-----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, P3+gIWD2VaNIYar8SFDbDvejNRcjvZ5PPcrBDODi2Usb3diy1TmOOq3jyAr971It C/GnwgWdw2EGoJfgju8vCQ== 0000950135-98-002719.txt : 19980428 0000950135-98-002719.hdr.sgml : 19980428 ACCESSION NUMBER: 0000950135-98-002719 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980427 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 98602072 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-K/A 1 GENZYME CORPORATION FORM 10-K/A 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: 0-14680 ------------------------ GENZYME CORPORATION (Exact name of Registrant as specified in its charter) MASSACHUSETTS (State or other jurisdiction of 06-1047163 incorporation or organization) (I.R.S. Employer Identification Number) ONE KENDALL SQUARE 02139 CAMBRIDGE, MASSACHUSETTS (Zip Code) (Address of principal executive offices) (617) 252-7500 (Registrant's telephone number, including area code)
------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: GENZYME GENERAL DIVISION COMMON STOCK, $0.01 PAR VALUE ("GGD STOCK") GENZYME TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("GTR STOCK") GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK, $0.01 PAR VALUE ("GMO STOCK") GGD STOCK PURCHASE RIGHTS GTR STOCK PURCHASE RIGHTS GMO STOCK PURCHASE RIGHTS Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 1, 1998: $2,470,667,321 Number of shares of the Registrant's GGD Stock outstanding as of March 1, 1998: 77,952,860 Number of shares of the Registrant's GTR Stock outstanding as of March 1, 1998: 20,022,438 Number of shares of the Registrant's GMO Stock outstanding as of March 1, 1998 3,928,572 ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Reports to Stockholders for its General Division, Tissue Repair Division and Molecular Oncology Division for the fiscal year ended December 31, 1997 are incorporated by reference into Parts I and II of this Form 10-K/A and portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 28, 1998 are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 This Annual Report on Form 10-K/A constitutes Amendment No. 1 to the Registrant's Form 10-K for the fiscal year ended December 31, 1997 (as amended, hereinafter referred to as this "Annual Report on Form 10-K") and is being filed (i) to add Exhibits 4.14, 4.15, 10.49 and 10.50 and to include such exhibits in the list of exhibits set forth in Item 14(3)(c) and (ii) to make certain immaterial corrections in Item 1 and in Exhibits 13.1, 13.2, 13.3 and 27 and a correction in Exhibit 21. NOTE REGARDING FORWARD-LOOKING STATEMENTS: This Annual Report on Form 10-K for Genzyme Corporation ("Genzyme" or the "Company") contains forward-looking statements concerning, among other things, the Company's expected future revenues, operations and expenditures, estimates of the potential markets for the Company's products and services, assessments of competitors and potential competitors, projected timetables for the preclinical and clinical development, regulatory approval and market introduction of the Company's products and services and estimates of the capacity of manufacturing and other facilities to support such products and services. All such forward-looking statements are necessarily only estimates of future results and the actual results achieved by the Company may differ materially from these projections due to a number of factors, including (i) the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and patent and other proprietary rights protection of its products and services, (ii) the content and timing of decisions made by the U.S. Food and Drug Administration (the "FDA") and other agencies regarding the indications for which the Company's products may be approved, (iii) the accuracy of the Company's estimates of the size and characteristics of markets to be addressed by the Company's products and services, (iv) market acceptance of the Company's products and services, (v) the Company's ability to obtain reimbursement for its products from third-party payers, where appropriate, and (vi) the accuracy of the Company's information concerning the products and resources of competitors and potential competitors. See also "Factors Affecting Future Operating Results" under the headings (x) "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations" and "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" in the Genzyme General Annual Report for the fiscal year ended December 31, 1997 (the "1997 Genzyme General Annual Report"), (y) "Management's Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and Results of Operations" in the Genzyme Tissue Repair Annual Report for the fiscal year ended December 31, 1997 (the "1997 GTR Annual Report") and (z) "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations" in the Genzyme Molecular Oncology Annual Report for the fiscal year ended December 31, 1997 (the "1997 GMO Annual Report") set forth in Exhibits 13.1, 13.2 and 13.3, respectively, to this Annual Report on Form 10-K. 2 3 PART I ITEM 1. BUSINESS INTRODUCTION Genzyme is a biotechnology company that develops innovative products and services for major unmet medical needs. Genzyme has three divisions: Genzyme General Division ("Genzyme General"), which develops and markets therapeutic and surgical products and diagnostic services and products; Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR"), which develops and markets biological products for the treatment of cartilage damage, severe burns, chronic skin ulcers and neurodegenerative diseases; and Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"), which was formed in June 1997 in connection with the acquisition of PharmaGenics, Inc. ("PharmaGenics") and develops gene-based approaches to cancer therapy through genomics, gene therapy and a small molecule drug discovery program. Genzyme has three outstanding series of common stock, each of which is intended to reflect the value and track the performance of one of Genzyme's three divisions: Genzyme General Division Common Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock") and Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). GGD Stock and GTR Stock are listed on the Nasdaq National Market under the symbols "GENZ" and "GENZL," respectively. GMO Stock is not yet publicly traded. For purposes of financial statement presentation, all of the Company's programs, products, assets and liabilities are allocated to Genzyme General, Genzyme Tissue Repair or Genzyme Molecular Oncology. Notwithstanding this allocation, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of GGD Stock, GTR Stock and GMO Stock have no specific claim against the assets attributed to the division whose performance is associated with the series of stock they hold. Liabilities or contingencies of any division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of all three divisions. Cerezyme(R), Ceredase(R), Thyrogen(R), Seprafilm(R), Pleur-evac(R), Thora-Klex(R), Tevdek(R), InSight(R), MASDA(R) and Vianain(R) are registered trademarks of Genzyme. Sepracoat(TM), Sepragel(TM), EndoCABG(TM), Sahara(TM), N-geneous LDL(TM), N-geneous HDL(TM), Contrast(TM), Carticel(TM) and SAGE(TM)are trademarks and Epicel(sm)and Epicel ASAP(sm) are service marks of Genzyme. RenaGel(R) is a registered trademark of GelTex Pharmaceuticals, Inc. ("GelTex"). NeuroCell(TM)-PD and NeuroCell(TM)-HD are trademarks of Diacrin, Inc. ("Diacrin"). Provisc(R) is a registered trademark of Alcon Laboratories, Inc. ("Alcon"). Pulmozyme(R) is a registered trademark of Genentech, Inc. GENZYME GENERAL -- PRODUCTS AND DEVELOPMENT PROGRAMS Recent Developments In January 1998, Genzyme General announced strategic changes in its pharmaceuticals and surgical products business units. Genzyme General will focus its efforts within three broad business areas -- therapeutics, surgical products and diagnostics. The new diagnostics business area comprises two units, genetic diagnostic services and diagnostic products. The business of the pharmaceuticals unit has been redirected toward its higher-value products, including phospholipids, peptides and hyaluronic acid ("HA"), for drug delivery and other purposes. The fine chemicals, bulk pharmaceuticals such as clindamycin phosphate, and dietary supplements such as melatonin businesses have been discontinued. The pharmaceuticals unit's phospholipid and peptide products for drug delivery have been incorporated into the therapeutics business area and its HA product for ophthalmic use is included in the surgical products business unit. Additionally, the surgical products unit has discontinued development of Sepracoat(TM) coating solution for the U.S. market. Therapeutics Cerezyme(R) Enzyme (Imiglucerase Injection)/Ceredase(R) Enzyme (Alglucerase Injection). Treatment with Cerezyme(R) enzyme or Ceredase(R) enzyme replacement therapy currently represents the only safe and effective treatment for Type I Gaucher disease, a seriously debilitating, sometimes fatal, genetic disorder caused by a deficiency in an important enzyme in the body called glucocerebrosidase ("GCR"). This deficiency results in the accumulation of the lipid glucocerebroside in the body. The disease is characterized 3 4 by an enlarged liver or spleen, anemia, bleeding problems, bone and joint pain, fatigue and orthopedic complications such as repeated fractures and bone erosion. Ceredase(R) enzyme is a modified form of human GCR in which glycoprotein remodeling technology has been used to target GCR to the cells where the lipid accumulation occurs. Cerezyme(R) enzyme is a recombinant form of GCR which has been remodeled in a similar manner. Genzyme General is marketing these products directly to physicians, hospitals and treatment centers worldwide through a highly trained sales force. This marketing effort is directed at identifying and initiating treatment for the 5,000 Gaucher patients Genzyme General believes exist worldwide. Currently, approximately 44% of these patients are receiving treatment. Cerezyme(R) enzyme and Ceredase(R) enzyme, together, are available in approximately 50 countries worldwide. Cerezyme(R) enzyme has received marketing approval in five countries as well as the 15 countries forming the European Union ("EU"). Ceredase(R) enzyme has received marketing approval in 13 countries. The Company's results of operations are highly dependent on sales of these products which, for 1997, totaled approximately $332.7 million. Genzyme General produces Ceredase(R) enzyme from an extract of human placental tissue supplied by Pasteur Merieux, a French company that is the only significant commercial source of this material. Historically, the supply available was not sufficient to produce enough Ceredase(R) enzyme to treat all known patients. To address supply constraints, Genzyme developed Cerezyme(R) enzyme and received approval from the FDA in October 1996 to manufacture Cerezyme(R) enzyme in Boston, Massachusetts. Patients receiving Ceredase(R) enzyme are currently being converted to Cerezyme(R) enzyme. Genzyme General will continue to manufacture Ceredase(R) enzyme until the process of patient conversions is completed. The conversion process is approximately 97% completed in the U.S. and is expected to be nearly completed on a worldwide basis by the end of 1998. Synthetic Phospholipids. Phospholipids are the major structural components of cell membranes. They are useful in drug delivery systems, emulsion formulations and as components of pharmaceutical products such as liposomes. Genzyme General has developed proprietary technology for the large scale manufacture of synthetic phospholipids with high purity and consistency and currently produces and sells synthetic phospholipids to pharmaceutical and biotechnology companies for use in the formulation and delivery of certain of their products. Synthetic Peptides and Amino Acid Derivatives. Synthetic peptides are a class of biologically active compounds comprised of chains of amino acids. Many of these compounds have applications as active drug compounds and are used by the pharmaceutical industry in final dosage form preparations. Genzyme General is a commercial scale contract manufacturer for third parties of synthetic peptides for many such applications. Amino acid derivatives are the materials used in the production of synthetic peptides. In addition to producing these materials for use in its own peptide manufacturing processes, Genzyme General sells amino acid derivatives to the pharmaceutical industry. RenaGel(R) Non-Absorbed Phosphate Binder. RenaGel(R) phosphate binder is designed to be used in the treatment of chronic kidney failure patients to remove dietary phosphorus in the gastrointestinal tract without being absorbed into the bloodstream. Elevated serum phosphorus levels can cause serious complications in chronic kidney failure patients, such as renal bone disease and soft tissue and vascular calcifications. There are an estimated 214,000 end-stage renal failure patients in the U.S., 95% of whom receive a phosphate control product, and 180,000 end-stage renal failure patents in Europe. Genzyme and GelTex have formed a joint venture for the final development and commercialization of RenaGel(R) phosphate binder. Genzyme General, as the exclusive distributor for the joint venture, will commercialize RenaGel(R) phosphate binder worldwide, excluding Japan and Pacific Rim countries, upon receipt of regulatory approvals. An application for marketing approval of a new drug ("NDA") was submitted to the FDA for RenaGel(R) phosphate binder in November 1997, and the FDA determined that the NDA was acceptable for filing. RenaGel(R) phosphate binder also received "Part B" status from the European Medicines Evaluation Agency ("EMEA"), which status is assigned to innovative medicinal products having novel characteristics, and means that only one application need be submitted in order to obtain marketing approval in all 15 EU countries. Applications for marketing authorization in Europe and Canada are expected to be submitted in 1998. See Note H., "Investments" to the 4 5 Genzyme Corporation and Subsidiaries Consolidated Financial Statements (the "Consolidated Financial Statements") for a description of the joint venture between Genzyme and GelTex. Thyrogen(R) Hormone. Genzyme General has developed Thyrogen(R) hormone, a recombinant form of human thyroid stimulating hormone, for use as an adjunct to the approximately 100,000 to 200,000 diagnostic and therapeutic procedures undertaken each year to detect and treat metastases of thyroid cancer. Thyrogen(R) hormone is designed to allow patients to continue taking their thyroid hormone supplements while they are being screened for metastases, thereby allowing patients to avoid the debilitating effects of hypothyroidism. An NDA for Thyrogen(R) hormone was submitted to the FDA on December 12, 1997 for the diagnostic indication. The FDA has accepted the NDA under its priority review process, which requires the agency to provide a letter to Genzyme indicating approval or non-approval within six months of the filing date. FDA priority review is reserved for therapies that have the potential to improve treatments for particular diseases or conditions substantially. A marketing authorization application for Thyrogen(R) hormone was also filed in Europe in December 1997. Genzyme General expects to file a new drug submission for Thyrogen(R) hormone in Canada in 1998. Antithrombin III. Antithrombin III is a plasma protein that helps regulate blood clotting. Genzyme and Genzyme Transgenics Corporation ("GTC") have formed a joint venture for the development and commercialization of transgenically produced recombinant human antithrombin III ("ATIII"). Transgenic ATIII is produced by GTC in goat milk. A Phase II clinical trial of ATIII was completed in December 1997, confirming safety of ATIII at all administered doses and supporting its ability to affect the anticoagulation response to heparin in patients undergoing coronary artery bypass grafting ("CABG"). The companies will conduct Phase III clinical trials of ATIII in 1998. Subject to the receipt of regulatory approvals, Genzyme General will market ATIII worldwide, excluding Asia, as the exclusive distributor for the joint venture. Genzyme owns approximately 43% of the outstanding shares of GTC common stock. See Note H., "Investments" to the Consolidated Financial Statements for a description of the relationship between Genzyme and GTC, including the joint venture. Other Development Programs. In addition to the products and programs described above, Genzyme General has several therapeutic products in various stages of the research, development and clinical testing.
PRODUCT/PROGRAM DESCRIPTION --------------- ----------- CFTR/adenovirus vector Genzyme General is developing a gene therapy approach using adenovirus vectors to correct the basic defect in cystic fibrosis ("CF") cells whereby the mutant genes are augmented with genes that would enable the patient's cells to produce normal cystic fibrosis transmembrane conductance regulator ("CFTR") protein. CFTR/lipid vector Genzyme General is developing lipid-DNA complexes as vectors for an alternative gene therapy approach to the treatment of CF. Ex vivo stem cells/retrovirus vector Through its collaborations with the University of Pittsburgh and IntroGene B.V., Genzyme General is developing a hematopoietic stem cell gene therapy for Gaucher disease. Various proprietary vectors for gene Through its collaborations with Duke University and the therapy University of California at San Diego, Genzyme General is developing gene therapies for congestive heart failure, vein graft failure and restenosis, as well as a gene therapy application to protect heart tissue from oxygen damage that can occur during various types of cardiac procedures.
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PRODUCT/PROGRAM DESCRIPTION --------------- ----------- Alpha-Gal Genzyme General is developing a recombinant form of the human enzyme Alpha-galactosidase ("Alpha-Gal") as a treatment for Fabry disease, a usually fatal inherited disorder of lipid metabolism. Prolactin Genzyme General is developing a recombinant form of the human hormone prolactin for use as an immune stimulant. Potential clinical indications include immunologic/hematopoietic reconstitution for myelosuppressed and immunocompromised patient populations and use as a vaccine adjuvant. Chitinase Genzyme General is evaluating recombinant human chitinase as a therapeutic agent for treating systemic fungal infections, which are often observed in immunosuppressed individuals.
Surgical Products Genzyme General develops, manufactures and markets surgical products for four principal business lines: the Sepra Products (described below), cardiovascular fluid management systems (chest drainage and autotransfusion systems), surgical closure systems (sutures and needles) and surgical instruments (cardiovascular punches and other cardiovascular, plastic surgery, endoscopic and general instruments). Genzyme General's sales force markets products directly to cardiac, general, gynecologic, colon and rectal surgeons and hospital purchasing departments throughout the U.S. and Europe. Sepra Products. Genzyme General, on behalf of a joint venture (the "Joint Venture") between Genzyme Development Partners, L.P. ("GDP") and Genzyme, is developing and marketing products for use during surgical procedures to limit the formation of postoperative adhesions (the "Sepra Products"). The Sepra Products are based on HA, a biopolymer produced naturally by the body to lubricate and protect tissue. Under the terms of various agreements between GDP and Genzyme, GDP has the exclusive right to sell the Sepra Products in the U.S. and Canada though the Joint Venture. Genzyme has the exclusive right to sell these products outside the U.S. and Canada subject to a royalty on European sales under certain circumstances. In March 1997, Genzyme and the Joint Venture entered into an exclusive marketing and distribution agreement whereby Genzyme acts as the sole distributor of the Sepra Products on behalf of the Joint Venture. The Sepra Products portfolio is primarily comprised of Seprafilm(R) bioresorbable membrane, Sepragel(TM) bioresorbable gel and Sepracoat(TM) coating solution. Seprafilm(R) bioresorbable membrane is a solid formulation of modified HA that is used to separate and protect tissues and organs that have been damaged during surgery. During the third quarter of 1996, the FDA granted approval to market Seprafilm(R) for use in any open abdominal or pelvic surgery. Genzyme General launched a broad U.S. marketing effort for Seprafilm(R) during the fourth quarter of 1996 using the sales force it acquired in connection with Genzyme's acquisition of Deknatel Snowden Pencer, Inc. in 1996. Genzyme General is initially targeting the top 300 hospitals that perform 27% of the colorectal and general abdominal surgeries in which Seprafilm(R) could be used in the United States. Genzyme is focusing on high-risk colorectal surgeries, where adhesions are a particular concern. Internationally, Genzyme launched sales of Seprafilm(R) in Europe in 1996 after the product was granted the Approval of Conformity Certificate in accordance with the European Medical Devices Directive (a "CE Mark"). Genzyme also began sales of Seprafilm(R) in Canada and Israel in 1997. Japan granted Seprafilm(R) regulatory approval in 1997, and working with Kaken Pharmaceuticals Co., Ltd., Genzyme plans to launch Seprafilm(R) in Japan in 1998. Because Seprafilm(R) represents such a notable departure from the techniques of the past, Genzyme General has faced challenges in establishing Seprafilm(R) as the new standard of care in the surgical industry. To improve its marketing efforts, Genzyme General hired and trained 20 Seprafilm(R) sales specialists in 1997. Genzyme General is also initiating a clinical trial designed to measure long-term outcomes related to small bowel obstruction in patients who receive Seprafilm(R) during surgery compared to those who do not, thereby providing information about Seprafilm(R)'s cost effectiveness and role in reducing intestinal obstructions. Genzyme General is currently developing a second generation Seprafilm(R) product, which is designed to have 6 7 improved elasticity and ease of use suitable for laparoscopic procedures. Genzyme General plans to file a supplemental Pre-Marketing Approval application ("PMA") with the FDA and apply for a CE Mark for the second generation Seprafilm(R) product in 1998. Sepragel(TM) bioresorbable gel is a highly viscous gel form of modified HA and is intended to be used in laparoscopic procedures and on tissue surfaces that are inaccessible to Seprafilm(R). Genzyme is continuing development of an alternative formulation for Sepragel(TM) with improved properties. Once work on the formulation is completed, additional patients are expected to be enrolled over the next 12 months in the Phase I clinical trial. Sepracoat(TM) coating solution is a liquid formulation of HA that, when used to coat tissues and organ surfaces at the start of and throughout surgical procedures, forms a temporary physical barrier that may protect tissues during surgery. In January 1996, Genzyme filed a PMA with the FDA to market Sepracoat(TM) for use in abdominal, pelvic and cardio-thoracic surgical procedures. In 1997, an advisory panel to the FDA recommended that Genzyme not be granted approval to market Sepracoat(TM) for the reduction of adhesions in abdominal and pelvic surgery. Genzyme General has since ceased development of Sepracoat(TM) for the U.S. market. Genzyme General believes that successful initial market penetration and subsequent maintenance of market share for Seprafilm(R) require a specialized hospital-based sales force and has deployed its surgical products sales force and additional sales specialists to accelerate the market introduction of these products in the U.S. and Europe. Substantial additional efforts to educate surgeons and hospital administrators as to the benefits of these products will also be required in order for the products to penetrate target markets and gain broad market acceptance. There can be no assurance that Genzyme General will be successful in its efforts to implement a commercialization strategy for the Sepra Products. See Note L., "Research and Development Agreements" to the Consolidated Financial Statements for a description of the relationship between Genzyme, GDP and the Joint Venture and details concerning funding of the development of the Sepra Products. Bulk and Pharmaceutical Grade Hyaluronic Acid. Genzyme General currently produces and sells bulk HA for a number of applications. Under an agreement with Alcon, Genzyme General supplies pharmaceutical grade HA powder to Alcon for incorporation into Provisc(R), an HA-based ophthalmic surgical aid product, which Alcon introduced in 1994. Genzyme General also receives a royalty based on Alcon's product sales. In addition, HA is sold to a number of customers for various research and development applications. Cardiovascular Fluid Management Systems. This product line consists primarily of self-contained, disposable chest drainage devices used to drain blood from the chest cavity following open heart surgery, other surgical procedures and trauma. Genzyme General also sells autotransfusion devices that allow the collection of blood shed by the patient and its reinfusion postoperatively, thus eliminating the risks associated with blood transfusions. Genzyme General's self-contained, disposable chest drainage unit, Pleur-evac(R), was introduced in 1967 and is the market leader in chest drainage devices. Genzyme General also sells a line of dry suction-controlled chest drainage and autotransfusion devices under the Sahara(TM) and Thora-Klex(R) brand names. Surgical Closure Systems. Surgical sutures, including Tevdek(R) and Silkey Polydek, are sold in packs consisting of suture/needle combinations and are Genzyme General's oldest product line. Genzyme General emphasizes high quality specialty sutures for cardiovascular and plastic surgery, utilizing special materials, advanced metallurgy and packaging innovations. Approximately 50% of Genzyme General's U.S. sales of surgical products are attributable to high margin "specials" in which individual surgeons order nonstandard products and customized suture/needle combinations for specific procedures. Surgical Instruments. Genzyme General sells cardiovascular punches, which are used during coronary artery bypass surgery to make cleanly cut holes, and hand-held, reusable instruments such as needleholders, scissors, forceps, graspers, dissectors and retractors. Genzyme General's instruments are used in cardiovascular, plastic, endoscopic and general surgery and are sold directly to the surgeon, the key decision maker on purchases of specialty instruments. 7 8 In September 1997, the surgical products business area created a unit focused on the development and marketing of broad and flexible systems for minimally invasive cardiovascular procedures. Genzyme General intends to leverage the core products under the Deknatel and Snowden Pencer brand names by combining these disposable and reusable devises with new minimally invasive cardiovascular systems. Genzyme General believes that up to 30% of the 430,000 conventional CABG and valve replacement procedures performed in the U.S. will be performed in a minimally invasive fashion in the next five years. Genzyme General entered into two agreements to expand its line of minimally invasive cardiac systems and to extend its use to other cardiac procedures. Under one agreement, this product line will be expanded so that surgeons can stop the heart with the aid of an aortic occlusion balloon developed by the Cook Group. Genzyme General will market the balloons exclusively and expects to begin offering the balloons as part of Genzyme General's line of instruments for use in endoscopic CABG procedures, called the EndoCABG(TM) System, in the first half of 1998. The other agreement covers a product development and marketing alliance with CarboMedics, Inc. ("CarboMedics"), pursuant to which the companies are developing a system of instrumentation and supplies which will allow cardiac surgeons to introduce CarboMedics's mechanical heart valves through a small incision in the patient's chest wall. Diagnostics Genetic Diagnostic Services Genzyme General applies advanced biotechnology to develop and provide high quality, sophisticated genetic diagnostic services to physicians, hospitals, universities, medical centers, clinical laboratories, genetic centers and managed care organizations in the U.S. and internationally through a national network of laboratories and a direct sales force. Genzyme General offers three types of genetic diagnostic services: biochemical testing, classical and molecular cytogenetic testing, and DNA testing. Biochemical testing services consist primarily of a widely used screening test (AFP3) to determine if further prenatal genetic testing is appropriate. Classical and molecular cytogenetic testing involves the analysis of fetal cells obtained through amniocentesis or chorionic villi sampling ("CVS") to evaluate chromosomal abnormalities. DNA testing is performed to determine the likelihood that the subject has, or is a carrier for, a specific genetic disorder, such as CF, Fragile X syndrome, Huntington's disease, spinal muscular atrophy, polycystic kidney disease, sickle cell anemia, hemophilia and Gaucher disease. Genzyme General employs over 70 board certified genetics professionals who interpret results and provide genetic counseling and support services to medical practitioners and their patients. InSight(R) Test. Genzyme General's InSight(R) test is a faster cytogenetic test based on in situ hybridization of chromosome-specific DNA probes. This technology permits identification of the most frequently occurring chromosomal abnormalities within 48 hours, as compared to the one to three weeks required to perform classical cytogenetic testing (karyotyping). The InSight(R) analysis is provided in conjunction with a complete karyotype. MASDA(R) Service. Genzyme General's patented Multiplex Allele-Specific Diagnostic Assay (the "MASDA(R) Service") can analyze in a single assay up to 500 DNA samples simultaneously for over 100 known gene mutations. The MASDA(R) Service not only analyzes different patient samples for different disease indications in a single assay, it also identifies multiple mutations in one or more genes in a single patient's DNA sample. Genzyme General is pursuing a number of commercialization strategies for the MASDA(R) Service. In February 1997, Genzyme General launched a 70-mutation CF test, called the "CF-70" test. Previous CF tests could only identify 32 or fewer mutations, thereby producing negative results for people with rare mutations. In addition, the MASDA(R) Service is also being used to provide genetic profiling services for clinical trials being conducted by pharmaceutical companies. Genzyme General has established a federally certified clinical trials laboratory to support diagnostic assay development using the MASDA(R) Service. In addition, the laboratory provides population segmentation services for internal drug development programs and external customers. These studies are designed to identify genetic markers that might provide information about the severity of a disease as well as the likelihood that a patient might respond either favorably or adversely to a therapy. 8 9 Development Programs. Genzyme General is developing additional platforms for complex mutational analysis and conducts major research and development programs in such areas as genomics and rare cell separation and analysis methods. For example, Genzyme General is continuing its efforts to develop methods and procedures to isolate and genetically analyze fetal cells obtained from maternal blood samples. Fetal cells obtained from maternal blood serum could potentially be used in lieu of cells derived from amniotic fluid or chorionic villi for genetic testing, thereby avoiding the risk associated with amniocentesis or CVS. Genzyme General also is developing a technology called cleavage and ligation associated mutation specific sequencing, or "CLAMSS," to detect and identify unknown mutations in genes. Diagnostic Products Genzyme General is a primary supplier of diagnostic components (enzymes, substrates, antibodies and antigens), bulk reagents and devices to manufacturers of clinical diagnostic reagents and kits as well as directly to clinical reference laboratories. It also manufactures and sells a broad line of antibody and antigen-based ELISA test kits. In addition, Genzyme General distributes a broad product line of research products to academic, industrial and governmental laboratories for use in immunology and cell biology and has developed manufacturing expertise in enzyme fermentation, purification, reagent formulation and immunoassay test development. Cardiovascular Products. Genzyme General sells devices and reagents for the quantification of low-density lipoprotein ("LDL") and high-density lipoprotein ("HDL") cholesterol levels. In September 1997, Genzyme General introduced a second-generation homogenous direct LDL cholesterol test, called N-geneous LDL(TM), and a second-generation homogenous HDL test, N-geneous HDL(TM), in the U.S. Both of the new tests accurately measure cholesterol levels that are present in a patient's serum or plasma directly without the labor intensive pretreatment steps that were needed previously and are easily adaptable to automated chemistry analyzers. N-geneous LDL(TM) is the only homogenous LDL test available for sale in the U.S. Both tests are being distributed in the U.S. by Genzyme General under a worldwide agreement with the manufacturer of the tests, Daiichi Pure Chemicals Co., Ltd., of Tokyo. In addition to the U.S., Genzyme General is also the exclusive marketing partner for the N-geneous LDL(TM) and N-geneous HDL(TM) tests in Europe and the rest of the world, with the exception of Asia, where Genzyme holds co-exclusive distribution rights. Diagnostic Intermediates. Genzyme General produces and sells intermediates such as diagnostic enzymes, substrates and reagents for use in diagnostic kits used for blood analysis in clinical chemistry laboratories. One area of emphasis is pancreatic function, where Genzyme General provides enzymes, substrates, bulk reagents and patented methodologies for amylase and lipase determination to diagnostic kit manufacturers. Genzyme General is also a primary supplier of cholesterol enzymes used in testing for coronary heart disease. Sales of its diagnostic intermediates are made to over 200 manufacturers and users of diagnostic kits worldwide through its own technical sales representatives in the U.S. and Europe and through distributors in Japan. ELISA Test Kits. Genzyme General manufactures and sells a broad range of ELISA test kits for infectious disease and endocrinology determinations. In addition, it supplies monoclonal and polyclonal antibodies plus other immunoassay raw materials to immunodiagnostic kit manufacturers. Patented Contrast(TM) rapid tests for pregnancy, Strep A and infectious mononucleosis determination are also becoming key contributors to Genzyme Generals' product portfolio. Research Products. The diagnostics business unit's research products consist of a comprehensive line of cytokines, growth factors, antibodies, proteins and cytokine and apoptosis ELISA systems which play an integral role in activating and modulating the body's immune system. These research products are used primarily to conduct research in the areas of immunology and cellular biology. GENZYME TISSUE REPAIR -- PRODUCTS AND DEVELOPMENT PRODUCTS GTR is a leading developer of biological products for the treatment of cartilage damage, severe burns, chronic ulcers, and neurodegenerative diseases. GTR believes that strong capabilities in three groups of core 9 10 technologies -- cell processing, therapeutic protein development and biomaterials -- enhance its ability to successfully develop and market a portfolio of novel products and services in the field of tissue repair. Carticel(TM) Autologous Cultured Chondrocytes ("Carticel(TM) AuCC"). GTR's lead product, Carticel(TM) AuCC, is used to treat damaged articular knee cartilage. GTR employs a proprietary process to grow a patient's own ("autologous") cartilage cells for use in repairing damaged knee cartilage. In addition to cartilage cell processing, GTR trains orthopedic surgeons, collects and analyzes outcomes data and assists physicians and patients in obtaining reimbursements from third party payers. GTR's comprehensive surgeon training program consists of lectures and hands-on bioskills sessions involving practice of the surgical procedures (including biopsy harvesting, implantation and surgical follow-up), as well as an orientation on reimbursement and billing procedures. Since inception, GTR has trained 1,988 surgeons in this program. In August 1997, the FDA granted GTR a biologics license (a "BLA") for the manufacture of Carticel(TM) AuCC for use in repairing clinically significant cartilage defects of the femoral condyle. Carticel(TM) AuCC is not indicated for the treatment of cartilage damage associated with osteoarthritis. GTR is making a substantial effort to establish the procedure known as autologous chondrocyte implantation ("ACI") using Carticel(TM) AuCC as the new standard of care for repair of cartilage damage to the femoral condyle. As part of these efforts, GTR shifted its focus in 1996 to increasing the rate of reimbursement approvals by establishing an educational program for third party payers. As a result of this program, several payers have established protocols for selecting patients and determining eligibility. Approximately 101 million people in the U.S. were covered by health plans with protocols for reviewing Carticel(TM) AuCC reimbursement requests as of December 31, 1997. In addition, one-third of GTR's 59-person U.S. sales and reimbursement staff is involved directly in claims processing and educating insurers about the appropriate uses of the Carticel(TM) AuCC. The commercial success of Carticel(TM) AuCC will depend materially on the ability of GTR to increase the approval rate for reimbursement of the product from third party payers. Although GTR has seen a substantial increase in the development of broad policy coverage for Carticel(TM) AuCC since receipt of the BLA, there can be no assurance that the recent increase in reimbursement approvals will continue. GTR also believes that successful commercialization of Carticel(TM) AuCC is dependent on its being accepted by and incorporated into routine use by a large number of orthopedic surgeons. GTR markets Carticel(TM) AuCC to orthopedic surgeons in the U.S. and Europe directly and through distributors. GTR's sales force promotes Carticel(TM) AuCC by contacting and educating orthopedic surgeons about the service and maintaining an ongoing relationship with each surgeon who receives training from GTR; assisting physicians with administrative, clinical and reimbursement issues involved in arranging to perform the biopsy and implantation procedures at hospitals; and assisting physicians in obtaining the necessary approval from the hospital's Institutional Review Board to collect outcomes data in accordance with GTR's protocol. GTR expects that its revenues from the sale of Carticel(TM) AuCC may be lower in the summer months as fewer operative procedures are typically performed during those months. GTR is required by the FDA to conduct two confirmatory post-marketing studies to gain a better understanding of the role of implanted cells in ACI and to assess longer term clinical results. Each of these studies is required to demonstrate that Carticel(TM) AuCC is superior to the alternatives studied. The first, a five year, randomized study, will compare outcomes of patients treated with Carticel(TM) AuCC to those of patients treated with abrasion and microfracture -- two common alternative treatments for articular cartilage defects. The second study will be a smaller scale study in which patients will undergo the ACI biopsy and implantation procedure, but will randomly be assigned to receive either Carticel(TM) AuCC or a placebo. This study is targeted to last three to five years, not including a 36-month follow-up. Epicel(sm) Service. GTR's Epicel(sm) Service, which provides cultured autologous skin cells as permanent skin replacement for patients with severe burns, was first introduced in 1987. These epidermal grafts are grown from a patient's own skin cells and, therefore, are not rejected by the patient's immune system. Starting with a patient biopsy about the size of a postage stamp, GTR can grow enough skin grafts in three to four weeks to cover a patient's entire body surface area. Most burn wounds involving less than 60% body surface area are covered with conventional skin grafts within the three to four weeks it currently takes to grow skin grafts produced using the Epicel(sm) Service. 10 11 Therefore, GTR believes that the primary candidates for the Epicel(sm) Service are the approximately 400 patients each year in the U.S. who survive burn injuries covering more than 60% of their body surface area. GTR markets the Epicel(sm) Service to burn centers in the U.S. and parts of Europe through its own direct sales force and in Japan through a distributor. NeuroCell(TM)-PD and NeuroCell(TM)-HD. GTR, through a joint venture with Diacrin, is developing NeuroCell(TM)-PD for the treatment of Parkinson's disease and NeuroCell(TM)-HD for the treatment of Huntington's disease. GTR estimates that the patient population with advanced Parkinson's disease ranges from 115,000 - 155,000 in the U.S., and that the U.S. patient population with Huntington's disease is approximately 25,000. Both of the NeuroCell(TM) products involve the implantation of fetal porcine brain cells into patients to replace damaged brain tissue. The joint venture has a license to use patented technology developed at Massachusetts General Hospital ("MGH") to protect the NeuroCell(TM) products from the host's immune system without the need for chronic, lifetime administration of immunosuppressive drugs. In January 1998, the joint venture received FDA approval to initiate patient recruitment in a Phase II/III trial of NeuroCell(TM)-PD. Enrollment in a Phase I clinical trial of NeuroCell(TM)-PD involving 12 patients was completed in October 1996. Patients in this trial are being evaluated at periodic intervals to assess long term clinical outcomes. The results at six months post-treatment showed marked improvement in symptoms and restored efficacy of the drug levodopa, which the brain converts to dopamine, in ten of the 12 patients. An analysis of the ten evaluable patients also demonstrated statistically significant improvement in mean scores on the Unified Parkinson's Disease Rating Scale ("UPDRS") six months post-treatment. Without treatment, scores on UPDRS generally deteriorate over time as the disease progresses. These results are similar to those obtained by other researchers treating Parkinson's patients with human fetal cells. Commercialization of treatments using human fetal cells is not practical, however, because of ethical concerns, supply constraints and inconsistent quality. A histological study published in the March 1997 issue of Nature Medicine showed that NeuroCell(TM)-PD cells transplanted into one of the patients in the Phase I clinical trial survived for more than seven months and showed signs of reconnecting nerve tissue damaged by the disease. The study marks the first documentation of survival of cells transplanted from another species into the human brain and of the appropriate growth of non-human neurons for a potential therapeutic response. The patient, a 69-year old man, died of a pulmonary embolism unrelated to treatment with NeuroCell(TM)-PD. The brain of the patient showed minimal signs of inflammation or rejection of the foreign tissue. The results of a Phase I clinical trial of NeuroCell(TM)-HD analyzed at three months post-treatment showed no observable improvements in patient outcomes. GTR believes, however, that such improvements may require a longer period to become evident. See Note H., "Investments" to the Consolidated Financial Statements for a description of the joint venture between Genzyme and Diacrin. Other Development Programs. GTR has a number of ongoing development programs supporting Carticel(TM) AuCC. GTR is conducting basic research and development into the biology of cartilage and the cartilage repair process. The objective of this research is to identify biologic materials that promote more rapid regeneration of articular cartilage, to develop new methods for the repair of arthritic joints and large surface area cartilage defects and to enable the ACI procedure to be performed less invasively. GTR is also committing resources to meet requirements specified by the FDA for validation of certain product manufacturing parameters. GTR is also developing recombinant Transforming Growth Factor Beta(2)("TGF-Beta(2)") for the treatment of chronic skin ulcers and as an intravenous injectable product for administration to multiple sclerosis ("MS") patients for the prevention of autoimmune damage to nerve tissue. GENZYME MOLECULAR ONCOLOGY -- PRODUCTS AND DEVELOPMENT PROGRAMS GMO is engaged in the development and commercialization of novel cancer therapeutics using an integrated, gene-based approach. GMO's products and services include: a genomics service business based on its patented Serial Analysis of Gene Expression, or "SAGE(TM) ", technology, gene therapy programs focused on gene immunotherapy and tumor targeting, and a drug discovery program to identify small molecules that interact with cancer-related targets, which includes access to Genzyme's library of over one million small 11 12 molecule compounds. GMO was formed in June 1997 by acquiring PharmaGenics and combining it with several of Genzyme's ongoing programs in the field of oncology. SAGE(TM) SAGE(TM) is a high throughput, high efficiency method of simultaneously detecting and measuring the expression level of most, and possibly all, genes expressed in a cell at a given time. Differential gene expression is the comparison of how, when and in what amounts genes are expressed in a given tissue or cell line versus another (e.g., cancer tissue versus normal tissue). GMO has an exclusive, worldwide license to the SAGE(TM) technology from the Johns Hopkins University School of Medicine ("JHU"). In December 1997, the U.S. Patent and Trademark Office ("PTO") issued a patent covering the methodology by which SAGE(TM) identifies and measures gene expression. GMO believes that an understanding of differential gene expression will accelerate the development of more effective cancer and other therapeutics and diagnostics. Potential uses of SAGE(TM) in evaluating therapeutic targets include comparison of disease tissue with normal tissue, comparison of genes expressed at different stages of disease, elucidation of disease pathways and measurement of response to drug candidates. SAGE(TM) may also be used to develop diagnostics (by identifying tumor or other biological markers), discover novel genes, map the genetic profiles of model organisms or optimize and monitor production methods. GMO has entered into several commercial agreements for the provision of SAGE services and SAGE(TM) sublicenses, including agreements with Hexagen plc, Ontogeny, Inc., Parke-Davis, a division of Warner-Lambert Company, and Reprogen, Inc. Development Programs GMO is conducting several gene therapy programs for the development of alternative or complementary approaches to existing cancer therapies, including the following:
PRODUCT/PROGRAM DESCRIPTION --------------- ----------- Immunotherapy: MART-1 and gp100 GMO is collaborating with researchers at the National Cancer Institute ("NCI") to develop adenoviral vectors carrying the MART-1 and gp100 genes for use as tumor "vaccines" for the treatment of melanoma. Two Phase I clinical trials completed in 1997 showed the vectors were safe and well tolerated and that a small subset of patients showed substantial tumor regression. These product candidates will continue to be evaluated in Phase I clinical trials in the next year. HSP65 GMO is collaborating with StressGen Biotechnologies Corp. ("StressGen") to optimize lipid delivery of the HSP65 gene. See "Collaborations -- StressGen" below. Tumor Targeting: Lipid vectors GMO is optimizing its lipid gene delivery vectors for use in systemic administration for delivery of genes to both primary tumors and metastasized cancers. p53 Schering-Plough Corporation ("Schering") is funding a research program to develop cancer gene therapy products by combining Schering's proprietary p53 tumor suppressor gene with GMO's lipid delivery vectors. See "Collaborations -- Schering" below.
GMO also has a number of cancer screens running both internally and through efforts with collaborators to identify small molecules that could have therapeutic benefit in treating cancer. Two areas of priority interest for GMO's small molecule program are metastasis inhibition and anti-angiogenesis. 12 13 Collaborations GMO is currently a party to a number of commercial and academic collaborations and licensing arrangements to provide access to complementary technologies, enhance its expertise in specific cancer indications and out-license products it does not choose to pursue internally, including the arrangements discussed below. StressGen. GMO, StressGen and the Canadian Medical Discoveries Fund Inc. ("CMDF") formed a joint venture in July 1997 to combine StressGen's proprietary stress genes with Genzyme's gene delivery technology. The joint venture will initially focus on the use of mycobacterial stress genes that have been licensed exclusively to the joint venture in the field of cancer. Subject to the successful completion of preclinical studies, the companies plan to initiate a Phase I clinical trial for ovarian cancer during the next 12 months. See Note H., "Investments" to the Consolidated Financial Statements for a description of the joint venture between Genzyme, StressGen and CMDF. Schering. In December 1997, GMO entered into a research and option agreement with Schering to combine GMO's proprietary lipid delivery systems with six of Schering's proprietary genes, including the p53 tumor suppressor gene, to develop gene therapy products. The agreement provides for up-front payments, research funding and potential milestone payments for research progress on a lipid-based p53 tumor suppressor gene therapy. At any time during the one-year research period, Schering may exercise its option to exclusively license GMO's lipid vector technology for delivery of the p53 gene. If this option is exercised, Schering will have the option to exclusively license the vector technology for delivery of five additional genes. Merck & Co., Inc. ("Merck"). In January 1998, GMO non-exclusively licensed an assay to Merck relating to methods for identifying small molecules that interfere with the binding of the MDM2 protein with the p53 protein. GMO received a license fee for the assay and could receive additional milestone payments if certain defined development milestones are achieved by Merck for a product developed by a method licensed from GMO or covered by GMO patent rights. In addition, GMO would receive royalties on worldwide sales of any such product. NCI. GMO has a collaborative research and development agreement ("CRADA") with the NCI relating to the development of treatments for metastatic melanoma. The CRADA, which is effective until August 1999, covers the use of adenoviral vectors that incorporate the genes for the proprietary melanoma tumor antigens MART-1 and gp100. Under the CRADA, GMO provides Dr. Steven Rosenberg at NCI with clinical grade adenoviral vectors, research funding and support for the conduct of clinical trials at the NCI relating to these vectors in exchange for an option to obtain either an exclusive or non-exclusive license to the technology developed under the CRADA. Dr. Rosenberg is also collaborating with third parties regarding the use of non-adenoviral vectors for the MART-1 and gp100 tumor antigen genes. JHU. GMO has a research agreement with JHU and Dr. Kenneth Kinzler under which GMO provides funding for Dr. Kinzler's SAGE(TM)-related research at JHU through 2000 in exchange for an option to obtain an exclusive worldwide license to technology developed as a part of that research. Under this agreement, GMO will be obligated to make milestone payments upon the fulfillment of research objectives. Furthermore, GMO has the rights to the SAGE(TM) data generated in Dr. Kinzler's laboratory and an option to license diagnostic and therapeutic rights to discoveries using SAGE(TM) that are further developed in Dr. Kinzler's laboratory. Under another research agreement with JHU, GMO sponsors certain cancer-based research (other than SAGE(TM)) in Dr. Kinzler's laboratory through 2000 in exchange for an option to obtain an exclusive, worldwide license to technology developed in the course of such research. In addition, GMO has retained Dr. Bert Vogelstein's services on a non-exclusive basis through a consulting agreement that is effective through April 2000. In addition, GMO, JHU and Hoffman La-Roche, Inc. ("Roche") are parties to a broad-based license agreement (the "1992 License Agreement") relating to the development and commercialization of technology developed by Dr. Vogelstein under an earlier research agreement. Under the 1992 License Agreement, JHU granted Roche an exclusive license for diagnostic products and services and GMO an exclusive license 13 14 for oligonucleotide therapeutics, each with the right to sublicense, and a co-exclusive license to GMO and Roche for non-oligonucleotide therapeutics and other products not covered by either GMO's or Roche's exclusive licenses. While the licenses from JHU are exclusive as to all rights that JHU possesses, some of the genes licensed from JHU are covered by patent applications that are co-owned with entities from which GMO and Roche have not obtained a license. GMO will owe royalties to JHU on net sales by GMO and its sublicensees of therapeutic products incorporating technology licensed under the 1992 License Agreement. In April 1997, Roche granted GMO a non-exclusive sublicense of its diagnostics rights licensed from JHU, along with the exclusive right to sublicense diagnostic rights to the JHU technology. GMO will owe royalties to Roche on net sales by GMO and its sublicensees of diagnostic products incorporating technology licensed under the 1992 License Agreement. COMPETITION Genzyme is engaged in a segment of the human health care products industry that is extremely competitive. Competitors in the U.S. and elsewhere are numerous and include major pharmaceutical, chemical, surgical device and biotechnology companies, many of which have substantially greater financial and human resources, more experience in research, preclinical and clinical development, and obtaining regulatory approvals and more extensive production and marketing infrastructure than Genzyme and its divisions. These companies may succeed in developing products that are more effective than any that have been or may be developed by Genzyme and may also prove to be more successful than Genzyme in producing and marketing their products. Each of Genzyme's products and services faces different competitive challenges: Cerezyme(R) Enzyme and Ceredase(R) Enzyme. Although Genzyme General is not aware of any current effective alternative to its products for the treatment for Gaucher disease, competition potentially could come from other protein replacement therapies or gene therapy. Genzyme General believes that its proprietary production techniques, exclusive raw material source for Ceredase(R) enzyme and, to a certain extent, the orphan drug status of its products give it a number of advantages over potential competitors using protein replacement therapy for the treatment of Gaucher disease. Gene therapy techniques are still in experimental stages. Genzyme General believes that the principal factors that will affect competition for Cerezyme(R) enzyme and Ceredase(R) enzyme will be clinical effectiveness and absence of adverse side effects. One company is attempting to develop an alternative form of recombinant GCR by producing the enzyme in insect cells and modifying it by applying a coating of polyethylene glycol. RenaGel(R) Phosphate Binder. Phosphate binders are currently the only available treatment for hyperphosphatemia. There are several phosphate binders available or under development. A prescription calcium acetate preparation is currently the only product approved in the U.S. for the control of elevated phosphorus levels in patients with chronic kidney failure. Other products used as phosphate binders include over-the-counter calcium- and aluminum-based antacids and dietary calcium supplements. Calcium acetate and calcium carbonate, the most commonly used agents, must be taken at sufficient doses to achieve adequate reductions in phosphate absorption, which can lead to constipation and patient noncompliance. In addition, calcium therapy requires frequent monitoring because its use can cause hypercalcemia. Aluminum hydroxide is more effective at lower doses than calcium acetate or calcium carbonate, but it is infrequently used because aluminum absorbed from the intestinal tract accumulates in the tissues of patients with chronic kidney failure, causing aluminum-related osteomalacia, anemia and dialysis dementia. RenaGel(R) phosphate binder binds dietary phosphate without the use of either calcium or aluminum and, therefore, will not cause hypercalcemia or aluminum toxicities. Genzyme believes that RenaGel(R) phosphate binder will effectively compete with existing phosphate binders by offering an excellent tolerability profile and a more palatable formulation than those of currently available phosphate binders. CF. There are a number of organizations, both academic and commercial, engaged in developing therapies to treat either the symptoms of CF or the cause of the disease. Several groups are developing gene therapy approaches to the disease and also have received approval from the FDA and the Recombinant DNA Advisory Committee ("RAC") to initiate limited human studies of CF gene therapy. In addition, other 14 15 organizations are investigating pharmacological and biological agents that would treat CF. One such product, Pulmozyme(R), which was developed by Genentech, Inc., is currently on the market. These groups may succeed in developing gene therapy products before Genzyme General, in obtaining patent protection that may effectively block Genzyme General from commercializing its gene therapy products or in developing other drug therapies that relieve the symptoms of CF and, thus, compete with products under development by Genzyme General. Sepra Products. Genzyme General believes that its expertise in developing proprietary fermentation processes and its access to proprietary strains of micro-organisms used in its HA production process will give it a competitive advantage in the marketing of the Sepra Products. Its anti-adhesion products may face significant competition, however, from other HA-based products, from non-HA-based products and from changes in surgical techniques that would obviate the use of HA. Genzyme General believes that the principal factor that will affect competition in this area is acceptance of the product by surgeons, which depends, in large part, upon product performance, safety and price. Other Surgical Products. The principal methods by which Genzyme General's surgical products business unit competes are continued innovative product development, the performance and breadth of its product lines, brand name recognition, sales force training and educational services, including sponsorship of training programs in advanced surgical techniques. Genzyme General's key product in the cardiovascular fluid management category is the Pleur-evac(R) chest drainage product. Genzyme General believes that it leads the chest drainage category and that this position is sustainable due to a broad product line possessing patented features and brand name recognition. Substantial competition in the market for fluid management devices resulted in a decrease in surgical products sales during 1997. Corrective actions taken by Genzyme General to boost sales in this market began yielding positive results in the fourth quarter of 1997. Genzyme General continues to compete aggressively in this market. The surgical closure category is dominated by Ethicon, a subsidiary of Johnson & Johnson, and Sherwood, a division of American Home Products Corporation. Genzyme General had focused on the cardiovascular suture market within this category and believes that favorable demographics such as the aging population and lengthening life expectancies will provide continued growth in this market. Competition within the surgical instruments category varies by segment, such as cardiovascular, endoscopic and plastic surgery instruments, with no one company dominating the entire category. Unique features and product innovation within its surgical instruments line, such as the recently launched EndoCABG(TM) System, have allowed Genzyme General to compete effectively across this category. Genetic Diagnostic Services. The U.S. market for prenatal cytogenetic and biochemical testing is divided among approximately 500 laboratories, many of which offer both types of testing. Of this total group, less than 20 laboratories market their services nationally. Genzyme General believes that the industry as a whole is still quite fragmented, with the top 20 laboratories accounting for approximately 50% of market revenues, and with no individual company accounting for more than 18% of the total other than Genzyme, which accounts for approximately 22% of the total. Genzyme General believes, however, that the industry will experience increasing consolidation, as smaller laboratories face the challenges of more complex and stringent regulation. Competitive factors in the genetic diagnostics services business generally include reputation of the laboratory, range of services offered, pricing, convenience of sample collection and pick-up, quality of analysis and reporting and timeliness of delivery of completed reports. Genzyme General believes that its research and development program, which has enabled it to develop and introduce testing services based on new technology, and its active sales and marketing force have played significant roles in the growth of its genetic diagnostics services business. In addition to Genzyme General, several companies and academic groups are attempting to develop fetal cell separation techniques. Genzyme General believes that its combination of separation and analytical technologies will give it a competitive advantage. Diagnostic Products. Genzyme General acts as a primary supplier of enzymes and substrates, and generally does not compete with its customers in the sale of complete diagnostic kits. This philosophy enables Genzyme General to maintain unique relationships with major diagnostic kit manufacturers and to engage with them in development efforts to produce new or improved kits. The market in the diagnostic products industry is mature and competition is based on price, reliability of supply and the purity and specific activity of products. 15 16 Carticel(TM) AuCC. GTR is aware of one other company, Verigen, Inc., that is culturing autologous chondrocytes for cartilage repair in Europe. In addition to Verigen, GTR knows of three other companies, Advanced Tissue Sciences, Inc. ("ATS"), in conjunction with Smith & Nephew PLC, Integra LifeSciences Corp. ("Integra") and LifeCell Corp., that are engaged in research on cultured cartilage products. In addition, a surgical technique known as osteochondral grafting may be competitive to Carticel(TM) AuCC. This procedure, which can be performed arthroscopically, involves transferring plugs of low weight bearing cartilage and bone to the area of a defect. Smith & Nephew, Arthrex, Inc. and Innovasive Devices, Inc. are known to have programs relating to this procedure. NeuroCell(TM) -PD and NeuroCell(TM) -HD. While there are currently no effective long-term therapies for advanced Parkinson's disease and no effective treatments for Huntington's disease, GTR is aware of other companies and institutions pursuing research and development of alternative treatments for the diseases. Experimental therapies under development for Parkinson's disease include surgical destruction of certain portions of the brain (pallidotomy), gene therapy, the use of growth factors and neuroprotectant therapy. Epicel(sm) Service. GTR is the only commercial provider of cultured skin grafts that have been shown to provide permanent skin replacement for burn patients in the U.S. However, GTR may face competition from companies using other approaches to culture skin tissue. Integra is marketing a collagen-based dermal replacement product for severely burned patients. This product will still require a skin graft from the patient or the Epicel(sm) Service to close a full-thickness wound, however, and therefore will not compete directly with the Epicel(sm) Service. ATS also has received approval for a temporary wound covering for burns. Organogenesis, Inc. has submitted a PMA for a product to be used for the closure of venous stasis ulcers. LifeCell Corp. currently has freeze-dried enzymatically processed human cadaver dermis on the market. TGF-Beta(2). The use of growth factors is emerging as a treatment for partial-thickness or very small full-thickness wounds. A number of companies are currently conducting or planning to conduct clinical trials with growth factors. Potential competitors include Chiron Corp., in collaboration with the Ethicon division of Johnson & Johnson, Curative Technologies, Inc., and Scios Novo, Inc. Curative Technologies, Inc., also has one product on the market which does not require FDA approval. Such growth factors may prove to be complementary to, as well as competitive with, TGF-Beta(2). GTR does not believe, however, that growth factors can provide permanent skin replacement to compete with the Epicel(sm)Service. Additionally, TGF-Beta(2) will compete with interferon-based immunomodulators produced by Chiron Corp. and Biogen Inc. for the treatment of MS. Cancer. Competition in the field of cancer therapeutics and diagnostics is intense. GMO faces, and will continue to face, significant competition from organizations such as large pharmaceutical and biotechnology companies, universities, government agencies and other research institutions in each of these fields. GMO is aware of clinical trials sponsored by Rhone-Poulenc Rorer relating to p53 gene therapy for cancer and expects that other large companies will be initiating gene therapy clinical trials in the near future. GMO also relies on its collaborators for support in some of its cancer research and development programs and intends to rely on these partners for preclinical evaluation and clinical development of its potential products and services. Competition may arise from the use of the same or similar technologies as those currently used or contemplated to be used by GMO, as well as from existing therapeutics and diagnostics, any or all of which may be more effective or less expensive than those developed by GMO. For instance, other companies provide genomics services that are competitive with SAGE(TM). Genzyme believes, however, that SAGE(TM) offers several advantages over competing genomics services, including that the genetic sequences used in SAGE(TM) for gene identification can be considerably shorter than those used in competing techniques, thereby increasing the rate at which genetic information can be analyzed and the probability of detecting rare genes. In addition, certain of its collaborators are conducting multiple product development programs in fields similar to those that are the subject of the partner's alliance with GMO. For instance, the NCI, with whom GMO is collaborating regarding the use of adenoviral vectors incorporating the MART-1 and gp100 tumor antigen genes for the treatment of melanoma, is currently working with others on non-adenoviral vector delivery systems for these antigens. Any product candidate of GMO, therefore, may be subject to competition with a potential product under development by a third party, including GMO's collaborators. 16 17 PATENTS AND PROPRIETARY TECHNOLOGY In general, Genzyme pursues a policy of obtaining patent protection both in the U.S. and in selected foreign countries for subject matter considered patentable and important to its business. In addition, a portion of Genzyme's proprietary position is based upon patents that Genzyme has licensed from others, including patents relating to RenaGel(R) phosphate binder, ATIII, the AFP3 test, NeuroCell(TM)-PD and NeuroCell(TM)-HD, the Epicel(sm) Service, TGF-Beta(2), SAGE(TM) and various cancer related genes such as p53. These license agreements generally require Genzyme to pay royalties upon commercialization of products covered by the licensed technology. Generally, patents issued in the U.S. are effective for a period of seventeen years from date of issue, although the GATT legislation changes this to twenty years from the filing date for applications filed after June 8, 1995. The duration of foreign patents varies in accordance with applicable local law. Genzyme also relies on trade secrets, proprietary know-how and continuing technological innovation to develop and maintain a competitive position in its product areas. Genzyme's employees, consultants and corporate partners who have access to its proprietary information have signed confidentiality agreements. Genzyme's patent position and proprietary technology are subject to certain risks and uncertainties. The information set forth under the subheading "Factors Affecting Future Operating Results -- Uncertainty Regarding Patents and Protection of Proprietary Technology" under (i) "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" in the 1997 Genzyme General Annual Report, (ii) "Management's Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and Results of Operations" in the 1997 GTR Annual Report and (iii) "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations" in the 1997 GMO Annual Report is incorporated herein by reference. The Company's registered trademarks Cerezyme(R), Ceredase(R), Thyrogen(R), Seprafilm(R), Pleur-evac(R), Thora-Klex(R), Tevdek(R), InSight(R), MASDA(R) and Vianain(R), together with its trademarks and service marks Sepragel(TM), Sepracoat(TM), EndoCABG(TM), Sahara(TM), N-geneous LDL(TM), N-geneous HDL(TM), Contrast(TM), Carticel(TM), Epicel(sm), Epicel ASAP(sm), and SAGE(TM), in the aggregate are considered to be of material importance to the Company. GOVERNMENT REGULATION Governmental regulation, in the U.S. and other countries, is a significant factor in the production and marketing of many of Genzyme's products and in its ongoing research and development activities. FDA Regulation In the U.S., products that do not achieve their principal intended purpose through chemical action within or on the body and which are not dependent upon being metabolized by the patient's body in order to be effective are classified by the FDA as "devices" while other products are classified as "drugs" or "biologics." Cerezyme(R) enzyme and Ceredase(R) enzyme are regulated in the U.S. as drugs, as are Thyrogen(R) hormone and RenaGel(R) phosphate binder. ATIII, Alpha-Gal, prolactin and the Company's gene therapy products are regulated as biologics. The Sepra Products and Genzyme's other surgical products are regulated as devices. The N-geneous LDL(TM) and N-geneous HDL(TM) cholesterol tests are classified as in vitro diagnostic devices. The activities required before drugs or biologics may be marketed in the U.S. include (i) preclinical laboratory tests, in vitro and in vivo preclinical studies and formulation and stability studies, (ii) the submission to the FDA and approval of an application for human clinical testing (an "IND"), (iii) adequate and well controlled human clinical trials to prove the safety and effectiveness of the drug or biologic, (iv) the submission of an NDA for a drug or a Product License Application ("PLA") for a biologic or a BLA for biologics identified by the FDA as "Specified Biologics" and (v) the approval by the FDA of the NDA, BLA or PLA. In addition to product approval, the manufacturer of the product may have to obtain an establishment license (for a biologic that is not considered well characterized) or a pre-approval Good Manufacturing Practices ("GMP") inspection (for a drug or well-characterized biologic) from the FDA. Since any license 17 18 granted by the FDA is both site and process specific, any material change by a company in the manufacturing process, equipment or location necessitates additional FDA review and approval. Products that are classified as devices also require FDA approval prior to marketing. Devices are classified as Class I, II or III, depending upon the information available to assure their safety and effectiveness. In general, Class I and Class II devices are devices whose safety and effectiveness can reasonably be assured through general or specific controls, respectively. Class III devices are life sustaining, life supporting or implantable devices or new devices which have been found not to be substantially equivalent to legally marketed devices. The steps required for approval of a Class III device include (i) preclinical laboratory tests and in vitro and in vivo preclinical studies, (ii) the submission to the FDA and approval of an investigational device exemption (an "IDE") to allow initiation of clinical testing, (iii) human clinical studies to prove safety and effectiveness of the device, (iv) the submission of a PMA and (v) the approval by the FDA of the PMA. Typically, clinical testing of devices involves initial testing to evaluate safety and feasibility and expanded trials to collect sufficient data to prove safety and effectiveness. In addition, the procedures and the facilities used to manufacture the device are subject to review and approval by the FDA. A device (other than a Class III device) which is proved to be substantially equivalent to a device marketed prior to May 28, 1976, when government regulations for devices were first introduced, can be marketed after approval of a 510(k) application rather than the filing of an IDE and a PMA. The 510(k) application must contain a description of the device, its methods of manufacture and quality control procedures and the results of testing to demonstrate that the device is substantially equivalent to the device already marketed. In May 1996, the FDA published a new guidance document that provided for the regulation of products such as Carticel(]) AuCC that use manipulated autologous structural cells. Under these regulations, companies that are not currently marketing autologous cultured chondrocytes would likely be required to provide a prospective randomized blinded control study comparing the treatment to alternative treatments. GTR estimates that it could take eight years for any competitor to complete a study of this nature that would demonstrate the clinical efficacy of its proposed treatment. In August 1997, the FDA granted GTR a BLA under these regulations for Carticel(TM) AuCC. GTR has initiated discussions with the FDA regarding an application for the Epicel(sm) Service, which has been on the market as an unregulated medical device. GTR expects that the FDA will permit the service to remain on the market until its regulatory status is resolved. The time and expense required to perform the clinical testing necessary to obtain FDA approval can far exceed the time and expense of the research and development initially required to create the product. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. In addition, use of these products during testing and after marketing approval has been obtained could reveal side effects which, if serious, could delay, impede or prevent marketing approval, limit uses, force a recall of the product or expose Genzyme to product liability claims. Regulation Outside the U.S. For marketing outside the U.S., Genzyme is subject to foreign regulatory requirements governing human clinical testing and marketing approval for its products. These requirements vary by jurisdiction, differ from those in the U.S. and may necessitate additional pre-clinical or clinical testing whether or not FDA approval has been obtained. Generally, Genzyme's initial focus for obtaining marketing approval outside the U.S. is Europe. EU Directives ("regulations") generally classify products either as medicinal products or devices. For medicinal products, like those produced by Genzyme, marketing approval may be sought using either the centralized procedure of the Committee for Proprietary Medicine or Products (the "CPMP") or the decentralized (mutual recognition) process. The CPMP centralized procedure of the EMEA results in a recommendation in all member states, while the EU multi-state process involves country by country approval. EU regulations for products classified as devices have been implemented for some devices. Devices such as Genzyme's Sepra Products must receive market approval through a centralized procedure, where the device receives a CE Mark 18 19 allowing distribution to all member states of the EU. For those devices where EU regulations have not been implemented, marketing approval must be obtained on a country by country basis. The CE mark certification requires the company to receive International Standards Organization ("ISO") certification for each facility involved in the manufacture or distribution of the device. This certification only comes after the development of an all inclusive quality system which is reviewed for compliance to International Quality Standards by a licensed "Notified Body" working within the EU. After certification is received a product dossier is reviewed which attests to the product's compliance with EU directive 93/42/EEC for medical devices. Only after this point is a CE Mark granted. Ceredase(R) enzyme has been registered for sale in the EU through a CPMP centralized procedure. Genzyme expects Cerezyme(R) enzyme, Thyrogen(R) hormone, RenaGel(R) phosphate binder, Alpha-Gal, prolactin and the gene therapy products also will be regulated through centralized CPMP procedure. Seprafilm(R) and Sepracoat(TM) have been granted the CE Mark. Genzyme will apply for a CE Mark for all of its other surgical products. Autologous products are specifically exempt from the European Device Directive and Pharmaceutical Directive promulgated by the EU. Therefore, each European country is free to impose its own regulations on the marketing of such products. To date, GTR has not encountered any local registration requirements for market introduction of Carticel(TM) AuCC. During September 1997, the Spanish national health system approved Carticel(TM) AuCC for use by public hospitals, representing the first broad approval of the product by a reimbursement authority in Europe. GTR is currently assessing the regulatory requirements for commercialization of Carticel(TM) AuCC in Japan. Other Government Regulation Orphan Drug Act. The Orphan Drug Act provides incentives to manufacturers to develop and market drugs for rare diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of application for orphan drug designation. The first developer to receive FDA marketing approval for an orphan drug is entitled to a seven-year exclusive marketing period in the U.S. for that product. However, a drug that is considered by the FDA to be clinically superior to or different from another approved orphan drug, even though for the same indication, is not barred from sale in the U.S. during the seven-year exclusive marketing period. Genzyme has been accorded orphan drug status for Cerezyme(R) enzyme, Ceredase(R) enzyme and Thyrogen(R) hormone and has received orphan drug designation for a number of other products currently under development, including its gene therapy products MART-1 and gp100, NeuroCell(TM)-PD and NeuroCell(TM)-HD. Legislation has been periodically introduced in recent years, however, to amend the Orphan Drug Act. Such legislation has generally been directed to shortening the period of automatic market exclusivity and granting certain marketing rights to simultaneous developers of a drug. The effect on Genzyme of any amendments ultimately adopted cannot be assessed at this time. It believes that the commercial success of these products, including Cerezyme(R) enzyme and Ceredase(R) enzyme, will depend more significantly on the associated safety and efficacy profile and on the price relative to competitive or alternative treatments and other marketing characteristics of each product than on the exclusivity afforded by the Orphan Drug Act. Additionally, these products may be protected by patents, exclusive raw material supply contracts and other means. Regulation of Diagnostic Services. The Clinical Laboratories Improvement Act ("CLIA") provides for the regulation of clinical laboratories by the U.S. Department of Health and Human Services. Regulations promulgated under CLIA affect the genetics laboratories of Genzyme. Regulation of Gene Therapy Products. In addition to FDA requirements, the National Institutes of Health ("NIH") has established guidelines providing that transfers of recombinant DNA into human subjects at NIH laboratories or with NIH funds must be approved by the NIH Director. NIH has established RAC to review gene therapy protocols. Genzyme expects that all of its gene therapy protocols will be subject to RAC review. In the U.K., Genzyme's gene therapy protocols will be subject to review by the Gene Therapy Advisory Committee. Tissue and Organ Bank Laws. A federal criminal statute that prohibits the transfer of any human organ for valuable consideration for use in human transplantation, but which permits recovery of reasonable costs associated with such activities, has not been applied to Carticel(TM) AuCC or the Epicel(sm)Service. Certain states 19 20 have laws requiring the licensure of tissue and organ banks and laws governing the sale of human organs and the safety and efficacy of drugs, devices and biologics, including skin, all of which could be interpreted to apply to GTR's production and distribution of cultured tissue products. Provisions in certain states' statutes prohibit the receipt of valuable consideration in connection with the sale of human tissue by a tissue bank but permit licensed tissue banks, including companies, to recover their reasonable costs associated with such sales. The application of these or other regulations to GTR could result in significant expense to GTR, limit Genzyme's reimbursement for its services and otherwise materially adversely affect GTR's results of operations. Other Laws and Regulations. Genzyme's operations are or may be also subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices and the purchase, storage, movement, use and disposal of hazardous or potentially hazardous substances used in connection with Genzyme's research work and manufacturing operations, including radioactive compounds and infectious disease agents. Although Genzyme believes that its safety procedures comply with the standards prescribed by federal, state and local regulations, the risk of contamination, injury or other accidental harm cannot be completely eliminated. In the event of such an accident, Genzyme could be held liable for any damages that result and any liabilities could exceed Genzyme's resources. EMPLOYEES OF REGISTRANT As of December 31, 1997, Genzyme (including all consolidated subsidiaries and excluding GTC) had approximately 3,500 employees. None of the Company's employees are covered by collective bargaining agreements. The Company considers its employee relations to be excellent. RESEARCH AND DEVELOPMENT COSTS The information required by Item 101(c)(xi) of Regulation S-K is incorporated by reference from the information set forth in Part II, Item 8 "Consolidated Financial Statements and Supplementary Schedules" and specifically in the Genzyme Corporation and Subsidiaries Consolidated Statements of Operations and in Note L., "Research and Development Agreements" to the Consolidated Financial Statements in the 1997 Genzyme General Annual Report set forth in Exhibit 13.1 to this Annual Report on Form 10-K. SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS The information required by Items 101(c)(1)(i) and (vii) and 101(d) of Regulation S-K is incorporated by reference from the information set forth in the 1997 Genzyme General Annual Report under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" and in Note P., "Financial Information by Geographic Area and Significant Customers and Suppliers" to the Consolidated Financial Statements set forth in Exhibit 13.1 to this Annual Report on Form 10-K. 20 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The following financial statements (and related notes) of Genzyme General and Genzyme Corporation and Subsidiaries are incorporated by reference from the 1997 Genzyme General Annual Report set forth in Exhibit 13.1 to this Annual Report on Form 10-K:
PAGE* ----- GENZYME GENERAL Combined Balance Sheets -- December 31, 1997 and 1996.................................................. 12 Combined Statements of Operations -- For the Years Ended December 31, 1997, 1996 and 1995................ 13-14 Combined Statements of Cash Flows -- For the Years Ended December 31, 1997, 1996 and 1995................ 15-16 Notes to Combined Financial Statements................. 17-29 Report of Independent Accountants...................... 30 GENZYME CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets -- December 31, 1997 and 1996.................................................. 45-46 Consolidated Statements of Operations -- For the Years Ended December 31, 1997, 1996 and 1995................ 47-48 Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1997, 1996 and 1995................ 49-50 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.......... 51-52 Notes to Consolidated Financial Statements............. 53-82 Report of Independent Accountants...................... 83
- --------------- * References are to page numbers in the 1997 Genzyme General Annual Report as it appears in Exhibit 13.1 to this Annual Report on Form 10-K. The following financial statements (and related notes) of GTR are incorporated by reference from the 1997 GTR Annual Report set forth in Exhibit 13.2 to this Annual Report on Form 10-K:
PAGE* ----- Combined Balance Sheets -- December 31, 1997 and 1996....... 10 Combined Statements of Operations -- For the Years Ended December 31, 1997, 1996 and 1995.......................... 11 Combined Statements of Cash Flows -- For the Years Ended December 31, 1997, 1996 and 1995.......................... 12 Notes to Combined Financial Statements...................... 13 - 20 Report of Independent Accountants........................... 21
- --------------- * References are to page numbers in the 1997 GTR Annual Report as it appears in Exhibit 13.2 to this Annual Report on Form 10-K. 21 22 The following financial statements (and related notes) of GMO are incorporated by reference from the 1997 GMO Annual Report set forth in Exhibit 13.3 to this Annual Report on Form 10-K:
PAGE* ----- Combined Balance Sheets -- December 31, 1997 and 1996....... 8 Combined Statements of Operations -- For the Years Ended December 31, 1997, 1996 and 1995.......................... 9 Combined Statements of Cash Flows -- For the Years Ended December 31, 1997, 1996 and 1995.......................... 10 Notes to Combined Financial Statements...................... 11 - 21 Report of Independent Accountants........................... 22
- --------- * References are to page numbers in the 1997 GMO Annual Report as it appears in Exhibit 13.3 to this Annual Report on Form 10-K. 2. FINANCIAL STATEMENT SCHEDULES The schedules listed below for Genzyme General, Genzyme Corporation and Subsidiaries, and GTR are filed as part of this Annual Report on Form 10-K:
PAGE* ----- GENZYME GENERAL Schedule II -- Valuation and Qualifying Accounts....... 31 GENZYME CORPORATION AND SUBSIDIARIES Schedule II -- Valuation and Qualifying Accounts....... 84 GTR Schedule II -- Valuation and Qualifying Accounts....... 22
- --------- * References are to page numbers in the 1997 Genzyme General Annual Report and 1997 GTR Annual Report as they appear in Exhibits 13.1 and 13.2, respectively, to this Annual Report on Form 10-K. All other schedules are omitted as the information required is inapplicable or the information is presented in (i) the Genzyme General Combined Financial Statements or notes thereto or the Consolidated Financial Statements or notes thereto in the 1997 Genzyme General Annual Report, (ii) the GTR Combined Financial Statements or notes thereto in the 1997 GTR Annual Report or (iii) the GMO Combined Financial Statements or notes thereto in the 1997 GMO Annual Report. 22 23 3. EXHIBITS The exhibits are listed below under Part IV, Item 14(c) of this Annual Report. (B) REPORTS ON FORM 8-K None. (C) EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ----------- *3.1 -- Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997. *3.2 -- By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated December 31, 1991. *4.1 -- Series Designation for Genzyme Molecular Oncology Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997. *4.2 -- Series Designation for Genzyme Series A, Series B and Series C Junior Participating Preferred Stock, $.01 par value. Filed as Exhibit 3 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997. *4.3 -- Amended and Restated Rights Agreement dated as of June 12, 1997 between Genzyme and American Stock Transfer & Trust Company. Filed as Exhibit 5 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997. *4.4 -- Specimen Callable Warrant to purchase Genzyme Common Stock issued to shareholders of Neozyme II. Filed as Exhibit 28.6 to Genzyme's Form 10-Q for the quarter ended March 31, 1992. *4.5 -- Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4 to the Form 8-K of IG Laboratories, Inc. dated October 11, 1990 (File No. 0-18439). *4.6 -- Genzyme Common Stock Purchase Warrant No. A-1 dated July 31, 1997 issued to Canadian Medical Discoveries Fund, Inc. ("CMDF"). Filed as Exhibit 10.2 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.7 -- Genzyme Common Stock Purchase Warrant No. A-2 dated July 31, 1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.8 -- Genzyme Common Stock Purchase Warrant No. A-3 dated July 31, 1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.9 -- Registration Rights Agreement dated as of July 31, 1997 by and between Genzyme and CMDF. Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.10 -- Genzyme Molecular Oncology Division Convertible Debenture dated August 29, 1997, including a schedule with respect thereto filed pursuant to Instruction 2 to Item 601 of Regulation S-K. Filed as Exhibit 10.6 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.11 -- Form of Genzyme General Division Convertible Debenture. Filed as Exhibit 10.7 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.12 -- Registration Rights Agreement dated as of August 29, 1997 by and among Genzyme and the entities listed on the signature pages thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *4.13 -- Warrant Agreement between Genzyme and Comdisco, Inc. Filed as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc. ("PharmaGenics") (File No. 0-20138). 4.14 -- Form of Genzyme Corporation Convertible Note dated February 28, 1997 issued to Credit Suisse First Boston (Hong Kong) Ltd. ("CSFB"). Filed herewith. 4.15 -- Registration Rights Agreement dated February 27, 1997 by and between Genzyme and CSFB. Filed herewith.
