<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(e)(1) OF THE SECURITIES EXCHANGE
ACT OF 1934)
(AMENDMENT NO._______________)
GENZYME CORPORATION
- --------------------------------------------------------------------------------
(NAME OF ISSUER)
NEOZYME II ACQUISITION CORP.
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING STATEMENT)
CALLABLE WARRANTS TO PURCHASE TWO SHARES OF GENERAL DIVISION COMMON STOCK,
$.01 PAR VALUE, AND 0.135 SHARE OF TISSUE REPAIR DIVISION COMMON STOCK,
$.01 PAR VALUE, OF GENZYME CORPORATION
- --------------------------------------------------------------------------------
(TITLE OF CLASS OF SECURITIES)
372917 138
- --------------------------------------------------------------------------------
(CUSIP NUMBER OF CLASS OF SECURITIES)
PETER WIRTH, ESQ. MAUREEN P. MANNING, ESQ.
EXECUTIVE VICE PRESIDENT PALMER & DODGE LLP
AND CHIEF LEGAL COUNSEL ONE BEACON STREET
GENZYME CORPORATION BOSTON, MA 02108
ONE KENDALL SQUARE (617) 573-0100
CAMBRIDGE, MA 02139
(617) 252-7500
- --------------------------------------------------------------------------------
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
SEPTEMBER 27, 1996
- --------------------------------------------------------------------------------
(DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS)
CALCULATION OF FILING FEE
- --------------------------------------------------------------------------------
TRANSACTION VALUATION1: $108,675,000 AMOUNT OF FILING FEE: $21,735
- --------------------------------------------------------------------------------
/X/ CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE
0-11(A)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS
PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT
NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING.
<TABLE>
<S> <C>
Amount previously paid: $21,735 Filing party: Neozyme II Acquisition Corp. and Genzyme
------- ----------------------------------------
Corporation
----------------------------------------
Form or registration no.: Schedule 14D-1 Date filed: September 27, 1996
-------------- ----------------------------------------
</TABLE>
1 For purposes of calculating fee only. This amount is based upon (a)
2,415,000 Units of Neozyme II Corporation (the "Units"), outstanding as of
September 27, 1996 and (b) the price offered per Unit ($45.00). The amount
of the filing fee, calculated in accordance with Regulation 240.0-11 under
the Securities Exchange Act of 1934, as amended, equals 1/50th of one
percent of the value of the Units to be purchased.
<PAGE> 2
This Statement on Schedule 13E-4 relates to the offer by Neozyme II
Acquisition Corp. (the "Purchaser"), a British Virgin Islands ("BVI")
international business company and a wholly-owned subsidiary of Genzyme
Corporation ("Genzyme"), a Massachusetts corporation, to purchase all of the
outstanding units (the "Units"), each consisting of one share of Callable
Common Stock, $1.00 par value per share, of Neozyme II Corporation (the
"Company"), a BVI international business company, and a Callable Warrant to
purchase two shares of General Division Common Stock, $.01 par value per share,
and 0.135 of a share of Tissue Repair Division Common Stock, $.01 par value per
share, of Genzyme at a purchase price of $45.00 per Unit, net to the seller in
cash, without interest thereon, upon the terms and subject to the conditions set
forth in the Offer to Purchase dated September 27, 1996 (the "Offer to
Purchase") and in the related Letter of Transmittal (the "Letter of
Transmittal" which, together with the Offer to Purchase, as each may be amended
or supplemented, constitute the "Offer"). The Offer to Purchase and Letter of
Transmittal are filed as Exhibits (a)(1) and (a)(2) hereto, respectively. This
Schedule 13E-4 is being filed by the Purchaser with respect to the tender offer
for the Callable Warrants contained in the Units pursuant to Rule 13e-4(2) under
the Securities Exchange Act of 1934, as amended. Because the Callable Warrants
trade as part of the Units, responses to certain Items of this Schedule 13E-4
refer to the Units rather than the Callable Warrants where appropriate.
ITEM 1. SECURITY AND ISSUER.
(a) - (d) The information set forth in the Offer to Purchase under
"INTRODUCTION" and "THE TENDER OFFER -- Section 1. Terms of the Offer;
Expiration Date," "-- Section 5. Price Range of Units; Dividends" and "--
Section 7. Certain Information Concerning Genzyme and the Purchaser" is
incorporated herein by reference.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the Offer to Purchase under "THE
TENDER OFFER -- Section 8. Source and Amount of Funds" is incorporated herein by
reference.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
(a) - (j) The information set forth in the Offer to Purchase under
"INTRODUCTION," "SPECIAL FACTORS -- Section 5. Reasons for the Transaction;
Purpose and Structure of the Transaction; Plans for the Company after the
Transaction," "-- Section 6. The Purchase Agreement; Appraisal Rights" and
"-- Section 8. Certain Effects of the Transaction" is incorporated herein
by reference.
2
<PAGE> 3
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in the Offer to Purchase under "THE TENDER
OFFER -- Section 7. Certain Information Concerning Genzyme and the Purchaser" is
incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES.
The information set forth in the Offer to Purchase under "INTRODUCTION" and
"SPECIAL FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights" is
incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Offer to Purchase under "INTRODUCTION,"
"SPECIAL FACTORS -- Section 9. Fees and Expenses" and "THE TENDER OFFER
- -- Section 12. Fees and Expenses" is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a) Pursuant to Instruction B to Schedule 13E-4, the financial statements
set forth in Exhibit (g)(1) hereto are incorporated herein by reference.
(b) Pursuant to Instruction B to Schedule 13E-4, the pro forma financial
statements set forth in Exhibit (g)(2) hereto are incorporated herein by
reference.
3
<PAGE> 4
ITEM 8. ADDITIONAL INFORMATION.
(a) The information set forth in the Offer to Purchase under "INTRODUCTION,"
"SPECIAL FACTORS -- Section 2. Agreements and Relationships between the Company
and Genzyme" and "-- Section 5. Reasons for the Transaction; Purpose and
Structure of the Transaction; Plans for the Company after the Transaction" is
incorporated herein by reference.
(b) The information set forth in the Offer to Purchase under "THE TENDER
OFFER -- Section 10. Certain Legal Matters; Regulatory Approvals" is
incorporated herein by reference.
(c) The information set forth in the Offer to Purchase under "SPECIAL
FACTORS -- Section 8. Certain Effects of the Transaction" is incorporated hereby
reference.
(d) None.
(e) The information set forth in the Offer to Purchase, the Letter of
Transmittal and the Purchase Agreement, dated as of September 20, 1996, by and
among Genzyme, the Purchaser and the Company filed as Exhibit (c)(1) hereto is
incorporated herein reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) - Offer to Purchase dated September 27, 1996. Filed herewith.
(a)(2) - Letter of Transmittal. Filed as Exhibit (a)(2) to the Schedule
14D-1 filed by Genzyme Corporation and Neozyme II Acquisition
Corp. contemporaneously herewith and incorporated herein by
reference.
(a)(3) - Notice of Guaranteed Delivery. Filed as Exhibit (a)(3) to the
Schedule 14D-1 filed by Genzyme Corporation and Neozyme II
Acquisition Corp. contemporaneously herewith and incorporated
herein by reference.
(a)(4) - Letter from Robertson, Stephens & Company, L.P. to Brokers,
Dealers, Banks, Trust Companies and Other Nominees. Filed as
Exhibit (a)(4) to the Schedule 14D-1 filed by Genzyme Corporation
and Neozyme II Acquisition Corp. contemporaneously herewith and
incorporated herein by reference.
(a)(5) - Letter to Clients for Use by Brokers, Dealers, Banks, Trust
Companies and Other Nominees. Filed as Exhibit (a)(5) to the
Schedule 14D-1 filed by Genzyme Corporation and Neozyme II
Acquisition Corp. contemporaneously herewith and incorporated
herein by reference.
(a)(6) - Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9. Filed as Exhibit (a)(6) to the Schedule
14D-1 filed by Genzyme
4
<PAGE> 5
Corporation and Neozyme II Acquisition Corp. contemporaneously
herewith and incorporated herein by reference.
(a)(7) - Press Release of Genzyme Corporation dated September 6, 1996.
Filed as Exhibit G to Amendment No. 1 to the Schedule 13D filed
by Genzyme Corporation on September 6, 1996 and incorporated
herein by reference.
(a)(8) - Press Release of Genzyme Corporation dated September 23, 1996.
Filed as Exhibit B to Amendment No. 2 to the Schedule 13D filed
by Genzyme Corporation on September 24, 1996 and incorporated
herein by reference.
(a)(9) - Summary Advertisement dated September 27, 1996. Filed as Exhibit
(a)(10) to the Schedule 14D-1 filed by Genzyme Corporation and
Neozyme II Acquisition Corp. contemporaneously herewith and
incorporated herein by reference.
(a)(10) - Press release of Genzyme Corporation dated September 27, 1996.
Filed as Exhibit (a)(9) to the Schedule 14D-1 filed by Genzyme
Corporation and Neozyme II Acquisition Corp. contemporaneously
herewith and incorporated herein by reference.
(b) - Not applicable.
(c)(1) - Purchase Agreement dated as of September 20, 1996 by and among
Genzyme Corporation, Neozyme II Acquisition Corp. and Neozyme II
Corporation. Filed herewith.
(c)(2) - Technology License Agreement dated April 28, 1992 between Genzyme
Corporation and Neozyme II Corporation. Filed as Exhibit 28.7 to
the Genzyme Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 and incorporated herein by
reference.
(c)(3) - Research and Development Agreement dated as of April 28, 1992
between Genzyme Corporation and Neozyme II Corporation. Filed as
Exhibit 28.8 to the Genzyme Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1992 and incorporated herein
by reference.
(c)(4) - Purchase Option Agreement dated April 28, 1992 between Genzyme
Corporation and certain other parties named therein. Filed as
Exhibit 28.9 to the Genzyme Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1992 and incorporated herein
by reference.
(c)(5) - Administrative Agreement dated April 28, 1992 between Genzyme
Corporation and Neozyme II Corporation. Filed as Exhibit 28.10 to
the Genzyme Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 and incorporated herein by
reference.
(c)(6) - Series 1992 Note of Neozyme II Corporation dated April 28, 1992.
Filed as Exhibit 28.11 to the Genzyme Corporation Quarterly
Report on Form 10-Q for the quarter ended March 31, 1992 and
incorporated herein by reference.
5
<PAGE> 6
(c)(7) - Services Agreement dated April 28, 1992 between Genzyme
Corporation and Neozyme II Corporation. Filed as Exhibit 10.5 to
the Genzyme Corporation Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(c)(8) - Amendment No. 1 dated as of August 11, 1993 to Technology License
Agreement and Research and Development Agreement between Neozyme
II Corporation and Genzyme Corporation. Filed as Exhibit 10.42 to
the Genzyme Corporation Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(c)(9) - License and Development Agreement dated as of August 11, 1993
between Genzyme Corporation and Univax Biologics, Inc. Filed as
Exhibit 10.19 to the Form 10-Q of Univax Biologics, Inc. for the
quarter ended September 30, 1993 (File No. 0-19748) and
incorporated herein by reference. Confidential treatment has
been granted for the deleted portions of this Exhibit.
(d) - Not applicable.
(e) - Not applicable.
(f) - Not applicable.
(g)(1) - Audited financial statements (and related notes) for Genzyme
Corporation, Genzyme General Division and Genzyme Tissue Repair
Division for the years ended December 31, 1993, 1994 and 1995,
and unaudited financial statements (and related notes) for
Genzyme Corporation, Genzyme General Division and Genzyme Tissue
Repair Division for the six months ended June 30, 1995 and 1996.
Filed herewith.
(g)(2) - Pro forma financial statements (and related notes) for Genzyme
Corporation and Genzyme General Division for the year ended
December 31, 1995 and for the six months ended June 30, 1996.
Filed herewith.
6
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
NEOZYME II ACQUISITION CORP.
September 27, 1996 By: /s/ Peter Wirth
-----------------------------------
Peter Wirth, Secretary
7
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<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
No. Description Page No.
- ------- ----------- -------
<S> <C> <C> <C>
(a)(1) - Offer to Purchase dated September 27, 1996. Filed herewith.
(a)(2) - Letter of Transmittal. Filed as Exhibit (a)(2) to the --
Schedule 14D-1 filed by Genzyme Corporation and Neozyme II
Acquisition Corp. contemporaneously herewith and incorporated
herein by reference.
(a)(3) - Notice of Guaranteed Delivery. Filed as Exhibit (a)(3) to the --
Schedule 14D-1 filed by Genzyme Corporation and Neozyme II
Acquisition Corp. contemporaneously herewith and incorporated
herein by reference.
(a)(4) - Letter from Robertson Stephens & Company, L.P. to Brokers, --
Dealers, Banks, Trust Companies and Other Nominees. Filed as
Exhibit (a)(4) to the Schedule 14D-1 filed by Genzyme Corporation
and Neozyme II Acquisition Corp. contemporaneously herewith and
incorporated herein by reference.
(a)(5) - Letter to Clients for Use by Brokers, Dealers, Banks, Trust --
Companies and Other Nominees. Filed as Exhibit (a)(5) to the
Schedule 14D-1 filed by Genzyme Corporation and Neozyme II
Acquisition Corp. contemporaneously herewith and incorporated
herein by reference.
(a)(6) - Guidelines for Certification of Taxpayer Identification Number on --
Substitute Form W-9. Filed as Exhibit (a)(6) to the Schedule
14D-1 filed by Genzyme Corporation and Neozyme II Acquisition
Corp. contemporaneously herewith and incorporated herein by
reference.
(a)(7) - Press Release of Genzyme Corporation dated September 6, 1996. --
Filed as Exhibit G to Amendment No. 1 to the Schedule 13D filed
by Genzyme Corporation on September 6, 1996 and incorporated
herein by reference.
(a)(8) - Press Release of Genzyme Corporation dated September 23, 1996. --
Filed as Exhibit B to Amendment No. 2 to the Schedule 13D filed
by Genzyme Corporation on September 24, 1996 and incorporated
herein by reference.
</TABLE>
8
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<TABLE>
<S> <C> <C> <C>
(a)(9) - Summary Advertisement dated September 27, 1996. Filed as --
Exhibit (a)(10) to the Schedule 14D-1 filed by Genzyme Corporation
and Neozyme II Acquisition Corp. contemporaneously herewith and
incorporated herein by reference.
(a)(10) Press Release of Genzyme Corporation dated September 27, 1996. --
Filed as Exhibit (a)(9) to the Schedule 14D-1 filed by Genzyme
Corporation and Neozyme II Acquisiton Corp. contemporaneously
herewith and incorporated herein by reference.
(c)(1) - Purchase Agreement dated as of September 20, 1996 by and
among Genzyme Corporation, Neozyme II Acquisition Corp. and
Neozyme II Corporation. Filed herewith.
(c)(2) - Technology License Agreement dated April 28, 1992 between --
Genzyme Corporation and Neozyme II Corporation. Filed as
Exhibit 28.7 to the Genzyme Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1992 and incorporated herein
by reference.
(c)(3) - Research and Development Agreement dated as of April 28, 1992 --
between Genzyme Corporation and Neozyme II Corporation. Filed as
Exhibit 28.8 to the Genzyme Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1992 and incorporated
herein by reference.
(c)(4) - Purchase Option Agreement dated April 28, 1992 between Genzyme --
Corporation and certain other parties named therein. Filed as
Exhibit 28.9 to the Genzyme Corporation Quarterly Report on Form
10-Q for the quarter ended March 31, 1992 and incorporated herein
by reference.
(c)(5) - Administrative Agreement dated April 28, 1992 between Genzyme --
Corporation and Neozyme II Corporation. Filed as Exhibit 28.10
to the Genzyme Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 and incorporated herein by
reference.
(c)(6) - Series 1992 Note of Neozyme II Corporation dated April 28, 1992. --
Filed as Exhibit 28.11 to the Genzyme Corporation Quarterly
Report on Form 10-Q for the quarter ended March 31, 1992 and
incorporated herein by reference.
(c)(7) - Services Agreement dated April 28, 1992 between Genzyme --
Corporation and Neozyme II Corporation. Filed as Exhibit 10.5 to
the Genzyme Corporation Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(c)(8) - Amendment No. 1 dated as of August 11, 1993 to Technology License --
Agreement and Research and Development Agreement between Neozyme
II Corporation and Genzyme Corporation. Filed as Exhibit 10.42 to
the Genzyme Corporation Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(c)(9) - License and Development Agreement dated as of August 11, 1993 --
between Genzyme Corporation and Univax Biologics, Inc. Filed as
Exhibit 10.19 to the Form 10-Q of Univax Biologics, Inc. for the
quarter ended September 30, 1993 (File No. 0-19748) and
incorporated herein by reference. Confidential treatment has
been granted for the deleted portions of this Exhibit.
</TABLE>
9
<PAGE> 10
(g)(1) - Audited financial statements (and related notes) for Genzyme
Corporation, Genzyme General Division and Genzyme Tissue Repair
Division for the years ended December 31, 1993, 1994 and 1995,
and unaudited financial statements (and related notes) for
Genzyme Corporation, Genzyme General Division and Genzyme Tissue
Repair Division for the six months ended June 30, 1995 and 1996.
Filed herewith.
(g)(2) - Pro forma financial statements (and related notes) for Genzyme
Corporation and Genzyme General Division for the year ended
December 31, 1995 and for the six months ended June 30, 1996.
Filed herewith.
10
<PAGE> 1
OFFER TO PURCHASE FOR CASH
ALL OUTSTANDING UNITS, EACH UNIT CONSISTING OF
ONE SHARE OF CALLABLE COMMON STOCK
of
NEOZYME II CORPORATION
and
ONE CALLABLE WARRANT TO PURCHASE
TWO SHARES OF GENERAL DIVISION COMMON STOCK
AND 0.135 SHARE OF TISSUE REPAIR DIVISION COMMON STOCK
of
GENZYME CORPORATION
at
$45.00 NET PER UNIT
by
NEOZYME II ACQUISITION CORP.
a wholly owned subsidiary
of
GENZYME CORPORATION
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
MONDAY, OCTOBER 28, 1996, UNLESS THE OFFER IS EXTENDED.
THE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST A
MAJORITY OF THE UNITS OUTSTANDING. IF LESS THAN A MAJORITY OF THE UNITS
OUTSTANDING ARE VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF
THE OFFER, NEOZYME II ACQUISITION CORP. (THE "PURCHASER") MAY ELECT TO AMEND AND
EXTEND THE OFFER TO ELIMINATE THIS CONDITION. IN THAT EVENT, DURING THE PERIOD
THAT THE OFFER IS EXTENDED, NEOZYME II CORPORATION (THE "COMPANY") SHALL, IN
ACCORDANCE WITH APPLICABLE LAWS AND THE PURCHASE AGREEMENT, SOLICIT THE APPROVAL
OF ITS SHAREHOLDERS FOR THE SECOND STEP TRANSACTION AS DESCRIBED BELOW.
ALTERNATIVELY, THE PURCHASER MAY ELECT TO TERMINATE THE OFFER AND, PROMPTLY
THEREAFTER, REQUEST THAT THE COMPANY SOLICIT THE APPROVAL OF ITS SHAREHOLDERS
FOR THE SECOND STEP TRANSACTION. IF THE PURCHASER DOES NOT MAKE EITHER ELECTION,
GENZYME CORPORATION ("GENZYME"), THE PURCHASER OR THE COMPANY MAY TERMINATE THE
PURCHASE AGREEMENT.
THE BOARD OF DIRECTORS OF THE COMPANY, BASED UPON, AMONG OTHER THINGS, THE
UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD CONSISTING OF THE
DIRECTORS OF THE COMPANY WHO ARE NOT OFFICERS OR DIRECTORS OF GENZYME, HAS
UNANIMOUSLY DETERMINED THAT EACH OF THE OFFER AND THE SECOND STEP TRANSACTION
REFERRED TO HEREIN IS FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS OF THE
UNITS ("HOLDERS"), HAS APPROVED THE OFFER AND THE SECOND STEP TRANSACTION AND
RECOMMENDS THAT THE HOLDERS ACCEPT THE OFFER AND TENDER THEIR UNITS PURSUANT TO
THE OFFER.
IMPORTANT
Any Holder desiring to tender all or any portion of such Holder's units (the
"Units"), each consisting of one share (the "Shares") of callable common stock,
par value $1.00 per share (the "Callable Common Stock"), of the Company and one
callable warrant (the "Callable Warrants") to purchase two shares of General
Division common stock, par value $.01 per share, and 0.135 share of Tissue
Repair Division common stock, par value $.01 per share, of Genzyme should either
(1) complete and sign the Letter of Transmittal (or a facsimile thereof) in
accordance with the instructions in the Letter of Transmittal and mail or
deliver it together with the certificates representing the Shares and the
Callable Warrants included in the tendered Units, and any other required
documents, to the Depositary or (2) request such Holder's broker, dealer,
commercial bank, trust company or other nominee to effect the transaction for
such Holder. Book-entry transfer procedures are not available to Holders. Any
Holder whose Units are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee must contact such broker, dealer,
commercial bank, trust company or other nominee if such Holder desires to tender
such Units.
