-----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, KabqXQSkVaVXbGAZBxOnABYTwL2BQipiznZEX7PSzNtEh7E77kBh1Q6Y4A4h2nqn zjn6fWJh7KQ+kIsQNIsWHg== 0000950135-96-004125.txt : 19960930 0000950135-96-004125.hdr.sgml : 19960930 ACCESSION NUMBER: 0000950135-96-004125 CONFORMED SUBMISSION TYPE: SC 13E4 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19960927 SROS: NASD GROUP MEMBERS: GENZYME CORP GROUP MEMBERS: NEOZYME II ACQUISITION CORP. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E4 SEC ACT: 1934 Act SEC FILE NUMBER: 005-37205 FILM NUMBER: 96635853 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 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E4 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 SC 13E4 1 GENZYME CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------- SCHEDULE 13E-4 ISSUER TENDER OFFER STATEMENT (PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) (AMENDMENT NO._______________) GENZYME CORPORATION - -------------------------------------------------------------------------------- (NAME OF ISSUER) NEOZYME II ACQUISITION CORP. - -------------------------------------------------------------------------------- (NAME OF PERSON(S) FILING STATEMENT) CALLABLE WARRANTS TO PURCHASE TWO SHARES OF GENERAL DIVISION COMMON STOCK, $.01 PAR VALUE, AND 0.135 SHARE OF TISSUE REPAIR DIVISION COMMON STOCK, $.01 PAR VALUE, OF GENZYME CORPORATION - -------------------------------------------------------------------------------- (TITLE OF CLASS OF SECURITIES) 372917 138 - -------------------------------------------------------------------------------- (CUSIP NUMBER OF CLASS OF SECURITIES) PETER WIRTH, ESQ. MAUREEN P. MANNING, ESQ. EXECUTIVE VICE PRESIDENT PALMER & DODGE LLP AND CHIEF LEGAL COUNSEL ONE BEACON STREET GENZYME CORPORATION BOSTON, MA 02108 ONE KENDALL SQUARE (617) 573-0100 CAMBRIDGE, MA 02139 (617) 252-7500 - -------------------------------------------------------------------------------- (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT) SEPTEMBER 27, 1996 - -------------------------------------------------------------------------------- (DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS) CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- TRANSACTION VALUATION1: $108,675,000 AMOUNT OF FILING FEE: $21,735 - -------------------------------------------------------------------------------- /X/ CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(A)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING. Amount previously paid: $21,735 Filing party: Neozyme II Acquisition Corp. and Genzyme ------- ---------------------------------------- Corporation ---------------------------------------- Form or registration no.: Schedule 14D-1 Date filed: September 27, 1996 -------------- ----------------------------------------
1 For purposes of calculating fee only. This amount is based upon (a) 2,415,000 Units of Neozyme II Corporation (the "Units"), outstanding as of September 27, 1996 and (b) the price offered per Unit ($45.00). The amount of the filing fee, calculated in accordance with Regulation 240.0-11 under the Securities Exchange Act of 1934, as amended, equals 1/50th of one percent of the value of the Units to be purchased. 2 This Statement on Schedule 13E-4 relates to the offer by Neozyme II Acquisition Corp. (the "Purchaser"), a British Virgin Islands ("BVI") international business company and a wholly-owned subsidiary of Genzyme Corporation ("Genzyme"), a Massachusetts corporation, to purchase all of the outstanding units (the "Units"), each consisting of one share of Callable Common Stock, $1.00 par value per share, of Neozyme II Corporation (the "Company"), a BVI international business company, and a Callable Warrant to purchase two shares of General Division Common Stock, $.01 par value per share, and 0.135 of a share of Tissue Repair Division Common Stock, $.01 par value per share, of Genzyme at a purchase price of $45.00 per Unit, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated September 27, 1996 (the "Offer to Purchase") and in the related Letter of Transmittal (the "Letter of Transmittal" which, together with the Offer to Purchase, as each may be amended or supplemented, constitute the "Offer"). The Offer to Purchase and Letter of Transmittal are filed as Exhibits (a)(1) and (a)(2) hereto, respectively. This Schedule 13E-4 is being filed by the Purchaser with respect to the tender offer for the Callable Warrants contained in the Units pursuant to Rule 13e-4(2) under the Securities Exchange Act of 1934, as amended. Because the Callable Warrants trade as part of the Units, responses to certain Items of this Schedule 13E-4 refer to the Units rather than the Callable Warrants where appropriate. ITEM 1. SECURITY AND ISSUER. (a) - (d) The information set forth in the Offer to Purchase under "INTRODUCTION" and "THE TENDER OFFER -- Section 1. Terms of the Offer; Expiration Date," "-- Section 5. Price Range of Units; Dividends" and "-- Section 7. Certain Information Concerning Genzyme and the Purchaser" is incorporated herein by reference. ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 8. Source and Amount of Funds" is incorporated herein by reference. (b) Not applicable. ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. (a) - (j) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Section 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction," "-- Section 6. The Purchase Agreement; Appraisal Rights" and "-- Section 8. Certain Effects of the Transaction" is incorporated herein by reference. 2 3 ITEM 4. INTEREST IN SECURITIES OF THE ISSUER. The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 7. Certain Information Concerning Genzyme and the Purchaser" is incorporated herein by reference. ITEM 5. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S SECURITIES. The information set forth in the Offer to Purchase under "INTRODUCTION" and "SPECIAL FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights" is incorporated herein by reference. ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Section 9. Fees and Expenses" and "THE TENDER OFFER - -- Section 12. Fees and Expenses" is incorporated herein by reference. ITEM 7. FINANCIAL INFORMATION. (a) Pursuant to Instruction B to Schedule 13E-4, the financial statements set forth in Exhibit (g)(1) hereto are incorporated herein by reference. (b) Pursuant to Instruction B to Schedule 13E-4, the pro forma financial statements set forth in Exhibit (g)(2) hereto are incorporated herein by reference. 3 4 ITEM 8. ADDITIONAL INFORMATION. (a) The information set forth in the Offer to Purchase under "INTRODUCTION," "SPECIAL FACTORS -- Section 2. Agreements and Relationships between the Company and Genzyme" and "-- Section 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction" is incorporated herein by reference. (b) The information set forth in the Offer to Purchase under "THE TENDER OFFER -- Section 10. Certain Legal Matters; Regulatory Approvals" is incorporated herein by reference. (c) The information set forth in the Offer to Purchase under "SPECIAL FACTORS -- Section 8. Certain Effects of the Transaction" is incorporated hereby reference. (d) None. (e) The information set forth in the Offer to Purchase, the Letter of Transmittal and the Purchase Agreement, dated as of September 20, 1996, by and among Genzyme, the Purchaser and the Company filed as Exhibit (c)(1) hereto is incorporated herein reference. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) - Offer to Purchase dated September 27, 1996. Filed herewith. (a)(2) - Letter of Transmittal. Filed as Exhibit (a)(2) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(3) - Notice of Guaranteed Delivery. Filed as Exhibit (a)(3) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(4) - Letter from Robertson, Stephens & Company, L.P. to Brokers, Dealers, Banks, Trust Companies and Other Nominees. Filed as Exhibit (a)(4) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(5) - Letter to Clients for Use by Brokers, Dealers, Banks, Trust Companies and Other Nominees. Filed as Exhibit (a)(5) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(6) - Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. Filed as Exhibit (a)(6) to the Schedule 14D-1 filed by Genzyme 4 5 Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(7) - Press Release of Genzyme Corporation dated September 6, 1996. Filed as Exhibit G to Amendment No. 1 to the Schedule 13D filed by Genzyme Corporation on September 6, 1996 and incorporated herein by reference. (a)(8) - Press Release of Genzyme Corporation dated September 23, 1996. Filed as Exhibit B to Amendment No. 2 to the Schedule 13D filed by Genzyme Corporation on September 24, 1996 and incorporated herein by reference. (a)(9) - Summary Advertisement dated September 27, 1996. Filed as Exhibit (a)(10) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(10) - Press release of Genzyme Corporation dated September 27, 1996. Filed as Exhibit (a)(9) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (b) - Not applicable. (c)(1) - Purchase Agreement dated as of September 20, 1996 by and among Genzyme Corporation, Neozyme II Acquisition Corp. and Neozyme II Corporation. Filed herewith. (c)(2) - Technology License Agreement dated April 28, 1992 between Genzyme Corporation and Neozyme II Corporation. Filed as Exhibit 28.7 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(3) - Research and Development Agreement dated as of April 28, 1992 between Genzyme Corporation and Neozyme II Corporation. Filed as Exhibit 28.8 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(4) - Purchase Option Agreement dated April 28, 1992 between Genzyme Corporation and certain other parties named therein. Filed as Exhibit 28.9 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(5) - Administrative Agreement dated April 28, 1992 between Genzyme Corporation and Neozyme II Corporation. Filed as Exhibit 28.10 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(6) - Series 1992 Note of Neozyme II Corporation dated April 28, 1992. Filed as Exhibit 28.11 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. 5 6 (c)(7) - Services Agreement dated April 28, 1992 between Genzyme Corporation and Neozyme II Corporation. Filed as Exhibit 10.5 to the Genzyme Corporation Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (c)(8) - Amendment No. 1 dated as of August 11, 1993 to Technology License Agreement and Research and Development Agreement between Neozyme II Corporation and Genzyme Corporation. Filed as Exhibit 10.42 to the Genzyme Corporation Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (c)(9) - License and Development Agreement dated as of August 11, 1993 between Genzyme Corporation and Univax Biologics, Inc. Filed as Exhibit 10.19 to the Form 10-Q of Univax Biologics, Inc. for the quarter ended September 30, 1993 (File No. 0-19748) and incorporated herein by reference. Confidential treatment has been granted for the deleted portions of this Exhibit. (d) - Not applicable. (e) - Not applicable. (f) - Not applicable. (g)(1) - Audited financial statements (and related notes) for Genzyme Corporation, Genzyme General Division and Genzyme Tissue Repair Division for the years ended December 31, 1993, 1994 and 1995, and unaudited financial statements (and related notes) for Genzyme Corporation, Genzyme General Division and Genzyme Tissue Repair Division for the six months ended June 30, 1995 and 1996. Filed herewith. (g)(2) - Pro forma financial statements (and related notes) for Genzyme Corporation and Genzyme General Division for the year ended December 31, 1995 and for the six months ended June 30, 1996. Filed herewith. 6 7 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. NEOZYME II ACQUISITION CORP. September 27, 1996 By: /s/ Peter Wirth ----------------------------------- Peter Wirth, Secretary 7 8 EXHIBIT INDEX
Exhibit No. Description Page No. - ------- ----------- ------- (a)(1) - Offer to Purchase dated September 27, 1996. Filed herewith. (a)(2) - Letter of Transmittal. Filed as Exhibit (a)(2) to the -- Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(3) - Notice of Guaranteed Delivery. Filed as Exhibit (a)(3) to the -- Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(4) - Letter from Robertson Stephens & Company, L.P. to Brokers, -- Dealers, Banks, Trust Companies and Other Nominees. Filed as Exhibit (a)(4) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(5) - Letter to Clients for Use by Brokers, Dealers, Banks, Trust -- Companies and Other Nominees. Filed as Exhibit (a)(5) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(6) - Guidelines for Certification of Taxpayer Identification Number on -- Substitute Form W-9. Filed as Exhibit (a)(6) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(7) - Press Release of Genzyme Corporation dated September 6, 1996. -- Filed as Exhibit G to Amendment No. 1 to the Schedule 13D filed by Genzyme Corporation on September 6, 1996 and incorporated herein by reference. (a)(8) - Press Release of Genzyme Corporation dated September 23, 1996. -- Filed as Exhibit B to Amendment No. 2 to the Schedule 13D filed by Genzyme Corporation on September 24, 1996 and incorporated herein by reference.
8 9 (a)(9) - Summary Advertisement dated September 27, 1996. Filed as -- Exhibit (a)(10) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisition Corp. contemporaneously herewith and incorporated herein by reference. (a)(10) Press Release of Genzyme Corporation dated September 27, 1996. -- Filed as Exhibit (a)(9) to the Schedule 14D-1 filed by Genzyme Corporation and Neozyme II Acquisiton Corp. contemporaneously herewith and incorporated herein by reference. (c)(1) - Purchase Agreement dated as of September 20, 1996 by and among Genzyme Corporation, Neozyme II Acquisition Corp. and Neozyme II Corporation. Filed herewith. (c)(2) - Technology License Agreement dated April 28, 1992 between -- Genzyme Corporation and Neozyme II Corporation. Filed as Exhibit 28.7 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(3) - Research and Development Agreement dated as of April 28, 1992 -- between Genzyme Corporation and Neozyme II Corporation. Filed as Exhibit 28.8 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(4) - Purchase Option Agreement dated April 28, 1992 between Genzyme -- Corporation and certain other parties named therein. Filed as Exhibit 28.9 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(5) - Administrative Agreement dated April 28, 1992 between Genzyme -- Corporation and Neozyme II Corporation. Filed as Exhibit 28.10 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(6) - Series 1992 Note of Neozyme II Corporation dated April 28, 1992. -- Filed as Exhibit 28.11 to the Genzyme Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference. (c)(7) - Services Agreement dated April 28, 1992 between Genzyme -- Corporation and Neozyme II Corporation. Filed as Exhibit 10.5 to the Genzyme Corporation Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (c)(8) - Amendment No. 1 dated as of August 11, 1993 to Technology License -- Agreement and Research and Development Agreement between Neozyme II Corporation and Genzyme Corporation. Filed as Exhibit 10.42 to the Genzyme Corporation Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. (c)(9) - License and Development Agreement dated as of August 11, 1993 -- between Genzyme Corporation and Univax Biologics, Inc. Filed as Exhibit 10.19 to the Form 10-Q of Univax Biologics, Inc. for the quarter ended September 30, 1993 (File No. 0-19748) and incorporated herein by reference. Confidential treatment has been granted for the deleted portions of this Exhibit.
9 10 (g)(1) - Audited financial statements (and related notes) for Genzyme Corporation, Genzyme General Division and Genzyme Tissue Repair Division for the years ended December 31, 1993, 1994 and 1995, and unaudited financial statements (and related notes) for Genzyme Corporation, Genzyme General Division and Genzyme Tissue Repair Division for the six months ended June 30, 1995 and 1996. Filed herewith. (g)(2) - Pro forma financial statements (and related notes) for Genzyme Corporation and Genzyme General Division for the year ended December 31, 1995 and for the six months ended June 30, 1996. Filed herewith. 10 EX-99.A1 2 OFFER TO PURCHASE 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING UNITS, EACH UNIT CONSISTING OF ONE SHARE OF CALLABLE COMMON STOCK of NEOZYME II CORPORATION and ONE CALLABLE WARRANT TO PURCHASE TWO SHARES OF GENERAL DIVISION COMMON STOCK AND 0.135 SHARE OF TISSUE REPAIR DIVISION COMMON STOCK of GENZYME CORPORATION at $45.00 NET PER UNIT by NEOZYME II ACQUISITION CORP. a wholly owned subsidiary of GENZYME CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, OCTOBER 28, 1996, UNLESS THE OFFER IS EXTENDED. THE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST A MAJORITY OF THE UNITS OUTSTANDING. IF LESS THAN A MAJORITY OF THE UNITS OUTSTANDING ARE VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER, NEOZYME II ACQUISITION CORP. (THE "PURCHASER") MAY ELECT TO AMEND AND EXTEND THE OFFER TO ELIMINATE THIS CONDITION. IN THAT EVENT, DURING THE PERIOD THAT THE OFFER IS EXTENDED, NEOZYME II CORPORATION (THE "COMPANY") SHALL, IN ACCORDANCE WITH APPLICABLE LAWS AND THE PURCHASE AGREEMENT, SOLICIT THE APPROVAL OF ITS SHAREHOLDERS FOR THE SECOND STEP TRANSACTION AS DESCRIBED BELOW. ALTERNATIVELY, THE PURCHASER MAY ELECT TO TERMINATE THE OFFER AND, PROMPTLY THEREAFTER, REQUEST THAT THE COMPANY SOLICIT THE APPROVAL OF ITS SHAREHOLDERS FOR THE SECOND STEP TRANSACTION. IF THE PURCHASER DOES NOT MAKE EITHER ELECTION, GENZYME CORPORATION ("GENZYME"), THE PURCHASER OR THE COMPANY MAY TERMINATE THE PURCHASE AGREEMENT. THE BOARD OF DIRECTORS OF THE COMPANY, BASED UPON, AMONG OTHER THINGS, THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD CONSISTING OF THE DIRECTORS OF THE COMPANY WHO ARE NOT OFFICERS OR DIRECTORS OF GENZYME, HAS UNANIMOUSLY DETERMINED THAT EACH OF THE OFFER AND THE SECOND STEP TRANSACTION REFERRED TO HEREIN IS FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS OF THE UNITS ("HOLDERS"), HAS APPROVED THE OFFER AND THE SECOND STEP TRANSACTION AND RECOMMENDS THAT THE HOLDERS ACCEPT THE OFFER AND TENDER THEIR UNITS PURSUANT TO THE OFFER. IMPORTANT Any Holder desiring to tender all or any portion of such Holder's units (the "Units"), each consisting of one share (the "Shares") of callable common stock, par value $1.00 per share (the "Callable Common Stock"), of the Company and one callable warrant (the "Callable Warrants") to purchase two shares of General Division common stock, par value $.01 per share, and 0.135 share of Tissue Repair Division common stock, par value $.01 per share, of Genzyme should either (1) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal and mail or deliver it together with the certificates representing the Shares and the Callable Warrants included in the tendered Units, and any other required documents, to the Depositary or (2) request such Holder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such Holder. Book-entry transfer procedures are not available to Holders. Any Holder whose Units are registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if such Holder desires to tender such Units. A Holder who desires to tender Units and whose certificates representing the Shares and the Callable Warrants included in such Units are not immediately available may tender such Units by following the procedures for guaranteed delivery set forth in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Units." Questions and requests for assistance may be directed to the Information Agent or to the Dealer Manager at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may also be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. --------------- THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. --------------- The Dealer Manager for the Offer is: ROBERTSON, STEPHENS & COMPANY LLC September 27, 1996 2 TABLE OF CONTENTS INTRODUCTION............................................................................ 3 SPECIAL FACTORS......................................................................... 6 1. Establishment and History of the Company........................................ 6 2. Agreements and Relationships Between the Company and Genzyme.................... 6 3. Background of the Transaction................................................... 8 4. Recommendation of the Company's Board of Directors; Fairness of the Transaction..................................................................... 12 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction............................................... 19 6. The Purchase Agreement; Appraisal Rights........................................ 30 7. Certain Federal Income Tax Consequences......................................... 38 8. Certain Effects of the Transaction.............................................. 40 9. Fees and Expenses............................................................... 42 THE TENDER OFFER........................................................................ 43 1. Terms of the Offer; Expiration Date............................................. 43 2. Acceptance for Payment and Payment for Units.................................... 44 3. Procedures for Accepting the Offer and Tendering Units.......................... 45 4. Withdrawal Rights............................................................... 47 5. Price Range of Units; Dividends................................................. 48 6. Certain Information Concerning the Company...................................... 49 7. Certain Information Concerning Genzyme and the Purchaser........................ 51 8. Source and Amount of Funds...................................................... 62 9. Certain Conditions of the Offer................................................. 62 10. Certain Legal Matters; Regulatory Approvals..................................... 63 11. Dividends and Distributions..................................................... 63 12. Fees and Expenses............................................................... 64 13. Miscellaneous................................................................... 64 SCHEDULE I Members of the Boards of Directors and Executive Officers of Genzyme and the Purchaser.................................................... I-1 SCHEDULE II Members of the Board of Directors and Executive Officer of the Company.............................................................. II-1 ANNEX I Opinion of Hambrecht & Quist LLC..................................... A-1 ANNEX II Opinion of Robertson, Stephens & Company LLC......................... B-1 ANNEX III Section 83 of the BVI International Business Companies Ordinance, 1984................................................................. C-1
2 3 TO THE HOLDERS OF UNITS OF NEOZYME II CORPORATION: INTRODUCTION Neozyme II Acquisition Corp. (the "Purchaser"), a British Virgin Islands ("BVI") international business company and a wholly owned subsidiary of Genzyme Corporation ("Genzyme"), a Massachusetts corporation, hereby offers to purchase all of the outstanding units (the "Units"), each consisting of one share (the "Shares") of callable common stock, par value $1.00 per share (the "Callable Common Stock"), of Neozyme II Corporation ("Neozyme II" or the "Company"), a BVI international business company, and one callable warrant (the "Callable Warrants") to purchase two shares of General Division common stock, par value $.01 per share ("General Division Common Stock"), and 0.135 share of Tissue Repair Division common stock, par value $.01 per share ("Tissue Repair Division Common Stock"), of Genzyme, at a purchase price of $45.00 per Unit, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). Tendering Holders will not be obligated to pay brokerage fees or commissions or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase by the Purchaser of Units pursuant to the Offer. The Purchaser will pay all fees and expenses of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), which is acting as the Dealer Manager for the Offer (in such capacity, the "Dealer Manager"), American Stock Transfer & Trust Company, which is acting as the Depositary (the "Depositary"), and Corporate Investor Communications, Inc., which is acting as the Information Agent (the "Information Agent"), incurred in connection with the Offer. See "SPECIAL FACTORS -- Section 9. Fees and Expenses" and "THE TENDER OFFER -- Section 12. Fees and Expenses." THE BOARD OF DIRECTORS OF THE COMPANY, BASED UPON, AMONG OTHER THINGS, THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD CONSISTING OF THE DIRECTORS OF THE COMPANY WHO ARE NOT OFFICERS OR DIRECTORS OF GENZYME, UNANIMOUSLY HAS DETERMINED THAT EACH OF THE OFFER AND THE SECOND STEP TRANSACTION IS FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS, HAS APPROVED THE OFFER AND THE SECOND STEP TRANSACTION AND RECOMMENDS THAT THE HOLDERS ACCEPT THE OFFER AND TENDER THEIR UNITS PURSUANT TO THE OFFER. THE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST A MAJORITY OF THE UNITS OUTSTANDING (THE "MINIMUM CONDITION"). IF LESS THAN A MAJORITY OF THE UNITS OUTSTANDING ARE VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER, THE PURCHASER MAY ELECT TO AMEND AND EXTEND THE OFFER TO ELIMINATE THIS CONDITION. IN THAT EVENT, DURING THE PERIOD THAT THE OFFER IS EXTENDED, THE COMPANY SHALL, IN ACCORDANCE WITH APPLICABLE LAWS AND THE PURCHASE AGREEMENT, SOLICIT THE APPROVAL OF THE HOLDERS OF THE SHARES FOR THE SECOND STEP TRANSACTION AS DESCRIBED BELOW. ALTERNATIVELY, THE PURCHASER MAY ELECT TO TERMINATE THE OFFER AND, PROMPTLY THEREAFTER, REQUEST THAT THE COMPANY SOLICIT THE APPROVAL OF THE HOLDERS OF THE SHARES FOR THE SECOND STEP TRANSACTION. IF THE PURCHASER DOES NOT MAKE EITHER ELECTION, GENZYME, THE PURCHASER OR THE COMPANY MAY TERMINATE THE PURCHASE AGREEMENT. SEE "THE TENDER OFFER -- SECTION 9. CERTAIN CONDITIONS OF THE OFFER." The Offer is being made pursuant to a Purchase Agreement dated as of September 20, 1996 (the "Purchase Agreement") among Genzyme, the Purchaser and the Company. The Purchase Agreement 3 4 provides that, among other things, as soon as practicable after the purchase of Units pursuant to, or in certain circumstances the termination of, the Offer, and the satisfaction of the other conditions contained in the Purchase Agreement and in accordance with the applicable provisions of the BVI International Business Companies Ordinance, 1984 (the "BVI Law"), the Purchaser will cause a transaction by which Genzyme will, directly or indirectly, acquire all of the Shares included in the untendered Units (the "Second Step Transaction"). If the Offer is consummated and 90% or more of the Units are tendered and accepted, the Purchaser will either (i) effect a merger of the Company into the Purchaser or (ii) cause the Company to redeem all Shares included in the untendered Units. If the Offer is consummated but less than 90% of the Units are tendered and accepted, or if, pursuant to the Purchase Agreement, the Offer is terminated or amended and the requisite approval of the Company's shareholders for the Second Step Transaction is obtained, then the Second Step Transaction will be effected as a merger of a wholly owned subsidiary of the Purchaser with and into the Company. Regardless of the form of the Second Step Transaction, the consideration to be received as a result of the Second Step Transaction by holders of Shares included in the untendered Units (other than Genzyme, the Purchaser or the Company or any direct or indirect subsidiary of any of them and Holders, if any, who shall have demanded and perfected their appraisal rights under the applicable provisions of the BVI Law) will be $29.00 per Share in cash, without interest. Any Callable Warrants included in the untendered Units will remain outstanding following the Second Step Transaction. Genzyme does not intend to list the Callable Warrants remaining outstanding after the Second Step Transaction on any securities exchange or to make a market in the Callable Warrants. As a result, no liquid market may develop for the Callable Warrants, which may adversely affect their value. See "SPECIAL FACTORS -- Section 8. Certain Effects of the Transaction." The Company has advised Genzyme that Hambrecht & Quist LLC ("Hambrecht & Quist"), financial advisor to the Special Committee, has delivered to the Special Committee and the Company's Board of Directors its written opinion dated September 20, 1996 that, on the basis of and subject to the matters set forth therein, the cash consideration to be received by the Holders in exchange for Units pursuant to the Offer and in exchange for Shares in the Second Step Transaction is fair to such Holders from a financial point of view (the "H&Q Opinion"). The Company has delivered to the Purchaser a copy of the H&Q Opinion, together with Hambrecht & Quist's written consent to the inclusion of or reference to the H&Q Opinion in the Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") filed by Genzyme and the Purchaser with the Securities and Exchange Commission (the "Commission") in connection with the Offer, the Rule 13e-3 Transaction Statement on Schedule 13E-3 filed by Genzyme, the Purchaser and the Company with the Commission and the Schedule 14D-9 filed by the Company with the Commission in connection with the Offer (the "Schedule 14D-9"). A copy of the H&Q Opinion is attached hereto as Annex I. See "SPECIAL FACTORS -- Section 4. Recommendation of the Company's Board of Directors; Fairness of the Transaction." The Company has filed with the Commission the Schedule 14D-9, which is being mailed to Holders concurrently herewith. The Company has advised the Purchaser that, as of September 20, 1996, there were 2,415,000 Units outstanding and that there were no Units or Shares reserved for issuance for any purpose. As of such date, neither Genzyme nor the Purchaser owned any Units; however, Genzyme is deemed to beneficially own all of the outstanding shares of Neozyme II Callable Common Stock as a result of an option to purchase all of the outstanding Shares, which option may be exercised by Genzyme at any time through December 31, 1996. See "SPECIAL FACTORS -- Section 2. Agreements and Relationships Between the Company and Genzyme." Based upon 2,415,000 Units outstanding as of September 20, 1996, 1,207,501 Units must be tendered in order to satisfy the Minimum Condition. All of the directors and the executive officers of Genzyme and the Company currently intend to tender to the Purchaser pursuant to the Offer all of the Units being sought by the Purchaser that they hold of record or beneficially. Units tendered by officers and directors of Genzyme and the Company will be purchased by the Purchaser on the same terms and conditions offered to all Holders. In order to effect the Second Step Transaction as promptly as possible following completion, or under certain circumstances the termination, of the Offer, the Board of Directors of the Company has authorized a Plan of Merger relating to a merger of a wholly owned subsidiary of the Purchaser with and into the Company 4 5 (the "Merger Plan") in accordance with the BVI Law and the Company's Memorandum and Articles of Association. The consummation of the Second Step Transaction is subject to the satisfaction or waiver of certain conditions, including the approval and adoption of the Merger Plan by the requisite vote or consent of the Holders, if required by the BVI Law. Under the BVI Law and the Company's Memorandum and Articles of Association, if the Purchaser acquires at least a majority of the outstanding Units, the Purchaser would have sufficient voting power to approve the Merger Plan by written consent in lieu of a meeting of Holders and without the vote or consent of any other Holder and consummate the Second Step Transaction. In addition, under the BVI Law, if the Purchaser acquires at least 90% of the outstanding Units, the Purchaser would have the power to consummate a merger of the Company into the Purchaser, or require the Company to redeem all of the Shares not held by the Purchaser, without a vote of the Holders. In either event, the Purchaser intends to take all necessary and appropriate action to cause the Second Step Transaction to become effective as soon as reasonably practicable after the consummation, or under certain circumstances the termination, of the Offer without a meeting of the Holders. See "SPECIAL FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights." THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 5 6 SPECIAL FACTORS 1. ESTABLISHMENT AND HISTORY OF THE COMPANY The Company was formed in March 1992 to contract with Genzyme to conduct research, development and clinical testing of biotherapeutic products ("Products") for the treatment of cystic fibrosis ("CF") by protein replacement or gene therapy (the "Field"). In August 1993, the Field was expanded to include the products involved in Genzyme's collaboration with North American Biological, Inc. ("NABI"). The lead product of the NABI collaboration, known as HyperGAM(TM)+CF, was an antibody-based product for the prevention and treatment of bacterial infections in CF patients. Development of all products in the NABI collaboration was discontinued in June 1996 following an interim analysis of data from a Phase II clinical trial of HyperGAM(TM)+CF. See "SPECIAL FACTORS -- Section 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction." As used herein, the term "Field" refers to the Field as so expanded. In May 1992, the Company and Genzyme completed a public offering (the "Unit Offering") of 2,415,000 units (the "Offered Units"), each Offered Unit consisting of one Share, one Series N Warrant to purchase, prior to the adjustment described in the next paragraph, one share of common stock, par value $.01 per share, of Genzyme ("Genzyme Common Stock") and one Callable Warrant to purchase, prior to the adjustment described in the next paragraph, one share of Genzyme Common Stock, at a price to the public of $35.00 per Offered Unit. The Company received all of the approximately $78 million in net proceeds from the Unit Offering. In connection with the Unit Offering, the Company issued its Series 1992 Note to Genzyme and entered into a Technology License Agreement, Development Agreement, Purchase Option Agreement, Services Agreement and Administrative Agreement with Genzyme. The terms of the Series 1992 Note and such agreements are summarized below. The Series N Warrants began trading separately from the Offered Units on August 4, 1992, resulting in the Offered Units becoming the Units, consisting of the Callable Common Stock and the Callable Warrants. As a result of a subsequent recapitalization and stock split by Genzyme, each Callable Warrant now represents the right to purchase two shares of Genzyme General Division Common Stock and 0.135 share of Genzyme Tissue Repair Division Common Stock. The Units trade on the Nasdaq National Market (the "NNM") under the symbol NIIUF. 2. AGREEMENTS AND RELATIONSHIPS BETWEEN THE COMPANY AND GENZYME TECHNOLOGY LICENSE AGREEMENT. Under the Technology License Agreement, Genzyme granted to Neozyme II a worldwide exclusive right and license to manufacture and sell Products within the Field based on all patent and other intellectual property rights owned, controlled or acquired by Genzyme during the term of the Development Agreement and as to which Genzyme has the right to grant sublicenses. Neozyme II paid Genzyme $5 million in consideration for Genzyme entering into the Technology License Agreement and in recognition of Genzyme's expertise and expenditures in developing the technology licensed to Neozyme II. Genzyme agreed to use commercially reasonable efforts to secure such technology rights as it deems reasonably necessary to conduct the research to be performed for Neozyme II under the Development Agreement. Neozyme II is obligated to assume, subject to its prior consent, any royalty or other obligations to third parties undertaken by Genzyme in the primary license. The license is otherwise royalty free. Also pursuant to the Technology License Agreement, Neozyme II granted to Genzyme a royalty-free, fully paid, irrevocable, perpetual, worldwide, exclusive right and license to engage in any and all uses of Improvements, except for those that are within the Field. "Improvements" consist of technology discovered, developed or otherwise acquired in the course of research conducted by Genzyme for Neozyme II under the Development Agreement. Neozyme II has agreed that it will not, without first obtaining the consent of Genzyme, sublicense, disclose or otherwise transfer any rights in the technology licensed to it by Genzyme, or in Improvements, to any third party before the expiration or termination of the Purchase Option Agreement. 6 7 Either party may terminate the Technology License Agreement under certain circumstances including breach by the other party of the Technology License Agreement or the Development Agreement that continues unremedied for 60 days. If the Technology License Agreement is terminated, the parties are obligated to negotiate commercially reasonable royalties or other compensation for certain rights, depending on which party terminated the agreement. DEVELOPMENT AGREEMENT. Under the Development Agreement, Neozyme II has engaged Genzyme to perform all of its research, development and clinical testing activities relating to the Products through December 31, 1996 unless terminated earlier. Genzyme agreed to use commercially reasonable efforts to conduct these activities pursuant to certain work plans and budgets prepared by Genzyme and approved by Neozyme II. Neozyme II is obligated to reimburse Genzyme for all costs associated with Genzyme's work under the Development Agreement up to an amount consisting of substantially all of the net proceeds from the Unit Offering plus interest accrued thereon, less the $5 million payment to Genzyme under the Technology License Agreement, less funds for use by Neozyme II for general and administrative expenses and less $1 million to be retained by Neozyme II for working capital (in the aggregate, the "Available Funds"). Genzyme may engage other parties to assist in the work performed for Neozyme II under the Development Agreement, provided that amounts paid to non-affiliates of Genzyme may not exceed $15 million unless otherwise approved by Neozyme II. As of August 31, 1996, Neozyme II had paid approximately $74.5 million to Genzyme under the Development Agreement. Based upon the work plan and budget approved for 1996 by the Neozyme II Board of Directors, Neozyme expects the Available Funds to be substantially exhausted by December 31, 1996. The Development Agreement may be terminated by either party under certain circumstances including breach by the other party of the Technology License Agreement or the Development Agreement that continues unremedied for 60 days. The Development Agreement also provides that it will terminate 90 days after the Available Funds become exhausted unless Genzyme elects to continue commercially reasonable efforts to continue research and development of the Products at its expense. Genzyme is under no obligation to continue such research and development. Genzyme may assign its rights and delegate its obligations only to an affiliate of Genzyme, certain successors of Genzyme or certain parties that acquire substantially all of the assets of Genzyme under certain circumstances. Neozyme II may not assign its rights or delegate its obligations under the Development Agreement. PURCHASE OPTION AGREEMENT. The Shares are subject to a purchase option agreement (the "Purchase Option Agreement") pursuant to which Genzyme may purchase all (but not less than all) of the shares from the holders thereof at any time through December 31, 1996, unless exercisability is accelerated upon exhaustion of the Available Funds. The Purchase Option is exercisable until December 31, 1996, at an exercise price per share that increases each month through December 31, 1996 to a maximum of $117.00 per share. The Purchase Option Exercise Price may be paid in cash, in shares of Genzyme stock, or in any combination thereof, at Genzyme's discretion. As of the date of this Offer to Purchase, the exercise price per share of the Purchase Option was $108.50. Termination of the Development Agreement or the Technology License Agreement due to a material breach by one of the parties will cause the Purchase Option to terminate 60 days thereafter in the case of a breach by Genzyme or 120 days thereafter in the case of a breach by Neozyme II. SERIES 1992 NOTE. In 1992, Neozyme II issued a note in the principal amount of $100,000 to Genzyme (the "Series 1992 Note"). The Series 1992 Note is due on the day following the termination of the Purchase Option Agreement and may not be prepaid. Pursuant to Neozyme II's Amended and Restated Memorandum of Association and Amended and Restated Articles of Association, Neozyme II and its shareholders are prohibited from taking any action or permitting any action to be taken that is inconsistent with Genzyme's rights under the Purchase Option Agreement. In addition, pursuant to the Company's Memorandum of Association, while the Series 1992 Note is outstanding, Neozyme II may not issue additional capital stock, borrow more than $1 million in the aggregate, declare or pay dividends utilizing funds committed to be paid to 7 8 Genzyme under the Development Agreement, merge, liquidate or sell all or substantially all of its assets without the approval of Genzyme. SERVICES AND ADMINISTRATIVE AGREEMENTS. Pursuant to these agreements, a subsidiary of Genzyme (Genzyme Limited) provides certain financial, legal and administrative services to Neozyme II on a cost reimbursement basis, and Neozyme II is required to provide a list of record holders of the Callable Common Stock to Genzyme upon Genzyme's exercise of the Purchase Option. OTHER RELATIONSHIPS Since the Company's inception, the sole executive officer of the Company has been an employee of Genzyme. From March 1992 until January 1996, G. Jan van Heek, a Senior Vice President of Genzyme, served as the Company's President and Treasurer. In January 1996, Mr. van Heek resigned as President and Treasurer of the Company, and Paul M. Edwards was appointed to these positions. Mr. Edwards also serves as Vice President and General Manager -- UK Operations for Genzyme, a position he has held since April 1993. Henri A. Termeer, the Chairman of the Board of the Company, is the Chairman, President and Chief Executive Officer of Genzyme. In addition, Mr. Termeer is a trustee of Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors. Hambrecht & Quist has acted as the Special Committee's financial advisor in connection with the offering. Gregory D. Phelps, a Director of the Company, is an Executive Vice President of Genzyme. Robert J. Carpenter, a Director of the Company, also serves as a Director of Genzyme. The Company does not have and has never had its own research and development employees or facilities and, therefore, it is heavily dependent upon the employees, facilities and other resources of Genzyme. Genzyme and the Company have also engaged the same independent auditors and outside legal counsel since the Company's inception. Any material adverse change in the business or financial condition of Genzyme could have a material adverse effect upon the Company. As of September 20, 1996, neither Genzyme nor the Purchaser owned any Units; however, Genzyme is deemed to beneficially own all of the outstanding Shares as a result of its option under the Purchase Option Agreement. See Schedule I and II for information concerning the ownership of Callable Common Stock by the directors and executive officers of Genzyme. 3. BACKGROUND OF THE TRANSACTION Beginning in the spring of 1996, Genzyme began to consider potential alternatives to its existing contractual relationship with the Company. In connection with these internal discussions, the members of Genzyme's management responsible for overseeing the research program in CF (the "CF Program") undertook an overall assessment of the CF Program, including the various approaches to the treatment of CF which have been explored, the then-current status of each such approach, the scientific questions that remained to be addressed before an effective treatment for CF could be achieved, Genzyme's knowledge of competitive CF programs, the Company's intellectual property portfolio and the status of the HyperGAM(TM)+CF clinical trial then being conducted by NABI, including the significance of the interim analysis for the trial expected to be received in June 1996. A management report summarizing this overall CF Program assessment was presented to the Genzyme Board of Directors at its annual meeting held on May 16, 1996, along with a preliminary analysis of Genzyme's alternatives to the existing relationship with the Company. No actions in respect of a transaction with the Company were authorized at the meeting. Following the May 16, 1996 meeting, Genzyme continued to explore internally alternative transactions that could be effected with the Company. On June 13, 1996, David J. McLachlan, Chief Financial Officer of Genzyme, contacted Kennett F. Burnes, a director of the Company who is neither an officer nor a director of Genzyme. Mr. McLachlan advised Mr. Burnes that, with just over six months remaining under the terms of the various agreements between the Genzyme and the Company, Genzyme was considering alternatives to its existing relationship with the Company and that, among the alternatives under discussion, Genzyme was considering the possibility of making an acquisition proposal on terms different from the Purchase Option or making a proposal to continue funding the CF Program. Mr. McLachlan further advised that, while the 8 9 Genzyme Board of Directors had not approved any proposal concerning the Company, Genzyme expected to have authorization from the Genzyme Board to make a proposal to the Company's Board of Directors at the next regularly scheduled meeting of the Company's Board to be held on July 23, 1996. Mr. McLachlan then suggested that it would be appropriate for the Company's Board of Directors to consider engaging independent advisors in connection with any possible transaction that might occur with Genzyme. In response to Mr. McLachlan's call, Mr. Burnes contacted the investment banking firm of Hambrecht & Quist and the law firm of Hale and Dorr to discuss the possible engagement of these firms to advise the Company's Board of Directors in any transaction with Genzyme. On June 20, 1996, NABI and Genzyme received the results of an interim analysis for the clinical trial being conducted for HyperGAM(TM)+ CF from an independent statistician. Although no major issues with the safety of the product were identified, the data also showed no difference in efficacy between those patients in the trial receiving placebo and those receiving either a high or low dose of HyperGAM(TM)+ CF. On June 21, 1996, a special meeting of the Company's Board of Directors was convened and a summary of the interim analysis for the HyperGAM(TM)+ CF trial was presented to the Board. Following the presentation, the Company's Board of Directors voted unanimously to terminate the agreement with NABI and, later that day, the Company and NABI announced the discontinuation of the trial. There were no discussions regarding the relationship between Genzyme and the Company at this meeting of the Company's Board of Directors. In light of the discontinuation of the HyperGAM(TM)+ CF trial, Genzyme re-evaluated the alternatives under consideration with respect to the Company. In connection with these efforts, in July 1996, Genzyme engaged Robertson, Stephens & Company to provide financial advisory services to Genzyme in connection with a possible acquisition of the Company. In connection with its engagement, Robertson, Stephens & Company conducted a due diligence review of the Company. On July 18, 1996, at a regularly scheduled meeting of the Genzyme Board of Directors, Genzyme management presented an analysis of Genzyme's options regarding the Company, and recommended that Genzyme make an offer to acquire the outstanding Units. Representatives of Robertson, Stephens & Company then made a preliminary presentation to the Genzyme Board of Directors. Following the presentations, the Genzyme Board of Directors voted to authorize management to initiate discussions regarding the acquisition of the Company with the independent directors of the Company and, if and when management determined that an offer would be in the best interest of Genzyme, to make an offer to acquire the outstanding Units at a price of up to $40 per Unit in cash. After such meeting, Mr. McLachlan called Mr. Burnes to advise him that Genzyme was considering the possibility of presenting an acquisition proposal to the Company's Board of Directors at the meeting scheduled for July 23, 1996. Following this call, on July 22, 1996 at the request of Mr. Burnes, Dennis J. Purcell, a Managing Director of Hambrecht & Quist, called Peter Wirth, Genzyme's General Counsel, to discuss the agenda for the upcoming meeting of the Company's Board of Directors. Mr. Wirth indicated that, as originally scheduled, the purpose of the meeting was to provide the Company's Board of Directors with an update as to the current status of the CF Program and that, as Mr. McLachlan had related to Mr. Burnes, Genzyme was also considering the possibility of presenting an acquisition proposal to the Company's Board. In response, Mr. Purcell suggested that while it was important for Genzyme to provide the Company's Board of Directors with an update as to the current status of the CF Program, significant additional due diligence would be required before the Company's Board would be in a position to respond to any acquisition proposal Genzyme might make. In response to Mr. Purcell's comments, it was agreed that the topics of discussion for the next day's meeting would be directed primarily towards the CF Program update and the process that might be followed in considering an acquisition proposal from Genzyme once the Company was prepared to respond to such a proposal. On July 23, 1996, a meeting of the Company's Board of Directors was convened. In addition to the members of the Board, representatives of Genzyme's management and Mr. Purcell were present. At the meeting, an update of the report summarizing the overall CF Program assessment previously presented to the Genzyme Board of Directors was presented to the Company's Board of Directors. Following the report, Mr. Wirth advised the Company's Board of Directors that, in view of the current status of the CF Program, 9 10 Genzyme did not expect to exercise the Purchase Option and that, in lieu of the Purchase Option, Genzyme's management was considering the possibility of making an acquisition proposal with respect to the Company. Mr. Wirth then described in general terms the process that might be followed by the Company's Board of Directors in considering an acquisition proposal from Genzyme and suggested that the Company's Board appoint a special committee of directors to consider any such proposal that Genzyme might determine to make. In response to Mr. Wirth's comments, the Company's Board of Directors appointed the Special Committee consisting of Mr. Burnes and Robert E. Flynn, the two directors of the Company who are not officers or directors of Genzyme, to consider any acquisition proposal which might be made by Genzyme. The members of the Special Committee and Mr. Purcell then requested that management provide a list of experts in the CF field who might be retained to perform an independent technical evaluation of the CF Program. It was further requested that management make available members of the CF Program staff for purposes of conducting due diligence. On July 25, 1996, Hambrecht & Quist selected Melissa Rosenfeld, M.D., a leading scientist in the CF field, as its technical consultant. On August 2, 1996, representatives of Hambrecht & Quist and Hale and Dorr and Dr. Rosenfeld met with representatives of management to conduct a due diligence review of the Company and the CF Program. Following such due diligence session, Hambrecht & Quist had discussions with Robertson Stephens & Company and Hale and Dorr had discussions with Palmer & Dodge, Genzyme's outside law firm, concerning the timing and process of the due diligence review and a response to any acquisition proposal Genzyme might make. Mr. Burnes and Mr. McLachlan also discussed the status of the Special Committee's efforts by telephone. On August 7, 1996, a meeting of the Special Committee was held to review the status of due diligence efforts and discussions with Genzyme regarding a potential acquisition proposal. Representatives of Hambrecht & Quist and Hale and Dorr participated in the meeting. The Special Committee approved and ratified the engagement of Hambrecht & Quist as financial advisor, Hale and Dorr as legal counsel and Dr. Rosenfeld as technical consultant. On August 8, 1996, a conference call between representatives of Genzyme, representatives of Hambrecht & Quist and Mr. Burnes was held. During the call, Mr. Wirth stated that Genzyme's management was considering making a proposal to acquire all of the outstanding Units for cash at a price per Unit equal to a discount of 10% to 15% from the then-current market price of the Units. Messrs. Wirth and McLachlan explained further that Genzyme believed a below-market price was justified in view of the current status of the CF Program, including the failure of HyperGAM(TM)+CF, the largely inactive status of the protein replacement program and the uncertainty surrounding gene therapy. In response to questions from representatives of Hambrecht & Quist regarding alternatives to a cash transaction, Mr. McLachlan advised that Genzyme had rejected the use of Genzyme stock, warrants or contingent value rights due to concerns over dilution and because it believed that the use of contingent rights would make the transaction more difficult for investors to value. In response to the comments from Messrs. Wirth and McLachlan, Messrs. Purcell and Burnes stated that the Special Committee would be unlikely to accept any offer at a price below market, but noted that Hambrecht & Quist had not yet concluded its analyses and, therefore, it was premature to commence negotiations regarding an acquisition price. Over the next weeks, Hambrecht & Quist and Hale and Dorr continued to conduct additional due diligence with respect to the Company. In particular, Hambrecht & Quist requested, received and reviewed documents from Genzyme relating to the Company, including general corporate materials, financial and accounting information, financial projections, license agreements and collaborations with third parties, copies of reports made to the Board of Directors concerning progress of the Company's research and development programs and analysts' reports on the Company, its competitors and CF in general. In addition, representatives of Hambrecht & Quist began to make informal inquiries as to the possible interest of potential third party purchasers of the Company. Hale and Dorr reviewed the existing agreements between the Company and Genzyme as well as the Company's patent position. Dr. Rosenfeld also continued to conduct additional due 10 11 diligence with respect to the Company and the CF Program and provided an assessment of the CF Program to Hambrecht & Quist. At a meeting of the Special Committee held on August 22, 1996, Hambrecht & Quist reported on the status of its due diligence review, indicating that, with the assistance of Dr. Rosenfeld, progress had been made on assessing the Company's technology. Hambrecht & Quist also indicated that it had made some informal inquiries as to the possible interest of potential third party purchasers, and determined that interest in the Company appeared to be insignificant due, among other things, to the limited nature of the Company's technology rights. Hale and Dorr provided an assessment of the Company's patent portfolio. It was also reported that the Company had agreed to indemnify the members of the Special Committee against liabilities arising out of their service on the Special Committee. On September 3, 1996, Messrs. McLachlan and Wirth met with David G. Golden, a Managing Director of Hambrecht & Quist, and Mr. Purcell to discuss the proposed acquisition price. Messrs. McLachlan and Wirth reiterated Genzyme's position that an acquisition price per Unit equal to a discount of 10% to 15% from the then current market price of the Units was appropriate in view of the status of the CF Program. Hambrecht & Quist stated that it did not believe the Special Committee would accept an acquisition price below market and that Genzyme should expect to have to pay a premium over the then-current market price of the Units. On September 4, 1996 Mr. McLachlan and Mr. Burnes discussed the previous day's telephone conference. Mr. Burnes reiterated that the Special Committee believed that any offer should be above the then current market price. On the morning of September 5, 1996, the Genzyme Board of Directors authorized management to propose an acquisition at $45 per Unit in cash if Genzyme's management could reach an agreement with the Special Committee at such price and if the Special Committee would recommend such price to the Holders. Mr. Termeer contacted Mr. Burnes and indicated that Genzyme's management would be willing to recommend to Genzyme's Board of Directors an increased acquisition price of $45 per Unit in cash, if the Special Committee would recommend such price to the Holders (the "Genzyme Proposal"). Mr. Burnes agreed to review the Genzyme Proposal with Mr. Flynn and Hambrecht & Quist. In the evening of September 5, 1996, the Special Committee met to consider the Genzyme Proposal. Hambrecht & Quist presented its preliminary analysis of the fairness of the Genzyme Proposal to the holders of the Units from a financial point of view and expressed its preliminary opinion that the Genzyme Proposal was fair to the holders of the Units from a financial point of view. Hambrecht & Quist noted that its opinion was subject to negotiation and review of the documentation for the transaction and satisfactory resolution of the structure of the transaction with respect to those Holders who do not tender their Units pursuant to the Offer. After review of the foregoing analysis and other considerations, the Special Committee unanimously approved in principle a transaction in which Units of the Company would be purchased by Genzyme at a purchase price of $45 per Unit in cash, subject to (a) negotiation and execution of definitive agreements, (b) receipt of Hambrecht & Quist's written fairness opinion, and (c) satisfactory resolution of the structure of the transaction with respect to non-tendering shareholders. On September 6, 1996, the Company and Genzyme jointly announced that they had reached an agreement in principle relating to the acquisition of the Company for $45 per Unit, subject to negotiation and execution of a definitive acquisition agreement. During the next two weeks, drafts of the Purchase Agreement were exchanged between Genzyme and the Company and their respective legal and financial advisors and the terms of such agreement were negotiated, including the structure of the Second Step Transaction, the amount of consideration to be paid in connection with the Second Step Transaction and arrangements between the parties in the event of a superior transaction, including the payment of a termination fee to Genzyme upon the consummation of a superior transaction and Genzyme's agreement to consent to the early assignment of the Technology License Agreement in connection with a superior transaction. On September 10, 1996, the Special Committee met with its financial and legal advisors to review issues relating to the draft Purchase Agreement. Hambrecht & Quist reported that several of the Company's 11 12 shareholders had contacted it with respect to the Offer, and indicated that shareholders had expressed dissatisfaction with the $45 price per Unit, principally due to their perception that Genzyme had previously led them to believe that any repurchase of the Units would be at a higher price. On September 17, 1996, the Genzyme Board of Directors held a special meeting to assess the status of the proposed transaction. At such meeting, Robertson, Stephens & Company made a presentation to the Genzyme Board (the "Robertson, Stephens & Company Presentation"). The Genzyme Board then reviewed with management the status of negotiations concerning the Purchase Agreement. On September 20, 1996, the Special Committee met with its financial and legal advisors to consider the Purchase Agreement. As described more fully below under "SPECIAL FACTORS -- Section 4. Recommendation of the Company's Board of Directors; Fairness of the Transaction", the Special Committee unanimously recommended that Neozyme II's Board of Directors approve the Offer and the Second Step Transaction. Thereafter, the full Neozyme II Board of Directors met and, upon the receiving the recommendation the Special Committee, unanimously determined (i) to accept the recommendation of the Special Committee, (ii) based upon, among other considerations, the recommendation of the Special Committee that the Offer and the Second Step Transaction are fair to, and in the best interests of, holders of the Units and (iii) to approve the Purchase Agreement and the transactions contemplated thereby. Following the meeting of the Company's Board of Directors on September 20, 1996, the Genzyme Board of Directors held a special meeting. At such meeting, Robertson, Stephens & Company delivered to the Genzyme Board its written opinion, dated September 20, 1996 (the "Robertson, Stephens & Company Opinion"), that, as of such date, and based upon and subject to the factors and assumptions set forth in such opinion, the Offer Price was fair to Genzyme from a financial point of view. After discussion with respect to the Offer and the other terms and conditions of and transactions contemplated by the Purchase Agreement and considering the matters discussed under "SPECIAL FACTORS -- Section 4. Recommendation of the Company's Board of Directors; Fairness of the Transaction" and "-- Section 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction" and the Robertson, Stephens & Company Opinion, the Genzyme Board unanimously determined (i) to approve the Offer and the Second Step Transaction, the Purchase Agreement and the transactions contemplated thereby and (ii) that, based upon, among other things, the conclusion of the Special Committee and the Company's Board, the terms of the Offer and the Second Step Transaction are fair to unaffiliated holders of the Units. The Purchase Agreement was executed by the parties and on September 23, 1996 a press release announcing the execution of the Purchase Agreement was issued. On September 27, 1996, the Purchaser commenced the Offer. 4. RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; FAIRNESS OF THE TRANSACTION At a meeting held on September 20, 1996, the Special Committee unanimously determined that the Offer and the Second Step Transaction are fair to, and in the best interests of, the Holders and resolved to recommend that the Board (a) determine that the Offer and the Second Step Transaction are fair to, and in the best interests of, the Holders; (b) adopt and approve the Offer, the Second Step Transaction, the Purchase Agreement and the transactions contemplated thereby; and (c) recommend that the Holders accept the Offer and tender their Units to the Purchaser pursuant to the Offer. In determining that the Offer and the Second Step Transaction are fair to, and in the best interests of, the Holders, and in making its recommendation to the Board, the Special Committee considered the following factors, which, taken as a whole, supported its decision: (a) the financial condition of the Company, including the fact that the Company's current cash is expected to be substantially exhausted by December 31, 1996 and the uncertain prospects of raising new capital in light of the current financing market for biotechnology companies, including the fact that many public offerings of biotechnology companies have either been postponed or priced below anticipated price ranges; 12 13 (b) the status of the Company's technology programs (based, in part, on input previously provided to Hambrecht & Quist by Dr. Rosenfeld and a prior oral presentation concerning the patent position of the Company's technology by Hale and Dorr, the Committee's independent legal counsel), including the fact that the Company's protein replacement therapy program has been largely inactive since 1994 and the decision in June 1996 to halt clinical trials for HyperGAM(TM)+CF; (c) the prospects of the Company, including the fact that the Company's gene therapy programs are unlikely to yield commercially viable products within the CF field for at least several years; (d) the fact that the market value of the Units is currently significantly lower than the Purchase Option Exercise Price and, that given the current status of the Company's technology programs and its prospects, the likelihood that the per Unit trading price on the NNM will not reach the Purchase Option Exercise Price prior to the expiration of the Purchase Option Agreement on December 31, 1996; (e) the valuation analyses presented to the Special Committee by Hambrecht & Quist at its September 5, 1996 and September 20, 1996 meetings; (f) the H&Q Opinion stating that, on the basis of and subject to the matters set forth therein, the cash consideration to be received by the shareholders of the Company in exchange for the Units in the Offer and in exchange for the Shares in the Second Step Transaction are fair to the holders of the Units and the Shares from a financial point of view. The H&Q Opinion contains a description of the factors considered, the assumptions made and the scope of review undertaken by Hambrecht & Quist in rendering the H&Q Opinion and is included herein as Annex I and is incorporated herein by reference. SHAREHOLDERS ARE URGED TO READ THE H&Q OPINION CAREFULLY IN ITS ENTIRETY; (g) the judgment of the Special Committee that $45 per Unit is the highest price reasonably available to the Company's shareholders for the following reasons: (1) the course of negotiations between the parties regarding the offering price, including the fact that Genzyme's original indication of interest was at a price level approximately 10% to 15% below the then current trading price of the Units of $44 and the fact that the $45 per Unit price represented a premium over the $44 1/16 trading price of the Units on the day before an agreement in principle with Genzyme was announced; (2) the pursuit of alternate transactions with third parties was not deemed to be a viable alternative (based, in part, on input received by Hambrecht & Quist in response to informal inquiries as to the possible interest of potential third party purchasers) given the nature of the contractual arrangements between the Company and Genzyme and the fact that the Company's rights in the technology developed in the course of its research programs is limited to the Field; and (3) since September 6, 1996, when Genzyme and the Company publicly announced an agreement in principle on an acquisition at $45 per Unit in cash, no third party had expressed an interest in having discussions with the Company to Hambrecht & Quist, which was identified in the press release as the Company's contact, or the Special Committee; and (h) the terms and conditions of the Purchase Agreement, including the right of the Special Committee to terminate the Purchase Agreement in order to proceed with a Superior Transaction. The Special Committee also considered the following negative factors relating to the Offer and the Second Step Transaction: (a) since the announcement of an agreement in principle with Genzyme, a number of the Company's shareholders contacted Hambrecht & Quist and the Special Committee and indicated they believe Genzyme should pay more than $45 per Unit, due, in part, to the indirect benefits Genzyme has received from the Company's technology programs; and 13 14 (b) the upside potential if the Company's technology programs, which are well regarded in scientific circles, are ultimately successful in discovering one or more products useful in the treatment of CF. The members of the Special Committee evaluated the above factors in light of their knowledge of the business of the Company and their business judgment and concluded that the factors supporting a decision to approve the Purchase Agreement outweighed the negative factors described above. In view of the wide variety of factors considered in connection with its evaluation of the Offer and the Second Step Transaction, the Special Committee did not find it practicable to, and did not, quantify or attempt to assign relative weights to the specific factors considered in reaching its decision. The Special Committee believes the process it followed in approving the Offer and the Second Step Transaction was procedurally fair and unbiased because (a) the Special Committee, consisting of all the directors of the Company who are not directors or officers of Genzyme, was constituted to consider and evaluate Genzyme's acquisition proposal with respect to the Company; (b) the members of the Special Committee will not personally benefit from the transactions contemplated by the Purchase Agreement (other than in their capacity as holders of Units); (c) the Special Committee retained independent advisors to assist it in evaluating Genzyme's acquisition proposal; (d) the Special Committee obtained the valuation analysis of Hambrecht & Quist and the H&Q Opinion; and (e) the Special Committee negotiated with Genzyme on an arm's length basis and with the assistance of its advisors. On September 20, 1996, the Board held a meeting and, based upon, among other things, the unanimous recommendation of the Special Committee (which was adopted by the Board in all respects), determined that the Offer and the Second Step Transaction are fair to, and in the best interests of, the Holders, approved the Offer and the Second Step Transaction and resolved to recommend that the Holders accept the Offer and tender their Units to the Purchaser pursuant to the Offer. OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE The Special Committee engaged Hambrecht & Quist to act as its financial advisor in connection with Genzyme's proposed acquisition of the Company and to render an opinion as to the fairness from a financial point of view to (a) the holders of Units of the consideration to be received by such holders in connection with Genzyme's offer to purchase all of the outstanding Units at a purchase price of $45.00 per Unit in cash, and (b) the holders of the Shares of the consideration to be received by such holders in connection with the Second Step Transaction pursuant to which, if the Offer is consummated, but not all of the Units are tendered and accepted or, if the Offer is terminated in accordance with the Purchase Agreement so that Genzyme may pursue a Termination Solicitation, Genzyme will acquire, directly or indirectly, all of the remaining Shares in exchange for cash in an amount equal to $29.00 per Share. Hambrecht & Quist rendered its oral opinion (subsequently confirmed in writing) on September 20, 1996 to the Special Committee that, as of such date, the consideration to be received by the holders of the Units pursuant to the Offer and the consideration to be received by the holders of the Shares pursuant to the Second Step Transaction is fair to such holders from a financial point of view. Hambrecht & Quist also delivered its oral opinion (subsequently confirmed in writing) to the Company's Board of Directors at its meeting on September 20, 1996. A COPY OF HAMBRECHT & QUIST'S OPINION DATED SEPTEMBER 20, 1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST IS ATTACHED AS ANNEX I TO THIS OFFER TO PURCHASE. NEOZYME II SHAREHOLDERS ARE ADVISED TO READ THE OPINION IN ITS ENTIRETY. Hambrecht & Quist delivered to the Special Committee written materials covering its methods of analyzing the Company and the Callable Warrants and the financial results of such analyses in connection with its September 20, 1996 opinion, which are attached as an exhibit to the Schedule 13E-3 filed with the Commission in connection with the Offer and will be available for inspection and copying at the principal executive offices of Genzyme during regular business hours by any interested shareholder of the Company or a representative of such shareholder who has been so designated in writing. No limitations were placed on Hambrecht & Quist by the Special Committee with respect to the investigation made or the procedures followed in preparing and rendering the H&Q Opinion. Hambrecht & Quist was not requested to and did not make any recommendation to the Special Committee as to the amount of consideration to 14 15 be offered to the Company's shareholders in the Offer and the Second Step Transaction, which consideration was determined through negotiations between the Special Committee and its financial and legal advisors and Genzyme and its financial and legal advisors. Hambrecht & Quist was not requested to and did not formally solicit third party indications of interest in acquiring all or any part of the Company. Hambrecht & Quist did, however, make informal inquiries as to the possible interest of potential third party purchasers, and determined that interest in the Company appeared to be insignificant due, among other things, to the limited nature of the Company's technology rights. Holders of Units should note that the opinion expressed by Hambrecht & Quist was provided for the information of the Special Committee and the Board of Directors of the Company in its evaluation of the Offer and the Second Step Transaction and does not constitute a recommendation to any shareholder as to how such shareholder should act with respect to the Offer. In connection with its review of the proposed transaction with Genzyme, and in arriving at its opinion, Hambrecht & Quist, among other things: (i) reviewed the publicly available consolidated financial statements of the Company for recent years and interim periods to date and certain other relevant financial and operating data of the Company made available to Hambrecht & Quist from published sources and from the internal records of the Company; (ii) discussed with certain members of the managements of the Company and Genzyme the business, financial condition and prospects of the Company; (iii) reviewed the publicly available consolidated financial statements of Genzyme for recent years and interim periods to date; (iv) reviewed certain internal financial and operating information, including certain projections, relating to the Company prepared by the management of Genzyme; (v) reviewed the recent reported prices and trading activity for the Units and compared such information and certain financial information of the Company with similar information for certain other companies engaged in businesses Hambrecht & Quist considered comparable to that of the Company; (vi) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions; (vii) reviewed drafts of the Purchase Agreement, the Offer Documents and certain other materials to be filed with the Securities and Exchange Commission in connection with the Offer; and (viii) performed such other analyses and examinations and considered such other information, financial studies, analyses and investigations and financial, economic and market data as Hambrecht & Quist deemed relevant. In rendering its opinion, Hambrecht & Quist assumed and relied upon the accuracy and completeness of all of the information concerning the Company and Genzyme considered in connection with its review of the proposed transaction, and Hambrecht & Quist did not assume any responsibility for independent verification of such information. Hambrecht & Quist did not prepare any independent valuation or appraisal of any of the assets or liabilities of the Company, nor did Hambrecht & Quist conduct a physical inspection of the properties and facilities of the Company. With respect to the financial forecasts and projections made available to Hambrecht & Quist and used in its analysis, Hambrecht & Quist assumed that they reflected the best currently available estimates and judgments of the expected future financial performance of the Company. For purposes of its opinion, Hambrecht & Quist assumed that the Company was not a party to any pending transactions, including external financings, recapitalizations or material merger discussions, other than the proposed transaction with Genzyme and those activities undertaken in the ordinary course of conducting its business. Hambrecht & Quist's opinion was necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of their opinion and any change in such conditions would require a reevaluation of that opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. The summary of the Hambrecht & Quist analyses set forth below does not purport to be a complete description of the analyses underlying the H&Q Opinion. In arriving at its opinion, Hambrecht & Quist did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Hambrecht & Quist believes that its analyses and the summary set forth below must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or of the summary set forth below, without considering all factors and analyses, could create an incomplete view of the processes underlying the analyses set forth in the Hambrecht & Quist presentation to the Special Committee and the H&Q Opinion. In performing its analyses, Hambrecht & Quist made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which 15 16 are beyond the control of the Company and Genzyme. The analyses performed by Hambrecht & Quist (and summarized below) are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, analyses relating to the values of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. Analysis of Technology and Stage of Development. Hambrecht & Quist reviewed and analyzed, among other things, the Field in which Neozyme II is engaged (i.e., the research, development and clinical testing of products for the treatment of cystic fibrosis), Neozyme II's intellectual property rights (which are limited to technology in the Field, with all technology developed by the Company with application outside the Field being licensed back to Genzyme exclusively on a royalty free basis) and approaches to treating CF. In connection with its review, Hambrecht & Quist retained the outside consulting services of an independent leading scientist in the field of CF, Dr. Rosenfeld. The role of Dr. Rosenfeld was not to appraise or value any of the Company's technology, but to assist Hambrecht & Quist in assessing, among other things, the quality and progress of the Company's science and its stage of scientific and clinical development. On the basis of its analysis, Hambrecht & Quist observed the following: (i) the Company's most advanced approach to treating cystic fibrosis has been gene therapy using an adenovirus vector; (ii) this approach has encountered several significant obstacles that make the development of a gene therapy product unlikely in the next few years (Genzyme forecasts commercialization in 2003); (iii) while gene therapy approaches using an adenoassociated virus or a lipid vector hold promise, these approaches are in comparatively early stages and a pivotal trial for a particular vector is not likely in the near future; and (iv) Genzyme's work in the areas of protein replacement and Hypergam(TM)+CF have proved to be disappointments and development of these products have been suspended and terminated, respectively. Comparable Company Analysis. Hambrecht & Quist reviewed and compared selected historical financials, operating and stock market performance data of the Company to the corresponding data of four publicly traded biotechnology companies with a scientific focus in the area of gene therapy (the "Gene Therapy Companies"). The Gene Therapy Companies included in this Group were GeneMedicine Incorporated, Somatix Therapy Corporation, Targeted Genetics Corporation and Vical Incorporated. Hambrecht & Quist compared cash, book value, net income, enterprise value (consisting of equity value plus debt less cash) and burn rate (cash used in operating activities plus capital expenditures) for the latest available 12 month period ("LTM") for each of the Gene Therapy Companies with the Company. Hambrecht & Quist also analyzed the financial ratios of market value to cash and market value to book value. Hambrecht & Quist calculated the ratio of the cash position to the LTM burn rate of each of the Gene Therapy Companies to determine the "survival index" (the number of consecutive annual periods that such company could continue to fund cash losses at the rate experienced in the LTM from the most recently available reported cash without obtaining additional capital) and compared such information from such Gene Therapy Companies with the Company. The average enterprise value of the Gene Therapy Companies was $75.3 million ($70.3 million excluding the high and low) compared to an enterprise value of $61.4 million for the Company based on the Offer (assuming a value of $16.00 per Callable Warrant). Hambrecht & Quist noted that the Gene Therapy Companies had research projects in multiple disease areas while the Company is limited to the Field and has no rights to gene delivery or other technology outside the Field. Hambrecht & Quist also reviewed and compared selected historical and projected financials, operating and stock market performance data of certain publicly traded biotechnology and pharmaceutical companies (the "Established Companies Comparables"). This comparison provided a basis for the range of Price-Earnings ("P/E") multiples used in further analysis, particularly the Terminal Value (as defined below) in connection with the discounted cash flow analyses described below. The companies included in the Established Companies Comparables were the following: Johnson & Johnson, Merck & Co, Pfizer Inc., SmithKline Beecham, Glaxo-Wellcome, Chiron Corp., Amgen Inc. and Genentech Inc. Hambrecht & Quist did not attempt to prepare any further quantitative valuation analyses based on the Established Companies Comparables because Hambrecht & Quist believed that any comparative multiples that might be derived based upon earnings or other financial data of such companies would not be meaningful when applied to the Company's operating losses. 16 17 Hambrecht & Quist also reviewed and analyzed the acquisition by Chiron of Viagene and the acquisition of Genetic Therapy by Sandoz. Hambrecht & Quist observed that Chiron acquired Viagene in a transaction valued at $102 million, representing a premium of 67% over the market value of Viagene stock one day prior to the transaction's announcement and that Sandoz acquired Genetic Therapy in a transaction valued at $295 million, representing a premium of 38% over the market value of Genetic Therapy stock one day prior to the transaction's announcement. Hambrecht & Quist did not attempt to prepare any further quantitative valuation analyses based on these acquisition transactions because Hambrecht & Quist believed that differences in the technologies of each company and the differences in the market conditions at the time such acquisitions were made would make such analyses meaningless. Comparable SWORD Analysis. Hambrecht & Quist noted that the Shares had originally been offered as part of a unit financing in which purchasers bought a Unit consisting of (i) one Share, (ii) one Series N Warrant and (iii) one Callable Warrant. Hambrecht & Quist reviewed and analyzed the original offering of the Units and other comparable public offerings of special purpose funding companies commonly referred to as Stock Warrant for Off-Balance Sheet Research and Development Companies ("SWORDs"). Hambrecht & Quist also reviewed the stock prices and market performances of the Units and the comparable SWORD offerings. Where the stock of SWORD companies was repurchased by the SWORD sponsor in a negotiated transaction and not pursuant to the original purchase option, Hambrecht & Quist analyzed a number of factors, including the purchase price attributable to the technology, the discount to the original purchase option price and calculated the implied rate of return from the original offering date. The sponsor companies of the comparable SWORD offerings included in this analysis were ALZA Corp., Centocor, Inc. (two such offerings), Immunex Corporation, Elan Corporation PLC (two such offerings), Genetics Institute Inc., Gensia, Inc., Cytogen Corp., Genzyme Corporation (including only Neozyme Corporation and not Neozyme II Corporation), PerSeptive Biosystems Inc., and Ligand Pharmaceuticals, Inc./Allergan, Inc. (a co-sponsored SWORD). Hambrecht & Quist observed that the value of the average SWORD units had appreciated (inclusive of implied appreciation where such units had been repurchased by the sponsoring companies) approximately 71.6% (from offering date to September 19, 1996), as compared to a 63.4% increase in value of the Units. Hambrecht & Quist also observed that, at the time of the unit offering, the average value of the warrants at an assumed 40% volatility in the SWORD sponsoring company represented approximately 54.6% of the aggregate SWORD unit value and that in the case of the Company, the Genzyme warrants represented approximately 23.7% of the value of the Unit at the time of the original offering. Accordingly, Hambrecht & Quist observed that, of the $35.00 per Unit offering price, approximately $8.30 per Unit was allocable to the Series N Warrants and approximately $26.70 per Unit was allocable to the Shares and the Callable Warrants. The Series N Warrants originally included in the Units have separated from the Units and now trade separately under the symbol "GENZZ" (the closing price on September 19, 1996 was $11.50 per Series N Warrant). These figures were compared with a valuation of $29.00 per Share included in the Units and $16.00 per warrant for the Callable Warrants included in the Units. In addition, Hambrecht & Quist observed that the discount to the original purchase option price of SWORDs repurchased in negotiated transactions was 58.7%, compared to 61.5% for the Company pursuant to the Offer and that the rate of return in negotiated repurchases was -9.2% for the comparable SWORD repurchases, compared to 6.5% for the Units. Discounted Cash Flow Analysis. Hambrecht & Quist analyzed the theoretical valuation of the Company based on the unlevered discounted cash flow of its projected financial performance under three scenarios: (i) the Company launches a cystic fibrosis product in 2003 in accordance with the projections Genzyme provided Hambrecht & Quist (the "Base Case"); (ii) the Company's anticipated product launch is delayed until 2004 (the "Delayed Scenario"); and (iii) the Company's anticipated product launch is accelerated by one year to 2002 (the "Accelerated Scenario"). In all three scenarios, Hambrecht & Quist used discount rates ranging from 25% to 40% to calculate the present value (the "Present Value") of the Company's projected stream of after-tax cash flows through 2005. Hambrecht & Quist then calculated a terminal value (the "Terminal Value") for the Company which represents the hypothetical value of selling 17 18 the entire business at the end of 2005 and discounting the amount received from such hypothetical sale to its net present value (using the same discount rate as applied to the Present Value). The Terminal Value used under all scenarios was based upon multiples of 14.0x to 24.0x projected net income for the year 2005. The range of 14.0x to 24.0x projected net income reflects a range of P/E multiples derived from the Established Companies Comparables. For the purposes of this analysis, Hambrecht & Quist relied on the Genzyme's management's estimate of projected revenues with respect to all scenarios and altered only the year in which such revenues would be recognized, with respect to the Delayed Scenario and the Accelerated Scenario. To estimate the total present value of the Company's business, before giving effect to its capital structure, Hambrecht & Quist added the Present Value to the Terminal Value. Using the Base Case, Hambrecht & Quist calculated a range of present values, including $41.9 million at a 35% discount rate and an 18.0x exit multiple, $72.3 million at a 30% discount rate and an 18.0x exit multiple, $50.7 million at a 35% discount rate and an 20.0x exit multiple and $84.8 million at a 30% discount rate and an 20.0x exit multiple. Using the Delayed Scenario, Hambrecht & Quist calculated a range of present values, including $3.2 million at a 35% discount rate and an 18.0x exit multiple, $17.0 million at a 30% discount rate and an 18.0x exit multiple, $8.0 million at a 35% discount rate and an 20.0x exit multiple and $23.8 million at a 30% discount rate and an 20.0x exit multiple. Using the Accelerated Scenario, Hambrecht & Quist calculated a range of present values, including $71.6 million at a 35% discount rate and an 18.0x exit multiple, $114.1 million at a 30% discount rate and an 18.0x exit multiple, $82.6 million at a 35% discount rate and an 20.0x exit multiple and $130.0 million at a 30% discount rate and an 20.0x exit multiple. Hambrecht & Quist observed that the Offer of approximately $70.0 million (assuming a value of $38.6 million for the Callable Warrants) for the Company fell within the middle ranges calculated using the Base Case Scenario, above the middle ranges calculated using the Delayed Scenario and below the middle ranges calculated using the Accelerated Scenario. Warrant Valuation Analysis. Hambrecht & Quist analyzed the valuation of the Callable Warrants using the Black-Sholes option valuation formula. Such formula suggested that the value of the warrant for two shares of General Division Common Stock based on a range of volatility of 45% to 55% to be between $13.03 and $16.57. Additionally, such formula suggested that the value of the warrant for 0.135 share of Tissue Repair Common Stock based on a range of volatility to be between $0.32 and $0.42. Hambrecht & Quist also noted that the implied volatility based on a $16.00 warrant valuation was approximately 53.8%. Accordingly, Hambrecht & Quist concluded that the aggregated value of the Callable Warrants range from $32.2 million to $41.0 million, or $13.33 to $16.98 per Callable Warrant. Stock Trading History Analysis. Hambrecht & Quist examined the trading history of (i) the Units in terms of both price and volume from September 5, 1995 to September 4, 1996 and (ii) the Units and Genzyme common stock, compared to the American Biotechnology Index from August 4, 1992 to September 6, 1996. Hambrecht & Quist noted that, over the period, the Units increased in value at a far greater rate than either Genzyme common stock or the American Biotechnology Index, which tended to trade in parallel. No company or transaction used in the above analyses is identical to the Company, Genzyme or the proposed transaction. Accordingly, an analysis of the results of the foregoing is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values of the companies or company to which they are compared. The foregoing description of Hambrecht & Quist's opinion is qualified in its entirety by reference to the full text of such opinion, which is attached hereto as Annex I. Certain Relationship; Terms of Engagement. Hambrecht & Quist, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The Special Committee selected Hambrecht & Quist to serve as its financial advisor in connection with the proposed transaction with Genzyme because it is an internationally recognized investment banking firm whose 18 19 professionals have substantial experience in SWORDs transactions and transactions similar to the Offer and the Second Step Transaction. Hambrecht & Quist has, from time to time, provided financial advisory services to Genzyme, and has received fees for rendering these services. In July 1996, Hambrecht & Quist acted as managing underwriter for a public offering of Genzyme Transgenics Corporation, an affiliate of Genzyme and received as compensation fees and commissions of approximately $312,000. In the ordinary course of business, Hambrecht & Quist acts as a market maker and broker in the publicly traded securities of the Company and Genzyme and receives customary compensation in connection therewith, and also provides research coverage for Genzyme. In the ordinary course of business, Hambrecht & Quist actively trades in the equity securities of the Company and Genzyme for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Hambrecht & Quist may in the future provide additional investment banking or other financial advisory services to Genzyme. Pursuant to an engagement letter dated August 2, 1996, the Company has agreed to pay Hambrecht & Quist a retainer in the amount of $50,000 and a fee in connection with its services as financial advisor to the Special Committee and the rendering of a fairness opinion. The Company has agreed to pay a fee of $200,000 upon the delivery of the fairness opinion. The retainer and fairness opinion fee shall be credited against any Transaction Fee (as defined below). Upon consummation by the Company of the proposed transaction, the Company shall pay Hambrecht & Quist a fee (the "Transaction Fee"), payable in cash on closing, of 1.0% of the value of the consideration to be received by holders of Units plus 3.0% of the value of the consideration to be received by holders of Units in excess of $43.00. The Company has agreed to reimburse Hambrecht & Quist for its reasonable out of pocket expenses, and to indemnify Hambrecht & Quist against certain liabilities, including liabilities under the federal securities laws or relating to or arising out of Hambrecht & Quist's engagement as financial advisor. The amount of compensation to be paid to Hambrecht & Quist was determined by negotiations between the Special Committee and Hambrecht & Quist. 