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EXHIBIT NO. DESCRIPTION - ------- ----------- *10.1 -- Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration Statement on Form S-1 (File No. 33-4904). *10.2 -- Lease dated as of September 15, 1989 for 95-111 Binney Street, Cambridge, Massachusetts between Genzyme and the Trustees of the Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1992. First amendment of lease dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1993. *10.3 -- Lease dated December 20, 1988 for Building 1400, One Kendall Square, Cambridge, Massachusetts between Genzyme and the Trustees of Old Binney Realty Trust, as amended by letters dated December 20, 1988, January 19, 1989 and January 31, 1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K for 1988. Addendum dated September 20, 1991 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 19.1 to Genzyme's Form 10-Q for the quarter ended September 30, 1991. Addenda dated August 2, 1990 and April 6, 1993 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to Genzyme's Form 10-K for 1993. *10.4 -- Lease dated December 20, 1988 for Building 700, One Kendall Square, Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall Realty Trust, as amended by letters dated December 20, 1988 and January 31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for 1988. *10.5 -- Lease dated September 30, 1985 for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990. Amendment No. 1, dated October 11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to Genzyme's Form 10-K for 1993. *10.6 -- Lease dated April 30, 1990 for 64 Sidney Street, Cambridge, Massachusetts between BioSurface Technology, Inc. ("BioSurface") and Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to BioSurface's Registration Statement on Form S-1 (File No. 33-55874). *10.7 -- Sublease Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Prime Computer, Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993. *10.8 -- Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Mark L. Fins, David J. Winstanley and Bruce A. Gurall, tenants in common. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1993. *10.9 -- Lease dated June 1, 1992 for land at Allston Landing, Allston, Massachusetts between Allston Landing Limited Partnership and the Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's Form 10-K for 1993. *10.10 -- Underlease for Block 13 building at Kings Hill Business Park West Malling Kent among Rouse and Associates Block 13 Limited, Genzyme (UK) Limited and Genzyme. Filed as Exhibit 10.11 to Genzyme's Registration Statement on Form 8-B dated December 31, 1991, filed on March 2, 1992. *10.11 -- Agreement of Limited Partnership dated as of September 13, 1989 between Genzyme Development Corporation II ("GDC II"), as General Partner, and each of the Limited Partners named therein. Filed as Exhibit 10(aa) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.12 -- Cross License Agreement dated as of September 13, 1989 between Genzyme and Genzyme Development Partners, L.P. ("GDP"). Filed as Exhibit 10(bb) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343).
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EXHIBIT NO. DESCRIPTION - ------- ----------- *10.13 -- Development Agreement dated as of September 13, 1989 between Genzyme and GDP. Filed as Exhibit 10(cc) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.14 -- Amendment No. 1 dated January 4, 1994 to Development Agreement dated as of September 13, 1989 between Genzyme and GDP. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993. *10.15 -- Partnership Purchase Option Agreement dated as of September 13, 1989 between Genzyme, GDC II, GDP, each Class A Limited Partner and the Class B Limited Partner. Filed as Exhibit 10(dd) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.16 -- Partnership Purchase Agreement, undated and unexecuted, between Genzyme, GDC II, GDP, each Class A Limited Partner and the Class B Limited Partner, as the case may be. Filed as Exhibit 10(ee) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343). *10.17 -- Amended and Restated Joint Venture Agreement between Genzyme and GDP. Filed as Exhibit 10.1 to GDP's on Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554). *10.18 -- Tax Indemnification Agreement. Filed as Exhibit 10.2 to GDP's Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554). *10.19 -- Marketing and Distribution Agreement. Filed as Exhibit 10.3 to GDP's Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554). *10.20 -- Technology License and Supply Agreement dated as of September 8, 1989 between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form 10-K for 1990.** *10.21 -- 1988 Director Stock Option Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33265). *10.22 -- 1990 Equity Incentive Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33249). *10.23 -- 1990 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33291). *10.24 -- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33251). *10.25 -- Executive Employment Agreement dated as of January 1, 1990 between Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's Form 10-K for 1990. *10.26 -- Form of Severance Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.33 to Genzyme's Form 10-K for 1990. Current schedule identifying the executives filed as Exhibit 10.32 to Genzyme's Form 10-K for 1993. *10.27 -- Form of Indemnification Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.34 to Genzyme's Form 10-K for 1990. Current schedule identifying the executives filed as Exhibit 10.33 to Genzyme's Form 10-K for 1993. *10.28 -- Consulting Agreement dated March 1, 1993 between Genzyme and Henry E. Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for 1992. Consulting Agreement dated February 3, 1994 between Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to Genzyme's Form 10-K for 1993. *10.29 -- Executive Employment Agreement dated as of January 1, 1996 between Genzyme and Peter Wirth. Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter ended March 31, 1996.
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EXHIBIT NO. DESCRIPTION - ------- ----------- *10.30 -- Technology Transfer Agreement between Genzyme and Genzyme Transgenics Corporation ("GTC") dated as of May 1, 1993. Filed as Exhibit 2.1 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.31 -- Research and Development Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.32 -- Services Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.33 -- Series A Convertible Preferred Stock Purchase Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.5 to the Registration Statement on Form S-1 of GTC (File No. 33-62872). *10.34 -- Convertible Debt and Development Funding Agreement dated as of March 29, 1996 between Genzyme and GTC. Filed as Exhibit 10.39 to Genzyme's Form 10-K for 1995. *10.35 -- Amended and Restated Convertible Debt Agreement dated as of September 4, 1997 by and between Genzyme and GTC. Filed as Exhibit 10.4 to GTC's Form 10-Q for the quarter ended September 30, 1997 (File No. 0-21794). *10.36 -- Amended and Restated Operating Agreement of ATIII LLC dated as of January 1, 1998 by and among Genzyme and GTC. Filed as Exhibit 10.52.1 to GTC's Form 10-K for 1997 (File No. 0-21794).** *10.37 -- Purchase Agreement dated as of January 1, 1998 by and between Genzyme and GTC. Filed as Exhibit 10.52.2 to GTC's Form 10-K for 1997 (File No. 0-21794).** *10.38 -- Collaboration Agreement dated as of January 1, 1997 by and among Genzyme, GTC and ATIII LLC. Filed as Exhibit 10.52.3 to GTC's Form 10-K for 1997 (File No. 0-21794) and incorporated herein by reference.** *10.39 -- Common Stock Purchase Agreement between Argus Pharmaceuticals, Inc. and Genzyme Corporation dated as of September 10, 1993. Filed as Exhibit A to Schedule 13D filed by Genzyme on September 20, 1993.** *10.40 -- Agreement and Plan of Reorganization dated as of July 25, 1994, as amended, among Genzyme, Phoenix Acquisition Corporation and BioSurface. Filed as Annex X to Genzyme's Registration Statement on Form S-4 (File No. 33-83346). *10.41 -- License and Development Agreement between Celtrix Pharmaceuticals, Inc. ("Celtrix") and Genzyme dated as of June 24, 1994. Filed as Exhibit 10.42 to Celtrix's Form 10-K for 1994.** *10.42 -- Common Stock Purchase Agreement dated as of June 24, 1994 between Celtrix and Genzyme. Filed as Exhibit A to Schedule 13D filed by Genzyme on July 5, 1994. *10.43 -- Credit Agreement dated November 14, 1996 among Genzyme and those of its subsidiaries party thereto, Fleet National Bank, as Administrative Agent, and The First National Bank of Boston, as Documentation Agent. Filed as Exhibit 10.39 to Genzyme's Form 10-K for 1996. *10.44 -- Collaboration Agreement dated as of June 17, 1997 by and among Genzyme, GelTex Pharmaceuticals, Inc. ("GelTex") and RenaGel LLC. Filed as Exhibit 10.18 to GelTex's Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872).** *10.45 -- Purchase Agreement dated as of June 17, 1997 by and between Genzyme and GelTex. Filed as Exhibit 10.19 to GelTex's Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872).**
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EXHIBIT NO. DESCRIPTION - ------- ----------- *10.46 -- Operating Agreement of RenaGel LLC dated as of June 17, 1997 by and among Genzyme, GelTex and RenaGel, Inc. Filed as Exhibit 10.20 to GelTex's Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872). *10.47 -- Purchase Agreement dated as of August 29, 1997 by and among Genzyme Corporation and the entities listed on the signature pages thereto. Filed as Exhibit 10.5 to Genzyme's Form 10-Q for the quarter ended September 30, 1997. *10.48 -- Composite copy of Agreement and Plan of Merger dated as of January 31, 1997, as amended, between Genzyme and PharmaGenics. Filed as Annex I to Genzyme's Registration Statement on Form S-4 (File No. 333-26351). 10.49 -- First Amendment to Credit Agreement and Consent to Subordination Terms dated as of March 3, 1997 by and among Genzyme and those of its subsidiaries party thereto, The First National Bank of Boston, as Administrative Agent, The First National Bank of Boston, as Administrative Agent, and the lenders identified in the signature pages thereto. Filed herewith. 10.50 -- Note Purchase Agreement by and between Genzyme and CSFB dated as of February 27, 1997. Filed herewith. 13.1 -- Portions of the 1997 Genzyme General Annual Report incorporated by reference into Parts I and II of this Form 10-K. Filed herewith. 13.2 -- Portions of the 1997 Genzyme Tissue Repair Annual Report incorporated by reference into Parts I and II of this Form 10-K. Filed herewith. 13.3 -- Portions of the 1997 Genzyme Molecular Oncology Annual Report incorporated by reference into Parts I and II of this Form 10-K. Filed herewith. 21 -- Subsidiaries of the Registrant. Filed herewith. 23.1 -- Consent of Coopers & Lybrand L.L.P. Filed herewith. 23.2 -- Consent of Coopers & Lybrand L.L.P. relating to the Annual Report of Genzyme Corporation Retirement Savings Plan on Form 11-K. To be filed by amendment. 27 -- Financial Data Schedule for Genzyme Corporation. Filed herewith. *99.1 -- Management and Accounting Policies Governing the Relationship of Genzyme Divisions.
- --------------- * Indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K, 8-A or 8-B of Genzyme Corporation were filed under Commission File No. 0-14680. ** Confidential treatment has been granted or requested for the deleted portions of Exhibits 10.20, 10.36, 10.37, 10.38, 10.39, 10.41, 10.44 and 10.45. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Exhibits 10.21 through 10.29 above are management contracts or compensatory plans or arrangements in which the executive officers or directors of Genzyme participate. 27 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENZYME CORPORATION Dated: April 27, 1998 By: /s/ DAVID J. MCLACHLAN ---------------------------------- DAVID J. MCLACHLAN Executive Vice President, Finance 28 29 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ *3.1 -- Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997................................ *3.2 -- By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated December 31, 1991................................. *4.1 -- Series Designation for Genzyme Molecular Oncology Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997........................................................ *4.2 -- Series Designation for Genzyme Series A, Series B and Series C Junior Participating Preferred Stock, $.01 par value. Filed as Exhibit 3 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997................................ *4.3 -- Amended and Restated Rights Agreement dated as of June 12, 1997 between Genzyme and American Stock Transfer & Trust Company. Filed as Exhibit 5 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997................... *4.4 -- Specimen Callable Warrant to purchase Genzyme Common Stock issued to shareholders of Neozyme II. Filed as Exhibit 28.6 to Genzyme's Form 10-Q for the quarter ended March 31, 1992........................................................ *4.5 -- Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4 to the Form 8-K of IG Laboratories, Inc. dated October 11, 1990 (File No. 0-18439)..................................... *4.6 -- Genzyme Common Stock Purchase Warrant No. A-1 dated July 31, 1997 issued to Canadian Medical Discoveries Fund, Inc. ("CMDF"). Filed as Exhibit 10.2 to Genzyme's Form 10-Q for the quarter ended September 30, 1997........................ *4.7 -- Genzyme Common Stock Purchase Warrant No. A-2 dated July 31, 1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form 10-Q for the quarter ended September 30, 1997............... *4.8 -- Genzyme Common Stock Purchase Warrant No. A-3 dated July 31, 1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form 10-Q for the quarter ended September 30, 1997............... *4.9 -- Registration Rights Agreement dated as of July 31, 1997 by and between Genzyme and CMDF. Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter ended September 30, 1997........................................................ *4.10 -- Genzyme Molecular Oncology Division Convertible Debenture dated August 29, 1997, including a schedule with respect thereto filed pursuant to Instruction 2 to Item 601 of Regulation S-K. Filed as Exhibit 10.6 to Genzyme's Form 10-Q for the quarter ended September 30, 1997.................... *4.11 -- Form of Genzyme General Division Convertible Debenture. Filed as Exhibit 10.7 to Genzyme's Form 10-Q for the quarter ended September 30, 1997.................................... *4.12 -- Registration Rights Agreement dated as of August 29, 1997 by and among Genzyme and the entities listed on the signature pages thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q for the quarter ended September 30, 1997....................
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SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ *4.13 -- Warrant Agreement between Genzyme and Comdisco, Inc. Filed as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc. ("PharmaGenics") (File No. 0-20138)......................... 4.14 -- Form of Genzyme Corporation Convertible Note dated February 28, 1997 issued to Credit Suisse First Boston (Hong Kong) Ltd. ("CSFB"). Filed herewith................... 4.15 -- Registration Rights Agreement dated February 27, 1997 by and between Genzyme and CSFB. Filed herewith............. *10.1 -- Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration Statement on Form S-1 (File No. 33-4904)................................................ *10.2 -- Lease dated as of September 15, 1989 for 95-111 Binney Street, Cambridge, Massachusetts between Genzyme and the Trustees of the Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1992. First amendment of lease dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's Form 10-K for 1993.......................................... *10.3 -- Lease dated December 20, 1988 for Building 1400, One Kendall Square, Cambridge, Massachusetts between Genzyme and the Trustees of Old Binney Realty Trust, as amended by letters dated December 20, 1988, January 19, 1989 and January 31, 1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K for 1988. Addendum dated September 20, 1991 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 19.1 to Genzyme's Form 10-Q for the quarter ended September 30, 1991. Addenda dated August 2, 1990 and April 6, 1993 to Lease for Building 1400, One Kendall Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to Genzyme's Form 10-K for 1993................................ *10.4 -- Lease dated December 20, 1988 for Building 700, One Kendall Square, Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall Realty Trust, as amended by letters dated December 20, 1988 and January 31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for 1988............... *10.5 -- Lease dated September 30, 1985 for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990. Amendment No. 1, dated October 11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for 51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to Genzyme's Form 10-K for 1993................ *10.6 -- Lease dated April 30, 1990 for 64 Sidney Street, Cambridge, Massachusetts between BioSurface Technology, Inc. ("BioSurface") and Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to BioSurface's Registration Statement on Form S-1 (File No. 33-55874)................................ *10.7 -- Sublease Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Prime Computer, Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993................................ *10.8 -- Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue, Framingham, Massachusetts between Genzyme and Mark L. Fins, David J. Winstanley and Bruce A. Gurall, tenants in common. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1993............................................... *10.9 -- Lease dated June 1, 1992 for land at Allston Landing, Allston, Massachusetts between Allston Landing Limited Partnership and the Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's Form 10-K for 1993............. *10.10 -- Underlease for Block 13 building at Kings Hill Business Park West Malling Kent among Rouse and Associates Block 13 Limited, Genzyme (UK) Limited and Genzyme. Filed as Exhibit 10.11 to Genzyme's Registration Statement on Form 8-B dated December 31, 1991, filed on March 2, 1992...................
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SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ *10.11 -- Agreement of Limited Partnership dated as of September 13, 1989 between Genzyme Development Corporation II ("GDC II"), as General Partner, and each of the Limited Partners named therein. Filed as Exhibit 10(aa) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343)................... *10.12 -- Cross License Agreement dated as of September 13, 1989 between Genzyme and Genzyme Development Partners, L.P. ("GDP"). Filed as Exhibit 10(bb) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343)................... *10.13 -- Development Agreement dated as of September 13, 1989 between Genzyme and GDP. Filed as Exhibit 10(cc) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343)...... *10.14 -- Amendment No. 1 dated January 4, 1994 to Development Agreement dated as of September 13, 1989 between Genzyme and GDP. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993........................................................ *10.15 -- Partnership Purchase Option Agreement dated as of September 13, 1989 between Genzyme, GDC II, GDP, each Class A Limited Partner and the Class B Limited Partner. Filed as Exhibit 10(dd) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343)............................................... *10.16 -- Partnership Purchase Agreement, undated and unexecuted, between Genzyme Corporation, GDC II, GDP, each Class A Limited Partner and the Class B Limited Partner, as the case may be. Filed as Exhibit 10(ee) to Genzyme's Registration Statement on Form S-4 (File No. 33-32343)................... *10.17 -- Amended and Restated Joint Venture Agreement between Genzyme and GDP. Filed as Exhibit 10.1 to GDP's on Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554)............. *10.18 -- Tax Indemnification Agreement between Genzyme and GDP. Filed as Exhibit 10.2 to GDP's Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554)........................... *10.19 -- Marketing and Distribution Agreement between Genzyme and Genzyme Ventures II. Filed as Exhibit 10.3 to GDP's Form 10-Q for the quarter ended March 31, 1997 (File No. 0-18554).................................................... *10.20 -- Technology License and Supply Agreement dated as of September 8, 1989 between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form 10-K for 1990.**............ *10.21 -- 1988 Director Stock Option Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33265).................................................. *10.22 -- 1990 Equity Incentive Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33249).................................................. *10.23 -- 1990 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33291).................................................. *10.24 -- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit 99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33251).................................................. *10.25 -- Executive Employment Agreement dated as of January 1, 1990 between Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's Form 10-K for 1990.............................
32
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ *10.26 -- Form of Severance Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.33 to Genzyme's Form 10-K for 1990. Current schedule identifying the executives filed as Exhibit 10.32 to Genzyme's Form 10-K for 1993................................ *10.27 -- Form of Indemnification Agreement between Genzyme and certain senior executives, together with schedule identifying the provisions applicable to each executive. Filed as Exhibit 10.34 to Genzyme's Form 10-K for 1990. Current schedule identifying the executives filed as Exhibit 10.33 to Genzyme's Form 10-K for 1993....................... *10.28 -- Consulting Agreement dated March 1, 1993 between Genzyme and Henry E. Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for 1992. Consulting Agreement dated February 3, 1994 between Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to Genzyme's Form 10-K for 1993................................ *10.29 -- Executive Employment Agreement dated as of January 1, 1996 between Genzyme and Peter Wirth. Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter ended March 31, 1996.... *10.30 -- Technology Transfer Agreement between Genzyme and Genzyme Transgenics Corporation ("GTC") dated as of May 1, 1993. Filed as Exhibit 2.1 to the Registration Statement on Form S-1 of GTC (File No. 33-62872).............................. *10.31 -- Research and Development Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement on Form S-1 of GTC (File No. 33-62872)................................................... *10.32 -- Services Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of GTC (File No. 33-62872)...................... *10.33 -- Series A Convertible Preferred Stock Purchase Agreement between Genzyme and GTC dated as of May 1, 1993. Filed as Exhibit 10.5 to the Registration Statement on Form S-1 of GTC (File No. 33-62872)..................................... *10.34 -- Convertible Debt and Development Funding Agreement dated as of March 29, 1996 between Genzyme and GTC. Filed as Exhibit 10.39 to Genzyme's Form 10-K for 1995....................... *10.35 -- Amended and Restated Convertible Debt Agreement dated as of September 4, 1997 by and between Genzyme and GTC. Filed as Exhibit 10.4 to GTC's Form 10-Q for the quarter ended September 30, 1997 (File No. 0-21794)....................... *10.36 -- Amended and Restated Operating Agreement of ATIII LLC dated as of January 1, 1998 by and among Genzyme and GTC. Filed as Exhibit 10.52.1 to GTC's Form 10-K for 1997 (File No. 0-21794)**.................................................. *10.37 -- Purchase Agreement dated as of January 1, 1998 by and between Genzyme and GTC. Filed as Exhibit 10.52.2 to GTC's Form 10-K for 1997 (File No. 0-21794)**..................... *10.38 -- Collaboration Agreement dated as of January 1, 1997 by and among Genzyme, GTC and ATIII LLC. Filed as Exhibit 10.52.3 to GTC's Form 10-K for 1997 (File No. 0-21794) and incorporated herein by reference**.......................... *10.39 -- Common Stock Purchase Agreement between Argus Pharmaceuticals, Inc. and Genzyme Corporation dated as of September 10, 1993. Filed as Exhibit A to Schedule 13D filed by Genzyme on September 20, 1993**..........................
33
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ *10.40 -- Agreement and Plan of Reorganization dated as of July 25, 1994, as amended, among Genzyme, Phoenix Acquisition Corporation and BioSurface. Filed as Annex X to Genzyme's Registration Statement on Form S-4 (File No. 33-83346)...... *10.41 -- License and Development Agreement between Celtrix Pharmaceuticals, Inc. ("Celtrix") and Genzyme dated as of June 24, 1994. Filed as Exhibit 10.42 to Celtrix's Form 10-K for 1994**.................................................. *10.42 -- Common Stock Purchase Agreement dated as of June 24, 1994 between Celtrix and Genzyme. Filed as Exhibit A to Schedule 13D filed by Genzyme on July 5, 1994........................ *10.43 -- Credit Agreement dated November 14, 1996 among Genzyme and those of its subsidiaries party thereto, Fleet National Bank, as Administrative Agent, and The First National Bank of Boston, as Documentation Agent. Filed as Exhibit 10.39 to Genzyme's Form 10-K for 1996................................ *10.44 -- Collaboration Agreement dated as of June 17, 1997 by and among Genzyme, GelTex Pharmaceuticals, Inc. ("GelTex") and RenaGel LLC. Filed as Exhibit 10.18 to GelTex's Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872)**.... *10.45 -- Purchase Agreement dated as of June 17, 1997 by and between Genzyme and GelTex. Filed as Exhibit 10.19 to GelTex's Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872)**.................................................. *10.46 -- Operating Agreement of RenaGel LLC dated as of June 17, 1997 by and among Genzyme, GelTex and RenaGel, Inc. Filed as Exhibit 10.20 to GelTex's Form 10-Q for the quarter ended June 30, 1997 (File No. 0-26872)............................ *10.47 -- Purchase Agreement dated as of August 29, 1997 by and among Genzyme Corporation and the entities listed on the signature pages thereto. Filed as Exhibit 10.5 to Genzyme's Form 10-Q for the quarter ended September 30, 1997.................... *10.48 -- Composite copy of Agreement and Plan of Merger dated as of January 31, 1997, as amended, between Genzyme and PharmaGenics. Filed as Annex I to Genzyme's Registration Statement on Form S-4 (File No. 333-26351).................. 10.49 -- First Amendment to Credit Agreement and Consent to Subordination Terms dated as of March 3, 1997 by and among Genzyme and those of its subsidiaries party thereto, The First National Bank of Boston, as Administrative Agent, The First National Bank of Boston, as Administrative Agent, and the lenders identified on the signature pages thereto. Filed herewith.............................................. 10.50 -- Note Purchase Agreement by and between Genzyme and CSFB dated as of February 27, 1997. Filed herewith............... 13.1 -- Portions of the 1997 Genzyme General Annual Report incorporated by reference into Parts I and II of this Form 10-K. Filed herewith........................................ 13.2 -- Portions of the 1997 Genzyme Tissue Repair Annual Report incorporated by reference into Parts I and II of this Form 10-K. Filed herewith........................................ 13.3 -- Portions of the 1997 Genzyme Molecular Oncology Annual Report incorporated by reference into Parts I and II of this Form 10-K. Filed herewith................................... 21 -- Subsidiaries of the Registrant. Filed herewith.............. 23.1 -- Consent of Coopers & Lybrand L.L.P. Filed herewith.......... 23.2 -- Consent of Coopers & Lybrand L.L.P. relating to the Annual Report of Genzyme Corporation Retirement Savings Plan on Form 11-K. To be filed by amendment.........................
34
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGES - ------- ----------- ------------ 27 -- Financial Data Schedule for Genzyme Corporation. Filed herewith.............................................. *99.1 -- Management and Accounting Policies Governing the Relationship of Genzyme Divisions...........................
- --------------- * Indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K, 8-A or 8-B of Genzyme Corporation were filed under Commission File No. 0-14680. ** Confidential treatment has been granted or requested for the deleted portions of Exhibits 10.20, 10.35, 10.36, 10.37, 10.38, 10.40, 10.43 and 10.44. EX-4.14 2 FORM OG GENZYME CORPORATION CONVERTIBLE NOTE 1 EXHIBIT 4.14 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE, TRANSFER OR DISPOSITION. THIS NOTE IS ISSUED SUBJECT TO THE TERMS OF (i) THE NOTE PURCHASE AGREEMENT, DATED FEBRUARY 27, 1997, BY AND BETWEEN GENZYME CORPORATION AND THE HOLDER OF THIS NOTE ("NOTE PURCHASE AGREEMENT") AND (ii) THE REGISTRATION RIGHTS AGREEMENT, DATED FEBRUARY 27, 1997, BY AND BETWEEN GENZYME CORPORATION AND THE HOLDER OF THIS NOTE ("REGISTRATION RIGHTS AGREEMENT"). GENZYME CORPORATION CONVERTIBLE NOTE New York, New York $13,000,000 February 28, 1997 FOR VALUE RECEIVED, Genzyme Corporation, a Massachusetts corporation (the "COMPANY"), hereby promises to pay to the order of Credit Suisse First Boston (Hong Kong) Ltd. or its assignees (the "HOLDER") the sum of THIRTEEN MILLION DOLLARS ($13,000,000) in same day funds, on or before February 27, 2000 (the "MATURITY DATE"), and to pay interest thereon as provided herein. The following terms shall apply to this Note: 1. INTEREST. (a) INTEREST RATE; STOCK PAYMENT OPTION. This Note shall bear interest on the unpaid principal amount hereof at an annual rate of five percent (5%) from the original date of the issuance hereof (the "ISSUE DATE"), computed on the basis of a 360-day year of twelve 30-day months for the actual number of days elapsed. Interest accrued hereunder shall be due and payable on each Conversion Date (as defined herein), on a Redemption Date (as defined herein) and on the Maturity Date, but, in the case of interest which is due on a Conversion Date and payable in cash, such interest may be paid on the following business day in the event that a Conversion Notice (as defined herein) is delivered to the Company after 2 p.m., eastern time, on the Conversion Date. Interest due on a Conversion Date may be paid either in cash or, at the option of the Company (the "STOCK PAYMENT OPTION"), upon satisfaction of the conditions set forth in paragraph 1(b) below, in shares of the Company's Tissue Repair Division Common Stock, $.01 par value, or any shares of capital stock into which such stock may be changed, reclassified or redeemed (the "GTR STOCK"). The shares of GTR Stock to be issued and delivered by the Company pursuant to the Stock Payment Option shall be fully paid and non-assessable, free and clear of any liens, claims, preemptive rights or encumbrances imposed by or through the Company, in an amount calculated in accordance with Section 3 below (the "INTEREST PAYMENT SHARES") and shall be issued and delivered to the Holder on the third (3rd) business day 2 following the Conversion Date. Any amount of interest on this Note which is not paid within three business days of the date when the same becomes due and payable hereunder (the "PAYABLE DATE") shall bear interest at an annual rate equal to the lower of (x) the "prime" rate (as published in the Wall Street Journal) on the Payable Date PLUS three percent (3%) and (y) the highest rate permitted by applicable law, for the number of days elapsed from such third business day until such amount is paid in full ("DEFAULT INTEREST"). The Company may not make payments of Default Interest in shares of GTR Stock. (b) CONDITIONS TO STOCK PAYMENT OPTION. If the Company wishes to exercise the Stock Payment Option, it may do so only if each of the following conditions has been satisfied as of the relevant Conversion Date: (i) the number of shares of GTR Stock authorized, unissued and unreserved for all other purposes, or held in the Company's treasury, is sufficient to pay such interest in shares of GTR Stock; (ii) the Interest Payment Shares are authorized for quotation on the Nasdaq National Market or for listing or quotation on any other national securities exchange or market on which the GTR Stock may be listed; (iii) the Registration Statement (as defined in the Registration Rights Agreement) shall be effective and available for the sale of the Interest Payment Shares by the Holder; (iv) a Mandatory Redemption Event (as defined herein) shall not have occurred or be continuing; (v) the Company shall have delivered to the Holder a certificate, signed by an executive officer of the Company, setting forth: - the amount of the interest payment to which the Holder is entitled and, if not the same, the amount of such payment to be made in Interest Payment Shares; - the number of Interest Payment Shares to be delivered in payment of such interest, and the calculation therefor; and - a statement to the effect that all of the conditions set forth in paragraphs 1(b)(i) - (iv) have been satisfied; and (vi) the Holder shall have consented in writing to the Company's use of the Stock Payment Option on such Conversion Date. (c) DELIVERY OF INTEREST PAYMENT SHARES. If the Company elects to exercise the Stock Payment Option, the Company shall deliver to such Holder, on or before the third business day following the applicable Conversion Date (the "INTEREST PAYMENT SHARE DELIVERY DATE"), one or more certificates representing the aggregate number of whole Interest Payment Shares that is determined by dividing (x) the amount of interest which would otherwise be payable in cash to 2 3 such Holder on the applicable Conversion Date by (y) the Conversion Price (as defined herein) then in effect. No fractional Interest Payment Shares shall be issued; the Company shall, in lieu thereof, either issue a number of Interest Payment Shares which reflects a rounding up to the next whole number of shares or pay such amount in cash. (d) FAILURE TO DELIVER INTEREST PAYMENT SHARES. If the Company fails to issue and deliver the appropriate number of Interest Payment Shares to such Holder on or before the tenth (10th) business day following the Interest Payment Share Delivery Date, the Company shall not be entitled to utilize the Stock Payment Option in respect of such interest payment, but instead must immediately pay such interest payment in cash, together with Default Interest on such unpaid amount calculated from the applicable Conversion Date until the date on which such amount is paid. (e) NOTICE OF EXERCISE. Not later than five (5) business days immediately prior to the first day of each calendar month during which any principal of this Note remains unpaid and outstanding, the Company shall notify the Holder in writing whether the Company intends, assuming satisfaction of the conditions set forth in subparagraph (b) above, to pay interest in Interest Payment Shares in lieu of cash on any Conversion Date occurring during that month or during such longer period as the Company may specify. 2. PRIORITY; SUBORDINATION. (a) NO PAYMENT IF DEFAULT ON SENIOR INDEBTEDNESS. No payment of principal of, premium, if any, or interest on this Note or on account of any purchase or redemption or other acquisition of the Note, whether at maturity or otherwise, shall be made upon, or accepted with respect to, this Note, and the Holder shall not initiate any action to accelerate the maturity of the Note or exercise any remedy to seek collection if at the time of such payment the Holder has received written notice from the Company or a holder of Senior Debt (as defined below) that there exists or, after giving effect to such payment, there would exist any default in respect of any Senior Debt or under any agreement pursuant to which such Senior Debt was issued (a "Default"); PROVIDED, HOWEVER, that the foregoing restriction shall cease to apply with respect to a Default upon the earliest to occur of (i) the commencement by any holder of Senior Debt of the exercise of its remedies against the Company or its property including, without limitation, any action, suit or other legal proceeding against the Company or its property based upon such Default, or (ii) at the expiration of 180 days after the date of such notice if no holder of Senior Debt shall have commenced the exercise of its remedies against the Company or its property including, without limitation, any action, suit or other legal proceeding against the Company or its property based upon such Default. Upon the maturity of any Senior Debt by lapse of time, acceleration or otherwise, all principal or, premium, if any, interest and other amounts due or to become due on all such Senior Debt shall first be paid in full in cash, cash equivalents or in any other manner acceptable to the holders of Senior Debt (hereinafter, "Payment in Full" or "Paid in Full"), or such payment shall have been provided for to the satisfaction of the holders of Senior Debt before any payment on account of principal of, premium, if any, interest or any other amounts shall be made upon this Note. (b) PAYMENT UPON DISSOLUTION, ETC. (i) In the event of (x) any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Company or to its creditors, as such, or to its assets or (y) the dissolution or other 3 4 winding up of the Company whether total or partial, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy proceedings, or (z) any assignment for the benefit of creditors or any marshaling of the material assets or material liabilities of the Company, then, and in any such event, (A) the holders of all Senior Debt shall first be entitled to receive Payment in Full of all principal, premium, if any, interest and other amounts due or to become due on the Senior Debt (including, without limitation, any interest and charges accruing thereon in any such proceeding, notwithstanding any law to the contrary) before any payment on account of principal, premium, if any, interest or any other amounts is made on this Note, and (B) in any such proceedings, any payment that may be payable or deliverable in respect of this Note shall be paid to the holders of the Senior Debt or their representatives, unless and until the principal of, premium, if any, interest and other amounts due or to become due on all such Senior Debt shall have been Paid in Full; PROVIDED, HOWEVER, that in the event that such payment consists solely of shares of stock or securities of the Company as reorganized the payment of which is subordinated, at least to the same extent as the Note, to the payment of all Senior Debt and such payment is authorized by an order or decree made by a court of competent jurisdiction in a reorganization proceeding under any applicable law pursuant to a plan of reorganization and the rights of the holders of Senior Debt are not impaired or otherwise altered adversely by such reorganization or adjustment, no such payment shall be required hereby to be made to the holders of the Senior Debt or their representatives. (ii) In the event that any such payment shall be received by the Holder in violation of the subordination provisions hereof before all Senior Debt is Paid in Full, such payment or distribution shall be received and held in trust for and shall be paid over to the holders of all Senior Debt remaining unpaid, or their representatives, until such Senior Debt shall have been Paid in Full, after giving effect to any concurrent payment or distribution or provision thereof to the holders of such Senior Debt. (c) SUBROGATION. Subject to the prior Payment in Full of all Senior Debt, the Holder shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of assets of the Company applicable to the Senior Debt to the extent that payments otherwise payable to the Holder under the Note have been applied to the payment of the Senior Debt; PROVIDED, HOWEVER, that the subrogation rights of the holder of the Note shall be fully subordinated to the rights and remedies of the holders of Senior Debt. (d) AGREEMENTS OF HOLDER. (i) The Holder agrees that upon the commencement of any bankruptcy, insolvency or other similar case or proceeding relative to the Company, or to its creditors, as such, or to its assets, the Holder shall take such actions as may be necessary or appropriate to effectuate the subordination provision hereof, including, without limitation, that the Holder shall (i) timely file a proof of claim in respect of the Note and the indebtedness and obligations evidenced hereby, provided, however, that if the Holder fails within thirty (30) days prior to the expiration of any claims bar date to file a proof of claim, any holder of Senior Debt shall be entitled to file such a proof of claim in respect thereof in the name of the Holder and the Holder irrevocably appoints the holders of Senior Debt and their representatives as its attorney-in-fact solely for such purpose; (ii) not oppose any motion filed or supported by any holder of Senior Debt for relief from stay or adequate protection in respect of the Senior Debt; and (iii) not file or accept any reorganization plan that impairs or otherwise alters adversely the rights of the holders of Senior Debt. 4 5 (ii) The Company and the Holder, for themselves and their successors and assigns, covenant to execute and deliver to the holders of Senior Debt, such further instruments and to take such further action as the holders of Senior Debt may at any time or times reasonably request in order to carry out the provisions hereof. (iii) No holder of Senior Debt shall be prejudiced in its right to enforce the subordination of this Note by any act or failure to act on the part of the Company. (iv) Without notice to or the consent of the Holder, the holders of Senior Debt may at any time and from time to time, in their discretion, without impairing or releasing the subordination herein made, change the manner, place or terms or payment, or change or extend the time of payment of or renew or alter the Senior Debt, or amend or supplement in any manner any instrument evidencing the Senior Debt, any agreement pursuant to which the Senior Debt was issued or incurred or any instrument securing or relating to the Senior Debt; release any person liable in any manner for the payment or collection of the Senior Debt; exercise or refrain from exercising any rights in respect of the Senior Debt against the Company or any other person; apply any moneys or other property paid by any person or release in any manner to the Senior Debt; or accept or release any security for the Senior Debt. (e) CONTINUING OFFER. This Section shall constitute a continuing offer to all persons who, in reliance on such provisions, become holders of, or continue to hold, Senior Debt, and such provisions of this Section are made for the benefit of such holders and may not be amended, modified, changed or waived without the prior written consent of the holders of Senior Debt. (f) RIGHTS OF HOLDERS UNIMPAIRED. The foregoing provisions as to subordination are solely for the purpose of defining the relative rights of the holders of the Senior Debt on the one hand and the Holder on the other hand. None of such provisions shall impair, as between the Company and the Holder, the obligation of the Company, which is unconditional and absolute, to pay the Holder of this Note the amounts due on this Note in accordance with the terms hereof and of the Note Purchase Agreement, nor shall any such provisions prevent the Holder from exercising all remedies otherwise permitted by law. Moreover, nothing contained herein shall be deemed to limit in any way the right of the Holder to convert, at any time and from time to time, the principal balance of this Note into shares of GTR Stock (as defined below) pursuant to Section 3 hereof or to receive shares of GTR Stock as payment of interest hereon pursuant to Section 2 hereof. (g) DEFINITION OF SENIOR DEBT. For purposes hereof, "Senior Debt" shall mean (a) the principal of, premium, if any, accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company), and any other monetary obligations on (i) indebtedness of the Company for money borrowed, whether outstanding on the date of this Note or thereafter created, incurred or assumed (including but not limited to nonrecourse borrowings secured by receivables), (ii) guaranties by the Company of indebtedness for money borrowed by any other person, or reimbursement obligations under letters of credit, in either case, whether outstanding on the date of this Note or thereafter created, incurred or assumed, and (iii) indebtedness evidenced by notes (other than the Note), debentures, bonds or other instruments of indebtedness for the payment of which the Company is responsible or liable, by guarantees or otherwise, whether outstanding on the date of this Note or thereafter created, incurred or assumed, and (b) modification, renewals, extensions, refinancings, refundings and replacements of any such indebtedness, obligations or guarantees; unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is 5 6 expressly provided that such indebtedness, obligations or guarantees or such modification, renewal, extension, refinancing, refunding or replacement thereof are not superior in right of payment to this Note and the holder of such indebtedness has consented to same; provided, however, that Senior Debt shall not be deemed to include any obligations of the Company to any of its subsidiaries. Without in any way limiting the scope of the foregoing, it is expressly acknowledged and agreed that Senior Debt shall include all indebtedness, obligations and guaranties of the Company and its subsidiaries under that certain Credit Agreement dated November 14, 1996 among the Company, certain of its subsidiaries, Fleet National Bank, as administrative agent, The First National Bank of Boston, as documentation agent, and the lender parties thereto and under all notes, instruments, agreements and documents entered into pursuant thereto or in connection therewith and all modifications, renewals, extensions, refinancings, refundings and replacements thereof. 3. CONVERSION. (a) RIGHT TO CONVERT. Subject to the limitations contained in paragraph 3(i) below, the Holder shall have the right from the date that is ninety (90) days following the Issue Date to convert at any time and from time to time all or any part of the outstanding unpaid principal amount of this Note in minimum amounts of $100,000 (or such smaller amount of principal as may remain unpaid at the time of such Conversion), into fully paid and non-assessable shares of GTR Stock, free and clear of any liens, claims, preemptive rights or encumbrances imposed by or through the Company (the "CONVERSION SHARES"), in accordance with the terms hereof (a "CONVERSION"). (b) RESERVATION OF GTR STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of GTR Stock, free from any preemptive rights, solely for the purpose of effecting Conversions hereunder, such number of its shares of GTR Stock as shall from time to time be sufficient to effect the Conversion of the entire remaining unpaid principal balance of this Note. If at any time the number of authorized but unissued shares of GTR Stock shall not be sufficient to effect a Conversion in its entirety, the Company shall issue to the Holder all of the shares of GTR Stock which are then available to effect such Conversion, and shall use its best efforts to take such corporate action as may be necessary to increase its authorized but unissued shares of GTR Stock to such number of shares as shall be sufficient for such purpose. If the Company shall issue any securities or make any change in its capital structure which would change the number of Conversion Shares deliverable upon the Conversion of the entire remaining unpaid balance of this Note, the Company shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of GTR Stock authorized and reserved, free from any preemptive rights, for such Conversion. (c) CONVERSION NOTICE. In order to convert the principal amount of this Note, or any portion thereof, the Holder shall send by facsimile transmission, at any time prior to 11:59 p.m., eastern time, on the date on which the Holder wishes to effect such Conversion (the "CONVERSION DATE"), a notice of conversion to the Company and to its designated transfer agent for the GTR Stock (the "TRANSFER AGENT") stating the principal amount to be converted, the amount of interest accrued on the then unpaid principal balance of the Note as provided herein up to and including the Conversion Date, the applicable Conversion Price and a calculation of the number of shares of GTR Stock issuable upon such Conversion (a "CONVERSION NOTICE"). The Holder shall not be required to physically surrender this Note to the Company in order to effect a Conversion. The Company shall maintain a record showing, at any given time, the unpaid principal amount of this 6 7 Note and the date of each Conversion or other payment of principal herof. The Holder shall amend Annex I hereto upon any such conversion or payment of principal to reflect the unpaid principal amount hereof. In the case of a dispute as to the calculation of the Conversion Price or the number of Conversion Shares issuable upon a Conversion, the Company shall promptly issue to the Holder the number of Conversion Shares that are not disputed and shall submit the disputed calculations to its independent accountants within one (1) business day of receipt of the Holder's Conversion Notice. The Company shall cause such accountant to calculate the Conversion Price as provided herein and to notify the Company and the Holder of the results in writing no later than two (2) business days following the day on which it received the disputed calculations. Such accountant's calculation shall be deemed conclusive absent manifest error. The fees of any such accountant shall be borne by the Company. (d) NUMBER OF CONVERSION SHARES; CONVERSION PRICE. The number of Conversion Shares to be delivered by the Company pursuant to a Conversion shall be determined by dividing the principal amount of this Note to be converted by the Conversion Price (as defined herein) in effect on the Conversion Date. The "CONVERSION PRICE" (A) with respect to a Conversion occurring on a Conversion Date which is on or prior to the last day of the 450-day period following the Issue Date (the "INITIAL CONVERSION PERIOD"), shall be the price determined by multiplying (x) the Applicable Percentage (as defined herein) TIMES the average of the closing bid prices for the GTR Stock as reported by Nasdaq, or by the principal securities market on which the GTR Stock is then traded, on the twenty-five (25) Trading Days (as defined herein) occurring immediately prior to (but not including) the Conversion Date (the "FLOATING CONVERSION PRICE") and (B) with respect to any Conversion occurring on a Conversion Date which is on or after the first business day following the end of the Initial Conversion Period, shall be the lesser of (i) the Floating Conversion Price and (ii) (x) the average of the closing bid prices for the GTR Stock as reported by Nasdaq, or by the principal securities market on which the GTR Stock is then traded, on the twenty-five (25) Trading Days occurring immediately prior to (but not including) the last day of the Initial Conversion Period TIMES (y) eighty-nine percent (89%) (the "FIXED CONVERSION PRICE"). "TRADING DAY" shall mean any day on which the GTR Stock is traded for any period on the Nasdaq National Market or on the principal securities exchange or market on which the GTR Stock is then traded. (e) APPLICABLE PERCENTAGE. The "APPLICABLE PERCENTAGE" shall be determined in accordance with the following schedule, where "X" represents the Conversion Date: Number of Days After Issue Date Applicable Percentage ---------------- --------------------- 90 < X < 180 100% - 180 < X < 210 98% - 210 < X < 240 97% - 240 < X < 270 96% - 270 < X < 300 95% - 300 < X < 330 94% - 330 < X < 360 93% - 360 < X < 390 92% - 390 < X < 420 91% - 420 < X < 450 90% - 450 < X 89% - 7 8 (f) DELIVERY OF GTR STOCK UPON CONVERSION. Upon receipt of a Conversion Notice pursuant to paragraph 3(c) above, the Company shall, no later than the close of business on the third (3rd) business day following the Conversion Date set forth in such Conversion Notice (the "DELIVERY DATE"), issue and deliver or caused to be delivered to the Holder the number of Conversion Shares as shall be determined as provided herein. If any Conversion would create a fractional Conversion Share, such fractional Conversion Share shall be disregarded and the number of Conversion Shares issuable upon such Conversion, in the aggregate, shall be the next higher number of Conversion Shares. Conversion Shares delivered to the Holder shall not contain any restrictive legend as long as the sale of such Conversion Shares is covered by an effective Registration Statement (as defined in the Registration Rights Agreement) or may be made pursuant to Rule 144(k) under the Securities Act or any successor rule or provision. (g) FAILURE TO DELIVER CONVERSION SHARES. In the event that the Company fails for any reason to deliver to the Holder the number of Conversion Shares specified in the applicable Conversion Notice on or before the Delivery Date therefor (a "CONVERSION DEFAULT"), and such Conversion Default continues for longer than seven (7) business days, the Company shall pay to the Holder payments ("CONVERSION DEFAULT PAYMENTS") in the amount of (i) (N/365) MULTIPLIED BY (ii) the unpaid principal amount of this Note represented by the Conversion Shares which remain the subject of such Conversion Default MULTIPLIED BY (iii) the lower of twenty-four percent (24%) and the maximum rate permitted by applicable law, where "N" equals the number of days elapsed between the original Delivery Date of such Conversion Shares and the earlier to occur of (A) the date on which all of such Conversion Shares are issued and delivered to the Holder and (B) the date on which the principal amount represented thereby is redeemed pursuant to the terms of this Note. Cash amounts payable hereunder shall be paid on or before the fifth (5th) business day of the calendar month following the calendar month in which such amount has accrued. Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver Conversion Shares on the applicable Delivery Date (including, without limitation, damages relating to any purchase of shares of GTR Stock by the Holder to make delivery on a sale effected in anticipation of receiving Conversion Shares upon Conversion), and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief). (h) PAYMENT OF PRINCIPAL AT MATURITY; OPTIONAL CONVERSION. On the Maturity Date, the Company shall pay to the Holder the amount of the unpaid principal amount of this Note in same day funds, PROVIDED, HOWEVER, that if (i) the Holder agrees to receive such payment in shares of GTR Stock (an "OPTIONAL CONVERSION"), and (ii) the Company has satisfied each of the Optional Conversion Conditions (as defined herein), such unpaid principal amount may be converted into the number of shares of GTR Stock equal to the amount of such unpaid principal amount DIVIDED BY the then applicable Conversion Price, and the Maturity Date shall be deemed the Conversion Date with respect to such Optional Conversion. If an Optional Conversion occurs, the Company and the Holder shall follow the procedures for Conversion set forth in this Section 3; provided, however, that the Holder shall not be required to send the Conversion Notice contemplated by paragraph 3(c). The "OPTIONAL CONVERSION CONDITIONS" are as follows: (i) the market value of the outstanding shares of GTR Stock on the Maturity Date (not including any such shares represented by the outstanding principal balance of this Note) shall be greater than eighty million dollars ($80,000,000); 8 9 (ii) the GTR Stock shall have an average daily trading volume of at least eight hundred thousand dollars ($800,000) for the period of one hundred and eighty (180) days ending on the fifteenth (15th) day of the calendar month immediately prior to the calendar month in which the Maturity Date occurs; and (iii) the GTR Stock shall qualify as a "margin stock" under Regulation T of the Board of Governors of the Federal Reserve System. (i) LIMITATIONS ON RIGHT TO CONVERT. (i) The Holder may not convert any principal of this Note unless a Registration Statement (as defined in the Registration Rights Agreement) is effective and available for the sale of Conversion Shares by the Holder or unless sales of the Conversion Shares may be made to the public pursuant to Rule 144 under the Securities Act. (ii) The Holder may not convert any principal of this Note to the extent that the aggregate number of shares of GTR Stock issued upon such Conversion and all prior Conversions exceeds 19.99% of the number of outstanding shares on the Issue Date (subject to equitable adjustments from time to time for the events described in Section 4 below) unless the Company shall have obtained any approval of its shareholders required by NASD Rule 4460 (or any successor rule or regulation) for issuance in excess of such amount. (iii) In no event shall the Holder be permitted to convert principal of this Note in excess of that amount of principal upon the Conversion of which (x) the number of shares of GTR Stock beneficially owned by the Holder and its affiliates (other than shares of GTR Stock which may be deemed beneficially owned except for being subject to a limitation on conversion or exercise analogous to the limitation contained in this subparagraph (iii)) PLUS (y) the number of shares of GTR Stock issuable upon the Conversion of such principal amount is equal to or exceeds (z) 4.99% of the number of shares of GTR Stock then issued and outstanding. Nothing contained herein shall be deemed to restrict the right of the Holder to convert such excess principal amount at such time as such Conversion will not violate the provisions of this subparagraph (iii). (iv) The restrictions contained in subparagraphs (ii) and (iii), respectively, of this Section 3(i) shall not apply in the event of either an Optional Conversion or an Optional Redemption (each as defined herein). 4. ADJUSTMENTS TO CONVERSION PRICE. (a) ADJUSTMENT TO FIXED CONVERSION PRICE DUE TO STOCK SPLIT, STOCK DIVIDEND, ETC. If, after the Initial Conversion Period and prior to the Conversion of the entire principal amount of this Note, (A) the number of outstanding shares of GTR Stock is increased by a stock split, stock dividend, reclassification, the distribution to holders of GTR Stock of rights or warrants entitling them to subscribe for or purchase GTR Stock at less than the then current market price thereof or other similar event, the Fixed Conversion Price shall be proportionately reduced, or (B) the number of outstanding shares of GTR Stock is decreased by a reverse stock split, combination or reclassification of shares or other similar event, the Fixed Conversion Price shall be proportionately increased. In such event, the Company shall notify the Transfer Agent of such change on or before the effective date thereof. For purposes hereof, the market price per 9 10 share of GTR Stock on any date shall be the average of the closing sale prices for the GTR Stock as reported by Nasdaq, or by the principal securities market on which the GTR Stock is then traded, on the five (5) consecutive Trading Days (as defined below) selected by the Company not later than, the earlier of the date in question and the Trading Day before the "ex" date, if any, with respect to the issuance or distribution requiring such computation. The term "'ex' date", when used with respect to any issuance or distribution, means the first Trading Day on which the GTR Stock trades regular way in the market from which such average closing price is then to be determined without the right to receive such issuance or distribution. In the absence of one or more such quotations, the Company shall determine the current market price on the basis of such quotations as it considers appropriate. (b) ADJUSTMENT TO CONVERSION PRICE. If, prior to the Conversion of the entire principal amount of this Note, the number of outstanding shares of GTR Stock is increased or decreased by a stock split, stock dividend, combination, reclassification or other similar event, which event shall have taken place during the reference period for determination of the Conversion Price for any conversion of the principal balance of this Note, the Conversion Price shall be calculated giving appropriate effect to the stock split, stock dividend, combination, reclassification or other similar event for all Trading Days immediately preceding the Conversion Date. (c) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If prior to the Conversion of the entire principal amount of this Note, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, redemption or other similar event, as a result of which shares of GTR Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity or there is a sale of all or substantially all the Company's assets or there is a change of control transaction with respect to which, in any such case, the Holder does not exercise its right to a Mandatory Redemption (as defined below) of the outstanding principal hereof, then the Holder shall thereafter have the right to receive upon Conversion of the principal amount of this Note, upon the terms and conditions specified herein and in lieu of the shares of GTR Stock immediately therefore issuable upon conversion, such stock, securities and/or other assets, if any, which the Holder would have been entitled to receive in such transaction had such principal amount been converted prior to such transaction, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof (including, without limitation, provisions for the adjustment of the Conversion Price and of the number of shares issuable upon a Conversion) shall thereafter be applicable as nearly as may be practicable in relation to any securities thereafter deliverable upon the exercise hereof. The Company shall not effect any transaction described in this subsection 4(c) unless (i) it first gives to the Holder prior notice of such merger, consolidation, exchange of shares, recapitalization, reorganization, redemption or other similar event, and makes a public announcement of such event at the same that it gives such notice and (ii) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligations of the Company under this Note, including the terms of this subsection 4(c). Nothing contained herein shall prevent the Company from issuing additional series or classes of its common stock as long as any such issuance does not result in dilution (as contemplated by this paragraph 4(c)) of the shares of GTR Stock then outstanding. (d) DISTRIBUTION OF ASSETS. If, prior to the Conversion of the entire principal amount of this Note, the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of GTR Stock as a partial liquidating dividend, by way of return of capital 10 11 or otherwise, including any dividend or distribution in cash or shares of capital stock of a subsidiary of the Company (collectively, a "DISTRIBUTION"), then, upon a Conversion by the Holder occurring after the record date for determining shareholders entitled to such Distribution but prior to the effective date of such Distribution, the Holder shall be entitled to receive the amount of such assets which would have been payable to the Holder had the Holder been the holder of such shares of GTR Stock on the record date for the determination of shareholders entitled to such Distribution. The Fixed Conversion Price for amounts of principal of this Note not converted prior to the effective date of a Distribution shall be reduced to a price determined by decreasing the Fixed Conversion Price in effect immediately prior to the record date of the Distribution by an amount equal to the fair market value of the assets so distributed, as determined by mutual agreement of the Company and the Holder. (e) NO FRACTIONAL SHARES. If any adjustment under this Section 4 would create a fractional share of GTR Stock or a right to acquire a fractional share of GTR Stock, such fractional share shall be disregarded and the number of shares of GTR Stock issuable upon Conversion shall be the next higher number of shares. 5. OPTIONAL REDEMPTION BY THE COMPANY. (a) OPTIONAL REDEMPTION. If at any time commencing twenty-one (21) months after the Issue Date, the closing bid price of the GTR Stock as reported by Nasdaq, or by the principal securities exchange or market on which the GTR Stock is then traded, for twenty-five (25) consecutive Trading Days exceeds 150% of the Fixed Conversion Price, the Company shall have the right, in its sole discretion, to redeem (an "OPTIONAL REDEMPTION"), any or all of the principal amount of this Note then outstanding at the Optional Redemption Price (as defined herein): provided, however, that in order to effect an Optional Redemption, the Company shall have provided to the Holder thirty (30) Trading Days' prior written notice of the effective date of the Optional Redemption (the "OPTIONAL REDEMPTION DATE"). The Company shall be entitled to four (4) Optional Redemptions during the term of this Note. Nothing contained herein shall prevent the Holder from converting any or all of the unpaid principal amount to this Note at any time or from time to time prior to the Optional Redemption Date. (b) OPTIONAL REDEMPTION PRICE. The "OPTIONAL REDEMPTION PRICE" shall mean the principal amount of this Note being redeemed, MULTIPLIED BY the Optional Redemption Percentage. The Optional Redemption Percentage initially shall be 130%; beginning on June 1, 1997, and on the first day of each calendar quarter thereafter, the Optional Redemption Percentage shall be reduced on a straight line basis so that during the last calendar quarter occurring during the term of the Note (assuming that this Note has not been redeemed, converted or paid in full prior thereto) the Optional Redemption Percentage shall be 100%. (c) PAYMENT OF OPTIONAL REDEMPTION PRICE. (i) The Company shall pay the Optional Redemption Price to the Holder within five (5) business days of the Optional Redemption Date. In the event that the Company redeems the entire remaining unpaid principal amount of this Note, and pays to the Holder all interest accrued thereon and all other amounts due in connection therewith, the Holder shall return this Note to the Company for cancellation. 11 12 (ii) The Company may, upon fifteen (15) Trading Days' prior written notice to the Holder, pay the Optional redemption Price in shares of GTR Stock in lieu of cash. The number of shares of GTR Stock to be delivered to the Holder in the event that the Company exercises such option shall be determined by dividing the Optional Redemption Price by the average of the closing bid prices for the GTR Stock as reported by Nasdaq, or by the principal securities market on which the GTR Stock is then traded, on the five (5) Trading Days occurring immediately prior to (but not including) the Optional Redemption Date. 6. MANDATORY REDEMPTION BY THE COMPANY. (a) MANDATORY REDEMPTION. In the event that a Mandatory Redemption Event (as defined herein) occurs, the Holder shall have the right, upon written notice to the Company, to have all or any portion of the unpaid principal amount of this Note redeemed by the Company (a "MANDATORY REDEMPTION DATE") at the Mandatory Redemption Price (as defined herein) in same day funds. Such notice shall specify the effective date of such Mandatory Redemption (the "MANDATORY REDEMPTION DATE") and the amount of principal to be redeemed. The Optional Redemption Date and the Mandatory Redemption Date are sometimes each referred to herein as a "REDEMPTION DATE". (b) MANDATORY REDEMPTION PRICE. The "MANDATORY REDEMPTION PRICE" shall be equal to the principal amount of this Note being redeemed MULTIPLIED BY one hundred and twenty percent (120%); PROVIDED, HOWEVER, that with respect to a Mandatory Redemption which occurs as a result of a Mandatory Redemption Event described in subparagraph 6(d)(ii) or 6(d)(vii) below, the Mandatory Redemption Price shall be equal to the principal amount of this Note being redeemed, DIVIDED BY the Applicable Percentage in effect on the Mandatory Redemption Date. (c) PAYMENT OF MANDATORY REDEMPTION PRICE. (i) The Company shall pay the Mandatory Redemption Price to the Holder within five (5) business days of the Mandatory Redemption Date. In the event that the Company redeems the entire remaining unpaid principal amount of this Note, and pays to the Holder all interest accrued thereon and all other amounts due in connection therewith, the Holder shall return this Note to the Company for cancellation. (ii) If Company fails to pay the Mandatory Redemption Price to the Holder within five (5) business days of the Mandatory Redemption Date, the Holder shall be entitled to interest thereon at an annual rare equal to the lower of (x) the "prime" rate (as published in the Wall Street Journal) on such fifth business day PLUS three percent (3%) and (y) the highest rate permitted by applicable law from the Mandatory Redemption Date until the Mandatory Redemption Price has been paid in full. (d) MANDATORY REDEMPTION EVENT. Each of the following events shall be deemed a "MANDATORY REDEMPTION EVENT": (i) the Company fails for any reason (including without limitation as a result of not having a sufficient number of shares of GTR Stock authorized and reserved for issuance or as a result of the prohibition contained in Section 3(i)(ii)) to issue shares of GTR Stock to the Holder in accordance with the provisions of this Note upon Conversion of any principal amount hereof, and such failure continues for ten (10) business days; 12 13 (ii) the Holder is prohibited from converting principal of this Note by operation of subparagraph 3(i)(ii) hereof, and such prohibition continues for a period of sixty (60) days thereafter; (iii) the Company fails to transfer any certificate for shares of GTR Stock issued to the Holder upon Conversion of any principal amount hereof as and when required by this Note or the Registration Rights Agreement and such failure continues for a period of ten (10) business days; (iv) the Company breaches, in a material respect, any covenant or other material term or condition of this Note, the Note Purchase Agreement, the Registration Rights Agreement or any other agreement, certificate or instrument delivered by the Company at the Closing (as defined in the Note Purchase Agreement) (the "Transaction Documents"), and such breach continues for a period of ten (10) business days after written notice thereof to the Company from the Holder; (v) the Registration Statement (as defined in the Registration Rights Agreement) is not declared effective by August 15, 1997, or if the Registration Statement has been declared effective by such date, and the effectiveness of the Registration Statement lapses for any reason (including without limitation, the issuance of a stop order) or is unavailable to the Holder for sale of Conversion Shares in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of five (5) business days, PROVIDED that the cause of such lapse or unavailability is not due to factors solely within the control of the Holder, and PROVIDED, FURTHER, that the Registration Statement shall not be deemed to be unavailable to the Holder, for purposes of this paragraph (v) only, during any Standstill Period (as defined in the Registration Rights Agreement); (vi) the GTR Stock is no longer quoted on the Nasdaq National Market or listed on a national securities exchange; (vii) the sale, conveyance or disposition of all or substantially all of the assets of the Company or all or substantially all of the assets comprising the Company's Tissue Repair Division, the effectuation of a transaction or series of transactions, in which more than fifty percent (50%) of the voting power of the Company is disposed of, or the consolidation, merger or other business combination of the Company with or into any other entity, immediately following which the prior stockholders of the Company fail to own, directly or indirectly, at least fifty percent (50%) of the surviving entity; and (viii) the Company or any subsidiary of the Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed; or bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company and, in the case of an involuntary action or other proceeding, remains undismissed and unstayed for a period of sixty (60) days (each, a "LIQUIDATION EVENT"). 13 14 (e) FAILURE TO PAY REDEMPTION AMOUNTS. If the Company fails to pay the Mandatory Redemption Price within ten (10) business days of the Payable Date therefor, then the Holder shall have the right at any time, so long as the Company remains in default, to require the Company, upon written notice, to immediately issue, in lieu of the Mandatory Redemption Price, the number of shares of GTR Stock of the Company equal to the Mandatory Redemption Price DIVIDED BY the Conversion Price in effect on such Conversion Date as is specified by the Holder in writing to the Company. 7. MISCELLANEOUS. (a) FAILURE TO EXERCISE RIGHTS NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof. All rights and remedies of the Holder hereunder are cumulative and not exclusive of any rights or remedies otherwise available. (b) NOTICES. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Note shall be in writing and shall be deemed given (i) when delivered personally or by verifiable facsimile transmission (with a hard copy to follow), (ii) on the next business day after timely delivery to an overnight courier and (iii) on the third business day after deposit in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows: If to the Company: Genzyme Corporation One Kendall Square Cambridge, Massachusetts 02139 Attn: Chief Legal Counsel Fax: 617-252-7553 If to the Holder: Credit Suisse First Boston (Hong Kong) Ltd. One Exchange Square 16th Floor Hong Kong Attn: Matthew Lawrence Fax: 011-852-2530-0556 With a copy to: Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Attn: Raymond J. Dorado, Esq. Fax: 212-325-8102 14 15 and: Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Attn: Allan Weine/John McAvoy Fax: 212-325-6519 and if to any other Holder, at such address as such Holder shall have furnished the Company in writing. (c) AMENDMENTS. No amendment, modification or other change may be made to this Note unless such amendment, modification or change is set forth in writing and is signed by the Company and the Holder. (d) TRANSFER OF NOTE. With the consent of the Company, which shall not be unreasonably withheld, the Holder may sell, transfer or otherwise dispose of all, but not less than all, of this Note to any person or entity as long as such sale, transfer or disposition is the subject of an effective registration statement under the Securities Act or is exempt from registration thereunder; PROVIDED, HOWEVER, that such consent shall not be required (but the Company shall nonetheless be entitled to receive notice thereof) in the event of a sale, transfer or disposition of this Note to an affiliate of the Holder. From and after the date of such sale, transfer of disposition, the transferee hereof shall be deemed to be the Holder. Upon any such sale, transfer or disposition, the Company shall, promptly following the return of this Note by the transferee hereof, issue and deliver to such transferee a new note identical in all respects to this Note, in the name of such transferee, except that the principal amount of such new note may reflect the unpaid principal amount of this Note at the time of such sale, transfer or disposition. (e) LOST OR STOLEN NOTE. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Note, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Note, if mutilated the Company shall execute and deliver to the Holder a new note identical in all respects to this Note. Upon the issuance of any new Note hereunder, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge and any expenses (including reasonable fees and expenses of counsel) in connection therewith. (f) GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of law provisions thereof. 15 16 IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer on the date first above written. GENZYME CORPORATION By: /s/ David J. McLachlan ---------------------------------------- Name: David J. McLachlan Title: Executive Vice President, Finance and Chief Financial Officer 16 17 ANNEX 1 Schedule of Principal Payment and Conversions ----------------------- Principal Amount Paid Date of Payment Balance or Converted or Conversion --------- ------------ --------------- $13,000,000 _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ _____________________ _______________________ _____________________ 17 EX-4.15 3 REGISTRATION RIGHTS AGREEMENT 1 EHXIBIT 4.15 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated February 27, 1997, by and between Genzyme Corporation, a Massachusetts corporation (the "COMPANY"), and Credit Suisse First Boston (Hong Kong) Ltd. (the "PURCHASER"). In connection with the Note Purchase Agreement of even date herewith (the "NOTE PURCHASE AGREEMENT"), the Company has agreed, subject to the terms and conditions set forth therein, to issue and sell to the Purchase a note (the "NOTE") which is convertible into shares of the Company's Tissue Repair Division Common Stock, $.01 par value (the "GTR STOCK"). In order to induce the Purchaser to enter into the Note Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended (the "SECURITIES ACT"), and under applicable state securities laws. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Note. In consideration of the Purchaser entering into the Note Purchase Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings specified: (a) "CLOSING" shall have the meaning specified in the Note Purchase Agreement; (b) "DUE DATE" means June 27, 1997; (c) "HOLDER" means any person owning or having the right to acquire, through conversion of principal of or interest on the Note, Registrable Securities, including initially the Purchaser, and any permitted assignee thereof; (d) "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act ("Rule 415") or any successor rule providing for the offering of securities on a continuous basis ("Registration Statement"), and the declaration or ordering of effectiveness of the Registration Statement by the Securities and Exchange Commission (the "Commission"); and (e) "REGISTRABLE SECURITIES" means the shares of GTR Stock issued or issuable either (i) upon conversion of principal of the Note or (ii) as payment for interest due and payable thereon (the "Conversion Shares") and any shares of capital stock issued or issuable from time to time (with any adjustments) in replacement of, in exchange for or otherwise in respect of the Conversion Shares. 2. MANDATORY REGISTRATION. (a) On or before April 1, 1997, the Company shall prepare and file a Registration Statement on Form S-3 (or, if Form S-3 is not available, on such form of 2 Registration Statement as is then available to effect a registration of the Registrable Securities, subject to the consent of the Purchaser, which consent will not be unreasonably withheld) as a "shelf" registration statement under Rule 415 covering the resale of all shares of Registrable Securities then issuable on conversion of the Note or in payment of interest thereon. The Registration Statement shall state, to the extent permitted by Rule 416 under the Securities Act, that it also covers such indeterminate number of shares of GTR Stock as may be required to effect conversion of the Note to prevent dilution resulting from stock splits, stock dividends or similar events, or by reason of changes in the Conversion Price in accordance with the terms of the Note. (b) The Company shall, subject to Sections 4(h) and 4(i) hereof, maintain the effectiveness of the Registration Statement from the effective date thereof until the earlier to occur of (i) the date on which all of the Registrable Securities have been sold pursuant to the Registration Statement and (ii) the date on which all of the remaining Registrable Securities (in the reasonable opinion of counsel to the Purchaser) may be immediately sold to public without registration and without regard to the amount of Registrable Securities which may be sold by the Holder thereof at a given time (the "REGISTRATION PERIOD"). (c) If the Registration Statement is not declared effective by the Commission on or before the Due Date, or if, after the Registration Statement has been declared effective by the Commission, sales of Registrable Securities cannot be made by Holder under the Registration Statement for any reason (other than during a Standstill Period, as defined below), the Company shall pay to the Holder an amount equal to the lesser of (x) two percent (2%) per month and (y) the highest rate permitted by applicable law, TIMES the aggregate unpaid principal amount of the Note, accruing daily and compounded monthly, from the Due Date until the date on which the Registration Statement is declared effective or becomes available for sales of Registrable Securities, as the case may be. The amounts paid or payable by the Company hereunder shall be in addition to any other remedies available to the Purchaser at law or in equity or pursuant to the terms of any other Transaction Document. 3. PIGGYBACK REGISTRATION. If at any time prior to the expiration of the Registration Period, (i) the Company proposes to register shares of GTR Stock under the Securities Act in connection with the public offering of such share for case (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a registration on Form S-4 under the Securities Act or any successor or similar form registering stock issuable upon a reclassification, a business combination involving an exchange of securities or an exchange offer for securities of the issuer or another entity (a "Proposed Registration") and (ii) a registration statement covering the sale of all of the Registrable Securities is not then effective and available for sales thereof by the Holder, the Company shall, at such time, promptly give the Holder written notice of such Proposed Registration. The Holder shall have thirty (30) days from its receipt of such notice to deliver to the Company a written request specifying the amount of Registrable Securities that the Holder intends to sell and the Holder's intended method of distribution. Upon receipt of such request, the Company shall use its best efforts to cause all Registrable Securities which the Company has been requested to register to be registered under the Securities Act to the extent necessary to permit their sale or other disposition in accordance with the intended methods of distribution specified in the request of the Holder; PROVIDED, HOWEVER, that the Company shall have the right 2 3 to postpone or withdraw any registration effected pursuant to this Section 3 without obligation to the Holder. 4. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities pursuant to a Registration Statement, the Company shall: (a) prepare and file with the Commission a Registration Statement with respect to the Registrable Securities and use its best efforts to cause such Registration Statement to become effective and keep such Registration Statement effective at all times during the Registration Period; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Securities Act or to maintain the effectiveness of the Registration Statement, or as may be reasonably requested by the Holder in order to incorporate information concerning the Holder or the Holder's intended method of distribution; (c) in the event that the number of shares available under a Registration Statement filed by the Company hereunder is insufficient to cover all of the Registrable Securities then outstanding, the Company shall amend such Registration Statement, or file a new Registration Statement, or both, so as to cover all shares of Registrable Securities then outstanding. Any Registration Statement filed pursuant to this Section 4 shall state that, to the extent permitted by Rule 416 under the Securities Act, such Registration Statement also covers such indeterminate number of additional shares of GTR Stock as may become issuable upon conversion of the Note. Unless and until such amendment or new Registration Statement becomes effective, the Holder shall have the rights described in Section 2(c) above; (d) secure the designation and quotation of the Registrable Securities on the Nasdaq National Market; (e) furnish to the Holder such number of copies of the prospectus included in such Registration Statement, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as the Holder may reasonably request in order to facilitate the disposition of the Holder's Registrable Securities; (f) use its best efforts to register or qualify the Registrable Securities under the securities or "blue sky" laws of such jurisdictions within the United States as shall be reasonably requested from time to time by the Holder, and do any and all other acts or things which may be necessary or advisable to enable the Holder to consummate the public sale or other disposition of the Registrable Securities in such jurisdictions; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction; (g) in the event of an underwritten public offering of the Registrable Securities enter into an perform its obligations under an underwriting agreement, in usual and 3 4 customary form reasonably acceptable to the Company, with the managing underwriter of such offering; (h) notify the Holder immediately upon the occurrence of any event as a result of which the prospectus included in such Registration Statement, as then in effect, contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and a promptly as practicable, prepare, file and furnish to the Holder a reasonable number of copies of a supplement or an amendment to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; PROVIDED, HOWEVER, that the Company may delay preparing, filing and distributing any such supplement or amendment if the Company determines in good faith that such supplement or amendment might, in the reasonable judgment of the Company, (i) interfere with or affect the negotiation or completion of a transaction that is being contemplated by the Company (whether or not a final decision has been made to undertake such transaction) or (ii) involve initial or continuing disclosure obligations that are not in the best interests of the Company's stockholders at such time; PROVIDED, FURTHER, that (x) the Company will give notice (a "STANDSTILL NOTICE") of any such delay no less than five (5) business days prior to such delay, (y) such delay shall not extend for a period of more than ten (10) business days without the written consent of the Holder and (z) the Company may utilize such delay no more than once in each calendar year; (i) use its best efforts to prevent the issuance of any stop order or other order suspending the effectiveness of such Registration Statement and, if such an order is issued, to obtain the withdrawal thereof at the earliest possible time and to notify the Holder of the issuance of such order and the resolution thereof; (j) furnish to the Holder, on the date that such Registration Statement becomes effective, (i) an opinion, dated such date, of outside counsel representing the Company (and reasonably acceptable to the Holder) addressed to the Holder and in form and substance as is customarily given to underwriters in an underwritten public offering, and (ii) in the case of an underwriting, a letter, dated such date, from the Company's independent certified public accountants, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder; (k) provide the Holder and its representatives the opportunity to conduct a reasonable inquiry of the Company's financial and other records during normal business hours and make available its officers, directors and employees for questions regarding information which the Holder may reasonably request in order to fulfill any due diligence obligation on its part; and (l) permit counsel for the Holder to review such Registration Statement and all amendments and supplements thereto a reasonable period of time prior to the filing thereof with the Commission. 4 5 5. OBLIGATIONS OF HOLDER. In connection with the registration of the Registrable Securities pursuant to the Registration Statement, the Holder shall: (a) furnish to the Company such information regarding itself and the intended method of disposition of Registrable Securities as the Company shall reasonably request in order to effect the registration thereof: (b) upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph 4(i), immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement until withdrawal of the stop order referred to in paragraph 4(i); and (c) if so requested by the Company, provided a Registration Statement covering the sale of all of the Registrable Securities is then effective, the Holder shall not sell or otherwise transfer pursuant to the Registration Statement or pursuant to Rule 144 any Registrable Securities (i) during the period from the second (2nd) business day prior to the effective date of a registration statement filed by the Company under the Securities Act in connection with a public offering of GTR Stock until the thirtieth (30th) calendar day following such effective date, and (ii) during the period from the date specified in the Standstill Notice given by the Company pursuant to paragraph 4(h) above that the Company has determined that it will delay the preparation and filing of an amendment or supplement to the prospectus included in the Registration Statement until the expiration date specified in such notice (the periods described in clauses (i) and (ii) hereof are each referred to herein as a "Standstill Period"). The Company agrees that upon a Conversion with a Conversion Date occurring after the expiration date of a Standstill Period until (and including) the tenth (10th) business day following the date of such expiration, the Conversion Price shall be the lesser of (A) the lowest Conversion Price in effect during the Standstill Period and (B) the Conversion Price on the Conversion Date. 6. INDEMNIFICATION. In the event that any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company shall indemnify and hold harmless the Holder, the officers, directors, employees, agents and representatives of the Holder, and each person, if any, who controls the Holder within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "1934 ACT"), against any losses, claims, damages, liabilities or reasonable out-of-pocket expenses (whether joint or several) (collectively, including legal or other expenses reasonably incurred in connection with investigating or defending same, "LOSSES"), insofar as any such Losses arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (collectively, "VIOLATIONS"). The Company will reimburse the Holder, and each such officer, director, employee, agent, representative or controlling person for any legal or other expenses as reasonably incurred by any 5 6 such entity or person in connection with investigating or defending any Loss; provided, however, that the foregoing indemnity shall not apply to amounts paid in settlement of any Loss if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be obligated to indemnify any person for any Loss to the extent that such Loss arises out of or is based upon and in conformity with written information furnished by such person expressly for use in such Registration Statement; and provided, further, that the Company shall not be required to indemnify any person to the extent that any Loss results from such person selling Registrable Securities (i) to a person to whom there was not sent or give, at or prior to the written confirmation of the sale of such shares, a copy of the prospectus, as most recently amended or supplemented, if the Company has previously furnished or made available copies thereof or (ii) during any period following written notice by the Company to the Holder of an event described in Section 4(h) or 4(i). (b) To the extent permitted by law, the Holder shall indemnify and hold harmless the Company, the officers, directors, employees, agents and representatives of the Company, and each person, if any, who controls the Company within the meaning of the Securities Act or the 1934 Act, against any Losses to the extent (and only to the extent) that any such Losses arise out of or are based upon and in conformity with written information furnished by the Holder expressly for use in such Registration Statement; and the Holder will reimburse any legal or other expenses as reasonably incurred by the Company and any such officer, director, employee, agent, representative, or controlling person, in connection with investigating or defending any such Loss; provided, however, that the foregoing indemnity shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 6(b) exceed the net purchase price of securities sold by the Holder under the Registration Statement. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of one such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate under applicable standards of professional conduct due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, to the extent prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 6 with respect to such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 6 or with respect to any other action. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 6 is unavailable or insufficient to hold harmless an indemnified party for any reason, the Company and the Holder agree to contribute to the aggregate Losses to which the Company or the Holder may be subject in such proportion as is appropriate to reflect the relative fault of the 6 7 Company and the Holder in connection with the statements or omissions which resulted in such Losses; provided, however, that in no case shall the holder be responsible for any amount in excess of the net purchase price of securities sold by it under the Registration Statement. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or by the Holder. The Company and the Holder agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 6, each person who controls the Holder within the meaning of either the Securities Act or the Exchange Act and each officer, director, employee, agent or representative of the Holder shall have the same rights to contribution as the Holder, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act and each officer, director, employee, agent or representative of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The obligations of the Company and the Holder under this Section 6 shall survive the conversion or redemption, if any, of the Note, the completion of any offering of Registrable Securities pursuant to a Registration Statement under this Agreement, or otherwise. 7. REPORTS. With a view to making available to the Holder the benefits of Rule 144 under the Securities Act ("Rule 144") and any other rule or regulation of the Commission that may at any time permit the Holder to sell securities of the Company to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the 1934 Act; and (c) furnish to the Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the Securities Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the Holder of any rule or regulation of the Commission which permits the selling of any such securities without registration. 8. MISCELLANEOUS. (a) EXPENSES OF REGISTRATION. All expenses, other than underwriting discounts and commissions and fees and expenses of counsel to the Holder, incurred in connection with the registrations, filings or qualifications described herein, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, the fees and 7 8 disbursements of counsel for the Company, and the fees and disbursements incurred in connection with the opinion and letter described in paragraph 4(j) hereof shall be borne by the Company. (b) AMENDMENT; WAIVER. Any provisions of this Agreement may be amended only pursuant to a written instrument executed by the Company and the Holder. Any waiver of the provision of this Agreement may be made only pursuant to a written instrument executed in accordance with this paragraph shall be binding upon the Holder, each future Holder, and the Company. (c) NOTICES. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Agreement shall be in writing and shall be deemed given (i) when delivered personally or when sent by verifiable facsimile transmission (with a hard copy to follow), (ii) on the next business day after timely delivery to an overnight courier and (iii) on the third business day after deposit in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed to the parties as follows: If to the Company: Genzyme Corporation One Kendall Square Cambridge, Massachusetts 02139 Attn: Chief Legal Counsel Fax: 617-252-7553 If to the Purchaser: Credit Suisse First Boston (Hong Kong) Ltd. One Exchange Square, 16th Floor Hong Kong Attn: Matthew Lawrence Fax: 852-2845-2456 With a copy to: Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Attn: Raymond J. Dorado, Esq. Fax: 212-325-8102 With a copy to: Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Attn: Allen Weine/John McAvoy Fax: 212-325-6519 8 9 and if to any other Holder, at such Holder's address as such Holder shall have furnished the Company in writing. (d) TERMINATION. This Agreement shall terminate on the earlier to occur of (a) the end of the Registration Period and (b) the date on which all of the Registrable Securities have been publicly distributed; but any such termination shall be without prejudice to (i) the parties' rights and obligations arising from breaches of this Agreement occurring prior to such termination and (ii) the indemnification obligations under this Agreement. (e) ASSIGNMENT. The rights of the Holder hereunder shall be assigned automatically to any transferee of the Note or Registrable Securities as long as: (i) the Company is, within a reasonable period of time following such transfer, furnished with written notice of the name and address of such transferee, (ii) immediately following such transfer, the further disposition of Registrable Securities is restricted under the Securities Act or under state securities laws, (iii) the transferee agrees in writing with the Company to be bound by all of the provisions hereof and (iv) such transfer is made in accordance with the applicable requirements of the Note Purchase Agreement. No rights under this Agreement shall be assigned to any person or entity to whom less than the Note and all of the Registrable Securities held by the Holder are transferred. (f) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws provisions thereof. 9 10 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written. GENZYME CORPORATION By: /s/ David J. McLachlan ---------------------------------------- Name: David J. McLachlan Title: Executive Vice President, Finance and Chief Financial Officer CREDIT SUISSE FIRST BOSTON (HONG KONG) LTD. By: /s/ Matthew T. Lawrence ---------------------------------------- Name: Matthew T. Lawrence Title: Director 10 EX-10.49 4 FIRST AMEND. TO CREDIT AGREEMENT AND CONSENT 1 EXHIBIT 10.49 FIRST AMENDMENT TO CREDIT AGREEMENT AND CONSENT TO SUBORDINATION TERMS FIRST AMENDMENT to Credit Agreement and CONSENT to Subordination Terms ("First Amendment") dated as of March 3, 1997 among and between Genzyme Corporation (the "Company"); each of the Subsidiaries of the Company identified under the caption "Subsidiary Guarantors" on the signature pages hereto; each of the Lenders identified under the caption "Lenders" on the signature pages hereto (each a "Lender" and collectively, the "Lenders"); Fleet National Bank ("Fleet") as administrative agent for the Lenders (the "Administrative Agent"); and The First National Bank of Boston ("BankBoston") as documentation agent for the Lenders (the "Documentation Agent"). Reference is made to the Credit Agreement dated as of November 14, 1996, among and between the Company, the Subsidiary Guarantors, the Lenders, the Administrative Agent and the Documentation Agent, pursuant to which the Lenders furnished to the Company a $225,000,000 revolving line of credit. Capitalized terms used in this First Amendment have the meanings given such terms in the Credit Agreement, as amended hereby, except as provided otherwise herein. The Company has requested that Section 9.5(d)(ii) of the Credit Agreement be amended as provided by this First Amendment. Under section 12.5 of the Agreement, to be effective, the amendment to Section 9.5(d)(ii) set forth in this First Amendment must be signed by the Company, the Administrative Agent and the Lenders constituting the Required Lenders. In addition, the Company has requested that the Lenders constituting the Required Lenders confirm that the subordination terms of a certain Genzyme Corporation Convertible Note dated February 28, 1997 in the original principal amount of $13,000,000 that are attached hereto as EXHIBIT A (the "Subordination Terms") are satisfactory. 1. AMENDMENT TO SECTION 9.5 - (PROHIBITION OF FUNDAMENTAL CHANGES - EXCEPTIONS). Subsection 9.5(d)(ii) of the Credit Agreement is deleted, in its entirety, and the following is substituted in its place thereof: "the Company and its Subsidiaries may acquire any assets used or useful in the lines of business permitted under Section 9.10 or the stock or other equity interest of any Person that is engaged in a line of business permitted to the Company under Section 9.10 or merge any Person that is in a line or lines of business permitted under Section 9.10 with the Company or a Subsidiary or the Company or a Subsidiary with any such Person (provided that the conditions in the provisos in Section 9.5(d)(i) are satisfied with respect to such merger) provided that at the time of the consummation of any such transaction and after giving effect thereto, the Company shall be in compliance with the covenants in Section 9.9 as of the end of the most recent fiscal quarter or annual period of the Company and the transaction will not be reasonably likely to result in the noncompliance with such financial covenants;" 2 2. CONFIRMATION THAT SUBORDINATION TERMS ARE SATISFACTORY. The undersigned Lenders confirm that the Subordination Terms are satisfactory, as provided in the definition of "Subordinated Debt" under Section 1.1 of the Credit Agreement. 3. REPRESENTATIONS AND WARRANTIES. In order to induce the Agents and Lenders to enter into this First Amendment, the Company makes the following representations and warranties, all of which shall survive the execution and delivery of this First Amendment: (a) Each of the Company and the Subsidiary Guarantors has all requisite corporate, partnership or other power and authority to execute, deliver and perform its obligations under the First Amendment and under the Credit Agreement, as amended hereby. This First Amendment has been duly authorized, executed and delivered by the Company and each Subsidiary Guarantor, and does not conflict with, violate or result in a breach of or require any consent under any applicable law, rule or regulation or any of the terms of the charter or by-laws (or equivalent constitutional documents) of any Obligor, any agreement or instrument to which the Company or any Subsidiary is a party or to which any of them or their Property is bound or to which any of them is subject. This First Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligation of each Obligor enforceable against each Obligor in accordance with its terms. (b) On the date hereof each of the representations and warranties in the Credit Agreement are true, accurate and complete in all material respects. (c) Upon the execution and delivery of this First Amendment, and the satisfaction of each of the conditions precedent set forth in Section 4 of this First Amendment, no Default or Event of Default shall exist and be continuing. 4. CONDITIONS PRECEDENT. The agreements contained herein and the amendments contemplated hereby shall become effective on the date (the "Effective Date") when Company, the Required Lenders, and the Administrative Agent shall have executed this First Amendment and when each of the following conditions shall have been fulfilled: (a) EXECUTION OF DOCUMENTS, ETC. This First Amendment and any other agreements, documents and instruments to be executed and/or delivered in connection herewith (collectively the "First Amendment Documents") shall have been duly and properly authorized and executed by: the Company, the Administrative Agent, and the Required Lenders and shall be in full force and effect on and as of the Effective Date of this First Amendment. (b) PROCEEDINGS; RECEIPT OF DOCUMENTS. All requisite corporate action and proceedings of the Company and the Subsidiary Guarantors in connection with the execution and delivery of this First Amendment and the other First Amendment Documents shall be satisfactory in form and substance to the Administrative Agent and its counsel, and the Administrative Agent and its counsel shall have received all information and copies of all documents, including without limitation, records of requisite corporate action and proceedings which the Administrative Agent or its counsel may have requested in connection therewith, such 3 documents where requested by the Administrative Agent or its counsel to be certified by appropriate persons or governmental authorities. (c) MATERIAL LITIGATION. There shall be no pending or, to the best knowledge of the Company, threatened litigation with respect to the Company or any Subsidiary Guarantor before any court, arbitrator or governmental or administrative body or agency which challenges or relates to (i) the transactions contemplated hereby or (ii) the Loan Documents. 5. REAFFIRMATION AND RATIFICATION OF EXISTING AGREEMENT, ETC. The Company: (i) reaffirms and ratifies all the Obligations to the Agents and the Lenders, in respect to the Credit Agreement, as hereby amended, and the other Loan Documents, (ii) certifies that there are no defenses, offsets or counterclaims to such Obligations as of the date hereof, (iii) expressly acknowledges its continuing liability pursuant thereto, and (iv) agrees that each of the Credit Agreement, as amended hereby, and the other Loan Documents shall remain in full force and effect, enforceable against the Company and Subsidiary Guarantors in accordance with its terms. 6. MISCELLANEOUS. (a) This First Amendment may be executed on separate counterparts by the parties hereto, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same agreement. (b) This First Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the laws of the Commonwealth of Massachusetts (without giving effect to the conflict of laws principles thereof). (c) The headings of the several sections of this First Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this First Amendment. (d) This First Amendment, together with the other First Amendment Documents, embodies the entire agreement and understanding among the parties relating to the subject matter hereof and supersedes all prior proposals, negotiation, agreements and understandings relating to such subject matter. (e) This First Amendment, together with the other First Amendment Documents, shall be deemed to be Loan Documents under the Credit Agreement. (f) EACH OF THE OBLIGORS, THE AGENTS AND THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS FIRST AMENDMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY. (g) The Company shall pay on demand the reasonable costs and expenses, including, without limitation, reasonable attorney's fees and expenses incurred, or which may be incurred 4 by the agents or the Lenders in connection with the negotiation, documentation, administration and enforcement of this First Amendment. IN WITNESS WHEREOF, this First Amendment has been duly executed and delivered as a sealed instrument at Boston, Massachusetts as of the 3rd day of March, 1997. THE COMPANY: GENZYME CORPORATION By: /s/ David J. Mclachlan ----------------------------------- Title: Executive Vice President SUBSIDIARY GUARANTORS: DEKNATEL SNOWDEN PENCER, INC. By: /s/ David J. Mclachlan ----------------------------------- Title: Treasurer DSP WORLDWIDE, INC. By: /s/ John R. Connolly ----------------------------------- Title: Executive Vice President ALLSTON LANDING LIMITED PARTNERSHIP By: Allston Landing Corporation, its General Partner By: /s/ David J. Mclachlan ----------------------------------- Title: Vice President and Treasurer ADMINISTRATIVE AGENT: FLEET NATIONAL BANK By: /s/ [signature illegible] ----------------------------------- Title: Senior Vice President DOCUMENTATION AGENT: THE FIRST NATIONAL BANK OF BOSTON By: /s/ Elizabeth C. Everett ----------------------------------- Title: Director 5 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: FLEET NATIONAL BANK $35,000,000.00 By: /s/ [signature illegible] ---------------------------- Title: Senior Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 6 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE FIRST NATIONAL BANK OF BOSTON $22,000,000.00 By: /s/ Elizabeth C. Everett ---------------------------- Title: Director [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 7 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: BANK OF TOKYO-MITSUBISHI TRUST COMPANY $13,000,000.00 By: /s/ Michael J. Cronin ---------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 8 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: CREDIT LYONNAIS NEW YORK BRANCH $13,000,000.00 By: /s/ Robert Ivosevich ---------------------------- Title: Senior Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 9 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE FUJI BANK LIMITED, NEW YORK BRANCH $13,000,000.00 By: /s/ Masanobo Kobayashi ---------------------------------- Title: Vice President and Manager [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 10 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: MELLON BANK, N.A. $13,000,000.00 By: /s/ Rita C. Long --------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 11 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: NATIONSBANK, N.A. $13,000,000.00 By: /s/ Michael A. Crabb, III ------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 12 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: REPUBLIC NATIONAL BANK OF NEW YORK $13,000,000.00 By: /s/ Patrick Hildreth ------------------------------- Title: First Vice President By: /s/ Jean-Pierre F. Diels ------------------------------- Title: Executive Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 13 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: ABN AMRO BANK N.V. $7,500,000.00 By: /s/ Carol A. Levine ------------------------------- Title: Senior Vice President By: /s/ Brian M. Horgan ------------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 14 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: BANK LEUMI TRUST COMPANY OF NEW YORK $7,500,000.00 By: /s/ John Koenigsberg -------------------------------- Title: Vice President By: /s/ [signature illegible] -------------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 15 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE BANK OF NOVA SCOTIA $7,500,000.00 By: /s/ T. M. Pitcher -------------------------------- Title: Authorized Signatory [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 16 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: CITIZENS BANK OF MASSACHUSETTS $7,500,000.00 By: /s/ Anne Forbes Van Nest -------------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 17 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: CORESTATES BANK, N.A. $7,500,000.00 By: /s/ [signature illegible] -------------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 18 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: CREDIT SUISSE FIRST BOSTON $7,500,000.00 By: /s/ [signature illegible] -------------------------------- Title: Vice President By: /s/ [signature illegible] -------------------------------- Title: Associate [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 19 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: KREDIETBANK, N.V. $7,500,000.00 By: /s/ Robert Snauffer -------------------------------- Title: Vice President By: /s/ Garling Lee -------------------------------- Title: Assistant Treasurer [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 20 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: LTCB TRUST CO. $7,500,000.00 By: /s/ [signature illegible] -------------------------------- Title: Executive Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 21 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE NORTHERN TRUST COMPANY $7,500,000.00 By: /s/ [signature illegible] -------------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 22 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE SAKURA BANK, LIMITED $7,500,000.00 By: /s/ Yasumasa Kikuchi -------------------------------- Title: Senior Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 23 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE SANWA BANK, LIMITED $7,500,000.00 By: /s/ Yutaka Higashino -------------------------------- Title: Senior Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 24 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997. Revolving Credit Commitment: THE SUMITO BANK, LIMITED, NEW YORK BRANCH $7,500,000.00 By: /s/ Leslie L Rogers -------------------------------- Title: Vice President [Signature Page to First Amendment to Credit Agreement and Consent to Subordination Terms dated March 3, 1997] 25 EXHIBIT A TO FIRST AMENDMENT TO CREDIT AGREEMENT AND CONSENT TO SUBORDINATION TERMS DATED AS OF MARCH 3, 1997 2. PRIORITY; SUBORDINATION. (a) NO PAYMENT IF DEFAULT ON SENIOR INDEBTEDNESS. No payment of principal of, premium, if any, or interest on this Note or on account of any purchase or redemption or other acquisition of the Note, whether at maturity or otherwise, shall be made upon, or accepted with respect to, this Note, and the Holder shall not initiate any action to accelerate the maturity of the Note or exercise any remedy to seek collection if at the time of such payment the Holder has received written notice from the Company or a holder of Senior Debt (as defined below) that there exists or, after giving effect to such payment, there would exist any default in respect of any Senior Debt or under any agreement pursuant to which such Senior Debt was issued (a "Default"); PROVIDED, HOWEVER, that the foregoing restriction shall cease to apply with respect to a Default upon the earliest to occur of (i) the commencement by any holder of Senior Debt of the exercise of its remedies against the Company or its property including, without limitation, any action, suit or other legal proceeding against the Company or its property based upon such Default, or (ii) at the expiration of 180 days after the date of such notice if no holder of Senior Debt shall have commenced the exercise of its remedies against the Company or its property including, without limitation, any action, suit or other legal proceeding against the Company or its property based upon such Default. Upon the maturity of any Senior Debt by lapse of time, acceleration or otherwise, all principal or, premium, if any, interest and other amounts due or to become due on all such Senior Debt shall first be paid in full in cash, cash equivalents or in any other manner acceptable to the holders of Senior Debt (hereinafter, "Payment in Full" or "Paid in Full"), or such payment shall have been provided for to the satisfaction of the holders of Senior Debt before any payment on account of principal of, premium, if any, interest or any other amounts shall be made upon this Note. 26 (b) PAYMENT UPON DISSOLUTION, ETC. (i) In the event of (x) any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Company or to its creditors, as such, or to its assets or (y) the dissolution or other winding up of the Company whether total or partial, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy proceedings, or (z) any assignment for the benefit of creditors or any marshaling of the material assets or material liabilities of the Company, then, and in any such event, (A) the holders of all Senior Debt shall first be entitled to receive Payment in Full of all principal, premium, if any, interest and other amounts due or to become due on the Senior Debt (including, without limitation, any interest and charges accruing thereon in any such proceeding, notwithstanding any law to the contrary) before any payment on account of principal, premium, if any, interest or any other amounts is made on this Note, and (B) in any such proceedings, any payment that may be payable or deliverable in respect of this Note shall be paid to the holders of the Senior Debt or their representatives, unless and until the principal of, premium, if any, interest and other amounts due or to become due on all such Senior Debt shall have been Paid in Full; PROVIDED, HOWEVER, that in the event that such payment consists solely of shares of stock or securities of the Company as reorganized the payment of which is subordinated, at least to the same extent as the Note, to the payment of all Senior Debt and such payment is authorized by an order or decree made by a court of competent jurisdiction in a reorganization proceeding under any applicable law pursuant to a plan of reorganization and the rights of the holders of Senior Debt are not impaired or otherwise altered adversely by such reorganization or adjustment, no such payment shall be required hereby to be made to the holders of the Senior Debt or their representatives. (ii) In the event that any such payment shall be received by the Holder in violation of the subordination provisions hereof before all Senior Debt is Paid in Full, such payment or distribution shall be received and held in trust for and shall be paid over to the holders of all Senior Debt remaining unpaid, or their representatives, until such Senior Debt shall have been Paid in Full, after giving effect to any concurrent payment or distribution or provision thereof to the holders of such Senior Debt. (c) SUBROGATION. Subject to the prior Payment in Full of all Senior Debt, the Holder shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of assets of the Company applicable to the Senior Debt to the extent that payments otherwise payable to the Holder under the Note have been applied to the payment of the Senior Debt; PROVIDED, HOWEVER, that the subrogation rights of the holder of the Note shall be fully subordinated to the rights and remedies of the holders of Senior Debt. (d) AGREEMENTS OF HOLDER. (i) The Holder agrees that upon the commencement of any bankruptcy, insolvency or other similar case or proceeding relative to the Company, or to its creditors, as such, or to its assets, the Holder shall take such actions as may be necessary or appropriate to effectuate the subordination provision hereof, including, without limitation, that the Holder shall (i) timely file a proof of claim in respect of the Note and the indebtedness and obligations evidenced hereby, provided, however, that if the Holder fails within thirty (30) days prior to the expiration of any claims bar date to file a proof of claim, any holder of Senior Debt shall be 27 entitled to file such a proof of claim in respect thereof in the name of the Holder and the Holder irrevocably appoints the holders of Senior Debt and their representatives as its attorney-in-fact solely for such purpose; (ii) not oppose any motion filed or supported by any holder of Senior Debt for relief from stay or adequate protection in respect of the Senior Debt; and (iii) not file or accept any reorganization plan that impairs or otherwise alters adversely the rights of the holders of Senior Debt. (ii) The Company and the Holder, for themselves and their successors and assigns, covenant to execute and deliver to the holders of Senior Debt, such further instruments and to take such further action as the holders of Senior Debt may at any time or times reasonably request in order to carry out the provisions hereof. (iii) No holder of Senior Debt shall be prejudiced in its right to enforce the subordination of this Note by any act or failure to act on the part of the Company. (iv) Without notice to or the consent of the Holder, the holders of Senior Debt may at any time and from time to time, in their discretion, without impairing or releasing the subordination herein made, change the manner, place or terms or payment, or change or extend the time of payment of or renew or alter the Senior Debt, or amend or supplement in any manner any instrument evidencing the Senior Debt, any agreement pursuant to which the Senior Debt was issued or incurred or any instrument securing or relating to the Senior Debt; release any person liable in any manner for the payment or collection of the Senior Debt; exercise or refrain from exercising any rights in respect of the Senior Debt against the Company or any other person; apply any moneys or other property paid by any person or release in any manner to the Senior Debt; or accept or release any security for the Senior Debt. (e) CONTINUING OFFER. This Section shall constitute a continuing offer to all persons who, in reliance on such provisions, become holders of, or continue to hold, Senior Debt, and such provisions of this Section are made for the benefit of such holders and may not be amended, modified, changed or waived without the prior written consent of the holders of Senior Debt. (f) RIGHTS OF HOLDERS UNIMPAIRED. The foregoing provisions as to subordination are solely for the purpose of defining the relative rights of the holders of the Senior Debt on the one hand and the Holder on the other hand. None of such provisions shall impair, as between the Company and the Holder, the obligation of the Company, which is unconditional and absolute, to pay the Holder of this Note the amounts due on this Note in accordance with the terms hereof and of the Note Purchase Agreement, nor shall any such provisions prevent the Holder from exercising all remedies otherwise permitted by law. Moreover, nothing contained herein shall be deemed to limit in any way the right of the Holder to convert, at any time and from time to time, the principal balance of this Note into shares of GTR Stock (as defined below) pursuant to Section 3 hereof or to receive shares of GTR Stock as payment of interest hereon pursuant to Section 2 hereof. (g) DEFINITION OF SENIOR DEBT. For purposes hereof, "Senior Debt" shall mean (a) the principal of, premium, if any, accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company), and any other monetary obligations on (i) indebtedness of the Company for money borrowed, whether 28 outstanding on the date of this Note or thereafter created, incurred or assumed (including but not limited to nonrecourse borrowings secured by receivables), (ii) guaranties by the Company of indebtedness for money borrowed by any other person, or reimbursement obligations under letters of credit, in either case, whether outstanding on the date of this Note or thereafter created, incurred or assumed, and (iii) indebtedness evidenced by notes (other than the Note), debentures, bonds or other instruments of indebtedness for the payment of which the Company is responsible or liable, by guarantees or otherwise, whether outstanding on the date of this Note or thereafter created, incurred or assumed, and (b) modification, renewals, extensions, refinancings, refundings and replacements of any such indebtedness, obligations or guarantees; unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that such indebtedness, obligations or guarantees or such modification, renewal, extension, refinancing, refunding or replacement thereof are not superior in right of payment to this Note and the holder of such indebtedness has consented to same; provided, however, that Senior Debt shall not be deemed to include any obligations of the Company to any of its subsidiaries. Without in any way limiting the scope of the foregoing, it is expressly acknowledged and agreed that Senior Debt shall include all indebtedness, obligations and guaranties of the Company and its subsidiaries under that certain Credit Agreement dated November 14, 1996 among the Company, certain of its subsidiaries, Fleet National Bank, as administrative agent, The First National Bank of Boston, as documentation agent, and the lender parties thereto and under all notes, instruments, agreements and documents entered into pursuant thereto or in connection therewith and all modifications, renewals, extensions, refinancings, refundings and replacements thereof. EX-10.50 5 NOTE PURCHASE AGREEMENT 1 EXHIBIT 10.50 NOTE PURCHASE AGREEMENT NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of February 27, 1997, by and between Genzyme Corporation, a Massachusetts corporation (the "COMPANY"), and Credit Suisse First Boston (Hong Kong) Ltd. (the "PURCHASER"). The Company wishes to sell and the Purchaser wishes to buy, subject to the terms and conditions set forth in this Agreement, a convertible note of the Company in the principal amount of $13,000,000, having the terms and conditions and in the form attached hereto as EXHIBIT A (the "NOTE"), in reliance on the exemption from securities registration afforded by the provisions of Regulation D under the Securities Act of 1993, as amended (the "SECURITIES ACT"). The Note will be convertible, in accordance with its terms, into shares (the "CONVERSION SHARES") of the Company's Tissue Repair Division Common Stock, $.01 par value (the "GTR STOCK"). The parties hereto agree as follows: 1. PURCHASE AND SALE OF NOTE. 1.1 AGREEMENT TO PURCHASE AND SELL. Upon the terms and subject to the conditions set forth herein, the Company agrees to sell at the Closing (as defined below), and the Purchaser agrees to purchase, the Note at the purchase price in the amount of thirteen million dollars ($13,000,000) (the "PURCHASE PRICE"). 1.2 CLOSING. Subject to the satisfaction of the conditions set forth herein, the closing of the purchase and sale of the Note (the "CLOSING") will be deemed to occur when this Agreement, and the other Transaction Documents (as defined below), have been executed and delivered by both the Company and the Purchaser, and full payment of the Purchase Price has been made by the Purchaser by wire transfer of same day funds to an account designated by the Company against delivery by the Company of the duly executed Note. 1.3 FINANCING FEE. The Company will pay to Credit Suisse First Boston Corporation a financing fee in the amount of four percent (4%) of the Purchase Price in the same day funds wired to an account designated by Credit Suisse First Boston Corporation to the Company. 1.4 CERTAIN DEFINITIONS. When used herein (A) "business day" shall mean any day on which the New York Stock Exchange and commercial banks in the cities of Boston and New York are open for business and (B) an "affiliate" of a party shall mean any person or entity controlling, controlled by or under common control with that party. 2 2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby makes the following representations and warranties to the Company (which shall be true as of the Closing and as of any such later date as contemplated hereunder) and agrees with the Company that: 2.1 AUTHORIZATION; ENFORCEABILITY. The Purchaser is duly and validly organized, validly existing and in good standing as a corporation under the laws of the state of its incorporation with full power and authority to purchase the Note and to execute and deliver this Agreement. This Agreement constitutes the Purchaser's valid and legally binding obligation, enforceable in accordance with its terms, except as such enforcement may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) general principles of equity. 2.2 ACCREDITED INVESTOR; INVESTMENT INTENT. The Purchaser is an accredited investor, as defined in Rule 501 of Regulation D under the Securities Act. The Purchaser is acquiring the Note solely for the Purchaser's own account for investment purposes as a principal and not with a view to the public resale or distribution of all or any part thereof; provided, however, that in making such representation, the Purchaser does not agree to hold the Note for any minimum or specific term and reserves the right to sell, transfer or otherwise dispose of the Note at any time in accordance with the provisions of this Agreement and with Federal and state securities laws applicable to such sale, transfer or disposition. 2.3 INFORMATION. The Company has provided the Purchaser with certain information regarding the Company and has granted to the Purchaser the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the terms and conditions of the purchase of sale of the Note hereunder, and the Company and its business and prospects. 2.4 LIMITATIONS ON DISPOSITION. The Purchaser acknowledges that the Note is a "restricted security" under the Securities Act and that under the Securities Act and applicable rules and regulations neither the Note nor any interest therein may be transferred or resold without registration under the Securities Act or unless pursuant to an exemption therefrom. The Purchaser agrees not to sell, transfer or otherwise dispose of the Note or any interest therein unless and until: (a) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) the Purchaser shall have notified the Company in advance of the proposed disposition, and (ii) if reasonably requested by the Company, Purchaser shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of Note under the Securities Act. It is agreed that no opinion of counsel will be required for the transfer 2 3 of the Note or any interest therein to an affiliate of the Purchaser or with respect to the sale thereof made pursuant to Rule 144 under the Securities Act ("Rule 144"); PROVIDED, HOWEVER, that prior to any sale made pursuant to Rule 144, the Purchaser will furnish to the Company, upon its request, a certificate setting forth such representations as are customarily given by selling shareholder to the issuer in a Rule 144 transaction. 2.5 LEGEND. The Purchaser understands that the Note shall bear at issuance the following legend. "This Note has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold or transferred in the absence of an effective registration statement under the Securities Act or an exemption from the registration requirements thereunder." The legend set forth above shall be removed and the Company shall issue a new Note without such legend to the holder of the Note if (i) the sale of the Note is registered under the Securities Act, or (ii) the Note can be sold publicly pursuant Rule 144(k) (or any successor provision). 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby makes the following representations and warranties to the Purchaser (which shall be true as of the Closing and as of any such later date as contemplated hereunder) and agrees with the Purchaser that: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the Company and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted. Each of the Company and its subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on the consolidated business or financial condition of the Company and its subsidiaries take as a whole. Each of the Company and its subsidiaries is not the subject of any pending or, to its knowledge, threatened investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, the Securities and Exchange Commission (the "Commission") or any state securities commission or other governmental entity which could reasonably be expected to have a material adverse effect on the consolidated business or financial condition of the Company. The term "subsidiaries" means corporations in which the Company has an equity interest of greater than 50%. 3.2 AUTHORIZATION; CONSENTS. All corporate action on the part of the Company by its officers, directors and shareholders necessary for (A) the authorization, execution and delivery of, and the performance by the Company of its obligation under, (i) this Agreement, (ii) the Note, (iii) the Registration Rights Agreement (as defined below) and (iv) all other agreements, documents, certificates or other instruments delivered by the Company at the 3 4 Closing (the instruments described in (i), (ii), (iii) and (iv) being collectively referred herein as the "TRANSACTIONS DOCUMENTS"), and (B) except to the extent that the approval described in Section 3(i)(ii) of the Note may be required by the NASD or other association or exchange on which the GTR Stock is quoted or listed, the authorization, reservation for issuance, and issuance and delivery of the Conversion Shares upon conversion of the Note has been taken. The Transaction Documents constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except as other such enforcement may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) general principles of equity. Except as otherwise provided in the Transaction Documents, the Company has obtained all governmental or regulatory consents and approvals required for it to execute, deliver and perform its obligations under the Transaction Documents. 3.3 DISCLOSURE DOCUMENTS; MATERIAL AGREEMENTS; OTHER INFORMATION. The Company has filed with the Commission: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1995, (ii) Quarterly Reports on form 10-Q for the quarters ended March 31, June 30 and September 30, 1996, (iii) all Current Reports on Form 8-K required to be filed with the Commission since December 31, 1995 and (iv) the Company's definitive Proxy Statement for its 1996 Annual Meeting of Shareholders (collectively, the "DISCLOSURE DOCUMENTS"). The Company is not aware of any event that would require the filing of a Form 8-K after the Closing, except with regard to matters disclosed in the press release, dated February 3, 1997 (the "Press Release"), attached hereto as Exhibit 3.3. Each Disclosure Document, as of the date of the filing thereof with the Commission, conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules and regulations thereunder, and, as of the date of such filing, such Disclosure Document did not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All material agreements required to be filed as exhibits to the Disclosure Documents have been filed as required; neither the Company nor any of its subsidiaries is in breach of any such agreement where such breach is reasonably likely to have a material adverse effect on the business or financial condition of the Company. The information provided to the Purchaser as described in paragraph 2.3 above does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.4 CAPITALIZATION. The capitalization of the Company as of December 31, 1996 is as set forth on EXHIBIT 3.4 hereto. 3.5 VALID ISSUANCE. The Note, when issued, sold and delivered in accordance with the terms hereof, and the Conversion Shares and the Interest Payment Shares (as defined in the Note), when issued in accordance with the terms of the Note, will be duly and validly issued, fully paid and nonassessable, free and clear of any liens, claims, preemptive rights or encumbrances imposed by or through the Company and, based in part upon the representations of the Purchaser in this Agreement, will be issued in compliance with all applicable Federal and state securities laws. 4 5 3.6 NO CONFLICT WITH OTHER INSTRUMENTS. Neither the Company nor any of its subsidiaries is in violation or default of any provisions of its Certificate of Incorporation or Bylaws as amended and in effect on and as of the date hereof or of any material provision of any material instrument or contract to which it is a party or by which it is bound, or of any provision of any Federal or state judgment, writ, decree, order, statute, rule or governmental regulation applicable to the Company, which would have a material adverse affect on the Company's consolidated business or financial condition. The execution, delivery and performance of the Note, this Agreement and the other Transaction Documents, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or of any of its subsidiaries. 3.7 FINANCIAL CONDITION; TAXES; LITIGATION. 3.7.1 The Company's financial condition is, in all material respects, as described in the Disclosure Documents, except for changes in the ordinary course of business and normal year-end adjustments that are not, in the aggregate, materially adverse to the Company. Except as otherwise described in the Disclosure Documents as of the date hereof or in the Press Release, there have been no material adverse changes to the Company's consolidated business or financial condition since September 30, 1996. 3.7.2 The financial statements contained in the Disclosure Documents have been prepared with generally accepted accounting principles consistently applied and fairly present the consolidated financial condition of the Company as of the dates of the balance sheets included therein and the consolidated results of its operations and cash flows for the period then ended (except as may be indicated therein). Without limitation the foregoing, there are no material liabilities, contingent or actual, that are required to be disclosed in the Disclosure Documents that are not so disclosed. 3.7.3 The Company has filed all tax returns required to be filed by it and paid all taxes which are due, except for taxes which it reasonably disputes or which could not reasonably be expected to have a material adverse effect on the consolidated business or financial condition of the Company. 3.7.4 Except as set forth in Schedule 3.7.4, there is no material claim, litigation or administrative proceeding pending, or to the best of the Company's knowledge, threatened, against the Company or any of its subsidiaries, or against any officer, director or employee of the Company or any such subsidiary in connection with such person's employment therewith. Neither the Company nor any of its subsidiaries is a party to or subject to the provisions of, any order, writ, injunction, judgment or decree of any court or government agency or instrumentally which could reasonably be expected to have a material adverse effect on the consolidated business or financial condition of the Company. 5 6 3.8 REPORTING COMPANY; FORM S-3. The Company is subject to the reporting requirements of the Exchange Act, has a class of securities registered under Section 12 of the Exchange Act, and has filed all reports required thereby. The Company is eligible to register for resale shares of its GTR Stock on a registration statement on Form S-3 under the Securities Act. 3.9 INTELLECTUAL PROPERTY. The Company and its subsidiaries own, possess or can acquire on reasonable terms adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property rights necessary to conduct business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any such rights that, if determined adversely of the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the consolidated business or financial condition of the Company. 3.10 REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as described on Schedule 3.10 hereto, (A) the Company has not granted or agreed to grant to any person or entity any rights (including "piggy back" registration rights) to have any securities of the Company registered with the Commission or any other governmental authority and (B) no person or entity, including, but no limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement or any other Transaction Document which has not been waived. 3.11 TRADING ON NASDAQ. The GTR Stock in authorized for quotation on the Nasdaq National Market, and trading in the GTR Stock on Nasdaq has not been suspended. Shareholder approval for the issuance of the Note is not required under NASD Rule 4460. 3.12 SOLICITATION. Neither the Company nor any of its subsidiaries or affiliates, nor any person acting on its or their behalf, (i) has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Note or (ii) has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under any circumstances that would require registration of the Note under the Securities Act. 3.13 OTHER FEES. The Company is not obligated to pay any compensation or other fee, cost or related expenditure to any underwriter, broker, agent or other representative other than the Placement Agent in connection with the transactions contemplated hereby. 4. COVENANTS OF THE COMPANY. 4.1 CORPORATE EXISTENCE. The Company shall, during the term of the Registration Rights Agreement (as defined in the Note), so long as the Purchaser or any affiliate of the Purchaser beneficially owns the Note (or any interest therein), any Conversion Shares or Interest Payment Shares (but in no event longer than three (3) years from the date of Closing), maintain its corporate existence in good standing and shall pay all its taxes when due except 6 7 for taxes which the Company reasonably disputes or which could not reasonably be expected to have a materially adverse change on the consolidated business or financial condition for the Company. 4.2 PROVISION OF INFORMATION. The Company shall provide the Purchaser with copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, in each such case promptly after filing thereof with the Commission, until the conversion or redemption of the Note in its entirety. 4.3 BLUE-SKY QUALIFICATION. The Company shall, on or before the Closing, take such action as is necessary to qualify the Note for sale under applicable state or "blue sky" laws or obtain an exemption therefrom, and shall provide evidence of any such action to the Purchaser. 4.4 REPORTING STATUS. As long as the Purchaser or any affiliate of the Purchaser beneficially owns the Note, or any interest therein, or any Conversion Shares or Interest Payment Shares, and until the date on which any of the foregoing may be sold to the public pursuant to Rule 144(k) (or any successor rule or regulation), (i) the Company shall timely file with the Commission all reports required to be so filed pursuant to the Exchange Act and (ii) the Company shall not terminate its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules and regulations thereunder would permit such termination. 4.5 USE OF PROCEEDS. The Company shall use the proceeds from the sale of the Note for general corporate purposes and shall not use such proceeds to make a loan to or an investment in any other corporation, partnership or other entity. 4.6 LISTING. The Company shall promptly secure the designation and quotation of the Conversion Shares on the Nasdaq National Market and shall use its best efforts to maintain the listing of the shares of GTR Stock on the Nasdaq National Market or another national securities exchange or quotation system. 4.7 USE OF PURCHASER NAME. The Company shall not use, directly or indirectly, the Purchaser's name in any advertisement, announcement, press release or other similar communication unless it has received the prior written consent of the Purchaser for the specific use contemplated. 4.8 COMPANY'S INSTRUCTIONS TO TRANSFER AGENT. The Company shall instruct its transfer agent (the "Transfer Agent") (i) to convert the Note into GTR Stock in accordance with the terms of the Note upon receipt of a valid Conversion Notice (as defined in the Note) from the Purchaser, (ii) to issue certificates representing the number of shares of GTR Stock specified in such Conversion Notice, free to any restrictive legend, in the name of the Purchaser or its nominee and (iii) to deliver such certificates to the Purchaser no later than the close of business on the third (3rd) business day following the Conversion Date (as defined in the Note). The Company represents to and agrees with the Purchaser that it will not give any instruction to the Transfer Agent that will conflict with the foregoing instruction or otherwise 7 8 restrict the Purchaser's right to convert the Note or receive Conversion Shares in accordance with the terms of the Note, the Registration Rights Agreement and this Agreement, respectively. In the event the Company's relationship with the Transfer Agent should be terminated for any reason, the Transfer Agent shall continue acting as transfer agent pursuant to the terms hereof until such time that successor transfer agent is appointed by the Company and executes and agrees to be bound by the terms hereof. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING. The Purchaser's obligations at the Closing, including without limitation its obligation to purchase the Note, are conditioned upon the fulfillment of each of the following events: (a) the representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of the Closing as if made on such date; (b) the Company shall have complied with or performed all of the agreements, obligations and conditions set forth in this Agreement that are required to be complied with or performed by the Company on or before the Closing; (c) the Company shall have delivered to the Purchaser a certificate, signed by an officer of the Company, certifying that the conditions specified in paragraphs (a) and (b) above have been fulfilled; (d) the Company shall have delivered to the Purchaser an opinion of counsel for the Company, dated as of the date of Closing, in the form attached as EXHIBIT 5.1; (e) the Company shall have executed and delivered the Registration Rights Agreement; (f) the GTR Stock shall be listed and traded on the Nasdaq National Market; (g) there shall have been no material adverse changes in the Company's consolidated business or financial condition since September 30, 1996 which have not been disclosed in the Disclosure Documents or the Press Release; and (h) the Company shall have authorized and reserved for issuance upon conversion of the Note a reasonably sufficient number of shares of GTR Stock to effect conversion of the entire principal balance of the Note. 8 9 5.2 CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The Company's obligations at the Closing are conditioned upon the fulfillment of each of the following events; (a) the representatives and warranties of the Purchaser shall be true and correct in all material respects of the date of the Closing as if made on such date; (b) the Purchaser shall have complied with or performed all of the agreements, obligations and conditions set forth in this Agreement that are required to be complied with or performed by the Purchaser on or before the Closing; and (c) the Purchaser shall have delivered to the Company a letter, dated as of the date of the Closing and addressed to Coopers & Lybrand, L.L.P., describing the factors on which a determination by a holder of the Note to accept cash or securities under the Note would be based. 6. INDEMNIFICATION. The Company agrees to indemnify and hold harmless the Purchaser and its officers, directors, employees and agents, and each person who controls the Purchaser within the meaning of the Securities Act or the Exchange Act (each, a "Purchaser Indemnified Party") against any losses, claims, damages, liabilities or reasonable out-of-pocket expenses (including the reasonable fees and disbursements of counsel) as incurred, joint or several, to which it, they or any of them, may become subject and not otherwise reimbursed, arising out of or in connection with the breach by the Company of any of its representations, warranties or covenants made herein. The Purchaser agrees to indemnify and hold harmless the Company and its officers, directors and agents, and each person who controls the Company within the meaning of the Securities Act or the Exchange Act (each, a "Company Indemnified Party") (a Purchaser Indemnified Party and a Company Indemnified Party are each hereinafter referred to as an "Indemnified Party') against any losses, claims, damages, liabilities or expenses (including the fees and disbursements of counsel) as incurred, joint or several, to which it, they or any of them, may become subject and not otherwise reimbursed, arising out of or in connection with the breach by the Purchaser of any of its representatives, warranties or covenants made herein. Promptly after receipt by an Indemnified Party of notice of the commencement of any action pursuant to which indemnification may be sought hereunder, such Indemnified Party will, if a claim in respect thereof is to be made against the other party (the "Indemnifying Party"), deliver to the Indemnifying Party a written notice of the commencement thereof and the Indemnifying Party shall have the right to participate in and to assume the defense thereof with counsel reasonably selected by the Indemnifying Party, provided, however, that an Indemnified Party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of such counsel to be paid by the Company, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate 9 10 due to actual or potential conflicts of interest under applicable standards of professional conduct between such Indemnified Party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the Indemnifying Party within a reasonable time of the commencement of any such action will not relieve the Indemnifying Party of any of its obligations hereunder with respect to such action except to the extent such failure is prejudicial to the Indemnifying Party's ability to defend any such action. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of pending or threatened action in respect of which an Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party unless such settlement includes an unconditional release of such Indemnified Party from all liability on any claims that are the subject matter of such action. An Indemnifying Party will not be liable for any settlement of any action or claim effected without its written consent. 7. MISCELLANEOUS. 7.1 SURVIVAL; SEVERABILITY. The representation, warranties, covenants and indemnities made by the parties herein shall survive the Closing notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to either party. 7.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The Purchaser may assign its rights hereunder, in connection with any private sale or transfer of the Note, as long as, as a condition precedent to such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement, in which case the term "Purchaser" shall be deemed to refer to such transferee as though such transferee were an original signatory hereto. 7.3 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of New York without regard to the conflict of laws provisions hereof. 7.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 7.5 HEADINGS. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 10 11 7.6 NOTICES. Any notice, demand or request required or permitted to be given by the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given (i) when delivered personally or by verifiable facsimile transmission (with a hard copy to follow) on or before 5:00 p.m., eastern time, on a business day or, if such day is not a business day, on the next succeeding business day, (ii) on the next business day after timely delivery to an overnight courier and (iii) on the third business day after deposit in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed to the parties as follows: If to the Company: Genzyme Corporation One Kendall Square Cambridge, Massachusetts 02139 Attention: Chief Legal Counsel Fax: 617-252-7553 If to the Purchaser: Credit Suisse First Boston (Hong Kong) Ltd. One Exchange Square, 16th Floor Hong Kong Attention: Matthew Lawrence Fax: 852-2845-2456 With a copy to: Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Attention: Raymond J. Dorado, Esq. Fax: 212-325-8102 With a copy to: Credit Suisse First Boston Corporation 11 Madison Avenue New York, New York 10010 Attention: Allan Weine/John McAvoy Fax: 212-325-6519 7.7 EXPENSES. Each of the Company and the Purchaser shall pay all costs and expenses that it incurs in connection with the negotiation, execution, delivery and performance of this Agreement. 11 12 7.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Note and the other Transaction Documents constitute the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between the parties. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended except pursuant to a written instrument executed by the Company and the Purchaser, and no provision hereof may be waived other than by a written instrument executed by the Company and the Purchaser, and no provision hereof may be waived other than by a written instrument signed by the party against whom enforcement of any such waiver is sought. 7.9 ARBITRATION. Any controversy or claim arising out of or related to this Agreement or the breach thereof, shall be settled by binding arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A proceeding shall be commenced upon written demand by one party to the other. The arbitrator(s) shall enter a judgment by default against any third party which fails or refuses to appear in any properly noticed arbitration proceeding. The proceeding shall be conducted by one (1) arbitrator, unless the amount alleged to be in dispute exceeds two hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators shall preside. The arbitrator(s) will be chosen by the parties from a list provided by the AAA, and if they are unable to agree within ten (10) days, the AAA shall select the arbitrator(s). The arbitrators must be experts in securities law and financial transactions. The arbitrators shall assess costs and expenses of the arbitration, including all attorneys' and experts' fees, as the arbitrators believe it is appropriate in light of the merits of parties' respective positions in the issues in dispute. Each party submits irrevocably to the jurisdiction of any state court sitting in New York County, New York or to the United States District Court for the Southern District of New York for purposes of enforcement of any discovery, order, judgment or award in connection with such arbitration. The award of the arbitrator(s) shall be final and binding upon the parties and may be enforced in any court having jurisdiction. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written. GENZYME CORPORATION By: /s/ David J. McLachlan ---------------------------------------- Name: David J. McLachlan Title: Executive Vice President, Finance and Chief Financial Officer CREDIT SUISSE FIRST BOSTON (HONG KONG) LTD. By: /s/ Matthew T. Lawrence ---------------------------------------- Name: Matthew T. Lawrence Title: Director EX-13.1 6 PORTIONS OF THE GENZYME GENERAL ANNUAL REPORT 1 FINANCIAL STATEMENTS EXHIBIT 13.1
PAGE NO. I. GENZYME GENERAL Combined Selected Financial Data.................................................................. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 5 Combined Balance Sheets - December 31, 1997 and 1996.............................................. 12 Combined Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995.......... 13 Combined Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995.......... 15 Notes to Combined Financial Statements............................................................ 17 Report of Independent Accountants................................................................. 30 II. GENZYME CORPORATION AND SUBSIDIARIES Consolidated Selected Financial Data.............................................................. 31 Management's Discussion and Analysis of Financial Condition and Results of Operations............. 34 Consolidated Balance Sheets - December 31, 1997 and 1996.......................................... 45 Consolidated Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995...... 47 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995...... 49 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995........................................................................................ 51 Notes to Consolidated Financial Statements........................................................ 53 Report of Independent Accountants................................................................. 83
1 2 GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
COMBINED STATEMENTS OF OPERATIONS DATA (AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Revenues: Net product sales ................................. $ 529,927 $ 424,483 $ 304,373 $ 238,645 $ 183,366 Net service sales ................................. 55,835 61,638 47,230 49,686 50,511 Revenues from research and development contracts: Related parties ................................. 8,041 23,011 26,758 20,883 29,478 Other ........................................... 3,400 2,310 202 1,513 2,332 --------- --------- --------- --------- --------- Total revenues .................................. 597,203 511,442 378,563 310,727 265,687 Operating costs and expenses: Cost of products sold (1) ......................... 206,028 155,930 113,964 92,226 64,704 Cost of services sold ............................. 35,451 42,889 31,137 32,116 34,558 Selling, general and administrative (1) ........... 173,020 135,153 97,520 80,026 72,051 Research and development (including research and development related to contracts)................. 74,192 69,969 57,907 51,696 45,526 Amortization of intangibles ....................... 12,534 8,849 4,647 4,741 5,964 Purchase of in-process research and development (2)................................... -- 130,639 14,216 -- 24,000 Other (3).......................................... -- 1,465 -- -- 26,517 --------- --------- --------- --------- --------- Total operating costs and expenses .............. 501,225 544,894 319,391 260,805 273,320 --------- --------- --------- --------- --------- Operating income (loss) ............................. 95,978 (33,452) 59,172 49,922 (7,633) Other income (expenses): Equity in loss of unconsolidated affiliates ....... (5,281) (2,633) (1,810) (1,353) -- Other (1) ......................................... (2,000) 1,711 1,608 (9,752) 9,192 Investment income ................................. 10,038 13,909 7,428 9,072 12,209 Interest expense .................................. (8,108) (6,842) (1,069) (1,354) (2,500) --------- --------- --------- --------- --------- Total other income (expenses) ................... (5,351) 6,145 6,157 (3,387) 18,901 --------- --------- --------- --------- --------- Income (loss) before income taxes.................... 90,627 (27,307) 65,329 46,535 11,268 Provision for income taxes .......................... (33,601) (20,206) (30,506) (16,341) (2,812) --------- --------- --------- --------- --------- Net income (loss) ................................... 57,026 (47,513) 34,823 30,194 8,456 Tax benefit allocated from Genzyme Tissue Repair .... 17,666 17,011 8,857 1,860 9,564 Tax benefit allocated from Genzyme Molecular Oncology .......................................... 2,755 -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) attributable to Genzyme General Division Common Stock ("GGD Stock") (4,6,11) .... $ 77,447 $ (30,502) $ 43,680 $ 32,054 $ 18,020 ========= ========= ========= ========= =========
2 3 GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED STATEMENTS OF OPERATIONS DATA (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------- -------- -------- -------- ------- GENZYME GENERAL COMMON SHARE DATA: Net income (loss) attributable to GGD Stock (4) $77,447 $(30,502) $ 43,680 $ 32,054 $18,020 ======= ======== ======== ======== ======= Per Genzyme General common share-basic (4,5,6): Net income (loss) ............................. $ 1.01 $ (0.45) $ 0.79 $ 0.67 $ 0.37 ======= ======== ======== ======== ======= Weighted average shares outstanding (5)........ 76,531 68,289 55,531 48,141 48,075 ======= ======== ======== ======== ======= Per Genzyme General common and common equivalent share-diluted (4,5,6): Net income (loss) ............................. $ 0.98 $ (0.45) $ 0.68 $ 0.58 $ 0.36 ======= ======== ======== ======== ======= Adjusted weighted average shares outstanding (5) 78,925 68,289 63,967 55,321 56,282 ======= ======== ======== ======== =======
COMBINED BALANCE SHEET DATA (2): DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- -------- -------- -------- Cash and investments (7) ................... $ 193,197 $ 171,725 $278,663 $128,652 $168,953 Working capital ............................ 307,988 381,373 308,036 83,314 99,503 Total assets ............................... 1,203,056 1,229,519 854,586 630,144 532,357 Long-term debt and capital lease obligations excluding current portion (8,9) ........... 117,978 223,998 124,473 126,555 144,674 Division equity (10) ....................... 980,876 884,225 659,281 395,651 324,391
