<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K/A
AMENDMENT NO. 2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1994 Commission File No. 0-14680
GENZYME CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 06-1047163
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE KENDALL SQUARE 02139
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(617) 252-7500
(Registrant's telephone number, including area code)
______________________
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
GENERAL DIVISION COMMON STOCK, $0.01 PAR VALUE ("GENERAL DIVISION STOCK")
TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("TR STOCK")
GENERAL DIVISION STOCK PURCHASE RIGHTS
TR STOCK PURCHASE RIGHTS
WARRANTS (DATED NOVEMBER 3 AND 10, 1989) TO PURCHASE GENERAL DIVISION
STOCK AND TR STOCK
SERIES N WARRANTS (DATED MAY 5, 1992) TO PURCHASE GENERAL DIVISION
STOCK AND TR STOCK
______________________
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 ws 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 (17 CFR 229.405) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1995: $1,055,582,472
Number of shares of the Registrant's General Division Stock outstanding
as of March 1, 1995: 26,494,931
Number of shares of the Registrant's TR Stock outstanding as of March
1, 1995: 8,681,243
______________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 18, 1995 are incorporated by reference into Part
III of this Form 10-K.
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<PAGE> 2
This report on Form 10-K/A constitutes Amendment No. 2 to the
registrant's Form 10-K for the year ended December 31, 1994. The items hereby
amended are as follows:
-- Item 6 is deleted in its entirety and replaced with the following.
-- Item 7 is deleted in its entirety and replaced with the following.
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<PAGE> 3
ITEM 6. SELECTED FINANCIAL DATA
GENZYME CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales..................... $238,969 $183,366 $139,568 $ 72,019 $ 32,057
Net service sales..................... 49,686 50,511 40,400 21,503 13,941
Revenues from research and development
contracts:
Related parties..................... 20,883 34,162 35,412 23,778 11,389
Other............................... 1,513 2,332 3,699 4,616 4,162
-------- -------- -------- -------- --------
311,051 270,371 219,079 121,916 61,549
Operating costs and expenses:
Cost of products sold................. 92,513 64,704 52,514 33,164 18,239
Cost of services sold................. 32,116 34,558 27,254 14,169 8,439
Selling, general and administrative... 85,731 78,716 59,704 39,118 23,615
Research and development (including
research and development related
to contracts)........................ 55,334 48,331 39,675 27,232 18,611
Purchase of in-process research and
development (2)...................... 11,215 49,000 51,100 - 20,783
Goodwill impairment and
restructuring costs (4).............. - 26,517 - - -
Charge for purchase options and
financing expenses (3)............... - - 16,905 - 9,050
-------- -------- -------- -------- --------
276,909 301,826 247,152 113,683 98,737
-------- -------- -------- -------- --------
Operating income (loss)................ 34,142 (31,455) (28,073) 8,233 (37,188)
Other income and (expenses):
Minority interest in net
loss of subsidiaries................. 1,659 9,892 1,678 2,362 645
Equity in loss of unconsolidated
subsidiary........................... (1,353) - - - -
Charge for impaired investments....... (9,431) (700) - - -
Settlement of lawsuit................. (1,980) - - - -
Investment income..................... 9,101 12,209 21,981 12,371 4,752
Interest expense...................... (1,354) (2,500) (7,099) (2,088) (681)
Gain on issuance of stock by IG Labs.. - - - - 7,214
Gain on sale of GENE-TRAK............. - - - 4,065 -
-------- -------- -------- -------- --------
(3,358) 18,901 16,560 16,710 11,930
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary credit.................. 30,784 (12,554) (11,513) 24,943 (25,258)
Benefit (provision) for income taxes... (14,481) 6,459 (18,804) (12,484) (730)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
credit................................ 16,303 (6,095) (30,317) 12,459 (25,988)
Extraordinary credit resulting from use
of operating loss carryforwards....... - - - 8,387 -
-------- -------- -------- -------- --------
Net income (loss)...................... $ 16,303 $ (6,095) $(30,317) $ 20,846 $(25,988)
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 4
SELECTED FINANCIAL DATA (CONTINUED)
GENZYME CORPORATION (CONTINUED)
<TABLE>
<CAPTION>
COMMON SHARE DATA: FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
APPLICABLE TO THE GENERAL
DIVISION (PRO FORMA):
Net income (loss) attributable to
General Division Stock............... $ 32,054 $ 18,020 $(29,809) $21,107 $(26,382)
======== ======== ======== ======= ========
Per common and common equivalent
share:
Income (loss) before extraordinary
credit............................. $ 1.22 $ 0.69 $ (1.33) $ 0.54 $ (1.56)
Extraordinary credit................ - - - 0.36 -
-------- -------- -------- ------- --------
Net income (loss)................... $ 1.22 $ 0.69 $ (1.33) $ 0.90 $ (1.56)
======== ======== ======== ======= ========
Weighted average number of shares
outstanding (in thousands)......... 26,169 26,250 22,370 23,554 16,910
======== ======== ======== ======= ========
APPLICABLE TO THE TISSUE REPAIR
DIVISION (PRO FORMA):
Net loss attributable to TR Stock.... $(15,751) $(24,115) $ (508) $ (261) $ 394
======== ======== ======== ======= ========
Per common share..................... $ (4.40) $ (7.43) $ (0.17) $ (0.10) $ 0.17
======== ======== ======== ======= ========
Weighted average shares outstanding.. 3,578 3,245 3,019 2,739 2,282
======== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA (1): DECEMBER 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and investments (5)............... $153,460 $168,953 $248,325 $283,473 $ 47,059
Working capital........................ 103,871 99,605 166,324 147,007 62,252
Total assets........................... 658,408 542,052 481,896 403,643 129,625
Long-term debt and capital lease
obligations excluding
current portion (6)................... 126,729 144,674 105,369 104,609 5,694
Stockholders' equity (7)............... 418,964 334,072 322,613 268,333 103,300
<FN>
There were no cash dividends paid.
________________________________
(1) In October 1992, Genzyme acquired all the outstanding common shares of
Vivigen in a transaction accounted for as a pooling of interests. Accordingly,
Genzyme's financial data has been restated to include Vivigen for all periods
presented.
(2) In 1990, 1992, 1993 and 1994, respectively, Genzyme acquired the assets
and assumed the liabilities of the Ceredase Partnership, all of the rights to
four of the Neozyme I development programs and Medix Biotech, Inc., all of the
rights to the remaining two Neozyme I development programs and all of the
outstanding stock of BioSurface Technology, Inc. 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: 1990, $20.8 million; 1992, $51.1 million; 1993, $49.0
million and 1994, $11.2 million.
(3) In 1990 and 1992, respectively, Genzyme sponsored formation of Neozyme I
and Neozyme II. In connection with these transactions, Genzyme obtained options
to acquire all of the equity of each entity under certain circumstances in
exchange for the issuance of warrants to acquire the Company's stock. The value
assigned to each option ($8.2 million for Neozyme I and $16.9 million for
Neozyme II) was charged to operations in the period each option was obtained due
to uncertainty as to Genzyme's future exercise of these options.
(4) In December 1993, the Company incurred restructuring charges of $2.8
million related to the consolidation of laboratory operations in its diagnostic
services business. Also in December 1993, the Company wrote off $23.7 million
for the value of impaired goodwill associated primarily with IG's acquisition of
GDI in 1992.
</TABLE>
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<PAGE> 5
(5) Cash and investments includes cash, cash equivalents, and short- and long-
term investments.
(6) In October 1991, Genzyme issued $100.0 million of its 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3 million.
(7) In April 1991, Genzyme completed the sale to the public of 4,025,000
shares of Genzyme Common Stock for net proceeds of $136.4 million. In December
1994, the outstanding shares of Genzyme common stock were redesignated as
General Division Common Stock on a share-for-share basis and a second class of
common stock designated as Tissue Repair Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's previous common stock held by shareholders of record on October 14,
1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock valued at
$25.3 million in connection with the acquisition of BioSurface Technology, Inc.