5. REASONS FOR THE TRANSACTION; PURPOSE AND STRUCTURE OF THE TRANSACTION; PLANS FOR THE COMPANY AFTER THE TRANSACTION In determining to seek to acquire the Company, the Board of Directors of Genzyme carefully considered the status of the technology and product development of the Company, which is summarized below. STATUS OF PRODUCT DEVELOPMENT Product Opportunity CF is the most common fatal genetic disease afflicting the caucasian population. Approximately one in every 2,500 infants in the United States is born with the disease. Although improvements have been made over the last 20 years in alleviating certain symptoms of the disease and delaying its progress, the underlying disease remains untreated and patients have an average life expectancy of only 29 years. There are approximately 30,000 CF patients in North America. CF is caused by one or more mutations in the gene responsible for determining the molecular structure of a protein called cystic fibrosis transmembrane conductance regulator ("CFTR"). The absence of functional CFTR protein from the membrane of airway surface cells disrupts the ion transport mechanism of the cells and contributes to the formation of a thick, dehydrated mucus that cannot be eliminated from the lungs in the normal fashion. Build-up of this mucus fosters recurrent infections that cause breathing difficulties and damage to the lungs, eventually leading to respiratory failure and death. Elsewhere in the body, the gene defect often results in digestive, reproductive and other problems. Such other problems are unlikely to be alleviated in the event CF-induced airway and lung damage is effectively treated. Neozyme II's work relating to the treatment of CF initially concentrated on two promising therapies to correct the basic defect in CF airway cells: gene therapy to augment the mutant genes with genes that would enable the patient's cells to produce normal CFTR protein, and protein replacement therapy to augment the missing or defective CFTR protein with properly functioning CFTR protein. For technical and competitive reasons, the gene therapy approach has been emphasized during the last two years, and currently the protein replacement program is largely inactive. Neozyme II also funded NABI's efforts to develop passive 19 20 immunization antibody products primarily for the prevention and treatment of bacterial infections common in CF patients. See "HyperGAM(TM)+CF" below. Progress to Date The gene responsible for the defective protein present in CF patients was identified by scientists at the University of Michigan and the Hospital for Sick Children in Toronto and their findings were published in 1989. Since that time, and on behalf of Neozyme II since March 1992, Genzyme scientists have intensively studied the gene and the protein and have made significant technical progress that should facilitate the development of effective therapies for the treatment of CF patients. These results have been published in leading scientific journals, and Genzyme has filed United States and foreign patent applications covering certain aspects of this work. GENE THERAPY. Gene therapy is a promising new technique being developed as a treatment for several genetic diseases including CF. To date, over 139 protocols for preliminary clinical studies of gene therapy for a variety of diseases have been approved by the National Institutes of Health. Because of the innovative nature of gene therapy and public policy issues surrounding the insertion of new genetic information into cells, the Company expects that early clinical evaluation will continue to entail especially careful testing in a limited number of patients. On behalf of Neozyme II, Genzyme is currently conducting preliminary clinical testing of Neozyme II's gene therapy products. The timing and results of these initial studies will determine whether and when pivotal trials to determine safety and effectiveness will be undertaken. These pivotal trials may involve large groups of patients for lengthy periods of time in order to address the uncertainties surrounding insertion of new genetic information into humans and to show clinical effectiveness in the treatment of a progressive disease. All of Genzyme's efforts related to gene therapies for CF are funded by Neozyme II. On behalf of Neozyme II, Genzyme scientists have demonstrated that the defective ion transport mechanism present in airway cells taken from CF patients can be corrected in vitro by the insertion of normal CFTR genes into the cells. However, the techniques for inserting genetic material into cells outside the body are not expected to be useful in gene therapy for CF because there is no practical way to remove and re-implant cells from the airways of CF patients. For this reason, Neozyme II's proposed gene therapy Product will likely need to be administered directly to the airways of the lung. Neozyme II believes that its gene therapy Product would need to be readministered periodically as the transferred gene ceases to function or is lost and as the treated cells naturally die and are replaced. Vectors are presently regarded as critical components of gene therapeutics which facilitate targeting and delivery of genetic material to the appropriate cells and affect the efficiency and duration of gene expression. On behalf of Neozyme II, Genzyme is developing both viral and non-viral vectors for delivering the gene encoding CFTR to the surface cells lining the airways. Animal studies aimed at demonstrating the potential safety and effectiveness of a variety of vectors have been initiated and several have been successfully completed and reported in scientific journals. Viral Vectors. On behalf of Neozyme II, Genzyme and collaborators at the University of Iowa, in 1993, conducted a small study in CF patients using an adenovirus-gene product administered to nasal epithelium. Results collected from the study showed that it is possible to correct the biochemical defect in CF cells in nasal epithelium in vivo. The study results, published in October 1993, were the first published report of a successful gene transfer in CF patients and the first successful application of an adenovirus vector in gene therapy. However, in a 1995 publication reporting the results of a similar study, researchers from the University of North Carolina questioned the efficacy of gene transfer using adenovirus. In December 1993, a Genzyme collaborator received Recombinant DNA Advisory Committee ("RAC") approval for a study involving repeat administration of Genzyme's second generation adenovirus vector to the nasal epithelium and sinus passages of CF patients. The nasal part of this study was initiated during the first quarter of 1994 and was completed in the second quarter of 1995. Aggregated data from this study showed limited evidence of gene expression at the intermediate doses but not at the highest dose. The 20 21 virus appeared safe, but a complex immune response to the adenovirus was measured in almost all patients. This and other data obtained in animals and submitted for publication in 1995 suggest that immune response may limit the efficacy of repeat dose therapy with adenovirus. The sinus study was not conducted due to the lack of interpretable baseline data in the CF sinus. During the fourth quarter of 1994, Genzyme received RAC approval and submitted a protocol to the United States Food and Drug Administration (the "FDA") for a two part safety study involving administration of its second generation adenovirus vector to the lungs of up to 40 CF patients via bronchoscope and aerosol. Bronchoscopic administration commenced in the first quarter of 1995, and aerosol administration commenced in September 1995. Additionally, in September 1995, Genzyme switched to the use of a third- generation adenovirus vector with an improved safety profile as part of this same study. The study is currently ongoing. In parallel with these clinical studies, Genzyme, on behalf of Neozyme II, is conducting extensive research into proving the safety and efficacy of adenovirus. Particular emphasis is being placed on immunology, since it now appears that new vectors or methods need to be developed so as to reduce the patient's immune response and to increase the efficacy of adenovirus vectors. Such improvements may be necessary in order for adenovirus vectors to be clinically useful in chronic therapy. Non-Viral Vectors. In addition to pursuing adenovirus and other viral vectors, Neozyme II is developing lipid-DNA complexes as vectors for gene therapy. Neozyme II believes that lipid-based vectors may offer advantages due to their reduced immunogenicity and ease of manufacture relative to viral vectors. Genzyme has synthesized, evaluated and filed patent applications on numerous new lipids. Several of these have shown significantly greater activity in vivo than commercially available lipids. To augment its internal efforts, Genzyme has entered into arrangements with third parties to gain access to non-viral gene delivery technologies. To date, the most significant such arrangement is an October 1993 exclusive research agreement with Vical, Inc. to evaluate Vical's cytofectins as non-viral gene delivery vectors for treating CF. The plasmid expression system containing the DNA also affects expression efficiency, and Genzyme has designed various new plasmid constructs to enhance expression. Although substantial progress has been made in both lipid and plasmid constructs, currently the optimal formulation of the best lipid-DNA complex is still less efficient than adenovirus as measured in single dose in vivo experiments. In December 1993, a Genzyme collaborator received RAC approval for a CF nasal protocol utilizing a lipid-DNA complex containing DMRIE, one of Vical's proprietary cytofectins. This study commenced in September 1995 and is currently ongoing. In December 1994, Genzyme also initiated a collaboration with a British academic group for purposes of further studying Neozyme II's proprietary lipid-DNA complexes. In December 1995, Genzyme submitted an IND to the FDA for a nasal study using a proprietary lipid-DNA complex developed by Genzyme. The study was initiated in January 1996 by Genzyme and its collaborators at the University of Iowa and completed in the second quarter of 1996. The study entailed the administration of the lipid- DNA complex to one nostril of nine CF patients and administration of the DNA plasmid alone to the patients' other nostril as a control. Although the results showed that the lipid-DNA compound was well tolerated, they did not demonstrate the lipid-DNA compound to be superior to the plasmid DNA in improving ion exchange across the cell membrane. A follow-on study to gather additional information is planned for later this year. Also in the second quarter of 1996, Genzyme completed a safety study in which the lipid alone was delivered in aerosol form to the lungs of 15 non-CF volunteers. The study showed that aerosolized delivery of the lipid to the lung was well tolerated. Based on these results, a pilot study involving aerosol administration of a lipid-DNA complex to the lungs of CF patients was planned to start later this year in the United Kingdom ("UK"). The commencement of this trial was placed on hold by the UK Medicines Control Agency ("MCA"), pending resolution of certain safety issues raised by the MCA. Genzyme has responded to these issues and submitted a revised protocol for the trial. There can be no assurance that the MCA will accept the revised protocol or require additional data that would further delay the trial. In the event that the revised protocol is not accepted, Genzyme plans to revise the IND currently on file with the FDA for the lipid-DNA complex to include an aerosol protocol. 21 22 Protein Replacement Therapy. CFTR is a membrane protein, a class of molecules which historically has been difficult to produce in conventional cell culture in active form and large quantities. Genzyme, however, has been able to develop recombinant cell lines that can synthesize the protein and has published data on the feasibility at laboratory scale of producing and purifying functional CFTR protein from mammalian and insect cells. In collaboration with researchers at Tufts University and Genzyme Transgenics Corporation, transgenic expression techniques were used successfully to breed mice and rabbits that secrete human CFTR protein in their milk. Based on these results, Genzyme engaged Genzyme Transgenics Corporation to develop transgenic goats that express CFTR in their milk. Although one transgenic goat has been born, it did not synthesize measurable CFTR in its milk and no further work is currently underway. As a membrane protein, CFTR must be delivered into the cell membrane to be effective. On behalf of Neozyme II, Genzyme has investigated various methods to deliver the CFTR protein across the planar bilayer of epithelial cells. In 1995, Genzyme reported in several publications the technical feasibility of delivering small but detectable amounts of functional CFTR to epithelial cells in vitro using virosomes. However, the effect detected was transient. As a theoretical matter, gene therapy is significantly more efficient than protein replacement because each DNA particle delivered will produce multiple copies of protein; whereas, in protein replacement, each delivered unit results in delivery of only one protein molecule. Both protein replacement and gene therapy have significant technical challenges related to delivery, but since gene therapy is more efficient once delivered, Genzyme has chosen to concentrate its efforts in this area. Although still a potentially viable approach, currently the protein replacement program is largely inactive. HyperGAM(TM)+CF. In August 1993, Genzyme entered into an alliance with NABI to develop a polyclonal antibody product called HyperGAM(TM)+CF for use in passive immunization of CF patients infected with Pseudomonas bacteria, which are a major medical problem associated with CF and a frequent cause of hospitalization. Neozyme II believed that HyperGAM(TM)+CF could be complementary to the Company's gene therapy or protein replacement products by preventing or treating Pseudomonas infections in conjunction with correcting the basic defect in airway cells. In exchange for funding Genzyme's share of NABI's development costs, Neozyme II received the exclusive right to market HyperGAM(TM)+CF worldwide and share in the profits with NABI. A Phase I clinical trial involving single dose administration of HyperGAM(TM)+CF was completed in 1994 and showed that HyperGAM(TM)+CF appeared to be safe and supported a monthly dosing regimen. A multi-center, dose ranging Phase II clinical trial to assess safety and efficacy of the product in chronic administration commenced in the first quarter of 1995. In June 1996, Neozyme II and NABI announced the halt of the Phase II clinical trial for HyperGAM(TM)+CF because an interim analysis of the trial data showed no evidence of a reduction in the number of acute pulmonary exacerbations in trial participants. No major issues with the safety of the product were identified. On June 21, 1996, after review of the interim analysis data, the Board of Directors of Neozyme II voted unanimously to terminate the license and development agreement with NABI. Under the terms of the agreement with NABI, Neozyme II is required to reimburse NABI for certain costs incurred in connection with the wind down of the HyperGAM(TM)+CF program up to a maximum of $900,000. REASONS FOR THE TRANSACTION Genzyme believes that a gene-based therapy for CF represents the most promising approach for addressing this important unmet medical need. Despite significant development progress under the CF Program, however, the key milestone of demonstrating clinical efficacy of a gene therapy approach has not been and, Genzyme believes, will not be demonstrated until well after the expiration of the Purchase Option on December 31, 1996, if at all. Accordingly, Genzyme believes the value of Neozyme II is significantly below the current Purchase Option Exercise Price and, absent unforeseen progress in the CF Program, Genzyme does not intend to exercise the Purchase Option. Notwithstanding the present intention not to exercise the Purchase Option, the Genzyme Board of Directors has determined that the acquisition of Neozyme II at this time on and subject to the terms of the Purchase Agreement is in the best interests of Genzyme and its stockholders for the following reasons: 22 23 Acceptable Valuation and Timing; Avoid Dilution. Genzyme believes that the Offer allows Genzyme to acquire Neozyme II at a price that appropriately reflects the value of Neozyme II at its current stage of development and within the time frame contemplated at the inception of Neozyme II. In addition, if the Offer is consummated, the number of outstanding warrants to acquire Genzyme stock will be significantly reduced, thereby reducing potential future dilution of Genzyme stock. Continuity of Program Development. Genzyme desires to maintain its commitment to the CF community to continue the research, development and clinical evaluation of the two gene therapy approaches currently being evaluated in the CF Program in an effort to reach the key milestone of demonstrating clinical efficacy as soon as possible. Genzyme expects, however, that advancing the CF Program through demonstration of clinical efficacy will require significant additional investment materially in excess of the remaining resources available from Neozyme II, which resources will be substantially depleted by the end of 1996. In the event that the Offer is rejected, Neozyme II will be required to seek alternative sources of capital to continue funding the CF Program, such as raising additional capital, an acquisition by a third party or some form of collaboration with a third party. Genzyme believes that any such alternative would involve significant time, expense and uncertainty and, more important, could result in the interruption of the research, development and clinical evaluation efforts being conducted under the CF Program. Any such interruption could have a material adverse effect on the time required to demonstrate clinical efficacy. Acquiring Neozyme II at this time, therefore, allows Genzyme to maintain its commitment to the CF community, while preserving the continuity of its CF development efforts. Preservation of Competitive Advantage. While the CF Program has experienced setbacks relating to the failure of HyperGAM(TM)+CF and the largely inactive status of the protein replacement program due to the significant technical challenges related to this approach, Genzyme believes that, with both viral and non-viral vector systems in clinical evaluation for CF, the CF Program is the most comprehensive program among those competitors active in the CF field. Substantially all of the value created by the CF Program derives, however, from the intellectual property developed under the CF Program. In the event that Neozyme II is required to seek alternative sources of capital to continue funding the CF Program, Genzyme believes that Neozyme II would be required to disclose such intellectual property to interested third parties, including existing or potential competitors, in connection with seeking such funding and that such disclosure notwithstanding the existence of non-disclosure agreements, could jeopardize the competitive position and diminish the value of the CF Program and related gene delivery technology developed by Genzyme. Genzyme believes that the acquisition of Neozyme II by Genzyme at this time would avoid the risks of such disclosure and, accordingly, would allow Genzyme to preserve the competitive advantage of the CF Program. Investor Relations. If the Offer is not successful and Neozyme II seeks alternative sources of funding, absent unforeseen progress in the CF Program, Genzyme may determine not to make any acquisition proposal upon expiration of the Purchase Option or, if Genzyme determines to make a subsequent proposal, it is likely that such proposal would be at a price below $45 per Unit. As also noted above, Genzyme expects that substantial commitments in time and capital will be required to advance the CF Program through a demonstration of clinical efficacy. In view of these commitments, the value realizable by the existing investors in Neozyme II could fall well below the $45 per Unit now being offered by Genzyme. Accordingly, Genzyme believes that effecting the Offer at this time at a premium to the market price of the Units at the time that an agreement in principal was reached will allow investors to realize a fair price for their investment, while avoiding the risk of any such future decline in the value of Neozyme II. Potential Gene Therapy Collaborations. Genzyme views the CF market and the gene therapy approach as an attractive opportunity that fits well with Genzyme's corporate objectives of developing novel therapeutics to address significant unmet medical needs. In particular, Genzyme has developed significant expertise outside of the CF field and the acquisition of rights to gene therapy-based programs within the CF field provides Genzyme with the ability to accelerate its overall gene therapy development by continuing work on the most advanced programs, thereby making Genzyme a more attractive partner. In reaching its determination that the acquisition of Neozyme II at this time on and subject to the terms of the Offer and the Second Step Transaction is fair to and in the best interests of Genzyme and its 23 24 stockholders, the Genzyme Board of Directors evaluated the factors considered by it in light of the directors' knowledge of the business and operations of Genzyme and Neozyme II and their respective business judgments. In addition, the Genzyme Board considered the presentation made to it on September 17, 1996 by Robertson, Stephens & Company (the "Robertson, Stephens & Company Presentation") and the written opinion, dated September 20, 1996, of Robertson, Stephens & Company (the "Robertson Stephens Opinion") (a copy of which is attached hereto as Annex II) that, based upon and subject to the factors and assumptions set forth in such opinion, the Offer Price was fair to Genzyme from a financial point of view. The Genzyme Board of Directors did not find it practicable to and did not quantify or assign relative weight to the specific factors considered by it in reaching its determination. A detailed description of the Robertson, Stephens & Company Presentation and the Robertson, Stephens & Company Opinion are set forth below. OPINION OF FINANCIAL ADVISOR TO GENZYME Robertson, Stephens & Company is acting as Genzyme's exclusive financial advisor and as Dealer Manager in connection with the Offer. Robertson, Stephens & Company was engaged on the basis of its experience as a financial advisor in connection with mergers and acquisitions as well as on its industry knowledge and familiarity with the Company. At a special meeting of the Genzyme Board held on September 17, 1996, Robertson, Stephens & Company made the Robertson, Stephens & Company Presentation and, on September 20, 1996, Robertson, Stephens & Company delivered the Robertson, Stephens & Company Opinion to the Genzyme Board. No limitations were imposed by the Genzyme Board upon Robertson, Stephens & Company with respect to investigations made or procedures followed by Robertson, Stephens & Company in rendering the Robertson, Stephens & Company Opinion. Robertson, Stephens & Company was not requested to opine as to the fairness of the Offer Price to the Company or to the Holders or the fairness of the consideration to be paid by Genzyme pursuant to the Second Step Transaction. The full text of the Robertson, Stephens & Company Opinion, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Robertson, Stephens & Company, is attached as Annex II to this Offer to Purchase and is incorporated herein by reference. The Robertson, Stephens & Company Opinion has been provided to the Genzyme Board for its information. It is directed only to the fairness from a financial point of view to Genzyme of the Offer Price and does not constitute a recommendation to any Holder as to whether such Holder should tender any or all of its Units pursuant to the Offer. The summary of the Robertson, Stephens & Company Opinion set forth in this Offer to Purchase is qualified in its entirety by reference to the full text of the opinion set forth in Annex II and incorporated herein by reference. The summary set forth below does not purport to be a complete description of the analyses underlying the Robertson, Stephens & Company Opinion or the Robertson, Stephens & Company Presentation. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Robertson, Stephens & Company did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Robertson, Stephens & Company believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all analyses, would create an incomplete view of the process underlying its opinion. For purposes of the Robertson, Stephens & Company Opinion, Robertson, Stephens & Company, among other things: (i) reviewed financial information regarding the Company furnished to Robertson, Stephens & Company by the Company, including certain financial forecasts prepared by the management of the Company; (ii) reviewed publicly available information regarding the Company; (iii) held discussions with the management of the Company concerning the business, past and current business operations, financial condition and future prospects of the Company; (iv) reviewed a draft dated September 20, 1996 of the Purchase Agreement; (v) reviewed the stock price and trading history of the Company; (vi) reviewed the valuations of publicly traded companies that Robertson, Stephens & Company deemed comparable to the 24 25 Company; (vii) compared the financial terms of the Offer with other transactions which Robertson, Stephens & Company deemed relevant; (viii) prepared a discounted cash flow analysis of the Company; (ix) analyzed the value of the Callable Warrants; and (x) made such other studies and inquiries, and reviewed such other data, as Robertson, Stephens & Company deemed relevant. In arriving at its opinion, Robertson, Stephens & Company did not independently verify any of the foregoing information and relied on all such information being complete and accurate in all material respects. Furthermore, Robertson, Stephens & Company did not make any independent appraisal of the properties or assets and liabilities of the Company, nor was Robertson, Stephens & Company furnished with any such evaluations or appraisals. With respect to the financial forecasts (and the assumptions and bases therefor) of the Company provided to Robertson, Stephens & Company by the management of the Company, Robertson, Stephens & Company assumed that such forecasts had been reasonably prepared in good faith on the basis of reasonable assumptions and reflected the best available estimates and judgments of the management of the Company as to the likely future financial performance of the Company. In that regard, Robertson, Stephens & Company relied on the assumptions of the management of the Company with respect to the effect on such forecasts of the potential outcome of the Company's pending patent applications. The Robertson, Stephens & Company Opinion was necessarily based upon market, economic, and other conditions that existed and could be evaluated as of the date of the Robertson, Stephens & Company Opinion and on information available to Robertson, Stephens & Company as of such date. The following is a summary of the analyses performed by Robertson, Stephens & Company in connection with the preparation of the Robertson, Stephens & Company Presentation and the Robertson, Stephens & Company Opinion. A copy of the Robertson, Stephens & Company Presentation will be made available for inspection and copying at the principal executive offices of Genzyme during regular business hours by any interested Holder, or his representative who has been so designated in writing. STOCK PRICE AND TRADING HISTORY Robertson, Stephens & Company reviewed the trading activity of the Units and the Series N Warrants, including the daily closing price and daily volume of each of the Units and the Series N Warrants, for the period from January 3, 1995 to September 13, 1996 and identified certain events that had a significant effect on the prices of the Units and the Series N Warrants. VALUATION ANALYSIS Introduction. In valuing the Units, Robertson, Stephens & Company performed a comparable company analysis, a comparable transaction analysis, a discounted cash flow analysis and a warrant valuation analysis, each of which is described in detail below. The comparable company analysis, comparable transaction analysis for acquisitions of non-SWORDS (as defined below) and discounted cash flow analysis were used to determine ranges for the Technology Value (as defined below) of the Company. The comparable transaction analysis for acquisitions of SWORDS was used to calculate the premiums paid by acquiring companies in comparable acquisitions in order to determine the Equity Value (as defined below) of the Company. For the warrant valuation analysis, Robertson, Stephens & Company used the Black-Scholes formula to determine an implied value per Callable Warrant. By adding to the Technology Value the implied aggregate value of the Callable Warrants, based on an implied value, solely for purposes of this analysis, per Callable Warrant of $15.12, Robertson, Stephens & Company determined the equity value of the Company (the "Equity Value"), which represents the aggregate market capitalization of the Units. Comparable Company Analysis. Robertson, Stephens & Company performed an analysis of companies engaged in research and development activities in the area of gene therapy and which are considered by Robertson, Stephens & Company to be reasonably comparable to the Company. The Tier 1 companies identified by Robertson, Stephens & Company comprise Somatix Therapy Corporation and Vical Incorporated (the "Tier 1 Companies"), and the Tier 2a companies identified by Robertson, Stephens & Company comprise Avigen, Inc., Cell Genesys, Inc., GeneMedicine, Inc. and Targeted Genetics Corporation (the "Tier 2a Companies"). Robertson, Stephens & Company identified as the Tier 2b companies Immusol, Inc., 25 26 Introgen Therapeutics, Inc. and Transkaryotic Therapies, Inc. (the "Tier 2b Companies"), each of which had recently filed a registration statement with respect to an initial public offering. Robertson, Stephens & Company noted that the Tier 1 Companies generally trade at significantly higher market capitalizations than the Tier 2a Companies because they have one or more of the following characteristics: (i) more enabling technologies, (ii) more substantial corporate endorsements, (iii) broader patent estates, (iv) later stages of clinical development and (v) more significant disease market opportunities. Robertson, Stephens & Company then determined a Technology Value range. For purposes of this methodology, Robertson, Stephens & Company defined Technology Value as the market capitalization less cash and cash equivalents for each of the comparable companies. For the Tier 1 Companies and the Tier 2a Companies, market capitalization was based on market data as of September 13, 1996. For the Tier 2b Companies, market capitalization was based on the mid-point of the proposed initial public offering price disclosed in each such company's registration statement and the expected number of fully diluted shares outstanding immediately after such offering. Based on this analysis, Robertson, Stephens & Company determined a range of Technology Value of (i) between $104.7 million and $169.3 million for the Tier 1 Companies, (ii) between $28.4 million and $57.5 million for the Tier 2a Companies and (iii) between $115.4 and $168.5 million for the Tier 2b Companies. By including the implied value of the Callable Warrants, Robertson, Stephens & Company calculated a range of Equity Value of (i) between $141.2 million and $205.8 million, or $58.46 and $85.23 per Unit, based on the Tier 1 Companies, (ii) between $64.9 million and $94.0 million, or $26.89 and $38.91 per Unit, based on the Tier 2a Companies and (iii) between $151.9 million and $205.0 million, or $62.90 and $84.90 per Unit, based on the Tier 2b Companies. Robertson, Stephens & Company also reviewed the trading performance of the Units over the period from January 3, 1995 to September 13, 1996 and compared such performance with that of indices representing the average trading prices for each of the Tier 1 Companies and the Tier 2a Companies. Such review indicated that, over such period, the trading price of the Units, the Tier 1 Companies and the Tier 2a Companies increased by 55.5%, 82.7% and 0.4%, respectively. No company utilized in the comparable company analysis was identical to the Company. In particular, Robertson, Stephens & Company noted that the Company's assets are limited to determining the application of potential gene therapy products in the treatment of CF only. Certain of the comparable companies have broader gene therapy technology programs, with potential applications to CF and the treatment of other diseases. Accordingly, an analysis of the results of such a comparison is not purely mathematical as several factors that are not relevant to the Company could affect the public trading value of the comparable companies to which the Company is being compared. Comparable Transaction Analysis: Acquisitions of SWORDS Companies. Robertson, Stephens & Company analyzed publicly available information for 11 Stock/Warrant for Off balance sheet Research and Development Subsidiary ("SWORDS") acquisitions within the biopharmaceutical industry (the "SWORDS Acquisitions") considered by Robertson, Stephens & Company to be reasonably comparable to the Company. The SWORDS Acquisitions analyzed were: (i) PerSeptive Biosystems, Inc.'s acquisition of PerSeptive Technologies II Corporation, (ii) Elan Corporation, plc's acquisition of Advanced Therapeutic Systems Limited, (iii) Cytogen Corporation's acquisition of CytoRad Corporation, (iv) Centocor, Inc.'s acquisition of Tocor II, Inc., (v) Gensia Pharmaceuticals Inc.'s acquisition of Aramed, Inc., (vi) Genetics Institute, Inc.'s acquisition of SciGenics Incorporated, (vii) Genzyme Corporation's acquisition of Neozyme I Corporation, (viii) Elan Corporation, plc's acquisition of Drug Research Corp., (ix) Immunex Corporation's acquisition of Receptech Corp., (x) Centocor, Inc.'s acquisition of Tocor, Inc. and (xi) Alza NV's acquisition of Bio-Electro Systems, Inc. In five of the SWORDS Acquisitions, the acquiring sponsor company exercised its contractual option to acquire the SWORDS company. The other six SWORDS Acquisitions were negotiated transactions at prices below the option exercise price. For each of the SWORDS Acquisitions, Robertson, Stephens & Company determined (i) the annual compounded return, (ii) the premium paid to the SWORDS unit price, or to the aggregate price of the SWORDS common stock and the detachable warrants to acquire the common stock of the sponsor company 26 27 ("Sponsor Warrants") for those SWORDS whose Sponsor Warrants had detached from the SWORDS units and were trading separately (the "Combined Premium"), 28 days prior to the date of announcement of the SWORDS Acquisition and (iii) the premium paid to the SWORDS unit price, or to the SWORDS common stock price for those SWORDS whose Sponsor Warrants had detached from the SWORDS units and were trading separately (the "Ex-Sponsor Warrant Premium"), 28 days prior to the date of announcement of the SWORDS Acquisition. Robertson, Stephens & Company determined that (i) the annual compounded return for the SWORDS Acquisitions ranged from -28.5% to 42.9%, (ii) the Combined Premium ranged from -3.6% to 135.6% and (iii) the Ex-Sponsor Warrant Premium ranged from 1.5% to 143.8%. Excluding the SWORDS Acquisitions effected upon the exercise of the sponsor company's contractual purchase option, such ranges were -28.5% to 26.4%, -3.6% to 135.6% and 2.8% to 143.8%, respectively. Robertson, Stephens & Company calculated a range for the Equity Value by (i) applying the annual compounded return to the Unit Offering price of $35.00 per Unit and (ii) applying the Ex-Sponsor Warrant Premium to the market price of the Units as of September 5, 1996. In each such case, Robertson, Stephens & Company excluded from its analysis the SWORDS Acquisitions effected upon the exercise of a contractual purchase option. Based on this analysis, Robertson, Stephens & Company calculated ranges of Equity Value of (i) between -$7.2 million and $209.4 million, or -$2.97 and $86.71 per Unit, applying the annual compounded return, and (ii) between $110.1 million and $261.2 million, or $45.60 and $108.16 per Unit, applying the Ex-Sponsor Warrant Premium. No company utilized in the comparable SWORDS Acquisitions analysis was identical to the Company, and no transaction utilized in the comparable SWORDS Acquisitions analysis was identical to the Offer and Second Step Transaction. Accordingly, an analysis of the results of such a comparison is not purely mathematical but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the comparable companies and other factors that could affect the acquisition value of such companies and the Company. Comparable Transaction Analysis: Acquisitions of Non-SWORDS Early-Stage Biotechnology Companies. Robertson, Stephens & Company analyzed publicly available information for seven acquisitions of non-SWORDS, early-stage biotechnology companies (the "Non-SWORDS Acquisitions") considered by Robertson, Stephens & Company to be reasonably comparable to the Company (each, an "Acquired Company"). The Non-SWORDS Acquisitions analyzed were: (i) Targeted Genetics Corporation's acquisition of RGene Therapeutics, Inc., (ii) Schering-Plough Corporation's acquisition of Canji, Inc., (iii) Rhone-Poulenc Rorer Inc.'s acquisition of Applied Immune Sciences, Inc., (iv) Sandoz AG's acquisition of Genetic Therapy, Inc., (v) Cytogen Corporation's acquisition of Cellcor, Inc., (vi) Chiron Corporation's acquisition of Viagene, Inc. and (vii) Ligand Pharmaceuticals Incorporated's acquisition of Glycomed Incorporated. For the Non-SWORDS Acquisitions, Robertson, Stephens & Company calculated the price paid by the acquiring company as a multiple of (i) the total research and development expenses accrued for the Acquired Company since its inception including, where applicable, in-process research and development (the "R&D Multiple") and (ii) the Technology Value of the Acquired Company (the "Technology Value Multiple"). For purposes of this methodology, Robertson, Stephens & Company defined Technology Value as the equity market capitalization of the Acquired Company one month prior to the announcement date of the acquisition plus total debt less current cash. In addition, Robertson, Stephens & Company calculated the premium paid for the Acquired Company to the price per share of the Common Stock of the Acquired Company (a) one day prior to the announcement date of the acquisition (the "One Day Premium") and (b) one month prior to the announcement date of the acquisition (the "One Month Premium"). Robertson, Stephens & Company excluded from its acquisition premium analysis two of the Acquired Companies that were not publicly traded as of the date of the acquisition. Robertson, Stephens & Company determined that (i) the R&D Multiple ranged from 0.7x to 7.4x, (ii) the Technology Value Multiple ranged from 1.5x to 3.1x, (iii) the One Day Premium ranged from 33.0% to 149.4% and (iv) the One Month Premium ranged from 35.3% to 95.3%. Robertson, Stephens & Company calculated a range for the Equity Value by applying (i) the R&D Multiple to total research and development expenses for the CFTR gene therapy program (but not for the HyperGAM(TM)+CF and CFTR protein replacement therapy programs) since the inception of the Company of 27 28 $36.6 million, (ii) the Technology Value Multiple to an estimated Technology Value (which, solely for purposes of this analysis, Robertson, Stephens & Company deemed to be $71.0 million, calculated as the market value of the Company as of September 13, 1996 less the implied aggregate value of the Callable Warrants), (iii) the One Day Premium to an acquisition price of $29.25 per share of the Callable Common Stock and (iv) the One Month Premium to an acquisition price of $29.25 per share of the Callable Common Stock. Based on this analysis, Robertson, Stephens & Company calculated a range of Equity Value of (a) between $61.2 million and $306.6 million, or $25.36 and $126.94 per Unit, applying the R&D Multiple, (b) between $140.5 million and $256.1 million, or $58.18 and $106.06 per Unit, applying the Technology Value Multiple, (c) between $130.5 million and $212.7 million, or $54.03 and $88.06 per Unit, applying the One Day Premium, and (d) between $132.1 million and $174.5 million, or $54.70 and $72.27 per Unit, applying the One Month Premium. No company utilized in the comparable Non-SWORDS Acquisitions transaction analysis was identical to the Company, and no transaction utilized in the comparable Non-SWORDS Acquisitions analysis was identical to the Offer and the Second Step Transaction. Accordingly, an analysis of the results of such a comparison is not purely mathematical but instead involves complex considerations and judgments concerning differences in historical and projected financial and operating characteristics of the comparable companies and other factors that could affect the acquisition value of such companies and the Company. Discounted Cash Flow Analysis. Robertson, Stephens & Company performed a discounted cash flow analysis of the projected cash flows of the Company for the years 1997 through 2006 to 2008, based upon projections provided to Robertson, Stephens & Company by the management of the Company. In conducting its discounted cash flow analysis, Robertson, Stephens & Company utilized projections representing three cases, each developed by the management of the Company. These cases consisted of a base case (the "Base Case") and two adjusted cases (the "Upside Case" and the "Downside Case"). In developing the three cases, the management of the Company made certain assumptions regarding (i) patient growth, (ii) market penetration, (iii) non-U.S. revenues and (iv) royalty income. None of the cases assigned any value to discontinued or suspended research operations, including the HyperGAM(TM)+CF and CFTR protein replacement therapy programs. For each of the three cases, Robertson, Stephens & Company calculated a range for the Technology Value. For purposes of this analysis, Robertson, Stephens & Company utilized discount rates ranging from 30.0% to 35.0% and terminal value multiples of earnings before interest and taxes ("EBIT") ranging from 8.0x to 10.0x. Based on this analysis, Robertson, Stephens & Company calculated a range of Technology Value of (i) between $20.9 million and $85.0 million, or $8.64 and $35.19 per share of the Callable Common Stock, based on the Base Case, (ii) between $49.9 million and $153.8 million, or $20.68 and $63.69 per share of the Callable Common Stock, based on the Upside Case, and (iii) between $4.0 million and $61.4 million, or $1.65 and $25.41 per share of the Callable Common Stock, based on the Downside Case. By including the implied value of $15.12 per Callable Warrant, Robertson, Stephens & Company calculated a range of Equity Value of (i) between $57.4 million and $121.5 million, or $23.78 and $50.32 per Unit, based on the Base Case, (ii) between $86.4 million and $190.3 million, or $35.79 and $78.81 per Unit, based on the Upside Case, and (iii) between $40.5 million and $97.9 million, or $16.78 and $40.55 per Unit, based on the Downside Case. Robertson, Stephens & Company noted that a discounted cash flow analysis is a less reliable indicator of value for an early-stage biopharmaceutical company such as the Company due to, among other things, the uncertainties in developing a therapeutic product that satisfies both regulatory and market requirements. Valuation of Callable Warrants. Robertson, Stephens & Company also performed a valuation of the maximum theoretical price per Callable Warrant by using the Black-Scholes formula for valuing warrants of publicly traded companies. The Black-Scholes formula incorporates the following information: (i) a price per share of common stock, calculated as the sum of the price per share of General Division Common Stock, par value $.01 per share, of Genzyme ("General Share"), multiplied by two and the price per share of Tissue Repair Division Common Stock, par value $.01 per share, of Genzyme ("Tissue Repair Share") multiplied by 0.135, (ii) an exercise price of the Callable Warrants, calculated as the 20-day trailing average of the sum of 28 29 the price per share of a General Share multiplied by two and the price per share of a Tissue Repair Share multiplied by 0.135, (iii) an exercise date of the Callable Warrants of December 31, 1998, (iv) an interest rate of 6.3%, (v) estimated levels of volatility ranging from 40.9% to 60.9% and (vi) an adjustment in the price per General Share due to dilution. Robertson, Stephens & Company computed a per Callable Warrant value ranging from $12.19 to $17.03, respectively. For purposes of this analysis, Robertson, Stephens & Company noted that one reliable indicator of the value of the Callable Warrants is the historical 100-day volatility of the blended General Shares and Tissue Repair Shares, which is 52.9% and yields an adjusted value per Callable Warrant of $15.12. GENERAL The preparation of fairness opinions involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis and the application of those methods to the particular circumstances and, therefore, such opinions are not readily susceptible to summary description. Accordingly, Robertson, Stephens & Company believes its analyses must be considered as a whole and that considering any portion of such analyses and the factors, without considering all such analyses and current factors, could create a misleading or incomplete view of the process underlying such opinions. In its analyses, Robertson, Stephens & Company made numerous assumptions with respect to industry performance, general business and other conditions and matters, many of which are beyond the control of the Company. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the value of a business do not purport to be appraisals or to reflect the prices at which such businesses actually may be sold. Robertson, Stephens & Company was engaged on the basis of its experience as a financial advisor in connection with mergers and acquisitions as well as on its industry knowledge and familiarity with the Company. Robertson, Stephens & Company is a nationally recognized investment banking firm. As part of its investment banking business, Robertson, Stephens & Company is frequently engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. In the course of its market- making and other activities, Robertson, Stephens & Company may, from time to time, have a long or short position in and buy and sell securities of the Company. Genzyme has agreed to pay Robertson, Stephens & Company a total fee of $440,000 for its services as financial advisor to Genzyme and as Dealer Manager. Of such total fee, $50,000 will be payable upon the purchase of Units pursuant to the Offer. Genzyme has also agreed to reimburse Robertson, Stephens & Company for its reasonable out-of-pocket expenses, including the fees and expenses of its legal counsel. Genzyme has further agreed to indemnify Robertson, Stephens & Company for certain liabilities relating to or arising out of services provided by Robertson, Stephens & Company as financial advisor or as Dealer Manager, including, without limitation, certain liabilities under U.S. federal securities laws. PURPOSE AND STRUCTURE OF THE TRANSACTION The purpose of the Offer is to enable Genzyme, through its wholly owned subsidiary, to acquire the entire equity interest of the Company, and to enable Genzyme to acquire the Callable Warrants associated with the Units that are tendered to reduce the possible dilution to Genzyme's existing stockholders. Following the completion, or under certain circumstances the termination, of the Offer, Genzyme and the Purchaser intend to acquire any Shares included in the untendered Units by consummating the Second Step Transaction. In the Second Step Transaction, holders of Shares included in the untendered Units (other than Genzyme, the Purchaser or the Company or any direct or indirect subsidiary of any of them and Holders, if any, who are entitled to and who perfect their appraisal rights under the applicable provisions of the BVI Law), will receive $29.00 per Share in cash, without interest. Any Callable Warrants included in the untendered Units will remain outstanding following the Second Step Transaction. The acquisition of the Company is structured as a cash tender offer followed by the Second Step Transaction in order to expedite the opportunity for Genzyme and the Purchaser to obtain a controlling interest in the Company, to enable Genzyme to acquire some or all 29 30 of the Callable Warrants, to provide a prompt and orderly transfer of ownership of the Company from the Company's current Holders to the Purchaser and to provide the Company's current Holders with cash for all of their Units. In the event that the Minimum Condition is not satisfied, the Purchase Agreement provides that the Purchaser may elect to amend and extend the Offer to eliminate this condition. In that event, during the period that the Offer is extended, the Company shall, in accordance with applicable laws and the Purchase Agreement, solicit the approval of the holders of the Shares for the Second Step Transaction. Alternatively, the Purchaser may elect to terminate the Offer and, promptly thereafter, request that the Company solicit the approval of the holders of the Shares for the Second Step Transaction. If the Purchaser does not make either election, Genzyme, the Purchaser or the Company may terminate the Purchase Agreement. See "SPECIAL FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights." Under the BVI Law and the Company's Memorandum and Articles of Association, if the Purchaser acquires at least a majority of the outstanding Shares, the Purchaser would have sufficient voting power to approve the Merger Plan, if necessary, and consummate the Second Step Transaction, by written consent in lieu of a meeting of the Holders and without the vote or consent of any other Holders. In addition, under the BVI Law, if the Purchaser acquires at least 90% of the outstanding Shares, the Purchaser would have the power to consummate a merger of the Company with and into the Purchaser, or require the Company to redeem all of the Shares not held by the Purchaser, without a vote of the Holders. In either event, the Purchaser intends to take all necessary and appropriate action to cause the Second Step Transaction to become effective as soon as reasonably practicable after the consummation, or under certain circumstances the termination, of the Offer without a meeting of the Holders. PLANS FOR THE COMPANY AFTER THE TRANSACTION Although Genzyme is considering pursuing corporate partnering arrangements with third parties to jointly develop products based, in part, on technology owned by the Company, except as described in this Offer to Purchase, neither Genzyme nor the Purchaser has any present plans or proposals which relate to or would result in any extraordinary corporate transaction, such as a merger, reorganization, liquidation, or sale or transfer or a material amount of assets involving the Company, or any material changes in the Company's capitalization, dividend policy, corporate structure or business or the composition of the Company's Board of Directors or management. The Purchase Agreement provides that, upon the acceptance for payment of and payment by the Purchaser for any Units pursuant to the Offer, the Purchaser shall be entitled to designate persons to be elected as Class A directors of the Company so as to give the Purchaser representation on the Company's Board of Directors proportional to its ownership of Units. See "SPECIAL FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights." 6. THE PURCHASE AGREEMENT; APPRAISAL RIGHTS THE PURCHASE AGREEMENT The following is a brief summary of certain provisions of the Purchase Agreement, a copy of which is filed as an exhibit to the Schedule 14D-1 and is incorporated herein by reference. This summary does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreement. Capitalized terms used herein and not otherwise defined have the same meaning as in the Purchase Agreement. The Offer. The Purchase Agreement provides for the commencement of the Offer as soon as practicable and in any event within five business days of the public announcement of the Purchaser's intention to make the Offer. The obligation of the Purchaser to commence the Offer and accept for payment any Units tendered is subject to the satisfaction of certain conditions (including the Minimum Condition) which are described in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer." The Purchase Agreement provides that without the consent of the Company, as approved by the Special Committee, the Purchaser shall not amend or waive the Minimum Condition or the Majority Consent Condition (as defined below), extend the Offer, reduce the maximum number of Units to be purchased, reduce the price to be paid per Unit pursuant to the Offer or amend any other material term of the Offer in a manner adverse to the holders of the Units. 30 31 Pursuant to the Purchase Agreement, if on October 28, 1996 (the "Initial Expiration Date"), the Minimum Condition has not been satisfied, the Purchaser may, not later than 9:00 a.m., eastern time, on the next business day following the Initial Expiration Date, elect either (x) to extend the Offer for a period not to exceed 60 days and amend the Offer to delete the Minimum Condition and add the Majority Consent Condition (as defined below), in which case, promptly thereafter, the Company shall commence to convene a meeting or solicit the written consent of its shareholders for approval of the Merger Plan (the foregoing being referred to as the "Simultaneous Solicitation") or (y) terminate the Offer and promptly return all tendered Units, in which case, promptly thereafter, the Company shall commence to convene a meeting or solicit the written consent of its shareholders for approval of the Merger Plan (the foregoing being referred to as the "Termination Solicitation"), in either case with such solicitation or meeting to be conducted in accordance with applicable law and the terms of the Purchase Agreement. The Majority Consent Condition is defined in the Purchase Agreement to mean that the sum of (a) the Shares included in the Units tendered and not withdrawn as of the new expiration date of the Offer (provided such Shares may be voted in favor of the Merger Plan at the meeting or pursuant to the consent solicitation by the Purchaser immediately after the purchase of the Units which include such Shares in the Offer by the Purchaser) plus (b) the number of Shares held by holders who have voted in favor of the Merger Plan at the meeting or pursuant to the consent solicitation as of the new expiration date of the Offer (but excluding any such Shares that would result in double counting with (a) above) represents not less than a majority of the Shares outstanding. Approval of the Second Step Transaction. The Board of Directors of the Company has authorized the Merger Plan in accordance with applicable law and the Company's Memorandum and Articles of Association. The Company has agreed in the Purchase Agreement, at the request of Genzyme, to take all action (coordinating the timing thereof with Genzyme and the Purchaser) to the extent necessary to convene a meeting of the Holders as promptly as practicable after the purchase of Units pursuant to the Offer, if required by applicable law for consummation of the Second Step Transaction, to consider and vote upon the approval of the Merger Plan or to solicit the written consent of the Holders to approve the Merger Plan promptly after such purchase, or at the request of Genzyme, promptly after the commencement of the Offer and while it is pending upon the election of Genzyme to pursue the Simultaneous Solicitation or following the termination of the Offer upon the election of Genzyme to pursue the Termination Solicitation. If required by applicable law, the Company has agreed to promptly prepare and file with the Commission, and use its best efforts to have cleared by the Commission, a proxy, consent solicitation or information statement relating to the Second Step Transaction in compliance with applicable law. The Second Step Transaction. The Purchase Agreement provides that, as soon as practicable following the consummation of the Offer, the satisfaction of the Majority Consent Condition (in the event of a Simultaneous Solicitation) or the satisfaction of the conditions to effect the merger pursuant to the Merger Plan (in the event of a Termination Solicitation) and subject to the terms and conditions thereof and the satisfaction or waiver of the other conditions to the Second Step Transaction and in accordance with the BVI Law, the Purchaser shall cause to be effected a transaction that results in Genzyme owning, directly or indirectly, all of the Shares of the Company. If the Offer is consummated and 90% or more of the Units are tendered and accepted, the Purchaser will either (i) effect a merger of the Company into the Purchaser or (ii) cause the Company to redeem all Shares included in the untendered Units. If the Offer is consummated but less than 90% of the Units are tendered and accepted, or if, pursuant to the Termination Solicitation, the requisite approval of the Company's shareholders for the Second Step Transaction is obtained, then the Second Step Transaction will be effected as a merger of the Company with a wholly owned subsidiary of the Purchaser. Regardless of the form of the Second Step Transaction, the consideration to be received as a result of the Second Step Transaction by holders of Shares included in the untendered Units (other than Genzyme, the Purchaser or the Company or any direct or indirect subsidiary of any of them and holders, if any, who shall have demanded and perfected their appraisal rights under the applicable provisions of the BVI Law) will be $29.00 per Share in cash, without interest (the "Second Step Consideration"). Upon consummation of the Second Step Transaction, the Callable Warrants will become exercisable and, beginning on the day following the Effective Date, will trade separately from the right to receive the Second Step Consideration on account of the Callable Common Stock. 31 32 Indemnification and Insurance. The Purchase Agreement provides that proper provision will be made so that any affiliate of Genzyme that succeeds to the assets and liabilities of the Company or, at Genzyme's option, Genzyme, shall assume all of the obligations of the Company under the indemnification agreements between the Company and the members of the Special Committee as in effect on the date of the Purchase Agreement and, if amended prior to the Effective Date, on the Effective Date. Genzyme, the Purchaser and the Company have also agreed that in the event the Company or the successor entity (i) consolidates with or merges into any other person and shall not be the surviving corporation or (ii) transfers all or substantially all of its assets to any person, then, and in each case, proper provision shall be made so that the successors and assigns of such successor entity or at Genzyme's option, Genzyme, shall assume the indemnity obligations under such agreements. The Purchase Agreement also provides that the Company, and from and after the consummation of the Offer (or the Merger in the event of the Termination Solicitation) Genzyme, shall, to the fullest extent permitted by applicable law, indemnify and hold harmless each present and former director or officer of the Company against all losses arising out of any act or omission in their capacity as an officer, director or employee of the Company. Additionally, Genzyme is obligated to maintain, for three years from the Effective Date, directors' and officers' liability insurance policies covering the directors and officers of the Company with coverages and other terms at least as favorable as is currently in effect; provided that Genzyme is not obligated to spend more than 150% of the current annual premiums paid by the Company for such insurance, and, following such three year period until the sixth anniversary of the Effective Date, Genzyme has agreed to assume the indemnification obligations of the Company under the indemnification agreements referred to above to the extent that it has not already done so. Designation of Directors. The Purchase Agreement provides that, promptly upon the acceptance for payment of and payment by the Purchaser for any Units pursuant to the Offer, and from time to time thereafter as Units are accepted for payment and paid for by the Purchaser, the Purchaser shall be entitled to designate such number of Class A directors of the Company, rounded to the nearest whole number, as will give the Purchaser representation on the Company's Board of Directors equal to at least that number of directors which equals the product of the total number of the Company's directors (after giving effect to the directors elected in accordance with this procedure) multiplied by the percentage that such number of Units so accepted for payment and paid for by the Purchaser bears to the number of Units outstanding, and the Company shall, at such time, take such actions as are necessary to cause the Purchaser's designees to be so elected or appointed; provided, however, that, notwithstanding the Purchaser's right to designate certain of the Company's directors as described above, until the Effective Date, the Company's Class A Directors shall include at least two directors who were directors on September 20, 1996 and who are not officers or directors of Genzyme or the Purchaser (the "Independent Directors"); provided further, that, if the number of Independent Directors shall be reduced below two for any reason whatsoever, any remaining Independent Director shall be entitled to designate a person who is not an officer or director of Genzyme or the Purchaser to fill such vacancy who shall be deemed to be an Independent Director or, if no Independent Directors then remain, the other directors shall designate two persons to fill such vacancies who shall not be designees, stockholders, directors, officers or affiliates of Genzyme or the Purchaser, and such persons shall be deemed to be Independent Directors. Notwithstanding anything in the Purchase Agreement to the contrary, subject to the terms of the Company's Memorandum of Association and Articles of Association, in the event that the Purchaser's designees are appointed or elected as the Company's directors, after the acceptance for payment of Units pursuant to the Offer and prior to the Effective Date, the affirmative vote of a majority (or, if there are only one or two Independent Directors, the single or unanimous vote, as the case may be) of the Independent Directors (who shall act as an independent committee of the Board of Directors for this purpose) shall be required, and alone shall be sufficient, to (i) amend or terminate the Purchase Agreement by the Company, (ii) exercise or waive any of the Company's rights or remedies under the Purchase Agreement, (iii) extend the time for performance of Genzyme's and the Purchaser's respective obligations under the Purchase Agreement, or (iv) approve any other action by the Company that the Independent Directors determine could adversely affect the interests of the Holders (other than Genzyme, the Purchaser and their affiliates) with respect to the transactions contemplated by the Purchase Agreement. 32 33 Representations and Warranties. The Purchase Agreement contains certain customary representations and warranties of the parties. The Company has made representations and warranties to Genzyme and the Purchaser regarding, among other things: (i) the Company's organization and qualification; (ii) the Company's capitalization; (iii) the Company's authority to enter into and perform its obligations under the Purchase Agreement (subject to approval of the Merger Plan by the shareholders to the extent required by the BVI Law); (iv) the compliance of the transactions contemplated by the Purchase Agreement with the Company's Memorandum of Association and Articles of Association, certain agreements and applicable laws; and (v) the accuracy and completeness of the Company's Schedule 14D-9 filed in connection with the Offer and any proxy or information statement to be filed in connection with the Second Step Transaction. Genzyme and the Purchaser have made representations and warranties to the Company regarding, among other things: (i) Genzyme's and the Purchaser's organization and qualification; (ii) Genzyme's and the Purchaser's authority to enter into and perform their respective obligations under the Purchase Agreement; (iii) the compliance of the transactions contemplated by the Purchase Agreement with Genzyme's and the Purchaser's respective charters or other governing instruments, certain agreements and applicable laws; and (iv) the accuracy and completeness of the documents filed by Genzyme and the Purchaser with the Commission in connection with the Offer. The representations and warranties contained in the Purchase Agreement shall expire upon consummation of the Offer. Conditions to the Second Step Transaction. The obligations of each of the Company, the Purchaser and Genzyme to consummate the Second Step Transaction, other than following a Termination Solicitation, are subject to the following conditions: (i) the Purchaser shall have made the Offer on the terms and conditions set forth therein and shall have purchased, or caused to be purchased, all Units validly tendered and not withdrawn pursuant to the Offer; provided, however, that this condition is not applicable to the obligations of Genzyme or the Purchaser if, in breach of the Purchase Agreement or the terms of the Offer, the Purchaser fails to purchase any Units validly tendered and not withdrawn pursuant to the Offer; (ii) the Merger Plan shall have been approved and adopted by the requisite vote or consent of the Holders, if any, required by the BVI Law and the Company's Memorandum of Association and Articles of Association; and (iii) no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission nor any statute, rule, regulation or executive order promulgated or enacted by any governmental authority shall be in effect, which would make the acquisition by Genzyme or the Purchaser of the Callable Common Stock illegal or otherwise prevent the consummation of the Second Step Transaction. In addition to the condition set forth in clause (ii) of the preceding sentence, following a Termination Solicitation in which clause (ii) of the preceding sentence has been satisfied, the Purchaser shall not be obligated to effect a merger pursuant to the Merger Plan if on or before the Effective Date any of the following shall occur or shall be determined by the Purchaser to have occurred and remain in effect: (a) except for matters which affect generally the economy or the industry in which the Company is engaged and except for continued losses incurred by the Company as a result of its operations and continued depletion of its cash resources in the ordinary course of business or consistent with the annual workplan currently in effect, any change shall have occurred in the business, properties, assets, liabilities, capitalization, shareholders equity, financial condition, operations, licenses or franchises or results of operations of the Company which has a Material Adverse Effect (as defined in the Purchase Agreement); or (b) there shall have been instituted or be pending any action, proceeding, application or counterclaim before any court or governmental or regulatory body which (i) challenges the validity of or seeks to restrain the consummation of or to impose any material limitation, on any transaction contemplated by the Purchase Agreement or seeks (ii) to obtain any material amount of damages in connection with such transactions; or (c) any statute, regulation, order or injunction shall have been enacted, entered, enforced or deemed applicable to the Merger that is reasonably likely to, directly or indirectly, result in any of the consequences referred to in paragraph (b) above; or 33 34 (d) the representations and warranties of the Company set forth in the Purchase Agreement shall not be true in any material respect as though made on such date, or the Company shall have failed in any material respect to perform any material obligation or covenant required in the Purchase Agreement to be performed or complied with by it; or (e) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or agreement in principle with respect to any Acquisition Proposal (as defined below). Acquisition Proposals. The Company has agreed in the Purchase Agreement that it shall not, directly or indirectly through any officer, director, employee, financial advisor, representative or agent of the Company: (i) solicit or initiate any inquiries or proposals for a merger, consolidation, business combination, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving the Company, other than the transactions contemplated by the Purchase Agreement (any of the foregoing inquiries or proposals being referred to as an "Acquisition Proposal"); (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Acquisition Proposal; or (iii) agree to, approve or recommend any Acquisition Proposal; provided, however, that nothing contained in the Purchase Agreement shall prevent the Company, the Company's directors or the Special Committee (through any officer, director, employee, financial advisor, representative or agent) from (A) engaging in negotiations or discussions in response to an inquiry that was not solicited after September 20, 1996; (B) furnishing non-public information to any person or entity in connection with an unsolicited written Acquisition Proposal by such person or entity or recommending an unsolicited written Acquisition Proposal to the Holders, if and only to the extent that (1) the Company's Board of Directors or the Special Committee, as the case may be, believe in good faith (after consultation with its financial advisor) that the party requesting such non-public information is capable of financing a transaction more favorable to the Holders from a financial point of view than the transaction contemplated by the Purchase Agreement and the Company's Board of Directors or the Special Committee, as the case may be, determine in good faith (after consultation with outside legal counsel) that such action is necessary to comply with their fiduciary duties to Holders under applicable law and (2) prior to furnishing such non-public information to such person or entity, the Company's Board of Directors or the Special Committee, as the case may be, receive from such person or entity an executed confidentiality agreement on customary terms or (C) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. The Company has further agreed that it will notify Genzyme in writing within 24 hours after receipt by the Company (or its advisors) of any written Acquisition Proposal or any written request for non-public information pursuant to which it intends to provide non-public information. Conduct of Business. Pursuant to the Purchase Agreement the Company has agreed that, except as otherwise expressly contemplated thereby, prior to the Effective Date or such earlier time as designees of the Purchaser constitute a majority of the Company's Directors (determined on the basis of the combined voting power of the Company's Class A and Class B Directors): (a) the business of the Company shall in all material respects be conducted only in, and the Company shall not take any material action except in, the ordinary course of business and consistent with past practice, and the Company shall use all reasonable efforts, consistent with past practice or the annual workplan currently in effect, to maintain and preserve its business organization, assets, and advantageous business relationships; (b) the Company shall not make any tax election or, except in the ordinary course of business and consistent with past practice, settle or compromise any federal, state, local or foreign tax liability; and (c) the Company shall not agree, in writing or otherwise, to take any of the foregoing actions or any action which would make any representation or warranty of the Company in the Purchase Agreement untrue or incorrect in any material respect, or which would materially impair or prevent the occurrence of any condition described in "THE TENDER OFFER -- Section 9. Certain Conditions to the Offer" prior to the consummation of the Offer. In addition to the foregoing, the Purchase Agreement provides that, if the Minimum Condition has not been satisfied on the Initial Expiration Date, and the Purchaser elects to proceed with either a Simultaneous Solicitation or a Termination Solicitation, then until the earlier of the Effective Date or the termination of the Purchase Agreement, the Special Committee shall be authorized to take such actions as it may deem 34 35 appropriate to reduce or eliminate any discretionary spending by the Company or by Genzyme on behalf of the Company not contractually committed to with a person or entity that is not a party to the Purchase Agreement; provided that, Genzyme may elect to continue such spending on its own account and to the extent it elects to do so, the Company will, if the Merger is effected, reimburse Genzyme for such expenditures immediately prior to the Effective Date. Fees and Expenses. The Purchase Agreement provides that each party thereto shall bear all of the fees and expenses incurred by it in connection with the negotiation and performance of the Purchase Agreement and no party to the Purchase Agreement may recover any such fees and expenses from another party upon termination of the Purchase Agreement, except for a termination fee payable to Genzyme as further described under the heading "Effect of Termination Resulting from a Superior Transaction." Termination. The Purchase Agreement may be terminated at any time prior to the Effective Date as follows: (a) by the mutual written consent of the Boards of Directors of Genzyme, the Purchaser and the Company, with the affirmative vote of a majority of the Independent Directors (who shall act as an independent committee of the Board of Directors of the Company for this purpose) being required, and alone being sufficient, for action by the Board of Directors of the Company for this purpose; (b) by the Company upon approval of the Special Committee: (i) if (A) the Purchaser shall have terminated the Offer without the purchase of any Units thereunder; or (B) the Purchaser shall not have paid for all Units validly tendered pursuant to the Offer and not withdrawn within 90 days after the commencement of the Offer, unless such termination of the Offer or failure to pay for Units shall have been caused by or resulted from the failure of the Company to perform in any material respect any of its covenants or agreements contained in the Purchase Agreement, the material breach by the Company of any of its representations or warranties contained in the Purchase Agreement or an election by the Purchaser to terminate the Offer and effect a Termination Solicitation; or (ii) if the Effective Date shall not have occurred on or before the six-month anniversary of the execution of the Purchase Agreement due to a failure of any of the conditions to the obligation of the Company to effect the Second Step Transaction as described above under the heading Conditions to the Second Step Transaction, or if the Purchaser has elected to proceed with the Termination Solicitation, if the Effective Date shall not have occurred on or before the six-month anniversary of the date of the Purchase Agreement; or (iii) if, prior to the purchase of any Units pursuant to the Offer, or the Effective Date if the Purchaser has elected to proceed with a Termination Solicitation, Genzyme or the Purchaser materially fails to perform any of their respective obligations under the Purchase Agreement and such nonperformance has a material adverse effect on Genzyme's or the Purchaser's ability to consummate the Offer or the Second Step Transaction; or (iv) if, in the event the Minimum Condition shall not have been satisfied on the Initial Expiration Date and the Purchaser shall have amended the Offer or terminated the Offer pursuant to its election to proceed with either the Simultaneous Solicitation or the Termination Solicitation, the Purchaser has materially failed to perform any of its obligation in connection with the Simultaneous or Termination Solicitation; or (v) if, prior to the purchase of Units pursuant to the Offer, or the Effective Date if the Purchaser has elected to proceed with the Termination Solicitation, the Special Committee shall have withdrawn or modified its approval or recommendation of the Offer or the Purchase Agreement in order to approve the execution by the Company of a definitive agreement providing for the acquisition of the Company or substantially all of its assets or a merger or other business combination or in order to approve a tender offer for all of the Shares or Units by a third party, in any case, as determined by the Special Committee, on terms more favorable to the Company's shareholders than the Offer (a "Superior Transaction"), provided, that (i) the Company shall have provided Genzyme with at least five business days' written notice of such Superior Transaction, including a copy of the proposed agreement and (ii) the Company shall not have violated the provisions described above under "Acquisition Proposals"; or (c) by Genzyme or the Purchaser (i) if, due to an occurrence that would result in a failure to satisfy any condition to the consummation of the Offer or the Majority Consent Condition if the Purchaser has 35 36 elected to proceed with the Simultaneous Solicitation, the Purchaser shall have (A) failed to commence the Offer within 5 business days of the date on which the Purchaser's intention to make the Offer is publicly announced; (B) terminated the Offer without the purchase of any Units thereunder; or (C) failed to pay for all Units validly tendered pursuant to the Offer and not withdrawn within 90 days after commencement of the Offer, unless such failure or termination shall have been caused by or results from (x) the failure of Genzyme or the Purchaser to perform in any material respect any of its covenants or agreements contained in the Purchase Agreement, (y) the material breach by Genzyme or the Purchaser of any of its representations or warranties contained in the Purchase Agreement, or (z) the Purchaser's election to proceed to seek approval of the Merger Plan pursuant to the Termination Solicitation; or (ii) if the Effective Date shall not have occurred on or before the six-month anniversary of the date of the Purchase Agreement due to a failure of any of the conditions to the obligations of Genzyme or the Purchaser to effect the Second Step Transaction as described above under the heading "Conditions to the Second Step Transaction"; or (iii) if, prior to the purchase of Units pursuant to the Offer, or the Effective Date if the Purchaser has elected to proceed with the Termination Solicitation, the Company's directors shall have publicly withdrawn or modified in a manner adverse to the Purchaser their approval or recommendation of the Offer or the Purchase Agreement or recommended acceptance of a Superior Transaction or shall have resolved to do any of the foregoing. Effect of Termination. In the event of the termination of the Purchase Agreement as provided under the heading "Termination," all obligations and agreements of the parties set forth therein shall forthwith terminate and be of no further force or effect, and there shall be no liability on the part of Genzyme, the Purchaser or the Company thereunder except (a) as provided under the headings "Effect of Termination Resulting from a Superior Transaction" and "Ancillary Agreements" below and (b) that the foregoing shall not relieve any party for liability for any breach of the Purchase Agreement occurring prior to such termination. Effect of Termination Resulting from a Superior Transaction. In the event of the termination of the Purchase Agreement by the Company in accordance with clause (b)(v) under the heading "Termination" or by Genzyme or the Purchaser in accordance with (x) clause (c)(iii) under the heading "Termination", or (y) clause (c)(i) or (c)(ii) under the heading "Termination" if such termination is based on the failure of the Company to perform in any material respect any of its covenants or agreements contained in the Purchase Agreement, the Purchase Agreement requires that the Company pay to Genzyme a termination fee of $500,000 upon consummation of any Superior Transaction. Ancillary Agreements. In the event of any termination of the Purchase Agreement (x) by the Company in accordance with clause (b)(v) or by Genzyme or the Purchaser in accordance with clause (c)(iii) under the heading "Termination" above as a result of a Superior Transaction in connection with which the Company shall not have violated the provisions described above under the heading "Acquisition Proposals,", or (y) by Genzyme or the Purchaser pursuant to clause (c)(i) under the heading "Termination" above, unless such termination is based on the failure of the Company to perform in any material respect any of its covenants or agreements contained in the Purchase Agreement, Genzyme has agreed that, effective upon consummation of such Superior Transaction, it shall, at the Company's request, (a) consent to the Superior Transaction in its capacity as holder of the Company's Series 1992 Note and pursuant to all applicable provisions of the Company's Memorandum of Association; (b) terminate the Purchase Option Agreement, in which event the Series 1992 Note will become due and payable in accordance with its terms; (c) consent to the assignment by the Company of the Technology License Agreement; (d) at the option of Genzyme, terminate or consent to the assignment by the Company of each of the Research and Development Agreement, the Services Agreement, and the Administrative Agreement. Amendment. Subject to the amendment provision described above under the heading "Designation of Directors," the Purchase Agreement may not be amended except by action of the Boards of Directors of each of the parties to the Purchase Agreement, set forth in an instrument in writing signed on behalf of each of the parties; provided, however, that the Board of Directors of the Company shall not act to amend the Purchase Agreement without the approval of the Special Committee. 36 37 Waiver. At any time prior to the Effective Date, whether before or after any special meeting or written action of the Holders to approve the Second Step Transaction, any party to the Purchase Agreement, subject to the waiver provisions described above under the heading "Designation of Directors," by action taken by its Board of Directors (and in the case of the Company, subject to the approval of the Special Committee), may (i) extend the time for the performance of any of the obligations or other acts of any other party to the Purchase Agreement or (ii) subject to the third sentence above under the heading "The Offer" and the proviso contained above under the heading "Amendment," waive compliance with any of the agreements of any other party or with any conditions to its own obligations. Any agreement on the part of a party to the Purchase Agreement to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. APPRAISAL RIGHTS No appraisal rights are available in connection with the Offer. However, if the Second Step Transaction is consummated, Holders may have certain rights under Section 83 of the BVI Law to dissent and demand appraisal of, and to receive payment in cash of the fair value of, their Shares. Under the BVI Law, holders of shares of a BVI company are entitled to payment of fair value for their shares upon dissenting from mergers (if the BVI company is a constituent company in the merger and not the surviving company), consolidations, certain dispositions of more than 50% of the company's assets, compulsory redemptions of shares, and certain other transactions (a "Specified Transaction"). In order to assert rights under Section 83, the following procedures must be followed: - A Holder who desires to exercise dissenters' rights must give to the Company before or at the meeting of Holders at which the Specified Transaction is submitted to a vote, a written notice of an objection to the Specified Transaction. The objection must include a statement that the Holder proposes to demand payment for his shares if the action is taken. In the event that the Holder does not receive notice of the meeting, or if the proposed action is authorized by written consent without a meeting, no notice of objection is required. - Within 20 days following the authorization of the Specified Transaction by vote or written consent, the Company must give written notice of the action to each Holder who gave written objection or from whom written objection was not required, except those who voted for, or consented in writing to, the proposed action. A Holder to whom the Company is required to give notice who elects to dissent must, within 20 days of notice or authorization, give to the Company a written notice of his decision to elect to dissent, stating such Holder's name and address, the number and class or series of shares involved (which must include all shares held by such Holder) and a demand for payment of fair value for the shares. Upon the giving of notice, the Holder ceases to have the rights of a Holder with the exception of the right to be paid for the fair value of his shares. - Within 7 days of the later to occur of: (i) the expiration of the period within which Holders may give notice or election of dissent or (ii) the effective date of the Specified Transaction, the surviving corporation must make a written offer to each dissenting Holder to purchase his shares at a price that the Company determines to be their fair value. - If within 30 days of the offer, the Company and the dissenting Holder agree on the price to be paid for the shares, the Company will pay such amount to the Holder upon surrender of the certificates representing the shares. - If the Company and the dissenting Holder fail to agree on a price within 30 days, the following shall occur within the next 20 days: (i) the Company and the Holder shall each designate an appraiser; (ii) the two designated appraisers shall designate a third appraiser; 37 38 (iii) the three appraisers shall fix the fair value of the dissenting Holders' shares as of the close of business on the day prior to the vote on the Specified Transaction, excluding any appreciation or depreciation directly or indirectly induced by the Specified Transaction, and such value shall be binding on the Company and the dissenter; and (iv) the Company shall pay the dissenting Holder such amount in money upon the surrender of the certificates representing the shares. - The enforcement by a Holder of dissenters' rights will exclude the enforcement by the Holder of his other rights as a holder of shares, other than the Holder's right to obtain relief on the ground that the action taken was illegal. See Annex II attached hereto for the full text of Section 83 of the BVI Law. 7. CERTAIN FEDERAL INCOME TAX CONSEQUENCES THE FOLLOWING IS A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF THE TRANSACTIONS DESCRIBED IN THIS OFFER TO PURCHASE. THE TAX CONSEQUENCES OF THE TRANSACTIONS WILL DEPEND IN LARGE PART ON THE FACTS AND CIRCUMSTANCES APPLICABLE TO EACH HOLDER. THEREFORE, EACH HOLDER IS URGED TO CONSULT THE HOLDER'S OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THAT HOLDER. NO INFORMATION IS PROVIDED WITH RESPECT TO STATE, LOCAL, OR FOREIGN TAX CONSEQUENCES, AND HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO SUCH CONSEQUENCES. The discussion does not address federal income tax consequences applicable to all Holders, some of whom may be subject to special rules (including, for example, Holders who own, or are considered as owning pursuant to certain attribution rules, five percent or more of the outstanding Shares). The discussion focuses on Holders who are individual citizens or residents of the United States and domestic corporations and has only limited application to Holders who are foreign corporations, regulated investment companies, life insurance companies, financial institutions, estates, trusts, tax-exempt organizations or nonresident aliens. Also, unless otherwise stated, the discussion assumes that each of the Units, Shares and Callable Warrants are capital assets in the hands of the Holder at all relevant times. The discussion is based upon existing federal income tax law, including the Internal Revenue Code of 1986, as amended (the "Code"), income tax regulations issued by the Internal Revenue Service (the "IRS"), rulings of the IRS and court decisions. Future changes in the federal income tax laws could adversely affect a Holder. CONSEQUENCES OF PASSIVE FOREIGN INVESTMENT COMPANY STATUS In each year that Neozyme II has been in existence, Neozyme II has determined that it qualified as a Passive Foreign Investment Company ("PFIC") and has sent to the holders of the Units the PFIC annual information statement and a form of an election statement whereby the shareholder could elect to treat Neozyme II as a qualified electing fund ("QEF") and to include annually in gross income the shareholder's pro rata share of Neozyme II's ordinary earnings and net capital gain (his "QEF inclusion"). If a Holder has not elected to treat Neozyme II as a QEF, any gain recognized by such non-electing Holder as a result of the disposition of the Holder's Shares pursuant to the transactions described in this Offer to Purchase will be treated as ordinary income. The non-electing Holder's tax liability with respect to such gain will be determined by allocating such gain in pro rata amounts to each day in the Holder's holding period for the Shares and by multiplying the gain allocated to each taxable year of the Holder other than the current taxable year by the highest rate of tax in effect for the Holder in that year, without regard to the actual rate that applied to the Holder's income in that year. The non-electing Holder will be subject to an interest charge on the taxes so determined at the rates and using the methods in Section 6621 of the Code for underpayments of tax, as if the Holder had recognized the gain allocated to each prior taxable year in that prior taxable year. If a Holder elected to treat Neozyme II as a QEF in the first taxable year that the Holder held Shares or later made the election and also either (i) elected to treat the Shares generally as if they were sold on the first day of the taxable year for which the election was made or (ii) elected to include in the Holder's gross income 38 39 the earnings and profits attributable to the Shares as of the first day of the taxable year for which the election was made, any gain recognized by such electing Holder as a result of the disposition of the Holder's Shares pursuant to the transactions described in this Offer to Purchase will generally be capital gain if the stock is held as a capital asset on the disposition date. If for any taxable year an electing Holder elected under Section 1294 of the Code to extend the time for the payment of the tax on a QEF inclusion and that extension has not expired, the disposition of the Holder's Shares pursuant to the transactions described in this Offer to Purchase will cause the extension to expire. The extension will expire on the due date (without regard to extensions) of the Holder's tax return for the taxable year in which the disposition occurs. Following the consummation of the transactions described in this Offer to Purchase, Genzyme may make an election pursuant to Section 338 of the Code. Such an election may cause an electing Holder to recognize a substantially increased QEF inclusion. However, the basis of the electing Holder's Shares should be increased by the amount of the QEF inclusion. Any additional amounts of net capital gain QEF inclusion resulting from the Section 338 election should thus be offset by a reduced amount of capital gain or a capital loss in respect of the electing Holder's sale of the Shares. However, any additional amounts of ordinary earnings QEF inclusion resulting from the Section 338 election could not generally be offset by a capital loss (except possibly for certain relatively small amounts in the case of individuals). CONSEQUENCES TO HOLDERS WHOSE UNITS ARE TENDERED AND ACCEPTED PURSUANT TO THE TENDER OFFER A Holder who tenders a Unit pursuant to the Offer and does not properly withdraw such Unit prior to the expiration of the Offer will be deemed to have sold each of the Unit's constituent elements, i.e., one share of Callable Common Stock and one Callable Warrant, for the Offer Price and will be required to allocate the Offer Price between these constituent elements in proportion to their relative fair market values on the purchase date. The Holder will recognize gain or loss with respect to the deemed sale of the Callable Warrant in an amount equal to the difference between the amount of the Offer Price allocable to the Callable Warrant and the portion of the Holder's adjusted basis in the Unit allocable to the Callable Warrant. This gain or loss will generally be capital gain or loss if the Unit is held as a capital asset on the purchase date and will be long-term capital gain or loss if the Unit has been held for more than one year on the purchase date. The Holder will recognize gain or loss with respect to the deemed sale of the share of Callable Common Stock in an amount equal to the difference between the amount of the purchase price of the Unit allocable to the share of Callable Common Stock and the portion of the Holder's adjusted basis in the Unit allocable to the share of Callable Common Stock. Except as otherwise described above under Consequences of Passive Foreign Investment Company Status, this gain or loss will generally be capital gain or loss if the Unit is held as a capital asset on the purchase date and will be long-term capital gain or loss if the Unit has been held for more than one year on the purchase date. CONSEQUENCES TO HOLDERS WHO DO NOT TENDER THEIR UNITS If the Offer is consummated, Genzyme intends to effect the Second Step Transaction, pursuant to which all of the Shares included in untendered Units will be converted into the right to receive cash in an amount per Share equal to the Second Step Consideration. The Callable Warrants associated with these Shares will become exercisable and will separate and be transferable separately from the right to receive cash for the Shares. A Holder whose Shares are converted to the right to receive cash in the Second Step Transaction will recognize gain or loss in an amount equal to the difference between the Second Step Consideration and the portion of the Holder's adjusted basis in the Unit allocable to the Shares. Except as otherwise described above under Consequences of Passive Foreign Investment Company Status, this gain or loss will generally be capital gain or loss if the Unit is held as a capital asset on the Effective Date and will be long-term capital gain or loss if the Unit has been held for more than one year on the Effective Date. 39 40 A Holder will not recognize income, gain or loss as a result of the acceleration in the exercisability of the Callable Warrants or their separation from the Shares. OTHER CONSIDERATIONS Uncertainty exists as to the treatment of the initial grant to Genzyme of the Purchase Option. The IRS might take the position that the Callable Warrants received as part of a Unit in the initial Unit Offering in April 1992 were issued by Genzyme in exchange for the separate grant of the Purchase Option by the initial purchasers of the Units and that the full purchase price of the Units was paid in exchange for the Callable Common Stock. In that event, upon the lapse or termination of the Purchase Option, a Holder might recognize a short-term capital gain in an amount equal to the value of the Callable Warrants on the closing date of the initial Unit Offering, less the Holder's tax basis in the Callable Warrants. If a Holder were treated as having paid the full purchase price for the Unit in exchange for the Callable Common Stock and as then having granted the Purchase Option to Genzyme in exchange for the Warrants, the Holder would have an increased tax basis in the Callable Common Stock which would reduce the amount of gain (or increase the amount of loss) realized upon a disposition of the Callable Common Stock pursuant to the transactions described in this Offer to Purchase. Any such loss would be available to offset any gain taken into account from a lapse or termination of the Purchase Option. United States Taxation of Non-U.S. Persons The following is a general discussion of certain anticipated United States federal income tax consequences of a disposition of Units or Shares to a Holder who, for United States federal income tax purposes, (1) is not a "United States person", (2) is not, and has not been, engaged in a United States trade or business and (3) in the case of an individual, will not be present in the United States for 183 days or more during the taxable year of the Holder that includes the date of disposition of the Holder's Units or Shares. A "United States person" means a citizen or resident of the United States for United States federal income tax purposes, a corporation, partnership or other entity created or organized in or under the laws of the United States or any state thereof, or an estate or trust, the income of which is subject to United States federal income tax regardless of its sources. The following discussion does not consider specific facts and circumstances that may be relevant to a particular Non-U.S. Holder's tax position. Specifically, this discussion does not address the United States tax consequences to any person who might own, or be considered as owning pursuant to certain attribution rules, 5 percent or more of the outstanding Shares. Furthermore, the following discussion is based on current provisions of the Code and on administrative and judicial interpretations as of the date hereof, all of which are subject to change. Each Non-U.S. Holder, as well as each non-United States person who is or has been engaged in a United States trade or business or who is an individual who has been present in the United States for 183 days or more during a taxable year, or who may be eligible for special treatment under an applicable income tax treaty is urged to consult a tax advisor with respect to the United States federal income tax consequences of the disposition of Units or Shares, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction. A Non-U.S. Holder will not be subject to United States federal income tax (and no tax will generally be withheld) with respect to gain recognized on a disposition of the Units or of Callable Common Stock. Backup withholding requirements may apply to the gross proceeds paid to a Non-U.S. Holder upon the disposition of the Units or Shares, unless the holder certifies its foreign status or otherwise establishes an exemption. A Non-U.S. Holder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service. 8. CERTAIN EFFECTS OF THE TRANSACTION Interest in Assets and Earnings. Neither Genzyme or the Purchaser currently owns any of the outstanding Units. As a result of the Offer and the Second Step Transaction, Genzyme (directly or indirectly through the Purchaser) will own the entire equity interest in the Company and will thereby be entitled to 100% of the Company's net assets and earnings and the current Holders will no longer have an equity interest in the Company. 40 41 Voting Power. Unless waived by Genzyme and the Purchaser, the Offer is conditioned upon the tender of at least a majority of the outstanding Units. If a majority of the outstanding Units are tendered in the Offer, the Purchaser will have the right under the BVI Law and the Company's Memorandum of Association and Articles of Association to approve the Second Step Transaction by written consent in lieu of a meeting of stockholders and without the vote or consent of any of the remaining Holders. In addition, under the BVI Law, if the Purchaser acquires at least 90% of the outstanding Units, the Purchaser would have the power to approve a merger of the Company into the Purchaser, or require the Company to redeem all of the Shares not held by the Purchaser, in each case without a vote of the Holders. NNM Quotation. Depending upon the aggregate market value and the number of Units not purchased pursuant to the Offer, as well as the identity of the holders of such Units, the Units may no longer meet the quantitative requirements of the National Association of Securities Dealers, Inc. the ("NASD") for continued inclusion in the NNM, which require that an issuer have at least 200,000 publicly held shares, held by at least 400 stockholders or 300 stockholders of round lots, with a market value of at least $1 million, have net tangible assets of at least $1 million, $2 million or $4 million (depending on profitability levels during the issuer's four most recent fiscal years) and have a minimum bid price per shares of $1 (unless the issuer has a public float of at least $3 million and at least $4 million of net tangible assets). In the event that the Units no longer meet the requirements for NNM quotation, it is possible that the Units would continue to trade in the over-the-counter market and that price or other quotations might still be available from other sources. The extent of the public market for the Units and the availability of such quotations would, however, depend upon such factors as the number of holders and/or the aggregate market value of such Units remaining at such time, the interest in maintaining a market in such Units on the part of securities firms, the possible termination of registration of such Units under the Exchange Act, as described below, and other factors. The Purchaser cannot predict whether a reduction in the number of Units that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the Units or whether it would cause future market prices to be greater or less than the price to be paid in the Offer. The Purchaser and Genzyme intend to cancel all Callable Warrants purchased by the Purchaser pursuant to the Offer. Following the Second Step Transaction, Genzyme does not intend to list the outstanding Callable Warrants on the NNM, and therefore, any market that may develop for the Callable Warrants may be adversely affected. Exchange Act Registration. The Units are currently registered under the Exchange Act. The purchase of Units pursuant to the Offer or following consummation of the Offer may result in the Units becoming eligible for deregistration under the Exchange Act. Registration of the Units may be terminated upon application of the Company to the Commission if the Units are not listed on a national securities exchange and there are fewer than 300 record holders of the Units. There currently are fewer than 300 record holders of the Units. The termination of the registration of the Units under the Exchange Act, assuming there are no other securities of the Company subject to registration, would result in the suspension of the Company's obligation to file reports pursuant to Section 15(d) of the Exchange Act, thereby substantially reducing the information required to be furnished by the Company to holders of the Units and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with stockholders' meetings pursuant to Section 14(a) and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions, no longer applicable to the Units. Furthermore, "affiliates" of the Company and persons holder "restricted securities" of the Company may be deprived of the ability to dispose of the securities pursuant to Rule 144 under the Securities Act. If registration of the Units under the Exchange Act were terminated, the Units would no longer be "margin securities" or eligible for NNM quotation. The Purchaser presently intends to seek to cause the Company to terminate the registration of the Units under the Exchange Act as soon after the consummation of the Offer or Second Step Transaction as the requirements for termination of registration are met. In addition, following the Second Step Transaction, the outstanding Callable Warrants may not meet the requirements for registration under the Exchange Act, and the provisions of the Exchange Act described 41 42 above applicable to transactions in the Units would similarly not apply to transactions in the Callable Warrants. Margin Regulations. The Units are currently "margin securities" under the rule of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of such Units for the purpose of buying, carrying or trading in securities ("purpose loans"). Depending upon factors such as the number of record holders of the Units and the number and market value of publicly held Units, following the purchase of Units pursuant to the Offer or following consummation of the Offer, the Units might no longer constitute "margin securities" for purposes of the Federal Reserve Board's margin regulations and therefore could no longer be used as collateral for purpose loans made by brokers. 9. FEES AND EXPENSES The following is an estimate of expenses to be incurred in connection with the Offer and the Second Step Transaction, other than (i) the fees and expenses of Robertson, Stephens & Company (see "SPECIAL FACTORS -- Section 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction," and (ii) the fees and expenses of Hambrecht & Quist (see "SPECIAL FACTORS -- Section 4. Recommendation of the Company's Board of Directors; Fairness of the Transaction"). The Purchase Agreement provides that all costs and expenses incurred in connection with the Offer and the Second Step Transaction will be paid by the party incurring such costs and expenses, whether or not the Offer or the Second Step Transaction is consummated. Expenses to be paid by Genzyme and the Purchaser: Legal Fees and Expenses................................................... $200,000 Printing and Mailing...................................................... $100,000 Advertising............................................................... $ 65,000 Filing Fees............................................................... $ 21,375 Depositary Fees........................................................... $ 7,500 Information Agent Fees.................................................... $ 15,000 Accounting Fees and Expenses.............................................. $ 50,000 Miscellaneous............................................................. $ 16,125 ======== Total........................................................... $475,000