A Holder who desires to tender Units and whose certificates representing the
Shares and the Callable Warrants included in such Units are not immediately
available may tender such Units by following the procedures for guaranteed
delivery set forth in "THE TENDER OFFER -- Section 3. Procedures for Accepting
the Offer and Tendering Units."
Questions and requests for assistance may be directed to the Information
Agent or to the Dealer Manager at their respective addresses and telephone
numbers set forth on the back cover of this Offer to Purchase. Additional copies
of this Offer to Purchase, the Letter of Transmittal and the Notice of
Guaranteed Delivery may also be obtained from the Information Agent or from
brokers, dealers, commercial banks or trust companies.
---------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------
The Dealer Manager for the Offer is:
ROBERTSON, STEPHENS & COMPANY LLC
September 27, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
INTRODUCTION............................................................................ 3
SPECIAL FACTORS......................................................................... 6
1. Establishment and History of the Company........................................ 6
2. Agreements and Relationships Between the Company and Genzyme.................... 6
3. Background of the Transaction................................................... 8
4. Recommendation of the Company's Board of Directors; Fairness of the
Transaction..................................................................... 12
5. Reasons for the Transaction; Purpose and Structure of the Transaction; Plans for
the Company after the Transaction............................................... 19
6. The Purchase Agreement; Appraisal Rights........................................ 30
7. Certain Federal Income Tax Consequences......................................... 38
8. Certain Effects of the Transaction.............................................. 40
9. Fees and Expenses............................................................... 42
THE TENDER OFFER........................................................................ 43
1. Terms of the Offer; Expiration Date............................................. 43
2. Acceptance for Payment and Payment for Units.................................... 44
3. Procedures for Accepting the Offer and Tendering Units.......................... 45
4. Withdrawal Rights............................................................... 47
5. Price Range of Units; Dividends................................................. 48
6. Certain Information Concerning the Company...................................... 49
7. Certain Information Concerning Genzyme and the Purchaser........................ 51
8. Source and Amount of Funds...................................................... 62
9. Certain Conditions of the Offer................................................. 62
10. Certain Legal Matters; Regulatory Approvals..................................... 63
11. Dividends and Distributions..................................................... 63
12. Fees and Expenses............................................................... 64
13. Miscellaneous................................................................... 64
SCHEDULE I Members of the Boards of Directors and Executive Officers of Genzyme
and the Purchaser.................................................... I-1
SCHEDULE II Members of the Board of Directors and Executive Officer of the
Company.............................................................. II-1
ANNEX I Opinion of Hambrecht & Quist LLC..................................... A-1
ANNEX II Opinion of Robertson, Stephens & Company LLC......................... B-1
ANNEX III Section 83 of the BVI International Business Companies Ordinance,
1984................................................................. C-1
</TABLE>
2
<PAGE> 3
TO THE HOLDERS OF UNITS OF
NEOZYME II CORPORATION:
INTRODUCTION
Neozyme II Acquisition Corp. (the "Purchaser"), a British Virgin Islands
("BVI") international business company and a wholly owned subsidiary of Genzyme
Corporation ("Genzyme"), a Massachusetts corporation, hereby offers to purchase
all of the outstanding units (the "Units"), each consisting of one share (the
"Shares") of callable common stock, par value $1.00 per share (the "Callable
Common Stock"), of Neozyme II Corporation ("Neozyme II" or the "Company"), a BVI
international business company, and one callable warrant (the "Callable
Warrants") to purchase two shares of General Division common stock, par value
$.01 per share ("General Division Common Stock"), and 0.135 share of Tissue
Repair Division common stock, par value $.01 per share ("Tissue Repair Division
Common Stock"), of Genzyme, at a purchase price of $45.00 per Unit, net to the
seller in cash, without interest thereon (the "Offer Price"), upon the terms and
subject to the conditions set forth in this Offer to Purchase and in the related
Letter of Transmittal (which, together with any amendments or supplements hereto
or thereto, collectively constitute the "Offer").
Tendering Holders will not be obligated to pay brokerage fees or
commissions or, except as otherwise provided in Instruction 6 of the Letter of
Transmittal, stock transfer taxes with respect to the purchase by the Purchaser
of Units pursuant to the Offer. The Purchaser will pay all fees and expenses of
Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), which is
acting as the Dealer Manager for the Offer (in such capacity, the "Dealer
Manager"), American Stock Transfer & Trust Company, which is acting as the
Depositary (the "Depositary"), and Corporate Investor Communications, Inc.,
which is acting as the Information Agent (the "Information Agent"), incurred in
connection with the Offer. See "SPECIAL FACTORS -- Section 9. Fees and Expenses"
and "THE TENDER OFFER -- Section 12. Fees and Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY, BASED UPON, AMONG OTHER THINGS, THE
UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD CONSISTING OF THE
DIRECTORS OF THE COMPANY WHO ARE NOT OFFICERS OR DIRECTORS OF GENZYME,
UNANIMOUSLY HAS DETERMINED THAT EACH OF THE OFFER AND THE SECOND STEP
TRANSACTION IS FAIR TO, AND IN THE BEST INTERESTS OF, THE HOLDERS, HAS APPROVED
THE OFFER AND THE SECOND STEP TRANSACTION AND RECOMMENDS THAT THE HOLDERS ACCEPT
THE OFFER AND TENDER THEIR UNITS PURSUANT TO THE OFFER.
THE OFFER IS CONDITIONED ON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST A
MAJORITY OF THE UNITS OUTSTANDING (THE "MINIMUM CONDITION"). IF LESS THAN A
MAJORITY OF THE UNITS OUTSTANDING ARE VALIDLY TENDERED AND NOT WITHDRAWN PRIOR
TO THE EXPIRATION OF THE OFFER, THE PURCHASER MAY ELECT TO AMEND AND EXTEND THE
OFFER TO ELIMINATE THIS CONDITION. IN THAT EVENT, DURING THE PERIOD THAT THE
OFFER IS EXTENDED, THE COMPANY SHALL, IN ACCORDANCE WITH APPLICABLE LAWS AND THE
PURCHASE AGREEMENT, SOLICIT THE APPROVAL OF THE HOLDERS OF THE SHARES FOR THE
SECOND STEP TRANSACTION AS DESCRIBED BELOW. ALTERNATIVELY, THE PURCHASER MAY
ELECT TO TERMINATE THE OFFER AND, PROMPTLY THEREAFTER, REQUEST THAT THE COMPANY
SOLICIT THE APPROVAL OF THE HOLDERS OF THE SHARES FOR THE SECOND STEP
TRANSACTION. IF THE PURCHASER DOES NOT MAKE EITHER ELECTION, GENZYME, THE
PURCHASER OR THE COMPANY MAY TERMINATE THE PURCHASE AGREEMENT. SEE "THE TENDER
OFFER -- SECTION 9. CERTAIN CONDITIONS OF THE OFFER."
The Offer is being made pursuant to a Purchase Agreement dated as of
September 20, 1996 (the "Purchase Agreement") among Genzyme, the Purchaser and
the Company. The Purchase Agreement
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provides that, among other things, as soon as practicable after the purchase of
Units pursuant to, or in certain circumstances the termination of, the Offer,
and the satisfaction of the other conditions contained in the Purchase Agreement
and in accordance with the applicable provisions of the BVI International
Business Companies Ordinance, 1984 (the "BVI Law"), the Purchaser will cause a
transaction by which Genzyme will, directly or indirectly, acquire all of the
Shares included in the untendered Units (the "Second Step Transaction"). If the
Offer is consummated and 90% or more of the Units are tendered and accepted, the
Purchaser will either (i) effect a merger of the Company into the Purchaser or
(ii) cause the Company to redeem all Shares included in the untendered Units. If
the Offer is consummated but less than 90% of the Units are tendered and
accepted, or if, pursuant to the Purchase Agreement, the Offer is terminated or
amended and the requisite approval of the Company's shareholders for the Second
Step Transaction is obtained, then the Second Step Transaction will be effected
as a merger of a wholly owned subsidiary of the Purchaser with and into the
Company. Regardless of the form of the Second Step Transaction, the
consideration to be received as a result of the Second Step Transaction by
holders of Shares included in the untendered Units (other than Genzyme, the
Purchaser or the Company or any direct or indirect subsidiary of any of them and
Holders, if any, who shall have demanded and perfected their appraisal rights
under the applicable provisions of the BVI Law) will be $29.00 per Share in
cash, without interest. Any Callable Warrants included in the untendered Units
will remain outstanding following the Second Step Transaction. Genzyme does not
intend to list the Callable Warrants remaining outstanding after the Second Step
Transaction on any securities exchange or to make a market in the Callable
Warrants. As a result, no liquid market may develop for the Callable Warrants,
which may adversely affect their value. See "SPECIAL FACTORS -- Section 8.
Certain Effects of the Transaction."
The Company has advised Genzyme that Hambrecht & Quist LLC ("Hambrecht &
Quist"), financial advisor to the Special Committee, has delivered to the
Special Committee and the Company's Board of Directors its written opinion dated
September 20, 1996 that, on the basis of and subject to the matters set forth
therein, the cash consideration to be received by the Holders in exchange for
Units pursuant to the Offer and in exchange for Shares in the Second Step
Transaction is fair to such Holders from a financial point of view (the "H&Q
Opinion"). The Company has delivered to the Purchaser a copy of the H&Q Opinion,
together with Hambrecht & Quist's written consent to the inclusion of or
reference to the H&Q Opinion in the Tender Offer Statement on Schedule 14D-1
(the "Schedule 14D-1") filed by Genzyme and the Purchaser with the Securities
and Exchange Commission (the "Commission") in connection with the Offer, the
Rule 13e-3 Transaction Statement on Schedule 13E-3 filed by Genzyme, the
Purchaser and the Company with the Commission and the Schedule 14D-9 filed by
the Company with the Commission in connection with the Offer (the "Schedule
14D-9"). A copy of the H&Q Opinion is attached hereto as Annex I. See "SPECIAL
FACTORS -- Section 4. Recommendation of the Company's Board of Directors;
Fairness of the Transaction."
The Company has filed with the Commission the Schedule 14D-9, which is
being mailed to Holders concurrently herewith.
The Company has advised the Purchaser that, as of September 20, 1996, there
were 2,415,000 Units outstanding and that there were no Units or Shares reserved
for issuance for any purpose. As of such date, neither Genzyme nor the Purchaser
owned any Units; however, Genzyme is deemed to beneficially own all of the
outstanding shares of Neozyme II Callable Common Stock as a result of an option
to purchase all of the outstanding Shares, which option may be exercised by
Genzyme at any time through December 31, 1996. See "SPECIAL FACTORS -- Section
2. Agreements and Relationships Between the Company and Genzyme." Based upon
2,415,000 Units outstanding as of September 20, 1996, 1,207,501 Units must be
tendered in order to satisfy the Minimum Condition. All of the directors and the
executive officers of Genzyme and the Company currently intend to tender to the
Purchaser pursuant to the Offer all of the Units being sought by the Purchaser
that they hold of record or beneficially. Units tendered by officers and
directors of Genzyme and the Company will be purchased by the Purchaser on the
same terms and conditions offered to all Holders.
In order to effect the Second Step Transaction as promptly as possible
following completion, or under certain circumstances the termination, of the
Offer, the Board of Directors of the Company has authorized a Plan of Merger
relating to a merger of a wholly owned subsidiary of the Purchaser with and into
the Company
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(the "Merger Plan") in accordance with the BVI Law and the Company's Memorandum
and Articles of Association. The consummation of the Second Step Transaction is
subject to the satisfaction or waiver of certain conditions, including the
approval and adoption of the Merger Plan by the requisite vote or consent of the
Holders, if required by the BVI Law. Under the BVI Law and the Company's
Memorandum and Articles of Association, if the Purchaser acquires at least a
majority of the outstanding Units, the Purchaser would have sufficient voting
power to approve the Merger Plan by written consent in lieu of a meeting of
Holders and without the vote or consent of any other Holder and consummate the
Second Step Transaction. In addition, under the BVI Law, if the Purchaser
acquires at least 90% of the outstanding Units, the Purchaser would have the
power to consummate a merger of the Company into the Purchaser, or require the
Company to redeem all of the Shares not held by the Purchaser, without a vote of
the Holders. In either event, the Purchaser intends to take all necessary and
appropriate action to cause the Second Step Transaction to become effective as
soon as reasonably practicable after the consummation, or under certain
circumstances the termination, of the Offer without a meeting of the Holders.
See "SPECIAL FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights."
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
WITH RESPECT TO THE OFFER.
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SPECIAL FACTORS
1. ESTABLISHMENT AND HISTORY OF THE COMPANY
The Company was formed in March 1992 to contract with Genzyme to conduct
research, development and clinical testing of biotherapeutic products
("Products") for the treatment of cystic fibrosis ("CF") by protein replacement
or gene therapy (the "Field"). In August 1993, the Field was expanded to include
the products involved in Genzyme's collaboration with North American Biological,
Inc. ("NABI"). The lead product of the NABI collaboration, known as
HyperGAM(TM)+CF, was an antibody-based product for the prevention and treatment
of bacterial infections in CF patients. Development of all products in the NABI
collaboration was discontinued in June 1996 following an interim analysis of
data from a Phase II clinical trial of HyperGAM(TM)+CF. See "SPECIAL
FACTORS -- Section 5. Reasons for the Transaction; Purpose and Structure of the
Transaction; Plans for the Company after the Transaction." As used herein, the
term "Field" refers to the Field as so expanded.
In May 1992, the Company and Genzyme completed a public offering (the "Unit
Offering") of 2,415,000 units (the "Offered Units"), each Offered Unit
consisting of one Share, one Series N Warrant to purchase, prior to the
adjustment described in the next paragraph, one share of common stock, par value
$.01 per share, of Genzyme ("Genzyme Common Stock") and one Callable Warrant to
purchase, prior to the adjustment described in the next paragraph, one share of
Genzyme Common Stock, at a price to the public of $35.00 per Offered Unit. The
Company received all of the approximately $78 million in net proceeds from the
Unit Offering. In connection with the Unit Offering, the Company issued its
Series 1992 Note to Genzyme and entered into a Technology License Agreement,
Development Agreement, Purchase Option Agreement, Services Agreement and
Administrative Agreement with Genzyme. The terms of the Series 1992 Note and
such agreements are summarized below.
The Series N Warrants began trading separately from the Offered Units on
August 4, 1992, resulting in the Offered Units becoming the Units, consisting of
the Callable Common Stock and the Callable Warrants. As a result of a subsequent
recapitalization and stock split by Genzyme, each Callable Warrant now
represents the right to purchase two shares of Genzyme General Division Common
Stock and 0.135 share of Genzyme Tissue Repair Division Common Stock. The Units
trade on the Nasdaq National Market (the "NNM") under the symbol NIIUF.
2. AGREEMENTS AND RELATIONSHIPS BETWEEN THE COMPANY AND GENZYME
TECHNOLOGY LICENSE AGREEMENT. Under the Technology License Agreement,
Genzyme granted to Neozyme II a worldwide exclusive right and license to
manufacture and sell Products within the Field based on all patent and other
intellectual property rights owned, controlled or acquired by Genzyme during the
term of the Development Agreement and as to which Genzyme has the right to grant
sublicenses.
Neozyme II paid Genzyme $5 million in consideration for Genzyme entering
into the Technology License Agreement and in recognition of Genzyme's expertise
and expenditures in developing the technology licensed to Neozyme II. Genzyme
agreed to use commercially reasonable efforts to secure such technology rights
as it deems reasonably necessary to conduct the research to be performed for
Neozyme II under the Development Agreement. Neozyme II is obligated to assume,
subject to its prior consent, any royalty or other obligations to third parties
undertaken by Genzyme in the primary license. The license is otherwise royalty
free.
Also pursuant to the Technology License Agreement, Neozyme II granted to
Genzyme a royalty-free, fully paid, irrevocable, perpetual, worldwide, exclusive
right and license to engage in any and all uses of Improvements, except for
those that are within the Field. "Improvements" consist of technology
discovered, developed or otherwise acquired in the course of research conducted
by Genzyme for Neozyme II under the Development Agreement. Neozyme II has agreed
that it will not, without first obtaining the consent of Genzyme, sublicense,
disclose or otherwise transfer any rights in the technology licensed to it by
Genzyme, or in Improvements, to any third party before the expiration or
termination of the Purchase Option Agreement.
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Either party may terminate the Technology License Agreement under certain
circumstances including breach by the other party of the Technology License
Agreement or the Development Agreement that continues unremedied for 60 days. If
the Technology License Agreement is terminated, the parties are obligated to
negotiate commercially reasonable royalties or other compensation for certain
rights, depending on which party terminated the agreement.
DEVELOPMENT AGREEMENT. Under the Development Agreement, Neozyme II has
engaged Genzyme to perform all of its research, development and clinical testing
activities relating to the Products through December 31, 1996 unless terminated
earlier. Genzyme agreed to use commercially reasonable efforts to conduct these
activities pursuant to certain work plans and budgets prepared by Genzyme and
approved by Neozyme II.
Neozyme II is obligated to reimburse Genzyme for all costs associated with
Genzyme's work under the Development Agreement up to an amount consisting of
substantially all of the net proceeds from the Unit Offering plus interest
accrued thereon, less the $5 million payment to Genzyme under the Technology
License Agreement, less funds for use by Neozyme II for general and
administrative expenses and less $1 million to be retained by Neozyme II for
working capital (in the aggregate, the "Available Funds"). Genzyme may engage
other parties to assist in the work performed for Neozyme II under the
Development Agreement, provided that amounts paid to non-affiliates of Genzyme
may not exceed $15 million unless otherwise approved by Neozyme II. As of August
31, 1996, Neozyme II had paid approximately $74.5 million to Genzyme under the
Development Agreement. Based upon the work plan and budget approved for 1996 by
the Neozyme II Board of Directors, Neozyme expects the Available Funds to be
substantially exhausted by December 31, 1996.
The Development Agreement may be terminated by either party under certain
circumstances including breach by the other party of the Technology License
Agreement or the Development Agreement that continues unremedied for 60 days.
The Development Agreement also provides that it will terminate 90 days after the
Available Funds become exhausted unless Genzyme elects to continue commercially
reasonable efforts to continue research and development of the Products at its
expense. Genzyme is under no obligation to continue such research and
development. Genzyme may assign its rights and delegate its obligations only to
an affiliate of Genzyme, certain successors of Genzyme or certain parties that
acquire substantially all of the assets of Genzyme under certain circumstances.
Neozyme II may not assign its rights or delegate its obligations under the
Development Agreement.
PURCHASE OPTION AGREEMENT. The Shares are subject to a purchase option
agreement (the "Purchase Option Agreement") pursuant to which Genzyme may
purchase all (but not less than all) of the shares from the holders thereof at
any time through December 31, 1996, unless exercisability is accelerated upon
exhaustion of the Available Funds.
The Purchase Option is exercisable until December 31, 1996, at an exercise
price per share that increases each month through December 31, 1996 to a maximum
of $117.00 per share. The Purchase Option Exercise Price may be paid in cash, in
shares of Genzyme stock, or in any combination thereof, at Genzyme's discretion.
As of the date of this Offer to Purchase, the exercise price per share of the
Purchase Option was $108.50.
Termination of the Development Agreement or the Technology License
Agreement due to a material breach by one of the parties will cause the Purchase
Option to terminate 60 days thereafter in the case of a breach by Genzyme or 120
days thereafter in the case of a breach by Neozyme II.
SERIES 1992 NOTE. In 1992, Neozyme II issued a note in the principal
amount of $100,000 to Genzyme (the "Series 1992 Note"). The Series 1992 Note is
due on the day following the termination of the Purchase Option Agreement and
may not be prepaid. Pursuant to Neozyme II's Amended and Restated Memorandum of
Association and Amended and Restated Articles of Association, Neozyme II and its
shareholders are prohibited from taking any action or permitting any action to
be taken that is inconsistent with Genzyme's rights under the Purchase Option
Agreement. In addition, pursuant to the Company's Memorandum of Association,
while the Series 1992 Note is outstanding, Neozyme II may not issue additional
capital stock, borrow more than $1 million in the aggregate, declare or pay
dividends utilizing funds committed to be paid to
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Genzyme under the Development Agreement, merge, liquidate or sell all or
substantially all of its assets without the approval of Genzyme.
SERVICES AND ADMINISTRATIVE AGREEMENTS. Pursuant to these agreements, a
subsidiary of Genzyme (Genzyme Limited) provides certain financial, legal and
administrative services to Neozyme II on a cost reimbursement basis, and Neozyme
II is required to provide a list of record holders of the Callable Common Stock
to Genzyme upon Genzyme's exercise of the Purchase Option.
