. Upon any sale, transfer, assignment or other disposition by Genzyme of any product, program or asset not consisting of all or substantially all of the assets of a division, all proceeds from such disposition will be allocated to the division to which the program, product or asset had been allocated, and such proceeds will be used for the benefit of such division. If a program, product or asset is allocated to more than one division, the proceeds of the disposition will be allocated among such divisions based on their respective interests in such program, product or asset. Such allocation will be made by the 41 43 Board taking into account such matters as the Board and its financial advisors, if any, deem relevant. Any such determination by the Board will be final and binding on all holders of all classes of common stock. Inter-Division Asset Transfers. The Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations will be done at fair market value, determined by the Board, taking into account, in the case of a program under development, the commercial potential of such program, the phase of clinical development of such program, the expenses associated with realizing any income from such program, the likelihood and timing of any such realization and other matters that the Board and its financial advisors deem relevant. The consideration for such reallocation may be paid by one division to another in cash or, in lieu of cash or other consideration, the Board may elect to account for a reallocation of assets from GTR to the General Division as an increase in the number of General Designated Shares and a reallocation of assets from the General Division to GTR as either an increase in the number of TR Designated Shares or a reduction in the General Designated Shares, if any, except that a reallocation of assets from GTR to the General Division may not be accounted for as an increase in General Designated Shares without a class vote of the holders of the TR Stock. Notwithstanding the foregoing, no Key TR Program, as defined below, may be transferred out of GTR without a class vote of the holders of the TR Stock unless the Board determines that such Key TR Program has application outside of the field of tissue repair (in which case it may be transferred out only for the non-tissue repair applications). A "Key TR Program" is any of the following: (i) Vianain(R) Debriding Product for debridement of necrotic or damaged tissue; (ii) TGF-SS(2) for all indications licensed from Celtrix Pharmaceuticals, Inc. as of December 16, 1994; (iii) EpicelSM cultured epithelial cell autografts for tissue replacement or repair; (iv) ActicelSM cultured epithelial cell allografts for tissue replacement or repair; (v) CARTICELSM Autologous Chondrocyte Service; and (vi) any additional tissue repair program or product being developed from time to time in GTR which (a) constituted 20% or more of the research and development budget of GTR in any of three most recently completed fiscal years or (b) has had a cumulative investment of $8 million or more in research and development expenses by GTR. The foregoing policies regarding transfers of assets between divisions may not be changed by the Board without a class vote of the holders of the TR Stock. Access to Technology and Know-How. GTR and the General Division each have free access to all technology and know-how of Genzyme that may be useful in such division's business, subject to any obligations or limitations applicable to Genzyme. Disposition of TR Designated Shares. The TR Designated Shares may be (i) issued upon the exercise of outstanding stock options and warrants and the conversion of outstanding convertible notes allocated to the General Division, (ii) subject to the restrictions set forth in the following paragraph, sold for any valid business purpose, or (iii) distributed as a dividend to the holders of shares of General Division Stock, all as determined from time to time by the Board in its sole discretion. Genzyme distributed approximately 3.3 million of the initial 5.0 million TR Designated Shares as a stock dividend to holders of Genzyme Common Stock of record on December 16, 1994, and reserved the remaining initial TR Designated Shares for issuance upon the exercise or conversion of stock options, warrants and convertible notes outstanding as of December 15, 1994. To the extent that any such remaining initial TR Designated Shares are not used for such purposes, the Board may issue them for any other valid business purposes without crediting any proceeds to GTR. Issuance of Additional Shares of any Class of General Division Stock. If additional shares of any class of common stock are issued and sold by Genzyme, Genzyme will identify (i) the number of such shares issued and sold for the account of the division to which they relate, the proceeds of which will be allocated to and reflected in the financial statements of such division and (ii) the number of such shares issued and sold that will reduce the number of Designated Shares from such division and the proceeds of which may be used for any valid business purpose. Notwithstanding the foregoing, Genzyme will not sell any shares of TR Stock without allocating the proceeds to GTR (except upon exercise or conversion of options, warrants or convertible notes outstanding as of December 16, 1994) unless (i) the Board determines that GTR has cash sufficient to fund its operations for at least the next 12 months or (ii) shares of TR Stock concurrently being 42 44 sold for the account of GTR will produce proceeds sufficient to fund GTR's cash needs for the next 12 months. Reservation of Shares of TR Stock. Genzyme has reserved approximately 3.3 million shares of TR Stock for issuance to Genzyme employees pursuant to grants made after December 15, 1994 under one or more employee incentive plans. Open Market Purchases of Shares of any Class. Genzyme may make open market purchases of any class of its common stock in accordance with applicable securities law requirements; provided, however, that such purchases of TR Stock may not be made if as an immediate result thereof the number of TR Designated Shares would represent more than 60% of the number of TR Designated Shares plus the number of outstanding shares of TR Stock. Such restriction is intended to prevent Genzyme from using open market purchases to effect a redemption of the TR Stock without paying the 30% premium required for a complete redemption of TR Stock under the terms of Genzyme's Articles of Organization. In addition, within 90 days of any open market purchase of any class of common stock, Genzyme may not exchange shares of such class for cash or shares of any other class of common stock. Class Voting. In addition to any shareholder approval required by Massachusetts law, whenever the approval of the holders of a class of common stock is required to take any action pursuant to these policies or Genzyme's Articles of Organization, such requirement will be satisfied if a meeting of the holders of such class is held at which a quorum is present and the votes cast in favor of the proposed action exceed the votes cast against. Non-Compete. Genzyme will not develop products outside of GTR that compete or would compete in the market with products being developed or sold by GTR. Interdivisional Loan Policy. Loans may be made from time to time between divisions in the nature of interim financing for significant capital projects pending completion and closing of the associated permanent financing. Any such loan will mature within 18 months and interest will be paid monthly in arrears at the best borrowing rate available to Genzyme for a loan of like type and duration. Amounts borrowed in excess of $1 million require approval of the Board. UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated , 1996 (the "Underwriting Agreement"), CS First Boston Corporation, (the "Underwriter") has agreed to purchase all of the Notes from the Company. The Underwriting Agreement provides that the obligations of the Underwriter are subject to certain conditions precedent and that the Underwriter will be obligated to purchase all the Notes (other than those covered by the over-allotment option described below) if any are purchased. The Company has granted to the Underwriter an option, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to an additional $25 million aggregate principal amount of Notes at the initial public offering price less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the Notes. The Company has been advised by the Underwriter that it proposes to offer the Notes to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of % of the principal amount per Note, and the Underwriter and such dealers may allow a discount of % of such principal amount per Note on sales to certain other dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the Underwriter. The Notes are a new issue of securities with no established trading market. The Company has been advised by the Underwriter that it plans to make a market in the Notes as permitted by applicable laws and 43 45 regulations. However, the Underwriter is not obligated to do so and may discontinue any market trading at any time without notice. No assurance can be given therefore as to the liquidity of the trading markets for the Notes. In connection with this offering, the Underwriter and selling group members (if any) and their respective affiliates may engage in passive market making transactions in the General Division Stock on The Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act during a period before commencement of offers or sales of the Notes offered hereby. The passive market making transactions must comply with the applicable volume and price limits and be identified as such. The Company has agreed that it will not offer, sell, contract to sell, announce its intention to sell, pledge or otherwise dispose, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of its General Division Stock, or securities convertible into or exchangeable or exercisable for any shares of General Division Stock, other than pursuant to employee benefit plans or the stock split described in "Business -- Recent Developments" or upon the exercise of outstanding warrants or conversion of the Notes, without the prior written consent of the Underwriter for a period of 90 days after the date of this Prospectus. The Company has agreed to indemnify the Underwriter against certain liabilities, including civil liabilities under the Securities Act, or contribute to payments which the Underwriter may be required to make in respect thereof. The Underwriter has provided financial advisory and investment banking services to Genzyme and may continue to do so in the future. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Notes in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of Notes are effected. Accordingly, any resale of the Notes in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Notes. REPRESENTATIONS OF PURCHASERS Each purchaser of Notes in Canada who receives a purchase confirmation will be deemed to represent to the Company and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Notes without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions". RIGHTS OF ACTION AND ENFORCEMENT The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons 44 46 may be located outside of Canada and as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE OF BRITISH COLUMBIA RESIDENTS A purchaser of Notes to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Notes acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of Notes acquired on the same date and under the same prospectus exemption. LEGAL OPINIONS The validity of the Notes offered hereby will be passed upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts, counsel for the Company. Peter Wirth, a partner in Palmer & Dodge LLP, is a Senior Vice President, and the General Counsel and Clerk of the Company. As of June 1, 1996, Mr. Wirth beneficially owned 5,860 and 3,520 shares of General Division Stock and TR Stock, respectively, including shares subject to options exercisable within 60 days. Certain legal matters will be passed upon for the Company by Mark A. Hofer, Senior Vice President and Chief Patent Counsel of the Company. As of June 1, 1996, Mr. Hofer beneficially owned 76,731 and 23,181 shares of General Division Stock and TR Stock, respectively, including shares subject to options exercisable within 60 days. Certain legal matters will be passed upon for the Underwriter by Cahill Gordon & Reindel (a partnership including a professional corporation), New York, New York. EXPERTS The consolidated financial statements and financial statement schedule of Genzyme Corporation, the combined financial statements and financial statement schedule of the General Division and the combined financial statements and financial statement schedule of GTR included in Genzyme's Annual Report on Form 10-K for the year ended December 31, 1995, that have been incorporated by reference into this Prospectus, have been incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The DSP financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 45 47 INDEX TO FINANCIAL STATEMENTS
PAGE ------------ PRO FORMA FINANCIAL STATEMENTS: GENZYME CORPORATION: Pro Forma Consolidated Balance Sheets as of March 31, 1996..................... F-3 Pro Forma Consolidated Statements of Operations for the Three Months Ended March 31, 1996............................................................... F-4 Pro Forma Consolidated Statements of Operations for the Year Ended December 31, 1995............................................................ F-5 GENZYME GENERAL DIVISION: Pro Forma Combined Balance Sheets as of March 31, 1996......................... F-6 Pro Forma Combined Statements of Operations for the Three Months Ended March 31, 1996..................................................................... F-7 Pro Forma Combined Statements of Operations for the Year Ended December 31, 1995............................................................ F-8 Notes to Unaudited Pro Forma Financial Statements.............................. F-9 DSP CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Public Accountants....................................... F-13 Consolidated Balance Sheets as of September 30, 1994 and 1995 and March 24, 1996 (unaudited)............................................................. F-14 Consolidated Statements of Operations for the Years Ended September 30, 1994 and 1995 and for the Six Months Ended March 26, 1995 and March 24, 1996 (unaudited).................................................................. F-15 Consolidated Statements of Stockholders' Investment for the Years Ended September 30, 1994 and 1995 and for the Six Months Ended March 24, 1996 (unaudited).................................................................. F-16 Consolidated Statements of Cash Flows for the Years Ended September 30, 1994 and 1995 and for the Six Months Ended March 26, 1995 and March 24, 1996 (unaudited).................................................................. F-17 Notes to Consolidated Financial Statements..................................... F-18
F-1 48 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA FINANCIAL STATEMENTS INTRODUCTION: The unaudited pro forma financial statements and the related notes are presented to give effect to the acquisition of Genetrix, Inc. (the "Genetrix Acquisition") and the acquisition of Deknatel Snowden Pencer, Inc. (the "DSP Acquisition"). Pro forma statements of operations have been presented for both Genzyme and the General Division assuming that both acquisitions occurred as of January 1, 1995, using the purchase accounting method. Pro forma balance sheets have been presented for both Genzyme and the General Division assuming that both acquisitions occurred as of March 31, 1996. To distinguish the effect of each transaction, a subtotal column has been included on each financial statement to give effect to the Genetrix Acquisition, after certain pro forma adjustments, before consideration of the DSP Acquisition and any related pro forma adjustments. The notes to the unaudited pro forma financial statements are defined as related either to the Genetrix Acquisition or the DSP Acquisition. Year end for Genzyme and Genetrix is December 31, while year-end for DSP prior to acquisition by Genzyme was September 30. The pro forma financial statements for the year ended December 31, 1995, herein, are based on the historical income statements of Genzyme and Genetrix for the year ended December 31, 1995 and the historical income statement for DSP for the year ended September 30, 1995. Revenues and operating costs and expenses for DSP for the three months ended December 31, 1995 were $22,001,000 and $18,260,000, respectively. F-2 49 GENZYME CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEETS MARCH 31, 1996
PRO FORMA PRO HISTORICAL HISTORICAL PRO FOOT GENZYME PRO FOOT FORMA GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA NOTE GENZYME CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF. CORP. ---------- ---------- -------- ----- ---------- ---------- --------- ----- ---------- ASSETS Current assets: Cash and cash equivalents........ $102,446 $ 416 $ -- $102,862 $ 3,107 $ (50,750) (F) $ -- 19,375 (F) 74,594 Short-term investments........ 182,228 -- -- 182,228 -- -- 182,228 Accounts receivable, less allowance for doubtful accounts........... 86,599 4,526 -- 91,125 16,962 (500) (F) 107,587 Inventories.......... 59,289 284 (60) (B) 59,513 21,940 6,060 (F) 87,513 Prepaid expenses and other current assets............. 13,066 1,351 -- 14,417 477 -- 14,894 Deferred tax assets -- current... 7,729 -- 2,725 (B) 10,454 -- -- 10,454 -------- ------- -------- -------- --------- ---------- Total current assets..... 451,357 6,577 2,665 460,599 42,486 (25,815) 477,270 Property, plant and equipment, net..... 345,164 3,581 -- 348,745 17,953 -- 366,698 Other Assets: Long-term investments........ 52,629 -- -- 52,629 -- -- 52,629 Notes receivable-related party.............. 2,651 -- -- 2,651 -- -- 2,651 Intangibles, net of accumulated amortization....... 28,708 2,462 32,575 (B) 63,745 51,563 153,229 (F) 268,537 Deferred tax assets -- noncurrent... 23,645 -- -- 23,645 (740) (10,161) (F) 12,744 Other noncurrent assets............. 33,946 224 -- 31,170 774 5,625 (F) 40,569 -------- ------- -------- -------- --------- ---------- Total other assets... 141,579 2,686 32,575 176,840 51,597 148,693 377,130 -------- ------- -------- -------- --------- ---------- Total assets..... $938,100 $ 12,844 $ 35,240 $986,184 $112,036 $ 122,878 $1,221,098 ======== ======= ======== ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..... $ 12,969 $ 2,011 $ -- $ 14,980 $ 3,987 $ -- $ 18,967 Accrued expenses..... 40,578 1,595 7,150 (B) 49,323 17,978 3,500 (F) 70,801 Income taxes payable............ 7,080 -- -- 7,080 -- -- 7,080 Deferred revenue..... 2,244 -- -- 2,244 -- -- 2,244 Short-term borrowings......... 8,000 8,000 8,000 Current portion of long-term debt and capital lease obligations........ 2,362 2,346 (1,952) (C) 2,756 8,546 (8,375) (D) 2,927 -------- ------- -------- -------- --------- ---------- Total current liabilities... 73,233 5,952 5,198 84,383 30,511 (4,875) 110,019 Noncurrent liabilities: Long-term debt and capital lease obligations........ 24,286 232 -- 24,518 50,028 (49,750) (D) 200,000 (F) 225,000 (F) (200,000) (F) 249,796 Other noncurrent liabilities........ 8,784 181 -- 8,965 -- -- 8,965 -------- ------- -------- -------- --------- ---------- 33,070 413 -- 33,483 -- 175,250 258,761 Stockholders' Equity: General Division Stock, $.01 par value.............. 336 -- 7 (B) 343 -- -- 343 TR Stock, $.01 par value.............. 126 -- -- 126 -- -- 126 Treasury Stock, at cost............... (882) (60) 60 (A) (882) -- -- (882) Genetrix, Inc. convertible preferred stock.... -- 5 (5) (A) 0 -- -- 0 Genetrix, Inc. common stock.............. -- 13 (13) (A) 0 -- -- 0 DSP, Inc. common stock.............. -- -- -- -- 4 (4) (E) 0 Additional paid-in capital............ 841,204 24,433 (17,954) (A) 30,035 (B) 877,718 46,497 (46,497) (E) 877,718 Accumulated deficit............ (6,866) (17,912) 17,912 (A) (6,866) (15,004) 15,004 (E) (16,000) (F) (22,866) Other equity adjustments........ (2,121) -- -- (2,121) -- -- (2,121) -------- ------- -------- -------- --------- ---------- Total stockholders' equity..... 831,797 6,479 30,042 868,318 31,497 (47,497) 852,318 -------- ------- -------- -------- --------- ---------- Total liabilities and stockholders' equity............. $938,100 $ 12,844 $ 35,240 $986,184 $112,036 $ 122,878 $1,221,098 ======== ======= ======== ======== ========= ==========
See notes to unaudited pro forma financial statements. F-3 50 GENZYME CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
PRO FORMA GENZYME PRO HISTORICAL HISTORICAL PRO FOOT CORP. PRO FOOT FORMA GENZYME GENETRIX, FORMA NOTE AND HISTORICAL FORM NOTE GENZYME CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF. CORP. ---------- ---------- ------- ----- -------- ---------- -------- ----- -------- Net revenues.......................... $113,497 $5,427 $ -- $118,924 $ 27,695 $ -- $146,619 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses.............. 99,168 5,595 (25) (H) 104,738 21,428 (363) (K) 125,803 Amortization expense................ 1,071 -- 543 (G) 1,614 917 646 (J) 3,177 Other expenses...................... -- -- -- -- 546 -- 546 ---------- ---------- ------- -------- ---------- -------- -------- Total operating expenses.............. 100,239 5,595 518 106,352 22,891 283 129,526 ---------- ---------- ------- -------- ---------- -------- -------- Operating income...................... 13,258 (168) (518) 12,572 4,804 (283) 17,093 Other income and (expenses): Investment income................... 4,492 -- -- 4,492 -- -- 4,492 Interest expense.................... (213) (89) 53 (C) (249) (1,457) (3,072) (L) (4,772 ) Other............................... (937) -- -- (937) (101) -- (1,038 ) ---------- ---------- ------- -------- ---------- -------- -------- 3,342 (89) 53 3,306 (1,552) (3,072) (1,318 ) ---------- ---------- ------- -------- ---------- -------- -------- Income before income taxes............ 16,600 (257) (465) 15,878 3,252 (3,355) 15,775 Provision for income taxes............ (6,308) -- 70 (I) (6,238) (646) 1,012 (M) (5,872 ) ---------- ---------- ------- -------- ---------- -------- -------- Net income............................ $ 10,292 $ (257) $ (395) $ 9,640 $ 2,606 $ (2,343) $ 9,903 ========= ========= ======= ======== ========= ======== ======== Attributable to the General Division: Net income.......................... $ 15,537 $ 14,885 $15,148 Tax benefit allocated from Tissue Repair Division................. 3,497 3,497 3,497 ---------- -------- -------- Net income attributable to General Division Stock...................... $ 19,034 $ 18,382 $18,645 ========= ======== ======== Income (loss) per General Division common and common equivalent share............................... $ 0.53 $(0.05) $ 0.51 $ 0.51 ========= ========= ======== ======== Historical weighted average shares outstanding......................... 35,691 5,251 (5,251) 35,691 35,691 Shares issued for Genetrix Acquisition......................... -- -- 690 690 690 ---------- ---------- ------- -------- -------- Pro forma weighted average shares outstanding......................... 35,691 5,251 (4,561) 36,381 36,381 ========= ========= ======= ======== ======== Income per General Division common and common equivalent share assuming full dilution....................... $ 0.51 $ 0.49 $ 0.49 ========= ======== ======== Historical fully diluted weighted average shares outstanding.......... 37,096 37,096 37,096 Shares issued for Genetrix Acquisition......................... -- 690 690 690 ---------- ------- -------- -------- Pro forma fully diluted weighted average shares outstanding.......... 37,096 690 37,786 37,786 ========= ======= ======== ======== Attributable to the Tissue Repair Division: Net loss............................ $ (8,742) $ (8,742) $(8,742 ) Tax benefit allocated to the General Division.......................... -- -- -- ---------- -------- -------- Net income (loss) attributable to TR Stock............................... $ (8,742) $ (8,742) $(8,742 ) ========= ======== ======== Loss per Tissue Repair Division common share............................... $ (0.71) $ (0.71) $ (0.71 ) ========= ======== ======== Historical weighted average shares outstanding......................... 12,246 12,246 12,246 ========= ======== ========