Expenses to be paid by the Company: Legal Fees and Expenses................................................... $180,000 Printing and Mailing...................................................... $ 25,000 Miscellaneous............................................................. $ 20,000 ======== Total........................................................... $225,000
42 43 THE TENDER OFFER 1. TERMS OF THE OFFER; EXPIRATION DATE Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will accept for payment and pay for all Units validly tendered prior to the Expiration Date (as defined below) and not properly withdrawn as provided in "THE TENDER OFFER -- Section 4. Withdrawal Rights." The term "Expiration Date" means 5:00 p.m., New York City time, on October 28, 1996, unless and until the Purchaser, in its sole discretion (but subject to the terms and conditions of the Purchase Agreement), shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Purchaser, shall expire. Subject to the applicable rules and regulations of the Commission, the Purchaser expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Purchase Agreement), at any time and from time to time, to extend the period during which the Offer is open for any reason, including the failure to satisfy any of the conditions specified in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer," and thereby delay acceptance for payment of, or payment for, any Units, by giving oral or written notice of such extension to the Depositary. There can be no assurance that the Purchaser will exercise its right to extend the Offer. During any such extension, all Units previously tendered and not properly withdrawn will remain subject to the Offer, subject to the rights of a tendering Holder to withdraw such Holder's Units. See "THE TENDER OFFER -- Section 4. Withdrawal Rights." Subject to the applicable rules and regulations of the Commission, the Purchaser also expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Purchase Agreement), at any time and from time to time, to (i) delay acceptance for payment of or, regardless of whether the Units were theretofore accepted for payment, payment for, any Units pending receipt of any regulatory approvals that may be required as described in "THE TENDER OFFER -- Section 10. Certain Legal Matters; Regulatory Approvals," (ii) terminate the Offer and not accept for payment (or pay for) any Units if any of the conditions referred to in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer" have not been satisfied or upon the occurrence and during the continuance of any of the events specified in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer" and (iii) waive any condition or amend the Offer in any respect, in each case, by giving oral or written notice of such delay, termination, waiver or amendment to the Depositary and by making a public announcement thereof. The Purchase Agreement provides that, without the consent of the Company, as approved by the Special Committee, the Purchaser shall not amend or waive the Minimum Condition or the Majority Consent Condition (as defined below), extend the offer, reduce the maximum number of Units to be purchased, reduce the price to be paid per Unit pursuant to the Offer and amend any other material term of the Offer in a manner adverse to the Holders. Pursuant to the Purchase Agreement, if on October 28, 1996, the Minimum Condition has not been satisfied, the Purchaser may, not later than 9:00 a.m., eastern time, on the next business day following the Initial Expiration Date, elect either (x) to extend the Offer for a period not to exceed 60 days and amend the Offer to delete the Minimum Condition and add the Majority Consent Condition, in which case, promptly thereafter, the Company shall commence to convene a meeting or solicit the written consent of its shareholders for approval of the Merger Plan, or (y) terminate the Offer and promptly return all tendered Units, in which case, promptly thereafter, the Company shall commence to convene a meeting or solicit the written consent of the its shareholders for approval of the Merger Plan, in either case with such solicitation or meeting to be conducted in accordance with applicable law and the terms of the Purchase Agreement. The Majority Consent Condition is defined in the Purchase Agreement to mean that the sum of (a) the Shares included in the Units tendered and not withdrawn as of the new expiration date of the Offer (provided such Shares may be voted in favor of the Merger Plan at the meeting or pursuant to the consent solicitation by the Purchaser immediately after the purchase of the Units which include such Shares in the Offer by the Purchaser) plus (b) the number of Shares held by holders who have voted in favor of the Merger Plan at the meeting or pursuant to the consent solicitation as of the new expiration date of the Offer (but excluding any such Shares that would result 43 44 in double counting with (a) above) represents not less than a majority of the Shares outstanding. The Purchaser acknowledges (x) that Rule 14e-1(c) under the Exchange Act requires the Purchaser to pay the consideration offered or return the Units tendered promptly after the termination or withdrawal of the Offer and (y) that the Purchaser may not delay acceptance for payment of, or payment for (except as provided in clause (i) of the first sentence of this paragraph), any Units upon the occurrence of any of the conditions specified in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer" without extending the period of time during which the Offer is open. If the Minimum Condition or any other condition specified in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer" is not fulfilled by the Expiration Date, the Purchaser reserves the right (but shall not be obligated) to (i) decline to purchase any of the Units tendered, return all tendered Units to tendering Holders and terminate the Offer, (ii) subject to the terms and conditions of the Purchase Agreement, extend the Offer and retain all tendered Units until the expiration of the Offer, as extended, subject to the terms and conditions of the Offer (including any rights of Holders to withdraw their Units) or (iii) subject to the terms and conditions of the Purchase Agreement, waive or reduce the condition and, subject to complying with applicable rules and regulations of the Commission, accept for payment and purchase all Units validly tendered. Any extension, delay, termination, waiver or amendment will be followed as promptly as practicable by a public announcement thereof, such announcement, in the case of an extension, to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Without limiting the manner in which the Purchaser may choose to make any public announcement, except as provided by applicable law (including Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act, which require that material changes be promptly disseminated to Holders), the Purchaser will have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a release to the Dow Jones News Service. If, in accordance with the terms and conditions of the Purchase Agreement, the Purchaser makes a material change in the terms of the Offer or the information concerning the Offer, or waives a material condition of the Offer, the Purchaser will disseminate additional tender offer materials (including by public announcement as set forth above) and extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. The minimum period during which an offer must remain open following material changes in the terms of the offer or information concerning the offer, other than a change in price, a change in percentage of securities sought or a change in any dealer's soliciting fee, will depend upon the facts and circumstances, including the relative materiality of the changes. With respect to a change in price or, subject to certain limitations, a change in the percentage of securities sought or a change in any dealer's soliciting fee, a minimum ten business day period from the day of such change is generally required to allow for adequate dissemination to Holders. Accordingly, if, prior to the Expiration Date, the Purchaser decreases the number of Units being sought, increases the consideration offered pursuant to the Offer or adds a dealer's soliciting fee, and if the Offer is scheduled to expire at any time earlier than the period ending on the tenth business day from the date that notice of such increase, decrease or addition is first published, sent or given to the Holders, the Offer will be extended at least until the expiration of such ten business day period. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or a federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time. The Company has elected to disseminate the Offer to the Holders. This Offer to Purchase and the related Letter of Transmittal and, if required, other relevant material will be mailed to record holders of Units and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the Company's list of Holders for subsequent transmittal to beneficial owners of Units. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR UNITS Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will purchase by accepting for payment, and paying for, all Units validly tendered prior to the Expiration Date and not properly withdrawn 44 45 (including Units validly tendered and not withdrawn during any extension of the Offer, if the Offer is extended, subject to the terms and conditions of such extension), promptly after the Expiration Date. In addition, subject to complying with Rule 14e-1 under the Exchange Act, the Purchaser expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Purchase Agreement), to delay the acceptance for payment of, or payment for, Units in order to comply, in whole or in part, with any other applicable law. In all cases, payment for Units tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates representing the Callable Common Stock and the Callable Warrants included in the Units ("Unit Certificates"), (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantee, and (iii) any other documents required by the Letter of Transmittal. Accordingly, payment may be made to tendering Holders at different times if delivery of the Units and other required documents occurs at different times. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment, and thereby purchased, Units validly tendered and not properly withdrawn if, as and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance for payment of such Units pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Units so accepted for payment pursuant to the Offer will be made by deposit of the aggregate purchase price therefor with the Depositary, which will act as agent for tendering Holders for the purpose of receiving payment from the Purchaser and transmitting such payment to Holders whose Units have been accepted for payment. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE PURCHASE PRICE FOR UNITS BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. Upon the deposit of funds with the Depositary for the purpose of making payment to validly tendering Holders, the Purchaser's obligation to make such payment shall be satisfied and such tendering Holders must thereafter look solely to the Depositary for payment of the amounts owed to them by reason of the acceptance for payment of Units pursuant to the Offer. If any tendered Units are not accepted for payment pursuant to the terms and conditions of the Offer for any reason, or if the Unit Certificates are submitted for more Units than are tendered, Unit Certificates representing Units not purchased or not tendered will be returned, without expense to the tendering Holder, as soon as practicable following expiration of termination of the Offer. If, prior to the Expiration Date, the Purchaser increases the consideration to be paid per Unit, the Purchaser will pay such increased consideration for all Units purchased pursuant to the Offer, whether or not such Units have been tendered or purchased prior to such increase in consideration. The Purchase Agreement provides that it shall not be assigned except that the Purchaser may assign its rights and obligations to Genzyme or to one or more direct or indirect wholly owned subsidiaries of Genzyme which in a written instrument shall make all the representations and warranties of the Purchaser set forth therein and shall agree to assume all of the Purchaser's obligations thereunder and be bound by all of the terms and conditions of the Purchase Agreement; provided, however, that no such assignment shall relieve Genzyme or the Purchaser of its obligations thereunder. 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING UNITS General. Except as set forth below, in order for Units to be validly tendered pursuant to the Offer, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, together with any required signature guarantees and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase prior to the Expiration Date, and either (i) Unit Certificates representing tendered Units must be received by the Depositary at such address prior to the Expiration Date, or (ii) the guaranteed delivery procedures set forth below must be complied with. Book-entry transfer procedures are not available to Holders. No alternative, conditional or contingent tenders will be accepted and no fractional Units will be purchased. All tendering Holders, by execution of the Letter of Transmittal (or facsimile thereof), waive any right to receive any notice of the acceptance of their Units for payment. 45 46 THE METHOD OF DELIVERY OF UNIT CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE SOLE OPTION AND RISK OF EACH TENDERING HOLDER AND, EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION 3, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Signature Guarantees. Signatures on all Letters of Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program, the Stock Exchanges' Medallion Program or the New York Stock Exchange, Inc. Medallion Signature Program (an "Eligible Institution"), unless the Units tendered thereby are tendered (i) by a registered Holder of Units who has not completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. See Instruction 1 of the Letter of Transmittal. If the Unit Certificates are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or Unit Certificates for unpurchased Units are to be returned, to a person other than the registered holder(s), then the tendered Unit Certificates must be endorsed or accompanied by appropriate stock powers signed exactly as the name(s) of the registered holder(s) appear on the Unit Certificates with the signature(s) on such Unit Certificates or stock powers guaranteed by an Eligible Institution as provided above and in the letter of transmittal. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a Holder desires to tender Units pursuant to the Offer and such Holder's Unit Certificates are not immediately available or time will not permit all of the required documents to reach the Depositary prior to the Expiration Date, such Units may nevertheless be tendered, provided that all of the following conditions are satisfied: (a) such tender is made by or through an Eligible Institution; (b) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by the Purchaser herewith, is received by the Depositary, as provided below, prior to the Expiration Date; and (c) the Unit Certificates for all tendered Units, in proper form for transfer, in each case together with the Letter of Transmittal (or a facsimile thereof) properly completed and duly executed, with any required signature guarantees and any other documents required by the Letter of Transmittal are received by the Depositary within three NNM trading days after the date of execution of such Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Units accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of Unit Certificates therefor, a properly completed and duly executed Letter of Transmittal (or facsimile thereof), together with any required signature guarantees and any other documents required by the Letter of Transmittal. Accordingly, payment might not be made to all tendering Holders at the same time, and will depend upon when Unit Certificates are received into the Depositary's account. Backup Federal Income Tax Withholding. Under the federal income tax laws, the Depositary may, under certain circumstances, be required to withhold 31% of the amount of any payments made to certain Holders pursuant to the Offer. TO PREVENT SUCH BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENTS MADE TO CERTAIN HOLDERS OF THE PURCHASE PRICE OF UNITS PURCHASED PURSUANT TO THE OFFER, EACH SUCH HOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH HOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY 46 47 THAT SUCH HOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL. SEE INSTRUCTION 9 OF THE LETTER OF TRANSMITTAL. Appointment as Proxy. By executing the Letter of Transmittal, a tendering Holder irrevocably appoints designees of the Purchaser as the Holder's attorneys-in-fact and proxies in the manner set forth in the Letter of Transmittal, each with full power of substitution with respect to any Units tendered thereby (and with respect to any and all other Units or other securities issued or issuable in respect of such Units on or after September 20, 1996). All such powers of attorney and proxies will be considered irrevocable and coupled with an interest in the tendered Units. This appointment will be effective when, and only to the extent that, the Purchaser accepts such Units for payment and deposits the purchase price therefor with the Depositary. Upon such payment, all prior powers of attorney and proxies given by such Holder with respect to such Units (and other Units and securities issued or issuable in respect of such Units on or after September 20, 1996) will, without further action, be revoked, and no subsequent powers of attorney and proxies may be given nor any subsequent written consents executed by such Holder (and, if given or executed, will not be deemed effective). Upon such payment by the Purchaser, the designees of the Purchaser will, with respect to such Units and other securities, be empowered to exercise all voting and other rights of such Holder as they in their sole discretion may deem proper at any annual or special meeting of the Holders, or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. The Purchaser reserves the right to require that, in order for Units to be deemed validly tendered, immediately upon the Purchaser's payment for such Units, the Purchaser must be able to exercise full voting and other rights of a record and beneficial holder, including voting at any meeting of Holders. Determination of Validity. All questions as to the validity, form, eligibility (including the time of receipt) and acceptance for payment of any tendered Units pursuant to any of the procedures described above will be determined by the Purchaser, in its sole discretion, which determination will be final and binding on all parties. The Purchaser reserves the absolute right to reject any and all tenders of any particular Units determined by it not to be in appropriate form or the acceptance of or payment for which may, in the opinion of its counsel, be unlawful. The Purchaser also reserves the absolute right to waive any of the conditions of the Offer (subject to the terms and conditions of the Purchase Agreement) or any defect or irregularities in the tender of any particular Units, whether or not similar defects or irregularities are waived in the case of any other Units. The Purchaser's interpretations of the terms and conditions of the Offer (including the Letter of Transmittal and Instructions thereto) will be final and binding. No tender of Units will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of Genzyme, the Purchaser, any of their respective affiliates or assigns, the Dealer Manager, the Information Agent, the Depositary nor any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Purchaser's acceptance for payment of Units tendered pursuant to the Offer will constitute a binding agreement between the tendering Holder and the Purchaser upon the terms and subject to the conditions of the Offer. 4. WITHDRAWAL RIGHTS Except as otherwise provided in this Section 4, tenders of Units made pursuant to the Offer are irrevocable. Units tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date and, unless theretofor accepted for payment as provided herein, may also be withdrawn at any time after November 25, 1996. If the Purchaser extends the Offer, is delayed in, or delays, its acceptance for payment or payment for Units or is unable to accept for payment or pay for Units for any reason, then, without prejudice to the Purchaser's other rights under the Offer, tendered Units may nevertheless be retained by the Depositary, on behalf of the Purchaser, and may not be withdrawn except to the extent tendering Holders are entitled to and duly exercise withdrawal rights as described in this Section 4. Any such delay will be accompanied by an extension of the Offer to the extent required by law. 47 48 In order for a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Units to be withdrawn, the number of Units to be withdrawn and the name of the registered holder of such Units, if different from that of the person who tendered such Units. If Unit Certificates to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Unit Certificates, the tendering Holder must also submit the serial numbers shown on such Unit Certificates to the Depository and the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Units have been tendered for the account of an Eligible Institution. Withdrawals may not be revoked and any Units properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Units may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in "THE TENDER OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Units." All questions as to the form and validity (including the time of receipt) of any notice of withdrawal will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding. None of Genzyme, the Purchaser, any of their affiliates or assigns, the Dealer Manager, the Information Agent, the Depositary or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failing to give any such notification. 5. PRICE RANGE OF UNITS; DIVIDENDS The Units are traded in the over-the-counter market and are included on the NNM under the symbol "NIIUF". The following table sets forth the high and low sales prices per Unit on the NNM, as reported in publicly available sources for each of the periods indicated.
HIGH LOW ---- ---- Year Ended December 31, 1994: First Quarter............................................................. 37 1/2 31 1/2 Second Quarter............................................................ 37 1/4 33 1/2 Third Quarter............................................................. 34 1/2 32 Fourth Quarter............................................................ 34 1/2 25 1/2 Year Ended December 31, 1995: First Quarter............................................................. 38 3/4 28 1/2 Second Quarter............................................................ 39 3/4 37 7/8 Third Quarter............................................................. 43 1/2 38 3/4 Fourth Quarter............................................................ 47 3/4 41 1/2 Year Ending December 31, 1996: First Quarter............................................................. 53 38 1/8 Second Quarter............................................................ 52 3/4 41 Third Quarter (through September 26, 1996)................................ 45 1/2 43
As of September 25, 1996, there were 77 holders of record of the Units and in excess of 750 beneficial owners of Units. On September 5, 1996, the last full trading day prior to Genzyme's issuance of a press release announcing that it had reached an agreement in principle for the acquisition of the Company at a price $45.00 per Unit net to the seller in cash, the closing sale price per Unit as reported on the NNM was $44 1/16. On September 19, 1996, the last full trading day prior to the public announcement of the execution of the Purchase Agreement and of the Purchaser's intention to commence the Offer, the closing sale price per Unit as reported on the 48 49 NNM was $44 1/2. On September 26, 1996, the last full trading day prior to the commencement of the Offer, the closing sale price per Unit as reported on the NNM was $44 1/2. HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE UNITS. The Company has never declared or paid any cash dividends in respect of the Callable Common Stock, and is prohibited by the terms of its Memorandum of Association from doing so without the consent of Genzyme. 6. CERTAIN INFORMATION CONCERNING THE COMPANY Except as otherwise set forth herein, the information concerning the Company set forth in this Section 6 and elsewhere in this Offer to Purchase has been furnished by the Company or has been taken from, or is based upon, publicly available documents on file with the Commission and other public sources. Holders are urged to review the publicly available information concerning the Company before acting on the Offer. Although neither Genzyme nor the Purchaser has any knowledge of any facts that would indicate that any statements contained herein which are based on such documents are untrue, neither Genzyme nor the Purchaser takes any responsibility for the accuracy or completeness of the information concerning the Company furnished by the Company or contained in such documents or herein or for any failure by the Company to disclose events which may have occurred and which may have affected or may affect the significance or accuracy of any such information but that are unknown to Genzyme or the Purchaser. General. The Company, a BVI international business company, is engaged, through Genzyme, in the research, development and clinical testing of products for the treatment of CF. See "SPECIAL FACTORS -- Section 1. Establishment of the Company;" "-- Section 2. Agreements and Relationships Between the Company and Genzyme" and "-- Section 5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Offering -- Status of the Programs." The principal executive offices of the Company are located at the Todman Building, Main Street, Road Town, Tortola, British Virgin Islands. Directors and Executive Officers. The name, business address, principal occupation, five-year employment history and citizenship of each of the directors and executive officers of the Company are set forth in Schedule II hereto. Schedule II also sets forth information concerning the ownership of Units by the directors and the executive officers of the Company. The Company is subject to the disclosure requirements of the Exchange Act and in accordance therewith is required to file reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. In addition, the Company has filed a statement on Schedule 14D-9 regarding its recommendation to the Holders with respect to the Offer. Such reports, proxy statements, Schedule 14D-9 and other information are available for inspection at the Commission's public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549 and should also be available for inspection at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained at prescribed rates from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. Certain reports and other information can also be obtained through the Commission's Electronic Data Gathering, Analysis and Retrieval System which is publicly available through the Commission's World Wide Web site (http://www.sec.gov). Financial Information. Set forth below is certain selected financial data with respect to the Company excerpted or derived from the audited financial statements contained in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and the unaudited financial statements contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 (the "Company Reports"). More comprehensive financial information is included in the Company Reports and in other documents filed by the Company with the Commission (which may be inspected or obtained in the manner set forth above), and the following data is qualified in its entirety by reference to the Company Reports and 49 50 other documents and all of the financial information (including any related notes) contained therein or incorporated by reference. NEOZYME II CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) SUMMARY FINANCIAL DATA (HISTORICAL) (Amounts in thousands, except for per share amounts)
CUMULATIVE CUMULATIVE FROM FROM MARCH 2, 1992 MARCH 2, 1992 (DATE OF SIX MONTHS ENDED (DATE OF INCEPTION) TO YEAR ENDED DECEMBER 31, JUNE 30, INCEPTION) TO DECEMBER 31, ----------------------------- ------------------- JUNE 30, 1992 1993 1994 1995 1995 1996 1996 ------------- ------- -------- -------- -------- -------- ------------- Statement of Operations Data: Investment income..................... $ 2,576 $ 5,567 $ 2,522 $ 1,497 $ 820 $ 453 $ 12,615 Operating costs and expenses: Selling, general, administrative, research and development expenses(1)......................... 10,501 12,807 18,012 24,455 11,810 10,758 76,533 ------------- ------- -------- -------- -------- -------- ------------- Net loss................................ $(7,925) $(7,240) $(15,490) $(22,958) $(10,990) $(10,305) $ (63,918) ============= ======= ======== ======== ======== ======== ============= Common Share Data: Per common share...................... $ (4.17) $ (3.00) $ (6.41) $ (9.51) $ (4.55) $ (4.27) $ (27.59) ============= ======= ======== ======== ======== ======== ============= Average shares outstanding............ 1,901 2,415 2,415 2,415 2,415 2,415 2,317 ============= ======= ======== ======== ======== ======== ============= JUNE 30, Combined Balance Sheet Data: 1996 -------- Cash and investment(2)................ $ 13,814 Working capital....................... 14,183 Total assets.......................... 14,341 Note payable to Genzyme Corporation(3)...................... 100 Stockholders' equity.................. 14,083 Book value per Neozyme II callable common share ($10.10 at December 31, 1995)............................... $ 5.83
- --------------- (1) In May 1992, Neozyme II paid a technology license fee of $5,000,000 to Genzyme in consideration for Genzyme entering into the Technology License Agreement and in recognition of Genzyme's expertise and expenditures in developing technology licensed to Neozyme II. (2) Cash and investments includes cash, cash equivalents, and short-term investments. (3) In May 1992, Neozyme II issues a note in the principal amount of $100,000 to Genzyme (the "Series 1992 Note") which is due on the day following the termination of the Purchase Option Agreement with Genzyme and may not be prepaid. (4) The ratio of earnings to fixed charges is not presented for Neozyme II due to the absence of fixed charges. During the course of discussions between representatives of Genzyme and the Special Committee that led to the execution of the Purchase Agreement, certain non-public business and financial information about the Company was reviewed. The Company does not as a matter of course make public any forecasts or projections as to future performance or earnings, and the information set forth below is included in this Offer to Purchase only because such information was received by representatives of the parties. The forecasted and projected financial information set forth below was not prepared with a view to public disclosure or compliance with published guidelines of the Commission or the guidelines established by the American Institute of Certified Public Accountants regarding projections and forecasts. None of Genzyme, the Purchaser or the Company, nor any of their respective financial advisors, assumes any responsibility for the accuracy of this information. While presented with numerical specificity, this information is based upon a variety of assumptions relating to the business of the Company which may not be realized and is subject to significant 50 51 uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of the Company. There can be no assurance that the projected or forecasted results will be realized, and actual results may vary materially and adversely from those shown. The projections were based on certain assumptions regarding patient growth, market penetration, royalty income and other factors. The projections forecast base case net losses of approximately $8 million to $11 million in each of 1996 through 2002, base case revenue for 2003, 2004 and 2005 of approximately $26 million, $165 million and $293 million, respectively, and base case net income for 2003, 2004 and 2005 of approximately $300,000, $42 million and $76 million, respectively. 7. CERTAIN INFORMATION CONCERNING GENZYME AND THE PURCHASER Genzyme. Genzyme, a Massachusetts corporation with its principal executive offices located at One Kendall Square, Cambridge, MA 02139, is a diversified, integrated human health care company which operates in five major business areas. Genzyme's business activities in the areas of pharmaceuticals, genetic diagnostic services and therapeutic diagnostic and surgical products and pharmaceuticals are organized as the Genzyme General Division. Genzyme's activities to develop, manufacture and market technologically advanced products for the treatment or cartilage damage, severe burns and chronic skin ulcers are conducted through the Genzyme Tissue Repair Division. Genzyme's common stock is divided into two classes, General Division Common Stock and Tissue Repair Division Common Stock, each of which is traded in the over-the-counter market and is included on the NNM under the symbol "GENZ" and "GENZL," respectively. Genzyme is subject to the disclosure requirements of the Exchange Act and in accordance therewith is required to file reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Such reports, proxy statements and other information are available for inspection and copying at prescribed rates at the offices of the Commission as set forth in "THE TENDER OFFER -- Section 6. Certain Information Concerning the Company." In addition to the Offer described herein, Genzyme has engaged in the following transactions or negotiations with its affiliates in the last fiscal year: (i) IG Laboratories, Inc. In October 1994, Genzyme management began consulting with its investment bankers regarding the potential acquisition of all of the shares of the common stock of IG Laboratories, Inc., a majority owned subsidiary of Genzyme ("IG"), not then owned by Genzyme. At the same time, the IG Board established a committee (the "IG Independent Committee") consisting of the directors of IG who were not affiliated with Genzyme. The IG Independent Committee was charged with investigating and considering the options available to IG for the further development of its business or for a business combination with a third party, including Genzyme. Between October 1994 and February 1995, the IG Independent Committee consulted independent financial and legal advisors. Such advisors began meeting with representatives of Genzyme in January 1995. On February 15, 1995, Genzyme sent a proposal to the IG Independent Committee to acquire all outstanding shares of IG's common stock not owned by Genzyme through a merger of IG and Genzyme in which IG stockholders other than Genzyme would receive shares of Genzyme General Division Common Stock in exchange for their shares of IG Common Stock. On May 18, 1995, Genzyme and the IG Independent Committee executed a letter of intent pursuant to which the IG Independent Committee recommended to the full IG Board of Directors the acquisition by Genzyme of all the outstanding shares of IG's Common Stock. Genzyme and IG entered into an Agreement and Plan of Merger dated as of June 10, 1995 providing, among other things, for the merger of IG with and into Genzyme and for the exchange of all outstanding shares of IG Common Stock (other than shares held by IG as treasury stock or by Genzyme or subsidiaries of IG or Genzyme) for a number of shares of Genzyme General Division Common Stock determined by dividing $7.00 by the average of the closing prices reported by the Nasdaq National Market for Genzyme General Division Common Stock during the ten trading days ending on the second trading day prior to the closing date. The merger was approved by a majority of the IG stockholders on September 29, 1995 and was consummated on October 2 1995, and each outstanding share of IG Common Stock (other than as indicated above) was converted into .1201 share of Genzyme General Division Common Stock in accordance with the Merger Agreement. 51 52 (ii) Surgical Aids Partnership. On January 30, 1996, Genzyme made a proposal to a special committee (the "Special Committee") of the Board of Directors of the general partner of the Genzyme Development Partners, L.P. (the "Partnership") offering to purchase substantially all of the assets of the Partnership for approximately $93 million payable in shares of Genzyme General Division Common Stock. The parties were unable to agree upon the purchase price, and negotiations have been terminated. The Purchaser. The Purchaser, a BVI international business company and a wholly-owned subsidiary of Genzyme, was incorporated in September 1996 solely for purposes of the transactions contemplated by the Purchase Agreement. It is not anticipated that, prior to the consummation of the Offer, the Purchaser will have any significant assets or liabilities (other than those arising under the Purchase Agreement or otherwise in connection with the Offer or the Second Step Transaction) or engage in any activities other than those incident to its formation and capitalization and the Offer and Second Step Transaction. No meaningful financial information concerning the Purchaser is available. The principal executive offices of the Purchaser are located at Craigmuir Chambers, Road Town, Tortola, British Virgin Islands. Directors and Executive Officers. The name, business address, principal occupation, five-year employment history and citizenship of each of the directors and executive officers of Genzyme and the Purchaser are set forth in Schedule I hereto. Certain Transactions. Except for the Purchase Agreement and as otherwise set forth in this Offer to Purchase, neither Genzyme nor the Purchaser beneficially owns or has a right to acquire, directly or indirectly, any Units and neither Genzyme nor Purchaser nor, to the best knowledge of Genzyme and the Purchaser, any of the persons listed in Schedule I to this Offer to Purchase, nor any associate or majority-owned subsidiary of any of the foregoing, nor any of the respective executive officers, directors or subsidiaries of any of the foregoing, has effected any transaction in the Units during the past 60 days. Set forth in Schedule I hereto is information concerning the ownership of Units by the directors and executive officers of Genzyme. Except as provided in the Purchase Agreement and as otherwise set forth in this Offer to Purchase, neither Genzyme nor the Purchaser nor, to the best knowledge of Genzyme and the Purchaser, any of the persons listed on Schedule I hereto, has any contract, arrangement, understanding or relationship with any other person with respect to any Units or other securities of the Company, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or voting of any such Units or other securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase (particularly the sections entitled "SPECIAL FACTORS -- Section 2. Agreements and Relationships Between the Company and Genzyme" and "-- Section 3. Background of the Transaction"), since January 1, 1993, there have been no contacts, negotiations or transactions between any of Genzyme, the Purchaser, any subsidiary of Genzyme or the Purchaser or, to the best knowledge of Genzyme and the Purchaser, any of the persons listed on Schedule I hereto, on the one hand, and the Company or any of its officers, directors or affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets. Except as set forth in this Offer to Purchaser neither Genzyme nor the Purchaser nor, to the best knowledge of Genzyme and the Purchaser, any of the persons listed on Schedule I hereto has, since January 1, 1993, had any business relationships or transactions with the Company or any of its executive officers, directors or affiliates that would require disclosure herein under the rules and regulations of the Commission applicable to the Offer. Except as described in this Offer to Purchase, Genzyme has no plans or proposals that relate to or would result in: (i) the acquisition by any person of additional securities of Genzyme, or the disposition of securities of Genzyme; (ii) an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving Genzyme or any of its subsidiaries; (iii) a sale or transfer of a material amount of assets of Genzyme or any of its subsidiaries; (iv) any change in the present board of directors or management of Genzyme including, but not limited to, any plans or proposals to change the number or the terms of directors, to fill any 52 53 existing vacancy on the board or to change any material term of the employment contract of any executive officer; (v) any material change in the present dividend rate or policy, or indebtedness or capitalization of Genzyme; (vi) any other material change in Genzyme's corporate structure or business; (vii) changes in Genzyme's charter, by-laws or instruments corresponding thereto or other actions which may impede the acquisition of control of Genzyme by any person; (viii) causing a class of equity security of Genzyme to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association; (ix) a class of equity security of Genzyme becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act; or (x) the suspension of Genzyme's obligation to file reports pursuant to Section 15(d) of the Exchange Act. Notwithstanding the foregoing, Genzyme from time to time considers various transactions, including mergers and recapitalizations, which may affect its corporate structure or certain areas of its business. There can be no assurance that Genzyme will not effect any such transaction at any point in the future. Financial Information. Set forth below is certain selected financial data with respect to Genzyme excerpted or derived from the audited consolidated financial statements contained in Genzyme's Annual Report on Form 10-K for its fiscal year ended December 31, 1995 and the unaudited financial statements contained in Genzyme's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 (the "Genzyme Reports"). More comprehensive financial information is included in Schedule III hereof, in the Genzyme Reports and in other documents filed by Genzyme with the Commission (which may be inspected and copies thereof obtained at the offices of the Commission as set forth in "THE TENDER OFFER -- Section 6. Certain Information Concerning the Company"). 53 54 GENZYME CORPORATION AND SUBSIDIARIES SUMMARY FINANCIAL DATA (HISTORICAL) (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND RATIO AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- Consolidated Statement of Operations Data(1): Net revenues(2).............................. $121,916 $219,079 $270,371 $311,051 $383,783 $181,794 $229,132 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses................... 112,483 176,110 220,345 260,953 329,094 155,940 200,309 Amortization expense.......................... 1,200... 3,037 5,964 4,741 4,677 2,430 2,536 Other expenses(3)............................. -- 68,005 75,517 11,215 14,216 -- 1,465 -------- -------- -------- -------- -------- -------- -------- 113,683 247,152 301,826 276,909 347,987 158,370 204,310 -------- -------- -------- -------- -------- -------- -------- Operating income (loss)....................... 8,233 (28,073) (31,455) 34,142 35,796 23,424 24,822 Other income and (expenses): Investment income............................ 12,371 21,981 12,209 9,101 8,814 3,062 9,103 Interest expense............................. (2,088) (7,099) (2,500) (1,354) (1,109) (220) (395) Other........................................ 6,427... 1,678 9,192 (11,105) (202) (876) (347) -------- -------- -------- -------- -------- -------- -------- 16,710.. 16,560 18,901 (3,358) 7,503 1,966 8,361 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary credit......................... 24,943 (11,513) (12,554) 30,784 43,299 25,390 33,183 Benefit (Provision) for income taxes.......... (12,484) (18,804) 6,459 (14,481) (21,649) (9,394) (13,107) -------- -------- -------- -------- -------- -------- -------- Extraordinary credit resulting from utilization of operating loss carryforwards................................ 8,387 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............................. $ 20,846 $(30,317) $ (6,095) $ 16,303 $ 21,650 $ 15,996 $ 20,076 ======== ======== ======== ======== ======== ======== ======== Common Share Data: Attributable to the General Division: Net income (loss).......................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $ 24,965 $ 39,318 ======== ======== ======== ======== ======== ======== ======== Per common and common equivalent share: Income (loss) before extraordinary credit................................. $ 0.27 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54 Extraordinary credit..................... 0.18 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)........................ $ 0.45 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54 ======== ======== ======== ======== ======== ======== ======== Average shares outstanding(4).............. 47,108 44,740 52,500 52,338 60,184 56,210 72,880 ======== ======== ======== ======== ======== ======== ======== Attributable to the Tissue Repair Division: Net loss................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $ (8,969) $(19,242) ======== ======== ======== ======== ======== ======== ======== Per common share........................... $ (0.10) $ (0.17) $ (7.43) $ (4.40) $ (2.28) $ (1.03) $ (1.55) ======== ======== ======== ======== ======== ======== ======== Average shares outstanding................. 2,739 3,019 3,245 3,578 9,659 8,721 12,411 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges, consolidated(5).............................. 5.7x (0.0)x (0.6)x 2.5x 3.4x 3.9x 6.6x Ratio of EBITDA to interest costs, consolidated(6).............................. 16.1x 0.9x 2.6x 4.8x 6.6x 7.4x 17.2x EBITDA(5)..................................... $ 34,501 $ 6,632 $ 6,767 $ 50,364 $ 67,046 $ 37,205 $ 45,574
54 55
JUNE 30, 1996 ------------- Consolidated Balance Sheet Data: Cash and investments(7)........................................................................................ $ 334,535 Working capital(8)............................................................................................. 373,491 Total assets(9)................................................................................................ 1,006,329 Long-term debt and capital lease obligations excluding current portion(10)..................................... 32,921 General Division equity(10).................................................................................... 842,936 Book value per General Division common share ($21.14 at December 31, 1995)..................................... $ 12.16 Tissue Repair Division equity.................................................................................. 38,109 Book value per Tissue Repair Division common share ($3.79 at December 31, 1995)................................ $ 3.00
- --------------- (1) In October 1992, Genzyme acquired all the outstanding common shares of Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling of interests. Accordingly, Genzyme's financial data has been restated to include Vivigen for all periods presented. (2) In July 1993, GTR received a technology license fee of $2,000,000 from Neozyme I related to expansion of the field of the Vianain(R) debriding product. (3) 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. (4) Reflects July 25, 1996 2-for-1 stock split of shares of General Division Stock. (5) 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 excluding capitalized interest, 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 $12.2 million and $17.3 million, respectively. (6) 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. (7) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (8) Genzyme has an available line of credit with a commercial bank of $215 million which may be used by either the General or Tissue Repair Division. As of June 1996, Genzyme's Tissue Repair Division ("GTR") borrowed $15 million under this credit line at an interest rate of approximately 6.06% as temporary financing for its manufacturing capacity expansion project. In July 1996, the General Division used $200 million to finance the acquisition of DSP. (9) In April 1996, the Company acquired Genetrix, Inc., in a tax free exchange of General Division Stock which was accounted for as a purchase. In the aggregate, approximately 1,380,000 shares of General Division Stock valued at $36.5 million were issued. In July, the Company acquired DSP for cash of approximately $250.8 million financed by cash of $50.8 million and line of credit borrowings of $200 million. (10) 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. 55 56 GENZYME GENERAL DIVISION SUMMARY FINANCIAL DATA (HISTORICAL) (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- -------------------- 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 $179,517 $225,771 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses................... 109,930 172,936 216,839 256,064 300,498 144,113 176,747 Amortization expense.......................... 1,200 3,037 5,964 4,741 4,677 2,430 2,536 Other expenses(2)............................. -- 68,005 50,517 -- 14,216 -- 1,465 -------- -------- -------- -------- -------- -------- -------- 111,130 243,978 273,320 260,805 319,391 146,543 180,748 -------- -------- -------- -------- -------- -------- -------- Operating income (loss)....................... 8,494 (27,565) (7,633) 49,922 59,172 32,974 45,023 Other income and (expenses): Investment income............................ 12,371 21,981 12,209 9,072 7,428 2,481 8,144 Interest expense............................. (2,088) (7,099) (2,500) (1,354) (1,069) (220) (395) Other........................................ 6,427 1,678 9,192 (11,105) (202) (876) (347) -------- -------- -------- -------- -------- -------- -------- 16,710 16,560 18,901 (3,387) 6,157 1,385 7,402 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary credit......................... 25,204 (11,005) 11,268 46,535 65,329 34,359 52,425 Benefit (Provision) for income taxes.......... (12,589) (19,007) (2,812) (16,341) (30,506) (13,056) (20,909) -------- -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary credit..... 12,615 (30,012) 8,456 30,194 34,823 21,303 31,516 Extraordinary credit resulting from utilization of operating loss carryforwards................................ 8,323 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............................. 20,938 (30,012) 8,456 30,194 34,823 21,303 31,516 Tax benefit allocated from GTR................ 169 203 9,564 1,860 8,857 3,662 7,802 -------- -------- -------- -------- -------- -------- -------- Net income (loss) attributable to General Division Stock............................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $ 24,965 $ 39,318 ======== ======== ======== ======== ======== ======== ======== Common Share Data: Attributable to the General Division: Net income (loss).......................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $ 24,965 $ 39,318 ======== ======== ======== ======== ======== ======== ======== Per common and common equivalent share: Income (loss) before extraordinary credit................................. $ 0.27 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54 Extraordinary credit..................... 0.18 -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)........................ $ 0.45 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54 ======== ======== ======== ======== ======== ======== ======== Average shares outstanding(3).............. 47,108 44,740 52,500 52,338 60,184 56,210 72,880 ======== ======== ======== ======== ======== ======== ========
JUNE 30, 1996 ------------- Combined Balance Sheet Data: Cash and investments(4).............................................................................. $ 298,555 Working capital...................................................................................... 355,426 Total assets(5)...................................................................................... 948,841 Long-term debt and capital lease obligations excluding current portion(5)............................ 32,170 Stockholders' equity(6).............................................................................. 842,936
- --------------- (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 56 57 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) Reflects July 25, 1996 2-for-1 stock split of shares of General Division Stock. (4) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (5) In April 1996, the Company acquired Genetrix, Inc., in a tax free exchange of General Division Stock which was accounted for as a purchase. In the aggregate, approximately 1,380,000 shares of General Division Stock valued at $36.5 million were issued. In July, the General Division acquired DSP for cash of approximately $250.8 million financed by cash of $50.8 million and line of credit borrowings of $200 million. (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. 57 58 GENZYME TISSUE REPAIR DIVISION SUMMARY FINANCIAL DATA (HISTORICAL) (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- Combined Statement of Operations Data: Net revenues(1).............................. $ 2,291 $ 2,666 $ 4,684 $ 324 $ 5,220 $ 2,277 $ 3,361 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses................... 2,552 3,174 3,506 4,889 28,596 11,827 23,562 Other expenses(2)............................ -- -- 25,000 11,215 -- -- -- ------ ------- --------- --------- --------- -------- --------- 2,552 3,174 28,506 16,104 28,596 11,827 23,562 ------ ------- --------- --------- --------- -------- --------- Operating income (loss)....................... (261) (508) (23,822) (15,780) (23,376) (9,550) (20,201) Other income and (expenses): Investment income............................ -- -- -- 29 1,386 605 964 Interest expense............................. -- -- -- -- (40) (24) (5) ------ ------- --------- --------- --------- -------- --------- -- -- -- 29 1,346 581 959 ------ ------- --------- --------- --------- -------- --------- Income (loss) before income taxes and extraordinary credit......................... (261) (508) (23,822) (15,751) (22,030) (8,969) (19,242) Benefit (Provision) for income taxes.......... 50 -- (38) -- -- -- -- ------ ------- --------- --------- --------- -------- --------- Net loss...................................... (211) (508) (23,860) (15,751) (22,030) (8,969) (19,242) Tax benefit allocated to the General Division..................................... (50) -- (255) -- -- -- -- ------ ------- --------- --------- --------- -------- --------- Net loss..................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $ (8,969) $(19,242) ====== ======= ========= ========= ========= ======== ========= Common Share Data: Attributable to the Tissue Repair Division: Net loss................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $ (8,969) $(19,242) ====== ======= ========= ========= ========= ======== ========= Per common share........................... $ (0.10) $ (0.17) $ (7.43) $ (4.40) $ (2.28) $ (1.03) $ (1.55) ====== ======= ========= ========= ========= ======== ========= Average shares outstanding................. 2,739 3,019 3,245 3,578 9,659 8,721 12,411 ====== ======= ========= ========= ========= ======== =========
JUNE 30, 1996 ------------- Combined Balance Sheet Data: Cash and investments(3)......................................................................................... $35,980 Working capital(4).............................................................................................. 18,065 Total assets.................................................................................................... 59,796 Long-term debt and capital lease obligations excluding current portion.......................................... 751 Stockholders' equity............................................................................................ 38,109
- --------------- (1) In July 1993, GTR received a technology license fee of $2,000,000 from Neozyme I related to expansion of the field of the Vianain(R) debriding product. (2) Includes charges related to the purchase of in-process research and development totaling $25 million and $11.2 million, respectively, for the year ended December 31, 1993 and 1994. (3) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (4) Genzyme has an available line of credit with a commercial bank of $215 million which may be used by either the General or Tissue Repair Division. In June 1996, Genzyme's Tissue Repair Division ("GTR") borrowed $15 million under this credit line at an interest rate of approximately 6.06% as temporary financing for its manufacturing capacity expansion project. Set forth below is certain pro forma selected financial data with respect to Genzyme to give effect to the consummation of the Offer and the Second Step Transaction (assuming that all outstanding Units are tendered in the Offer). 58 59 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS) The pro forma statement of operations data and ratios have been prepared as if the acquisition of Genetrix, Inc. (the "Genetrix Acquisition"), the acquisition of DSP (the "DSP Acquisition") and the probable merger with Neozyme II (the "Neozyme II Acquisition") occurred as of January 1, 1995. The pro forma balance sheet data has been prepared as if the Genetrix Acquisition, DSP Acquisition and Neozyme II Acquisition occurred on June 30, 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.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ -------- Pro Forma Consolidated Statement of Operations Data(1): Net revenues............................................................................. $476,850 $279,878 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses................................................................... 434,406 251,832 Amortization expense..................................................................... 13,551 8,931 Other expenses(2)........................................................................ 17,801 2,011 -------- -------- 465,758 262,774 -------- -------- Operating income........................................................................... 11,092 17,104 Other income and (expenses): Investment income........................................................................ 4,895 6,836 Interest expense......................................................................... (13,511) (6,611) Other.................................................................................... (1,556) (1,284) -------- -------- (10,172) (1,059) -------- -------- Income before income taxes................................................................. 920 16,045 Provision for income taxes................................................................. (9,124) (9,486) -------- -------- Net income................................................................................. $ (8,204) $ 6,559 ======== ======== Attributable to General Division Stock: Net income............................................................................... $ 13,826 $ 25,801 Per common and common equivalent share................................................... $ 0.22 $ 0.35 Average shares outstanding............................................................... 61,565 73,800 Attributable to TR Stock: Net loss................................................................................. $(22,030) $(19,242) Per common share......................................................................... $ (2.28) $ (1.55) Average shares outstanding............................................................... 9,659 12,411 Ratio of earnings to fixed charges(3), consolidated........................................ 0.7x 2.2x
59 60
JUNE 30, 1996 ------------ Pro Forma Consolidated Balance Sheet Data(1): Cash and investments(4).................................................................. $ 190,627 Working capital.......................................................................... 46,565 Total assets............................................................................. 1,115,104 Long-term debt, capital lease obligations excluding current portion, and other noncurrent liabilities............................................................................ 33,147 Pro Forma General Division equity(5)..................................................... 722,883 Pro Forma Book value per General Division common share................................... $ 10.22 Pro Forma Tissue Repair Division equity.................................................. 38,109 Pro Forma book value per Tissue Repair Division common share............................. $ 3.00
- --------------- (1) On May 1, 1996, the Company acquired Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Common Stock. In the aggregate, approximately 1,380,000 shares of General Division Common Stock, valued at approximately $36.5 million, were issued for all the outstanding shares of Genetrix preferred stock and Genetrix common stock, (together with the Genetrix Preferred Stock "Genetrix Stock"). The acquisition was accounted for as a purchase. The total purchase price of approximately $39.7 million included acquisition costs of $3.8 million. Approximately $35 million of the excess purchase price was allocated to goodwill and is being amortized over 15 years. On July 1, 1996, Genzyme completed the acquisition of Deknatel, Snowden, Pencer, Inc., a privately held specialty surgical products company. The Company paid approximately $250 million which was partially funded by $200 million borrowed under a revolving credit facility. The total purchase price of $250.8 million included acquisition costs of $5.8 million. Approximately $36 million was allocated to tangible net assets, $70 million was allocated to patents and tradenames (useful life of 12 and 40 years, respectively), $24.2 million to in-process technology and $127.8 million to goodwill (useful life of 40 years). The amount allocated to in-process technology was charged to expense and is reflected as a charge to accumulated deficit in the pro forma balance sheet but is not reflected in the pro forma statement of operations as it is a material nonrecurring charge. On September 23, 1996, Genzyme announced that it had signed a definitive Purchase Agreement with Neozyme II under which Genzyme will commence a tender offer for all outstanding units of Neozyme II at $45 per Unit in cash. The unaudited pro forma consolidated financial data presented herein assumes that all outstanding Units are tendered in the Offer. The total purchase price of $109.7 million includes acquisition costs of $1.0 million and has been allocated to the net assets of Neozyme II of $14.1 million and to in-process technology of $95.6 million. The amount allocated to in-process technology is reflected as a charge to accumulated deficit in the pro forma balance sheet and is not reflected in the pro forma statement of operations as it is a material nonrecurring charge which will be charged to expense upon completion of the acquisition. (2) Includes charges related to the purchase of in-process research and development of $14.2 million for the year ended December 31, 1995. (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. (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. 60 61 GENZYME GENERAL DIVISION UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS) The pro forma statement of operations data has been prepared as if the Genetrix Acquisition, the DSP Acquisition and the Neozyme II Acquisition occurred as of January 1, 1995. The pro forma balance sheet data has been prepared as if the Genetrix Acquisition, DSP Acquisition and the Neozyme II Acquisition occurred on June 30, 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.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ---------- Pro Forma Combined Statement of Operations Data(1): Net revenues.......................................................... $471,630 $276,517 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses................ 405,810 228,270 Amortization expense................................................ 13,551 8,931 Other expenses(2)................................................... 17,801 2,011 ------------ ---------- 437,162 239,212 ------------ ---------- Operating income...................................................... 34,468 37,305 Other income and (expenses): Investment income................................................... 3,509 5,877 Interest expense.................................................... (13,471) (6,611) Other............................................................... (1,556) (1,284) ------------ ---------- (11,518) (2,018) ------------ ---------- Income before income taxes............................................ 22,950 35,287 Provision for income taxes............................................ (17,981) (17,288) ------------ ---------- Net income............................................................ 4,969 17,999 Tax benefit allocated from GTR........................................ 8,857 7,802 ------------ ---------- Net income attributable to General Division Stock..................... $ 13,826 $ 25,801 ============ ========== Per common and common equivalent share: Net income.......................................................... $ 0.22 $ 0.35 Average shares outstanding.......................................... 61,565 73,800
JUNE 30, 1996 ---------- Pro Forma Combined Balance Sheet Data(1): Cash and investments(3).............................................. $ 154,647 Working capital...................................................... 28,500 Total assets......................................................... 1,057,616 Long-term debt, capital lease obligations excluding current portion, and other noncurrent liabilities.................................. 32,396 Division equity(4)................................................... 722,883
- --------------- (1) On May 1, 1996, the Company acquired Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Common Stock. In the aggregate, approximately 1,380,000 shares of General Division Common Stock, valued at approximately $36.5 million, were issued for all the outstanding shares of Genetrix preferred stock and Genetrix common 61 62 stock, together with the Genetrix Preferred Stock "Genetrix Stock". The acquisition was account for as a purchase. The total purchase price of approximately $39.7 million included acquisition costs of $3.8 million. Approximately $35 million of the excess purchase price was allocated to goodwill and is being amortized over 15 years. On July 1, 1996, Genzyme completed the acquisition of Deknatel, Snowden, Pencer, Inc., a privately held specialty surgical products company. The Company paid approximately $250 million which was partially funded by $200 million borrowed under a revolving credit facility. The total purchase price of $250.8 million included acquisition costs of $5.8 million. Approximately $36 million was allocated to tangible net assets, $70 million was allocated to patents and tradenames (useful life of 12 and 40 years, respectively), $24.2 million to in-process technology and $127.8 million to goodwill (useful life of 40 years). The amount allocated to in-process technology was charged to expense and is reflected as a charge to accumulated deficit in the pro forma balance sheet but is not reflected in the pro forma statement of operations as it is a material nonrecurring charge. On September 23, 1996, Genzyme announced that it had signed a definitive Purchase Agreement with Neozyme II under which Genzyme will commence a tender offer for all outstanding units of Neozyme II at $45 per Unit in cash. The unaudited summary pro forma financial combined financial data presented herein assumes that all outstanding Units are tendered in the Offer. The total purchase price of $109.7 million includes acquisition costs of $1.0 million and has been allocated to the net assets of Neozyme II of $14.1 million and to in-process technology of $95.6 million. The amount allocated to in-process technology is reflected as a charge to accumulated deficit in the pro forma balance sheet and is not reflected in the pro forma statement of operations as it is a material nonrecurring charge which will be charged to expense upon completion of the acquisition. (2) Includes charges related to the purchase of in-process research and development $14.2 million for the year ended December 31, 1995. (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. SOURCE AND AMOUNT OF FUNDS. The total amount of funds required by the Purchaser to purchase 2,415,000 Units pursuant to the Offer, and to pay related fees and expenses is estimated to be approximately $109 million. The Purchaser expects to obtain such funds from Genzyme. Genzyme intends to obtain such funds from its available corporate funds. Obtaining financing is not a condition to the Offer or the Second Step Transaction. 9. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provisions of the Offer, and in addition to the condition that Units that would constitute not less than a majority of the Units outstanding are validly tendered prior to expiration of the Offer and not withdrawn, the Purchaser shall not be required to accept for payment and pay for any Units tendered pursuant to the Offer, may postpone the purchase of, and payment for, Units tendered, and may terminate or amend the Offer if at any time on or after the date of the Purchase Agreement, and at or before the time of acceptance for payment of any such Units (whether or not any Units have theretofore been accepted for payment and paid for pursuant to the Offer) any of the following shall occur or shall be determined by the Purchaser to have occurred and remain in effect: (a) except for matters which affect generally the economy or the industry in which the Company is engaged and except for continued losses incurred by the Company as a result of its operations and continued depletion of its cash resources in the ordinary course of business or consistent with the annual workplan currently in effect, any change shall have occurred in the business, properties, assets, liabilities, capitalization, stockholders' equity, financial condition, operations, licenses or franchises or results of operations of the Company which has a Material Adverse Effect (as defined in the Purchase Agreement); or (b) there shall have been instituted or be pending any action, proceeding, application or counterclaim before any court or governmental or regulatory body which (i) challenges the validity of or seeks to restrain the consummation of or to impose any material limitation, on any transaction contemplated by the Purchase Agreement or seeks (ii) to obtain any material amount of damages in connection with such transactions; or 62 63 (c) any statute, regulation, order or injunction shall have been enacted, entered, enforced or deemed applicable to the Offer or the Second Step Transaction that is reasonably likely to, directly or indirectly, result in any of the consequences referred to in paragraph (b) above; or (d) the Board of Directors of the Company shall have publicly (including by amendment of its Schedule 14D-9) withdrawn or modified in a manner adverse to the Purchaser its approval or recommendation of the Offer or shall have resolved to do so; or (e) the representations and warranties of the Company set forth in the Purchase Agreement shall not be true in any material respect as though made on such date or the Company shall have failed in any material respect to perform any material obligation or covenant required in the Purchase Agreement to be performed or complied with by it; or (f) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or agreement in principle with respect to any Acquisition Proposal (as defined in the Purchase Agreement). 10. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS. Neither Genzyme nor the Purchaser is aware of any license or regulatory permit that appears to be material to the business of the Company that might be adversely affected by the Purchaser's acquisition of Units as contemplated herein. Neither Genzyme nor the Purchaser is aware of any other material filing, approval or other action by any federal or state governmental or administrative authority that would be required for the acquisition of Units by the Purchaser as contemplated herein, including any approval required under the Hart-Scott-Rodino Act. Should any such approval or action be required, it is currently contemplated that such approval or action would be sought. There is, however, no present intention to delay the purchase of Units tendered pursuant to the Offer pending the outcome of any such approval or action. There can be no assurance that any such approval or action, if needed, would be obtained without substantial conditions or that adverse consequences might not result to Genzyme's, the Purchaser's or the Company's business in the event that such approvals were not obtained or such actions were not taken. The Purchaser's obligation under the Offer to accept for payment and pay for Units is subject to certain conditions, including conditions relating to the legal matters discussed in this Section 10. See "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer." 11. DIVIDENDS AND DISTRIBUTIONS. If, on or after September 20, 1996, the Company should declare or pay any dividend or other distribution (including, without limitation, the issuance of additional Shares pursuant to a stock dividend or stock split or the issuance of rights for the purchase of any securities) with respect to the Callable Common Stock that is payable or distributable to Holders of record on a date occurring prior to the transfer to the name of the Purchaser or its nominees or transferees on the Company's stock transfer records of the Units purchased pursuant to the Offer, then, without prejudice to the Purchaser's rights described in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer," (i) the purchase price per Unit payable by the Purchaser pursuant to the Offer will be reduced in the amount of any such cash dividend or distribution and (ii) the whole of any non-cash dividend or distribution (including, without limitation, additional shares or rights as aforesaid) will be required to be remitted promptly and transferred by each tendering Holder to the Depositary for the account of the Purchaser accompanied by appropriate documentation of transfer and pending such remittance or appropriate assurance thereof, the Purchaser will be entitled to all rights and privileges as owner of any such non-cash dividend, distribution or right, and may withhold the entire purchase price or deduct from the purchase price the amount of value of such non-cash dividend, distribution or right, as determined by the Purchaser in its sole discretion. If, on or after September 20, 1996, the Company should split the shares of Callable Common Stock or combine or otherwise change the shares of Callable Common Stock or its capitalization, then, without prejudice to the Purchaser's rights described in "THE TENDER OFFER -- Section 9. Certain Conditions of the Offer," appropriate adjustments to reflect such split, combination or change may be made by the Purchaser in the purchase price and other terms of the Offer, including, without limitation, the number or type of securities offered to be purchased. 63 64 12. FEES AND EXPENSES. Genzyme engaged Robertson, Stephens & Company to act as its financial advisor and as Dealer Manager. See "SPECIAL FACTORS -- Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for the Company after the Transaction" for a description of Robertson, Stephens & Company's compensation. Genzyme has retained Corporate Investor Communications, Inc. to act as the Information Agent and American Stock Transfer & Trust Company as the Depositary in connection with the Offer. The Information Agent may contact holders of Units by mail, telephone, telex, telecopy, telegraph and personal interview and may request brokers, dealers, commercial banks, trust companies and other nominees to forward the Offer materials to beneficial owners. Each of the Information Agent and the Depositary will receive reasonable and customary compensation for its services, will be reimbursed for certain reasonable out-of-pocket expenses and will be indemnified against certain liabilities and expenses in connection with the Offer, including, without limitation, certain liabilities under U.S. federal securities laws. Neither Genzyme nor the Purchaser will pay any fees or commissions to any broker or dealer or any other person for soliciting tenders of Units pursuant to the Offer (other than to the Dealer Manager and the Information Agent). Brokers, dealers, commercial banks and trust companies will, upon request, be reimbursed by the Purchaser for customary mailing and handling expenses incurred by them in forwarding Offer materials to their customers. 13. MISCELLANEOUS. The Offer is being made solely by this Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Units. The Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Units pursuant thereto, the Purchaser will make a good faith effort to comply with such state statute.If, after such good faith effort, the Purchaser cannot comply with such state statute, the Offer will not be made to, nor will tenders be accepted from or on behalf of, the Holders in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by the Dealer Manager or one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. The Purchaser has filed with the Commission (i) a Schedule 14D-1 together with exhibits, pursuant to Rule 14d-3 promulgated by the Commission under the Exchange Act, furnishing certain additional information with respect to the Offer, (ii) a Schedule 13E-3 together with exhibits, pursuant to Rule 13e-3 promulgated by the Commission under the Exchange Act, furnishing certain additional information with respect to the Offer, and (iii) a Schedule 13E-4 together with exhibits, pursuant to Rule 13e-4 promulgated by the Commission under the Exchange Act, furnishing certain additional information with respect to the Offer. Such statements and any amendments thereto, including exhibits, may be examined and copies may be obtained at the same places and in the same manner as set forth with respect to information about the Company in "THE TENDER OFFER -- Section 6. Certain Information Concerning the Company" (except that such statement and amendments may not be available in the regional offices of the Commission). NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF GENZYME, THE PURCHASER OR THE COMPANY NOT CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED. NEOZYME II ACQUISITION CORP. September 27, 1996 64 65 SCHEDULE I MEMBERS OF THE BOARDS OF DIRECTORS AND EXECUTIVE OFFICERS OF GENZYME AND THE PURCHASER 1. Directors and Executive Officers of Genzyme. The name, business address and position with Genzyme, present principal occupation or employment and five year employment history of each of the directors and executive officers of Genzyme, together with the names, principal businesses and addresses of any corporations or other organizations in which such principal occupations are conducted are set forth below. Unless otherwise indicated, each occupation set forth refers to Genzyme, each individual is a United States citizen and each individual's business address is One Kendall Square, Cambridge, MA 02139. Unless otherwise indicated, no director or executive officer of Genzyme beneficially owns any Units (or rights to acquire Units).