OTHER RELATIONSHIPS
Since the Company's inception, the sole executive officer of the Company
has been an employee of Genzyme. From March 1992 until January 1996, G. Jan van
Heek, a Senior Vice President of Genzyme, served as the Company's President and
Treasurer. In January 1996, Mr. van Heek resigned as President and Treasurer of
the Company, and Paul M. Edwards was appointed to these positions. Mr. Edwards
also serves as Vice President and General Manager -- UK Operations for Genzyme,
a position he has held since April 1993. Henri A. Termeer, the Chairman of the
Board of the Company, is the Chairman, President and Chief Executive Officer of
Genzyme. In addition, Mr. Termeer is a trustee of Hambrecht & Quist Healthcare
Investors and Hambrecht & Quist Life Sciences Investors. Hambrecht & Quist has
acted as the Special Committee's financial advisor in connection with the
offering. Gregory D. Phelps, a Director of the Company, is an Executive Vice
President of Genzyme. Robert J. Carpenter, a Director of the Company, also
serves as a Director of Genzyme.
The Company does not have and has never had its own research and
development employees or facilities and, therefore, it is heavily dependent upon
the employees, facilities and other resources of Genzyme. Genzyme and the
Company have also engaged the same independent auditors and outside legal
counsel since the Company's inception. Any material adverse change in the
business or financial condition of Genzyme could have a material adverse effect
upon the Company.
As of September 20, 1996, neither Genzyme nor the Purchaser owned any
Units; however, Genzyme is deemed to beneficially own all of the outstanding
Shares as a result of its option under the Purchase Option Agreement. See
Schedule I and II for information concerning the ownership of Callable Common
Stock by the directors and executive officers of Genzyme.
3. BACKGROUND OF THE TRANSACTION
Beginning in the spring of 1996, Genzyme began to consider potential
alternatives to its existing contractual relationship with the Company. In
connection with these internal discussions, the members of Genzyme's management
responsible for overseeing the research program in CF (the "CF Program")
undertook an overall assessment of the CF Program, including the various
approaches to the treatment of CF which have been explored, the then-current
status of each such approach, the scientific questions that remained to be
addressed before an effective treatment for CF could be achieved, Genzyme's
knowledge of competitive CF programs, the Company's intellectual property
portfolio and the status of the HyperGAM(TM)+CF clinical trial then being
conducted by NABI, including the significance of the interim analysis for the
trial expected to be received in June 1996. A management report summarizing this
overall CF Program assessment was presented to the Genzyme Board of Directors at
its annual meeting held on May 16, 1996, along with a preliminary analysis of
Genzyme's alternatives to the existing relationship with the Company. No actions
in respect of a transaction with the Company were authorized at the meeting.
Following the May 16, 1996 meeting, Genzyme continued to explore internally
alternative transactions that could be effected with the Company. On June 13,
1996, David J. McLachlan, Chief Financial Officer of Genzyme, contacted Kennett
F. Burnes, a director of the Company who is neither an officer nor a director of
Genzyme. Mr. McLachlan advised Mr. Burnes that, with just over six months
remaining under the terms of the various agreements between the Genzyme and the
Company, Genzyme was considering alternatives to its existing relationship with
the Company and that, among the alternatives under discussion, Genzyme was
considering the possibility of making an acquisition proposal on terms different
from the Purchase Option or making a proposal to continue funding the CF
Program. Mr. McLachlan further advised that, while the
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Genzyme Board of Directors had not approved any proposal concerning the Company,
Genzyme expected to have authorization from the Genzyme Board to make a proposal
to the Company's Board of Directors at the next regularly scheduled meeting of
the Company's Board to be held on July 23, 1996. Mr. McLachlan then suggested
that it would be appropriate for the Company's Board of Directors to consider
engaging independent advisors in connection with any possible transaction that
might occur with Genzyme.
In response to Mr. McLachlan's call, Mr. Burnes contacted the investment
banking firm of Hambrecht & Quist and the law firm of Hale and Dorr to discuss
the possible engagement of these firms to advise the Company's Board of
Directors in any transaction with Genzyme.
On June 20, 1996, NABI and Genzyme received the results of an interim
analysis for the clinical trial being conducted for HyperGAM(TM)+ CF from an
independent statistician. Although no major issues with the safety of the
product were identified, the data also showed no difference in efficacy between
those patients in the trial receiving placebo and those receiving either a high
or low dose of HyperGAM(TM)+ CF. On June 21, 1996, a special meeting of the
Company's Board of Directors was convened and a summary of the interim analysis
for the HyperGAM(TM)+ CF trial was presented to the Board. Following the
presentation, the Company's Board of Directors voted unanimously to terminate
the agreement with NABI and, later that day, the Company and NABI announced the
discontinuation of the trial. There were no discussions regarding the
relationship between Genzyme and the Company at this meeting of the Company's
Board of Directors.
In light of the discontinuation of the HyperGAM(TM)+ CF trial, Genzyme
re-evaluated the alternatives under consideration with respect to the Company.
In connection with these efforts, in July 1996, Genzyme engaged Robertson,
Stephens & Company to provide financial advisory services to Genzyme in
connection with a possible acquisition of the Company. In connection with its
engagement, Robertson, Stephens & Company conducted a due diligence review of
the Company.
On July 18, 1996, at a regularly scheduled meeting of the Genzyme Board of
Directors, Genzyme management presented an analysis of Genzyme's options
regarding the Company, and recommended that Genzyme make an offer to acquire the
outstanding Units. Representatives of Robertson, Stephens & Company then made a
preliminary presentation to the Genzyme Board of Directors. Following the
presentations, the Genzyme Board of Directors voted to authorize management to
initiate discussions regarding the acquisition of the Company with the
independent directors of the Company and, if and when management determined that
an offer would be in the best interest of Genzyme, to make an offer to acquire
the outstanding Units at a price of up to $40 per Unit in cash.
After such meeting, Mr. McLachlan called Mr. Burnes to advise him that
Genzyme was considering the possibility of presenting an acquisition proposal to
the Company's Board of Directors at the meeting scheduled for July 23, 1996.
Following this call, on July 22, 1996 at the request of Mr. Burnes, Dennis J.
Purcell, a Managing Director of Hambrecht & Quist, called Peter Wirth, Genzyme's
General Counsel, to discuss the agenda for the upcoming meeting of the Company's
Board of Directors. Mr. Wirth indicated that, as originally scheduled, the
purpose of the meeting was to provide the Company's Board of Directors with an
update as to the current status of the CF Program and that, as Mr. McLachlan had
related to Mr. Burnes, Genzyme was also considering the possibility of
presenting an acquisition proposal to the Company's Board. In response, Mr.
Purcell suggested that while it was important for Genzyme to provide the
Company's Board of Directors with an update as to the current status of the CF
Program, significant additional due diligence would be required before the
Company's Board would be in a position to respond to any acquisition proposal
Genzyme might make. In response to Mr. Purcell's comments, it was agreed that
the topics of discussion for the next day's meeting would be directed primarily
towards the CF Program update and the process that might be followed in
considering an acquisition proposal from Genzyme once the Company was prepared
to respond to such a proposal.
On July 23, 1996, a meeting of the Company's Board of Directors was
convened. In addition to the members of the Board, representatives of Genzyme's
management and Mr. Purcell were present. At the meeting, an update of the report
summarizing the overall CF Program assessment previously presented to the
Genzyme Board of Directors was presented to the Company's Board of Directors.
Following the report, Mr. Wirth advised the Company's Board of Directors that,
in view of the current status of the CF Program,
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Genzyme did not expect to exercise the Purchase Option and that, in lieu of the
Purchase Option, Genzyme's management was considering the possibility of making
an acquisition proposal with respect to the Company. Mr. Wirth then described in
general terms the process that might be followed by the Company's Board of
Directors in considering an acquisition proposal from Genzyme and suggested that
the Company's Board appoint a special committee of directors to consider any
such proposal that Genzyme might determine to make.
In response to Mr. Wirth's comments, the Company's Board of Directors
appointed the Special Committee consisting of Mr. Burnes and Robert E. Flynn,
the two directors of the Company who are not officers or directors of Genzyme,
to consider any acquisition proposal which might be made by Genzyme. The members
of the Special Committee and Mr. Purcell then requested that management provide
a list of experts in the CF field who might be retained to perform an
independent technical evaluation of the CF Program. It was further requested
that management make available members of the CF Program staff for purposes of
conducting due diligence. On July 25, 1996, Hambrecht & Quist selected Melissa
Rosenfeld, M.D., a leading scientist in the CF field, as its technical
consultant.
On August 2, 1996, representatives of Hambrecht & Quist and Hale and Dorr
and Dr. Rosenfeld met with representatives of management to conduct a due
diligence review of the Company and the CF Program.
Following such due diligence session, Hambrecht & Quist had discussions
with Robertson Stephens & Company and Hale and Dorr had discussions with Palmer
& Dodge, Genzyme's outside law firm, concerning the timing and process of the
due diligence review and a response to any acquisition proposal Genzyme might
make. Mr. Burnes and Mr. McLachlan also discussed the status of the Special
Committee's efforts by telephone.
On August 7, 1996, a meeting of the Special Committee was held to review
the status of due diligence efforts and discussions with Genzyme regarding a
potential acquisition proposal. Representatives of Hambrecht & Quist and Hale
and Dorr participated in the meeting. The Special Committee approved and
ratified the engagement of Hambrecht & Quist as financial advisor, Hale and Dorr
as legal counsel and Dr. Rosenfeld as technical consultant.
On August 8, 1996, a conference call between representatives of Genzyme,
representatives of Hambrecht & Quist and Mr. Burnes was held. During the call,
Mr. Wirth stated that Genzyme's management was considering making a proposal to
acquire all of the outstanding Units for cash at a price per Unit equal to a
discount of 10% to 15% from the then-current market price of the Units. Messrs.
Wirth and McLachlan explained further that Genzyme believed a below-market price
was justified in view of the current status of the CF Program, including the
failure of HyperGAM(TM)+CF, the largely inactive status of the protein
replacement program and the uncertainty surrounding gene therapy. In response to
questions from representatives of Hambrecht & Quist regarding alternatives to a
cash transaction, Mr. McLachlan advised that Genzyme had rejected the use of
Genzyme stock, warrants or contingent value rights due to concerns over dilution
and because it believed that the use of contingent rights would make the
transaction more difficult for investors to value. In response to the comments
from Messrs. Wirth and McLachlan, Messrs. Purcell and Burnes stated that the
Special Committee would be unlikely to accept any offer at a price below market,
but noted that Hambrecht & Quist had not yet concluded its analyses and,
therefore, it was premature to commence negotiations regarding an acquisition
price.
Over the next weeks, Hambrecht & Quist and Hale and Dorr continued to
conduct additional due diligence with respect to the Company. In particular,
Hambrecht & Quist requested, received and reviewed documents from Genzyme
relating to the Company, including general corporate materials, financial and
accounting information, financial projections, license agreements and
collaborations with third parties, copies of reports made to the Board of
Directors concerning progress of the Company's research and development programs
and analysts' reports on the Company, its competitors and CF in general. In
addition, representatives of Hambrecht & Quist began to make informal inquiries
as to the possible interest of potential third party purchasers of the Company.
Hale and Dorr reviewed the existing agreements between the Company and Genzyme
as well as the Company's patent position. Dr. Rosenfeld also continued to
conduct additional due
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diligence with respect to the Company and the CF Program and provided an
assessment of the CF Program to Hambrecht & Quist.
At a meeting of the Special Committee held on August 22, 1996, Hambrecht &
Quist reported on the status of its due diligence review, indicating that, with
the assistance of Dr. Rosenfeld, progress had been made on assessing the
Company's technology. Hambrecht & Quist also indicated that it had made some
informal inquiries as to the possible interest of potential third party
purchasers, and determined that interest in the Company appeared to be
insignificant due, among other things, to the limited nature of the Company's
technology rights. Hale and Dorr provided an assessment of the Company's patent
portfolio. It was also reported that the Company had agreed to indemnify the
members of the Special Committee against liabilities arising out of their
service on the Special Committee.
On September 3, 1996, Messrs. McLachlan and Wirth met with David G. Golden,
a Managing Director of Hambrecht & Quist, and Mr. Purcell to discuss the
proposed acquisition price. Messrs. McLachlan and Wirth reiterated Genzyme's
position that an acquisition price per Unit equal to a discount of 10% to 15%
from the then current market price of the Units was appropriate in view of the
status of the CF Program. Hambrecht & Quist stated that it did not believe the
Special Committee would accept an acquisition price below market and that
Genzyme should expect to have to pay a premium over the then-current market
price of the Units. On September 4, 1996 Mr. McLachlan and Mr. Burnes discussed
the previous day's telephone conference. Mr. Burnes reiterated that the Special
Committee believed that any offer should be above the then current market price.
On the morning of September 5, 1996, the Genzyme Board of Directors
authorized management to propose an acquisition at $45 per Unit in cash if
Genzyme's management could reach an agreement with the Special Committee at such
price and if the Special Committee would recommend such price to the Holders.
Mr. Termeer contacted Mr. Burnes and indicated that Genzyme's management would
be willing to recommend to Genzyme's Board of Directors an increased acquisition
price of $45 per Unit in cash, if the Special Committee would recommend such
price to the Holders (the "Genzyme Proposal"). Mr. Burnes agreed to review the
Genzyme Proposal with Mr. Flynn and Hambrecht & Quist.
In the evening of September 5, 1996, the Special Committee met to consider
the Genzyme Proposal. Hambrecht & Quist presented its preliminary analysis of
the fairness of the Genzyme Proposal to the holders of the Units from a
financial point of view and expressed its preliminary opinion that the Genzyme
Proposal was fair to the holders of the Units from a financial point of view.
Hambrecht & Quist noted that its opinion was subject to negotiation and review
of the documentation for the transaction and satisfactory resolution of the
structure of the transaction with respect to those Holders who do not tender
their Units pursuant to the Offer. After review of the foregoing analysis and
other considerations, the Special Committee unanimously approved in principle a
transaction in which Units of the Company would be purchased by Genzyme at a
purchase price of $45 per Unit in cash, subject to (a) negotiation and execution
of definitive agreements, (b) receipt of Hambrecht & Quist's written fairness
opinion, and (c) satisfactory resolution of the structure of the transaction
with respect to non-tendering shareholders.
On September 6, 1996, the Company and Genzyme jointly announced that they
had reached an agreement in principle relating to the acquisition of the Company
for $45 per Unit, subject to negotiation and execution of a definitive
acquisition agreement.
During the next two weeks, drafts of the Purchase Agreement were exchanged
between Genzyme and the Company and their respective legal and financial
advisors and the terms of such agreement were negotiated, including the
structure of the Second Step Transaction, the amount of consideration to be paid
in connection with the Second Step Transaction and arrangements between the
parties in the event of a superior transaction, including the payment of a
termination fee to Genzyme upon the consummation of a superior transaction and
Genzyme's agreement to consent to the early assignment of the Technology License
Agreement in connection with a superior transaction.
On September 10, 1996, the Special Committee met with its financial and
legal advisors to review issues relating to the draft Purchase Agreement.
Hambrecht & Quist reported that several of the Company's
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shareholders had contacted it with respect to the Offer, and indicated that
shareholders had expressed dissatisfaction with the $45 price per Unit,
principally due to their perception that Genzyme had previously led them to
believe that any repurchase of the Units would be at a higher price.
On September 17, 1996, the Genzyme Board of Directors held a special
meeting to assess the status of the proposed transaction. At such meeting,
Robertson, Stephens & Company made a presentation to the Genzyme Board (the
"Robertson, Stephens & Company Presentation"). The Genzyme Board then reviewed
with management the status of negotiations concerning the Purchase Agreement.
On September 20, 1996, the Special Committee met with its financial and
legal advisors to consider the Purchase Agreement. As described more fully below
under "SPECIAL FACTORS -- Section 4. Recommendation of the Company's Board of
Directors; Fairness of the Transaction", the Special Committee unanimously
recommended that Neozyme II's Board of Directors approve the Offer and the
Second Step Transaction. Thereafter, the full Neozyme II Board of Directors met
and, upon the receiving the recommendation the Special Committee, unanimously
determined (i) to accept the recommendation of the Special Committee, (ii) based
upon, among other considerations, the recommendation of the Special Committee
that the Offer and the Second Step Transaction are fair to, and in the best
interests of, holders of the Units and (iii) to approve the Purchase Agreement
and the transactions contemplated thereby.
Following the meeting of the Company's Board of Directors on September 20,
1996, the Genzyme Board of Directors held a special meeting. At such meeting,
Robertson, Stephens & Company delivered to the Genzyme Board its written
opinion, dated September 20, 1996 (the "Robertson, Stephens & Company Opinion"),
that, as of such date, and based upon and subject to the factors and assumptions
set forth in such opinion, the Offer Price was fair to Genzyme from a financial
point of view. After discussion with respect to the Offer and the other terms
and conditions of and transactions contemplated by the Purchase Agreement and
considering the matters discussed under "SPECIAL FACTORS -- Section 4.
Recommendation of the Company's Board of Directors; Fairness of the Transaction"
and "-- Section 5. Reasons for the Transaction; Purpose and Structure of the
Transaction; Plans for the Company after the Transaction" and the Robertson,
Stephens & Company Opinion, the Genzyme Board unanimously determined (i) to
approve the Offer and the Second Step Transaction, the Purchase Agreement and
the transactions contemplated thereby and (ii) that, based upon, among other
things, the conclusion of the Special Committee and the Company's Board, the
terms of the Offer and the Second Step Transaction are fair to unaffiliated
holders of the Units.
The Purchase Agreement was executed by the parties and on September 23,
1996 a press release announcing the execution of the Purchase Agreement was
issued.
On September 27, 1996, the Purchaser commenced the Offer.
4. RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; FAIRNESS OF THE
TRANSACTION
At a meeting held on September 20, 1996, the Special Committee unanimously
determined that the Offer and the Second Step Transaction are fair to, and in
the best interests of, the Holders and resolved to recommend that the Board (a)
determine that the Offer and the Second Step Transaction are fair to, and in the
best interests of, the Holders; (b) adopt and approve the Offer, the Second Step
Transaction, the Purchase Agreement and the transactions contemplated thereby;
and (c) recommend that the Holders accept the Offer and tender their Units to
the Purchaser pursuant to the Offer.
In determining that the Offer and the Second Step Transaction are fair to,
and in the best interests of, the Holders, and in making its recommendation to
the Board, the Special Committee considered the following factors, which, taken
as a whole, supported its decision:
(a) the financial condition of the Company, including the fact that
the Company's current cash is expected to be substantially exhausted by
December 31, 1996 and the uncertain prospects of raising new capital in
light of the current financing market for biotechnology companies,
including the fact that many public offerings of biotechnology companies
have either been postponed or priced below anticipated price ranges;
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(b) the status of the Company's technology programs (based, in part,
on input previously provided to Hambrecht & Quist by Dr. Rosenfeld and a
prior oral presentation concerning the patent position of the Company's
technology by Hale and Dorr, the Committee's independent legal counsel),
including the fact that the Company's protein replacement therapy program
has been largely inactive since 1994 and the decision in June 1996 to halt
clinical trials for HyperGAM(TM)+CF;
(c) the prospects of the Company, including the fact that the
Company's gene therapy programs are unlikely to yield commercially viable
products within the CF field for at least several years;
(d) the fact that the market value of the Units is currently
significantly lower than the Purchase Option Exercise Price and, that given
the current status of the Company's technology programs and its prospects,
the likelihood that the per Unit trading price on the NNM will not reach
the Purchase Option Exercise Price prior to the expiration of the Purchase
Option Agreement on December 31, 1996;
(e) the valuation analyses presented to the Special Committee by
Hambrecht & Quist at its September 5, 1996 and September 20, 1996 meetings;
(f) the H&Q Opinion stating that, on the basis of and subject to the
matters set forth therein, the cash consideration to be received by the
shareholders of the Company in exchange for the Units in the Offer and in
exchange for the Shares in the Second Step Transaction are fair to the
holders of the Units and the Shares from a financial point of view. The H&Q
Opinion contains a description of the factors considered, the assumptions
made and the scope of review undertaken by Hambrecht & Quist in rendering
the H&Q Opinion and is included herein as Annex I and is incorporated
herein by reference. SHAREHOLDERS ARE URGED TO READ THE H&Q OPINION
CAREFULLY IN ITS ENTIRETY;
(g) the judgment of the Special Committee that $45 per Unit is the
highest price reasonably available to the Company's shareholders for the
following reasons:
(1) the course of negotiations between the parties regarding the
offering price, including the fact that Genzyme's original indication of
interest was at a price level approximately 10% to 15% below the then
current trading price of the Units of $44 and the fact that the $45 per
Unit price represented a premium over the $44 1/16 trading price of the
Units on the day before an agreement in principle with Genzyme was
announced;
(2) the pursuit of alternate transactions with third parties was
not deemed to be a viable alternative (based, in part, on input received
by Hambrecht & Quist in response to informal inquiries as to the
possible interest of potential third party purchasers) given the nature
of the contractual arrangements between the Company and Genzyme and the
fact that the Company's rights in the technology developed in the course
of its research programs is limited to the Field; and
(3) since September 6, 1996, when Genzyme and the Company publicly
announced an agreement in principle on an acquisition at $45 per Unit in
cash, no third party had expressed an interest in having discussions
with the Company to Hambrecht & Quist, which was identified in the press
release as the Company's contact, or the Special Committee; and
(h) the terms and conditions of the Purchase Agreement, including the
right of the Special Committee to terminate the Purchase Agreement in order
to proceed with a Superior Transaction.