See notes to unaudited pro forma financial statements. F-4 51 GENZYME CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
PRO FORMA GENZYME PRO HISTORICAL HISTORICAL PRO FOOT CORP. PRO FOOT FORMA GENZYME GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE GENZYME CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF. CORP. ---------- ---------- ------- ----- -------- ---------- -------- ----- -------- Net revenues.................... $383,783 $ 22,006 $ -- $405,789 $ 95,259 $ -- $501,048 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses........ 329,094 22,151 (100) (H) 351,145 79,146 (1,450) (K) 428,841 Amortization expense.......... 4,677 -- 2,172 (G) 6,849 2,750 3,505 (J) 13,104 Other expenses................ 14,216 -- -- 14,216 3,585 -- (F) 33,801 -------- ------- ------- -------- ------- -------- -------- Total operating expenses........ 347,987 22,151 2,072 372,210 85,481 2,055 459,746 -------- ------- ------- -------- ------- -------- -------- Operating income................ 35,796 (145) (2,072) 33,579 9,778 (2,055) 41,302 Other income and (expenses): Investment income............. 8,814 25 -- 8,839 -- -- 8,839 Interest expense.............. (1,109) (260) 178 (C) (1,191) (6,937) (13,618) (L) (21,746 ) Other......................... (202) -- -- (202) (1,354) -- (1,556 ) -------- ------- ------- -------- ------- -------- -------- 7,507 (235) 178 7,446 (8,291) (13,618) (14,463 ) -------- ------- ------- -------- ------- -------- -------- Income before income taxes...... 43,299 (380) (1,894) 41,025 1,487 (15,673) 26,839 Provision for income taxes...... (21,649) -- 40 (I) (21,609) (172) 3,265 (M) (18,516 ) -------- ------- ------- -------- ------- -------- -------- Net income...................... $ 21,250 $ (380) $(1,854) $ 19,416 $ 1,315 $(12,408) $ 8,323 ======== ======= ======= ======== ======= ======== ======== Applicable to the General Division: Net income.................... $ 34,823 $ 32,589 $21,496 Tax benefit allocated from Tissue Repair Division.... 8,857 8,857 8,857 -------- -------- -------- Net income attributable to General Division Stock........ $ 43,680 $ 41,446 $30,353 ======== ======== ======== Income (loss) per General Division common and common equivalent share.............. $ 1.45 $ (0.07) $ 1.35 $ 0.99 ======== ======= ======== ======== Historical weighted average shares outstanding............ 30,092 5,247 (5,247) 30,092 30,092 Shares issued for Genetrix Acquisition................... -- -- 690 690 690 -------- ------- ------- -------- Pro forma weighted average shares outstanding............ 30,092 5,247 (4,557) 30,782 30,782 ======== ======= ======= ======== Income per General Division common and common equivalent share assuming full dilution...................... $ 1.31 $ 1.22 $ 0.89 ======== ======== ======== Historical fully diluted weighted average shares outstanding................... 33,311 33,311 33,311 Shares issued for Genetrix Acquisition................... -- 690 690 690 -------- ------- -------- -------- Pro forma fully diluted weighted average shares outstanding.... 33,311 690 34,001 34,001 ======== ======= ======== ======== Applicable to the Tissue Repair Division: Net loss...................... $(22,030) $(22,030) $(22,030) Tax benefit allocated to the General Division............ -- -- -- -------- -------- -------- Net income (loss) attributable to TR Stock................... $(22,030) $(22,030) $(22,030) ======== ======== ======== Loss per Tissue Repair Division common share.................. $ (2.28) $ (2.28) $ (2.28 ) ======== ======== ======== Historical weighted average shares outstanding............ 9,659 9,659 9,659 ======== ======== ========
See notes to unaudited pro forma financial statements. F-5 52 GENZYME GENERAL DIVISION AND SUBSIDIARIES PRO FORMA COMBINED BALANCE SHEETS MARCH 31, 1996
PRO FORMA GENZYME PRO HISTORICAL GENERAL FORMA GENZYME HISTORICAL PRO FOOT DIVISION PRO FOOT GENZYME GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE GENERAL DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF. DIVISION ---------- ---------- -------- ----- -------- ---------- --------- ---- ---------- ASSETS Current Assets: Cash and cash equivalents.... $ 74,254 $ 416 $ -- $ 74,670 $ 3,107 $ (50,750) (S) $ 19,375 (S) 46,402 Short-term investments....... 175,313 -- -- 175,313 -- -- 175,313 Accounts receivable, less allowance for doubtful accounts................... 84,749 4,526 -- 89,275 16,962 (500) (S) 105,737 Inventories.................. 57,858 284 (60) (O) 58,062 21,940 6,060 (S) 86,022 Prepaid expenses and other current assets............. 12,631 1,351 -- 13,982 477 -- 14,459 Due from Tissue Repair Division................... 991 -- -- 991 -- -- 991 Deferred tax assets -- current.......... 7,729 -- 2,725 (O) 10,454 -- -- 10,454 -------- -------- ------- -------- -------- -------- ---------- Total current assets.............. 413,525 6,577 -- 422,767 42,486 (25,815) 439,438 Property, plant & equipment, net.......................... 333,310 3,581 -- 336,891 17,953 -- 354,844 Other Assets: Long-term investments........ 52,629 -- -- 52,629 -- -- 52,629 Notes receivable-related party...................... 2,651 -- -- 2,651 -- -- 2,651 Intangibles, net of accumulated amortization... 28,708 2,462 32,575 (O) 63,745 51,563 153,229 (S) 268,537 Deferred tax assets -- noncurrent....... 23,645 -- -- 23,645 (740) (10,161) (S) 12,744 Other noncurrent assets...... 33,895 224 32,925 774 5,625 (S) 39,324 -------- -------- ------- -------- -------- -------- ---------- Total other assets.... 141,528 2,686 32,575 176,789 51,597 148,693 377,079 -------- -------- ------- -------- -------- -------- ---------- Total assets.......... $888,363 $ 12,844 $ 35,240 $936,447 $112,036 $ 122,878 $1,171,361 ======== ======== ======= ======== ======== ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............. 11,600 2,011 -- 13,611 3,987 -- 17,598 Accrued expenses............. 39,077 1,595 7,150 (O) 47,822 17,978 3,500 (S) 69,300 Income taxes payable......... 7,080 -- -- 7,080 -- -- 7,080 Deferred revenue............. 2,244 -- -- 2,244 -- -- 2,244 Current portion of long-term debt and capital lease obligations................ 2,271 2,346 (1,952) (P) 2,665 8,546 (8,375) (Q) 2,836 -------- -------- ------- -------- -------- -------- ---------- Total current liabilities......... 62,272 5,952 5,198 73,422 30,511 (4,875) 99,058 Noncurrent Liabilities: Long-term debt and capital lease obligations.......... 24,286 232 -- 24,518 50,028 (49,750) (Q) 200,000 (S) 225,000 (S) (200,000) (S) 249,796 Other noncurrent liabilities... 8,039 181 -- 8,220 -- -- 8,220 -------- -------- ------- -------- -------- -------- ---------- 32,325 413 -- 32,738 -- 175,250 258,016 Division Equity: Division equity.............. 793,766 -- 7 (O) 30,035 (O) 6,479 (O) 830,287 (16,000) (S) 814,287 Genetrix, Inc. treasury stock, at cost............. -- (60) 60 (N) 0 -- -- 0 Genetrix, Inc. convertible preferred stock............ -- 5 (5) (N) 0 -- -- 0 Genetrix, Inc. common stock...................... -- 13 (13) (N) 0 -- -- 0 DSP, Inc. common stock....... -- -- -- -- 4 (4) (R) Additional paid-in capital... -- 24,433 (17,954) (N) (6,479) (O) 0 46,497 (46,497) (R) Accumulated deficit.......... (17,912) 17,912 (N) 0 (15,004) 15,004 (R) 0 -------- -------- ------- -------- -------- -------- ---------- Total division equity.............. 793,766 6,479 30,042 830,287 31,497 (47,497) 814,287 -------- -------- ------- -------- -------- -------- ---------- Total liabilities and division equity....................... $888,363 $ 12,844 $ 34,240 $936,447 $112,036 $ 122,878 $1,171,361 ======== ======== ======= ======== ======== ======== ==========
See notes to unaudited pro forma financial statements. F-6 53 GENZYME GENERAL DIVISION AND SUBSIDIARIES PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
PRO FORMA GENZYME PRO HISTORICAL GENERAL FORMA GENZYME HISTORICAL PRO FOOT DIVISION PRO FOOT GENZYME GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE GENERAL DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF. DIVISION ---------- ---------- ------- ----- -------- ---------- -------- ----- -------- Net revenues.................... $111,783 $5,427 $ -- $117,210 $ 27,695 $ -- $144,905 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses........ 88,142 5,595 (25) (U ) 93,712 21,428 (363) (X ) 114,777 Amortization expense.......... 1,071 -- 543 (T ) 1,614 917 (646) (W ) 3,177 Other expenses................ -- -- -- -- 546 546 ------- ------ ------- -------- ------- -------- -------- Total operating expenses........ 89,213 5,595 518 95,326 22,891 283 118,500 ------- ------ ------- -------- ------- -------- -------- Operating income................ 22,570 (168) (518) 21,884 4,804 (283) 26,405 Other income and (expenses): Investment income............. 3,918 -- -- 3,918 -- -- 3,918 Interest expense.............. (209) (89) 53 (P ) (245) (1,451) (3,072) (Y ) (4,768) Other......................... (937) -- -- (937) (101) -- (1,038) ------- ------ ------- -------- ------- -------- -------- 2,772 (89) 53 2,736 (1,552) (3,072) (1,888) ------- ------ ------- -------- ------- -------- -------- Income before income taxes...... 25,342 (257) (465) 24,620 3,252 (3,355) 24,517 Provision for income taxes...... (9,805) -- 70 (V ) (9,735) (646) (1,012) (Z ) (9,369) ------- ------ ------- -------- ------- -------- -------- Net income (loss)............... 15,537 $ (257) $ (395) $ 14,885 $ 2,606 $ (2,343) 15,148 ====== ======= ======= ======== Tax benefit allocated from Tissue Repair Division........ 3,497 3,497 3,497 ------- -------- -------- Net income attributable to General Division Stock........ $ 19,034 $ 18,382 $ 18,645 ======= ======== ======== Income (loss) per General Division common and common equivalent share.............. $ 0.53 $(0.05) $ 0.51 $ 0.51 ======= ====== ======== ======== Historical weighted average shares outstanding............ 35,691 5,251 (5,251) 35,691 35,691 Shares issued for Genetrix Acquisition................... -- -- 690 690 690 ------- ------ ------- -------- -------- Pro forma weighted average shares outstanding............ 35,691 5,251 (4,561) 36,381 36,381 ======= ====== ======= ======== ======== Income per General Division common and common equivalent share assuming full dilution...................... $ 0.51 $ 0.49 $ 0.49 ======= ======== ======== Historical fully diluted weighted average shares outstanding................... 37,096 37,096 37,096 Shares issued for Genetrix Acquisition................... -- 690 690 690 Pro forma fully diluted weighted average shares outstanding.... 37,096 690 37,786 37,786 ======= ======= ======== ========
See notes to unaudited pro forma financial statements. F-7 54 GENZYME GENERAL DIVISION AND SUBSIDIARIES PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
PRO FORMA PRO GENZYME FORMA HISTORICAL GENERAL GENZYME GENZYME HISTORICAL PRO FOOT DIVISION PRO FOOT GENERAL GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE REF. DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF. DIVISION ---------- ---------- ------- ---- -------- ---------- -------- ---- -------- Net revenues.............. $378,563 $ 22,006 $ -- $400,569 $ 95,259 $ -- $495,828 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses.............. 300,498 22,151 (100) (U) 322,549 79,146 (1,450) (W) 400,245 Amortization expense.... 4,677 -- 2,172 (W) 6,849 2,750 3,318 (X) 13,104 Other expenses.......... 14,216 -- -- 14,216 3,585 3,505 17,801 -------- ------- ------- -------- ------- -------- -------- Total operating expenses................ 319,391 22,151 2,072 343,614 85,481 2,055 431,150 -------- ------- ------- -------- ------- -------- -------- Operating income.......... 59,172 (145) (2,072) 56,955 9,778 (2,055) 64,678 Other income and (expenses): Investment income....... 7,428 25 -- 7,453 -- -- 7,453 Interest expense........ (1,069) (260) 178 (P) (1,151) (6,937) (13,618) (Y) (21,706) Other................... (202) -- -- (202) (1,354) -- (1,354) -------- ------- ------- -------- ------- -------- -------- 6,157 (235) 178 6,100 (8,291) (13,618) (15,809) -------- ------- ------- -------- ------- -------- -------- Income before income taxes................... 65,329 (380) (1,894) 63,055 1,487 (15,673) 48,869 Provision for income taxes................... (30,506) -- 40 (V) (30,466) (172) 3,265 (Z) (27,373) -------- ------- ------- -------- ------- -------- -------- Net income................ 34,823 $ (380) $(1,854) 32,589 $ 1,315 $(12,408) 21,496 ======= ======= ======= ======== Tax benefit allocated from Tissue Repair Division................ 8,857 8,857 8,857 -------- -------- -------- Net income attributable to General Division Stock................... $ 43,680 $ 41,446 $ 30,353 ======== ======== ======== Income (loss) per General Division common and common equivalent share................... $ 1.45 $ (0.07) $ 1.35 $ 0.99 ======== ======= ======== ======== Historical weighted average shares outstanding............. 30,092 5,247 (5,247) 30,092 30,092 Shares issued for Genetrix Acquisition............. -- -- 690 690 690 -------- ------- ------- -------- Pro forma weighted average shares outstanding...... 30,092 5,247 (4,557) 30,782 30,782 ======== ======= ======= ======== ======== Income per General Division common and common equivalent share assuming full dilution........... $ 1.31 $ 1.22 $ 0.89 ======== ======== ======== Historical fully diluted weighted average shares outstanding............. 33,311 33,311 33,311 Shares issued for Genetrix Acquisition............. -- 690 690 690 Pro forma fully diluted weighted average shares outstanding............. 33,311 690 34,001 34,001 ======== ======= ======== ========
See notes to unaudited pro forma financial statements. F-8 55 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND PROCEDURES: The accounting policies and procedures for Genzyme, Genetrix and DSP are in conformity in all material respects. The pro forma financial statements include both Genzyme, the registrant and issuer of the convertible debentures, and the General Division, the stock of which is being used to effect the Genetrix Acquisition. 2. GENZYME CORPORATION'S ACQUISITION OF GENETRIX, INC.: On April 30, 1996, the Company acquired Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Stock. In the aggregate, approximately 690,000 shares of Genzyme General Division Common Stock ("Genzyme General Division Stock"), valued at approximately $36.5 million, were issued for all the outstanding shares of Genetrix preferred stock ("Genetrix Preferred Stock") and Genetrix common stock ("Genetrix Common Stock", together with the Genetrix Preferred Stock "Genetrix Stock"). The acquisition will be accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $35 million will be allocated to Goodwill to be amortized over 15 years. For the purposes of the unaudited pro forma condensed financial statements, the Closing Price of Genzyme General Division Stock has been calculated, pursuant to the terms of the Merger Agreement using the actual closing date of April 30, 1996, to be $52.93 per share, resulting in approximately 690,000 of Genzyme General Division shares to be exchanged. The pro forma exchange of shares is calculated as follows: Shares Exchanged: Purchase Price.......................................................... $38,500,000 Purchase Price Adjustments.............................................. (1,978,556) ----------- 36,521,444 Market value of Genzyme General Division Stock.......................... $ 52.93 ----------- Shares issued........................................................... 689,995 Shares allocated in satisfaction of Merger Preference................... (427,526) Shares allocable to escrow.............................................. (1,464) ----------- Shares to be allocated to Genetrix Common Shareholders.................. 261,005(A) Total Genetrix Common Shares Outstanding (including participation of Preferred Series A, B, E, and F)...................................... 11,609,894(B) Conversion factor....................................................... .0225(A)/(B)
Amounts at the effective time of the acquisition may differ from the information presented in the pro forma financial statements based on subsequent changes in the Purchase Adjustment amounts and any other related items which may impact the amounts reflected herein. 3. GENZYME CORPORATION'S OFFER TO PURCHASE THE ASSETS OF DEKNATEL SNOWDEN PENCER, INC.: On May 28, 1996, Genzyme announced that it signed a definitive agreement to acquire the common stock of Deknatel Snowden Pencer, Inc., a privately held surgical products company, for approximately $250 million in cash. The pro forma balance sheets and income statements are presented assuming that this transaction occurred as of March 31, 1996 and January 1, 1995, respectively, using the purchase accounting method. Genzyme intends to finance the purchase through the issuance of $200 million bridge notes and cash of $50.8 million. The bridge notes are assumed to be refinanced in thirty days with net proceeds of the $225 million convertible subordinated debentures described in this Prospectus. F-9 56 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) Amounts and the recording of such amounts at the effective time of the acquisition may differ from current presentation depending on the facts and circumstances relating to the purchase price and any other related items which may impact the amounts reflected herein. 4. PRO FORMA ADJUSTMENTS RELATED TO THE GENETRIX ACQUISITION AND THE DEKNATEL ACQUISITION: These adjustments reflect the retirement of all Genetrix Common and Preferred Stock, the retirement of all DSP Common Stock and the issuance of Genzyme General Division Common Stock in the amounts described in Note 2. The Genzyme General Division Common Stock which will be issued upon conversion of the convertible debentures described in Note 3 have been determined to have an antidilutive effect on the General Division's primary and fully diluted earnings per share. I. Pro Forma Adjustments to Genzyme Corporation's Consolidated Balance Sheets: Related to the Genetrix Acquisition: A. Eliminate Genetrix Treasury Stock of $60,000, Genetrix Preferred Stock of $5,000, Genetrix Common Stock of $13,000 and the Accumulated Deficit of Genetrix of $17.9 million. B. Issuance of 689,995 Genzyme General Division Stock in aquisition of Genetrix -- an increase to General Division Stock of $7,000 and APIC of $30 million ($36.5 million less the net assets of Genetrix at the balance sheet date, $6.5 million). The allocation of excess purchase price to Goodwill of $35 million includes reduction of inventory value by $60,000 and accrual for acquisition costs and restructuring reserves of $7.2 million and excludes an acquired Deferred Tax Asset of $2.7 million. C. Adjust for repayment of credit line and resulting reduction of interest expense. Related to the Deknatel Acquisition: D. Eliminate DSP's Current and Long-term Debt which will not be assumed by Genzyme, $8.4 million and $49.8 million, respectively. E. Eliminate DSP's Common Stock of $4,000, Additional Paid-In Capital of $46.5 million and Accumulated Deficit of $15.0 million. F. Record the acquisition of the net assets of DSP for $250 million paid for by $50 million in cash and financed by the issuance of $200 million in notes payable. The notes were refinanced 30 days later by $225 million in convertible debentures reduced by $5.6 million of issuance costs with net cash proceeds to the Company of $19.4 million. The purchase price has been allocated based on the estimated fair value of the assets acquired and liabilities assumed. The actual fair value and allocation of purchase price will be determined at the consummation of the acquisition and may vary from the values presented herein. This allocation results in an increase of $6.1 million over the historical cost of inventory acquired and the recording intangible assets related to trademarks and tradenames of $56 million and patents of $17 million, which will be amortized over 40 and 11 years, respectively. The excess purchase price over the estimated fair value of assets acquired is allocated $131.8 million to Goodwill to be amortized over 40 years. Property, Plant and Equipment consisting of Buildings and Machinery will be depreciated over 25 and 5 years, respectively. In-process research and development expenses acquired of $16 million were expensed in connection with the Acquisition. Additionally, $3.5 million of costs were accrued related to tax liabilities, restructuring and deal costs and $10.2 million of deferred tax liabilities were recorded. F-10 57 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) II. Pro Forma Adjustments to Genzyme Corporation' Consolidated Statements of Operations: Related to the Genetrix Acquisition: G. Record amortization expense, based on $35.0 million of Goodwill over 15 years, or $543,000 for the three months ended March 31, 1996 and $2.2 million for the year ended December 31, 1995. H. Eliminate certain administrative costs (i.e. audit, legal and filing fees) of Genetrix which would not be incurred on a combined basis -- a Reduction for Common Costs of $25,000 three months ended March 31, 1996 and $100,000 for the year ended December 31, 1995. I. Record income tax (provision) benefit. Related to the DSP Acquisition: J. Record amortization expense based on $56 million of trademarks, over 40 years, $17 million of patents, over 11 years and $131.8 million of Goodwill over 40 years, a net adjustment of $646,000 to historical amortization expense for the three months ended March 31, 1996 and $3.5 million for the year ended December 31, 1995. K. Eliminate certain administrative costs (i.e. senior management salaries and related expenses and professional fees) of DSP which would not be incurred on a combined basis -- a Reduction for Common Costs of $363,000 three months ended March 31, 1996 and $1.5 million for the year ended December 31, 1995. L. Reverse interest of DSP long-term debt not assumed and to record interest expense related to a 1-month bridge loan in the amount of $200 million at 5.2% per annum and the $225 million convertible debentures at 9% per annum and the amortization of deferred debt financing costs related to the Notes of $5.6 million over the 5-year term of the debentures. For the three months ended March 31, 1996, interest expense related to these two instruments is $4.5 million and for the year ended December 31, 1995, $20.6 million. M. Record income tax (provision) benefit. III. PRO FORMA ADJUSTMENTS TO GENZYME GENERAL DIVISION'S COMBINED BALANCE SHEETS: Related to the Genetrix Acquisition: N. Eliminate Genetrix Treasury Stock of $60,000, Genetrix Preferred Stock of $5,000, Genetrix Common Stock of $13,000 and the Accumulated Deficit of Genetrix of $17.9 million. O. Issuance of 689,995 Genzyme General Division Stock in acquisition of Genetrix -- an increase to General Division Stock of $7,000 and APIC of $30 million ($36.5 million less the net assets of Genetrix at the balance sheet date, $6.5 million. The allocation of excess purchase price to Goodwill of $35.0 million includes adjustments and restructuring charges of $7.2 million and excludes an acquired Deferred Tax Asset of $2.7 million. P. Adjust for repayment of credit line and interest. Related to the DSP Acquisition: Q. Eliminate DSP's Current and Long-term Debt which will not be assumed by Genzyme, $8.4 million and $49.8 million, respectively. R. Eliminate DSP's Common Stock of $4,000, Additional Paid-In Capital of $46.5 million and Accumulated Deficit of $15.0 million. F-11 58 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) S. Record the acquisition of the net assets of DSP for $250 million paid for by $50 million in cash and financed by the issuance of $200 million in notes payable. These notes were refinanced 30 days later by $225 million in convertible debentures reduced by $5.6 million of issuance costs with net cash proceeds to the Company of $19.4 million. The purchase price will be allocated based on the fair value of the assets acquired and liabilities assumed. This allocation results in an increase of $6.1 million over the historical cost of inventory acquired and the recording intangible assets related to trademarks and tradenames of $56 million and patents of $17 million, which will be amortized over 40 and 11 years, respectively. The excess purchase price over the fair value of assets acquired is allocated $131.8 million to Goodwill to be amortized over 40 years. Property, Plant and Equipment, consisting of Buildings and Machinery, will be depreciated over 25 and 5 years, respectively. Approximately $16 million has been allocated to in-process research and development which has been charged to accumulated deficit for purposes of pro forma balance sheet presentation only. Additionally, $3.5 million of costs were accrued related to tax liabilities, restructuring and deal costs and $10.2 million of deferred tax liabilities were recorded. IV. PRO FORMA ADJUSTMENTS TO GENZYME GENERAL DIVISION'S STATEMENTS OF OPERATIONS: Related to the Genetrix Acquisition: T. Record amortization expense, based on $35.0 million of Goodwill over 15 years, of $543,000 for the three months ended March 31, 1996 and $2.2 million for the year ended December 31, 1995. U. Eliminate certain administrative costs (i.e. audit, legal and filing fees) of Genetrix which would not be incurred on a combined basis -- a Reduction for Common Costs of $25,000 three months ended March 31, 1996 and $100,000 for the year ended December 31, 1995. V. Record income tax (provision) benefit. Related to the DSP Acquisition: W. Record amortization expense based on $56 million of trademarks, over 40 years, $17 million of patents, over 11 years and $131.8 million of Goodwill over 40 years, a net adjustment of $646,000 to historical amortization expense for the three months ended March 31, 1996 and $3.5 million for the year ended December 31, 1995. X. Eliminate certain administrative costs (i.e. senior management salaries and related expenses and professional fees) of DSP which would not be incurred on a combined basis -- a Reduction for Common Costs of $363,000 three months ended March 31, 1996 and $1.5 million for the year ended December 31, 1995. Y. Reverse interest of DSP long-term debt not assumed and record interest expense related to a 1-month bridge loan in the amount of $200 million at 5.2% per annum and the $225 million convertible debentures at 9% per annum and the amortization of deferred debt financing costs related to the Notes of $5.6 million over the 5-year term of the debentures. For the three months ended March 31, 1996, interest expense related to these two instruments and is $4.5 million and for the year ended December 31, 1995, $20.6 million. Z. Record income tax (provision) benefit. F-12 59 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Deknatel Snowden Pencer, Inc.: We have audited the accompanying consolidated balance sheets of Deknatel Snowden Pencer, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1994 and 1995, and the related consolidated statements of operations, stockholders' investment and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the supplementary consolidating information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deknatel Snowden Pencer, Inc. and Subsidiaries as of September 30, 1994 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Boston, Massachusetts November 21, 1995 (except with respect to the matter discussed in Note 11, as to which the date is May 24, 1996) F-13 60 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, --------------------- MARCH 24, 1994 1995 1996 -------- -------- --------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................... $ 1,414 $ 6,288 $ 3,107 Accounts receivable, less allowance of $2,312 and $3,016 at September 30, 1994 and 1995, respectively, and $3,034 at March 24, 1996........................................................ 