NAME POSITION WITH GENZYME - --------------------------------------------- --------------------------------------------- Henri A. Termeer............................. Chairman of the Board; President; Chief Executive Officer Geoffrey F. Cox.............................. Executive Vice President David D. Fleming............................. Group Senior Vice President, Diagnostics John V. Heffernan............................ Senior Vice President, Human Resources Elliott D. Hillback, Jr...................... Senior Vice President, Genomics Mark A. Hofer................................ Senior Vice President; Chief Patent Counsel David J. McLachlan........................... Executive Vice President, Finance; Chief Financial Officer Gregory D. Phelps............................ Executive Vice President James R. Rasmussen........................... Senior Vice President, Research Alan E. Smith................................ Senior Vice President, Research; Chief Scientific Officer Peter Wirth.................................. Executive Vice President, Legal Affairs; Chief Legal Counsel Evan M. Lebson............................... Treasurer John M. McPherson............................ Senior Vice President, Protein Development Richard A. Moscicki.......................... Senior Vice President, Clinical, Medical and Regulatory Affairs; Chief Medical Officer G. Jan van Heek.............................. Group Senior Vice President; Therapeutics Constantine E. Anagnostopoulos............... Director Douglas A. Berthiaume........................ Director Henry E. Blair............................... Director Charles L. Cooney............................ Director Robert J. Carpenter.......................... Director Henry R. Lewis............................... Director
Mr. Termeer has served as President and a Director of Genzyme since October 1983, as Chief Executive Officer since December 1985 and as Chairman of the Board since May 1988. For ten years prior to joining Genzyme, Mr. Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human health care products. Mr. Termeer is Chairman of the Boards of Genzyme Transgenics Corporation (an affiliate of Genzyme) and Neozyme II. Mr. Termeer is also a director of Abiomed, Inc., AutoImmune Inc., GelTex Pharmaceuticals, Inc. and Xenova Ltd. and a trustee of Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors. Mr. Termeer is a citizen of The Netherlands and beneficially owns 3,300 Units. 66 Dr. Cox joined Genzyme in June 1984 and served as Senior Vice President, Operations of Genzyme from May 1988 until September 1996, when he became an Executive Vice President. For 14 years prior to joining Genzyme, Dr. Cox worked for the manufacturing division of British Fermentation Products, Ltd., a division of Gist-Brocades N.V. Mr. Cox is a citizen of the United Kingdom. Mr. Fleming joined Genzyme in April 1984. He has served as President of Genzyme Diagnostics Division since January 1989 and a Senior Vice President of Genzyme from August 1989 until September 1996. He was named Group Senior Vice President of Genzyme in September 1996. For 11 years prior to joining Genzyme, he worked for Baxter Travenol Laboratories, Inc. Mr. Heffernan joined Genzyme as Vice President, Human Resources in October 1989 and has served as Senior Vice President, Human Resources since May 1992. Prior to joining Genzyme, he served for more than five years as Vice President, Human Resources Corporate Staff of GTE Corporation, a diversified communications and electronics company. Mr. Hillback became Senior Vice President, Genomics in September 1996. He served as Senior Vice President and as President of Integrated Genetics (formerly IG Laboratories, Inc., a majority-owned subsidiary merged into Genzyme in October 1995) from July 1990 until September 1996. For one year before joining Genzyme, he was President and Chief Executive Officer of Cellcor Therapies, Inc., a biotechnology company. Prior to that, Mr. Hillback was employed for six years in the human health care products business of The BOC Group, Inc., most recently as President of its Glasrock Home Health Care subsidiary. For 11 years prior to joining The BOC Group, Inc., he served in varying capacities at Baxter Travenol Laboratories, Inc. Mr. Hillback is also a director of IVF America, Inc., an in vitro fertilization services company in which Genzyme holds a minority interest. Mr. Hofer joined Genzyme in August 1989 as Vice President and General Counsel, served as Senior Vice President and General Counsel from May 1992 until December 1995 and has been Senior Vice President and Chief Patent Counsel since January 1996. Prior to joining Genzyme, he served as Chief Patent Counsel for Integrated Genetics, Inc., a biotechnology company, from July 1987 until its acquisition by Genzyme in August 1989. From March 1981 until July 1987, he served as Patent Counsel for Johnson & Johnson specializing in biotechnology. Mr. McLachlan joined Genzyme in December 1989 and served as Senior Vice President, Finance until September 1996, when he became Executive Vice President, Finance. He has served as Chief Financial Officer since joining Genzyme. Prior to joining Genzyme, he served for more than five years as Vice President of Finance for Adams-Russell Electronics Inc., a defense electronics manufacturer, and Adams-Russell Co., Inc., a cable television company. Mr. McLachlan is also a director of HearX, Ltd. Mr. McLachlan beneficially owns 1,400 Units. Mr. Phelps joined Genzyme as Senior Vice President in November 1991 and was named Executive Vice President in September 1996. Prior to joining Genzyme, Mr. Phelps served as President and Chief Executive Officer of Viagene, Inc., a biotechnology company, from October 1988 to June 1990, and of ZymoGenetics, Inc., a biotechnology company, from May 1986 to August 1988, and held various positions at Baxter Travenol Laboratories, Inc., a manufacturer of human health care products, from 1975 to 1986. Mr. Phelps is also a director of Neozyme II and Oxtex International Inc. Mr. Phelps beneficially owns 2,500 Units. Dr. Rasmussen joined Genzyme in June 1984 and has served as Senior Vice President, Research since August 1989. Prior to joining Genzyme, he was an Assistant Professor of Chemistry at Cornell University. Dr. Smith joined Genzyme in August 1989 as Senior Vice President, Research. He also became Genzyme's Chief Scientific Officer in September 1996. Prior to joining Genzyme, he served as Vice President-Scientific Director of Integrated Genetics, Inc., from November 1984 until its acquisition by Genzyme in August 1989. From October 1980 to October 1984, Dr. Smith was head of the Biochemistry Division of the National Institute for Medical Research, Mill Hill, London, England. Dr. Smith also serves as a director of Genzyme Transgenics Corporation. Dr. Smith is a citizen of the United Kingdom. 67 Mr. Wirth joined Genzyme in January 1996 as Senior Vice President and General Counsel and became Executive Vice President, Legal Affairs and Chief Legal Officer in September 1996. He will remain a partner of Palmer & Dodge LLP, a Boston, Massachusetts law firm, a position he has held since 1982 until September 30, 1996, at which time he will become of Counsel. Palmer & Dodge LLP is counsel to Genzyme, the Purchaser and the Company. Mr. Lebson joined Genzyme in August 1989 as Executive Assistant to the President and served as Vice President, Financial Operations from April 1990 to August 1991 and as Vice President and Treasurer from August 1991 to September 1996. He currently serves as Treasurer of Genzyme. Prior to joining Genzyme, he served as Treasurer and Chief Financial Officer of Integrated Genetics, Inc. from 1983 until its acquisition by Genzyme in August 1989. Mr. Lebson is also Vice President and Treasurer of Genzyme Transgenics Corporation. Dr. McPherson joined Genzyme in August 1989 and served as Vice President, Therapeutic Protein Development from November 1989 to May 1993 and as Vice President, Biotherapeutic Product Development since then. He was appointed Vice President, Research and Development of Genzyme Tissue Repair Division in December 1994. Prior to joining Genzyme, he was, since April 1988, Director, Protein Chemistry of Integrated Genetics, Inc. Dr. Moscicki joined Genzyme in March 1992 as Medical Director, became Vice President, Medical Affairs in early 1993 and was named Vice President, Clinical, Medical and Regulatory Affairs in December 1993. In September 1996, he became Senior Vice President, Clinical, Medical and Regulatory Affairs and Chief Medical Officer. Since 1979, he has also been a physician staff member at the Massachusetts General Hospital and a faculty member at the Harvard Medical School. Mr. van Heek joined Genzyme in September 1991 as General Manager of its wholly-owned subsidiary, Genzyme, B.V., and became a Genzyme Vice President and the President of Genzyme Therapeutics Division in December 1993. In September 1996 he was named Group Senior Vice President, Therapeutics. Prior to joining Genzyme, he was, since 1988, Vice President/General Manager of the Fenwal Division of Baxter Healthcare Corporation. Mr. van Heek also has served as President and Treasurer of Neozyme II from March 1992 to January 1996. Mr. van Heek is a citizen of The Netherlands and beneficially owns 400 Units. Dr. Anagnostopoulos is Managing General Partner of Gateway Associates, which is the general partner of Gateway Venture Partners III, L.P., a venture capital partnership. From January 1986 to April 1987, Dr. Anagnostopoulos was a consultant to Monsanto Company, a producer of pharmaceuticals, chemicals, plastics and textiles, and to Alafi Capital, a venture capital firm. From 1982 through 1985, he served as Corporate Vice President of Monsanto Company. His principal business address is Gateway Associates, 800 Maryland Avenue, Suite 1190, St. Louis, MO 63105. Mr. Berthiaume is Chairman, President and Chief Executive Officer of Waters Corporation, a high technology manufacturer of products used for analysis and purification, formerly a division of Millipore Corporation. From May 1991 to August 1994, he was President of the Waters Division of Millipore Corporation, and from 1988 to 1991, he was Chief Financial Officer of Millipore Corporation. His principal business address is Waters Corporation, 34 Maple Street, Milford, MA 01757. Mr. Blair is a consultant to several companies, including Genzyme. Prior to January 1990, Mr. Blair was Senior Vice President, Scientific Affairs of Genzyme. Before joining Genzyme in 1981, he was Associate Director of the New England Enzyme Center at Tufts University School of Medicine. Mr. Blair is also a director of Genzyme Transgenics Corporation, Dynagen, Inc. and Celtrix Pharmaceuticals, Inc. His principal business address is P.O. Box 648, 275 Mill Way, Barnstable, MA 02630. Mr. Carpenter is President and Chief Executive Officer of VacTex, Inc., a privately held biotechnology company which he co-founded in November 1995, and Chairman of GelTex Pharmaceuticals, Inc., a publicly held pharmaceutical development company which he co-founded in November 1991 and where he served as President and Chief Executive Officer until May 1993. Mr. Carpenter was Chairman of the Board, President and Chief Executive Officer of Integrated Genetics, Inc., a biotechnology company that merged with Genzyme in 1989. Following the merger and until 1991, Mr. Carpenter was Executive Vice President of 68 Genzyme, and Chief Executive Officer and Chairman of the Board of IG Laboratories, Inc. Mr. Carpenter is also a director of Apex Biosciences, Inc. and Neozyme II. His principal business address is VacTex, Inc., 70 Walnut Street, Wellesley, MA 02181. Mr. Carpenter owns 2,000 Units, including 1,000 owned by Mr. Carpenter's wife, as to which he disclaims beneficial ownership. Dr. Cooney is a Professor of Chemical and Biochemical Engineering and Co-Director of the Program on the Pharmaceutical Industry at Massachusetts Institute of Technology ("MIT"). Dr. Cooney joined the MIT faculty as an Assistant Professor in 1970 and became a Professor in 1982. Dr. Cooney is also a principal of BioInformation Associates, Inc., a consulting company. His principal business address is Massachusetts Institute of Technology, 25 Ames Street, Building 66, Room 472, Cambridge, MA 02139. Mr. Lewis is a consultant to several companies and Chairman of the Board of Delphax Systems, a manufacturer of high speed non-impact printers, and a member of the Board of Dyax Corp., a bioseparation, pharmaceutical discovery and development company. From 1986 to February 1991, Mr. Lewis was the Vice Chairman of the Board of Dennison Manufacturing Company, a manufacturer and distributor of products for the stationery, technical paper, and industrial and retail systems markets. From 1982 to 1986, Mr. Lewis was a Senior Vice President of Dennison Manufacturing Company. His principal business address is Protein Engineering Corporation, 35 Clover Street, Belmont, MA 02178. 2. Directors and Executive Officers of the Purchaser. The name, business address and position with the Purchaser, present principal occupation or employment and five year employment history of each of the directors and executive officers of the Purchaser, together with the names, principal businesses and addresses of any corporations or other organizations in which such principal occupations are conducted are set forth below. Unless otherwise indicated, each individual is a United States citizen, and no director or executive officer of the Purchaser beneficially owns any Units (or rights to acquire Units).
NAME POSITION WITH THE PURCHASER - --------------------------------------------- --------------------------------------------- David J. McLachlan........................... President and Treasurer Peter Wirth.................................. Secretary
See Section 1 of this Schedule I for information concerning Messrs. McLachlan and Wirth. 69 SCHEDULE II MEMBERS OF THE BOARDS OF DIRECTORS AND EXECUTIVE OFFICERS OF NEOZYME II The name, business address and position with Neozyme II, present principal occupation or employment and five year employment history of each of the directors and executive officers of Neozyme II, together with the names, principal businesses and addresses of any corporations or other organizations in which such principal occupations are conducted are set forth below. Unless otherwise indicated, each individual is a United States citizen and each individual's business address is One Kendall Square, Cambridge, MA 02139. Unless otherwise indicated, no director or executive officer of Neozyme II beneficially owns any Units (or rights to acquire Units).
NAME POSITION WITH NEOZYME II - --------------------------------------------------------------------- ------------------------ Paul M. Edwards...................................................... President and Treasurer Kennett F. Burnes.................................................... Director Robert J. Carpenter.................................................. Director Robert E. Flynn...................................................... Director Gregory D. Phelps.................................................... Director Henri A. Termeer..................................................... Director
Mr. Edwards became President and Treasurer of Neozyme II in January 1996. Mr. Edwards also serves as Vice President and General Manager -- UK Operations for Genzyme, a position he has held since April 1993. He joined Genzyme Limited, a Genzyme subsidiary in the UK, in 1986 as a Production Manager and became its Director, Manufacturing Operations in 1990. Prior to joining Genzyme Limited, Mr. Edwards was employed by Beecham Pharmaceuticals from September 1979 in varying capacities. Mr. Edwards is a citizen of the United Kingdom. Mr. Burnes is President and Chief Operating Officer of Cabot Corporation, a specialty chemicals and materials and energy company, a position he has held since February 1995. From August 1988 through February 1995, he was Executive Vice President of Cabot Corporation, and from November 1987 through August 1988, he was Vice President and General Counsel of Cabot Corporation. Prior to joining Cabot Corporation, Mr. Burnes was a partner at the Boston, Massachusetts law firm of Choate, Hall & Stewart. Mr. Burnes is also a director of Cabot Corporation. His principal business address is Cabot Corporation, 75 State Street, Boston, MA 02109. He beneficially owns 500 Units. Mr. Carpenter is President and Chief Executive Officer of VacTex, Inc., a privately held biotechnology company which he co-founded in November 1995, and Chairman of GelTex Pharmaceuticals, Inc., a publicly held pharmaceutical development company which he co-founded in November 1991 and where he served as President and Chief Executive Officer until May 1993. Mr. Carpenter was Chairman of the Board, President and Chief Executive Officer of Integrated Genetics, Inc., a biotechnology company that merged with Genzyme in 1989. Following the merger and until 1991, Mr. Carpenter was Executive Vice President of Genzyme, and Chief Executive Officer and Chairman of the Board of IG Laboratories, Inc. Mr. Carpenter is also a director of Apex Biosciences, Inc. and Genzyme. His principal business address is VacTex, Inc., 70 Walnut Street, Wellesley, MA 02181. Mr. Carpenter owns 2,000 Units, including 1,000 owned by Mr. Carpenter's wife, as to which he disclaims beneficial ownership. Mr. Flynn has been President of Houghton & Richards, Inc., a privately held tool steel sales company, since 1976. He is also a director of the Massachusetts Cystic Fibrosis Foundation and a trustee of the national Cystic Fibrosis Foundation. His principal business address is Houghton & Richards Corporation, P.O. Box 509, Marlborough, MA 01752. He owns 7,850 Units, including 1,600 Units held in an employee benefit plan trust of which Mr. Flynn is the trustee and in which Mr. Flynn has a minority interest, 300 Units held by Mr. Flynn as custodian of accounts for the benefit of his children, 950 Units owned by Mr. Flynn's spouse and 70 1,000 Units owned in irrevocable trusts for the benefit of his children. Mr. Flynn disclaims beneficial ownership of the Units owned by his spouse and the Units owned in the trusts for the benefit of his children. Mr. Phelps joined Genzyme as Senior Vice President in November 1991 and was named Executive Vice President in September 1996. Prior to joining Genzyme, Mr. Phelps served as President and Chief Executive Officer of Viagene, Inc., a biotechnology company, from October 1988 to June 1990, and of ZymoGenetics, Inc., a biotechnology company, from May 1986 to August 1988, and held various positions at Baxter Travenol Laboratories, Inc., a manufacturer of human health care products, from 1975 to 1986. Mr. Phelps is also a director of Oxtex International Inc. Mr. Phelps beneficially owns 2,500 Units. Mr. Termeer has served as President and a Director of Genzyme since October 1983, as Chief Executive Officer since December 1985 and as Chairman of the Board since May 1988. For ten years prior to joining Genzyme, Mr. Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human health care products. Mr. Termeer is Chairman of the Boards of Genzyme Transgenics Corporation. Mr. Termeer is also a director of Abiomed, Inc., AutomImmune Inc., GelTex Pharmaceuticals, Inc. and Xenova Ltd. and a trustee of Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences Investors. Mr. Termeer is a citizen of The Netherlands. Mr. Termeer beneficially owns 3,300 Units. 71 ANNEX I HAMBRECHT & QUIST LLC ONE BUSH STREET SAN FRANCISCO, CA 94104 (415)576-3300 September 20, 1996 CONFIDENTIAL The Special Committee of The Board of Directors The Board of Directors Neozyme II Corporation Todman Building Main Street Road Town, Tortola British Virgin Islands Gentlemen: You have requested our opinion as to the fairness from a financial point of view to the holders of the outstanding shares of callable common stock, par value $1.00 per share ("Common Stock"), of Neozyme II Corporation ("Neozyme" or the "Company") of the consideration to be received by such holders in connection with a proposed transaction (the "Proposed Transaction") pursuant to which an affiliate of Genzyme Corporation ("Genzyme") will offer to purchase the outstanding units of Neozyme (the "Units") at a purchase price of $45.00 per Unit in cash (the "Offer"). As of the date hereof, all of the outstanding Common Stock is owned as part of a Unit, each of which consists of (i) one share of Common Stock and (ii) one callable warrant to purchase two shares of Genzyme General Division Common Stock and 0.135 shares of Genzyme Tissue Repair Division Common Stock. The Offer will be made by means of offering documents (the "Offer Documents") to be filed with the Securities and Exchange Commission. If the Offer is consummated, but not all of the Units are tendered and accepted or, if the Offer is terminated in accordance with Section 1.1(b)(ii) of the Purchase Agreement, Genzyme has, pursuant to a Purchase Agreement (the "Purchase Agreement") dated as of September 20, 1996, agreed to effect a second step transaction (the "Second Step Transaction") in which Genzyme will acquire, directly or indirectly, all of the remaining Common Stock in exchange for cash in an amount equal to $29.00 per share of Common Stock. Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. We have acted as a financial advisor to the Special Committee of the Board of Directors of Neozyme in connection with the Proposed Transaction, and we will receive a fee for our services, which include the rendering of this opinion. SAN FRANCISCO * NEW YORK * BOSTON MEMBERS NEW YORK STOCK EXCHANGE * AMERICAN STOCK EXCHANGE PACIFIC STOCK EXCHANGE 72 The Special Committee of the Board of Directors The Board of Directors Neozyme II Corporation Page 2 We are familiar with Genzyme and have, from time to time, provided financial advisory services to Genzyme, and we have received fees for rendering these services. In July 1996, we acted as managing underwriter for a public offering of Genzyme Transgenics Corporation, an affiliate of Genzyme. In the ordinary course of business, Hambrecht & Quist acts as a market maker and broker in the publicly traded securities of Neozyme and Genzyme and receives customary compensation in connection therewith, and also provides research coverage for Genzyme. In the ordinary course of business, Hambrecht & Quist actively trades in the equity securities of Neozyme and Genzyme for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Hambrecht & Quist may in the future provide additional investment banking or other financial advisory services to Genzyme. In connection with our review of the proposed Transaction, and in arriving at our opinion, we have, among other things: (i) reviewed the publicly available consolidated financial statements of Neozyme for recent years and interim periods to date and certain other relevant financial and operating data of Neozyme made available to us from published sources and from the internal records of Neozyme; (ii) discussed with certain members of the managements of Neozyme and Genzyme the business, financial condition and prospects of Neozyme; (iii) reviewed the publicly available consolidated financial statements of Genzyme for recent years and interim periods to date; (iv) reviewed certain internal financial and operating information, including certain projections, relating to Neozyme prepared by the management of Genzyme; (v) reviewed the recent reported prices and trading activity for the Common Stock and compared such information and certain financial information of Neozyme with similar information for certain other companies engaged in businesses we considered comparable to that of Neozyme; (vi) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions; (vii) reviewed drafts of the Purchase Agreement, the Offer Documents and certain other materials to be filed with the Securities and Exchange Commission in connection with the Offer; and (ix) performed such other analyses and examinations and considered such other information, financial studies, analyses and investigations and financial, economic and market data as we deemed relevant. In rendering our opinion, we have assumed and relied upon the accuracy and completeness of all of the information concerning Neozyme and Genzyme considered in connection with our review of the Proposed Transaction, and we have not assumed any responsibility for independent verification 73 The Special Committee of the Board of Directors The Board of Directors Neozyme II Corporation Page 3 of such information. We have not prepared any independent valuation or appraisal of any of the assets or liabilities of Neozyme, nor have we conducted a physical inspection of the properties and facilities of the Company. With respect to the financial forecasts and projections made available to us and used in our analysis, we have assumed that they reflect the best currently available estimates and judgments of the expected future financial performance of Neozyme. For purposes of this opinion, we have assumed that Neozyme is not a party to any pending transactions, including external financings, recapitalizations or material merger discussions, other than the Proposed Transaction and those activities undertaken in the ordinary course of conducting its business. Our opinion is necessarily based upon market, economic, financial and other conditions as they exist and can be evaluated as of the date of this letter and any change in such conditions would require a reevaluation of this opinion. We were not requested to, and did not, formally solicit indications of interest from any other parties in connection with a possible acquisition of, or business combination with, Neozyme. It is understood that this letter is for the information of the Special Committee and the Board of Directors only and may not be used for any other purpose without our prior written consent; provided, however, that this letter may be reproduced in full in any filing with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, including Schedules 14D-1, 14-D9 and 13E-3 to be filed in connection with the Offer. This letter does not constitute a recommendation to any Neozyme stockholder as to whether such stockholder should accept the Offer. In addition, we express no opinion, however, as to the adequacy of any consideration received in the Proposed Transaction by Genzyme or any of its affiliates. Based upon and subject to the foregoing and after considering such other matters as we deem relevant, we are of the opinion that as of the date hereof the consideration to be received by the holders of the Units pursuant to the Offer and the consideration to be received by the holders of the Common Stock pursuant to the Second Step Transaction is fair to such holders from a financial point of view. Very truly yours, Hambrecht & Quist LLC By /s/ David G. Golden ---------------------------- David G. Golden Managing Director 74 ANNEX II [ROBERTSON STEPHENS & COMPANY LETTERHEAD] September 20, 1996 Board of Directors Genzyme Corporation One Kendall Square Cambridge, MA 02139-1562 Members of the Board: You have asked our opinion with respect to the fairness from a financial point of view, as of the date hereof, to Genzyme Corporation ("Genzyme"), of the Offer Price (as defined below) to be paid by Genzyme in the proposed acquisition (the "Acquisition") of Neozyme II Corporation ("Neozyme") by Neozyme II Acquisition Corporation (the "Purchaser"), a wholly owned subsidiary of Genzyme, pursuant to the Purchase Agreement (the "Agreement") proposed to be entered into among Genzyme, the Purchaser and Neozyme. Under the terms of the Agreement, the Purchaser will make a tender offer (the "Offer") to purchase all of the outstanding units (the "Units"), each of which consists of (i) one share of Callable Common Stock, par value $1.00 per share (the "Shares"), of Neozyme and (ii) Callable Warrants (the "Warrants") to purchase two shares of General Division Common Stock of Genzyme and 0.135 shares of Tissue Repair Division Common Stock of Genzyme, at a price of $45.00 per Unit, net to the seller in cash (the "Offer Price"). In addition, if any Units remain outstanding following the completion of the Offer, Genzyme will effect a transaction (the "Second Step Transaction") pursuant to which the Shares associated with such outstanding Units will be acquired, directly or indirectly, by Genzyme and the Warrants associated with such outstanding Units will remain outstanding. In the Second Step Transaction, holders of such outstanding Units will receive $29.00 in cash per Share. The terms and conditions of the Offer and the Second Step Transaction are set out more fully in the Agreement. For purposes of this opinion we have: (i) reviewed financial information regarding Neozyme furnished to us by Neozyme, including certain financial forecasts prepared by the management of Neozyme; (ii) reviewed publicly available information regarding Neozyme; (iii) held discussions with the management of Neozyme concerning the business, past and current business operations, financial condition and future prospects of Neozyme; (iv) reviewed a draft dated September 20, 1996 of the Agreement; (v) reviewed the stock price and trading history of Neozyme; (vi) reviewed the valuations of publicly traded companies that we deemed comparable to Neozyme; (vii) compared the financial terms of the Acquisition with other transactions which we deemed 75 Board of Directors Genzyme Corporation September 20, 1996 Page Two relevant; (viii) prepared a discounted cash flow analysis of Neozyme; (ix) analyzed the value of the Warrants; and (x) made such other studies and inquiries, and reviewed such other data, as we deemed relevant. In connection with our opinion we have not independently verified any of the foregoing information and have relied on all such information being complete and accurate in all material respects. Furthermore, we have not made any independent appraisal of the properties or assets and liabilities of Neozyme, nor have we been furnished with any such evaluations or appraisals. With respect to the financial forecasts (and the assumptions and bases therefor) of Neozyme provided to us by the management of Neozyme, we have assumed that such forecasts have been reasonably prepared in good faith on the basis of reasonable assumptions and reflect the best available estimates and judgments of the management of Neozyme as to the likely future financial performance of Neozyme. In that regard we have relied on the assumptions of the management of Neozyme with respect to the effect on such forecasts of the potential outcome of Neozyme's pending patent applications. This opinion is necessarily based upon market, economic and other conditions that exist and can be evaluated as of the date of this letter, and on information available to us as of the date hereof. We have acted as financial advisor to Genzyme in connection with the Acquisition and will act as Dealer Manager in connection with the Offer. A portion of our fees in connection with such services will be payable upon consummation of the Offer. In the ordinary course of our business, we may actively trade the securities of Genzyme and Neozyme for our own account and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. It is understood that this letter is for the information of the Board of Directors of Genzyme. Based upon and subject to the foregoing considerations, it is our opinion that, as of the date hereof, the Offer Price to be paid by Genzyme in the Acquisition is fair to Genzyme from a financial point of view. Very truly yours, ROBERTSON, STEPHENS & COMPANY LLC By: Robertson, Stephens & Company Group, L.L.C. 76 ANNEX III SECTION 83 OF THE BVI INTERNATIONAL BUSINESS COMPANIES ORDINANCE, 1984 SUMMARY OF STOCKHOLDER APPRAISAL RIGHTS AND TEXT OF SECTION 83 OF THE BVI INTERNATIONAL BUSINESS COMPANIES ORDINANCE, 1984 Summary of Stockholder Appraisal Rights. No appraisal rights are available in connection with the Offer. However, if the Second Step Transaction is a merger, consolidation, sale or other disposition of more than 50 percent of the assets of the Company, or a redemption, stockholders will have certain rights under the BVI Law to dissent and demand appraisal of, and to receive payment in cash of the fair value of, their shares of Callable Common Stock. Such rights to dissent, if the statutory procedures were complied with, could lead to an arbitration proceeding to determine the fair value of the Callable Common Stock, as of the day prior to the date on which the stockholders' vote was taken approving the Second Step Transaction (excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal), required to be paid in cash to such dissenting holders for their shares of Callable Common Stock. The value determined in an arbitration proceeding could be the same, more or less than the portion of the purchase price per Unit attributable to the share of Callable Common Stock included in each Unit in the Offer or the consideration per share of Callable Common Stock to be paid in the Second Step Transaction. RIGHTS OF DISSENTERS 83. (1) A member of a company incorporated under this Ordinance is entitled to payment of the fair value of his shares upon dissenting from (a) a merger, if the company is a constituent company, unless the company is the surviving company and the member continues to hold the same or similar shares; (b) a consolidation, if the company is a constituent company; (c) any sale, transfer, lease, exchange or other disposition of more than 50 percent of the assets or business of the company, if not made in the usual or regular course of the business carried on by the company, but not including (i) a disposition pursuant to an order of the court having jurisdiction in the matter; (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the members in accordance with their respective interests within one year after the date of disposition; or (iii) a transfer pursuant to the power described in subsection (2) of section 9; (d) a redemption of his shares by the company pursuant to section 81; and (e) an arrangement, if permitted by the court. (2) A member who desires to exercise his entitlement under subsection (1) must give to the company, before the meeting of members at which the action is submitted to a vote, or at the meeting but before the vote, written objection to the action; but an objection is not required from a member to whom the company did not give notice of the meeting in accordance with this Ordinance or where the proposed action is authorized by written consent of members without a meeting. (3) An objection under subsection (2) must include a statement that the member proposes to demand payment for his shares if the action is taken. (4) Within 20 days immediately following the date on which the vote of members authorizing the action is taken, or the date on which written consent of members without a meeting is obtained, the company must give written notice of the authorization or consent to each member who gave written objection or from whom written objection was not required, except those members who voted for, or consented to in writing, the proposed action. 77 (5) A member to whom the company was required to give notice who elects to dissent must, within 20 days immediately following the date on which the notice referred to in subsection (4) is given, give to the company a written notice of his decision to elect to dissent, stating (a) his name and address; (b) the number and classes or series of shares in respect of which he dissents; and (c) a demand for payment of the fair value of his shares; and a member who elects to dissent from a merger under section 77 must give to the company a written notice of his decision to elect to dissent within 20 days immediately following the date on which the copy of the plan or merger or an outline thereof is given to him in accordance with section 77. (6) A member who dissents must do so in respect of all shares that he holds in the company. (7) Upon the giving of a notice of election to dissent, the member to whom the notice relates ceases to have any of the rights of a member except the right to be paid the fair value of his shares. (8) Within 7 days immediately following the date of the expiration of the period within which members may give their notices of election to dissent, or within 7 days immediately following the date on which the proposed action is put into effect, whichever is later, the company or, in the case of a merger or consolidation, the surviving company or the consolidated company, must make a written offer to each dissenting member to purchase his shares at a specified price that the company determines to be their fair value; and if, within 30 days immediately following the date on which the offer is made, the company making the offer and the dissenting member agree upon the price to be paid for his shares, the company shall pay to the member the amount in money upon the surrender of the certificates representing his shares. (9) If the company and a dissenting member fail, within the period of 30 days referred to in subsection (8), to agree on the price to be paid for the shares owned by the member, within 20 days immediately following the date on which the period of 30 days expires, the following shall apply: (a) the company and the dissenting member shall each designate an appraiser; (b) the 2 designated appraisers together shall designate a third appraiser; (c) the 3 appraisers shall fix the fair value of the shares owned by the dissenting member as of the close of business on the day prior to the date on which the vote of members authorizing the action was taken or the date on which written consent of members without a meeting was obtained, excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal, and that value is binding on the company and the dissenting member for all purposes; and (d) the company shall pay to the member the amount in money upon the surrender by him of the certificates representing his shares. (10) Shares acquired by the company pursuant to subsection (8) or (9) shall be cancelled but if the shares are shares of a surviving company, they shall be available for reissue. (11) The enforcement by a member of his entitlement under this section excludes the enforcement by the member of a right to which he might otherwise be entitled by virtue of his holding shares, except that this section does not exclude the right of the member to institute proceedings to obtain relief on the ground that the action is illegal. (12) Only subsections (1) and (8) to (11) shall apply in the case of a redemption of shares by a company pursuant to the provisions of Section 81 and in such case the written offer to be made to the dissenting member pursuant to subsection (8) shall be made within 7 days immediately following the direction given to a company pursuant to Section 81 to redeem its shares. 78 Facsimile copies of the Letter of Transmittal, properly completed and duly elected, will be accepted. The Letter of Transmittal and certificates evidencing Units and any other required documents should be sent or delivered by each Holder or such Holder's broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below. AMERICAN STOCK TRANSFER & TRUST COMPANY By Mail: By Overnight Courier: By Hand: American Stock Transfer American Stock Transfer American Stock Transfer & Trust Company & Trust Company & Trust Company 6201 15th Avenue 6201 15th Avenue 40 Wall Street, 46th Floor Third Floor, Inside Delivery Third Floor, Inside Delivery New York, New York Brooklyn, New York 11219 Brooklyn, New York 11219
By Facsimile Transmission: (718) 234-5001 For confirmation: (718) 921-8222 Questions or requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth below. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent. Holders may also contact brokers, dealers, commercial banks or trust companies for assistance concerning the Offer. The Information Agent for the Offer is: CORPORATE INVESTOR COMMUNICATIONS, INC. 111 Commerce Road Carlstadt, New Jersey 07072-2586 (201) 896-1900 (call collect) or Call Toll-Free (888) 463-6242 The Dealer Manager for the Offer is: ROBERTSON, STEPHENS & COMPANY LLC 555 California Street San Francisco, California 94104 Call Toll-Free (800) 357-8435 EX-99.C1 3 PURCHASE AGREEMENT 1 Exhibit (C)(1) PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (this "Agreement") dated as of September 20, 1996 is among Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Neozyme II Acquisition Corp. (the "Purchaser"), a British Virgin Islands ("BVI") international business company and a wholly-owned subsidiary of Genzyme, and Neozyme II Corporation (the "Company"), a BVI international business company. BACKGROUND A. The respective Boards of Directors of Genzyme, the Purchaser and the Company have duly approved the acquisition of the Company pursuant to the terms of this Agreement. B. In furtherance of such acquisition, it is proposed that the Purchaser will make a tender offer (the "Offer") to purchase all of the outstanding units (the "Units"), each of which consists of one share of Callable Common Stock, par value $1.00 per share, of the Company (individually, a "Share" and, collectively, the "Shares") and Callable Warrants (the "Callable Warrants") to purchase two shares of General Division Common Stock of Genzyme and .135 shares of Tissue Repair Division Common Stock of Genzyme. The Shares included in the Units represent all of the issued and outstanding capital stock of the Company. The Offer will be at a price of $45.00 per Unit in cash and will be subject to the Minimum Condition (as defined in ANNEX I hereto), and on the terms and subject to the other conditions set forth in the Offer Documents (as defined in Section 1.1(b)). C. If the Offer is consummated, but not all of the Units are tendered and accepted, Genzyme has agreed to effect a transaction (as more fully described in Section 2.1) in which Genzyme will acquire, directly or indirectly, all of the remaining Shares of the Company in exchange for cash in an amount per Share equal to $29.00 (the "Second Step Consideration"). The Callable Warrants associated with each such Share shall remain outstanding following consummation of the Second Step Transaction (as defined in Section 2.1). In order to effect the Second Step Transaction as promptly as practicable following completion of the Offer, the Board of Directors of the Company has duly authorized a merger (the "Merger") of the Company with a wholly- owned subsidiary of the Purchaser on the terms and subject to the conditions of this Agreement and pursuant to the plan of merger set forth as ANNEX II hereto (the "Merger Plan") in accordance with the applicable provisions of the BVI International Business Companies Ordinance, 1984 (the "BVI Law"). At the request of Genzyme in accordance with the terms of this Agreement, the Company will solicit the written consents of its shareholders for the approval of the Merger Plan. At Genzyme's option and subject to compliance with applicable laws, such solicitation may occur while the Offer is pending or following its consummation. D. If the Offer is terminated because the Minimum Condition has not been satisfied, upon the election and at the request of Genzyme in accordance with Section 1.1(b)(ii) of this Agreement, the Company shall take all action (coordinating the timing thereof with Genzyme and the Purchaser) necessary, in accordance with applicable law and the Company's -1- 2 Memorandum of Association and Articles of Association, to convene a meeting of its shareholders to consider and vote upon the approval of the Merger Plan, or to solicit the written consent of its shareholders to approve the Merger Plan. E. The Board of Directors of the Company, on the recommendation of a special committee of the Board of Directors consisting of all of the directors of the Company who are not officers or directors of Genzyme (the "Special Committee"), has determined that the Offer and the Second Step Transaction are fair to, and in the best interests of the holders of the Units and has duly approved the Offer and the Second Step Transaction and resolved to recommend acceptance of the Offer by the holders of the Units. Accordingly, in consideration of the mutual representations, warranties and covenants contained herein, the parties hereto agree as follows: 1. THE OFFER 1.1. The Offer. --------- (a) Provided that this Agreement shall not have been terminated in accordance with Section 8.1 hereof and nothing shall have occurred and be continuing that would result in a failure to satisfy any of the conditions set forth in ANNEX I hereto, the Purchaser shall, as soon as practicable after the date hereof, and in any event within five business days of the day on which the Purchaser's intention to make the Offer is publicly announced, which announcement will be made promptly following the execution of this Agreement, commence (within the meaning of Rule 14d-2(a) of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act")), the Offer for all Units, subject to the Minimum Condition (as defined in ANNEX I hereto), at a price of $45.00 per Unit, net to the seller in cash, without interest thereon. The Purchaser shall conduct the Offer in compliance in all material respects with applicable laws and consummate the Offer, on the terms and subject to the conditions thereof. Genzyme represents that it has, and will provide to the Purchaser on a timely basis, the funds necessary to purchase the Units pursuant to the Offer and to consummate the Second Step Transaction. (b) The Offer shall be made by means of the Offer Documents (as defined below), which shall not contain any condition not set forth in ANNEX I hereto and shall be open for a period of 21 business days (such 21st business day being referred to herein as the "Initial Expiration Date"). Without the consent of the Company, as approved by the Special Committee, the Purchaser shall not amend or waive the Minimum Condition (as defined in ANNEX I hereto) or the Majority Consent Condition (as defined below), extend the Offer, reduce the maximum number of Units to be purchased, reduce the price to be paid per Unit pursuant to the Offer or amend any other material term of the Offer in a manner adverse to the holders of the Units; provided, however, that if, on the Initial Expiration Date, the Minimum Condition has not been satisfied, the Purchaser may, not later than 9:00 a.m., eastern time, on the next business day following the Initial Expiration Date, elect either (x) to amend the Offer and, subject to compliance with applicable laws, proceed in accordance with subsection (i) below or (y) to terminate the Offer and, subject to compliance with applicable laws, proceed in accordance with subsection (ii) below. If, on the Initial Expiration Date, the Minimum Condition has not been satisfied and the Purchaser does not elect to proceed pursuant to subsection (i) or (ii) below -2- 3 within the time period and as described in the preceding sentence, then the Company shall have the right to terminate this Agreement in accordance with Section 8.1(b)(i) and Genzyme and the Purchaser shall have the right to terminate this Agreement in accordance with Section 8.1(c)(i). (i) If the Purchaser elects to amend the Offer and proceed under this subsection 1.1(b)(i), the Purchaser will (a) extend the Offer for a period not to exceed sixty days, (b) amend the Offer to delete the Minimum Condition, (c) amend the Offer to add the Majority Consent Condition (as defined below), and (d) amend the Offer Documents to reflect the foregoing and cause the dissemination of such revised documents in accordance with applicable laws. In such event, the Company shall promptly commence (coordinating the timing thereof with Genzyme and the Purchaser) to convene a meeting of its shareholders or solicit the written consent of its shareholders for approval of the Merger Plan, such solicitation or meeting to be conducted in accordance with applicable laws and the terms of this Agreement. The Majority Consent Condition shall mean that the sum of (a) the Shares included in the Units tendered and not withdrawn as of the new expiration date of the Offer (provided such Shares may be voted in favor of the Merger Plan at the meeting or pursuant to the consent solicitation by the Purchaser immediately after the purchase of the Units which include such Shares in the Offer by the Purchaser) plus (b) the number of Shares held by holders who have voted in favor of the Merger Plan at the meeting or pursuant to the consent solicitation as of the new expiration date of the Offer (but excluding any such Shares that would result in double counting with (a) above) represents not less than a majority of the Shares outstanding. (ii) If the Purchaser elects to terminate the Offer and proceed under this subsection 1.1(b)(ii), the Purchaser will promptly return all tendered Units. In such event, the Company shall promptly commence (coordinating the timing thereof with Genzyme and the Purchaser) to convene a meeting of its shareholders or solicit the written consent of its shareholders for approval of the Merger Plan, such solicitation or meeting to be conducted in accordance with applicable laws and the terms of this Agreement. (c) As soon as practicable on the date of commencement of the Offer, the Purchaser shall file with the Securities and Exchange Commission (the "Commission") with respect to the Offer (i) a Tender Offer Statement on Schedule 14D-1 (together with all amendments and supplements thereto, the "Schedule 14D-1"), (ii) a Rule 13e-3 Transaction Statement on Schedule 13E-3 (together with all amendments and supplements thereto, the "Schedule 13E-3") and (iii) an Issuer Tender Offer Statement on Schedule 13e-4 (together with all amendments and supplements thereto, the "Schedule 13E-4"), which will contain an offer to purchase and forms of the related letters of transmittal and summary advertisement (the Schedule 14D-1, the Schedule 13E-3, the Schedule 13E-4, the offer to purchase and such other documents, together with any supplements or amendments thereto, are referred to herein collectively as the "Offer Documents"), all of which Offer Documents will be subject to review -3- 4 by the Company prior to filing. Genzyme and the Purchaser shall provide the Company and its counsel with a copy of any written comments or telephonic notification of any verbal comments Genzyme or the Purchaser may receive from the Commission or its staff with respect to the Offer Documents promptly after the receipt thereof and shall provide the Company and its counsel with a copy of any written responses thereto and telephonic notification of any verbal responses thereto of Genzyme or the Purchaser or their counsel. 1.2. Company Action -------------- (a) In connection with the Offer, the Company will comply with the requirements of Rule 14d-5(b) of the Exchange Act and will, or will cause its agent to, mail, via first class mail, postage prepaid the Offer Documents and, if applicable, the Proxy Statement (as defined in 1.2(c)) to the record holders of the Units in accordance with Rule 14d-5(b). The Company will cooperate with the Purchaser to the end that any additional Offer Documents furnished to it (or its agent) are mailed as soon as practicable. The Purchaser shall pay all costs and expenses of such mailing. (b) The Company represents and warrants that the Board of Directors of the Company (the "Company's Directors"), on the recommendation of the Special Committee, (i) has duly adopted and approved the Offer, the Second Step Transaction, this Agreement and the transactions contemplated hereby and thereby, (ii) has determined that the Offer and the Second Step Transaction are fair to and in the best interests of the shareholders of the Company and (iii) after consideration of its fiduciary duties under applicable laws, has resolved to recommend acceptance of the Offer by holders of Units. The Company agrees to file with the Commission as soon as reasonably practicable on the date of the commencement of the Offer a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the "Schedule 14D-9") and to disseminate the Schedule 14D-9 to the extent required by Rule 14d-9 under the Exchange Act and any other applicable U.S. federal securities laws. Subject to the fiduciary duties of the Company's Directors, as advised by counsel, the Offer Documents and the Schedule 14D-9 shall contain the recommendation of the Company's Directors that the holders of Units accept the Offer, and the Company hereby consents to the inclusion in the Offer Documents of such recommendation. The Company shall provide Genzyme and its counsel with a copy of any written comments or telephonic notification of any verbal comments the Company may receive from the Commission or its staff with respect to the Schedule 14D-9 promptly after the receipt thereof and shall provide Genzyme and its counsel with a copy of any written responses thereto and telephonic notification of any verbal responses thereto of the Company or its counsel. (c) At the request of Genzyme, the Company shall take all action (coordinating the timing thereof with Genzyme and the Purchaser) necessary, in accordance with applicable law and the Company's Memorandum of Association and Articles of Association, to convene a meeting of its shareholders (the "Shareholders' Meeting"), as promptly as practicable after the purchase of Units pursuant to the Offer to consider and vote upon the approval of the Merger Plan, or to solicit the written consent of its shareholders to approve the Merger Plan (the "Consent Solicitation") promptly after such purchase or, promptly after the request of Genzyme, after the commencement of the Offer and while it is pending or following the termination of the Offer upon the election of Genzyme pursuant to Section 1.1(b)(ii). If required by applicable -4- 5 law, the Company shall promptly prepare and file with the Commission, and use its reasonable best efforts to have cleared by the Commission, a proxy, consent solicitation or information statement relating to the Second Step Transaction (the "Proxy Statement") in compliance with applicable law. Subject to the fiduciary duties of the Company's Directors, as advised by counsel, the Proxy Statement shall contain a statement as to the approval of the Merger Plan by the Company's Board of Directors and the determination by the Company's Board of Directors that the Second Step Transaction is fair to and in the best interests of the holders of the Shares, and the Company hereby consents to the inclusion in the proxy, consent solicitation or information statement of such statement. (d) The Special Committee and the Company's Directors have received the written opinion of Hambrecht & Quist LLC (the "Financial Adviser") that, on the basis of and subject to the matters set forth therein, the cash consideration of $45.00 per Unit to be received by holders of the Units pursuant to the Offer is fair to the holders of the Units from a financial point of view and the Second Step Consideration to be received by the holders of the Shares pursuant to the Second Step Transaction is fair to the holders of the Shares from a financial point of view (the "Fairness Opinion"). The Company has provided Genzyme and the Purchaser with a copy of the Fairness Opinion for inclusion in the Offer Documents. 1.3. Directors. --------- (a) Promptly upon the acceptance for payment of and payment by the Purchaser for any Units pursuant to the Offer, and from time to time thereafter as Units are accepted for payment and paid for by the Purchaser, subject to compliance with Section 14(f) of the Exchange Act, the Purchaser shall be entitled to designate such number of the Company's Class A Directors, rounded to the nearest whole number, as will give the Purchaser representation on the Company's Board of Directors equal to at least that number of directors which equals the product of the total number of the Company's Directors (after giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that such number of Units so accepted for payment and paid for by the Purchaser bears to the number of Units outstanding, and the Company shall, promptly following any such designation by the Purchaser, take such actions as are necessary to cause the Purchaser's designees to be so elected, including increasing the size of the Board of Directors or securing the resignations of incumbent directors or both; provided, however, that notwithstanding the Purchaser's right to designate certain of the Company's Directors, until the Effective Date (as defined in Section 2.3 hereof), the Company's Class A Directors shall include at least two directors who are directors on the date hereof and who are not officers or directors of Genzyme or the Purchaser (the "Independent Directors"); provided further that, if the number of Independent Directors shall be reduced below two for any reason whatsoever, any remaining Independent Director shall be entitled to designate a person who is not an officer or director of Genzyme or the Purchaser to fill such vacancy and such person shall be deemed to be an Independent Director for purposes of this Agreement or, if no Independent Directors then remain, the other directors shall designate two persons to fill such vacancies who shall not be designees, shareholders, directors, officers or affiliates of Genzyme or the Purchaser, and such persons shall be deemed to be Independent Directors for purposes of this Agreement. Subject to applicable law, the Company shall take all action necessary to effect the election of directors as provided in this Section 1.3(a), including mailing to its shareholders the information required by Section 14(f) of the Exchange Act and Rule 14f-1 -5- 6 promulgated thereunder. Genzyme and the Purchaser shall supply to the Company and be solely responsible for any information with respect to them and their nominees, officers, directors and affiliates required by Section 14(f) and Rule 14f-1. (b) Notwithstanding anything in this Agreement to the contrary, subject to the terms of the Company's Memorandum of Association and Articles of Association, in the event that the Purchaser's designees are appointed or elected as Company Directors, after the acceptance for payment of Units pursuant to the Offer and prior to the Effective Date, the affirmative vote of a majority (or, if there are only one or two Independent Directors, the single or unanimous vote, as the case may be) of the Independent Directors (who shall act as an independent committee of the Board of Directors for this purpose) shall be required, and alone shall be sufficient, to (i) amend or terminate this Agreement by the Company, (ii) exercise or waive any of the Company's rights or remedies hereunder, (iii) extend the time for performance of Genzyme's and the Purchaser's respective obligations hereunder, or (iv) approve any other action by the Company that the Independent Directors determine could adversely affect the interests of the shareholders of the Company (other than Genzyme, the Purchaser and their affiliates) with respect to the transactions contemplated hereby. 2. THE SECOND STEP TRANSACTION 2.1. Consummation of the Second Step Transaction. ------------------------------------------- (a) If the Offer is consummated and 90% or more of the Units are tendered and accepted, the Purchaser will, as soon as practicable following satisfaction or waiver of the conditions set forth in Section 7.1 hereof, either (i) effect a merger of the Company into the Purchaser pursuant to Section 77 of the BVI Law (the "Short Form Merger") or (ii) cause the Company to redeem all Shares not held by the Purchaser pursuant to Section 81 of the BVI Law (the "Redemption"). (b) If the Offer is consummated and less than 90% but more that 50% of the Units are tendered and accepted, the Purchaser will own a majority of the Shares and will vote those shares in favor of and will effect, as soon as practicable following satisfaction or waiver of the conditions set forth in Section 7.1 hereof, the Merger. (c) If the Offer is not consummated on the Initial Expiration Date because the Minimum Condition is not met and the Purchaser elects to proceed as described in Section 1.1(b)(i), the Company, the Purchaser and Genzyme shall take the actions set forth in Section 1.1(b)(i). As soon as practicable following satisfaction of the Majority Consent Condition and satisfaction or waiver of the conditions set forth in Annex I (other than the Minimum Condition) and Section 7.1, the Purchaser will purchase all Units validly tendered and not withdrawn, vote the Shares thus acquired in favor of the Merger Plan and effect the Merger. (d) If the Offer is not consummated because the Minimum Condition is not met and the Purchaser elects to proceed as described in Section 1.1(b)(ii), the Company, the Purchaser and Genzyme shall take the actions set forth in Section 1.1(b)(ii). As soon as practicable following satisfaction or waiver of the conditions set forth in Article 7 hereof, the Purchaser will effect the Merger. -6- 7 (e) The Short Form Merger, the Redemption and the Merger referred to in subsections (a) - (d) above are referred to herein as the "Second Step Transaction." The date of consummation of the Second Step Transaction is referred to herein as the "Effective Date." 2.2. SECOND STEP CONSIDERATION. (a) On the Effective Date, as a result of the Short Form Merger, if applicable. the Company will be merged with and into the Purchaser, with the Purchaser as the surviving corporation and: (i) The holder of each Share issued and outstanding immediately prior to the Effective Date (other than Shares owned by Genzyme, the Purchaser, the Company or any direct or indirect subsidiary of any of them and any Dissenting Shares (as defined in subsection (d) below)) shall be entitled to receive an amount in cash per Share equal to the Second Step Consideration. (ii) Shares owned by Genzyme, the Purchaser or the Company or any direct or indirect subsidiary of any of them shall be cancelled. (b) On the Effective Date, as a result of the Redemption, if applicable, the holder of each Share issued and outstanding immediately prior to the Effective Date (other than Shares owned by the Purchaser and any Dissenting Shares) shall be entitled to receive an amount in cash per Share equal to the Second Step Consideration. (c) On the Effective Date, as a result of the Merger pursuant to Sections 2.1(b)-(d), if applicable, a wholly-owned subsidiary of the Purchaser will be merged with and into the Company, with the Company as the surviving corporation and: (i) The holder of each Share issued and outstanding immediately prior to the Effective Date (other than Shares owned by Genzyme, the Purchaser, the Company or any direct or indirect subsidiary of any of them and any Dissenting Shares) shall be entitled to receive an amount in cash per Share equal to the Second Step Consideration. (ii) Shares owned by Genzyme, the Purchaser or the Company or any direct or indirect subsidiary of any of them shall be cancelled. (iii) Each issued and outstanding share of capital stock of the subsidiary of the Purchaser that is a party to the Merger Plan shall be converted into one fully paid and nonassessable share of common stock of the surviving corporation. (d) (i) In the case of the Short Form Merger, the Redemption or the Merger, shares of capital stock of the Company held by a shareholder who has properly exercised dissenters rights with respect thereto in accordance with Section 83 of the BVI Law (collectively, the "Dissenting Shares") shall not be converted into the Second Step Consideration. From and after the Effective Date, a shareholder who has properly exercised such dissenters' rights shall no longer retain any rights of a shareholder of the Company, except those provided under the BVI Law. If after the Effective Date such holder withdraws or loses his right to demand -7- 8 payment for his Shares, such Shares shall be treated as if they had been converted as of the Effective Date into the right to receive the Second Step Consideration payable in respect of such Shares pursuant to Section 2.2(a)(i). (ii) The Company shall give Genzyme (i) prompt notice of any demands for payment, or notices of intent to demand payment, with respect to any shares of capital stock of the Company, any withdrawal of any such demands and any other instruments served pursuant to the BVI Law and received by the Company and (ii) the right to participate in all negotiations and proceedings with respect to any such demands. The Company shall cooperate with Genzyme concerning, and shall not, except with the prior written consent of Genzyme, voluntarily make any payment with respect to, or offer to settle or settle, any such demands. 2.3. Exchange of Certificates. ------------------------- (a) Genzyme shall authorize one or more persons to act as Payment Agent for the Second Step Consideration (the "Payment Agent"). Genzyme shall deposit with the Payment Agent in trust for the benefit of the holders of certificates representing Shares converted pursuant to Section 2.2(a)(i), on or prior to the Effective Time, immediately available funds in an amount equal to the product of the Second Step Consideration multiplied by the number of Shares entitled to payment pursuant to Section 2.2(a)(i). As soon as practicable after the Effective Time, Genzyme shall cause the Payment Agent to mail to all former holders of record of Shares instructions for surrendering their certificates representing Shares in exchange for the Second Step Consideration. Upon surrender of a Share certificate for cancellation to the Payment Agent, the Payment Agent shall pay to the holder of such certificate the Second Step Consideration multiplied by the number of Shares represented by such certificate, and the certificate so surrendered shall forthwith be canceled. Notwithstanding the foregoing, if delivery of the Second Step 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 delivery or establish to the satisfaction of Genzyme that such tax has been paid or is not applicable. Furthermore, neither Genzyme nor any affiliate of Genzyme shall be liable to a holder of Shares for any Second Step Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. After the Effective Time, there shall be no transfers of the Shares on the stock transfer books of the Company. (b) The Payment Agent shall make the payments referred to in Section 2.2(a)(i) out of the funds supplied by Genzyme. Promptly following the date that is six months after the Effective Date, the Payment Agent shall, upon request by Genzyme, deliver to Genzyme all cash, certificates and other documents in its possession relating to the transactions described in this Agreement, and the Payment Agent's duties shall terminate. Thereafter, each holder of a certificate formerly representing a Share may surrender such certificate to Genzyme and (subject to applicable abandoned property, escheat and similar laws) receive in exchange therefor the Second Step Consideration, without any interest thereon but shall have no greater rights against Genzyme than may be accorded to general creditors of Genzyme under applicable law. -8- 9 (c) From and after the Effective Date, holders of certificates theretofore evidencing Shares shall cease to have any rights as shareholders of the Company, except as provided herein or by law. Until surrendered in accordance with the provisions of this Section, each Share certificate (other than for Dissenting Shares) shall represent for all purposes only the right to receive the Second Step Consideration multiplied by the number of Shares represented by such certificate. 2.4. CALLABLE WARRANTS. On the Effective Date, the Callable Warrants associated with the Shares converted into the right to receive the Second Step Consideration will become exercisable in accordance with its terms and at the exercise price computed as stated therein. On the day following the Effective Date, such Callable Warrants will separate and be transferable separately from the right to receive the Second Step Consideration on account of the Shares. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND GENZYME The Purchaser and Genzyme represent and warrant to the Company as follows: 3.1. ORGANIZATION. Each of Genzyme 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 and authority to enter into, execute and deliver this Agreement and to perform fully its respective obligations hereunder. 3.2. AUTHORITY. The execution and delivery of this Agreement have been duly authorized by the Board of Directors of each of Genzyme and the Purchaser. No other corporate action on the part of Genzyme or the Purchaser is necessary to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of Genzyme and the Purchaser and constitutes a valid and binding obligation of each, enforceable in accordance with its terms. 3.3. Compliance. ----------- (a) Neither the execution, delivery and performance by Genzyme and the Purchaser of this Agreement, nor the consummation by Genzyme 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 Genzyme or the Purchaser, (b) violate, conflict with or 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 Genzyme or the Purchaser is a party, or by which its properties or assets may be bound or (c) subject to compliance with the laws referred to in the next paragraph, violate any law or any order, judgment, injunction, decree or requirement of any court, arbitrator or governmental or regulatory body applicable to Genzyme or the Purchaser or by which any of their assets or properties is bound, except, in each case, for such violations, breaches or defaults that, in the aggregate, would not materially impair the ability of the Purchaser or Genzyme to perform its obligations hereunder. -9- 10 (b) Other than in connection with or in compliance with the provisions of the BVI Law, the U.S. Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act, the "takeover" or "blue sky" laws of various states of the United States, (and assuming that the Company will, prior to consummation of the Offer, have total assets of less than $10 million as shown on its last regularly prepared balance sheet prior to such date) no notice to, filing with or authorization, consent or approval of, any domestic or foreign public body or authority is necessary for the consummation by the Purchaser and Genzyme of the transactions contemplated by this Agreement, except for such notices, filings, authorizations, consents or approvals the absence of which would not, in the aggregate, materially impair the ability of the Purchaser or Genzyme to perform its obligations hereunder. 3.4. COMMISSION FILINGS. The Offer Documents, and any information provided in writing by or on behalf of the Purchaser or Genzyme which is included in the Schedule 14D-9, on the date the Offer Documents or Schedule 14D-9, as the case may be, are filed with the Commission or first published, sent or given to security holders, as the case may be, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made with respect to any information provided in writing by or on behalf of the Company and included in the Offer Documents. The information supplied by the Purchaser or Genzyme for inclusion in the Proxy Statement will not, on the date the Proxy Statement (or any amendment or supplement thereto) is first mailed to shareholders of the Company, at the time of the Shareholders' Meeting, if any, and on the Effective Date, contain any statement which at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein in the light of the circumstances under which they are made, not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of consents or proxies for the Shareholders' Meeting which shall have become false or misleading. The Offer Documents shall comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations thereunder. Genzyme and the Purchaser agree to correct the Offer Documents promptly if and to the extent that any of them shall have become false or misleading (provided that, with respect to any false or misleading information provided by or on behalf of the Company and included in the Offer Documents, the Company shall have provided Genzyme and the Purchaser with correct information) and Genzyme and the Purchaser shall take all steps necessary to cause the Offer Documents as so corrected to be filed with the Commission and to be disseminated to the holders of the Units, in each case as and to the extent required by applicable U.S. federal securities laws. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Purchaser and Genzyme as follows: 4.1. ORGANIZATION. The Company is an international business company duly organized, validly existing and in good standing under the laws of the BVI and has the requisite corporate power and authority to enter into, execute and deliver this Agreement and, subject to the -10- 11 approval of the Second Step Transaction by the Company's shareholders (if required under the BVI law), to perform fully its obligations hereunder. 4.2. AUTHORITY. The execution and delivery of this Agreement have been duly authorized by the Board of Directors of the Company. No other corporate action on the part of the Company is necessary to consummate the transactions contemplated hereby (other than approval of the Merger Plan by the shareholders of the Company to the extent required by the BVI law). This Agreement has been duly executed and delivered by the Company and, subject to the foregoing, constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. 4.3. Compliance. ----------- (a) 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 Memorandum of Association or Articles of Association of the Company, (b) violate, conflict with or 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 Company is a party, or by which its properties or assets may be bound or (c) subject to compliance with the laws referred to in the next paragraph, violate any law or any order, judgment, injunction, decree or requirement of any court, arbitrator or governmental or regulatory body applicable to the Company or by which any of its assets or properties is bound, except, in each case, for such violations, breaches or defaults that, in the aggregate, would not have a material adverse effect on the financial condition, business or operations of the Company (a "Material Adverse Effect"), or materially impair the ability of the Company to perform its obligations hereunder. (b) Other than in connection with or in compliance with the provisions of the BVI Law, the Securities Act, the Exchange Act, the "takeover" or "blue sky" laws of various states of the United States, (and assuming that the Company will, prior to consummation of the Offer, have total assets of less than $10 million as shown on its last regularly prepared balance sheet prior to such date) no notice to, filing with or authorization, consent or approval of, any domestic or foreign public body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement, except for such notices, filings, authorizations, consents or approvals the absence of which would not, in the aggregate materially impair the ability of the Company to perform its obligations hereunder. 4.4. CAPITALIZATION. The authorized capital stock of the Company consists of 9,000,000 shares of Callable Common Stock, par value $1.00 per share. As of the date of this Agreement, 2,415,000 Shares were validly issued and outstanding, fully paid and nonassessable (all of which are included in the Units); and no Shares were held in the treasury of the Company. Except as set forth above in this Section 4.4 and the Purchase Option Agreement, there are no other shares of capital stock or other securities of the Company outstanding and no other outstanding options, warrants, rights to subscribe to (including any preemptive rights), calls or commitments of any character whatsoever to which the Company is a party or may be bound requiring the issuance, transfer or sale of any shares of capital stock or other securities of the Company or any -11- 12 securities or rights convertible into or exchangeable or exercisable for any such shares or securities, and there are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock or securities convertible into or exchangeable or exercisable for any such shares. 