-5-
<PAGE> 6
SELECTED FINANCIAL DATA (CONTINUED)
GENERAL DIVISION
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (1)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales...................... $238,645 $183,366 $139,568 $ 72,019 $ 32,057
Net service sales...................... 49,686 50,511 40,400 21,503 13,941
Revenues from research and development
contracts:
Related parties...................... 20,883 29,478 32,746 21,486 10,528
Other................................ 1,513 2,332 3,699 4,616 4,162
-------- -------- -------- -------- --------
310,727 265,687 216,413 119,624 60,688
Operating costs and expenses:
Cost of products sold.................. 92,226 64,704 52,514 33,164 18,239
Cost of services sold.................. 32,116 34,558 27,254 14,169 8,439
Selling, general and administrative.... 84,767 78,015 58,881 38,296 23,521
Research and development (including
research and development related
to contracts)......................... 51,696 45,526 37,324 25,501 18,238
Purchase of in-process research and
development (2)....................... - 24,000 51,100 - 20,783
Goodwill impairment and
restructuring costs (4)............... - 26,517 - - -
Charge for purchase options
and financing expenses (3)............ - - 16,905 - 9,050
-------- -------- -------- -------- --------
260,805 273,320 243,978 111,130 98,270
-------- -------- -------- -------- --------
Operating income (loss)................. 49,922 (7,633) (27,565) 8,494 (37,582)
Other income and (expenses):
Minority interest in net loss
of subsidiaries....................... 1,659 9,892 1,678 2,362 645
Equity in loss of unconsolidated
subsidiary............................ (1,353) - - - -
Charge for impaired investments........ (9,431) (700) - - -
Settlement of lawsuit.................. (1,980) - - - -
Investment income...................... 9,072 12,209 21,981 12,371 4,752
Interest expense....................... (1,354) (2,500) (7,099) (2,088) (681)
Gain on issuance of stock by IG Labs... - - - - 7,214
Gain on sale of GENE-TRAK.............. - - - 4,065 -
-------- -------- -------- -------- --------
(3,387) 18,901 16,560 16,710 11,930
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary credit................... 46,535 11,268 (11,005) 25,204 (25,652)
Provision for income taxes.............. (16,341) (2,812) (19,007) (12,589) (730)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
credit................................. 30,194 8,456 (30,012) 12,615 (26,382)
Extraordinary credit resulting from use
of operating loss carryforwards....... - - - 8,323 -
-------- -------- -------- -------- --------
Net income (loss)....................... 30,194 8,456 (30,012) 20,938 (26,382)
Allocated tax benefit generated by
Tissue Repair Division (pro forma).... 1,860 9,564 203 169 -
-------- -------- -------- -------- --------
Net income (loss) attributable to
General Stock.......................... $ 32,054 $ 18,020 $(29,809) $ 21,107 $(26,382)
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 7
SELECTED FINANCIAL DATA (CONTINUED)
GENERAL DIVISION (CONTINUED)
<TABLE>
<CAPTION>
GENERAL DIVISION COMMON SHARE DATA: FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss) attributable
to General Stock (pro forma).......... $32,054 $18,020 $(29,809) $21,107 $(26,382)
======= ======= ======== ======= ========
Per General Division Common and common
equivalent share (pro forma):
Net income (loss) before
extraordinary credit................. $ 1.22 $ 0.69 $ (1.33) $ 0.54 $ (1.56)
======= ======= ======== ======= ========
Net income (loss)..................... $ 1.22 $ 0.69 $ (1.33) $ 0.90 $ (1.56)
======= ======= ======== ======= ========
Average shares outstanding............ 26,169 26,250 22,370 23,554 16,910
======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (1): DECEMBER 31,
-------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and investments (5)............... $128,652 $168,953 $248,325 $283,473 $ 47,059
Working capital........................ 83,314 99,503 166,101 147,007 62,252
Total assets........................... 630,144 532,357 481,896 403,643 129,625
Long-term debt and capital lease
obligations excluding
current portion (6)................... 126,555 144,674 105,369 104,609 5,694
Division equity (7).................... 395,651 324,391 322,390 268,333 103,300
<FN>
There were no cash dividends paid.
_________________
(1) In October 1992, the General Division acquired all the outstanding common
shares of Vivigen in a transaction accounted for as a pooling of interests.
Accordingly, the General Division's financial data has been restated to include
Vivigen for all periods presented.
(2) In 1990, 1992 and 1993, respectively, the General Division
acquired the assets and assumed the liabilities of the Ceredase Partnership,
all of the rights to four of the Neozyme I development programs and Medix
Biotech, Inc., and all of the rights to one of the remaining two Neozyme I
development programs. In connection with these transactions, all of which
were accounted for as purchases, the General Division charged to operations
the following amounts which represented the purchase of in-process research
and development: 1990, $20.8 million, 1992, $51.1 million and 1993, $24.0
million.
(3) In 1990 and 1992, respectively, Genzyme sponsored formation of Neozyme I
and Neozyme II. In connection with these transactions, Genzyme obtained options
to acquire all of the equity of each entity under certain circumstances in
exchange for the issuance of warrants to acquire the Company's stock. The value
assigned to each option ($8.2 million for Neozyme I and $16.9 million for
Neozyme II) was charged to operations in the period each option was obtained due
to uncertainty as to Genzyme's future exercise of these options.
(4) In December 1993, the General Division incurred restructuring charges of
$2.8 million related to the consolidation of laboratory operations in its
diagnostic services business. Also in December 1993, the General Division
wrote off $23.7 million for the value of impaired goodwill associated primarily
with IG's acquisition of GDI in 1992.
(5) Cash and investments includes cash, cash equivalents, and short- and long-
term investments.
(6) In October 1991, Genzyme issued $100.0 million of its 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3 million.
(7) In April 1991, Genzyme completed the sale to the public of 4,025,000 shares
of Genzyme Common Stock for net proceeds of $136.4 million. In December 1994,
the outstanding shares of Genzyme common stock were redesignated as General
Division Common Stock on a share-for-share basis.
</TABLE>
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<PAGE> 8
SELECTED FINANCIAL DATA (CONTINUED)
TISSUE REPAIR DIVISION
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues....................... $ 324 $ - $ - $ - $ -
Related party revenues:
Technology license fee (2)........... - 2,000 - - 549
Revenues from research and
development contracts............... - 2,684 2,666 2,291 312
-------- -------- ------ ------ ------
324 4,684 2,666 2,291 861
Operating costs and expenses:
Cost of products sold.................. 287 - - - -
Selling, general and administrative.... 964 701 823 822 94
Research and development (including
research and development
related to contracts)................. 3,638 2,805 2,351 1,730 373
Purchase of in-process research and
development (1)....................... 11,215 25,000 - - -
-------- -------- ------ ------ ------
16,104 28,506 3,174 2,552 467
-------- -------- ------ ------ ------
Operating income (loss)................. (15,780) (23,822) (508) (261) 394
Other income:
Investment income...................... 29 - - - -
-------- -------- ------ ------ ------
Income (loss) before income taxes....... (15,751) (23,822) (508) (261) 394
Benefit (provision) for income taxes.... - (38) - 50 (64)
-------- -------- ------ ------ ------
Net income (loss)....................... (15,751) (23,860) (508) (211) 330
Allocated tax benefit generated by
General Division (pro forma).......... - (255) - (50) 64
-------- -------- ------ ------ ------
Net income (loss) attributable to
TR Stock.............................. $(15,751) $(24,115) $ (508) $ (261) $ 394
======== ======== ====== ====== ======
TISSUE REPAIR DIVISION COMMON
SHARE DATA (PRO FORMA):
Net loss attributable to TR Stock...... $(15,751) $(24,115) $ (508) $ (261) $ 394
======== ======== ====== ====== ======
Per common share....................... $ (4.40) $ (7.43) $(0.17) $(0.10) $ 0.17
======== ======== ====== ====== ======
Weighted average shares outstanding.... 3,578 3,245 3,019 2,739 2,282
======== ======== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER 31,
----------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and investments................... $24,808 $ - $ - $ - $ -
Working capital........................ 20,557 - (149) - -
Total assets........................... 28,435 - - - -
Division equity (3).................... 23,313 - (149) - -
</TABLE>
There were no cash dividends paid.
-8-
<PAGE> 9
SELECTED FINANCIAL DATA (CONTINUED)
TISSUE REPAIR DIVISION (CONTINUED)
-----------
(1) In December 1993, the TR Division exercised its option to purchase the
rights to the Vianain[R] research program being funded by Neozyme I. The
transaction was accounted for as a purchase of in-process research and
development and, accordingly, the TR Division charged the $25,000,000
acquisition cost to operations in 1992.
(2) In July 1993, the TR Division received a technology license fee of
$2,000,000 from Neozyme I related to expansion of the field of the Vianain[R]
debriding product.
(3) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as General Division Common Stock on a share-for-share basis and a
second class of common stock designated as Tissue Repair Common Stock ("TR
Stock") was distributed on the basis of .135 of one share of TR Stock for each
share of Genzyme's previous common stock held by shareholders of record on
October 14, 1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock
valued at $25.3 million in connection with the acquisition of BioSurface
Technology, Inc.
-9-
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENZYME CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Genzyme created the Genzyme Tissue Repair Division ("GTR") in December
1994 by acquiring BioSurface Technology, Inc. ("BioSurface") and combining it
with several Genzyme programs and collaborations in the area of tissue repair.