The Special Committee also considered the following negative factors
relating to the Offer and the Second Step Transaction:
(a) since the announcement of an agreement in principle with Genzyme,
a number of the Company's shareholders contacted Hambrecht & Quist and the
Special Committee and indicated they believe Genzyme should pay more than
$45 per Unit, due, in part, to the indirect benefits Genzyme has received
from the Company's technology programs; and
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(b) the upside potential if the Company's technology programs, which
are well regarded in scientific circles, are ultimately successful in
discovering one or more products useful in the treatment of CF.
The members of the Special Committee evaluated the above factors in light
of their knowledge of the business of the Company and their business judgment
and concluded that the factors supporting a decision to approve the Purchase
Agreement outweighed the negative factors described above. In view of the wide
variety of factors considered in connection with its evaluation of the Offer and
the Second Step Transaction, the Special Committee did not find it practicable
to, and did not, quantify or attempt to assign relative weights to the specific
factors considered in reaching its decision.
The Special Committee believes the process it followed in approving the
Offer and the Second Step Transaction was procedurally fair and unbiased because
(a) the Special Committee, consisting of all the directors of the Company who
are not directors or officers of Genzyme, was constituted to consider and
evaluate Genzyme's acquisition proposal with respect to the Company; (b) the
members of the Special Committee will not personally benefit from the
transactions contemplated by the Purchase Agreement (other than in their
capacity as holders of Units); (c) the Special Committee retained independent
advisors to assist it in evaluating Genzyme's acquisition proposal; (d) the
Special Committee obtained the valuation analysis of Hambrecht & Quist and the
H&Q Opinion; and (e) the Special Committee negotiated with Genzyme on an arm's
length basis and with the assistance of its advisors.
On September 20, 1996, the Board held a meeting and, based upon, among
other things, the unanimous recommendation of the Special Committee (which was
adopted by the Board in all respects), determined that the Offer and the Second
Step Transaction are fair to, and in the best interests of, the Holders,
approved the Offer and the Second Step Transaction and resolved to recommend
that the Holders accept the Offer and tender their Units to the Purchaser
pursuant to the Offer.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
The Special Committee engaged Hambrecht & Quist to act as its financial
advisor in connection with Genzyme's proposed acquisition of the Company and to
render an opinion as to the fairness from a financial point of view to (a) the
holders of Units of the consideration to be received by such holders in
connection with Genzyme's offer to purchase all of the outstanding Units at a
purchase price of $45.00 per Unit in cash, and (b) the holders of the Shares of
the consideration to be received by such holders in connection with the Second
Step Transaction pursuant to which, if the Offer is consummated, but not all of
the Units are tendered and accepted or, if the Offer is terminated in accordance
with the Purchase Agreement so that Genzyme may pursue a Termination
Solicitation, Genzyme will acquire, directly or indirectly, all of the remaining
Shares in exchange for cash in an amount equal to $29.00 per Share. Hambrecht &
Quist rendered its oral opinion (subsequently confirmed in writing) on September
20, 1996 to the Special Committee that, as of such date, the consideration to be
received by the holders of the Units pursuant to the Offer and the consideration
to be received by the holders of the Shares pursuant to the Second Step
Transaction is fair to such holders from a financial point of view. Hambrecht &
Quist also delivered its oral opinion (subsequently confirmed in writing) to the
Company's Board of Directors at its meeting on September 20, 1996. A COPY OF
HAMBRECHT & QUIST'S OPINION DATED SEPTEMBER 20, 1996, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS OF THE REVIEW
UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST IS ATTACHED AS ANNEX
I TO THIS OFFER TO PURCHASE. NEOZYME II SHAREHOLDERS ARE ADVISED TO READ THE
OPINION IN ITS ENTIRETY. Hambrecht & Quist delivered to the Special Committee
written materials covering its methods of analyzing the Company and the Callable
Warrants and the financial results of such analyses in connection with its
September 20, 1996 opinion, which are attached as an exhibit to the Schedule
13E-3 filed with the Commission in connection with the Offer and will be
available for inspection and copying at the principal executive offices of
Genzyme during regular business hours by any interested shareholder of the
Company or a representative of such shareholder who has been so designated in
writing.
No limitations were placed on Hambrecht & Quist by the Special Committee
with respect to the investigation made or the procedures followed in preparing
and rendering the H&Q Opinion. Hambrecht & Quist was not requested to and did
not make any recommendation to the Special Committee as to the amount of
consideration to
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be offered to the Company's shareholders in the Offer and the Second Step
Transaction, which consideration was determined through negotiations between the
Special Committee and its financial and legal advisors and Genzyme and its
financial and legal advisors. Hambrecht & Quist was not requested to and did not
formally solicit third party indications of interest in acquiring all or any
part of the Company. Hambrecht & Quist did, however, make informal inquiries as
to the possible interest of potential third party purchasers, and determined
that interest in the Company appeared to be insignificant due, among other
things, to the limited nature of the Company's technology rights. Holders of
Units should note that the opinion expressed by Hambrecht & Quist was provided
for the information of the Special Committee and the Board of Directors of the
Company in its evaluation of the Offer and the Second Step Transaction and does
not constitute a recommendation to any shareholder as to how such shareholder
should act with respect to the Offer.
In connection with its review of the proposed transaction with Genzyme, and
in arriving at its opinion, Hambrecht & Quist, among other things: (i) reviewed
the publicly available consolidated financial statements of the Company for
recent years and interim periods to date and certain other relevant financial
and operating data of the Company made available to Hambrecht & Quist from
published sources and from the internal records of the Company; (ii) discussed
with certain members of the managements of the Company and Genzyme the business,
financial condition and prospects of the Company; (iii) reviewed the publicly
available consolidated financial statements of Genzyme for recent years and
interim periods to date; (iv) reviewed certain internal financial and operating
information, including certain projections, relating to the Company prepared by
the management of Genzyme; (v) reviewed the recent reported prices and trading
activity for the Units and compared such information and certain financial
information of the Company with similar information for certain other companies
engaged in businesses Hambrecht & Quist considered comparable to that of the
Company; (vi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions; (vii) reviewed drafts of the
Purchase Agreement, the Offer Documents and certain other materials to be filed
with the Securities and Exchange Commission in connection with the Offer; and
(viii) performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and financial,
economic and market data as Hambrecht & Quist deemed relevant.
In rendering its opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all of the information concerning the Company and
Genzyme considered in connection with its review of the proposed transaction,
and Hambrecht & Quist did not assume any responsibility for independent
verification of such information. Hambrecht & Quist did not prepare any
independent valuation or appraisal of any of the assets or liabilities of the
Company, nor did Hambrecht & Quist conduct a physical inspection of the
properties and facilities of the Company. With respect to the financial
forecasts and projections made available to Hambrecht & Quist and used in its
analysis, Hambrecht & Quist assumed that they reflected the best currently
available estimates and judgments of the expected future financial performance
of the Company. For purposes of its opinion, Hambrecht & Quist assumed that the
Company was not a party to any pending transactions, including external
financings, recapitalizations or material merger discussions, other than the
proposed transaction with Genzyme and those activities undertaken in the
ordinary course of conducting its business. Hambrecht & Quist's opinion was
necessarily based upon market, economic, financial and other conditions as they
existed and could be evaluated as of the date of their opinion and any change in
such conditions would require a reevaluation of that opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analyses set forth below does not purport to be a
complete description of the analyses underlying the H&Q Opinion. In arriving at
its opinion, Hambrecht & Quist did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
Hambrecht & Quist believes that its analyses and the summary set forth below
must be considered as a whole and that selecting portions of its analyses,
without considering all analyses, or of the summary set forth below, without
considering all factors and analyses, could create an incomplete view of the
processes underlying the analyses set forth in the Hambrecht & Quist
presentation to the Special Committee and the H&Q Opinion. In performing its
analyses, Hambrecht & Quist made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which
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are beyond the control of the Company and Genzyme. The analyses performed by
Hambrecht & Quist (and summarized below) are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
Analysis of Technology and Stage of Development. Hambrecht & Quist
reviewed and analyzed, among other things, the Field in which Neozyme II is
engaged (i.e., the research, development and clinical testing of products for
the treatment of cystic fibrosis), Neozyme II's intellectual property rights
(which are limited to technology in the Field, with all technology developed by
the Company with application outside the Field being licensed back to Genzyme
exclusively on a royalty free basis) and approaches to treating CF. In
connection with its review, Hambrecht & Quist retained the outside consulting
services of an independent leading scientist in the field of CF, Dr. Rosenfeld.
The role of Dr. Rosenfeld was not to appraise or value any of the Company's
technology, but to assist Hambrecht & Quist in assessing, among other things,
the quality and progress of the Company's science and its stage of scientific
and clinical development. On the basis of its analysis, Hambrecht & Quist
observed the following: (i) the Company's most advanced approach to treating
cystic fibrosis has been gene therapy using an adenovirus vector; (ii) this
approach has encountered several significant obstacles that make the development
of a gene therapy product unlikely in the next few years (Genzyme forecasts
commercialization in 2003); (iii) while gene therapy approaches using an
adenoassociated virus or a lipid vector hold promise, these approaches are in
comparatively early stages and a pivotal trial for a particular vector is not
likely in the near future; and (iv) Genzyme's work in the areas of protein
replacement and Hypergam(TM)+CF have proved to be disappointments and
development of these products have been suspended and terminated, respectively.
Comparable Company Analysis. Hambrecht & Quist reviewed and compared
selected historical financials, operating and stock market performance data of
the Company to the corresponding data of four publicly traded biotechnology
companies with a scientific focus in the area of gene therapy (the "Gene Therapy
Companies"). The Gene Therapy Companies included in this Group were GeneMedicine
Incorporated, Somatix Therapy Corporation, Targeted Genetics Corporation and
Vical Incorporated. Hambrecht & Quist compared cash, book value, net income,
enterprise value (consisting of equity value plus debt less cash) and burn rate
(cash used in operating activities plus capital expenditures) for the latest
available 12 month period ("LTM") for each of the Gene Therapy Companies with
the Company. Hambrecht & Quist also analyzed the financial ratios of market
value to cash and market value to book value. Hambrecht & Quist calculated the
ratio of the cash position to the LTM burn rate of each of the Gene Therapy
Companies to determine the "survival index" (the number of consecutive annual
periods that such company could continue to fund cash losses at the rate
experienced in the LTM from the most recently available reported cash without
obtaining additional capital) and compared such information from such Gene
Therapy Companies with the Company. The average enterprise value of the Gene
Therapy Companies was $75.3 million ($70.3 million excluding the high and low)
compared to an enterprise value of $61.4 million for the Company based on the
Offer (assuming a value of $16.00 per Callable Warrant). Hambrecht & Quist noted
that the Gene Therapy Companies had research projects in multiple disease areas
while the Company is limited to the Field and has no rights to gene delivery or
other technology outside the Field.
Hambrecht & Quist also reviewed and compared selected historical and
projected financials, operating and stock market performance data of certain
publicly traded biotechnology and pharmaceutical companies (the "Established
Companies Comparables"). This comparison provided a basis for the range of
Price-Earnings ("P/E") multiples used in further analysis, particularly the
Terminal Value (as defined below) in connection with the discounted cash flow
analyses described below. The companies included in the Established Companies
Comparables were the following: Johnson & Johnson, Merck & Co, Pfizer Inc.,
SmithKline Beecham, Glaxo-Wellcome, Chiron Corp., Amgen Inc. and Genentech Inc.
Hambrecht & Quist did not attempt to prepare any further quantitative valuation
analyses based on the Established Companies Comparables because Hambrecht &
Quist believed that any comparative multiples that might be derived based upon
earnings or other financial data of such companies would not be meaningful when
applied to the Company's operating losses.
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Hambrecht & Quist also reviewed and analyzed the acquisition by Chiron of
Viagene and the acquisition of Genetic Therapy by Sandoz. Hambrecht & Quist
observed that Chiron acquired Viagene in a transaction valued at $102 million,
representing a premium of 67% over the market value of Viagene stock one day
prior to the transaction's announcement and that Sandoz acquired Genetic Therapy
in a transaction valued at $295 million, representing a premium of 38% over the
market value of Genetic Therapy stock one day prior to the transaction's
announcement. Hambrecht & Quist did not attempt to prepare any further
quantitative valuation analyses based on these acquisition transactions because
Hambrecht & Quist believed that differences in the technologies of each company
and the differences in the market conditions at the time such acquisitions were
made would make such analyses meaningless.
Comparable SWORD Analysis. Hambrecht & Quist noted that the Shares had
originally been offered as part of a unit financing in which purchasers bought a
Unit consisting of (i) one Share, (ii) one Series N Warrant and (iii) one
Callable Warrant. Hambrecht & Quist reviewed and analyzed the original offering
of the Units and other comparable public offerings of special purpose funding
companies commonly referred to as Stock Warrant for Off-Balance Sheet Research
and Development Companies ("SWORDs"). Hambrecht & Quist also reviewed the stock
prices and market performances of the Units and the comparable SWORD offerings.
Where the stock of SWORD companies was repurchased by the SWORD sponsor in a
negotiated transaction and not pursuant to the original purchase option,
Hambrecht & Quist analyzed a number of factors, including the purchase price
attributable to the technology, the discount to the original purchase option
price and calculated the implied rate of return from the original offering date.
The sponsor companies of the comparable SWORD offerings included in this
analysis were ALZA Corp., Centocor, Inc. (two such offerings), Immunex
Corporation, Elan Corporation PLC (two such offerings), Genetics Institute Inc.,
Gensia, Inc., Cytogen Corp., Genzyme Corporation (including only Neozyme
Corporation and not Neozyme II Corporation), PerSeptive Biosystems Inc., and
Ligand Pharmaceuticals, Inc./Allergan, Inc. (a co-sponsored SWORD). Hambrecht &
Quist observed that the value of the average SWORD units had appreciated
(inclusive of implied appreciation where such units had been repurchased by the
sponsoring companies) approximately 71.6% (from offering date to September 19,
1996), as compared to a 63.4% increase in value of the Units. Hambrecht & Quist
also observed that, at the time of the unit offering, the average value of the
warrants at an assumed 40% volatility in the SWORD sponsoring company
represented approximately 54.6% of the aggregate SWORD unit value and that in
the case of the Company, the Genzyme warrants represented approximately 23.7% of
the value of the Unit at the time of the original offering. Accordingly,
Hambrecht & Quist observed that, of the $35.00 per Unit offering price,
approximately $8.30 per Unit was allocable to the Series N Warrants and
approximately $26.70 per Unit was allocable to the Shares and the Callable
Warrants. The Series N Warrants originally included in the Units have separated
from the Units and now trade separately under the symbol "GENZZ" (the closing
price on September 19, 1996 was $11.50 per Series N Warrant). These figures were
compared with a valuation of $29.00 per Share included in the Units and $16.00
per warrant for the Callable Warrants included in the Units. In addition,
Hambrecht & Quist observed that the discount to the original purchase option
price of SWORDs repurchased in negotiated transactions was 58.7%, compared to
61.5% for the Company pursuant to the Offer and that the rate of return in
negotiated repurchases was -9.2% for the comparable SWORD repurchases, compared
to 6.5% for the Units.
Discounted Cash Flow Analysis. Hambrecht & Quist analyzed the theoretical
valuation of the Company based on the unlevered discounted cash flow of its
projected financial performance under three scenarios: (i) the Company launches
a cystic fibrosis product in 2003 in accordance with the projections Genzyme
provided Hambrecht & Quist (the "Base Case"); (ii) the Company's anticipated
product launch is delayed until 2004 (the "Delayed Scenario"); and (iii) the
Company's anticipated product launch is accelerated by one year to 2002 (the
"Accelerated Scenario"). In all three scenarios, Hambrecht & Quist used discount
rates ranging from 25% to 40% to calculate the present value (the "Present
Value") of the Company's projected stream of after-tax cash flows through 2005.
Hambrecht & Quist then calculated a terminal value (the "Terminal Value") for
the Company which represents the hypothetical value of selling
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the entire business at the end of 2005 and discounting the amount received from
such hypothetical sale to its net present value (using the same discount rate as
applied to the Present Value). The Terminal Value used under all scenarios was
based upon multiples of 14.0x to 24.0x projected net income for the year 2005.
The range of 14.0x to 24.0x projected net income reflects a range of P/E
multiples derived from the Established Companies Comparables. For the purposes
of this analysis, Hambrecht & Quist relied on the Genzyme's management's
estimate of projected revenues with respect to all scenarios and altered only
the year in which such revenues would be recognized, with respect to the Delayed
Scenario and the Accelerated Scenario. To estimate the total present value of
the Company's business, before giving effect to its capital structure, Hambrecht
& Quist added the Present Value to the Terminal Value.
Using the Base Case, Hambrecht & Quist calculated a range of present
values, including $41.9 million at a 35% discount rate and an 18.0x exit
multiple, $72.3 million at a 30% discount rate and an 18.0x exit multiple, $50.7
million at a 35% discount rate and an 20.0x exit multiple and $84.8 million at a
30% discount rate and an 20.0x exit multiple. Using the Delayed Scenario,
Hambrecht & Quist calculated a range of present values, including $3.2 million
at a 35% discount rate and an 18.0x exit multiple, $17.0 million at a 30%
discount rate and an 18.0x exit multiple, $8.0 million at a 35% discount rate
and an 20.0x exit multiple and $23.8 million at a 30% discount rate and an 20.0x
exit multiple. Using the Accelerated Scenario, Hambrecht & Quist calculated a
range of present values, including $71.6 million at a 35% discount rate and an
18.0x exit multiple, $114.1 million at a 30% discount rate and an 18.0x exit
multiple, $82.6 million at a 35% discount rate and an 20.0x exit multiple and
$130.0 million at a 30% discount rate and an 20.0x exit multiple. Hambrecht &
Quist observed that the Offer of approximately $70.0 million (assuming a value
of $38.6 million for the Callable Warrants) for the Company fell within the
middle ranges calculated using the Base Case Scenario, above the middle ranges
calculated using the Delayed Scenario and below the middle ranges calculated
using the Accelerated Scenario.
Warrant Valuation Analysis. Hambrecht & Quist analyzed the valuation of
the Callable Warrants using the Black-Sholes option valuation formula. Such
formula suggested that the value of the warrant for two shares of General
Division Common Stock based on a range of volatility of 45% to 55% to be between
$13.03 and $16.57. Additionally, such formula suggested that the value of the
warrant for 0.135 share of Tissue Repair Common Stock based on a range of
volatility to be between $0.32 and $0.42. Hambrecht & Quist also noted that the
implied volatility based on a $16.00 warrant valuation was approximately 53.8%.
Accordingly, Hambrecht & Quist concluded that the aggregated value of the
Callable Warrants range from $32.2 million to $41.0 million, or $13.33 to $16.98
per Callable Warrant.
Stock Trading History Analysis. Hambrecht & Quist examined the trading
history of (i) the Units in terms of both price and volume from September 5,
1995 to September 4, 1996 and (ii) the Units and Genzyme common stock, compared
to the American Biotechnology Index from August 4, 1992 to September 6, 1996.
Hambrecht & Quist noted that, over the period, the Units increased in value at a
far greater rate than either Genzyme common stock or the American Biotechnology
Index, which tended to trade in parallel.
No company or transaction used in the above analyses is identical to the
Company, Genzyme or the proposed transaction. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading values of the companies or company to which they are compared. The
foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of such opinion, which is attached hereto
as Annex I.