4.5. COMMISSION FILINGS. The Schedule 14D-9 and any information provided in writing by or on behalf of the Company which is included in the Offer Documents, on the date the Schedule 14D-9 or the Offer Documents, as the case may be, are filed with the Commission or first published, sent or given to security holders, as the case may be, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that no representation or warranty is made with respect to any information provided in writing by or on behalf of Genzyme or the Purchaser and included in the Schedule 14D-9. The Proxy Statement will not, on the date it (or any amendment or supplement thereto) is first mailed to shareholders of the Company, at the time of the Shareholders' Meeting, if any, and on the Effective Date, contain any statement which at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein in the light of the circumstances under which they are made, not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of consents or proxies for the Shareholders' Meeting which shall have become false or misleading; provided that no representation or warranty is made with respect to any information provided in writing by or on behalf of Genzyme or the Purchaser and included in the Proxy Statement. The Schedule 14D-9 and the Proxy Statement shall comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations thereunder. The Company agrees promptly to correct the Schedule 14D-9 and the Proxy Statement if and to the extent that either shall have become false or misleading (provided that, with respect to any false or misleading information provided by or on behalf of Genzyme or the Purchaser and included in the Schedule 14D-9 or the Proxy Statement, Genzyme or the Purchaser shall have provided the Company with correct information) and the Company shall take all steps necessary to cause the Schedule 14D-9 or the Proxy Statement as so corrected to be filed with the Commission and to be disseminated to the holders of the Units and to the Company's shareholders, as the case may be, as and to the extent required by applicable U.S. federal securities laws. 5. CONDUCT OF BUSINESS 5.1. CONDUCT PRIOR TO EFFECTIVE DATE. Except as otherwise expressly contemplated hereby, the Company covenants and agrees that, unless Genzyme shall otherwise agree in writing, prior to the Effective Date or such earlier time as designees of the Purchaser constitute a majority of the Company's Directors (determined on the basis of combined voting power of the Company's Class A and Class B directors): (a) The business of the Company shall in all material respects be conducted only in, and the Company shall not take any material action except in, the ordinary course of business and consistent with past practice, and the Company shall use all reasonable efforts, consistent -12- 13 with past practice or the annual workplan currently in effect, to maintain and preserve its business organization, assets and advantageous business relationships; (b) The Company shall not make any tax election or, except in the ordinary course of business and consistent with past practice, settle or compromise any federal, state, local or foreign tax liability; and (c) The Company shall not agree in writing or otherwise, to take any of the foregoing actions or any action that would make any representation or warranty in Article 1 or Article 4 hereof untrue or incorrect in any material respect or that would materially impair or prevent the occurrence of any condition in ANNEX I prior to consummation of the Offer and, thereafter, Article 7 hereof. 5.2. COMMISSION FILINGS AND OTHER MATTERS. The Company shall promptly provide Genzyme (or its counsel) with copies of all filings made by the Company with the Commission or any other state or federal governmental entity in connection with this Agreement and the transactions contemplated hereby. 5.3. CONDUCT OF BUSINESS AFTER THE INITIAL EXPIRATION DATE. Notwithstanding any other provision contained herein, if the Minimum Condition has not been satisfied on the Initial Expiration Date and the Purchaser elects to amend the Offer in accordance with Section 1.1(b)(i) or to terminate the Offer in accordance with Section 1.1(b)(ii), then until the earlier of the Effective Date or the termination of this Agreement, the Special Committee shall be authorized to take such actions as it may deem appropriate to reduce or eliminate any discretionary spending by the Company or by Genzyme on behalf of the Company not contractually committed to with a person or entity that is not a party to this Agreement; provided that, Genzyme may elect to continue such spending on its own account and to the extent it elects to do so, the Company will, if the Merger is effected, reimburse Genzyme for such expenditures immediately prior to the Effective Date. 6. ADDITIONAL AGREEMENTS 6.1. PREPARATION OF PROXY STATEMENT. Genzyme, the Purchaser and the Company shall cooperate with each other in the preparation of the Proxy Statement (if required), and the Company shall notify Genzyme of the receipt of any comments of the Commission with respect to the Proxy Statement and of any requests by the Commission for any amendment or supplement thereto or for additional information and shall provide to Genzyme promptly copies of all correspondence between the Company or any representative of the Company and the Commission. The Company shall give Genzyme and its counsel the opportunity to review the Proxy Statement prior to its being filed with the Commission and shall give Genzyme and its counsel the opportunity to review all amendments and supplements to the Proxy Statement and all responses to requests for additional information and replies to comments prior to their being filed with, or sent to, the Commission. Each of the Company, Genzyme and the Purchaser agrees to use its reasonable best efforts, after consultation with the others, to respond promptly to all such comments of and requests by the Commission and to cause the Proxy Statement and all required amendments and supplements thereto to be mailed to the holders of Shares entitled to vote upon the approval of the Second Step Transaction at the earliest practicable time. -13- 14 6.2. FEES AND EXPENSES. Each party shall bear all fees and expenses incurred by it in connection with the negotiation and performance of this Agreement and no party may recover any such fees and expenses from any other party upon any termination of this Agreement except as provided in Article 8. 6.3. ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to consummate and make effective as promptly as practicable the transactions contemplated by the Offer and this Agreement, and to cooperate with each of the other parties hereto in connection with the foregoing, including using all reasonable efforts (which shall not be construed to require the payment of any money to a third party or the divestiture of any business or assets): (A) to obtain all necessary waivers, consents and approvals from other parties to agreements; (B) to obtain all necessary consents, approvals and authorizations as are required by law; (C) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby; (D) to effect all necessary registrations and filings and submissions of information requested by governmental authorities; and (E) to fulfill all conditions to this Agreement. Each of the Company, Genzyme and the Purchaser further covenants and agrees that, prior to the exercise by Genzyme or the Purchaser of its right to terminate the Offer under paragraphs (b) or (c) of ANNEX I hereto, each of the Company, Genzyme and the Purchaser shall use their respective reasonable best efforts (which shall not be construed to require the payment of any money to a third party or the divestiture of any business or assets) to prevent the entry of an injunction or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby . 6.4. NO SOLICITATION. (a) The Company shall not, directly or indirectly, through any officer, director, employee, financial advisor, representative or agent of the Company, (i) solicit or initiate any inquiries or proposals regarding a merger, consolidation, business combination, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving the Company, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Acquisition Proposal, or (iii) agree to, approve or recommend any Acquisition Proposal; provided, however, that nothing contained in this Agreement shall prevent the Company, the Company's Directors or the Special Committee (through any officer, director, employee, financial advisor, representative or agent) from (A) engaging in negotiations or discussions in response to an inquiry that was not solicited after the date hereof; (B) furnishing non-public information to any person or entity in connection with an unsolicited written Acquisition Proposal by such person or entity or recommending an unsolicited written Acquisition Proposal to the shareholders of the Company, if and only to the extent that (1) the Company's Directors or the Special Committee, as the case may be, believe in good faith after consultation with its financial advisor that the party requesting such non-public information or making such Acquisition Proposal is capable of financing a transaction more favorable to the Company's shareholders from a financial point of view than the transaction contemplated by this Agreement and the Company's Directors or the Special Committee, as the case may be, determine in good -14- 15 faith after consultation with outside legal counsel that such action is necessary to comply with their fiduciary duties to shareholders under applicable law and (2) prior to furnishing such non-public information to such person or entity, the Company's Directors or the Special Committee, as the case may be, receive from such person or entity an executed confidentiality agreement on customary terms; or (C) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. (b) The Company shall notify Genzyme in writing in reasonable detail within 24 hours after receipt by the Company (or its advisors) of any written Acquisition Proposal or any written request for non-public information to which the Company intends to affirmatively respond. (c) Genzyme and the Company acknowledge and confirm that neither (x) Section 2.3 ("Restrictions Upon Use of Licensed Technology") of the Technology License Agreement dated April 28, 1992 between them, nor (y) Section 12 of the Company's Memorandum of Association, is intended or shall be deemed, to prohibit or restrict any discussions, negotiations or other activity by the Company permitted by subsection (a) above. 6.5. NOTIFICATION OF BREACH. The Company shall give prompt notice to Genzyme, and Genzyme and the Purchaser shall give prompt notice to the Company, of the occurrence or failure to occur of any event which occurrence or failure to occur causes (x) any representation or warranty made by it in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the date of purchase of, and payment for, Units pursuant to the Offer, or (y) any material failure to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall be deemed to cure any breach or otherwise affect the representations or warranties of such party or the conditions to the obligations of the parties hereunder. 6.6. ACCESS TO INFORMATION. Except as prohibited by BVI law, the Company shall afford to Genzyme and to the officers, employees and agents of Genzyme reasonable access during regular business hours, from the date hereof to the Effective Date, to the Company's officers, employees, agents, properties, books, records and contracts, and shall furnish Genzyme all financial, operating and other data and information as Genzyme, through its officers, employees or agents, may reasonably request; provided, however, that such access shall not unreasonably interfere with any of the operations of the Company. 6.7. DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. (a) As of the Effective Date, proper provision will be made so that any affiliate of Genzyme that succeeds to the assets and liabilities of the Company, or at Genzyme's option, Genzyme, shall assume all of the obligations of the Company under the indemnification agreements between the Company and the Independent Directors as in effect on the date of this Agreement and, if amended prior to the Effective Date, on the Effective Date. In the event of a transfer by such successor entity of all or substantially all of its assets or a merger or consolidation in which such entity is not the surviving entity, proper provision will also be made so that the successors and assigns of such entity, or at Genzyme's option, Genzyme, shall assume the obligations of the Company under such agreements. In addition, the Company and, -15- 16 from and after consummation of the Offer or, if the Purchaser elects to proceed under Section 1.1(b)(ii), the Merger, Genzyme shall, to the fullest extent permitted by applicable law, indemnify and hold harmless each present and former director or officer of the Company (collectively, "Indemnified Parties") against all costs and expenses (including attorneys' fees) judgments, fines, losses, claims, damages, liabilities and settlement amounts paid in connection with any claim, action, suit, proceeding or investigation (whether arising before or after the consummation of the Offer) arising out of any act or omission in their capacity as officer, director or employee of the Company (and shall pay any expenses in advance of the final disposition of such action or proceeding to each Indemnified Party to the fullest extent permitted by law). If indemnification is sought hereunder by any Indemnified Party, then such Indemnified Party shall promptly notify Genzyme in writing of the claim for which indemnification is sought; provided, however, that the failure to so notify Genzyme shall not relieve Genzyme from any liability unless and to the extent that such failure results in a forfeiture by the Indemnified Party of substantive rights or defenses. Following such notification, Genzyme may elect to assume the defense of such claim, and, upon such election, Genzyme shall not be liable for any legal costs subsequently incurred by such Indemnified Party (other than reasonable costs of investigation) in connection therewith, unless Genzyme has failed to provide counsel reasonably satisfactory to such Indemnified Party in a timely manner or counsel that has been provided by Genzyme reasonably determines that its representation of such Indemnified Party would present it with a conflict of interest. The Indemnified Party will cooperate with Genzyme in the investigation and defense of any claim and shall not settle any claim without Genzyme's prior written consent. (b) Genzyme shall maintain in effect for three years from the Effective Date, if available, directors' and officers' liability insurance policies covering the directors and officers of the Company, with coverages and other terms at least as favorable as is currently in effect; provided, however, that Genzyme shall not be required to spend more than an amount per year equal to 150% of the current annual premium paid by the Company for such insurance. Following such three year period, and until the sixth anniversary of the Effective Date, Genzyme will assume the indemnification obligations of the Company under the indemnification agreements referred to in subsection (a) above to the extent it has not already done so. 6.8. GENZYME'S GUARANTY. Genzyme unconditionally guarantees the Purchaser's obligations (and the obligations of any other affiliate of Genzyme that is a party to the Merger Plan) under this Agreement and agrees to be primarily liable for any breach of this Agreement by the Purchaser (or such other affiliate of Genzyme). 7. CONDITIONS 7.1. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE SECOND STEP TRANSACTION. The respective obligations of each party to effect the Second Step Transaction shall be subject to the fulfillment at or prior to the Effective Date of each of the following conditions: (a) the Purchaser shall have made the Offer on the terms and conditions set forth therein and shall have purchased, or caused to be purchased, all Units validly tendered and not withdrawn pursuant to the Offer; provided, however, this condition shall not be applicable to the obligations of Genzyme or the Purchaser if, in breach of this Agreement or the terms of the -16- 17 Offer, the Purchaser fails to purchase any Units validly tendered and not withdrawn pursuant to the Offer and provided further than this condition shall not be applicable if the Purchaser has exercised its option described in Section 1.1(b)(ii); (b) the Merger Plan shall have been approved and adopted by the requisite vote or consent, if any, of the shareholders of the Company required by the BVI Law and the Company's Memorandum of Association and Articles of Association; and (c) no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental or regulatory body nor any statute, rule, regulation or order promulgated or enacted by any governmental body shall be in effect, which would make the acquisition by Genzyme or the Purchaser of the Shares illegal or otherwise prevent the consummation of the Second Step Transaction. 7.2. CONDITIONS TO OBLIGATION OF THE PURCHASER TO EFFECT A MERGER PURSUANT TO SECTION 1.1(b)(ii). In addition to the fulfillment of the condition set forth in subsection 7.1(b), the Purchaser shall not be obligated to effect a Merger pursuant to Section 1.1(b)(ii) if on or before the Effective Date any of the following shall occur or shall be determined by the Purchaser to have occurred and remain in effect: (a) except for matters which affect generally the economy or the industry in which the Company is engaged and except for continued losses incurred by the Company as a result of its operations and continued depletion of its cash resources in the ordinary course of business or consistent with the annual workplan currently in effect, any change shall have occurred in the business, properties, assets, liabilities, capitalization, stockholders equity, financial condition, operations, licenses or franchises or results of operations of the Company which has a Material Adverse Effect; or (b) there shall have been instituted or be pending any action, proceeding, application or counterclaim before any court or governmental or regulatory body which (i) challenges the validity of or seeks to restrain the consummation of or to impose any material limitation, on any transaction contemplated by this Agreement or seeks (ii) to obtain any material amount of damages in connection with such transactions; or (c) any statute, regulation, order or injunction shall have been enacted, entered, enforced or deemed applicable to the Merger that is reasonably likely to, directly or indirectly, result in any of the consequences referred to in subsection 7.2(b); or (d) the representations and warranties of the Company set forth in the Purchase Agreement shall not be true in any material respect as though made on such date, or the Company shall have failed in any material respect to perform any material obligation or covenant required in the Purchase Agreement to be performed or complied with by it; or (e) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or agreement in principle with respect to any Acquisition Proposal. -17- 18 8. TERMINATION, AMENDMENT AND WAIVER 8.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Date, as follows: (a) Subject to Section 1.3(b), by mutual written consent of the Boards of Directors of the Purchaser, Genzyme and the Company (upon the approval of the Special Committee); or (b) By the Company upon approval of the Special Committee: (i) if (A) the Purchaser shall have terminated the Offer without the purchase of any Units thereunder; or (B) the Purchaser shall not have paid for all Units validly tendered pursuant to the Offer and not withdrawn within 90 days after the commencement of the Offer, unless such termination of the Offer or failure to pay for Units shall have been caused by or resulted from (a) the failure of the Company to perform in any material respect any of its covenants or agreements contained in this Agreement, (b) the material breach by the Company of any of its representations or warranties contained in this Agreement, or (c) an election by the Purchaser pursuant to Section 1.1(b)(ii) of this Agreement to terminate the Offer; or (ii) if the Effective Date shall not have occurred on or before the six-month anniversary of the date of this Agreement due to a failure of any of the conditions to the obligation of the Company to effect the Second Step Transaction set forth in Section 7.1 or if the Purchaser has elected to proceed under Section 1.1(b)(i), if the Effective Date shall not have occurred on or before the six-month anniversary of the date of this Agreement; or (iii) prior to the purchase of any Units pursuant to the Offer, or the Effective Date if the Purchaser has elected to proceed under Section 1.1(b)(ii), if the Purchaser or Genzyme has materially failed to perform any of its obligations under this Agreement and such nonperformance has a material adverse effect on the Purchaser's or Genzyme's ability to consummate the Offer or the Second Step Transaction; or (iv) if, in the event that the Minimum Condition shall not have been satisfied on the Initial Expiration Date and the Purchaser shall have amended the Offer or terminated the Offer pursuant to the proviso in the second sentence of Section 1.1(b), the Purchaser has materially failed to perform any of its obligations under Section 1.1(b); or (v) if, prior to the purchase of Shares pursuant to the Offer, or the Effective Date if the Purchaser has elected to proceed under Section 1.1(b)(ii), the Special Committee shall have withdrawn or modified its approval or recommendation of the Offer or this Agreement in order to approve the execution by the Company of a definitive agreement providing for the acquisition of the Company or substantially all of its assets or a merger or other business combination or in order to approve a tender offer for all of the Shares or Units by a third party, in any case, as determined by the Special Committee, on terms more favorable to the Company's stockholders than the Offer (a "Superior Transaction"), provided, that (i) the Company shall have provided Genzyme with at least five business days' written notice of such Superior -18- 19 Transaction, including a copy of the proposed agreement and (ii) the Company shall not have violated Section 6.4 in connection with such Superior Transaction. (c) By Genzyme or the Purchaser: (i) if, due to an occurrence that would result in a failure to satisfy any condition set forth in Annex I or the Majority Consent Condition if the Purchaser has elected to proceed pursuant to Section 1.1(b)(i), the Purchaser shall have (A) failed to commence the Offer within 5 business days of the date on which the Purchaser's intention to make the Offer is publicly announced; (B) terminated the Offer without the purchase of any Units thereunder; or (C) failed to pay for all Units validly tendered pursuant to the Offer and not withdrawn within 90 days after commencement of the Offer, unless such failure or termination shall have been caused by or results from (x) the failure of Genzyme or the Purchaser to perform in any material respect any of its covenants or agreements contained in this Agreement, (y) the material breach by Genzyme or the Purchaser of any of its representations or warranties contained in this Agreement, or (z) the Purchaser's election to proceed pursuant to Section 1.1(b)(ii); or (ii) if the Effective Date shall not have occurred on or before the six-month anniversary of the date of this Agreement due to (i) a failure of any of the conditions to the obligations of Genzyme or the Purchaser to effect the Second Step Transaction set forth in Section 7.1, or (ii) in the event that the Purchaser has elected to proceed under Section 1.1(b)(ii), a failure of any of the conditions to the obligations of Genzyme or the Purchaser to effect the Second Step Transaction set forth in Section 7.2; or (iii) if, prior to the purchase of Units pursuant to the Offer, or the Effective Date if the Purchaser has elected to proceed under Section 1.1(b)(ii), the Company's Directors shall have publicly withdrawn or modified in a manner adverse to the Purchaser their approval or recommendation of the Offer or this Agreement or recommended acceptance of a Superior Transaction or shall have resolved to do any of the foregoing. 8.2. EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 8.1, all obligations and agreements of the parties set forth in this Agreement shall forthwith terminate and be of no further force or effect, and there shall be no liability on the part of Genzyme, the Purchaser or the Company hereunder except (a) as provided in Sections 8.3 and 8.4 and (b) that the foregoing shall not relieve any party for liability for any breach of this Agreement occurring prior to such termination. 8.3. ANCILLARY AGREEMENTS. In the event of any termination of this Agreement (x) by the Company pursuant to Section 8.1(b)(v) or by Genzyme or the Purchaser pursuant to Section 8.1(c)(iii), in either case as a result of a Superior Transaction in connection with which the Company shall not have violated Section 6.4, or (y) by Genzyme or the Purchaser pursuant to Section 8.1(c)(i), unless such termination is based upon the failure of the Company to perform in any material respect of its covenants or agreements contained in this Agreement, Genzyme agrees that, effective upon consummation of a Superior Transaction, it shall, at the Company's request: -19- 20 (a) consent to the Superior Transaction in its capacity as holder of the Company's Series 1992 Note dated April 28, 1992 and pursuant to all applicable provisions of the Company's Memorandum of Association; (b) terminate the Purchase Option Agreement dated as of April 28, 1992 among Genzyme and the underwriters named therein, in which event the Series 1992 Note will become due and payable in accordance with its terms; (c) consent to the assignment by the Company of the Technology License Agreement dated as of April 28, 1992 between Genzyme and the Company; (d) at the option of Genzyme, terminate or consent to the assignment by the Company of each of the following agreements, each of which are dated as of April 28, 1992: (i) the Research and Development Agreement between Genzyme and the Company; (ii) the Services Agreement between Genzyme Limited (a subsidiary of Genzyme) and the Company; and (iii) the Administrative Agreement between Genzyme and the Company. The termination of any of the foregoing agreements pursuant to this Section 8.3 shall not terminate any provision of such agreement which, by its terms, survives termination of such agreement. 8.4. TERMINATION FEE. In consideration of Genzyme's agreement set forth in Section 8.3 and its expenses incurred in connection with the transactions contemplated by this Agreement, in the event of the termination of this Agreement (A) by the Company pursuant to Section 8.1(b)(v) or (B) by Genzyme or the Purchaser pursuant to (x) Section 8.1(c)(iii) or (y) Section 8.1(c)(i) or (ii) if such termination is based upon the failure of the Company to perform in any material respect any of its covenants or agreements contained in this Agreement, the Company shall pay Genzyme a termination fee of $500,000 upon consummation of any Superior Transaction. 8.5. AMENDMENT. This Agreement may not be amended except, subject to Section 1.3, by action of the Board of Directors of each of the parties hereto set forth in an instrument in writing signed on behalf of each of the parties hereto; provided, however, that the Board of Directors of the Company shall not act to amend this Agreement without the approval of the Special Committee. 8.6. WAIVER. At any time prior to the Effective Date, whether before or after any special meeting or written action of the shareholders of the Company to approve the Second Step Transaction, any party hereto, subject to Section 1.3(b), by action taken by its Board of Directors (and, in the case of the Company, subject to the approval of the Special Committee), may (i) extend the time for the performance of any of the obligations or other acts of any other party hereto or (ii) subject to the second sentence of Section 1.1(b) and the proviso contained -20- 21 in Section 8.5, waive compliance with any of the agreements of any other party or with any conditions to its own obligations. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. 9. GENERAL PROVISIONS 9.1. CLOSING. Unless this Agreement shall have been terminated pursuant to the provisions of Article 8, and subject to the provisions of Article 7 hereof, the closing of the Second Step Transaction pursuant to this Agreement (the "Closing") shall take place at the offices of Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts 02108, as soon as practicable following consummation of the Offer or at such other place, time and date as the parties may mutually agree. The date and time of such Closing are hereinafter referred to as the "Closing Date." 9.2. BROKERS. (a) The Company represents and warrants that no broker, finder or investment banker other than the Financial Adviser is entitled to any brokerage, finder's or other fee or commission in connection with the Offer or the Second Step Transaction based upon arrangements made by or on behalf of the Company. The Company has provided to Genzyme a true and complete copy of its agreement with the Financial Adviser. (b) Genzyme and the Purchaser represent and warrant that no broker, finder or investment banker other than Robertson, Stephens & Company LLC is entitled to any brokerage, finder's or other fee or commission in connection with the Offer or the Second Step Transaction based upon arrangements made by or on behalf of Genzyme, the Purchaser or any of their respective subsidiaries or affiliates. 9.3. PUBLICITY. So long as this Agreement is in effect, except as such party reasonably believes is required by applicable law or applicable requirements of the Commission or The Nasdaq Stock Market, Inc., neither the Company nor Genzyme shall, nor shall either permit any of its subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other party. The parties shall cooperate as to the timing and contents of any such announcement. 9.4. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been fully given if (i) delivered personally, (ii) sent by certified or registered mail, return receipt requested, (iii) sent by overnight courier for delivery on the next business day or (iv) sent by confirmed telecopy, provided that a hard copy of all such telecopied materials is thereafter sent within 24 hours in the manner described in clauses (i), (ii) or (iii), to the parties at the following addresses or at such other addresses as shall be specified by the parties by like notice: -21- 22 (a) If to the Purchaser or Genzyme: Genzyme Corporation One Kendall Square Cambridge, MA 02139 Attention: Peter Wirth Telecopy No.: (617) 252-7600 with a copy to: Palmer & Dodge LLP One Beacon Street Boston, MA 02108 Attention: Maureen P. Manning Telecopy No.: (617) 227-4420 (b) If to the Company: Neozyme II Corporation One Kendall Square Cambridge, MA 02139 Attention: President Telecopy No.: (617) 252-7600 with copies to: The Special Committee of the Board of Directors of Neozyme II Corporation c/o Hambrecht & Quist LLC 230 Park Avenue New York, NY 10169 Attention: Dennis J. Purcell Telecopy No.: (212) 207-1519 and Hale and Dorr 60 State Street Boston, MA 02109 Attention: Steven D. Singer Telecopy No.: (617) 526-5000 Notices provided in accordance with this Section 9.4 shall be deemed delivered (i) on the date of personal delivery, (ii) four business days after deposit in the mail, (iii) one business day after delivery to an overnight courier, or (iv) on the date of confirmation of the telecopy transmission, as the case may be. -22- 23 9.5. INTERPRETATION. When a reference is made in this Agreement to subsidiaries of Genzyme, the Purchaser or the Company, the word "subsidiaries" means any corporation more than 50 percent of whose outstanding voting securities, or any partnership, joint venture or other entity more than 50 percent of whose total equity interest, is directly or indirectly owned by Genzyme, the Purchaser or the Company, as the case may be; and the word "affiliates" shall have the meaning assigned to such term under Rule 405 of the Securities Act. For purposes of this Agreement, the Company shall not be deemed to be an affiliate or subsidiary of Genzyme or the Purchaser. 9.6. REPRESENTATIONS AND WARRANTIES, ETC. The respective representations and warranties of the Company, Genzyme and the Purchaser contained herein shall expire upon consummation of the Offer. This Section 9.6 shall have no effect upon any other obligation of the parties hereto, whether to be performed before or after the consummation of the Offer. 9.7. MISCELLANEOUS. This Agreement (i) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof; (ii) is not intended to confer upon any other person any rights or remedies hereunder, create any agreement of employment with any person or otherwise create any third-party beneficiary hereto, except for the provisions of Section 6.7 (which provisions are intended to be for the benefit of the persons referred to therein and may be enforced by such persons); (iii) shall not be assigned except that the Purchaser may assign its rights and obligations to Genzyme or to one or more direct or indirect wholly-owned subsidiaries of Genzyme which in a written instrument shall make all the representations and warranties of the Purchaser set forth herein and shall agree to assume all of the Purchaser's obligations hereunder and be bound by all of the terms and conditions of this Agreement; provided, however, that no such assignment shall relieve Genzyme or the Purchaser of its obligations hereunder; and (iv) shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflict of laws thereof. Only the Purchaser (or Genzyme or a direct or indirect wholly-owned subsidiary of Genzyme to which the Purchaser assigns such rights and obligations) may commence the Offer or the purchase of Shares thereunder. 9.8. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 9.9. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 9.10. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. -23- 24 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above. GENZYME CORPORATION By /s/ David J. McLachlan ------------------------------------ Senior Vice President, Finance NEOZYME II ACQUISITION CORP. By /s/ David J. McLachlan ------------------------------------ President NEOZYME II CORPORATION By /s/ Paul M. Edwards ------------------------------------ President -24- 25 ANNEX I CONDITIONS OF THE OFFER Capitalized terms used in this Annex I have the meanings set forth in the attached Purchase Agreement. The Purchaser shall not be required to accept for payment and pay for any Units tendered pursuant to the Offer, may postpone the purchase of, and payment for, Units tendered, and may terminate or amend the Offer unless Units that would constitute not less than a majority of the Units outstanding are validly tendered prior to expiration of the Offer and not withdrawn (the "Minimum Condition") and if at or before the time of acceptance for payment of any such Units (whether or not any Units have theretofore been accepted for payment and paid for pursuant to the Offer) any of the following shall occur or shall be determined by the Purchaser to have occurred and remain in effect: (a) except for matters which affect generally the economy or the industry in which the Company is engaged and except for continued losses incurred by the Company as a result of its operations and continued depletion of its cash resources in the ordinary course of business or consistent with the annual workplan currently in effect, any change shall have occurred in the business, properties, assets, liabilities, capitalization, stockholders equity, financial condition, operations, licenses or franchises or results of operations of the Company which has a Material Adverse Effect; or (b) there shall have been instituted or be pending any action, proceeding, application or counterclaim before any court or governmental or regulatory body which (i) challenges the validity of or seeks to restrain the consummation of or to impose any material limitation, on any transaction contemplated by the Purchase Agreement or seeks (ii) to obtain any material amount of damages in connection with such transactions; or (c) any statute, regulation, order or injunction shall have been enacted, entered, enforced or deemed applicable to the Offer or the Second Step Transaction that is reasonably likely to, directly or indirectly, result in any of the consequences referred to in paragraph (b) above; or (d) the Board of Directors of the Company shall have publicly (including by amendment of its Schedule 14D-9 relating to the Offer) withdrawn or modified in a manner adverse to the Purchaser its approval or recommendation of the Offer or shall have resolved to do so; or (e) the representations and warranties of the Company set forth in the Purchase Agreement shall not be true in any material respect as though made on such date, or the Company shall have failed in any material respect to perform any material obligation or covenant required in the Purchase Agreement to be performed or complied with by it; or I-1 26 (f) the Company shall have entered into, or shall have publicly announced its intention to enter into, an agreement or agreement in principle with respect to any Acquisition Proposal. The foregoing conditions are for the sole benefit of Genzyme and the Purchaser and may be waived by Genzyme or the Purchaser, in whole or in part, at any time in their sole discretion, subject to the limitations set forth in the Purchase Agreement. I-2 27 ANNEX II PLAN OF MERGER This Plan of Merger (the "Merger Agreement"), dated as of __________, 1996, is between Neozyme II Merger Corp. ("Merger Corp."), a BVI international business company and wholly-owned subsidiary of Neozyme II Acquisition Corp., and Neozyme II Corporation ("Neozyme"), a BVI international business company. PRELIMINARY STATEMENT The Board of Directors of Merger Corp. and Neozyme have determined that it is advisable for Merger Corp. to merge with and into Neozyme pursuant to this Merger Agreement. Accordingly, Merger Corp. and Neozyme hereby agree as follows: ARTICLE 1 THE MERGER SECTION 1.1 THE MERGER In accordance with the provisions of this Merger Agreement and the BVI International Business Companies Ordinance, 1984 (the "BVI Law"), Merger Corp. shall be merged with and into Neozyme (the "Merger"). Following the Merger, the separate existence of Merger Corp. shall cease, and Neozyme shall continue as the surviving corporation (the "Surviving Corporation"). SECTION 1.2 EFFECTIVENESS Following approval of this Merger Agreement and the Merger by the members of Merger Corp. and Neozyme in accordance with the requirements of the BVI Law, the Merger shall become effective at 11:59 p.m. on _____________, 1996 or at such other time and date that this Merger Agreement is made effective in accordance with applicable law (the date of the effectiveness of the Merger being referred to herein as the "Effective Date"). ARTICLE 2 THE SURVIVING CORPORATION SECTION 2.1 NAME The name of the Surviving Corporation upon the effectiveness of the Merger shall be Neozyme II Corporation. SECTION 2.2 MEMORANDUM OF ASSOCIATION; ARTICLES OF ASSOCIATION The Memorandum of Association and Articles of Association of Merger Corp. as in effect immediately prior to the Merger shall be the Memorandum of Association and Articles of Association of the Surviving Corporation, without amendment except that Article 1 of the Memorandum of Association of the Surviving Corporation shall be amended to read as follows: "The name of the Corporation is: Neozyme II Corporation." SECTION 2.3 DIRECTORS AND OFFICERS The directors, committees of directors and officers of Merger Corp. immediately prior to the effectiveness of the Merger shall be the directors, committees and officers of the Surviving Corporation each to hold office and be constituted, as appropriate, in accordance with the Articles and Memorandum of Association of the Surviving Corporation. II-1 28 ARTICLE 3 MANNER OF CONVERSION OF STOCK SECTION 3.1 CONVERSION OF MERGER CORP. COMMON STOCK (a) Immediately prior to the Effective Date, Merger Corp. has outstanding __________ shares of Common Stock, $1.00 par value per share, which is its only class of capital stock and all of which shares are entitled to vote on the Merger as a single class. (b) On the Effective Date, each share of Common Stock, $1.00 par value, of Merger Corp. issued and outstanding immediately prior thereto shall, by virtue of the Merger and without the surrender of stock certificates or any other action by the holder of such shares or any other person, be converted into and exchanged for one fully paid and nonassessable share of Common Stock, $1.00 par value, of the Surviving Corporation. SECTION 3.2 CONVERSION OF NEOZYME CALLABLE COMMON STOCK (a) Immediately prior to the Effective Date, Neozyme has outstanding 2,415,000 shares of Callable Common Stock (the "Shares"), $1.00 par value per share, which is its only class of capital stock and all of which shares are entitled to vote on the Merger as a single class. (b) On the Effective Date, by virtue of the Merger and without any action on the part of Merger Corp. and Neozyme or the holder of any of the following securities: (i) Each Share issued and outstanding immediately prior to the Effective Date (other than Shares to be cancelled pursuant to clause (ii) below and any Dissenting Shares (as herein defined)) shall be converted into and become the right to receive an amount in cash per Share equal to $29.00 (the "Merger Consideration"). (ii) Each Share issued and outstanding immediately prior to the Effective Date and owned by Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Neozyme Acquisition Corp., a BVI international business company and the sole member of Merger Corp. or Neozyme or any direct or indirect subsidiary of such corporations, shall be canceled, and no payment shall be made with respect thereto. (iii) All Dissenting Shares shall be handled in accordance with Section 3.2(c). (c) Shares of capital stock of Neozyme held by a shareholder who has properly exercised dissenters rights with respect thereto in accordance with Section 83 of the BVI Law (collectively, the "Dissenting Shares") shall not be converted into Merger Consideration. From and after the Effective Date, a shareholder who has properly exercised such dissenters' rights shall no longer retain any rights of a shareholder of Neozyme or the Surviving Corporation, except those provided under the BVI Law. If after the Effective Date such holder withdraws or loses his right to demand payment for his Shares, such Shares shall be treated as if they had been converted as of the Effective Date into the right to receive the Merger Consideration payable in respect of such Shares pursuant to Section 3.2(b)(i). (d) Neozyme shall give Genzyme (i) prompt notice of any demands for payment, or notices of intent to demand payment, with respect to any shares of capital stock of Neozyme, any withdrawal of any such demands and any other instruments served pursuant to the BVI Law and received by Neozyme and (ii) the right to participate in all negotiations and proceedings with respect to any such demands. Neozyme shall cooperate with Genzyme concerning, and shall not, except with the prior written consent of Genzyme, voluntarily make any payment with respect to, or offer to settle or settle, any such demands. II-2 29 SECTION 3.3 EXCHANGE OF CERTIFICATES (a) Upon surrender of the Share certificate for cancellation to the Payment Agent selected by Genzyme, the Payment Agent shall pay to the holder of such certificate the Merger Consideration multiplied by the number of Shares represented by such certificate, and the certificate so surrendered shall forthwith be canceled. Notwithstanding the foregoing, 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 delivery or establish to the satisfaction of Genzyme that such tax has been paid or is not applicable. Furthermore, neither Genzyme nor any affiliate of Genzyme shall be liable to a holder of Shares for any Merger Consideration delivered to a public official pursuant to applicable abandoned property, escheat and similar laws. After the Effective Date, there shall be no transfers of the Shares on the stock transfer books of the Company. (b) Promptly following the date that is six months after the Effective Date, the Payment Agent shall, upon request by Genzyme, deliver to Genzyme all cash, certificates and other documents in its possession relating to the transactions described in this Merger Agreement, and the Payment Agent's duties shall terminate. Thereafter, each holder of a certificate formerly representing a Share may surrender such certificate to Genzyme and (subject to applicable abandoned property, escheat and similar laws) receive in exchange therefor the Merger Consideration, without any interest thereon but shall have no greater rights against Genzyme than may be accorded to general creditors of Genzyme under applicable law. ARTICLE 4 GENERAL SECTION 4.1 TERMINATION OR ABANDONMENT Prior to the approval of the members of Merger Corp. or of Neozyme, this Merger Agreement and the Merger may be terminated or abandoned by action of the Board of Directors of either Neozyme or Merger Corp., or both if, in the opinion of the Boards of Directors of Merger Corp. and Neozyme, such action would be in the best interests of such corporations. In the event of the termination or abandonment of this Agreement, this Agreement shall become void and have no effect, without any liability on the part of any party or its members or directors or officers with respect thereto. SECTION 4.2 WAIVER, MODIFICATION, OR AMENDMENT Any of the terms or conditions of this Merger Agreement may be waived before action thereon by the members of Merger Corp. or of Neozyme, by the party that is entitled to the benefits thereof. This Merger Agreement may be modified or amended by the Board of Directors of Merger Corp. and Neozyme before action thereon by the members of Merger Corp. or Neozyme, except as required by law. Any waiver, modification, or amendment shall be in writing. SECTION 4.3 MISCELLANEOUS This Merger Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The headings contained in this Agreement are solely for convenience of reference and shall not be deemed to affect the meaning or interpretation of any provision contained herein. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. II-3 EX-99.G1 4 AUDITED FINANCIAL STATEMENTS 1 EXHIBIT (g)(1) GENZYME CORPORATION AND SUBSIDIARIES FORM 10-K, DECEMBER 31, 1995 TABLE OF CONTENTS ITEM 8 FINANCIAL STATEMENTS AND NOTES Form 10-K Page No. --------- GENZYME CORPORATION AND SUBSIDIARIES Report of Independent Accountants 2 Consolidated Statements of Operations - For the Years Ended December 31, 1995, 1994 and 1993. 3 Consolidated Balance Sheets - December 31, 1995 and 1994 5 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1995, 1994 and 1993 7 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 9 Notes to Consolidated Financial Statements 11 GENZYME GENERAL DIVISION Report of Independent Accountants 34 Combined Statements of Operations - For the Years Ended December 31, 1995, 1994 and 1993 35 Combined Balance Sheets - December 31, 1995 and 1994 37 Combined Statements of Cash Flows - For the Years Ended December 31, 1995, 1994 and 1993 38 Notes to Combined Financial Statements 40 GENZYME TISSUE REPAIR DIVISION Report of Independent Accountants 68 Combined Statements of Operations - For the Years Ended December 31, 1995, 1994 and 1993. 69 Combined Balance Sheets - December 31, 1995 and 1994 70 Combined Statements of Cash Flows - For the Years Ended December 31, 1995, 1994 and 1993 71 Notes to Combined Financial Statements 72 All other schedules are omitted since the required information is inapplicable or has been presented in the related financial statements and the related notes. 2 Exhibit (g)(1) GENZYME CORPORATION AND SUBSIDIARIES REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of GENZYME CORPORATION: We have audited the accompanying consolidated balance sheets of Genzyme Corporation and Subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, cash flows and stockholders' equity and the consolidated financial statement schedule for each of the three years in the period ended December 31, 1995. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genzyme Corporation and Subsidiaries as of December 31, 1995 and 1994 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the consolidated financial statement schedule taken as a whole presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts March 1, 1996, except as to Note Q which is March 26, 1996 -2- 3 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Revenues: Net product sales ............................... $ 304,373 $ 238,645 $ 183,366 Net service sales ............................... 52,450 50,010 50,511 Revenues from research and development contracts: Related parties ................................ 26,758 20,883 34,162 Other .......................................... 202 1,513 2,332 --------- --------- --------- 383,783 311,051 270,371 Operating costs and expenses: Cost of products sold ........................... 113,964 92,226 64,704 Cost of services sold ........................... 35,868 32,403 34,558 Selling, general and administrative ............. 115,094 85,731 78,716 Research and development (including research and development related to contracts) .......... 68,845 55,334 48,331 Purchase of in-process research and development .................................... 14,216 11,215 49,000 Goodwill impairment and restructuring costs ..... -- -- 26,517 --------- --------- --------- 347,987 276,909 301,826 --------- --------- --------- Operating income (loss) ................................ 35,796 34,142 (31,455) Other income and (expenses): Minority interest in net loss of subsidiaries ... 1,608 1,659 9,892 Equity in net loss of unconsolidated subsidiary . (1,810) (1,353) -- Charge for impaired investments ................. -- (9,431) (700) Settlement of lawsuit ........................... -- (1,980) -- Investment income ............................... 8,814 9,101 12,209 Interest expense ................................ (1,109) (1,354) (2,500) --------- --------- --------- 7,503 (3,358) 18,901 --------- --------- --------- Income (loss) before income taxes ...................... 43,299 30,784 (12,554) Benefit (provision) for income taxes ................... (21,649) (14,481) 6,459 --------- --------- --------- Net income (loss) ...................................... $ 21,650 $ 16,303 $ (6,095) ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -3- 4 GENZYME CORPORATION AND SUBSIDIARIES INCOME (LOSS) PER COMMON SHARE
(Amounts in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1995 1994 1993 ---- ---- ---- ATTRIBUTABLE TO THE GENERAL DIVISION: Net income .............................. $ 34,823 $ 30,194 $ 8,456 Tax benefit allocated from Tissue Repair Division ................. 8,857 1,860 9,564 -------- -------- -------- Net income attributable to General Division Stock .............. $ 43,680 $ 32,054 $ 18,020 ======== ======== ======== Per common and common equivalent share: Net income ........................... $ 1.45 $ 1.22 $ 0.69 ======== ======== ======== Average shares outstanding ........... 30,092 26,169 26,250 ======== ======== ======== Per common share assuming full dilution: Net income ........................... $ 1.31 $ 1.14 $ 0.69 ======== ======== ======== Average shares outstanding ........... 33,311 28,159 26,250 ======== ======== ======== ATTRIBUTABLE TO THE TISSUE REPAIR DIVISION: Net loss ................................ $(22,030) $(15,751) $(23,860) Tax benefit allocated to General Division -- -- (255) -------- -------- -------- Net loss attributable to TR Stock .... $(22,030) $(15,751) $(24,115) ======== ======== ======== Per common share: Net loss ............................. $ (2.28) $ (4.40) $ (7.43) ======== ======== ======== Average shares outstanding ........... 9,659 3,578 3,245 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -4- 5 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) DECEMBER 31, - --------------------------------------------------------------------------- 1995 1994 ---- ---- ASSETS Current Assets: Cash and cash equivalents .................. $144,372 $ 63,542 Short-term investments ..................... 112,303 13,073 Accounts receivable, less allowance of $8,159 in 1995 and $6,169 in 1994 ..... 88,959 78,127 Inventories ................................ 53,042 36,840 Prepaid expenses and other current assets .. 12,531 11,074 Deferred tax assets - current .............. 7,729 4,072 -------- -------- Total current assets ..................... 418,936 206,728 Property, plant and equipment, net ............ 329,423 296,802 Other Assets: Long-term investments ...................... 69,561 76,845 Note receivable - related party ............ 262 3,572 Intangibles, net of accumulated amortization of $17,340 in 1995 and $12,633 in 1994 .... 29,934 29,303 Deferred tax assets - noncurrent ........... 23,645 28,473 Other noncurrent assets .................... 33,440 16,685 -------- -------- 156,842 154,878 -------- -------- $905,201 $658,408 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -5- 6 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Amounts in thousands) DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- 1995 1994 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable .......................................................... $ 21,980 $ 21,387 Accrued expenses .......................................................... 39,418 30,986 Income taxes payable ...................................................... 1,316 6,523 Deferred revenue .......................................................... 1,367 2,604 Current portion of long-term debt and capital lease obligations ............................................ 2,445 41,357 --------- --------- Total current liabilities ............................................. 66,526 102,857 Noncurrent Liabilities: Long-term debt and capital lease obligations .............................. 124,473 126,729 Other noncurrent liabilities .............................................. 8,995 7,548 --------- --------- 133,468 134,277 Minority interest in subsidiaries ............................................ -- 2,310 Commitments and Contingencies (Notes D, H, J, L and Q) ....................... -- -- Stockholders' Equity: Preferred Stock, $.01 par value, authorized 10,000,000 shares; no shares issued and outstanding Preferred Stock, Series A Junior participating, $.01 par value authorized 1,000,000 shares; no shares issued and outstanding Preferred Stock, Series B Junior participating, $.01 par value authorized 400,000 shares; no shares issued and outstanding Common Stocks: General Division Common Stock, $0.01 par value, authorized 100,000,000 shares; 31,185,800 and 26,446,510 issued at December 31, 1995 and 1994, respectively ............................ 312 264 Tissue Repair Division Common Stock, $0.01 par value, authorized 40,000,000 shares; 12,112,700 and 8,674,706 issued at December 31, 1995 and 1994, respectively ............................ 121 87 Treasury common stock, at cost: General Division Common Stock, 52,770 and 49,686 shares at December 31, 1995 and 1994, respectively ............................... (882) (755) Additional paid-in capital ................................................ 724,342 470,826 Accumulated deficit ....................................................... (17,158) (38,808) Other equity adjustments .................................................. (1,528) (12,650) --------- --------- 705,207 418,964 --------- --------- $ 905,201 $ 658,408 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -6- 7 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------- 1995 1994 1993 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) .................................. $ 21,650 $ 16,303 $ (6,095) Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization ................... 22,638 18,226 16,821 Write-off of impaired goodwill .................. -- -- 23,690 (Gain) loss on sale of investments .............. 110 (1,430) (1,647) Loss on disposal of fixed assets ................ 903 -- -- Non-cash compensation expense ................... 1,013 -- -- Write-off of impaired equity investments ........ -- 9,431 -- Accrued interest/amortization on bonds .......... (355) (2,116) -- Provision for bad debts ......................... 5,415 4,331 -- Purchase of in-process research and development for stock .......................... 14,216 11,215 -- Deferred income taxes ........................... 4,428 1,439 (27,068) Minority interest in net loss of subsidiaries ... (1,608) (1,659) (9,892) Equity in net loss of unconsolidated subsidiary . 1,810 1,353 -- Other ........................................... 1,458 386 831 Increase (decrease) in cash from working capital: Accounts receivable ........................... (15,069) (14,916) (10,917) Inventories ................................... (15,906) (10,549) (2,322) Prepaid expenses and other current assets ..... (1,680) (1,769) (695) Accounts payable, accrued expenses and deferred revenue ............................. 5,679 2,782 17,608 --------- --------- --------- Net cash provided by operating activities ..... 44,702 33,027 314 INVESTING ACTIVITIES: Purchases of investments ........................... (142,522) (210,274) (122,723) Purchases of restricted investments ................ (4,418) (10,000) (10,000) Maturities of investments .......................... 57,055 265,851 177,043 Property, plant and equipment ...................... (49,988) (101,707) (118,436) Cash paid as part of IG acquisition ................ (322) 5,359 (9,541) Additional investment in unconsolidated subsidiary . (4,428) (1,465) -- Other noncurrent assets ............................ (1,265) (3,221) (504) --------- --------- --------- Net cash used by investing activities ......... (145,888) (55,457) (84,161) FINANCING ACTIVITIES: Proceeds from issuance of common stock ............. 223,139 45,926 8,465 Proceeds from issuance of common stock by subsidiary ............................... 1,107 319 11,136 Proceeds from issuance of debt ..................... -- 21,819 39,360 Payments of long-term debt and capital lease obligations ................................. (41,449) (4,793) (979) --------- --------- --------- Net cash provided by financing activities ..... 182,797 63,271 57,982 Effect of exchange rate changes on cash ............... (781) (274) (135) --------- --------- --------- Increase (decrease) in cash and cash equivalents ...... 80,830 40,567 (26,000) Cash and cash equivalents at beginning of period ...... 63,542 22,975 48,975 --------- --------- --------- Cash and cash equivalents at end of period ............ $ 144,372 $ 63,542 $ 22,975 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -7- 8 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1995 1994 1993 ---- ---- ---- Supplemental disclosures of cash flows: Cash paid during the year for: Interest .......................... $ 9,944 $ 9,634 $ 7,333 Income taxes ...................... 19,581 13,506 16,066
Supplemental Disclosures of Non-Cash Transactions: Settlement of note receivable -- Note F Acquisition liability -- Note B The accompanying notes are an integral part of these financial statements. -8- 9 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS ------------------- --------------------- 1995 1994 1993 1995 1994 1993 ------- ------- ------- ------- ------- ------- COMMON STOCKS: General Division Common Stock: Balance at beginning of year ............... 26,447 24,292 23,830 $ 264 $ 243 $ 238 Shares issued in public offering ........... 2,875 -- -- 29 -- -- Issuance of General Division Common Stock in connection with acquisitions ............................. 420 -- -- 4 -- -- Exercise of stock options .................. 958 68 254 10 1 3 Issuance from employee stock purchase plan ............................. 143 126 86 1 1 1 Exercise of warrants ....................... 343 1,961 122 4 19 1 ------- ------- ------- ------- ------- ------- Balance at end of year ..................... 31,186 26,447 24,292 $ 312 $ 264 $ 243 ======= ======= ======= ======= ======= ======= Tissue Repair Division Common Stock: Balance at beginning of year ............... 8,675 -- -- $ 87 $ -- $ -- Shares issued in public offering ........... 3,000 -- -- 30 -- -- Issued to BioSurface shareholders .......... -- 5,000 -- -- 50 -- Issued at conversion ....................... -- 3,357 -- -- 34 -- Exercise of stock options .................. 122 -- -- 1 -- -- Issuance from employee stock purchase plan ............................. 270 4 -- 3 -- -- Exercise of warrants ....................... 46 314 -- -- 3 -- ------- ------- ------- ------- ------- ------- Balance at end of year ..................... 12,113 8,675 -- $ 121 $ 87 $ -- ======= ======= ======= ======= ======= ======= TREASURY COMMON STOCK (AT COST): General Division Common Stock: Balance at beginning of year ............... (50) (50) (50) $ (755) $ (755) $ (751) Purchases .................................. (3) -- -- (127) -- (4) ------- ------- ------- ------- ------- ------- Balance at end of year ................. (53) (50) (50) $ (882) $ (755) $ (755) ======= ======= ======= ======= ======= =======
ADDITIONAL PAID IN CAPITAL: Balance at beginning of year $ 470,826 $ 397,471 $ 378,854 General Division Common Stock issued in public offering 141,247 -- -- Tissue Repair Division Common Stock issued in public offering 42,262 -- -- Issuance of General Division Common Stock in connection with acquisitions 23,817 -- -- Tissue Repair Division Common Stock issued to BioSurface shareholders -- 25,263 -- Tissue Repair Division Common Stock issued at conversion -- (34) -- Exercise of stock options 28,152 1,189 3,846 Issuance from employee stock purchase plan 5,140 3,005 2,358 Exercise of warrants 6,260 41,708 2,261 Gain on sale of stock by subsidiary -- -- 7,553 Tax benefit from disqualified dispositions 5,500 2,224 2,599 Non-cash compensation expense 1,013 -- -- Purchase of Treasury Stock 125 -- -- --------- --------- --------- Balance at end of year $ 724,342 $ 470,826 $ 397,471 ========= ========= =========
The accompanying notes are an integral part of these financial statements. -9- 10 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
DOLLARS IN THOUSANDS -------------------- 1995 1994 1993 ---- ---- ---- ACCUMULATED DEFICIT: Balance at beginning of year $(38,808) $(55,111) $(49,016) Net income (loss) 21,650 16,303 (6,095) -------- -------- -------- Balance at end of year $(17,158) $(38,808) $(55,111) ======== ======== ======== OTHER EQUITY ADJUSTMENTS: Foreign currency adjustments $ (3,590) $ (4,915) (7,776) Unrealized gains/(losses) on investments 2,062 (7,735) -- -------- -------- -------- Total other equity adjustments $ (1,528) $(12,650) $ (7,776) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -10- 11 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: Genzyme Corporation (the "Company" or "Genzyme"), is a diversified human healthcare business with product development, manufacturing and marketing capabilities in therapeutic and diagnostic products, pharmaceuticals, diagnostic services and tissue repair. Basis of Presentation: The approval effective December 16, 1994 (the "Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994 resulted in the redesignation of Genzyme's common stock. The outstanding shares of Genzyme common stock were redesignated as General Division Common Stock ("General Division Stock") on a share-for-share basis and a second class of common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's common stock. General Division Stock and TR Stock provide stockholders with separate securities which are intended to reflect the performance of the General Division and Tissue Repair Division ("GTR"), respectively, and the allocation of tax benefits between the divisions pursuant to the management and accounting policies adopted by the Board of Directors (the "Board") of Genzyme Corporation. The approval of the Genzyme Stock Proposal did not result in any transfer of assets and liabilities of the Company or its subsidiaries. The Company prepares separate financial statements for the General Division and GTR in addition to consolidated financial information of the Company. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in companies and joint ventures in which the Company has a substantial ownership interest of approximately twenty-percent to fifty-percent, or in which the Company participates in policy decisions are accounted for using the equity method. Accordingly, the Company's share of the earnings of these entities is included in combined net income. Investments of less than 20% are reported at fair value (see "Investments"). All significant intercompany items and transactions have been eliminated in consolidation. Certain items in the consolidated financial statements for the periods prior to December 31, 1994 have been reclassified to conform with the current year's presentation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents, consisting principally of money market funds and municipal notes purchased with initial maturities of three months or less, are valued at cost plus accrued interest, which approximates market. Investments: Short-term investments include all investments with remaining maturities of twelve months or less. Long-term investments include all investments with remaining maturities greater than twelve months. The Company classifies its equity investments as available-for-sale and its investments in debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time the investments are purchased. Equity investments are included in "Other noncurrent assets" on the consolidated balance sheet (See Note D Investments). As of December 31, 1995, the Company classified all investments in debt -11- 12 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS securities as available-for-sale. These investments are reported at fair value as of the balance sheet date with unrealized holding gains and losses (the adjustment to fair value) included as a separate component of Stockholder's equity. If the adjustment to fair value reflects a decline in the value of the investment, management considers all available evidence to evaluate the extent to which the decline is "other than temporary" based on factors including (but not limited to) (i) the length of time and extent to which the market value has been less than cost; (ii) the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer; and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. Fair Value of Financial Instruments: The fair value of investments is obtained from market quotations and is disclosed in Note D. The fair value of the Company's subordinated debentures is obtained from a market maker in the debentures and is disclosed in Note H. The fair value of foreign currency forward contracts is based on forward rates in effect at December 31, 1995 and is disclosed below (see -- Hedging). Inventories: Inventories are valued at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Provision for depreciation is computed using the straight-line method over the estimated useful lives of the assets (three to ten years for plant and equipment, five to seven years for furniture and fixtures, and twenty to forty years for buildings). Certain specialized manufacturing equipment (with a net book value of $34.1 million at December 31, 1995) is depreciated over its remaining useful life using the units-of-production method. The remaining life and recoverability of such equipment is evaluated periodically based on the appropriate facts and circumstances. Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. For products expected to be commercialized, the Company capitalizes, to construction in-progress, the costs of manufacturing process validation and optimization incurred beginning when the product is deemed to have demonstrated technological feasibility and ending when the asset is substantially complete and is ready for its intended use. Qualified costs include direct labor and material, and incremental fixed overhead to the extent incurred. These costs are depreciated using the units of production method. Issuance of Stock by a Subsidiary: Gains on the issuance of stock by a subsidiary are included in net income unless the subsidiary is a research and development, start-up or development stage company or an entity whose viability as a going concern is under consideration. In those situations the Company accounts for the change in its proportionate share of subsidiary equity resulting from the additional equity raised by the subsidiary as an equity transaction. Intangibles: Intangible assets consist primarily of goodwill which is amortized on a straight-line basis over seven to eleven years. The remaining intangibles, including customer lists, patents and a covenant not to compete are being amortized on a straight-line basis over five to eleven years. Management's policy regarding intangible assets is to evaluate the recoverability of its intangible assets when the facts and circumstances suggest that these assets may be impaired. This analysis relies on a number of factors, including operating -12- 13 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS results, business plans, budgets, economic projections and changes in management's strategic direction or market emphasis. The test of such recoverability is a comparison of the asset to expected cumulative (undiscounted) operating income of the acquired entity over the remaining life of the asset. If the book value of the intangible asset exceeds undiscounted cumulative operating income, the write-down is computed as the excess of the asset over the present value of operating income discounted at the Company's weighted average cost of capital over the remaining amortization period. (See Note K - Goodwill Impairment and Restructuring Costs) Revenue Recognition: Revenues from product sales are recognized when goods are shipped and are net of third party contractual allowances, as applicable. Revenues from service sales are recognized when the service procedures have been completed. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract. Translation of Foreign Currencies: The financial statements of the Company's foreign subsidiaries are translated from local currency into U.S. dollars using the current exchange rate at the balance sheet date for assets and liabilities and the average exchange rate prevailing during the period for revenues and expenses. The local currency for all Company foreign subsidiaries is considered to be the functional currency for each entity and accordingly, translation adjustments for these subsidiaries are reported as a separate component of Stockholder equity. Exchange gains and losses on intercompany balances of a long-term investment nature are also recorded as a charge or credit to Stockholder equity. Transaction gains and losses are recorded in income and totaled $(840,000), $(41,000), and $(322,000) for the years ended December 31, 1995, 1994 and 1993, respectively. Hedging: The Company enters into forward contracts to reduce foreign currency exchange risk. Such contracts are revalued using current exchange rates at the balance sheet date. Gains and losses on forward contracts intended to hedge identifiable foreign currency commitments are deferred and included in the measurement of the related foreign currency transaction. All other gains and losses on revaluation of forward contracts are included in net income. At December 31, 1995, the Company had forward exchange contracts valued at $1,209,000. Related gains and losses were not material to the financial statements. Research and Development: Research and development costs are expensed in the period incurred. Costs of purchased technology which management believes has not demonstrated technological feasibility and for which there is no alternative future use are charged to expense in the period of purchase. Income Taxes: The Company uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The Company has not provided for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. At December 31, 1995, such undistributed foreign earnings were approximately $1,731,000. Net Income (Loss) Per Share: The method of calculating income per share for General Division Stock and TR Stock reflects the terms of the Articles of Organization, as amended, which provide that dividends may be declared and paid only out of the lesser of funds of Genzyme legally available therefore and each division's Available Dividend Amount, as defined. The Company computes income -13- 14 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS per share by dividing the income attributable to each class of stock by the weighted average number of shares of that stock and dilutive common stock equivalents and other potentially dilutive securities outstanding during the applicable period. Income attributable to General Division Stock and TR Stock equals the respective division's net income or loss for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from either division pursuant to the accounting policies adopted by the Board of Directors (the "Board"). The accounting policies provide that, as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other division without any compensating payment or allocation. Further description of management and accounting policies are included in the notes to the General Division financial statements. Income per share assuming full dilution is determined by dividing net income plus subordinated debenture interest (net of capitalized amounts) by the weighted average number of common shares outstanding during the year after giving effect for common stock equivalents arising from stock options and warrants and for subordinated debentures assumed converted to common stock. Net income (loss) attributable to General Division and TR Stock and net income (loss) per share gives effect to the provisions of the Genzyme Stock Proposal and, accordingly, periods prior to December 15, 1994 are presented on a pro forma basis. Accounting for Stock-Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), will require the Company to either elect expense recognition under SFAS 123 or its disclosure-only alternative for stock-based employee compensation. The expense recognition provision encouraged by SFAS 123 would require fair value-based financial accounting to recognize compensation expense for employee stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996 financial statements with comparable disclosures for the prior year. The Company has determined that it will elect the disclosure-only alternative permitted under SFAS 123. The Company will be required to disclose pro forma net income and pro forma earnings per share in the footnotes using the fair value based method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The Company has not determined the impact of these pro forma adjustments to its net income or earnings per share. Financial Instruments: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, current and non-current investments. The Company generally invests its cash investments in investments-grade securities. Uncertainties: The Company is subject to risks common to companies in the Biotechnology industry, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA government regulations. NOTE B ACQUISITIONS In April 1993, the Company acquired Virotech System-Diagnostika, GmbH in Germany, for approximately $10,200,000, of which approximately $8,100,000 was recorded as goodwill. In May 1993 Genzyme srl, a wholly-owned subsidiary of the -14- 15 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company located in Italy, acquired certain assets of Omnia Res srl for approximately $700,000, of which approximately $100,000 was recorded as goodwill. These acquisitions were accounted for as purchases. Accordingly, the associated net assets and operations have been included in the Company's financial statements since the acquisition dates. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. In July 1994, the Company paid approximately $6,100,000 for newly-issued shares of common stock representing 51% of the outstanding common stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance chemicals used in the development of pharmaceuticals. Based on certain put and call options in the Acquisition Agreement, which effectively ensure the purchase by the Company of the remaining outstanding shares during the period from July 1, 1996 through June 30, 1999, the Company accounted for the acquisition as a purchase of all of the outstanding shares of Sygena, and recorded a deferred liability at a present value of approximately 9,000,000 Swiss francs for the purchase of the remaining shares. The excess purchase price over the net assets acquired was approximately 5,000,000 Swiss francs (approximately $4,000,000) and was recorded as goodwill. The net assets and operations of Sygena have been included in the Company's financial statements from the date of acquisition. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. On December 15, 1994, Genzyme acquired BioSurface Technology, Inc. ("BioSurface") by issuing .575 of one share of TR Stock for each share of BioSurface common stock. In the aggregate, 5,000,000 shares of TR Stock, valued at $25,312,500, were issued representing 50% of the initial equity interest in GTR. The acquisition was accounted for as a purchase. Accordingly, the associated net assets and operations of BioSurface have been included in the Company's financial statements since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, $11,215,000, was allocated to in-process research and development and charged to operations. The following summary, prepared on a pro forma basis, presents the consolidated results of operations as if BioSurface had been acquired at the beginning of the periods presented. This pro forma summary does not necessarily reflect the results of operations as they would have been if Genzyme and BioSurface constituted a single entity during the periods presented and is not necessarily indicative of results which may be obtained in the future.