GTR will develop, manufacture and market technologically advanced products for
the treatment and prevention of serious tissue damage. The remaining business
activities of Genzyme -- including therapeutics, diagnostic services,
diagnostic products and pharmaceuticals and fine chemicals -- are organized as
the Genzyme General Division (the "General Division").
In December 1994, the shareholders of Genzyme approved a
reclassification of Genzyme's common stock in which the authorized shares of
Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, Tissue Repair Division Common Stock ("TR Stock"), was created. The
General Division Stock and the TR Stock are intended to reflect the value and
track the performance of the General Division and GTR, respectively, without
diminishing the benefits of remaining a single corporation or precluding
future transactions affecting either division.
Genzyme continues to hold title to all of its assets and be responsible
for all of its liabilities and the holders of the General Division Stock and the
TR Stock have no specific claim against the assets attributed for financial
statement presentation purposes to the division whose performance is associated
with the class of stock they hold. Liabilities or contingencies of either
division that affect Genzyme's resources or financial condition could affect the
financial condition or results of operations of both divisions. Accordingly,
Genzyme's consolidated financial statements, which Genzyme provides to holders
of both classes of its common stock, should be read in conjunction with the
financial statements of the General Division or GTR, as appropriate.
Genzyme issued 5,000,000 shares of TR Stock, valued at approximately
$25.3 million and representing 50% of the initial equity of GTR, to the
stockholders of BioSurface to effect the acquisition. A total of 5,000,000
additional shares of TR Stock were either distributed to the holders of General
Division Stock on the basis of .135 of one share of TR Stock for each share of
General Division Stock held on December 16, 1994 or reserved for issuance upon
the exercise or conversion of stock options, warrants and convertible notes
outstanding on December 16, 1994.
The acquisition of BioSurface was accounted for as a purchase.
Accordingly, the associated net assets and operations of BioSurface have been
included in GTR's financial statements and in Genzyme's consolidated financial
statements since the acquisition date.
-10-
<PAGE> 11
RESULTS OF OPERATIONS
1994 AS COMPARED TO 1993
Total revenues for 1994 were $311.0 million, an increase of 15% over
1993. Product and service revenues were $288.7 million, an increase of 23% over
1993. Product revenues increased 30% to $239.0 million reflecting sales
increases of 39%, 10% and 17%, respectively, in the Therapeutic, Diagnostic
Products and Pharmaceutical/Fine Chemical ("PFC") product lines. The increase in
sales of Therapeutic products resulted primarily from increased shipments of
Ceredase[R] enzyme, for which the rate of new patient accruals more than offset
dosage reductions, and the market introduction, in 1994, of Cerezyme[TM] enzyme,
the recombinant form of Ceredase[R] enzyme. Genzyme's results of operations are
highly dependent on sales of these products. Related sales increased 39% to
$172.0 million and represented 72% of consolidated product sales in 1994
compared to 68% in 1993. The increase in Diagnostic Products' sales resulted
from increases in sales of immunobiological products, 1994 revenues associated
with a European company acquired in April 1993, and a more than doubling in
revenues from sales of Direct LDL tests. The increase in PFC sales resulted from
the operations of a Swiss company acquired in July 1994. Service revenues for
1994 declined 2% to $49.7 million from $50.5 million for 1993. The drop in
service revenue resulted from declines in identity testing revenues due
primarily to the loss of four state paternity contracts in mid-1993 and the
impact of increasing price pressures on public paternity testing. The Medical
testing business also experienced increased price competition due to increases
in the number of HMO contracts, although year-to-year revenues remained steady.
International sales represented approximately 37% of product sales in
1994 compared with 29% in 1993. This increase was due primarily to a 90%
increase in the combined international sales of Ceredase[R]/Cerezyme[TM]
enzyme. International sales are expected to account for a higher proportion of
sales in the future due to increased international marketing efforts in all
areas of Genzyme's business, as well as the impact of expansion through
acquisitions of European operations such as those in 1993 and 1994. As the
Company's presence in foreign markets increases, Genzyme will experience
increasing exposure to currency fluctuations which it will attempt to minimize
through asset and cash management strategies.
Revenue from research and development contracts for 1994 was $22.4
million, a decrease of 39% from 1993. In 1993, Neozyme Corporation ("Neozyme I")
and the Surgical Aids Partnership (the "Partnership") provided revenues to
Genzyme of $11.0 million and $8.4 million, respectively. Neozyme I, an
independent public company formed in 1990 to fund accelerated research on
products at Genzyme, wound up its business and terminated this funding to
Genzyme at the end of 1993 when Genzyme purchased the remainder of Neozyme I's
technology. The Partnership, which funds development of the HAL[TM] products,
exhausted the funds it had available for this purpose during the first quarter
of 1994. Revenues from Neozyme II Corporation ("Neozyme II"), an independent
public company formed in 1992 to fund the development, at Genzyme, of treatments
for cystic fibrosis, increased 42% to $17.8 million for 1994 due primarily to
increased activity relating to collaborations with third parties that began in
1993 as well as increased efforts internally.
Gross margins for 1994 were 57%, as compared to 58% for 1993. 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 1994 declined to 61% from 65% in 1993
due primarily to lower margins on Ceredase[R] enzyme as a result of the higher
cost of purchased material beginning in the second quarter of 1994. Service
margins for 1994 increased to 35% from 32% on slightly lower sales volumes due
primarily to economies achieved in the consolidation of testing activities.
Selling, general and administrative expenses for 1994 were $85.7
million, an increase of 9% over 1993. The increase was due primarily to
increased staffing in
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support of the growth in several product lines and to the ongoing operating
expenses associated with various operations acquired in 1993 and 1994.
Research and development expenses for 1994 were $55.3 million, an
increase of 14% over 1993 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the HAL[TM] products after
the exhaustion of the Partnership's funding and the Neozyme I programs acquired
at the end of 1993.
In 1994, several transactions resulted in Genzyme recording unusual
charges totaling $22.6 million before taxes. In December, Genzyme charged $11.2
million to operations for in-process research and development purchased in
connection with the BioSurface acquisition, charged $9.4 million for the
write-off of impaired value of certain equity investments and settled a lawsuit
for $2.0 million.
Investment income for 1994 totaled $9.1 million, compared with $12.2
million for 1993. The decrease resulted from lower average cash and investment
balances. Investment income for 1994 and 1993 included gains of $1.4 million
and $1.6 million, respectively, on the sales of securities, the majority of
which occurred in the first quarter of each period.
Interest expense for 1994 was $1.4 million, net of capitalized interest
of $9.2 million. Interest relating to Genzyme's 6 3/4% convertible subordinated
notes was $6.7 million in each period. Interest on a December 1993 $39.0 million
secured loan, which was outstanding throughout 1994 and repaid in January 1995,
was $1.8 million for 1994. Genzyme also incurred interest expense in 1994 of
$0.9 million related to a $21.5 million mortgage loan used to acquire real
property in the second quarter of 1994.
The tax provision for 1994 varies from the U.S. Statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate for 1994 was 47%, in part due to the
non- deductibility of the $11.2 million charge for in-process research and
development, as compared to a 51% benefit for 1993. The remainder of the
increase was due to changes in U.S. versus foreign taxable income and to the
lower proportion of tax exempt securities in the investment portfolio.
1993 AS COMPARED TO 1992
Genzyme's total revenue for 1993 was $270.4 million, an increase of 23%
from 1992.
Revenues from product sales in 1993 increased $43.8 million or 31% to
$183.4 million. Therapeutic revenues were $125.7 million, up 34% from 1992
primarily due to increased sales of Ceredase[R] enzyme. For 1993, these sales
totaled $123.9 million (68% of consolidated product sales in 1993 and 1992).
Diagnostic product revenues were $42.8 million in 1993, an increase of 28% over
1992 due primarily to revenues from two companies acquired in 1993 and a full
year of revenues from a company acquired in 1992. Genzyme's pharmaceutical and
fine chemical revenues were $14.8 million in 1993, an increase of 21% from 1992
due to increased sales of existing products and continued development of custom
products for new customers. Revenues from diagnostic services were $50.5 million
in 1993, an increase of $10.1 million, or 25%, over 1992. The increase was due
to a full year of revenues from a paternity testing business acquired in mid
1992 and the addition of new accounts and the application of new technology to
prenatal genetic testing.
International sales represented approximately 29% of product sales in
1993 compared with 17% in 1992 due primarily to a 278% increase in international
sales of Ceredase[R] enzyme.
Combined research and development revenues decreased 7% to $36.5 million
in 1993. The decrease resulted primarily from the inclusion in 1992 of a $5.0
million one-time license fee from Neozyme II.
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Total operating expenses were $226.3 million in 1993 (net of unusual
charges of $75.5 million, described below) as compared to $179.1 million (net of
unusual charges of $68.0 million, described below) in 1992, an increase of 26%.