16,187 14,640 16,962 Inventories........................................................ 22,781 18,627 21,940 Prepaid expenses................................................... 1,137 367 477 Prepaid tax assets................................................. 612 913 553 -------- -------- -------- Total current assets....................................... 42,131 40,835 43,039 -------- -------- -------- Property, plant and equipment: Land............................................................... 670 673 641 Buildings and improvements......................................... 9,059 9,233 7,809 Machinery and equipment............................................ 14,421 17,699 18,153 Construction-in-process............................................ 149 271 208 -------- -------- -------- 24,299 27,876 26,811 Less -- Accumulated depreciation and amortization.................... 5,495 9,581 8,858 -------- -------- -------- Net property, plant and equipment.......................... 18,804 18,295 17,953 -------- -------- -------- Investment in Joint Venture.......................................... 100 240 221 -------- -------- -------- Intangible Assets, Net............................................... 49,413 46,456 51,563 -------- -------- -------- $110,448 $105,826 $ 112,776 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Short-term loans................................................... $ 4,500 $ 161 $ 171 Current portion of long-term debt.................................. 4,750 6,750 8,375 Accounts payable................................................... 1,979 2,083 3,987 Accrued liabilities................................................ 16,262 18,860 16,271 Accrued income taxes............................................... 254 509 1,707 -------- -------- -------- Total current liabilities.................................. 27,745 28,363 30,511 -------- -------- -------- Long-term debt, less current portion................................. 58,500 51,750 49,750 -------- -------- -------- Other long-term liabilities.......................................... 358 367 278 -------- -------- -------- Deferred income taxes................................................ 685 748 740 -------- -------- -------- Commitments and contingencies (Note 4) Stockholders' investment: Class A common stock, $.01 par value -- Authorized -- 600,000 shares Issued and outstanding -- 449,602 shares and 449,329 shares at September 30, 1994 and 1995, respectively, and 449,105 at March 24, 1996............................................................... 4 4 4 Class B common stock, $.01 par value -- Authorized -- 60,000 shares Issued and outstanding -- No shares at September 30, 1994 or 1995, and 16,176 at March 24, 1996....................................... -- -- -- Additional paid-in capital......................................... 44,956 44,928 46,351 Accumulated deficit................................................ (21,586) (20,271) (14,713) Cumulative translation adjustment.................................. (214) (63) (145) -------- -------- -------- Total stockholders' investment 23,160 24,598 31,497 -------- -------- -------- $110,448 $105,826 $ 112,776 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-14 61 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
FISCAL YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, ------------------------- ------------------- MARCH 26, MARCH 24, 1994 1995 1995 1996 ------- ------- --------- ----------- (UNAUDITED) Net sales........................................ $85,410 $95,259 $45,509 $49,696 Cost of products sold............................ 43,873 48,191 23,362 23,663 ------- ------- ------- ------- Gross profit........................... 41,537 47,068 22,147 26,033 ------- ------- ------- ------- Operating costs and expenses: Selling and marketing.......................... 16,318 17,247 8,624 8,401 Distribution................................... 2,702 2,940 1,427 1,623 Research and development....................... 2,839 1,971 947 1,079 General and administrative..................... 6,063 8,797 4,060 3,383 Amortization of intangibles.................... 3,832 2,750 1,594 1,702 Severance and other charges.................... 1,483 3,585 504 1,300 ------- ------- ------- ------- 33,237 37,290 17,156 17,488 ------- ------- ------- ------- Operating income....................... 8,300 9,778 4,991 8,545 ------- ------- ------- ------- Other income (expense): Interest expense............................... (6,339) (6,937) (3,395) (2,905) Cash discounts and other expenses.............. (1,704) (1,634) (787) (726) Other income................................... 194 280 104 1,800 ------- ------- ------- ------- (7,849) (8,291) (4,078) (1,831) ------- ------- ------- ------- Income before provision for income taxes and extraordinary loss......... 451 1,487 913 6,714 Provision for income taxes....................... 188 172 303 1,447 ------- ------- ------- ------- Income before extraordinary loss....... 263 1,315 610 5,267 Extraordinary loss from debt refinancing......... (2,360) -- -- -- ------- ------- ------- ------- Net income (loss)...................... $(2,097) $ 1,315 $ 610 $ 5,267 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-15 62 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CLASS A CLASS B COMMON STOCK COMMON STOCK ----------------------- ----------------------- ADDITIONAL CUMULATIVE NUMBER $.01 NUMBER $.01 PAID-IN TRANSLATION OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL ADJUSTMENT --------- --------- --------- --------- ---------- ----------- Balance, September 30, 1993........... 401,901 $ 4 -- $-- 40,145 $(292) Common stock issued in connection with Snowden-Pencer Inc. acquisition...................... 55,000 -- -- -- 5,500 -- Common stock repurchased, net of collections of subscriptions receivable....................... (7,299) -- -- -- (689) -- Foreign currency translation adjustment....................... -- -- -- -- -- 78 Net loss............................ -- -- -- -- -- -- -- ------- ------ --- ------- ----- Balance, September 30, 1994........... 449,602 4 -- -- 44,956 (214) Common stock repurchased, net of collections of subscriptions receivable....................... (273) -- -- -- (28) -- Foreign currency translation adjustment....................... -- -- -- -- -- 151 Net income.......................... -- -- -- -- -- -- -- ------- ------ --- ------- ----- Balance, September 30, 1995........... 449,329 4 -- -- 44,928 (63) Common stock repurchased............ (224) -- -- -- (22) -- Sale of common stock................ -- -- 16,176 -- 1,445 -- Gain on intercompany debt repayment, net of tax....................... -- -- -- -- -- -- Foreign currency translation adjustment....................... -- -- -- -- -- (82) Net income.......................... -- -- -- -- -- -- -- ------- ------ --- ------- ----- Balance, March 24, 1996 (unaudited)... 449,105 $ 4 16,176 $-- $ 46,351 $(145) ======= == ====== === ======= ===== TOTAL ACCUMULATED STOCKHOLDERS' DEFICIT INVESTMENT ----------- ------------- Balance, September 30, 1993........... $ (19,489) $20,368 Common stock issued in connection with Snowden-Pencer Inc. acquisition...................... -- 5,500 Common stock repurchased, net of collections of subscriptions receivable....................... -- (689) Foreign currency translation adjustment....................... -- Net loss............................ (2,097) (2,097) -------- ------- Balance, September 30, 1994........... (21,586) 23,160 Common stock repurchased, net of collections of subscriptions receivable....................... -- (28) Foreign currency translation adjustment....................... -- 151 Net income.......................... 1,315 1,315 -------- ------- Balance, September 30, 1995........... (20,271) 24,598 Common stock repurchased............ -- (22) Sale of common stock................ -- 1,445 Gain on intercompany debt repayment, net of tax....................... 291 291 Foreign currency translation adjustment....................... -- (82) Net income.......................... 5,267 5,267 -------- ------- Balance, March 24, 1996 (unaudited)... $ (14,713) $31,497 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-16 63 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
FISCAL YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, ----------------------- -------------------- MARCH 26, MARCH 24, 1994 1995 1995 1996 -------- ------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income (loss).................................................. $ (2,097) $ 1,315 $ 610 $ 5,267 Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Extraordinary loss on debt refinancing........................... 2,360 -- -- -- Depreciation..................................................... 2,389 2,789 1,378 1,537 Amortization..................................................... 4,350 3,179 1,594 1,702 Gain on sale of fixed assets..................................... -- -- -- (1,656) Other noncash expenses........................................... 400 1,145 200 219 Change in deferred income taxes.................................. (134) (238) (40) (8) Other, net....................................................... 38 43 (303) 291 Changes in certain assets and liabilities -- Decrease (increase) in accounts receivable..................... 55 1,547 203 (2,322) Decrease (increase) in inventories............................. (2,262) 2,817 1,214 (1,618) Decrease in prepaid expenses................................... 74 770 759 250 Increase (decrease) in accounts payable........................ (66) 104 508 1,904 Increase (decrease) in accrued liabilities..................... 238 2,853 1,775 (1,391) -------- ------- ------- ------- Net cash provided by operating activities................... 5,345 16,324 7,898 4,175 -------- ------- ------- ------- Cash flows from investing activities: Construction and capital expenditures.............................. (1,318) (1,883) (555) (709) Acquisitions, net of cash acquired................................. (16,804) -- -- (9,474) Investment in joint venture........................................ (100) (250) (213) -- Proceeds from sale of fixed assets................................. -- -- -- 1,940 -------- ------- ------- ------- Net cash used for investing activities...................... (18,222) (2,133) (768) (8,243) -------- ------- ------- ------- Cash flows from financing activities: Borrowings under term loan......................................... 55,000 -- -- -- Borrowings under revolving line of credit.......................... 6,327 -- -- 4,000 Repayments of revolving line of credit............................. (1,927) (4,400) (3,900) (3,000) Principal payments of term loan.................................... (47,015) (4,750) (1,000) (1,375) Repurchase of stock................................................ (689) (28) -- (22) Fees paid in connection with refinancing........................... (2,439) -- -- -- Purchase of interest rate cap...................................... -- (235) -- -- Sale of common stock............................................... -- -- -- 1,445 Other, net......................................................... 33 70 (40) (79) -------- ------- ------- ------- Net cash (used for) provided by financing activities........ 9,290 (9,343) (4,940) 969 -------- ------- ------- ------- Effect of exchange rate changes on cash.............................. 78 26 161 (82) -------- ------- ------- ------- Increase (decrease) in cash and cash equivalents..................... (3,509) 4,874 2,351 (3,181) Cash and cash equivalents, beginning of year......................... 4,923 1,414 1,414 6,288 -------- ------- ------- ------- Cash and cash equivalents, end of year............................... $ 1,414 $ 6,288 $ 3,765 $ 3,107 ======== ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for -- Interest......................................................... $ 5,038 $ 6,461 $ 3,017 $ 3,084 ======== ======= ======= ======= Income taxes..................................................... $ 213 $ 206 $ 15 $ 397 ======== ======= ======= =======
Supplemental disclosure of noncash activity: In connection with the acquisition of Snowden-Pencer, Inc. in April 1994, the Company issued 55,000 shares of common stock valued at $5,500,000. The accompanying notes are an integral part of these consolidated financial statements. F-17 64 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND ACQUISITION Deknatel Snowden Pencer, Inc. and Subsidiaries (the Company) designs, manufactures and markets chest drainage devices, vascular punches, specialty needles and sutures, and precision surgical instruments used in cardiovascular, endoscopic, plastic and general surgical procedures. On April 20, 1994, the Company was formed and made a tax-free exchange of all of the outstanding common stock of Deknatel Holdings Corporation for the Company's common stock. In accordance with Accounting Interpretation No. 39 of Accounting Principles Board Opinion No. 16, Business Combinations, the accompanying consolidated financial statements are presented in a manner similar to that in pooling-of-interest accounting, with all assets and liabilities accounted for at historical cost for all periods presented. On April 20, 1994, the Company acquired 100% of the common stock of Snowden-Pencer Inc., a manufacturer of surgical instruments, for $11,822,000 of cash (net of cash acquired), $4,982,000 of assumed liabilities repaid at closing and 55,000 shares of common stock (valued at $5,500,000). On November 19, 1991, the Company acquired, from Pfizer Hospital Products Group, Inc. (HPG), certain assets and assumed certain liabilities of HPG's Deknatel division and acquired all of the outstanding common stock of Deknatel Medizinische Produkte GmbH (Deknatel GmbH). Total consideration paid (net of cash acquired) by the Company was $96,507,000. For financial reporting purposes, these acquisitions have been accounted for using the purchase method of accounting, and their results of operations have been included in the accompanying consolidated financial statements from each acquired entity's respective date of acquisition. For each acquisition, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market values existing at the date of acquisition. The excess of the purchase price over the estimated fair market value of net assets acquired is reflected in the accompanying consolidated balance sheets as goodwill and is included in intangible assets. For income tax reporting purposes, the acquisitions of Deknatel GmbH and Snowden-Pencer Inc. were treated as acquisitions of stock. As a result, the tax basis of the related assets and liabilities carries over from amounts previously reported for income tax purposes. Based on unaudited data, the following table presents selected financial information for fiscal year 1994 for the Company and Snowden-Pencer Inc. on a pro forma basis, assuming that the companies had been combined since the beginning of fiscal 1994 (in thousands): Net sales........................................................ $93,360 Income before other income (expense)............................. 13,230 Income before extraordinary item................................. 579
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Inventories Inventories consist of materials, labor and overhead and are valued at the lower of cost (first-in, first-out) or market, excluding those of the Company's Snowden-Pencer Inc. subsidiary, which are stated at the lower of cost (last-in, first-out) or market. As of September 30, 1995, approximately $6,672,000 of total inventories were valued on the last-in, first-out method. Under the first-in, first-out method, such inventories would have been $1,773,000 lower at September 30, 1995 (in thousands). F-18 65 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1994 1995 ------- ------- Raw materials............................................ $ 6,809 $ 5,648 Work-in-process.......................................... 1,959 1,592 Finished goods........................................... 14,013 11,387 ------- ------- $22,781 $18,627 ======= =======
(c) Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company provides for depreciation on property and equipment on a straight-line basis over their estimated useful lives as follows: Buildings and improvements.................................... 25 - 40 years Machinery and equipment....................................... 5 - 12 years
Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the assets or the remaining lease term. (d) Intangible Assets Included in intangible assets at September 30, 1994 and 1995 are the following (in thousands):
1994 1995 ------- ------- Customer sales contracts................................. $ 6,100 $ 6,100 Patents.................................................. 15,833 15,833 Noncompete agreements.................................... 18,000 18,000 Trade names.............................................. 700 705 Deferred financing costs................................. 2,439 2,674 Goodwill................................................. 31,907 31,937 ------- ------- Gross intangibles........................................ 74,979 75,249 Less -- amortization..................................... 25,566 28,793 ------- ------- Net intangibles.......................................... $49,413 $46,456 ======= =======
Customer sales contracts, patents, noncompete agreements and trade names are being amortized on a straight-line basis over their estimated useful lives. These lives are summarized as follows: Customer sales contracts....................................... 2 years Patents........................................................ 3-16 years Noncompete agreements.......................................... 2-10 years Trade names.................................................... 40 years
Deferred financing costs represent costs associated with the Company's long-term debt and interest rate protection agreements (see Note 3), which are being amortized over the lives of the respective debt agreements. During 1994 and 1995, amortization of deferred financing costs was $518,000 and $429,000, respectively, and has been included in interest expense in the accompanying consolidated statements of operations. Goodwill represents the excess of the purchase price over the fair market value of identified net assets acquired related to the business acquisitions more fully described in Note 1. Goodwill is amortized on a straight-line basis over a 40-year period. F-19 66 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) Accrued Liabilities Included in accrued liabilities at September 30, 1994 and 1995 are the following (in thousands):
1994 1995 ------- ------- Accrued compensation and benefits........................ $ 3,389 $ 5,402 Accrued employee benefit costs........................... 4,442 4,036 Accrued customer rebates................................. 4,069 4,591 Other.................................................... 4,362 4,831 ------- ------- $16,262 $18,860 ======= =======
(f) Income Taxes The Company records income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. (g) Foreign Currency Translation All assets and liabilities of the Company's foreign subsidiaries are translated at exchange rates at the balance sheet date, and revenues and expenses are translated at average exchange rates for the period in accordance with SFAS No. 52, Foreign Currency Translation. Resulting translation adjustments are reflected as a separate component of stockholders' investment titled cumulative translation adjustment. Exchange gains and losses on foreign currency transactions consummated during the year are included in the accompanying consolidated statements of operations and are immaterial. (h) Cash Equivalents Cash and cash equivalents include marketable securities with an original maturity date of three months or less. (i) Unaudited Interim Financial Statements In the opinion of the Company's management, the March 26, 1995 and March 24, 1996 unaudited interim financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of results for this interim period. The results of operations for the six months ended March 26, 1995 and March 24, 1996 are not necessarily indicative of the results to be expected for the full year or for any future period. (3) LONG-TERM DEBT On April 20, 1994, in part to facilitate the acquisition of Snowden-Pencer Inc. (see Note 1), the Company refinanced its then-outstanding term loan. At the date of refinancing, approximately $2,360,000 of unamortized deferred financing costs related to the original term loan was expensed and is reflected in the accompanying consolidated statements of operations as an extraordinary loss. Costs incurred in securing the new term loans of $2,439,000 have been capitalized and included in intangible assets (see Note 2) and are being amortized over the term of the loans. F-20 67 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LONG-TERM DEBT (CONTINUED) Long-term debt as of September 30, 1994 and 1995 consists of the following (in thousands):