There were no cash dividends paid. NOTES TO SELECTED FINANCIAL DATA: (1) In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges mainly associated with its Pharmaceutical business and Surgical Products businesses and the sale of Genetic Design, Inc.("GDI"), which was sold in 1996. This resulted in (i) an $18.1 million charge to cost of products sold primarily related to the melatonin, bulk pharmaceuticals and fine chemical product lines which are being discontinued by Genzyme General; (ii) charges of $5.5 million to cost of products sold and $3.5 million to selling, general and administrative("SG&A") expense primarily related to the manufacturing and selling of the Sepracoat(TM) product line, which was also discontinued after an advisory panel of the U.S. Food and Drug Administration (the "FDA") recommended against granting market approval of this product in 1997; and (iii) a $2.0 million charge to other expense related to the uncertainty of collection on certain notes receivable. (2) Genzyme General acquired: in 1996 the assets of Deknatel Snowden Pencer, Inc. ("DSP") and all of the Callable Common Stock of Neozyme II Corporation ("Neozyme II"); in 1995 the publicly-held, minority interest in IG Laboratories, Inc. ("IG"); and, in 1993, all of the rights to one of the two remaining development programs of Neozyme I Corporation ("Neozyme I"). In connection with these transactions, all of which were accounted for as purchases, Genzyme General charged to operations the following amounts which represented the purchase of in-process research and development: 1996, $130.6 million; 1995, $14.2 million; and 1993, $24.0 million. (3) In 1996, Genzyme General incurred restructuring charges of $1.5 million related to the consolidation of laboratory operations in its diagnostic services business and to the consolidation of foreign operations in its surgical products business in connection with certain acquisitions. In 1993, Genzyme General incurred restructuring charges of $2.8 million related to the consolidation of laboratory operations in its diagnostic services business and wrote off $23.7 million for the value of impaired goodwill associated primarily with IG's acquisition of GDI in 1992. (4) Net income (loss) attributable to Genzyme General and net income (loss) per common and common equivalent share of GGD Stock for the year ended December 31, 1993 gives effect to the provisions of the Management and Accounting Policies adopted by the Genzyme Board of Directors (the "Genzyme Board") in connection with the creation of the Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and, accordingly, are pro forma presentations. 3 4 (5) Reflects a July 25, 1996 2-for-1 stock split of GGD Stock effected by means of a 100% stock dividend paid to stockholders of record on July 11, 1996. All share and per share amounts have been restated to reflect this split. (6) In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") which established a different method of computing net income per share ("EPS") than is required under the provisions of Accounting Principles Board Opinion No. 15 ("APB 15"). The Company adopted SFAS 128 in the fiscal quarter ending December 31, 1997. All historical EPS data presented herein has been restated to conform to the provisions of SFAS 128 (See Note A., "Summary of Significant Accounting Policies-Net Income (Loss) Per Share" to Genzyme General's Combined Financial Statements). (7) Cash and investments includes cash, cash equivalents, and short- and long-term investments and excludes investment in equity securities. (8) In March 1996, holders of the 6 3/4% Convertible Subordinated Notes due 2001 (the "Notes") issued by Genzyme in October 1991 for net proceeds of $97.3 million, converted such notes into 3,782,496 shares of GGD Stock and 255,000 shares of Genzyme Tissue Repair Division Common Stock ("GTR Stock"). (9) In June 1996, the Company's $15.0 million credit line with a commercial bank was increased to $215.0 million in connection with the acquisition of DSP in July 1996. In November 1996, this credit line was refinanced with a syndicated group of banks and the line of credit was increased to $225.0 million (the "Revolving Credit Facility"). As of December 1996, Genzyme had $218.0 million outstanding under the Revolving Credit Facility, of which $200.0 million was allocated to Genzyme General. As of December 31, 1997, Genzyme had $118.0 million outstanding under the Revolving Credit Facility, of which $95.0 million was allocated to Genzyme General. (See Note J., "Long-Term Debt and Leases" to Genzyme's Consolidated Financial Statements which is incorporated herein by reference). (10) In October 1995, Genzyme General completed the sale of 5,750,000 shares of GGD Stock for net proceeds of $141.3 million. (11) Genzyme formed Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO") in June 1997 by acquiring Pharmagenics, Inc. ("PharmaGenics") and combining it with several existing programs in the field of oncology. The costs related to these programs were included in Genzyme General from December 1, 1994 to June 18, 1997. Therefore, from June 18, 1997, the costs and expenses related to GMO are no longer included in Genzyme General's results of operations. 4 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the expectations of the management of Genzyme General Division ("Genzyme General") and Genzyme Corporation ("Genzyme" or the "Company") as of the filing date of this Annual Report. The actual results for both Genzyme General and Genzyme could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for Genzyme General and Genzyme, respectively. Stockholders and potential investors should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme General and Genzyme. Genzyme provides separate financial statements for the Company and its subsidiaries on a consolidated basis and for each of Genzyme General, Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"). The financial statements of each division include the financial position, results of operations and cash flows of programs and products allocated to the division under the Company's Restated Articles of Organization, as amended (the "Genzyme Charter"), and the management and accounting policies adopted by the Genzyme Board of Directors (the "Genzyme Board") to govern the relationship of the divisions. The financial information of Genzyme General, Genzyme Tissue Repair and Genzyme Molecular Oncology, taken together, include all accounts which comprise the consolidated financial information presented for Genzyme and its subsidiaries. For purposes of financial statement presentation, all of the Company's programs and products are allocated to Genzyme General, Genzyme Tissue Repair or Genzyme Molecular Oncology. Notwithstanding this allocation, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of Genzyme General Division Common Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock") and Genzyme Molecular Oncology Division Common Stock ("GMO Stock") have no specific claim against the assets attributed to the division whose performance is associated with the series of stock they hold. Liabilities or contingencies of one division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of the other divisions. Stockholders and potential investors should, therefore, read this discussion and analysis of Genzyme General's financial position and results of operations in conjunction with the financial statements and related notes of Genzyme General and the discussion and analysis of Genzyme's financial position and results of operations and financial statements and related notes of Genzyme, all of which are included with this Annual Report. RESULTS OF OPERATIONS The following discussion summarizes the key factors management considers necessary in reviewing Genzyme General's combined results of operations. Detailed discussion and analysis of the consolidated results of operations of Genzyme Corporation and its subsidiaries, which include the combined results of Genzyme General, Genzyme Tissue Repair and Genzyme Molecular Oncology, are provided separately in this Annual Report under "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations". In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges mainly associated with its Pharmaceutical and Surgical Products businesses and the sale of Genetic Design, Inc.("GDI"), which was sold in 1996. The Pharmaceutical business will now focus on products that are more consistent with Genzyme General's long-term business strategy of moving towards higher-value products and away from fine chemical and bulk pharmaceuticals. This change in strategy resulted in a $18.1 million charge to cost of products sold primarily related to the melatonin, bulk pharmaceuticals and fine chemical product lines which are being discontinued. In addition, Genzyme General recorded charges of $5.5 million to cost of products sold and $3.5 million to selling, general and administrative("SG&A") expense primarily related to the manufacturing and selling of the Sepracoat(TM) product line, which was also discontinued after an advisory panel of the U.S. Food and Drug Administration ("FDA") recommended against granting marketing approval of this product in 1997. Genzyme General also recorded a $2.0 million charge to other expense related to the uncertainty of collection on certain notes receivable. Because of the strategic changes in Genzyme General's business, the financial condition and results of operations will now be discussed differently than in previous years. Genzyme General is now focusing its efforts within three business areas -- therapeutics, surgical products and diagnostics. 5 6 GENZYME GENERAL (CONT.) 1997 AS COMPARED TO 1996 REVENUES. Total revenues for 1997 were $597.2 million compared to $511.4 million in 1996, an increase of 17%. Product and service revenues were $585.8 million, compared to $486.1 million in 1996, an increase of 21%. Revenues from research and development contracts for 1997 were $11.4 million compared to $25.3 million in 1996, a decrease of 55%. Product revenues in 1997 increased 25% to $529.9 million from $424.5 million in 1996, due primarily to increased sales of Cerezyme(R) enzyme and a full year of sales by DSP, which was acquired by the Company in July 1996. Sales of Therapeutic products in 1997 consisted primarily of sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and Ceredase(R) increased 26% to $332.7 million from $264.6 million in 1996, due to continued growth in new patient accruals in existing markets. Genzyme General's results of operations are highly dependent on sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, which together represented 63% of consolidated product sales in 1997 compared to 62% in 1996. In October 1996, Genzyme General received FDA approval to manufacture Cerezyme(R) enzyme in the Company's large-scale manufacturing plant located in Boston, Massachusetts. Having achieved the ability to produce uninterrupted supply of Cerezyme(R) enzyme at the plant, Genzyme General commenced the process of converting patients receiving Ceredase(R) enzyme to Cerezyme(R) enzyme. The conversion of patients from Ceredase(R) enzyme to Cerezyme(R) enzyme is substantially complete in the United States. Genzyme General may be required to record a charge to earnings for the equipment used exclusively for and any inventory of Ceredase(R) enzyme remaining upon completion of the patient conversion process and, if the conversions proceed more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme and the corresponding charge to earnings could be material. Pharmaceuticals 1997 product sales decreased 31% from 1996 due primarily to a significant decline in sales of Melatonin in 1997. Melatonin sales declined materially during the second half of 1996 due to declining market demand and Genzyme General discontinued this product line in the fourth quarter of 1997. The Surgical Products business unit was formed in July 1996 following the acquisition of DSP and combines the business of DSP with Genzyme General's hyaluronic acid-based products designed to limit post operative adhesions (the "Sepra Products"). Sepra Products primarily consist of sales of Seprafilm(R). Product sales by the Surgical Products business unit for 1997 were $100.8 million as compared to $50.7 million for the period from July 1, 1996, the date of the acquisition of DSP, through December 31, 1996. Surgical Products sales consisted primarily of sales of cardiovascular fluid management products, surgical closures and surgical instruments. These product sales (excluding sales of Sepra Products) declined 12% in the second half of 1997 in comparison to the same period of 1996 due to a loss of volume and severe price competition in the fluid management business. DSP's product sales for the first half of 1996, which are not included in the results of Genzyme General, were $53.2 million. Seprafilm(R) is being marketed in the United States and Canada by Genzyme General on behalf of Genzyme Ventures II ("GVII"), the joint venture between Genzyme and Genzyme Development Partners, L.P. ("GDP"). In March 1997, Genzyme and GDP reached agreement concerning the operation of and allocations of profits and losses from GVII. Under the terms of this agreement, Genzyme purchases product from GVII for resale by Genzyme. Genzyme funds the activities of GVII and is reimbursed at cost for SG&A expenses. The first $200,000 of losses generated by GVII are allocated to GDP and thereafter losses are allocated 40% to GDP and 60% to Genzyme, provided, however, that to the extent a loss allocated to GDP would, pursuant to the partnership agreement, be allocated to the general partner of GDP rather than the limited partners, such loss is allocated 100% to Genzyme. GDP will receive the first $5.6 million in profits generated by GVII, Genzyme General will receive the next $8.4 million in profits and, thereafter, Genzyme General and GDP will receive 60% and 40% share, respectively, in the profits of GVII. In 1997, Genzyme General contributed an additional $1.5 million to GVII through GDP. The Diagnostics Business unit consists of product sales and genetic testing services. Product sales of diagnostic products in 1997 were level with 1996. Service revenues for genetic testing in 1997 decreased 9% primarily due to the loss of revenue from GDI, which was sold in November 1996. This decrease was offset in part by higher unit volumes that were primarily attributable to the acquisition of Genetrix, Inc. ("Genetrix"), which was included in Genzyme General's results of operations from May 1, 1996. International sales as a percentage of total sales in 1997 increased to 37% from 35% in 1996, due primarily to a 32% increase in combined international sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, offset in part by additional domestic sales by DSP. Revenues from research and development contracts for 1997 decreased 55% to $11.4 million from $25.3 million in 1996, due primarily to the absence of revenue from Neozyme II, which was acquired by 6 7 GENZYME GENERAL (CONT.) Genzyme in the fourth quarter of 1996. This decrease was offset in part by increases in revenues from research and development contracts with third parties. Revenues from Neozyme II were $19.8 million in 1996. MARGINS AND OPERATING EXPENSES. Gross margins for 1997 were 59%, level with 1996. Excluding the effects of special charges, gross margins were 63% in 1997 compared to 59% in 1996. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for 1997 decreased to 61% from 63% in 1996. Excluding the effects of special charges, product margins in 1997 were 66%. The increase in product margins before special charges in 1997 is primarily due to increased sales volume of Cerezyme[R] enzyme offset in part by a full year of sales of lower margin DSP products. Service margins for 1997 increased to 37% from 30% in 1996 due to the consolidation of Genetrix, the sale of GDI in 1996 and the resulting elimination of redundant facilities and staffing. SG&A expenses and amortization of intangibles for 1997 were $185.6 million compared to $144.0 million in 1996, an increase of 29%. Excluding special charges, SG&A expenses increased by 25% over 1996. The increase was due primarily to the acquisition of DSP and increased staffing in support of the growth in several product lines, most notably in support of the North American introduction of Seprafilm(R). DSP added $16.7 million in SG&A expenses and amortization of intangibles in the first half of 1997 for which comparable amounts were not included in the results of Genzyme General in 1996. The acquisition of Genetrix did not materially affect SG&A expenses in 1996 and 1997 due to consolidation of operations. Research and development expenses for 1997 were $74.2 million compared to $70.0 million in 1996, an increase of 6%, due to Genzyme General's commitment to fund development costs of the transgenic recombinant human antithrombin III ("ATIII") program being conducted by Genzyme Transgenics Corporation ("GTC") and increased spending on internal programs, most notably Thyrogen[R]. OTHER INCOME AND EXPENSES. Other income and expenses were a net expense of $5.4 million (which includes a $2.0 million special charge) compared to other income of $6.1 million in 1996. The change was due primarily to a decrease in investment income and an increase in interest expense as well as increased equity in net losses of unconsolidated affiliates. Investment income for 1997 was $10.0 million, compared with $13.9 million for 1996. The decrease resulted from lower average cash and investment balances. Investment income for 1997 did not include any material gain or loss from sales of securities. Interest expense for 1997 was $8.1 million, compared to $6.8 million in 1996. The increase resulted from interest on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II. Equity in net loss of unconsolidated affiliates increased from $2.6 million in 1996 to $5.3 million in 1997. The change is primarily due to increased losses from Genzyme General's 43% owned affiliate, GTC, and increased losses resulting from the joint venture between Genzyme General and GelTex Pharmaceuticals, Inc. ("GelTex") for the development and commercialization of RenaGel[R] phosphate binder. The net tax provision for 1997 varies from the U.S. statutory tax rate because of the provision for state income taxes, the foreign sales corporation, nondeductible amortization of intangibles, tax credits and Genzyme General's share of the losses of unconsolidated affiliates. In 1997, the effective tax rate was 37%, compared to 41% in 1996 before acquisitions. The decrease in the rate was due to additional tax credits in 1997 as well as a change in Massachusetts state law. The allocated tax benefit generated by GTR and GMO of $17.7 million and $2.8 million, respectively, in 1997 and $17.0 million and zero, respectively, in 1996 reduced Genzyme General's tax rate to 15% and 12% in 1997 and 1996, respectively. 1996 AS COMPARED TO 1995 REVENUES. Total revenues for 1996 were $511.4 million compared to $378.6 million in 1995, an increase of 35%. Product and service revenues were $486.1 million in 1996 compared to $351.6 million in 1995, an increase of 38%. Revenues from research and development contracts for 1996 were $25.3 million compared to $27.0 million in 1995, a decrease of 6%. Product revenues in 1996 increased 39% to $424.5 million from $304.4 million in 1995, due primarily to the addition of sales by DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Increases in sales by each of the Diagnostic Products and Pharmaceuticals business units accounted for the remainder of the increase in product revenues in 1996. 7 8 GENZYME GENERAL (CONT.) Sales of Therapeutic products in 1996 consisted entirely of sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Through the third quarter of 1995, Therapeutic product sales included sales of Cosmetic Grade HA Powder, which were reclassified as Pharmaceuticals product sales beginning in the fourth quarter of 1995. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1996 increased 23% to $264.6 million due to increased shipments resulting from the introduction of these products in Japan and continued growth in new patient accruals in existing markets. Genzyme General's results of operations are highly dependent on sales of Ceredase(R) enzyme and Cerezyme(R) enzyme, which together represented 62% of consolidated product sales in 1996 compared to 71% in 1995. Product sales by the Surgical Products business unit for the period beginning with the DSP acquisition on July 1, 1996 and ending December 31, 1996 were $50.7 million and were generated primarily from sales by DSP. DSP's product sales for the first half of 1996 and for the years ending December 31, 1995 and 1994, which are not included in the results of Genzyme General, were $53.2 million, $95.2 million and $90.5 million, respectively. Product sales by the Diagnostic Products and Pharmaceuticals business units increased 15% and 45%, respectively, over 1995. The increase in Diagnostic Products sales resulted from growth in each of its product lines, most notably in sales of the Direct LDL[TM] test and diagnostic intermediates. The increase in Pharmaceuticals sales was generated primarily from sales of Melatonin during the first half of 1996 and from sales of Cosmetic Grade HA Powder. Melatonin sales declined materially during the second half of 1996 due to declining market demand. Revenues for the Diagnostic Services business unit in 1996 increased 31% to $61.6 million, due to higher unit volumes that were primarily attributable to the acquisition of Genetrix, which was included in Genzyme General's results of operations from May 1, 1996 forward, and to changes in service pricing. On November 1, 1996, the assets of GDI were sold. GDI contributed $11.6 million in diagnostic service revenues through October 31, 1996. International sales as a percentage of total sales in 1996 decreased to 35% from 36% in 1995, as the addition of domestic sales by DSP offset a 35% increase in combined international sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Revenues from research and development contracts for 1996 decreased 6% to $25.3 million from $27.0 million in 1995, as a decrease in revenues from Neozyme II was partially offset by an increase in revenues from research and development contracts with third parties. Revenues from Neozyme II decreased 18% to $19.8 million in 1996 compared to $24.2 million in 1995, due to the acquisition of Neozyme II in the fourth quarter. MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 59%, level with 1995. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for 1996 were 63%, level with 1995, as sales of higher margin products and cost reductions by both the Pharmaceuticals and Diagnostic Products business units and higher margins on Ceredase(R) enzyme resulting from manufacturing process improvements were offset by lower margin products acquired with DSP. Service margins for 1996 decreased to 30% from 34% in 1995 due to the consolidation of Genetrix, which required the operation of redundant facilities while staffing was expanded and employees trained at the facilities that remained open following the consolidation. SG&A expenses and amortization of intangibles for 1996 were $144.0 million compared to $102.2 million in 1995, an increase of 41%. The increase was due primarily to the acquisition of DSP and increased staffing in support of the growth in several product lines, most notably in support of the North American introduction of the Sepra Products. DSP added $12.1 million in SG&A expenses in 1996. For the first half of 1996 and for 1995, DSP incurred SG&A expenses of $15.7 million and $25.3 million, respectively, which are not included in the results of Genzyme General. Genetrix did not contribute materially to SG&A expenses in 1996 due to consolidation of its operations with Genzyme Genetics. Research and development expenses for 1996 were $70.0 million compared to $57.9 million in 1995, an increase of 21%, due to Genzyme General's funding of development costs of the ATIII program being conducted by GTC and increased spending on internal programs, most notably Thyrogen(R). 8 9 GENZYME GENERAL (CONT.) Genzyme recorded charges related to the following acquisitions completed in 1996: Genetrix. On May 1, 1996, Genzyme acquired all of the outstanding shares of Genetrix capital stock in exchange for approximately 1,380,000 shares of GGD Stock valued at approximately $36.5 million. Genzyme General recorded a charge in 1996 of $1.5 million for amortization of goodwill and a restructuring charge of $1.0 million in connection with the Genetrix acquisition. DSP. On July 1, 1996, Genzyme acquired DSP for a total purchase price of $252.0 million. Genzyme General recorded charges of $24.2 million for the purchase of in-process research and development and $0.5 million for restructuring in connection with the acquisition of DSP. Neozyme II. On October 28, 1996, Genzyme, through a wholly-owned subsidiary ("Acquisition Corp.") completed a tender offer for outstanding Units of Neozyme II for $45.00 per Unit in cash. A total of 2,385,686 Units, or 98.8%, were tendered and accepted for payment. Each Neozyme II Unit consisted of one share of Callable Common Stock and one Callable Warrant to purchase two shares of GGD Stock and .0675 share of GTR Stock (after 1996 GGD Stock split). On December 6, 1996, Neozyme II was merged with and into Acquisition Corp. and the remaining outstanding shares of Callable Common Stock (other than shares held by Genzyme and its subsidiaries) were thereby cancelled and converted into the right to receive $29.00 per share in cash. The Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger and became exercisable on December 6, 1996. Genzyme General recorded a charge of $106.5 million for the purchase of in-process research and development in connection with the acquisition of Neozyme II. OTHER INCOME AND EXPENSES. Other income and expenses decreased by less than 1% in 1996 to $6.1 million compared to $6.2 million in 1995, as increases in interest expenses offset an 87% increase in investment income. Investment income for 1996 was $13.9 million, compared with $7.4 million for 1995. The increase resulted from higher average cash and investment balances. Investment income for 1996 did not include any material gain or loss on sales of securities. Interest expense for 1996 was $6.8 million, compared to $1.1 million in 1995. The increase resulted from interest on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II. The tax provision for 1996 varies from the U.S. statutory tax rate because of the provision for state income taxes, tax credits, taxes on foreign earnings, losses of unconsolidated affiliates and nondeductible charges in connection with tax-free acquisitions. In 1996, the effective tax rate before these acquisitions was 41%, compared to 38% in 1995. The increase in the rate was due to nondeductible goodwill charges in 1996 and to the absence in 1996 of certain operating loss carryforwards available in 1995. The tax provision in 1996 resulted from taxes on foreign earnings and taxes on earnings before acquisition-related charges comprising charges for goodwill and incomplete technologies accruing from the acquisitions of DSP of Genetrix. The allocated tax benefit generated by GTR of $17.0 million in 1996 and $8.9 million in 1995 reduced Genzyme General's tax rate to 12% and 33% in 1996 and 1995, respectively. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, Genzyme General had cash, cash equivalents and investments (excluding equity securities) of $193.2 million compared to $171.7 million at December 31, 1996 an increase of $21.5 million. In 1997, operating and financing activities provided $79.5 million and $2.8 million of cash, respectively, while investing activities used $91.0 million of cash and fluctuations in exchange rates caused a reduction in cash of $2.3 million. At December 31, 1997, inventories had increased 12% to $137.7 million from $123.4 million at December 31, 1996, due primarily to support of increased business operations, most notably in the Therapeutics inventories as a result of increased production of the Cerezyme(R) enzyme and in the Surgical Products business unit in support of the introduction of Seprafilm(R) in the North American marketplace. Genzyme General used $28.5 million for capital acquisitions. Genzyme General used $50.3 million for net purchases of investments. Genzyme General received $123.8 million of cash from issuances of common stock and used $101.1 million of cash for payments of debt and capital leases. Genzyme General believes that its available cash, investments and cash flow from operations will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources, it has committed to utilize a portion of its resources for certain purposes, such as completing the market introduction of the Sepra Products in the United States and Europe and making certain payments to third parties in connection with strategic collaborations. Genzyme General's cash resources will also be diminished upon repayment of amounts borrowed, plus accrued interest, under the Revolving Credit Facility and if its option to acquire the partnership interests in GDP is exercised using cash to pay some or all of the exercise price. In addition, the liabilities or contingencies of GTR and GMO affect Genzyme's resources or financial condition and could affect the financial condition or results of operations of Genzyme General. As a result, Genzyme may have to obtain additional financing. There can be no assurance that such financing will be available on terms reasonably acceptable to Genzyme. Genzyme General's capital requirements could differ materially from those currently anticipated by management due to the factors described under the "Factors Affecting Future Operating Results-Future Capital Needs" in "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations". For a discussion of the demands, commitments and events that may affect the liquidity and capital resources of Genzyme Corporation including Genzyme General, see "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Liquidity and Capital Resources" included in this Annual Report. 9 10 GENZYME GENERAL (CONT.) NEW ACCOUNTING PRONOUNCEMENTS, YEAR 2000 AND FINANCIAL REPORTING RELEASE 48 ("FRR 48") See Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations -- Liquidity and Financial Resources included in this Annual Report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme General could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussions and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Factors Affecting Future Operating Results" included in this Annual Report. DEPENDENCE ON CEREZYME(R) ENZYME AND CEREDASE(R) ENZYME SALES. Genzyme General's results of operations are highly dependent upon the sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme in 1997 were $332.7 million, representing 63% of Genzyme's consolidated product sales in 1997. To address supply constraints, Genzyme General developed Cerezyme(R) enzyme. Patients receiving Ceredase(R) enzyme are being converted to Cerezyme(R) enzyme; however, Genzyme General will continue to manufacture Ceredase(R) enzyme until the process of patient conversion is completed. Any disruption in the supply or manufacturing process of Cerezyme(R) enzyme may have a material adverse effect on revenue. In addition, Genzyme General may be required to record a charge to earnings for the equipment used for and the inventory of Ceredase(R) enzyme remaining upon completion of the patient conversion process, and, if the conversions proceed more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme and the corresponding charge to earnings could be material. NO ASSURANCE OF COMMERCIAL SUCCESS OF THE SEPRA PRODUCTS. In August 1996, Genzyme received marketing approval from the FDA for Seprafilm(R) and commenced commercial sales of Seprafilm(R) in the U.S. on behalf of GVII. The successful commercialization of Seprafilm(R) and other Sepra Products will depend on many factors, including: (i) the content and timing of decisions made by the FDA and other regulatory authorities, (ii) market acceptance of the Sepra Products by surgeons and hospital administrators, (iii) Genzyme General's ability to deploy its sales force to market the Sepra Products, (iv) Genzyme General's ability to supply sufficient product to meet market demand, (v) the number and relative efficacy of competitive products that may subsequently enter the market and (vi) the degree to which third party reimbursement is available for the Sepra Products. There can be no assurance that Genzyme General will be successful in its efforts to commercialize the Sepra Products. TECHNOLOGY TRANSFERRED TO GENZYME DEVELOPMENT PARTNERS, L.P. Genzyme organized GDP, a special purpose research and development entity, and transferred technology and commercial rights to certain products that Genzyme previously had under development. Genzyme has an option to purchase the limited partnership interests in GDP under certain circumstances. It is uncertain at this time whether Genzyme will exercise this option. If Genzyme does not 10 11 GENZYME GENERAL (CONT.) exercise this option, it will have limited rights in revenues generated from the sale of GDP's products. If Genzyme does exercise this option, it will be required to make substantial cash payments or to issue shares of GGD Stock, or both. Cash payments will diminish Genzyme's capital resources. Payments in GGD Stock could result in dilution to holders of GGD Stock and could negatively affect the market price of such stock. POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS. The market prices for securities of biotechnology companies have been volatile. Factors such as announcements of technological innovations or new commercial products by Genzyme or its competitors, governmental regulation, patent or proprietary rights developments, public concern as to the safety or other implications of biotechnology products and market conditions in general may have a significant impact on the market price of GGD Stock. No cash dividends have been paid to date on GGD Stock, nor does Genzyme General anticipate paying cash dividends on such stock in the foreseeable future. 11 12 GENZYME GENERAL COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) December 31, - ----------------------------------------------------------------------------------------------------------------- 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ...................................................... $ 66,276 $ 77,220 Short-term investments ......................................................... 35,294 56,290 Accounts receivable, net ....................................................... 116,056 115,156 Inventories .................................................................... 137,708 123,442 Prepaid expenses and other current assets ...................................... 15,941 99,953 Due from Genzyme Molecular Oncology ............................................ 5,434 -- Due from Genzyme Tissue Repair ................................................. 1,213 1,604 Deferred tax assets - current .................................................. 27,601 17,493 ---------- ---------- Total current assets ......................................................... 405,523 491,158 Property, plant and equipment, net ................................................ 365,337 371,610 Long-term investments ............................................................. 91,627 38,215 Notes receivable - related parties ................................................ 4,601 -- Intangibles, net .................................................................. 243,071 247,745 Deferred tax assets - noncurrent .................................................. 35,988 42,221 Investments in equity securities................................................... 30,047 10,813 Other noncurrent assets ........................................................... 26,862 27,757 ---------- ---------- Total assets ................................................................. $1,203,056 $1,229,519 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ............................................................... $ 18,409 $ 20,522 Accrued expenses ............................................................... 66,865 67,645 Income taxes payable ........................................................... 11,157 17,926 Deferred revenue - related parties and unaffiliated entities ................... 217 2,693 Current portion of long-term debt and capital lease obligations ................ 887 999 ---------- ---------- Total current liabilities .................................................... 97,535 109,785 Noncurrent liabilities: Long-term debt and capital lease obligations ................................... 117,978 223,998 Other noncurrent liabilities ................................................... 6,667 11,511 ---------- ---------- Total liabilities ............................................................ 222,180 345,294 Commitments and contingencies (See Notes) ......................................... Division equity (Note L) .......................................................... 980,876 884,225 ---------- ---------- Total liabilities and division equity......................................... $1,203,056 $1,229,519 ========== ==========
The accompanying notes are an integral part of these combined financial statements 12 13 GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------- 1997 1996 1995 --------- --------- --------- Revenues: Net product sales ............................... $ 529,927 $ 424,483 $ 304,373 Net service sales ............................... 55,835 61,638 47,230 Revenues from research and development contracts: Related parties ................................ 8,041 23,011 26,758 Other .......................................... 3,400 2,310 202 --------- --------- --------- Total revenues................................. 597,203 511,442 378,563 Operating costs and expenses: Cost of products sold ........................... 206,028 155,930 113,964 Cost of services sold ........................... 35,451 42,889 31,137 Selling, general and administrative ............. 173,020 135,153 97,520 Research and development (including research and development related to contracts) .............. 74,192 69,969 57,907 Amortization of intangibles ..................... 12,534 8,849 4,647 Purchase of in-process research and development . -- 130,639 14,216 Other ........................................... -- 1,465 -- --------- --------- --------- Total operating costs and expenses ............ 501,225 544,894 319,391 --------- --------- --------- Operating income (loss) ............................. 95,978 (33,452) 59,172 Other income (expenses): Equity in net loss of unconsolidated affiliates . (5,281) (2,633) (1,810) Other ........................................... (2,000) 1,711 1,608 Investment income ............................... 10,038 13,909 7,428 Interest expense ................................ (8,108) (6,842) (1,069) --------- --------- --------- Total other income (expenses) ................. (5,351) 6,145 6,157 --------- --------- --------- Income (loss) before income taxes ................... 90,627 (27,307) 65,329 Provision for income taxes .......................... (33,601) (20,206) (30,506) --------- --------- --------- Net income (loss) ................................... 57,026 (47,513) 34,823 Tax benefit allocated from Genzyme Tissue Repair..... 17,666 17,011 8,857 Tax benefit allocated from Genzyme Molecular Oncology 2,755 -- -- --------- --------- --------- Net income (loss) attributable to GGD Stock ......... $ 77,447 $ (30,502) $ 43,680 ========= ========= =========
The accompanying notes are an integral part of these combined financial statements 13 14 GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------- 1997 1996 1995 ------- -------- ------- Net income (loss) attributable to GGD Stock ....................... $77,447 $(30,502) $43,680 ======= ======== ======= Income (loss) per Genzyme General common share - basic: Net income (loss) ............................................ $ 1.01 $ (0.45) $ 0.79 ======= ======== ======= Weighted average shares outstanding .......................... 76,531 68,289 55,531 ======= ======== ======= Income (loss) per Genzyme General common and common equivalent share - diluted: Net income (loss) ............................................ $ 0.98 $ (0.45) $ 0.68 ======= ======== ======= Adjusted weighted average shares outstanding ................. 78,925 68,289 63,967 ======= ======== =======
The accompanying notes are an integral part of these combined financial statements 14 15 GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1997 1996 1995 --------- --------- --------- Net income (loss) ........................................... $ 57,026 $ (47,513) $ 34,823 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ............................ 43,653 29,257 22,010 Loss on disposal of fixed assets ......................... 1,234 42 743 Non-cash compensation expense ............................ 2,881 148 131 Accrued interest/amortization on bonds ................... (571) 1,110 (279) Provisions for bad debts and inventory ................... 14,100 9,521 8,105 Purchase of in-process research and development .......... -- 130,639 14,216 Deferred income taxes .................................... (3,969) (28,558) 4,428 Minority interest in net loss of subsidiaries ............ -- -- (1,608) Equity in net loss of unconsolidated affiliates .......... 5,281 3,646 1,810 Gain on investment in unconsolidated affiliate ........... -- (1,013) -- Other .................................................... 528 (1,558) 1,568 Increase (decrease) in cash from working capital changes: Accounts receivable ................................... (10,052) (18,318) (14,486) Inventories ........................................... (29,149) (40,547) (18,142) Prepaid expenses and other assets ..................... (8,774) (379) (1,778) Accounts payable, accrued expenses, income taxes payable and deferred revenue ........................ 8,945 43,342 14,423 Due from Genzyme Tissue Repair ........................ 391 430 (1,863) Due from Genzyme Molecular Oncology ................... (2,011) -- -- --------- --------- --------- Net cash provided by operating activities ............. 79,513 80,249 64,101 INVESTING ACTIVITIES: Purchases of investments .................................... (131,197) (117,089) (130,253) Sales and maturities of investments ......................... 80,867 195,952 39,064 Acquisition of property, plant and equipment ................ (28,456) (42,540) (48,694) Acquisitions, net of acquired cash and assumed liabilities .. -- (299,078) (322) Additional investment in unconsolidated affiliates .......... (6,449) (3,600) (4,428) Loans to affiliates ......................................... (4,601) (1,676) Other ....................................................... (1,173) (7,621) (1,172) --------- --------- --------- Net cash used by investing activities ................. (91,009) (275,652) (145,805) FINANCING ACTIVITIES: Proceeds from issuance of common stock ...................... 123,837 39,119 179,623 Proceeds from issuance of common stock by a subsidiary ...... -- -- 1,107 Issuance of debt ............................................ -- 480,000 -- Payments of debt and capital lease obligations .............. (101,118) (340,333) (41,163) Net cash allocated to Genzyme Tissue Repair ................. (14,892) (11,714) -- Net cash allocated to Genzyme Molecular Oncology ............ (5,000) -- -- --------- --------- --------- Net cash provided by financing activities ............. 2,827 167,072 139,567 Effect of exchange rate changes on cash ......................... (2,275) 1,920 (781) --------- --------- --------- Increase (decrease) in cash and cash equivalents ................ (10,944) (26,411) 57,082 Cash and cash equivalents at beginning of period ................ 77,220 103,631 46,549 --------- --------- --------- Cash and cash equivalents at end of period ...................... $ 66,276 $ 77,220 $ 103,631 ========= ========= =========
The accompanying notes are an integral part of these combined financial statements. 15 16 GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 ------- ------- ------- Supplemental cash flow information: Cash paid during the year for: Interest ................................................... $ 8,684 $ 6,169 $ 9,944 Income taxes ............................................... 18,887 14,133 19,581 Supplemental disclosures of non-cash transactions: Acquisition liability - Note D Allocation of tax benefit - Note B Strategic Financial Provisions - Note C Warrant exercise - Note L Debt conversion - Note L
The accompanying notes are an integral part of these combined financial statements. 16 17 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme General, a division of Genzyme, is a global diversified human health care business with product development, manufacturing and marketing capabilities. Genzyme is focusing its efforts on three broad business areas -- therapeutic products, surgical products and diagnostics. BASIS OF PRESENTATION The combined financial statements of Genzyme General include the balance sheets, results of operations and cash flows of Genzyme's therapeutic products, surgical products, diagnostics and corporate operations during the periods presented. Genzyme General's financial statements are prepared using the amounts included in Genzyme's consolidated financial statements. Corporate allocations reflected in these financial statements are determined based upon methods which management believes to be reasonable. PRINCIPLES OF COMBINATION The combined financial statements of Genzyme General include the accounts of all of the majority and wholly-owned subsidiaries and joint ventures of Genzyme, except for the accounts of Genzyme Tissue Repair and, beginning on June 18, 1997, the accounts of Genzyme Molecular Oncology. The equity method is used to account for investments in companies and joint ventures in which Genzyme General has a substantial ownership interest (20% to 50%), or in which Genzyme General participates in policy decisions. Investments of less than 20% are reported at fair value. (See Note H., "Investments" to Genzyme's Consolidated Financial Statements (the "Consolidated Financial Statements") which is incorporated herein by reference.) All significant intercompany items and transactions have been eliminated in combination. Certain items in the combined financial statements for the years ended December 31, 1995 and 1996 have been reclassified to conform with the December 31, 1997 presentation. FINANCIAL INFORMATION Genzyme provides to holders of GGD Stock separate financial statements, management's discussion and analysis, descriptions of business and other relevant information for Genzyme General. Notwithstanding the attribution of assets and liabilities, including contingent liabilities, between Genzyme General, GTR and GMO for the purposes of preparing their respective financial statements, this attribution will not affect legal title to such assets or responsibility for such liabilities of Genzyme or any of its subsidiaries. Holders of GGD Stock are common stockholders of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme. Liabilities or contingencies of Genzyme General, GTR or GMO could affect the financial condition or results of operations of the other divisions. Accordingly, the Genzyme General combined financial statements should be read in connection with Genzyme's consolidated financial statements included in this Annual Report. Accounting policies and financial information specific to Genzyme General are presented in these Genzyme General combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO collectively are presented in the consolidated financial statements of Genzyme Corporation and subsidiaries. The Company prepares the financial statements of the division in accordance with generally accepted accounting principles, the management and accounting policies of Genzyme and the divisional accounting policies approved by the Genzyme Board. (See Note A., "Summary of Significant Accounting Policies" to the Consolidated Financial Statements, which is incorporated herein by reference). Except as otherwise provided in such policies, the management and accounting policies applicable to the presentation of the financial statements of Genzyme General may be modified or rescinded at the sole discretion of the Genzyme Board without approval of the stockholders, subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders. DIVIDEND POLICY Under the terms of the Genzyme Charter, dividends to be paid to the holders of GGD Stock will be limited to the lesser of funds of Genzyme legally available for the payment of dividends and the Available GGD Dividend Amount, as defined in the Genzyme Charter. Although there is no requirement to do so, the Genzyme Board would declare and pay cash dividends on GGD Stock, if any, based primarily on earnings, financial condition, cash flow and business requirements of Genzyme General. Genzyme General has never paid any cash dividends on shares of its capital stock. Genzyme General currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on GGD Stock in the forseeable future. 17 18 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NET INCOME (LOSS) PER SHARE Net income (loss) per share attributable to Genzyme General, GTR and GMO give effect to the management and accounting policies adopted by the Genzyme Board in connection with the re-designation of Genzyme common stock as GGD Stock and the creation of GTR Stock and GMO Stock and are reported in lieu of consolidated per share data. The Company computes net income (loss) per share for each division by dividing the earnings attributable to each series of stock by the weighted average number of shares of that stock outstanding during the period, for basic earnings per share, and by the weighted average shares of that stock, plus other potentially dilutive securities outstanding during the applicable period for diluted earnings per share. Earnings (loss) attributable to GGD Stock, GTR Stock and GMO 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 the other divisions pursuant to the management and accounting policies adopted by the Genzyme Board. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share is similar to the previously reported fully diluted earnings per share except that the new treasury stock method used in determining the dilutive effect of options uses the average market price for the period rather than the higher of the average market price or the ending market price. All net income (loss) per common share amounts have been restated to conform to SFAS 128 requirements. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
1997 1996 1995 ---- ---- ---- Net income (loss) attributable to GGD Stock-basic and diluted (1) ............... $ 77,447 $(30,502) $ 43,680 ======== ======== ======== Shares used in net income per common share-basic ............................... 76,531 68,289 55,531 Effect of dilutive securities: Employee and director stock options ..... 2,387 - 2,757 Warrants ................................ 7 - 1,897 6 3/4% convertible subordinated notes (1) .............................. - - 3,782 -------- -------- -------- Dilutive potential common shares (2) ..... 2,394 - 8,436 -------- -------- -------- Shares used in net income per common share-diluted (1,2) ...................... 78,925 68,289 63,967 ======== ======== ======== Net income (loss) per common share - basic (1) .............................. $ 1.01 $ (0.45) $ 0.79 ======== ======== ======== Net income (loss) per common share - diluted (1,2) ............................ $ 0.98 $ (0.45) $ 0.68 ======== ======== ========
- ------------ (1) In March 1996, $100.0 million of 6 3/4% convertible subordinated notes issued by Genzyme in October 1991 were converted into approximately 3,782,000 shares of GGD Stock and 255,000 shares of GTR Stock. For the diluted EPS calculation in 1995, no adjustment to Genzyme General's net income is required in assuming the conversion of the notes as of January 1, 1995 because substantially all of the interest costs incurred on the notes were capitalized. (2) In computing diluted EPS for 1996, exercise of approximately 6,506,000 options and 35,000 warrants are not assumed as the result would be antidilutive due to Genzyme General's net loss. Options to purchase approximately 5,921,000 shares of GGD Stock in 1997, 3,824,000 shares in 1996, and 2,837,000 shares of stock in 1995 were outstanding during the years then ended but were not included in the year-to-date calculation of diluted income per share because the options' exercise price was greater than the average market price of the common shares during those periods. Warrants to purchase 40,000 shares of GGD stock exercisable as of July 31, 1997 were not included in the year-to-date calculation of diluted income per share because the exercise price of the warrants was greater than the average market price of the common shares during those periods. ACCOUNTING FOR STOCK-BASED COMPENSATION Genzyme General has elected the disclosure-only alternative permitted under SFAS 123, "Accounting for Stock-Based Compensation". Genzyme General has disclosed herein pro forma net income and pro forma earnings per share in the footnotes using the fair value based method for 1997, 1996 and 1995. TRANSLATION OF FOREIGN CURRENCIES Exchange gains and losses on intercompany balances of a long-term investment nature are charged to division equity. Transaction gains and losses are included in the results of operations. Net transaction losses were $0.1 million in 1997, $1.0 million in 1996 and $0.8 million in 1995. Division equity includes cumulative foreign currency translation adjustments of $(12.4) million and $(0.7) million at December 31, 1997 and 1996, respectively. NOTE B. RELATED PARTY TRANSACTION POLICIES Genzyme allocates certain corporate costs for general and administrative, research and development and cash management services to the divisions. Genzyme files a consolidated tax return and allocates income taxes to the divisions in accordance with the policies described below. Effective upon the merger of GMO and PharmaGenics, the Genzyme Board amended certain of the policies which govern the management of the divisions and added certain new policies governing interdivision transactions. The policies summarized below, with the exception of Interdivision Asset Transfers, may be further modified or rescinded by action of the Genzyme Board, or the Genzyme Board may adopt additional policies, without approval of the stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme stockholders. In addition, generally accepted accounting principles require that any change in policy be preferable (in accordance with such principles) to the previous policy. 18 19 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS FINANCIAL MATTERS The Company manages the financial activities of Genzyme General, GTR and GMO. These financial activities include the investment of cash; the issuance, repayment and repurchase of short-term and long-term debt; and the issuance and repurchase of equity instruments. Loans may be made from time to time between divisions. Any such loan of $1.0 million or less will mature within 18 months and interest will accrue at the lowest borrowing rate available to Genzyme for a loan with similar terms and duration. Amounts borrowed in excess of $1.0 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. As of December 31, 1997, a $2.5 million inter-divisional note receivable due from Genzyme Molecular Oncology (related to GMO's acquisition of PharmaGenics in June 1997) remained outstanding at an interest rate of 6.15% per annum. SHARED SERVICES Genzyme General operates as a division of Genzyme with its own personnel and financial resources, however, Genzyme General has access to Genzyme's corporate general and administrative functions, the costs of which are allocated to each division in a reasonable and consistent manner based on utilization by the division of the services to which such costs relate. Management believes that such allocation is a reasonable estimate of such expenses. Genzyme's corporate general and administrative and research and development functions and certain selling and marketing efforts are performed primarily by Genzyme General. General and administrative and selling and marketing expenses have been allocated to GTR and GMO based upon utilization of such services as if each division operated independently. Genzyme's allocations to GTR for SG&A expenses were $7.7 million in 1997, $9.1 million in 1996 and $4.4 million in 1995. Genzyme allocated $2.1 million, $0.2 million and $0.1 million of SG&A expenses to Genzyme Molecular Oncology in 1997, 1996 and 1995, respectively. Genzyme's allocations to GTR and GMO for research and development expenses were (i) in the case of GTR, $7.7 million in 1997, $6.9 million in 1996 and $4.7 million in 1995 and (ii) in the case of GMO, $5.3 million in 1997, $0.8 million in 1996 and $0.4 million in 1995. Amounts due from GTR for operating activities were $1.2 million and $1.6 million at December 31, 1997 and 1996 and in the case of GMO, $5.4 million at December 31, 1997. INTERDIVISION INCOME TAX ALLOCATIONS Genzyme General is included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions by determining the tax provision of each division, in accordance with generally accepted accounting principles, as if it were a separate taxpayer. Accordingly, the realizability of deferred tax assets is assessed at the division level. The sum of division tax provisions may not equal the consolidated tax provision under this approach. Pursuant to the management and accounting policies adopted by the Genzyme Board, as of the end of any fiscal quarter of Genzyme, any projected tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to any other division which can utilize the benefit without any compensating payment or allocation. The treatment of such allocation for purposes of earnings per share computation is discussed in Note A., "Net Income (Loss) Per Share" to the Consolidated Financial Statements which is incorporated herein by reference. ACCESS TO TECHNOLOGY AND KNOW-HOW Genzyme General has free access to all technology and know-how of Genzyme that may prove useful in Genzyme General's business, subject to any obligations or limitations applicable to Genzyme. INTERDIVISION ASSET TRANSFERS The policy described below regarding the transfer of assets between divisions may not be changed by the Genzyme Board without the approval of the holders of GTR Stock and GMO Stock, each voting as a separate class; provided, however, that if a policy change affects GTR or GMO alone, only holders of shares representing the affected division will be entitled to a class vote on such matter. The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations will be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likelihood and timing of any such realization and other matters that the Genzyme Board and its financial advisors, if any, deem relevant. The consideration for such 19 20 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS reallocation may be paid by one division to another in cash or other consideration, in lieu of cash, with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from Genzyme General to GTR or GMO, the Genzyme Board may elect to account for such reallocation of assets as an increase in Designated Shares representing the division to which such assets are reallocated. Notwithstanding the foregoing, no Key GMO Program, as defined in the management and accounting policies, may be transferred out of GMO without a class vote of the holders of GMO Stock and no Key GTR Program, as defined in the management and accounting policies, may be transferred out of GTR without a class vote of the holders of GTR Stock. OTHER INTERDIVISION TRANSACTIONS From time to time, a division may engage in transactions with one or more other divisions or jointly with one or more other divisions and one or more third parties. Such transactions may include agreements by one division to provide products and services for use by another division, and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. Research and development performed by one division for the benefit of another division will be charged to the division for which work is performed on a cost basis. The division performing the research will not recognize revenue as a result of performing such research. Other interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated with unaffiliated third parties. Any interdivisional transaction to be performed on terms and conditions other than those previously set forth and that is material to one or more of the participating divisions will require the approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each division. If a division (the "purchasing division") requires any product or service from which another division (the "selling division") derives revenue from sales to third parties (a "commercial product or service"), the purchasing division may solicit from the selling division a bid to provide such commercial product or service in addition to any bids solicited by the purchasing division from third parties. Subject to determination by the Genzyme Board that the bid of selling division is fair and reasonable to each division and to their respective stockholders and that the purchasing division is willing to accept the selling division's bid, the purchasing division may accept any bid deemed to offer the most favorable terms and conditions for providing the commercial product or service sought by the purchasing division. NOTE C. STRATEGIC FINANCIAL PROVISIONS In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges mainly associated with its Pharmaceutical and Surgical Products businesses and the sale of GDI, which was sold in 1996. The Pharmaceutical business will now focus on products that are more consistent with Genzyme General's long-term business strategy of moving towards higher-value products and away from fine chemical and bulk pharmaceuticals. This change in strategy resulted in a $18.1 million charge to cost of products sold primarily related to the melatonin, bulk pharmaceuticals and fine chemical product lines which are being discontinued. In addition, Genzyme General recorded charges of $5.5 million to cost of products sold and $3.5 million to SG&A expense primarily related to the manufacturing and selling of the Sepracoat(TM) product line, which was also discontinued after an advisory panel of the FDA recommended against granting market approval of this product in 1997. Genzyme General also recorded a $2.0 million charge to other expense related to the uncertainty of collection on certain notes receivable. 20 21 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NOTE D. ACQUISITIONS Incorporated by reference herein are the disclosures related to the acquisitions of IG, Genetrix, DSP and Neozyme II included in Note C., "Acquisitions" to the Consolidated Financial Statements. PRO FORMA FINANCIAL INFORMATION The following pro forma information presents the results of operations of Genzyme General, for the year ended December 31, 1996, with pro forma adjustments as if the acquisitions of Genetrix, DSP and Neozyme II had been consummated as of January 1, 1996. This pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made as of that date or of results which may occur in the future. The pro forma financial information does not include charges for in-process technology of $24.2 million and $106.5 million, related to the DSP and Neozyme II acquisitions, respectively, which were recognized as expense upon consummation of each acquisition in 1996.
YEAR ENDED DECEMBER 31, ------------------------ 1996 ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) - ------------------------------------------------------------------------------- Pro forma revenues ................................... $ 556,274 Pro forma net income ................................. $ 65,146 Pro forma net income per Genzyme General common share - basic ............................... $ 0.95 Pro forma net income per Genzyme General common and common equivalent share - diluted ....... $ 0.88
NOTE E. MAJORITY-OWNED SUBSIDIARY IG LABORATORIES, INC. IG was an approximately seventy-percent-owned subsidiary for the period from January 1, 1995 through October 1, 1995. (See Note C., "Acquisitions" to the Consolidated Financial Statements which is incorporated herein by reference). NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Genzyme General's trade receivables primarily represent amounts due from healthcare service providers and companies and institutions engaged in research, development, or production of pharmaceutical and biopharmaceutical products. Genzyme General performs ongoing credit evaluations of its customers and generally does not require collateral. Accounts receivable are stated at fair value after reflecting the allowance for doubtful accounts of $11.3 million and $16.1 million at December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996, accumulated amortization of intangible assets was $38.6 million and $26.2 million, respectively. NOTE G. INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996 ------------------------------------------------ Raw materials ........ $ 48,149 $ 30,243 Work-in-process ...... 30,264 36,516 Finished products .... 59,295 56,683 -------- -------- $137,708 $123,442 ======== ========
21 22 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NOTE H. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 includes the following:
(DOLLARS IN THOUSANDS) 1997 1996 --------------------------------------------------------------- Plant and equipment .............. $ 232,405 $ 163,413 Land and buildings ............... 138,696 173,296 Leasehold improvements ........... 63,244 55,828 Furniture and fixtures ........... 13,522 12,996 Construction in-progress ......... 24,853 53,298 --------- --------- 472,720 458,831 Less accumulated depreciation .. (107,383) (87,221) --------- --------- Property, plant and equipment, net $ 365,337 $ 371,610 ========= =========
Depreciation expense was $31.1 million, $22.1 million, and $17.3 million in 1997, 1996 and 1995, respectively. Genzyme General has a production facility at Allston Landing in Boston, Massachusetts to produce Cerezyme(R) enzyme and other products. The Company had capitalized approximately $154.1 million of gross expenditures related to this building and approximately $64.3 million of gross process validation and optimization costs related to this and other manufacturing facilities. In 1997, 1996 and 1995, the Company capitalized approximately $0.5 million, $2.2 million and $9.0 million of interest costs, respectively, relating to this and other facility construction. The Company began depreciating this facility in July 1996 upon receipt of FDA approval for the facility, using the units of production method of depreciation. Depreciation expense for 1997 and 1996 related to this facility was $6.1 million and $1.7 million, respectively. NOTE I. INVESTMENTS INVESTMENTS Investments in marketable securities at December 31 consisted of the following:
1997 1996 -------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE ---------------------------------------------------------------------------------------- Short Term: Certificates of deposit ................ $ - $ - $ 1,564 $ 1,564 Corporate notes ........................ 35,298 35,294 54,732 54,726 ------- ------- ------- ------- $35,298 $35,294 $56,296 $56,290 ======= ======= ======= ======= Long Term: Corporate notes ........................ $69,932 $69,872 $16,481 $16,485 U.S. Treasury notes .................... 21,667 21,755 22,010 21,730 ------- ------- ------- ------- $91,599 $91,627 $38,491 $38,215 ======= ======= ======= ======= Equity securities....................... $29,609 $30,047 $10,905 $10,813 ======= ======= ======= =======
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND INVESTMENTS: Investment income for 1997, 1996 and 1995 includes net realized losses of $0, $47,000 and $110,000, respectively. Net realized gains included in investment income for 1995 were $1.4 million. The realized gain on the sale of the investment in Nabi was reported as a separate line item in the Company's statement of operations for 1996. Gross unrealized holding losses of $2.9 million and gross unrealized holding gains of $3.4 million were recorded at December 31, 1997 in division equity as compared to unrealized gross holding losses of $2.7 million and unrealized holding gains of $2.3 million recorded at December 31, 1996. Information regarding the range of contractual maturities of investments in debt securities at December 31, 1997 and 1996 is as follows:
1997 1996 -------------------- -------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE ---------------------------------------------------------------------------------------- Within 1 year ............................ $ 35,298 $ 35,294 $56,296 $56,290 After 1 year through 2 years ............. 62,856 62,806 11,399 11,415 After 2 years through 10 years ........... 28,743 28,821 27,092 26,800 -------- -------- ------- ------- $126,897 $126,921 $94,787 $94,505 ======== ======== ======= =======
Investments in marketable securities are attributed to either Genzyme General, GTR or GMO. The Company holds certain strategic investments in unconsolidated entities which may be attributed to either Genzyme General, GTR or GMO. 22 23 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS The disclosures related to Genzyme General's investments in GTC, ABIOMED, Inc., Aronex Pharmaceuticals, Inc., Celtrix Pharmaceuticals, Inc., Geltex Pharmaceuticals, Inc., and Nabi (formerly North American Biologicals, Inc.) are included in Note H., "Investments" to the Consolidated Financial Statements which is incorporated herein by reference. NOTE J. ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1997 1996 -------------------------------------------------- Professional fees .... $ 7,057 $ 3,757 Compensation ......... 19,865 21,252 Royalties ............ 8,151 8,210 Rebates .............. 4,575 7,604 Interest ............. 381 1,677 Other ................ 26,836 25,145 ------- ------- $66,865 $67,645 ======= =======
NOTE K. LONG-TERM DEBT AND LEASES LONG-TERM DEBT Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1997 1996 ----------------------------------------------------------------------------- Revolving Credit Facility .................. $ 95,000 $ 200,000 Mortgage note payable, matures June 13, 1999 19,833 20,375 Other mortgage notes payable ............... 3,856 3,983 --------- --------- 118,689 224,358 Less current portion ....................... (711) (999) --------- --------- $ 117,978 $ 223,359 ========= =========
In January 1997, Genzyme General repaid $100.0 million of its debt outstanding plus accrued interest of $0.5 million. Minimum annual principal repayment of long-term debt, excluding capital leases, in each of the next five years are as follows: 1998-$711,000, 1999-$114,394,000, 2000-$153,000, 2001-$160,000 and 2002-$170,000 and thereafter $3,101,000. Although the Company retains responsibility for the repayment of all long-term debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated Financial Statements which is incorporated herein by reference), such debt is allocated to either Genzyme General, GTR or GMO for reporting purposes based on the intended use of the funds borrowed under each instrument. CREDIT FACILITIES, INTEREST RATE HEDGE AGREEMENTS, MORTGAGE NOTES AND CONVERSION OF $100.0 million, 6-3/4% CONVERTIBLE SUBORDINATED NOTES: The disclosures related to Genzyme's Credit Facilities, and Interest Rate Hedge Agreements, Mortgage Notes and conversion of $100.0 million Convertible Subordinated Notes (the "Notes") (which were converted in March 1996 into shares of GGD Stock and GTR Stock) and the GTR and GMO Private Placements are included in Note J., "Long-Term Debt and Leases" to the Consolidated Financial Statements which is incorporated herein by reference. OPERATING LEASES Total rent expense under operating leases was $14.4 million, $10.7 million, and $8.6 million in 1997, 1996 and 1995, respectively. Genzyme General leases facilities and personal property under certain operating leases in excess of one year. 23 24 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS FUTURE MINIMUM PAYMENTS DUE UNDER CAPITAL AND OPERATING LEASES:
CAPITAL OPERATING (DOLLARS IN THOUSANDS) LEASES LEASES ----------------------------------------------------------------------------------- 1998 ............................................... $182 $ 13,256 1999 ............................................... 10 12,674 2000 ............................................... -- 11,532 2001 ............................................... -- 8,481 2002 ............................................... -- 8,155 Thereafter ......................................... -- 77,824 ---- -------- Total minimum payments ............................. 192 $131,922 ======== Less: interest ..................................... (10) ---- $182 ====
NOTE L. DIVISION EQUITY The following presents the division equity of Genzyme General for the periods presented:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Balance at beginning of period ............................. $ 884,225 $ 659,281 $395,649 Net income (loss) .......................................... 57,026 (47,513) 34,823 Allocation of tax benefits generated by GTR ................ 17,666 17,011 8,857 Allocation of tax benefits generated by GMO ................ 2,755 -- -- Issuance of common stock under stock plans ................. 35,963 18,581 32,083 Exercise of warrants ....................................... 855 106,164 6,264 Allocation to GTR for designated shares ..................... (14,892) (11,714) -- Shares issued in connection with acquisitions .............. -- 36,991 23,821 Allocation of acquired deferred tax asset in connection with the acquisition of PharmaGenics, Inc. .................... 2,900 -- -- Tax benefit of disqualified dispositions ................... 4,127 3,500 5,500 Issuance of common stock in connection with the conversion of $100.0M 6 3/4% Convertible Subordinated Notes .......... -- 101,400 -- Shares issued in public offering ........................... -- -- 141,276 Equity adjustments ......................................... (9,749) 524 11,008 --------- --------- -------- $ 980,876 $ 884,225 $659,281 ========= ========= ========
At December 31, 1997 and 1996, Genzyme General had 200,000,000 shares of GGD Stock authorized and approximately 77,693,000 and 75,537,000 shares, respectively, issued. Included in division equity are the cumulative foreign currency translation adjustments of $(12.4) million and $(0.7) million at December 31, 1997 and 1996, respectively. In March 1996, holders of the Notes converted such Notes into GGD Stock and GTR Stock. Holders of such Notes received 37.826 shares of GGD Stock and 2.553 shares of GTR Stock in conversion of each $1,000 Note. In June 1996, the Genzyme Board declared a 2-for-1 stock split of shares of GGD Stock to be effected by means of a 100% stock dividend payable on July 25, 1996 to stockholders of record on July 11, 1996. On July 25, 1996, a total of 34,669,435 shares of GGD Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been restated to reflect this split. 24 25 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLAN, STOCK RIGHTS, STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, CREATION OF GGD STOCK AND GTR STOCK, WARRANTS, GTR DESIGNATED SHARES AND GMO DESIGNATED SHARES The disclosures relating to Genzyme's preferred stock, Directors' Deferred Compensation Plan, stock rights, stock options, Employee Stock Purchase Plan, creation of GGD Stock and GTR Stock, and warrants are included in Note K., "Stockholders' Equity" to the Consolidated Financial Statements which is incorporated herein by reference. At December 31, 1997, approximately 18,135,000 shares of GGD Stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997 Equity Incentive Plan, 1988 Director Stock Option Plan, as amended, and 1990 Employee Stock Purchase Plan, as amended, and upon the exercise of outstanding warrants. At December 31, 1997, approximately 13,347,000 options to purchase shares of GGD Stock were outstanding. Pursuant to the Genzyme Charter, GTR and GMO Designated Shares are authorized shares of GTR Stock and GMO Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GTR or GMO. GTR and GMO Designated Shares are created in certain circumstances when cash or other assets are transferred from Genzyme General to GTR or GMO. In October 1996, the Genzyme Board approved the allocation of up to $20.0 million in cash from Genzyme General to GTR to provide initial funding for GTR's joint venture with Diacrin, of which $7.0 million has been allocated to GTR in exchange for 721,455 GTR Designated Shares. In 1997, the Genzyme Board approved the allocation of up to $25.0 million in cash from Genzyme General to GMO (the "GMO Equity Line"). The amount available was reduced to $5.0 million as a result of the issuance of the GMO Debentures in August 1997. No draws have been made under the GMO Equity Line to date. As of December 31, 1997, there were approximately 885,000 GTR Designated Shares reserved for issuance. During 1997, the Company distributed approximately 2,292,000 GTR Designated Shares as a dividend to Genzyme General shareholders. As of December 31, 1997, there were 6,000,000 GMO Designated Shares reserved for issuance. There have been no issuances of GMO Designated Shares to date. Further disclosures relating to Genzyme's stock options and GTR and GMO Designated Shares are included in Note K., "Stockholders' Equity" to the Consolidated Financial Statements which is incorporated herein by reference. STOCK COMPENSATION PLANS The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its four stock-based compensation plans, the 1990 Equity Incentive Plan, and the 1997 Equity Incentive Plan (both of which are stock option plans), the 1988 Director Stock Option Plan (a stock option plan) and the 1990 Employee Stock Purchase Plan (a stock purchase plan) and, accordingly, no compensation expense has been recognized for shares purchased or for options granted to employees with an exercise price equal to fair market value. Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation" ("SFAS 123"), Genzyme General's net (loss) income and (loss) earnings per share would have been as follows:
DECEMBER 31, ------------------------------- (Amounts in thousands, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------- GENZYME GENERAL: Net income (loss): As reported ............................... $77,447 $(30,502) $43,680 Pro forma ................................. $65,440 $(40,558) $40,429 Basic earnings per share: As reported ............................... $ 1.01 $ (0.45) $ 0.79 Pro forma ................................. $ 0.86 $ (0.59) $ 0.73 Diluted earnings per share: As reported ............................... $ 0.98 $ (0.45) $ 0.68 Pro forma ................................. $ 0.83 $ (0.59) $ 0.63
For the assumptions used in the SFAS 123 calculations for Genzyme General for the three years ended December 31, 1997, 1996 and 1995 -- see Note K., "Stockholders Equity" to the Consolidated Financial Statements which is incorporated herein by reference. The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995 and additional awards are anticipated in future years. NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------ Fees for research and development activities: Neozyme II .................................. $ -- $19,799 $24,198 Research contracts .......................... 8,041 3,212 2,560 ------- ------- ------- $ 8,041 $23,011 $26,758 ======= ======= =======
The disclosures related to Neozyme II and Genzyme General participation in research contracts are included in Note H., "Investments in GTC and RenaGel LLC," and Note L., "Research and Development Agreements -- Genzyme Development Partners, L.P." to the Consolidated Financial Statements which are incorporated herein by reference. NOTE N. COMMITMENTS AND CONTINGENCIES From time to time Genzyme General has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1997, there were no asserted claims against Genzyme General which, in the opinion of management, if adversely decided would have a material adverse effect on Genzyme General's financial position and results of operations. 25 26 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NOTE O. 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) 1997 1996 1995 ------------------------------------------------------------------ Domestic (1) ......... $81,805 $(37,615) $62,633 Foreign .............. 8,822 10,308 2,696 ------- -------- ------- Total .......... $90,627 $(27,307) $65,329 ======= ======== ======= Currently payable: Federal ........... $ 31,102 $ 37,985 $ 18,780 State ............. 3,498 6,889 5,949 Foreign ........... 2,971 3,616 1,349 -------- -------- -------- Total current .. 37,571 48,490 26,078 Deferred: Federal ........... (3,723) (28,448) 4,507 State ............. (247) 164 (79) -------- -------- -------- Total deferred . (3,970) (28,284) 4,428 -------- -------- -------- Provision for income taxes ............. $ 33,601 $ 20,206 $ 30,506 ======== ======== ========
(1) Includes $130.6 million and $14.2 million in charges for purchased research and development and acquisition expenses in 1996 and 1995, respectively. Provisions for income taxes were at rates other than the U.S. federal statutory tax rate for the following reasons:
1997 1996 1995 ---------------------------------------------------------------------------------------------------- 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 .................... 1.1 0.8 0.8 State taxes, net ............................................. 3.0 5.2 5.2 Foreign sales corporation .................................... (2.4) (2.1) (1.4) Nondeductible amortization ................................... 3.1 2.1 1.4 Benefit of tax credits ....................................... (1.8) -- -- Other, net ................................................... (0.9) 2.2 0.7 Utilization of operating loss carryforwards .................. -- (2.6) (3.8) ------- ------- ------ Effective tax rate before certain charges .................. 37.1 40.6 37.9 Gross charge for purchased research and development net of related tax benefits ......................................... -- 33.4 8.8 ------- ------- ------ 37.1 74.0 46.7 Allocated tax benefits generated by Genzyme Tissue Repair .... (19.5) (62.3) (13.6) Allocated tax benefits generated by Genzyme Molecular Oncology (3.1) -- -- ------- ------- ------ Effective tax rate attributable to Genzyme General Stock ..... 14.5% 11.7% 33.1% ========================================================================================================
26 27 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS At December 31 the components of net deferred tax assets were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards .......................... $ 4,909 $10,427 Tax credits ............................................... 5,091 -- Deferred gain ............................................. 2,237 -- Intangible amortization ................................... 28,730 29,901 Investments in unconsolidated subsidiaries ................ 1,323 -- Realized and unrealized capital losses .................... 16,987 17,603 Reserves and other ........................................ 23,716 17,687 Allocation of tax benefit from Genzyme Tissue Repair ...... 15,515 13,266 Allocation of tax benefit from Genzyme Molecular Oncology.. 3,252 -- - ------------------------------------------------------------------------------------------------- Gross deferred tax asset .................................. 101,760 88,884 Valuation allowance ....................................... (14,914) (15,299) - ------------------------------------------------------------------------------------------------- Net deferred tax asset .................................... 86,846 73,585 Deferred tax liabilities: Depreciable assets ........................................ (23,257) (13,871) - ------------------------------------------------------------------------------------------------- Net deferred tax asset .................................... $ 63,589 $59,714 =================================================================================================
Due to uncertainty surrounding the realization of certain favorable tax attributes primarily relating to capital losses related to the purchase of in-process research and development, the Company placed a valuation allowance of $14.9 million and $15.3 million for December 31, 1997 and December 31, 1996, respectively, against otherwise recognizable deferred tax assets. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At December 31, 1997 Genzyme General had U.S. net operating loss and tax credit carryforwards of $14.0 million and $5.1 million, respectively, for income tax purposes. These carryforwards expire from 2002 to 2012. Utilization of tax net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). Tax credits of $2.5 million expire in 2012. The remaining $2.6 million of tax credits carry forward indefinitely. NOTE P. BENEFIT PLANS The disclosures relating to Genzyme's domestic employee savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") and defined-benefit pension plans are included in Note O., "Benefit Plans" to the Consolidated Financial Statements which is incorporated herein by reference. Genzyme General contributed $1.3 million, $1.1 million, and $0.7 million to the 401(k) Plan in 1997, 1996 and 1995, respectively. The Company has defined-benefit pension plans covering substantially all the employees of DSP and its foreign subsidiaries. Pension expense for Genzyme General related to these plans for 1997, 1996 and 1995 was approximately $1,110,000, $601,000 and $498,000, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans are not presented because the plans are not material. 27 28 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NOTE Q. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS Genzyme General operates in the healthcare industry and manufactures and markets its products in two major geographic areas, the United States and Europe. Genzyme General's principal manufacturing facilities are located in the United States, United Kingdom, Switzerland and Germany. Genzyme General purchases products from its British and Swiss subsidiaries for sale to customers in the United States. Transfer prices from the foreign subsidiaries are intended to allow Genzyme to produce profit margins commensurate with its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary European distributor of Genzyme General's therapeutic products. Certain information by geographic area follows (dollars in thousands):
UNITED STATES NETHERLANDS UK OTHER ELIMINATION COMBINATION ----------- ----------- ------- ------- ----------- ----------- 1997 Net sales - unaffiliated customers ..................... $ 423,912 $ 40,436 $32,852 $88,562 $ -- $ 585,762 Transfers between geographic areas .......... 119,391 63,100 28,205 2,634 (213,330) -- ----------- -------- ------- ------- --------- ----------- Total product and service sales .............. 543,303 103,536 61,057 91,196 (213,330) 585,762 Pre-tax income .............................. 78,942 1,539 3,304 2,699 4,143 90,627 Net income .................................. 70,008 948 2,172 1,235 3,084 77,447 Assets ...................................... 1,144,583 30,638 69,125 39,304 (80,594) 1,203,056 Liabilities ................................. 180,117 28,329 2,058 22,114 (10,438) 222,180 1996 Net sales - unaffiliated customers ..................... $ 354,323 $ 56,865 $21,217 $53,716 $ -- $ 486,121 Transfers between geographic areas .......... 101,786 33,659 30,435 3,615 (169,495) -- ----------- -------- ------- ------- --------- ----------- Total product and service sales .............. 456,109 90,524 51,652 57,331 (169,495) 486,121 Pre-tax income .............................. (30,124) 920 8,349 1,807 (8,259) (27,307) Net income .................................. (31,956) 520 8,349 844 (8,259) (30,502) Assets ...................................... 1,170,826 33,500 69,379 41,511 (85,697) 1,229,519 Liabilities ................................. 283,756 31,930 2,241 27,410 (43) 345,294 1995 Net sales - unaffiliated customers ..................... $ 247,138 $ 70,532 $13,669 $20,264 $ -- $ 351,603 Transfers between geographic areas .......... 74,697 -- 19,543 4,115 (98,355) -- ----------- -------- ------- ------- --------- ----------- Total product and service sales .............. 321,835 70,532 33,212 24,379 (98,355) 351,603 Pre-tax income .............................. 65,941 836 93 1,759 (3,300) 65,329 Net income .................................. 45,856 540 93 491 (3,300) 43,680 Assets ...................................... 873,252 27,703 54,595 25,692 (126,656) 854,586 Liabilities ................................. 156,650 26,652 1,962 10,041 -- 195,305
Substantially all revenue from research and development contracts is earned in the United States. Entities comprising Other include Genzyme General's operations in Germany, France, Switzerland, Japan, Italy, Belgium, Sweden, Canada, Israel, Spain, Argentina and Brazil. Export sales from the United States were $36.2 million, $27.4 million and $20.5 million in 1997, 1996 and 1995, respectively. Export sales by Genzyme's Netherlands subsidiary amounted to $40.4 million, $56.9 million and $66.2 million in 1997, 1996 and 1995, respectively. Genzyme General's results of operations are highly dependent upon the sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. In 1997, 1996 and 1995 Cerezyme(R) enzyme and Ceredase(R) enzyme represented 63%, 62% and 71% of total product sales, respectively. In 1997, 1996 and 1995, Genzyme General marketed its Cerezyme(R) enzyme and Ceredase(R) enzyme products directly to physicians, hospitals and treatment centers, and sold products representing approximately 18%, 12% and 14%, respectively, of net revenue to an unaffiliated distributor. Otherwise, the credit risk associated with trade receivables is mitigated due to the large number of customers and their broad dispersion over different industries and geographic areas. 28 29 GENZYME GENERAL NOTES TO COMBINED FINANCIAL STATEMENTS NOTE R. QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1997 and 1996 are displayed in the following table.