The cost of products sold increased 23% to $64.7 million on a sales increase of
31%. The cost of services increased 27% to $34.6 million on a revenue increase
of 25%. Consequently, combined gross margin improved during 1993 to 58% versus
56% in 1992. Gross margin increased in 1993 due to a higher proportion of sales
of higher margin products, most notably Ceredase[R] enzyme. Selling, general and
administrative expenses increased 32% to $78.7 million in 1993. This increase
funded expanded efforts to support the increasing sales and business activity
for each of Genzyme's product lines, including Ceredase[R] enzyme, and ongoing
costs associated with the operations of the two diagnostic products companies
acquired during 1993. A portion of the increase also represented a full year of
costs associated with the operations of two 1992 acquisitions. Research and
development expenses increased 22% to $48.3 million due to the increased efforts
on behalf of Neozyme II and the Surgical Aids Partnership and due to expanded
clinical testing activities.
Investment income for 1993 decreased 44% from 1992 to $12.2 million,
which included $1.6 million of realized gains from the sale of securities. The
decrease resulted from lower average cash balances due to increased capital
spending, and a 1992 realized gain of approximately $4.6 million from the sale
of securities. Interest expense, net of amounts capitalized into manufacturing
construction projects, decreased 65% to $2.5 million.
In 1993, several transactions resulted in Genzyme recording unusual
charges totaling $75.5 million before taxes. In December, Genzyme completed the
purchase of the technology in the two remaining Neozyme I development programs
for $49.0 million in cash. Also in December, Genzyme incurred restructuring
charges of $2.8 million and wrote off $23.7 million to reduce the carrying value
of intangibles in the Diagnostic Services business. The majority of the
write-off ($21.9 million) related to the goodwill recorded in connection with
the acquisition of a paternity testing business in mid 1992. The write-off was
based on an analysis of that business which indicated that the environment for
public paternity testing had changed significantly since the acquisition, and
therefore called into question the carrying value of the acquisition-related
goodwill. The business review disclosed the development of a competitive
environment which emphasized cost rather than service and performance, intense
price competition from a major competitor, a general reduction in the ordering
of identity tests due to governmental budgetary restrictions and uncertainties
as to the level of federal funding of state testing activities, a cost structure
at the Company which made it difficult for it to continue as an effective
competitor in a slow-growth, cost-driven environment and the decreased
likelihood of sufficient support in Congress for passage of additional social
legislation which would significantly increase federal funding of state testing
activities. These changed circumstances resulted in a determination to reduce
the carrying value of the goodwill to zero at the end of 1993. The remaining
$1.8 million of write-offs consisted of patent rights and other intangible
assets related to earlier acquisitions. In the fourth quarter of 1993, Genzyme
incurred restructuring charges of $2.8 million related to the consolidation of
laboratory operations in its Diagnostic Services business. The expenses were
related to severance of $1.2 million for an estimated 45 employees; lease costs
of $0.8 million; equipment movement and disposal costs of $0.2 million; costs
incurred to restructure Genzyme's paternity product line of $0.2 million; and
other costs of $0.4 million. All costs were cash expenditures in 1994. The
restructuring plan was undertaken to consolidate lab testing services into
Genzyme's most cost-effective testing locations, transfer accounting functions
to division headquarters and streamline the paternity product line.
In 1992, Genzyme recorded unusual charges totaling $68.0 million. In May,
in connection with the unit offering by Genzyme and Neozyme II, Genzyme wrote
off $16.9 million, the value of its option to purchase all of Neozyme II's
callable common stock due to the uncertainty as to Genzyme's future exercise of
the option. In December, Genzyme completed the purchase of four of the Neozyme
I development
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programs. The purchase price of the Neozyme I programs, $49.0 million, and
$2.1 million of purchased technology in connection with a 1993 acquisition were
charged to operations as in-process research and development.
Genzyme's effective tax rate was a 51% benefit in 1993 compared to a
163% expense in 1992. The rate reduction resulted primarily from the effects of
the unusual charges described above. Excluding these unusual charges, Genzyme
would have had a tax rate of 27% and 33% in 1993 and 1992, respectively. In
January 1993, Genzyme adopted Statement of Financial Accounting Standard No. 109
("FAS 109") which requires the use of the asset and liability approach for
accounting for income taxes. Genzyme elected to apply the provisions of FAS 109
retroactively to January 1, 1992 and the adoption had no significant impact on
the previously reported results of operations.
LIQUIDITY AND FINANCIAL RESOURCES
Genzyme has historically financed its research and development from R&D
contracts, its operations from product sales and equity financing and its
capital requirements from equity financing and convertible debt. In 1994,
although funding from R&D contracts declined 39%, Genzyme generated $33.0
million of working capital from operations. In addition, the turnover of the
investment portfolio provided $55.6 million of working capital and proceeds from
the exercise of stock options and warrants provided $45.9 million, of which $39
million resulted from the exercise of warrants to purchase common stock at $19
per share that expired December 31, 1994. Genzyme also incurred borrowings of
$21.5 million to acquire real estate.
As of December 31, 1994, Genzyme had liquid assets, consisting of cash,
cash equivalents and short-term investments in marketable securities, totaling
$76.6 million including $39.0 million which was used to repay bank debt in
January 1995. Long-term investments at December 31, 1994 were $76.8 million.
Primary uses of cash in 1994 included spending, primarily for manufacturing
capacity, of $78.8 million, the purchase of real property for $22.9 million, and
an investment of $10.0 million in the stock of a company in collaboration with
Genzyme.
As of December 31, 1994, Genzyme had accounts receivable of $78.1
million, an increase of $13.4 million from December 31, 1993, due primarily to
the growth in sales of its Ceredase[R] enzyme and the 1994 market introduction
of Cerezyme[TM] enzyme. Inventories increased $13.6 million, or 59%, to $36.8
million as of December 31, 1994. The increase was due primarily to $2.2 million
of inventory obtained through acquisitions, $3.2 million representing the
increase in Ceredase[R] enzyme raw material cost and the remainder in support of
increased business operations.
Genzyme holds an option to purchase all of the outstanding Neozyme II
callable common stock at prices which increase monthly from $200.4 million at
January 1, 1995, to $282.6 million at December 31, 1996. In addition, Genzyme
holds an option to acquire all of the partnership interests in the Surgical Aids
Partnership for approximately $26 million plus a continuing royalty payment for
a period of ten years on certain sales of products developed by the Partnership.
Genzyme has a contingent obligation to provide working capital to a joint
venture established between the Partnership and Genzyme to commercialize the
Partnership's products. The extent of that contingent obligation cannot be
measured at this time. Genzyme's decisions regarding future exercise of these
options likely will be based, in part, on the progress in the development work
conducted for each and Genzyme's evaluation of the potential commercial success
of each compared to the costs of the option. The timing of any decision
regarding the Neozyme II option exercise is likely to be influenced by the fact
that the price increases periodically until termination, and by the rate of
depletion of research and development funds. The exercise prices for the
purchase options are payable in cash, common stock or a combination of the two,
as determined by Genzyme at the time each option is exercised. Genzyme currently
does not have sufficient cash to pay the exercise prices of these options and
payments in General Division Stock would result in substantial dilution to the
holders of General Division Stock. (See "Notes to Consolidated Financial
Statements").
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<PAGE> 15
The available research and development funds in the Surgical Aids
Partnership were fully expended in the first quarter of 1994 and Genzyme is not
obligated to provide additional funding. Although Genzyme is not otherwise
contractually required to do so, in January 1994, it agreed to continue funding
the development of the HAL[TM] products on behalf of the Partnership in part to
delay accelerated termination of its option to purchase the partnership
interests due to exhaustion of the Partnership's funds. This agreement, which
covered the twelve-month period starting in March 1994, was renewed by Genzyme
in January 1995 for the period through March 31, 1996. Genzyme expended $6.5
million in 1994 and expects to spend approximately $5.9 million on the
Partnership's development programs in 1995.
Genzyme expects that its available cash, investments and cash flow from
research contracts and product and service sales will be sufficient to finance
its planned operations and capital requirements for at least the next two
years. Although Genzyme currently has substantial cash resources, it has
committed to utilize a portion of its resources for certain purposes, such as
completing validation of the manufacturing facility in Boston, Massachusetts,
completing its commitment to develop manufacturing capacity sufficient to meet
the requirements for commercialization of the Partnership's products, making
certain payments to third parties in connection with strategic collaborations
and making the final payment for a company acquired in 1994. In addition,
working capital and other capital requirements may change because of
unanticipated changes in business conditions, and such other considerations as
expansion of operations, results of research and development activities,
competitive and technological developments, the timing and costs of obtaining
required regulatory approvals for new products and future acquisitions of
technology and/or product rights. As a result, Genzyme may have to obtain
additional financing. There can be no assurance that such financing will be
available on acceptable terms.