1994 1995 ------- ------- Term loan A, interest at LIBOR plus 3% (8.43% and 9.31% at September 30, 1994 and 1995, respectively, subject to adjustment for interest rate cap), payable in installments through 1999................................................... $28,000 $23,250 Term loan B, interest at LIBOR plus 3.5% (8.93% and 9.81% at September 30, 1994 and 1995, respectively, subject to adjustment for interest rate cap), payable in installments through 2001................................................... 25,000 25,000 12% Note due to Pfizer Hospital Products Group, Inc., interest at 12%, payable in installments in 1999 through 2001, interest payable semiannually........................................... 10,250 10,250 ------- ------- 63,250 58,500 Less -- Current portion.......................................... 4,750 6,750 ------- ------- Long-term portion........................................... $58,500 $51,750 ======= =======
(a) Term Loans A and B Minimum annual principal installments due under the term loans are summarized as follows (in thousands): 1996............................................................. $ 6,750 1997............................................................. 8,500 1998............................................................. 9,500 1999............................................................. 9,625 2000............................................................. 9,250 Thereafter....................................................... 4,625 ---- $48,250 ====
In addition to the minimum installments shown above, the loan agreement requires additional principal repayments to be made within 105 days after each fiscal year-end equal to 75% of each year's adjusted excess cash flow (as defined in the loan agreement). As of September 30, 1995, no additional principal repayments will be required in 1996. Further accelerations of principal repayments are required in the event of a sale of equity of the Company or the incurrence of indebtedness. In any event, all remaining outstanding amounts due under the term loan are payable in full in November 2001. On January 23, 1995, the Company purchased an interest rate cap covering a notional amount of $30,000,000 for the period from January 27, 1995 to April 20, 1997. Under the terms of the cap, the Company's maximum interest rate expense for the covered notional principal is 8%, unless LIBOR, at any measurement date, exceeds 9%. If LIBOR, at any measurement date, exceeds 9%, then the maximum interest rate is capped at 9%. Through September 30, 1995, the interest rate on the term loan was less than the interest rate cap. The cost of the cap, $235,000, is included in intangible assets and is being amortized over the period covered by the cap. Substantially all of the Company's assets have been pledged in support of the term loan and revolving line of credit (see Note 3(c)). F-21 68 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LONG-TERM DEBT (CONTINUED) (b) 12% Note Due to Pfizer Hospital Products Group, Inc. Minimum annual principal repayments due under the 12% note due to HPG (12% note) are summarized as follows (in thousands): 1999.............................................................. $3,416 2000.............................................................. 3,417 2001.............................................................. 3,417
In addition, mandatory principal prepayments are required (1) in the event of a significant sale of equity of the Company (other than stock options) and (2) in an amount equal to 50% of excess cash flow (as defined) after the satisfaction of all obligations for repayments under the term loans. (c) Revolving Line of Credit The Company has available up to $20 million under a secured revolving line of credit that expires in April 1999. Available borrowings under the revolving line of credit are limited to the Company's borrowing base, which is calculated as the sum of 80% of eligible domestic receivables plus 50% of eligible domestic inventory. As of September 30, 1995, the Company's borrowing base was approximately $9.7 million. Borrowings under the revolving line of credit bear interest at a rate of LIBOR plus 3%, and a fee of 1/2% of the unused portion of the line is charged on an annual basis. At September 30, 1994 and 1995, $4,400,000 and $0 were outstanding under this agreement, respectively. (d) Letter-of-credit Facility Included in the revolving line-of-credit facility, the Company has available a letter-of-credit facility under which irrevocable standby letters of credit may be issued for up to $2.5 million in aggregate. No letters of credit were issued as of September 30, 1995. The letter of credit facility provides for a commitment fee equal to 2.25% to 2.5% of the letter of credit amount upon issuance of such commitments. The term loan, 12% note and revolving line-of-credit agreements contain certain covenants that, among other things, restrict dividends or stock repurchases, limit capital expenditures and annual operating lease payments, and set minimum fixed charges, interest coverage and leverage ratios, and minimum consolidated adjusted-net-worth requirements. The agreements also limit the Company's ability to issue capital stock and set maximum inventory and accounts receivable levels. (4) COMMITMENTS AND CONTINGENCIES Future minimum rental commitments under third-party operating leases (see Note 8 for discussion of related party commitments) that have initial or noncancelable lease terms in excess of one year are as follows (in thousands): 1996................................................................ $ 656 1997................................................................ 424 1998................................................................ 44 1999................................................................ 32 2000................................................................ 16 ------ $1,172 ======
The Company has a commitment to invest up to $600,000 in a 50%-owned joint venture. As of September 30, 1995, the Company had advanced $350,000 of such committed funds. F-22 69 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is contingently liable with respect to certain lawsuits and other matters that arise in the ordinary course of business. In the opinion of management, resolution of these contingencies will not have a material effect on the consolidated financial statements of the Company. During 1995, the Company entered into foreign exchange forward contracts totaling $6 million and maturing on a monthly basis throughout fiscal 1996. These forward contracts require the purchase of German deuche marks at rates ranging from 1.4296 deuche marks per U.S. dollar to 1.4084 deuche marks per U.S. dollar. The forward contracts are intended to hedge anticipated intercompany inventory transfers and debt payments, and are marked to market, which could result in a foreign currency gain or loss based on future fluctuations in exchange rates. No gain or loss was reflected in the 1995 financial statements, as year-end exchange rates approximated contract rates. (5) INCOME TAXES The components of the income before provision for income taxes and extraordinary loss for 1994 and 1995 are as follows (in thousands):
1994 1995 ---- ------ Domestic.................................................... $137 $1,881 Foreign..................................................... 314 (394) ---- ------ $451 $1,487 ==== ======
The provision for income taxes for 1994 and 1995 consists of the following (in thousands):
1994 1995 ----- ----- Current -- Federal................................................... $ -- $ 115 Foreign................................................... 200 102 State..................................................... 92 192 ---- ---- 292 409 ---- ---- Deferred -- Federal................................................... -- -- Foreign................................................... (114) (258) State..................................................... 10 21 ---- ---- (104) (237) ---- ---- Provision for income taxes........................... $ 188 $ 172 ==== ====
F-23 70 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) INCOME TAXES (CONTINUED) The provision for income taxes differs from the amounts calculated by applying the statutory federal income tax rate of 34% to income before provision for income taxes and extraordinary loss due to the following (in thousands):
1994 1995 ----- ----- Income tax provision at statutory federal income tax rates..................................................... $ 153 $ 506 Effect of lower foreign tax rates........................... (21) (22) State income taxes, net of federal benefit.................. 102 141 Nondeductible goodwill amortization......................... 52 127 Change in U.S. valuation allowance.......................... 221 (283) Other....................................................... (319) (297) ---- ---- Provision for income taxes............................. $ 188 $ 172 ==== ====
At September 30, 1995, subject to Internal Revenue Service review, the Company has U.S. net operating loss carryforwards (NOLs) available of approximately $8,000,000 for tax purposes which expire if unutilized beginning in fiscal 2007. The NOLs are available to offset future U.S. taxable income, but their use could be limited if a change in control of the Company occurred. Prepaid income taxes and deferred income taxes at September 30, 1994 and 1995 consist of the following (in thousands):
1994 1995 ------- ------- Prepaid income taxes -- Intangible asset amortization.......................... $ 5,670 $ 5,071 Accrued expenses....................................... 1,458 1,509 Inventory basis differences............................ 132 606 Other.................................................. 153 214 NOLs................................................... 2,537 2,711 ------- ------- 9,950 10,111 Valuation allowance.................................... (7,910) (7,627) ------- ------- Total deferred tax assets...................... $ 2,040 $ 2,484 ======= ======= Deferred income taxes -- Depreciation........................................... $ 2,028 $ 2,312 Other.................................................. 85 7 ------- ------- Total deferred tax liabilities................. $ 2,113 $ 2,319 ======= =======
The Company has recorded a valuation allowance against its otherwise recognizable net deferred tax asset due to the uncertainty of realizing the future benefit of the deferred tax assets. (6) EMPLOYEE BENEFIT PLANS (a) Pension Plans The Company has a defined benefit pension plan, which covers substantially all U.S. employees of the Company, excluding those employed by the Company's Snowden-Pencer Inc. subsidiary. Plan assets consist primarily of U.S. government and corporate securities. F-24 71 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) EMPLOYEE BENEFIT PLANS (CONTINUED) The funded status of the pension plan at September 30, 1994 and 1995 was as follows (in thousands):
1994 1995 ------- ------- Actuarial present value of accumulated benefit obligation -- Vested................................................. $ 3,016 $ 4,257 Nonvested.............................................. 649 650 ------- ------- Total.......................................... $ 3,665 $ 4,907 ======= ======= Projected benefit obligation............................. $ 4,420 $ 5,567 Plan assets at market value.............................. 2,765 3,672 ------- ------- Funded status -- plan assets less than projected benefit obligation............................................. (1,655) (1,895) Unrecognized prior service costs......................... (20) (19) Unrecognized net loss from past experience different from that assumed and changes in actuarial assumptions...... 526 664 ------- ------- Accrued pension cost........................... $(1,149) $(1,250) ======= =======
Assumptions used in the computation for 1994 and 1995 are as follows:
1994 1995 ---- ---- Weighted average discount rate................................. 8.5 % 7.5 % Expected long-term rate of return on assets.................... 9.0 9.0 Rate of increase in future compensation levels................. 4.0 3.5
Benefits under the pension plan are generally based on years of service and the employees' career earnings. Employees become fully vested after five years. A summary of the components of net periodic pension cost for 1994 and 1995 is as follows (in thousands):
1994 1995 ----- ----- Service cost................................................ $ 516 $ 417 Interest cost............................................... 334 341 Actual return on plan assets................................ 488 (533) Net amortization and deferral............................... (741) 273 ----- ----- Net periodic pension cost......................... $ 597 $ 498 ===== =====
F-25 72 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) EMPLOYEE BENEFIT PLANS (CONTINUED) The Company's German subsidiary also has a defined benefit pension plan for its employees. The funded status at September 30, 1994 and 1995 is as follows (in thousands):
1994 1995 ------- ------- Actuarial present value of accumulated benefit obligation -- Vested................................................. $ 1,332 $ 1,470 Nonvested.............................................. 358 238 ------- ------- Total.......................................... $ 1,690 $ 1,708 ======= ======= Projected benefit obligation............................. 2,234 2,379 Plan assets at market value.............................. $ -- $ -- ------- ------- Funded status -- plan assets less than projected benefit obligation............................................. (2,234) (2,379) Unrecognized net loss.................................... 498 72 ------- ------- Accrued pension cost........................... $(1,736) $(2,307) ======= =======
Assumptions used in the computation for 1994 and 1995 are as follows:
1994 1995 --- --- Weighted average discount rate............................... 6.0% 6.5% Expected long-term rate of return on assets.................. N/A N/A Rate of increase in future compensation levels............... 3.5% 3.0%
A summary of the components of net periodic pension cost for 1994 and 1995 are as follows (in thousands):
1994 1995 ---- ---- Service cost.................................................. $233 $203 Interest cost................................................. 134 154 Net amortization and deferral................................. 26 4 ---- ---- Net periodic pension cost........................... $393 $361 ==== ====
(b) Savings and Investment and Profit Sharing Plans The Company has a savings and investment plan for all U.S. employees. Employee contributions to the savings plan can be made both on a pretax (salary deferral) and after-tax basis. The Company may make a matching contribution in an amount equal to 100% of the first 2% of employee salary deferral contributions and 50% of the next 4% of employee salary deferral contributions (subject to certain limitations, as defined in the plan). The Company matched pretax salary deferrals totaling $461,000 and $543,000 in fiscal 1994 and 1995, respectively. Employees of Snowden-Pencer Inc. also participate in a noncontributory profit sharing plan. The plan provides for discretionary contributions to be determined annually. In fiscal 1995, the expense related to the plan included in the accompanying 1995 consolidated statement of operations was $78,000. F-26 73 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) STOCKHOLDERS' AGREEMENTS AND CONVERTIBLE SECURITIES (a) Stockholders' Agreement Stockholders of the Company entered into an agreement that, among other provisions, allows the Company and/or certain stockholders of the Company the right of first refusal to purchase shares in the event that outstanding stock is offered for sale by any stockholder. Additionally, in the event that the Company proposes to issue any additional shares (other than in satisfaction of stock option obligations), stockholders have the right of first refusal to purchase a portion of such stock sufficient to maintain their percentage interest in outstanding common stock immediately prior to such issuance. During 1995, the Company amended its Stockholders' Agreement to allow for the issuance of Class B common stock. Class B common stockholders are eligible to receive dividends at a rate of 70% of those paid to Class A shareholders and, in the event of a liquidation, will participate in the distribution of assets at a rate equal to 70% of distributions received by Class A stockholders. Class B stock will convert to Class A common stock upon (1) the completion of an initial public offering of stock by the Company, (2) a change in control of the ownership of the Company or (3) a resolution of the Board of Directors authorizing such a conversion. (b) Employee Stock Options In November 1991, the Company granted to certain members of management options to purchase common stock at $100 per share. The options are exercisable at the rate of 20% each year from the date of grant. A summary of the option activity is as follows:
EXERCISABLE NONEXERCISABLE TOTAL ----------- -------------- ------ October 1, 1993........................... 9,093 15,684 24,777 Terminated.............................. 7,910 13,909 21,819 ------ ------- ------- September 30, 1994........................ 1,183 1,775 2,958 Terminated.............................. 828 1,775 2,603 ------ ------- ------- September 31, 1995........................ 355 -- 355 ====== ======= =======
During 1995, the Company granted to certain members of management, options to purchase 40,293 shares of Class B common stock at $70 per share. Options granted become exercisable ratably over a five-year period. As of September 30, 1995, 10,627 options were exercisable. The Company has the right to repurchase, at fair market value, as determined by the Board of Directors, any stock issued under the stock option plan. The options expire at the earlier of 10 years from grant date or the termination of the executive's employment. No options were exercised in fiscal 1994 and 1995. The option price for all options approximated fair market value at grant date as determined by the Board of Directors. (c) Royalty Capital Partners' Stock Options As partial compensation for services in connection with the acquisition of certain assets and liabilities from HPG (see Note 1), the Company granted to Royalty Capital Partners (RCP) options to purchase 1,172 shares of common stock at the price of $100 per share. The options vest and become exercisable upon the achievement of both earnings and working capital as a percentage of sales targets, as defined, on a cumulative basis for the five years ending December 31, 1996. All unvested RCP options expire after December 31, 1996, and to the extent not exercised, all RCP options expire as of November 20, 2001. (8) RELATED PARTY TRANSACTIONS Fees of $256,000 and $170,000 were paid during 1994 to affiliates of two of the principal stockholders of the Company for services rendered in connection with the acquisition of Snowden-Pencer (described in F-27 74 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) RELATED PARTY TRANSACTIONS (CONTINUED) Note 1) and with the arrangement of the long-term debt used to finance the acquisition (see Note 3). Such fees have been allocated between deferred financing costs and goodwill and have been included in the purchase price on the accompanying consolidated balance sheets, as appropriate. The Company leases one of its facilities from one of its stockholders under a 20-year operating lease. During 1994 and 1995, the Company expensed approximately $91,000 and $207,000, respectively, related to this facility lease. Future minimum rental commitments under the remainder of the lease are as follows (in thousands): 1996................................................................ $ 213 1997................................................................ 220 1998................................................................ 226 1999................................................................ 233 2000................................................................ 240 Thereafter.......................................................... 4,066 ------ $5,198 ======
The Company is also required to pay quarterly management fees to one of its principal stockholders. During fiscal 1994 and 1995, $146,000 was expensed and paid in each year. (9) SEVERANCE AND OTHER CHARGES During 1994 and 1995, the Company expensed the following amounts in connection with work force reductions, a plant closure, consolidation of the sales force and the defense of rights under certain intangible assets (in thousands):
1994 1995 ------ ------ Severance and social benefits.............................. $ 983 $1,651 Plant closure costs........................................ -- 888 Sales and marketing relocation and severance............... -- 653 Patent defense............................................. 500 393 ------ ------ $1,483 $3,585 ====== ======
The majority of the above amounts were paid in the year expensed; amounts accrued at each of the year-ends were not material. F-28 75 DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) GEOGRAPHIC AND CUSTOMER INFORMATION The Company's operations by geographic area for the years ended September 30, 1994 and 1995 are summarized as follows (in thousands):
1994 1995 -------- -------- Net sales -- United States........................................ $ 60,105 $ 66,404 Europe............................................... 20,459 22,439 Other................................................ 4,846 6,416 -------- -------- $ 85,410 $ 95,259 ======== ======== Income (loss) before provision for income taxes and extraordinary loss -- United States........................................ $ 137 $ 1,881 Europe............................................... 314 (394) -------- -------- $ 451 $ 1,487 ======== ======== Total assets -- United States........................................ $ 96,388 $ 92,703 Europe............................................... 14,060 13,123 -------- -------- $110,448 $105,826 ======== ========
Two distributors accounted for 21% and 17% of net sales in 1994 and 17% and 16% of net sales in 1995. United States sales include export sales of $2,932,000 in 1994 and $3,623,000 in 1995. (11) SUBSEQUENT EVENTS On December 5, 1995, the Company purchased certain assets and assumed certain liabilities relating to a product line of chest drainage and cardiovascular autotransfusion products from Davol, Inc., a subsidiary of C.R. Bard, Inc. for $9.5 million in cash. This acquisition was accounted for using the purchase method. Pro forma results of the acquisition are not presented because they would not be materially different from the Company's historical financial statements. In January 1996, the Company sold 16,176 shares of Class B common stock, at a price of $90 per share, to certain officers of the Company. The $90 per share represented estimated fair market value per share as determined by the Board of Directors of the Company. In December 1995, the Company's German subsidiary sold its primary building for approximately $1,900,000 in cash. The Company recorded a gain on the sale of $1,656,000 which is included in other income for the six months ended March 24, 1996. In May 1996, the Company agreed to be purchased by Genzyme Corporation for $250 million in cash. F-29 76 - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Available Information................. Incorporation of Certain Documents by Reference........................... Prospectus Summary.................... Risk Factors.......................... Use of Proceeds....................... Capitalization........................ Price Range of General Division Stock and Dividend Policy................. DSP Management's Discussion and Analysis of Financial Condition and Results of Operations............... Business.............................. Description of Notes.................. Certain Federal Income Tax Consequences........................ Description of Genzyme Capital Stock............................... Management and Accounting Policies Governing the Relationship of Genzyme Divisions................... Underwriting.......................... Notice to Canadian Residents.......... Legal Opinions........................ Experts............................... Index to Financial Statements.........