Certain Relationship; Terms of Engagement. Hambrecht & Quist, as part of
its investment banking services, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
strategic transactions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. The Special Committee selected
Hambrecht & Quist to serve as its financial advisor in connection with the
proposed transaction with Genzyme because it is an internationally recognized
investment banking firm whose
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professionals have substantial experience in SWORDs transactions and
transactions similar to the Offer and the Second Step Transaction. Hambrecht &
Quist has, from time to time, provided financial advisory services to Genzyme,
and has received fees for rendering these services. In July 1996, Hambrecht &
Quist acted as managing underwriter for a public offering of Genzyme Transgenics
Corporation, an affiliate of Genzyme and received as compensation fees and
commissions of approximately $312,000. In the ordinary course of business,
Hambrecht & Quist acts as a market maker and broker in the publicly traded
securities of the Company and Genzyme and receives customary compensation in
connection therewith, and also provides research coverage for Genzyme. In the
ordinary course of business, Hambrecht & Quist actively trades in the equity
securities of the Company and Genzyme for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities. Hambrecht & Quist may in the future provide additional
investment banking or other financial advisory services to Genzyme.
Pursuant to an engagement letter dated August 2, 1996, the Company has
agreed to pay Hambrecht & Quist a retainer in the amount of $50,000 and a fee in
connection with its services as financial advisor to the Special Committee and
the rendering of a fairness opinion. The Company has agreed to pay a fee of
$200,000 upon the delivery of the fairness opinion. The retainer and fairness
opinion fee shall be credited against any Transaction Fee (as defined below).
Upon consummation by the Company of the proposed transaction, the Company shall
pay Hambrecht & Quist a fee (the "Transaction Fee"), payable in cash on closing,
of 1.0% of the value of the consideration to be received by holders of Units
plus 3.0% of the value of the consideration to be received by holders of Units
in excess of $43.00. The Company has agreed to reimburse Hambrecht & Quist for
its reasonable out of pocket expenses, and to indemnify Hambrecht & Quist
against certain liabilities, including liabilities under the federal securities
laws or relating to or arising out of Hambrecht & Quist's engagement as
financial advisor. The amount of compensation to be paid to Hambrecht & Quist
was determined by negotiations between the Special Committee and Hambrecht &
Quist.
5. REASONS FOR THE TRANSACTION; PURPOSE AND STRUCTURE OF THE TRANSACTION; PLANS
FOR THE COMPANY AFTER THE TRANSACTION
In determining to seek to acquire the Company, the Board of Directors of
Genzyme carefully considered the status of the technology and product
development of the Company, which is summarized below.
STATUS OF PRODUCT DEVELOPMENT
Product Opportunity
CF is the most common fatal genetic disease afflicting the caucasian
population. Approximately one in every 2,500 infants in the United States is
born with the disease. Although improvements have been made over the last 20
years in alleviating certain symptoms of the disease and delaying its progress,
the underlying disease remains untreated and patients have an average life
expectancy of only 29 years. There are approximately 30,000 CF patients in North
America.
CF is caused by one or more mutations in the gene responsible for
determining the molecular structure of a protein called cystic fibrosis
transmembrane conductance regulator ("CFTR"). The absence of functional CFTR
protein from the membrane of airway surface cells disrupts the ion transport
mechanism of the cells and contributes to the formation of a thick, dehydrated
mucus that cannot be eliminated from the lungs in the normal fashion. Build-up
of this mucus fosters recurrent infections that cause breathing difficulties and
damage to the lungs, eventually leading to respiratory failure and death.
Elsewhere in the body, the gene defect often results in digestive, reproductive
and other problems. Such other problems are unlikely to be alleviated in the
event CF-induced airway and lung damage is effectively treated.
Neozyme II's work relating to the treatment of CF initially concentrated on
two promising therapies to correct the basic defect in CF airway cells: gene
therapy to augment the mutant genes with genes that would enable the patient's
cells to produce normal CFTR protein, and protein replacement therapy to augment
the missing or defective CFTR protein with properly functioning CFTR protein.
For technical and competitive reasons, the gene therapy approach has been
emphasized during the last two years, and currently the protein replacement
program is largely inactive. Neozyme II also funded NABI's efforts to develop
passive
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immunization antibody products primarily for the prevention and treatment of
bacterial infections common in CF patients. See "HyperGAM(TM)+CF" below.
Progress to Date
The gene responsible for the defective protein present in CF patients was
identified by scientists at the University of Michigan and the Hospital for Sick
Children in Toronto and their findings were published in 1989. Since that time,
and on behalf of Neozyme II since March 1992, Genzyme scientists have
intensively studied the gene and the protein and have made significant technical
progress that should facilitate the development of effective therapies for the
treatment of CF patients. These results have been published in leading
scientific journals, and Genzyme has filed United States and foreign patent
applications covering certain aspects of this work.
GENE THERAPY. Gene therapy is a promising new technique being developed as
a treatment for several genetic diseases including CF. To date, over 139
protocols for preliminary clinical studies of gene therapy for a variety of
diseases have been approved by the National Institutes of Health.
Because of the innovative nature of gene therapy and public policy issues
surrounding the insertion of new genetic information into cells, the Company
expects that early clinical evaluation will continue to entail especially
careful testing in a limited number of patients. On behalf of Neozyme II,
Genzyme is currently conducting preliminary clinical testing of Neozyme II's
gene therapy products. The timing and results of these initial studies will
determine whether and when pivotal trials to determine safety and effectiveness
will be undertaken. These pivotal trials may involve large groups of patients
for lengthy periods of time in order to address the uncertainties surrounding
insertion of new genetic information into humans and to show clinical
effectiveness in the treatment of a progressive disease. All of Genzyme's
efforts related to gene therapies for CF are funded by Neozyme II.
On behalf of Neozyme II, Genzyme scientists have demonstrated that the
defective ion transport mechanism present in airway cells taken from CF patients
can be corrected in vitro by the insertion of normal CFTR genes into the cells.
However, the techniques for inserting genetic material into cells outside the
body are not expected to be useful in gene therapy for CF because there is no
practical way to remove and re-implant cells from the airways of CF patients.
For this reason, Neozyme II's proposed gene therapy Product will likely need to
be administered directly to the airways of the lung. Neozyme II believes that
its gene therapy Product would need to be readministered periodically as the
transferred gene ceases to function or is lost and as the treated cells
naturally die and are replaced.
Vectors are presently regarded as critical components of gene therapeutics
which facilitate targeting and delivery of genetic material to the appropriate
cells and affect the efficiency and duration of gene expression. On behalf of
Neozyme II, Genzyme is developing both viral and non-viral vectors for
delivering the gene encoding CFTR to the surface cells lining the airways.
Animal studies aimed at demonstrating the potential safety and effectiveness of
a variety of vectors have been initiated and several have been successfully
completed and reported in scientific journals.
Viral Vectors. On behalf of Neozyme II, Genzyme and collaborators at the
University of Iowa, in 1993, conducted a small study in CF patients using an
adenovirus-gene product administered to nasal epithelium. Results collected from
the study showed that it is possible to correct the biochemical defect in CF
cells in nasal epithelium in vivo. The study results, published in October 1993,
were the first published report of a successful gene transfer in CF patients and
the first successful application of an adenovirus vector in gene therapy.
However, in a 1995 publication reporting the results of a similar study,
researchers from the University of North Carolina questioned the efficacy of
gene transfer using adenovirus.
In December 1993, a Genzyme collaborator received Recombinant DNA Advisory
Committee ("RAC") approval for a study involving repeat administration of
Genzyme's second generation adenovirus vector to the nasal epithelium and sinus
passages of CF patients. The nasal part of this study was initiated during the
first quarter of 1994 and was completed in the second quarter of 1995.
Aggregated data from this study showed limited evidence of gene expression at
the intermediate doses but not at the highest dose. The
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virus appeared safe, but a complex immune response to the adenovirus was
measured in almost all patients. This and other data obtained in animals and
submitted for publication in 1995 suggest that immune response may limit the
efficacy of repeat dose therapy with adenovirus. The sinus study was not
conducted due to the lack of interpretable baseline data in the CF sinus.
During the fourth quarter of 1994, Genzyme received RAC approval and
submitted a protocol to the United States Food and Drug Administration (the
"FDA") for a two part safety study involving administration of its second
generation adenovirus vector to the lungs of up to 40 CF patients via
bronchoscope and aerosol. Bronchoscopic administration commenced in the first
quarter of 1995, and aerosol administration commenced in September 1995.
Additionally, in September 1995, Genzyme switched to the use of a third-
generation adenovirus vector with an improved safety profile as part of this
same study. The study is currently ongoing.
In parallel with these clinical studies, Genzyme, on behalf of Neozyme II,
is conducting extensive research into proving the safety and efficacy of
adenovirus. Particular emphasis is being placed on immunology, since it now
appears that new vectors or methods need to be developed so as to reduce the
patient's immune response and to increase the efficacy of adenovirus vectors.
Such improvements may be necessary in order for adenovirus vectors to be
clinically useful in chronic therapy.
Non-Viral Vectors. In addition to pursuing adenovirus and other viral
vectors, Neozyme II is developing lipid-DNA complexes as vectors for gene
therapy. Neozyme II believes that lipid-based vectors may offer advantages due
to their reduced immunogenicity and ease of manufacture relative to viral
vectors. Genzyme has synthesized, evaluated and filed patent applications on
numerous new lipids. Several of these have shown significantly greater activity
in vivo than commercially available lipids. To augment its internal efforts,
Genzyme has entered into arrangements with third parties to gain access to
non-viral gene delivery technologies. To date, the most significant such
arrangement is an October 1993 exclusive research agreement with Vical, Inc. to
evaluate Vical's cytofectins as non-viral gene delivery vectors for treating CF.
The plasmid expression system containing the DNA also affects expression
efficiency, and Genzyme has designed various new plasmid constructs to enhance
expression. Although substantial progress has been made in both lipid and
plasmid constructs, currently the optimal formulation of the best lipid-DNA
complex is still less efficient than adenovirus as measured in single dose in
vivo experiments.
In December 1993, a Genzyme collaborator received RAC approval for a CF
nasal protocol utilizing a lipid-DNA complex containing DMRIE, one of Vical's
proprietary cytofectins. This study commenced in September 1995 and is currently
ongoing. In December 1994, Genzyme also initiated a collaboration with a British
academic group for purposes of further studying Neozyme II's proprietary
lipid-DNA complexes.
In December 1995, Genzyme submitted an IND to the FDA for a nasal study
using a proprietary lipid-DNA complex developed by Genzyme. The study was
initiated in January 1996 by Genzyme and its collaborators at the University of
Iowa and completed in the second quarter of 1996. The study entailed the
administration of the lipid- DNA complex to one nostril of nine CF patients and
administration of the DNA plasmid alone to the patients' other nostril as a
control. Although the results showed that the lipid-DNA compound was well
tolerated, they did not demonstrate the lipid-DNA compound to be superior to the
plasmid DNA in improving ion exchange across the cell membrane. A follow-on
study to gather additional information is planned for later this year.
Also in the second quarter of 1996, Genzyme completed a safety study in
which the lipid alone was delivered in aerosol form to the lungs of 15 non-CF
volunteers. The study showed that aerosolized delivery of the lipid to the lung
was well tolerated. Based on these results, a pilot study involving aerosol
administration of a lipid-DNA complex to the lungs of CF patients was planned to
start later this year in the United Kingdom ("UK"). The commencement of this
trial was placed on hold by the UK Medicines Control Agency ("MCA"), pending
resolution of certain safety issues raised by the MCA. Genzyme has responded to
these issues and submitted a revised protocol for the trial. There can be no
assurance that the MCA will accept the revised protocol or require additional
data that would further delay the trial. In the event that the revised protocol
is not accepted, Genzyme plans to revise the IND currently on file with the FDA
for the lipid-DNA complex to include an aerosol protocol.
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Protein Replacement Therapy. CFTR is a membrane protein, a class of
molecules which historically has been difficult to produce in conventional cell
culture in active form and large quantities. Genzyme, however, has been able to
develop recombinant cell lines that can synthesize the protein and has published
data on the feasibility at laboratory scale of producing and purifying
functional CFTR protein from mammalian and insect cells. In collaboration with
researchers at Tufts University and Genzyme Transgenics Corporation, transgenic
expression techniques were used successfully to breed mice and rabbits that
secrete human CFTR protein in their milk. Based on these results, Genzyme
engaged Genzyme Transgenics Corporation to develop transgenic goats that express
CFTR in their milk. Although one transgenic goat has been born, it did not
synthesize measurable CFTR in its milk and no further work is currently
underway.
As a membrane protein, CFTR must be delivered into the cell membrane to be
effective. On behalf of Neozyme II, Genzyme has investigated various methods to
deliver the CFTR protein across the planar bilayer of epithelial cells. In 1995,
Genzyme reported in several publications the technical feasibility of delivering
small but detectable amounts of functional CFTR to epithelial cells in vitro
using virosomes. However, the effect detected was transient.
As a theoretical matter, gene therapy is significantly more efficient than
protein replacement because each DNA particle delivered will produce multiple
copies of protein; whereas, in protein replacement, each delivered unit results
in delivery of only one protein molecule. Both protein replacement and gene
therapy have significant technical challenges related to delivery, but since
gene therapy is more efficient once delivered, Genzyme has chosen to concentrate
its efforts in this area. Although still a potentially viable approach,
currently the protein replacement program is largely inactive.
HyperGAM(TM)+CF. In August 1993, Genzyme entered into an alliance with
NABI to develop a polyclonal antibody product called HyperGAM(TM)+CF for use in
passive immunization of CF patients infected with Pseudomonas bacteria, which
are a major medical problem associated with CF and a frequent cause of
hospitalization. Neozyme II believed that HyperGAM(TM)+CF could be complementary
to the Company's gene therapy or protein replacement products by preventing or
treating Pseudomonas infections in conjunction with correcting the basic defect
in airway cells. In exchange for funding Genzyme's share of NABI's development
costs, Neozyme II received the exclusive right to market HyperGAM(TM)+CF
worldwide and share in the profits with NABI.
A Phase I clinical trial involving single dose administration of
HyperGAM(TM)+CF was completed in 1994 and showed that HyperGAM(TM)+CF appeared
to be safe and supported a monthly dosing regimen. A multi-center, dose ranging
Phase II clinical trial to assess safety and efficacy of the product in chronic
administration commenced in the first quarter of 1995. In June 1996, Neozyme II
and NABI announced the halt of the Phase II clinical trial for HyperGAM(TM)+CF
because an interim analysis of the trial data showed no evidence of a reduction
in the number of acute pulmonary exacerbations in trial participants. No major
issues with the safety of the product were identified. On June 21, 1996, after
review of the interim analysis data, the Board of Directors of Neozyme II voted
unanimously to terminate the license and development agreement with NABI. Under
the terms of the agreement with NABI, Neozyme II is required to reimburse NABI
for certain costs incurred in connection with the wind down of the
HyperGAM(TM)+CF program up to a maximum of $900,000.
REASONS FOR THE TRANSACTION
Genzyme believes that a gene-based therapy for CF represents the most
promising approach for addressing this important unmet medical need. Despite
significant development progress under the CF Program, however, the key
milestone of demonstrating clinical efficacy of a gene therapy approach has not
been and, Genzyme believes, will not be demonstrated until well after the
expiration of the Purchase Option on December 31, 1996, if at all. Accordingly,
Genzyme believes the value of Neozyme II is significantly below the current
Purchase Option Exercise Price and, absent unforeseen progress in the CF
Program, Genzyme does not intend to exercise the Purchase Option.
Notwithstanding the present intention not to exercise the Purchase Option,
the Genzyme Board of Directors has determined that the acquisition of Neozyme II
at this time on and subject to the terms of the Purchase Agreement is in the
best interests of Genzyme and its stockholders for the following reasons:
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Acceptable Valuation and Timing; Avoid Dilution. Genzyme believes that the
Offer allows Genzyme to acquire Neozyme II at a price that appropriately
reflects the value of Neozyme II at its current stage of development and within
the time frame contemplated at the inception of Neozyme II. In addition, if the
Offer is consummated, the number of outstanding warrants to acquire Genzyme
stock will be significantly reduced, thereby reducing potential future dilution
of Genzyme stock.
Continuity of Program Development. Genzyme desires to maintain its
commitment to the CF community to continue the research, development and
clinical evaluation of the two gene therapy approaches currently being evaluated
in the CF Program in an effort to reach the key milestone of demonstrating
clinical efficacy as soon as possible. Genzyme expects, however, that advancing
the CF Program through demonstration of clinical efficacy will require
significant additional investment materially in excess of the remaining
resources available from Neozyme II, which resources will be substantially
depleted by the end of 1996. In the event that the Offer is rejected, Neozyme II
will be required to seek alternative sources of capital to continue funding the
CF Program, such as raising additional capital, an acquisition by a third party
or some form of collaboration with a third party. Genzyme believes that any such
alternative would involve significant time, expense and uncertainty and, more
important, could result in the interruption of the research, development and
clinical evaluation efforts being conducted under the CF Program. Any such
interruption could have a material adverse effect on the time required to
demonstrate clinical efficacy. Acquiring Neozyme II at this time, therefore,
allows Genzyme to maintain its commitment to the CF community, while preserving
the continuity of its CF development efforts.
Preservation of Competitive Advantage. While the CF Program has
experienced setbacks relating to the failure of HyperGAM(TM)+CF and the largely
inactive status of the protein replacement program due to the significant
technical challenges related to this approach, Genzyme believes that, with both
viral and non-viral vector systems in clinical evaluation for CF, the CF Program
is the most comprehensive program among those competitors active in the CF
field. Substantially all of the value created by the CF Program derives,
however, from the intellectual property developed under the CF Program. In the
event that Neozyme II is required to seek alternative sources of capital to
continue funding the CF Program, Genzyme believes that Neozyme II would be
required to disclose such intellectual property to interested third parties,
including existing or potential competitors, in connection with seeking such
funding and that such disclosure notwithstanding the existence of non-disclosure
agreements, could jeopardize the competitive position and diminish the value of
the CF Program and related gene delivery technology developed by Genzyme.
Genzyme believes that the acquisition of Neozyme II by Genzyme at this time
would avoid the risks of such disclosure and, accordingly, would allow Genzyme
to preserve the competitive advantage of the CF Program.
Investor Relations. If the Offer is not successful and Neozyme II seeks
alternative sources of funding, absent unforeseen progress in the CF Program,
Genzyme may determine not to make any acquisition proposal upon expiration of
the Purchase Option or, if Genzyme determines to make a subsequent proposal, it
is likely that such proposal would be at a price below $45 per Unit. As also
noted above, Genzyme expects that substantial commitments in time and capital
will be required to advance the CF Program through a demonstration of clinical
efficacy. In view of these commitments, the value realizable by the existing
investors in Neozyme II could fall well below the $45 per Unit now being offered
by Genzyme. Accordingly, Genzyme believes that effecting the Offer at this time
at a premium to the market price of the Units at the time that an agreement in
principal was reached will allow investors to realize a fair price for their
investment, while avoiding the risk of any such future decline in the value of
Neozyme II.
Potential Gene Therapy Collaborations. Genzyme views the CF market and the
gene therapy approach as an attractive opportunity that fits well with Genzyme's
corporate objectives of developing novel therapeutics to address significant
unmet medical needs. In particular, Genzyme has developed significant expertise
outside of the CF field and the acquisition of rights to gene therapy-based
programs within the CF field provides Genzyme with the ability to accelerate its
overall gene therapy development by continuing work on the most advanced
programs, thereby making Genzyme a more attractive partner.
In reaching its determination that the acquisition of Neozyme II at this
time on and subject to the terms of the Offer and the Second Step Transaction is
fair to and in the best interests of Genzyme and its
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stockholders, the Genzyme Board of Directors evaluated the factors considered by
it in light of the directors' knowledge of the business and operations of
Genzyme and Neozyme II and their respective business judgments. In addition, the
Genzyme Board considered the presentation made to it on September 17, 1996 by
Robertson, Stephens & Company (the "Robertson, Stephens & Company Presentation")
and the written opinion, dated September 20, 1996, of Robertson, Stephens &
Company (the "Robertson Stephens Opinion") (a copy of which is attached hereto
as Annex II) that, based upon and subject to the factors and assumptions set
forth in such opinion, the Offer Price was fair to Genzyme from a financial
point of view. The Genzyme Board of Directors did not find it practicable to and
did not quantify or assign relative weight to the specific factors considered by
it in reaching its determination. A detailed description of the Robertson,
Stephens & Company Presentation and the Robertson, Stephens & Company Opinion
are set forth below.
OPINION OF FINANCIAL ADVISOR TO GENZYME
Robertson, Stephens & Company is acting as Genzyme's exclusive financial
advisor and as Dealer Manager in connection with the Offer. Robertson, Stephens
& Company was engaged on the basis of its experience as a financial advisor in
connection with mergers and acquisitions as well as on its industry knowledge
and familiarity with the Company.