FACTORS AFFECTING FUTURE OPERATING RESULTS
DEPENDENCE ON CEREDASE [R] ENZYME
Genzyme's results of operations are highly dependent upon the sales of
Ceredase[R]/Cerezyme[TM] enzyme. For 1994, these sales totaled $172.0 million as
compared to $123.9 million in 1993. Genzyme produces Ceredase[R] enzyme from an
extract of human placental tissue supplied by a French company that is the only
significant commercial source of this material. During 1994, Genzyme
experienced a major increase in the cost of the raw material used to produce
Ceredase[R] enzyme when its French supplier raised its prices to Genzyme by
approximately $20 million per year. To achieve a partial recovery of the cost
increase, Genzyme, early in 1994, increased the price of Ceredase[R] enzyme.
The supply of starting material available for the production of
Ceredase[R] enzyme effectively limits the amount of product that can be
produced. During 1994, Genzyme and its French supplier were successful in
improving the yield of enzyme obtained from the starting material thereby
increasing the amount of product which could be produced. Nonetheless, the
current supply available is not sufficient to produce enough Ceredase[R] enzyme
to supply all present patients. Any disruption in the supply or manufacturing
process of Ceredase[R] enzyme may have a material adverse effect on revenue in
any period.
To address supply constraints, Genzyme has developed Cerezyme[TM]
enzyme, a recombinant form of the enzyme. In 1994, Genzyme received approval to
market this product in the U.S. and Israel and currently is working to expedite
the foreign approvals needed to market Cerezyme[TM] enzyme elsewhere abroad.
Manufacturing capacity constraints on Cerezyme[TM] enzyme, presently produced in
Genzyme's small scale cell culture plant, will limit the availability of the
product for new patients pending receipt of regulatory approval to use Genzyme's
large scale mammalian cell culture manufacturing plant in Boston, Massachusetts
for production of Cerezyme[TM] enzyme.
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<PAGE> 16
OPERATING LOSSES
GTR is expected to experience significant operating losses at least for
the next several years as the CarticelSM service is launched and as its research
and development and clinical trial programs expand. There can be no assurance
that GTR ever will achieve a profitable level of operations or that
profitability, if achieved, can be sustained on an ongoing basis. In addition,
under the management and accounting policies adopted by the Genzyme Board of
Directors, to the extent GTR is unable to utilize its operating losses to reduce
its current or deferred income tax expense, the tax benefit from such losses may
be reallocated to the General Division on a quarterly basis if the General
Division can utilize such losses to offset current or deferred tax expense.
Accordingly, any such losses that cannot be utilized by GTR will not be carried
forward to reduce GTR's taxes payable in the future. This could result in GTR
recognizing more tax expense in the future than would have been required if GTR
had retained its losses in the form of a NOL carryforward.
FLUCTUATION IN QUARTERLY RESULTS
Revenues realized from the sale of Epicel[TM] skin grafts ("Epicel[TM]")
are dependent on many factors, including the number of burn center personnel who
have been trained in the use of Epicel[TM], the accepted medical practices
regarding the appropriate utilization of Epicel[TM] as the treatment for severe
burns and the number and survival rate of patients for which Epicel[TM] is the
indicated treatment. The number of severe burns for which Epicel[TM] is the
indicated treatment and the mortality rate of patients with severe burns are
unpredictable and can result in substantial fluctuations in GTR's revenues from
quarter to quarter. Since the production of Epicel[TM] requires GTR to maintain
extensive tissue culture facilities and a staff of trained personnel, 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.
POTENTIAL COMPENSATION EXPENSE RESULTING FROM STOCK OPTION PRICING
As of December 16, 1994, Genzyme granted initial options to purchase a
total of 878,326 shares of TR Stock to employees of GTR, employees of Genzyme
who devote a substantial portion of their efforts to GTR and officers of
Genzyme. These options have an exercise price equal to the lower of $4.75 or
the closing price of TR Stock on June 16, 1995, are exercisable 20% on the
effective date of the grant and 20% on each of the next four anniversaries
thereof and have a term of ten years.
If the closing price of TR Stock on June 16, 1995 is higher than $4.75,
GTR will record compensation expense measured by the difference between the
stock prices times 878,326. GTR would expect to record that charge over the
period of service of the optionholders, which is expected to coincide with the
four year vesting period.
LEGISLATIVE ACTIVITY
Ceredase[R] enzyme, Cerezyme[TM] enzyme and Genzyme products under
development have been granted orphan drug designation under the Orphan Drug Act
which grants exclusive marketing rights within the United States for seven years
from the date of FDA commercial approval. Periodically, legislation is proposed
before the United States Congress to amend the Orphan Drug Act to reduce the
seven-year exclusive marketing period under certain circumstances. Such
proposed legislation would not be expected to affect Genzyme's market
exclusivity for Ceredase[R] enzyme and Cerezyme[TM] enzyme but could reduce the
market exclusivity period for future products. However, the legislative outcome
is uncertain and its effect on Genzyme cannot be determined at this time.
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<PAGE> 17
RISKS IN PRODUCT DEVELOPMENT
Product development involves a high degree of risk, and returns to
investors are dependent upon successful development of Genzyme's products. There
can be no assurance that development of any product will be successfully
completed or that FDA approval of any of Genzyme's products will be obtained.
In addition, because of the length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, Genzyme places considerable importance on obtaining patent and
trade secret protection for its significant technologies, products and
processes. There can be no assurance that any patent applications filed by
Genzyme will mature into issued patents. Furthermore, even if such patents are
issued, there can be no assurance that Genzyme's patent claims will offer
protection against competition, or will not be designed around or infringed upon
by others.
GTR's future success will be largely dependent upon its ability to
develop, manufacture and market its products under development, in addition to
continuing to sell Epicel[TM]. Several of GTR's products are in an early stage
of development. Other GTR products including Acticel[TM], CarticelSM cartilage
repair products, TGF-[Greek letter beta]2, and Vianain[R], are currently in
clinical trials to test safety and efficacy in humans for various conditions.
There can be no assurance that clinical testing of these products will be
completed successfully within any specified time period, if at all, or that
GTR will not encounter problems in clinical trials that will cause a delay or
suspension of clinical trials. There can also be no assurance that such
testing will ultimately show these products to be safe or effective in
treating the condition for which each is being tested.
RISKS INHERENT IN INTERNATIONAL OPERATIONS
Foreign operations of Genzyme accounted for 37% of net product sales in
1994 as compared to 29% and 17% in 1993 and 1992, respectively. In addition,
Genzyme has direct investments in ten subsidiaries and branches in foreign
countries (primarily in Europe and Japan) and purchases certain raw materials
from a European supplier.
Financial results of Genzyme could be adversely or beneficially affected
by fluctuations in foreign exchange rates. Fluctuations in the value of foreign
currencies affect the U.S. dollar value of Genzyme's net investment in foreign
subsidiaries, with related effects included in a separate component of
Stockholders' equity. Operating results of foreign subsidiaries are translated
into U.S. dollars at average monthly exchange rates. In addition, the U.S.
dollar value of transactions based in foreign currency (collections on foreign
sales or payments for foreign purchases) also fluctuates with exchange rates.
The largest foreign currency exposure results from activity in British pounds,
French francs, Swiss francs, Dutch guilders, German marks, Japanese yen and
Italian lire.
Genzyme's long-term operating strategies are formulated to minimize the
impact of foreign currency fluctuations on non U.S. dollar-denominated
purchases and sales. Genzyme manages its foreign exchange exposure primarily by
entering into forward contracts with banks to the extent that the timing of the
currency flows can reasonably be anticipated and by offsetting matching foreign
currency-denominated assets with foreign currency-denominated liabilities.
Genzyme does not hedge net foreign investments. Genzyme has no material unhedged
monetary assets, liabilities or commitments denominated in foreign currencies.
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<PAGE> 18
GENZYME GENERAL DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Genzyme created the Genzyme Tissue Repair Division ("GTR") in December
1994 by acquiring BioSurface Technology, Inc. ("BioSurface") and combining it
with several Genzyme programs and collaborations in the area of tissue repair.
GTR will develop, manufacture and market technologically advanced products for
the treatment and prevention of serious tissue damage. The remaining business
activities of Genzyme -- including therapeutics, diagnostic services,
diagnostic products and pharmaceuticals and fine chemicals -- are organized as
the Genzyme General Division (the "General Division").
In December 1994, the shareholders of Genzyme approved a
reclassification of Genzyme's common stock in which the authorized shares of
Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, Tissue Repair Division Common Stock ("TR Stock"), was created (the
"Genzyme Stock Proposal"). The General Division Stock and the TR Stock are
intended to reflect the value and track the performance of the General Division
and GTR, respectively, without diminishing the benefits of remaining a single
corporation or precluding future transactions affecting either division.