YEAR ENDED DECEMBER 31, ----------------------- 1994 1993 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) - ------------------------------------------------ ----------- ----------- Revenues ....................................... $ 317,047 $ 276,080 Net income (loss) .............................. 19,448 (13,978) Pro forma net income (loss) per share: Attributable to General Division ............. 1.22 0.68 Attributable to Tissue Repair Division........ (1.51) (3.78)
In October 1995, Genzyme acquired the publicly-held minority interest in its majority-owned subsidiary, IG Laboratories, Inc. ("IG"), by issuing approximately .125 of one share of General Division Stock for each share of IG common stock. In the aggregate, approximately 385,255 shares of General Division Stock, valued at approximately $22.5 million were issued. The acquisition was accounted for as a purchase. The excess of the purchase price -15- 16 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS over the fair market value of the net assets acquired, approximately $18.6 million, was allocated $14.2 million to in-process research and development and charged to operations, and $4.4 million to goodwill to be amortized over 11 years. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. In February 1996, Genzyme signed a definitive agreement to acquire Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Stock valued at approximately $36.8 million. Genetrix Inc. will be merged with Genzyme's Integrated Genetics diagnostic services business. The transaction will be accounted for as a pooling of interests. NOTE C MAJORITY-OWNED SUBSIDIARIES IG LABORATORIES, INC. IG was an approximately 70%-owned subsidiary for the years ended December 31, 1993, 1994 and for the period from January 1, 1995 through October 1, 1995. (See Note B). GENZYME TRANSGENICS CORPORATION. Genzyme Transgenics Corporation ("GTC") was a majority-owned subsidiary for the years ended December 31, 1992, 1993 and for the period from January 1, 1994 through September 30, 1994. (See Note D). NOTE D INVESTMENTS Investments in marketable securities at December 31 consisted of the following:
1995 1994 ----------------------------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - -------------------------------------------------------------------------------------------------------------------------------- Short Term: Certificates of deposit .................... $ 1,870 $ 1,870 $ 2,979 $ 2,979 Federal agency notes ....................... 26,731 26,767 -- -- Corporate notes ............................ 80,576 80,646 4,281 4,177 U.S. Treasury notes ........................ 3,031 3,020 6,063 5,917 Municipal notes ............................ -- -- -- -- -------- -------- -------- -------- $112,208 $112,303 $ 13,323 $ 13,073 ======== ======== ======== ======== Long Term: Common stock ............................... $ -- $ -- $ -- $ -- Federal agency notes ....................... 4,047 4,053 Corporate notes ............................ 42,518 42,845 57,584 54,420 U.S. Treasury notes ........................ 22,351 22,663 24,716 22,425 Municipal notes ............................ -- -- -- -- -------- -------- -------- -------- $ 68,916 $ 69,561 $ 82,300 $ 76,845 ======== ======== ======== ========
Information regarding the range of contractual maturities of investments in debt securities at December 31, 1995 is as follows:
MARKET (DOLLARS IN THOUSANDS) COST VALUE ------------------------------------------------------------------ Within 1 year ............................. $112,208 $112,304 After 1 year through 2 years .............. 29,997 30,137 After 2 years through 10 years ............ 38,919 39,423 -------- --------
-16- 17 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $181,124 $181,864 ======== ======== In August 1993, the Company acquired 502,512 shares of the Series E Convertible Preferred Stock (the "Series E Stock") of Univax Biologics, Inc., for $5.0 million in connection with an agreement to develop and commercialize certain products. Upon the achievement of specified clinical milestones, the Company is committed to making future milestone payments. In November 1995, Univax merged with North American Biologicals, Inc.("NABI") and in connection with the merger the General Division received 526,315 shares of NABI common stock in exchange for the Series E Stock. The investment is classified as available-for-sale and is included in "Other noncurrent assets" in the consolidated balance sheets at fair market value. At December 31, 1995, this value was approximately $5.7 million compared to a value of $2.7 million at December 31, 1994. In September 1993, the Company acquired 714,286 shares of common stock of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in connection with an agreement to develop and commercialize certain products. Upon the achievement of certain specified clinical milestones, the Company is committed to making future milestone payments and an additional $5.0 million investment in Argus. In August 1994, pursuant to the Common Stock Purchase Agreement, Argus delivered to the Company an additional 132,325 shares resulting in a total of 846,611 shares held by the Company. The investment is classified as available-for-sale and is included in "Other noncurrent assets" in the consolidated balance sheets at fair market value. At December 31, 1994, this value was approximately $1.8 million. The Company believed that a portion of the impairment in the value of the investment in Argus was "other than temporary" and accordingly, a loss of approximately $3.3 million was charged to operations in 1994. In September 1995, Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex. In connection with this merger, the common stock of Argus was redesignated as common stock of Aronex. At December 31, 1995 the value of this investment was $3.7 million. Pursuant to the Common Stock Purchase Agreement (the "Agreement") dated as of June 24, 1994 between the Company and Celtrix Pharmaceuticals, Inc. ("Celtrix"), the Company acquired 1,550,388 restricted shares, approximately 11.5% of the common stock of Celtrix outstanding after the acquisition, for $10.0 million. In November 1994, Celtrix announced a delay in the commercialization of an application of a key product and in February 1995, Celtrix announced that it had halted all studies related to another of its key development products. These announcements resulted in a decline in the fair market value of the Company's investment. The Company believed that a portion of the impairment in the value of the investment in Celtrix was "other than temporary". Accordingly, a loss of approximately $6.1 million was charged to operations in 1994. In 1995, Celtrix exercised its option to require the Company to purchase additional shares of Celtrix at fair market value. As a result in December 1995, the Company acquired an additional 1,472,829 shares at $3 per share. The investment is classified as available-for-sale and is included in "Other noncurrent assets". At December 31, 1995, this value was approximately $7.7 million. Net realized losses included in investment income for 1995 were $110,000 Net realized gains included in investment income for 1994 and 1993 were $1,430,000 and $1,647,000, respectively. Gross unrealized holding gains of $2,073,000 and unrealized holding losses of $10,000, were recorded at December 31, 1995 in Stockholders' equity as compared to unrealized holding losses of $5,704,000 recorded at December 31, 1994. -17- 18 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In July 1993, GTC, a wholly-owned subsidiary of the Company specializing in transgenic technology which was incorporated in February 1993, completed an initial public offering of 1,500,000 shares of its common stock priced at $8.00 per share. The offering resulted in an increase in the value of the Company's investment in GTC of $7.6 million which was recorded as an increase to additional paid-in capital. At December 31, 1993, the Company owned 4,000,000 shares or approximately 73% of the outstanding common stock of GTC. On October 1, 1994, GTC acquired TSI Corporation ("TSI") in a merger transaction in which GTC issued two-tenths (0.2) of one share of GTC common stock for each share of TSI common stock, in a transaction accounted for as a purchase. As a result of the acquisition, the Company's percentage ownership of GTC common stock declined from approximately 73% to approximately 40%. Accordingly, the Company began accounting for its investment in GTC under the equity method. In February 1995, GTC exercised its option to sell to the Company 500,000 additional shares of GTC common stock at a price of $8.00 per share. The $4.0 million acquisition cost has been added to the Company's equity investment in this subsidiary. In June 1995, the Company converted approximately $4.0 million of GTC debt into equity through the acquisition of 1.3 million shares of GTC common stock. In July 1995, GTC acquired Biodevelopment Laboratories, Inc. ("BDL"). In connection with the transaction, the Company issued approximately 34,000 shares of General Division Common Stock to former stockholders of BDL in exchange for approximately 475,000 shares of newly issued GTC stock. In total, GTC issued approximately 1,207,000 shares of its common stock in the transaction, resulting in a decrease in the Company's interest in GTC to 48.2%. Also as part of the BDL transaction, the Company guaranteed a $7.5 million line of credit from a commercial bank in return for warrants to purchase 145,000 shares of GTC stock. As of December 31, 1995, GTC had $6.0 million outstanding under this line of credit. GTC had a working capital deficiency of approximately $25.1 million at December 31, 1995 and had an operating loss of approximately $4.1 million for the year then ended. The fair market value of the GTC shares, based on quoted market prices, was $27,601,000 at December 31, 1995. The Company reported equity in GTC's losses of $1,810,000 in 1995. Following are condensed financial data of GTC: -18- 19 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, ----------------------- (DOLLARS IN THOUSANDS) 1995 1994 1993 ---------------------------------------------------------------------------- Revenues....................... $38,406 $11,692 $ 3,222 Operating loss................. (2,014) (5,231) (1,327) Net loss....................... (4,133) (5,284) (1,171)
DECEMBER 31, ------------ (DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------- Current assets................. $16,409 $11,629 Noncurrent assets.............. 41,478 36,364 Current liabilities............ 24,155 19,487 Noncurrent liabilities......... 6,444 9,082
NOTE E INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1995 1994 ------------------------------------------------------ Raw materials.............. $12,634 $14,572 Work-in-process............ 14,821 9,247 Finished products.......... 25,587 13,021 ------- ------- $53,042 $36,840 ======= =======
NOTE F PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------- Plant and equipment.................... $109,035 $ 64,350 Land and buildings..................... 46,456 40,157 Leasehold improvements................ 52,803 32,562 Furniture and fixtures................. 7,530 8,426 Construction in progress............... 178,083 198,117 -------- -------- 393,907 343,612 Less accumulated depreciation........ (64,484) (46,810) -------- -------- Property, plant and equipment, net..... $329,423 $296,802 ======== ========
Depreciation expense was $17,961,000, $13,486,000, and $10,857,000 in 1995, 1994 and 1993, respectively. The Company is constructing a mammalian cell production facility in Boston, Massachusetts which will be used to produce a recombinant form of Ceredase(R) enzyme ("Cerezyme(TM)") and other products. The facility is expected to cost approximately $151 million plus an additional $23 million of Cerezyme(R) process validation and optimization costs. The facility is expected to be validated and placed into service in 1996. As of December 31, 1995, the Company had capitalized, and included in construction in progress, approximately $151,000,000 of expenditures related to this building and approximately -19- 20 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $33,472,000 of process validation and optimization costs related to this and other facilities. In 1995, 1994 and 1993, the Company capitalized approximately $9.0, $9.2 and $4.7 million of interest costs, respectively, relating to this and other facility construction. In June 1994, the Company acquired its Mountain Road facility in Framingham, Massachusetts for $26.9 million of which $25.1 million was allocated to buildings and $1.8 million was allocated to land based on appraised values. The Company funded the purchase with $1.2 million in cash, settlement of a $4.2 million note receivable (including accrued interest) from the landlord of the facility and the proceeds of a $21.5 million term loan from a bank (See Note H). NOTE G ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------- Professional fees...................... $ 2,679 $ 3,102 Compensation........................... 12,951 8,853 Royalties.............................. 6,702 5,055 Interest............................... 1,857 2,361 Other.................................. 15,229 11,615 ------- ------- $39,418 $30,986 ======= =======
NOTE H LONG-TERM DEBT AND LEASES Long-Term Debt Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------- Convertible subordinated notes......... $100,000 $100,000 Note payable, bank (due 1/6/95)........ - 39,000 Mortgage note payable, matures June 13, 1999......................... 20,863 21,323 Mortgage note payable, matures November 2014........................ 3,356 3,409 Mortgage note payable, matures January 1, 2008...................... 747 808 Term notes payable..................... 1,626 2,879 -------- -------- 126,592 167,419 Less current portion................... (2,243) (41,020) -------- -------- $124,349 $126,399 ======== ========
In 1991, the Company issued 6 3/4% Convertible Subordinated Notes due October 1, 2001 in the aggregate principal amount of $100,000,000. The notes are convertible into General Division Stock and TR Stock at any time at a conversion price of $52.875 and, under certain circumstances, may be redeemed by the Company. Net proceeds from the debentures were $97,250,000. Deferred financing costs of $2,750,000, classified as "Other noncurrent assets" on the combined balance sheets, are being amortized to expense over the term of the debt issue. As of December 31, 1995, the debentures had a market value of approximately $125 million (See Note Q). On December 21, 1993, the Company borrowed $39,000,000, under a Credit Agreement (the "Agreement") with a bank. The interest rate in effect at December 31, 1994 was 6.2875%. The loan was repaid January 6, 1995. -20- 21 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The mortgage note due June 1999 is collateralized by land and buildings with a net book value of $29,108,000 at December 31, 1995, bears interest at 7.73% annually, and is payable monthly based on a twenty year direct reduction amortization schedule, with the remaining principal due June 13, 1999. The mortgage note maturing November 2014 is collateralized by land and buildings with a net book value of $5,188,000 at December 31, 1995 and bears interest at 10.5%. The mortgage note maturing January 2008 provides the bank with a "call or review" feature at the end of the first 60 month period, allowing the bank to adjust the note under specific circumstances. This note bears interest at a variable rate of prime plus 1% and is collateralized by land and fixtures. Principal and interest are payable monthly on both of these notes. The Company maintains a $15.0 million line of credit with Fleet Bank of Massachusetts, the entire amount, of which, remained available at December 31, 1995. Operating Leases Total rent expense under operating leases was $10,006,000, $8,663,000, and $8,734,000 in 1995, 1994 and 1993 respectively. The Company leases facilities and personal property under certain operating leases in excess of one year. Future minimum payments due under the Company's long-term obligations and capital and operating leases are as follows:
LONG-TERM CAPITAL OPERATING (DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES -------------------------------------------------------------------------------------------- 1996...................................... $ 11,160 $240 $ 12,317 1997...................................... 9,381 70 12,071 1998...................................... 9,376 118 11,141 1999...................................... 27,306 - 10,942 2000...................................... 7,253 - 9,305 Thereafter................................ 111,792 - 48,273 -------- ---- -------- Total minimum payments................. 176,268 428 104,049 Less: interest............................ (49,676) (102) - -------- ---- -------- $126,592 $326 $104,049 ======== ==== ========
NOTE I STOCKHOLDERS' EQUITY Immediately prior to the Effective Date, as defined in Note A, approximately 15,791,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the "Warrants"), and the conversion of the 6 3/4% Convertible Subordinated Notes Due 2001 (the "Notes"). Pursuant to antidilution provisions in the agreements covering the options, Genzyme has adjusted each option outstanding on the Effective Date to provide for separation of the option into an option exercisable for General Division Stock and an option exercisable for the number of shares of TR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date. The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of General Division Stock and TR Stock upon exercise of the Warrant that the holder would have received if the holder had exercised the Warrant immediately prior to the Effective Date. -21- 22 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after the Effective Date will receive, in addition to the shares of General Division Stock into which the Note is convertible, the same number of shares of TR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. In September 1995, Genzyme sold 3,000,000 shares of Tissue Repair Common Stock to the public at a price of $15 per share for net proceeds of $42.4 million after underwriting discounts and commissions. In October 1995, Genzyme sold 2,875,000 shares of General Division Common Stock to the public for $51.25 per share for net proceeds of $141.5 million. At December 31, 1995, approximately 11,185,804 shares of General Division Stock and 3,478,585 shares of TR Stock were reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as amended outstanding warrants, and the conversion of the Notes. Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the preferences, voting powers, qualifications and special or relative rights or privileges of any such series before the issuance of any shares of that series. The Board of Directors shall determine the number of shares constituting each series of Preferred Stock and each series shall have a distinguishing designation. Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"), options may be granted to purchase an aggregate of 7,600,000 shares of General Division Stock and 2,000,000 shares of TR Stock. The Plan allows the granting of incentive stock options and nonstatutory stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, the Company has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 100,000 shares and 70,000 shares, respectively, of General Division Stock and TR Stock, at a rate of 1,600 shares and 400 shares, respectively, for each year of service are automatically granted at fair market value to members of the Board of Directors of the Company upon their election or reelection as Directors. All options expire ten years after the initial grant date and vest over various periods. Stock option activity is summarized below:
SHARES UNDER OPTION OPTION PRICE ------------ ------------ GENZYME CORPORATION COMMON STOCK Outstanding at December 31, 1992..................... 2,929,067 3.00 - 72.04 Granted............................................ 1,332,240 26.25 - 45.00 Exercised.......................................... (254,171) 4.00 - 37.25 Forfeited and canceled............................. (161,782) 7.75 - 72.04 ---------- Outstanding at December 31, 1993..................... 3,845,354 3.00 - 66.16 Granted............................................ 1,619,364 22.63 - 42.00 Exercised.......................................... (66,378) 3.00 - 35.25 Forfeited and canceled............................. (211,763) 8.25 - 66.16
-22- 23 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Converted at Effective Date........................ (5,186,577) 5.89 - 65.49 ---------- Outstanding at December 31, 1994..................... - ========== GENERAL DIVISION STOCK Converted at Effective Date........................ 5,186,577 $ 5.89 - $65.49 Granted............................................ 66,674 27.25 - 32.50 Exercised.......................................... (1,250) 6.02 - 19.38 Forfeited and canceled............................. (11,151) 30.13 - 49.00 ----------- Outstanding at December 31, 1994..................... 5,240,850 5.89 - 65.49 Granted 2,070,751 5.89 - 67.63 Exercised (1,003,827) 5.89 - 60.14 Forfeited and canceled (221,441) 5.89 - 66.63 ---------- Outstanding at December 31, 1995..................... 6,086,333 7.57 - 67.63 ========== TR STOCK Converted at Effective Date........................ 464,824 $ 1.03 - $11.15 Granted............................................ 940,976 4.75 - 5.13 ---------- Outstanding at December 31, 1994..................... 1,405,800 1.03 - 11.15 Granted............................................ 1,153,053 3.19 - 17.63 Exercised.......................................... (63,608) 1.68 - 9.58 Forfeited and canceled............................. (76,202) 1.68 - 8.30 ---------- Outstanding at December 31, 1995..................... 2,419,043 1.03 - 17.63 ==========
At December 31, 1995, 2,559,198 of the outstanding General Division Stock options were exercisable resulting in aggregate exercise proceeds of approximately $78,615,000 and 444,343 of the outstanding TR Stock options were exercisable resulting in aggregate exercise proceeds of approximately $2,457,400. The total exercise proceeds for all options outstanding at December 31, 1995 is approximately $216,568,000 and $20,885,000 for General Division Stock and TR Stock, respectively. Information regarding the range of option prices is as follows:
GENERAL DIVISION STOCK TISSUE REPAIR STOCK ---------------------- ------------------- SHARES SHARES UNDER OPTION OPTION PRICE UNDER OPTION OPTION PRICE ------------ ------------ ------------ ------------ 641,247 $ 7.57 - $18.93 80,998 $1.026 - $ 3.257 1,381,472 19.38 - 29.88 1,033,340 3.300 - 5.088 765,926 30.00 - 32.13 79,855 5.109 - 5.471 785,815 32.24 - 38.84 385,115 5.492 - 6.000 704,394 38.88 110,688 6.003 8.302 726,683 39.00 - 48.75 115,768 8.325 - 16.000 1,080,796 49.00 - 67.63 613,279 16.625 - 17.625 --------- --------- 6,086,333 2,419,043 ========= =========
Employee Stock Purchase Plan. The Company's 1990 Employee Stock Purchase Plan allows full-time employees, as defined in this plan, to purchase the Company's stock at 85% of fair market value. Under this plan, 750,000 shares of the General Division Stock are authorized, of which 142,934, 129,938 and 85,929 shares were issued in 1995, 1994 and 1993, respectively and 600,000 shares of TR Stock are authorized, of which 269,920 and 3,613 shares of TR Stock were issued in 1995 and 1994, respectively. -23- 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Rights. In 1989, the Company's Board issued a dividend of one preferred stock purchase right (a "Common Stock Right") on each share of Common Stock. At the Effective Date, the Rights Agreement under which the rights were issued was amended and restated to reflect the change in the capital structure of the Company and the Board declared a distribution to holders of TR Stock of a right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated Rights Agreement provides that each General Division Stock Right, which replaced the Common Stock Right, and each TR Stock Right, when it becomes exercisable, will entitle the holder to purchase from the Company (i) in the case of a General Division Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $52, subject to adjustment, and (ii) in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $25, subject to adjustment. The rights expire on March 28, 1999. Stock Warrants. The Company has issued warrants which, when exercised, grant the holders one share of General Division Stock and .135 shares of TR Stock. These warrants were granted in exchange for the receipt of options to purchase the partnership interests of Genzyme Development Partners, L.P. (the "Surgical Aids Partnership") the callable common stock of Neozyme II Corporation ("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds from the exercise of these warrants will be allocated to the General Division (see "TR Designated Shares"). The outstanding warrants were issued under the following terms:
EXERCISE ISSUE NUMBER OF PRICE DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD - ---- ---------------------------------- -------- --------- --------------- 1989 Surgical Aids Partnership, the sales agent and its affiliates 1,205,416 $ 16.01 November 1, 1991 to 50,285 16.03 October 31, 1996 666,399 22.91 1992 Investors in Neozyme II: Series N 2,415,000 $38.25 Through December 31, 1996 Callable 2,415,000 See below January 1, 1997 to December 31, 1998 unless otherwise terminated 1995 Dr. Richard Warren 6,005 $ 42.67 Through September 30, 2000
The warrants issued to the Surgical Aids Partnership were issued in consideration for the granting to Genzyme of an exclusive right to purchase all of the outstanding partnership interests of the Surgical Aids Partnership. The warrants issued to investors of Neozyme II were granted in consideration of the option to purchase the callable common stock of Neozyme II and had an appraised fair value of $16,905,000. The Callable Warrants automatically terminate upon Genzyme's exercise of its option to purchase all of the callable common stock of Neozyme II. These warrants have an exercise price equal to the sum of the average of the closing sale prices of one share of General Division Stock and .135 share of TR Stock for the 20 trading days immediately preceding the exercise thereof. Warrant activity is summarized below: -24- 25 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS WARRANT PRICE -------- ------------- Outstanding at December 31, 1992..................... 8,283,246 16.01 - 41.31 Exercised........................................ (123,180) 16.01 - 23.86 Expired.......................................... (4,062) 38.79 - 41.31 ---------- Outstanding at December 31, 1993..................... 8,156,004 16.01 - 38.25 Exercised........................................ (2,197,774) 16.01 - 22.91 Expired.......................................... (23,849) 16.01 - 22.91 ---------- Outstanding at December 31, 1994..................... 5,934,381 16.01 - 38.25 Granted.......................................... 6,005 42.67 Exercised........................................ (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995..................... 5,597,241 16.01 - 42.67 ==========
NOTE J RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following:
(DOLLARS IN THOUSANDS) 1995 1994 1993 ------------------------------------------------------------------------------------------------- Technology license fees.............................. $ - $ - $ 2,000 Fees for research and development activities: Neozyme I....................................... - - 8,983 Surgical Aids Partnership....................... - 913 8,378 Neozyme II...................................... 24,198 17,785 12,651 Research joint venture.......................... 2,560 2,185 2,150 ------- ------- ------- $26,758 $20,883 $34,162 ======= ======= =======
Neozyme I and II In 1992, the Company entered into a development contract with Neozyme II whereby the Company was engaged to perform all research, development and clinical testing activities related to products and programs for which Neozyme II was licensed. The Company received $5,000,000 in 1992 under the technology license agreement pursuant to which the Company granted Neozyme II exclusive rights to manufacture and sell the products developed under the technology license agreements. The funds for Neozyme II's development contract were raised by the sale of 2,415,000 units for net proceeds of $78,038,000. Each unit consisted of one share of Neozyme II callable common stock, one Series N warrant and one callable warrant to purchase one share of General Division Stock and .135 shares of TR Stock. Included in accounts receivable as of December 31, 1995 and 1994 was $2,469,000 and $729,000, respectively, due from Neozyme II. The Company has an option to purchase all of the shares of the Neozyme II callable common stock for cash, shares of General Division Stock or any combination thereof (determined at Genzyme's sole discretion) at $117.00 per share from January 1, 1996 through December 31, 1996, subject to downward adjustment if exercised before December 31. Due to the uncertainties inherent in the very early stages of the research into CFTR, management did not consider the exercise of the option probable and, accordingly, charged to operations in 1992 the $16,905,000 appraised fair value of this purchase option. -25- 26 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 1993, the Company exercised its option to purchase one of the two remaining research programs being funded by Neozyme I, created in 1990 for a purchase price of $24,000,000 in cash. As part of the purchase, the Company retained $0.6 million to fund the costs of the Neozyme I dissolution which occurred in 1994, and any future tax liabilities. This transaction was accounted for as a purchase of in-process research and development and its value charged to operations in 1993. The Surgical Aids Partnership In September 1989, the Company entered into a development contract valued at approximately $37,000,000 with the Surgical Aids Partnership ("the Partnership") to perform research and development of products based on hyaluronic acid for use as surgical aids to reduce the incidence and severity of postoperative adhesions. The Company received a technology license fee of $1,500,000 in November 1989 and was reimbursed its development costs plus 10% through the first quarter of 1994 when the Partnership's funds were exhausted. The General Partner believes that additional funds will be required to complete the development, clinical testing and commercialization of the Partnership's products. Although the Company is not obligated to provide additional funding, the Purchase Option (see below) terminates unless the Company commits on an annual basis to provide funding for continuation of the research and development programs for the next twelve month period or until receipt of FDA approval of one of the Partnership's products is obtained, whichever is shortest. The Company spent approximately $6.4 million and $6.5 million on the Partnership's development programs in 1995 and 1994, respectively and has committed to fund the programs in 1996, expecting to spend approximately $7.9 million (unaudited). Included in accounts receivable as of December 31, 1994 was $199,000 due from the Partnership. The Company also entered into a joint venture agreement with the Partnership to manufacture and market the Partnership's products, to share in the profits, to make non-interest bearing loans for working capital deficiencies, and to make capital contributions as deemed necessary by the Partnership in connection with the business of the joint venture. The exact amounts and timing of these expenditures and contributions cannot be determined at this time. The Company also obtained an option (the "Purchase Option") to purchase all of the outstanding partnership interests for a payment of approximately $26,000,000 in cash, General Division Stock or a combination thereof determined at Genzyme's sole discretion, plus future royalty payments. The Purchase Option does not become exercisable until at least twenty-four months after the first commercial sale of a product of the Partnership. Deferred revenue from related parties at December 31 includes the following:
(DOLLARS IN THOUSANDS) 1995 1994 ----------------------------------------------------------------------------- Neozyme II.......................................... 186 Other............................................... 47 38 ----- ---- $ 47 $224 ===== ====
NOTE K GOODWILL IMPAIRMENT AND RESTRUCTURING COSTS In the fourth quarter of 1993, the Company recognized an expense of $23.7 million to reduce the carrying value of intangibles to the realizable value based on revised estimates of continuing value and future benefits. The majority of the write-off, $21.9 million, related to the goodwill recorded in -26- 27 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS connection with the acquisition of Genetic Design Inc. ("GDI") in June 1992. The goodwill write-off was based on an analysis of GDI's business conducted in the fourth quarter of 1993, including the loss of significant state public paternity testing contracts, which indicated that the environment for public paternity testing, GDI's primary business market, had changed significantly since the acquisition, and therefore called into question the carrying value of the acquisition-related GDI goodwill. The business review disclosed the development of a competitive environment which emphasized cost rather than service and performance, intense price competition from a major competitor, a general reduction in the ordering of identity tests due to governmental budgetary restrictions and uncertainties as to the level of federal funding of state testing activities, a cost structure at GDI which made it difficult for GDI to continue as an effective competitor in a slow-growth, cost-driven environment and the decreased likelihood of sufficient support in Congress for passage of additional social legislation which would significantly increase federal funding of state testing activities. These changed circumstances resulted in a determination to reduce the carrying value of GDI goodwill to zero at the end of 1993. The remaining $1.8 million of write-offs consisted of approximately $1.1 million of patent rights resulting from the purchase of Enzymatix Ltd. by Genzyme Ltd. (UK) and approximately $0.7 million of intangible assets resulting from the acquisition of a clinical testing laboratory by IG. Also in the fourth quarter of 1993, the Company incurred restructuring charges of $2.8 million related to the consolidation of laboratory operations in its Diagnostic Services business. The expenses were related to severance of $1.2 million for an estimated 45 employees; lease costs of $0.8 million; equipment movement and disposal of $0.2 million; costs incurred to restructure the Company's paternity product line of $0.2 million and other costs of $0.4 million. All costs were cash expenditures in 1994. The restructuring plan was undertaken to consolidate lab testing services into the Company's most cost-effective testing locations, transfer virtually all accounting functions to the Company's headquarters and streamline the paternity product line at GDI. NOTE L COMMITMENTS AND CONTINGENCIES In December 1994, the Company fully settled litigation brought by Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash. The dispute arose out of a contract between Granada R&D Ventures, a predecessor of Granada BioSciences, and Integrated Genetics, prior to its merger with the Company in 1989, regarding development of recombinant fertility hormones for cows and other animals. From time to time the Company has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1995, there were no asserted claims against the Company which, in the opinion of management, if adversely decided would have a material adverse effect on the Company's financial position and results of operations. -27- 28 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE M INCOME TAXES Income (loss) before income taxes and the related income tax expense (benefit) are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1995 1994 1993 -------------------------------------------------------------------------------------------------------- Domestic (includes $15.2 million in charges for purchased research and development and acquisition expenses in 1995, and includes $11.2 million and $49 million in charges for purchased research and development in 1994 and 1993 respectively) ........................... $40,551 $27,217 $(14,314) Foreign.................................................... 2,748 3,567 1,760 ------- ------- -------- Total................................................ $43,299 $30,784 $(12,554) ======= ======= ======== Currently payable: Federal................................................. $11,051 $ 8,565 $ 14,606 State................................................... 4,803 3,627 5,090 Foreign................................................. 1,367 850 913 ------- -------- -------- Total current........................................ 17,221 13,042 20,609 Deferred: Federal................................................. 4,507 1,092 (22,804) State................................................... (79) 347 (4,264) -------- -------- -------- Total deferred....................................... 4,428 1,439 (27,068) ------- -------- -------- Provision (benefit) for income taxes....................... $21,649 $14,481 $ (6,459) ======= ======= ========
Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following reasons:
1995 1994 1993 - ------------------------------------------------------------------------------------------------------ Tax at U.S. statutory rate.................................. 35.0% 35.0% 35.0% Losses in foreign subsidiary and less than 80%-owned subsidiaries with no current tax benefit..................................... 1.0 2.5 23.2 State taxes, net............................................ 5.2 5.7 1.5 Federal rate change......................................... - - (1.0) Tax exempt interest......................................... - - (3.9) Foreign sales corporation................................... (2.0) (4.3) (1.7) Benefit of tax credits...................................... - (2.9) (1.4) Purchase accounting adjustments............................. - - 1.8 Current year realization of tax benefits of purchased technology and purchase options........................................... - - (8.8) Other, net.................................................. 3.0 (4.1) 2.2 Utilization of operating loss carryforwards.............................................. (5.2) - (0.5) ----- ----- ---- Effective tax rate before certain charges - expense.......................................... 37.0 31.9 46.4 Gross charge for purchased research and development and purchase options net of related deferred tax benefits....................... 13.0 14.9 (97.8) ---- ---- ----- Effective tax rate - expense (benefit)...................... 50.0% 46.8% (51.4)% ==== ===== =====
-28- 29 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31 the components of net deferred tax assets were as follows :
(DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards........................... $ 10,216 $ 15,908 Intangible amortization.................................... 24,515 26,630 Purchase of in-process research and development........................................... 15,666 15,687 Unrealized capital losses.................................. 2,561 5,587 Other...................................................... 9,609 3,977 -------- -------- Gross deferred tax asset................................... 62,567 67,789 Valuation allowance........................................ (20,637) (32,233) -------- -------- Net deferred tax asset........................................ 41,930 35,556 Deferred tax liabilities: Depreciable assets......................................... (10,556) (3,011) --------- --------- Net deferred tax asset........................................ $ 31,374 $ 32,545 ======== ========
At December 31, 1995 and 1994, valuation allowances of $20.6 million and $32.2 million, respectively, were recorded to offset a portion of the deferred tax assets related to the realization of net operating loss carryforwards, and deductions relating to the purchase of in-process research and development and the future disposition of certain stock purchase options. Realization of the net deferred tax asset is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. A total of $1.5 million of the valuation allowance relates to tax assets arising from the IG Labs acquisition. If any portion of this tax asset is ultimately realized, the remaining goodwill related to the IG Labs acquisition will be reduced accordingly. At December 31, 1995, the Company had U.S. net operating loss carryforwards of $26.4 million for income tax purposes. These carryforwards expire from 2000 to 2010. Utilization of tax net operating loss carryforwards may be limited under section 382 of the Internal Revenue Code of 1986. At December 31, 1995, the Company also had U.K. operating loss carry-forwards for income tax purposes of approximately $2.9 million which are available indefinitely to offset future taxable income in the U.K. NOTE N BENEFIT PLANS The Company has defined-benefit pension plans covering substantially all the employees of its foreign subsidiaries. Pension expense for 1995, 1994 and 1993 was $498,000, $266,000 and $206,000, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans are not presented because they are not material. Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of the Company. The plan allows employees to make contributions up to a specified percentage of -29- 30 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS their compensation, a portion of which are matched by the Company. The Company contributed $696,000, $587,000, and $342,000 to the plan in 1995, 1994 and 1993, respectively. -30- 31 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE O FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS The Company operates in one industry, the human healthcare industry, and manufactures and markets its products in two major geographic areas, the United States and Europe. The Company's principal manufacturing facilities are located in the United Kingdom and the United States. The Company purchases products from its United Kingdom subsidiaries for sale to United States customers. Transfer prices from the foreign subsidiaries are intended to allow the United States parent to produce profit margins commensurate with its sales and marketing effort. The Netherlands subsidiary is the European distributor of the Company's therapeutic products. Certain information by geographic area follows (dollars in thousands):
THE UNITED NETHER- ELIMI- COMBI- STATES LANDS OTHER NATION NATION -------- -------- ----- ------ ------ 1995 Net sales - unaffiliated customers............. $252,358 $70,532 $33,933 $ - $356,823 Transfers between geo- graphic areas...................... 74,697 - 23,658 (98,355) - -------- ------- ------- -------- -------- 327,055 70,532 57,591 (98,355) 356,823 Pre-tax income (loss)............... 43,911 836 1,852 (3,300) 43,299 Net income (loss)................... 23,826 540 584 (3,300) 21,650 Assets.............................. 923,867 27,703 80,287 (126,656) 905,201 Liabilities......................... 161,338 26,652 12,004 - 199,994 1994 Net sales - unaffiliated customers............. $224,655 $38,535 $25,465 $ - $288,655 Transfers between geo- graphic areas...................... 38,590 - 12,784 (51,374) - -------- ------- ------- -------- -------- 263,245 38,535 38,249 (51,374) 288,655 Pre-tax income (loss)............... 28,544 578 3,155 (1,493) 30,784 Net income (loss)................... 14,736 417 2,643 (1,493) 16,303 Assets.............................. 637,024 16,384 69,130 (64,130) 658,408 Liabilities......................... 212,027 15,704 11,713 - 239,444 1993 Net sales - unaffiliated customers............. $214,822 $ - $19,055 $ - $233,877 Transfers between geo- graphic areas...................... 1,998 - 10,640 (12,638) - -------- ------- ------- -------- -------- 216,820 - 29,695 (12,638) 233,877 Pre-tax income (loss)............... (14,772) 165 1,595 458 (12,554) Net income (loss) (7,400) 104 743 458 (6,095) Assets.............................. 547,915 566 45,608 (52,037) 542,052 Liabilities......................... 203,381 384 4,215 - 207,980
-31- 32 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Substantially all revenue from research and development contracts is earned in the United States. Entities comprising Other include the Company's operations in the United Kingdom, Belgium, Japan, Switzerland, Italy and Germany. Export sales from the United States were $20,539,000, $23,902,000 and $33,343,000 in 1995, 1994 and 1993, respectively. Export sales by the Netherlands subsidiary amounted to $66,216,000 in 1995. In 1995, 1994 and 1993, the Company marketed its Ceredase(R)/Cerezyme(TM) enzyme product directly to physicians, hospitals and treatment centers, and sold products representing approximately 14%, 17% and 18%, respectively, of net revenue to an unaffiliated distributor. NOTE P QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1995, 1994 and 1993 are displayed in the following table.
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1995 Net sales ................................... $ 88,189 $ 93,605 $ 95,919 $ 106,070 Gross profit ................................ 47,683 48,433 53,185 57,690 Net income (4) .............................. 8,056 7,940 10,710 (5,056) Income per share (1): Attributable to General Division: Primary ................................. 0.43 0.46 0.53 0.08 Fully diluted ........................... 0.40 0.43 0.49 0.07 Attributable to TR Stock ................. (0.45) (0.57) (0.59) (0.64) 1994 Net sales ................................... $ 73,282 $ 75,378 $ 79,180 $ 83,211 Gross profit ................................ 40,049 40,101 41,407 42,469 Net income (3) .............................. 9,062 8,493 9,006 (10,258) Income per share (1): Attributable to General Division: Primary ................................. 0.38 0.37 0.38 0.09 Fully diluted ........................... 0.35 0.35 0.35 0.09 Attributable to TR Stock ................. (0.25) (0.34) (0.32) (3.56) 1993 Net sales ................................... $ 62,292 $ 68,556 $ 72,395 $ 67,128 Gross profit ................................ 32,712 35,489 35,279 31,135 Net income (loss) (2) ....................... 10,889 11,577 13,522 (42,083) Income (loss) per share (pro forma) (1) ............................ 0.42 0.44 0.44 (0.67)
- ------------------ (1) Cumulative quarterly income per share data does not equal the annual amounts due to changes in the average common and common equivalent shares outstanding. (2) Includes charges in the fourth quarter of $50.5 million (See Notes D and K). (3) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes D and L) for the write down of investments and the settlement of a lawsuit and an $11.2 million charge for acquired incomplete technology. (See Note J). (4) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired incomplete technology. (See Note B). -32- 33 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Q SUBSEQUENT EVENTS In January 1996, Genzyme made a conditional offer to acquire substantially all the assets of the Partnership for General Division Stock valued at $93.0 million. In January 1996, GTR acquired certain real estate in Framingham, Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to buildings and $1.1 million was allocated to land based on appraised values. In January 1996, GTC obtained a short-term loan in the amount of $950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at a rate of 6 1/2% per annum. In February 1996, the Company announced a planned redemption of its 6 3/4% Convertible Subordinated Notes. All holders elected to convert their notes into shares of General Division Stock and TR Stock. Holders of the notes received 18.913 shares of General Division Stock and 2.553 shares of TR Stock in conversion of each $1,000 note. Supplementary earnings per share for the General Division which gives effect to the conversion of the notes as if such conversion took place at the beginning of each period presented, is equal to fully diluted earnings per share. In March 1996, an advisory panel to the U.S. Food and Drug Administration ("the FDA") recommended that Genzyme be granted approval to market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's recommendation will be considered by the FDA in its final review of Genzyme's premarket approval application. In March 1996, GTC entered into a Convertible Debt and Development Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving line of credit in the amount of $10 million and has agreed to fund development costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under the Agreement, GTC granted to Genzyme co-marketing rights to AT-III in all territories other than Asia subject to negotiation and execution of a development and supply agreement between the parties prior to March 31, 1997. The line of credit carries a rate of 7% and is convertible into GTC's common stock at the average market price for the 20 day period ending two days before the Conversion at GTC's option to maintain GTC's tangible net worth at the end of each quarter at a level between $4.0 million and $4.2 million or by Genzyme at any time for up to the full amount outstanding. In March 1996, the GTR utilized $8.0 million of the Company's $15.0 million available credit line with Fleet Bank. In March 1996, the Board voted, subject in each case to the approval of the stockholders, to adopt two amendments to the Company's 1990 Equity Incentive Plan (the "Equity Plan"). These amendments would increase the aggregate number of shares of General Division Stock that may be subject to grants under the Equity Plan from 7,600,000 to 9,900,000 and the aggregate number of shares of TR Stock that may be subject to grants under the Equity Plan from 2,000,000 to 3,300,000 subject to adjustment for stock splits, stock dividends and certain transactions affecting the Company's capital stock. -33- 34 GENZYME GENERAL DIVISION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of GENZYME CORPORATION: We have audited the accompanying combined balance sheets of the Genzyme General Division (as described in Note A) as of December 31, 1995 and 1994 and the related combined statements of operations and cash flows and the combined financial statement schedule for each of the three years in the period ended December 31, 1995. The combined financial statements and financial statement schedule are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements of Genzyme General Division present fairly, in all material respects, the financial position of Genzyme General Division as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the combined financial statement schedule taken as a whole presents fairly, in all material respects, the information required to be included therein. As more fully described in Note A to these financial statements, Genzyme General Division is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme General Division should be read in connection with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts March 1, 1996, except as to Note R which is March 26, 1996 -34- 35 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED (AMOUNTS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------------------------------ 1995 1994 1993 ---- ---- ---- Revenues: Net product sales........................................ $304,373 $238,645 $183,366 Net service sales......................................... 47,230 49,686 50,511 Revenues from research and development contracts: Related parties......................................... 26,758 20,883 29,478 Other................................................... 202 1,513 2,332 -------- -------- -------- 378,563 310,727 265,687 Operating costs and expenses: Cost of products sold..................................... 113,964 92,226 64,704 Cost of services sold..................................... 31,137 32,116 34,558 Selling, general and administrative....................... 102,167 84,767 78,015 Research and development (including research and development related to contracts).................... 57,907 51,696 45,526 Purchase of in-process research and development.............................................. 14,216 - 24,000 Goodwill impairment and restructuring costs............... - - 26,517 -------- -------- -------- 319,391 260,805 273,320 -------- -------- -------- Operating income (loss)....................................... 59,172 49,922 (7,633) Other income and (expenses): Minority interest in net loss of subsidiaries............. 1,608 1,659 9,892 Equity in net loss of unconsolidated subsidiary........... (1,810) (1,353) - Charge for impaired investments........................... - (9,431) (700) Settlement of lawsuit..................................... - (1,980) - Investment income......................................... 7,428 9,072 12,209 Interest expense.......................................... (1,069) (1,354) (2,500) -------- -------- -------- 6,157 (3,387) 18,901 -------- --------- -------- Income before income taxes.................................... 65,329 46,535 11,268 Provision for income taxes.................................... (30,506) (16,341) (2,812) --------- -------- -------- Net income.................................................... 34,823 30,194 8,456 Tax benefit allocated from Tissue Repair Division....................................... 8,857 1,860 9,564 -------- -------- -------- Net income attributable to Genzyme General Division Stock....................................... $ 43,680 $ 32,054 $ 18,020 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. -35- 36 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, - --------------------------------------------------------------------------------- 1995 1994 1993 -------- -------- ------- Net income attributable to Genzyme General Division Stock ................ $ 43,680 $ 32,054 $18,020 ======== ======== ======= Income per General Division Common and common equivalent share: Net income ......................... $ 1.45 $ 1.22 $ 0.69 ======== ======== ======= Weighted average shares outstanding 30,092 26,169 26,250 ======== ======== ======= Income per General Division Common Share assuming full dilution: Net income ......................... $ 1.31 $ 1.14 $ 0.69 ======== ======== ======= Weighted average shares outstanding 33,311 28,159 26,250 ======== ======== =======
The accompanying notes are an integral part of these combined financial statements. -36- 37 GENZYME GENERAL DIVISION COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31, - ---------------------------------------------------------------------------------------------- 1995 1994 -------- -------- ASSETS Current Assets: Cash and cash equivalents ..................................... $103,631 $ 46,549 Short-term investments ........................................ 105,471 7,155 Accounts receivable, less allowance of $7,833 in 1995 and $5,992 in 1994 ........................................... 87,121 76,641 Inventories ................................................... 52,281 36,764 Prepaid expenses and other current assets ..................... 12,345 10,790 Due from Tissue Repair Division ............................... 2,034 171 Deferred tax assets - current ................................. 7,729 4,072 -------- -------- Total current assets ........................................ 370,612 182,142 Property, plant and equipment, net ............................... 327,461 295,346 Other Assets: Long-term investments ......................................... 69,561 74,948 Note receivable - related party ............................... 262 3,572 Intangibles, net of accumulated amortization of $17,340 in 1995 and $12,633 in 1994 .......................................... 29,934 29,303 Deferred tax assets - noncurrent .............................. 23,645 28,473 Other noncurrent assets ....................................... 33,111 16,360 -------- -------- 156,513 152,656 -------- -------- $854,586 $630,144 ======== ======== LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable .............................................. $ 19,548 $ 20,859 Accrued expenses .............................................. 38,069 27,766 Income taxes payable .......................................... 1,316 6,523 Deferred revenue - related parties ............................ 47 224 Deferred revenue - unaffiliated entities ...................... 1,320 2,380 Current portion of long-term debt and capital lease obligations 2,276 41,076 -------- -------- Total current liabilities ................................... 62,576 98,828 Noncurrent Liabilities: Long-term debt and capital lease obligations .................. 124,473 126,555 Other noncurrent liabilities .................................. 8,256 6,800 -------- -------- 132,729 133,355 Minority interest in subsidiaries ................................ -- 2,310 Commitments and Contingencies (Notes D, F, J, M and R) ............. -- -- Division equity (Note C) ......................................... 659,281 395,651 -------- -------- $854,586 $630,144 ======== ========
The accompanying notes are an integral part of these combined financial statements. -37- 38 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1995 1994 1993 --------- --------- --------- Net income ......................................... $ 34,823 $ 30,194 $ 8,456 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ................... 22,010 18,200 16,821 Write-off of impaired goodwill .................. -- -- 23,690 Gain (loss) on sale of investments .............. 110 (1,430) (1,647) Loss on disposal of fixed assets ................ 743 -- -- Non-cash compensation expense ................... 131 -- -- Write-off of impaired equity investments ........ -- 9,431 -- Accrued interest/amortization on bonds .......... (279) (2,072) -- Provision for bad debts ......................... 5,184 4,331 -- Purchase of in-process research and development for stock ...................... 14,216 -- -- Deferred income taxes ........................... 4,428 1,439 (17,373) Minority interest in net loss of subsidiaries ... (1,608) (1,659) (9,892) Equity in net loss of unconsolidated subsidiary . 1,810 1,353 -- Other ........................................... 1,458 386 -- Increase (decrease) in cash from working capital: Accounts receivable .......................... (14,486) (14,712) (10,917) Inventories .................................. (15,221) (10,858) (2,322) Prepaid expenses and other current assets .... (1,778) (1,958) (695) Accounts payable, accrued expenses and deferred revenue ........................ 14,423 2,976 18,202 Due from Genzyme Tissue Repair Division ...... (1,863) -- -- --------- --------- --------- Net cash provided by operating activities .... 64,101 35,621 24,323 INVESTING ACTIVITIES: Purchases of investments ........................... (125,835) (210,274) (122,723) Purchases of restricted investments ................ (4,418) (10,000) (10,000) Sales and maturities of investments ................ 39,064 265,851 177,043 Property, plant and equipment ...................... (48,694) (101,707) (118,436) Cash paid as part of IG acquisition ................ (322) (222) (9,541) Additional investment in unconsolidated subsidiary . (4,428) (1,465) -- Other noncurrent assets ............................ (1,172) (3,221) (504) --------- --------- --------- Net cash used by investing activities ........ (145,805) (61,038) (84,161) FINANCING ACTIVITIES: Proceeds from issuance of common stock ............. 179,623 45,040 -- Proceeds from issuance of TR Stock ................. -- 872 -- Proceeds from issuance of common stock by subsidiary ..................................... 1,107 319 -- Issuance of debt ................................... -- 21,819 39,360 Payments of debt and capital lease obligations ..... (41,163) (4,793) (979) Net cash (to) from Genzyme ......................... -- (13,993) (4,408) --------- --------- --------- Net cash provided by financing activities .... 139,567 49,264 33,973 Effect of exchange rate changes on cash ................ (781) (273) (135) --------- --------- --------- Increase (decrease) in cash and cash equivalents ........................................... 57,082 23,574 (26,000) Cash and cash equivalents, beginning of period ......... 46,549 22,975 48,975 --------- --------- --------- Cash and cash equivalents, end of period ............... $ 103,631 $ 46,549 $ 22,975 ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. -38- 39 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------- 1995 1994 1993 ----- ------- ------- Supplemental cash flow information: Cash paid during the year for: Interest ................................................... $ 9,944 $ 9,634 $ 7,333 Income taxes ............................................... 19,581 13,506 16,066 Supplemental disclosures of non-cash transactions: Settlement of note receivable -- Note H Acquisition liability -- Note D Allocation of tax benefit -- Note B
The accompanying notes are an integral part of these combined financial statements. -39- 40 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: Genzyme General Division (the "General Division"), a division of Genzyme Corporation (the "Company" or "Genzyme"), is a diversified human health care business with product development, manufacturing and marketing capabilities in therapeutic and diagnostic products, pharmaceuticals, and diagnostic services. Basis of Presentation: The approval effective December 16, 1994 (the "Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994 resulted in the redesignation of Genzyme's common stock. The outstanding shares of Genzyme common stock were redesignated as General Division Common Stock ("General Division Stock") on a share-for-share basis and a second class of common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's common stock held by stockholders of record on October 14, 1994. General Division Stock and TR Stock provide stockholders with separate securities which are intended to reflect the performance of the General Division and Tissue Repair Division ("GTR"), respectively, and the allocation of tax benefits between the divisions pursuant to the management and accounting policies adopted by the Board of Directors (the "Board") of Genzyme Corporation. Dividends to the holders of General Division Stock will be limited to the lesser of funds of Genzyme legally available for the payment of dividends and the Available Tissue Repair Dividend Amount, as defined in Genzyme's Articles of Organization, as amended. Although there is no requirement to do so, the Board would declare and pay dividends on General Division Stock, if any, based primarily on the earnings, financial condition, cash flow and business requirements of the General Division. There is currently no intention of paying dividends. Genzyme, subject to certain conditions, has the right to exchange each outstanding share of TR Stock for any combination of cash and/or shares of General Division Stock at a 30% premium over Fair Market Value. In addition, following a disposition of all or substantially all assets of GTR, the shares of TR Stock are subject to mandatory exchange by Genzyme for cash and/or shares of General Division Stock at a 30% premium over Fair Market Value as determined by the trading prices during a specified period prior to public announcement of the disposition. Shares of General Division Stock are not subject to either optional or mandatory exchange. On all matters as to which common stockholders generally are entitled to vote, holders of General Division Stock are entitled to one vote per share and holders of TR Stock are entitled to .29 votes per share from the Effective Date through December 31, 1996. On January 1, 1997 and on each January 1 every two years thereafter, the number of votes to which the holder of each share of TR Stock shall be entitled shall be adjusted and fixed for two-periods to equal the quotient (expressed as a decimal rounded to the nearest two decimal places) obtained by dividing the fair market value of one share of TR Stock by the fair market value of one share of General Division Stock as of such date. If no shares of General Division Stock are outstanding on such date, or if shares of TR Stock are entitled to vote separately as a class, each share of TR Stock shall have one vote. Holders of each class vote together as a single class. Except in limited circumstances provided under Massachusetts law and in Genzyme's Articles of Organization, as amended, and in the management and accounting policies adopted by the Board, holders of each class of common stock will have no rights to vote on matters as a separate class. Separate meetings -40- 41 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) of the holders of each class of common stock will not be held. 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 will control the outcome of the vote on that matter. The combined financial statements of the General Division include the financial position and results of operations and cash flows of all businesses of Genzyme except those of GTR. The General Division's financial statements are prepared using amounts included in Genzyme's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be reasonable (see Note B). Genzyme provides holders of General Division Stock separate financial statements, management's discussion and analysis, descriptions of businesses and other relevant information for the General Division in addition to consolidated financial information of Genzyme. Notwithstanding the attribution of assets and liabilities (including contingent liabilities) between the General Division and GTR for the purposes of preparing their respective historical and future financial statements, this attribution and the change in the capital structure of Genzyme as a result of the approval of the Genzyme Stock Proposal does not affect legal title to the assets or responsibility for the liabilities of Genzyme or any of its subsidiaries. Holders of General Division Stock are shareholders of Genzyme, which continue to be responsible for all of its liabilities. 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. Accordingly, Genzyme's consolidated financial statements should be read in connection with the General Division's financial statements. Except as stated in the amended articles, the accounting policies applicable to the preparation of the financial statements of the General Division may be modified or rescinded at the sole discretion of the Board without the approval of the shareholders, although there is no intention to do so. Principles of Combination: The combined financial statements include the accounts of the General Division and its wholly-owned subsidiaries. Investments in companies and joint ventures in which the General Division has a substantial ownership interest of approximately twenty-percent to fifty-percent, or in which the General Division participates in policy decisions are accounted for using the equity method. Accordingly, the General Division's share of the earnings of these entities is included in combined net income. Investments of less than 20% are reported at fair value. All significant intercompany items and transactions have been eliminated in combination. Certain items in the combined financial statements for the periods prior to December 31, 1994 have been reclassified to conform with the current year's presentation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents, consisting principally of money market funds and municipal notes purchased with initial maturities of three months or less, are valued at cost plus accrued interest, which approximates market. -41- 42 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Investments: Short-term investments include all investments with remaining maturities of twelve months or less. Long-term investments include all investments with remaining maturities greater than twelve months. The General Division classifies its equity investments as available-for-sale and its investments in debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time the investments are purchased. Equity investments are included in "Other noncurrent assets" on the combined balance sheet (See Note F - Investments). As of December 31, 1995, the General Division classified all investments in debt securities as available-for-sale. These investments are reported at fair value as of the balance sheet date with unrealized holding gains and losses (the adjustment to fair value) included in Division equity. If the adjustment to fair value reflects a decline in the value of the investment, management considers all available evidence to evaluate the extent to which the decline is "other than temporary" based on factors including (but not limited to) (i) the length of time and extent to which the market value has been less than cost; (ii) the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer; and (iii) the intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. Fair Value of Financial Instruments: The fair value of investments is obtained from market quotations and is disclosed in Note F. The fair value of the General Division's subordinated debentures is obtained from a market maker in the debentures and is disclosed in Note J. The fair value of foreign currency forward contracts is based on forward rates in effect at December 31, 1995 and is disclosed below (see -- Hedging). Inventories: Inventories are valued at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Provision for depreciation is generally computed using the straight-line method over the estimated useful lives of the assets (three to ten years for plant and equipment, five to seven years for furniture and fixtures, and twenty to forty years for buildings). Certain manufacturing equipment (with a net book value of $34.1 million at December 31, 1995) is depreciated over its remaining useful life using the units-of-production method. The remaining life and recoverability of such equipment is evaluated periodically based on the appropriate facts and circumstances. Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. For products expected to be commercialized, the General Division capitalizes, to construction in-progress, the costs of manufacturing process validation and optimization incurred beginning when the product is deemed to have demonstrated technological feasibility and ending when the asset is substantially complete and is ready for its intended use. Qualified costs include direct labor and material, and incremental fixed overhead to the extent incurred. These costs are depreciated using the units of production method. Issuance of Stock by a Subsidiary: Gains on the issuance of stock by a subsidiary are included in net income unless the subsidiary is a research and development, start-up or development stage company or an entity whose viability as a going concern is under consideration. In those situations the General Division accounts for the change in its proportionate share of subsidiary equity resulting from the additional equity raised by the subsidiary as an equity -42- 43 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) transaction. Intangibles: Intangible assets consist primarily of goodwill which is amortized on a straight-line basis over seven to eleven years. The remaining intangibles, including customer lists, patents and a covenant not to compete are being amortized on a straight-line basis over five to eleven years. Management's policy is to evaluate the recoverability and useful lives of its intangible assets when the facts and circumstances suggest that these assets may be impaired or their useful lives may have changed. This analysis relies on a number of factors, including operating results, business plans, budgets, economic projections and changes in management's strategic direction or market emphasis. The test of such recoverability is a comparison of the asset to expected cumulative (undiscounted) operating income of the acquired entity over the remaining life of the asset. If the book value of the intangible asset exceeds undiscounted cumulative operating income, the write-down is computed as the excess of the asset over the present value of operating income discounted at the General Division's weighted average cost of capital over the remaining amortization period. (See Note M - Goodwill Impairment and Restructuring Costs) Revenue Recognition: Revenues from product sales are recognized when goods are shipped and are net of third party contractual allowances, as applicable. Revenues from service sales are recognized when the service procedures have been completed. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract. Translation of Foreign Currencies: The financial statements of the General Division's foreign subsidiaries are translated from local currency into U.S. dollars using the current exchange rate at the balance sheet date for assets and liabilities and the average exchange rate prevailing during the period for revenues and expenses. The local currency for all General Division foreign subsidiaries is considered to be the functional currency for each entity and accordingly, translation adjustments for these subsidiaries are charged or credited to Division equity. Exchange gains and losses on intercompany balances of a long-term investment nature are also recorded as a charge or credit to Division equity. Transaction gains and losses are recorded in income and totaled $(840,000), $(41,000), and $(322,000) for the years ended December 31, 1995, 1994 and 1993, respectively. Hedging: The General Division enters into forward contracts to reduce foreign currency exchange risk. Such contracts are revalued using current exchange rates at the balance sheet date. Gains and losses on forward contracts intended to hedge identifiable foreign currency commitments are deferred and included in the measurement of the related foreign currency transaction. All other gains and losses on revaluation of forward contracts are included in net income. At December 31, 1995, the General Division had forward exchange contracts valued at $1,209,000. Related gains and losses were not material to the financial statements. Research and Development: Research and development costs are expensed in the period incurred. Costs of purchased technology which management believes has not demonstrated technological feasibility and for which there is no alternative future use are charged to expense in the period of purchase. Income Taxes: The General Division uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The General Division has not provided for possible U.S. taxes on -43- 44 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. At December 31, 1995, such undistributed foreign earnings were approximately $1,731,000. Net Income Per Share: The method of calculating income per share for General Division Stock reflects the terms of the Articles of Organization, as amended, which provide that dividends may be declared and paid only out of the lesser of funds of Genzyme legally available therefore and each division's Available Dividend Amount, as defined. For the purpose of computing net income per common share of General Division Stock for periods prior to December 12, 1994, the number of shares and share equivalents of General Division Stock prior to the Effective Date are assumed to be the same as the total number of shares and share equivalents of Genzyme common stock. The General Division computes income per share by dividing the income attributable to General Division Stock by the weighted average number of shares of General Division Stock and dilutive common stock equivalents and other potentially dilutive securities outstanding during the applicable period. Income attributable to General Division Stock equals the General Division's net income or loss for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from the General Division pursuant to the accounting policies adopted by the Board. The accounting policies provide that, as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other division without any compensating payment or allocation. Income per share assuming full dilution is determined by dividing net income plus subordinated debenture interest (net of capitalized amounts) by the weighted average number of common shares outstanding during the year after giving effect for common stock equivalents arising from stock options and warrants and for subordinated debentures assumed converted to common stock. Net income attributable to General Division Stock and net income per share for the years ended December 31, 1994 and 1993, give effect to the provisions of the accounting policies adopted by the Board in connection with the creation of the General Division and, accordingly, are pro forma presentations. Accounting for Stock-Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), will require the Company to either elect expense recognition under SFAS 123 or its disclosure-only alternative for stock-based employee compensation. The expense recognition provision encouraged by SFAS 123 would require fair value-based financial accounting to recognize compensation expense for employee stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996 financial statements with comparable disclosures for the prior year. The Company has determined that it will elect the disclosure-only alternative permitted under SFAS 123. The Company will be required to disclose pro forma net income and pro forma earnings per share in the footnotes using the fair value based method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The Company has not determined the impact of these pro forma adjustments to its net income or earnings per share. Financial Instruments: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, current and non-current investments. The Company generally invests its cash investments in investments-grade securities. -44- 45 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Uncertainties: The Company is subject to risks common to companies in the Biotechnology industry, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA government regulations. NOTE B RELATED PARTY TRANSACTIONS The following policies may be modified or rescinded by action of the Board, or the Board may adopt additional policies, without approval of the shareholders of Genzyme, although the Board has no present intention to do so. Genzyme allocated certain corporate general and administrative expenses, research and development expense and income taxes in accordance with the policies described below. Financial Matters: As a matter of policy, the Company manages the financial activities of the General Division and GTR on a centralized basis. These financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt and the issuance and repurchase of common stock. In preparing these financial statements for each of the three years in the period ended December 31, 1995, transactions primarily related to investments, short-term and long-term debt (including convertible debt), related net interest and other financial costs have been attributed to the General Division based upon its cash flows for the periods presented after giving consideration to the debt and equity structure of the Company. At December 31, 1995, the Company attributed all of its short-term and long-term debt to the General Division based upon the specific purpose for which the debt was incurred and the cash flow requirements of the General Division. All of the Company's interest costs have been allocated to the General Division (see Note J). The Company believes this method of allocation to be equitable and a reasonable estimate of such costs as if the General Division operated on a stand-alone basis. To the extent borrowings are deemed to occur between the General Division and GTR, intercompany accounts have been established bearing interest at the rate in effect from time to time under the Company's unsecured credit lines or, if no such credit lines exist, at the prime rate charged by The First National Bank of Boston from time to time. To date no such borrowings have occurred; however, at December 31, 1995 GTR owed the General Division $2.0 million for services rendered in the normal course of business. Shared Services: Genzyme's corporate general and administrative functions and certain sales and marketing efforts related to foreign market penetration are performed by the General Division. General, administrative, sales and marketing expenses have been allocated to GTR based upon utilization of such services as if the General Division and GTR operated on a stand-alone basis. Management believes that such allocation is a reasonable estimate of such expenses. These allocations for the years ended December 31, 1995, 1994 and 1993 were $4,355,000, $833,000 and $701,000, respectively. In addition, costs incurred by the General Division related to research and development for GTR products are charged to GTR. These charges for the years ended December 31, 1995, 1994 and 1993 were $4,730,000, $3,331,000 and $2,805,000, respectively. Income Taxes: The General Division is included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to its divisions by determining the tax provision of each division, in accordance with generally accepted accounting principles, as if it were a separate taxpayer. Accordingly, the realizability of deferred tax assets -45- 46 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) is assessed at the Division level. The sum of the tax provisions calculated for individual divisions of Genzyme may not equal the consolidated tax provision under this approach. The treatment of the allocation of a division's projected tax benefit for purposes of income per share computation is discussed in Note A. 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 the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likelihood and timing of any such realization and other matters that the 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 General Designated Shares and a reallocation of assets from the General Division to GTR as either an increase in the 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 TR Stock. NOTE C DIVISION EQUITY The following analyzes the Division equity of the General Division for the periods presented:
(DOLLARS IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------- Balance at beginning of period .............. $ 395,651 $ 324,391 $ 322,390 Net income .................................. 34,823 30,194 8,456 Allocation of tax benefits generated by Tissue Repair Division......... 8,857 11,423 -- Exercise of options.......................... 27,921 1,190 -- Shares issued in connection with Employee Stock Purchase Plan................ 4,161 2,992 -- Exercise of warrants......................... 6,264 41,730 -- Shares issued in public offering ............ 141,276 -- -- Acquisition of publicly held minority share of IG................................. 22,460 -- -- Shares issued in connection with GTC's acquisition of BDL......................... 1,360 -- -- Tax benefit of disqualified dispositions............................... 5,500 2,224 -- Compensation expense ........................ 131 -- -- Foreign currency translation................. 1,325 2,861 (1,064) Unrealized gain/(loss) on investments........ 9,552 (7,480) -- Net cash (to) from Genzyme .................. -- (13,874) (5,391) --------- --------- --------- $ 659,281 $ 395,651 $ 324,391 ========= ========= =========
In October 1995, Genzyme sold 2,875,000 shares of General Division Common Stock to the public for $51.25 per share for net proceeds of $141.5 million. Included in Division Equity is the cumulative foreign currency translation adjustments of $(3,590,000) and $(4,915,000) at December 31, 1995, and 1994 respectively. -46- 47 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Immediately prior to the Effective Date, as defined in Note A, approximately 15,791,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, and upon the exercise of outstanding warrants (the "Warrants"), and the conversion of the 6 3/4% Convertible Subordinated Notes Due 2001 (the "Notes"). Pursuant to antidilution provisions in the agreements covering the options, Genzyme has adjusted each option outstanding on the Effective Date to provide for separation of the option into an option exercisable for General Division Stock and an option exercisable for the number of shares of TR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date. The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of General Division Stock and TR Stock upon exercise of the Warrant that the holder would have received if the holder had exercised the Warrant immediately prior to the Effective Date. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after the Effective Date will receive, in addition to the shares of General Division Stock into which the Note is convertible, the same number of shares of TR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. At December 31, 1995, approximately 11,185,804 shares of General Division Stock were reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as amended, and upon the exercise of outstanding warrants, and the conversion of the Notes. Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the preferences, voting powers, qualifications and special or relative rights or privileges of any such series before the issuance of any shares of that series. The Board of Directors shall determine the number of shares constituting each series of Preferred Stock and each series shall have a distinguishing designation. Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"), options may be granted to purchase an aggregate of 7,600,000 shares of General Division Stock and 2,000,000 shares of TR Stock. The Plan allows the granting of incentive stock options and nonstatutory stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, the Company has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 100,000 shares and 70,000 shares, respectively, of General Division Stock and TR Stock, at a rate of 1,600 shares and 400 shares, respectively, for each year of service are automatically granted at fair market value to members of the Board of Directors of the Company upon their election or reelection as Directors. All options expire ten years after the initial grant date. Stock option activity is summarized below: SHARES -47- 48 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
UNDER OPTION OPTION PRICE ------------ ------------ GENZYME CORPORATION COMMON STOCK Outstanding at December 31, 1992..................... 2,929,067 3.00 - 72.04 Granted............................................ 1,332,240 26.25 - 45.00 Exercised.......................................... (254,171) 4.00 - 37.25 Forfeited and canceled............................. (161,782) 7.75 - 72.04 ---------- Outstanding at December 31, 1993..................... 3,845,354 3.00 - 66.16 Granted............................................ 1,619,364 22.63 - 42.00 Exercised.......................................... (66,378) 3.00 - 35.25 Forfeited and canceled............................. (211,763) 8.25 - 66.16 Converted at Effective Date........................ (5,186,577) 5.89 - 65.49 ---------- Outstanding at December 31, 1994..................... - ========== GENERAL DIVISION STOCK Converted at Effective Date........................ 5,186,577 $ 5.89 - $65.49 Granted............................................ 66,674 27.25 - 32.50 Exercised.......................................... (1,250) 6.02 - 19.38 Forfeited and canceled............................. (11,151) 30.13 - 49.00 ----------- Outstanding at December 31, 1994..................... 5,240,850 5.89 - 65.49 Granted 2,070,751 5.89 - 67.63 Exercised (1,003,827) 5.89 - 60.14 Forfeited and canceled (221,441) 5.89 - 66.63 ---------- Outstanding at December 31, 1995..................... 6,086,333 7.57 - 67.63 ==========
At December 31, 1995 and 1994, 2,559,198 and 2,336,498 of the outstanding options were exercisable resulting in aggregate exercise proceeds of approximately $78,867,000 and $63,343,000, respectively. The total exercise proceeds for all options outstanding at December 31, 1995 is approximately $216,568,000. Information regarding the range of option prices is as follows:
SHARES UNDER OPTION OPTION PRICE ------------ ------------ 641,247 $ 7.57 - $18.93 1,381,472 19.38 - 29.88 765,926 30.00 - 32.13 785,815 32.24 - 38.84 704,394 38.88 726,683 39.00 - 48.75 1,080,796 49.00 - 67.63 --------- 6,086,333 =========
Employee Stock Purchase Plan. The Company's 1990 Employee Stock Purchase Plan allows full-time employees, as defined in this plan, to purchase the Company's stock at 85% of fair market value. Under this plan, 750,000 shares of the General Division Stock are authorized of which 142,934, 129,938 and 85,929 shares were issued in 1995, 1994 and 1993, respectively. Stock Rights. In 1989, the Company's Board issued a dividend of one preferred stock purchase right (a "Common Stock Right") on each share of Common Stock. At the Effective Date, the Rights Agreement under which the rights were issued was amended and restated to reflect the change in the capital structure -48- 49 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) of the Company and the Board declared a distribution to holders of TR Stock of a right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated Rights Agreement provides that each General Division Stock Right, which replaced the Common Stock Right, and each TR Stock Right, when it becomes exercisable, will entitle the holder to purchase from the Company (i) in the case of a General Division Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $52, subject to adjustment, and (ii) in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $25, subject to adjustment. The rights expire on March 28, 1999. Stock Warrants. The Company has issued warrants which, when exercised, grant the holders one share of General Division Stock and .135 shares of TR Stock. These warrants were granted in exchange for the receipt of options to purchase the partnership interests of Genzyme Development Partners, L.P. (the "Surgical Aids Partnership") the callable common stock of Neozyme II Corporation ("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds from the exercise of these warrants will be allocated to the General Division (see "TR Designated Shares"). The outstanding warrants were issued under the following terms:
EXERCISE ISSUE NUMBER OF PRICE DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD - ---- --------- -------- --------- --------------- 1989 Surgical Aids Partnership, the sales agent and its affiliates 1,205,416 $16.01 November 1, 1991 to 50,285 16.03 October 31, 1996 666,399 22.91 1992 Investors in Neozyme II: Series N 2,415,000 $38.25 Through December 31, 1996 Callable 2,415,000 See below January 1, 1997 to December 31, 1998 unless otherwise terminated 1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
The warrants issued to the Surgical Aids Partnership were issued in consideration for the granting to Genzyme of an exclusive right to purchase all of the outstanding partnership interests of the Surgical Aids Partnership. The warrants issued to investors of Neozyme II were granted in consideration of the option to purchase the callable common stock of Neozyme II and had an appraised fair value of $16,905,000. The Callable Warrants automatically terminate upon the General Division's exercise of its option to purchase all of the callable common stock of Neozyme II. These warrants have an exercise price equal to the sum of the average of the closing sale prices of one share of General Division Stock and .135 share of TR Stock for the 20 trading days immediately preceding the exercise thereof. Warrant activity is summarized below:
WARRANTS WARRANT PRICE -------- ------------- Outstanding at December 31, 1992..................... 8,283,246 16.01 - 41.31 Exercised........................................ (123,180) 16.01 - 23.86 Expired.......................................... (4,062) 38.79 - 41.31 ----------
-49- 50 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Outstanding at December 31, 1993 8,156,004 16.01 - 38.25 Exercised ..................... (2,197,774) 16.01 - 22.91 Expired ....................... (23,849) 16.01 - 22.91 ---------- Outstanding at December 31, 1994 5,934,381 16.01 - 38.25 Granted ....................... 6,005 42.67 Exercised ..................... (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995 .. 5,597,241 16.01 - 42.67 ==========
TR Designated Shares. Pursuant to Genzyme's Articles of Organization, as amended, 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. At the Effective Date, 5,000,000 TR Designated Shares were established. As a result of the distribution of approximately 3,300,000 shares of TR Stock to holders of General Division Stock, the number of TR Designated Shares were reduced by a corresponding amount. The remaining 1,700,000 TR Designated Shares were reserved for issuance upon the exercise of Genzyme stock options and warrants and the conversion of Genzyme's convertible notes which were outstanding on the Effective Date. TR Designated Share activity is summarized below:
TR DESIGNATED SHARES ------ Established at Effective Date.................................. 5,000,000 Stock dividend to holders of Genzyme Common Stock.......................................... (3,356,713) Stock options exercised........................................ (168) Stock warrants exercised....................................... (233,412) ---------- Balance at December 31, 1994................................ 1,409,707 Stock options exercised........................................ (72,942) Stock warrants exercised....................................... (46,244) ESPP shares issued (3,613) ---------- Outstanding at December 31, 1995............................ 1,286,908 ==========
The number of TR Designated Shares will be decreased by the number of shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the General Division; the number of shares of TR Stock issued as a dividend to holders of General Division stock; and the number of shares of TR Stock issued upon the conversion of convertible securities, including the Notes, attributed to the General Division. In addition, the number of TR Designated Shares can be increased as a result of certain inter-division transactions. The remaining TR Designated Shares are reserved for issuance upon the exercise of the Notes, the aforementioned warrants and the stock options which resulted from the conversion of Genzyme options into TR Stock and General Division Stock options (See Note M). NOTE D ACQUISITIONS In April 1993, the General Division acquired Virotech System-Diagnostika, GmbH in Germany, for approximately $10,200,000, of which approximately $8,100,000 was recorded as goodwill. In May 1993 Genzyme srl, a wholly-owned subsidiary of the General Division located in Italy, acquired certain assets of Omnia Res srl for approximately $700,000, of which approximately $100,000 was recorded as goodwill. These acquisitions were accounted for as purchases. -50- 51 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Accordingly, the associated net assets and operations have been included in the General Division's financial statements since the acquisition dates. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisitions is not material. In July 1994, the General Division paid approximately $6,100,000 for newly-issued shares of common stock representing 51% of the outstanding common stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance chemicals used in the development of pharmaceuticals. Based on certain put and call options in the Acquisition Agreement, which effectively ensure the purchase by the General Division of the remaining outstanding shares during the period from July 1, 1996 through June 30, 1999, the General Division accounted for the acquisition as a purchase of all of the outstanding shares of Sygena, and recorded a deferred liability at a present value of approximately 8,600,000 Swiss francs (approximately 9,400,000 Swiss francs or $8,129,000 at December 31, 1995) for the purchase of the remaining shares. The excess purchase price over the net assets acquired was approximately 5,399,600 Swiss francs (approximately $4,120,000) and was recorded as goodwill. The net assets and operations of Sygena have been included in the General Division's financial statements from the date of acquisition. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. On December 15, 1994, the General Division acquired BioSurface Technology, Inc. ("BioSurface") by issuing .575 of one share of TR Stock for each share of BioSurface common stock. In the aggregate, 5,000,000 shares of TR Stock, valued at $25,312,500, were issued representing 50% of the initial equity interest in GTR. The acquisition was accounted for as a purchase. Accordingly, the associated net assets and operations of BioSurface have been included in the General Division's financial statements since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, $11,215,000, was allocated to in-process research and development and charged to operations. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. The following summary, prepared on a pro forma basis, presents the consolidated results of operations as if BioSurface had been acquired at the beginning of the periods presented. This pro forma summary does not necessarily reflect the results of operations as they would have been if Genzyme and BioSurface constituted a single entity during the periods presented and is not necessarily indicative of results which may be obtained in the future.