- ------------------------------------------------------ - ------------------------------------------------------ genzyme $225,000,000 % Convertible Subordinated Notes Due 2001 PROSPECTUS MN () - ------------------------------------------------------ 77 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses to be borne by the Company in connection with this offering are as follows: SEC registration fee...................................................... $ 86,207 NASD filing fee........................................................... $ 25,500 Blue Sky fees and expenses................................................ $ 25,000 Printing expenses......................................................... $ 75,000 Accounting fees and expenses.............................................. $200,000 Legal fees and expenses................................................... $125,000 Trustee fees.............................................................. $ 20,000 Miscellaneous expenses.................................................... $ 43,293 -------- Total........................................................... $600,000 ========
All of the above figures, except the SEC registration fee and NASD filing fee, are estimates. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 67 of chapter 156B of the Massachusetts Business Corporation Law grants Genzyme the power to indemnify any director, officer, employee or agent to whatever extent permitted by Genzyme's Articles of Organization, By-Laws or a vote adopted by the holders of a majority of the shares entitled to vote thereon, unless the proposed indemnitee has been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her actions were in the best interests of the corporation or, to the extent that the matter for which indemnification is sought relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Such indemnification may include payment by Genzyme of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if he or she shall be adjudicated to be not entitled to indemnification under the statute. Article VI of Genzyme's By-Laws provides that Genzyme shall, to the extent legally permissible, indemnify each person who may serve or who has served at any time as a director or officer of the corporation or of any of its subsidiaries, or who at the request of the corporation may serve or at any time has served as a director, officer or trustee of, or in a similar capacity with, another organization or an employee benefit plan, against all expenses and liabilities (including counsel fees, judgments, fines, excise taxes, penalties and amounts payable in settlements) reasonably incurred by or imposed upon such person in connection with any threatened, pending or completed action, suit or other proceeding, whether civil, criminal, administrative or investigative, in which he or she may become involved by reason of his or her serving or having served in such capacity (other than a proceeding voluntarily initiated by such person unless he or she is successful on the merits, the proceeding was authorized by the corporation or the proceeding seeks a declaratory judgment regarding his or her own conduct). Such indemnification shall include payment by Genzyme of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if he or she shall be adjudicated to be not entitled to indemnification under Article VI, which undertaking may be accepted without regard to the financial ability of such person to make repayment. The indemnification provided for in Article VI is a contract right inuring to the benefit of the directors, officers and others entitled to indemnification. In addition, the indemnification is expressly not exclusive of any other rights to which such director, officer or other person may be entitled by contract or otherwise under law, and inures to the benefit of the heirs, executors and administrators of such a person. II-1 78 Genzyme also has in place agreements with certain officers and directors which affirm Genzyme's obligation to indemnify them to the fullest extent permitted by law and contain various procedural and other provisions which expand the protection afforded by Genzyme's By-Laws. Section 13(b)(1 1/2) of chapter 156B of the Massachusetts Business Corporation Law provides that a corporation may, in its articles of organization, eliminate a director's personal liability to the corporation and its stockholders for monetary damages for breaches of fiduciary duty, except in circumstances involving (i) a breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unauthorized distributions and loans to insiders and (iv) transactions from which the director derived an improper personal benefit. Section VI.C.5. of Genzyme's Articles of Organization provides that no director shall be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except to the extent that such exculpation is not permitted under the Massachusetts Business Corporation Law as in effect when such liability is determined. ITEM 16. EXHIBITS 1.1 -- Underwriting Agreement dated as of , 1996 between Genzyme and CS First Boston Corporation. To be filed by amendment. 2.1 -- Merger Agreement among Genzyme, DSP Acquisition Corporation and DSP, Inc. dated as of May 24, 1996. Filed herewith. Pursuant to Item 601 (b)(2) of Regulation S-K, the schedules referred to in the Agreement are omitted. The Registrant hereby undertakes to furnish supplementally a copy of any omitted schedule to the Commission upon request. 4.1 -- Indenture dated as of , 1996 between Genzyme and State Street Bank and Trust Company. To be filed by amendment. 4.2 -- Articles of Organization, as amended, of Genzyme. Filed as Exhibit 3.1 to Genzyme's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 4.3 -- By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated December 31, 1991, and incorporated herein by reference. 5.1 -- Opinion of Palmer & Dodge LLP. Filed herewith. 12.1 -- Computation of Ratio of Earnings to Fixed Charges. Filed herewith. 23.1 -- Consent of Coopers & Lybrand L.L.P., independent accountants to Genzyme. Filed herewith. 23.2 -- Consent of Arthur Andersen LLP, independent accountants to DSP. Filed herewith. 23.3 -- Consent of Palmer & Dodge LLP (contained in Opinion of Palmer & Dodge LLP, filed as Exhibit 5.1). 25.1 -- Statement of Eligibility and Qualification of the Trustee on Form T-1 of State Street Bank and Trust Company. Filed herewith.
ITEM 17. UNDERTAKINGS (a) The undersigned hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of II-2 79 appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 80 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cambridge, Commonwealth of Massachusetts, on June 13, 1996. GENZYME CORPORATION By: /s/ HENRI A. TERMEER ------------------------------------ Henri A. Termeer President POWER OF ATTORNEY We, the undersigned officers and directors of Genzyme Corporation, hereby severally constitute and appoint Henri A. Termeer, David J. McLachlan, Evan M. Lebson and Peter Wirth, and each of them singly, our true and lawful attorneys, with full power to them in any and all capacitates, to sign any amendments to this Registration Statement on Form S-3 (including Pre-and Post-Effective Amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ -------------- /s/ HENRI A. TERMEER Director and Principal June 13, 1996 - ----------------------------------------------- Executive Officer Henri A. Termeer /s/ DAVID J. MCLACHLAN Principal Financial and June 13, 1996 - ----------------------------------------------- Accounting Officer David J. McLachlan /s/ CONSTANTINE E. ANAGNOSTOPOULOS Director June 13, 1996 - ----------------------------------------------- Constantine E. Anagnostopoulos /s/ DOUGLAS A. BERTHIAUME Director June 13, 1996 - ----------------------------------------------- Douglas A. Berthiaume /s/ HENRY E. BLAIR Director June 13, 1996 - ----------------------------------------------- Henry E. Blair /s/ ROBERT J. CARPENTER Director June 13, 1996 - ----------------------------------------------- Robert J. Carpenter /s/ CHARLES L. COONEY Director June 13, 1996 - ----------------------------------------------- Charles L. Cooney /s/ HENRY R. LEWIS Director June 13, 1996 - ----------------------------------------------- Henry R. Lewis
II-4 81 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NO. - ------- -------------------------------------------------------------------------- ---------- 1.1 -- Underwriting Agreement dated as of , 1996 between Genzyme and CS First Boston Corporation. To be filed by amendment. 2.1 -- Merger Agreement among Genzyme, DSP Acquisition Corporation and DSP, Inc. dated as of May 24, 1996. Filed herewith. Pursuant to Item 601(b)(2) of Regulation S-K, the schedules referred to in the Agreement are omitted. The Registrant hereby undertakes to furnish supplementally a copy of any omitted schedule to the Commission upon request. 4.1 -- Indenture dated as of , 1996 between Genzyme and State Street Bank and Trust Company. To be filed by amendment. 4.2 -- Articles of Organization, as amended, of Genzyme. Filed as Exhibit 3.1 to * Genzyme's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 4.3 -- By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated * December 31, 1991, and incorporated herein by reference. 5.1 -- Opinion of Palmer & Dodge LLP. Filed herewith. 12.1 -- Computation of Ratio of Earnings to Fixed Charges. Filed herewith. 23.1 -- Consent of Coopers & Lybrand LLP, independent accountants to Genzyme. Filed herewith. 23.2 -- Consent of Arthur Andersen LLP, independent accountants to DSP. Filed herewith. 23.3 -- Consent of Palmer & Dodge LLP (contained in Opinion of Palmer & Dodge LLP, filed as Exhibit 5.1). 25.1 -- Statement of Eligibility and Qualification of the Trustee on Form T-1 of State Street Bank and Trust Company. Filed herewith.
- --------------- * Incorporated herein by reference. EX-2.1 2 MERGER AGREEMENT 1 EXECUTION COPY MERGER AGREEMENT AMONG GENZYME CORPORATION, DSP ACQUISITION CORP. AND DEKNATEL SNOWDEN PENCER, INC. DATED AS OF MAY 24, 1996 2 TABLE OF CONTENTS Article 1 - The Merger................................................................................. 1 Section 1.1 General.......................................................................... 1 Section 1.2 Filing........................................................................... 1 Section 1.3 Effectiveness of the Merger...................................................... 1 Section 1.4 Certificate of Incorporation and Bylaws.......................................... 1 Section 1.5 Directors and Officers........................................................... 2 Section 1.6 Conversion....................................................................... 2 Section 1.7 Dissenting Shares................................................................ 3 Section 1.8 Exchange of Shares............................................................... 3 Section 1.9 Effects of Merger................................................................ 4 Section 1.10 Closing......................................................................... 4 Article 2 - Representations and Warranties of the Company.............................................. 4 Section 2.1 Organization and Qualification................................................... 4 Section 2.2 Corporate Authorization.......................................................... 5 Section 2.3 Financial Data................................................................... 5 Section 2.4 Ownership of Stock............................................................... 6 Section 2.5 Consents and Approvals........................................................... 6 Section 2.6 Litigation....................................................................... 6 Section 2.7 Compliance with Law.............................................................. 6 Section 2.8 Tax Matters...................................................................... 7 Section 2.9 Employee Benefit Plans........................................................... 7 Section 2.10 Intellectual Property........................................................... 8 Section 2.11 Real Property................................................................... 9 Section 2.12 Material Contracts.............................................................. 11 Section 2.13 Environmental and Safety Matters................................................ 12 Section 2.14 FDA Matters..................................................................... 13 Section 2.15 Employee Relations.............................................................. 13 Section 2.16 Brokers......................................................................... 14 Section 2.17 Absence of Undisclosed Liabilities.............................................. 14 Section 2.18 Material Adverse Change......................................................... 14 Section 2.19 Accounts Receivable............................................................. 14 Section 2.20 Inventory....................................................................... 14 Section 2.21 Disclaimer...................................................................... 14 Article 3 - Representations and Warranties of the Parent and the Purchaser............................. 15 Section 3.1 Organization and Qualification................................................... 15 Section 3.2 Corporate Authorization.......................................................... 15 Section 3.3 Consents and Approvals........................................................... 15 Section 3.4 Financing........................................................................ 15 Section 3.5 Litigation....................................................................... 15 Section 3.6 Brokers.......................................................................... 16
(i) 3 Article 4 - Covenants.................................................................................. 16 Section 4.1 Conduct of Business of the Company and the Subdiairies........................... 16 Section 4.2 Filings.......................................................................... 17 Section 4.3 Confidentiality; Access to Information........................................... 17 Section 4.4 Public Announcements............................................................. 17 Section 4.5 Exclusivity...................................................................... 18 Section 4.6 Insurance........................................................................ 18 Article 5 - Conditions to Closing...................................................................... 18 Section 5.1 Conditions to Each Party's Obligation............................................ 18 Section 5.2 Conditions to Obligation of the Parent and the Purchaser......................... 19 Section 5.3 Conditions to Obligation of the Company.......................................... 20 Article 6 - Termination................................................................................ 21 Section 6.1 Termination...................................................................... 21 Section 6.2 Effect of Termination............................................................ 21 Article 7 - General Provisions......................................................................... 22 Section 7.1 Rules of Construction............................................................ 22 Section 7.2 Non-Survival..................................................................... 22 Section 7.3 Notices.......................................................................... 22 Section 7.4 Governing Law.................................................................... 24 Section 7.5 Entire Agreement................................................................. 24 Section 7.6 Amendment; Waiver................................................................ 24 Section 7.7 Binding Effect................................................................... 24 Section 7.8 Counterparts..................................................................... 24 Section 7.9 Expenses......................................................................... 24
SCHEDULES Schedule 2.1 Subsidiaries Schedule 2.4 Capitalization Schedule 2.5 Company Consents and Approvals Schedule 2.6 Litigation Schedule 2.7 Compliance with Laws Schedule 2.8 Tax Matters Schedule 2.9 Employee Benefit Plans Schedule 2.10 Intellectual Property Schedule 2.11 Real Property Schedule 2.12 Material Contracts Schedule 2.13 Environmental Matters Schedule 2.14 FDA Matters Schedule 2.15 Severance Arrangements Schedule 2.16 Transaction Fees Schedule 3.3 Parent Consents and Approvals (ii) 4 MERGER AGREEMENT MERGER AGREEMENT dated as of May 24, 1996, among Genzyme Corporation, a Massachusetts corporation (the "Parent"), DSP ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of Parent (the "Purchaser"), and DEKNATEL SNOWDEN PENCER, INC., a Delaware corporation (the "Company"). The Company and the Parent have approved the acquisition of the Company by the Parent pursuant to a merger of the Purchaser with and into the Company with the Company surviving such merger, subject to the terms and conditions contained herein. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties and covenants contained herein, the parties agree as follows: ARTICLE 1 THE MERGER Section 1.1 General. Upon the terms and conditions contained herein and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), at the Effective Time (as defined in Section 1.3), the Purchaser shall be merged with and into the Company (the "Merger") and thereupon the separate corporate existence of the Purchaser shall cease, and the Company, as the surviving corporation (the "Surviving Corporation"), shall continue to exist under and be governed by the DGCL. Section 1.2 Filing. On the Closing Date (as defined in Section 1.10) or as soon as practicable thereafter, the Company and the Purchaser will cause a certificate of merger (the "Merger Certificate") to be filed with the Secretary of State of the State of Delaware pursuant to applicable provisions of the DGCL and shall take all such further actions as may be required by law to make the Merger effective. Section 1.3 Effectiveness of the Merger. The Merger shall become effective (the "Effective Time") at such time as the Merger Certificate is filed with the Secretary of State of Delaware in accordance with the DGCL or at such later time (but in no event later than one business day thereafter) as is specified in the Merger Certificate. Section 1.4 Certificate of Incorporation and Bylaws. Upon the Effective Time, the certificate of incorporation and bylaws of Purchaser, in each case as in effect immediately prior to the Effective Time, shall become the certificate of incorporation and bylaws of the Surviving Corporation (but subject, in the case of the certificate of incorporation, to such amendments as the Parent shall require to be set forth in the Merger Certificate). 1 5 Section 1.5 Directors and Officers. The persons who are directors and officers of the Purchaser immediately prior to the Effective Time shall, as of the Effective Time, constitute the directors and officers of the Surviving Corporation, in each case to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation. The Surviving Corporation may designate such other officers as it determines. Section 1.6 Conversion. At the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof in the case of subsections (a), (c) and (d) below, and by virtue of valid and binding contractual obligations enforceable against the parties thereto in the case of subsection (b): (a) Each outstanding share of the Company's Class A and Class B Common Stock, $.01 par value per share (collectively, the "Common Stock"), other than Dissenting Shares as defined in Section 1.7, shall be converted into and shall thereafter represent only the right to receive, upon surrender in accordance with Section 1.8, an amount in cash (the "Merger Consideration"), without interest, determined in accordance with the following formula: (x) two hundred forty-five million dollars ($245,000,000) minus the Company's total indebtedness for borrowed money as of the Closing Date (including principal, interest and fees, if any, and including all such indebtedness outstanding under the Banque Paribas and the Pfizer Hospital Products Group instruments listed on Schedule 2.12 as Contracts Related to the Borrowing of Money, but excluding amounts guaranteed to Fleet Bank under the guaranty agreement listed on Schedule 2.12, provided that arrangements satisfactory to the Parent are in place on the Closing Date to terminate such guaranty in exchange for Parent's payment to Fleet of the amounts guaranteed out of the portion of the Merger Consideration payable to the stockholders of the Company who are the primary obligors of such indebtedness) minus all fees and expenses in excess of $3,500,000 associated with the sale of the Company which remain unpaid as of the Closing Date, including fees and expenses of attorneys and investment bankers, plus the Company's cash and cash-equivalents as of the Closing Date (without giving effect to the payment of up to $3,500,000 in transaction expenses of the Company on the Closing Date), plus the aggregate exercise price of all outstanding options as of the Closing Date, other than the options granted by the stock option agreement dated November 20, 1991 with Royalty Capital Partners (the "RCP Option"),divided by (y) the total number of shares of Common Stock outstanding as of the Closing Date plus the total number of shares issuable upon the exercise of all options outstanding as of the Closing Date, other than the RCP Option; (b) All outstanding options to purchase Common Stock (the "Stock Options"), other than the RCP Option, shall be converted into the right to receive the Merger Consideration multiplied by the number of shares for which such Stock Option is exercisable, less the exercise price therefor; 2 6 (c) All shares of capital stock which are held by the Company as treasury shares shall be cancelled and retired and cease to exist, without any conversion thereof; and (d) Each share of the outstanding common stock, $.01 par value, of the Purchaser shall be converted into one share of common stock, $.01 par value, of the Surviving Corporation. Section 1.7 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, shares of Common Stock that are issued and outstanding immediately prior to the Effective Time and that are held by stockholders who have not voted such shares in favor of the Merger or consented thereto in writing and who have delivered a written demand for payment for such shares in the manner provided in Section 262 of the DGCL (the "Dissenting Shares") shall not be converted into or represent a right to receive the Merger Consideration pursuant to Section 1.6 hereof, but the holder thereof shall be entitled only to such rights as are granted by Section 262 of the DGCL. Each holder of Dissenting Shares shall receive payment therefor from the Surviving Corporation in accordance with the DGCL; provided, however, (a) if any such holder of Dissenting Shares shall have failed to establish his entitlement to receive payment for such shares as provided in Section 262 of the DGCL, or (b) if any such holder of Dissenting Shares shall have effectively withdrawn his demand for payment for such shares of Common Stock or lost his right to receive payment for his shares of Common Stock under Section 262 of the DGCL, or (c) if neither any holder of Dissenting Shares nor the Surviving Corporation shall