Genzyme continues to hold title to all of its assets and be responsible
for all of its liabilities and the holders of the General Division Stock and
the TR Stock have no specific claim against the assets attributed for financial
statement presentation purposes to the division whose performance is associated
with the class of stock they hold. Liabilities or contingencies of either
division that affect Genzyme's resources or financial condition could affect
the financial condition or results of operations of both divisions.
Accordingly, Genzyme's consolidated financial statements, which Genzyme
provides to holders of both classes of its common stock, should be read in
conjunction with the financial statements of the General Division or GTR, as
appropriate.
Genzyme issued 5,000,000 shares of TR Stock, valued at approximately
$25.3 million and representing 50% of the initial equity of GTR, to the
stockholders of BioSurface to effect the acquisition. A total of 5,000,000
additional shares of TR Stock were either distributed to the holders of General
Division Stock on the basis of .135 of one share of TR Stock for each share of
General Division Stock held on December 16, 1994 or reserved for issuance upon
the exercise or conversion of stock options, warrants and convertible notes
outstanding on December 16, 1994.
The acquisition of BioSurface was accounted for as a purchase.
Accordingly, the associated net assets and operations of BioSurface have been
included in GTR's financial statements and in Genzyme's consolidated financial
statements since the acquisition date.
The following discussion is a summary of the key factors management
considers necessary in reviewing the General Division's results of operations,
liquidity and capital resources. This discussion should be read in conjunction
with the financial statements and related notes of Genzyme.
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RESULTS OF OPERATIONS
1994 AS COMPARED TO 1993
Total revenues for 1994 were $310.7 million, an increase of 17% over
1993. Product and service revenues were $288.3 million, an increase of 23% over
1993. Product revenues increased 30% to $238.6 million reflecting sales
increases of 39%, 10% and 17%, respectively, in the Therapeutic, Diagnostic
Products and Pharmaceutical/Fine Chemical ("PFC") product lines. The increase in
sales of Therapeutic products resulted primarily from increased shipments of
Ceredase[R] enzyme, for which the rate of new patient accruals more than offset
dosage reductions, and the market introduction, in 1994, of Cerezyme[TM] enzyme,
the recombinant form of Ceredase[R] enzyme. The General Division's results of
operations are highly dependent on these products. Related sales increased 39%
to $172.0 million and represented 72% of consolidated product sales in 1994
compared to 68% in 1993. The increase in Diagnostic Products' sales resulted
from increases in sales of immunobiological products, 1994 revenues associated
with a European company acquired in April 1993, and a more than doubling in
revenues from sales of Direct LDL tests. The increase in PFC sales resulted from
the operations of a Swiss company acquired in July 1994. Service revenues for
1994 declined 2% to $49.7 million from $50.5 million for 1993. The drop in
service revenue resulted from declines in identity testing revenues due
primarily to the loss of four state paternity contracts in mid-1993 and the
impact of increasing price pressures on public paternity testing. Medical
testing also experienced increased price competition due to increases in the
number of HMO contracts, although year-to-year revenues remained steady.
International sales represented approximately 37% of product sales in
1994 compared with 29% in 1993. This increase was due primarily to a 90%
increase in the combined international sales of Ceredase[R]/Cerezyme[TM]
enzyme. International sales are expected to account for a higher proportion of
sales in the future due to increased international marketing efforts in all
areas of the General Division's business, as well as the impact of expansion
through acquisitions of European operations such as those in 1993 and 1994. As
the Company's presence in foreign markets increases, the General Division will
experience increasing exposure to currency fluctuations which it will attempt to
minimize through asset and cash management strategies.
Revenue from research and development contracts for 1994 was $22.4
million, a decrease of 30% from 1993. In 1993, Neozyme Corporation ("Neozyme I")
and the Surgical Aids Partnership (the "Partnership") provided revenues to the
General Division of $6.3 million and $8.4 million, respectively. Neozyme I, an
independent company formed in 1990 to fund accelerated research on products at
Genzyme, wound up its business and terminated this funding at the end of 1993
when the General Division purchased the technology in one of its remaining
products. The Partnership, which funds development of the HAL[TM] products,
exhausted the funds it had available for this purpose during the first quarter
of 1994. Revenues from Neozyme II Corporation ("Neozyme II"), an independent
public company formed in 1992 to fund the development, at Genzyme, of treatments
for cystic fibrosis, increased 40% to $17.8 million for 1994 due primarily to
increased activity relating to collaborations with third parties that began in
1993 along with increased efforts internally.
Gross margins for 1994 were 57%, as compared to 58% for 1993. The
General Division 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 1994 declined to 61%
from 65% in 1993 due primarily to lower margins on Ceredase[R] enzyme as a
result of the higher cost of purchased material beginning in the second quarter
of 1994. Service margins for 1994 increased to 35% from 32% on slightly lower
sales volumes due primarily to economies achieved in the consolidation of
testing activities.
Selling, general and administrative expenses for 1994 were $84.8
million, an increase of 9% over 1993. The increase was due primarily to
increased staffing in
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<PAGE> 20
support of the growth in several product lines and to the ongoing operating
expenses associated with various operations acquired in 1993 and 1994.
Research and development expenses for 1994 were $51.7 million, an
increase of 14% over 1993 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the HAL[TM] products after
the exhaustion of the Partnership's funding and a Neozyme I program acquired at
the end of 1993.
In 1994, two transactions resulted in the General Division recording
unusual charges totaling $11.4 million before taxes. In December, the General
Division charged $9.4 million for the write-off of impaired value of certain
equity investments and settled a lawsuit for $2.0 million.
Investment income for 1994 totaled $9.1 million, compared with $12.2
million for 1993. The decrease resulted from lower average cash and investment
balances. Investment income for 1994 and 1993 included gains of $1.4 million
and $1.6 million, respectively, on the sales of securities, the majority of
which occurred in the first quarter of each period.
Interest expense for 1994 was $1.4 million, net of capitalized interest
of $9.2 million. Interest relating to the General Division's 6 3/4% convertible
subordinated notes was $6.7 million in each period. Interest on a December 1993
$39.0 million secured loan, which was outstanding throughout 1994 and repaid in
January 1995, was $1.8 million for 1994. The General Division also incurred
interest expense in 1994 of $0.9 million related to a $21.5 million mortgage
loan used to acquire real property in the second quarter of 1994.
The tax provision for 1994 varies from the U.S. Statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate was 35% for 1994 as compared to 25% for
1993. The increase was due to changes in U.S. versus foreign taxable income, to
the lower proportion of tax exempt securities in the investment portfolio and to
certain charges recorded in 1994 for which the General Division received no tax
benefit. The allocated tax benefit of $1.9 million generated by GTR reduced the
General Division's tax rate to 31%.
1993 AS COMPARED TO 1992
The General Division's total revenue for 1993 was $265.7 million, an
increase of 23% from 1992.
Revenues from product sales in 1993 increased $43.8 million or 31% to
$183.4 million. Therapeutic revenues were $125.7 million, up 34% from 1992
primarily due to increased sales of Ceredase[R] enzyme. For 1993, these sales
totaled $123.9 million (68% of consolidated product sales in 1993 and 1992).
Diagnostic product revenues were $42.8 million in 1993, an increase of 28% over
1992 due primarily to the revenues from two companies acquired in 1993 and a
full year of revenues from a company acquired in 1992. The General Division's
pharmaceutical and fine chemical revenues were $14.8 million in 1993, an
increase of 21% from 1992 due to increased sales of existing products and
continued development of custom products for new customers. Revenues from
diagnostic services were $50.5 million in 1993, an increase of $10.1 million, or
25%, over 1992. The increase was due to a full year of revenues from a paternity
testing business acquired in mid 1992 and the addition of new accounts and the
application of new technology to prenatal genetic testing.
International sales represented approximately 29% of product sales in
1993 compared with 17% in 1992 due primarily to a 278% increase in international
sales of Ceredase[R] enzyme.
Combined research and development revenues decreased 13% to $31.8
million in 1993. The decrease resulted primarily from the inclusion in 1992 of a
$5.0 million one-time license fee from Neozyme II.
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Total operating expenses in 1993 were $222.8 million (net of unusual
charges of $50.5 million, described below) as compared to $176.0 million (net of
unusual charges of $68.0 million, described below) in 1992, an increase of 27%.
The cost of products sold increased 23% to $64.7 million on a sales increase of
31%. The cost of services increased 27% to $34.6 million on a revenue increase
of 25%. Consequently, combined gross margin improved during 1993 to 58% versus
56% in 1992. Gross margin increased in 1993 due to a higher proportion of sales
of higher margin products, most notably Ceredase[R] enzyme. Selling, general and
administrative expenses increased 32% to $78.0 million in 1993. This increase
funded expanded efforts to support the increasing sales and business activity
for each of the General Division's product lines, including Ceredase[R] enzyme,
and ongoing costs associated with the operations of the two diagnostic products
companies acquired during 1993. A portion of the increase also represented a
full year of costs associated with the operations of two 1992 acquisitions.