At a special meeting of the Genzyme Board held on September 17, 1996,
Robertson, Stephens & Company made the Robertson, Stephens & Company
Presentation and, on September 20, 1996, Robertson, Stephens & Company delivered
the Robertson, Stephens & Company Opinion to the Genzyme Board. No limitations
were imposed by the Genzyme Board upon Robertson, Stephens & Company with
respect to investigations made or procedures followed by Robertson, Stephens &
Company in rendering the Robertson, Stephens & Company Opinion. Robertson,
Stephens & Company was not requested to opine as to the fairness of the Offer
Price to the Company or to the Holders or the fairness of the consideration to
be paid by Genzyme pursuant to the Second Step Transaction.
The full text of the Robertson, Stephens & Company Opinion, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken by Robertson, Stephens & Company, is attached as Annex II to this
Offer to Purchase and is incorporated herein by reference. The Robertson,
Stephens & Company Opinion has been provided to the Genzyme Board for its
information. It is directed only to the fairness from a financial point of view
to Genzyme of the Offer Price and does not constitute a recommendation to any
Holder as to whether such Holder should tender any or all of its Units pursuant
to the Offer. The summary of the Robertson, Stephens & Company Opinion set forth
in this Offer to Purchase is qualified in its entirety by reference to the full
text of the opinion set forth in Annex II and incorporated herein by reference.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Robertson, Stephens & Company Opinion or the
Robertson, Stephens & Company Presentation. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to partial analysis or summary description. In
arriving at its opinion, Robertson, Stephens & Company did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Robertson, Stephens & Company believes that its analyses
must be considered as a whole and that selecting portions of its analyses,
without considering all analyses, would create an incomplete view of the process
underlying its opinion.
For purposes of the Robertson, Stephens & Company Opinion, Robertson,
Stephens & Company, among other things: (i) reviewed financial information
regarding the Company furnished to Robertson, Stephens & Company by the Company,
including certain financial forecasts prepared by the management of the Company;
(ii) reviewed publicly available information regarding the Company; (iii) held
discussions with the management of the Company concerning the business, past and
current business operations, financial condition and future prospects of the
Company; (iv) reviewed a draft dated September 20, 1996 of the Purchase
Agreement; (v) reviewed the stock price and trading history of the Company; (vi)
reviewed the valuations of publicly traded companies that Robertson, Stephens &
Company deemed comparable to the
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Company; (vii) compared the financial terms of the Offer with other transactions
which Robertson, Stephens & Company deemed relevant; (viii) prepared a
discounted cash flow analysis of the Company; (ix) analyzed the value of the
Callable Warrants; and (x) made such other studies and inquiries, and reviewed
such other data, as Robertson, Stephens & Company deemed relevant.
In arriving at its opinion, Robertson, Stephens & Company did not
independently verify any of the foregoing information and relied on all such
information being complete and accurate in all material respects. Furthermore,
Robertson, Stephens & Company did not make any independent appraisal of the
properties or assets and liabilities of the Company, nor was Robertson, Stephens
& Company furnished with any such evaluations or appraisals. With respect to the
financial forecasts (and the assumptions and bases therefor) of the Company
provided to Robertson, Stephens & Company by the management of the Company,
Robertson, Stephens & Company assumed that such forecasts had been reasonably
prepared in good faith on the basis of reasonable assumptions and reflected the
best available estimates and judgments of the management of the Company as to
the likely future financial performance of the Company. In that regard,
Robertson, Stephens & Company relied on the assumptions of the management of the
Company with respect to the effect on such forecasts of the potential outcome of
the Company's pending patent applications. The Robertson, Stephens & Company
Opinion was necessarily based upon market, economic, and other conditions that
existed and could be evaluated as of the date of the Robertson, Stephens &
Company Opinion and on information available to Robertson, Stephens & Company as
of such date.
The following is a summary of the analyses performed by Robertson, Stephens
& Company in connection with the preparation of the Robertson, Stephens &
Company Presentation and the Robertson, Stephens & Company Opinion. A copy of
the Robertson, Stephens & Company Presentation will be made available for
inspection and copying at the principal executive offices of Genzyme during
regular business hours by any interested Holder, or his representative who has
been so designated in writing.
STOCK PRICE AND TRADING HISTORY
Robertson, Stephens & Company reviewed the trading activity of the Units
and the Series N Warrants, including the daily closing price and daily volume of
each of the Units and the Series N Warrants, for the period from January 3, 1995
to September 13, 1996 and identified certain events that had a significant
effect on the prices of the Units and the Series N Warrants.
VALUATION ANALYSIS
Introduction. In valuing the Units, Robertson, Stephens & Company
performed a comparable company analysis, a comparable transaction analysis, a
discounted cash flow analysis and a warrant valuation analysis, each of which is
described in detail below. The comparable company analysis, comparable
transaction analysis for acquisitions of non-SWORDS (as defined below) and
discounted cash flow analysis were used to determine ranges for the Technology
Value (as defined below) of the Company. The comparable transaction analysis for
acquisitions of SWORDS was used to calculate the premiums paid by acquiring
companies in comparable acquisitions in order to determine the Equity Value (as
defined below) of the Company. For the warrant valuation analysis, Robertson,
Stephens & Company used the Black-Scholes formula to determine an implied value
per Callable Warrant. By adding to the Technology Value the implied aggregate
value of the Callable Warrants, based on an implied value, solely for purposes
of this analysis, per Callable Warrant of $15.12, Robertson, Stephens & Company
determined the equity value of the Company (the "Equity Value"), which
represents the aggregate market capitalization of the Units.
Comparable Company Analysis. Robertson, Stephens & Company performed an
analysis of companies engaged in research and development activities in the area
of gene therapy and which are considered by Robertson, Stephens & Company to be
reasonably comparable to the Company. The Tier 1 companies identified by
Robertson, Stephens & Company comprise Somatix Therapy Corporation and Vical
Incorporated (the "Tier 1 Companies"), and the Tier 2a companies identified by
Robertson, Stephens & Company comprise Avigen, Inc., Cell Genesys, Inc.,
GeneMedicine, Inc. and Targeted Genetics Corporation (the "Tier 2a Companies").
Robertson, Stephens & Company identified as the Tier 2b companies Immusol, Inc.,
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Introgen Therapeutics, Inc. and Transkaryotic Therapies, Inc. (the "Tier 2b
Companies"), each of which had recently filed a registration statement with
respect to an initial public offering. Robertson, Stephens & Company noted that
the Tier 1 Companies generally trade at significantly higher market
capitalizations than the Tier 2a Companies because they have one or more of the
following characteristics: (i) more enabling technologies, (ii) more substantial
corporate endorsements, (iii) broader patent estates, (iv) later stages of
clinical development and (v) more significant disease market opportunities.
Robertson, Stephens & Company then determined a Technology Value range. For
purposes of this methodology, Robertson, Stephens & Company defined Technology
Value as the market capitalization less cash and cash equivalents for each of
the comparable companies. For the Tier 1 Companies and the Tier 2a Companies,
market capitalization was based on market data as of September 13, 1996. For the
Tier 2b Companies, market capitalization was based on the mid-point of the
proposed initial public offering price disclosed in each such company's
registration statement and the expected number of fully diluted shares
outstanding immediately after such offering.
Based on this analysis, Robertson, Stephens & Company determined a range of
Technology Value of (i) between $104.7 million and $169.3 million for the Tier 1
Companies, (ii) between $28.4 million and $57.5 million for the Tier 2a
Companies and (iii) between $115.4 and $168.5 million for the Tier 2b Companies.
By including the implied value of the Callable Warrants, Robertson, Stephens &
Company calculated a range of Equity Value of (i) between $141.2 million and
$205.8 million, or $58.46 and $85.23 per Unit, based on the Tier 1 Companies,
(ii) between $64.9 million and $94.0 million, or $26.89 and $38.91 per Unit,
based on the Tier 2a Companies and (iii) between $151.9 million and $205.0
million, or $62.90 and $84.90 per Unit, based on the Tier 2b Companies.
Robertson, Stephens & Company also reviewed the trading performance of the
Units over the period from January 3, 1995 to September 13, 1996 and compared
such performance with that of indices representing the average trading prices
for each of the Tier 1 Companies and the Tier 2a Companies. Such review
indicated that, over such period, the trading price of the Units, the Tier 1
Companies and the Tier 2a Companies increased by 55.5%, 82.7% and 0.4%,
respectively.
No company utilized in the comparable company analysis was identical to the
Company. In particular, Robertson, Stephens & Company noted that the Company's
assets are limited to determining the application of potential gene therapy
products in the treatment of CF only. Certain of the comparable companies have
broader gene therapy technology programs, with potential applications to CF and
the treatment of other diseases. Accordingly, an analysis of the results of such
a comparison is not purely mathematical as several factors that are not relevant
to the Company could affect the public trading value of the comparable companies
to which the Company is being compared.
Comparable Transaction Analysis: Acquisitions of SWORDS
Companies. Robertson, Stephens & Company analyzed publicly available
information for 11 Stock/Warrant for Off balance sheet Research and Development
Subsidiary ("SWORDS") acquisitions within the biopharmaceutical industry (the
"SWORDS Acquisitions") considered by Robertson, Stephens & Company to be
reasonably comparable to the Company. The SWORDS Acquisitions analyzed were: (i)
PerSeptive Biosystems, Inc.'s acquisition of PerSeptive Technologies II
Corporation, (ii) Elan Corporation, plc's acquisition of Advanced Therapeutic
Systems Limited, (iii) Cytogen Corporation's acquisition of CytoRad Corporation,
(iv) Centocor, Inc.'s acquisition of Tocor II, Inc., (v) Gensia Pharmaceuticals
Inc.'s acquisition of Aramed, Inc., (vi) Genetics Institute, Inc.'s acquisition
of SciGenics Incorporated, (vii) Genzyme Corporation's acquisition of Neozyme I
Corporation, (viii) Elan Corporation, plc's acquisition of Drug Research Corp.,
(ix) Immunex Corporation's acquisition of Receptech Corp., (x) Centocor, Inc.'s
acquisition of Tocor, Inc. and (xi) Alza NV's acquisition of Bio-Electro
Systems, Inc. In five of the SWORDS Acquisitions, the acquiring sponsor company
exercised its contractual option to acquire the SWORDS company. The other six
SWORDS Acquisitions were negotiated transactions at prices below the option
exercise price.
For each of the SWORDS Acquisitions, Robertson, Stephens & Company
determined (i) the annual compounded return, (ii) the premium paid to the SWORDS
unit price, or to the aggregate price of the SWORDS common stock and the
detachable warrants to acquire the common stock of the sponsor company
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("Sponsor Warrants") for those SWORDS whose Sponsor Warrants had detached from
the SWORDS units and were trading separately (the "Combined Premium"), 28 days
prior to the date of announcement of the SWORDS Acquisition and (iii) the
premium paid to the SWORDS unit price, or to the SWORDS common stock price for
those SWORDS whose Sponsor Warrants had detached from the SWORDS units and were
trading separately (the "Ex-Sponsor Warrant Premium"), 28 days prior to the date
of announcement of the SWORDS Acquisition. Robertson, Stephens & Company
determined that (i) the annual compounded return for the SWORDS Acquisitions
ranged from -28.5% to 42.9%, (ii) the Combined Premium ranged from -3.6% to
135.6% and (iii) the Ex-Sponsor Warrant Premium ranged from 1.5% to 143.8%.
Excluding the SWORDS Acquisitions effected upon the exercise of the sponsor
company's contractual purchase option, such ranges were -28.5% to 26.4%, -3.6%
to 135.6% and 2.8% to 143.8%, respectively.
Robertson, Stephens & Company calculated a range for the Equity Value by
(i) applying the annual compounded return to the Unit Offering price of $35.00
per Unit and (ii) applying the Ex-Sponsor Warrant Premium to the market price of
the Units as of September 5, 1996. In each such case, Robertson, Stephens &
Company excluded from its analysis the SWORDS Acquisitions effected upon the
exercise of a contractual purchase option. Based on this analysis, Robertson,
Stephens & Company calculated ranges of Equity Value of (i) between -$7.2
million and $209.4 million, or -$2.97 and $86.71 per Unit, applying the annual
compounded return, and (ii) between $110.1 million and $261.2 million, or $45.60
and $108.16 per Unit, applying the Ex-Sponsor Warrant Premium.
No company utilized in the comparable SWORDS Acquisitions analysis was
identical to the Company, and no transaction utilized in the comparable SWORDS
Acquisitions analysis was identical to the Offer and Second Step Transaction.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the comparable companies and other factors that could affect
the acquisition value of such companies and the Company.
Comparable Transaction Analysis: Acquisitions of Non-SWORDS Early-Stage
Biotechnology Companies. Robertson, Stephens & Company analyzed publicly
available information for seven acquisitions of non-SWORDS, early-stage
biotechnology companies (the "Non-SWORDS Acquisitions") considered by Robertson,
Stephens & Company to be reasonably comparable to the Company (each, an
"Acquired Company"). The Non-SWORDS Acquisitions analyzed were: (i) Targeted
Genetics Corporation's acquisition of RGene Therapeutics, Inc., (ii)
Schering-Plough Corporation's acquisition of Canji, Inc., (iii) Rhone-Poulenc
Rorer Inc.'s acquisition of Applied Immune Sciences, Inc., (iv) Sandoz AG's
acquisition of Genetic Therapy, Inc., (v) Cytogen Corporation's acquisition of
Cellcor, Inc., (vi) Chiron Corporation's acquisition of Viagene, Inc. and (vii)
Ligand Pharmaceuticals Incorporated's acquisition of Glycomed Incorporated.
For the Non-SWORDS Acquisitions, Robertson, Stephens & Company calculated
the price paid by the acquiring company as a multiple of (i) the total research
and development expenses accrued for the Acquired Company since its inception
including, where applicable, in-process research and development (the "R&D
Multiple") and (ii) the Technology Value of the Acquired Company (the
"Technology Value Multiple"). For purposes of this methodology, Robertson,
Stephens & Company defined Technology Value as the equity market capitalization
of the Acquired Company one month prior to the announcement date of the
acquisition plus total debt less current cash. In addition, Robertson, Stephens
& Company calculated the premium paid for the Acquired Company to the price per
share of the Common Stock of the Acquired Company (a) one day prior to the
announcement date of the acquisition (the "One Day Premium") and (b) one month
prior to the announcement date of the acquisition (the "One Month Premium").
Robertson, Stephens & Company excluded from its acquisition premium analysis two
of the Acquired Companies that were not publicly traded as of the date of the
acquisition. Robertson, Stephens & Company determined that (i) the R&D Multiple
ranged from 0.7x to 7.4x, (ii) the Technology Value Multiple ranged from 1.5x to
3.1x, (iii) the One Day Premium ranged from 33.0% to 149.4% and (iv) the One
Month Premium ranged from 35.3% to 95.3%.
Robertson, Stephens & Company calculated a range for the Equity Value by
applying (i) the R&D Multiple to total research and development expenses for the
CFTR gene therapy program (but not for the HyperGAM(TM)+CF and CFTR protein
replacement therapy programs) since the inception of the Company of
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$36.6 million, (ii) the Technology Value Multiple to an estimated Technology
Value (which, solely for purposes of this analysis, Robertson, Stephens &
Company deemed to be $71.0 million, calculated as the market value of the
Company as of September 13, 1996 less the implied aggregate value of the
Callable Warrants), (iii) the One Day Premium to an acquisition price of $29.25
per share of the Callable Common Stock and (iv) the One Month Premium to an
acquisition price of $29.25 per share of the Callable Common Stock. Based on
this analysis, Robertson, Stephens & Company calculated a range of Equity Value
of (a) between $61.2 million and $306.6 million, or $25.36 and $126.94 per Unit,
applying the R&D Multiple, (b) between $140.5 million and $256.1 million, or
$58.18 and $106.06 per Unit, applying the Technology Value Multiple, (c) between
$130.5 million and $212.7 million, or $54.03 and $88.06 per Unit, applying the
One Day Premium, and (d) between $132.1 million and $174.5 million, or $54.70
and $72.27 per Unit, applying the One Month Premium.
No company utilized in the comparable Non-SWORDS Acquisitions transaction
analysis was identical to the Company, and no transaction utilized in the
comparable Non-SWORDS Acquisitions analysis was identical to the Offer and the
Second Step Transaction. Accordingly, an analysis of the results of such a
comparison is not purely mathematical but instead involves complex
considerations and judgments concerning differences in historical and projected
financial and operating characteristics of the comparable companies and other
factors that could affect the acquisition value of such companies and the
Company.
Discounted Cash Flow Analysis. Robertson, Stephens & Company performed a
discounted cash flow analysis of the projected cash flows of the Company for the
years 1997 through 2006 to 2008, based upon projections provided to Robertson,
Stephens & Company by the management of the Company. In conducting its
discounted cash flow analysis, Robertson, Stephens & Company utilized
projections representing three cases, each developed by the management of the
Company. These cases consisted of a base case (the "Base Case") and two adjusted
cases (the "Upside Case" and the "Downside Case"). In developing the three
cases, the management of the Company made certain assumptions regarding (i)
patient growth, (ii) market penetration, (iii) non-U.S. revenues and (iv)
royalty income. None of the cases assigned any value to discontinued or
suspended research operations, including the HyperGAM(TM)+CF and CFTR protein
replacement therapy programs.
For each of the three cases, Robertson, Stephens & Company calculated a
range for the Technology Value. For purposes of this analysis, Robertson,
Stephens & Company utilized discount rates ranging from 30.0% to 35.0% and
terminal value multiples of earnings before interest and taxes ("EBIT") ranging
from 8.0x to 10.0x.
Based on this analysis, Robertson, Stephens & Company calculated a range of
Technology Value of (i) between $20.9 million and $85.0 million, or $8.64 and
$35.19 per share of the Callable Common Stock, based on the Base Case, (ii)
between $49.9 million and $153.8 million, or $20.68 and $63.69 per share of the
Callable Common Stock, based on the Upside Case, and (iii) between $4.0 million
and $61.4 million, or $1.65 and $25.41 per share of the Callable Common Stock,
based on the Downside Case. By including the implied value of $15.12 per
Callable Warrant, Robertson, Stephens & Company calculated a range of Equity
Value of (i) between $57.4 million and $121.5 million, or $23.78 and $50.32 per
Unit, based on the Base Case, (ii) between $86.4 million and $190.3 million, or
$35.79 and $78.81 per Unit, based on the Upside Case, and (iii) between $40.5
million and $97.9 million, or $16.78 and $40.55 per Unit, based on the Downside
Case. Robertson, Stephens & Company noted that a discounted cash flow analysis
is a less reliable indicator of value for an early-stage biopharmaceutical
company such as the Company due to, among other things, the uncertainties in
developing a therapeutic product that satisfies both regulatory and market
requirements.
Valuation of Callable Warrants. Robertson, Stephens & Company also
performed a valuation of the maximum theoretical price per Callable Warrant by
using the Black-Scholes formula for valuing warrants of publicly traded
companies. The Black-Scholes formula incorporates the following information: (i)
a price per share of common stock, calculated as the sum of the price per share
of General Division Common Stock, par value $.01 per share, of Genzyme ("General
Share"), multiplied by two and the price per share of Tissue Repair Division
Common Stock, par value $.01 per share, of Genzyme ("Tissue Repair Share")
multiplied by 0.135, (ii) an exercise price of the Callable Warrants, calculated
as the 20-day trailing average of the sum of
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the price per share of a General Share multiplied by two and the price per share
of a Tissue Repair Share multiplied by 0.135, (iii) an exercise date of the
Callable Warrants of December 31, 1998, (iv) an interest rate of 6.3%, (v)
estimated levels of volatility ranging from 40.9% to 60.9% and (vi) an
adjustment in the price per General Share due to dilution. Robertson, Stephens &
Company computed a per Callable Warrant value ranging from $12.19 to $17.03,
respectively. For purposes of this analysis, Robertson, Stephens & Company noted
that one reliable indicator of the value of the Callable Warrants is the
historical 100-day volatility of the blended General Shares and Tissue Repair
Shares, which is 52.9% and yields an adjusted value per Callable Warrant of
$15.12.
GENERAL
The preparation of fairness opinions involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such opinions are not readily susceptible to
summary description. Accordingly, Robertson, Stephens & Company believes its
analyses must be considered as a whole and that considering any portion of such
analyses and the factors, without considering all such analyses and current
factors, could create a misleading or incomplete view of the process underlying
such opinions. In its analyses, Robertson, Stephens & Company made numerous
assumptions with respect to industry performance, general business and other
conditions and matters, many of which are beyond the control of the Company. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of a business do not purport to be appraisals or to reflect the
prices at which such businesses actually may be sold.
Robertson, Stephens & Company was engaged on the basis of its experience as
a financial advisor in connection with mergers and acquisitions as well as on
its industry knowledge and familiarity with the Company. Robertson, Stephens &
Company is a nationally recognized investment banking firm. As part of its
investment banking business, Robertson, Stephens & Company is frequently engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. In the course of its market-
making and other activities, Robertson, Stephens & Company may, from time to
time, have a long or short position in and buy and sell securities of the
Company.