have filed a petition demanding a determination of the value of all Dissenting Shares within the time provided in Section 262 of the DGCL, such holder or holders (as the case may be) shall forfeit the right to receive payment for such shares of Common Stock pursuant to Section 262 of the DGCL and each such share of Common Stock shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive the Merger Consideration pursuant to Section 1.6 hereof. Section 1.8 Exchange of Shares. Parent shall authorize one or more persons to act as Exchange Agent hereunder (the "Exchange Agent"). As soon as practicable after the Effective Time, Parent shall cause the Exchange Agent to mail (i) to all former holders of record of Common Stock instructions for surrendering their certificates representing Common Stock in exchange for the Merger Consideration. Upon surrender of Common Stock certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, the holder of such certificate shall be entitled to receive in exchange therefor the Merger Consideration multiplied by the number of shares represented by such certificate, and the certificate so surrendered shall forthwith be canceled. Until surrendered in accordance with the provisions of this Section, each Common Stock certificate (other than for Dissenting Shares, if any) shall represent for all purposes only the right to receive the Merger Consideration multiplied by the number of shares represented by such certificate. If delivery of the Merger Consideration is to be made to any person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of such delivery that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such delivery shall pay any transfer or other taxes required by reason of such 3 7 delivery or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 1.8, each Common Stock certificate (other than certificates representing Dissenting Shares) shall represent for all purposes only the right to receive the Merger Consideration multiplied by the number of shares represented by such certificate, but shall have no other rights. Notwithstanding the foregoing, neither the Parent nor the Surviving Corporation shall be liable to a holder of shares of Common Stock for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. After the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Corporation of the shares of Common Stock that were outstanding immediately prior to the Effective Time. Section 1.9 Effects of Merger. The Merger shall have the effects set forth in the DGCL. Without limiting the foregoing, on and after the Effective Time, the Surviving Corporation shall possess all the assets and interests of every description, wherever located, and all rights, privileges, immunities, powers, franchises and authority, of a public as well as of a private nature, of each of the Company and the Purchaser, all of which shall be vested in the Surviving Corporation without further act or deed. The Surviving Corporation shall be liable for all the obligations of the Company and the Purchaser, and any claims existing, or action or proceeding pending, by or against the Company or the Purchaser may be prosecuted to judgment, with right of appeal, as if the Merger had not taken place, or the Surviving Corporation may be substituted in its place, and all the rights of creditors of each of the Company and the Purchaser shall be preserved unimpaired. Section 1.10 Closing. The closing of the Merger (the "Closing") shall be held at the offices of Palmer & Dodge LLP, counsel to the Purchaser, at 10:00 a.m. (local time) on the third business day after the satisfaction or waiver of the conditions set forth in Article (the "Closing Date"), or at such other place and time as the Purchaser and the Company may mutually agree. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Parent and the Purchaser as follows: Section 2.1 Organization and Qualification. (a) The Company (i) is a corporation validly existing and in good standing under the laws of the State of Delaware, (ii) has the requisite corporate power to carry on its business as now being conducted, and (iii) is duly qualified as a foreign corporation in good standing in Massachusetts, Georgia, Connecticut and each other jurisdiction where the conduct of its business makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a Material Adverse Effect (as 4 8 defined in Section 7.1.1). Except as set forth on Schedule 2.1, the Company owns, directly or indirectly, 100% of the outstanding capital stock of each of the subsidiaries listed on Schedule 2.1 (the "Subsidiaries"), which constitute the only subsidiaries of the Company. Each Subsidiary is a corporation validly existing and in good standing under the laws of its jurisdiction of organization and is duly qualified as a foreign corporation in good standing in each jurisdiction where the conduct of its business makes such qualification necessary, except for failures to be so qualified or in good standing which would not, individually or in the aggregate, have a Material Adverse Effect. (b) The Company has previously made available to the Parent true and complete copies of the charter and bylaws or other governing instruments of the Company and each Subsidiary as presently in effect, and neither the Company nor any Subsidiary is in default in the performance, observation or fulfillment of its charter or bylaws or other governing instruments. The minute books of the Company and each of the Subsidiaries contain true and complete records of all meetings and consents in lieu of meetings of the Board of Directors (and any committees thereof) and of the shareholders since the time of each such corporation's incorporation and accurately reflect in all material respects all transactions referred to in such minutes and consents in lieu of meetings. The stock books of the Company and each of the Subsidiaries are true and complete. Section 2.2 Corporate Authorization. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby are within the Company's corporate powers and have been duly authorized by all necessary corporate action on the part of the Company, including approval by the holders of not less than 90% of the Company's outstanding Common Stock acting by written consent pursuant to Section 228 of the DGCL. This Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, reorganization, fraudulent conveyance and transfer, and moratorium or other similar laws of general application affecting the enforcement of creditors' rights generally. Section 2.3 Financial Data. The Company has previously furnished to the Parent copies of the Company's (i) audited consolidated balance sheets and related statements of income and cash flows as of and for the fiscal years ended September 30, 1995 and 1994 (the "Audited Financial Statements") and (ii) unaudited consolidated balance sheets as at December 24, 1995 and March 24, 1996, (the March 24, 1996 balance sheet being referred to herein as the "Interim Balance Sheet") and related statements of operations and cash flows for the periods then ended (the "Interim Financial Statements"). All of such financial statements referred to in this section are collectively referred to herein as the "Financial Statements." The Financial Statements have been prepared from, and are in accordance with, the books and records of the Company and present fairly in all material respects the financial position and the results of operations of the Company and the Subsidiaries as of the dates and for the periods indicated, in each case in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods involved except as otherwise stated therein, and subject, in the case of 5 9 the Interim Financial Statements, to normal year end audit adjustments, which in the aggregate are not material, and to the absence of footnote disclosures. Section 2.4 Ownership of Stock. The Company's outstanding capital stock consists of 449,105 shares of Class A Common Stock and 16,176 shares of Class B Common Stock. The outstanding Common Stock is duly authorized and validly issued, is fully paid and non-assessable, and as of the date hereof is owned of record as set forth on Schedule 2.4. Except as set forth on Schedule 2.4, the Company has no outstanding capital stock and there are no outstanding options, warrants or similar rights to acquire, or any securities convertible into or exchangeable for, any capital stock of the Company. True and complete copies of all instruments (or the forms of such instruments) referred to in this Section 2.4 have been previously furnished to the Buyer. Except for the Amended and Restated Stockholders Agreement referenced on Schedule 2.12, there are no shareholder agreements, voting trusts, proxies or other agreements, instruments or understandings with respect to the outstanding shares of capital stock of the Company to which the Company is a party. Section 2.5 Consents and Approvals. Except as set forth on Schedule 2.5, the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby require no action by or in respect of, or filing with or notice to, any governmental or regulatory body, agency or official which, if not obtained or made, would have a Material Adverse Effect. Except as set forth on Schedule 2.5, neither the execution, delivery and performance by the Company of this Agreement, nor the consummation by the Company of the transactions contemplated hereby, will (a) violate, conflict with, or result in a breach of, any provision of the charter or bylaws of the Company or any Subsidiary or of any applicable law , or (b) result in a default (or give rise to any right of termination, cancellation or acceleration) under, any Material Contract (as defined in Section 2.12) to which the Company or any Subsidiary is a party, or by which the Company or any Subsidiary may be bound, except in the case of clause (b) for such violations, breaches or defaults which would not, individually or in the aggregate, have a Material Adverse Effect. Section 2.6 Litigation. Except as set forth on Schedule 2.6, there are no claims, actions, suits, complaints or proceedings pending, or to the Company's knowledge, threatened against the Company or any Subsidiary before any court, arbitrator or administrative, governmental or regulatory authority or body, nor is the Company or any Subsidiary subject to any order, judgment, writ, injunction or decree, except in either case for matters which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 2.7 Compliance with Law. Except as set forth on Schedule 2.7 and except with respect to FDA matters (which are covered in Section 2.14), neither the Company nor any Subsidiary nor any Plan (as defined in Section 2.9) is in violation of any statute, law, ordinance, regulation, rule or order of any federal, state or local governmental authority or any judgment, decree or order of any court, except where any such violation would not, individually or in the aggregate, have a Material Adverse Effect. Except as set forth on Schedule 2.7, the Company and each Subsidiary has all permits, approvals, licenses and franchises from governmental 6 10 authorities required to conduct its business as now being conducted, except for such permits, approvals, licenses and franchises the absence of which would not, individually or in the aggregate, have a Material Adverse Effect. Section 2.8 Tax Matters. (a) The Company and its Subsidiaries have filed all tax reports and returns required to be filed by them and have paid or will timely pay all taxes and other charges shown as due on such reports and returns. Neither the Company nor any of its Subsidiaries is delinquent in the payment of any material tax assessment or other governmental charge (including without limitation applicable withholding taxes). Any provision for taxes reflected in the Interim Balance Sheet is adequate for payment of any and all tax liabilities for periods ending on or before March 24, 1996 and there are no tax liens on any assets of the Company or its Subsidiaries except liens for current taxes not yet due. (b) Except as set forth on Schedule 2.8, there has not been any audit of any tax return filed by the Company or any of its Subsidiaries and no audit of any such tax return is in progress and neither the Company nor any Subsidiary has been notified by any tax authority that any such audit is contemplated or pending. The Company knows of no tax deficiency or claim for additional taxes asserted or threatened to be asserted against the Company or any of its Subsidiaries by any taxing authority and the Company knows of no grounds for any such assessment. No extension of time with respect to any date on which a tax return was or is to be filed by the Company or any of its Subsidiaries is in force, and no waiver or agreement by the Company or any of its Subsidiaries is in force for the extension of time for the assessment or payment of any tax. For purposes of this Agreement, the term "tax" includes all federal, state, local and foreign taxes or assessments, including income, sales, gross receipts, excise, use, value added, royalty, franchise, payroll, withholding, property and import taxes and any interest or penalties applicable thereto. (c) Neither the Company nor any of its Subsidiaries has agreed to, or is required to, make any adjustments under Section 481(a) of the Code by reason of a change in accounting method or otherwise. Section 2.9 Employee Benefit Plans. (a) The Company has made available to the Parent true and complete copies of each pension, profit-sharing, deferred compensation, incentive compensation, severance pay, retirement, welfare benefit or other plan or arrangement providing benefits to employees or retirees, including both those that do and do not constitute employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently maintained or contributed to by the Company or any Subsidiary for the benefit of its employees or retirees, but excluding informal practices that may be discontinued without liability to the Company (each, a "Plan"), each of which Plans is listed on Schedule 2.9 attached hereto. 7 11 (b) Except as set forth on Schedule 2.9, (i) each such Plan that is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA is being operated and administered in compliance with Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), except where any such failure to comply would not have a Material Adverse Effect, and a favorable determination letter has been obtained from-the Internal Revenue Service (the "IRS") for such Plan; (ii) except where such events would not, individually or in the aggregate, have a Material Adverse Effect, there has been no non-exempt "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code involving the assets of any Plan nor any "reportable event" within the meaning of Section 4043 of ERISA with respect to any Plan; (iii) all required employer contributions to such Plan have been made (or, in the case of contributions not yet due, have been accrued on the Company's financial statements and records); (iv) the Company has made available to the Parent as to each such Plan a true and correct copy of (w) the annual report (Form 5500) filed with the IRS for each of the three most recent plan years, (x) each plan, trust agreement, group annuity contract and insurance contract, if any, relating to such Plan, (y) each actuarial report prepared for each of the last three years for each Plan and (z) each summary plan description distributed to participants in each Plan and each summary of material modifications to each Plan (as defined in ERISA); and (v) each such Plan is in compliance with ERISA, the Code and the terms of such Plan, except where any such failure to comply would not have a Material Adverse Effect. Neither the Company nor its Subsidiaries has ever participated in a "multiemployer pension plan" as defined in Section 3(37) of ERISA. (c) Except as set forth on Schedule 2.9, neither the Company nor any Subsidiary has any obligation to provide any welfare benefits to retired or former employees other than continuation of welfare benefits as required by applicable law. (d) Neither the Company nor any Subsidiary has any liability under or with respect to any employee benefit plans or arrangements that they no longer maintain or in which they no longer participate, except where such liability would not have a Material Adverse Effect. Section 2.10 Intellectual Property. (a) Schedule 2.10 sets forth a complete list of all patents, trademarks, service marks, trade names, logos and copyrights and all applications to register any of the foregoing (collectively, "Proprietary Rights") used in and material to the business of the Company and its Subsidiaries as presently conducted or proposed to be conducted. The Proprietary Rights are sufficient to carry on the business of the Company and its Subsidiaries as presently conducted. The Company and its Subsidiaries have exclusive ownership of all Proprietary Rights identified in Schedule 2.10 or have obtained any licenses, releases or assignments to use all such Proprietary Rights (all such licensed third-party rights are separately described in Schedule 2.10). Except as set forth on Schedule 2.12, neither the Company nor its Subsidiaries has granted any rights in or licenses to their respective Proprietary Rights to any third party and the Company or its Subsidiaries has the right to use such Proprietary Rights free and clear of claims or rights of others. Except as set forth on Schedule 2.12, no officer, employee, consultant, 8 12 subcontractor or other party, other than the Company or its Subsidiaries, has any rights in or licenses to the Proprietary Rights of the Company and its Subsidiaries. (b) Neither the Company nor its Subsidiaries has received any notices of infringement by the Company of any Proprietary Rights of others, nor has the Company or any of its Subsidiaries received any notices from others regarding an alleged violation of their intellectual property rights which references any aspect of the Company's or its Subsidiaries activities or products, and, to the best knowledge of the Company, none of the present or contemplated activities of the Company or its Subsidiaries or their products, services or assets infringe on any Proprietary Rights of others, including unauthorized use of any confidential information or trade secrets of any person. The Company is not aware of any infringement or violation by others of the Proprietary Rights of the Company or its Subsidiaries. (c) All patents, trademarks, service marks and copyrights listed on Schedule 2.10 ("Registered Rights") have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights, or the corresponding offices of other jurisdictions as identified in said Schedule and have been properly maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and in each such other jurisdiction. (d) Each of the Company and its Subsidiaries has required all employees engaged in research and development activities to execute agreements under which such employees are required to convey to the Company or its Subsidiaries ownership of all Proprietary Rights conceived or created by them in the course of their employment or relationship with the Company or its Subsidiaries. (e) To the best knowledge of the Company, none of the activities of the employees of the Company on behalf of the Company violates any agreements or arrangements which any such employees have with former employers. Section 2.11 Real Property. (a) Schedule 2.11 sets forth a complete list of all real property owned by the Company or any Subsidiary (individually, an "Owned Property" and collectively, the "Owned Properties"). The Company or the Subsidiaries have good and clear record and marketable fee title to the Owned Properties, free and clear of all mortgages, liens, security interests, easements, restrictive covenants, rights-of-way and other encumbrances ("Encumbrances") other than (i) liens that are disclosed on Schedule 2.11; (ii) liens for taxes, fees, levies, duties or other governmental charges of any kind which are not yet delinquent; (iii) (A) platting, subdivision, zoning, building and other similar legal requirements, (B) easements, restrictive covenants, rights-of-way, encroachments and other similar encumbrances, whether or not of record, (C) reservations of coal, oil, gas, minerals and mineral interests, whether or not of record, and other Encumbrances as of the date hereof which do not, individually or in the aggregate, materially detract from the value of the real property subject thereto or impair in any material respect the 9 13 operation of the Company's business (the Encumbrances described in clauses (i) through (iii) above are hereinafter referred to collectively as "Permitted Liens"). Without limiting the generality of the foregoing, as evidenced by the owner's title insurance policies identified in Schedule 2.11, the Company or a Subsidiary holds fee simple title to each Owned Property subject only to the matters set forth in such title policies, which matters are set forth on Schedule 2.11. The Company shall, at its expense, cause title to the Owned Properties to be updated from the effective dates of such title insurance policies to the Closing Date showing that there have been no new matters of record. (b) Schedule 2.11 attached hereto sets forth a complete list of all real property leased by the Company or any Subsidiary (individually, a "Leased Property" and, collectively, the "Leased Properties"). The Company or a Subsidiary has a valid, good and marketable leasehold interest in the Leased Properties, in each case free and clear of all mortgages, liens, security interests, easements, restrictive covenants, rights-of-way and other encumbrances, except for Permitted Liens, and encumbrances on the fee interest of the Leased Properties which do not constitute indebtedness of the Company or its Subsidiaries. To the best of the Company's knowledge, none of the easements, restrictions or other matters of record to which such Leased Property is subject prevent or unreasonably or materially interfere with the use of such Leased Property for the conduct of the business thereon as heretofore conducted by the Company or its Subsidiaries. Schedule 2.11 hereto identifies the parties to and dates of the lease for each material Leased Property and all addenda, amendments and attachments thereto (each, a "Real Property Lease"); except as set forth in Schedule 2.11, such Real Property Lease has not been otherwise amended, modified or supplemented by any written or oral agreement or understanding. Except as set forth on Schedule 2.11, the Merger as contemplated by this Agreement is either permitted as of right under each Real Property Lease or otherwise does not require the consent of the landlord under such Real Property Lease; with respect to each material Real Property Lease for which the landlord's consent is required, the Company shall obtain such consent prior to the Closing. The Company or a Subsidiary has accepted possession of each Leased Property and occupies such leased premises in connection with the conduct of the business. Each Real Property Lease affords the Company or a Subsidiary peaceful and undisturbed possession of the leased premises thereunder. The landlord under each Real Property Lease has performed, to the satisfaction of the Company or a Subsidiary all of the landlord's obligations under such Real Property Lease, and all fixtures, equipment, improvements and other components of the leased premises are in good working order and condition so as to be adequate for the conduct of the Company's business. The Company shall cause the landlord for each material Leased Property to deliver to Parent as of the Closing Date an estoppel certificate that confirms the accuracy of the foregoing representations. (c) To the Company's knowledge, there are no eminent domain proceedings pending or threatened against any Owned Property or Leased Property (the Owned Properties and the Leased Properties are herein referred to collectively as the "Real Property"). 