Research and development expenses increased 22% to $45.5 million due to the
increased efforts by the General Division on behalf of Neozyme II and the
Surgical Aids Partnership and expanded clinical testing activities.
Investment income for 1993 decreased 44% from 1992 to $12.2 million,
which included $1.6 million of realized gains from the sale of securities. The
decrease resulted from lower average cash balances due to increased capital
spending, and a 1992 realized gain of approximately $4.6 million from the sale
of securities. Interest expense, net of amounts capitalized into manufacturing
construction projects, decreased 65% to $2.5 million.
In 1993, several transactions resulted in the General Division
recording unusual charges totaling $50.5 million before taxes. In December, the
General Division completed the purchase of the fetal cell separation technology
from Neozyme I for $24.0 million in cash. Also in December, the General
Division incurred restructuring charges of $2.8 million and wrote off $23.7
million to reduce the carrying value of intangibles in the Diagnostic Services
business. The majority of the write-off ($21.9 million) related to the goodwill
recorded in connection with the acquisition of a paternity testing business in
mid 1992. The write-off was based on an analysis of that business which
indicated that the environment for public paternity testing had changed
significantly since the acquisition, and therefore called into question the
carrying value of the acquisition-related goodwill. The remaining $1.8 million
of write-offs consisted of patent rights and other intangible assets related to
earlier acquisitions. In the fourth quarter of 1993, the General Division
incurred restructuring charges of $2.8 million related to the consolidation of
laboratory operations in its Diagnostic Services business. The expenses were
related to severance of $1.2 million for an estimated 45 employees; lease costs
of $0.8 million; equipment movement and disposal costs of $0.2 million; costs
incurred to restructure the General Division's paternity product line of $0.2
million; and other costs of $0.4 million. All costs were cash expenditures in
1994. The restructuring plan was undertaken to consolidate lab testing
services into the General Division's most cost-effective testing locations,
transfer accounting functions to the Diagnostic Services headquarters and
streamline the paternity product.
In 1992, the General Division recorded unusual charges totaling $68.0
million. In May, in connection with the unit offering by the General Division
and Neozyme II, the General Division wrote off $16.9 million, the value of its
option to purchase all of Neozyme II's callable common stock due to the
uncertainty as to the General Division's future exercise of the option. In
December, the General Division completed the purchase of four of the Neozyme I
development programs. The purchase price of the Neozyme I programs, $49.0
million, and $2.1 million of purchased technology in connection with a 1993
acquisition were charged to operations as in-process research and development.
The General Division's effective tax rate was 25% in 1993 compared to
173% in 1992. The rate reduction resulted primarily from the effects of the
unusual charges described above. Excluding these unusual charges, the General
Division would have
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had an effective tax rate of 28% and 33% in 1993 and 1992, respectively. In
January 1993, the General Division adopted Statement of Financial Accounting
Standard No. 109 ("FAS 109") which requires the use of the asset and liability
approach for accounting for income taxes. The General Division elected to apply
the provisions of FAS 109 retroactively to January 1, 1992 and the adoption had
no significant impact on the previously reported results of operations. The
effective tax rates for 1993 and 1992, after the allocated tax benefit (pro
forma) of $9.6 million and $0.2 million, respectively, generated by GTR was a
60% benefit and 171% expense.
LIQUIDITY AND FINANCIAL RESOURCES
A portion of Genzyme's corporate assets and liabilities have been
attributed to the General Division based upon utilization of the shared services
from which assets and liabilities are generated. Management believes such
allocation to be equitable and a reasonable estimate of the assets and
liabilities which would be generated if the General Division operated on a
stand-alone basis.
In 1994, the General Division generated $35.6 million of working capital
from operations. In addition, the turnover of the investment portfolio provided
$55.6 million of working capital and proceeds from the exercise of stock
options, warrants and stock issued through the employee stock purchase plan
provided $45.9 million, of which $39 million resulted from the exercise of
warrants to purchase common stock at $19 per share that expired December 31,
1994. The General Division also incurred borrowings of $21.5 million to acquire
real estate.
As of December 31, 1994, the General Division had liquid assets,
consisting of cash, cash equivalents and short-term investments in marketable
securities, totaling $53.7 million including $39.0 million which was used to
repay bank debt in January 1995. Long-term investments at December 31, 1994 were
$74.9 million. Primary uses of cash in 1994 included spending, primarily for
manufacturing capacity, of $78.8 million, the purchase of real property for
$22.9 million, and an investment of $10.0 million in the stock of a company in
collaboration with the General Division.
As of December 31, 1994, the General Division had accounts receivable of
$76.6 million, an increase of $11.9 million from December 31, 1993, due
primarily to the growth in sales of its Ceredase[R] enzyme and the 1994 market
introduction of Cerezyme[TM] enzyme. Inventories increased $13.5 million, or
58%, to $36.8 million as of December 31, 1994. The increase was due primarily to
$2.1 million of inventory obtained through acquisitions, $3.2 million
representing the increase in Ceredase[R] enzyme raw material cost and the
remainder in support of increased business operations.
The General Division holds an option to purchase all of the outstanding
Neozyme II callable common stock at prices which increase monthly from $200.4
million at January 1, 1995, to $282.6 million at December 31, 1996. In
addition, the General Division holds an option to acquire all of the partnership
interests in the Surgical Aids for approximately $26 million plus a continuing
royalty payment for a period of ten years on certain sales of products developed
by the Partnership. The General Division has a contingent obligation to provide
working capital to a joint venture established between the Partnership and the
General Division to commercialize the Partnership's products. The extent of that
contingent obligation cannot be measured at this time. The General Division's
decisions regarding future exercise of these options likely will be based, in
part, on the progress in the development work conducted for each and the General
Division's evaluation of the potential commercial success of each compared to
the costs of the option. The timing of any decision regarding the Neozyme II
option exercise is likely to be influenced by the fact that the price increases
periodically until termination, and by the rate of depletion of research and
development funds. The exercise prices for the purchase options are payable in
cash, common stock or a combination of the two, as determined by the General
Division at the time each option is exercised. Genzyme currently does not have
sufficient cash to pay the exercise prices of these options and payments in
General Division Stock would result in substantial dilution to the holders of
General Division Stock. (See "Notes to Combined Financial Statements").
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The available research and development funds in the Surgical Aids
Partnership were fully expended in the first quarter of 1994 and the General
Division is not obligated to provide additional funding. Although Genzyme is not
otherwise contractually required to do so, in January 1994, it agreed to
continue funding the development of the HAL[TM] products on behalf of the
Partnership in part to delay accelerated termination of its option to purchase
the partnership interests due to exhaustion of the Partnership's funds. This
agreement, which covered the twelve-month period starting in March 1994, was
renewed by the General Division in January 1995 for the period through March 31,
1996. The General Division expended $6.5 million in 1994 and expects to spend
approximately $5.9 million on the Partnership's development programs in 1995.
The General Division expects that its available cash, investments and
cash flow from research contracts and product and service sales will be
sufficient to finance its planned operations and capital requirements for at
least the next two years. Although the General Division currently has
substantial cash resources, it has committed to utilize a portion of its
resources for certain purposes, such as completing validation of the
manufacturing facility in Boston, Massachusetts, completing its commitment to
develop manufacturing capacity sufficient to meet the requirements for
commercialization of the Surgical Aids Partnership's products, making certain
payments to third parties in connection with strategic collaborations and making
a final payment for a company acquired in 1994. Genzyme has also committed,
subject to certain conditions, to allocate up to $30 million from the General
Division over the next three years to fund the operations of GTR. See "Funding
Commitment" below. In addition, working capital and other capital requirements
may change because of unanticipated changes in business conditions, and such
other considerations as expansion of operations, results of research and
development activities, competitive and technological developments, the timing
and costs of obtaining required regulatory approvals for new products and
future acquisitions of technology and/or product rights. As a result, the
General Division may have to obtain additional financing. There can be no
assurance that such financing will be available on acceptable terms.