Genzyme has agreed to pay Robertson, Stephens & Company a total fee of
$440,000 for its services as financial advisor to Genzyme and as Dealer Manager.
Of such total fee, $50,000 will be payable upon the purchase of Units pursuant
to the Offer. Genzyme has also agreed to reimburse Robertson, Stephens & Company
for its reasonable out-of-pocket expenses, including the fees and expenses of
its legal counsel. Genzyme has further agreed to indemnify Robertson, Stephens &
Company for certain liabilities relating to or arising out of services provided
by Robertson, Stephens & Company as financial advisor or as Dealer Manager,
including, without limitation, certain liabilities under U.S. federal securities
laws.
PURPOSE AND STRUCTURE OF THE TRANSACTION
The purpose of the Offer is to enable Genzyme, through its wholly owned
subsidiary, to acquire the entire equity interest of the Company, and to enable
Genzyme to acquire the Callable Warrants associated with the Units that are
tendered to reduce the possible dilution to Genzyme's existing stockholders.
Following the completion, or under certain circumstances the termination, of the
Offer, Genzyme and the Purchaser intend to acquire any Shares included in the
untendered Units by consummating the Second Step Transaction. In the Second Step
Transaction, holders of Shares included in the untendered Units (other than
Genzyme, the Purchaser or the Company or any direct or indirect subsidiary of
any of them and Holders, if any, who are entitled to and who perfect their
appraisal rights under the applicable provisions of the BVI Law), will receive
$29.00 per Share in cash, without interest. Any Callable Warrants included in
the untendered Units will remain outstanding following the Second Step
Transaction. The acquisition of the Company is structured as a cash tender offer
followed by the Second Step Transaction in order to expedite the opportunity for
Genzyme and the Purchaser to obtain a controlling interest in the Company, to
enable Genzyme to acquire some or all
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of the Callable Warrants, to provide a prompt and orderly transfer of ownership
of the Company from the Company's current Holders to the Purchaser and to
provide the Company's current Holders with cash for all of their Units. In the
event that the Minimum Condition is not satisfied, the Purchase Agreement
provides that the Purchaser may elect to amend and extend the Offer to eliminate
this condition. In that event, during the period that the Offer is extended, the
Company shall, in accordance with applicable laws and the Purchase Agreement,
solicit the approval of the holders of the Shares for the Second Step
Transaction. Alternatively, the Purchaser may elect to terminate the Offer and,
promptly thereafter, request that the Company solicit the approval of the
holders of the Shares for the Second Step Transaction. If the Purchaser does not
make either election, Genzyme, the Purchaser or the Company may terminate the
Purchase Agreement. See "SPECIAL FACTORS -- Section 6. The Purchase Agreement;
Appraisal Rights."
Under the BVI Law and the Company's Memorandum and Articles of Association,
if the Purchaser acquires at least a majority of the outstanding Shares, the
Purchaser would have sufficient voting power to approve the Merger Plan, if
necessary, and consummate the Second Step Transaction, by written consent in
lieu of a meeting of the Holders and without the vote or consent of any other
Holders. In addition, under the BVI Law, if the Purchaser acquires at least 90%
of the outstanding Shares, the Purchaser would have the power to consummate a
merger of the Company with and into the Purchaser, or require the Company to
redeem all of the Shares not held by the Purchaser, without a vote of the
Holders. In either event, the Purchaser intends to take all necessary and
appropriate action to cause the Second Step Transaction to become effective as
soon as reasonably practicable after the consummation, or under certain
circumstances the termination, of the Offer without a meeting of the Holders.
PLANS FOR THE COMPANY AFTER THE TRANSACTION
Although Genzyme is considering pursuing corporate partnering arrangements
with third parties to jointly develop products based, in part, on technology
owned by the Company, except as described in this Offer to Purchase, neither
Genzyme nor the Purchaser has any present plans or proposals which relate to or
would result in any extraordinary corporate transaction, such as a merger,
reorganization, liquidation, or sale or transfer or a material amount of assets
involving the Company, or any material changes in the Company's capitalization,
dividend policy, corporate structure or business or the composition of the
Company's Board of Directors or management.
The Purchase Agreement provides that, upon the acceptance for payment of
and payment by the Purchaser for any Units pursuant to the Offer, the Purchaser
shall be entitled to designate persons to be elected as Class A directors of the
Company so as to give the Purchaser representation on the Company's Board of
Directors proportional to its ownership of Units. See "SPECIAL
FACTORS -- Section 6. The Purchase Agreement; Appraisal Rights."
6. THE PURCHASE AGREEMENT; APPRAISAL RIGHTS
THE PURCHASE AGREEMENT
The following is a brief summary of certain provisions of the Purchase
Agreement, a copy of which is filed as an exhibit to the Schedule 14D-1 and is
incorporated herein by reference. This summary does not purport to be complete
and is qualified in its entirety by reference to the Purchase Agreement.
Capitalized terms used herein and not otherwise defined have the same meaning as
in the Purchase Agreement.
The Offer. The Purchase Agreement provides for the commencement of the
Offer as soon as practicable and in any event within five business days of the
public announcement of the Purchaser's intention to make the Offer. The
obligation of the Purchaser to commence the Offer and accept for payment any
Units tendered is subject to the satisfaction of certain conditions (including
the Minimum Condition) which are described in "THE TENDER OFFER -- Section 9.
Certain Conditions of the Offer." The Purchase Agreement provides that without
the consent of the Company, as approved by the Special Committee, the Purchaser
shall not amend or waive the Minimum Condition or the Majority Consent Condition
(as defined below), extend the Offer, reduce the maximum number of Units to be
purchased, reduce the price to be paid per Unit pursuant to the Offer or amend
any other material term of the Offer in a manner adverse to the holders of the
Units.
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Pursuant to the Purchase Agreement, if on October 28, 1996 (the "Initial
Expiration Date"), the Minimum Condition has not been satisfied, the Purchaser
may, not later than 9:00 a.m., eastern time, on the next business day following
the Initial Expiration Date, elect either (x) to extend the Offer for a period
not to exceed 60 days and amend the Offer to delete the Minimum Condition and
add the Majority Consent Condition (as defined below), in which case, promptly
thereafter, the Company shall commence to convene a meeting or solicit the
written consent of its shareholders for approval of the Merger Plan (the
foregoing being referred to as the "Simultaneous Solicitation") or (y) terminate
the Offer and promptly return all tendered Units, in which case, promptly
thereafter, the Company shall commence to convene a meeting or solicit the
written consent of its shareholders for approval of the Merger Plan (the
foregoing being referred to as the "Termination Solicitation"), in either case
with such solicitation or meeting to be conducted in accordance with applicable
law and the terms of the Purchase Agreement. The Majority Consent Condition is
defined in the Purchase Agreement to mean that the sum of (a) the Shares
included in the Units tendered and not withdrawn as of the new expiration date
of the Offer (provided such Shares may be voted in favor of the Merger Plan at
the meeting or pursuant to the consent solicitation by the Purchaser immediately
after the purchase of the Units which include such Shares in the Offer by the
Purchaser) plus (b) the number of Shares held by holders who have voted in favor
of the Merger Plan at the meeting or pursuant to the consent solicitation as of
the new expiration date of the Offer (but excluding any such Shares that would
result in double counting with (a) above) represents not less than a majority of
the Shares outstanding.
Approval of the Second Step Transaction. The Board of Directors of the
Company has authorized the Merger Plan in accordance with applicable law and the
Company's Memorandum and Articles of Association. The Company has agreed in the
Purchase Agreement, at the request of Genzyme, to take all action (coordinating
the timing thereof with Genzyme and the Purchaser) to the extent necessary to
convene a meeting of the Holders as promptly as practicable after the purchase
of Units pursuant to the Offer, if required by applicable law for consummation
of the Second Step Transaction, to consider and vote upon the approval of the
Merger Plan or to solicit the written consent of the Holders to approve the
Merger Plan promptly after such purchase, or at the request of Genzyme, promptly
after the commencement of the Offer and while it is pending upon the election of
Genzyme to pursue the Simultaneous Solicitation or following the termination of
the Offer upon the election of Genzyme to pursue the Termination Solicitation.
If required by applicable law, the Company has agreed to promptly prepare and
file with the Commission, and use its best efforts to have cleared by the
Commission, a proxy, consent solicitation or information statement relating to
the Second Step Transaction in compliance with applicable law.
The Second Step Transaction. The Purchase Agreement provides that, as soon
as practicable following the consummation of the Offer, the satisfaction of the
Majority Consent Condition (in the event of a Simultaneous Solicitation) or the
satisfaction of the conditions to effect the merger pursuant to the Merger Plan
(in the event of a Termination Solicitation) and subject to the terms and
conditions thereof and the satisfaction or waiver of the other conditions to the
Second Step Transaction and in accordance with the BVI Law, the Purchaser shall
cause to be effected a transaction that results in Genzyme owning, directly or
indirectly, all of the Shares of the Company. If the Offer is consummated and
90% or more of the Units are tendered and accepted, the Purchaser will either
(i) effect a merger of the Company into the Purchaser or (ii) cause the Company
to redeem all Shares included in the untendered Units. If the Offer is
consummated but less than 90% of the Units are tendered and accepted, or if,
pursuant to the Termination Solicitation, the requisite approval of the
Company's shareholders for the Second Step Transaction is obtained, then the
Second Step Transaction will be effected as a merger of the Company with a
wholly owned subsidiary of the Purchaser. Regardless of the form of the Second
Step Transaction, the consideration to be received as a result of the Second
Step Transaction by holders of Shares included in the untendered Units (other
than Genzyme, the Purchaser or the Company or any direct or indirect subsidiary
of any of them and holders, if any, who shall have demanded and perfected their
appraisal rights under the applicable provisions of the BVI Law) will be $29.00
per Share in cash, without interest (the "Second Step Consideration").
Upon consummation of the Second Step Transaction, the Callable Warrants
will become exercisable and, beginning on the day following the Effective Date,
will trade separately from the right to receive the Second Step Consideration on
account of the Callable Common Stock.
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Indemnification and Insurance. The Purchase Agreement provides that proper
provision will be made so that any affiliate of Genzyme that succeeds to the
assets and liabilities of the Company or, at Genzyme's option, Genzyme, shall
assume all of the obligations of the Company under the indemnification
agreements between the Company and the members of the Special Committee as in
effect on the date of the Purchase Agreement and, if amended prior to the
Effective Date, on the Effective Date. Genzyme, the Purchaser and the Company
have also agreed that in the event the Company or the successor entity (i)
consolidates with or merges into any other person and shall not be the surviving
corporation or (ii) transfers all or substantially all of its assets to any
person, then, and in each case, proper provision shall be made so that the
successors and assigns of such successor entity or at Genzyme's option, Genzyme,
shall assume the indemnity obligations under such agreements. The Purchase
Agreement also provides that the Company, and from and after the consummation of
the Offer (or the Merger in the event of the Termination Solicitation) Genzyme,
shall, to the fullest extent permitted by applicable law, indemnify and hold
harmless each present and former director or officer of the Company against all
losses arising out of any act or omission in their capacity as an officer,
director or employee of the Company. Additionally, Genzyme is obligated to
maintain, for three years from the Effective Date, directors' and officers'
liability insurance policies covering the directors and officers of the Company
with coverages and other terms at least as favorable as is currently in effect;
provided that Genzyme is not obligated to spend more than 150% of the current
annual premiums paid by the Company for such insurance, and, following such
three year period until the sixth anniversary of the Effective Date, Genzyme has
agreed to assume the indemnification obligations of the Company under the
indemnification agreements referred to above to the extent that it has not
already done so.
Designation of Directors. The Purchase Agreement provides that, promptly
upon the acceptance for payment of and payment by the Purchaser for any Units
pursuant to the Offer, and from time to time thereafter as Units are accepted
for payment and paid for by the Purchaser, the Purchaser shall be entitled to
designate such number of Class A directors of the Company, rounded to the
nearest whole number, as will give the Purchaser representation on the Company's
Board of Directors equal to at least that number of directors which equals the
product of the total number of the Company's directors (after giving effect to
the directors elected in accordance with this procedure) multiplied by the
percentage that such number of Units so accepted for payment and paid for by the
Purchaser bears to the number of Units outstanding, and the Company shall, at
such time, take such actions as are necessary to cause the Purchaser's designees
to be so elected or appointed; provided, however, that, notwithstanding the
Purchaser's right to designate certain of the Company's directors as described
above, until the Effective Date, the Company's Class A Directors shall include
at least two directors who were directors on September 20, 1996 and who are not
officers or directors of Genzyme or the Purchaser (the "Independent Directors");
provided further, that, if the number of Independent Directors shall be reduced
below two for any reason whatsoever, any remaining Independent Director shall be
entitled to designate a person who is not an officer or director of Genzyme or
the Purchaser to fill such vacancy who shall be deemed to be an Independent
Director or, if no Independent Directors then remain, the other directors shall
designate two persons to fill such vacancies who shall not be designees,
stockholders, directors, officers or affiliates of Genzyme or the Purchaser, and
such persons shall be deemed to be Independent Directors.
Notwithstanding anything in the Purchase Agreement to the contrary, subject
to the terms of the Company's Memorandum of Association and Articles of
Association, in the event that the Purchaser's designees are appointed or
elected as the Company's directors, after the acceptance for payment of Units
pursuant to the Offer and prior to the Effective Date, the affirmative vote of a
majority (or, if there are only one or two Independent Directors, the single or
unanimous vote, as the case may be) of the Independent Directors (who shall act
as an independent committee of the Board of Directors for this purpose) shall be
required, and alone shall be sufficient, to (i) amend or terminate the Purchase
Agreement by the Company, (ii) exercise or waive any of the Company's rights or
remedies under the Purchase Agreement, (iii) extend the time for performance of
Genzyme's and the Purchaser's respective obligations under the Purchase
Agreement, or (iv) approve any other action by the Company that the Independent
Directors determine could adversely affect the interests of the Holders (other
than Genzyme, the Purchaser and their affiliates) with respect to the
transactions contemplated by the Purchase Agreement.
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Representations and Warranties. The Purchase Agreement contains certain
customary representations and warranties of the parties. The Company has made
representations and warranties to Genzyme and the Purchaser regarding, among
other things: (i) the Company's organization and qualification; (ii) the
Company's capitalization; (iii) the Company's authority to enter into and
perform its obligations under the Purchase Agreement (subject to approval of the
Merger Plan by the shareholders to the extent required by the BVI Law); (iv) the
compliance of the transactions contemplated by the Purchase Agreement with the
Company's Memorandum of Association and Articles of Association, certain
agreements and applicable laws; and (v) the accuracy and completeness of the
Company's Schedule 14D-9 filed in connection with the Offer and any proxy or
information statement to be filed in connection with the Second Step
Transaction.
Genzyme and the Purchaser have made representations and warranties to the
Company regarding, among other things: (i) Genzyme's and the Purchaser's
organization and qualification; (ii) Genzyme's and the Purchaser's authority to
enter into and perform their respective obligations under the Purchase
Agreement; (iii) the compliance of the transactions contemplated by the Purchase
Agreement with Genzyme's and the Purchaser's respective charters or other
governing instruments, certain agreements and applicable laws; and (iv) the
accuracy and completeness of the documents filed by Genzyme and the Purchaser
with the Commission in connection with the Offer.
The representations and warranties contained in the Purchase Agreement
shall expire upon consummation of the Offer.
Conditions to the Second Step Transaction. The obligations of each of the
Company, the Purchaser and Genzyme to consummate the Second Step Transaction,
other than following a Termination Solicitation, are subject to the following
conditions: (i) the Purchaser shall have made the Offer on the terms and
conditions set forth therein and shall have purchased, or caused to be
purchased, all Units validly tendered and not withdrawn pursuant to the Offer;
provided, however, that this condition is not applicable to the obligations of
Genzyme or the Purchaser if, in breach of the Purchase Agreement or the terms of
the Offer, the Purchaser fails to purchase any Units validly tendered and not
withdrawn pursuant to the Offer; (ii) the Merger Plan shall have been approved
and adopted by the requisite vote or consent of the Holders, if any, required by
the BVI Law and the Company's Memorandum of Association and Articles of
Association; and (iii) no preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission nor any statute,
rule, regulation or executive order promulgated or enacted by any governmental
authority shall be in effect, which would make the acquisition by Genzyme or the
Purchaser of the Callable Common Stock illegal or otherwise prevent the
consummation of the Second Step Transaction. In addition to the condition set
forth in clause (ii) of the preceding sentence, following a Termination
Solicitation in which clause (ii) of the preceding sentence has been satisfied,
the Purchaser shall not be obligated to effect a merger pursuant to the Merger
Plan if on or before the Effective Date any of the following shall occur or
shall be determined by the Purchaser to have occurred and remain in effect:
(a) except for matters which affect generally the economy or the industry
in which the Company is engaged and except for continued losses incurred by the
Company as a result of its operations and continued depletion of its cash
resources in the ordinary course of business or consistent with the annual
workplan currently in effect, any change shall have occurred in the business,
properties, assets, liabilities, capitalization, shareholders equity, financial
condition, operations, licenses or franchises or results of operations of the
Company which has a Material Adverse Effect (as defined in the Purchase
Agreement); or
(b) there shall have been instituted or be pending any action, proceeding,
application or counterclaim before any court or governmental or regulatory body
which (i) challenges the validity of or seeks to restrain the consummation of or
to impose any material limitation, on any transaction contemplated by the
Purchase Agreement or seeks (ii) to obtain any material amount of damages in
connection with such transactions; or
(c) any statute, regulation, order or injunction shall have been enacted,
entered, enforced or deemed applicable to the Merger that is reasonably likely
to, directly or indirectly, result in any of the consequences referred to in
paragraph (b) above; or
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(d) the representations and warranties of the Company set forth in the
Purchase Agreement shall not be true in any material respect as though made on
such date, or the Company shall have failed in any material respect to perform
any material obligation or covenant required in the Purchase Agreement to be
performed or complied with by it; or
(e) the Company shall have entered into, or shall have publicly announced
its intention to enter into, an agreement or agreement in principle with respect
to any Acquisition Proposal (as defined below).
Acquisition Proposals. The Company has agreed in the Purchase Agreement
that it shall not, directly or indirectly through any officer, director,
employee, financial advisor, representative or agent of the Company: (i) solicit
or initiate any inquiries or proposals for a merger, consolidation, business
combination, sale of substantial assets, sale of shares of capital stock
(including without limitation by way of a tender offer) or similar transactions
involving the Company, other than the transactions contemplated by the Purchase
Agreement (any of the foregoing inquiries or proposals being referred to as an
"Acquisition Proposal"); (ii) engage in negotiations or discussions concerning,
or provide any non-public information to any person or entity relating to, any
Acquisition Proposal; or (iii) agree to, approve or recommend any Acquisition
Proposal; provided, however, that nothing contained in the Purchase Agreement
shall prevent the Company, the Company's directors or the Special Committee
(through any officer, director, employee, financial advisor, representative or
agent) from (A) engaging in negotiations or discussions in response to an
inquiry that was not solicited after September 20, 1996; (B) furnishing
non-public information to any person or entity in connection with an unsolicited
written Acquisition Proposal by such person or entity or recommending an
unsolicited written Acquisition Proposal to the Holders, if and only to the
extent that (1) the Company's Board of Directors or the Special Committee, as
the case may be, believe in good faith (after consultation with its financial
advisor) that the party requesting such non-public information is capable of
financing a transaction more favorable to the Holders from a financial point of
view than the transaction contemplated by the Purchase Agreement and the
Company's Board of Directors or the Special Committee, as the case may be,
determine in good faith (after consultation with outside legal counsel) that
such action is necessary to comply with their fiduciary duties to Holders under
applicable law and (2) prior to furnishing such non-public information to such
person or entity, the Company's Board of Directors or the Special Committee, as
the case may be, receive from such person or entity an executed confidentiality
agreement on customary terms or (C) complying with Rule 14e-2 promulgated under
the Exchange Act with regard to an Acquisition Proposal.
The Company has further agreed that it will notify Genzyme in writing
within 24 hours after receipt by the Company (or its advisors) of any written
Acquisition Proposal or any written request for non-public information pursuant
to which it intends to provide non-public information.
Conduct of Business. Pursuant to the Purchase Agreement the Company has
agreed that, except as otherwise expressly contemplated thereby, prior to the
Effective Date or such earlier time as designees of the Purchaser constitute a
majority of the Company's Directors (determined on the basis of the combined
voting power of the Company's Class A and Class B Directors): (a) the business
of the Company shall in all material respects be conducted only in, and the
Company shall not take any material action except in, the ordinary course of
business and consistent with past practice, and the Company shall use all
reasonable efforts, consistent with past practice or the annual workplan
currently in effect, to maintain and preserve its business organization, assets,
and advantageous business relationships; (b) the Company shall not make any tax
election or, except in the ordinary course of business and consistent with past
practice, settle or compromise any federal, state, local or foreign tax
liability; and (c) the Company shall not agree, in writing or otherwise, to take
any of the foregoing actions or any action which would make any representation
or warranty of the Company in the Purchase Agreement untrue or incorrect in any
material respect, or which would materially impair or prevent the occurrence of
any condition described in "THE TENDER OFFER -- Section 9. Certain Conditions to
the Offer" prior to the consummation of the Offer.