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- -------- --------- 1997 Net sales .......................................... $144,606 $147,614 $ 148,841 $ 156,142 Gross profit ....................................... 87,084 91,454 94,387 71,358 Net income (1) ..................................... 21,238 23,283 24,357 8,569 Income per share (2,3): Basic ............................................ 0.28 0.31 0.32 0.11 Diluted .......................................... 0.27 0.30 0.31 0.11 1996 Net sales .......................................... $111,783 $113,988 $ 141,022 $ 144,649 Gross profit ....................................... 64,171 67,260 73,867 82,004 Net income (loss) (4) ............................. 19,034 20,284 (5,908) (63,912) Income (loss) per share (2,3): Basic ............................................ 0.30 0.30 (0.09) (0.91) Diluted .......................................... 0.26 0.27 (0.09) (0.91)
- --------- (1) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million resulting from certain strategic financial provisions recorded in December 1997 (see Note C., "Strategic Financial Provisions" to the Combined Financial Statements above). (2) Income (loss) per share data for the first, second and third quarters of 1997 and for all quarters of 1996 has been restated to reflect the adoption in December 1997 of SFAS 128, "Earnings Per Share" and is pro forma. (See Note A., "Summary of Significant Accounting Policies" to the Combined Financial Statements above.) (3) Cumulative quarterly income per share data does not equal the annual amounts due to changes in the average common and common equivalent shares outstanding. (4) Includes pre-tax charges in the third and fourth quarters of 1996 of $24.2 million and $106.5 million, respectively, for acquired incomplete technology (See Note C., "Acquisitions" to the Consolidated Financial Statements which is incorporated herein by reference). NOTE S. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The disclosures relating to off-balance sheet financial instruments are included in Note D., "Off-Balance-Sheet Financial Instruments" to the Consolidated Financial Statements which is incorporated herein by reference. 29 30 GENZYME GENERAL REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: We have audited the accompanying combined balance sheets of Genzyme General (as described in Note A) as of December 31, 1997 and 1996, 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, 1997. The combined financial statements and financial statement schedule are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements of Genzyme General present fairly, in all material respects, the financial position of Genzyme General as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme General 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 February 27, 1998 30 31 GENZYME GENERAL DIVISION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
========================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------------------------------------------------------------------- ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ---------------------------------------------------------------------------------------------------------- Year ended December 31, 1997: Allowance for doubtful accounts $16,100,400 $ 2,355,000 - $7,156,400 $11,299,000 Inventory Reserve $ 3,247,200 $15,585,000(1) - $3,840,000 $14,992,200 Year ended December 31, 1996: Allowance for doubtful accounts $ 7,833,800 $ 8,093,600 $2,534,000(3) $2,361,000(2) $16,100,400 Inventory Reserve $ 3,082,200 $ 1,426,600 - $1,261,600 $ 3,247,200 Year ended December 31, 1995: Allowance for doubtful accounts $ 5,992,300 $ 5,180,000 - $3,338,500(2) $ 7,833,800 Inventory Reserve $ 1,131,000 $ 2,920,700 - $ 969,500 $ 3,082,200
- ----------- (1) Includes $13.4 million of strategic financial provisions (See Note C, "Strategic Financial Provisions" to Genzyme General's Combined Financial Statements). (2) Uncollectible accounts written off, net of recoveries. (3) Reserve acquired in acquisition. 32 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA CONSOLIDATED STATEMENTS OF OPERATIONS DATA (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Revenues: Net product sales ........................... $ 529,927 $ 424,483 $ 304,373 $ 238,645 $ 183,366 Net service sales ........................... 67,158 68,950 52,450 50,010 50,511 Revenues from research and development contracts: Related parties ........................... 8,356 23,011 26,758 20,883 34,162 Other ..................................... 3,400 2,310 202 1,513 2,332 --------- --------- --------- --------- --------- Total revenues........................... 608,841 518,754 383,783 311,051 270,371 Operating costs and expenses: Cost of products sold (1) ................... 206,028 155,930 113,964 92,226 64,704 Cost of services sold ....................... 47,289 54,082 35,868 32,403 34,558 Selling, general and administrative (1) ..... 200,476 162,264 110,447 80,990 72,752 Research and development (including research and development related to contracts) ...... 89,558 80,849 68,845 55,334 48,331 Amortization of intangibles ................. 17,245 8,849 4,647 4,741 5,964 Purchase of in-process research and development (2) ........................... 7,000 130,639 14,216 11,215 49,000 Other (3) ................................... -- 1,465 -- -- 26,517 --------- --------- --------- --------- --------- Total operating costs and expenses....... 567,596 594,078 347,987 276,909 301,826 --------- --------- --------- --------- --------- Operating income (loss) ........................ 41,245 (75,324) 35,796 34,142 (31,455) Other income (expenses): Equity in net loss of unconsolidated subsidiaries ............................... (12,258) (4,360) (1,810) (1,353) -- Other (1) ................................... (2,000) 1,711 1,608 (9,752) 9,192 Investment income ........................... 11,409 15,341 8,814 9,101 12,209 Interest expense ............................ (12,667) (6,990) (1,109) (1,354) (2,500) --------- --------- --------- --------- --------- Total other income (expenses)............. (15,516) 5,702 7,503 (3,358) 18,901 --------- --------- --------- --------- --------- Income (loss) before income taxes .............. 25,729 (69,622) 43,299 30,784 (12,554) Benefit (provision) for income taxes ........... (12,100) (3,195) (21,649) (14,481) 6,459 --------- --------- --------- --------- --------- Net income (loss)(4,6) ......................... $ 13,629 $ (72,817) $ 21,650 $ 16,303 $ (6,095) ========= ========= ========= ========= =========
31 33 GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED) CONSOLIDATED STATEMENTS OF OPERATIONS DATA (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- COMMON SHARE DATA: 1997 1996 1995 1994 1993 ----------- ---------- --------- -------- --------- ATTRIBUTABLE TO GENZYME GENERAL: Net income (loss) attributable to Genzyme General Division Common Stock ("GGD Stock") (1,2,3,4,6) ..................................... $ 77,447 $ (30,502) $ 43,680 $ 32,054 $ 18,020 =========== ========== ========= ======== ========= Per Genzyme General common share-basic (1,2,4,5,6): Net income (loss) .............................. $ 1.01 $ (0.45) $ 0.79 $ 0.67 $ 0.37 =========== ========== ========= ======== ========= Weighted average shares outstanding ............. 76,531 68,289 55,531 48,141 48,075 =========== ========== ========= ======== ========= Per Genzyme General common and common equivalent share-diluted (4,5,6): Net income (loss) ............................... $ 0.98 $ (0.45) $ 0.68 $ 0.58 $ 0.36 =========== ========== ========= ======== ========= Adjusted weighted average shares outstanding .... 78,925 68,289 63,967 55,321 56,282 =========== ========== ========= ======== ========= ATTRIBUTABLE TO GENZYME TISSUE REPAIR: Net loss attributable to Genzyme Tissue Repair Division Common Stock ("GTR Stock") (4,6) ............................ $ (45,984) $ (42,315) $ (22,030) $(15,751) $ (24,115) =========== ========== ========= ======== ========= Per GTR basic and diluted common share (6) ....... $ (3.07) $ (3.38) $ (2.28) $ (4.40) $ (7.43) =========== ========== ========= ======== ========= Weighted average basic and diluted shares outstanding .................................... 14,976 12,525 9,659 3,578 3,245 =========== ========== ========= ======== ========= ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY: Net loss attributable to Genzyme Molecular Oncology Division Common Stock ("GMO Stock")(6).. $ (19,578) $ (1,003) $ (464) $ (37) -- =========== ========== ========= ======== Pro forma per GMO basic and diluted common share (6,7) ..................................... $ (4.98) $ (0.26) $ (0.12) $ (0.01) -- =========== ========== ========= ======== Pro forma basic and diluted shares outstanding (7) ................................. 3,929 3,929 3,929 3,929 -- =========== ========== ========= ========
CONSOLIDATED BALANCE SHEET DATA: DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- -------- -------- ------- Cash and investments (8) ................... $ 246,341 $ 187,955 $326,236 $153,460 $168,953 Working capital ............................ 350,822 395,605 352,410 103,871 99,605 Total assets ............................... 1,295,453 1,270,508 905,201 658,408 542,052 Long-term debt, convertible debentures and capital lease obligations excluding current portion (9,10) .................... 170,276 241,998 124,473 126,729 144,674 Stockholders' equity (9,11) ................ 1,012,050 902,309 705,207 418,964 334,072
There were no cash dividends paid. NOTES TO SELECTED FINANCIAL DATA: (1) In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges mainly associated with its Pharmaceutical and Surgical Products businesses and the sale of Genetic Design, Inc. ("GDI"), which was sold in 1996. This resulted in (i) an $18.1 million charge to cost of products sold primarily related to the melatonin, bulk pharmaceuticals and fine chemical product lines which are being discontinued by Genzyme General; (ii) charges of $5.5 million to cost of products sold and $3.5 million to selling, general and administrative ("SG&A") expense primarily related to the manufacturing and selling of the Sepracoat(TM) product line, which was also discontinued after an advisory panel of the U.S. Food and Drug Administration recommended against granting market approval of this product 32 34 in 1997; and (iii) a $2.0 million charge to other expense related to the uncertainty of collection on certain notes receivable. (2) Genzyme acquired: in 1997, the assets of PharmaGenics, Inc. ("PharmaGenics"); in 1996, Deknatel Snowden Pencer, Inc. ("DSP") and all of the Callable Common Stock of Neozyme II Corporation ("Neozyme II"); in 1995, the publicly-held, minority interest in IG Laboratories, Inc. ("IG"); in 1994, all of the outstanding stock of BioSurface Technology, Inc. ("BioSurface"); and, in 1993, all of the rights to the two remaining development programs of Neozyme I Corporation ("Neozyme I"). In connection with these transactions, all of which were accounted for as purchases, Genzyme charged to operations the following amounts which represented the purchase of in-process research and development: 1997, $7.0 million; 1996, $130.6 million; 1995, $14.2 million; 1994, $11.2 million; and 1993, $49.0 million. (3) In 1996, Genzyme incurred restructuring charges of $1.5 million related to the consolidation of laboratory operations in its diagnostic services business and to the consolidation of foreign operations in its surgical products business in connection with certain acquisitions. In 1993, Genzyme incurred restructuring charges of $2.8 million related to the consolidation of laboratory operations in its diagnostic services business and wrote off $23.7 million for the value of impaired goodwill associated primarily with IG's acquisition of GDI in 1992. (4) Net income (loss) attributable to Genzyme General Division ("Genzyme General") and Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and net income (loss) per common and common equivalent share of GGD Stock and GTR Stock for the year ended December 31, 1993 give effect to the provisions of the Management and Accounting Policies adopted by the Genzyme Board of Directors (the "Genzyme Board") in connection with the creation of GTR and accordingly, are pro forma presentations. (5) Reflects the July 25, 1996 2-for-1 stock split of GGD Stock effected by means of a 100% stock dividend paid to stockholders of record on July 11, 1996. All share and per share amounts have been restated to reflect this split. (6) In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") which established a different method of computing net income per share ("EPS") than is required under the provisions of Accounting Principles Board Opinion No. 15 ("APB 15"). The Company adopted SFAS 128 in the fiscal quarter ending December 31, 1997. All historical EPS data presented herein has been restated to conform to the provisions of SFAS 128. (See Note A., "Summary of Significant Accounting Policies" to the Consolidated Financial Statements). (7) Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO") is a division of Genzyme Corporation. GMO was part of Genzyme General from December 1, 1994 (Date of Inception) to June 18, 1997. Therefore, pro forma net loss per share data is presented for GMO Stock for all periods presented as there were no shares of GMO Stock outstanding prior to June 18, 1997. In each year, approximately 3,929,000 shares of GMO Stock, which represents the shares of GMO Stock issued to effect the merger of PharmaGenics with and into Genzyme on June 18, 1997, have been used for the pro forma loss per basic and diluted share calculation. (8) Cash and investments includes cash, cash equivalents, and short and long-term investments and excludes investments in equity securities. (9) In October 1991, the Company issued $100.0 million of 6 3/4% convertible subordinated notes due October 2001 and received net proceeds of $97.3 million. The notes were converted into shares of GGD Stock in March 1996. In March 1996, the convertible subordinated notes were converted into approximately 3,782,000 shares of GGD Stock and 255,000 shares of GTR Stock. See Note J., "Long-Term Debt and Leases" to the Consolidated Financial Statements for disclosures relating to the GTR and GMO private placements. (10) In June 1996, the Company's $15.0 million credit line with a commercial bank was increased to $215.0 million in connection with the acquisition of DSP in July 1996. In November 1996, this credit line was refinanced with a syndicated group of banks and the line of credit was increased to $225.0 million (the "Revolving Credit Facility"). As of December 1996, Genzyme had $218.0 million outstanding under the Revolving Credit Facility. As of December 31, 1997, Genzyme had $118.0 million outstanding under the Revolving Credit Facility. (See Note J., "Long-Term Debt and Leases" to the Consolidated Financial Statements). (11) In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for $7.75 per share. Net proceeds from the offering after underwriting discounts, commissions and offering costs were $29.0 million. In October 1995, Genzyme General completed the sale of 5,750,000 shares of GGD Stock for net proceeds of $141.3 million. In September 1995, GTR completed the sale of 3,000,000 shares of GTR Stock for net proceeds of $42.3 million. 33 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES' FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the expectations of the management of Genzyme Corporation ("Genzyme" or the "Company") as of the filing date of this Annual Report. The actual results for Genzyme could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results". Stockholders and potential investors should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of Genzyme. Genzyme is a biotechnology company that develops innovative products and services for major unmet medical needs. Genzyme has three divisions: Genzyme General, which develops and markets therapeutic and surgical products and diagnostic services and products; Genzyme Tissue Repair, which develops and markets biological products for the treatment of cartilage damage, severe burns, chronic skin ulcers and neurodegenerative diseases; and Genzyme Molecular Oncology, which was formed in June 1997 in connection with the acquisition of PharmaGenics and develops gene-based approaches to cancer therapy through genomics, gene therapy and a small molecule drug discovery program. Genzyme owns approximately 43% of the outstanding shares of the common stock of Genzyme Transgenics Corporation ("GTC"). GTC applies transgenic technology to enable the development and production of recombinant proteins and monocolonal antibodies for medical uses. Primedica Corporation, GTC's contract research organization, provides preclinical development and testing services to pharmaceutical, biotechnology, medical device and other companies. GTC is also developing idiotypic vaccines in collaboration with the National Cancer Institute. Genzyme Corporation provides separate financial statements for the Company and its subsidiaries on a consolidated basis and for each of Genzyme General, GTR and GMO. The financial statements of each division include the financial position, results of operations and cash flows of programs and products allocated to the division under the Company's Restated Articles of Organization, as amended (the "Genzyme Charter"), and the management and accounting policies adopted by the Genzyme Board to govern the relationship of the divisions. The financial information of Genzyme General, GTR and GMO, taken together, include all accounts which comprise the consolidated financial information presented for Genzyme and its subsidiaries. RESULTS OF OPERATIONS The following discussion summarizes the key factors management considers necessary in reviewing Genzyme's consolidated results of operations. Detailed discussion and analysis of each division's results of operations are provided in the respective Management's Discussion and Analysis of Results of Operations and Financial Condition for each division. In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges mainly associated with its Pharmaceutical and Surgical Products businesses and the sale of GDI which was sold in 1996. The Pharmaceutical business will now focus on products that are more consistent with Genzyme General's long-term business strategy of moving towards higher-value products and away from fine chemical and bulk pharmaceuticals. This change in strategy resulted in a $18.1 million charge to cost of products sold primarily related to the melatonin, bulk pharmaceuticals and fine chemical product lines which are being discontinued. In addition, Genzyme General recorded charges of $5.5 million to cost of products sold and $3.5 million to SG&A expense primarily related to the manufacturing and selling of the Sepracoat(TM) product line, which was also discontinued after an advisory panel of the U.S. Food and Drug Administration ("FDA") recommended against granting marketing approval of this product in 1997. Genzyme General also recorded a $2.0 million charge to other expense related to the uncertainty of collection on certain notes receivable. Because of the strategic changes in Genzyme General's business the financial condition and results of operations will now be discussed differently than in previous years. Genzyme General is now focusing its efforts within three business areas - therapeutics, surgical products and diagnostics. 34 36 GENZYME CORPORATION (CONT.) 1997 AS COMPARED TO 1996 REVENUES. Total revenues for 1997 were $608.8 million compared to $518.8 million in 1996, an increase of 17%. Product and service revenues were $597.1 million in 1997, compared to $493.4 million in 1996, an increase of 21%. Revenues from research and development contracts for 1997 were $11.8 million compared to $25.3 million in 1996, a decrease of 53%. Product revenues consist of sales by Genzyme General. Product revenues in 1997 increased 25% to $529.9 million from $424.5 million in 1996, due primarily to increased sales of Cerezyme(R) enzyme and a full year of sales by DSP, which was acquired by the Company in July 1996. Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme by Genzyme General increased 26% to $332.7 million in 1997 from $264.6 million in 1996, due to continued growth in new patient accruals in existing markets. Genzyme's results of operations are highly dependent on sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, which together represented 63% of consolidated product sales in 1997 compared to 62% in 1996. In October 1996, Genzyme General received FDA approval to manufacture Cerezyme(R) enzyme in its large-scale manufacturing plant located in Boston, Massachusetts. Having achieved the ability to produce uninterrupted supply of Cerezyme(R) enzyme at the plant, Genzyme General commenced the process of converting patients receiving Ceredase(R) enzyme to Cerezyme(R) enzyme. The conversion of patients from Ceredase(R) enzyme to Cerezyme(R) enzyme is substantially complete in the United States. Genzyme General may be required to record a charge to earnings for the equipment used exclusively for and any inventory of Ceredase(R) enzyme remaining upon completion of the patient conversion process and, if the conversions proceed more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme and the corresponding charge to earnings could be material. Genzyme General's Surgical Products business unit was formed in July 1996 by Genzyme General following the acquisition of DSP and combines the business of DSP with Genzyme General's hyaluronic acid-based products designed to limit postoperative adhesions (the "Sepra Products"). Sepra Products primarily consist of sales of Seprafilm(R). Product sales by the Surgical Products business unit for 1997 were $100.8 million as compared to $50.7 million for the period from July 1, 1996, the date of the acquisition of DSP, through December 31, 1996. Surgical Products sales consisted primarily of sales of cardiovascular fluid management products, surgical closures and surgical instruments. These product sales (excluding sales of Sepra Products) declined 12% in the second half of 1997 in comparison to the same period of 1996 due to a loss of volume and severe price competition in the fluid management business. DSP's product sales for the first half of 1996, which are not included in the results of Genzyme General, were $53.2 million. Service revenues primarily consist of genetic testing services by Genzyme General and sales of GTR's autologous cultured chondrocytes ("Carticel(TM) AuCC") and Epicel [SM] services. Service revenues for genetic testing in 1997 decreased 9% primarily due to the loss of revenue from GDI, which was sold in November 1996, offset in part by higher unit volumes that were primarily attributable to the acquisition of Genetrix, Inc. ("Genetrix") which was included in Genzyme General's results of operations from May 1, 1996 forward. International sales as a percentage of total sales in 1997 increased to 36% from 35% in 1996, due primarily to a 32% increase in combined international sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, offset in part by additional domestic sales by DSP. Revenues from research and development contracts are primarily attributable to Genzyme General. Revenues from research and development contracts for 1997 decreased 53% to $11.8 million from $25.3 million in 1996, due primarily to the absence of revenue from Neozyme II which was acquired by 35 37 GENZYME CORPORATION (CONT.) Genzyme in the fourth quarter of 1996. This decrease was offset in part by increases in revenues from research and development contracts with third parties. Revenues from Neozyme II were $19.8 million in 1996. MARGINS AND OPERATING EXPENSES. Gross margins for 1997 were 58%, as compared to 57% in 1996. Excluding the effects of special charges, gross margins were 62% in 1997 compared to 57% in 1996. Genzyme provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for 1997 decreased to 61% from 63% in 1996. Excluding the effects of special charges, product margins in 1997 were 66%. The increase in product margins before special charges in 1997 is primarily due to increased sales volume of Cerezyme[R] enzyme offset in part by a full year of sales of lower margin DSP products. Service margins for 1997 were 30%, compared to 22% in 1996 due to the consolidation of Genetrix, the sale of GDI in 1996 and the resulting elimination of redundant facilities and staffing. SG&A expenses and amortization of intangibles for 1997 were $217.7 million compared to $171.1 million in 1996, an increase of 27%. Excluding special charges, SG&A expenses increased by 21% over 1996. The increase was due primarily to the acquisition of DSP and increased staffing in support of the growth in several product lines, most notably in support of the North American introduction of Seprafilm[R] and increased surgeon training costs related to Carticel(TM) AuCC. DSP added $16.7 million in SG&A expenses and amortization of intangibles in the first half of 1997 for which comparable amounts were not included in the results of Genzyme General in 1996. The acquisition of Genetrix did not materially affect SG&A expenses in 1996 and 1997 due to consolidation of operations. GMO incurred $5.1 million in amortization of intangibles in 1997 as a result of the acquisition of PharmaGenics, and there was no similar amount in 1996. In 1997, GMO recorded a $7.0 million charge for the purchase of in-process technology which has no alternative future use, as part of the acquisition of PharmaGenics. Research and development expenses for 1997 were $89.6 million compared to $80.8 million in 1996, an increase of 11%, due to Genzyme General's commitment to fund development costs of the transgenic recombinant human antithrombin III ("ATIII") program being conducted by GTC and increased spending on internal programs, most notably Thyrogen[R]. OTHER INCOME AND EXPENSES. Other income and expenses were a net expense of $15.5 million (which includes a $2.0 million special charge) compared to other income of $5.7 million in 1996. The change was due primarily to a decrease in investment income and an increase in interest expense as well as increased equity in net losses of unconsolidated affiliates. Investment income for 1997 was $11.4 million, compared with $15.3 million for 1996. The decrease resulted from lower average cash and investment balances. Investment income for 1997 did not include any material gain or loss from sales of securities. Interest expense for 1997 was $12.7 million, compared to $7.0 million in 1996. The increase resulted from interest on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II and interest related to convertible notes of GTR and GMO issued in 1997. Equity in net loss of unconsolidated affiliates increased from $4.3 million in 1996 to $12.3 million in 1997. The change is primarily due to increased losses from the joint venture established between Genzyme Tissue Repair and Diacrin Inc., ("Diacrin") to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans, increased losses from GTC and losses resulting from the joint venture between Genzyme General and GelTex Pharmaceuticals, Inc. ("GelTex") for the development and commercialization of RenaGel[R] phosphate binder. The tax provision for 1997 varies from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible interest, the foreign sales corporation, nondeductible amortization of intangibles, tax credits and Genzyme's share of the losses of unconsolidated affiliates. In 1997, the effective tax rate was 37%, compared to 41% in 1996. The decrease in the rate was due to additional tax credits in 1997 as well as a change in Massachusetts state law. 1996 COMPARED TO 1995 REVENUES. Total revenues for 1996 were $518.8 million compared to $383.8 million in 1995, an increase of 35%. Product revenues consisted of product sales by Genzyme General which increased 39% to $424.5 million in 1996 from $304.4 million in 1995. The increase resulted primarily from the addition of sales from DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme by Genzyme General increased 23% to $264.6 million in 1996 from $215.4 million in 1995. Service revenues consisted of sales of genetic diagnostic testing services by Genzyme General's Diagnostic Services business unit and sales of Genzyme Tissue Repair's Carticel(TM) AuCC and Epicel(SM) Service. Service revenues in 36 38 GENZYME CORPORATION (CONT.) 1996 increased 31% to $69.0 million from $52.5 million in 1995, due primarily to higher unit volumes in the Diagnostic Services business unit due primarily to the acquisition of Genetrix. Revenues from research and development contracts for 1996 were attributable entirely to Genzyme General. Revenues from research and development contracts decreased 6% to $25.3 million in 1996 from $27.0 million in 1995. The decrease was due to the acquisition of Neozyme II in the fourth quarter of 1996. MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 57%, compared to 58% for 1995. Product margins for 1996 were 63%, level with 1995, as increased sales of higher margin products from the Company's existing portfolio were offset by lower margin products acquired with DSP. Service margins for 1996 decreased to 22% from 32% in 1995 due primarily to increased costs associated with sales of Carticel(TM) AuCC and increased costs during the consolidation period associated with Genzyme General's acquisition of Genetrix. SG&A expenses for 1996 were $162.3 million compared to $110.4 million in 1995, an increase of 47%. The increase resulted primarily from the acquisitions of DSP and Genetrix and increased staffing in support of the growth in several product lines and the growth in sales of Carticel(TM) AuCC. Research and development expenses for 1996 were $80.8 million compared to $68.8 million in 1995, an increase of 17%. The increase was primarily due to Genzyme General's commitment to fund development costs of the ATIII program being conducted by GTC and increased spending on internal programs. Genzyme recorded the following acquisition-related charges in 1996: $24.2 million and $106.5 million for the purchase of in-process research and development in connection with the acquisitions of DSP and Neozyme II, respectively; $8.8 million for the amortization of intangible assets including goodwill recorded in connection with the acquisitions of Genetrix, DSP and, in 1995, the publicly-held, minority interest in IG; and $1.5 million for restructuring charges incurred in connection with the acquisitions of DSP and Genetrix. OTHER INCOME AND EXPENSES. Other income and expenses were $5.7 million in 1996, compared to $7.5 million in 1995, a 24% decrease. The decrease was primarily the result of increases in interest expenses and Genzyme's equity in the net loss of GTC which offset a 74% increase in investment income. Interest expense for 1996 was $7.0 million, compared to $1.1 million in 1995. The increase resulted from interest on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II. The tax provision for 1996 varies from the U.S. statutory tax rate because of the provision for state income taxes, tax credits and taxes on foreign earnings, losses of unconsolidated affiliates and nondeductible charges in connection with tax-free acquisitions. In 1996, the effective tax rate before these acquisitions was 41%, compared to 37% in 1995. The increase in the rate was due to nondeductible goodwill charges in 1996 and to the absence in 1996 of certain operating loss carryforwards available in 1995. The tax provision in 1996 resulted from taxes on foreign earnings and taxes on earnings before acquisition-related charges comprising charges for goodwill and incomplete technologies accruing from the acquisitions of DSP and Genetrix. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES As of December 31, 1997, Genzyme had cash, cash equivalents and investments (excluding equity securities) of $246.3 million, an increase of $58.3 million from December 31, 1996. In 1997 operating and financing activities provided $39.7 million and $87.0 million of cash, respectively, investing activities used $115.2 million and fluctuations in exchange rates caused a reduction in cash of $2.3 million. In 1997, financing activities provided $156.0 million of cash proceeds from the exercise of stock options and warrants and the issuance of stock under the employee stock purchase plan, and $32.1 million from the issuance of debt, and used $101.1 million for the repayment of debt and capital lease obligations. At December 31, 1997, $118.0 million was outstanding under the $225.0 million Revolving Credit Facility, of which $95.0 million was allocated to Genzyme General, $18.0 million was allocated to GTR and $5.0 million was allocated to GMO. In 1997, investing activities used $66.7 million of cash for 37 39 GENZYME CORPORATION (CONT.) net purchases of investments and $29.3 million was used to finance capital expenditures. Genzyme had inventories of $139.7 million, an increase of $14.4 million over December 31, 1996. The increase was due primarily to support of increased business operations, most notably in Genzyme General's Therapeutics business unit as a result of increased production of Cerezyme(R) enzyme and in the Surgical Products business unit in support of the introduction of Seprafilm(R) in the North American marketplace. On February 28, 1997, GTR raised $13.0 million through the private placement of a 5% convertible note (the "GTR Note") to an affiliate of Credit Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the GTR Note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price preceding the conversion date or the date 15 months after the date of issue. In the first quarter of 1997, GTR recorded $11.5 million of proceeds attributed to the value of the debt and $1.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The debt will be accreted to its face value by a charge to interest expense of $1.5 million over the term of the initial 15 month conversion period. As of December 31, 1997, GTR had accreted $1.0 million of the value of the conversion feature. On June 30, 1997, the Genzyme Board declared a dividend of approximately 2,686,000 GTR Designated Shares which were distributed on July 22, 1997 to Genzyme General stockholders of record as of July 11, 1997, in a tax-free distribution of approximately .03 share of GTR Stock for each share of GGD Stock owned. A total of approximately 2,292,000 shares of GTR Stock were issued to Genzyme General stockholders in the distribution and approximately 394,000 shares of GTR Stock have been reserved for issuance upon the exercise of Genzyme General stock options and warrants outstanding on the record date. In June 1997, Genzyme General formed RenaGel LLC for the final development and commercialization of RenaGel(R) non-absorbed phosphate binder. Funding for the joint venture is provided equally by Genzyme and GelTex. The agreement calls for Genzyme General to pay GelTex $27.5 million, consisting of a $2.5 million equity investment in GelTex made in June 1997, a $15.0 million payment on receipt of FDA marketing approval for RenaGel(R) and a $10.0 million payment one year following receipt of FDA marketing approval for RenaGel(R). In September 1997, Genzyme and GTC entered into an Amended and Restated Convertible Debt Agreement (the "1997 Debt Agreement"), which superseded and replaced the provisions of the 1996 Agreement other than the provisions relating to the development and commercialization of ATIII. Under the 1997 Debt Agreement, the line of credit was reduced from $10.0 million to $8,327,000 and the expiration date of the revolving credit line was extended to March 31, 2000, with an option, at that date, for GTC to convert the outstanding balance to a three-year term loan. The interest rate remains at 7% through April 1, 1998. Thereafter, the interest rate increases annually, starting at a rate equal to the lower of 8% or the prime lending rate in the first year and ending at a rate equal to the lower of 10% or the prime lending rate plus 2% from April 2, 2002 through the final year of the term loan. Financial covenants require positive quarterly earnings before interest, taxes, depreciation, amortization and unfunded research and development expense starting April 1, 1998. Any amounts outstanding under the credit line may be converted into shares of GTC common stock at Genzyme's option at any time for up to the full amount outstanding or at GTC's option on a quarterly basis limited to an amount sufficient to maintain the minimum tangible net worth required for continued listing on the Nasdaq National Market. Under the terms of the BioSurface acquisition agreement, 38 40 GENZYME CORPORATION (CONT.) the Genzyme Board voted in June 1997 to allocate $10.0 million under the agreement in exchange for an increase in the GTR Designated Shares of 1,000,000 shares. In July 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian Medical Discoveries Fund Inc. ("CMDF") to develop stress gene therapies for the treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in connection with the joint venture through the combination of a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian), the purchase of warrants from Genzyme in the amount of $1.0 million (Canadian), the purchase of warrants and preferred stock from StressGen in the amount of $1.4 million (Canadian) and a limited recourse loan bearing interest at 0.125% per annum to StressGen in the amount of $6.6 million (Canadian). Each of Genzyme and StressGen (through a U.S. subsidiary) also made a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian) and a limited recourse loan was made by the U.S. subsidiary of StressGen to StressGen/Genzyme LLC in the amount of $7.0 million (Canadian). In addition, Genzyme and StressGen have agreed to provide in equal shares any additional capital required by the joint venture in excess of the initial $10.0 million (Canadian) funding. Genzyme and StressGen have an option (the "Purchase Option"), payable in equal shares, to purchase CMDF's membership interest in StressGen/Genzyme LLC at any time during the three-year period beginning July 31, 1999 and ending July 31, 2002. The exercise price of the Purchase Option initially will be $15.6 million (Canadian) in July 1999 and will increase monthly thereafter to a final exercise price of $30.5 million (Canadian) in July 2002. The limited recourse loan made by CMDF will be retired in connection with the exercise of the Purchase Option. If the Purchase Option is not exercised on or before July 31, 2002, CMDF may require Genzyme and StressGen to repay $2.0 million (Canadian) each of the limited recourse loan. In addition, at any time during the 30-day period commencing on the date when not less than 75% of the initial funding provided by CMDF has been spent by the joint venture, but in no event later that July 31, 1999, CMDF shall have the right (the "Mandatory Purchase Right") to require Genzyme and StressGen to purchase its membership interest at an aggregate purchase price of $10.0 million (Canadian) plus interest thereon at a rate per annum equal to the Canadian prime rate plus 1%. The Mandatory Purchase Right will terminate if not exercised by CMDF during such 30-day period. Genzyme's share of any amounts payable to CMDF upon exercise of the Purchase Option, the Mandatory Purchase Right or repayment of the limited recourse loan may be paid in cash, Genzyme common stock or any combination thereof at the discretion of Genzyme. In August 1997, GMO completed a private placement of Convertible Debentures (the "GMO Debentures") due August 29, 2002. The GMO Debentures bear interest at 6% per annum and are convertible into shares of GMO Stock beginning no earlier than the 91st day after the 39 41 GENZYME CORPORATION (CONT.) effective date of a registration statement covering the initial public offering of GMO stock (the "GMO IPO"). Beginning on February 26, 1998, the GMO Debentures are convertible at a discount to the average of the closing bid prices of GMO Stock as reported by the Nasdaq National Market for the 20 trading days immediately preceding the applicable conversion date (the "Market Price"), which discount begins at 7% and will increase by an additional one percent every 30 days thereafter until October 24, 1998. Beginning November 23, 1998, the conversion price will be the lower of (i) 85% of the Market Price calculated as of the actual conversion date and (ii) 85% of the Market Price calculated as of November 21, 1998. In no event, however, will the conversion price be less than $7.70 per share (subject to adjustment in the event of any stock split, stock dividend, reclassification, combination or similar event). In the third quarter of 1997, GMO recorded $16.5 million of proceeds attributed to the value of the debt and $3.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The debt will be accreted to its $20.0 million face value by a charge to interest expense of $3.5 million over the term of the initial 15 month conversion period. As of December 31, 1997, GMO had accreted $407,000 of the value of the conversion feature. If GMO has not completed the GMO IPO by August 29, 1998, at the holder's option, the GMO Debentures may be exchanged for 5% debentures convertible into shares of GGD Stock ("GGD Debentures") due August 29, 2003. If the GMO IPO is completed before August 29, 1998 but the aggregate proceeds from the offering are less than $15.0 million or GMO's market capitalization is below $90.0 million, at the holder's option, 50% of the GMO Debentures can be exchanged for GGD Debentures. The exchange option must be exercised within 30 business days after August 29, 1998 or the date on which the GMO IPO is consummated. The GGD Debentures, if issued, will be convertible at the option of the holder at any time prior to maturity into shares of GGD Stock at a 13% premium to the average closing bid price of GGD Stock as reported by the Nasdaq National Market for the five trading days immediately preceding the issue date. In addition, beginning on the 181st day after the completion of the GMO IPO, the holders of GMO Debentures have the option (the "Put Option") to require Genzyme to pay the entire principal amount of the GMO Debentures in cash, together with interest at the rate of 15% per annum (less any interest previously paid) if the conversion price (as calculated above) is less than $7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put Option is exercisable only with respect to the first Put Option Review Period that occurs while the GMO Debentures are outstanding and if the Put Option is not exercised within 15 days after any Put Option Review Period, a period of 90 days from the last day of the previous Put Option Review Period must elapse before another Put Option Review Period commences. The GMO Debentures are callable with cash or stock beginning 18 months after the GMO IPO if the stock has closed at 150% of the Fixed Conversion Price for 20 consecutive trading days. The Genzyme Board approved the allocation of up to $25.0 million in cash from Genzyme General to GMO (the "GMO Equity Line"), subject to a dollar-for-dollar reduction by the proceeds of outside financing received by GMO. As a result of the issuance of the GMO debentures in August 1997, the amount available under the GMO Equity Line was reduced to $5.0 million. No draws have been made under the Equity Line to date. In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for $7.75 per share. Net proceeds from the offering after underwriting discounts and commissions were $29.0 million. In order to provide initial funding for the joint venture with Diacrin, the Genzyme Board has approved the allocation of up to $20.0 million in cash from Genzyme General to GTR (the "GTR Equity Line") in exchange for an increase in the number of GTR Designated Shares at a rate determined by dividing the amount of cash so allocated by the average of the daily closing prices of one share of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. The Company intends to make monthly allocations of cash under the GTR Equity Line in an amount corresponding to the funding commitment of GTR under the joint venture agreement for such month. As of December 31, 1997 the Company had allocated $7.0 million from Genzyme General to GTR under the GTR Equity Line. 40 42 GENZYME CORPORATION (CONT.) Genzyme holds an option to acquire all of the partnership interests in Genzyme Development Partners, L.P. ("GDP") for approximately $26.0 million plus a continuing royalty payment for a period of ten years on certain sales of Sepra Products. Genzyme's decision regarding the exercise of this option will be based, in part, on the progress in the development and Genzyme's evaluation of the potential commercial success of the Sepra Products. The exercise price for the purchase option is payable in cash, shares of GGD Stock or a combination of the two, as determined by Genzyme at the time the option is exercised. Genzyme believes that its available cash, investments and cash flow from operations will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Although Genzyme had approximately $246.3 million in cash, cash equivalents and short and long-term investments at December 31, 1997, it has committed to utilize a portion of such funds for certain purposes, such as (i) completing the market introduction in the U.S. and Europe of Seprafilm(R) and clinical development of other Sepra Products, (ii) completing the market introduction of GTR's Carticel(TM) AuCC and developing, producing and marketing other products through GTR and GMO and (iii) making certain payments to third parties in connection with strategic collaborations. In addition to these commitments, Genzyme historically has pursued strategic acquisitions and collaborations with complementary businesses as opportunities became available and will seek additional acquisitions and collaborations in the future. Genzyme may require additional capital to finance any such activities. There can be no assurance, however, that such capital will be available on terms reasonably acceptable to Genzyme. In addition, as of December 31, 1997, approximately $118.0 million was outstanding under the Revolving Credit Facility, $95.0 million of which was allocated to Genzyme General, $18.0 million of which was allocated to GTR and $5.0 million of which was allocated to GMO. Amounts borrowed under this facility are payable on November 15, 1999. Genzyme's cash resources will be diminished upon repayment of amounts borrowed, plus accrued interest, under this credit facility. In addition, pursuant to the terms of both the GTR Note and the GMO Debentures, the holders will, in some circumstances, receive cash from Genzyme. To the extent Genzyme uses cash to pay the principal and accrued interest on the GTR Note or GMO Debentures, its cash reserves will also be diminished. As a result, Genzyme may have to obtain additional financing. There can be no assurance that such financing will be available on terms reasonably acceptable to Genzyme. NEW ACCOUNTING PRONOUNCEMENTS, YEAR 2000 AND FINANCIAL REPORTING RELEASE 48 ("FRR 48") In June 1997, the FASB issued Statement of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS 130"), and "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), respectively (collectively, the "Statements"). The Statements are effective for fiscal years beginning December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive income and its components in annual financial statements. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprises's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131, respectively. Application of the Statement's disclosure requirements will have no impact on Genzyme's combined financial position, results of operations or earnings per share data as currently reported. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 is effective for fiscal years beginning after December 15, 1997. Genzyme has not assessed the impact of SFAS 132 on its financial statement disclosures. Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing the internal readiness of its computer systems for handling the year 2000. The Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues, and does not believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and the Company's inability to implement such changes could have an adverse effect on future results of operations. In January 1997, the Securities and Exchange Commission issued Financial Reporting Release 48 which expands disclosure requirements for certain derivative and other financial instruments. The Company adopted the sensitivity analysis approach effective in the fourth quarter of 1997. The sensitivity approach presents the hypothetical changes in fair value resulting from hypothetical changes in market rates. As a result of the Company's worldwide operations, the Company faces exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse effect on the Company's financial results in the future. Historically, the Company's primary exposures have been related to local currency operating expenses in Europe and Asia, where the Company sells primarily in U.S. dollars. The Company generally does not hedge anticipated foreign currency cash flows. The carrying amounts reflected in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturities of these instruments. The fair values represent estimates of possible value that may not be realized in the future. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of Genzyme Corporation and its Subsidiaries could differ materially from the results described above due to the following risks and uncertainties. DEPENDENCE ON CEREZYME(R) ENZYME AND CEREDASE(R) ENZYME SALES Genzyme's results of operations are highly dependent upon the sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme in 1997 were $332.7 million, representing 63% of Genzyme's consolidated product sales in 1997. To address supply constraints, Genzyme developed Cerezyme(R) enzyme. Patients receiving Ceredase(R) enzyme are being converted to Cerezyme(R) enzyme; however, Genzyme will continue to manufacture Ceredase(R) enzyme until the process of patient conversion is completed. Any disruption in the supply or manufacturing process of Cerezyme(R) enzyme may have a material adverse effect on revenue. In addition, Genzyme may be required to record a charge to earnings for the equipment used for and inventory of Ceredase(R) enzyme remaining upon completion of the patient conversion process, and, if the conversions proceed more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme and the corresponding charge to earnings could be material. 41 43 GENZYME CORPORATION (CONT.) RISKS INHERENT IN INTERNATIONAL OPERATIONS. Foreign operations of Genzyme accounted for 36% of consolidated net sales in 1997 as compared to 35% in each of 1996 and 1995. In addition, Genzyme has direct investments in a number of subsidiaries in foreign countries (primarily in Europe and Japan). Financial results of Genzyme could be adversely affected by fluctuations in foreign exchange rates. Fluctuations in the value of foreign currencies affect the dollar value of Genzyme's net investment in foreign subsidiaries, with these fluctuations being included in a separate component of stockholders' equity. Operating results of foreign subsidiaries are translated into U.S. dollars at average monthly exchange rates. As of December 31, 1997, Genzyme had a cumulative charge of $12.4 million to stockholders' equity as a result of foreign currency adjustments and there can be no assurance that the Company will not incur additional charges relating to such adjustments in future periods. In addition, the U.S. dollar value of transactions based in foreign currency (collections on foreign sales or payments for foreign purchases) also fluctuates with exchange rates. The largest foreign currency exposure results from activity in Dutch guilders, British pounds, French francs, German marks and Japanese yen. Genzyme has not hedged net foreign investments in the past, although it may engage in hedging transactions in the future to manage and reduce its foreign exchange risk, subject to certain restrictions imposed by the Genzyme Board. There can be no assurance that Genzyme's attempts to manage its foreign currency exchange risk will be successful. UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of Genzyme's products are currently in or will require clinical trials to test safety and efficacy in humans for various conditions. There can be no assurance that Genzyme will not encounter problems in clinical trials that will cause it to delay or suspend these clinical trials. In addition, there can be no assurance that such clinical testing, if completed, will ultimately show these products to be safe and efficacious. RAPID TECHNOLOGICAL CHANGE. The field of biotechnology is expected to continue to undergo significant and rapid technological change. Although Genzyme will seek to expand its technological capabilities in order to remain competitive, there can be no assurance that research and discoveries by others will not render Genzyme's products or services obsolete. THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES. A majority of Genzyme's revenues are attributable directly or indirectly to payments received from third party payers, including government health administration authorities and private health insurers. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third party payers are increasingly challenging the prices charged for health care products and services. Third party payers are also increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. There can be no assurance that third party insurance coverage will be available for any products or services under development by Genzyme. If adequate coverage and reimbursement are not provided by government and other third party payers for Genzyme's products and services, its results of operations may be materially adversely affected. In addition, Congress has from time to time discussed the possible implementation of broad-based health care cost containment measures. While these discussions have not led to the enactment of any specific health care cost containment legislation, it is possible that health care measures will again be proposed in Congress. The effects on Genzyme of any such measures that are ultimately adopted cannot be predicted at this time. 42 44 GENZYME CORPORATION (CONT.) UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. Genzyme's success depends, to a large extent, on its ability to maintain a competitive technological position in its product areas. Proprietary rights relating to Genzyme's products and services are protected from unauthorized use by third parties only to the extent that they are covered by patents or are maintained in confidence as trade secrets. Genzyme has filed for patents and has rights to numerous patents and patent applications worldwide. While certain of Genzyme's patents have been allowed or issued, there can be no assurance that these allowed and issued patents or additional patents allowed or issued to Genzyme will effectively protect the proprietary technology of Genzyme. In addition, patent litigation is widespread in the biotechnology industry and it is not possible to predict how any such litigation will affect Genzyme. No consistent policy has emerged from the U.S. Patent and Trademark Office regarding the breadth of claims allowed in biotechnology patents and, therefore, the degree of future protection for Genzyme's proprietary rights is uncertain. The allowance of broader claims may increase the incidence and cost of patent interference proceedings in the U.S. and the risk of infringement litigation in the U.S. and abroad. Conversely, the allowance or narrower claims, while reducing the risk of infringement, may limit the value of Genzyme's proprietary rights under its patents, licenses and pending patent applications. Genzyme attempts to monitor the patent filings of its competitors in an effort to guide the design and development of its products to avoid infringement. Notwithstanding these efforts, there can by no assurance that the patents issued or licensed to Genzyme will remain free of challenge by third parties. In addition, patent rights filed by third parties may, if issued, cover Genzyme's products and services as ultimately developed, which could have an adverse impact on Genzyme's results of operations in amounts that cannot presently be determined. Genzyme may, depending on the final formulation of such products and services, need to acquire license to, or contest the validity of, such patents. For example, Genzyme may need to acquire patent rights from third parties that cover particular diagnostic and/or therapeutic gene sequences or that cover aspects of adjuvant therapies such as compositions of matter or methods of use related to the administration of cytokines as immunostimulants in combination with a cancer therapy. In gene therapy, Genzyme may need to license a number of patents covering different elements of the technique, such as those relating to particular viral or non-viral vector or methods for its delivery. The extent to which Genzyme may need to license rights or contest the validity of patents depends on the scope and validity of such patents and ultimately on the final design or formulation of its products and services under development. The cost and ability to license any such rights and the likelihood of successfully contesting the validity of such patents are uncertain. Genzyme has also relied upon trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position. There can be no assurance that others will not independently develop such know-how or otherwise obtain access to Genzyme's technology. While Genzyme's employees, consultants and corporate partners with access to proprietary information are generally required to enter into confidentiality agreements, there can be no assurance that these agreements will be honored. Certain of Genzyme's consultants have developed portions of Genzyme's proprietary technology at their respective universities or governmental laboratories. There can be no assurance that such universities or governmental authorities will not assert rights to intellectual property arising out of university or government based research conducted by such consultants. GOVERNMENT REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS. The production and sale of health care products and provision of health care services are highly regulated. In particular, human therapeutic and diagnostic products are subject to pre-marketing approval by the FDA and comparable agencies in foreign countries. The process of obtaining these approvals varies according to the nature and use of the product and can involve lengthy and detailed 43 45 GENZYME CORPORATION (CONT.) laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. Regulation of Genzyme's products and services could also limit Genzyme's reimbursement for its products and services and otherwise materially affect the results of operations of Genzyme. Additional regulatory regimes, in the U.S. and internationally, affect the Company's work in gene therapy and the provision of cancer diagnostic services. There can be no assurance that any of the required regulatory approvals will be granted on a timely basis, if at all. Certain of Genzyme's products, including Cerezyme(R) enzyme and Ceredase(R) enzyme, have been designated as orphan drugs under the Orphan Drug Act, which provides incentives to manufacturers to develop and market drugs for rare diseases. The Orphan Drug Act generally entitles the first developer to receive FDA marketing approval for an orphan drug to a seven-year exclusive marketing period in the United States for that product. Legislation has been periodically introduced in recent years, however, to amend the Orphan Drug Act. Such legislation has generally been directed to shortening the period of automatic market exclusivity and granting certain market rights to simultaneous developers of a drug. The effect on Genzyme of any amendments ultimately adopted cannot be assessed at this time. PRODUCT LIABILITY AND LIMITATIONS OF INSURANCE. Genzyme may be subject to product liability claims in connection with the use or misuse of its products during testing or after commercialization. While Genzyme has taken, and continues to take, what it believes are appropriate precautions, there can be no assurance that Genzyme will avoid significant liability exposure. Genzyme has only limited amounts of product liability insurance and there can be no assurance that such insurance will provide sufficient coverage against any or all potential product liability claims. If Genzyme attempts to obtain additional insurance in the future, there can be no assurance that it will be able to do so on acceptable terms, if at all, or that such insurance will provide adequate coverage against claims asserted. RISKS RELATED TO GENZYME TRACKING STOCK Prior to June 18, 1997, Genzyme had two outstanding classes of common stock, GGD Stock and GTR Stock. Effective June 18, 1997, the GGD Stock and GTR Stock were redesignated as separate series of a single class of common stock and a new series of the same class of common stock, GMO Stock, was issued. As a result, Genzyme currently has three series of common stock outstanding: GGD Stock, GTR Stock and GMO Stock, which are intended to reflect the value and track the performance of Genzyme's three divisions: Genzyme General, GTR and GMO. Prospective investors in GGD Stock, GTR Stock or GMO Stock should carefully consider the following risks relating to an investment in Genzyme "tracking stock." STOCKHOLDERS OF ONE COMPANY; FINANCIAL IMPACTS ON ONE DIVISION COULD AFFECT THE OTHERS. Notwithstanding the allocation of Genzyme's products and programs between divisions for purposes of financial statement presentation and allocation of equity interests, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of its divisions. Holders of each series of Genzyme common stock have no specific claim against the assets attributed for financial statement presentation purposes to the division whose performance is associated with the series of stock they hold. Liabilities or contingencies of any division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of the other divisions. NO RIGHTS OR ADDITIONAL DUTIES WITH RESPECT TO THE DIVISIONS; POTENTIAL CONFLICTS. Holders of each series of Genzyme common stock have only the rights of stockholders of Genzyme, and, except in limited circumstances, do not have any rights specifically related to the division to which such series of common stock relates. The existence of separate series of common stock may give rise to occasions when the interests of holders of each series of Genzyme common stock may diverge or appear to diverge. Although Genzyme is aware of no precedent concerning the manner in which Massachusetts law would be applied to the duties of a board of directors in the context of three series of common stock with divergent interests, Genzyme believes, based on the advice of counsel, that a Massachusetts court would hold that a board of directors owes an equal duty to all stockholders regardless of class or series and does not have separate or additional duties to any group of stockholders. That duty is the fiduciary duty to act in good faith and in a manner it reasonably believes to be in the best interests of the corporation. Genzyme has been advised that, under Massachusetts law, a good faith determination by a disinterested and adequately informed board of directors that an action is in the best interests of the corporation, taking into account the interests of the holders of each series of common stock and the alternatives reasonably available, should represent an appropriate defense to any challenge by or on behalf of the holders of any series of common stock that such action could have a disparate effect on different series of common stock. However, a Massachusetts court hearing a case involving such a challenge may decide to apply principles of Massachusetts law other than those described above, or may develop new principles of Massachusetts law to decide such a case. Disproportionate ownership interests of members of the Genzyme Board in any series of common stock or disparities in the value of such stock could create or appear to create potential conflicts of interest when directors are faced with decisions that could have different implications for each series of common stock. Nevertheless, Genzyme believes that a director would be able to discharge his or her fiduciary responsibilities even if his or her interest in shares of such series were disproportionate or had disparate values. The Genzyme Board may also from time to time establish one or more committees to review matters presented to it that raise conflict issues, which committee(s) would report to the full Genzyme Board on such matters. NO ADDITIONAL SEPARATE VOTING RIGHTS. Holders of each series of Genzyme common stock vote together as a single class on all matters as to which common stockholders generally are entitled to vote (including the election of directors). Except in certain limited circumstances provided under Massachusetts law, in the Genzyme Charter and in the management and accounting policies adopted by the Genzyme Board, holders of each series of common stock have no rights to vote on matters separately. Accordingly, except in limited circumstances, holders of shares of one series of common stock could not bring a proposal to a vote of the holders of that series of common stock only, but would be required to bring any proposal to a vote of all common stockholders. On all matters as to which common stockholders generally are entitled to vote, each share of GGD Stock has one vote, each share of GTR Stock has, through December 31, 1998, .33 vote and each share of GMO stock will have, through December 31, 1998, .25 vote. On January 1, 1999 and on January 1 every two years thereafter, the number of votes to which each share of GTR Stock is entitled will be adjusted to equal the ratio of the Fair Market Value (as defined herein) of one share of GTR Stock to the Fair Market Value of one share of GGD Stock as of such date. The number of votes to which each share of GMO Stock is entitled will also be adjusted on such dates to equal the ratio of the Fair Market Value of one share of GMO Stock to the Fair Market Value of one share of GGD Stock. "Fair Market Value" as of any date means the average of the daily closing prices as reported by the Nasdaq National Market (or the appropriate exchange on which such shares are traded) for the 20 consecutive trading days commencing on the 30th trading day prior to such date. In the event such closing prices are unavailable, Fair Market Value will be determined by the Genzyme Board. Certain matters as to which the holders of common stock are entitled to vote may involve a divergence or the appearance of a divergence in the interests of holders of each series of Genzyme common stock. If, when a stockholder vote is taken on any matter as to which a separate vote by each series is not required and the holders of any series of common stock would have more than the number of votes required to approve any such matter, the holders of that series would control the outcome of the vote on such matter, Holders of GGD Stock, GTR Stock and GMO Stock currently have approximately 91.1%, 7.7% and 1.2%, respectively, of the total voting power of Genzyme. As a result, on matters which are submitted to a vote of the common stockholders, the preferences of the holders of GGD Stock are likely to dominate and determine the outcome of such vote unless and until the relative number of shares outstanding and/or the market value of each series of Genzyme common stock materially changes. EXCHANGE OF GTR STOCK AND GMO STOCK. The Genzyme Board can, in its sole discretion, determine to exchange shares of GTR Stock and GMO Stock for cash or shares of GGD Stock (or any combination thereof) at a 30% premium over Fair Market Value of the GTR Stock or GMO Stock at any time. In addition, following a disposition of all or substantially all of the assets of GTR or GMO, the shares of GTR Stock or GMO Stock, as the case may be, are subject to mandatory exchange by Genzyme for cash and/or shares of GGD Stock at a 30% premium over Fair Market Value of such series of common stock as determined by the trading prices during a specified period prior to public announcement of the disposition. Consequently, holders of GTR Stock and GMO Stock may receive a greater or lesser premium for their shares than any premium paid by a third party buyer of all or substantially all of the assets of GTR or GMO. In addition, the right of the Genzyme Board to exchange shares of GTR Stock or GMO Stock at a 30% premium over the Fair Market Value of such shares does not preclude the Genzyme Board from making an offer to exchange such shares on terms other than those provided in the Genzyme Charter. Although any alternative offer would be subject to acceptance by the holders of the shares to be exchanged, such offer could be made on terms less favorable than those provided in the Genzyme Charter. Any exchange of shares for GGD Stock could be made at a time when the GGD Stock may be considered to be undervalued and, if such exchange is perceived as dilutive, the market price of GGD Stock may be adversely affected. See "Management and Accounting Policies Governing the Relationship of Genzyme Divisions -- Open Market Purchases of Shares of Common Stock" set forth in Exhibit 99.1 to Genzyme's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"). NO ADJUSTMENT TO LIQUIDATING DISTRIBUTIONS. In the event of a voluntary or involuntary dissolution, liquidation or winding up of the affairs of Genzyme (other than pursuant to a merger, business combination or sale of substantially all assets), holders of outstanding shares of each series of Genzyme common stock would receive the assets, if any, remaining for distribution to common stockholders on a per share basis in proportion to the respective per share liquidation units of such series. Currently, each share of GGD Stock has 100 liquidation units, each share of GTR Stock has 58 liquidation units and each share of GMO Stock has 25 liquidation units. Because the liquidation units will not be adjusted to reflect changes in the relative market value or performance of each of the divisions of Genzyme, the per share liquidating distribution to a holder of GGD Stock, GTR Stock or GMO Stock is not likely to correspond to the value of the assets of Genzyme General, GTR or GMO, respectively, at the time of a dissolution, liquidation or winding up of Genzyme. MANAGEMENT AND ACCOUNTING POLICIES TO CHANGE. The Genzyme Board has adopted certain management and accounting policies applicable to the preparation of the financial statements of the divisions of Genzyme, the allocation of corporate expenses, assets and liabilities, the reallocation of assets between divisions and other matters. These policies may, except as stated therein, be modified or rescinded at the sole discretion of the Genzyme Board without the approval of Genzyme's stockholders, subject to the Genzyme Board's fiduciary duty to all holders of Genzyme's capital stock. See "Management and Accounting Policies Governing the Relationship of Genzyme Divisions" set forth in Exhibit 99.1 to the 1997 Form 10-K. NON-COMPETE POLICY. The Genzyme Board has adopted a policy providing that the Company will not develop products and services outside of GTR or GMO that compete with products and services being developed or sold by GTR or GMO, other than through joint ventures in which GTR or GMO participate (the "Non-Compete Policy"). The scope of the Non-Compete Policy does not extend to the entire fields of tissue repair and oncology. Accordingly, the Company is currently developing oncology products outside of GMO that do not compete with products and services being developed or sold by GMO and, in the future, may develop additional oncology and tissue repair products and services outside of GMO and GTR, provided that such products and services do not compete with then-existing GMO or GTR products and services. See "Management and Accounting Policies Governing the Relationship of Genzyme Divisions" set forth in Exhibit 99.1 to the 1997 Form 10-K. USE OF TAX BENEFITS BY OTHER GENZYME DIVISIONS. Genzyme's management and accounting policies provide that, to the extent any division of Genzyme is unable to utilize its operating losses or other projected tax benefits to reduce its current or deferred income tax expense, such losses or benefits may be reallocated to another division on a quarterly basis for financial reporting purposes. Accordingly, although the actual payment of taxes is a corporate liability of Genzyme as a whole, separate financial statements will be prepared for each division and any losses that cannot be utilized by a division will be allocated among the profitable divisions rather than carried forward to reduce the future tax liability of the division generating such losses. This could result in a division (such as GTR and GMO currently) being charged a greater portion of the total corporate tax liability and reporting lower earnings after taxes in the future than would have been the case if such division had retained its losses or other benefits in the form of a net operating loss carryforward. 44 46 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) DECEMBER 31, - ---------------------- ------------ 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents ............................................. $ 102,406 $ 93,132 Short-term investments ................................................ 51,259 56,608 Accounts receivable, net .............................................. 118,277 116,833 Inventories ........................................................... 139,681 125,265 Prepaid expenses and other current assets ............................. 17,361 100,287 Deferred tax assets - current ......................................... 27,601 17,493 ---------- ---------- Total current assets ................................................ 456,585 509,618 Property, plant and equipment, net ....................................... 385,348 393,839 Long-term investments .................................................... 92,676 38,215 Note receivable - related party .......................................... 2,019 -- Intangibles, net ......................................................... 271,275 247,745 Deferred tax assets - noncurrent ......................................... 29,479 42,221 Investment in equity securities........................................... 30,047 10,813 Other noncurrent assets................................................... 28,024 28,057 ---------- ---------- Total assets......................................................... $1,295,453 $1,270,508 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 45 47 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in thousands) DECEMBER 31, - ---------------------- ------------ 1997 1996 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................ $ 19,787 $ 22,271 Accrued expenses ............................................................ 72,103 70,124 Income taxes payable ........................................................ 11,168 17,926 Deferred revenue ............................................................ 1,800 2,693 Current portion of long-term debt and capital lease obligations ............. 905 999 ----------- ----------- Total current liabilities ............................................... 105,763 114,013 Noncurrent liabilities: Long-term debt and capital lease obligations ................................ 140,978 241,998 Convertible debentures, net ................................................. 29,298 -- Other noncurrent liabilities ................................................ 7,364 12,188 ----------- ----------- Total liabilities ....................................................... 283,403 368,199 Commitments and contingencies (See Notes) ...................................... Stockholders' equity: Preferred Stock, $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding Preferred Stock, Series A Junior Participating, $0.01 par value, 2,000,000 shares authorized; no shares issued and outstanding Preferred Stock, Series B Junior Participating, $0.01 par value, 400,000 shares authorized; no shares issued and outstanding Preferred Stock, Series C Junior Participating, $0.01 par value, 400,000 shares authorized; no shares issued and outstanding Common Stocks $0.01 par value, 390,000,000 shares authorized; 179,254,865 issued and outstanding: Genzyme General Division Common Stock, $0.01 par value, 200,000,000 shares authorized; 77,692,550 and 75,537,300 issued and outstanding at December 31, 1997 and 1996, respectively .............................. 777 755 Genzyme Tissue Repair Division Common Stock, $0.01 par value, 40,000,000 shares authorized; 19,941,193 and 13,161,500 issued and outstanding at December 31, 1997 and 1996, respectively .............................. 199 132 Genzyme Molecular Oncology Division Common Stock, $0.01 par value, 40,000,000 shares authorized; 3,928,572 and 0 issued and outstanding at December 31, 1997 and 1996, respectively .............................. 39 -- Treasury common stock, at cost: Genzyme General Common Stock,106,358 and 105,941 shares at December 31, 1997 and 1996, respectively ................................. (901) (890) Additional paid-in capital - Genzyme General ................................ 895,340 871,020 Additional paid-in capital - Genzyme Tissue Repair .......................... 170,430 122,385 Additional paid-in capital - Genzyme Molecular Oncology ..................... 34,517 Accumulated deficit ......................................................... (76,346) (89,975) Foreign currency translation adjustments .................................... (12,449) (745) Unrealized gains (losses) on investments .................................... 444 (373) ----------- ----------- Total stockholders' equity............................................. 1,012,050 902,309 ----------- ----------- Total liabilities and stockholders' equity............................. $ 1,295,453 $ 1,270,508 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 46 48 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues Net product sales ................................. $ 529,927 $ 424,483 $ 304,373 Net service sales ................................. 67,158 68,950 52,450 Revenues from research and development contracts: Related parties .................................. 8,356 23,011 26,758 Other ............................................ 3,400 2,310 202 --------- --------- --------- Total revenues................................ 608,841 518,754 383,783 Operating costs and expenses: Cost of products sold ............................. 206,028 155,930 113,964 Cost of services sold ............................. 47,289 54,082 35,868 Selling, general and administrative ............... 200,476 162,264 110,447 Research and development (including research and development related to contracts) ................ 89,558 80,849 68,845 Amortization of intangibles ....................... 17,245 8,849 4,647 Purchase of in-process research and development 7,000 130,639 14,216 Restructuring charges ............................. -- 1,465 -- --------- --------- --------- Total operating costs and expenses............ 567,596 594,078 347,987 --------- --------- --------- Operating income (loss) ............................... 41,245 (75,324) 35,796 Other income (expenses): Equity in net loss of unconsolidated affiliates .... (12,258) (4,360) (1,810) Other .............................................. (2,000) 1,711 1,608 Investment income .................................. 11,409 15,341 8,814 Interest expense ................................... (12,667) (6,990) (1,109) --------- --------- --------- Total other income (expenses)................. (15,516) 5,702 7,503 --------- --------- --------- Income (loss) before income taxes ..................... 25,729 (69,622) 43,299 Provision for income taxes ............................ (12,100) (3,195) (21,649) --------- --------- --------- Net income (loss) ..................................... $ 13,629 $ (72,817) $ 21,650 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 47 49 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Amounts in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ---- ---- ---- ATTRIBUTABLE TO GENZYME GENERAL: Net income (loss) ............................................... $ 57,026 $(47,513) $ 34,823 Tax benefit allocated from Genzyme Tissue Repair ................ 17,666 17,011 8,857 Tax benefit allocated from Genzyme Molecular Oncology............ 2,755 -- -- -------- -------- -------- Net income (loss) attributable to GGD Stock .................. $ 77,447 $(30,502) $ 43,680 ======== ======== ======== Per Genzyme General common share-basic: Net income (loss) ............................................ $ 1.01 $ (0.45) $ 0.79 ======== ======== ======== Weighted average shares outstanding .......................... 76,531 68,289 55,531 ======== ======== ======== Per Genzyme General common and common equivalent share - diluted: Net income (loss) ............................................ $ 0.98 $ (0.45) $ 0.68 ======== ======== ======== Adjusted weighted average shares outstanding ................. 78,925 68,289 63,967 ======== ======== ======== ATTRIBUTABLE TO GENZYME TISSUE REPAIR: Net loss attributable to GTR Stock .............................. $(45,984) $(42,315) $(22,030) ======== ======== ======== Per GTR basic and diluted common share: Net loss ..................................................... $ (3.07) $ (3.38) $ (2.28) ======== ======== ======== Weighted average shares outstanding .......................... 14,976 12,525 9,659 ======== ======== ======== ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY: Net loss attributable to GMO Stock .............................. $(19,578) $ (1,003) $ (464) ======== ======== ======== Pro forma per GMO basic and diluted common share: Pro forma net loss .......................................... $ (4.98) $ (0.26) $ (0.12) ======== ======== ======== Pro forma shares outstanding ................................. 3,929 3,929 3,929 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 48 50 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, - ---------------------- -------------------------------------------- 1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES: Net income (loss) ................................................... $ 13,629 $ (72,817) $ 21,650 Reconciliation of net income (loss) to net cash provided by operating activities: Depreciation and amortization .................................... 50,964 30,192 22,638 Loss on disposal of fixed assets ................................. 1,258 101 903 Non-cash compensation expense .................................... 3,160 460 1,013 Accrued interest/amortization on bonds ........................... (900) 1,195 (355) Provisions for bad debts and inventory ........................... 14,580 9,759 8,336 Purchase of in-process research and development .................. 7,000 130,639 14,216 Deferred income taxes ............................................ (5,061) (28,558) 4,428 Accretion of debt conversion feature.............................. 2,028 -- -- Minority interest in net loss of subsidiaries .................... -- -- (1,608) Equity in net loss of unconsolidated subsidiaries ................ 12,258 4,360 1,810 Other ............................................................ 528 (1,558) 1,568 Increase (decrease) in cash from changes in working capital net of acquired assets: Accounts receivable ............................................ (11,076) (18,395) (15,069) Inventories .................................................... (29,299) (41,609) (18,827) Prepaid expenses and other current assets ...................... (10,062) (527) (1,680) Accounts payable, accrued expenses and deferred revenue ........ (9,333) 26,775 5,679 --------- --------- --------- Net cash provided by operating activities ...................... 39,674 40,017 44,702 INVESTING ACTIVITIES: Purchases of investments ............................................ (147,897) (122,093) (146,940) Maturities of investments ........................................... 81,185 207,399 57,055 Purchases of property, plant and equipment .......................... (29,309) (63,802) (49,988) Sale of property, plant and equipment ............................... 852 -- -- Acquisitions, net of cash acquired and liabilities assumed .......... 9 (299,078) (322) Additional investment in unconsolidated affiliates .................. (13,993) (5,511) (4,428) Loans to affiliates ................................................. (4,601) (1,676) -- Other ............................................................... (1,419) (7,470) (1,265) --------- --------- --------- Net cash used by investing activities .......................... (115,173) (292,231) (145,888) FINANCING ACTIVITIES: Proceeds from issuance of common stock .............................. 156,036 41,556 223,139 Proceeds from issuance of common stock by subsidiary ................ -- -- 1,107 Proceeds from issuance of debt ...................................... 32,127 536,000 -- Payments of long-term debt and capital lease obligations ............ (101,115) (378,502) (41,449) --------- --------- --------- Net cash provided by financing activities ...................... 87,048 199,054 182,797 Effect of exchange rate changes on cash ................................ (2,275) 1,920 (781) --------- --------- --------- Increase (decrease) in cash and cash equivalents ....................... 9,274 (51,240) 80,830 Cash and cash equivalents at beginning of period ....................... 93,132 144,372 63,542 --------- --------- --------- Cash and cash equivalents at end of period ............................. $ 102,406 $ 93,132 $ 144,372 ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 49 51 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31, - ---------------------- -------------------------------- 1997 1996 1995 ---- ---- ---- Supplemental disclosures of cash flows: Cash paid during the year for: Interest ......................................................... $ 9,811 $ 6,285 $ 9,944 Income taxes ..................................................... 18,887 14,149 19,581
Supplemental Disclosures of Non-Cash Transactions: Acquisition liability -- Note C Investment in unconsolidated affiliate -- Note H Exercise of warrants - Note K Debt conversion - Note J Strategic financial provision -- Note B GTR designated share dividend -- Note K The accompanying notes are an integral part of these consolidated financial statements. 50 52 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS ------------------- -------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- COMMON STOCKS: GENZYME GENERAL DIVISION COMMON STOCK: Balance at beginning of year ................. 75,537 62,372 52,894 $ 755 $ 624 $ 529 Exercise of stock options .................... 1,750 1,371 1,916 18 13 19 Issuance from employee stock purchase plan ... 367 291 286 4 3 3 Exercise of warrants ......................... 39 6,341 686 -- 63 7 Shares issued in public offering ............. -- -- 5,750 -- -- 58 Issuance of GGD Stock in connection with conversion of convertible notes ............ -- 3,782 -- -- 38 -- Issuance of GGD Stock in connection with acquisitions ............................... -- 1,380 840 -- 14 8 ------ ------ ------ ----- ----- ----- Balance at end of year ....................... 77,693 75,537 62,372 $ 777 $ 755 $ 624 ====== ====== ====== ===== ===== ===== GENZYME TISSUE REPAIR DIVISION COMMON STOCK: Balance at beginning of year ................. 13,162 12,113 8,675 $ 132 $ 121 $ 87 Exercise of stock options .................... 206 124 122 2 1 1 Issuance from employee stock purchase plan ... 281 325 270 2 3 3 Exercise of warrants ......................... -- 345 46 -- 4 -- Issuance of GTR Stock in connection with declared dividend of GTR Designated Shares . 2,292 -- -- 23 -- -- Shares issued in public offering ............. 4,000 -- 3,000 40 -- 30 Issuance of GTR Stock in connection with conversion of convertible notes ............. -- 255 -- -- 3 -- ------ ------ ------ ----- ----- ----- Balance at end of year ....................... 19,941 13,162 12,113 $ 199 $ 132 $ 121 ====== ====== ====== ===== ===== ===== GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK: Balance at June 18, 1997 ..................... -- -- -- $ -- $-- $-- Issuance of GMO Stock in connection with the acquisition of PharmaGenics ........... 3,929 -- -- 39 -- -- ------ ------ ------ ----- ----- ----- Balance at end of year ....................... 3,929 -- -- $ 39 $-- $-- ====== ====== ====== ===== ===== ===== TREASURY COMMON STOCK (AT COST): GENZYME GENERAL DIVISION COMMON STOCK: Balance at beginning of year ................. (106) (106) (100) $(890) $(882) $(755) Purchases .................................... -- -- (6) (11) (8) (127) ------ ------ ------ ----- ----- ----- Balance at end of year ....................... (106) (106) (106) $(901) $(890) $(882) ====== ====== ====== ===== ===== =====