10 14 Section 2.12 Material Contracts. Except as listed or described on Schedule 2.11 and Schedule 2.12, as of the date hereof, neither the Company nor any Subsidiary is a party to or bound by any written or oral leases, agreements or other contracts or legally binding contractual commitments ("Contracts") that are of a type described below or otherwise material to the conduct of the Company's business as currently conducted or proposed to be conducted (collectively, the "Material Contracts"): (i) any collective bargaining arrangement with any labor union or any employment contract; (ii) any Contract or series of Contracts with the same party for capital expenditures or the acquisition or construction of fixed assets in excess of $100,000; (iii) any Contract or series of Contracts with the same party requiring aggregate future payments by or to the Company or any Subsidiary in excess of $100,000; (iv) any Contract relating to the borrowing of money, or the guaranty of another person's borrowing of money; (v) any Contract granting any person a lien on all or any part of its assets; (vi) any Contract granting to any person a first refusal, first offer or similar preferential right to purchase or acquire any of its assets; (vii) any Contract under which the Company or any Subsidiary is (A) a lessee; or sublessee of any machinery, equipment, vehicle (including fleet equipment) or other; tangible personal property, or (B) a lessor of any property, in either case requiring annual payments in excess of $100,000; (viii) any Contract limiting, restricting or prohibiting it from conducting business anywhere in the United States or elsewhere in the world; (ix) any joint venture or partnership Contract; (x) any agreement with or for the benefit of any current or former officer, director, stockholder, employee or consultant of the Company or any Subsidiary, other than severance agreements with former employees in accordance with the Company's severance policy referenced on Schedule 2.9; (xi) any license or other agreement pursuant to which the Company or any Subsidiary grants or is granted the right to use any Proprietary Right listed on Schedule 2.10); 11 15 (xii) any agreement with customers or suppliers for the sharing of fees, the rebating of charges or other similar arrangements (other than rebates to distributors in accordance with industry practices and cash discounts to customers in accordance with the Company's credit policies and industry practices); (xiii) any agreement with any holder of securities of the Company or any Subsidiary as such; (xiv) any agreement obligating the Company or any Subsidiary to deliver services under a "most favored nation" pricing clause; and (xv) except as set forth on Schedule 2.16, any agreement requiring the payment to any person of a brokerage or sales commission or a finder's or referral fee (other than arrangements to pay commissions or fees to employees in the ordinary course of business). The Company has made available to the Parent true and complete copies of each written Material Contract and each Real Property Lease, including all amendments or other modifications thereto. Except as set forth on Schedule 2.12, to the Company's knowledge, each Material Contract and each Real Property Lease is a valid and binding obligation of the parties thereto enforceable in accordance with its terms, subject only to bankruptcy, insolvency, reorganization, receivership and other laws affecting creditors' rights generally. Except as set forth on Schedule 2.12, the Company or the Subsidiaries, as the case may be, have performed all obligations required to be performed by them under the Material Contracts and each Real Property Lease and the Company or the Subsidiaries, as the case may be, are not in breach or default thereunder, except for breaches or defaults which will not, individually or in the aggregate, have a Material Adverse Effect. Section 2.13 Environmental and Safety Matters. Except as set forth on Schedule 2.13 hereto and except for such of the following as, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect: (i) the Company and each Subsidiary is in compliance with all applicable Environmental Laws; (ii) neither the Company nor any Subsidiary has received notice of any liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), or any corrective, investigatory or remedial obligations, arising under applicable Environmental Laws with respect to the Owned Properties or the Leased Properties or the conduct of its business; (iii) the Company and each Subsidiary has obtained, and is and has been in compliance with all terms and conditions of, all permits, licenses and other authorizations required pursuant to Environmental Laws for the occupation of the Owned Properties and the Leased Properties and the conduct of its business; and (iv) the transactions contemplated by this Agreement do not impose any obligations under Environmental Laws for site investigation or cleanup or notification to or consent of any government agencies or third parties. The Company has made available to the Parent true, complete and correct copies of all environmental reports, analyses, tests or monitoring in the possession of the Company pertaining to any Owned or Leased Property. As used in this Agreement, "Environmental Laws" shall 12 16 mean all material federal, state or local statutes, laws, codes, rules, regulations, ordinances, orders, standards, permits, licenses or requirements (including consent decrees, judicial decisions and administrative orders), presently in force, as amended or reauthorized, pertaining to the protection, preservation, conservation or regulation of the environment, or imposing requirements relating to public or employee health and safety, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300F et seq., and the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq. Section 2.14 FDA Matters. Except as set forth on Schedule 2.14 and except for such exceptions to the following as, individually or in the aggregate, would not have a Material Adverse Effect, the Company's operations are being conducted in compliance with all applicable requirements of the United States Food and Drug Administration ("FDA") and comparable foreign regulatory authorities in the countries in which the Company's products are sold, and the Company or the Subsidiaries have received all required product authorizations from the FDA and such comparable foreign regulatory authorities, including all FDA 510(k) Pre-Market Notifications, Pre-Market Approval Applications and Investigational Device Exemptions. There are no product recalls by the FDA or any comparable foreign regulatory authority pending or, to the Company's knowledge, threatened with respect to the Company's products. Section 2.15 Employee Relations. (a) Neither the Company nor any Subsidiary has experienced any strike, picketing, boycott, work stoppage, slowdown or other labor dispute, and neither the Company nor any Subsidiary is subject to any pending charge or complaint of unfair labor practice or employment discrimination nor, to the Company's knowledge, is any such event currently threatened against the Company or any Subsidiary which, individually or in the aggregate, could have a Material Adverse Effect. (b) The Company and its Subsidiaries are not delinquent in payments to any of their respective employees or consultants for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them to the date hereof or amounts required to be reimbursed to such employees. Except as set forth on Schedule 2.15, upon termination of the employment of any employees, neither the Company, its Subsidiaries nor the Parent or the Surviving Corporation will by reason of the Merger or anything done prior to the Effective Time be liable to any of such employees for severance pay or any other payments (other than accrued salary, vacation or sick pay in accordance with the Company's normal policies). True and complete information as to all current directors, officers, employees or consultants of the Company and its Subsidiaries, including, in each case, name, current job title, base salary, 13 17 bonus potential, commissions and termination obligations has been previously furnished to the Parent. Section 2.16 Brokers. Except for fees payable to Goldman, Sachs & Co. and Kohlberg & Co., which fees are set forth on Schedule 2.16 hereto, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. Section 2.17 Absence of Undisclosed Liabilities. As at September 30, 1995, the Company and its Subsidiaries had no material liabilities of any nature, whether accrued, absolute, contingent or otherwise (including, without limitation, liabilities as guarantor or otherwise with respect to obligations of others or liabilities for taxes due or then accrued or to become due), required to be reflected or disclosed in the September 30, 1995, balance sheet included in the Audited Financial Statements that were not adequately reflected or reserved against on such balance sheet. The Company and its Subsidiaries have no such liabilities, other than liabilities (i) adequately reflected or reserved against on the September 30, 1995, balance sheet, (ii) reflected on the Interim Balance Sheet, (iii) incurred since March 24, 1996 in the ordinary course of business, (iv) disclosed in this Agreement, or (v) that would not, in the aggregate, have a Material Adverse Effect. Section 2.18 Material Adverse Change. Since September 30, 1995, except as described in the Interim Financial Statements, (i) there has not been any change in the business of the Company that would have a Material Adverse Effect and (ii) the Company has taken no action that if taken after the date of this Agreement would constitute a breach of any covenant set forth in Section 4.1. Section 2.19 Accounts Receivable. Subject to the allowances with respect to accounts receivable set forth on the Interim Balance Sheet, all accounts receivable reflected on the Interim Balance Sheet and all accounts receivable arising subsequent thereto, have arisen in the ordinary course of business of the Company or the Subsidiaries, represent valid and enforceable obligations due to the Company or the Subsidiaries and have been and are subject to no set-off, counterclaim or future performance obligation on the part of the Company or a Subsidiary in excess of the amount of such allowances. Section 2.20 Inventory. Subject to the reserves set forth on the Interim Balance Sheet, the inventory of the Company and its Subsidiaries is and at the Effective Time will be in good and merchantable condition and saleable or usable in the manufacture of saleable finished goods in the ordinary course of business. Section 2.21 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 2, THE COMPANY MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY. 14 18 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE PURCHASER The Parent and the Purchaser represent and warrant to the Company as follows: Section 3.1 Organization and Qualification. Each of the Parent and the Purchaser (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; and (ii) has the requisite corporate power to carry out the transactions contemplated hereby. Section 3.2 Corporate Authorization. The execution, delivery and performance by each of the Parent and the Purchaser of this Agreement and the transactions contemplated hereby are within the corporate powers of each of the Parent and the Purchaser and have been duly authorized by all necessary corporate action on the part of each of the Parent and the Purchaser. This Agreement constitutes a valid and binding obligation of each of the Parent and the Purchaser, enforceable against each of the Parent and the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, reorganization, fraudulent conveyance and transfers, and moratorium or other similar laws of general application affecting the enforcement of creditors' rights generally. Section 3.3 Consents and Approvals. Except as set forth on Schedule 3.3, the execution, delivery and performance by each of the Parent and the Purchaser of this Agreement and the consummation of the transactions contemplated hereby require no action by or in respect of, filing with, or notice to any governmental or regulatory body, agency or official. Neither the execution, delivery and performance by the Parent and the Purchaser of this Agreement, nor the consummation by the Parent and the Purchaser of the transactions contemplated hereby, will (a) violate, conflict with, or result in a breach of, any provision of the charter or bylaws of the Parent or the Purchaser or (b) result in a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, lease, agreement or other instrument or obligation to which the Parent or the Purchaser is a party, or by which its properties or assets may be bound, except for such violations, breaches or defaults which would not prevent or delay consummation of the transactions contemplated hereby. Section 3.4 Financing. The Parent currently has sufficient funds on hand, or has sufficient borrowing capacity available from responsible financial institutions, to enable the Purchaser to finance the consummation of the transactions contemplated hereby and to pay related fees and expenses. Section 3.5 Litigation. There are no claims, actions, suits, approvals, investigations, informal objections, complaints or proceedings pending against the Parent or the Purchaser before any court, arbitrator, or administrative, governmental or regulatory authority or body, 15 19 nor is the Parent or the Purchaser subject to any order, judgment, writ, injunction or decree, which in either case could prevent, delay or materially burden the transactions contemplated hereby. Section 3.6 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Parent or the Purchaser. ARTICLE 4 COVENANTS Section 4.1 Conduct of Business of the Company and the Subsidiaries. Except as contemplated by this Agreement or otherwise consented to in writing by the Parent, during the period from the date of this Agreement to the Closing Date: (a) the Company shall conduct, and shall cause each of the Subsidiaries to conduct, its business solely in the ordinary course; and (b) the Company will not, and will not permit either of the Subsidiaries to, intentionally take any actions that could reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement, prior to the Closing Date, the Company will not, and will not permit either of the Subsidiaries to, without the prior written consent of the Parent: (i) declare or pay any dividend or other distribution upon, or repurchase or otherwise reacquire for value, any capital stock of the Company (other than repurchases of Common Stock from employees of the Company in connection with termination of employment); (ii) issue any capital stock of the Company or any securities convertible into or exchangeable for capital stock of the Company, other than issuance of Common Stock upon the exercise of outstanding options; (iii) incur any indebtedness for borrowed money other than borrowings for working capital purposes in the ordinary course of business, (iv) acquire any substantial assets other than in connection with planned capital expenditures approved by the Company's board of directors prior to the date hereof; (v) sell, pledge, dispose of or encumber its assets, except for sales of inventory and sales of obsolete assets and assets concurrently replaced with similar assets, in each case in the ordinary course of its business; (vi) except as otherwise required by law or by any existing plan, arrangement or agreement, enter into, adopt or amend in any material respect, any Plan for the benefit of its employees or any employment, severance or other agreement with any officer, director, employee or consultant of the Company or any Subsidiary, (vii) change the compensation or fringe benefits of any officer, director, employee or consultant, except for ordinary merit increases for employees other than officers based on periodic reviews in accordance with past practices; or (viii) take any other intentional action that would cause the Company's representations and warranties to be untrue in any material respect. In addition, the Company and/or its Subsidiaries shall maintain in full force and effect the existing insurance policies relating to the Real Property in accordance with Section 6.1 attached hereto. Without limiting the foregoing, the Company and/or its Subsidiaries shall maintain in full force and effect (I) "all risk" casualty insurance coverage on the Real Property, which in no event shall be less than 16 20 100% of the full insurable value of the Real Property; (II) commercial general public liability insurance (broad form) insuring against any and all liability or claims of liability arising out of, occasioned by, or resulting from any accident or other cause in or about the Real Property, in an amount not less than $10,000,000. Section 4.2 Filings. Each of the Company, the Parent and the Purchaser shall exercise commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things necessary, proper or advisable under applicable laws to consummate and make effective, as soon as reasonably practicable, the transactions contemplated hereby. Without limiting the generality of the foregoing, each of the Company, the Parent and the Purchaser (a) shall make all required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, as amended, no later than five business days after the execution of this Agreement, (b) shall exercise commercially reasonable efforts to obtain all necessary waivers, consents and approvals from other governmental authorities and parties to Material Contracts and to oppose, lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, and (c) shall otherwise fulfill all conditions to this Agreement within its reasonable control. Section 4.3 Confidentiality; Access to Information. That certain letter agreement dated March 20, 1996 between the Parent and Goldman, Sachs & Co. on behalf of the Company (the "Confidentiality Agreement") with respect to, among other things, confidential treatment of information provided by the Company and its representatives to the Purchaser and its representatives shall remain in full force and effect and shall survive the execution and delivery of this Agreement and the termination of this Agreement for any reason whatsoever. Subject to the terms of the Confidentiality Agreement, from the date hereof to the Closing Date, the Company shall, and shall cause its officers, directors, employees and agents to, afford the directors, officers, employees, agents, representatives and advisors of the Parent complete access at all reasonable times to its officers, employees, agents, properties, books, records and contracts, and shall furnish the Parent all financial, operating and other data and information relating to the Company and the Subsidiaries as the Parent may reasonably request. Parent, at its expense, may take measurements, show the Real Property to contractors, architects, insurers, banks and other lenders or investors, and prospective tenants, and conduct surveys, site analysis, structural tests, and such other tests, inspections or investigations with respect to the Real Property as Parent may desire. The Company and its Subsidiaries agree to cooperate with and assist Parent, provided that all inspections shall be conducted during normal business hours (or such other time as is reasonably necessary to conduct such inspections or tests) and shall not unreasonably interfere with the conduct of the normal business thereon of the Company or its Subsidiaries. The Company and its Subsidiaries agree that Parent may discuss the Real Property with and make inquiries of any state or local officials or authorities regarding the status of such variances, permits, certificates, consents and approvals as Parent deems appropriate. Parent agrees to repair any damage to the Real Property resulting from such inspections. Section 4.4 Public Announcements. The Company and the Parent shall consult with each other before issuing any press release or otherwise making any public statements with 17 21 respect to this Agreement or the transactions contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law. Section 4.5 Exclusivity. Unless and until this Agreement shall have been terminated pursuant to Article , the Company shall not, directly or indirectly through any officer, director, employee, agent, affiliate or otherwise, (i) enter into any agreement, agreement in principle or other commitment (whether or not legally binding) relating to any acquisition, business combination or recapitalization transaction involving the Company or a substantial portion of its assets or capital stock (a "Competing Transaction"), (ii) solicit, initiate or encourage the submission of any proposal or offer from any person or entity (including any of its officers, directors, employees and agents) relating to any Competing Transaction, or (iii) participate in any discussions or negotiations regarding, furnish to any other person or entity any information with respect to, or otherwise assist, facilitate or cooperate in any way with any effort or attempt by any other person or entity to effect a Competing Transaction. The Company shall immediately cease any and all contacts, discussions and negotiations with third parties regarding any Competing Transaction. The Company shall request the return of any confidential information about the Company that was previously furnished to any other party in connection with the Company's solicitation of bids to purchase the Company. Section 4.6 Insurance. The Parent agrees that the rights to indemnification provided to the directors and officers of the Company and its Subsidiaries by such entities' charter or bylaws as in effect on the date of this Agreement and by applicable law shall survive the Closing Date. The Parent shall use its best efforts to obtain and maintain for a period of one year after the Closing Date an endorsement extending the period in which claims may be made under the Company's directors' and officers' liability insurance policy in effect on the date of this Agreement, or a policy of such other responsible carrier as the Parent may elect, with respect to causes of action that arise out of acts or omissions occurring on or before the Closing Date, provided, however, that in no event shall the Parent be required to expend pursuant to this section more than an amount per year equal to 125% of current annual premiums paid by the Company for such insurance. ARTICLE 5 CONDITIONS TO CLOSING Section 5.1 Conditions to Each Party's Obligation. The respective obligations of each party to effect the transactions contemplated hereby are subject to the satisfaction or waiver prior to the Closing Date of the following conditions: 5.1.1 No Legal Prohibition. No statute, rule, regulation or order shall be enacted, promulgated, entered or enforced by any court or governmental authority which would prohibit consummation by such party of the transactions contemplated hereby. 18 22 5.1.2 No Injunction. Such party shall not be prohibited by any order, ruling, consent, decree, judgment or injunction of a court or regulatory agency of competent jurisdiction from consummating the transactions contemplated hereby. 