FUNDING COMMITMENT
Genzyme is committed to allocate from the assets of the General Division
not less than $30 million to fund the operations of GTR at the rate of $10
million by June 1996, an additional $10 million by June 1997 and a third $10
million by June 1998 (the "Funding Commitment"). Such allocations will increase
the number of TR Designated Shares at the rate of one share for each $10.00 so
allocated. TR Designated Shares are shares of TR Stock that may be issued by
Genzyme without allocating the proceeds to GTR. The Funding Commitment will
be reduced by a percentage of the gross proceeds received by GTR through the
sale of shares of TR Stock to purchasers other than Genzyme and certain related
parties. The Funding Commitment will be suspended in its entirety during any
fiscal quarter in which the cash balance of the General Division (consisting of
cash, cash equivalents and marketable debt instruments) is less than $60
million, will be reduced on a pro rata basis during any fiscal quarter in which
such cash balance is between $60 million and $90 million and will be reinstated
when the General Division's cash balance again exceeds $90 million. The General
Division's cash balance at February 28, 1995 was $102.8 million. The Funding
Commitment expires in December 2001. In addition to the Funding Commitment,
Genzyme has the right to make voluntary allocations of up to $30 million from
the General Division to GTR. Such allocations would reduce the Funding
Commitment on a dollar-for-dollar basis and increase the number of TR Designated
Shares at the rate of one share for each $10 so allocated.
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<PAGE> 24
FACTORS AFFECTING FUTURE OPERATING RESULTS
DEPENDENCE ON CEREDASE(R) ENZYME
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Dependence on
Ceredase[R] Enzyme."
LEGISLATIVE ACTIVITY
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Legislative
Activity."
RISKS IN PRODUCT DEVELOPMENT
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Risks in Product
Development."
RISKS INHERENT IN INTERNATIONAL OPERATIONS
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Risks Inherent in
International Operations."
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<PAGE> 25
GENZYME TISSUE REPAIR DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Genzyme created the Genzyme Tissue Repair Division ("GTR") in December
1994 by acquiring BioSurface Technology, Inc. ("BioSurface") and combining it
with several Genzyme programs and collaborations in the area of tissue repair.
GTR will develop, manufacture and market technologically advanced products for
the treatment and prevention of serious tissue damage. The remaining business
activities of Genzyme -- including therapeutics, diagnostic services,
diagnostic products and pharmaceuticals and fine chemicals -- are organized as
the Genzyme General Division (the "General Division").
In December 1994, the shareholders of Genzyme approved a
reclassification of Genzyme's common stock in which the authorized shares of
Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, Tissue Repair Division Common Stock ("TR Stock"), was created (the
"Genzyme Stock Proposal"). The General Division Stock and the TR Stock are
intended to reflect the value and track the performance of the General Division
and GTR, respectively, without diminishing the benefits of remaining a single
corporation or precluding future transactions affecting either division.
Genzyme continues to hold title to all of its assets and be responsible
for all of its liabilities and the holders of the General Division Stock and
the TR Stock have no specific claim against the assets attributed for financial
statement presentation purposes to the division whose performance is associated
with the class of stock they hold. Liabilities or contingencies of either
division that affect Genzyme's resources or financial condition could affect
the financial condition or results of operations of both divisions.
Accordingly, Genzyme's consolidated financial statements, which Genzyme
provides to holders of both classes of its common stock, should be read in
conjunction with the financial statements of the General Division or GTR, as
appropriate.
Genzyme issued 5 million shares of TR Stock, valued at approximately
$25.3 million and representing 50% of the initial equity of GTR, to the
stockholders of BioSurface to effect the acquisition. A total of 5,000,000
additional shares of TR Stock were either distributed to the holders of General
Division Stock on the basis of .135 of one share of TR Stock for each share of
General Division Stock held on December 16, 1994 or reserved for issuance upon
the exercise or conversion of stock options, warrants and convertible notes
outstanding on December 16, 1994.
The acquisition of BioSurface was accounted for as a purchase.
Accordingly, the associated net assets and operations of BioSurface have been
included in GTR's financial statements and in Genzyme's consolidated financial
statements since the acquisition date.
RESULTS OF OPERATIONS
1994 AS COMPARED TO 1993
Product revenues, which consisted solely of revenues from the sale of
Epicel[TM] skin grafts for the period from December 16, 1994, the acquisition
date of BioSurface, through December 31, 1994, were $324,000. Revenues from the
sales of Epicel[TM] skin grafts are dependent upon numerous factors, many of
which are not in GTR's control and, as a result, GTR expects sales of Epicel[TM]
skin grafts to fluctuate from period to period.
GTR earned no revenues from research and development contracts in 1994
as compared to $4.7 million in 1993. Neozyme I funded the development of
Vianain[R] debriding product from 1990 through the end of 1994 when GTR acquired
the
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<PAGE> 26
development program from Neozyme I. Revenues from research and development in
1993 consisted of a $2.0 million technology license fee related to expansion
of the field of Vianain[R] debriding product to include both burns and ulcers in
addition to reimbursement for GTR's costs of conducting the Vianain[R] research.
General and administrative expenses are borne across Genzyme's entire
activity base and charges to a specific activity, such as research and
development, are a function of total spending within that activity as well as
the size of the overall base. GTR also incurs direct selling, general and
administrative charges as a result of the acquisition of BioSurface. Selling,
general and administrative expenses for 1994 increased 38% to $964,000. Of this
increase, 18% corresponds to the increase in spending on research and
development for the same period with the remaining increase resulting from the
operations of BioSurface.
Research and development expenses for 1994 increased 30% to $3.6 million
including $306,000 related to the operations of BioSurface. Excluding the
effect of BioSurface, research and development expenses increased 19% due
primarily to increased outside clinical trials related to the Vianain[R]
programs and increased manufacturing support.
The excess of the purchase price over the fair market value of the net
assets acquired in the acquisition of BioSurface, $11.2 million, was allocated
to in-process research and development and charged to operations.
1993 AS COMPARED TO 1992
GTR's revenues from research and development contracts for 1993 were
$4.7 million, as compared to $2.7 million in 1992, an increase of 76%, due
primarily to a technology license fee of $2.0 million from Neozyme I related to
expansion of the field of Vianain[R] debriding product to include the treatment
of ulcers.
General and administrative expenses decreased 15% to $701,000 in 1993
due to a lower percentage charge resulting from an increase in Genzyme's overall
activity base.
Research and development expenses for 1993 increased 19% to $2.8
million. The increase in spending was due primarily to increased outside
clinical trials related to the Vianain[R] programs and increased manufacturing
support.
In December 1993, GTR completed the purchase of the rights to the
Vianain[R] technology from Neozyme I and charged the $25.0 million purchase
price to operations as in-process research and development.
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<PAGE> 27
LIQUIDITY AND FINANCIAL RESOURCES
GTR has historically financed its operations and capital requirements
through funding from Genzyme. As of December 31, 1994, GTR had approximately
$24.8 million of cash and investments. The primary source of these funds was the
acquisition of BioSurface which provided approximately $16.6 million of funds to
GTR. In addition, at the acquisition date (the "Effective Date"), Genzyme
allocated $10 million in cash from the General Division to GTR.
FUNDING COMMITMENT
Genzyme is committed to allocate from the assets of the General Division
not less than $30 million to fund the operations of GTR at the rate of $10
million by June 1996, an additional $10 million by June 1997 and a third $10
million by June 1998 (the "Funding Commitment"). Such allocations will increase
the number of TR Designated Shares at the rate of one share for each $10.00 so
allocated. TR Designated Shares are shares of TR Stock that may be issued by
Genzyme without allocating the proceeds to GTR. The Funding Commitment will
be reduced by a percentage of the gross proceeds received by GTR through the
sale of shares of TR Stock to purchasers other than Genzyme and certain related
parties. The Funding Commitment will be suspended in its entirety during any
fiscal quarter in which the cash balance of the General Division (consisting of
cash, cash equivalents and marketable debt instruments) is less than $60
million, will be reduced on a pro rata basis during any fiscal quarter in which
such cash balance is between $60 million and $90 million and will be reinstated
when the General Division's cash balance again exceeds $90 million. The General
Division's cash balance at February 28, 1995 was $102.8 million. The Funding
Commitment expires in December 2001. In addition to the Funding Commitment,
Genzyme has the right to make voluntary allocations of up to $30 million from
the General Division to GTR. Such allocations would reduce the Funding
Commitment on a dollar-for-dollar basis and increase the number of TR Designated
Shares at the rate of one share for each $10 so allocated.
FACTORS AFFECTING FUTURE OPERATING RESULTS
OPERATING LOSSES
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Operating Losses."
FLUCTUATION IN QUARTERLY RESULTS
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Fluctuation in
Quarterly Results."
RISKS IN PRODUCT DEVELOPMENT
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Risks in Product
Development."
POTENTIAL COMPENSATION EXPENSE RESULTING FROM STOCK OPTION PRICING
See "Genzyme Corporation and Subsidiaries -- Management's Discussion and
Analysis -- Factors Affecting Future Operating Results -- Potential
Compensation Expense Resulting From Stock Option Pricing."
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned.
GENZYME CORPORATION
Date: September 12, 1995 By: /s/ David J. McLachlan
--------------------------------
David J. McLachlan
Senior Vice President, Finance
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