The accompanying notes are an intergral part of these consolidated financial statements. 51 53 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
DOLLARS IN THOUSANDS -------------------- 1997 1996 1995 ---- ---- ---- ADDITIONAL PAID IN CAPITAL - GENZYME GENERAL: Balance at beginning of year ........................................... $ 871,020 $ 616,096 $ 406,991 Exercise of stock options .............................................. 28,518 13,870 27,903 Issuance from employee stock purchase plan ............................. 7,370 4,695 4,158 Exercise of warrants ................................................... 855 106,101 6,257 GGD Stock issued in public offering .................................... -- -- 141,218 Issuance of GGD Stock in connection with conversion of convertible notes ................................................................ -- 101,362 -- Issuance of GGD Stock in connection with acquisitions .................. -- 36,508 23,813 Callable Warrants issued in connection with acquisition of Neozyme II .. -- 469 -- Allocation to Genzyme Tissue Repair for Designated Shares............... (14,892) (11,714) -- Allocation to Genzyme Molecular Oncology for Designated Shares.......... (2,886) -- -- Tax benefit from disqualified dispositions ............................. 4,127 3,500 5,500 Stock compensation expense ............................................. 1,218 123 131 Purchase of Treasury Stock ............................................. 10 10 125 --------- --------- --------- Balance at end of year ................................................. $ 895,340 $ 871,020 $ 616,096 ========= ========= ========= ADDITIONAL PAID IN CAPITAL- GENZYME TISSUE REPAIR: Balance at beginning of year ........................................... $ 122,385 $ 107,934 $ 63,573 Exercise of stock options .............................................. 705 539 240 Issuance from employee stock purchase plan ............................. 1,729 1,893 980 Exercise of warrants ................................................... -- (4) (3) Issuance of GTR Stock in public offering ............................... 28,997 -- 42,262 Issuance of GTR Stock in connection with conversion of Genzyme's 6 3/4% convertible subordinated notes ......................................... -- (3) -- Issuance of GTR Stock in connection with declared dividend of GTR Designated Shares ................................................... (23) -- -- Value of debt conversion feature ....................................... 1,524 -- -- Allocation from Genzyme General for Designated Shares................... 14,892 11,714 -- Stock compensation expense ............................................. 221 312 882 --------- --------- --------- Balance at end of year ................................................. $ 170,430 $ 122,385 $ 107,934 ========= ========= ========= ADDITIONAL PAID IN CAPITAL- GENZYME MOLECULAR ONCOLOGY: Balance at June 18, 1997 ............................................... $ -- Issuance of GMO Stock in connection with the acquisition of PharmaGenics 27,330 Sale of warrants ....................................................... 724 Value of debt conversion feature ....................................... 3,530 Allocation from Genzyme General for Designated Shares................... 2,886 Stock compensation expense ............................................. 47 --------- Balance at end of year ................................................. $ 34,517 ========= ACCUMULATED DEFICIT Balance at beginning of year ........................................... $ (89,975) $ (17,158) $ (38,808) Net income (loss) ...................................................... 13,629 (72,817) 21,650 --------- --------- --------- Balance at end of year ................................................. $ (76,346) $ (89,975) $ (17,158) ========= ========= ========= FOREIGN CURRENCY TRANSLATION ADJUSTMENTS: Balance at beginning of year ........................................... $ (745) $ (3,590) $ (4,915) Translation adjustments ................................................ (11,704) 2,845 1,325 --------- --------- --------- Balance at end of year ................................................. $ (12,449) $ (745) $ (3,590) ========= ========= ========= UNREALIZED GAINS (LOSSES) ON INVESTMENTS: Balance at beginning of year ........................................... $ (373) $ 2,062 $ (7,735) Adjustments ............................................................ 817 (2,435) 9,797 --------- --------- --------- Balance at end of year ................................................. $ 444 $ (373) $ 2,062 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 52 54 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Corporation is a global diversified human healthcare business with product development, manufacturing and marketing capabilities in therapeutic products, surgical products, diagnostics, tissue repair and molecular oncology. BASIS OF PRESENTATION The consolidated financial statements of Genzyme include the balance sheets, results of operations and cash flows of Genzyme's therapeutic products, surgical products, diagnostics, tissue repair, molecular oncology and corporate operations during the periods presented. 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 GGD Stock and a second class of common stock, designated as GTR Stock was distributed on the basis of .0675 of one share of GTR Stock (after 1996 GGD Stock split) for each share of Genzyme's common stock. The merger of PharmaGenics with and into Genzyme was consummated on June 18, 1997. In connection with the merger, Genzyme established Genzyme Molecular Oncology, a new division of Genzyme, which consists of all of PharmaGenics's business, several programs previously allocated to Genzyme General in the area of molecular oncology and Genzyme's rights under agreements with third parties relating to gene therapies for the treatment of cancer. (See Note C., "Acquisitions" below). Contemporaneous with the Merger, the Genzyme stockholders also approved the amendment and restatement of the Genzyme Charter redesignating the GGD Stock and GTR Stock as a separate series of a single class of common stock with substantially the same features as the existing GGD Stock and GTR Stock and authorizing the designation of the GMO Stock. GGD Stock, GTR Stock and GMO Stock provide stockholders with separate securities which are intended to reflect the performance of Genzyme General, GTR, and GMO, respectively. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority and wholly-owned subsidiaries. Investments in companies and joint ventures in which the Company has a substantial ownership interest (20% to 50%), or in which the Company participates in policy decisions are accounted for using the equity method. Accordingly, the Company's share of the earnings of these entities is included in consolidated net income. Investments of less than 20% are reported at fair value (see Note H., "Investments" below). All significant intercompany items and transactions have been eliminated in consolidation. Certain items in the consolidated financial statements for the years ended December 31, 1995 and 1996 have been reclassified to conform with the December 31, 1997 presentation. FINANCIAL INFORMATION The Company prepares separate financial statements for Genzyme General, GTR and GMO in addition to consolidated financial statements of the Company. Although the financial statements of Genzyme General, GTR and GMO separately report the assets, liabilities and stockholders' equity of Genzyme attributable to each such division, such attribution of assets and liabilities (including contingent liabilities) and stockholders' equity among Genzyme General, GTR and GMO does not affect legal title to such assets or responsibility for such liabilities. Holders of GGD Stock, GTR Stock and GMO Stock are holders of common stock of Genzyme and continue to be subject to all the risks associated with an investment in Genzyme and all of its businesses and liabilities. Liabilities or contingencies of Genzyme General, GTR or GMO could affect the results of operations and financial condition of the other divisions. DIVIDEND POLICY The Company has never paid any cash dividends on shares of its capital stock. Genzyme currently intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends on Genzyme Common Stock in the foreseeable future. 53 55 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 and accounts receivable. The Company generally invests its cash investments in investment-grade securities to mitigate risk. UNCERTAINTIES The Company is subject to risks common to companies in the biotechnology industry, including the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and patent and other proprietary rights protection of its products and services, (ii) decisions, and the timing of decisions, made by the FDA and other agencies regarding the indications for which the Company's products may be approved, (iii) the accuracy of the Company's estimates of the size and characteristics of markets to be addressed by the Company's products and services, (iv) market acceptance of the Company's products and services, (v) the Company's ability to obtain reimbursement for its products from third-party payers, where appropriate, and (vi) the accuracy of the Company's information concerning the products and resources of competitors and potential competitors. CASH AND CASH EQUIVALENTS Cash and 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. As of December 31, 1997 and 1996, the Company classified all investments in debt and equity securities as available-for-sale. Available-for-sale 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 Stockholders' equity. If the adjustment to fair value reflects a decline in the value of the investment, management considers all available evidence to evaluate the extent to which the decline is "other than temporary" and marks the investment to market through a charge to the income statement. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of investments is obtained from market quotations and is disclosed in Note H., "Investments" below. The fair value of foreign currency forward contracts is based on forward rates in effect at the balance sheet date and is disclosed below (see -- Hedging). There were no foreign currency forward contracts outstanding at December 31, 1997. 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. On disposal, the related cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. 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 20 to 40 years for buildings). Certain specialized manufacturing equipment and facilities allocated to Genzyme General (with a net book value of $169.9 million at December 31, 1997) is depreciated over its remaining useful life using the units-of-production method. The remaining life and recoverability of such equipment is evaluated periodically based on the appropriate facts and circumstances. Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. For products expected to be commercialized, the Company capitalizes, to construction in-progress, the costs of manufacturing process validation and optimization incurred beginning when the product is deemed to have demonstrated technological feasibility and ending when the asset is substantially complete and ready for its intended use. Qualified costs include incremental labor and direct material, and incremental fixed overhead and interest. These costs are depreciated using the units of production method. 54 56 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTANGIBLES Intangible assets consist of goodwill, covenants not to compete, customer lists, patents, trademarks, trade-names and technology rights and are being amortized using the straight-line method over useful lives of three to forty years. Management's policy regarding intangible assets is to evaluate the recoverability of its intangible assets when the facts and circumstances suggest that these assets may be impaired. Evaluations consider factors including operating results, business plans, economic projections, strategic plans and market emphasis. Evaluations also compare expected cumulative, undiscounted operating incomes or cash flows with net book values of related intangible assets. Unrealizable intangible asset values are charged to operations if these evaluations indicate an impairment in value. Accumulated amortization of intangibles were $43.3 million and $26.2 million as of December 31, 1997 and 1996. TRANSLATION OF FOREIGN CURRENCIES The financial statements of the Company's foreign subsidiaries are translated from local currency into U.S. dollars using the current exchange rate at the balance sheet date for assets and liabilities and the average exchange rate prevailing during the period for revenues and expenses. The local currency for all Company foreign subsidiaries is considered to be the functional currency for each entity and accordingly, translation adjustments for these subsidiaries are included in Stockholders' equity. Exchange gains and losses on intercompany balances of a long-term investment nature are also recorded as a charge or credit to Stockholder's equity. Transaction gains and losses are recorded in income and totaled net losses of $0.3, $0.9 million and $0.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. HEDGING FORWARD CONTRACTS From time to time, the Company enters into forward contracts to reduce foreign currency exchange risk. Such contracts are revalued using current exchange rates at the balance sheet date. All gains and losses on revaluation of forward contracts are included in net income. At December 31, 1997 the Company had no currency contracts outstanding and at December 31, 1996, had currency contracts valued at approximately $0.9 million. Related gains and losses were not material to the financial statements. INTEREST RATE HEDGE AGREEMENTS Interest rate hedge agreements are used to reduce interest rate risks and costs inherent in the Company's debt portfolio. The Company enters into these agreements to change the fixed/variable interest rate mix of the portfolio to reduce the Company's aggregate risk to movements in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. The differentials to be received or paid under contracts designated as hedges are recognized in income over the life of the contracts as adjustments to interest expense. The fair values of interest rate contracts are estimated based on the estimated amount necessary to terminate the agreements. REVENUE RECOGNITION Revenues from product sales are recognized when goods are shipped and are net of third party contractual allowances and rebates, as applicable. Revenues from service sales are recognized when the service procedures have been completed or applicable milestones have been achieved. Revenues from research and development contracts are recognized over applicable contractual periods as specified by each contract and as costs related to the contracts are incurred. 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. 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. 55 57 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1997, such undistributed foreign earnings were approximately $4.0 million. Based on the Company's policy of indefinite reinvestment in non-US operations, it is not currently practicable to determine the tax liability associated with the repatriation of those earnings. NET INCOME (LOSS) PER SHARE Net income (loss) per share attributable to Genzyme General, GTR and GMO give effect to the management and accounting policies adopted by the Genzyme Board in connection with the redesignation of Genzyme common stock as GGD Stock and the creation of GTR Stock and GMO Stock and are reported in lieu of consolidated per share data. The Company computes net income (loss) per share for each division by dividing the earnings attributable to each series of stock by the weighted average number of shares of that stock outstanding during the period for basic earnings per share and by the weighted average shares of that stock plus other potentially dilutive securities outstanding during the applicable period for diluted earnings per share. Earnings (loss) attributable to GGD Stock, GTR Stock and GMO Stock equal 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 the division pursuant to the management and accounting policies adopted by the Genzyme Board. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share is very similar to the previously reported fully diluted earnings per share except that the new treasury stock method used in determining the dilutive effect of options uses the average market price for the period rather than the higher of the average market price or the ending market price. All net income (loss) per common share amounts have been restated to conform to SFAS 128 requirements. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
1997 1996 1995 ---- ---- ---- GENZYME GENERAL Net income (loss) attributable to GGD Stock -basic and diluted (1) .................... $ 77,447 $(30,502) $ 43,680 ======== ======== ======== Shares used in net income per common share-basic ................................ 76,531 68,289 55,531 Effect of dilutive securities: Employee and director stock options ........ 2,387 - 2,757 Warrants ................................... 7 - 1,897 6 3/4% convertible subordinated notes (1) .. - - 3,782 -------- -------- -------- Dilutive potential common shares (2) ......... 2,394 - 8,436 -------- -------- -------- Shares used in net income per common share-diluted (1,2) ........................ $ 78,925 $ 68,289 $ 63,967 ======== ======== ======== Net income (loss) per common share - basic (1) ................................ $ 1.01 $ (0.45) $ 0.79 ======== ======== ======== Net income (loss) per common share - diluted (1,2) ............................ $ 0.98 $ (0.45) $ 0.68 ======== ======== ========
- ------------------------- (1) In March 1996, $100.0 million of 6 3/4% convertible subordinated notes issued by Genzyme in October 1991 were converted into approximately 3,782,000 shares of GGD Stock and 255,000 shares of GTR Stock. For the diluted EPS calculation in 1995, no adjustment to Genzyme General's net income is required in assuming the conversion of the notes as of January 1, 1995 because substantially all of interest costs incurred on the notes were capitalized. (2) In computing diluted EPS for 1996, exercise of approximately 6,506,000 options and 35,000 warrants are not assumed as the result would be antidilutive due to Genzyme General's net loss. Options to purchase approximately 5,921,000 shares of GGD Stock in 1997, 3,824,000 shares in 1996, and 2,837,000 shares of stock in 1995 were outstanding during the years then ended but were not included in the year-to-date calculation of diluted income per share because the options' exercise price was greater than the average market price of the common shares during those periods. Warrants to purchase 40,000 shares of GGD stock exercisable as of July 31, 1997 were not included in the year-to-date calculation of diluted income per share because the exercise price of the warrants was greater than the average market price of the common shares during the year. GENZYME TISSUE REPAIR The following table sets forth the computation of basic and diluted earnings per share:
(Amounts in thousands, except per share amounts) December 31, - ----------------------------------------------------------------------------------------- 1997 1996 1995 -------- -------- -------- Net loss for basic and diluted weighted average shares outstanding.................... $(45,984) $(42,315) $(22,030) Basic and diluted weighted average shares outstanding................................... 14,976 12,525 9,659 Net loss per common share - basic and diluted ............................ $ (3.07) $ (3.38) $ (2.28)
During the years ended December 31, 1997, 1996, and 1995, certain securities which were not included in the computation of diluted earnings per share because they would have an anti-dilutive effect due to the net loss for the years, were as follows: (i) options to purchase approximately 2,777,000, 2,574,000 and 1,985,000 shares of GTR Stock with a price range of $4.84-$12.88 per share; (ii) 885,000, 1,794,000 and 1,287,000 GTR Designated shares issuable for the benefit of Genzyme General; (iii) debentures convertible into 1,772,000 shares of GTR Stock computed as of December 31, 1997. GENZYME MOLECULAR ONCOLOGY The following table sets forth the computation of basic and diluted earnings per share:
(Amounts in thousands, except per share amounts) December 31, - ----------------------------------------------------------------------------------------- 1997 1996 1995 -------- -------- -------- Net loss for basic and diluted weighted average shares ............................... $(19,578) $ (1,003) $ (464) Basic and diluted weighted average shares outstanding................................... 3,929 3,929 3,929 Pro forma net loss per common share - basic and diluted............................. $ (4.98) $ (0.26) $ (0.12)
During the year ended December 31, 1997, certain securities which were not included in the computation of diluted earnings per share because they would have an anti-dilutive effect due to the net loss for the year were as follows: (i) options to purchase approximately 826,000 shares of GMO Stock at $7.00 per share; (ii) warrants to purchase 10,000 shares of GMO Stock at $8.04 per share; (iii) debentures convertible into 3,476,000 shares of GMO Stock; and (iv) 6,000,000 GMO Designated Shares issuable for the benefit of Genzyme General. During the years ended December 31, 1996 and 1995, there were no securities outstanding to be considered in this calculation. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected the disclosure-only alternative permitted under SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has disclosed herein pro forma net income and pro forma earnings per share in the footnotes using the fair value based method for fiscal 1997, 1996 and 1995. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), respectively (collectively, the "Statements"). The Statements are effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive income and its 56 58 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS components in annual financial statements. SFAS 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS 130 and SFAS 131, respectively. Application of SFAS 130 will have no impact on Genzyme's consolidated financial position, results of operations or earnings per share data as currently reported or the combined financial position, results of operations or earnings per share data as currently reported for Genzyme General, GTR or GMO. The impact of adoption of SFAS 131 on the Company's disclosures is being evaluated. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS 132"). SFAS 132 effective for fiscal years beginning after December 15, 1997. Genzyme has not assessed the impact of the Statement on its financial statement disclosures. NOTE B. STRATEGIC FINANCIAL PROVISIONS In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges mainly associated with its Pharmaceutical and Surgical Products businesses and the sale of GDI, which was sold in 1996. The Pharmaceutical business will now focus on products that are more consistent with Genzyme's long-term business strategy of moving towards higher-value products and away from fine chemical and bulk pharmaceuticals. This change in strategy resulted in a $18.1 million charge to cost of products sold primarily related to the melatonin, bulk pharmaceuticals and fine chemical product lines which are being discontinued. In addition, Genzyme recorded charges of $5.5 million to cost of products sold and $3.5 million to SG&A expense primarily related to the manufacturing and selling of the Sepracoat product line, which an advisory panel of the FDA recommended against granting market approval of this product in 1997. Genzyme also recorded a $2.0 million charge to other expense related to the uncertainty of collection on certain notes receivable. NOTE C. ACQUISITIONS ACQUISITIONS The Company allocates all acquisitions to either Genzyme General, GTR or GMO depending on the nature of the acquired business. ALLOCATED TO GENZYME GENERAL: NEOZYME II CORPORATION On October 28, 1996, Genzyme completed its tender offer for the outstanding units (the "Units") of Neozyme II, each Unit consisting of (i) one share of Neozyme II Callable Common Stock ("Callable Common Stock"), and (ii) one callable warrant (the "Neozyme II Callable Warrants") to purchase two shares of GGD Stock and 0.135 share of GTR Stock, for $45.00 per Unit in cash. A total of 2,385,686 Units, or 98.8%, were tendered and accepted for payment resulting in payment of $107.4 million. On December 6, 1996, Neozyme II was merged with and into a wholly-owned subsidiary of Genzyme and, as a result of the merger, all outstanding shares of Callable Common Stock (other than shares held by Genzyme and its subsidiaries) were cancelled and converted into the right to receive $29.00 in cash per share, for an aggregate merger consideration of $0.9 million. The Neozyme II Callable Warrants included in the untendered Units separated from the shares of Callable Common Stock converted in the merger, and accordingly, 29,314 of such warrants became exercisable on December 6, 1996. The Neozyme II Callable Warrants have an exercise price of $44.202 per share and will expire on December 31, 1998. The aggregate purchase price of Neozyme II was $111.3 million and consisted of $108.2 million of cash, warrants valued at $0.5 million and acquisition costs of $2.6 million. 57 59 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The acquisition was accounted for as a purchase. The excess purchase price was allocated to Neozyme II's only remaining assets which were technologies still in the development stage. These technologies consisted of specific programs for the treatment of cystic fibrosis and have no alternative future use. Accordingly, the statement of operations for the year ended December 31, 1996 reflects a $106.5 million charge for in-process technology and a related deferred tax benefit of $21.7 million which were recorded upon consummation of the acquisition. DEKNATEL SNOWDEN PENCER, INC. On July 1, 1996, Genzyme completed the acquisition of DSP, a privately held surgical products company. The purchase price of $252.2 million consisted of cash of approximately $192.0 million, acquisition costs of approximately $4.6 million and debt obligations of DSP of approximately $55.6 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $130.8 million, was allocated to goodwill to be amortized over 40 years. Funds for the acquisition, the repayment of the debt and the payment of the acquisition costs were provided by borrowings of $200.0 million under a revolving credit facility from Fleet National Bank. The purchase price was allocated to the assets and liabilities of DSP based on their estimated respective fair values on the date of acquisition. Completed technology that has reached technological feasibility was valued using a risk adjusted cash flow model under which future cash flows were discounted, taking into account risks related to existing and future markets and assessments of the life expectancy of the completed technology. In-process technology that has not reached technological feasibility and that has no alternative future use was valued using the same method. Expected future cash flows associated with in-process technology are discounted considering risks and uncertainties related to viability of and to the potential changes in future target markets and to the completion of the products expected to be ultimately marketed by Genzyme. The amount allocated to in-process technology of $24.2 million was charged to operations in July 1996 upon completion of the acquisition. The Company incurred restructuring charges of $0.5 million related to this acquisition. GENETRIX, INC. On May 1, 1996, the Company acquired Genetrix, a privately held genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of GGD Stock. In the aggregate, approximately 1,380,000 shares of GGD Stock valued at approximately $36.5 million were issued for all the outstanding shares of Genetrix preferred stock and Genetrix common stock. The acquisition was accounted for as a purchase. The purchase price was allocated to the assets and liabilities of Genetrix based on their respective estimated fair values at the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired, approximately $39.0 million, was allocated to goodwill to be amortized over 15 years. The Company incurred restructuring charges of $1.0 million related to closings of laboratories made redundant by the acquisition. IG LABORATORIES, INC. IG was an approximately 70%-owned subsidiary for the period from January 1, 1995 through October 1, 1995. In October 1995, Genzyme acquired the publicly-held minority interest in IG by issuing approximately 770,510 shares of GGD Stock, valued at approximately $22.5 million. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, approximately $18.6 million, was allocated $14.2 million to in-process research and development and charged to operations, and $4.4 million to goodwill to be amortized over 11 years. Pro forma information is not presented since the impact of the acquisition on financial statement periods prior to the acquisition is not material. ALLOCATED TO GENZYME MOLECULAR ONCOLOGY: PHARMAGENICS, INC. The merger of PharmaGenics with and into Genzyme (the "Merger") was consummated on June 18, 1997. 58 60 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As compensation to Genzyme General for its contribution to GMO, 6,000,000 shares of GMO Stock have been reserved for issuance at the discretion of the Genzyme Board for the benefit of Genzyme General or its stockholders ("GMO Designated Shares"). (See Note K., "Stockholder's Equity - GMO Designated Shares" below). The aggregate purchase price of $27.5 million (net of $0.5 million which represents the fees payable by PharmaGenics in connection with the merger), plus acquisition costs of $2.5 million and assumed liabilities of $5.4 million has been allocated to the acquired tangible and intangible assets based on their respective fair values (amounts in thousands): Property, plant & equipment .............................. $ 208 Other assets ............................................. 50 Completed technology rights (to be amortized over 3 years) 20,000 Goodwill (to be amortized over 3 years) .................. 15,729 Deferred tax liability (to be amortized over 3 years) .... (7,600) In-process technology .................................... 7,000 -------- Total................................................. $ 35,387 ========
Accumulated amortization of the completed technology rights and goodwill was $5,127,000 as of December 31, 1997. The $7.0 million allocated to in-process technology represents the value assigned to PharmaGenics's programs which are still in the development stage and for which there is no alternative use. The value assigned to these programs (both complete and in-process) has been determined by selecting the maximum anticipated value of these programs, as provided by an independent valuation of the PharmaGenics business, based on comparable technologies. The amount allocated to in-process technology was charged to operations in June 1997, the period in which the merger was consummated. The deferred tax liability of $7.6 million results from the temporary difference between the book and tax basis of the completed technology computed at a 38.0% incremental tax rate. As of the date of the Merger, PharmaGenics had borrowed $2.5 million from Genzyme under a credit facility (the "PharmaGenics Note") which Genzyme had made available to PharmaGenics to fund PharmaGenics's documented operating costs. Upon consummation of the Merger, the PharmaGenics Note became a liability allocated to GMO and the $2.5 million of outstanding principal is considered an intracompany loan by Genzyme General to GMO bearing interest at 6.15% per annum and maturing on February 10, 2002 and convertible at any time prior thereto, at the Genzyme Board's option, into GMO Designated Shares. See Note K., "Stockholder's Equity - GMO Designated Shares" below. 59 61 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma information presents the results of operations of Genzyme for the years ended December 31, 1997 and 1996 as if the acquisitions of Genetrix, DSP, Neozyme II and PharmaGenics had been consummated as of the beginning of the periods presented. This pro forma information does not purport to be indicative of what would have occurred had the acquisitions been made as of those dates or of results that may occur in the future. The pro forma financial information does not include charges for in-process technology of (i) $24.2 million and $106.5 million related to the DSP and Neozyme II acquisitions, respectively in 1996 and (ii) $7.0 million related to the acquisition of PharmaGenics in 1997, all of which were recognized as expense upon consummation of each acquisition.
YEARS ENDED DECEMBER 31, ---------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 ------------------------------------------------ ----------- ---------- Pro forma revenues .......................................... $608,916 $565,004 Pro forma net income ........................................ 7,667 9,668 Pro forma net income attributable to GGD Stock .............. $77,447 $65,146 Pro forma net income per Genzyme General common share - basic ............................ $1.01 $0.95 ====== ====== Weighted average shares outstanding ....................... 76,531 68,289 ====== ====== Pro forma net income per Genzyme General common and common equivalent share - diluted .... $0.98 $0.88 ====== ====== Adjusted weighted average shares outstanding .............. 78,925 73,704 ====== ====== Pro forma net loss attributable to GMO Stock ................ $(26,091) $(15,113) Pro forma net loss per GMO common share - basic and diluted ....................................... $(6.64) $(3.85) ====== ====== Weighted average shares outstanding ....................... 3,929 3,929 ====== ======
NOTE D. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Off-balance-sheet financial instruments represent various degrees and types of risk to Genzyme, including credit, interest rate and liquidity risk. In the normal course of business, Genzyme enters into interest rate swap contracts to hedge its interest rate risk related to its variable rate notes payable. The notional amount of interest rate contracts is the amount upon which interest and other payments under the contract are based. Interest rate swaps generally involve the exchange of fixed and variable interest payments between two parties based on a common notional principal amount and maturity date. The primary risks associated with interest rate swaps are the exposure to movements in interest rates and the ability of counterparties to meet the terms of the contract. At December 31, 1997, Genzyme had one swap agreement with a notional value of approximately $100.0 million. The agreement matures in 1998. NOTE E. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS Genzyme's trade receivables primarily represent amounts due from healthcare service providers and companies and institutions engaged in research, development or production of pharmaceutical and biopharmaceutical products. Genzyme performs ongoing credit evaluations of its customers and generally does not require collateral. Accounts receivable are stated at fair value after reflecting the allowance for doubtful accounts of $12.1 million and $16.5 million at December 31, 1997 and 1996, respectively. As of December 31, 1997 and 1996 accumulated amortization of intangible assets was $43.3 million and $26.2 million, respectively. NOTE F. INVENTORIES Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996 ---------------------- ---- ---- Raw materials ............ $ 48,392 $ 30,379 Work-in-process .......... 31,994 38,203 Finished products ........ 59,295 56,683 -------- -------- $139,681 $125,265 ========= =========
NOTE G. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 include the following
(DOLLARS IN THOUSANDS) 1997 1996 ---------------------- ---- ---- Plant and equipment ....................$ 249,718 $ 217,594 Land and buildings ..................... 141,020 122,843 Leasehold improvements ................. 65,672 58,215 Furniture and fixtures ................. 15,364 14,714 Construction in-progress ............... 24,953 69,286 --------- --------- 496,727 482,652 Less accumulated depreciation .......... (111,379) (88,813) --------- --------- Property, plant and equipment, net.. $ 385,348 $ 393,839 ========== ==========
60 62 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Depreciation and amortization expense was $33.5 million, $23.1 million and $18.0 million in 1997, 1996 and 1995, respectively. The Company attributes its fixed assets to Genzyme General, GTR or GMO based on use. The Company has completed construction of the Company's mammalian cell production facility at Allston Landing in Boston, Massachusetts to produce a recombinant form of Ceredase(R) enzyme and other products. The Company has capitalized approximately $154.1 million of expenditures related to this building and approximately $64.3 million of gross process validation and optimization costs related to this and other manufacturing facilities. In 1997, 1996 and 1995, the Company capitalized approximately $0.5 million, $2.2 million and $9.0 million of interest costs, respectively, relating to this and other facility construction. The Company began depreciating this facility in July 1996 using the units of production method of depreciation. Depreciation expense for 1997 and 1996 related to this facility was $6.1 million and $1.7 million, respectively. NOTE H. INVESTMENTS Consolidated investments in marketable securities at December 31 consisted of the following:
1997 1996 -------------------- ---------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - ---------------------- ---- ----- ---- ----- Short Term: Certificates of deposit $ -- $ -- $ 1,882 $ 1,882 Corporate notes ....... 51,280 51,259 54,732 54,726 ------- ------- ------- ------- $51,280 $51,259 $56,614 $56,608 ======= ======= ======= ======= Long Term: Corporate notes ....... $70,981 $70,921 $16,481 $16,485 U.S. Treasury notes ... 21,667 21,755 22,010 21,730 ------- ------- ------- ------- $92,648 $92,676 $38,491 $38,215 ======= ======= ======= ======= Equity securities ........ $29,609 $30,047 $10,905 $10,813 ======= ======= ======= =======
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY INVESTMENTS Investment income for 1997, 1996 and 1995 includes gross realized losses of $2,000, $47,000 and $110,000 respectively. Gross realized gains included in investment income for 1995 were $1.4 million. The realized gain on the investment in Nabi was reported as a separate line item in the Company's statement of operations for 1996. Gross unrealized holding losses of $3.0 million and unrealized holding gains of $3.4 million were recorded at December 31, 1997 in Stockholders' equity as compared to unrealized holding losses of $2.7 million and unrealized holding gains of $2.3 million at December 31, 1996. Information regarding the range of contractual maturities of investments in debt securities at December 31, 1997 and 1996 is as follows:
1997 1996 -------------------- ---------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - ---------------------- ---- ----- ---- ----- Within 1 year ................ $ 51,280 $ 51,259 $56,614 $56,608 After 1 year through 2 years . 63,905 63,855 11,399 11,415 After 2 years through 10 years 28,743 28,821 27,092 26,800 -------- -------- ------- ------- $143,928 $143,935 $95,105 $94,823 ======== ======== ======= =======
Investments in marketable securities are attributed to either Genzyme General, GTR or GMO. 61 63 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company holds certain strategic investments in unconsolidated entities which may be attributed to either Genzyme General, GTR or GMO. INVESTMENTS ALLOCATED TO GENZYME GENERAL: ABIOMED, INC. ("ABIOMED") In July 1997, Genzyme General purchased 1,153,846 shares of ABIOMED common stock for $13.00 per share for an aggregate investment of $14,999,998. As a result of the investment, Genzyme owns approximately 13% of ABIOMED. As of December 31, 1997, the fair market value of the Company's investment in ABIOMED was approximately $18.9 million. The Company's Chairman and Chief Executive Officer is a director of ABIOMED. CELTRIX Pharmaceuticals, INC. ("CELTRIX") and Aronex Pharmaceuticals, Inc. ("ARONEX") Genzyme owns 3,023,217 shares of common stock of CELTRIX and 423,306 shares of common stock of ARONEX. At December 31, 1997, the fair market value of the Company's investments in Celtrix and Aronex were approximately $5.5 million and $1.8 million, respectively. Nabi (formerly NORTH AMERICAN BIOLOGICALS, INC.) In April 1996, the Company disposed of its entire investment in Nabi and recorded a realized gain of approximately $1.7 million on the sale. GENZYME TRANSGENICS CORPORATION ("GTC") Genzyme currently holds approximately 43% of the outstanding common stock of GTC, and accounts for its investment in GTC under the equity method. Genzyme and GTC are parties to a services agreement under which GTC pays Genzyme for certain basic services provided by Genzyme, such as treasury, data processing and laboratory support services, a sublease agreement pursuant to which Genzyme subleases a portion of one of its facilities in Framingham, Massachusetts to GTC and a research and development agreement pursuant to which Genzyme and GTC each perform certain research services for each other. During 1997, Genzyme received approximately $7.4 million from GTC pursuant to the three agreements between the companies and GTC received approximately $5.9 million from Genzyme pursuant to the research and development agreement. In December 1995, GTC refinanced its line of credit and term loan agreement with a commercial bank, subject to Genzyme's continuing guaranty of a total of $9.8 million of credit facilities provided to GTC by the commercial bank. The largest amount outstanding under these facilities during the fiscal year ended December 31, 1997 was $6.0 million. In exchange for its guaranty, Genzyme received a warrant to purchase 145,000 shares of GTC common stock with an exercise price of $2.84375 per share. 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 $10.0 million and agreed to fund development costs of the transgenic antithrombin ("ATIII") program through March 31, 1997 (the "1996 Agreement"). Under the agreement, GTC granted to the Company co-marketing rights to ATIII in all territories other than Asia subject to negotiation and execution of a development and supply agreement between the parties prior to March 31, 1997. Pursuant to the terms of this agreement, GTC borrowed $4.3 million in 1996 from Genzyme General, of which $1.7 million of this debt was converted into 219,565 shares of GTC Stock, $1.2 million was offset against amounts owed by Genzyme General to GTC for services provided in relation to the ATIII program and $1.4 million was repaid by GTC with accrued interest. 62 64 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In September 1997, Genzyme and GTC entered into an Amended and Restated Convertible Debt Agreement (the "1997 Debt Agreement"), which superseded and replaced the provisions of the 1996 Agreement other than the provisions relating to the development and commercialization of ATIII. Under the 1997 Debt Agreement, the line of credit was reduced to $8,327,000 and the expiration date of the revolving credit line was extended to March 31, 2000, with an option, at that date, for GTC to convert the outstanding balance to a three-year term loan. The interest rate remains at 7% through April 1, 1998. Thereafter, the interest rate increases annually starting at a rate equal to the lower of 8% or the prime lending rate in the first year and ending at a rate equal to the lower of 10% or the prime lending rate plus 2% from April 2, 2002 through the final year of the term loan. Financial covenants require positive quarterly earnings before interest, taxes, depreciation, amortization and unfunded research and development expense starting April 1, 1998. Any amounts outstanding under the credit line may be converted into shares of GTC common stock at Genzyme's option at any time for up to the full amount outstanding or at GTC's option on a quarterly basis limited to an amount sufficient to maintain a minimum tangible net worth required for continued listing on the Nasdaq National Market. All such conversions are to be based on the average closing stock price over 20 trading days ending two trading days prior to the date of conversion. The largest amount outstanding under this line of credit during the fiscal year ended December 31, 1997 was $6.0 million. As of December 31, 1997, $2.0 million remained outstanding under this credit line. In December 1997, Genzyme and GTC established ATIII LLC, a joint venture for the development and commercialization of ATIII effective as of January 1, 1998. Initially, Genzyme will fund 70% of the development costs up to a maximum of $33.0 million and GTC will fund the remaining 30% of the development costs. Both companies will fund equally any costs in excess of that level, and profits will be split equally. To the extent that either party fails to fund its share of costs and expenses, the profit sharing interests and the future funding obligations of the parties may be proportionately adjusted. The joint venture has the right to commercialize ATIII worldwide, excluding Asia. GTC has contributed ATIII and the product's underlying patents and technology to the joint venture. Pursuant to the terms of the joint venture agreements, Genzyme will pay GTC certain amounts upon the achievement of milestones events. GTC will manufacture ATIII in bulk form and Genzyme will perform the finished processing work. Genzyme, as the exclusive distributor for ATIII LLC, will market and sell products for the joint venture in the territory. The joint venture agreements supersede and replace the provisions of the 1996 Agreement that related to the ATIII program, pursuant to which Genzyme had previously funded the ATIII program. The fair market value of the GTC shares, based on quoted market prices, was $71.5 million and $45.5 million at December 31, 1997 and 1996, respectively. The Company reported equity in GTC's net losses of $2.9 million, $2.4 million and $1.8 million for the years ended December 31, 1997, 1996 and 1995, respectively. Following are condensed statements of operations and balance sheet data of GTC which are recorded as other noncurrent assets in Genzyme's financial statements:
YEAR ENDED DECEMBER 31, ----------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 - ---------------------- ---- ---- ---- Revenues ............. $ 62,938 $ 46,834 $32,421 Operating loss ....... (8,352) (7,253) (7,855) Net loss ............. (9,343) (7,746) (4,133)
DECEMBER 31, ------------ (DOLLARS IN THOUSANDS) 1997 1996 - ---------------------- ---- ---- Current assets ....... $ 24,400 $24,642 Noncurrent assets .... 46,580 42,062 Current liabilities .. 32,823 24,758 Noncurrent liabilities 10,779 6,742
63 65 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GELTEX PHARMACEUTICALS, INC. AND RENAGEL LLC In June 1997, Genzyme and GelTex established RenaGel LLC, a joint venture for the final development and commercialization of RenaGel(R) non-absorbed phosphate binder. Each of Genzyme and GelTex currently hold a 50% ownership interest in RenaGel LLC. Genzyme and GelTex are each required to fund 50% of the joint venture's costs and expenses, and will share equally in the profits. To the extent that either party fails to fund its share of costs and expenses, the profit sharing interests and the future funding obligations of the parties may be proportionately adjusted. GelTex contributed RenaGel(R) and the product's underlying patents and technologies to the joint venture. Pursuant to the terms of the joint venture agreements, Genzyme will pay GelTex a total of $27.5 million, consisting of a $2.5 million equity investment for 100,000 shares of GelTex common stock at $25.00 per share, which represents less than 1% ownership in GelTex, which was made in June 1997, a $15.0 million payment on receipt of FDA marketing approval for RenaGel and a $10.0 million payment one year following FDA marketing approval for RenaGel(R). The joint venture has rights to commercialize RenaGel(R) worldwide, except in Japan and Pacific Rim countries. Genzyme, as exclusive distributor for RenaGel LLC, will market and sell products for the joint venture pursuant to the terms of the joint venture agreement in the territory. The Company's Chairman and Chief Executive Officer is a director of Geltex. INVESTMENT ALLOCATED TO GENZYME TISSUE REPAIR: DIACRIN/GENZYME LLC On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin to develop and commercialize products and processes for use in the treatment of Parkinson's disease and Huntington's disease in humans using porcine fetal cells. Under the terms of the joint venture agreement, GTR is required to provide 100% of the initial $10.0 million of the funding requirements and 75% of the next $40.0 million of funding requirements. After that, all costs will be shared equally between GTR and Diacrin. Profits from the joint venture will be shared by the two parties. Genzyme General has agreed to provide funding to GTR in support of GTR's joint venture efforts in exchange for GTR Designated Shares. Pursuant to this agreement, Genzyme General allocated $5.1 million and $1.9 million of cash to GTR in 1997 and 1996, respectively, and 489,810 and 231,645 GTR Designated Shares, respectively, were reserved for issuance by the Genzyme Board's for the benefit of Genzyme General or its stockholders. As of December 31, 1997, GTR has provided a total of $8.7 million of funding to the joint venture and realized net losses from the joint venture of $6.7 million in 1997 and $1.7 million in 1996. Summary financial information is not presented as the impact of the Joint Venture's activities on the Company's statement of operations for the years ended December 31, 1997 is not considered to be material. The Company's Chairman and Chief Executive Officer is a director of Diacrin. INVESTMENT ALLOCATED TO GENZYME MOLECULAR ONCOLOGY: STRESSGEN/GENZYME LLC In July 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen and CMDF to develop stress gene therapies for the treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in connection with the joint venture through the combination of a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian), the purchase of warrants from Genzyme in the amount of $1.0 million (Canadian), the purchase of warrants and preferred stock from StressGen in the amount of $1.4 million (Canadian) and a limited recourse loan bearing interest at 0.125% per annum to StressGen in the amount of $6.6 million (Canadian). Each of Genzyme and StressGen (through a U.S. subsidiary) also made a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian) and a limited recourse loan was made by the U.S. subsidiary of StressGen to StressGen/Genzyme LLC in the amount of $7.0 million (Canadian). In addition, Genzyme and StressGen have agreed to provide in equal shares any additional capital required by the joint venture in excess of the initial $10.0 million (Canadian) in funding. 64 66 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Genzyme and StressGen have an option, payable in equal shares, to purchase CMDF's membership interest in StressGen/Genzyme LLC at any time during the three-year period beginning July 31, 1999 and ending July 31, 2002. The exercise price of the Purchase Option initially will be $15.6 million (Canadian) in July 1999 and will increase monthly thereafter to a final exercise price of $30.5 million (Canadian) in July 2002. The limited recourse loan made by CMDF will be retired in connection with the exercise of the Purchase Option. If the Purchase Option is not exercised on or before July 31, 2002, CMDF may require Genzyme and StressGen to repay $2.0 million (Canadian) each of the limited recourse loan. In addition, at any time during the 30-day period commencing on the date when not less than 75% of the initial funding provided by CMDF has been spent by the joint venture, but in no event later than July 31, 1999, CMDF shall have the right to require Genzyme and StressGen to purchase its membership interest at an aggregate purchase price of $10.0 million (Canadian) plus interest thereon at a rate per annum equal to the Canadian prime rate plus 1%. The Mandatory Purchase Right will terminate if not exercised by CMDF during such 30-day period. Genzyme's share of any amounts payable to CMDF upon exercise of the Purchase Option, the Mandatory Purchase Right or repayment of the limited recourse loan may be paid in cash, Genzyme common stock or any combination thereof at the discretion of Genzyme. Prior to the repurchase of CMDF's membership interest in StressGen/Genzyme LLC, profits from the joint venture will be shared in proportion to the capital contributions of the three parties. Following the repurchase of CMDF's membership interest, profits will be shared equally by StressGen and Genzyme. However, GMO currently records 50% of the net operating losses of the joint venture due to the existence of the Mandatory Purchase Right. Accordingly, for the year ended December 31, 1997, GMO recorded $258,000 of equity in loss of joint venture. GMO recorded $315,000 and $287,000 of research and development revenue and cost of research and development revenue, respectively, related to services billed to StressGen/Genzyme LLC for the year ended December 31, 1997. GMO has a receivable of $427,000 from StressGen/Genzyme LLC at December 31, 1997, which is included in other current assets. NOTE I. ACCRUED EXPENSES Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1997 1996 ---------------------- ---- ---- Professional fees .... $ 7,949 $ 4,402 Compensation ......... 21,917 22,626 Royalties ............ 8,421 8,323 Rebates .............. 4,575 7,604 Interest ............. 799 1,681 Other ................ 28,442 25,488 ------- ------- $72,103 $70,124 ======= =======
65 67 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J. LONG-TERM DEBT AND LEASES LONG-TERM DEBT Although the Company retains responsibility for the repayment of all long-term debt obligations, such debt and leases are allocated to Genzyme General, GTR or GMO for reporting purposes based on the intended use of the funds borrowed under each instrument or facility or equipment leased. Long-term debt at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1997 1996 ----------------------------------------------------- ---- ---- Revolving Credit Facility ........................... $ 118,000 $ 218,000 6% convertible subordinated debentures .............. 16,617 -- 5% convertible subordinated debentures .............. 12,681 -- Mortgage note payable, matures June 13, 1999 ........ 19,833 20,375 Other mortgage notes payable ........................ 3,856 3,983 --------- --------- 170,987 242,358 Less current portion ................................ (711) (999) --------- --------- $ 170,276 $ 241,359 ========= =========
Minimum annual principal repayment of long-term debt, excluding capital leases, in each of the next five years are as follows: 1998 - $711,000, 1999 - $137,397,000, 2000 - $12,831,000, 2001 - $160,000, 2002 - $16,787,000 and thereafter $3,101,000. CREDIT FACILITIES In November 1996, Genzyme refinanced its existing $215.0 million line of credit (the "Credit Line") with a Revolving Credit Facility made available through a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under this facility may be allocated to Genzyme General, GTR or GMO. As of December 31, 1996, Genzyme had $218.0 million of debt outstanding under the Revolving Credit Facility, of which $200.0 million was allocated to Genzyme General and $18.0 million to GTR. In June 1997, $5.0 million of borrowings originally allocated to Genzyme General were reallocated to GMO. As of December 31, 1997, Genzyme had $118.0 million of debt outstanding under the Revolving Credit Facility, which had been allocated $95.0 million to Genzyme General, $18.0 million to GTR and $5.0 million to GMO. REVOLVING CREDIT FACILITY Genzyme may request loans up to a maximum aggregate principal amount outstanding at any time of $225.0 million under the terms of the Revolving Credit Facility. Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and conditions defined in the credit agreement. The notes have certain covenants which require Genzyme to, among other things, maintain certain levels of earnings and liquidity ratios. If Genzyme defaults on the covenants the Revolving Credit Facility is payable on demand. The stock of Genzyme Securities Corporation, a Massachusetts Securities Corporation, is pledged as collateral for this facility. As of December 31, 1997, the interest rate on amounts outstanding under the Revolving Credit Facility was approximately 6.28%. Genzyme pays a commitment fee ranging from .15% to .375% on the unused portion of the Revolving Credit Facility. INTEREST RATE HEDGE AGREEMENT In December 1996, Genzyme entered into a $100.0 million interest rate swap contract (the "Interest Rate Swap Contract") to effectively convert the variable interest rate on borrowings under the Revolving Credit Facility to fixed interest rates. Net payments made or received under the Interest Rate Swap Contract are recorded as interest expense. At December 31, 1997, the Interest Rate Swap Contract had a termination value of approximately ($618,000). 66 68 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GTR PRIVATE PLACEMENT: On February 28, 1997, GTR raised $13.0 million through the private placement of the GTR Note to an affiliate of Credit Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the GTR Note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price preceding the conversion date or the date 15 months after the date of issue. In the first quarter of 1997, GTR recorded $11.5 million of proceeds attributed to the value of the debt and $1.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The debt will be accreted to its $13.0 million face value by a charge to interest expense of $1.5 million over the term of the initial 15 month conversion period. GMO PRIVATE PLACEMENT On August 29, 1997, GMO raised $20.0 million through the private placement of the GMO Debentures, due August 29, 2002. The GMO Debentures are convertible into shares of GMO Stock, at the option of the holders, beginning on the 91st day after the effective date of a registration statement covering the GMO IPO at the average of the closing bid prices of GMO Stock as reported by the Nasdaq National Market for the 20 trading days immediately preceding the applicable conversion date (the "GMO Market Price"). Beginning February 26, 1998, the GMO Debentures are convertible at a discount to the GMO Market Price. This discount will begin at 7% on February 26, 1998 and will increase by an additional one percent every 30 days thereafter to 15% on October 24, 1998. Beginning November 23, 1998, the conversion price will be the lower of (i) 85% of the GMO Market Price calculated as of the actual conversion date and (ii) 85% of the GMO Market Price calculated as of November 21, 1998. In no event, however, will the conversion price be less than $7.70 per share (subject to adjustment in the event of any stock split, stock dividend, reclassification, combination or singular event). In the third quarter of 1997, GMO recorded $16.5 million of proceeds attributed to the value of the debt and $3.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The debt will be accreted to its $20.0 million face value by a charge to interest expense of $3.5 million over the term of the initial 15 month conversion period. The Genzyme Board approved the allocation of up to $25.0 million in cash from Genzyme General to GMO (the "GMO Equity Line"), subject to a dollar-for-dollar reduction by the proceeds of outside financing received by GMO. As a result of the issuance of the GMO debentures in August 1997, the amount available under the GMO Equity Line was reduced to $5.0 million. No draws have been made under the Equity Line to date. Upon successful completion of a GMO IPO the Equity Line will terminate. If the effective date of the GMO IPO does not occur before August 29, 1998, at the holder's option, the GMO Debentures may be exchanged for a 5% convertible debenture issued by Genzyme General (the "GGD Debenture") due August 29, 2003. If the GMO IPO is completed before August 29, 1998 but the aggregate proceeds from the offering are less than $15.0 million or GMO's market capitalization is below $90.0 million, at the holder's option, 50% of the GMO Debentures can be exchanged for the Genzyme General Debentures. The exchange option must be exercised within 30 business days of the event triggering the right of exchange. Beginning on the 181st day following the effective date of the GMO IPO, the holders of the GMO Debentures have the option (the "Put Option") to require Genzyme to pay the entire principal amount of the GMO Debentures in cash, together with interest at the rate of 15% per annum (less any interest previously paid) if the conversion price (as calculated above) is less than $7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put Option is exercisable only with respect to the first three Put Option Review Periods that occur while the GMO Debentures are outstanding and, if the Put Option is not exercised within 15 days after any Put Option Review Period, a period of 90 days from the last day of the previous Put Option Review Period must elapse before another Put Option Review Period commences. The GMO Debentures are callable with cash or stock beginning 18 months after the effective date of the GMO IPO if the stock has closed at 150% of the fixed conversion price for 20 consecutive trading days. MORTGAGE NOTES The Company's three mortgage notes have been attributed to Genzyme General. The mortgage note due June 1999 is collateralized by land and buildings with a net book value of $27.6 million at December 31, 1997, bears interest at 7.73% annually, and is payable monthly based on a 20 year direct reduction amortization schedule, with the remaining principal due June 13, 1999. 67 69 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The mortgage note maturing November 2014 is collateralized by land and buildings with a net book value of $6.1 million at December 31, 1997 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. CONVERSION OF $100.0 Million 6 3/4% CONVERTIBLE SUBORDINATED NOTES In March 1996, holders of Genzyme's 6 3/4% Convertible Subordinated Notes due October 1, 2001 in the aggregate principal amount of $100.0 million (the "Notes"), converted such Notes into shares of GGD Stock and GTR Stock pursuant to the amended terms of the Notes and received 37.826 shares of GGD Stock and 2.553 shares of GTR Stock in conversion of each $1,000 Note. Prior to conversion, the Notes had been allocated to Genzyme General. OPERATING LEASES Total rent expense under operating leases was $16.3 million, $12.8 million and $10.0 million in 1997, 1996 and 1995, respectively. The Company leases facilities and personal property under certain operating leases in excess of one year. FUTURE MINIMUM PAYMENTS DUE UNDER CAPITAL AND OPERATING LEASES: Future minimum payments due under the Company's long-term obligations and capital and operating leases are as follows:
CAPITAL OPERATING (DOLLARS IN THOUSANDS) LEASES LEASES ---------------------- ------ ------ 1998 .................................. $203 $ 14,903 1999 .................................. 20 14,296 2000 .................................. 0 13,153 2001 .................................. 0 10,014 2002 .................................. 0 9,611 Thereafter ............................ 0 80,009 ---- -------- Total minimum payments ............. 223 $141,986 ======== Less: interest ........................ (12) ---- $211 ====
NOTE K. STOCKHOLDERS' EQUITY PREFERRED STOCK Shares of preferred stock may be issued from time to time in one or more series. The Genzyme Board 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 such shares of that series. The Genzyme Board shall determine the number of shares constituting each series of preferred stock and each series shall have a distinguishing designation. CREATION OF GGD STOCK AND GTR STOCK Immediately prior to the Effective Date, as defined in Note A., "Summary of Significant Accounting Policies" above, approximately 31,582,000 shares of Genzyme common stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the "Warrants"), and the conversion of the 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 GGD Stock and an option exercisable for the number of shares of GTR Stock that the holder would have received if the holder had exercised the option immediately prior to the Effective Date. The Warrants provide that the holder of the Warrant is entitled to receive the number of shares of GGD Stock and GTR Stock upon exercise of the Warrant that the holder would have received had the holder 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 68 70 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS was adjusted so that the holder of a Note converted after the Effective Date would receive, in addition to the shares of GGD Stock into which the Note is convertible, the same number of shares of GTR Stock as the holder would have received had the holder converted the Note immediately prior to the Effective Date. CREATION OF GMO STOCK In June 1997, Genzyme issued 3,928,572 shares of GMO Stock to effect the acquisition of PharmaGenics (See Note C., "Acquisitions" above). STOCK OFFERINGS In November 1997, Genzyme sold 4,000,000 shares of GTR Stock to the public at a price of $7.75 per share for net proceeds of $29.0 million after offering costs and underwriting discounts and commissions. In October 1995, Genzyme sold 5,750,000 shares of GGD Stock to the public at a price of $25.63 per share for net proceeds of $141.3 million after underwriting discounts and commissions. In September 1995, Genzyme sold 3,000,000 shares of GTR Stock to the public at a price of $15.00 per share for net proceeds of $42.3 million after underwriting discounts and commissions. STOCK SPLIT In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of GGD 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 stockholder approval of an amendment to the Genzyme Charter to increase the number of authorized shares of GGD 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 GGD Stock and GTR Stock, voting together as a single class, at a special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a total of 34,669,435 shares of GGD Stock were distributed to stockholders in connection with the dividend. All share and per share amounts have been re-stated to reflect this split. DIRECTOR'S DEFERRED COMPENSATION PLAN Genzyme's Directors' Deferred Compensation Plan (the "Deferred Compensation Plan") allows each member of the Genzyme Board who is not also an officer, employee or consultant of Genzyme to defer receipt of all or a portion of the cash compensation payable to him or her as a director of Genzyme. Compensation may be deferred until the termination of services as a director or, subject to certain restrictions, such other date as may be specified by the director. All of the current directors of Genzyme, other than those directors who are also officers, employees or consultants of Genzyme, are eligible to participate in the plan and as of December 31, 1997, one of the directors has elected to participate in the plan. Genzyme has reserved 50,000 shares of GGD Stock, 100,000 shares of GTR Stock and 50,000 shares of GMO Stock to cover distributions of shares credited to stock accounts under the Deferred Compensation Plan (subject in each case to adjustments for stock splits, stock dividends, and certain transactions affecting Genzyme's capital stock). As of December 31, 1997, no shares of GGD Stock, GTR Stock, or GMO Stock credited to stock accounts under the Deferred Compensation Plan have been distributed to participants in such plan. SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS' STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLAN At December 31, 1997, approximately 18,135,000 shares of GGD Stock, 5,392,000 shares of GTR Stock and 4,070,000 shares of GMO Stock were reserved for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997 Equity Plan, 1988 Director Stock Option Plan, as amended, 1990 Employee Stock Purchase Plan, as amended, and upon the exercise of outstanding warrants. STOCK OPTIONS Pursuant to the 1990 Equity Incentive Plan, as amended, and the 1997 Equity Plan options may be granted to purchase an aggregate of 23,800,000 shares of GGD Stock 5,300,000 shares of GTR Stock and 3,500,000 shares of GMO Stock. The plans allow the granting of stock options at not less than fair market value at date of grant, and stock appreciation rights, performance shares, restricted stock and stock units to employees and consultants of the Company, each with a maximum term of ten 69 71 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS years. In addition, Genzyme has a 1988 Director Stock Option Plan, as amended, pursuant to which nonstatutory stock options up to a maximum of 233,600 shares or GGD Stock, 100,000 shares of GTR Stock and 70,000 shares of GMO Stock, respectively, are automatically granted at fair market value to members of the Genzyme Board upon their election or reelection as directors. For each year of a director's term of office, he or she receives an option to purchase 4,000 shares of GGD Stock and a number of GTR Stock and GMO Stock options with a market value equal to one-quarter of the market value of the stock subject to GGD Stock options. All options expire ten years after the initial grant date and generally vest over four years. Stock option activity is summarized below:
WEIGHTED SHARES AVERAGE UNDER OPTION EXERCISE PRICE EXERCISABLE ------------ -------------- ----------- GGD STOCK: Outstanding at December 31, 1994 .... 10,481,700 $15.13 4,683,967 Granted ........................... 4,141,502 23.25 Exercised ......................... (2,007,654) 13.97 Forfeited and cancelled ........... (442,882) 14.96 ---------- Outstanding at December 31, 1995 .... 12,172,666 17.79 5,138,502 Granted ........................... 3,442,484 29.16 Exercised ......................... (906,041) 15.70 Forfeited and cancelled ........... (643,626) 22.81 ---------- Outstanding at December 31, 1996 .... 14,065,483 20.48 6,505,835 Granted ........................... 2,083,936 29.86 Exercised ......................... (1,760,934) 16.25 Forfeited and cancelled ........... (1,041,218) 23.77 ---------- Outstanding at December 31, 1997 .... 13,347,267 22.22 6,982,224 ========== GTR STOCK: Outstanding at December 31, 1994 .... 940,976 4.84 207,583 Granted ........................... 1,160,928 12.86 Exercised ......................... (48,232) 5.15 Forfeited and cancelled ........... (68,435) 4.96 ---------- Outstanding at December 31, 1995 .... 1,985,237 8.66 449,257 Granted ........................... 819,142 12.88 Exercised ......................... (81,117) 5.23 Forfeited and cancelled ........... (149,043) 9.50 ---------- Outstanding at December 31, 1996 .... 2,574,219 10.73 739,421 Granted ........................... 636,605 9.84 Exercised ......................... (100,407) 5.21 Forfeited and cancelled ........... (333,655) 12.75 ---------- Outstanding at December 31, 1997 .... 2,776,762 10.50 1,084,532 ========== GMO STOCK: Outstanding June 18, 1997 -- Granted ............................. 826,334 7.00 ---------- Outstanding at December 31, 1997 .... 826,334 7.00 180,063 ==========
70 72 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total exercise proceeds for all options outstanding at December 31, 1997 is approximately $296,601,000, $29,152,000 and $5,784,338 for GGD Stock, GTR Stock and GMO Stock, respectively. Information regarding the range of option prices as of December 31, 1997 is as follows: GGD STOCK:
EXERCISABLE ------------------------------ RANGE OF NUMBER WEIGHTED WEIGHTED WEIGHTED EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE CONTRACTUAL LIFE - ---------------------------- --------------- --------------- --------------- --------------- --------------- $ 3.85 - $14.72 2,678,907 4.44 $11.32 1,953,504 $10.16 $14.75 - $19.44 3,238,377 6.10 $17.61 2,131,983 $17.72 $19.50 - $28.00 3,390,201 7.19 $25.32 1,569,813 $24.04 $28.06 - $30.63 3,830,507 8.95 $30.36 1,233,521 $30.27 $30.65 - $38.00 209,275 7.90 $33.63 93,403 $33.13 - ---------------------------- --------------- --------------- --------------- --------------- --------------- $ 3.85 - $38.00 13,347,267 6.89 $22.22 6,982,224 $19.45
GTR STOCK:
EXERCISABLE ------------------------------ RANGE OF NUMBER WEIGHTED WEIGHTED WEIGHTED EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE CONTRACTUAL LIFE - ---------------------------- --------------- --------------- --------------- --------------- --------------- $ 3.19 - $ 6.00 906,686 7.07 $ 5.09 655,865 $ 5.03 $ 6.63 - $11.75 752,948 9.50 $ 9.90 133,227 $ 9.97 $11.88 - $17.50 1,052,530 8.09 $14.93 274,797 $13.49 $17.63 - $25.75 64,598 8.08 $21.24 20,643 $20.50 - ---------------------------- --------------- --------------- --------------- --------------- --------------- $ 3.19 - $25.75 2,776,762 8.14 $10.50 1,084,532 $ 8.07
GMO STOCK:
EXERCISABLE ------------------------------ NUMBER WEIGHTED WEIGHTED WEIGHTED EXERCISE PRICE OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE CONTRACTUAL LIFE - ---------------------------- --------------- --------------- --------------- --------------- --------------- $7.00 826,334 9.77 $7.00 180,063 $ 7.00 - ---------------------------- --------------- --------------- --------------- --------------- ---------------
EMPLOYEE STOCK PURCHASE PLAN Genzyme's 1990 Employee Stock Purchase Plan allows full-time employees, as defined in the plan, to purchase the Company's stock at 85% of fair market value. Under this plan, (i) 2,000,000 shares of GGD Stock are authorized, of which 366,922, 291,053 and 285,868 shares were issued in 1997, 1996 and 1995, respectively, (ii) 1,100,000 shares of GTR Stock are authorized, of which 280,819, 325,300 and 269,920 shares of GTR Stock were issued in 1997, 1996 and 1995, respectively, and (iii) 500,000 shares of GMO Stock are authorized, of which no shares were issued in or prior to 1997. STOCK COMPENSATION PLANS The Company applies APB Opinion 25 and related Interpretations in accounting for its four stock-based compensation plans, the 1990 Equity Incentive Plan and the 1997 Equity Incentive Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan (a stock 71 73 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS purchase plan) and the 1988 Director Stock Option Plan and accordingly, no compensation expense has been recognized for options granted and shares purchased under the provisions of these plans for options granted to employees with an exercise price equal to fair market value. Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the method of SFAS 123, net income (loss) and income (loss) per share would have been as follows (In the case of GMO, disclosure is presented exclusively for the year ended December 31, 1997, as there were no stock options issued under the above mentioned plans prior to 1997):
DECEMBER 31, ------------ (Amounts in thousands, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- CONSOLIDATED: Net income (loss): as reported .................. $ 13,629 $ (72,817) $ 21,650 pro forma .................... $ (2,150) $ (86,293) $ 17,261 GENZYME GENERAL: Net income (loss): As reported .................. $ 77,447 $ (30,502) $ 43,680 Pro forma .................... $ 65,440 $ (40,558) $ 40,429 Basic income (loss) per share: As reported .................. $ 1.01 $ (0.45) $ 0.79 Pro forma .................... $ 0.86 $ (0.59) $ 0.73 Diluted income (loss) per share: As reported .................. $ 0.98 $ (0.45) $ 0.68 Pro forma .................... $ 0.83 $ (0.59) $ 0.63 GENZYME TISSUE REPAIR: Net loss: As reported .................. $ (45,984) $ (42,315) $ (22,030) Pro forma .................... $ (49,547) $ (45,735) $ (23,168) Basic and diluted loss per share: As reported .................. $ (3.07) $ (3.38) $ (2.28) Pro forma .................... $ (3.31) $ (3.65) $ (2.40) GENZYME MOLECULAR ONCOLOGY: Net loss: As reported .................. $ (19,578) -- -- Pro forma .................... $ (19,787) -- -- Basic and diluted loss per share: As reported .................. $ (4.98) -- -- Pro forma .................... $ (5.04) -- --
The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995, and additional awards are anticipated in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. In computing these pro forma amounts, Genzyme General has assumed a risk-free interest rate equal to approximately 5.96%, 6.37% and 6.33%, expected volatility of 42% in 1997 and 45% in each of 1996 and 1995, zero dividend yields and expected lives of four years for 1997, 72 74 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1996 and 1995, respectively. The average fair value of the Genzyme General options granted during 1997, 1996 and 1995 is estimated as $12.21, $11.98 and $11.53, respectively, on the date of grant. In computing these pro forma amounts, GTR has assumed a risk-free interest rate equal to approximately 5.96%, 6.37% and 6.33%, expected volatility of 70% in 1997 and 80% in each of 1996 and 1995, zero dividend yields and expected lives of four years for 1997, 1996, and 1995, respectively. The average fair value of GTR Stock granted during 1997, 1996 and 1995 is estimated as $5.66, $9.23 and $10.06, respectively, on the date of grant. In computing these pro forma amounts, GMO has assumed a risk-free interest rate equal to approximately 5.96%, expected volatility of 45%, zero dividend yields and expected lives of four years for 1997. The average fair value of the options exercisable for shares of GMO Stock granted during 1997 is estimated as $2.97 on the date of grant. STOCK RIGHTS Pursuant to the Company's Restated Rights Agreement, each outstanding share of GGD Stock, GTR Stock and GMO Stock also represents one preferred stock purchase right (a "GGD Stock Right", a "GTR Stock Right" and a "GMO Stock Right", respectively). Each GGD Stock Right, GTR Stock Right and GMO Stock Right, when it becomes exercisable, will entitle the registered holder to purchase from Genzyme (i) in the case of a GGD Stock Right, one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $26.00, subject to adjustment, (ii) in the case of a GTR Stock Right, one one-hundredth of a share of Series B Junior Participating Preferred Stock at a purchase price of $25.00, subject to adjustment, and (iii) in the case of a GMO Stock Right, one one-hundredth of a share of Series C Junior Participating Preferred Stock at a purchase price of $21.00, subject to adjustment. WARRANTS Genzyme sold three warrants (the "Front-End Warrant", the "NDA Warrant", and the "Callable Warrant", to purchase Genzyme common stock to CMDF for an aggregate purchase price of $1.0 million (Canadian). Each warrant is initially exercisable for up to 40,000 shares of GGD Stock and will be converted automatically upon the closing date of the GMO IPO into warrants to purchase shares of GMO Stock as follows: The Front-End Warrant is exercisable immediately and will terminate upon the earlier of the exercise of the Mandatory Purchase Right by CMDF or July 31, 2002. The exercise price of the Front-End Warrant is $30.18 per share of GGD Stock (120% of $25.15) and, upon conversion following the GMO IPO, will be equal to 120% of a defined conversion price per share of GMO Stock. 73 75 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The NDA Warrant will be exercisable during the one-year period following the filing of the first new drug application with the FDA for a product developed through the collaboration and will terminate upon the earliest of the exercise of the Mandatory Purchase Right by CMDF, the expiration of the Purchase Option or July 31, 2007. The exercise price of the NDA Warrants is $30.18 per share of GGD Stock and, upon conversion following the GMO IPO, will be equal to 120% of a defined conversion price per share of GMO Stock. The Callable Warrant will terminate upon the earliest of the exercise of the Mandatory Purchase Right by CMDF, the exercise of the Purchase Option or July 31, 2005 and will be exercisable during the three-year period following the expiration of the Purchase Option. The exercise price of the Callable Warrant per share of GGD Stock will be equal to the average of the closing sale prices of GGD Stock on the Nasdaq National Market for the 20 trading days ending on the expiration date of the Purchase Option and, upon conversion following the GMO IPO, will be equal to the average of closing sale prices of GMO Stock on the Nasdaq National Market for the 20 trading days ending on the expiration date of the Purchase Option. In 1992 and 1995, Genzyme issued certain warrants which, when exercised, grant the holders two shares of GGD Stock and .0675 share of GTR Stock (after 1996 GGD Stock split) for each warrant exercised. These warrants were granted in exchange for the receipt of options to purchase the callable common stock of Neozyme II and in connection with Genzyme's purchase of the publicly-held shares of IG in exchange for IG warrants. Warrant activity related to GGD Stock is summarized below:
WARRANTS WARRANT PRICE -------- ------------- Outstanding at December 31, 1994 ... 5,934,381 $16.01 - $38.25 Granted ........................ 6,005 42.67 Exercised ...................... (343,145) 16.01 - 38.25 ---------- Outstanding at December 31, 1995 ... 5,597,241 16.01 - 42.67 ---------- Exercised ...................... (3,170,551) 16.01 - 38.25 Tendered ....................... (2,385,686) Expired ........................ (5,685) 16.01 - 38.25 ---------- Outstanding at December 31, 1996 ... 35,319 16.01 - 44.20 Granted ........................ 120,000 30.18 Exercised ...................... (19,340) 44.20 ---------- Outstanding at December 31, 1997 135,979 16.01 - 44.20 ==========
GTR DESIGNATED SHARES Pursuant to Genzyme's charter, as amended, GTR Designated Shares are authorized shares of GTR Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GTR. GTR Designated Shares are created in certain circumstances when cash or other assets are transferred from Genzyme General to GTR. The number of GTR Designated Shares will be decreased by: the number of shares of GTR Stock issued by Genzyme, the proceeds of which are allocated to Genzyme General; the number of shares of GTR Stock issued as a dividend to holders of GGD Stock; and the number of shares of GTR Stock issued upon the conversion of convertible securities, including the 5% convertible note, the proceeds of which are attributed to Genzyme General. In addition, the number of GTR Designated Shares can be increased as a result of certain interdivision transactions. At the Effective Date, 5,000,000 GTR Designated Shares were established. As a result of the distribution of approximately 3,300,000 shares of GTR Stock to holders of GGD Stock on the Effective Date, the number of GTR Designated Shares were reduced by a corresponding amount. The remaining 1,700,000 GTR Designated Shares were reserved for issuance upon the exercise of Genzyme stock options and warrants and the conversion of Genzyme's convertible notes which were outstanding on the Effective Date. 74 76 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Genzyme also has the option to allocate to GTR, at $10.00 per GTR Designated Share, up to $30.0 million from Genzyme General (the "GTR Purchase Option") in exchange for a maximum of 3,000,000 GTR Designated Shares to be issued in connection with the exercise of the GTR Purchase Option. In each of June 1996 and 1997, pursuant to the terms of the GTR Purchase Option, the Genzyme Board elected to allocate $10.0 million in cash from Genzyme General to GTR in exchange for 1,000,000 GTR Designated Shares, respectively, which were reserved for issuance at the sole discretion of the Genzyme Board for the benefit of the Genzyme General stockholders. In October 1996, the Genzyme Board approved the allocation of up to a maximum of $20.0 million of cash from Genzyme General to GTR (the "GTR Equity Line") to provide initial funding for GTR's joint venture with Diacrin. The GTR Equity Line was provided in exchange for an increase in the number of GTR Designated Shares at a rate determined by dividing the cash so allocated by the average of the daily closing prices of one share of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of allocation. As of December 31, 1997, Genzyme had allocated a total of $7.0 million of cash from Genzyme General to GTR under the GTR Equity line and 721,455 GTR Designated Shares had been reserved for issuance at the discretion of the Genzyme Board for the benefit of the Genzyme General stockholders. If, as of May 31 of each year starting May 31, 1997, the number of GTR Designated Shares on such date (not including those reserved for issuance with respect to Genzyme General convertible securities as a result of anti-dilution adjustments required by the terms of such instruments by the Genzyme Board) exceeds 10% of the number of shares of GTR Stock then issued and outstanding, then substantially all GTR Designated Shares will be distributed to holders of record of GGD Stock, subject to reservation of a number of such shares equal to the sum of (a) the number of GTR Designated Shares reserved for issuance upon the exercise or conversion of Genzyme General convertible securities and (b) the number of GTR Designated Shares reserved by the Genzyme Board as of such date for sale not later than six months after such date, the proceeds of which sale will be allocated to Genzyme General. On June 30, 1997, the Genzyme Board declared a dividend of approximately 2,686,000 GTR Designated Shares for distribution to Genzyme General stockholders of record as of July 11, 1997, in a tax-free distribution of approximately .03 shares of GTR Stock for each share of GGD Stock owned. In total, 2,292,000 shares of GTR Stock were issued to GGD Stockholders on July 22, 1997 in the distribution with a fair market value of $22.9 million and 394,000 shares of GTR Stock have been reserved for issuance upon the exercise of GGD Stock options and warrants outstanding on the record date. GTR Designated Share activity is summarized below:
GTR DESIGNATED SHARES -------------- Balance at December 31, 1994 1,409,707 Stock options exercised ........... (72,942) Stock warrants exercised .......... (46,244) ESPP shares issued ................ (3,613) ---------- Balance at December 31, 1995 1,286,908 Stock options exercised ........... (42,728) Stock warrants exercised .......... (426,984) Convertible notes conversion ...... (255,249) Exercise of GTR Purchase Option ... 1,000,000 Increase from equity line ......... 231,645 ---------- Balance at December 31, 1996 1,793,592 Stock options exercised ........... (103,729) Stock warrants exercised .......... (2,617) Exercise of GTR Purchase Option ... 1,000,000 Increase from equity line ......... 489,810 Dividend distribution ............. (2,292,003) ---------- Balance at December 31, 1997 885,053 ==========
75 77 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GMO DESIGNATED SHARES: Pursuant to Genzyme's charter, as amended, GMO Designated Shares are authorized shares of GMO Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GMO. GMO Designated Shares are created in certain circumstances when cash or other assets are transferred from Genzyme General to GMO. The Genzyme Board may issue the GMO Designated Shares as a stock dividend to the holders of GGD Stock or it may sell such shares in a public or private sale and allocate all of the proceeds to Genzyme General. Genzyme's management and accounting policies require Genzyme to distribute GMO Designated Shares to holders of GGD Stock on the later of November 30, 1998 or 360 days following completion of an initial public offering of shares of GMO Stock, although the Genzyme Board may elect to distribute these shares at any time but not later than November 29, 1999. As compensation to Genzyme General for its contribution to GMO, 6,000,000 GMO Designated Shares have been reserved for issuance at the discretion of the Genzyme Board for the benefit of Genzyme General or its stockholders. Upon consummation of the PharmaGenics Merger, the $2.5 million of debt outstanding under a credit facility which Genzyme had made available to PharmaGenics to fund PharmaGenics's documented operating costs became a liability allocated to GMO (the "GMO Note"), and is considered as an intracompany loan by Genzyme General to GMO, due on February 10, 2002, and convertible at any time prior thereto, at the Genzyme Board's option, into GMO Designated Shares. The number of GMO Designated Shares resulting from any conversion of the GMO Note will be determined by dividing the principal and interest being converted by the conversion price (the "GMO Conversion Price") in effect on the date of conversion. The initial GMO Conversion Price will be determined upon the closing of a GMO initial public offering in which the aggregate gross proceeds to GMO equal or exceed $10.0 million (an "Offering"), and will be equal to (i) the per share price of the GMO Stock sold in the Offering or, if GMO Stock is not sold in the Offering, (ii) the initial conversion price of the security convertible into GMO Stock that is sold in the Offering, provided that if any portion of the PharmaGenics Note is converted prior to any Offering, the initial GMO Conversion Price is $7.00. The GMO Conversion Price is subject to adjustment upon declaration of any stock dividend or on completion of any subdivision or combination of the GMO Stock. NOTE L. RESEARCH AND DEVELOPMENT AGREEMENTS Revenues from research and development agreements with related parties include the following:
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ---------------------- ------- ------- ------- Fees for research and development activities: Neozyme II ............................. $ -- 19,799 24,198 Research contracts ..................... 8,041 3,212 2,560 ------ ------- ------- $8,041 $23,011 $26,758 ====== ======= =======
The Company allocates all research and development agreements with unconsolidated affiliates to Genzyme General, GTR or GMO based on the business to which the research relates. 76 78 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENZYME GENERAL: GENZYME DEVELOPMENT PARTNERS, L.P. ("GDP") Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme, is the General Partner of GDP, a Delaware limited partnership which was formed in September 1989 to develop, produce and derive income from the sale of products (the "Sepra Products") based on hyaluronic acid. Such Sepra Products are intended to be used to limit the incidence and severity of postoperative adhesions. The Company has an option (the "GDP Purchase Option") to purchase all of the outstanding partnership interests for a payment of approximately $26.0 million in cash, GGD Stock or a combination thereof determined at Genzyme's sole discretion, plus future royalty payments. The GDP Purchase Option does not become exercisable until at least twenty-four months after the first commercial sale of a product of GDP and certain returns have been earned by GDP. Genzyme elected without obligation to fund the research and development activities of GDP using Genzyme General cash and spent approximately $7.3 million, $6.0 million and $6.4 million on the GDP's programs in 1997, 1996 and 1995, respectively. The Company has agreed to fund the GDP's research and development programs and general and administrative expenses through 1998 but, as General Partner, believes that additional funds will be required to complete the development, clinical testing and commercialization of GDP's products. In 1997, Genzyme made an additional capital contribution of $1.5 million to the Partnership. The Company and GDP formed Genzyme Ventures II (the "Joint Venture"), in September 1989 for the purpose of manufacturing and marketing the Sepra Products in the United States and Canada for use in human clinical trials or human surgical procedures. In December 1994, the Company allocated its interests in the Joint Venture to Genzyme General. GDP has contributed its technology and $1.7 million to the Joint Venture and Genzyme General has contributed its agreement to manufacture and market the Sepra Products, to make non-interest bearing loans to the Joint Venture in the amount of any working capital deficiency, and to make capital contributions to the extent deemed necessary by the two venturers in connection with the business of the Joint Venture. The Joint Venture began to engage in active business after receipt of FDA marketing approval for Seprafilm[R] in August 1996. For the years ended December 31, 1997 and 1996, the Joint Venture incurred net losses of $2.3 million and $2.5 million, respectively, primarily attributable to costs associated with the introduction of the Sepra Products to the healthcare marketplace. Summary financial information is not presented as the impact of the Joint Venture's activities on the Company's statement of operations for the year ended December 31, 1997 is not considered to be material. NEOZYME II In 1992, the Company entered into a development agreement with Neozyme II Corporation ("Neozyme II") whereby the Company was engaged to perform all research, development and clinical testing activities related to products and 77 79 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS programs for which Neozyme II was licensed. Pursuant to the terms of the development agreement, Neozyme II was required to reimburse the Company for research and development expenses incurred by Genzyme in connection with the Neozyme II development programs and fulfilled this obligation through October 1996, at which time Genzyme acquired 98.8% outstanding Neozyme II Units through a tender offer (See Note C., "Acquisitions" above). GTC: The disclosures related to the research and development agreement between Genzyme and GTC are included in Note H., "Investments" above. RENAGEL LLC AND ATIII LLC: The disclosures related to Genzyme General's participation in RenaGel LLC and ATIII LLC, joint ventures with Geltex and GTC, respectively, are included in Note H., "Investments" above. GENZYME TISSUE REPAIR: The disclosures related to GTR's participation Diacrin/Genzyme LLC, a joint venture are included in Note H., "Investments" above. GENZYME MOLECULAR ONCOLOGY: The disclosures related to GMO's participation StressGen/Genzyme LLC, a joint venture are included in Note H., "Investments" above. NOTE M. COMMITMENTS AND CONTINGENCIES From time to time the Company has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1997, there were no asserted claims against the Company which, in the opinion of management, if adversely decided would have a material adverse effect on the Company's financial position and results of operations. NOTE 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) 1997 1996 1995 - ---------------------- ---- ---- ---- Domestic(1) ............................................................. $16,907 $(79,930) $40,551 Foreign ................................................................. 8,822 10,308 2,748 ------- -------- ------- Total ............................................................. $25,729 $(69,622) $43,299 ======= ======== =======
(DOLLARS IN THOUSANDS) 1997 1996 1995 - ---------------------- -------- -------- -------- Currently payable: Federal ......................... $11,344 $ 23,174 $11,051 State ........................... 1,754 4,689 4,803 Foreign ......................... 2,971 3,616 1,367 ------- -------- ------- Total current ................ 16,069 31,479 17,221 Deferred: Federal ......................... (3,723) (28,448) 4,507 State ........................... (246) 164 (79) ------- -------- ------- Total deferred ............... (3,969) (28,284) 4,428 ------- -------- ------- Provision (benefit) for income taxes $12,100 $ 3,195 $21,649 ======= ======== =======
- ------------------- (1) Includes $7.0 million in charges for purchased research and development in 1997, $130.7 million in charges for purchased research and development and acquisition expenses in 1996, and $14.2 million in charges for purchased research and development in 1995. 78 80 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following reasons:
1997 1996 1995 ---- ----- ---- 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 .............. 3.1 1.4 1.0 State taxes, net ....................................... 3.0 5.2 5.2 Foreign sales corporation .............................. (6.7) (3.6) (2.0) Nondeductible amortization ............................. 10.6 3.6 1.9 Benefit of tax credits ................................. (7.7) -- -- Other, net ............................................. (2.6) 3.7 1.1 Nondeductible interest ................................. 2.2 -- -- Utilization of operating loss carryforwards ............ -- (4.5) (5.2) Effective tax rate before certain charges - expense .... 36.9 40.8 37.0 ---- ---- ---- Gross charge for purchased research and development net of related tax benefits ........................... 10.1 (36.3) 13.0 ---- ----- ---- Effective tax rate - expense ........................... 47.0% 4.5% 50.0% ==== ===== ====
At December 31 the components of net deferred tax assets were as follows:
(DOLLARS IN THOUSANDS) 1997 1996 - --------------------------------------------- -------- -------- Deferred tax assets: Net operating loss carryforwards ............ $ 7,702 $ 10,427 Tax credits ................................. 6,514 -- Deferred gain ............................... 2,237 -- Intangible amortization ..................... 46,391 41,183 Investments in unconsolidated subsidiary .... 1,323 1,323 Realized and unrealized capital losses ...... 10,182 17,603 Reserves and other .......................... 27,328 19,670 -------- -------- Gross deferred tax asset .................... 101,677 90,206 Valuation allowance ......................... (14,914) (16,622) -------- -------- Net deferred tax asset ...................... 86,763 73,584 Deferred tax liabilities: Depreciable assets .......................... (23,174) (13,870) Intangible amortization ..................... (6,509) -- -------- -------- Net deferred tax asset ...................... $ 57,080 $ 59,714 ======== ========
Due to uncertainty surrounding the realization of certain favorable tax attributes primarily relating to capital losses related to the purchase of in-process research and development, the Company placed a valuation allowance of $14.9 million and $16.6 million for December 31, 1997 and December 31, 1996, respectively, against otherwise recognizable deferred tax assets. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of loss carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 79 81 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1997 the Company had U.S. net operating loss and tax credit carryforwards of $22.0 million and $6.5 million, respectively, for income tax purposes. These loss carryforwards expire from 2002 to 2012. Utilization of tax net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986. Tax credits of $3.9 million expire in 2012. The remaining $2.6 million of tax credits carry forward indefinitely. NOTE O. BENEFIT PLANS Genzyme has a domestic employee savings plan under Section 401(k) of the Internal Revenue Code covering substantially all employees of the Company with the exception of employees of DSP who have a separate retirement savings plan. The plan allows employees to make contributions up to a specified percentage of their compensation, a portion of which are matched by the Company. The Company contributed $1.5 million, $1.1 million, and $0.7 million to the 401(k) Plan in 1997, 1996 and 1995, respectively. The Company has defined-benefit pension plans covering substantially all the employees of DSP and its foreign subsidiaries. Pension expense for 1997, 1996 and 1995 was approximately $1,100,000, $601,000 and $498,000, respectively. Pension costs are funded as accrued. Actuarial and other disclosures regarding the plans are not presented because they are not material. NOTE P. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS The Company operates in the human healthcare industry and manufactures and markets its products in two major geographic areas, the United States and Europe. The Company's principal manufacturing facilities are located in the United States, United Kingdom, Switzerland and Germany. The Company purchases products from its British, Swiss and German subsidiaries for sale to customers in the United States. Transfer prices from the foreign subsidiaries are intended to allow the United States parent to produce profit margins commensurate with its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary European distributor of the Company's therapeutic products. Certain information by geographic area follows (dollars in thousands):
UNITED STATES NETHERLANDS UK OTHER ELIMINATION CONSOLIDATION ---------- ----------- ------- ------- ----------- ------------- 1997 - ---- Net sales - unaffiliated customers .......... $ 435,235 $ 40,436 $32,852 $88,562 $ -- $ 597,085 Transfers between geographic areas 119,391 63,100 28,205 2,634 (213,330) -- ---------- -------- ------- ------- --------- ---------- Total product and service sales... 554,626 103,536 61,057 91,196 (213,330) 597,085 Pre-tax income ................... 14,075 1,539 3,304 2,699 4,112 25,729 Net income ....................... 6,233 948 2,172 1,235 3,041 13,629 Assets ........................... 1,236,980 30,638 69,125 39,304 (80,594) 1,295,453 Liabilities ...................... 241,330 28,329 2,058 22,114 (10,428) 283,403 1996 - ---- Net sales - unaffiliated customers .......... $ 361,635 $ 56,865 $21,217 $53,716 $ -- $ 493,433 Transfers between geographic areas 101,786 33,659 30,435 3,615 (169,495) -- ---------- -------- ------- ------- --------- ---------- Total product and service sales... 463,421 90,524 51,652 57,331 (169,495) 493,433 Pre-tax income (loss) ............ (72,439) 920 8,349 1,807 (8,259) (69,622) Net income ....................... (74,271) 520 8,349 844 (8,259) (72,817) Assets ........................... 1,211,816 33,500 69,378 41,511 (85,697) 1,270,508 Liabilities ...................... 306,662 31,930 2,240 27,410 (43) 368,199
80 82 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995 - ---- Net sales - unaffiliated customers .......... $252,358 $70,532 $13,669 $20,264 $ -- $356,823 Transfers between geographic areas 74,697 -- 19,543 4,115 (98,355) -- -------- ------- ------- ------- --------- -------- Total product and service sales... 327,055 70,532 33,212 24,379 (98,355) 356,823 Pre-tax income ................... 43,911 836 93 1,759 (3,300) 43,299 Net income ....................... 23,826 540 93 491 (3,300) 21,650 Assets ........................... 923,867 27,703 54,594 25,692 (126,655) 905,201 Liabilities ...................... 161,339 26,652 1,962 10,041 -- 199,994
Substantially all revenue from research and development contracts is earned in the United States. Entities comprising "Other" include Genzyme's operations in Germany, France, Switzerland, Japan, Italy, Belgium, Sweden, Israel, Canada, Spain, Argentina and Brazil. Export sales from the United States were $36.2 million, $27.4 million and $20.5 million in 1997, 1996 and 1995, respectively. Export sales by the Netherlands subsidiary amounted to $40.4 million, $56.9 million and $66.2 million in 1997, 1996 and 1995, respectively. Genzyme's results of operations are highly dependent upon the sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. For the years ended December 31, 1997, 1996 and 1995, sales of Cerezyme(R) enzyme and Ceredase(R) enzyme represented 63%, 62% and 71% of total product sales. In 1997, 1996 and 1995, Genzyme marketed its Cerezyme(R) enzyme and Ceredase(R) enzyme products directly to physicians, hospitals and treatment centers, and sold products representing approximately 18%, 12% and 14%, respectively, of net revenue to an unaffiliated distributor. The credit risk associated with trade receivables is mitigated due to the large number of customers and their broad dispersion over different industries and geographic areas. NOTE Q. QUARTERLY RESULTS (UNAUDITED) Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended December 31, 1997 and 1996 are displayed in the following table. 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- --------- 1997 - ---- Net revenue ............................ $146,593 $150,268 $152,094 $159,886 Gross profit ........................... 86,215 90,973 94,466 72,114 Net income (loss) (1,2) ................ 9,367 4,269 9,557 (9,564) Income (loss) per share (3,4): Attributable to GGD Stock: Basic ............................. 0.28 0.27 0.32 (0.11) Diluted ........................... 0.27 0.26 0.31 (0.11) Attributable to GTR Stock: Basic and diluted ................. (0.90) (0.83) (0.78) (1.02) Pro forma attributable to GMO Stock (5): Basic and diluted ................. (0.16) (2.14) (1.00) (1.69) 1996 - ---- Net revenue ............................ $113,497 $115,635 $142,883 $146,739 Gross profit ........................... 63,459 65,451 73,212 81,299 Net income (loss) (2) .................. 10,292 9,784 (15,840) (77,053) Income (loss) per share (3,4): Attributable to GGD Stock: Basic ............................. 0.30 0.30 (0.09) (0.91) Diluted ........................... 0.26 0.27 (0.09) (0.91) 81 83 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Attributable to GTR Stock: Basic and diluted .................... (0.71) (0.83) (0.78) (1.02) Pro forma attributable to GMO Stock (5): Basic and diluted .................... (0.06) (0.06) (0.06) (0.08)
- -------------- (1) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million related to resulting from certain strategic financial provisions recorded in December 1997 (see Note B., "Strategic Financial Provisions" above). (2) Includes pre-tax charges in the second quarter of 1997 and third and fourth quarters of 1996 of $7.0 million, $24.2 million and $106.5 million, respectively for acquired incomplete technology (see Note C., "Acquisitions" above). (3) Income (loss) per share data for the first three quarters of 1997 and for all quarters of 1996 have been restated to reflect the adoption in December 1997 of SFAS 128, "Earnings Per Share". (See Note A. "Summary of Significant Accounting Policies" above.) (4) Cumulative quarterly income per share data does not equal the annual amounts due to changes in the average common and common equivalent shares outstanding. (5) Pro forma net loss per share data is presented for GMO Stock for the first and second quarters of 1997 and all four quarters of 1996 as there were no shares of GMO Stock outstanding prior to June 18, 1997. In each such quarter, approximately 3,929,000 shares of GMO Stock, which represents the shares of GMO Stock issued to effect the merger with PharmaGenics, were used for the pro forma loss per share calculation. 82 84 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1997 and 1996, 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, 1997. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genzyme Corporation and Subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 February 27, 1998 83 85 GENZYME CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ===============================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------------------------------------------------------------------------------------------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997: Allowance for doubtful accounts $16,508,400 $ 2,835,000 $7,205,400 $12,138,000 Inventory Reserve $ 7,674,200 $19,505,000(1) -- $3,840,000 $23,339,200 Year ended December 31, 1996: Allowance for doubtful accounts $ 8,158,800 $ 8,331,600 $2,534,000(2) $2,516,000(3) $16,508,400 Inventory Reserve $ 3,082,200 $ 5,853,600 $1,261,600 $ 7,674,200 Year ended December 31, 1995: Allowance for doubtful accounts $ 6,169,100 $ 5,390,000 $3,400,100(3) $ 8,159,000 Inventory Reserve $ 1,131,000 $ 2,920,700 $ 969,500 $ 3,082,200
(1) Includes $13.4 million of strategic financial provisions (See Note B., "Strategic Financial Provisions" to the Consolidated Financial Statements). (2) Reserve acquired in acquisition. (3) Uncollectible accounts written off, net of recoveries. EX-13.2 7 PORTIONS OF THE 1997 GENZYME TISSUE REPAIR A/R 1 EXHIBIT 13.2 FINANCIAL STATEMENTS PAGE NO. I. GENZYME TISSUE REPAIR Combined Selected Financial Data................................... 2 Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................................. 4 Combined Balance Sheets - December 31, 1997 and 1996............... 10 Combined Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995.................................. 11 Combined Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995.................................. 12 Notes to Combined Financial Statements............................. 13 Report of Independent Accountants.................................. 21 2 GENZYME TISSUE REPAIR COMBINED SELECTED FINANCIAL DATA
COMBINED STATEMENTS OF OPERATIONS DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Revenues: Net service sales .......................... $10,856 $ 7,312 $ 5,220 $ 324 $ - Related party revenues: Technology license fee (1) ................ - - - - 2,000 Revenues from research and development contracts ................................ - - - - 2,684 ------- ------- ------- ------- ------- Total revenues .......................... 10,856 7,312 5,220 324 4,684 Operating costs and expenses: Cost of services sold ...................... 11,788 11,193 4,731 287 - Selling, general and administrative ........ 25,571 27,111 12,927 964 701 Research and development (including research and development related to contracts) ..... 10,845 10,880 10,938 3,638 2,805 Purchase of in-process research and development (2) ........................... - - - 11,215 25,000 ------- ------- ------- ------- ------- Total operating costs and expenses ...... 48,204 49,184 28,596 16,104 28,506 ------- ------- ------- ------- ------- Operating loss ................................ (37,348) (41,872) (23,376) (15,780) (23,822) Other income (expenses): Interest income ............................ 979 1,432 1,386 29 - Interest expense ........................... (2,896) (148) (40) - - Equity in net loss of joint venture (3) .... (6,719) (1,727) - - - ------- ------- ------- ------- ------- Total other income (expenses) .......... (8,636) (443) 1,346 29 - ------- ------- ------- ------- ------- Loss before income taxes ...................... (45,984) (42,315) (22,030) (15,751) (23,822) ------- ------- ------- ------- ------- Provision for income taxes .................... - - - - (38) Tax benefit allocated to Genzyme General ...... - - - - (255) Net loss attributable to Genzyme Tissue Repair stock (4) ................................... (45,984) (42,315) (22,030) (15,751) (24,115) ======= ======= ======= ======= ======= Per Genzyme Tissue Repair common share (basic and diluted): Net loss (4) ................................ $ (3.07) $ (3.38) $ (2.28) $ (4.40) $ (7.43) ======= ======= ======= ======= ======= Weighted average shares outstanding (4) ..... 14,976 12,525 9,659 3,578 3,245 ======= ======= ======= ======= =======
2 3 GENZYME TISSUE REPAIR COMBINED SELECTED FINANCIAL DATA (CONTINUED) COMBINED BALANCE SHEET DATA(7): DECEMBER 31, - -------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- Cash and investments (5) ...... $31,915 $16,230 $47,573 $24,808 $ - Working capital ............... 31,434 14,232 44,374 20,557 - Total assets .................. 56,818 42,593 52,649 28,435 - Long-term debt (6) ............ 30,681 18,000 - 174 - Division equity (6,7,8) ....... 20,203 18,084 45,926 23,313 - There were no cash dividends paid. - ----------------------- NOTES TO SELECTED FINANCIAL DATA: (1) Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") received a $2.0 million technology license fee from the Neozyme Corporation ("Neozyme I") in July 1993 related to the expansion of the Vianain(R) debriding product. (2) GTR acquired (a) the rights to the Neozyme I Vianain(R) development program in 1993, and (b) all of the outstanding stock of BioSurface Technology, Inc. ("BioSurface") in 1994. These acquisitions were accounted for as purchases. In-process research and development acquired in connection with the acquisitions was charged to operations. (3) In 1996, in connection with the formation of a joint venture with Diacrin, Inc., the Genzyme Board of Directors (the "Genzyme Board") authorized the allocation of up to $20.0 million in cash from Genzyme General Division ("Genzyme General" or "GGD") to GTR. In 1997 and 1996, GTR received $5.1 million and $1.9 million, respectively, in cash from Genzyme General to fund the joint venture in exchange for the rights to 489,810 and 231,645 GTR Designated Shares, respectively. (See Note F., "Investments and Other Noncurrent Assets" below). (4) Net loss attributable to GTR and net loss per share for the year ended December 31, 1993 gives effect to the management and accounting policies adopted by the Genzyme Board in connection with the creation of GTR and, accordingly, is a pro forma presentation. (5) Cash and investments includes cash, cash equivalents, and short- and long-term investments. (6) In December 1996, GTR borrowed $18.0 million under Genzyme Corporation's ("Genzyme" or the "Company") $225.0 million revolving credit facility to fund operations. At December 31, 1997 this $18.0 million is still outstanding. On February 28, 1997, GTR raised $13.0 million through the private placement of a 5% convertible note due February 27, 2000 (the "GTR Note") to an affiliate of Credit Suisse First Boston Corporation. In the first quarter of 1997, GTR recorded $11.5 million of proceeds attributed to the value of the debt and $1.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). (See Note H., "Long-term Obligations and Leases" below). (7) In December 1994, the outstanding shares of Genzyme common stock were redesignated as Genzyme General Division Common Stock ("GGD Stock") on a share-for-share basis and a second class of common stock designated as Genzyme Tissue Repair Division Common Stock ("GTR Stock") was distributed on the basis of .0675 of one share of GTR Stock (after 1996 GGD Stock split) for each share of Genzyme's previous common stock held by stockholders of record on December 16, 1994. In December 1994, Genzyme issued 5,000,000 shares of GTR Stock valued at $25.3 million in connection with the acquisition of BioSurface. (8) In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for $7.75 per share. Net proceeds from the offering after underwriting discounts and commissions were $29.0 million. In September 1995, GTR completed the sale of 3,000,000 shares of GTR Stock for net proceeds of $42.3 million. In June 1996 and June 1997, GTR received $10.0 million from Genzyme General for 1,000,000 GTR Designated Shares issued pursuant to the terms of the purchase option agreement between Genzyme General and GTR. 3 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME TISSUE REPAIR'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the expectations of the management of GTR and Genzyme as of the filing date of this Annual Report. The actual results for both GTR and Genzyme could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for GTR and Genzyme, respectively. Stockholders and potential investors should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of GTR and Genzyme. Genzyme provides separate financial statements for the Company and its subsidiaries on a consolidated basis and for each of Genzyme General, GTR and Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"). The financial statements of each division include the financial position, results of operations and cash flows of programs and products allocated to the division under the Company's Restated Articles of Organization, as amended (the "Genzyme Charter"), and the management and accounting policies adopted by the Genzyme Board to govern the relationship of the divisions. The financial information of Genzyme General, GTR and GMO, taken together, include all accounts which comprise the consolidated financial information presented for Genzyme and its subsidiaries. For purposes of financial statement presentation, all of Genzyme's programs and products are allocated to Genzyme General, GTR or GMO. Notwithstanding this allocation, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of Genzyme General Stock, GTR Stock and Genzyme Molecular Oncology Division Common Stock ("GMO Stock") have no specific claim against the assets attributed to the division whose performance is associated with the series of stock they hold. Liabilities or contingencies of one division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of any other division. Stockholders and potential investors should, therefore, read this discussion and analysis of GTR's financial position and results of operations in conjunction with the financial statements and related notes of GTR and the discussion and analysis of Genzyme's financial position and results of operations and financial statements and related notes of Genzyme, all of which are included with this Annual Report. RESULTS OF OPERATIONS 1997 COMPARED TO 1996 REVENUES. Revenues in 1997 increased 49% to $10.9 million from $7.3 million in 1996. Sales of the Carticel(TM) autologous cultured chondrocytes ("Carticel(TM) AuCC") were $6.6 million, compared to $3.1 million in 1996. The growth in sales of Carticel(TM) AuCC is primarily attributable to increased acceptance by orthopedic surgeons and insurance companies, most notably following issuance by the U.S. Food and Drug Administration ("FDA") of a biologics license to GTR in August 1997 for Carticel(TM) AuCC, and a continued increase in the number of orthopedic surgeons trained in the procedure utilizing the service. Sales of the Epicel[SM] Service were $4.3 million in 1997, compared to $4.2 million in 1996, due to a slight increase in the number of burn incidents requiring the service. MARGINS AND OPERATING EXPENSES. GTR's costs of services sold were $11.8 million in 1997 as compared to $11.2 million in 1996. Costs of services sold exceeded revenues by 9% in 1997 and 53% in 1996. The improvement in service margins is primarily attributable to the higher sales volume and efficiencies gained in the manufacturing process. Selling, general and administrative ("SG&A") expenses in 1997 were $25.6 million, a decrease of 6% from SG&A expenses of $27.1 million in 1996. The decrease is due primarily to a decrease in expenses incurred in connection with the marketing of Carticel(TM) AuCC in 1996. GTR incurs direct SG&A expenses as well as a SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In 1997, $7.7 million of SG&A services were provided by Genzyme General, compared to $9.1 million in 1996 due to a decrease in expenses incurred in connection with the marketing of Carticel (TM) AuCC in 1996. 4 5 GENZYME TISSUE REPAIR (CONT.) Research and development expenses were $10.8 million in 1997 and $10.9 million in 1996. In 1997, $7.7 million of the total research and development expenses incurred by GTR resulted from charges for research and development services provided by Genzyme General to GTR, compared to $6.9 million in 1996. OTHER INCOME AND EXPENSES. Interest income was $1.0 million in 1997 as compared to $1.4 million in 1996, due primarily to lower average cash balances during the year. Interest expense in 1997 was $2.9 million as compared to $0.1 million in 1996. Interest expense increased in 1997 as a result of $0.5 million of interest related to the addition of $11.5 million of debt from the GTR Note in February 1997 (see "Liquidity and Capital Resources"), $1.1 million of interest charges to accrete this debt to its face value and additional interest from increases in borrowing under a revolving credit facility in June 1996 and December 1996 of $8.0 million and $3.0 million, respectively. On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin, Inc. to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. Under the terms of the joint venture agreement, GTR is required to provide 100% of the initial $10.0 million of the funding requirements and 75% of the next $40.0 million of funding requirements for products to be developed by the joint venture. Thereafter, all costs will be shared equally between GTR and Diacrin. Profits from the joint venture will be shared equally by the two parties. For the year ended December 31, 1997, GTR had provided $6.8 million of funding to the joint venture and realized a net loss of $6.7 million from the joint venture, compared to $1.9 million of funding to the joint venture and a net loss of $1.7 million from the joint venture as of December 31, 1996. GTR's funding commitment to the joint venture is expected to be approximately $10.0 million for 1998. 1996 COMPARED TO 1995 REVENUES. Revenues in 1996 increased 40% to $7.3 million from $5.2 million in 1995. Sales of Carticel(TM) AuCC were $3.1 million, compared to $0.6 million in 1995, the year in which Carticel(TM) AuCC was launched. The increase in Carticel(TM) AuCC sales resulted primarily from the increase in the number of surgeons trained in the procedure utilizing Carticel(TM) AuCC. Sales of the Epicel[SM] Service in 1996 decreased 9% to $4.2 million, due to a decrease in the number of burn incidents requiring the service. MARGINS AND OPERATING EXPENSES. GTR's costs of services sold exceeded revenues by 53% in 1996, compared to a gross profit of 9% in 1995, due to increased spending for the expansion of manufacturing capacity. SG&A expenses in 1996 were $27.1 million, an increase of 110% over 1995. The increase resulted from the expenses and staffing to support revenue growth and increased surgeon training costs related to Carticel(TM) AuCC. GTR incurs direct SG&A expenses as well as a SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In 1996, $9.1 million of SG&A services were provided by Genzyme General, compared to $4.4 million in 1995, due to an increase in the level of operations related to Carticel(TM) AuCC. Research and development expenses were $10.9 million in each of 1996 and 1995. Increases in expenses associated with the TGF[Beta](2) program were offset by decreases in the Vianain(R) program. In 1996, $6.9 million of the total research and development expense incurred by GTR resulted from charges for services provided by Genzyme General to GTR, compared to $4.7 million in 1995. OTHER INCOME AND EXPENSES. Interest income was $1.4 million in each of 1996 and 1995, due primarily to level average cash balances during the year. Interest expense in 1996 was $0.1 million, net of capitalized interest on construction in-progress of $0.2 million, compared to $0.05 million in 1995. Interest expense increased in 1996 due to interest on borrowings. See "Liquidity and Capital Resources " for a description of the borrowings. 5 6 GENZYME TISSUE REPAIR (CONT) LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, GTR had cash, cash equivalents and short-term investments of $31.9 million, an increase of $15.7 million from December 31, 1996. In 1997, GTR used $37.2 million of cash for operations and $16.8 million for investing activities. In the year ended December 31, 1997, investing activities provided $0.9 million from the sale of equipment and used $6.8 million of cash to fund GTR's investment in Diacrin/Genzyme LLC, and $0.5 million to purchase equipment. Financing activities provided $59.2 million of cash, of which $14.9 million was allocated to GTR from Genzyme General, $13.0 million consisted of proceeds from the issuance of debt, $29.0 million consisted of proceeds from the sale of GTR Stock to the public and $2.4 million consisted of proceeds from the exercise of stock options and stock issued under the employee stock purchase plan. Of the $13.0 million in proceeds from the GTR Note, GTR recorded $11.5 million of proceeds attributable to the value of the convertible debt and $1.5 million attributable to the value of the conversion feature (recorded as an increase to division equity). The $11.5 million will be accreted to the face value of the debt by a charge to interest expense of $1.5 million over the term of the initial 15 month conversion period. As of December 31, 1997, $18.0 million of funds allocated to GTR in December 1996 under the Revolving Credit Facility remained outstanding. In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for $7.75 per share. Net proceeds from the offering after underwriting discounts and commissions were $29.0 million. GTR believes its available cash and investments, including the proceeds from the November 1997 stock offering, will be sufficient to finance planned operations and capital requirements through the end of 1998. GTR must raise significant additional capital in order to continue operations at current levels beyond 1998. GTR's plans to raise additional capital include the consideration of the sale of additional equity securities, strategic alliances with third parties to fund further developments and marketing of Carticel(TM) AuCC and other business transactions that would generate capital resources to assure continuation of GTR's operations and research programs. If these initiatives are not successful, GTR may be required to delay, scale back or eliminate certain of its programs, or to license third parties to commercialize technologies or products that the division would otherwise undertake itself. For a discussion of the demands, commitments and events that may affect the liquidity and capital reserves of Genzyme Corporation and GTR, see also Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Liquidity and Capital Resources included in this Annual Report. NEW ACCOUNTING PRONOUNCEMENTS AND YEAR 2000 For a discussion of new accounting pronouncements and Year 2000 impact, see Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - New Accounting Pronouncements, Year 2000 and Financial Reporting Release No. 48 ("FRR 48") included in this Annual Report. FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of GTR could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations -- Factors Affecting Future Operating Results" included in this Annual Report. NO ASSURANCE OF COMMERCIAL SUCCESS OF CARTICEL(TM) AuCC. In August 1997, the FDA approved GTR's BLA for Carticel(TM) AuCC. As a condition to such approval, GTR has agreed to conduct two confirmatory post-marketing studies, one of which will compare the long-term clinical effects of treatment with Carticel(TM) AuCC to certain other available treatments and the other of which will compare treatment with Carticel(TM) AuCC against a placebo implant. Should these post-marketing studies demonstrate that treatment with Carticel(TM) AuCC is not superior to the alternatives studied, the FDA may suspend or terminate GTR's license to market the product. If GTR were prohibited from marketing Carticel(TM) AuCC in the U.S., its results of operations would be materially adversely affected. The commercial success of Carticel(TM) AuCC will also depend materially on the ability of GTR to increase the approval rate for reimbursement of the product from third party payers. Although GTR has seen a substantial increase in the development of broad policy coverage for Carticel(TM) AuCC since the August 1997 FDA approval of the product, there can be no assurance that the recent increase in reimbursement approvals will continue. Although FDA approval is a critical requirement for most plans to adopt favorable policy coverage for new treatments, a number of major insurance plans also base their decisions on technology assessments conducted by individual plans or by independent associations such as the Blue Cross Blue Shield Association ("BCBSA"). The BCBSA Technology Assessment Committee (the "BCBSA Committee") met in late September 1997 to review the Carticel(TM) AuCC treatment. 6 7 GENZYME TISSUE REPAIR (CONT.) The BCBSA has indicated that it does not believe Carticel(TM) AuCC meets all of the published criteria used by BCBSA to evaluate new treatments. GTR is in discussions with BCBSA regarding this assessment. While a favorable review by the BCBSA Committee is not required for individual Blue Cross/Blue Shield plans to approve policy coverage for a new treatment, it is a factor in the decision process for many plans. Because of the BCBSA Committee report, implementation of policy coverage for Carticel(TM) AuCC by many Blue Cross/Blue Shield plans could be delayed. Since these plans represent approximately 60 million, or 25% of insured lives in the U.S., GTR's ability to access a substantial portion of the market for Carticel(TM) AuCC could also be delayed. Other indemnity plans have given GTR coverage for approximately 115 million insured lives in the U.S. GTR is marketing Carticel(TM) AuCC to orthopedic surgeons. The commercial success of the product depends on the extent to which sufficient numbers of surgeons who are trained by GTR incorporate the product into their existing practices. There can be no assurance that GTR will be successful in marketing Carticel(TM) AuCC to such surgeons or that such surgeons will use Carticel(TM) AuCC to the extent anticipated by GTR. GTR OPERATING LOSSES AND CASH REQUIREMENTS. GTR is expected to experience significant operating losses at least through 1998 as the market introduction of Carticel(TM) AuCC continues and its research and development and clinical programs progress. There can be no assurance that GTR will ever achieve a profitable level of operations or that profitability, if achieved, can be sustained on an ongoing basis. GTR anticipates that its existing cash, together with existing cash balances allocated to GTR or approved for reallocation from Genzyme General and cash generated from the sale of Carticel(TM) AuCC and the Epicel[SM] Service, will be sufficient to fund GTR's operations through the end of 1998. Significant additional funds may be required to continue operations at anticipated levels beyond 1998, however, and GTR may be required to delay, scale back or eliminate certain of its programs or to license third parties to commercialize technologies or products that it would otherwise undertake itself if it does not have sufficient capital or is not successful in raising additional capital. GTR's cash requirements may vary from those now planned as a result of numerous factors, including revenue fluctuations, reimbursement denials for GTR's products, results of research and development and clinical testing by GTR and its collaborators, competing technological and market developments and the cost and timing of clinical trials and regulatory approvals. In addition, if GTR commits to fund additional joint ventures or strategic collaborations or uses cash to effect acquisitions, its cash requirements may increase significantly. FLUCTUATIONS IN GTR'S QUARTERLY RESULTS. Revenues generated from the sale of Carticel(TM) AuCC are expected to fluctuate as GTR enrolls and trains additional orthopedic surgeons and the product gains market and third party payer acceptance. GTR's management is unable to predict the timing or magnitude of such fluctuations, although GTR expects that its revenues from the sale of Carticel(TM) AuCC may be lower in the summer months as fewer operative procedures are typically performed during those months. Sales of the Epicel[SM] Service for the treatment of severe burns also comprise a material percentage of GTR's revenues. Revenues realized from the Epicel[SM] Service fluctuate from quarter to quarter due to the dependency of such revenues on many unpredictable factors, including the number and survival rate of patients for which the Epicel[SM] Service is the indicated treatment. Since GTR is required to maintain extensive tissue culture facilities and a staff of trained personnel for both Carticel(TM) AuCC and the Epicel[SM] Service, a significant portion of GTR's costs are fixed and, therefore, fluctuations in demand can have a material adverse effect on GTR's results of operations. COLLABORATION WITH DIACRIN, INC. - NO CURRENTLY APPROVED XENOTRANSPLANTATION- BASED PRODUCTS; RELIANCE ON CELL TRANSPLANTATION TECHNOLOGY. GTR has formed a joint venture with Diacrin to develop and commercialize products based on transplantable fetal porcine brain cells for the treatment of Parkinson's disease and Huntington's disease. Human therapeutic products based on the transplantation of cells obtained from animals ("xenotransplantation") represent a novel therapeutic approach that has not been subject to extensive clinical testing. Xenotransplantation also poses a risk that viruses or other animal pathogens will be unintentionally transmitted to a human patient. The joint venture has been required by the FDA to perform certain assays to 7 8 GENZYME TISSUE REPAIR (CONT.) determine whether porcine retrovirus is present in patients that have received porcine cells. These assays have been performed on samples taken from all patients who have received NeuroCell(TM)-PD and no porcine retrovirus was detected in those samples. The joint venture has also been required by the FDA to perform additional assays on its porcine cellular products to determine if active porcine retroviruses are present and no retrovirus was detected. The joint venture has been required by the FDA to develop an additional test for the detection of porcine retrovirus and has been instructed to routinely monitor patient blood samples for the presence of porcine retrovirus. If porcine retrovirus is detected in this test or samples, additional tests may be required to assess the risk to patients of porcine retrovirus infection. If such additional tests are required, trials of the joint venture's porcine cell products may be delayed. While porcine retrovirus has not been shown to cause any disease in pigs, it is not known what effect, if any, porcine retrovirus may have on human beings. The joint venture's porcine cell product development programs would be negatively impacted by the detection of infectious porcine retrovirus in porcine cells or clinical trial subjects. An inability to proceed with further trials or a substantial delay in the clinical trials would have a material adverse effect on the Company. The FDA has issued draft regulatory guidelines to reduce the risk of contamination of xenotransplanted cellular products with infectious agents. Although GTR's management believes the processes used to produce the porcine cell products under development by the joint venture would comply with the guidelines as drafted, such guidelines may undergo substantial revision before definitive guidelines are issued by the FDA. There can be no assurance that definitive guidelines will be issued by the FDA or that processes used by the joint venture will comply with any guidelines that may be issued. No xenotransplantation-based therapeutic product has been approved by the FDA and there can be no assurance that any products developed by the joint venture will be approved by the FDA or regulatory authorities in other countries. There can also be no assurance that xenotransplantation-based products, including the joint venture's product candidates, will be accepted by the medical community or third party payers or that the degree of such acceptance will not limit the size of the market for such products. The success of the joint venture is also dependent upon the successful development of cell transplantation technology. This technology currently has limited clinical applications and there can be no assurance that it will result in the development of any therapeutic products. If the cell transplantation technology does not result in the development of such products, the joint venture may be required to change dramatically the scope and direction of its product development activities. RELIANCE ON AGREEMENTS WITH KEY COLLABORATORS. Carticel(TM) AuCC has been developed based on the work of a group of Swedish physicians, the two leaders of which are performing consulting services for GTR relating to the commercialization and further development of the product. These two physicians are parties to research and development consulting agreements with GTR (the "Consulting Agreements") which prohibit them, without GTR's consent, from performing consulting services for others in the field of cartilage and bone repair. In addition, pursuant to the Consulting Agreements, each physician (i) is prohibited from engaging in any business activity that is in competition with the products or services being developed, manufactured or sold by GTR during the term of the Consulting Agreements (currently through 1998) and for a period of one year after termination thereof, (ii) is subject to non-disclosure obligations and (iii) has assigned to GTR all rights to inventions resulting from work performed by each physician as a consultant to GTR, subject to royalties payable to the inventing physician. There can be no assurance that the two physicians will honor their obligations under the Consulting Agreements or that such agreements will be renewed beyond 1998. In addition, there can be no assurance that individuals who are familiar with the know-how underlying Carticel(TM) AuCC through their association with these physicians will not disclose such information to GTR's competitors. The occurrence of either of these events could have a material adverse effect on GTR's results of operations. GTR is conducting additional research relating to Carticel(TM) AuCC pursuant to a sponsored research agreement with the University of Gotenburg in Sweden and certain physicians, including the two referred to above. The sponsored research agreement requires that all members of the investigative team maintain the confidentiality of all information pertaining to GTR and its business that may become known to them in connection to their work under the agreement. The agreement also states that all inventions conceived or reduced to practice during the course of the research program will be the property of GTR, subject to royalties payable to the inventing physician. There can be no assurance that the sponsored research agreement will be honored by the individuals performing services thereunder. COMPETITION. GTR is engaged in a segment of the human health care products industry that is extremely competitive. Competitors in the U.S. and elsewhere are numerous and include major pharmaceutical, chemical and biotechnology companies, many of which have substantially greater capital resources marketing experience, research and development staffs and facilities than GTR. These companies may succeed in developing products that are more effective than any that have been or may be developed 8 9 GENZYME TISSUE REPAIR (CONT.) by GTR and may also be more successful than GTR in producing and marketing these products. GTR is aware of at least one company that is culturing autologous chondrocytes for cartilage repair in Europe and numerous additional companies developing competing products for cartilage repair and the treatment of Parkinson's disease, Huntington's disease, burns, chronic wounds and multiple sclerosis. The process used by GTR to grow autologous chondrocytes is not patentable, and GTR does not yet have significant patent protection covering the other methodologies used in providing Carticel(TM) AuCC. Consequently, GTR is unable to prevent a competitor from developing the ability to grow cartilage cells and from offering a product that is similar or superior to Carticel(TM) AuCC. GTR's results of operations could be materially adversely affected if a competitor were to develop such know-how and obtain FDA approval for an autologous chondrocyte product. UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY. GTR does not yet have significant patent protection covering the methodologies used in providing Carticel[TM] AuCC. Consequently, GTR is unable to prevent a competitor from developing the ability to grow cartilage cell cultures and from offering a service that is similar or superior to Carticel[TM] AuCC. GTR's results of operations could be materially and adversely affected if a competitor were to develop such know-how. DILUTION. Pursuant to an agreement made at the time of formation of GTR, the Genzyme Board may allocate up to $10.0 million from Genzyme General to GTR on or before June 14, 1998 in exchange for 1,000,000 GTR Designated Shares. In addition, the Genzyme Board has authorized the allocation of up to $20.0 million in cash from Genzyme General to GTR (the "GTR Equity Line"). Any amounts allocated to GTR under the GTR Equity line will result in an increase in such number of GTR Designated Shares determined by dividing (i) the amount of cash allocated by (ii) the average of the daily closing prices of GTR Stock for the 20 consecutive trading days commencing on the 30th trading day prior to the date of such allocation. Of the $20.0 million authorized for allocation to GTR, approximately $7.0 million had been allocated as of December 31, 1997. The GTR Designated Shares are not issued or outstanding, but may be issued from time to time by the Genzyme Board without allocating any proceeds to GTR or distributed as a stock dividend to the holders of GGD Stock. As of December 31, 1997, there were approximately 885,000 GTR Designated Shares reserved for issuance. Pursuant to the management and accounting policies adopted by the Genzyme Board, Genzyme is required to distribute or sell the GTR Designated Shares annually to the extent that the number of such shares (excluding those reserved for GGD option holders and the holders of instruments convertible into GGD Stock) exceeds 10% of the shares of GTR Stock outstanding. Genzyme is unable to predict the effect that the sales or distributions described in this paragraph may have on the then prevailing market price of GTR Stock. In addition, Genzyme currently has reserved approximately 2,577,000 shares of GTR Stock for issuance upon conversion of amounts payable under the GTR Note. The actual number of shares issued upon conversion of the GTR Note may be more or less than the number currently reserved. The GTR Note is convertible into shares of GTR Stock at a discount to the average of the closing bid prices of GTR Stock as reported by the Nasdaq National Market for the 25 trading days immediately preceding the applicable conversion date (the "Conversion Price"). This discount began at 2% on August 27, 1997 and increases by an additional one percent per month thereafter until May 27, 1998. After May 27, 1998, the Conversion Price will be equal to the lesser of : (i) 89% of the Conversion Price calculated as of the actual conversion date and (ii) 89% of the Conversion Price calculated as of May 27, 1998. POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS. The market prices for securities of biotechnology companies have been volatile. Factors such as announcements of technological innovations or new commercial products by Genzyme or its competitors, governmental regulation, patent or proprietary rights developments, public concern as to the safety or other implications of biotechnology products and market conditions in general may have a significant impact on the market price of GTR Stock. No cash dividends have been paid to date on Genzyme common stock, nor does Genzyme anticipate paying cash dividends on such stock in the foreseeable future. 9 10 GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31, - -------------------------------------------------------------------------------- 1997 1996 ---- ---- ASSETS Current assets: Cash and cash equivalents ................................ $21,120 $15,912 Short-term investments ................................... 10,795 318 Accounts receivable, net.................................. 2,221 1,677 Inventories .............................................. 1,973 1,823 Prepaid expenses and other current assets ................ 732 334 ------- ------- Total current assets .................................... 36,841 20,064 Property, plant and equipment, net ......................... 19,524 22,229 Other noncurrent assets .................................... 453 300 ------- ------- Total assets ............................................ $56,818 $42,593 ======= =======
LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ................................... $ 1,378 $ 1,749 Accrued expenses ................................... 2,816 2,479 Due to Genzyme General ............................. 1,213 1,604 ------- ------- Total current liabilities ........................ 5,407 5,832 Long-term debt ....................................... 18,000 18,000 Convertible debenture, net ........................... 12,681 - Other noncurrent liabilities ......................... 527 677 ------- ------- Total liabilities ................................. 36,615 24,509 Commitments and Contingencies (See Notes) ............ Division equity (Note J) ............................. 20,203 18,084 ------- ------- Total liabilities and division equity ............. $56,818 $42,593 ======= =======
The accompanying notes are an integral part of these combined financial statements. 10 11 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Net service sales ..................... $ 10,856 $ 7,312 $ 5,220 Operating costs and expenses: Cost of services sold ................. 11,788 11,193 4,731 Selling, general and administrative ... 25,571 27,111 12,927 Research and development .............. 10,845 10,880 10,938 -------- -------- -------- Total operating costs and expenses .... 48,204 49,184 28,596 -------- -------- -------- Operating loss .......................... (37,348) (41,872) (23,376) Other income (expenses): Equity in loss of joint venture ....... (6,719) (1,727) - Interest income ....................... 979 1,432 1,386 Interest expense ...................... (2,896) (148) (40) -------- -------- -------- Total other income (expenses) ......... (8,636) (443) 1,346 -------- -------- -------- Net loss ................................ $(45,984) $(42,315) $(22,030) ======== ======== ======== Per Genzyme Tissue Repair basic and diluted common share: Net loss .............................. $ (3.07) $ (3.38) $ (2.28) ======== ======== ======== Weighted average shares outstanding ... 14,976 12,525 9,659 ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. 11 12 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: 1997 1996 1995 ---- ---- ---- Net loss .......................................... $(45,984) (42,315) (22,030) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ................... 2,482 935 628 Loss on disposal of property, plant and equipment 24 59 160 Non-cash compensation expense ................... 221 312 882 Accrued interest/amortization on bonds .......... (188) 85 (76) Provision for bad debts ......................... 480 238 210 Accretion of debt discount ...................... 1,071 - - Equity in net loss of joint venture ............. 6,719 1,727 - Increase (decrease) in cash from working capital: Accounts receivable ........................... (1,024) (77) (562) Inventories ................................... (150) (1,062) (685) Prepaid expenses and other .................... (398) (148) 98 Accounts payable, accrued expenses and deferred revenue ............................. (39) 444 33 Due to Genzyme General ........................ (391) (430) 1,863 -------- -------- -------- Net cash used by operating activities ....... (37,177) (40,232) (19,479) INVESTING ACTIVITIES: Purchases of investments .......................... (10,614) (5,004) (16,687) Sales and maturities of investments ............... 318 11,447 17,991 Investment in joint venture ....................... (6,820) (1,911) - Purchases of property, plant and equipment ........ (496) (26,573) (1,294) Sale of property, plant and equipment ............. 852 5,311 - Other ............................................. (52) 151 (13) -------- -------- -------- Net cash used by investing activities ....... (16,812) (16,579) (3) FINANCING ACTIVITIES: Proceeds from issuance of common stock, net ....... 31,475 2,437 43,516 Proceeds from issuance of convertible debentures, net .................................. 12,977 56,000 - Payments of debt and capital lease obligations .... 3 (38,169) (286) Cash allocated from Genzyme General ............... 14,892 11,714 - Other ............................................. (150) - - -------- -------- -------- Net cash provided by financing activities ..... 59,197 31,982 43,230 Increase (decrease) in cash and cash equivalents ..... 5,208 (24,829) 23,748 Cash and cash equivalents at beginning of period ..... 15,912 40,741 16,993 -------- -------- -------- Cash and cash equivalents at end of period ........... $ 21,120 $ 15,912 $ 40,741 ======== ======== ======== Supplemental cash flow information: Cash paid during the year for: Interest ......................................... $ 1,127 $ 334 $ 40 Supplemental Disclosures of Non-Cash Transactions: GTR Designated Shares - Note J. Transfer of Property, Plant and Equipment - Note E.
The accompanying notes are an integral part of these combined financial statements. 12 13 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Tissue Repair ("GTR"), a division of Genzyme Corporation (the "Company" or "Genzyme") is a leading developer of biological products for the treatment of cartilage damage, severe burns, chronic skin ulcers and neurodegenerative diseases. GTR uses cell, enzyme, growth factor and matrix technologies to develop products that will augment or positively modify naturally-occurring biological processes involved in tissue repair. BASIS OF PRESENTATION The combined financial statements of GTR include the balance sheets, results of operations and cash flows during the periods presented. 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. 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 GGD Stock and a second class of common stock, designated as GTR Stock was distributed on the basis of .0675 of one share of GTR Stock (after 1996 GGD Stock split) for each share of Genzyme's common stock. PRINCIPLES OF COMBINATION The accompanying combined financial statements reflect the combined accounts of all of GTR's businesses. All material intradivisional items and transactions have been eliminated in combination. The equity method is used to account for investments in companies and joint ventures in which GTR has a substantial ownership interest (20% to 50%), or in which GTR participates in policy decisions. Accordingly, GTR's share of the earnings or losses of such entities is included in computation of GTR's net loss. FINANCIAL INFORMATION Genzyme will provide to holders of GTR Stock separate financial statements, management's discussion and analysis, descriptions of business and other relevant information for GTR. Notwithstanding the attribution of assets and liabilities, including contingent liabilities, between GTR, Genzyme General and GMO for the purposes of preparing their respective financial statements, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of GTR Stock, GGD Stock and GMO Stock have no specific claim against the assets attributed to the division whose performance is associated with the series of common stock they hold. Liabilities or contingencies of GTR, Genzyme General or GMO could affect the financial condition or results of operations of the other divisions. Accordingly, the GTR combined financial statements should be read in connection with Genzyme's consolidated financial statements included in this Annual Report. Accounting policies and financial information specific to GTR are presented in GTR's combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO are presented in the consolidated financial statements of Genzyme Corporation and Subsidiaries. The Company prepares the financial statements of GTR in accordance with generally accepted accounting principles, the management accounting policies of Genzyme and the divisional accounting policies approved by the Company's Board of Directors (the "Genzyme Board"). (see Note A., "Summary of Significant Accounting Policies" to Genzyme's Consolidated Financial Statements (the "Consolidated Financial Statements") which is incorporated herein by reference). Except as otherwise provided in such policies, the management and accounting policies applicable to the presentation of the financial statements of GTR may be modified or rescinded at the sole discretion of the Genzyme Board without approval of the stockholders, subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders. DIVIDEND POLICY Under the terms of the Genzyme Charter, dividends may be paid to the holders of GTR Stock only out of the lesser of funds of Genzyme legally available for the payment of dividends and the Available GTR Dividend Amount, as defined in the Genzyme Charter. Although there is no requirement to do so, the Genzyme Board would declare and pay cash dividends on GTR Stock, if any, based primarily on earnings, financial condition, cash flow and business requirements of GTR. There is currently no intention of paying any cash dividends. 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 Carticel(TM) AuCC. 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. 13 14 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS NET INCOME(LOSS) PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share is very similar to the previously reported fully diluted earnings per share except that the new treasury stock method used in determining the dilutive effect of options uses the average market price for the period rather than the higher of the average market price or the ending market price. All net income (loss) per common share amounts have been restated to conform to SFAS 128 requirements. The following table sets forth the computation of basic and diluted earnings per share: (Amounts in thousands, except per share amounts) December 31, - ------------------------------------------------------------------------------- 1997 1996 1995 -------- -------- -------- Net loss ...................................... $(45,984) $(42,315) $(22,030) Basic and diluted weighted average shares outstanding.................................. 14,976 12,525 9,659 Net loss per common share - basic.............. $ (3.07) $ (3.38) $ (2.28) Net loss per common share - diluted............ $ (3.07) $ (3.38) $ (2.28) During the years ended December 31, 1997, 1996 and 1995, certain securities which were not included in the computation of diluted earnings per share because they would have an anti-dilutive effect due to the net loss for the years, were as follows: (i) options to purchase approximately 2,777,000, 2,574,000 and 1,985,000 shares of GTR Stock with a price range of $4.84-$12.88 per share, respectively, (ii) 885,000, 1,794,000 and 1,287,000 GTR Designated shares issuable for the benefit of Genzyme General; (iii) debentures convertible into 1,772,000 shares of GTR Stock computed as of December 31, 1997. ACCOUNTING FOR STOCK-BASED COMPENSATION GTR has elected the disclosure-only alternative permitted under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). GTR has disclosed pro forma net income (loss) and pro forma earnings per share information in the footnotes to the combined financial statements using the fair value based method for 1997, 1996 and 1995. NOTE B. RELATED PARTY TRANSACTION POLICIES Genzyme allocates certain corporate costs for general and administrative expenses, research and development expenses and cash management services in accordance with the policies summarized below. Genzyme files a consolidated tax return and allocates income taxes to the divisions in accordance with the policies described below. Effective upon the merger of GMO and Pharmagenics Inc., the Genzyme Board amended certain of the policies which govern the management of GTR and Genzyme General to include the management of GMO and to add certain new policies governing interdivision transactions. The policies summarized below, with the exception of Interdivision Asset Transfers, may be further modified or rescinded by action of the Genzyme Board, or the Genzyme Board may adopt additional policies, without approval of the stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme stockholders. In addition, generally accepted accounting principles require that any change in policy be preferable (in accordance with such principles) to the previous policy. FINANCIAL MATTERS The Company manages the financial activities of Genzyme General, GTR and GMO 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 of equity instruments. Loans may be made from time to time between divisions. Any such loan of $1.0 million or less will mature within 18 months and interest will accrue at the lowest borrowing rate available to Genzyme for a loan with similar terms and duration. Amounts borrowed in excess of $1.0 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. SHARED SERVICES GTR operates as a division of Genzyme with its own personnel and financial resources. However, GTR has access to Genzyme's extensive research and development capabilities, manufacturing facilities, worldwide clinical development and regulatory affairs staffs, marketing, infrastructure, and experience in raising capital and Genzyme's corporate and general administrative functions, the costs of which are allocated to each division in a reasonable and consistent manner based on utilization by the division of the services to which such costs relate. Genzyme's corporate general and administrative and research and development functions are performed primarily by Genzyme General. Administrative expenses and research and development expenses have been allocated to GTR as if GTR operated on a stand-alone basis. Management believes that such allocation is a reasonable estimate of such expenses. These allocations for research and development were $7.7 million in 1997 compared 14 15 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS to $6.9 million in 1996. The charges for sales, general and administrative services were $7.7 million in 1997 compared with $9.1 million in 1996. INTERDIVISION INCOME TAX ALLOCATIONS GTR is included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions using the asset and liability method of accounting for income taxes as if the divisions were separate taxpayers. Accordingly, the realizability of deferred tax assets is assessed at the division level. The sum of the amounts calculated for individual divisions of Genzyme may not equal the consolidated amount under this approach. Pursuant to the management and accounting policies adopted by the Genzyme Board, as of the end of any fiscal quarter of Genzyme, any projected tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be allocated to any other division without any compensating payment or allocation. The treatment of such allocation for purposes of earnings per share computation is discussed in Note A., "Summary of Significant Accounting Policies -- Net Income (Loss) Per Share" in the Consolidated Financial Statements which is incorporated herein by reference. ACCESS TO TECHNOLOGY AND KNOW-HOW GTR has free access to all technology and know-how of Genzyme that may prove useful in GTR's business, subject to any obligations or limitations applicable to Genzyme. INTERDIVISION ASSET TRANSFERS The following policy regarding the transfer of assets between divisions may not be changed by the Genzyme Board without the approval of the holders of GTR Stock and GMO Stock, each voting as a separate class; provided, however, that if a policy change affects GTR or GMO alone, only holders of shares representing the affected division will be entitled to a class vote on such matter. The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations will be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likelihood and timing of any such realization and other matters that the Genzyme Board and its financial advisors, if any, deem relevant. The consideration for such reallocation may be paid by one division to another in cash or other consideration, with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from Genzyme General to GTR or GMO, the Genzyme Board may elect to account for such reallocation of assets as an increase in Designated Shares representing the division to which such assets are reallocated. Notwithstanding the foregoing, no Key GTR Program, as defined in the management and accounting policies, may be transferred out of GTR without a class vote of the holders of GTR Stock and no Key GMO Program, as defined in the management and accounting policies, may be transferred out of GMO without a class vote of the holders of GMO Stock. OTHER INTERDIVISION TRANSACTIONS From time to time, a division may engage in transactions with one or more other divisions or jointly with one or more other divisions and one or more third parties. Such transactions may include agreements by one division to provide products and services for use by another division and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. Research and development performed by one division for the benefit of another division will be charged to the division for which work is performed on a cost basis. The division performing the research will not recognize revenue as a result of performing such research. Other interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated with unaffiliated third parties. Any interdivisional transaction to be performed on terms and conditions other than those previously set forth and that is material to one or more of the participating divisions will require the approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each such division. If a division (the "purchasing division") requires any product or service from which another division (the "selling division") derives revenues from sales to third parties (a "commercial product or service"), the purchasing division may solicit from the selling division a bid to provide such commercial product or service in addition to any bids solicited by the purchasing division from third parties. Subject to determination by the Genzyme Board that the bid of the selling division is fair and reasonable to each division and to their respective stockholders and that the purchasing division is willing to accept the selling division's bid, the purchasing division may accept any bid deemed to offer the most favorable terms and conditions for providing the commercial product or service sought by the purchasing division. 15 16 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS NOTE C. ACCOUNTS RECEIVABLE GTR performs ongoing credit evaluations of its customers and generally does not require collateral. Accounts receivable are stated at fair value after reflecting the allowance for doubtful accounts of $840,000 at December 31, 1997 and $408,000 at December 31, 1996. NOTE D. INVENTORIES Inventories at December 31 consist of the following: (DOLLARS IN THOUSANDS) 1997 1996 ------------------------------------------------------- Raw materials.................... $ 243 $ 136 Work-in-process.................. 1,730 1,687 ------- ------- $1,973 $1,823 ======= ======= NOTE E. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 includes the following (DOLLARS IN THOUSANDS) 1997 1996 ----------------------------------------------------------- Plant and equipment.............. $ 16,847 $ 1,404 Land and buildings............... 2,324 2,324 Leasehold improvements........... 2,428 2,387 Furniture and fixtures........... 1,842 1,718 Construction in progress......... - 15,988 -------- -------- 23,441 23,821 Less accumulated depreciation.. (3,917) (1,592) -------- -------- Property, plant and equipment, net............................. $ 19,524 $ 22,229 ======== ======== Depreciation expense was $2,326,000 in 1997, $935,000 in 1996, and $628,000 in 1995. In August 1996, GTR effected an interdivisional transfer of certain land and a building in Framingham, Massachusetts, acquired in January 1996, to Genzyme General for $5.2 million, which represented the cost and approximate fair market value of the property at the date of the sale. There was no gain or loss recorded as a result of this transaction. NOTE F. INVESTMENTS AND OTHER NONCURRENT ASSETS Investments in marketable securities at December 31, consisted of the following: 1997 1996 ----------------------------------------------- MARKET MARKET (DOLLARS IN THOUSANDS) COST VALUE COST VALUE - ----------------------------------------------------------------------------- Short Term: Certificates of deposit . $ - $ - $ 318 $ 318 Corporate notes ......... 10,804 10,795 - - ------- ------- ------- ------- $10,804 $10,795 $ 318 $ 318 ======= ======= ======= ======= Gross unrealized holding losses of $9,000 were recorded at December 31, 1997 in division equity as compared to no unrealized gross holding losses at December 31, 1996. 16 17 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS DIACRIN/GENZYME LLC On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin, Inc. to develop and commercialize products and processes for use in the treatment of Parkinson's disease and Huntington's disease in humans using porcine fetal cells. Under the terms of the joint venture agreement, GTR will provide 100% of the initial $10.0 million of the funding requirements and 75% of the next $40.0 million of funding requirements for products to be developed by the joint venture. After that, all costs will be shared equally between GTR and Diacrin. Profits from the joint venture will be shared equally by the two parties. For the years ended December 31, 1997 and 1996, $5.1 million and $1.9 million, respectively, of Genzyme General cash had been allocated to GTR under the GTR Equity Line and 489,810 and 231,645, GTR Designated Shares respectively, have been reserved for issuance at the sole discretion of the Genzyme Board. As of December 31, 1997 and 1996, GTR realized a net loss of $6.7 million and $1.7 million, respectively, from the joint venture. For the year ended December 31, 1997, GTR had provided $6.8 million of funding to the joint venture. The Company's Chairman and Chief Executive Officer is a Director of Diacrin. NOTE G. ACCRUED EXPENSES Accrued expenses at December 31 include the following: (DOLLARS IN THOUSANDS) 1997 1996 ------------------------------------------------------ Professional fees................ $ 797 $ 743 Compensation..................... 1,837 1,375 Royalties........................ 58 113 Other............................ 124 248 ------- ------- $ 2,816 $ 2,479 ======= ======= NOTE H. LONG-TERM OBLIGATIONS AND LEASES Long-term obligations at December 31 is comprised of the following: (DOLLARS IN THOUSANDS) 1997 1996 ------------------------------------------------------ Revolving Credit Facility........ $18,000 $18,000 Convertible Debenture............ 12,681 - ------- ------- $30,681 $18,000 ======= ======= Although the Company retains responsibility for the repayment of all long-term debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated Financial Statements which is incorporated herein by reference), such debt is allocated to either Genzyme General, GTR or GMO for reporting purposes based on the intended use of the funds borrowed under each instrument. GTR PRIVATE PLACEMENT On February 28, 1997, GTR raised $13.0 million through the private placement of a 5% convertible note (the "GTR Note"), to an affiliate of Credit Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the GTR Note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price preceding the conversion date or the date 15 months after the date of issue. In the first quarter of 1997, GTR recorded $11.5 million of proceeds attributed to the value of the debt and $1.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The debt will be accreted to its $13.0 million face value by a charge to interest expense of $1.5 million over the term of the initial 15 month conversion period. As of December 31, 1997, GTR had accreted $1.1 million of the value of the conversion feature. Future minimum payments due under GTR's long-term obligations are as follows: LONG-TERM (DOLLARS IN THOUSANDS) DEBT ----------------------------------------------------- [S] [C] 1998...................................... $ - 1999...................................... 20,160 2000...................................... 14,583 ------- Total minimum payments............... 34,743 Less interest........................ (4,062) ------- $30,681 ======= 17 18 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS OPERATING LEASES GTR rents facilities and equipment under noncancellable operating leases expiring through 2001. For a GTR Facility there is an option to renew the lease expiring in 2001 for an additional five years. Rent expense under all operating leases was $1.8 million in 1997, $2.1 million in 1996 and $1.4 million in 1995. Future minimum payments due under Genzyme Tissue Repair non-cancellable operating leases are as follows: OPERATING (DOLLARS IN THOUSANDS) LEASES ------------------------------------------------------ 1998........................................ $1,680 1999........................................ 1,655 2000........................................ 1,653 2001........................................ 1,531 ------ Total minimum payments................. $6,519 ====== NOTE I. COMMITMENTS AND CONTINGENCIES From time to time GTR has been subject to legal proceedings and claims arising in connection with its business. At December 31, 1997, there were no asserted claims against GTR which, in the opinion of management, if adversely decided, would have a material adverse effect on GTR's financial position and results of operations. NOTE J. DIVISION EQUITY The following presents the equity of GTR for the periods presented: (AMOUNTS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ----- Balance at beginning of period ........... $ 18,084 $ 45,926 $ 23,313 Net loss ................................. (45,984) (42,315) (22,030) Exercise of stock options ................ 706 540 241 Shares issued in connection with the Employee Stock Purchase Plan ....... 1,732 1,896 983 Shares issued in public offering ......... 29,037 - 42,292 Allocation from Genzyme General for designated shares....................... 14,892 11,714 - Stock compensation........................ 221 312 882 Value of debt conversion feature.......... 1,524 - - Equity adjustments ....................... (9) 11 245 -------- ------- -------- Balance at end of period ................. $ 20,203 $ 18,084 $ 45,926 ======== ======== ======== At December 31, 1997 and 1996, GTR had 40,000,000 of $.01 par value GTR stock authorized and approximately 19,941,000 and 13,161,000 issued and outstanding. PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLANS, STOCK RIGHTS, STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, STOCK COMPENSATION PLANS AND GTR DESIGNATED SHARES The disclosures relating to Genzyme's Preferred Stock, Directors' Deferred Compensation Plan, Stock Rights, Employee Stock Purchase Plan, Stock Compensation Plans and GTR Designated Shares are included in Note K., "Stockholders' Equity" to the Consolidated Financial Statements which is incorporated herein by reference. Pursuant to Genzyme's charter, as amended, GTR Designated Shares are authorized shares of GTR Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GTR. GTR Designated Shares are created in certain circumstances when cash or other assets are transferred from Genzyme General to GTR. As of December 31, 1997, there were approximately 885,000 GTR Designated Shares reserved for issuance. During 1997, GTR distributed approximately 2,292,000 Designated Shares as a dividend to Genzyme General shareholders. Further disclosures relating to Genzyme's stock options and GTR Designated Shares are included in Note K., "Stockholders' Equity" to the Consolidated Financial Statements which are incorporated herein by reference. STOCK OFFERING In November 1997, Genzyme sold 4,000,000 shares of GTR stock to the public at a price of $7.75 per share for net proceeds of $29.0 million after underwriting discounts and commissions. STOCK COMPENSATION PLANS The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its four stock-based compensation plans, the 1997 Equity Incentive Plan and the 1990 Equity Incentive Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan (a stock purchase plan) and the 1988 Director Stock Option Plan and accordingly, no compensation expense has been recognized for options granted and shares purchased by employees under the provisions of these plans for options granted to employees with an exercise price equal to fair market value. 18 19 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the method of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), GTR's net loss and loss per share would have been as follows: DECEMBER 31, -------------------------------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 - ------------------------------------------------------------------------------ Net income (loss): As reported..................... $(45,984) $(42,315) $(22,030) Pro forma....................... $(49,547) $(45,735) $(23,168) Basic and diluted loss per share: As reported..................... $(3.07) $(3.38) $(2.28) Pro forma....................... $(3.31) $(3.65) $(2.40) For assumptions used in the SFAS 123 calculations for GTR for the three years ended December 31, 1997, 1996 and 1995 -- see Note K., "Stockholders Equity" to the Consolidated Financial Statements which is incorporated herein by reference. The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects on reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995. Additional awards are anticipated in future years. NOTE K. INCOME TAXES The differences between the effective tax rates and the U.S. federal statutory tax rates were as follows: YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------ ------ ------ U.S. Federal income tax statutory rate ........ (35.0)% (35.0)% (35.0)% State taxes, net .............................. (3.0) (5.2) (5.2)% Tax credits ................................... (1.4) - - Other ......................................... 1.0 - - Deductions subject to deferred tax valuation allowance .......................... 38.4 40.2 40.2 ----- ----- ----- Effective tax rate ............................ -% -% -% ===== ===== ===== At December 31, 1997 and 1996, the components of deferred tax assets were as follows (in thousands): 1997 1996 -------- -------- Deferred tax assets: Net operating loss carryforwards.............. $ 40,554 $ 24,802 Tax credits................................... 964 - Intangible amortization....................... 10,856 11,282 Reserves and other............................ 3,695 1,983 -------- -------- Gross deferred tax assets..................... 56,069 38,067 Valuation allowance........................... (56,069) (38,067) -------- -------- Net deferred tax assets....................... $ - $ - ======== ======== Due to uncertainty surrounding the realization of favorable tax attributes GTR placed a valuation allowance of $56.1 million and $38.1 million for December 31, 1997 and December 31, 1996, respectively, against otherwise recognizable deferred tax assets. At the time GTR recognizes these tax assets in accordance with generally accepted accounting principles, the resulting deferred tax benefits will be reflected in the tax provision for Genzyme General. However, the benefit of these deferred tax assets has been previously allocated to Genzyme General in accordance with the management and accounting policies, and will be reflected as a reduction of GTR net income to determine net income attributable to GTR Stock. 19 20 GENZYME TISSUE REPAIR NOTES TO COMBINED FINANCIAL STATEMENTS NOTE L. BENEFIT PLANS The disclosures relating to Genzyme's domestic employee savings plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") are included in Note O., "Benefit Plans" to the Consolidated Financial Statements which is incorporated herein by reference. Substantially all employees of GTR are covered under the 401(k) Plan. 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 $183,000, $165,000, and $36,000 in contributions to the plan in 1997, 1996 and 1995, respectively. 20 21 GENZYME TISSUE REPAIR 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 (as described in Note A) as of December 31, 1997, and 1996, 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, 1997. The combined financial statements and financial statement schedule are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements of Genzyme Tissue Repair present fairly, in all material respects, the financial position of Genzyme Tissue Repair as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Tissue Repair 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 February 27, 1998 21 22 GENZYME TISSUE REPAIR DIVISION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
================================================================================================ Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------ Additions --------------------- Balance at Charged to Charged Balance beginning Costs and to Other at end Description of period Expenses Accounts Deductions of Period - ------------------------------------------------------------------------------------------------ Year ended December 31, 1997: Allowance for doubtful accounts $ 408,000 $ 480,000 -- $ 49,000(1) $ 839,000 Inventory Reserve $4,427,000 $3,920,000 -- -- $8,347,000 Year ended December 31, 1996: Allowance for doubtful accounts $ 325,000 $ 238,000 -- $155,000(1) $ 408,000 Inventory Reserve -- $4,427,000 -- -- $4,427,000 Year ended December 31, 1995: Allowance for doubtful accounts $ 176,800 $ 210,000 -- $ 61,600(1) $ 325,200 - -------------- (1) Uncollectible accounts written off, net of recoveries. (2) Reserve acquired in acquisition.