YEAR ENDED DECEMBER 31, -------------------------------- 1994 1993 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) - ------------------------------------------------------------------------------------------------------------ Revenues................................................................. $317,047 $276,080 Net income (loss)........................................................ 19,448 (13,978) Pro forma net income (loss) per share: Attributable to General Division..................................... 1.22 0.68 Attributable to Tissue Repair Division............................... (1.51) (3.78)
In October 1995, the General Division acquired the publicly-held minority interest in its majority-owned subsidiary, IG Laboratories, Inc. ("IG"), by issuing approximately .125 of one share of General Division Stock for each share of IG common stock. In the aggregate, approximately 385,255 shares of General Division Stock, valued at approximately $22,460,000 were issued. The -51- 52 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $18,563,000, was allocated $14,216,000 to in-process research and development and charged to operations, and $4,347,000 to Goodwill to be amortized over 11 years. NOTE E MAJORITY-OWNED SUBSIDIARIES INTEGRATED GENETICS, INC. IG was an approximately seventy-percent- owned subsidiary for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through October 1, 1995. (See Note D). GENZYME TRANSGENICS CORPORATION. Genzyme Transgenics Corporation ("GTC") was a majority-owned subsidiary for the year ended December 31, 1993 and for the period from January 1, 1994 through September 30, 1994. (See Note F). NOTE F INVESTMENTS Investments in marketable securities at December 31 consisted of the following:
1995 1994 -------------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - --------------------------------------------------------------------------------------- Short Term: Certificates of deposit $ 1,870 $ 1,870 $ 2,979 $ 2,979 Federal agency notes .. 25,696 25,731 -- -- Corporate notes ....... 77,800 77,870 4,281 4,176 U.S. Treasury notes ... -- -- -- -- Municipal notes ....... -- -- -- -- -------- -------- -------- -------- $105,366 $105,471 $ 7,260 $ 7,155 ======== ======== ======== ======== Long Term: Common stock .......... $ -- $ -- $ -- $ -- Federal agency notes .. 4,047 4,053 Corporate notes ....... 42,518 42,845 57,584 54,420 U.S. Treasury notes ... 22,351 22,663 22,709 20,528 Municipal notes ....... -- -- -- -- -------- -------- -------- -------- $ 68,916 $ 69,561 $ 80,293 $ 74,948 ======== ======== ======== ========
Information regarding the range of contractual maturities of investments in debt securities at December 31, 1995 is as follows:
MARKET (DOLLARS IN THOUSANDS) COST VALUE --------------------------------------------------------------------------- Within 1 year................................... $105,371 $105,472 After 1 year through 2 years.................... 29,997 30,137 After 2 years through 10 years.................. 38,919 39,423 -------- -------- $174,287 $175,032 ========= ========
In August 1993, the General Division acquired 502,512 shares of the Series E Convertible Preferred Stock (the "Series E Stock") of Univax Biologics, Inc., for $5.0 million in connection with an agreement to develop and commercialize certain products. Upon the achievement of specified clinical milestones, the General Division is committed to making future milestone payments. In November 1995, Univax merged with North American Biologicals, Inc.("NABI") and in connection with the merger the General Division received 526,315 shares of NABI -52- 53 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) common stock in exchange for the Series E Stock. The investment is classified as available-for-sale and is included in "Other noncurrent assets" in the consolidated balance sheets at fair market value. At December 31, 1995, this value was approximately $5.7 million compared to a value of $2.7 million at December 31, 1994. At that time, General Division believed the decline in value was temporary and accordingly, an unrealized loss of approximately $2,300,000 was recorded as a charge to Stockholders' equity. In September 1993, the General Division acquired 714,286 shares of common stock of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in connection with an agreement to develop and commercialize certain products. Upon the achievement of certain specified clinical milestones, the General Division is committed to making future milestone payments and an additional $5.0 million investment in Argus. In August 1994, pursuant to the Common Stock Purchase Agreement, Argus delivered to the General Division an additional 132,325 shares resulting in a total of 846,611 shares held by the General Division. The investment is classified as available-for-sale and is included in "Other noncurrent assets" in the combined balance sheets at fair market value. At December 31, 1994, this value was approximately $1.8 million. The General Division believed that a portion of the impairment in the value of the investment in Argus was "other than temporary" and accordingly, a loss of approximately $3.3 million was charged to operations in 1994. In September 1995, Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex. In connection with this merger, the common stock of Argus was redesignated as common stock of Aronex. At December 31,1995 the value of this investment was $3.7 million. Pursuant to the Common Stock Purchase Agreement (the "Agreement") dated as of June 24, 1994 between the General Division and Celtrix Pharmaceuticals, Inc. ("Celtrix"), the General Division acquired 1,550,388 restricted shares, approximately 11.5% of the common stock of Celtrix outstanding after the acquisition, for $10.0 million. In November 1994, Celtrix announced a delay in the commercialization of an application of a key product and in February 1995, Celtrix announced that it had halted all studies related to another of its key development products. These announcements resulted in a decline in the fair market value of the General Division's investment. The General Division believed that a portion of the impairment in the value of the investment in Celtrix was "other than temporary". Accordingly, a loss of approximately $6.1 million was charged to operations in 1994. In 1995, Celtrix exercised its option to require the Company to purchase additional shares of Celtrix at fair market value. As a result in December 1995, the General Division acquired an additional 1,472,829 shares at $3 per share. The investment is classified as available-for-sale. At December 31, 1995, this value was approximately $7.7 million. Gross realized losses included in investment income for 1995 were $110,000. Net realized gains included in investment income for 1994 and 1993 were $1,430,000 and $1,647,000, respectively. Gross unrealized gains in the investment portfolio at December 31, 1995 were $2,073,000. Gross unrealized losses in the investment portfolio at December 31, 1994 were $5,449,000. In July 1993, GTC, a wholly-owned subsidiary of the Company specializing in transgenic technology which was incorporated in February 1993, completed an initial public offering of 1,500,000 shares of its common stock priced at $8.00 per share. The offering resulted in an increase in the value of the Company's investment in GTC of $7.6 million which was recorded as an increase to additional paid-in capital. At December 31, 1993, the Company owned 4,000,000 shares or approximately 73% of the outstanding common stock of GTC. -53- 54 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) On October 1, 1994, GTC acquired TSI Corporation ("TSI") in a merger transaction in which GTC issued two-tenths (0.2) of one share of GTC common stock for each share of TSI common stock, in a transaction accounted for as a purchase. As a result of the acquisition, the Company's percentage ownership of GTC common stock declined from approximately 73% to approximately 40%. Accordingly, the General Division began accounting for its investment in GTC under the equity method. In February 1995, GTC exercised its option to sell to the General Division 500,000 additional shares of GTC common stock at a price of $8.00 per share. The $4.0 million acquisition cost has been added to the General Division's equity investment in this subsidiary. In June 1995, the General Division converted approximately $4.0 million of GTC debt into equity through the acquisition of 1.3 million shares of GTC common stock. In July 1995, GTC acquired Biodevelopment Laboratories, Inc. ("BDL"). In connection with the transaction, the General Division issued approximately 34,000 shares of General Division Stock to former stockholders of BDL in exchange for approximately 475,000 shares of newly issued GTC stock. In total, GTC issued approximately 1,207,000 shares of its common stock in the transaction, resulting in a decrease in the General Division's interest in GTC to 48.2%. Also as part of the BDL transaction, the Company guaranteed a $7.5 million line of credit from a commercial bank in return for warrants to purchase 145,000 shares of GTC stock. As of December 31, 1995, GTC had $6.0 million outstanding under this line of credit. GTC had a working capital deficiency of approximately $25.1 million at December 31, 1995 and had an operating loss of approximately $4.1 million for the year then ended. Although GTC is actively seeking other sources of financing and is directing substantial efforts to generating positive cash flow, it is at least reasonably possible that GTC will not generate sufficient cash flows to fund its ongoing operations and will not be able to repay amounts outstanding under the line of credit. If this occurs, the General Division will be responsible for at least a portion of the amounts outstanding. (See Note R) The fair market value of the GTC shares, based on quoted market prices, was $27,601,000 at December 31, 1995. The Company reported equity in GTC's losses of $1,810,000 in 1995. Following are condensed financial data of GTC: -54- 55 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ----------------------------------------- (DOLLARS IN THOUSANDS) 1995 1994 1993 ------------------------------------------------------------------------------------------- Revenues...................................... $38,406 $11,692 $ 3,222 Operating loss................................ (2,014) (5,231) (1,327) Net loss...................................... (4,133) (5,284) (1,171)
DECEMBER 31, ----------------------- (DOLLARS IN THOUSANDS) 1995 1994 ------------------------------------------------------------------------- Current assets................................ $16,409 $11,629 Noncurrent assets............................. 41,478 36,364 Current liabilities........................... 24,155 19,487 Noncurrent liabilities........................ 6,444 9,082
NOTE G INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1995 1994 ------------------------------------------------------------------ Raw materials.......................... $12,527 $14,517 Work-in-process........................ 14,167 9,227 Finished products...................... 25,587 13,020 ------- ------- $52,281 $36,764 ======= =======
NOTE H PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------------------------- Plant and equipment...................................... $106,877 $ 63,084 Land and buildings....................................... 46,456 40,157 Leasehold improvements................................... 52,521 32,367 Furniture and fixtures................................... 7,530 8,405 Construction in progress................................. 177,903 198,117 -------- -------- 391,287 342,130 Less accumulated depreciation.......................... (63,826) (46,784) -------- -------- Property, plant and equipment, net....................... $327,461 $295,346 ======== ========
Depreciation expense was $17,333,000, $13,459,000, and $10,857,000 in 1995, 1994 and 1993, respectively. The General Division is constructing a mammalian cell production facility in Boston, Massachusetts which will be used to produce a recombinant form of Ceredase(R) enzyme ("Cerezyme(R)") and other products. The facility is expected to cost approximately $151 million plus an additional $23 million of Cerezyme(R) -55- 56 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) process validation and optimization costs. The facility is expected to be validated and placed into service in 1996. As of December 31, 1995, the General Division had capitalized, and included in construction in progress, approximately $151,000,000 of expenditures related to this building and approximately $33,472,000 of process validation and optimization costs related to this and other facilities. In 1995, 1994 and 1993, the General Division capitalized approximately $9.0, $9.2 and $4.7 million of interest costs, respectively, relating to this and other facility construction. In June 1994, the General Division acquired its Mountain Road facility in Framingham, Massachusetts for $26.9 million of which $25.1 million was allocated to buildings and $1.8 million was allocated to land based on appraised values. The General Division funded the purchase with $1.2 million in cash, settlement of a $4.2 million note receivable (including accrued interest) from the landlord of the facility and the proceeds of a $21.5 million term loan from a bank (See Note J.) NOTE I ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1995 1994 ----------------------------------------------------------------------------------- Professional fees........................................ $ 2,472 $ 924 Compensation............................................. 12,025 8,004 Royalties................................................ 6,606 4,949 Interest................................................. 1,857 2,361 Other.................................................... 15,109 11,528 ------- ------- $38,069 $27,766 ======= =======
NOTE J LONG-TERM DEBT AND LEASES Long-Term Debt Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1995 1994 ---------------------------------------------------------------------------------------- Convertible subordinated notes........................... $100,000 $100,000 Note payable, bank (due 1/6/95........................... - 39,000 Mortgage note payable, matures June 13, 1999........................................... 20,863 21,323 Mortgage note payable, matures November 2014........................................... 3,356 3,409 Mortgage note payable, matures January 1, 2008......................................... 747 808 Term notes payable....................................... 1,626 2,879 -------- -------- 126,592 167,419 Less current portion..................................... (2,243) (41,020) -------- -------- $124,349 $126,399 ======== ========
In 1991, the Company issued 6 3/4% Convertible Subordinated Notes due October 1, 2001 in the aggregate principal amount of $100,000,000. The notes are convertible into General Division Stock and TR Stock at any time at a conversion price of $52.875 and, under certain circumstances, may be redeemed by the Company. Net proceeds from the debentures were $97,250,000. Deferred financing costs of $2,750,000, classified as "Other noncurrent assets" on the combined balance sheets, are being amortized to expense over the term of the debt issue. As of December 31, 1995, the debentures had a market value of -56- 57 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) approximately $125 million (See Note R). On December 21, 1993, the Company borrowed $39,000,000, under a Credit Agreement (the "Agreement") with a bank. The interest rate in effect at December 31, 1994 was 6.2875%. The loan was repaid January 6, 1995. The mortgage note due June 1999 is collateralized by land and buildings with a net book value of $29,108,000 at December 31, 1995, bears interest at 7.73% annually, and is payable monthly based on a twenty year direct reduction amortization schedule, with the remaining principal due June 13, 1999. The mortgage note maturing November 2014 is collateralized by land and buildings with a net book value of $5,188,000 at December 31, 1995 and bears interest at 10.5%. The mortgage note maturing January 2008 provides the bank with a "call or review" feature at the end of the first 60 month period, allowing the bank to adjust the note under specific circumstances. This note bears interest at a variable rate of prime plus 1% and is collateralized by land and fixtures. Principal and interest are payable monthly on both of these notes. The Company maintains a $15.0 million line of credit with Fleet Bank of Massachusetts, the entire amount, of which, remained available at December 31, 1995. Operating Leases Total rent expense under operating leases was $8,603,000, $8,578,000, and $8,734,000 in 1995, 1994 and 1993 respectively. The General Division leases facilities and personal property under certain operating leases in excess of one year. Future minimum payments due under the General Division's long-term obligations and capital and operating leases are as follows:
LONG-TERM CAPITAL OPERATING (DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES -------------------------------------------------------------------------------------------- 1996...................................... $ 11,160 $ 67 $10,643 1997...................................... 9,381 70 10,441 1998...................................... 9,376 118 9,575 1999...................................... 27,306 - 9,381 2000...................................... 7,253 - 7,744 Thereafter................................ 111,792 - 43,158 -------- ---- ------- Total minimum payments................. 176,268 255 90,942 Less: interest............................ (49,676) (98) - -------- ---- ------- $126,592 $157 $90,942 ======== ==== =======
NOTE K RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following:
(DOLLARS IN THOUSANDS) 1995 1994 1993 ------------------------------------------------------------------------------------------------- Fees for research and development activities: Neozyme I....................................... $ - $ - $ 6,299 Surgical Aids Partnership....................... - 913 8,378 Neozyme II...................................... 24,198 17,785 12,651 Research joint venture.......................... 2,560 2,185 2,150 ------- ------- -------
-57- 58 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) $26,758 $20,883 $29,478 ======= ======= =======
Neozyme I and II In 1992, the General Division entered into a development contract with Neozyme II whereby the General Division was engaged to perform all research, development and clinical testing activities related to products and programs for which Neozyme II was licensed. The General Division received $5,000,000 in 1992 under the technology license agreement pursuant to which the General Division granted Neozyme II exclusive rights to manufacture and sell the products developed under the technology license agreements. The funds for Neozyme II's development contract were raised by the sale of 2,415,000 units for net proceeds of $78,038,000. Each unit consisted of one share of Neozyme II callable common stock, one Series N warrant and one callable warrant to purchase one share of General Division Stock and .135 shares of TR Stock. Included in accounts receivable as of December 31, 1995 and 1994 was $2,469,000 and $729,000, respectively, due from Neozyme II. The General Division has an option to purchase all of the shares of the Neozyme II callable common stock for cash, shares of General Division Stock or any combination thereof (determined at Genzyme's sole discretion) at $117.00 per share from January 1, 1996 through December 31, 1996, subject to downward adjustment if exercised before December 31 in any exercise period. Due to the uncertainties inherent in the very early stages of the research into CFTR, management did not consider the exercise of the option probable and, accordingly, charged to operations in 1992 the $16,905,000 appraised fair value of this purchase option. In December 1993, the General Division exercised its option to purchase one of the two remaining research programs being funded by Neozyme I (a special purpose accelerated research corporation created in 1990) for a purchase price of $24,000,000 in cash. As part of the purchase, the General Division retained $0.6 million to fund the costs of the Neozyme I dissolution which occurred in 1994, and any future tax liabilities. This transaction was accounted for as a purchase of in-process research and development and its value charged to operations in 1993. The Surgical Aids Partnership In September 1989, the General Division entered into a development contract valued at approximately $37,000,000 with the Surgical Aids Partnership ("the Partnership") to perform research and development of products based on hyaluronic acid for use as surgical aids to reduce the incidence and severity of postoperative adhesions. The General Division received a technology license fee of $1,500,000 in November 1989 and was reimbursed its development costs plus 10% through the first quarter of 1994 when the Partnerships funds were exhausted. The General Partner believes that additional funds will be required to complete the development, clinical testing and commercialization of the Partnership's products. Although the General Division is not obligated to provide additional funding, the Purchase Option (see below) terminates unless the General Division commits on an annual basis to provide funding for continuation of the research and development programs for the next twelve month period or until receipt of FDA approval of one of the Partnership's products is obtained, whichever is shortest. The General Division spent approximately $6.4 million and $6.5 million on the Partnership's development programs in 1995 and 1994, respectively, and has committed to fund the programs in 1996, expecting to spend approximately $7.9 million (unaudited). Included in accounts receivable as of -58- 59 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) December 31, 1994 was $199,000 due from the Partnership. The General Division also entered into a joint venture agreement with the Partnership to manufacture and market the Partnership's products, to share in the profits, to make non-interest bearing loans for working capital deficiencies, and to make capital contributions as deemed necessary by the Partnership in connection with the business of the joint venture. The exact amounts and timing of these expenditures and contributions cannot be determined at this time. The General Division also obtained an option (the "Purchase Option") to purchase all of the outstanding partnership interests for a payment of approximately $26,000,000 in cash, General Division Stock or a combination thereof determined at Genzyme's sole discretion, plus future royalty payments. The Purchase Option does not become exercisable until at least twenty-four months after the first commercial sale of a product of the Partnership. Deferred revenue from related parties at December 31 includes the following:
(DOLLARS IN THOUSANDS) 1995 1994 ----------------------------------------------------------------------------- Neozyme II ........................................ - 186 Research joint venture ............................. - - Other ............................................. 47 38 ---- ---- $ 47 $224 ==== ====
NOTE L GOODWILL IMPAIRMENT AND RESTRUCTURING COSTS In the fourth quarter of 1993, the General Division recognized an expense of $23.7 million to reduce the carrying value of intangibles to the realizable value based on revised estimates of continuing value and future benefits. The majority of the write-off, $21.9 million, related to the goodwill recorded in connection with the acquisition of Genetic Design, Inc. ("GDI") in June 1992. The goodwill write-off was based on an analysis of GDI's business conducted in the fourth quarter of 1993, including the loss of significant state public paternity testing contracts, which indicated that the environment for public paternity testing, GDI's primary business market, had changed significantly since the acquisition, and therefore called into question the carrying value of the acquisition-related GDI goodwill. The business review disclosed the development of a competitive environment which emphasized cost rather than service and performance, intense price competition from a major competitor, a general reduction in the ordering of identity tests due to governmental budgetary restrictions and uncertainties as to the level of federal funding of state testing activities, a cost structure at GDI which made it difficult for GDI to continue as an effective competitor in a slow-growth, cost-driven environment and the decreased likelihood of sufficient support in Congress for passage of additional social legislation which would significantly increase federal funding of state testing activities. These changed circumstances resulted in a determination to reduce the carrying value of GDI goodwill to zero at the end of 1993. The remaining $1.8 million of write-offs consisted of approximately $1.1 million of patent rights resulting from the purchase of Enzymatix Ltd. by Genzyme Ltd. (UK) and approximately $0.7 million of intangible assets resulting from the acquisition of a clinical testing laboratory by IG. Also in the fourth quarter of 1993, the General Division incurred restructuring charges of $2.8 million related to the consolidation of laboratory operations in its Diagnostic Services business. The expenses were related to severance of $1.2 million for an estimated 45 employees; lease costs of $0.8 million; -59- 60 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) equipment movement and disposal of $0.2 million; costs incurred to restructure the General Division's paternity product line of $0.2 million and other costs of $0.4 million. All costs were cash expenditures in 1994. The restructuring plan was undertaken to consolidate lab testing services into the General Division's most cost-effective testing locations, transfer virtually all accounting functions to the General Division's headquarters and streamline the paternity product line at GDI. NOTE M COMMITMENTS AND CONTINGENCIES In December 1994, the General Division fully settled litigation brought by Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash. The dispute arose out of a contract between Granada R&D Ventures, a predecessor of Granada BioSciences, and Integrated Genetics, prior to its merger with the General Division in 1989, regarding development of recombinant fertility hormones for cows and other animals. From time to time the General Division has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1995, there were no asserted claims against the General Division which, in the opinion of management, if adversely decided would have a material adverse effect on the General Division's financial position and results of operations. Genzyme's commitment to allocate up to $30 million from the General Division to fund the operations of GTR was eliminated when GTR sold newly issued TR Stock to the public in September, 1995; however, Genzyme has the right to make voluntary allocations of up to $30 million from the General Division to GTR. Such allocations would reduce the Funding Commitment on a dollar-for-dollar basis and increase the number of TR Designated Shares at the rate of one share for each $10 so allocated. -60- 61 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE N INCOME TAXES Income (loss) before income taxes and the related income tax expense (benefit) are as follows for the year ended December 31:
(DOLLARS IN THOUSANDS) 1995 1994 1993 -------------------------------------------------------------------------------------------------------- Domestic (includes $15.2 million in charges for purchased research and development and acquisition expenses in 1995, and $24 million in charges for purchased research and development in 1993) ........................... $62,633 $42,968 $ 9,508 Foreign ..................................................... 2,696 3,567 1,760 ------- ------- -------- Total .................................................. $65,329 $46,535 $ 11,268 ======= ======= ======== Currently payable: Federal .................................................. $18,780 $10,727 $ 14,276 State .................................................... 5,949 3,965 4,996 Foreign .................................................. 1,349 850 913 ------- ------- -------- Total current ......................................... 26,078 15,542 20,185 Deferred: Federal ................................................... 4,507 518 (14,638) State ................................................... (79) 281 (2,735) ------- ------- -------- Total deferred ......................................... 4,428 799 (17,373) ------- ------- -------- Provision for income taxes ................................... $30,506 $16,341 $ 2,812 ======= ======= ========
Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following reasons:
1995 1994 1993 -------------------------------------------------------------------------------------------------- Tax at U.S. statutory rate ................................... 35.0% 35.0% 35.0% Losses in foreign subsidiary and less than 80%-owned subsidiaries with no current tax benefit ...................................... 0.8 1.6 24.0 State taxes, net ............................................ 5.2 5.8 4.2 Federal rate change .......................................... - - (1.0) Tax exempt interest .......................................... - - (4.0) Foreign sales corporation .................................... (1.4) (2.8) (1.8) Benefit of tax credits ....................................... - (1.9) (1.4) Purchase accounting adjustments .............................. - - 1.8 Current year realization of tax benefits of purchased technology and purchase options ........................................... - - (9.1) Other, net .................................................. 2.1 (2.7) 2.2 Utilization of operating loss carryforwards ............................................... (3.8) - (0.5) ---- ----- ----- Effective tax rate before certain charges .................. 37.9 35.0 49.4 Gross charge for purchased research and development and purchase options net of related deferred tax benefits ........................ 8.8 - (24.4) ----- ----- ----- 46.7 35.0 25.0 Allocated tax benefits generated by Tissue Repair Division ...................................... (13.6) (4.0) (84.9) ----- ----- ----- Effective tax rate attributable to General Division Stockholders.............................. 33.1% 31.0% (59.9%) ===== ===== =====
-61- 62 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) At December 31 the components of net deferred tax assets were as follows:
(DOLLARS IN THOUSANDS) 1995 1994 --------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards .......................... $ 10,216 $ 15,908 Intangible amortization ................................... 16,100 17,575 Purchase of in-process research and development ......................................... 15,666 15,687 Unrealized capital losses.................................. 2,561 5,587 Other .................................................... 9,609 3,977 Allocation of tax benefit from Tissue Repair Division .................................. 8,415 9,055 -------- -------- Gross deferred tax asset ............................. 62,567 67,789 Valuation allowance ....................................... (20,637) (32,233) -------- -------- Net deferred tax asset ............................... 41,930 35,556 Deferred tax liabilities: Depreciable assets ........................................ (10,556) (3,011) -------- -------- Net deferred tax asset ............................... $ 31,374 $ 32,545 ======== ========
At December 31, 1995 and 1994, valuation allowances of $20.6 million and $32.2 million, respectively, were recorded to offset a portion of the deferred tax assets related to the realization of net operating loss carryforwards, and deductions relating to the purchase of in-process research and development and the future disposition of certain stock purchase options. Realization of the net deferred tax asset is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. A total of $1.5 million of the valuation allowance relates to tax assets arising from the IG Labs acquisition (See Note D). If any portion of this tax asset is ultimately realized, the remaining goodwill relating to the IG Labs acquisition will be reduced accordingly. At December 31, 1995, the General Division had U.S. net operating loss carryforwards of $26.4 million for income tax purposes. These carryforwards expire from 2000 to 2010. Utilization of tax net operating loss carryforwards may be limited under section 382 of the Internal Revenue Code of 1986. At December 31, 1995, the General Division also had U.K. operating loss carryforwards for income tax purposes of approximately $2.9 million which are available indefinitely to offset future taxable income in the U.K. NOTE O BENEFIT PLANS The General Division has defined-benefit pension plans covering substantially all the employees of its foreign subsidiaries. Pension expense for 1995, 1994 and 1993 was $498,000, $266,000 and $206,000, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans are not presented because they are not material. Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of the General Division. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by the General -62- 63 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) Division. The General Division contributed $660,000, $587,000, and $342,000 to the plan in 1995, 1994 and 1993, respectively. -63- 64 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) NOTE P FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS The General Division operates in one industry, the human healthcare industry and manufactures and markets its products in two major geographic areas, the United States and Europe. The General Division's principal manufacturing facilities are located in the United Kingdom and the United States. The General Division purchases products from its United Kingdom subsidiaries for sale to United States customers. Transfer prices from the foreign subsidiaries are intended to allow the United States parent to produce profit margins commensurate with its sales and marketing effort. The Netherlands subsidiary is the European distributor of the General Division's therapeutic products. Certain information by geographic area follows (dollars in thousands):
THE UNITED NETHER- ELIMI- COMBI- STATES LANDS OTHER NATION NATION ------ ------- ----- ------ ------ 1995 Net sales - unaffiliated customers ..... $ 247,138 $ 70,532 $ 33,933 $ -- $ 351,603 Transfers between geo- graphic areas .............. 74,697 -- 23,658 (98,355) -- --------- --------- --------- --------- --------- 321,835 70,532 57,591 (98,355) 351,603 Pre-tax income .............. 65,941 836 1,852 (3,300) 65,329 Net income .................. 45,856 540 584 (3,300) 43,680 Assets ...................... 873,252 27,703 80,287 (126,656) 854,586 Liabilities ................. 156,650 26,652 12,003 -- 195,305 1994 Net sales - unaffiliated customers ..... $ 224,331 $ 38,535 $ 25,465 $ -- $ 288,331 Transfers between geo- graphic areas .............. 38,590 -- 12,784 (51,374) -- --------- --------- --------- --------- --------- 262,921 38,535 38,249 (51,374) 288,331 Pre-tax income .............. 44,295 578 3,155 (1,493) 46,535 Net income .................. 28,627 417 2,643 (1,493) 30,194 Assets ...................... 608,760 16,384 69,130 (64,130) 630,144 Liabilities ................. 204,766 15,704 11,713 -- 232,183 1993 Net sales - unaffiliated customers ..... $ 214,822 $ -- $ 19,055 $ -- $ 233,877 Transfers between geo- graphic areas .............. 1,998 -- 10,640 (12,638) -- --------- --------- --------- --------- --------- 216,820 -- 29,695 (12,638) 233,877 Pre-tax income .............. 9,050 165 1,595 458 11,268 Net income .................. 7,151 104 743 458 8,456 Assets ...................... 538,220 566 45,608 (52,037) 532,357 Liabilities ................. 203,367 384 4,215 -- 207,966
-64- 65 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) Substantially all revenue from research and development contracts is earned in the United States. Entities comprising Other include the Division's operations in the United Kingdom, Belgium, Japan, Switzerland, Italy, France and Germany. Export sales from the United States were $20,539,000, $23,902,000 and $33,343,000 in 1995, 1994 and 1993, respectively. Export sales by the Netherlands subsidiary amounted to $66,216,000 and $35,973,000 in 1995 and 1994 respectively. In 1995, 1994 and 1993, the Company marketed its Ceredase(R)/ Cerezyme(R) enzyme product directly to physicians, hospitals and treatment centers, and sold products representing approximately 14%, 17% and 18%, respectively, of net revenue to an unaffiliated distributor. NOTE Q QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1995, 1994 and 1993 are displayed in the following table.
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1995 Net sales ................................................ $87,159 $92,358 $94,484 $104,562 Gross profit ............................................ 47,378 48,066 53,100 57,958 Net income (4)............................................ 11,998 12,967 16,092 2,623 Income per share (1): Primary ............................................. 0.43 0.46 0.53 0.08 Fully diluted ........................................ 0.40 0.43 0.49 0.07 1994 Net sales ................................................ $73,282 $75,378 $79,180 $ 82,887 Gross profit ............................................ 40,049 40,101 41,407 42,432 Net income (3) ........................................... 9,877 9,622 10,065 2,490 Income per share (1): Primary .............................................. 0.38 0.37 0.38 0.09 Fully diluted......................................... 0.35 0.35 0.35 0.09 1993 Net sales ................................................ $61,651 $ 67,801 $69,674 $ 66,561 Gross profit ............................................ 32,712 35,489 35,279 31,135 Net income (loss) (2)..................................... 10,965 11,703 11,635 (16,283) Income (loss) per share (pro forma) (1).......................................... 0.42 0.44 0.44 (0.67)
- ------------------- (1) Cumulative quarterly income per share data does not equal the annual amounts due to changes in the average common and common equivalent shares outstanding. (2) Includes charges in the fourth quarter of $50.5 million (See Notes F and L). (3) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes F and M) for the write down of investments and the settlement of a lawsuit and an $11.2 million charge for acquired incomplete technology. (See Note D). (4) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired incomplete technology. (See Note B). NOTE R SUBSEQUENT EVENTS -65- 66 GENZYME GENERAL DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) In January 1996, Genzyme made a conditional offer to acquire substantially all the assets of the Partnership for General Division Stock valued at $93.0 million. In February 1996, GTC obtained a short-term loan in the amount of $950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at a rate of 6 1/2% per annum. In February 1996, the General Division signed a definitive agreement to acquire Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Stock valued at approximately $36.8 million. Genetrix Inc. will be merged with the General Division's Integrated Genetics diagnostic services business. The transaction will be accounted for as a pooling of interests. In February 1996, the General Division announced a planned redemption of its 6 3/4% Convertible Subordinated Notes. All holders elected to convert their notes into shares of General Division Stock and TR Stock. Holders of the notes received 18.913 shares of General Division Stock and 2.553 shares of TR Stock in conversion of each $1,000 note. Supplementary earnings per share for the General Division which gives effect to the conversion of the notes as if such conversion took place at the beginning of each period presented, is equal to fully diluted earnings per share. In March 1996, an advisory panel to the U.S. Food and Drug Administration ("the FDA") recommended that Genzyme be granted approval to market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's recommendation will be considered by the FDA in its final review of Genzyme's premarket approval application. In March 1996, GTC entered into a Convertible Debt and Development Funding Agreement with the General Division under which the General Division agreed to provide a revolving line of credit in the amount of $10 million and has agreed to fund development costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under the Agreement GTC granted to the General Division co-marketing rights to AT-III in all territories other than Asia subject to negotiation and execution of a development and supply agreement between the parties prior to March 31, 1997. The line of credit carries a rate of 7% and is convertible into GTC's Common Stock at the average market price for the 20 day period ending two days before the Conversion at GTC's option to maintain GTC's tangible net worth at the end of each quarter at a level between $4.0 million and $4.2 million or by Genzyme at any time for up to the full amount outstanding. In March 1996, the Board of Directors voted, subject in each case to the approval of the stockholders, to adopt two amendments to the Company's 1990 Equity Incentive Plan (the "Equity Plan"). These amendments would increase the aggregate number of shares of General Division Stock that may be subject to grants under the Equity Plan from 7,600,000 to 9,900,000 subject to adjustment for stock splits, stock dividends and certain transactions affecting the Company's capital stock. -66- 67 GENZYME TISSUE REPAIR DIVISION REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of GENZYME CORPORATION: We have audited the accompanying combined balance sheets of Genzyme Tissue Repair Division (as described in Note A) as of December 31, 1995 and 1994, and the related combined statements of operations and cash flows and the combined financial statement schedule for each of the three years in the period ended December 31, 1995. The combined financial statements and financial statement schedule are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements of Genzyme Tissue Repair Division present fairly, in all material respects, the financial position of Genzyme Tissue Repair Division as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the combined financial statement schedule taken as a whole presents fairly, in all material respects, the information required to be included therein. As more fully described in Note A to these financial statements, Genzyme Tissue Repair Division is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Tissue Repair Division should be read in conjunction with the audited consolidated financial statements of Genzyme Corporation and Subsidiaries. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts March 1, 1996, except as to Note O which is March 26, 1996 -67- 68 GENZYME TISSUE REPAIR DIVISION COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31, - ------------------------------------------------------------------------------------ 1995 1994 1993 ---- ---- ---- Revenues: Net service sales............................. $ 5,220 $ 324 $ - Related party revenues: Technology license fee..................... - - 2,000 Revenues from research and development contracts................................. - - 2,684 -------- -------- -------- 5,220 324 4,684 Operating costs and expenses: Cost of services sold......................... 4,731 287 - Selling, general and administrative........... 12,927 964 701 Research and development (including research and development related to contracts)........ 10,938 3,638 2,805 Purchase of in-process research and development.................................. - 11,215 25,000 -------- -------- -------- 28,596 16,104 28,506 -------- -------- -------- Operating loss ................................... (23,376) (15,780) (23,822) Other income and (expenses): Investment income............................. 1,386 29 - Interest expense.............................. (40) - - -------- -------- -------- 1,346 29 - -------- -------- -------- Loss before income taxes.......................... (22,030) (15,751) (23,822) Provision for income taxes........................ - - (38) -------- -------- -------- Net loss.......................................... (22,030) (15,751) (23,860) Tax benefit allocated to General Division ........................................ - - (255) -------- -------- -------- Net loss attributable to Tissue Repair Stock...... $(22,030) $(15,751) $(24,115) ======== ======== ======== Per Tissue Repair Division Common Share: Net loss...................................... $ (2.28) $ (4.40) $ (7.43) ======== ======== ======== Weighted average shares outstanding........... 9,659 3,578 3,245 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. -68- 69 GENZYME TISSUE REPAIR DIVISION COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------- 1995 1994 ---- ---- ASSETS Current Assets: Cash and cash equivalents.............................. $40,741 $16,993 Short-term investments................................. 6,832 5,918 Accounts receivable, less allowance of $325 in 1995 and $177 in 1994...................................... 1,838 1,486 Inventories............................................ 761 76 Prepaid expenses and other current assets.............. 186 284 ------- ------- Total current assets................................. 50,358 24,757 Property, plant and equipment, net........................ 1,962 1,456 Other Assets: Long-term investments.................................. - 1,897 Other noncurrent assets................................ 329 325 ------- ------- 329 2,222 ------- ------- $52,649 $28,435 ======= ======= LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable....................................... $ 2,432 $ 528 Accrued expenses....................................... 1,349 3,220 Payable to Genzyme General Division.................... 2,034 171 Current portion of capital lease obligations........... 169 281 ------- ------- Total current liabilities............................ 5,984 4,200 Noncurrent Liabilities: Capital lease obligations.............................. - 174 Other noncurrent liabilities........................... 739 748 ------- ------- 739 922 Commitments and Contingencies (Notes D, J, M and O)....... - - Division Equity (Note C).................................. 45,926 23,313 ------- ------- $52,649 $28,435 ======= =======
The accompanying notes are an integral part of these combined financial statements. -69- 70 GENZYME TISSUE REPAIR DIVISION COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------ 1995 1994 1993 ---- ---- ---- OPERATING ACTIVITIES: Net loss............................................ $(22,030) $(15,751) $(23,860) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization.................... 628 26 - Loss on disposal of assets....................... 160 - - Non-cash compensation expense.................... 882 - - Accrued interest/amortization on bonds........... (76) (45) - Provision for bad debts.......................... 231 - - Purchase of in-process research and development for stock........................... - 11,215 - Increase (decrease) in cash from working capital: Accounts receivable........................... (583) (204) - Inventories................................... (685) 309 - Prepaid expenses and other current assets..... 98 18 - Accounts payable, accrued expenses and deferred revenue......................... 33 1,666 (149) Payable to Genzyme General Division........... 1,863 171 - -------- -------- -------- Net cash flow used by operating activities.... (19,479) (2,595) (24,009) INVESTING ACTIVITIES: Cash acquired in aquisition for stock, net.......... - 5,581 - Purchases of investments............................ (16,687) - - Sales and maturities of investments................. 17,991 - - Purchase of property, plant & equipment............. (1,294) - - Investments in non-current assets................... (13) - - -------- -------- -------- Net cash flow provided (used) by investing activities................................... (3) 5,581 - FINANCING ACTIVITIES: Proceeds from issuance of common stock.............. 43,516 14 - Net cash from Genzyme............................... - 13,993 24,009 Payment of debt and capital leases.................. (286) - - -------- -------- -------- Net cash provided by financing activities..... 43,230 14,007 24,009 -------- -------- -------- Increase in cash and cash equivalents................... 23,748 16,993 - Cash and cash equivalents, beginning of period.......... 16,993 - - -------- -------- -------- Cash and cash equivalents, end of period................ $ 40,741 $ 16,993 $ - ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. -70- 71 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: Genzyme Tissue Repair Division ("GTR"), a division of Genzyme Corporation (the "Company" or "Genzyme"), develops and commercializes products and services for the prevention or repair of tissue injury as a consequence of accidental or disease related trauma. GTR uses cell, enzyme, growth factor and matrix technologies to develop products that will augment or positively modify naturally-occurring biological processes involved in tissue repair. Basis of Presentation: The approval effective December 16, 1994 (the "Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994 resulted in the redesignation of Genzyme's common stock. The outstanding shares of Genzyme common stock were redesignated as General Division Common Stock ("General Division Stock") on a share-for-share basis and a second class of common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was distributed on the basis of .135 of one share of TR Stock for each share of Genzyme's previous common stock held by stockholders of record on October 14, 1994. General Division Stock and TR Stock provide stockholders with separate securities which are intended to reflect the performance of the Genzyme General Division (the "General Division") and GTR, respectively. Net income (loss) per common share has been included in the Statements of Operations. For the purpose of computing net loss per common share of TR Stock, the number of shares of TR Stock prior to the Effective Date are assumed to be the total number of shares of Genzyme common stock multiplied by .135. Dividends to the holders of TR Stock will be limited to the lesser of funds of Genzyme legally available for the payment of dividends and the Available Tissue Repair Dividend Amount, as defined in Genzyme's Articles of Organization, as amended. Although there is no requirement to do so, the Board would declare and pay dividends on TR Stock, if any, based primarily on the earnings, financial condition, cash flow and business requirements of GTR. There is currently no intention of paying dividends. Genzyme, subject to certain conditions, has the right to exchange each outstanding share of TR Stock for any combination of cash and/or shares of General Division Stock at a 30% premium over Fair Market Value. In addition, following a disposition of all or substantially all assets of GTR, the shares of TR Stock are subject to mandatory exchange by Genzyme for cash and/or shares of General Division Stock at a 30% premium over Fair Market Value as determined by the trading prices during a specified period prior to public announcement of the disposition. Shares of General Division Stock are not subject to either optional or mandatory exchange. Holders of General Division Stock and TR Stock each are entitled to one vote per share and vote together as a single class on all matters as to which common stockholders generally are entitled to vote. Except in limited circumstances provided under Massachusetts law and in Genzyme's Articles of Organization, as amended, and in the management and accounting policies adopted by Genzyme's Board of Directors (the "Board"), holders of each class of common stock will have no rights to vote on matters as a separate class. Separate meetings of the holders of each class of common stock will not be held. 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 will control the outcome of the vote on that matter. -71- 72 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The financial statements of GTR include the financial position, results of operations and cash flows of the tissue repair operations of Genzyme. GTR's financial statements are prepared using the amounts included in Genzyme's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be reasonable (see Note B). Genzyme provides holders of TR Stock separate financial statements, management's discussion and analysis, descriptions of businesses and other relevant information for GTR in addition to consolidated financial information of Genzyme. Notwithstanding the attribution of assets and liabilities (including contingent liabilities) between the General Division and GTR for the purposes of preparing their respective historical and future financial statements, this attribution and the change in the capital structure of Genzyme as a result of the approval of the Genzyme Stock Proposal does not affect legal title to the assets or responsibility for the liabilities of Genzyme or any of its subsidiaries. Holders of TR Stock are shareholders of Genzyme, which continue to be responsible for all of its liabilities. 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. Accordingly, Genzyme's consolidated financial statements should be read in connection with GTR's financial statements. Except as stated in the amended articles, the accounting policies applicable to the preparation of the financial statements of GTR may be modified or rescinded at the sole discretion of the Board without the approval of the shareholders, although there is no intention to do so. Principles of Combination: The accompanying combined financial statements reflect the combined accounts of all of Genzyme's tissue repair businesses. All material intercompany items and transactions have been eliminated in combination. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents, consisting principally of money market funds and municipal notes purchased with initial maturities of three months or less, are valued at cost plus accrued interest, which approximates market. Investments: Short-term investments include all investments with remaining maturities of twelve months or less. Long-term investments include all investments with remaining maturities greater than twelve months. GTR classifies its equity investments as available-for-sale and its investments in debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time the investments are purchased. As of December 31, 1995, the Company classified all investments, consisting solely of debt securities, as available-for-sale (See Note F - Investments). Fair Value of Financial Instruments: The fair value of investments is obtained from market quotations and is disclosed in Note F. Inventories: Inventories are valued at the lower of cost (first-in, -72- 73 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) first-out method) or market. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Provision for depreciation is computed using the straight-line method over the estimated useful lives of the assets (three to ten years for plant and equipment, five to seven years for furniture and fixtures, and twenty-five to forty years for buildings). Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. Revenue Recognition: GTR's two commercial tissue repair services are autologous epidermal skin grafts produced using the Epicel[SM] Service and the culturing of autologous cartilage cells using the CARTICEL[SM] Service. GTR recognizes service revenue at the time skin grafts or cartilage cells are shipped. Cancellation charges may be assessed upon the cancellation of an Epicel[SM] order. These charges are dependent upon order size and stage of skin graft growth and are recognized upon order cancellation and when collection is determined to be probable. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract. Non-refundable technology license fees are recognized as revenue upon consummation of the related agreement. Research and Development: Research and development costs are expensed in the period incurred. Costs of purchased technology which management believes has not demonstrated technological feasibility and for which there is no alternative future use are charged to expense in the period of purchase. Income Taxes: GTR uses the asset and liability method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. See Note B for allocation of Genzyme's income taxes to GTR. Net Loss Per Share: The method of calculating earnings per share for TR Stock reflects the terms of the Articles of Organization, as amended, which provide that dividends may be declared and paid only out of the lesser of funds of Genzyme legally available therefore and each division's Available Dividend Amount, as defined. For the purpose of computing net income per common share of TR Stock for periods prior to December 12, 1994, the number of shares and share equivalents of TR Stock prior to the Effective Date are assumed to be the same as the total number of shares and share equivalents of Genzyme common stock multiplied by .135. GTR computes income per share by dividing the income attributable to TR Stock by the weighted average number of shares of TR stock and dilutive common stock equivalents and other potentially dilutive securities outstanding during the applicable period. Income attributable to TR Stock equals GTR's net income or loss for the relevant period determined in accordance with generally accepted accounting principles in effect at such time, adjusted by the amount of tax benefits allocated to or from GTR pursuant to the accounting policies adopted by the Board. The accounting policies provide that, as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to the other division without any compensating payment or allocation. Net loss attributable to TR Stock and net loss per common and common equivalent share for the years ended December 31, 1993 and 1994 give effect to the provisions of the management and accounting policies adopted by the Board in connection with the creation of GTR and, accordingly, are pro forma presentations. Accounting for Stock-Based Compensation: Statement of Financial Accounting -73- 74 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), will require the Company to either elect expense recognition under SFAS 123 or its disclosure-only alternative for stock-based employee compensation. The expense recognition provision encouraged by SFAS 123 would require fair value-based financial accounting to recognize compensation expense for employee stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996 financial statements with comparable disclosures for the prior year. The Company has determined that it will elect the disclosure-only alternative permitted under SFAS 123. The Company will be required to disclose pro forma net income and pro forma earnings per share in the footnotes using the fair value based method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The Company has not determined the impact of these pro forma adjustments to its net income or earnings per share. Financial Instruments: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, current and non-current investments. The Company generally invests its cash investments in investments-grade securities. Uncertainties: The Company is subject to risks common to companies in the Biotechnology industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA government regulations. NOTE B RELATED PARTY TRANSACTIONS The following policies may be modified or rescinded by action of the Board, or the Board may adopt additional policies, without approval of the shareholders of Genzyme, although the Board has no present intention to do so. Genzyme allocates certain corporate general and administrative expenses, research and development expense and income taxes in accordance with the policies described below. Financial Matters: As a matter of policy, the Company manages the financial activities of the General Division and GTR on a centralized basis. These financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt and the issuance and repurchase of common stock. At December 31, 1995, the Company attributed none of its short-term and long-term debt to GTR based upon the specific purpose for which the debt was incurred and the cash flow requirements of GTR. Accordingly, none of the Company's interest expense has been allocated to GTR. The Company believes this method of allocation to be equitable and a reasonable estimate of such costs as if GTR operated on a stand-alone basis. To the extent borrowings are deemed to occur between GTR and the General Division, intercompany accounts have been established bearing interest at the rate in effect from time to time under the Company's unsecured credit lines or, if no such credit lines exist, at the prime rate charged by The First National Bank of Boston from time to time. To date no such borrowings have occurred, however at December 31, 1995 GTR owed the General Division $2.0 million for services rendered in the normal course of business. Shared Services: Genzyme's corporate general and administrative functions and certain sales and marketing efforts related to foreign market penetration are performed by the General Division. General, administrative, sales and marketing expenses have been allocated to GTR based upon utilization of such services as if the General Division and GTR operated on a stand-alone basis. -74- 75 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Management believes that such allocation is a reasonable estimate of such expenses. These allocations for the years ended December 31, 1995, 1994 and 1993 were $4,355,000, $833,000 and $701,000, respectively. In addition, costs incurred by the General Division related to research and development for GTR products are charged to GTR. These charges for the years ended December 31, 1995, 1994 and 1993 were $4,730,000 $3,331,000 and $2,805,000, respectively. Income Taxes: GTR is included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to its divisions by applying the provisions of FAS 109 to each division as if it were a separate taxpayer. Accordingly, the realizability of deferred tax assets is assessed at the GTR level. The sum of the amounts calculated for individual divisions of Genzyme may not equal the consolidated amount under this approach. GTR reports current and deferred tax assets and liabilities as a net intercompany payable or receivable. Under the terms of the Genzyme Stock Proposal, as of the end of any fiscal quarter of Genzyme Corporation, any projected tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to any other division without any compensating payment or allocation. The treatment of such allocation for purposes of earnings per share computation is discussed in Note A. 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 the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likelihood and timing of any such realization and other matters that the 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 General Designated Shares and a reallocation of assets from the General Division to GTR as either an increase in the 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 TR Stock. NOTE C DIVISION EQUITY The following analyzes the equity of GTR for the periods presented:
(AMOUNTS IN THOUSANDS) DECEMBER 31, ------------------------------------------------------------------------------------------------ 1995 1994 1993 ---- ---- ---- Balance at beginning of period........... $ 23,313 $ - $ (149) Net loss................................. (22,030) (15,751) (23,860) Shares issued in connection with acquisition of BioSurface............... - 25,312 - Shares issued in connection with Employee Stock Purchase Plan............ 983 14 - Exercise of stock options................ 241 Shares issued in public offering......... 42,292 Compensation expense..................... 882 Unrealized gain(loss) on investments..... 245 (255) -
-75- 76 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Net cash from Genzyme.................... - 13,993 24,009 -------- -------- -------- Balance at end of period............... $ 45,926 $ 23,313 $ - ======== ======== ========
Immediately prior to the Effective Date, as defined in Note A, approximately 15,791,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the "Warrants"), and conversion of the 6 3/4% Convertible Subordinated Notes Due 2001 (the "Notes"). Pursuant to antidilution provisions in the agreements covering the options, Genzyme has adjusted each option outstanding on the Effective Date to provide for separation of the option into an option exercisable for General Division Stock and an option exercisable for the number of shares of TR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date (with any resultant fractional shares of TR Stock rounded down to the nearest whole number). Upon exercise of these options, all proceeds will be allocated to the General Division (See TR Designated Shares). The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of General Division Stock and TR Stock upon exercise of the Warrant that the holder would have received if the holder had exercised the Warrant immediately prior to the Effective Date. Pursuant to the indenture under which the Notes were issued, the conversion privilege of the Notes was adjusted so that the holder of a Note converted after the Effective Date will receive, in addition to the shares of General Division Stock into which the Note is convertible, the same number of shares of TR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. In September 1995, GTR sold 3,000,000 shares of TR Stock to the public at a price of $15 per share for net proceeds of $42.4 million after underwriting discounts and commissions. At December 31, 1995, approximately 3,478,585 shares of TR Stock were reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as amended, outstanding warrants, and conversion of the Notes. Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the preferences, voting powers, qualifications and special or relative rights or privileges of any such series before the issuance of any shares of that series. The Board of Directors shall determine the number of shares constituting each series of Preferred Stock and each series shall have a distinguishing designation. Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"), options may be granted to purchase an aggregate of 2,000,000 shares of TR Stock. The Plan allows the granting of incentive stock and nonstatutory stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten years. In addition, the Company has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 70,000 shares of TR Stock, at a rate of 400 shares for each year of service are automatically granted at fair market value to members of the Board of Directors of the Company upon their election or reelection as Directors. All options expire ten years after the initial grant date and are subject to various vesting provisions. -76- 77 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) At the Effective Date of the Genzyme Stock Proposal, Genzyme granted initial options to purchase a total of 939,851 shares of TR Stock to employees of the Company who will devote a substantial portion of their efforts to GTR. These options, (i) had an exercise price of $4.75, the closing price of TR Stock on the first date such shares were traded on the NASDAQ National Market System or the closing price of such shares on the six-month anniversary of such date, (ii) become exercisable 20% on the effective date of the grant and 20% on each of the next four anniversaries thereof and (iii) have a term of ten years. At the six month anniversary date the closing price of the TR Stock was $6.25 and accordingly, compensation expense equal to 939,851 shares multiplied by the difference in the exercise price of $4.75 and $6.25, the six month anniversary price, will be recognized over the period of service of the holders. In 1995, GTR recorded $882,000 of related compensation expense and will record the balance of $505,000 over the next 3 years. Stock option activity is summarized below:
SHARES UNDER OPTION OPTION PRICE ------------ ------------ GENZYME CORPORATION COMMON STOCK Outstanding at December 31, 1992........ 2,929,067 3.00 - 72.04 Granted............................... 1,332,240 26.25 - 45.00 Exercised............................. (254,171) 4.00 - 37.25 Forfeited and canceled................ (161,782) 7.75 - 72.04 ---------- Outstanding at December 31, 1993........ 3,845,354 3.00 - 66.16 Granted............................... 1,619,364 22.63 - 42.00 Exercised............................. (66,378) 3.00 - 35.25 Forfeited and canceled................ (211,763) 8.25 - 66.16 Converted at Effective Date........... (5,186,577) 6.02 - 65.49 ---------- Outstanding at December 31, 1994........ - ========== TR STOCK Converted at Effective Date........... 464,824 $ 1.03 - $11.15 Granted............................... 940,976 4.75 - 5.13 ---------- Outstanding at December 31, 1994........ 1,405,800 1.03 - 11.15 Granted............................... 1,153,053 3.19 - 17.63 Exercised............................. (63,608) 1.68 - 9.58 Forfeited and canceled................ (76,202) 1.68 - 8.30 ---------- Outstanding at December 31,1995 2,419,043 1.03 - 17.63 ==========
At December 31, 1995 and 1994, 444,343 and 327,393 of the outstanding options were exercisable with aggregate exercise proceeds of approximately $2,457,400 and $1,657,800, respectively. The total exercise proceeds for all options outstanding at December 31, 1995 is approximately $20,885,000 Information regarding the range of option prices is as follows:
SHARES UNDER OPTION OPTION PRICE ------------ ------------ 80,998 $1.026 - $ 3.257 1,033,340 3.300 - 5.088 79,855 5.109 - 5.471 385,115 5.492 - 6.000 110,688 6.003 8.302
-77- 78 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 115,768 8.325 - 16.000 613,279 16.625 - 17.625 --------- 2,419,043 =========
Employee Stock Purchase Plan. The Company's 1990 Employee Stock Purchase Plan allows employees to purchase the Company's stock at 85% of fair market value. Under this plan 600,000 shares of TR Stock are authorized, of which 269,920 and 3,613 shares of TR Stock were issued in 1995 and 1994, respectively. Stock Rights. In 1989, the Company's Board of Directors issued a dividend of one preferred stock purchase right (a "Common Stock Right") on each share of Common Stock. At the Effective Date, the Rights Agreement under which the rights were issued was amended and restated to reflect the change in the capital structure of the Company and the Board declared a distribution to holders of TR Stock of a right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated Rights Agreement provides that each General Division Stock Right, which replaced the Common Stock Right, and each TR Stock Right, when it becomes exercisable, will entitle the holder to purchase from the Company (i) in the case of a General Division Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a price of $52, subject to adjustment, and (ii) in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $25, subject to adjustment. The rights expire on March 28, 1999. Stock Warrants. The Company has issued warrants which, when exercised, grant the holders one share of General Division Stock and .135 shares of TR Stock. These warrants were granted in exchange for the receipt of options by the General Division to purchase the partnership interests of Genzyme Development Partners, L.P. (the "Surgical Aids Partnership") the callable common stock of Neozyme II Corporation ("Neozyme II"), and in connection to Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds from the exercise of these warrants will be allocated to the General Division (see "TR Designated Shares"). The outstanding warrants were issued under the following terms:
EXERCISE ISSUE NUMBER OF PRICE DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD - ---- --------- -------- --------- --------------- 1989 Surgical Aids Partnership, the sales agent and its affiliates 1,205,416 $16.01 November 1, 1991 to 50,285 16.03 October 31, 1996 666,399 22.91 1992 Investors in Neozyme II: Series N 2,415,000 $38.25 Through December 31, 1996 Callable 2,415,000 See below January 1, 1997 to December 31, 1998 unless otherwise terminated 1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
The warrants issued to the Surgical Aids Partnership were issued in consideration for the granting to Genzyme of an exclusive right to purchase all of the outstanding partnership interests of the Surgical Aids Partnership. The warrants issued to investors of Neozyme II were granted in consideration -78- 79 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) of the option to purchase the callable common stock of Neozyme II and had an appraised fair value of $16,905,000. The Callable Warrants automatically terminate upon General Division's exercise of its option to purchase all of the callable common stock of Neozyme II. These warrants have an exercise price equal to the sum of the average of the closing sale prices of one share of General Division Stock and .135 share of TR Stock for the 20 trading days immediately preceding the exercise thereof. Warrant activity is summarized below:
WARRANTS WARRANT PRICE Outstanding at December 31, 1992........... 8,283,246 16.01 - 41.31 Exercised.............................. (123,180) 16.01 - 23.86 Expired................................ (4,062) 38.79 - 41.31 ---------- Outstanding at December 31, 1993........... 8,156,004 16.01 - 38.25 Exercised.............................. (2,197,774) 16.01 - 22.91 Expired................................ (23,849) 16.01 - 22.91 ---------- Outstanding at December 31, 1994........... 5,934,381 16.01 - 38.25 Granted................................ 6,005 42.67 Exercised.............................. (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995........... 5,597,241 16.01 - 42.67 ==========
TR Designated Shares. Pursuant to Genzyme's Articles of Organization, as amended, 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. At the Effective Date, 5,000,000 TR Designated Shares were established. As a result of the distribution of approximately 3,300,000 shares of TR Stock to holders of General Division Stock, the number of TR Designated Shares were reduced by a corresponding amount. The remaining 1,700,000 TR Designated Shares were reserved for issuance upon the exercise of Genzyme stock options and warrants and the conversion of Genzyme's convertible notes which were outstanding on the Effective Date. TR Designated Share activity is summarized below:
TR DESIGNATED SHARES ------------- Established at Effective Date.................. 5,000,000 Stock dividend to holders of Genzyme Common Stock.......................... (3,356,713) Stock options exercised........................ (168) Stock warrants exercised....................... (233,412) ---------- Balance at December 31, 1994................ 1,409,707 Stock options exercised........................ (72,942) Stock warrants exercised....................... (46,244) ESPP shares issued (3,613) ---------- Balance at December 31, 1995................ 1,286,908 ==========
The number of TR Designated Shares will be decreased by the number of shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the General Division; the number of shares of TR Stock issued as a dividend to holders of General Division stock; and the number of shares of TR Stock issued upon the conversion of convertible securities, including the Notes, attributed to the General Division. In addition, the number of TR Designated Shares can be increased as a result of certain inter-division transactions. The remaining TR -79- 80 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Designated Shares are reserved for issuance upon the exercise of the Notes, the aforementioned warrants and the stock options which resulted from the conversion of Genzyme options into TR Stock and General Division Stock options (See Note M). NOTE D RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following (dollars in thousands):
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 Technology license fees........ $- $- $2,000 Fees for research and development activities: Neozyme I.................. - - 2,684 -- -- ------ $- $- $4,684 == == ======
Neozyme I In 1990, GTR entered into a development contract with Neozyme I, whereby GTR was engaged to perform all research, development and clinical testing activities related to products and programs in the field of the Vianain(R) debriding product for which Neozyme I was licensed. GTR received $549,000 in 1990 under a technology license agreement (the "Agreement") pursuant to which GTR granted Neozyme I exclusive rights to manufacture and sell Vianain(R). In July 1993, GTR received an additional technology license fee of $2,000,000 from Neozyme I related to expansion of the field of the Vianain(R) debriding product. In December 1993, GTR exercised its option to purchase the Vianain(R) research program being funded by Neozyme I for a purchase price of $25,000,000 in cash. The transaction was accounted for as a purchase of in-process research and development and the value charged to operations in the fourth quarter of 1993. Celtrix Pharmaceuticals, Inc. In connection with the Common Stock Purchase Agreement dated June 24, 1994 between Genzyme and Celtrix Pharmaceuticals, Inc. ("Celtrix"), GTR entered into a License and Development Agreement (the "License Agreement") with Celtrix. The License Agreement granted GTR worldwide rights (excluding Asia) to manufacture and market products based on Transforming Growth Factor Beta2 for certain applications. In exchange, GTR agreed to fund development work relating to the products at both Celtrix and the General Division and to make milestone and royalty payments to Celtrix. NOTE E ACQUISITION OF BIOSURFACE TECHNOLOGY, INC. On December 15, 1994, Genzyme acquired BioSurface Technology, Inc. ("BST") by issuing .575 of one share of TR Stock for each share of BST common stock. In the aggregate, 5,000,000 shares of TR Stock, valued at $25,312,500, were issued representing 50% of the initial equity interest in GTR. The acquisition was accounted for as a purchase. Accordingly, the associated net assets and operations of BST have been included in GTR's financial statements since the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, $11,215,000, was charged to in-process research and development. The following summary, prepared on a pro forma basis, presents the -80- 81 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) consolidated results of operations as if BST had been acquired at the beginning of the periods presented. This pro forma summary does not necessarily reflect the results of operations as they would have been if GTR and BST constituted a single entity during the periods presented and is not necessarily indicative of results which may be obtained in the future.
YEAR ENDED DECEMBER 31, ---------------------------- 1994 1993 (Unaudited) (Unaudited) -------------------------------------------------------------- (Dollars in thousands, except per share amounts) Revenues....................... $ 6,320 $ 10,393 Net loss....................... (12,606) (31,617) Pro forma net loss per share... (1.51) (3.78)
NOTE F INVESTMENTS Investments in marketable securities at December 31 consisted of the following (dollars in thousands):
1995 1994 --------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE -------------------------------------------------------------------------- Short Term: Federal agency notes......... $1,035 $1,036 $ - $ - Corporate notes.............. 2,776 2,776 - - U.S. Treasury notes.......... 3,031 3,020 6,063 5,918 ------ ------ ------ ------ $6,842 $6,832 $6,063 $5,918 ====== ====== ====== ====== Long Term: U.S. Treasury notes.......... $ - $ - $2,007 $1,897 ====== ====== ====== ======
Gross unrealized losses in the investment portfolio at December 31, 1995 were $10,000 as compared to $255,000 at December 31, 1994. Information regarding the range of contractual maturities of investments in debt securities at December 31, 1995 is as follows:
MARKET (DOLLARS IN THOUSANDS) COST VALUE ------------------------------------------------------------------------ Within 1 year................. $6,842 $6,832 ====== ======
NOTE G INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1995 1994 -------------------------------------------------------------- Raw materials.............. $107 $55 Work-in-process............ 654 21 ---- --- $761 $76 ==== ===
NOTE H PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31 includes the following:
(DOLLARS IN THOUSANDS) 1995 1994 ----------------------------------------------------------------- Laboratory equipment................... $1,180 $1,266 Computer and office equipment.......... 978 21
-81- 82 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Leasehold improvements................. 282 195 Assets under construction 179 - ------ ------ 2,619 1,482 Less accumulated depreciation.......... (657) (26) ------ ------ $1,962 $1,456 ====== ======
The net book value of laboratory, computer and office equipment under capital leases at December 31, 1995 and 1994 totaled $146,000 and $470,000, respectively. Depreciation expense was $628,000, $26,000 and $0 in 1995, 1994 and 1993, respectively. NOTE I ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1995 1994 --------------------------------------------------------------- Professional fees...................... $ 207 $2,178 Compensation........................... 926 849 Royalties.............................. 96 106 Other.................................. 120 87 ------ ------ $1,349 $3,220 ====== ======
NOTE J LEASE COMMITMENTS Capital Leases GTR leases certain laboratory, computer and office equipment under capital leases. In connection with master lease agreements, GTR has granted the lessors certain security interests in a certificate of deposit. This collateral of approximately $293,000 is included in other noncurrent assets at December 31, 1995. Operating Leases Total rent expense under operating leases was $1,403,000 and $1,352,000 in 1995 and 1994, respectively. GTR leases facilities and personal property under certain operating leases in excess of one year. Future minimum payments due under GTR's capital and operating leases are as follows:
CAPITAL OPERATING (DOLLARS IN THOUSANDS) LEASES LEASES ------------------------------------------------------------------------ 1996................................ $173 $ 1,674 1997................................ - 1,630 1998................................ - 1,566 1999................................ - 1,561 2000................................ - 1,561 Thereafter.......................... - 5,115 ---- ------- Total minimum payments........... 173 13,107 Less: interest...................... 4 - ---- ------- $169 $13,107 ==== =======
NOTE K INCOME TAXES -82- 83 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) The following summarizes GTR's provision for (benefit from) income taxes (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------- 1995 1994 1993 ---- ---- ---- Federal income taxes: Current........................... $ - $(132) $ 132 Deferred.......................... - 132 (132) State income taxes: Current........................... - - 38 Deferred.......................... - - - ---- ----- ----- Total income tax expense (benefit)..... $ - $ - $ 38 ==== ===== =====
The differences between the effective tax rates and the U.S. federal statutory tax rates were as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 1993 ---- ---- ---- U.S. Federal income tax statutory rate.. (35.0)% (35.0)% (34.0)% State income taxes, net of federal benefit................................ (5.2) (6.0) 0.2 Deductions subject to deferred tax valuation allowance.................... 40.2 41.0 35.0 Benefit from net operating loss carryforward........................... - - (1.0) ----- ----- ----- Effective tax rate...................... -% -% .2% ===== ===== =====
At December 31, 1995 and 1994, the components of deferred tax assets and liabilities were as follows (in thousands):
1995 1994 ---- ---- Deferred assets Net operating loss carryforward...... $ 11,865 $ 2,368 Intangible amortization.............. 8,415 9,055 -------- -------- Total deferred tax assets......... 20,280 11,423 Tax benefit allocated to General Division.................... (20,280) (11,423) -------- -------- Net deferred tax assets........... $ - $ - ======== ========
The deferred tax assets of GTR cannot be utilized by the Division to offset or reduce current or deferred income tax expense. Accordingly, the deferred tax assets have been allocated to the General Division. GTR reports current and deferred tax assets and liabilities as a net intercompany payable or receivable. GTR's 1995 tax expense has been funded by Genzyme. NOTE L BENEFIT PLANS Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of GTR. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by GTR. GTR made $35,587 and $0 in contributions to the plan in 1995 and 1994, respectively. NOTE M GENERAL DIVISION FUNDING COMMITMENT AND PURCHASE OPTION -83- 84 GENZYME TISSUE REPAIR DIVISION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Genzyme's former obligation to allocate up to $30 million in cash from the General Division to GTR in the period through June 1998 (the "Funding Commitment") was eliminated by the consummation of GTR's public offering on September 22, 1995, which provided GTR with $42.4 million in net proceeds from the offering after underwriting discounts. Notwithstanding the elimination of the Funding Commitment, Genzyme still has an option to allocate to GTR, at $10 per TR Designated Share, up to $30 million from the General Division (the "Purchase Option"). Consequently, a maximum of 3,000,000 of TR Designated Shares may be issued in connection with the exercise of the Purchase Option. NOTE N QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1995 and 1994 are displayed in the following table:
1ST 2ND 3RD 4TH QTR QTR QTR QTR --- --- --- --- 1995 Net sales..................... $ 1,030 $ 1,247 $ 1,435 $ 1,508 Gross profit(loss)............ 305 367 85 (268) Net loss...................... (3,942) (5,027) (5,382) (7,679) Loss per common share......... (0.45) (0.57) (0.59) (0.64) 1994 Net sales..................... $ - $ - $ - $ 324 Gross profit(loss)............ - - - 37 Net loss (1).................. (815) (1,129) (1,059) (12,747) Loss per common share (1)..... (0.25) (0.34) (0.32) (3.56)
- ---------------- (1) Includes special charges related to the purchase of in-process research and development in the fourth quarter of $11,215 (See Note E). NOTE O SUBSEQUENT EVENTS In January 1996, GTR acquired certain real estate in Framingham, Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to buildings and $1.1 million was allocated to land based on appraised values. In March 1996, GTR utilized $8.0 million of the Company's $15.0 million line of credit with Fleet Bank of Massachusetts. In March 1996, the Board of Directors voted, subject in each case to the approval of the stockholders, to adopt two amendments to the Company's 1990 Equity Incentive Plan (the "Equity Plan"). These amendments would increase the aggregate number of shares of shares of TR Stock that may be subject to grants under the Equity Plan from 2,000,000 to 3,300,000 subject to adjustment for stock splits, stock dividends and certain transactions affecting the Company's capital stock. -84- 85 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1996 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. -------- ITEM 1. Unaudited Condensed Financial Statements GENZYME CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1996 and 1995............. 87 Condensed Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995........................................ 89 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 .......................... 90 Notes to Unaudited Condensed Consolidated Financial Statements.... 91 GENZYME GENERAL DIVISION Condensed Combined Statements of Operations for the Three and Six Months Ended June 30, 1996 and 1995.............. 94 Condensed Combined Balance Sheets as of June 30, 1996 and December 31, 1995........................................ 96 Condensed Combined Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 .......................... 97 Notes to Unaudited Condensed Combined Financial Statements........ 98 GENZYME TISSUE REPAIR DIVISION Condensed Combined Statements of Operations for the Three and Six Months Ended June 30, 1996 and 1995.............. 100 Condensed Combined Balance Sheets as of June 30, 1996 and December 31, 1995........................................ 101 Condensed Combined Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 .......................... 102 Notes to Unaudited Condensed Combined Financial Statements........ 103 -86- 86 GENZYME CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED (DOLLARS IN THOUSANDS) JUNE 30, JUNE 30, - -------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Net product sales ............................... $ 91,087 $74,054 $183,902 $142,325 Net service sales ............................... 18,408 13,048 33,029 26,542 Revenues from research and development contracts: Related parties ............................... 5,956 6,497 11,999 12,823 Other ......................................... 184 6 202 104 -------- ------- -------- -------- 115,635 93,605 229,132 181,794 Operating costs and expenses: Cost of products sold ........................... 29,164 30,843 62,488 56,974 Cost of services sold ........................... 14,880 7,826 25,533 15,777 Selling, general and administrative ............. 39,997 25,902 78,569 51,893 Research and development (including research and development related to contracts) .......... 18,565 17,263 36,255 33,726 Other ........................................... 1,465 - 1,465 - -------- ------- -------- -------- 104,071 81,834 204,310 158,370 -------- ------- -------- -------- Operating income ................................... 11,564 11,771 24,822 23,424 Other income and (expenses): Minority interest in net loss of subsidiaries ... - 501 - 866 Equity in net loss of unconsolidated affiliate .. (1,121) (793) (2,058) (1,742) Gain on investments ............................. 1,711 - 1,711 - Investment income ............................... 4,615 1,297 9,103 3,062 Interest expense ................................ (186) (173) (395) (220) -------- ------- -------- -------- 5,019 832 8,361 1,966 -------- ------- -------- -------- Income before income taxes ......................... 16,583 12,603 33,183 25,390 Provision for income taxes ......................... (6,799) (4,663) (13,107) (9,394) -------- ------- -------- -------- Net income ......................................... $ 9,784 $ 7,940 $ 20,076 $ 15,996 ======== ======= ======== ========
The accompanying notes are an integral part of these unaudited, condensed, consolidated financial statements. -87- 87 GENZYME CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30, - ----------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- ATTRIBUTABLE TO GENZYME GENERAL DIVISION: Net income ..................................... $ 15,979 $10,932 $ 31,516 $21,303 Allocated tax benefit generated by Genzyme Tissue Repair Division ........................ 4,305 2,035 7,802 3,662 -------- ------- -------- ------- Net income attributable to General Division Stock .............................. $ 20,284 $12,967 $ 39,318 $24,965 ======== ======= ======== ======= Income per General Division common and common equivalent share: Net income(1).................................. $ 0.27 $ 0.23 $ 0.54 $ 0.44 ======== ======= ======== ======= Average shares outstanding(1) ................. 73,908 56,636 72,880 56,210 ======== ======= ======== ======= Income per General Division Common Share assuming full dilution: Net income(1).................................. $ 0.27 $ 0.21 $ 0.53 $ 0.41 ======== ======= ======== ======= Average fully diluted shares outstanding(1) ... 73,934 60,646 74,300 60,470 ======== ======= ======== ======= ATTRIBUTABLE TO GENZYME TISSUE REPAIR DIVISION: Net loss attributable to TR Stock .............. $(10,500) $(5,027) $(19,242) $(8,969) ======== ======= ======== ======= Per common share: Net loss ...................................... $ (0.83) $ (0.57) $ (1.55) $ (1.03) ======== ======= ======== ======= Average shares outstanding ..................... 12,576 8,763 12,411 8,721 ======== ======= ======== ======= - ------------- (1) Reflects for July 25, 1996 2-for-1 stock split. (See Footnote 12 -- "Subsequent Events").
The accompanying notes are an integral part of these unaudited, condensed, consolidated financial statements. -88- 88 GENZYME CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, - ----------------------------------------------------------------------------- 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents ..................... $ 119,331 $144,372 Short-term investments ........................ 163,063 112,303 Accounts receivable, less allowance for doubtful accounts ........................ 97,935 88,959 Inventories ................................... 64,363 53,042 Prepaid expenses and other current assets ..... 13,433 12,531 Deferred tax assets - current ................. 7,729 7,729 ---------- -------- Total current assets ........................ 465,854 418,936 Property, plant and equipment, net .............. 365,341 329,423 Other Assets: Long-term investments ......................... 52,141 69,561 Note receivable - related party ............... 1,467 262 Intangibles, net of accumulated amortization .. 64,049 29,934 Deferred tax assets - noncurrent .............. 27,487 23,645 Other noncurrent assets ....................... 29,990 33,440 ---------- -------- 175,134 156,842 ---------- -------- $1,006,329 $905,201 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable .............................. $ 13,436 $ 21,980 Accrued expenses .............................. 49,065 39,418 Short-term borrowings ......................... 15,000 - Income taxes payable .......................... 8,828 1,316 Deferred revenue .............................. 3,273 1,367 Current portion of long-term debt and capital lease obligations .................... 2,761 2,445 ---------- -------- Total current liabilities ................... 92,363 66,526 Noncurrent Liabilities: Long-term debt and capital lease obligations .. 24,242 124,473 Other noncurrent liabilities .................. 8,679 8,995 ---------- -------- 32,921 133,468 Stockholders' Equity: General Division Stock, $.01 par value ........ 347 312 TR Stock, $.01 par value ...................... 124 121 Treasury Stock - at cost ...................... (881) (882) Additional paid-in capital .................... 879,513 724,342 Accumulated earnings (deficit) ................ 2,918 (17,158) Other equity adjustments ...................... (976) (1,528) ---------- -------- 881,045 705,207 ---------- -------- $1,006,329 $905,201 ========== ========
The accompanying notes are an integral part of these unaudited, condensed, consolidated financial statements. -89- 89 GENZYME CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, - -------------------------------------------------------------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income ......................................... $ 20,076 $ 15,996 Reconciliation of net income to net cash from operating activities: Depreciation and amortization .................... 11,966 11,595 Provision for bad debts .......................... 3,797 3,699 (Gain)/loss on sale of investments ............... (1,711) 110 Loss on disposal of fixed assets ................. 41 32 Accrued interest/amortization on bonds ........... 176 514 Minority interest in net loss of subsidiaries .... - (866) Equity in net loss of unconsolidated affiliate ... 1,719 1,742 Other ............................................ (136) 1,173 Decrease in cash from working capital: Accounts receivable ............................ (9,849) (4,363) Inventories .................................... (12,138) (4,183) Prepaid expenses and other current assets ...... (361) (710) Accounts payable, accrued expenses and deferred revenue .......................... 4,432 (14,738) -------- -------- Net cash provided by operating activities ...... 18,012 10,001 INVESTING ACTIVITIES: Investment in unconsolidated affiliate ............. (1,674) (4,000) Loans to affiliate ................................. (1,468) (1,857) Purchases of investments ........................... (75,935) (22,027) Sales and maturities of investments ................ 46,934 45,918 Property, plant and equipment ...................... (41,140) (25,675) Other noncurrent assets ............................ (2,758) (541) -------- -------- Net cash used by investing activities .......... (76,041) (8,182) FINANCING ACTIVITIES: Issuance of common stock ........................... 17,311 6,846 Issuance of common stock by subsidiary ............. - 260 Short-term borrowings under bank credit agreement .. 23,000 - Issuance of debt ................................... - 77 Payments of debt and capital lease obligations ..... (8,552) (39,341) -------- -------- Net cash provided by (used by) financing activities ................................... 31,759 (32,158) Effect of exchange rate changes on cash ............... 1,229 (1,655) -------- -------- Decrease in cash and cash equivalents ................. (25,041) (31,994) Cash and cash equivalents, beginning of period ........ 144,372 63,542 -------- -------- Cash and cash equivalents, end of period .............. $119,331 $ 31,548 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for: Interest .......................................... $ 1,196 $ 5,197 Income taxes ...................................... 6,114 14,405
Supplemental Disclosure of Non-Cash Transactions: Additional investment in unconsolidated affiliate -- Note 6 Acquisition of Genetrix, Inc -- Note 9 Conversion of 6 3/4% convertible subordinaated The accompanying notes are an integral part of these unaudited, condensed, consolidated financial statements. -90- 90 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: --------------------- These unaudited, condensed, consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1995 and the financial statements and footnotes included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. Certain items in the 1995 financial statements have been reclassified to conform with the 1996 presentation. The financial statements for the three and six months ended June 30, 1996 and 1995 are unaudited but include, in the Company's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies: ------------------- The accounting policies underlying the quarterly financial statements are those set forth in Note A of the financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1995. 3. Investments: ----------- As of June 30, 1996, the Company's investment portfolio, consisting primarily of debt securities classified as available for sale, was adjusted to its market value. As a result, gross unrealized holding gains of approximately $14,000 and gross unrealized holding losses totaling approximately $1,300,000 were recorded in a separate component of Stockholders' equity. In April 1996, the Company recorded a realized gain of approximately $1,711,000 on the sale of its investment in NABI. As of June 30, 1996, the carrying values of the Company's investments in Aronex, Inc., Celtrix Pharmaceuticals, Inc. and Integramed America, Inc. (formerly IVF America, Inc.), included in Other Noncurrent Assets in the unaudited, condensed, consolidated balance sheets, were adjusted to their respective market values. Gross unrealized holding gains of approximately $4,788,000 were recorded in a separate component of Stockholders' Equity. 4. Inventories: ----------- June 30, 1996 December 31, 1995 ------------- ----------------- Raw Materials ............ $13,981,000 $12,634,000 Work-in-process .......... 31,884,000 14,821,000 Finished products ........ 18,498,000 25,587,000 ----------- ----------- $64,363,000 $53,042,000 =========== ===========
5. Provision for Income Taxes: -------------------------- The tax provision for the three and six months ended June 30, 1996 varies from the U.S. statutory tax rate because of the provision for state income taxes, the Company's share of losses of subsidiaries which generate no current tax benefit, tax credits, taxes on foreign earnings and differences in tax bases due to acquisitions. The effective tax rate was 41% and 39.5%, respectively, for the three and six months ended June 30, 1996, slight increases over the corresponding periods in 1995. -91- 91 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. Additional Investments in Unconsolidated Affiliate: -------------------------------------------------- Pursuant to the terms of the Convertible Debt and Development Funding Agreement executed between Genzyme and Genzyme Transgenics Corporation ("GTC") in March 1996, GTC borrowed an additional $500,000 per month in April, May and June 1996 from Genzyme. On June 28, 1996, at GTC's request and in accordance with the Agreement, Genzyme converted $1.5 million plus accrued interest of approximately $23,000 into 193,321 shares of GTC Common Stock which increased Genzyme's interest in GTC to 48.1%. On July 31, 1996, GTC sold 3,000,000 shares of its Common Stock to the public for $4.00 per share. Genzyme purchased 900,000 shares in the offering after which Genzyme will own a 44.8% interest in GTC. 7. Allocation by the General Division to GTR for TR Designated Shares: ------------------------------------------------------------------ In June 1996, pursuant to the terms of an option held by Genzyme to allocate up to $30 million from Genzyme General Division (the General Division) to Genzyme Tissue Repair Division ("GTR"), the Board of Directors voted to allocate $10 million of cash from the General Division to GTR in June 1996 in exchange for an increase in the TR Designated Shares of 1,000,000 shares, which shares have been reserved for distribution at the discretion of the Board of Directors. 8. Short-Term Borrowing Arrangements: --------------------------------- Genzyme has an available line of credit with a commercial bank of $215 million, which may be used by either the General Division or GTR. In March 1996, GTR utilized $8.0 million under this line of credit as temporary financing for the acquisition of certain land and buildings in Framingham, Massachusetts (the "Acquisition") that were purchased for $6.8 million in cash in January 1996 as part of the planned expansion of manufacturing capacity for the CARTICEL[Service Mark] Service programs. In May 1996, GTR repaid the entire $8.0 million borrowed plus accrued interest of approximately $65,000. In June 1996, GTR borrowed $15.0 million under the same credit line at an interest rate of approximately 6.06% to provide further interim financing for the Acquisition and related required renovations until a suitable permanent financing arrangement can be obtained. 9. 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 General Division Stock valued at approximately $36.5 million were issued. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $34.6 million, was allocated to Goodwill to be amortized over 15 years. 10. Withdrawal of Offer to Acquire the Assets of Genzyme Development ----------------------------------------------------------------- Partners, L.P.: --------------- On May 3, 1996, Genzyme announced that it was withdrawing its offer to acquire substantially all of the assets of Genzyme Development Partners, L.P. (the "Partnership") for shares of Genzyme General Division Common Stock valued at $93 million at the time the offer was made. The withdrawal of the offer by Genzyme does not affect the respective rights and obligations of the Partnership and Genzyme under any of the existing agreements between the parties. 11. Long-Term Debt: --------------- In March 1996, holders of the Company's 6 3/4% percent convertible subordinated notes in the principal amount of $100 million converted such notes into General Division and TR Stock. Holders of the notes received 18.913 shares of General Division Stock and 2.553 shares of TR Stock in conversion of each $1,000 note. As a result of the conversion, the holders forfeited interest which would have been payable by the Company on April 1, 1996. The carrying amount of the debt, net of unamortized discount, plus accrued interest of approximately $2,914,000 was credited to Stockholders' Equity. 12. Subsequent Event: ---------------- On July 1, 1996, Genzyme completed the acquisition of Deknatel Snowden Pencer, Inc. ("DSP"), a privately held surgical products company, for approximately $250.0 million. The purchase price consisted of cash of approximately $190.0 million. Genzyme also assumed and subsequently repaid debt of DSP of approximately $56.5 million, and Genzyme paid acquisition costs of approximately $3.5 million. Funds for the acquisition, the repayment of the debt and the payment of the acquisition costs were provided by borrowings of $200.0 million under a revolving credit facility from Fleet National Bank, due September 1, 1997, with interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996) and approximately $50.0 million was provided from the Company's cash balances. -92- 92 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Subsequent Event (continued): ---------------------------- DSP designs, manufactures and markets cardiovascular devices, precision instruments and specialty surgical products. DSP had net sales of $95.3 million in the fiscal year ending September 30, 1995. Its 70-person sales force calls directly on cardiovascular, general and gynecological surgeons throughout the U.S. and Europe and has a strong presence in the operating rooms of major hospitals. Genzyme will retain DSP personnel and facilities and continue to pursue DSP's growth strategy. Genzyme plans to use DSP's sales force to accelerate the introduction of its Seprafilm[Trademark] bioresorbable membrane to the U.S. surgical market once Seprafilm[Trademark] is approved by the U.S. Food and Drug Administration. In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of General Division Stock to be effected by means of a 100% stock dividend payable on July 25, 1996 to stockholders of record on July 11, 1996, subject to increasing the authorized shares of General Division Stock from 100,000,000 to 200,000,000 shares (the "Amendment"). The Amendment was approved by holders of a majority in interest of the outstanding General Division and TR Stock, voting together as a single class, at a special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a total of 34,669,435 shares of General Division Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. In July 1996, the Company agreed to make a final payment of approximately $7.6 million for a company acquired in 1994. On July 31, 1996, GTC sold 3,000,000 shares of its Common Stock to the public for $4.00 per share. Genzyme purchased 900,000 shares in the offering after which Genzyme will own a 44.8% interest in GTC. On August 13, 1996, the FDA granted approval to market Seprafilm [Registered Trademark] for use in any open abdominal or pelvic surgery. There are estimated to be approximately 3.1 million such surgeries performed annually in the United States. Genzyme, on behalf of the Joint Venture formed between Genzyme and the Partnership, expects to launch Seprafilm[Registered Trademark] broadly in the United States in October, using the DSP sales force. Under the terms of the agreements between Genzyme and the Partnership, the Joint Venture will manufacture and market Seprafilm[Registered Trademark] in North America under contract with Genzyme. Genzyme and the Partnership expect to conclude negotiations during the third quarter to establish definitive terms for the Joint Venture, including the allocation between the parties of profits and losses from the Joint Venture. -93- 93 GENZYME GENERAL DIVISION CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED (DOLLARS IN THOUSANDS) JUNE 30, JUNE 30, - ---------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Net product sales ................................. $ 91,087 $74,054 $183,902 $142,325 Net service sales ................................. 16,761 11,801 29,668 24,265 Revenues from research and development contracts: Related parties ................................. 5,956 6,497 11,999 12,823 Other ........................................... 184 6 202 104 -------- ------- -------- -------- 113,988 92,358 225,771 179,517 Operating costs and expenses: Cost of products sold ............................. 29,164 29,963 62,488 55,369 Cost of services sold ............................. 11,424 7,826 19,651 15,777 Selling, general and administrative ............... 33,267 23,361 65,593 47,600 Research and development (including research and development related to contracts) ........... 16,215 14,148 31,551 27,797 Other ............................................. 1,465 - 1,465 - -------- ------- -------- -------- 91,535 75,298 180,748 146,543 -------- ------- -------- -------- Operating income ..................................... 22,453 17,060 45,023 32,974 Other income and (expenses) Minority interest in net loss of subsidiaries ..... - 501 - 866 Equity in net loss of unconsolidated affiliate .... (1,121) (793) (2,058) (1,742) Gain on investments ............................... 1,711 - 1,711 - Investment income ................................. 4,226 1,035 8,144 2,481 Interest expense .................................. (186) (173) (395) (220) -------- ------- -------- -------- 4,630 570 7,402 1,385 -------- ------- -------- -------- Income before income taxes ........................... 27,083 17,630 52,425 34,359 Provision for income taxes ........................... (11,104) (6,698) (20,909) (13,056) -------- ------- -------- -------- Net income ........................................... 15,979 10,932 31,516 21,303 Allocated tax benefit generated by Genzyme Tissue Repair Division .............................. 4,305 2,035 7,802 3,662 -------- ------- -------- -------- Net income attributable to Genzyme General Division Stock .............................. $ 20,284 $12,967 $ 39,318 $ 24,965 ======== ======= ======== ========
The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -94- 94 GENZYME GENERAL DIVISION CONDENSED COMBINED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30, - ----------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Net income attributable to Genzyme General Division Stock .......................... $20,284 $12,967 $39,318 $24,965 ======= ======= ======= ======= Income per General Division common and common equivalent share: Net income(1) ................................. $ 0.27 $ 0.23 $ 0.54 $ 0.44 ======= ======= ======= ======= Average shares outstanding(1) ................. 73,908 56,636 72,880 56,210 ======= ======= ======= ======= Income per General Division Common Share assuming full dilution: Net income(1) ................................. $ 0.27 $ 0.21 $ 0.53 $ 0.41 ======= ======= ======= ======= Average fully diluted shares outstanding(1) ... 73,934 60,646 74,300 60,470 ======= ======= ======= ======= (1) Reflects for July 25, 1996 2-for-1 stock split. (See Footnote 11 - "Subsequent Events".)