5.1.3 Hart-Scott-Rodino. The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been terminated without any condition or requirement which, in the reasonable opinion of Parent, makes consummation of the transaction inadvisable. Section 5.2 Conditions to Obligation of the Parent and the Purchaser. The obligation of the Parent and the Purchaser to effect the transactions contemplated hereby shall be subject to the fulfillment and satisfaction, prior to or at the Closing, of the following additional conditions: 5.2.1 Representations and Covenants. Except as expressly contemplated by this Agreement, the representations and warranties of the Company contained in this Agreement shall be true and correct without regard to materiality or Material Adverse Effect on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date except that any representation or warranty (except Section 2.1(a)(i) and (ii), the second sentence of Section 2.1(a), Sections 2.2 and 2.3 and the first three sentences of Section 2.4) that is not true and correct shall be deemed true and correct unless individually or in the aggregate it could have a Material Adverse Effect. The Company shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. The Company shall have delivered to the Parent a certificate, dated the Closing Date, as to the matters set forth in this section. 5.2.2 Approvals. All governmental and third party approvals, consents, permits or waivers which, if not obtained, would have a Material Adverse Effect shall have been obtained in form and substance reasonably satisfactory to the Parent. 5.2.3 Title to Owned Properties. The Company shall have caused title to the Owned Properties to be updated to the Closing Date, showing no material exceptions other than those permitted under this Agreement, as evidenced by so-called date down endorsements to the owner's title insurance policy for each of the Owned Properties, which endorsement shall also contain a so-called "non-imputation" endorsement satisfactory to Parent. In addition, the Company shall have caused the existing survey of each Owned Property to be updated by a surveyor's report so as to cause the standard survey exception to be deleted from such policies. 5.2.4 Possession of Real Property. Except as set forth on Schedule 2.11, at the time of the Closing, all Real Property shall be occupied solely by the Company or its Subsidiaries and no other tenant or occupants, and such Real Property shall then (i) be in the same condition as they are now, reasonable use and wear thereof excepted, and (ii) not in violation of applicable building, zoning, environmental, landmark, historic preservation, 19 23 wetlands, and other laws, codes, ordinances, by-laws, rules, regulations, and orders of governmental authorities, which violation would have a Material Adverse Effect. 5.2.5 Stock Options. All actions necessary to terminate all outstanding Stock Options, other than the RCP Option, shall have been taken. 5.2.6 Certificates. At least two business days prior to the Closing Date, the Company shall have delivered to the Purchaser a draft certificate as to the following matters: (a) The Company's total indebtedness for borrowed money as of the Closing Date, together with an itemization of the amount payable (including accrued interest and fees, if any) on the Closing Date to each obligee of such indebtedness and payment information sufficient to enable the Purchaser to discharge such indebtedness on the Closing Date; (b) The Company's fees and expenses associated with sale of the Company, including fees and expenses of attorneys and investment bankers; (c) The Company's cash and cash equivalents as of the Closing Date (without giving effect to the payment of up to $3,500,000 in transaction expenses of the Company on the Closing Date); (d) The aggregate exercise price of all outstanding options of the Company as of the Closing Date; and (e) The total number of shares of Common Stock outstanding as of the Closing Date and the total number of shares issuable upon the exercise of all options outstanding as of the Closing Date. Such draft certificate shall be updated as necessary and executed and delivered to the Purchaser on the Closing Date. Section 5.3 Conditions to Obligation of the Company. The obligation of the Company to effect the transactions contemplated hereby shall be subject to the fulfillment and satisfaction, prior to or at the Closing, of the following additional conditions: 5.3.1 Representations and Covenants. Except as expressly contemplated by this Agreement, the representations and warranties of the Parent and the Purchaser contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. The Parent and the Purchaser shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by the Parent and the Purchaser on or prior to the Closing Date. 20 24 5.3.2 Approvals. All governmental and third party approvals, consents, permits or waivers which, if not obtained, would have a Material Adverse Effect shall have been obtained in form and substance reasonably satisfactory to the Company; provided, however, that if the Parent waives the obtaining of any third party approval or consent, such consent shall not be a condition to the Company's obligation to consummate the Merger. ARTICLE 6 TERMINATION Section 6.1 Termination. This Agreement may be terminated at any time prior to the Closing: 6.1.1 By mutual written consent of the Parent and the Company. 6.1.2 By the Company: (i) if the Closing Date shall not have occurred on or before August 31, 1996, other than as a result of a breach by the Company of its representations, warranties or other obligations hereunder; or (ii) if, prior to the Closing Date, the Parent or the Purchaser fails to perform in any material respect any of its obligations under this Agreement and such failure has not been cured within 15 days after receipt of written notice from the Company. 6.1.3 By the Parent: (i) if the Closing Date shall not have occurred on or before August 31, 1996, other than as a result of a breach by the Parent or the Purchaser of their representations, warranties or other obligations hereunder; or (ii) if, prior to the Closing Date, the Company fails to perform in any material respect any of its obligations under this Agreement and such failure has not been cured within 15 days after written receipt of notice from the Parent. Section 6.2 Effect of Termination. In the event of termination of this Agreement by the Parent or the Company as provided in Section 6.1 hereof, all obligations of the parties under this Agreement shall terminate without liability of any party to any other party, except (i) that the obligations set forth in Section 7.9 of this Agreement and in the Confidentiality Agreement shall survive any such termination and (ii) for liability for any breach of this Agreement. 21 25 ARTICLE 7 GENERAL PROVISIONS Section 7.1 Rules of Construction. 7.1.1 Material Adverse Effect. For purposes of this Agreement, a "Material Adverse Effect" shall mean a material adverse effect on the operations, financial condition, properties, business or prospects (in the case of prospects, not taking into account general economic and securities market conditions or general industry developments) of the Company and the Subsidiaries, taken as a whole, or on the Company's ability to consummate the transactions contemplated by this Agreement. 7.1.2 Knowledge. Where a representation or warranty is stated to be based on knowledge, such phrase shall refer to the actual knowledge of the applicable person or persons. 7.1.3 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.1.4 Severability. If any provision of-this Agreement, or the application thereof to any person, place or circumstance, shall be held by a court of competent jurisdiction to be illegal, invalid, unenforceable or void, then such provision shall be enforced to the extent that it is not illegal, invalid, unenforceable or void, and the remainder of this Agreement, as well as such provision as applied to other persons, places or circumstances, shall remain in full force and effect. Section 7.2 Non-Survival. In the absence of fraud, the representations and the warranties of the parties hereto shall not survive the Closing. Section 7.3 Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and shall be deemed to have duly given or delivered (i) when delivered personally, (ii) sent by telephone facsimile transmission or (iii) sent via a nationally recognized overnight courier to the recipient for next business day delivery. Such notices, demands and other communications will be sent to the address indicated below: (i) If to the Company: 600 Airport Road Fall River, MA 02720 Attention: William C. Dow Fax: (508) 677-6699 22 26 with copies to: Kohlberg & Company 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 Attention: W. Dexter Paine III Fax: (415) 854-5415 Brownstein Hyatt Farber & Strickland, P.C. 410 Seventeenth Street, 22nd Floor Denver, CO 80202-4437 Attention: John R. Garrett Fax: (303) 623-1956 (ii) if to the Purchaser: Genzyme Corporation One Kendall Square Cambridge, MA 02139 Attention: David McLachlan Fax: 617-252-7844 with copies to: Palmer & Dodge LLP One Beacon Street Boston, MA 02108 Attention: Maureen P. Manning Fax: 617-227-4420 Genzyme Corporation One Kendall Square Cambridge, MA 02139 Attention: Peter Wirth, Esq. Fax: 617-252-7553 or to such other address as any party may specify by notice given to the other party in accordance with this Section. The date of giving any such notice shall be (i) the date of hand delivery, (ii) the date sent by telephone facsimile if a business day or the first business day thereafter or (iii) the business day after delivery to the overnight courier service. 23 27 Section 7.4 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the Commonwealth of Massachusetts without giving effect to any choice or conflict of law provision or rule (whether of the Commonwealth of Massachusetts or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Massachusetts. Notwithstanding the foregoing, the DGCL shall govern with respect to the Merger. Section 7.5 Entire Agreement. This Agreement (including attached exhibits and schedules) and the Confidentiality Agreement constitute the entire agreement among the parties with respect to the subject matter of this Agreement and supersede any prior agreement or understanding, whether written and oral, among the parties or between any of them with respect to the subject matter of this Agreement. There are no representations, warranties, covenants, promises or undertakings, other than those expressly set forth or referred to herein. Section 7.6 Amendment; Waiver. This Agreement may be amended, modified or waived only by a written agreement signed by the Parent and the Company. With regard to any power, remedy or right provided in this Agreement or otherwise available to any party, (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party, (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise or other indulgence, and (iii) waiver by any party of the time for performance of any act or condition hereunder does not constitute a waiver of the act or condition itself. Section 7.7 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors. Neither the rights nor the obligations of any party to this Agreement may be transferred or assigned. Any purported assignment of this Agreement or any of the rights and obligations hereunder shall be null, void and of no effect. Section 7.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but when taken together shall constitute one instrument. Section 7.9 Expenses. Each party to this Agreement shall bear all of its own expenses in connection with the execution, delivery and performance of this Agreement and the transactions contemplated hereby, including without limitation all fees and expenses of its agents, representatives, counsel and accountants. Notwithstanding the foregoing, Parent shall pay or provide the Company with sufficient funds to enable the Company to pay transaction expenses on the Closing Date in an amount not to exceed $3.5 million in the aggregate. 24 28 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the date first written above. DEKNATEL SNOWDEN PENCER, INC. By:/s/ William C. Dow -------------------------------------- William C. Dow President & CEO GENZYME CORPORATION By:/s/ David J. McLachlan -------------------------------------- David J. McLachlan Senior Vice President, Finance DSP ACQUISITION CORP. By:/s/ David J. McLachlan -------------------------------------- David J. McLachlan Treasurer 25 EX-5.1 3 OPINION OF PALMER & DODGE 1 EXHIBIT 5.1 PALMER & DODGE LLP ONE BEACON STREET BOSTON, MASSACHUSETTS 02108 Telephone: (617) 573-0100 Facsimile: (617) 227-4420 June 13, 1996 Genzyme Corporation One Kendall Square Cambridge, Massachusetts 02139 We are rendering this opinion in connection with the Registration Statement on Form S-3 (the "Registration Statement") filed by Genzyme Corporation (the "Company") with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on or about the date hereof. The Registration Statement relates to the offer and sale of an aggregate principal amount of up to $250,000,000 of the Company's Convertible Subordinated Notes due 2001 (the "Notes"). We have acted as your counsel in connection with the preparation of the Registration Statement and are familiar with the proceedings taken by the Company in connection with the authorization and issuance of the Notes. We have examined such documents as we consider necessary to render this opinion. Based upon the foregoing, it is our opinion that the Notes have been duly authorized, and upon issuance and delivery against payment therefor, will be valid and binding obligations of the Company enforceable in accordance with their terms, subject to applicable bankruptcy laws, and other similar laws affecting creditors rights generally and to general principles of equity. We hereby consent to the use of our name under the caption "Legal Opinions" in the Registration Statement and the filing of this opinion as Exhibit 5.1 to the Registration Statement. Very truly yours, /s/ Palmer & Dodge LLP ----------------------------- Palmer & Dodge LLP EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 GENZYME CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
PRO FORMA ------------------------- FOR THE THREE MONTHS ENDED FOR THE THREE YEAR MONTHS YEAR ENDED DECEMBER 31, MARCH 31, ENDED ENDED ----------------------------------------------------- ------------------ DECEMBER 31, MARCH 31, 1991 1992 1993 1994 1995 1995 1996 1995 1996 ------- -------- -------- ------- ------- ------- ------- ------------ --------- Consolidated Statement of Operations Data: Income (loss) before income taxes and extraordinary credit.............. $24,943 $(11,513) $(12,554) $30,784 $43,299 $12,787 $16,600 $ 26,839 $15,775 Add: Portion of rents representative of the interest factor.............. 3,161 3,944 3,803 3,627 4,186 1,046 1,462 4,186 1,462 Interest on indebtedness........ 2,088 7,099 2,500 1,354 1,109 47 213 21,746 4,772 ------- -------- -------- ------- ------- ------- ------- ------- ------- Income as adjusted...... $30,192 $ (470) $ (6,251) $35,765 $48,594 $13,880 $18,275 $ 52,771 $22,009 ======= ======== ======== ======= ======= ======= ======= ======= ======= Fixed charges: Portion of rents representative of the interest factor.............. 3,161 3,944 3,803 3,627 4,186 1,046 1,462 4,186 1,462 Interest on indebtedness........ 2,088 7,099 2,500 1,354 1,109 47 213 21,746 4,772 Amortization of debt expense and premium............. -- -- -- -- -- -- -- 1,125 281 Capitalized interest............ 27 623 4,723 8,816 7,468 2,678 1,738 7,463 1,738 Capitalized amortization of debt expense and premium............. 69 275 275 275 275 69 69 69 69 ------- -------- -------- ------- ------- ------- ------- ------- ------- Fixed charges........... $ 5,345 $ 11,941 $ 11,301 $14,072 $13,038 $ 3,840 $ 3,482 $ 33,464 $ 8,322 ======= ======== ======== ======= ======= ======= ======= ======= ======= Ratio of earnings to fixed charges......... 5.7x 0.0x (0.6)x 2.5x 3.7x 3.6x 5.3x 1.6x 2.6x ======= ======== ======== ======= ======= ======= ======= ======= =======
EX-23.1 5 CONSENT OF COOPERS & LYBRAND LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this Registration Statement on Form S-3 of Genzyme Corporation of our reports dated March 1, 1996 except as to Note Q which is March 26, 1996 on our audits of the consolidated financial statements and financial statement schedule of Genzyme Corporation, dated March 1, 1996 except as to Note R which is March 26, 1996 on our audits of the combined financial statements and financial statement schedule of Genzyme General Division and dated March 1, 1996 except as to Note O which is March 26, 1996 on our audits of the combined financial statements and financial statement schedule of Genzyme Tissue Repair Division as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, which reports are included in Genzyme Corporation's 1995 Annual Report on Form 10-K. In addition, we consent to the reference to our firm under the caption "EXPERTS". /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts June 13, 1996 EX-23.2 6 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP ----------------------------------- ARTHUR ANDERSEN LLP Boston, Massachusetts June 13, 1996 EX-25.1 7 STATEMENT OF ELIGIBILITY & QUALIFICATION 1 Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) __ STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) John R. Towers, Esq. Senior Vice President and Corporate Secretary 225 Franklin Street, Boston, Massachusetts 02110 (617)654-3253 (Name, address and telephone number of agent for service) --------------------- GENZYME Corporation (Exact name of obligor as specified in its charter) Massachusetts 06-1047163 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE KENDALL SQUARE, CAMBRIDE, MA 02139 (Address of principal executive offices) (Zip Code) -------------------- CONVERTIBLE SUBORDINATED NOTES (Title of indenture securities) 2 GENERAL Item 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervisory authority to which it is subject. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. Item 2. Affiliations with Obligor. If the Obligor is an affiliate of the trustee, describe each such affiliation. The obligor is not an affiliate of the trustee or of its parent, State Street Boston Corporation. (See note on page 6.) Item 3. through Item 15. Not applicable. Item 16. List of Exhibits. List below all exhibits filed as part of this statement of eligibility. 1. A copy of the articles of association of the trustee as now in effect. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A copy of the certificate of authority of the trustee to commence business, if not contained in the articles of association. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A copy of the authorization of the trustee to exercise corporate trust powers, if such authorization is not contained in the documents specified in paragraph (1) or (2), above. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A copy of the existing by-laws of the trustee, or instruments corresponding thereto. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 3 5. A copy of each indenture referred to in Item 4. if the obligor is in default. Not applicable. 6. The consents of United States institutional trustees required by Section 321(b) of the Act. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility and Qualification which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 6 th day of June , 1996. STATE STREET BANK AND TRUST COMPANY By:/s/ Gerald R. Wheeler -------------------------------------- Gerald R. Wheeler Vice President 2 4 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by Genzyme Corporation. of its Convertible Subordinated Notes, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By:/s/ Gerald R. Wheeler -------------------------------------- Gerald R. Wheeler Vice President Dated: June 6, 1996 3 5 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company of Boston, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business December 31, 1995, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin .................... 1,331,827 Interest-bearing balances.............................................. 5,971,326 Securities...................................................................... 6,325,054 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary ................................... 5,436,994 Loans and lease financing receivables: Loans and leases, net of unearned income ......... 4,308,339 Allowance for loan and lease losses .............. 63,491 Loans and leases, net of unearned income and allowances ............... 4,244,848 Assets held in trading accounts................................................. 1,042,846 Premises and fixed assets....................................................... 374,362 Other real estate owned......................................................... 3,223 Investments in unconsolidated subsidiaries...................................... 31,624 Customers' liability to this bank on acceptances outstanding ................... 57,472 Intangible assets............................................................... 68,384 Other assets.................................................................... 670,058 ---------- Total assets.................................................................... 25,558,018 ========== LIABILITIES Deposits: In domestic offices.................................................... 6,880,231 Noninterest-bearing ..................... 4,728,115 Interest-bearing ........................ 2,152,116 In foreign offices and Edge subsidiary ................................ 9,607,427 Noninterest-bearing ..................... 28,265 Interest-bearing ........................ 9,579,162 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary ................................... 5,913,969 Demand notes issued to the U.S. Treasury and Trading Liabilities ............... 530,406 Other borrowed money............................................................ 493,191 Bank's liability on acceptances executed and outstanding ....................... 57,387 Other liabilities.............................................................. 620,287 ---------- Total liabilities............................................................... 24,102,898 ---------- EQUITY CAPITAL Common stock.................................................................... 29,176 Surplus......................................................................... 228,448 Undivided profits............................................................... 1,197,496 ---------- Total equity capital............................................................ 1,455,120 ---------- Total liabilities and equity capital............................................ 25,558,018 ==========
4 6 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Charles F. Kaye 5 7 5. A copy of each indenture referred to in Item 4. if the obligor is in default. Not applicable. 6. The consents of United States institutional trustees required by Section 321(b) of the Act. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility and Qualification which relates to matters peculiarly within the knowledge of the obligor or any underwriter of the obligor, the trustee has relied upon the information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation duly organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the 6 th day of June, 1996. STATE STREET BANK AND TRUST COMPANY By:/s/ Gerald R. Wheeler -------------------------------------- Gerald R. Wheeler Vice President 2 -----END PRIVACY-ENHANCED MESSAGE-----