22 EX-13.3 8 PORTIONS OF 1997 GENZYME MOLECULAR ONCOLOGY A/R 1 EXHIBIT 13.3 FINANCIAL STATEMENTS
PAGE NO. I. GENZYME MOLECULAR ONCOLOGY Combined Selected Financial Data............................................................. 2 Management's Discussion And Analysis Of Financial Condition And Results Of Operations........ 4 Combined Balance Sheets - December 31, 1997 and 1996......................................... 8 Combined Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995..... 9 Combined Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995..... 10 Notes to Combined Financial Statements....................................................... 11 Report of Independent Accountants............................................................ 22
2 GENZYME MOLECULAR ONCOLOGY COMBINED SELECTED FINANCIAL DATA
FOR THE PERIOD FROM DECEMBER 1,1994 COMBINED STATEMENTS OF OPERATIONS DATA (1) (DATE OF INCEPTION) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, TO DECEMBER 31, 1994 - ---------------------------------------------------------------------------------------- -------------------- 1997 1996 1995 ---- ----- ----- Revenues: Service revenue.................................. $ 467 $ - $ - $ - Research and development revenue-related party... 315 - - - -------- ------- ------ ------ 782 - - - Operating costs and expenses: Cost of revenues................................. 337 - - - Selling, general and administrative.............. 2,118 185 87 8 Research and development (1)..................... 5,341 818 377 29 Amortization of intangibles...................... 5,127 - - - Charge for in-process technology (1)............. 7,000 - - - -------- ------- ------ ------ Total operating costs and expenses............ 19,923 1,003 464 37 -------- ------- ------ ------ Operating loss....................................... (19,141) (1,003) (464) (37) Other income (expenses): Equity in net loss of joint venture (2).......... (258) - - -- Interest income.................................. 392 - - - Interest expense................................. (1,663) - - - -------- ------- ------ ------ Total other income (expenses)................. (1,529) - - - -------- ------- ------ ------ Loss before income taxes............................. $(20,670) $(1,003) $ (464) $ (37) Tax benefit.......................................... 1,092 - - - -------- ------- ------ ------ Net loss............................................. $(19,578) $(1,003) $ (464) $ (37) ======== ======= ====== ====== Pro forma per Genzyme Molecular Oncology common share (basic and diluted)(1): Pro forma net loss............................... $(4.98) $ (.26) $ (.12) $(.01) Pro forma shares outstanding..................... 3,929 $3,929 $3,929 $3,929
2 3 GENZYME MOLECULAR ONCOLOGY COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED BALANCE SHEET DATA (1): DECEMBER 31, - ----------------------------------------------------------------------------- 1997 1996 1995 1994 ---- ---- ---- ---- Cash and investments(3)............. $21,229 $ - $ - $ - Working capital..................... 11,411 - - - Total assets........................ 53,801 - - - Long-term debt and convertible debenture(4,5)...................... 24,199 - - - Parent company investment(1)........ 2,875 1,504 501 37 Division equity(5).................. 13,466 - - -
There were no cash dividends paid. NOTES TO SELECTED FINANCIAL DATA: (1) Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO") is a division of Genzyme Corporation ("Genzyme" or the "Company"). GMO was part of Genzyme General Division ("Genzyme General" or "GGD") from December 1, 1994 (Date of Inception) to June 18, 1997. Genzyme acquired PharmaGenics, Inc. ("PharmaGenics") on June 18, 1997 (date of acquisition), and the combined financial statements of GMO beginning June 18, 1997 include the results of PharmaGenics. As a result of the PharmaGenics acquisition, GMO recorded a $7.0 million charge to operations for in-process technology that has no alternative future use. GMO's financial statements are prepared using amounts included in Genzyme's consolidated financial statements. Pro forma net loss per share data is presented for Genzyme Molecular Oncology Division Common Stock ("GMO Stock") for all periods presented as there were no shares of GMO Stock outstanding prior to June 18, 1997. Historical loss per share information is omitted from the statement of operations as GMO Stock was not part of the capital structure of Genzyme for periods presented prior to June 18, 1997. (2) In July 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian Medical Discoveries Fund Inc. ("CMDF") to develop stress gene therapies for the treatment of cancer. For the year ended December 31, 1997, GMO recorded $258,000 of equity in net loss in joint venture. (3) Cash and investments includes cash equivalents, and short- and long-term investments. (4) In June 1997, $5.0 million of borrowings under Genzyme's $225.0 million revolving credit facility were allocated to GMO to fund operations. At December 31, 1997 this $5.0 million is still outstanding. (5) In August 1997, GMO raised $20.0 million (before offering discounts and expenses), through the private placement of 6% convertible debentures (the "GMO Debentures"), due August 29, 2002. The GMO Debentures are convertible into shares of GMO Stock, at the option of the holders, beginning on the 91st day after the effective date of a registration statement covering the initial public offering of GMO Stock (the "GMO IPO") at the average of the closing bid prices of GMO Stock as reported by the Nasdaq National Market for the 20 trading days immediately preceding the applicable conversion date (the "GMO Market Price"). Beginning February 26, 1998, the GMO Debentures are convertible at a discount to the GMO Market Price. This discount will begin at 7% on February 26, 1998 and will increase by an additional one percent every 30 days thereafter to 15% on October 24, 1998. Beginning November 23, 1998, the conversion price will be the lower of (i) 85% of the GMO Market Price calculated as of the actual conversion date and (ii) 85% of the GMO Market Price calculated as of November 21, 1998. In no event, however, will the conversion price be less than $7.70 per share (subject to adjustment in the event of any stock split, stock dividend, reclassification, combination or singular event). If the effective date of the GMO IPO does not occur before August 29, 1998, at the holder's option, the GMO Debentures may be exchanged for a 5% convertible debenture issued by Genzyme General (the "GGD Debentures") due August 29, 2003. If the GMO IPO is completed before August 29, 1998 but the market capitalization is below $90.0 million, at the holder's option, 50% of the GMO Debentures can be exchanged for the GGD Debentures. The exchange option must be exercised within 30 business days of the event triggering the right of exchange. 3 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME MOLECULAR ONCOLOGY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the expectations of the management of GMO and Genzyme as of the filing date of this Annual Report. The actual results for both GMO and Genzyme could differ materially from those anticipated by the forward-looking statements due to the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" for GMO and Genzyme, respectively. Stockholders and potential investors should consider carefully each of these risks and uncertainties in evaluating the financial condition and results of operations of GMO and Genzyme. Genzyme provides separate financial statements for the Company and its subsidiaries on a consolidated basis and for each of Genzyme General, Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and GMO. The financial statements of each division include the financial position, results of operations and cash flows of programs and products allocated to the division under the Company's Restated Articles of Organization, as amended (the "Genzyme Charter"), and the management and accounting policies adopted by the Genzyme Board of Directors (the "Genzyme Board") to govern the relationship of the divisions. The financial information of Genzyme General, GTR and GMO, taken together, include all accounts which comprise the consolidated financial information presented for Genzyme and its subsidiaries. For purposes of financial statement presentation, all of the Company's programs and products are allocated to Genzyme General, GTR or GMO. Notwithstanding this allocation, Genzyme continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of the divisions. Holders of Genzyme General Division Common Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock") and GMO Stock have no specific claim against the assets attributed to the division whose performance is associated with the series of stock they hold. Liabilities or contingencies of one division that affect Genzyme's resources or financial condition could affect the financial condition or results of operations of any other division. Stockholders and potential investors should, therefore, read this discussion and analysis of financial position and results of operations in conjunction with the financial statements and related notes of GMO and the discussion and analysis of Genzyme's financial position and results of operations and financial statements and related notes of Genzyme, all of which are included with this Annual Report. Genzyme formed GMO on June 18, 1997 by acquiring PharmaGenics and combining it with several of its existing programs in the field of oncology. The aggregate purchase price of the PharmaGenics acquisition was $27.5 million plus acquisition costs of $2.5 million, assumed liabilities of $5.4 million and the recording of a deferred tax liability of $7.6 million resulting from the temporary difference between the book and tax basis of the completed technology. The portion of the purchase price allocated to the completed technology was $20.0 million which will be amortized over three years. GMO recorded $15.7 million of goodwill, which represents the remaining portion of the purchase price, which will be amortized over the same period as the completed technology. GMO allocated $7.0 million to in-process technology which represents the value assigned to PharmaGenics' programs which are still in the development stage and for which there is no alternative use. The value assigned to these programs has been determined by selecting the maximum anticipated value of these programs, as provided by an independent valuation of the PharmaGenics business, based on comparable technologies. GMO charged the amount allocated to in-process technology to operations in June 1997, the period in which the acquisition was completed. 4 5 GENZYME MOLECULAR ONCOLOGY (CONT.) RESULTS OF OPERATIONS From the Date of Inception, research and development functions with respect to development programs which have been attributed to GMO have been provided solely by Genzyme General. In accordance with Genzyme's management and accounting policies, expenses for research and development performed by Genzyme General for GMO are charged to GMO on a cost basis. Genzyme's corporate and general and administrative expenses or other indirect costs are allocated to GMO in a reasonable and consistent manner based on utilization by GMO of the services to which such costs relate. Management believes that such allocation is a reasonable estimate of such expenses. 1997 COMPARED TO 1996 REVENUES. GMO recorded $0.8 million total revenue in 1997 as compared to no revenue in 1996. GMO recorded service revenue of $0.5 million which consists of the sale of SAGE(TM) differential gene expression technology ("SAGE(TM)") services. GMO also recorded research and development revenue of $0.3 million, which consists of work performed for the joint venture with StressGen Biotechnologies Corporation ("StressGen/Genzyme LLC"). MARGINS AND OPERATING EXPENSES. GMO's cost of revenues in 1997 was $0.3 million, and consisted of work performed on behalf of StressGen/Genzyme LLC. In 1997, GMO incurred $2.1 million of selling, general and administrative ("SG&A") expenses, compared to $0.2 million in 1996. The increase is due to increased administrative support corresponding to the growth of GMO's business following the acquisition of PharmaGenics. Research and development costs in 1997 increased to $5.3 million from $0.8 million in 1996. The increase in research and development costs relate to increases in research personnel and related expenses pertaining to GMO's SAGE(TM) and gene therapy programs. Amortization expenses of $5.1 million in 1997 were attributable to the PharmaGenics acquisition which was effective on June 18, 1997. There were no similar amounts in 1996. GMO recorded a $7.0 million charge as part of the acquisition of PharmaGenics for the purchase of in-process technology that has no alternative future use. OTHER INCOME AND EXPENSES. Interest income and interest expense were $0.4 million and $1.7 million, respectively in 1997. There were no similar amounts in 1996. The interest income results from higher average cash balances due to the issuance of convertible debentures in August 1997 (the "GMO Debentures"). The interest expense is interest and related amortization of discount on the GMO Debentures. On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian Medical Discoveries Fund ("CMDF") to develop stress gene therapies for the treatment of cancer. GMO recorded an equity in net loss of the joint venture of $0.3 million in 1997. GMO recorded a tax benefit of $1.1 million during 1997. There was no similar amount in 1996. The tax benefit results from amortization of the deferred tax liability established upon the acquisition of PharmaGenics as described in the introduction to this section. 1996 AS COMPARED TO 1995 No revenues were earned by GMO from the date of inception through December 31, 1996. Research and development expenses for 1996 increased to $0.8 million from $0.4 million or 117% in comparison to 1995 due primarily to increased cancer research efforts. These efforts related to GMO's drug discovery programs, GMO's internal gene therapy programs and activities related to GMO's collaboration with the Imperial Cancer Research Technology Limited to develop cancer gene therapies, which commenced in January 1996, and GMO's Collaborative Research and Development Agreement with the National Cancer Institute to develop treatments for metastatic melanoma. SG&A expenses increased $98,000 to $185,000 or 113% primarily due to increased administrative support corresponding to the growth in GMO's programs. 5 6 GENZYME MOLECULAR ONCOLOGY (CONT.) LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997, GMO had cash, cash equivalents and short-term investments of $20.2 million. In 1997, GMO used $4.0 million for operations and $7.2 million for investing activities. In the year ended December 31, 1997, investing activities used $6.1 million for the purchases of short-term marketable securities and long-term investments. Financing activities for the year ended December 31, 1997 provided $26.2 million of cash, of which $19.2 million was the net proceeds from the issuance of the GMO Debentures, $5.0 million was allocated to GMO from Genzyme General under the revolving credit facility, and $1.4 million was Genzyme General's investment in GMO. Of the $19.2 million in proceeds from the GMO Debentures, GMO recorded $16.5 million of proceeds attributed to the value of the debt, $3.5 million attributed to the value of the conversion feature (recorded as an increase to division equity), net of $0.9 million of underwriter's fees associated with the issuance of the debt. The debt will be accreted to its $20.0 million face value by a charge to interest expense of $3.5 million over the term of the initial 15 month conversion period. GMO has recorded $2.4 million of accrued expenses as of December 31, 1997, which consist primarily of costs related to the PharmaGenics merger. Deferred revenue of $1.6 million represents contract execution payments received from collaborators which are to be recognized as revenues in future periods. Management of GMO currently believes that the existing cash balances and revenues generated from SAGE[TM] agreements and committed research funding from collaborators will enable GMO to maintain its current and planned operations through the end of 1999. Substantial additional funds will be required to complete development and commercialization of GMO's products and services (other than SAGE[TM] services). In addition, GMO's cash requirements may vary materially from those now planned as a result of numerous factors, including progress of GMO's research and development programs, achievement of milestones under strategic alliance arrangements, the ability of GMO to establish and maintain additional strategic alliances and licensing arrangements, the progress of development efforts of GMO's strategic partners, competing technological and market developments, the costs involved in enforcing patent claims and other intellectual property rights and the cost of timing and regulatory approvals. Insufficient funds may require GMO to delay, scale back or eliminate certain of its programs or to license third parties to commercialize technologies or products that GMO would otherwise undertake itself. Such actions may adversely affect the potential market value of GMO Stock. GMO is expected to experience significant operating losses at least through fiscal year 2001 as its research and development and clinical trial programs expand. There can be no assurance that GMO will ever achieve a profitable level of operations or that profitability, if achieved, can be sustained on an ongoing basis. In addition, Genzyme's management and accounting policies provide that to the extent GMO is unable to utilize its operating losses or other projected tax benefits to reduce its current or deferred income tax expense, such losses or benefits may be reallocated to another division on a quarterly basis. Accordingly, although the actual payment of taxes is a corporate liability of Genzyme as a whole, separate financial statements will be prepared for each division and any losses that cannot be utilized by GMO will not be carried forward to reduce the taxes allocable to GMO's earnings in the future. This could result in GMO being charged a greater portion of the total corporate tax liability and reporting lower earnings available to GMO stockholders in the future than would have been the case if GMO had retained its losses or other benefits in the form of a net operating loss carryforward. For a discussion of the demands, commitments and events that may affect the liquidity and capital resources of Genzyme Corporation, including GMO, see Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Liquidity and Capital Resources, included in this Annual Report. For a discussion of the new accounting pronouncements and Year 2000 impact, see Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - New Accounting Pronouncements, Year 2000 and Financial Reporting Release No. 48 ("FRR 48") included in this Annual Report. 6 7 GENZYME MOLECULAR ONCOLOGY (CONT.) FACTORS AFFECTING FUTURE OPERATING RESULTS The future operating results of GMO could differ materially from the results described above due to the risks and uncertainties described below and under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Factors Affecting Future Operating Results" included in this Annual Report. EARLY STAGE OF PRODUCT DEVELOPMENT. GMO's products and services, other than SAGE(TM) services, are at an early stage of development and will require, at substantial expense, additional research, development, preclinical and clinical testing and regulatory approval prior to commercialization. Revenues to date from SAGE(TM) services have been nominal. GMO does not expect to generate significant revenue from any additional commercial products or services for several years. GMO's gene therapy products for melanoma are its only therapeutic products that are currently in clinical trials. Although preliminary results from these trials are encouraging, such results are not necessarily indicative of results that will be obtained in subsequent or more extensive clinical testing. There can be no assurance that GMO will not encounter problems in clinical trials that will cause it to delay or suspend clinical trials or that such clinical testing, if completed, will ultimately show any of GMO's products to be safe and efficacious. In addition, gene therapy is a theoretically promising therapeutic approach that has many technical obstacles to be overcome. No gene therapy products have been approved to date for sale in the U.S. or internationally. GMO OPERATING LOSSES; LACK OF REVENUES. GMO's revenues from SAGE[TM] services have been nominal to date and all of its other revenues have resulted from payments by strategic partners. GMO does not expect that its revenues will be sufficient to support its operations and ongoing product and service development programs. In addition, because all of GMO's potential therapeutic products will require significant additional research, development, and preclinical and clinical testing prior to commercialization, it may be several years, if ever, before GMO recognizes revenue from sales or royalties on these products or services. Accordingly, GMO is expected to experience significant operating losses for at least the next several years and there can be no assurance that GMO will ever achieve a profitable level of operations or that profitability, if achieved, can be sustained on an ongoing basis. COMPETITION. Competition in the field of cancer therapeutics and diagnostics is intense. Competitors in the U.S. and elsewhere are numerous and include major pharmaceutical, chemical and biotechnology companies, many of which have substantially greater capital resources, marketing experience, research and development staffs and facilities than GMO. These companies may succeed in developing products and services that are more effective than any that have been or may be developed by GMO and may also be more successful than GMO in producing and marketing these products and services. In addition, other companies provide genomics services that are competitive with SAGE[TM]. RELIANCE ON COLLABORATORS. GMO's strategy to develop and commercialize certain of its products and services entails entering into various arrangements with both academic collaborators and corporate partners and licensees. GMO will be dependent on the subsequent success of these parties in performing research, preclinical and clinical testing and marketing. These arrangements may require GMO to transfer certain material rights to such corporate partners and licensees. While GMO believes its collaborators and licensees will have an economic motivation to succeed in performing their contractual responsibilities, in some cases the amount and timing of resources to be devoted to their collaboration with GMO, and the ability to terminate the collaboration, will be controlled by the collaborators. Consequently, there can be no assurance that any revenues or profits will be derived from such arrangements, that any of GMO's current strategic alliances will be continued or not terminated early or that GMO will be able to enter into future collaborations. UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. Several patents have recently issued that may affect GMO's business. The first is a U.S. patent issued to an academic institution that purports to cover the use of any recombinant viral vector in gene therapy, including adenoviral vectors. Based on public statements by the academic institution, GMO understands that the institution intends to make non-exclusive licenses under this patent widely available. In addition, the U.S. and European patent offices have recently issued patents to a third party relating to the use of cationic liposomes to deliver a gene to a target organ. The method claimed under these patents involves the selection of a site of administration proximal to the target organ. Since GMO seeks to optimize the systemic delivery advantages of cationic lipid delivery of genes at sites distant from the site of administration, it is not clear whether this technology will be necessary in GMO's gene therapy products. In addition, a third party has invited Genzyme to enter negotiations to license an issued European patent and claims in a U.S. patent application that relate to the collection and analysis of gene expression data from chemically exposed mammalian, plant and yeast cells. GMO is in the process of evaluating the scope and validity of each of these patents to determine whether obtaining licenses to these patents is necessary. Among the genes licensed by GMO from The Johns Hopkins University School of Medicine ("JHU") is p53, which is the subject of a pending patent application. GMO is aware of third party patent applications and issued patents directed to p53 gene therapy, as well as to general methods for delivering genes therapeutically, including for the treatment of cancer (the "Additional Gene Therapy Patents"). In the U.S., GMO believes that the U.S. Patent and Trademark Office (the "PTO") will declare a patent interference between certain of the Additional Gene Therapy Patents and the p53 patent application licensed to it from JHU and sublicensed to Genetic Therapy, Inc. ("GTI"). There can be no assurance, however, that the PTO will institute the interference or that JHU would prevail in such a proceeding. Claims to p53 gene therapy have been granted to a third party in Europe as well. GMO is participating in an opposition to these claims. Notwithstanding the issuance of the third party patent, the European patent office has indicated to JHU that its claims to p53 gene therapy are patentable. Revisions to the claims are being made to place the European patent application in form for grant. There can be no assurance that JHU will ultimately obtain the patent rights to p53 gene therapy in either the U.S. or Europe. GMO has a right of first negotiation to exclusively license the rights to inventions made by the National Cancer Institute ("NCI") regarding the tumor antigens MART-1 and gp100 under its collaborative research and development agreement. In addition, GMO may negotiate for pre-existing rights to MART-1 and gp100 held by the NCI. GMO also has a right of first negotiation to exclusively license the rights held by the Dana Farber Cancer Institute regarding certain dendritic cell fusion technology. With respect to the MART-1 gene, GMO is aware of a U.S. patent issued to a third party, which appears to cover the MART-1 gene. GMO is continuing to evaluate this patent and is in discussions with the patent holder regarding a license to the MART-1 gene. With respect to the gp100 gene, GMO is aware of two published PCT applications by two different third party applicants that appear to cover the gp100 gene. There can be no assurance, therefore, that the NCI will ultimately obtain the patent rights to gp100. GMO may need to obtain licenses from both the NCI and others in order to commercialize immunotherapy products based on MART-1 and gp100. Genzyme has also licensed the adenomatous polyposis coli ("APC") gene, for which a patent was issued in 1994, from JHU. A patent has been issued to a third party that purports to cover a probe residing in a specified chromosomal area linked to the APC gene. A license to such patent may be required if GMO decides to pursue APC diagnostic testing. If GMO determines that obtaining licenses to any patents, including those discussed above, is necessary, there can be no assurance that such licenses would be available on commercially reasonable terms, if at all. GMO and Hoffman La-Roche, Inc. ("Roche") have also licensed a number of patents and pending patent applications from JHU covering various cancer-related genes. While the licenses from JHU are exclusive as to all rights that JHU possesses, some of the genes licensed from JHU are covered by patent applications that are co-owned with entities from which GMO has not obtained a license. Because many foreign jurisdictions do not accept license grants as valid unless all owners of the licensed technology consent to the grant, such jurisdictions may not recognize the validity of JHU's license to GMO. No assurance can be given that such consents will be obtained. Unless and until such consents are obtained, GMO's rights to practice the pertinent inventions in foreign countries remain unclear and could adversely affect GMO's activities in those countries. Genzyme has been assigned the patent rights to the SPHERE screening technology from the inventor. A third party has notified Genzyme, however, that it believes that the inventor did not have the authority to assign the SPHERE technology to Genzyme. Genzyme is currently investigating this matter. NO PUBLIC MARKET FOR GMO STOCK. Currently there is no public market for GMO Stock, and there can be no assurance that a regular trading market for GMO Stock will develop. 7 8 GENZYME MOLECULAR ONCOLOGY COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------- 1997 1996 ------- ------- ASSETS Current assets: Cash and cash equivalents............................... $15,010 $ - Short-term investments.................................. 5,170 - Other................................................... 688 - ------- ------- Total current assets............................... 20,868 - Equipment, net........................................... 487 - Long-term investments.................................... 1,049 - Intangibles, net......................................... 30,688 - Investment in joint venture.............................. 574 - Other.................................................... 135 - ------- ------- Total assets....................................... $53,801 $ - ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses........................................ $ 2,422 $ - Due to Genzyme General.................................. 5,434 - Deferred revenue........................................ 1,583 - Other current liabilities............................... 18 - ------- ------- Total current liabilities........................... 9,457 - Noncurrent liabilities: Long-term debt.......................................... 5,000 - Convertible debentures, net............................. 16,617 - Note payable to Genzyme General......................... 2,582 - Deferred tax liability.................................. 6,509 Other noncurrent liabilities............................ 170 - ------- ------- Total liabilities.................................. 40,335 - Commitments and contingencies (See Notes)................ Division equity: Division equity (Note H)................................ 13,466 - Parent company investment-Genzyme General............... - 1,504 Accumulated deficit..................................... - (1,504) ------- ------- Total division equity.............................. 13,466 - ------- ------- Total liabilities and division equity.............. $53,801 $ - ======= =======
The accompanying notes are an integral part of these combined financial statements. 8 9 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: Service revenue.................................. $ 467 - - Research and development revenue - related party. 315 - - ---------- -------- ------- 782 - - Operating costs and expenses: Cost of service revenue.......................... 50 - - Cost of research and development revenue......... 287 - - Selling, general and administrative.............. 2,118 $ 185 $ 87 Research and development......................... 5,341 818 377 Amortization of intangibles...................... 5,127 - - Purchase of in-process technology................ 7,000 - - ---------- -------- ------- Total operating costs and expenses............ 19,923 1,003 464 ---------- -------- ------- Operating loss....................................... (19,141) (1,003) (464) Other income (expenses): Equity in net loss of joint venture.............. (258) - - Interest income.................................. 392 - - Interest expense................................. (1,663) - - ---------- -------- ------- Total other income (expenses)................. (1,529) - - ---------- -------- ------- - - Loss before income taxes............................. (20,670) (1,003) (464) Tax benefit.......................................... 1,092 - - ---------- -------- ------- Net loss............................................. (19,578) (1,003) (464) ========== ======== ======= Pro forma per Genzyme Molecular Oncology common share: Pro forma basic and diluted net loss............. $ (4.98) $ (0.26) $(0.12) ========== ======== ====== Pro forma shares outstanding..................... 3,929 3,929 3,929 ========== ======== =======
The accompanying notes are an integral part of these combined financial statements. 9 10 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------- 1997 1996 1995 -------- ------- ----- OPERATING ACTIVITIES: Net loss............................................. $(19,578) $(1,003) $(464) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization..................... 5,245 - - Amortization of deferred taxes.................... (1,092) - - Purchase of in-process technology................. 7,000 - - Accretion of debt conversion feature.............. 957 - - Equity in net loss of joint venture............... 258 - - Accrued interest/amortization of marketable securities.......................... (141) - - Non-cash compensation expense..................... 58 - - Increase (decrease) in cash from working capital, net of effects of acquired business: Other current assets and liabilities........... (890) - - Accrued expenses............................... 556 - - Deferred revenue............................... 1,583 - - Due to Genzyme General......................... 2,011 - - -------- ------- ----- Net cash used by operating activities.......... (4,033) (1,003) (464) INVESTING ACTIVITIES: Acquisition of PharmaGenics, Inc., net of acquired cash 9 - - Investment in joint venture.......................... (724) - - Purchases of investments............................. (6,086) - - Purchases of equipment............................... (357) - - -------- ------- ----- Net cash used by investing activities.......... (7,158) - - FINANCING ACTIVITIES: Proceeds from issuance of warrants................... 724 - - Proceeds from issuance of convertible debentures, net 19,150 - - Allocation of debt from Genzyme General.............. 5,000 - - Parent company investment, Genzyme General........... 1,371 1,003 464 Other................................................ (44) - - -------- ------- ----- Net cash provided by financing activities...... 26,201 1,003 464 Increase in cash and cash equivalents.................... 15,010 - - Cash and cash equivalents at beginning of period......... - - - -------- ------- ----- Cash and cash equivalents at end of period............... $ 15,010 $ - $ - ======== ======= ===== Supplemental disclosure of non-cash transaction: Acquisition of PharmaGenics, Inc. - See Note B.
The accompanying notes are an integral part of these combined financial statements. 10 11 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"), a division of Genzyme Corporation (the "Company" or "Genzyme"), is engaged in the development and commercialization of novel cancer therapeutics and diagnostics based on molecular tools and genomics information. GMO's products and services include a genomics service business based on its SAGE(TM) differential gene expression technology ("SAGE"), two gene immunotherapy programs currently in Phase I clinical trials for melanoma, additional gene therapy programs based on immunotherapy and tumor targeting, a drug discovery program to identify small molecules that interact with cancer-related targets and diagnostic assay capabilities. Genzyme formed GMO in June 1997 by acquiring PharmaGenics, Inc. ("PharmaGenics") and combining it with several of its existing programs in the field of oncology. Operations under the existing Genzyme programs combined to form GMO commenced December 1, 1994 (the "Date of Inception"). BASIS OF PRESENTATION The combined financial statements of GMO include the balance sheets, results of operations and cash flows of Genzyme's molecular oncology operations, which were part of Genzyme's General Division ("Genzyme General") through June 18, 1997. GMO'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 D., "Related Party Transactions" below). GMO generated revenue from operations during the third quarter of 1997 and therefore is no longer considered to be a development stage enterprise for reporting purposes. On June 18, 1997, pursuant to an agreement between Genzyme and PharmaGenics, PharmaGenics merged with and into Genzyme (the "Merger"). Therefore, from June 18, 1997, the results of PharmaGenics are included in GMO's financial statements. As consideration for the Merger, the stockholders of PharmaGenics received approximately 3,929,000 shares of Genzyme Molecular Oncology Common Stock ("GMO Stock"). The GMO Stock is intended to reflect the value and track the performance of GMO. As compensation to Genzyme General for its contribution to GMO, 6,000,000 shares of GMO Stock have been reserved for issuance for the benefit of Genzyme General or its stockholders (these 6,000,000 shares are referred to as the "GMO Designated Shares") (See Note H., "Division Equity" below). The Genzyme Board of Directors (the "Genzyme Board") may issue the GMO Designated Shares as a stock dividend to the holders of Genzyme General Division Common Stock ("GGD Stock") or it may sell such shares in a public or private sale and allocate all of the proceeds to Genzyme General. Genzyme's management and accounting policies require Genzyme to distribute GMO Designated Shares to holders of GGD Stock on the later of November 30, 1998 or 360 days following completion of an initial public offering of GMO Stock (the "GMO IPO"), although the Genzyme Board may elect to distribute these shares at any time but not later than November 29, 1999. PRINCIPLES OF COMBINATION The accompanying combined financial statements reflect the combined accounts of all of GMO's businesses. All material intradivisional items and transactions have been eliminated in combination. Investments in joint ventures in which GMO has a substantial ownership interest of approximately twenty-percent to fifty-percent, or in which GMO participates in policy decisions are accounted for using the equity method. Accordingly, GMO's share of the earnings or losses of these entities is included in combined net income (loss). 11 12 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INFORMATION Genzyme will provide to holders of GMO Stock separate financial statements, management's discussion and analysis, descriptions of business and other relevant information for GMO. Notwithstanding the attribution of assets and liabilities, including contingent liabilities, between Genzyme General, Genzyme Tissue Repair Division ("GTR") and GMO for the purposes of preparing their respective financial statements, this attribution will not affect legal title to such assets or responsibility for such liabilities of Genzyme or any of its subsidiaries. Holders of GMO Stock, GGD Stock, and Genzyme Tissue Repair Division Common Stock ("GTR Stock") are common stockholders of Genzyme and continue to be subject to all risks associated with an investment in Genzyme. Liabilities or contingencies of Genzyme General, GTR or GMO could affect the financial condition or results of operations of the other divisions. Accordingly, the GMO combined financial statements should be read in connection with Genzyme's consolidated financial statements included in this Annual Report. Accounting policies and financial information specific to GMO are presented in these GMO combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO collectively are presented in the consolidated financial statements of Genzyme Corporation and subsidiaries. The Company prepares the financial statements of the division in accordance with generally accepted accounting principles, the accounting policies of Genzyme (see Note A., "Summary of Significant Accounting Policies" to Genzyme's Consolidated Financial Statements (the "Consolidated Financial Statements") which is incorporated herein by reference), and the divisional accounting policies approved by the Genzyme Board. Except as otherwise provided in such policies, the management and accounting policies applicable to the presentation of the financial statements of GMO may be modified or rescinded at the sole discretion of the Genzyme Board without approval of the stockholders, subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders. DIVIDEND POLICY Under the terms of the Genzyme Articles of Organization, as amended, (the "Genzyme Charter"), dividends may be paid to the holders of GMO Stock only out of the lesser of funds of Genzyme legally available for the payment of dividends and the Available GMO Dividend Amount, as defined in the Genzyme Charter. Although there is no requirement to do so, the Genzyme Board would declare and pay cash dividends on GMO Stock, if any, based primarily on earnings, financial condition, cash flow and business requirements of GMO. There is currently no intention of paying cash dividends. NET LOSS PER SHARE Historical loss per share information is omitted as there were no shares of GMO Stock outstanding prior to June 18, 1997 and pro forma net loss per share is disclosed for all periods presented. The pro forma shares outstanding represent the shares of GMO Stock issued to effect the Merger. Following issuance of the GMO Stock, the method of calculating earnings per share for GMO would reflect the terms of the Genzyme Charter, which provide that dividends may be declared and paid out of the lesser of funds of Genzyme legally available for the payment of dividends and the Available GMO Dividend Amount, as defined. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share is very similar to the previously reported fully diluted earnings per share except that the new treasury stock method used in determining the dilutive effect of options uses the average market price for the period rather than the higher of the average market price or the ending market price. All net income (loss) per common share amounts have been restated to conform to SFAS 128 requirements. The following table sets forth the computation of basic and diluted earnings per share: December 31, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - -------------------------------------------------- ------- ------- ----- Net Loss.......................................... $(19,578) $(1,003) $(464) Basic and diluted weighted average shares outstanding.................................... 3,929 3,929 3,929 Pro forma net loss per common share - basic and diluted............................... $(4.98) $(0.26) $(0.12) During the year ended December 31, 1997, certain securities which were not included in the computation of diluted earnings per share because they would have an anti-dilutive effect due to the net loss for the year were as follows: (i) options to purchase approximately 826,000 shares of GMO Stock at $7.00 per share; (ii) warrants to purchase 10,000 shares of GMO Stock at $8.04 per share; (iii) debentures convertible into 3,476,000 shares of GMO Stock; (iv) 6,000,000 GMO Designated Shares issuable for the benefit of Genzyme General. During the years ended December 31, 1996 and 1995, there were no securities outstanding to be considered in this calculation. 12 13 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION The Genzyme stockholders have approved amendments to the existing Genzyme 1990 and 1997 Equity Incentive Plans (the "Equity Plans") and the 1988 Director Stock Option Plan (the "Director Stock Option Plan") that would allow for the issuance of shares of GMO Stock under such plans, in addition to the GGD Stock and GTR Stock already included in such plans. The Equity Plans will permit the granting of options to purchase GMO Stock to employees. GMO has elected the disclosure- only alternative for accounting for stock-based employee compensation as required by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). GMO has disclosed pro forma net income (loss) and pro forma earnings per share information in the footnotes to the combined financial statements using the fair value based method for 1997, as there were no GMO Stock Options issued under the above mentioned plan prior to 1997. 13 14 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE B. PHARMAGENICS MERGER In June 1997, pursuant to an agreement between Genzyme and PharmaGenics, PharmaGenics merged with and into Genzyme. This transaction was accounted for as a purchase. The aggregate purchase price of $27.5 million (net of $0.5 million which represents the fees payable by PharmaGenics in connection with the Merger, which are included in accrued expenses), plus acquisition costs of $2.5 million and assumed liabilities of $5.4 million has been allocated to the acquired tangible and intangible assets based on their estimated respective fair values (amounts in thousands): Equipment..................................................... $ 208 Other assets.................................................. 50 Completed technology rights (to be amortized over 3 years).... 20,000 Goodwill (to be amortized over 3 years)....................... 15,729 Deferred tax liability (to be amortized over 3 years)......... (7,600) In-process technology......................................... 7,000 ------- $35,387 ======= Accumulated amortization of the completed technology rights and goodwill was $5,127,000 as of December 31, 1997. The amount allocated to in-process technology of $7.0 million represents the value assigned to PharmaGenics's programs which are still in the development stage and for which there is no alternative use. The value assigned to these programs (both complete and in-process) has been determined by selecting the maximum anticipated value of these programs, as provided by an independent valuation of the PharmaGenics business, based on comparable technologies. The amount allocated to in-process technology was charged to operations in June 1997, the period in which the Merger was consummated. The deferred tax liability of $7.6 million results from the temporary difference between the book and tax basis of the completed technology computed at a 38.0% incremental tax rate. As of the date of the Merger, PharmaGenics had borrowed $2.5 million from Genzyme under a credit facility which Genzyme had made available to PharmaGenics to fund PharmaGenics' documented operating costs. Upon consummation of the Merger, the PharmaGenics Note (See Note C., "Credit Facility" below) became a liability allocated to GMO, and the $2.5 million of outstanding principal is considered as an intracompany loan by Genzyme General to GMO, bearing interest at 6.15% per annum and maturing on February 10, 2002 and convertible at any time prior thereto, at the Genzyme Board's option, into GMO Designated Shares. The number of GMO Designated Shares resulting from any conversion of the PharmaGenics Note will be determined by dividing the principal and interest being converted by the conversion price (the "GMO Conversion Price") in effect on the date of conversion. The initial GMO Conversion Price will be determined upon the closing of a GMO IPO in which the aggregate gross proceeds to GMO equal or exceed $10.0 million (an "Offering"), and will be equal to (i) the per share price of the GMO Stock sold in the Offering or, if GMO Stock is not sold in the Offering, (ii) the initial conversion price of the security convertible into GMO Stock that is sold in the Offering, provided that if any portion of the PharmaGenics Note is converted prior to an Offering, the initial GMO Conversion Price is $7.00. The GMO Conversion Price is subject to adjustment upon declaration of any stock dividend or upon completion of any subdivision or combination of the GMO Stock. 14 15 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE B. PHARMAGENICS MERGER (CONTINUED) If the acquisition had taken place at the beginning of 1996, after giving effect for adjustments for increased amortization, increased interest expense, the tax benefit from the amortization of the deferred tax liability and the one time charge for in-process technology, the pro forma revenues, net loss and net loss per share for GMO would have been as follows. This pro forma information does not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future.
(Amounts in thousands, except per share amounts) Year Ended December 31, - -------------------------------------------------------------------------------- 1997 1996 ---- ---- Pro forma revenues................................. $ 857 $ 1,418 Pro forma net loss................................. $(26,091) $(15,113) Pro forma basic and diluted net loss per share..... $ (6.64) $ (3.85) Pro forma weighted average shares outstanding...... 3,929 3,929
In connection with the PharmaGenics merger, a warrant to purchase certain shares of PharmaGenics Series A Stock was converted to a warrant to purchase approximately 10,000 shares of GMO Stock (the "Comdisco Warrant") at $8.04 per share. NOTE C. CREDIT FACILITY Genzyme had made a credit facility (the "Credit Facility") available to PharmaGenics to fund PharmaGenics documented operating costs through June 18, 1997 (date of acquisition). Monthly draws against the Credit Facility could be made, up to a maximum amount during December 1996, January 1997, February 1997, March 1997, April 1997 and May 1997 of $250,000, $750,000, $650,000, $450,000, $550,000 and $550,000, respectively. Amounts not drawn by PharmaGenics in a designated month were available to cover documented expenses in any later month (subject to limitations described below). The maximum amount of monthly draws was subject to downward adjustment based on the amount of the gross revenues received by PharmaGenics in the prior month. An additional draw of $250,000 could be made under the Credit Facility if the SAGE patent licensed by PharmaGenics to Johns Hopkins University ("JHU") was issued while the Credit Facility was in effect, provided, however, that such draw was used by PharmaGenics to fulfill its obligation to JHU. As of June 18, 1997, PharmaGenics had drawn $2,450,000. The amount outstanding under this credit facility, including accrued interest, at December 31, 1997 is $2,582,000. Amounts advanced under the Credit Facility are evidenced by a Subordinate Convertible Promissory Note which bears interest subsequent to June 18, 1997 at the best borrowing rate available to Genzyme, 6.15% per annum as of December 31, 1997, and matures on February 10, 2002 (the "Maturity Date"). The Note is a liability allocated to GMO, the outstanding principal amount has been treated as an intracompany loan by Genzyme General to GMO, due on the Maturity Date and convertible at any time prior thereto, at the Genzyme Board's option, into GMO Designated Shares pursuant to an established formula. NOTE D. RELATED PARTY TRANSACTIONS Genzyme allocates certain corporate general and administrative, research and development, and cash management services to the divisions. Genzyme files a consolidated tax return and allocates income taxes to the divisions in accordance with the policies described below. Effective upon completion of the Merger, the Genzyme Board amended certain of the policies which govern the management of Genzyme General and GTR to include the management of GMO and added certain new policies governing interdivision transactions. The policies summarized below, with the exception of Interdivision Asset Transfers, may be further modified or rescinded by action of the Genzyme Board, or the Genzyme Board may adopt additional policies, without approval of the stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme stockholders. In addition, generally accepted accounting principles require that any change in policy be preferable (in accordance with such principles) to the previous policy. 15 16 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE D. RELATED PARTY TRANSACTIONS (CONTINUED) FINANCIAL MATTERS The Company manages the financial activities of Genzyme General, GTR and GMO. 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. Loans may be made from time to time between divisions. Any such loan of $1.0 million or less will mature within 18 months and interest will accrue at the lowest borrowing rate available to Genzyme for a loan with similar terms and duration. Amounts borrowed in excess of $1.0 million will require approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the material terms of such loan, including the interest rate and maturity date, are fair and reasonable to each participating division and to holders of the common stock representing such division. To date, GMO has borrowed $2,582,000 from Genzyme General (See Note C., "Credit Facility" above). SHARED SERVICES GMO operates as a division of Genzyme with its own personnel and financial resources, however, GMO has access to Genzyme's extensive research and development capabilities, manufacturing facilities, and worldwide clinical development and regulatory affairs staff, marketing, infrastructure and experience in raising capital. Genzyme's corporate general and administrative, selling and marketing, and research and development expenses have been allocated to GMO as if GMO operated on a stand-alone basis. Management believes that such allocation is a reasonable estimate of such expenses. Genzyme General allocations to GMO for general and administrative and selling and marketing expenses were $2.1 million in 1997, $0.2 million in 1996, and $0.1 million in 1995. Genzyme General allocations to GMO for research and development expenses were $5.3 million in 1997, $0.8 million in 1996, and $0.4 million in 1995. INTERDIVISIONAL INCOME TAX ALLOCATIONS GMO is included in the consolidated U.S. federal income tax return filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions using the asset and liability method of accounting for income taxes and as if the divisions were separate taxpayers. Accordingly, the realizability of deferred tax assets is assessed at the division level. The sum of the amounts calculated for individual divisions of Genzyme may not equal the consolidated amount under this approach. The accounting policies provide that, as of the end of any fiscal quarter of Genzyme, any projected annual tax benefit attributable to any division that cannot be utilized by such division to offset or reduce its current or deferred income tax expense may be attributed to 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., "Summary of Significant Accounting Policies -- Net Income (Loss) Per Share" to the Consolidated Financial Statements which is incorporated herein by reference. ACCESS TO TECHNOLOGY AND KNOW-HOW GMO has free access to all technology and know-how of Genzyme that may prove useful in GMO's business, subject to any obligations or limitations applicable to Genzyme. 16 17 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE D. RELATED PARTY TRANSACTIONS (CONTINUED) INTERDIVISION ASSET TRANSFERS The following policy regarding the transfer of assets between divisions may not be changed by the Genzyme Board without the approval of the holders of GTR Stock and GMO Stock, each voting as a separate class; provided, however, that if a policy change affects GTR or GMO alone, only holders of shares representing the affected division will be entitled to a class vote on such matter. The Genzyme Board may at any time and from time to time reallocate any program, product or other asset from one division to any other division. All such reallocations will be done at fair market value, determined by the Genzyme Board, taking into account, in the case of a program under development, the commercial potential of the program, the phase of clinical development of the program, the expenses associated with realizing any income from the program, the likelihood and timing of any such realization and other matters that the Genzyme Board and its financial advisors, if any, deem relevant. The consideration for such reallocation may be paid by one division to another in cash or other consideration with a value equal to the fair market value of the assets being reallocated or, in the case of a reallocation of assets from GGD to GMO, the Genzyme Board may elect to account for such reallocation of assets as an increase in GMO Designated Shares. Notwithstanding the foregoing, no Key GMO Program, as defined in the management and accounting policies, may be transferred out of GMO without a class vote of the holders of GMO Stock. OTHER INTERDIVISION TRANSACTIONS From time to time, a division may engage in transactions with one or more other divisions or jointly with one or more other divisions and with one or more third parties. Such transactions may include agreements by one division to provide products and services for use by another division and joint ventures or other collaborative arrangements involving more than one division to develop new products and services jointly and with third parties. Research and development performed by one division for the benefit of another division will be charged to the division for which work is performed on a cost basis. The division performing the research will not recognize revenue as a result of performing such research. Corporate and general and administrative services will be provided by each division to any other division requesting such services on a cost basis. Other interdivisional transactions shall be on terms and conditions that would be obtainable in transactions negotiated at arm's length with unaffiliated third parties. Any interdivisional transaction to be performed on terms and conditions other than those previously set forth and that is material to one or more of the participating divisions will require the approval of the Genzyme Board, which approval shall include a determination by the Genzyme Board that the transaction is fair and reasonable to each participating division and to holders of the common stock representing each such division. If a division (the "purchasing division") requires any product or service from which another division (the "selling division") derives revenue from sales to third parties (a "commercial product or service"), the purchasing division may solicit from the selling division a bid to provide such commercial product or service in addition to any bids solicited by the purchasing division from third parties. Subject to determination by the Genzyme Board that the bid of the selling division is fair and reasonable to each division and to their respective stockholders and that the purchasing division is willing to accept the selling division's bid, the purchasing division may accept any bid deemed to offer the most favorable terms and conditions for providing the commercial product or service sought by the purchasing division. 17 18 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE E. REVOLVING CREDIT FACILITY Genzyme has a revolving credit facility (the "Revolving Credit Facility") with a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under the facility may be allocated among Genzyme General, GTR or GMO and are due in November 1999. As of December 31, 1997, GMO had $5.0 million of debt outstanding under the Revolving Credit Facility. GMO incurred $160,000 of interest expense related to this credit facility. (See Note J., "Long-term Debt And Leases" to the Consolidated Financial Statements which is incorporated herein by reference). NOTE F. GMO PRIVATE PLACEMENT In August 1997, GMO raised $20.0 million through the private placement of 6% convertible debentures (the "GMO Debentures"), due August 29, 2002. The GMO Debentures are convertible into shares of GMO Stock, at the option of the holders, beginning on the 91st day after the effective date of a registration statement covering a GMO IPO at the average of the closing bid prices of GMO Stock as reported by the Nasdaq National Market for the 20 trading days immediately preceding the applicable conversion date (the "GMO Market Price"). Beginning February 26, 1998, the GMO Debentures are convertible at a discount to the GMO Market Price. This discount will begin at 7% on February 26, 1998 and will increase by an additional one percent every 30 days thereafter to 15% on October 24, 1998. Beginning November 23, 1998, the conversion price will be the lower of (i) 85% of the GMO Market Price calculated as of the actual conversion date and (ii) 85% of the GMO Market Price calculated as of November 21, 1998. In no event, however, will the conversion price be less than $7.70 per share (subject to adjustment in the event of any stock split, stock dividend, reclassification, combination or singular event.) In the third quarter of 1997, GMO recorded $16.5 million of proceeds attributed to the value of the debt and $3.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The debt will be accreted to its $20.0 million face value by a charge to interest expense of $3.5 million over the term of the initial 15 month conversion period. During the year ended December 31, 1997, GMO incurred $407,000 of interest expense related to the GMO Debentures. EXCHANGE OPTION If the effective date of the GMO IPO does not occur before August 29, 1998, at the holder's option, the GMO Debentures may be exchanged for a 5% convertible debenture issued by Genzyme General (the "GGD Debentures") due August 29, 2003. If the GMO IPO is completed before August 29, 1998 but the aggregate proceeds from the offering are less than $15.0 million or GMO's market capitalization is below $90.0 million, at the holder's option, 50% of the GMO Debentures can be exchanged for the GGD Debentures. The exchange option must be exercised within 30 business days of the event triggering the right of exchange. PUT OPTION Beginning on the 181st day following the effective date of the GMO IPO, the holders of the GMO Debentures have the option (the "Put Option") to require Genzyme to pay the entire principal amount of the GMO Debentures in cash, together with interest at the rate of 15% per annum (less any interest previously paid) if the conversion price (as calculated above) is less than $7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put Option is exercisable only with respect to the first three Put Option Review Periods that occur while the GMO Debentures are outstanding and, if the Put Option is not exceeded within 15 days after any Put Option Review Period, a period of 90 days from the last day of the previous Put Option Review Period must elapse before another Put Option Review Period commences. GMO CALL OPTION The GMO Debentures are callable with cash or stock beginning 18 months after the effective date of the GMO IPO if the stock has closed at 150% of the fixed conversion price for 20 consecutive trading days. 18 19 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE G. STRESSGEN/GENZYME LLC The disclosures relating to Stressgen/Genzyme LLC are included in Note H., "Investments" to the Consolidated Financial Statements which is incorporated herein by reference. GMO recorded $315,000 and $287,000 of research and development revenue and cost of research and development revenue, respectively, related to services billed to StressGen/Genzyme LLC for the year ended December 31, 1997. GMO has a receivable of $427,000 from StressGen/Genzyme LLC at December 31, 1997, which is included in other current assets. For the year ended December 31, 1997, GMO recorded $258,000 of equity in net loss of joint venture. Summary financial information for StressGen/Genzyme LLC is not presented as the impact of StressGen/Genzyme LLC's activities on the Company's statement of operations for the year ended December 31, 1997 is not considered to be material. NOTE H. DIVISION EQUITY The following presents the equity of GMO for the periods presented. The presentation of Division Equity reflects the amounts expended by Genzyme on programs being attributed to GMO and, accordingly, such amounts are reflected as a parent company investment.
(AMOUNTS IN THOUSANDS) DECEMBER 31, - ------------------------------------------------------------------------------- 1997 1996 1995 -------- ------- ------ Balance at beginning of period................. $ - $ - $ - Net loss....................................... (19,578) (1,003) (464) Allocation from Genzyme General................ 1,371 1,003 464 Shares issued in connection with acquisition of PharmaGenics............................... 27,369 - - Issuance of warrants and options............... 899 - - Unearned compensation.......................... (117) - - Value of debt conversion feature............... 3,529 - - Unrealized gain (loss) on investments.......... (7) - - -------- ------- ------ Balance at end of period..................... $ 13,466 $ - $ - ======== ======= ======
There are 40,000,000 shares of GMO Stock authorized. Of the authorized shares, 3,928,572 million were issued to effect the Merger (see Note B., "PharmaGenics Merger" above). In addition, 6,000,000 GMO Designated Shares were created as a result of the Merger. PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLAN, STOCK RIGHTS, STOCK OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, STOCK COMPENSATION PLAN AND GMO DESIGNATED SHARES. The disclosures relating to Genzyme's Preferred Stock, Directors' Deferred Compensation Plan, Stock Rights, Employee Stock Purchase Plan, and Stock Compensation Plan, are included in Note K., "Stockholder's Equity" to the Consolidated Financial Statements which is incorporated herein by reference. Pursuant to Genzyme's charter, as amended, GMO Designated Shares are authorized shares of GMO Stock which are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds or other benefits of such issuance, sale or distribution to GMO. GMO Designated Shares are created in certain circumstances when cash or other assets are transferred from Genzyme General to GMO. As of December 31, 1997 GMO had 6,000,000 Designated Shares reserved for issuance. There have been no issuances of GMO Designated Shares to date. Further disclosures relating to Genzyme Stock Options and GMO Designated Shares are included in Note K., "Stockholders' Equity" to the Consolidated Financial Statements which is incorporated herein by reference. 19 20 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE H. DIVISION EQUITY (CONTINUED) STOCK COMPENSATION PLAN The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its four stock-based compensation plans, the 1997 Equity Incentive Plan and the 1990 Equity Incentive Plan (both of which are stock option plans), the 1990 Employee Stock Purchase Plan (a stock purchase plan), and the 1988 Director Stock Option Plan and accordingly, no compensation expense has been recognized for options granted and shares purchased under the provisions of these plans for options granted with an exercise price equal to fair market value. Had compensation expense for the stock-based compensation plans been determined based on the fair value at the grant dates for options granted and shares purchased under the plans consistent with the method of SFAS 123, GMO's net loss and loss per share would have been as follows (disclosure is presented exclusively for the year ended December 31, 1997, as there were no GMO Stock options issued under the above mentioned plans prior to 1997):
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION) - ----------------------------------------------------------------------------- 1997 ------------- Net loss: As reported........................................... $(19,578) Pro forma............................................. (19,787) Basic loss per share: As reported........................................... (4.98) Pro forma............................................. (5.04) Diluted loss per share: As reported........................................... (4.98) Pro forma............................................. (5.04)
For assumptions used in the SFAS 123 calculations for GMO for the three years ended December 31, 1997, 1996 and 1995 -- see Note K., "Stockholders Equity" to the Consolidated Financial Statements which is incorporated herein by reference. The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of the effects of reported net income for future years. SFAS 123 does not apply to awards granted prior to 1995 and additional awards are anticipated in future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. In computing these pro forma amounts, GMO has assumed a risk-free interest rate equal to approximately 5.96%, expected volatility of 45%, zero dividend yields and expected lives of four years. The average fair value of the options granted during 1997 is estimated at $7.00 on the date of the grant. 20 21 GENZYME MOLECULAR ONCOLOGY NOTES TO COMBINED FINANCIAL STATEMENTS NOTE I. INCOME TAXES There was no provision for income taxes due to GMO's operating losses. As part of the Merger, GMO recorded a deferred tax liability of $7.6 million resulting from the difference between the book and tax basis of the completed technology computed at a 38% incremental tax rate. This amount will be amortized over three years consistent with the life of the completed technology. GMO recorded $1,092,000 of deferred tax benefit for the year ended December 31, 1997. The following summarizes GMO's provision for (benefit from) income taxes for the year ended December 31, 1997: (DOLLARS IN THOUSANDS) - ------------------------------------- Federal income taxes: Current............................ $ - Deferred........................... (1,006) State income taxes: Current............................ - Deferred........................... (86) ------- Total income tax benefit............. $(1,092) ======= The differences between the effective tax rates and the U.S. federal statutory tax rates for the year ended December 31, 1997 were as follows: U.S. Federal income tax statutory rate................. (35.0)% State income taxes, net of federal benefit............. (3.0) Tax credits............................................ (2.4) Nondeductible amortization............................. 6.4 Nondeductible interest ................................ 2.7 Deductions subject to deferred tax valuation allowance. 22.4 ----- Effective tax rate..................................... (8.9)% ===== At December 31, 1997 and 1996, the components of deferred tax assets and liabilities were as follows (in thousands): 1997 1996 ------- ----- Deferred tax assets: Net operating loss carryforwards......... $ 5,250 $ 572 Tax credits.............................. 459 - ------- ----- Gross deferred tax asset................. 5,709 572 Valuation allowance...................... (5,709) (572) ------- ----- Net deferred tax asset................... $ - $ - Deferred tax liabilities: Intangible amortization.................. (6,509) - ------- ----- Net deferred tax liabilities............. $(6,509) $ - ======= ===== Due to uncertainty surrounding the realization of certain favorable tax attributes, GMO placed a valuation allowance of $5.7 million for December 31, 1997 against otherwise recognizable deferred tax assets. At the time GMO recognizes these tax assets in accordance with generally accepted accounting principles, the resulting deferred tax benefits will be reflected in the tax provision for GMO. However, the benefit of these deferred tax assets has been previously allocated to Genzyme General in accordance with the management and accounting policies, and will be reflected as a reduction of GMO net income to determine net income attributable to GMO Stock. NOTE J. BENEFIT PLANS For discussion on the Company's benefit plans, see Note O., "Benefit Plans" to the Consolidated Financial Statements which is incorporated herein by reference. 21 22 GENZYME MOLECULAR ONCOLOGY REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Genzyme Corporation: We have audited the accompanying combined balance sheets of Genzyme Molecular Oncology (as described in Note A) as of December 31, 1997 and 1996, the related combined statements of operations and cash flows for each of the three years in the period ended December 31, 1997. The combined financial statements are the responsibility of Genzyme Corporation's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 Molecular Oncology present fairly, in all material respects, the financial position of Genzyme Molecular Oncology as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As more fully described in Note A to these financial statements, Genzyme Molecular Oncology is a business group of Genzyme Corporation; accordingly, the combined financial statements of Genzyme Molecular Oncology 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 February 27, 1998 22 EX-21 9 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 JURISDICTION OF NAME DIRECT PARENT OWNERSHIP INCORPORATION - ---- ------------- --------- ------------- Allston Landing Genzyme Corporation 100% Massachusetts Corporation Allston Landing Genzyme Corporation 100% Massachusetts Corporation II Deknatel Snowden Genzyme Corporation 100% Delaware Pencer, Inc. Genzyme B.V. Genzyme Corporation 100% Netherlands Genzyme GmbH Genzyme B.V. 100% Germany Genzyme Finance S.A. Genzyme B.V. 100% France Genzyme Limited Genzyme Corporation 100% U.K. Genzyme Securities Genzyme Corporation 100% Massachusetts Corporation Genzyme Transgenics Genzyme Corporation 43% Massachusetts Corporation Genzyme Virotech GmbH Genzyme Corporation 100% Germany EX-23.1 10 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329, 33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003, 333-33249, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005, 333-33251, 33-22464, 33-29440, 33-51416, 33-68186, 33-58353, 33-58355, 33-60435, 333-33291, 33-21241) and on Form S-3 (File Nos. 33-61853, 333-15597, 333-24361) of our reports, dated February 27, 1998 on our audits of the consolidated financial statements and financial statement schedule of Genzyme Corporation, the combined financial statements and financial statement schedule of Genzyme General Division, the combined financial statements and financial statement schedule of Genzyme Tissue Repair Division and the combined financial statements of Genzyme Molecular Oncology Division as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which reports are included in this Annual Report on Form 10-K/A. /s/ Coopers & Lybrand L.L.P. ------------------------------- COOPERS & LYBRAND L.L.P. Boston, Massachusetts April 27, 1998 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 Exhibit 27.1 This schedule contains financial information extracted from the Consolidated Financial Statements of Genzyme Corporation and Subsidiaries and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 102,406 51,259 130,377 12,100 139,681 456,585 496,727 111,379 1,295,453 105,763 170,276 0 0 1,015 1,011,035 1,295,453 529,927 608,841 206,028 253,317 314,444 2,835 12,667 25,729 12,100 13,629 0 0 0 13,629 1.01 0.98 The earnings per share figures prepared on this schedule represent EPS data for net income attributable to Genzyme General Division Common Stock. Genzyme Corporation reports earnings based on its three tracking stocks ("GGD Stock"), therefore consolidate earnings per share data is not applicable . For the year ended December 31, 1997, Genzyme General has net income of $77,447 and net loss per share of GGD Stock - basic and diluted of $0.01 and $0.98, respectively. Net loss for Genzyme Tissue Repair for the year ended December 31, 1997 was $245,984 or $3.07 per share of GTR Stock - basic and diluted. Net loss for Genzyme Molecular Oncology for the year ended December 31, 1997 was $19,578, or $4.98 per share of GMO Stock - basic and diluted.
EX-27.2 12 FINANCIAL DATA SCHEDULE
5 Exhibit 27.2 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS PRESENTED IN THE 1996 ANNUAL REPORT ON FORM-10K FOR GENZYME CORPORATION. U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 93,132 56,608 116,833 16,508 125,265 509,618 393,839 20,172 1,270,508 114,013 241,998 887 0 0 901,422 1,270,508 424,483 518,754 155,930 210,012 384,066 8,338 6,990 (69,622) (3,195) (72,817) 0 0 0 (72,817) (0.45) (0.45) THE COMPANY HAS TWO CLASSES OF TRACKING STOCK WHICH ARE INTENDED TO REFLECT THE VALUE AND TRACK THE PERFORMANCE OF GENZYME'S GENERAL DIVISION AND TISSUE REPAIR DIVISION. EARNINGS (LOSS) PER SHARE IS REPORTED AS ATTRIBUTABLE TO EITHER GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK") OR GENZYME TISSUE REPAIR DIVISION COMMON STOCK ("GTR STOCK"). CONSOLIDATED EPS IS NOT APPLICABLE FOR THE YEAR ENDED DECEMBER 31, 1996. THE GENERAL DIVISION REPORTED A NET LOSS OF $0.45 PER SHARE OF GGD STOCK AND GTR REPORTED A NET LOSS OF $3.38 PER SHARE OF GTR STOCK. NET LOSS PER SHARE OF GGD STOCK AND GTR STOCK, FOR THE YEAR ENDED DECEMBER 31, 1996 COMPUTED TO CONFORM TO SFAS 128 IS THE SAME ON NET LOSS PER SHARE OF GGD STOCK AND GTR STOCK AS COMPUTED UNDER APB 15 AS THE INCLUSION OF CERTAIN POTENTIALLY DILUTIVE SHARES IN THE DILUTIVE LOSS PER SHARE CALCULATION FOR STOCK WOULD HAVE BEEN ANTIDILUTIVE.
EX-27.3 13 FINANACIAL DATA SCHEDULE
5 Exhibit 27.3 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED FINANCIAL STATEMENTS OF GENZYME CORPORATION'S GENERAL DIVISION FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 103,631 105,471 94,954 7,833 52,281 370,612 391,287 63,826 854,586 62,576 126,749 0 0 312 658,969 854,586 351,603 378,563 145,101 317,539 112 1,842 1,609 65,329 21,649 43,680 0 0 0 43,680 0.79 0.68 NET INCOME PER SHARE ATTRIBUTABLE TO GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK") FOR THE YEAR ENDED DECEMBER 31, 1995 HAS BEEN RESTATED TO CONFORM TO SFAS 128. PRIMARY AND FULLY DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO GGD STOCK COMPUTED UNDER THE PROVISIONS OF APB 15 WAS HISTORICALLY REPORTED AS $0.73 AND $0.66 PER SHARE, RESPECTIVELY.
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