The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -95- 95 GENZYME GENERAL DIVISION COMBINED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, - --------------------------------------------------------------------------- 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents..................... $ 85,354 $103,631 Short-term investments ....................... 161,060 105,471 Accounts receivable, less allowance for doubtful accounts........................ 96,719 87,121 Inventories .................................. 62,989 52,281 Prepaid expenses and other current assets .... 13,002 12,345 Due from Genzyme Tissue Repair Division ...... 2,308 2,034 Deferred tax assets - current ................ 7,729 7,729 -------- -------- Total current assets ....................... 429,161 370,612 Property, plant and equipment, net ............. 344,658 327,461 Other Assets: Long-term investments ........................ 52,141 69,561 Note receivable - affiliate .................. 1,467 262 Intangibles, net of accumulated amortization.. 64,049 29,934 Deferred tax assets - noncurrent ............. 27,487 23,645 Other noncurrent assets ...................... 29,878 33,111 -------- -------- 175,022 156,513 -------- -------- $948,841 $854,586 ======== ======== LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable ............................. $ 12,063 $ 19,548 Accrued expenses ............................. 46,847 38,069 Income taxes payable ......................... 8,828 1,316 Deferred revenue ............................. 3,273 1,367 Current portion of long-term debt and capital lease obligations ................... 2,724 2,276 -------- -------- Total current liabilities .................. 73,735 62,576 Noncurrent Liabilities: Long-term debt and capital lease obligations.. 24,242 124,473 Other noncurrent liabilities ................. 7,928 8,256 -------- -------- 32,170 132,729 Division equity ................................ 842,936 659,281 -------- -------- $948,841 $854,586 ======== ========
The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -96- 96 GENZYME GENERAL DIVISION CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, - ------------------------------------------------------------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income ........................................ $ 39,318 $ 24,965 Reconciliation of net income to net cash from operating activities: Depreciation and amortization ................... 11,708 11,282 Provision for bad debts ......................... 3,641 3,699 (Gain)/loss on sale of investments .............. (1,711) 110 Loss on disposal of fixed assets ................ 41 32 Accrued interest/amortization on bonds .......... 102 613 Minority interest in net loss of subsidiaries ... - (866) Equity in net loss of unconsolidated affiliate .. 1,719 1,742 Other ........................................... (110) 1,173 Decrease in cash from working capital: Accounts receivable ........................... (10,315) (4,854) Inventories ................................... (11,525) (4,149) Prepaid expenses and other current assets ..... (116) (806) Accounts payable, accrued expenses and deferred revenue ......................... 4,623 (13,350) Due from Genzyme Tissue Repair Division ....... (185) (655) -------- -------- Net cash provided by operating activities ..... 37,190 18,936 INVESTING ACTIVITIES: Cash allocated to Genzyme Tissue Repair Division .. (10,000) - Investment in unconsolidated affiliate ............ (1,674) (4,000) Loans to affiliate ................................ (1,468) (1,857) Purchases of investments .......................... (70,931) (11,070) Sales and maturities of investments ............... 37,172 37,831 Property, plant and equipment ..................... (22,161) (25,516) Other noncurrent assets ........................... (2,987) (549) -------- -------- Net cash provided by investing activities ..... (72,049) (5,161) -------- -------- FINANCING ACTIVITIES: Issuance of General Division Common Stock ......... 15,773 6,461 Issuance of common stock by subsidiary ............ - 260 Issuance of debt - 77 Payments of debt and capital lease obligations .... (420) (39,181) -------- -------- Net cash provided by financing activities ...... 15,353 (32,383) Effect of exchange rate changes on cash .............. 1,229 (1,655) -------- -------- Decrease in cash and cash equivalents ................ (18,277) (20,263) Cash and cash equivalents, beginning of period ....... 103,631 46,549 -------- -------- Cash and cash equivalents, end of period ............. $ 85,354 $ 26,286 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for: Interest ......................................... $ 1,125 $ 5,173 Income taxes ..................................... 5,543 14,405
Supplemental Disclosure of Non-Cash Transactions: Additional investment in unconsolidated affiliate -- Note 6 Acquisition of Genetrix, Inc. -- Note 8 Conversion of 6 3/4% convertible subordinated notes in the principal amount of $100 million -- Note 10 The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -97- 97 GENZYME GENERAL DIVISION NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS 1. Basis of Presentation: --------------------- These unaudited, condensed, combined financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1995 and the financial statements and footnotes for Genzyme General Division included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The financial statements for the three and six months ended June 30, 1996 and 1995 are unaudited but include, in the Division's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies: ------------------- The accounting policies underlying the quarterly financial statements are those set forth in Note A of the General Division's financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1995. 3. Investments: ----------- As of June 30, 1996, the General Division's investment portfolio, consisting primarily of debt securities classified as available for sale, was adjusted to its market value. As a result, gross unrealized holding gains of approximately $14,000 and gross unrealized holding losses totaling approximately $1,293,000 were recorded in a separate component of Division equity. In April 1996, the General Division recorded a realized gain of approximately $1,711,000 on the sale of its investment in NABI. As of June 30, 1996, the carrying values of the General Division's investments in Aronex, Inc., Celtrix Pharmaceuticals, Inc. and Integramed America, Inc. (formerly IVF America, Inc.), included in Other Noncurrent Assets in the unaudited, condensed, combined balance sheets, were adjusted to their respective market values. Gross unrealized holding gains of approximately $4,788,000 were recorded in a separate component of Division equity. 4. Inventories: -----------
June 30, 1996 December 31, 1995 ------------- ----------------- Raw Materials.............. $13,855,000 $12,527,000 Work-in-process............ 30,636,000 14,167,000 Finished products.......... 18,498,000 25,587,000 ----------- ----------- $62,989,000 $52,281,000 =========== ===========
5. Provision for Income Taxes: -------------------------- The tax provision for the three and six months ended June 30, 1996 varies from the U.S. statutory tax rate because of the provision for state income taxes, the General Division's share of losses of subsidiaries which generate no current tax benefit, tax credits, taxes on foreign earnings and differences in tax bases due to acquisitions. The effective tax rate was 41% and 39.9% for the three and six months ended June 30, 1996, slight increases over the corresponding periods in 1995. The allocated tax benefit generated by GTR of $4.3 million and $2.0 million in the second quarter of 1996 and 1995, respectively, reduced the General Division's tax rate for those periods to 25.1% and 26.4%, respectively. For the six months ended June 30, 1996 and 1995, the allocated tax benefit generated by GTR of $7.8 million -98- 98 GENZYME GENERAL DIVISION NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS 5. Provision for Income Taxes (continued): -------------------------------------- and $3.7 million, respectively, reduced the General Division's tax rate for the respective six month periods to 25% and 27.3%. 6. Additional Investments in Unconsolidated Affiliate: -------------------------------------------------- Pursuant to the terms of the Convertible Debt and Development Funding Agreement executed between Genzyme and GTC in March 1996, GTC borrowed an additional $500,000 per month in April, May and June 1996 from the General Division. On June 28, 1996, at GTC's request, the General Division converted $1.5 million plus accrued interest of approximately $23,000 into 193,321 shares of GTC Common Stock which increased the General Division's interest in GTC to 48.1%. On July 31, 1996, GTC sold 3,000,000 shares of its common stock to the public for $4.00 per share. Genzyme purchased 900,000 shares in the offering after which Genzyme will own a 44.8% interest in GTC. 7. Allocation by the General Division to GTR for TR Designated Shares: ------------------------------------------------------------------ In June 1996, pursuant to the terms of an option held by Genzyme to allocate up to $30 million from the General Division to GTR, the Board of Directors voted to allocate $10 million of cash from the General Division to GTR in exvchange for an increase in the TR Designated Shares of 1,000,000 shares, which shares have been reserved for distribution at the discretion of the Board of Directors. 8. Acquisition of Genetrix, Inc. ----------------------------- On April 30, 1996, the General Division 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 General Division Stock valued at approxmiately $36.5 million were issued. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $34.6 million, was allocated to Goodwill to be amortized over 15 years. 9. Withdrawal of Offer to Acquire the Assets of Genzyme Development Partners, L.P.: -------------------------------------------- On May 3, 1996, Genzyme announced that it was withdrawing its offer to acquire substantially all of the assets of Genzyme Development Partners, L.P. (the "Partnership") for shares of Genzyme General Division Common Stock valued at $93 million at the time the offer was made. The withdrawal of the offer by Genzyme does not affect the respective rights and obligations of the Partnership and Genzyme under any of the existing agreements between the parties. 10. Long-Term Debt: -------------- In March 1996, holders of the Company's 6 3/4% percent convertible subordinated notes in the principal amount of $100 million converted such notes into General Division and TR Stock. Holders of the notes received 18.913 shares of General Division Stock and 2.553 shares of TR Stock in conversion of each $1,000 note. As a result of the conversion, the holders forfeited interest which would have been payable by the Company on April 1, 1996. The carrying amount of the debt, net of unamortized discount, plus accrued interest of approximately $2,914,000 was credited to Stockholders' Equity. 11. Subsequent Events: ----------------- On July 1, 1996, the General Division completed the acquisition of DSP, a privately held surgical products company, for approximately $250.0 million. The purchase price consisted of cash of approximately $190.0 million. The General Division also assumed and subsequently repaid debt of DSP of approximately $56.5 million, and the General Division paid acquisition costs of approximately $3.5 million. Funds for the acquisition, the repayment of the debt and the payment of the acquisition costs were provided by borrowings of $200.0 million under a revolving credit facility from Fleet National Bank, due September 1, 1997, with interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996) and approximately $50.0 million was provided from General Division cash balances. DSP designs, manufactures and markets cardiovascular devices, precision instruments and specialty surgical products. DSP had net sales of $95.3 million in the fiscal year ending September 30, 1995. Its 70-person sales force calls directly on cardiovascular, general and gynecological surgeons throughout the U.S. and Europe and has a strong presence in the operating rooms of major hospitals. The General Division will retain DSP personnel and facilities and continue to pursue DSP's growth strategy. The General Division plans to use DSP's sales force to accelerate the introduction of its Seprafilm[Registered Trademark] bioresorbable membrane to the U.S. surgical market once Seprafilm[Trademark] is approved by the U.S. Food and Drug Administration. In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of General Division Stock to be effected by means of a 100% stock dividend payable on July 25, 1996 to stockholders of record on July 11, 1996, subject to increasing the authorized shares of General Division Stock from 100,000,000 to 200,000,000 shares (the "Amendment"). The Amendment was approved by holders of a majority in interest of the outstanding General Division and TR Stock, voting together as a single class, at a special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a total 34,669,435 shares of General Division Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. In July 1996, the General Division agreed to make a final payment of approximately $7.6 million for a company acquired in 1994. On July 31, 1996, GTC sold 3,000,000 shares of its Common Stock to the public for $4.00 per share. Genzyme purchased 900,000 shares in the offering after which Genzyme will own a 44.8% interest in GTC. On August 13, 1996, the FDA granted approval to market Seprafilm [Registered Trademark] for use in any open abdominal or pelvic surgery. There are estimated to be approximately 3.1 million such surgeries performed annually in the United States. Genzyme, on behalf of the Joint Venture formed between Genzyme and the Partnership, expects to launch Seprafilm[Registered Trademark] broadly in the United States in October, using the DSP sales force. Under the terms of the agreements between Genzyme and the Partnership, the Joint Venture will manufacture and market Seprafilm[Registered Trademark] in North America under contract with Genzyme. Genzyme and the Partnership expect to conclude negotiations during the third quarter to establish definitive terms for the Joint Venture, including the allocation between the parties of profits and losses from the Joint Venture. -99- 99 GENZYME TISSUE REPAIR DIVISION CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30, - --------------------------------------------------------------------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Net service sales .................... $ 1,647 $ 1,247 $ 3,361 $ 2,277 Operating costs and expenses: Cost of services sold ................ 3,456 880 5,882 1,605 Selling, general and administrative .. 6,730 2,541 12,976 4,293 Research and development ............. 2,350 3,115 4,704 5,929 -------- ------- -------- ------- 12,536 6,536 23,562 11,827 -------- ------- -------- ------- Operating loss .......................... (10,889) (5,289) (20,201) (9,550) ======== ======= ======== ======= Investment income ....................... 389 262 959 581 ======== ======= ======== ======= Net loss ................................ $(10,500) $(5,027) $(19,242) $(8,969) ======== ======= ======== ======= Per Tissue Repair Division Common share: Net loss ............................. $ (0.83) $ (0.57) $ (1.55) $ (1.03) ======== ======= ======== ======= Average shares outstanding ........... 12,576 8,763 12,411 8,721 ======== ======= ======== =======
The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -100- 100 GENZYME TISSUE REPAIR DIVISION COMBINED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, - ------------------------------------------------------------------------- 1996 1995 ---- ---- ASSETS Current Assets: Cash and cash equivalents .................... $33,977 $40,741 Short-term investments ....................... 2,003 6,832 Accounts receivable, less allowance for doubtful accounts ....................... 1,216 1,838 Inventories .................................. 1,374 761 Prepaid expenses and other current assets .... 431 186 ------- ------- Total current assets ....................... 39,001 50,358 Property, plant and equipment, net ............. 20,683 1,962 Other Assets: Other noncurrent assets ...................... 112 329 ------- ------- 112 329 ------- ------- $59,796 $52,649 ======= ======= LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable ............................. $ 1,373 $ 2,432 Accrued expenses ............................. 2,218 1,349 Payable to Genzyme General Division .......... 2,308 2,034 Short-term borrowings ........................ 15,000 - Current portion of capital lease obligations . 37 169 ------- ------- Total current liabilities .................. 20,936 5,984 Noncurrent Liabilities: Other noncurrent liabilities ................. 751 739 ------- ------- 751 739 Division equity ................................ 38,109 45,926 ------- ------- $59,796 $52,649 ======= =======
The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -101- 101 GENZYME TISSUE REPAIR DIVISION CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, - ---------------------------------------------------------------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net loss ............................................. $(19,242) $ (8,969) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ...................... 258 313 Provision for bad debts ............................ 156 Accrued interest/amortization on bonds ............. 74 (99) Other .............................................. (26) - Increase (decrease) in cash from working capital: Accounts receivable .............................. 466 491 Inventories ...................................... (613) (34) Prepaid expenses and other current assets ........ (245) 96 Accounts payable, accrued expenses and deferred revenue ............................ (191) (1,388) Due to Genzyme General Division .................. 185 655 -------- -------- Net cash used by operating activities ............ (19,178) (8,935) INVESTING ACTIVITIES: Purchases of investments ............................. (5,004) (10,957) Sales and maturities of investments .................. 9,762 8,087 Property, plant and equipment ........................ (18,979) (159) Other noncurrent assets .............................. 217 8 -------- -------- Net cash used by investing activities ............ (14,004) (3,021) FINANCING ACTIVITIES: Proceeds from issuance of TR Stock .................... 1,538 385 Short-term borrowings under bank credit agreement ..... 23,000 - Payments of debt and capital lease obligations ........ (8,132) (139) Cash allocated from Genzyme General Division .......... 10,000 - Other ................................................. 12 (21) -------- -------- Net cash provided by financing activities ........ 26,418 225 -------- -------- Decrease in cash and cash equivalents ................... (6,764) (11,731) Cash and cash equivalents, beginning of period .......... 40,741 16,993 -------- -------- Cash and cash equivalents, end of period ................ $ 33,977 $ 5,262 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for interest ............. $ 71 $ 24
The accompanying notes are an integral part of these unaudited, condensed, combined financial statements. -102- 102 GENZYME TISSUE REPAIR DIVISION NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS 1. Basis of Presentation: --------------------- These unaudited, condensed, combined financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1995 and the financial statements and footnotes for GTR included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The financial statements for the three and six months ended June 30, 1996 and 1995 are unaudited but include, in GTR's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies: ------------------- The accounting policies underlying the quarterly financial statements are those set forth in Note A of GTR's financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1995. 3. Investments: ----------- As of June 30, 1996, GTR's investment portfolio, consisting primarily of debt securities classified as available for sale, was adjusted to its market value. As a result, gross unrealized holding losses totaling approximately $7,000 were recorded in a separate component of Division equity. 4. Inventories: -----------
June 30, 1996 December 31, 1995 ------------- ----------------- Raw Materials.............. $ 126,000 $107,000 Work-in-process............ 1,248,000 654,000 ---------- -------- $1,374,000 $761,000 ========== ========
5. Allocation by the General Division to GTR for TR Designated Shares: ------------------------------------------------------------------ In June 1996, pursuant to the terms of an option held by Genzyme to allocate up to $30 million from Genzyme General Divisison (the General Division) to Genzyme Tissue Repair Division ("GTR"), the Board of Directors voted to allocate $10 million of cash from the General Division to GTR in June 1996 in exchange for an increase in the TR Designated Shares of 1,000,000 shares, which shares have been reserved for distribution at the discretion of the Board of Directors. 6. Short-Term Borrowing Arrangements: --------------------------------- Genzyme has an available line of credit with a commercial bank of $215 million, which may be used by either the General or Tissue Repair Division. In March 1996, GTR utilized $8.0 million under this credit line as temporary financing for the acquisition of certain land and buildings in Framingham, Massachusetts (the "Acquisition") that were purchased for $6.8 million in cash in January 1996 as part of the planned expansion of manufacturing capacity for the CARTICEL[Service Mark] Service programs. In May 1996, GTR repaid the entire $8.0 million borrowed plus accrued interest of approximately $65,000. In June 1996, GTR borrowed $15.0 million under the same credit line at an interest rate of approximately 6.06% to provide further interim financing for the Acquisition and related required renovations until a suitable permanent financing arrangement can be obtained. -103- EX-99.G2 5 PROFORMA FINANCIAL STATEMENTS 1 EXHIBIT (g)(2) GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS INTRODUCTION: These unaudited condensed pro forma financial statements and the related notes are presented to give effect to the acquisition (the "Genetrix Acquisition") of Genetrix, Inc. ("Genetrix") with and into Genzyme Corporation ("Genzyme") using shares of the common stock of the Genzyme General Division (the "General Division")(as described in Note 2), the acquisition (the "DSP Acquisition") of the assets of Deknatel Snowden Pencer, Inc. ("DSP") by Genzyme (as described in Note 3) and the probable acquisition of Neozyme II with and into Genzyme (the "Neozyme II Acquisition") (as described in Note 4). Pro forma condensed statements of operations have been presented for both Genzyme and the General Division assuming that the Genetrix, DSP and Neozyme II acquisitions each 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 the DSP Acquisition and the Neozyme II Acquisition occurred as of June 30, 1996. The historical Genzyme Corporation and Genzyme General Division results included in the pro forma balance sheets reflect the effect of the Genetrix Acquisition which was completed on May 1, 1996. To distinguish the effect of each transaction, subtotal columns have been included on each financial statement to give effect to the Genetrix Acquisition, after certain pro forma adjustments, and the DSP Acquisition, after certain pro forma adjustments, before consideration of the Neozyme II 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, the DSP Acquisition or the Neozyme II Acquisition. Year end for Genzyme, Genetrix and Neozyme II is December 31, while year end for DSP prior to the 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, Genetrix, and Neozyme II 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. 2 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 (Amounts in thousands)
HISTORICAL PRO GENZYME HISTORICAL FORMA CORP. DSP ADJS. ---------- ---------- --------- ASSETS Current assets: Cash and cash equivalents................. $ 119,331 $ 1,703 $(50,750) Short-term investments.................... 163,063 -- -- Accounts receivable, less allowance for doubtful accounts....................... 97,935 15,377 Inventories............................... 64,363 24,240 5,315 Prepaid expenses and other current assets.................................. 13,433 681 -- Deferred tax assets -- current............ 7,729 -- ---------- -------- -------- Total current assets.............. 465,854 42,001 (45,435) Property, plant and equipment, net........ 365,341 17,475 -- Other Assets: Long-term investments..................... 52,141 -- -- Notes receivable-related party............ 1,467 -- -- Intangibles, net of accumulated amortization............................ 64,049 49,176 151,297 Deferred tax assets -- noncurrent......... 27,487 (733) (10,168) Other noncurrent assets................... 29,990 152 -- ---------- -------- -------- Total other assets........................ 175,134 48,595 141,129 ---------- -------- -------- Total assets...................... $1,006,329 $108,071 $ 95,694 ========== ======== ========
PRO FORMA PRO FOOT GENZYME PRO FOOT FORMA NOTE CORP. HISTORICAL FORMA NOTE GENZYME REF. & DSP NEOZYME II ADJS. REF. CORP. ---- --------- ---------- --------- ---- --------- ASSETS Current assets: Cash and cash equivalents................. (C) $ 70,284 $ 8,636 $ -- $ 78,920 Short-term investments.................... 163,063 5,178 (108,675) (K) 59,566 Accounts receivable, less allowance for doubtful accounts....................... 113,312 -- -- 113,312 Inventories............................... (D) 93,918 -- -- 93,918 Prepaid expenses and other current assets.................................. 14,114 527 (556) (I) 14,085 Deferred tax assets -- current............ 7,729 -- -- 7,729 ---------- ------- --------- ---------- Total current assets.............. 462,420 14,341 (109,231) 367,530 Property, plant and equipment, net........ 382,816 -- -- 382,816 Other Assets: Long-term investments..................... 52,141 -- -- 52,141 Notes receivable-related party............ 1,467 -- -- 1,467 Intangibles, net of accumulated amortization............................ (E) 264,522 -- -- 264,522 Deferred tax assets -- noncurrent......... (E) 16,586 -- -- 16,586 Other noncurrent assets................... 30,142 -- (100) (I) 30,042 ---------- ------- --------- ---------- Total other assets........................ 364,858 -- (100) 364,758 ---------- ------- --------- ---------- Total assets...................... $1,210,094 $14,341 $(109,331) $1,115,104 ========== ======= ========= ==========
See notes to unaudited pro forma financial statements. 3 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED) JUNE 30, 1996 (Amounts in thousands)
HISTORICAL PRO GENZYME HISTORICAL FORMA CORP. DSP ADJS. ---------- ---------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................... $ 13,436 $ 4,434 $ -- Accrued expenses.......................... 49,065 19,898 3,500 Income taxes payable...................... 8,828 -- -- Deferred revenue.......................... 3,273 -- -- Short-term borrowings..................... 15,000 -- 200,000 Current portion of long-term debt and capital lease obligations............... 2,761 9,418 (9,250) ---------- ---------- -------- Total current liabilities......... 92,363 33,750 194,250 Noncurrent liabilities: Long-term debt and capital lease obligations............................. 24,242 45,726 (45,500) Note payable to Genzyme................... -- -- -- Other noncurrent liabilities.............. 8,679 -- -- ---------- ---------- -------- 32,921 45,726 (45,500) Stockholders' Equity: General Division Stock, $.01 par value.... 347 -- TR Stock, $.01 par value.................. 124 -- Treasury Stock, at cost................... (881) -- Neozyme II callable common stock.......... DSP, Inc. common stock.................... -- 5 (5) Additional paid-in capital................ 879,513 46,260 (46,260) Accumulated earnings (deficit)............ 2,918 (17,379) 17,379 (24,170) Other equity adjustments.................. (976) (291) -- ---------- ---------- -------- Total stockholders' equity........ 881,045 28,595 (53,056) ---------- ---------- -------- Total liabilities and stockholders' equity.................................. $1,006,329 $ 108,071 $ 95,694 ========== ========== ========
PRO FORMA PRO FOOT GENZYME PRO FOOT FORMA NOTE CORP. HISTORICAL FORMA NOTE GENZYME REF. & DSP NEOZYME II ADJS. REF. CORP. ---- --------- ---------- --------- ---- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................... $ 17,870 $ -- $ -- $ 17,870 Accrued expenses.......................... (F) 72,463 158 971 (I, K) 73,592 Income taxes payable...................... 8,828 -- 8,828 Deferred revenue.......................... 3,273 -- (527) (I) 2,746 Short-term borrowings..................... (G) 215,000 -- -- 215,000 Current portion of long-term debt and capital lease obligations............... (A) 2,929 -- -- 2,929 ---------- -------- --------- ---------- Total current liabilities......... 320,363 158 444 320,965 Noncurrent liabilities: Long-term debt and capital lease obligations............................. (A) 24,468 -- -- 24,468 Note payable to Genzyme................... -- 100 (100) (I) -- Other noncurrent liabilities.............. 8,679 -- -- 8,679 ---------- -------- --------- ---------- 33,147 100 (100) 33,147 Stockholders' Equity: General Division Stock, $.01 par value.... 347 -- -- 347 TR Stock, $.01 par value.................. 124 -- -- 124 Treasury Stock, at cost................... (881) -- -- (881) Neozyme II callable common stock.......... -- 2,415 (2,415) (J) -- DSP, Inc. common stock.................... (B) -- -- -- -- Additional paid-in capital................ (B) 879,513 75,620 (75,620) (J) 879,513 Accumulated earnings (deficit)............ (B) (21,252) (63,918) 63,918 (J) (116,810) (109,675) (K) (H) 14,117 (K) Other equity adjustments.................. (1,267) (34) -- (1,301) ---------- -------- --------- ---------- Total stockholders' equity........ 856,584 14,083 (109,675) 760,992 ---------- -------- --------- ---------- Total liabilities and stockholders' equity.................................. $1,210,094 $ 14,341 $(109,331) $1,115,104 ========== ======== ========= ==========
See notes to unaudited pro forma financial statements. 4 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Amounts in thousands, except per share information)
PRO FORMA HISTORICAL HISTORICAL PRO FOOT GENZYME GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL CORP. INC. ADJS. REF. GENETRIX DSP ---------- ---------- -------- ----- --------- ---------- Net revenues.................................... $229,132 $7,239 $ -- $236,371 $54,138 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses.................... 200,309 7,265 (33) [M] 207,541 44,892 Amortization expense.......................... 2,536 187 770 [L] 3,493 3,532 Other expenses................................ 1,465 -- 1,465 546 -------- ------ ------- -------- ------- Total operating expenses........................ 204,310 7,452 737 212,499 48,970 -------- ------ ------- -------- ------- Operating income................................ 24,822 (213) (737) 23,872 5,168 Other income and (expenses): Investment income............................. 9,103 -- -- 9,103 -- Interest expense.............................. (395) (115) 59 [N] (451) (3,039) Other......................................... (347) (43) -- (390) (894) -------- ------ ------- -------- ------- 8,361 (158) 59 8,262 (3,933) -------- ------ ------- -------- ------- Income before income taxes...................... 33,183 (371) (678) 32,134 1,235 Provision for income taxes...................... (13,107) -- 109 [O] (12,998) (1,004) -------- ------ ------- -------- ------- Net income...................................... $ 20,076 $ (371) $ (569) $ 19,136 $ 231 ======== ====== ======= ======== ======= Attributable to the General Division: Net income.................................... $ 31,516 $ 30,576 Tax benefit allocated from Tissue Repair Division.................................. 7,802 7,802 -------- -------- Net income attributable to General Division Stock................................ $ 39,318 $ 38,378 ======== ========
PRO FORMA GENZYME PRO PRO FOOT CORP. PRO FOOT FORMA FORMA NOTE GENETRIX HISTORICAL FORMA NOTE GENZYME ADJS. REF. AND DSP NEOZYME II ADJS. REF. CORP. -------- ---- -------- ---------- -------- ---- -------- Net revenues.................................... $ -- $290,509 $ -- $(10,631) [U] $279,878 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses.................... (725) [Q] 251,708 10,758 (10,634) [U] 251,832 Amortization expense.......................... 1,906 [P] 8,931 -- -- 8,931 Other expenses................................ -- 2,011 -- -- 2,011 ------- -------- -------- -------- -------- Total operating expenses........................ 1,181 262,650 10,758 (10,634) 262,774 ------- -------- -------- -------- -------- Operating income................................ (1,181) 27,859 (10,758) 3 17,104 Other income and (expenses): Investment income............................. -- 9,103 453 (2,720) [U,V] 6,836 Interest expense.............................. (3,121) [R] (6,611) -- -- (6,611) Other......................................... -- (1,284) -- -- (1,284) ------- -------- -------- -------- -------- (3,121) 1,208 453 (2,720) (1,059) ------- -------- -------- -------- -------- Income before income taxes...................... (4,302) 29,067 (10,305) (2,717) 16,045 Provision for income taxes...................... (1,018) [T] (15,020) -- 5,534 [W] (9,486) ------- -------- -------- -------- -------- Net income...................................... $(5,320) $ 14,047 $(10,305) $ 2,817 $ 6,559 ======= ======== ======== ======== ======== Attributable to the General Division: Net income.................................... $ 25,487 $ 17,999 Tax benefit allocated from Tissue Repair Division.................................. 7,802 7,802 -------- -------- Net income attributable to General Division Stock................................ $ 33,289 $ 25,801 ======== ========
See notes to unaudited pro forma financial statements. 5 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Amounts in thousands, except per share information)
PRO FORMA HISTORICAL HISTORICAL PRO FOOT GENZYME PRO GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA CORP. INC. ADJS. REF. GENETRIX DSP ADJS. ---------- ---------- -------- ----- --------- ---------- --------- Income (loss) per General Division common and common equivalent share....................... $ 0.54 $ 0.52 ======== ======== Pro forma weighted average shares outstanding................................. 72,880 920 73,800 ======== === ======== Income per General Division common and common equivalent share assuming full dilution............................... $ 0.53 $ 0.51 ======== ======== Pro forma fully diluted weighted average shares outstanding.......................... 74,300 920 75,220 ======== === ======== Attributable to the Tissue Repair Division: Net loss.................................... $(19,242) $(19,242) Tax benefit allocated to the General Division.................................. -- -- -------- -------- Net income (loss) attributable to TR Stock.... $(19,242) $(19,242) ======== ======== Loss per Tissue Repair Division common share....................................... $ (1.55) $ (1.55) ======== ======== Historical weighted average shares outstanding................................. 12,411 12,411 ======== ========
PRO FORMA GENZYME PRO FOOT CORP. PRO FOOT FORMA NOTE GENETRIX HISTORICAL FORMA NOTE GENZYME REF. AND DSP NEOZYME II ADJS. REF. CORP. ---- -------- ---------- -------- ---- -------- Income (loss) per General Division common and common equivalent share....................... $ 0.45 $ 0.35 ======== ======== Pro forma weighted average shares outstanding................................. 73,800 73,800 ======== ======== Income per General Division common and common equivalent share assuming full dilution............................... $ 0.44 $ 0.34 ======== ======== Pro forma fully diluted weighted average shares outstanding.......................... 75,220 75,220 ======== ======== Attributable to the Tissue Repair Division: Net loss.................................... $(19,242) $(19,242) Tax benefit allocated to the General Division.................................. -- -- -------- ======== Net income (loss) attributable to TR Stock.... $(19,242) $(19,242) ======== ======== Loss per Tissue Repair Division common share....................................... $ (1.55) $ (1.55) ======== ======== Historical weighted average shares outstanding................................. 12,411 12,411 ======== ========
See notes to unaudited pro forma financial statements. 6 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (Amounts in thousands, except per share information)
PRO FORMA HISTORICAL HISTORICAL PRO FOOT GENZYME GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL CORP. INC. ADJS. REF. GENETRIX DSP ---------- ---------- -------- ---- --------- ---------- Net revenues..................................... $383,783 $22,006 $ -- $405,789 $95,259 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses......................... 329,094 22,151 (100) (M) 351,145 79,146 Amortization expense........................... 4,677 -- 2,310 (L) 6,987 2,750 Other expenses................................. 14,216 -- -- 14,216 3,585 --------- ------- ------- -------- ------- Total operating expenses......................... 347,987 22,151 2,210 372,348 85,481 --------- ------- ------- -------- ------- Operating income................................. 35,796 (145) (2,210) 33,441 9,778 Other income and (expenses): Investment income.............................. 8,814 25 -- 8,839 -- Interest expense............................... (1,109) (260) 178 (N) (1,191) (6,937) Other.......................................... (202) -- -- (202) (1,354) --------- ------- ------- -------- ------- 7,503 (235) 178 7,446 (8,291) --------- ------- ------- -------- ------- Income before income taxes....................... 43,299 (380) (2,032) 40,887 1,487 Provision for income taxes....................... (21,649) -- 43 (O) (21,606) (172) --------- ------- ------- -------- ------- Net income....................................... $ 21,650 $ (380) $(1,989) $ 19,281 $ 1,315 ======== ======= ======= ======== ======= Applicable to the General Division: Net income..................................... $ 34,823 $ 32,454 Tax benefit allocated from Tissue Repair Division................................... 8,857 8,857 -------- -------- Net income attributable to General Division Stock.......................................... $ 43,680 $ 41,311 ======== ========
PRO FORMA PRO PRO FOOT GENZYME, PRO FOOT FORMA FORMA NOTE GENETRIX, HISTORICAL FORMA NOTE GENZYME ADJS. REF. & DSP NEOZYME II ADJS. REF. CORP. -------- ---- -------- ---------- -------- ---- -------- Net revenues..................................... $ -- $501,048 $ -- $(24,198) [U] $476,850 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses......................... (1,450) (Q) 434,156 24,455 (24,205) [U] 434,406 5,315 (S) Amortization expense........................... 3,814 (P) 13,551 -- -- 13,551 Other expenses................................. 17,801 -- -- 17,801 -------- -------- -------- -------- -------- Total operating expenses......................... 7,679 465,508 24,455 (24,205) 465,758 -------- -------- -------- -------- -------- Operating income................................. (7,679) 35,540 (24,455) 7 11,092 Other income and (expenses): Investment income.............................. -- 8,839 1,497 (5,441) [U,V] 4,895 Interest expense............................... (5,383) (R) (13,511) -- -- (13,511) Other.......................................... -- (1,556) -- -- (1,556) -------- -------- -------- -------- -------- (5,383) (6,228) 1,497 (5,441) (10,172) -------- -------- -------- -------- -------- Income before income taxes....................... (13,062) 29,312 (22,958) (5,434) 920 Provision for income taxes....................... 587 (T) (21,191) -- 12,067 [W] (9,124) -------- -------- -------- -------- -------- Net income....................................... $(12,475) $ 8,121 $(22,958) $ 6,633 $ (8,204) ======== ======== ======== ======== ======== Applicable to the General Division: Net income..................................... $ 21,294 $ 4,969 Tax benefit allocated from Tissue Repair Division................................... 8,857 8,857 -------- -------- Net income attributable to General Division Stock.......................................... $ 30,151 $ 13,826 ======== ========
See notes to unaudited pro forma financial statements. 7 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1995 (amounts in thousands, except per share information)
PRO FORMA HISTORICAL HISTORICAL PRO FOOT GENZYME GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL CORP. INC. ADJS. REF. GENETRIX DSP ---------- ---------- -------- ---- --------- ---------- Income (loss) per General Division common and common equivalent share........................ $ 0.73 $ 0.67 ======== ======== Pro forma weighted average shares outstanding.... 60,185 1,380 61,565 ======== ===== ======== Income per General Division common and common equivalent share assuming full dilution........ $ 0.66 $ 0.61 ======== ======== Pro forma fully diluted weighted average shares outstanding.................................... 66,621 1,380 68,001 ======== ===== ======== Applicable to the Tissue Repair Division: Net loss....................................... $(22,030) $(22,030) Tax benefit allocated to the General Division..................................... -- -- -------- -------- Net income (loss) attributable to TR Stock....... $(22,030) $(22,030) ======== ======== Loss per Tissue Repair Division common share..... $ (2.28) $ (2.28) ======== ======== Historical weighted average shares outstanding... 9,659 9,659 ======== ========
PRO FORMA PRO PRO FOOT GENZYME, PRO FOOT FORMA FORMA NOTE GENETRIX, HISTORICAL FORMA NOTE GENZYME ADJS. REF. & DSP NEOZYME II ADJS. REF. CORP. -------- ---- -------- ---------- -------- ---- -------- Income (loss) per General Division common and common equivalent share........................ $ 0.49 $ 0.22 -------- -------- Pro forma weighted average shares outstanding.... 61,565 61,565 ======== ======== Income per General Division common and common equivalent share assuming full dilution........ $ 0.44 $ 0.20 ======== ======== Pro forma fully diluted weighted average shares outstanding.................................... 68,001 68,001 ======== ======== Applicable to the Tissue Repair Division: Net loss....................................... $(22,030) $(22,030) Tax benefit allocated to the General Division..................................... -- -- -------- -------- Net income (loss) attributable to TR Stock....... $(22,030) $(22,030) ======== ======== Loss per Tissue Repair Division common share..... $ (2.28) $ (2.28) ======== ======== Historical weighted average shares outstanding... 9,659 9,659 ======== ========
See notes to unaudited pro forma financial statements. 8 GENZYME GENERAL DIVISION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS JUNE 30, 1996 (Amounts in thousands)
HISTORICAL GENZYME PRO GENERAL HISTORICAL FORMA DIVISION DSP ADJS. ---------- ---------- -------- ASSETS Current Assets: Cash and cash equivalents.................. $ 85,354 $ 1,703 $(50,750) Short-term investments..................... 161,060 -- -- Accounts receivable, less allowance for doubtful accounts........................ 96,719 15,377 Inventories................................ 62,989 24,240 5,315 Prepaid expenses and other current assets................................... 13,002 681 -- Due from Tissue Repair Division............ 2,308 -- -- Deferred tax assets -- current............. 7,729 -- -- -------- -------- -------- Total current assets................. 429,161 42,001 (45,435) Property, plant & equipment, net............. 344,658 17,475 -- Other Assets: Long-term investments...................... 52,141 -- -- Notes receivable-related party............. 1,467 -- -- Intangibles, net of accumulated amortization............................. 64,049 49,176 151,297 Deferred tax assets -- noncurrent.......... 27,487 (733) (10,168) Other noncurrent assets.................... 29,878 152 -- -------- -------- -------- Total other assets................... 175,022 48,595 141,129 -------- -------- -------- Total assets......................... $948,841 $108,071 $ 95,694 ======== ======== ========
PRO FORMA GENZYME PRO GENERAL FORMA FOOT DIVISION PRO FOOT GENZYME NOTE AND HISTORICAL FORMA NOTE GENERAL REF. DSP NEOZYME II ADJS. REF. DIVISION ---- --------- ---------- --------- ---- --------- ASSETS Current Assets: Cash and cash equivalents.................. [Z] $ 36,307 $ 8,636 $ -- $ 44,943 Short-term investments..................... 161,060 5,178 (108,675) [AH] 57,563 Accounts receivable, less allowance for doubtful accounts........................ 112,096 -- -- 112,096 Inventories................................ [AA] 92,544 -- -- 92,544 Prepaid expenses and other current assets................................... 13,683 527 (556) [AF] 13,654 Due from Tissue Repair Division............ 2,308 -- -- 2,308 Deferred tax assets -- current............. 7,729 -- -- 7,729 ---------- ------- --------- ---------- Total current assets................. 425,727 14,341 (109,231) 330,837 Property, plant & equipment, net............. 362,133 -- -- 362,133 Other Assets: Long-term investments...................... 52,141 -- -- 52,141 Notes receivable-related party............. 1,467 -- -- 1,467 Intangibles, net of accumulated amortization............................. [AB] 264,522 -- -- 264,522 Deferred tax assets -- noncurrent.......... [AB] 16,586 -- -- 16,586 Other noncurrent assets.................... 30,030 -- (100) [AF] 29,930 ---------- ------- --------- ---------- Total other assets................... 364,746 -- (100) 364,646 ---------- ------- --------- ---------- Total assets......................... $1,152,606 $14,341 $(109,331) $1,057,616 ========== ======= ========= ==========
See notes to unaudited pro forma financial statements. 9 GENZYME GENERAL DIVISION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS -- (CONTINUED) JUNE 30, 1996 (Amounts in thousands)
HISTORICAL GENZYME PRO GENERAL HISTORICAL FORMA DIVISION DSP ADJS. ---------- ---------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable........................... $ 12,063 $ 4,434 $ -- Accrued expenses........................... 46,847 19,898 3,500 Income taxes payable....................... 8,828 -- -- Deferred revenue........................... 3,273 -- -- Short-term borrowings...................... -- -- 200,000 Current portion of long-term debt and capital lease obligations................ 2,724 9,418 (9,250) -------- -------- -------- Total current liabilities............ 73,735 33,750 194,250 Noncurrent Liabilities: Long-term debt and capital lease obligations.............................. 24,242 45,726 (45,500) Note Payable to Genzyme.................... -- -- -- Other noncurrent liabilities................. 7,928 -- -- -------- -------- -------- 32,170 45,726 (45,500) Division Equity: Division equity............................ 842,936 (291) -- (24,170) DSP, Inc. common stock..................... -- 5 (5) Neozyme II, Corp. callable common stock.... -- -- -- Additional paid-in capital................. -- 46,260 (46,260) Accumulated deficit........................ -- (17,379) 17,379 -------- -------- -------- Total division equity................ 842,936 28,595 (53,056) -------- -------- -------- Total liabilities and division equity........ $948,841 $108,071 $ 95,694 ======== ======== ========
PRO FORMA GENZYME PRO GENERAL FORMA FOOT DIVISION PRO FOOT GENZYME NOTE AND HISTORICAL FORMA NOTE GENERAL REF. DSP NEOZYME II ADJS. REF. DIVISION ---- --------- ---------- --------- ---- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable........................... $ 16,497 -- -- $ 16,497 Accrued expenses........................... [AC] 70,245 158 971 [AH] 71,374 Income taxes payable....................... 8,828 -- 8,828 Deferred revenue........................... 3,273 -- (527) [AF] 2,746 Short-term borrowings...................... [AD] 200,000 -- -- 200,000 Current portion of long-term debt and capital lease obligations................ [X] 2,892 -- -- 2,892 ---------- -------- --------- ---------- Total current liabilities............ 301,735 158 444 302,337 Noncurrent Liabilities: Long-term debt and capital lease obligations.............................. [X] 24,468 -- -- 24,468 Note Payable to Genzyme.................... -- 100 (100) [AF] -- Other noncurrent liabilities................. 7,928 -- -- 7,928 ---------- -------- --------- ---------- 32,396 100 (100) 32,396 Division Equity: Division equity............................ [AE] 818,475 (34) (109,675) [AH] 722,883 14,117 [AH] DSP, Inc. common stock..................... [Y] -- -- -- Neozyme II, Corp. callable common stock.... 2,415 (2,415) [AG] -- Additional paid-in capital................. [Y] -- 75,620 (75,620) [AG] -- Accumulated deficit........................ [Y] -- (63,918) 63,918 [AG] -- ---------- -------- --------- ---------- Total division equity................ 818,475 14,083 (109,675) 722,883 ---------- -------- --------- ---------- Total liabilities and division equity........ $1,152,606 $ 14,341 $(109,331) $1,057,616 ========== ======== ========= ==========
See notes to unaudited pro forma financial statements. 10 GENZYME GENERAL DIVISION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Amounts in thousands, except per share information)
PRO FORMA GENZYME HISTORICAL GENERAL GENZYME HISTORICAL PRO FOOT DIVISION PRO GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. ---------- ---------- ------- ----- --------- ---------- ------- Net revenues................................. $225,771 $7,239 $ -- $233,010 $54,138 $ -- Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses........ 176,747 7,265 (33) [AJ] 183,979 44,892 (725) Amortization expense....................... 2,536 187 770 [AI] 3,493 3,532 1,906 Other expenses............................. 1,465 -- -- 1,465 546 -- -------- ------ ------- -------- ------- ------- Total operating expenses..................... 180,748 7,452 737 188,937 48,970 1,181 -------- ------ ------- -------- ------- ------- Operating income............................. 45,023 (213) (737) 44,073 5,168 (1,181) Other income and (expenses): Investment income.......................... 8,144 -- -- 8,144 -- -- Interest expense........................... (395) (115) 59 [AK] (451) (3,039) (3,121) Other...................................... (347) (43) -- (390) (894) -- -------- ------ ------- -------- ------- ------- 7,402 (158) 59 7,303 (3,933) (3,121) -------- ------ ------- -------- ------- ------- Income before income taxes................... 52,425 (371) (678) 51,376 1,235 (4,302) Provision for income taxes................... (20,909) -- 109 [AL] (20,800) (1,004) (1,018) -------- ------ ------- -------- ------- ------- Net income (loss)............................ 31,516 (371) (569) 30,576 231 (5,320) Tax benefit allocated from Tissue Repair Division................................... 7,802 -- -- 7,802 -- -- -------- ------ ------- -------- ------- ------- Net income attributable to General Division Stock...................................... $ 39,318 $ (371) $ (569) $ 38,378 $ 231 $(5,320) ======== ====== ======= ======== ======= =======
PRO FORMA GENZYME GENERAL PRO DIVISION, FORMA FOOT GENETRIX PRO FOOT GENZYME NOTE AND HISTORICAL FORMA NOTE GENERAL REF. DSP NEOZYME II ADJS. REF. DIVISION ---- -------- ---------- -------- ---- -------- Net revenues................................. $287,148 $ -- $(10,631) [AR] $276,517 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses........ [AN] 228,146 10,758 (10,634) [AR] 228,270 Amortization expense....................... [AM] 8,931 -- -- 8,931 Other expenses............................. 2,011 -- -- 2,011 -------- -------- -------- -------- Total operating expenses..................... 239,088 10,758 (10,634) 239,212 -------- -------- -------- -------- Operating income............................. 48,060 (10,758) 3 37,305 Other income and (expenses): Investment income.......................... 8,144 453 (2,720) [AJ] 5,877 Interest expense........................... [AO] (6,611) -- -- (6,611) Other...................................... (1,284) -- -- (1,284) -------- -------- -------- -------- 249 453 (2,720) (2,018) -------- -------- -------- -------- Income before income taxes................... 48,309 (10,305) (2,717) 35,287 Provision for income taxes................... [AQ] (22,822) -- 5,534 [AS] (17,288) -------- -------- -------- -------- Net income (loss)............................ 25,487 (10,305) 2,817 17,999 Tax benefit allocated from Tissue Repair Division................................... 7,802 -- -- 7,802 -------- -------- -------- -------- Net income attributable to General Division Stock...................................... $ 33,289 $(10,305) $ 2,817 $ 25,801 ======== ======== ======== ========
See notes to unaudited pro forma financial statements. 11 GENZYME GENERAL DIVISION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Amounts in thousands, except per share information)
PRO FORMA GENZYME HISTORICAL GENERAL GENZYME HISTORICAL PRO FOOT DIVISION PRO GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA DIVISION INC. ADJS. REF. GENETRIX DSP ADJS ---------- ---------- ------- ----- --------- ---------- ----- Income (loss) per General Division common and common equivalent share...................... $ 0.54 $ 0.52 ======= ======= Pro forma weighted average shares outstanding.................................. 72,880 920 73,800 ======= === ======= Income per General Division common and common equivalent share assuming full dilution...... $ 0.53 $ 0.51 ======= ======= Pro forma fully diluted weighted average shares outstanding.................................. 74,300 920 75,220 ======= === =======
PRO FORMA GENZYME PRO GENERAL FORMA FOOT DIVISION, PRO FOOT GENZYME NOTE GENETRIX, HISTORICAL FORMA NOTE GENERAL REF. & DSP NEOZYME II ADJS. REF. DIVISION ---- -------- ---------- -------- ---- -------- Income (loss) per General Division common and common equivalent share...................... $ 0.45 $ 0.35 ======= ======= Pro forma weighted average shares outstanding.................................. 73,800 73,800 ======= ======= Income per General Division common and common equivalent share assuming full dilution...... $ 0.44 $ 0.34 ======= ======= Pro forma fully diluted weighted average shares outstanding.................................. 75,220 75,220 ======= =======
See notes to unaudited pro forma financial statements. 12 GENZYME GENERAL DIVISION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (Amounts in thousands, except per share information)
PRO FORMA GENZYME HISTORICAL GENERAL GENZYME HISTORICAL PRO FOOT DIVISION PRO GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. ---------- ---------- -------- ---- -------- ---------- -------- Net revenues................................. $378,563 $22,006 $ -- $400,569 $95,259 $ -- Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses........ 300,498 22,151 (100) (AJ) 322,549 79,146 (1,450) 5,315 Amortization expense....................... 4,677 -- 2,310 (AI) 6,987 2,750 3,814 Other expenses............................. 14,216 -- -- 14,216 3,585 -------- ------- ------- -------- ------- -------- Total operating expenses..................... 319,391 22,151 2,210 343,752 85,481 7,679 -------- ------- ------- -------- ------- -------- Operating income............................. 59,172 (145) (2,210) 56,817 9,778 (7,679) Other income and (expenses): Investment income.......................... 7,428 25 -- 7,453 -- -- Interest expense........................... (1,069) (260) 178 (AK) (1,151) (6,937) (5,383) Other...................................... (202) -- -- (202) (1,354) -- -------- ------- ------- -------- ------- -------- 6,157 (235) 178 6,100 (8,291) (5,383) -------- ------- ------- -------- ------- -------- Income before income taxes................... 65,329 (380) (2,032) 62,917 1,487 (13,062) Provision for income taxes................... (30,506) -- 43 (AL) (30,463) (172) 587 -------- ------- ------- -------- ------- -------- Net income................................... 34,823 $ (380) $(1,989) 32,454 $ 1,315 $(12,475) ======= ======= ======= ======== Tax benefit allocated from Tissue Repair Division..................... 8,857 8,857 -------- -------- Net income attributable to General Division Stock..................... $ 43,680 $ 41,311 ======== ========
PRO FORMA GENZYME PRO GENERAL FORMA FOOT DIVISION PRO FOOT GENZYME NOTE GENETRIX HISTORICAL FORMA NOTE GENERAL REF. AND DSP NEOZYME II ADJS. REF. DIVISION ---- -------- ---------- -------- ---- -------- Net revenues................................. $495,828 $ -- $(24,198) [AR] $471,630 Operating costs and expenses: Cost of products and services sold and selling, general, administrative, research and development expenses........ (AN) 405,560 24,455 (24,205) [AR] 405,810 (AP) Amortization expense....................... (AM) 13,551 -- -- 13,551 Other expenses............................. 17,801 -- -- 17,801 ------- -------- -------- -------- Total operating expenses..................... 436,912 24,455 (24,205) 437,162 ------- -------- -------- -------- Operating income............................. 58,916 (24,455) 7 34,468 Other income and (expenses): Investment income.......................... -- 7,453 1,497 (5,441) [AT] 3,509 Interest expense........................... (AO) (13,471) -- -- (13,471) Other...................................... (1,556) -- -- (1,556) -------- -------- -------- -------- (7,574) 1,497 (5,441) (11,518) -------- -------- -------- -------- Income before income taxes................... 51,342 (22,958) (5,434) 22,950 Provision for income taxes................... (AQ) (30,048) -- 12,067 [AS] (17,981) -------- -------- -------- -------- Net income................................... $21,294 $(22,958) $ (6,633) $ 4,969 ======== ======== Tax benefit allocated from Tissue Repair Division..................... 8,857 8,857 ------- -------- Net income attributable to General Division Stock..................... $30,151 $ 13,826 ======= ========
See notes to unaudited pro forma financial statements. F-119 13 GENZYME GENERAL DIVISION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1995 (Amounts in thousands, except per share information)
PRO FORMA GENZYME HISTORICAL GENERAL GENZYME HISTORICAL PRO FOOT DIVISION PRO GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. ---------- ---------- -------- ---- -------- ---------- -------- Income (loss) per General Division common and common equivalent share........................ $ 0.73 $ 0.67 ======= ======= Pro forma weighted average shares outstanding.... 60,185 1,380 61,565 ======= ===== ======= Income per General Division common and common equivalent share assuming full dilution.................................. $ 0.66 $ 0.61 ======= ======= Pro forma fully diluted weighted average shares outstanding.................................... 66,621 1,380 68,001 ======= ===== =======
PRO FORMA GENZYME PRO GENERAL FORMA FOOT DIVISION PRO FOOT GENZYME NOTE GENETRIX HISTORICAL FORMA NOTE GENERAL REF. AND DSP NEOZYME II ADJS. REF. DIVISION ---- -------- ---------- -------- ---- -------- Income (loss) per General Division common and common equivalent share........................ $ .49 $ .22 ======= ======= Pro forma weighted average shares outstanding.... 61,565 61,565 ======= ======= Income per General Division common and common equivalent share assuming full dilution.................................. $ .44 $ 0.20 ======= ======= Pro forma fully diluted weighted average shares outstanding.................................... 68,001 68,001 ======= =======
See notes to unaudited pro forma financial statements. F-120 14 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND PROCEDURES: The accounting policies and procedures for Genzyme, Genetrix, DSP and Neozyme II are in conformity in all material respects. The pro forma financial statements include both Genzyme, the registrant, and the General Division, the stock of which was used to effect the Genetrix Acquisition, the borrower of the $200 million under the revolving credit facility used to effect the DSP Acquisition and the cash of which will be used to effect the Neozyme II Acquisition. Amounts at the effective time of the acquisitions may differ from the information presented in the pro forma financial statements based on subsequent changes in the purchase price allocations and any other related items which may impact the amounts reflected herein. 2. GENZYME CORPORATION'S ACQUISITION OF GENETRIX, INC.: On May 1, 1996, the Company acquired Genetrix Inc., a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division Stock. In the aggregate, approximately 1,380,000 shares of General Division Stock, valued at approximately $36.5 million, were issued for all the outstanding shares of Genetrix preferred stock ("Genetrix Preferred Stock") and Genetrix common stock ("Genetrix Common Stock", together with the Genetrix Preferred Stock "Genetrix Stock"). The acquisition was accounted for as a purchase. The historical balance sheets for Genzyme Corporation and Genzyme General Division as of June 30, 1996 reflect the acquisition of Genetrix which was completed on May 1, 1996. The pro forma statement of operations for the period ended June 30, 1996 include pro forma accounts for Genetrix for the four month period ended April 30, 1996. The pro forma statements of operations for the year ended December 31, 1995 included pro forma amounts for Genetrix for the twelve month period then ended. 3. GENZYME CORPORATION'S ACQUISITION OF DEKNATEL SNOWDEN PENCER, INC.: On July 1, 1996, Genzyme completed the acquisition of Deknatel Snowden Pencer, Inc., a privately held specialty surgical products company. The pro forma balance sheets and statements of operations are presented assuming that this transaction occurred as of June 30, 1996 and January 1, 1995, respectively, using the purchase accounting method. The purchase price was $250.8 million and consisted of cash of $245.0 million and acquisition costs of $5.8 million. The following is a summary of the allocation of the purchase price to net assets acquired as a result of the acquisition of DSP (amounts in thousands):
Allocation of Purchase Price: Current Assets $ 47,468 Property and Equipment 17,475 Patents 17,000 Trade Names 56,000 In-process technology 24,170 Goodwill 127,764 Current Liabilites (28,226) Deferred income taxes (10,901) -------- $250,750 ========
The purchase price was allocated to the assets and liabilities of DSP based on their estimated respective fair values. The final purchase price and allocation of purchase price may vary from the value presented above. The pro forma adjustments to the pro forma statements of operations do not give effect to the charge for in-process technology in the amount of $24,170,000 which is expected to be charged to operations upon consummation of the acquisition. 4. GENZYME CORPORATION'S PROBABLE ACQUISITION OF NEOZYME II CORP.: On September 23, 1996, Genzyme announced that it has signed a definitive acquisition agreement with Neozyme II Corp. under which Genzyme will commence a tender offer for all outstanding units of Neozyme II at $45 per unit in cash. Each Neozyme II unit consists of one share of Neozyme II callable common stock and one callable warrant to purchase two shares of Genzyme General Division Stock and 0.135 share of GTR Stock. The total purchase price of $108,675,000 plus estimated acquisition costs of $1 million has been allocated to acquired cash and short-term investments of $13,848,000, prepaid research and development of $527,000 which offsets Deferred Revenue recorded by Genzyme, assumed liabilites of $258,000, $129,000 of which offsets a note receivable and the interest related there to recorded by Genzyme and a charge for in-process technology of $94,558,000. 15 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) Under the agreement, if the tender offer is successfully completed, a second-step transaction will be effected in which the Neozyme II unit-holders who had not tendered their units will be entitled to receive $29 in cash for each share of callable common stock included in the untendered units. The callable warrants that had been included in the units acquired in the second-step transaction will remain outstanding. Genzyme's obligation to purchase units in the tender offer will be subject to the satisfaction of certain conditions, including the minimum condition of the tender of at least a majority of the outstanding units. If less than a majority of the outstanding units is tendered, Genzyme has the right under certain circumstances to terminate the tender offer and seek the approval of the holders of the units for the second-step transaction. Alternatively, Genzyme has the right under certain circumstances, if a majority approves the second-step transaction through a combination of shares of callable common stock included in units tendered and untendered shares voting in favor of the transaction, to waive the minimum condition and accept the tendered units. The pro forma financial statements assume that the full 2,415,000 callable common shares of Neozyme II are purchased under the tender offer. The pro forma adjustments to the pro forma statements of operations do not give effect to the charge for in-process technology in the amount of $95,558,000 which is expected to be charged to operations upon consummation of the acquisition. 5. PRO FORMA ADJUSTMENTS RELATED TO THE GENETRIX ACQUISITION, DSP ACQUISITION AND THE PROBABLE NEOZYME II ACQUISITION: These adjustments reflect the retirement of all DSP Common Stock and the retirement of all Neozyme II callable Common Stock. I. Pro Forma Adjustments to Genzyme Corporation's Consolidated Balance Sheets: Related to the DSP Acquisition: A. Eliminate DSP's current portion of long-term debt and long-term debt, $9.3 million and $45.5 million, respectively, which was assumed by Genzyme and subsequently repaid. B. Eliminate DSP's Common Stock of $5,000, Additional paid-in capital of $46.3 million and Accumulated deficit of $17.4 million. C. To record cash payments, including acquisition costs, totaling $50.8 million in connection with the acquisition of DSP. D. To record a $5.3 million adjustment to the estimated fair value of the inventory acquired. E. To record the adjustments to the estimated fair values of Patents, Tradenames, and Goodwill acquired and the offset to the related deferred tax liability. F. To record estimated additional liabilities assumed as a result of the acquisition, including unfunded pension liabilities. G. To record the $200 million borrowing under a revolving credit facility with a commercial bank, due September 1, 1997 with interest payable at LIBOR Plus 5/8% (6.16% at July 1, 1996) H. To record the impact to retained earning of the charge for acquired in-process technology. 16 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) Related to the Neozyme II Acquisition: I. Eliminate Series 1992 Note Payable issued by Neozyme II to Genzyme of $100,000 and related accrued interest of $29,000 and prepaid research and development costs paid by Neozyme II to Genzyme of $527,000. J. Eliminate Neozyme II's callable Common Stock of $2.4 million, Additional Paid-in capital of $75.6 million and Retained Deficit of $63.9 million. K. Record the acquisition of Neozyme II as a purchase of in-process technology of $95,558,000 net of the fair value of the net assets acquired of $14,117,000 and estimated acquisition costs of $1 million. II. Pro Forma Adjustments to Genzyme Corporation's Consolidated Statements of Operations: Related to the Genetrix Acquisition: L. Record amortization expense based on $35.0 million of Goodwill being amortized over 15 years, or $770,000 for the four months ended April 30, 1996 and $2.3 million for the year ended December 31, 1995. M. Eliminate certain administrative costs (i.e. audit, legal and filing fees) of Genetrix which would not be incurred on a combined basis, $33,000 for the four months ended April 30, 1996 and $100,000 for the year ended December 31, 1995. N. Eliminate interest expense related to debt assumed by Genzyme and subsequently repaid. O. Record income tax (provision) benefit. Related to the DSP Acquisition: P. Record amortization expense based on amortization of Patents, Tradenames and Goodwill over 12 years, 40 years and 40 years, respectively, an adjustment of $1,906,000 to amortization expense for the six months ended June 30, 1996 and $3.8 million for the year ended December 31, 1995. Q. 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, $725,000 for the six months ended June 30, 1996 and $1.5 million for the year ended December 31, 1995. R. Reverse interest expense of DSP long-term debt, which was assumed and repaid, in the amounts of $3,039,000 and $4,493,000 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively, and record interest expense related to the $200 million borrowed under a revolving credit line from a commercial bank at LIBOR plus 5/8% (6.16% at July 1, 1996). Interest expense under the $200 million borrowing is $6.2 million for the six months ended June 30, 1996 and $12.3 million for the year ended December 31, 1995. S. To record the cost of sales associated with the step-up in valuation of Inventory under the purchase accounting for the year ended December 31, 1995 of $5.3 million. 17 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) T. Record income tax (provision) benefit. Related to the Neozyme II Acquisition: U. Eliminate intercompany research and development revenue (Genzyme)/expense (Neozyme II) and service fees of $10,631,000 for the six months ending June 30, 1996 and $24,198,000 for the year ended December 31, 1995 and eliminate intercompany interest income/expense related to Series 1992 Note Payable or $3,000 for the six months ending June 30, 1996 and $7,000 for the year ended December 31, 1995. V. Reduce investment income at 5% per annum related to $108,675,000 cash and eqivalent used to finance Neozyme II Acquisition. W. Record income tax (provision) benefit. III. Pro Forma Adjustments to Genzyme General Division's Combined Balance Sheets: Related to the DSP Acquisition: X. Eliminate DSP's current portion of long-term debt and long-term Debt, $9.3 million and $45.5 million, respectively, which was assumed by Genzyme and subsequently repaid. Y. Eliminate DSP's Common Stock of $5,000, Additional paid-in capital of $46.3 million and Accumulated Deficit of $17.4 million. Z. To record cash payments, including acquisition costs, totaling $50.8 million in connection with the Acquisition of DSP. AA. To record a $5.3 million adjustment to the estimated fair value of the inventory acquired. AB. To record the adjustments to the estimated fair values of Patents, Tradenames, and Goodwill acquired and the offset to the related deferred tax liability. AC. To record estimated additional liabilites assumed as a result of the acquisition, including unfunded pension liability. AD. To record the $200 million borrowing under a revolving credit facility with a commercial bank, due September 1, 1997 with interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996). AE. To record the impact to retained earnings of the charge for acquired in-process technology. 18 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) Related to the Neozyme II Acquisition: AF. Eliminate Series 1992 Note Payable to Genzyme issued by Neozyme II of $100,000, and related accrued interest of $29,000 and prepaid research development costs paid by Neozyme II to Genzyme of $527,000. AG. Eliminate Neozyme II's Callable Common Stock of $2.4 million additional paid in capital of $75.6 million and Retained Deficit of $63.8 million. AH. Record acquisition of Neozyme II as a purchase of in-process technology of $109,675,000 net of the estimated fair value of the net assets acquired of $14,117,000 and estimated acquisition costs of $1 million. IV. Pro Forma Adjustments to Genzyme General Division's Statements of Operations: Related to the Genetrix Acquisition: AI. Record amortization expense, based on $35.0 million of Goodwill over 15 years, of $777,000 for the four months ended April 30, 1996 and $2.3 million for the year ended December 31, 1995. AJ. Eliminate certain administrative costs (i.e. audit, legal and filing fees) of Genetrix which would not be incurred on a combined basis, $33,000 for the four months ended April 30, 1996 and $100,000 for the year ended December 31, 1995. AK. Eliminate interest expense on debt assumed by Genzyme and subsequently repaid. AL. Record income tax (provision) benefit. Related to the DSP Acquisition: AM. Record amortization expense based on amortization of Patents, Tradenames, Goodwill over 12, 40 and 40 years, respectively, an adjustment of $1,906,000 to amortization expense for the six months ended June 30, 1996 and $3.8 million for the year ended December 31, 1995. AN. 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, $725,000 for the six months ended June 30, 1996 and $1.5 million for the year ended December 31, 1995. AO. Reverse interest expense of DSP long-term debt, which was assumed and repaid, in the amounts of $3,039,000 and $4,493,000 for the six months ended June 30, 1996 and the year ended December 31, 1995, respectively, and record interest expense related to a $200 million borrowed at 6.16% per annum. For the six months ended June 30, 1996, interest expense is $6.2 million and $12.3 million for the year ended December 31, 1995. AP. To record the cost of sales associated with the step-up in valuation of Inventory under the purchase accounting for the year ended 31, 1995 of $5.3 million. AQ. Record income tax (provision) benefit. Related to the Neozyme II Acquisition: AR. Eliminate intercompany research and development revenue (Genzyme)/expense (Neozyme II) and service fees of $10,631,000 for the six months ending June 30, 1996 and $24,198,000 for the year ended December 31, 1996. Eliminate intercompany interest income and interest expense related to $100,000 Series 1992 Note Payable issued by Neozyme II to Genzyme of 3,000 for the six months ending June 30, 1996 and 7,000 for the year ended December 31, 1995. AS. Record income tax (provision) benefit. AT. Reduce investment income at 5% per annum related to $108,675,000 cash and equivalent used to finance Neozyme II Acquisition. 18 -----END PRIVACY-ENHANCED MESSAGE-----