In addition to the foregoing, the Purchase Agreement provides that, if the
Minimum Condition has not been satisfied on the Initial Expiration Date, and the
Purchaser elects to proceed with either a Simultaneous Solicitation or a
Termination Solicitation, then until the earlier of the Effective Date or the
termination of the Purchase Agreement, the Special Committee shall be authorized
to take such actions as it may deem
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appropriate to reduce or eliminate any discretionary spending by the Company or
by Genzyme on behalf of the Company not contractually committed to with a person
or entity that is not a party to the Purchase Agreement; provided that, Genzyme
may elect to continue such spending on its own account and to the extent it
elects to do so, the Company will, if the Merger is effected, reimburse Genzyme
for such expenditures immediately prior to the Effective Date.
Fees and Expenses. The Purchase Agreement provides that each party thereto
shall bear all of the fees and expenses incurred by it in connection with the
negotiation and performance of the Purchase Agreement and no party to the
Purchase Agreement may recover any such fees and expenses from another party
upon termination of the Purchase Agreement, except for a termination fee payable
to Genzyme as further described under the heading "Effect of Termination
Resulting from a Superior Transaction."
Termination. The Purchase Agreement may be terminated at any time prior to
the Effective Date as follows:
(a) by the mutual written consent of the Boards of Directors of
Genzyme, the Purchaser and the Company, with the affirmative vote of a
majority of the Independent Directors (who shall act as an independent
committee of the Board of Directors of the Company for this purpose) being
required, and alone being sufficient, for action by the Board of Directors
of the Company for this purpose;
(b) by the Company upon approval of the Special Committee: (i) if (A)
the Purchaser shall have terminated the Offer without the purchase of any
Units thereunder; or (B) the Purchaser shall not have paid for all Units
validly tendered pursuant to the Offer and not withdrawn within 90 days
after the commencement of the Offer, unless such termination of the Offer
or failure to pay for Units shall have been caused by or resulted from the
failure of the Company to perform in any material respect any of its
covenants or agreements contained in the Purchase Agreement, the material
breach by the Company of any of its representations or warranties contained
in the Purchase Agreement or an election by the Purchaser to terminate the
Offer and effect a Termination Solicitation; or (ii) if the Effective Date
shall not have occurred on or before the six-month anniversary of the
execution of the Purchase Agreement due to a failure of any of the
conditions to the obligation of the Company to effect the Second Step
Transaction as described above under the heading Conditions to the Second
Step Transaction, or if the Purchaser has elected to proceed with the
Termination Solicitation, if the Effective Date shall not have occurred on
or before the six-month anniversary of the date of the Purchase Agreement;
or (iii) if, prior to the purchase of any Units pursuant to the Offer, or
the Effective Date if the Purchaser has elected to proceed with a
Termination Solicitation, Genzyme or the Purchaser materially fails to
perform any of their respective obligations under the Purchase Agreement
and such nonperformance has a material adverse effect on Genzyme's or the
Purchaser's ability to consummate the Offer or the Second Step Transaction;
or (iv) if, in the event the Minimum Condition shall not have been
satisfied on the Initial Expiration Date and the Purchaser shall have
amended the Offer or terminated the Offer pursuant to its election to
proceed with either the Simultaneous Solicitation or the Termination
Solicitation, the Purchaser has materially failed to perform any of its
obligation in connection with the Simultaneous or Termination Solicitation;
or (v) if, prior to the purchase of Units pursuant to the Offer, or the
Effective Date if the Purchaser has elected to proceed with the Termination
Solicitation, the Special Committee shall have withdrawn or modified its
approval or recommendation of the Offer or the Purchase Agreement in order
to approve the execution by the Company of a definitive agreement providing
for the acquisition of the Company or substantially all of its assets or a
merger or other business combination or in order to approve a tender offer
for all of the Shares or Units by a third party, in any case, as determined
by the Special Committee, on terms more favorable to the Company's
shareholders than the Offer (a "Superior Transaction"), provided, that (i)
the Company shall have provided Genzyme with at least five business days'
written notice of such Superior Transaction, including a copy of the
proposed agreement and (ii) the Company shall not have violated the
provisions described above under "Acquisition Proposals"; or
(c) by Genzyme or the Purchaser (i) if, due to an occurrence that
would result in a failure to satisfy any condition to the consummation of
the Offer or the Majority Consent Condition if the Purchaser has
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<PAGE> 36
elected to proceed with the Simultaneous Solicitation, the Purchaser shall
have (A) failed to commence the Offer within 5 business days of the date on
which the Purchaser's intention to make the Offer is publicly announced;
(B) terminated the Offer without the purchase of any Units thereunder; or
(C) failed to pay for all Units validly tendered pursuant to the Offer and
not withdrawn within 90 days after commencement of the Offer, unless such
failure or termination shall have been caused by or results from (x) the
failure of Genzyme or the Purchaser to perform in any material respect any
of its covenants or agreements contained in the Purchase Agreement, (y) the
material breach by Genzyme or the Purchaser of any of its representations
or warranties contained in the Purchase Agreement, or (z) the Purchaser's
election to proceed to seek approval of the Merger Plan pursuant to the
Termination Solicitation; or (ii) if the Effective Date shall not have
occurred on or before the six-month anniversary of the date of the Purchase
Agreement due to a failure of any of the conditions to the obligations of
Genzyme or the Purchaser to effect the Second Step Transaction as described
above under the heading "Conditions to the Second Step Transaction"; or
(iii) if, prior to the purchase of Units pursuant to the Offer, or the
Effective Date if the Purchaser has elected to proceed with the Termination
Solicitation, the Company's directors shall have publicly withdrawn or
modified in a manner adverse to the Purchaser their approval or
recommendation of the Offer or the Purchase Agreement or recommended
acceptance of a Superior Transaction or shall have resolved to do any of
the foregoing.
Effect of Termination. In the event of the termination of the Purchase
Agreement as provided under the heading "Termination," all obligations and
agreements of the parties set forth therein shall forthwith terminate and be of
no further force or effect, and there shall be no liability on the part of
Genzyme, the Purchaser or the Company thereunder except (a) as provided under
the headings "Effect of Termination Resulting from a Superior Transaction" and
"Ancillary Agreements" below and (b) that the foregoing shall not relieve any
party for liability for any breach of the Purchase Agreement occurring prior to
such termination.
Effect of Termination Resulting from a Superior Transaction. In the event
of the termination of the Purchase Agreement by the Company in accordance with
clause (b)(v) under the heading "Termination" or by Genzyme or the Purchaser in
accordance with (x) clause (c)(iii) under the heading "Termination", or (y)
clause (c)(i) or (c)(ii) under the heading "Termination" if such termination is
based on the failure of the Company to perform in any material respect any of
its covenants or agreements contained in the Purchase Agreement, the Purchase
Agreement requires that the Company pay to Genzyme a termination fee of $500,000
upon consummation of any Superior Transaction.
Ancillary Agreements. In the event of any termination of the Purchase
Agreement (x) by the Company in accordance with clause (b)(v) or by Genzyme or
the Purchaser in accordance with clause (c)(iii) under the heading "Termination"
above as a result of a Superior Transaction in connection with which the Company
shall not have violated the provisions described above under the heading
"Acquisition Proposals,", or (y) by Genzyme or the Purchaser pursuant to clause
(c)(i) under the heading "Termination" above, unless such termination is based
on the failure of the Company to perform in any material respect any of its
covenants or agreements contained in the Purchase Agreement, Genzyme has agreed
that, effective upon consummation of such Superior Transaction, it shall, at the
Company's request, (a) consent to the Superior Transaction in its capacity as
holder of the Company's Series 1992 Note and pursuant to all applicable
provisions of the Company's Memorandum of Association; (b) terminate the
Purchase Option Agreement, in which event the Series 1992 Note will become due
and payable in accordance with its terms; (c) consent to the assignment by the
Company of the Technology License Agreement; (d) at the option of Genzyme,
terminate or consent to the assignment by the Company of each of the Research
and Development Agreement, the Services Agreement, and the Administrative
Agreement.
Amendment. Subject to the amendment provision described above under the
heading "Designation of Directors," the Purchase Agreement may not be amended
except by action of the Boards of Directors of each of the parties to the
Purchase Agreement, set forth in an instrument in writing signed on behalf of
each of the parties; provided, however, that the Board of Directors of the
Company shall not act to amend the Purchase Agreement without the approval of
the Special Committee.
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Waiver. At any time prior to the Effective Date, whether before or after
any special meeting or written action of the Holders to approve the Second Step
Transaction, any party to the Purchase Agreement, subject to the waiver
provisions described above under the heading "Designation of Directors," by
action taken by its Board of Directors (and in the case of the Company, subject
to the approval of the Special Committee), may (i) extend the time for the
performance of any of the obligations or other acts of any other party to the
Purchase Agreement or (ii) subject to the third sentence above under the heading
"The Offer" and the proviso contained above under the heading "Amendment," waive
compliance with any of the agreements of any other party or with any conditions
to its own obligations. Any agreement on the part of a party to the Purchase
Agreement to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party by a duly authorized
officer.
APPRAISAL RIGHTS
No appraisal rights are available in connection with the Offer. However, if
the Second Step Transaction is consummated, Holders may have certain rights
under Section 83 of the BVI Law to dissent and demand appraisal of, and to
receive payment in cash of the fair value of, their Shares. Under the BVI Law,
holders of shares of a BVI company are entitled to payment of fair value for
their shares upon dissenting from mergers (if the BVI company is a constituent
company in the merger and not the surviving company), consolidations, certain
dispositions of more than 50% of the company's assets, compulsory redemptions of
shares, and certain other transactions (a "Specified Transaction"). In order to
assert rights under Section 83, the following procedures must be followed:
- A Holder who desires to exercise dissenters' rights must give to the
Company before or at the meeting of Holders at which the Specified
Transaction is submitted to a vote, a written notice of an objection
to the Specified Transaction. The objection must include a statement
that the Holder proposes to demand payment for his shares if the
action is taken. In the event that the Holder does not receive notice
of the meeting, or if the proposed action is authorized by written
consent without a meeting, no notice of objection is required.
- Within 20 days following the authorization of the Specified
Transaction by vote or written consent, the Company must give written
notice of the action to each Holder who gave written objection or from
whom written objection was not required, except those who voted for,
or consented in writing to, the proposed action. A Holder to whom the
Company is required to give notice who elects to dissent must, within
20 days of notice or authorization, give to the Company a written
notice of his decision to elect to dissent, stating such Holder's name
and address, the number and class or series of shares involved (which
must include all shares held by such Holder) and a demand for payment
of fair value for the shares. Upon the giving of notice, the Holder
ceases to have the rights of a Holder with the exception of the right
to be paid for the fair value of his shares.
- Within 7 days of the later to occur of: (i) the expiration of the
period within which Holders may give notice or election of dissent or
(ii) the effective date of the Specified Transaction, the surviving
corporation must make a written offer to each dissenting Holder to
purchase his shares at a price that the Company determines to be their
fair value.
- If within 30 days of the offer, the Company and the dissenting Holder
agree on the price to be paid for the shares, the Company will pay
such amount to the Holder upon surrender of the certificates
representing the shares.
- If the Company and the dissenting Holder fail to agree on a price
within 30 days, the following shall occur within the next 20 days:
(i) the Company and the Holder shall each designate an appraiser;
(ii) the two designated appraisers shall designate a third
appraiser;
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(iii) the three appraisers shall fix the fair value of the
dissenting Holders' shares as of the close of business on the day prior
to the vote on the Specified Transaction, excluding any appreciation or
depreciation directly or indirectly induced by the Specified
Transaction, and such value shall be binding on the Company and the
dissenter; and
(iv) the Company shall pay the dissenting Holder such amount in
money upon the surrender of the certificates representing the shares.
- The enforcement by a Holder of dissenters' rights will exclude the
enforcement by the Holder of his other rights as a holder of shares,
other than the Holder's right to obtain relief on the ground that the
action taken was illegal.
See Annex II attached hereto for the full text of Section 83 of the BVI
Law.
7. CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF THE TRANSACTIONS DESCRIBED IN THIS OFFER TO PURCHASE.
THE TAX CONSEQUENCES OF THE TRANSACTIONS WILL DEPEND IN LARGE PART ON THE FACTS
AND CIRCUMSTANCES APPLICABLE TO EACH HOLDER. THEREFORE, EACH HOLDER IS URGED TO
CONSULT THE HOLDER'S OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES TO THAT HOLDER. NO INFORMATION IS PROVIDED WITH RESPECT TO
STATE, LOCAL, OR FOREIGN TAX CONSEQUENCES, AND HOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO SUCH CONSEQUENCES.
The discussion does not address federal income tax consequences applicable
to all Holders, some of whom may be subject to special rules (including, for
example, Holders who own, or are considered as owning pursuant to certain
attribution rules, five percent or more of the outstanding Shares). The
discussion focuses on Holders who are individual citizens or residents of the
United States and domestic corporations and has only limited application to
Holders who are foreign corporations, regulated investment companies, life
insurance companies, financial institutions, estates, trusts, tax-exempt
organizations or nonresident aliens. Also, unless otherwise stated, the
discussion assumes that each of the Units, Shares and Callable Warrants are
capital assets in the hands of the Holder at all relevant times.
The discussion is based upon existing federal income tax law, including the
Internal Revenue Code of 1986, as amended (the "Code"), income tax regulations
issued by the Internal Revenue Service (the "IRS"), rulings of the IRS and court
decisions. Future changes in the federal income tax laws could adversely affect
a Holder.
CONSEQUENCES OF PASSIVE FOREIGN INVESTMENT COMPANY STATUS
In each year that Neozyme II has been in existence, Neozyme II has
determined that it qualified as a Passive Foreign Investment Company ("PFIC")
and has sent to the holders of the Units the PFIC annual information statement
and a form of an election statement whereby the shareholder could elect to treat
Neozyme II as a qualified electing fund ("QEF") and to include annually in gross
income the shareholder's pro rata share of Neozyme II's ordinary earnings and
net capital gain (his "QEF inclusion").
If a Holder has not elected to treat Neozyme II as a QEF, any gain
recognized by such non-electing Holder as a result of the disposition of the
Holder's Shares pursuant to the transactions described in this Offer to Purchase
will be treated as ordinary income. The non-electing Holder's tax liability with
respect to such gain will be determined by allocating such gain in pro rata
amounts to each day in the Holder's holding period for the Shares and by
multiplying the gain allocated to each taxable year of the Holder other than the
current taxable year by the highest rate of tax in effect for the Holder in that
year, without regard to the actual rate that applied to the Holder's income in
that year. The non-electing Holder will be subject to an interest charge on the
taxes so determined at the rates and using the methods in Section 6621 of the
Code for underpayments of tax, as if the Holder had recognized the gain
allocated to each prior taxable year in that prior taxable year.
If a Holder elected to treat Neozyme II as a QEF in the first taxable year
that the Holder held Shares or later made the election and also either (i)
elected to treat the Shares generally as if they were sold on the first day of
the taxable year for which the election was made or (ii) elected to include in
the Holder's gross income
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the earnings and profits attributable to the Shares as of the first day of the
taxable year for which the election was made, any gain recognized by such
electing Holder as a result of the disposition of the Holder's Shares pursuant
to the transactions described in this Offer to Purchase will generally be
capital gain if the stock is held as a capital asset on the disposition date.
If for any taxable year an electing Holder elected under Section 1294 of
the Code to extend the time for the payment of the tax on a QEF inclusion and
that extension has not expired, the disposition of the Holder's Shares pursuant
to the transactions described in this Offer to Purchase will cause the extension
to expire. The extension will expire on the due date (without regard to
extensions) of the Holder's tax return for the taxable year in which the
disposition occurs.
Following the consummation of the transactions described in this Offer to
Purchase, Genzyme may make an election pursuant to Section 338 of the Code. Such
an election may cause an electing Holder to recognize a substantially increased
QEF inclusion. However, the basis of the electing Holder's Shares should be
increased by the amount of the QEF inclusion. Any additional amounts of net
capital gain QEF inclusion resulting from the Section 338 election should thus
be offset by a reduced amount of capital gain or a capital loss in respect of
the electing Holder's sale of the Shares. However, any additional amounts of
ordinary earnings QEF inclusion resulting from the Section 338 election could
not generally be offset by a capital loss (except possibly for certain
relatively small amounts in the case of individuals).
CONSEQUENCES TO HOLDERS WHOSE UNITS ARE TENDERED AND ACCEPTED PURSUANT TO THE
TENDER OFFER
A Holder who tenders a Unit pursuant to the Offer and does not properly
withdraw such Unit prior to the expiration of the Offer will be deemed to have
sold each of the Unit's constituent elements, i.e., one share of Callable Common
Stock and one Callable Warrant, for the Offer Price and will be required to
allocate the Offer Price between these constituent elements in proportion to
their relative fair market values on the purchase date.
The Holder will recognize gain or loss with respect to the deemed sale of
the Callable Warrant in an amount equal to the difference between the amount of
the Offer Price allocable to the Callable Warrant and the portion of the
Holder's adjusted basis in the Unit allocable to the Callable Warrant. This gain
or loss will generally be capital gain or loss if the Unit is held as a capital
asset on the purchase date and will be long-term capital gain or loss if the
Unit has been held for more than one year on the purchase date.
The Holder will recognize gain or loss with respect to the deemed sale of
the share of Callable Common Stock in an amount equal to the difference between
the amount of the purchase price of the Unit allocable to the share of Callable
Common Stock and the portion of the Holder's adjusted basis in the Unit
allocable to the share of Callable Common Stock. Except as otherwise described
above under Consequences of Passive Foreign Investment Company Status, this gain
or loss will generally be capital gain or loss if the Unit is held as a capital
asset on the purchase date and will be long-term capital gain or loss if the
Unit has been held for more than one year on the purchase date.
CONSEQUENCES TO HOLDERS WHO DO NOT TENDER THEIR UNITS
If the Offer is consummated, Genzyme intends to effect the Second Step
Transaction, pursuant to which all of the Shares included in untendered Units
will be converted into the right to receive cash in an amount per Share equal to
the Second Step Consideration. The Callable Warrants associated with these
Shares will become exercisable and will separate and be transferable separately
from the right to receive cash for the Shares.
A Holder whose Shares are converted to the right to receive cash in the
Second Step Transaction will recognize gain or loss in an amount equal to the
difference between the Second Step Consideration and the portion of the Holder's
adjusted basis in the Unit allocable to the Shares. Except as otherwise
described above under Consequences of Passive Foreign Investment Company Status,
this gain or loss will generally be capital gain or loss if the Unit is held as
a capital asset on the Effective Date and will be long-term capital gain or loss
if the Unit has been held for more than one year on the Effective Date.
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A Holder will not recognize income, gain or loss as a result of the
acceleration in the exercisability of the Callable Warrants or their separation
from the Shares.
OTHER CONSIDERATIONS
Uncertainty exists as to the treatment of the initial grant to Genzyme of
the Purchase Option. The IRS might take the position that the Callable Warrants
received as part of a Unit in the initial Unit Offering in April 1992 were
issued by Genzyme in exchange for the separate grant of the Purchase Option by
the initial purchasers of the Units and that the full purchase price of the
Units was paid in exchange for the Callable Common Stock. In that event, upon
the lapse or termination of the Purchase Option, a Holder might recognize a
short-term capital gain in an amount equal to the value of the Callable Warrants
on the closing date of the initial Unit Offering, less the Holder's tax basis in
the Callable Warrants.
If a Holder were treated as having paid the full purchase price for the
Unit in exchange for the Callable Common Stock and as then having granted the
Purchase Option to Genzyme in exchange for the Warrants, the Holder would have
an increased tax basis in the Callable Common Stock which would reduce the
amount of gain (or increase the amount of loss) realized upon a disposition of
the Callable Common Stock pursuant to the transactions described in this Offer
to Purchase. Any such loss would be available to offset any gain taken into
account from a lapse or termination of the Purchase Option.
United States Taxation of Non-U.S. Persons
The following is a general discussion of certain anticipated United States
federal income tax consequences of a disposition of Units or Shares to a Holder
who, for United States federal income tax purposes, (1) is not a "United States
person", (2) is not, and has not been, engaged in a United States trade or
business and (3) in the case of an individual, will not be present in the United
States for 183 days or more during the taxable year of the Holder that includes
the date of disposition of the Holder's Units or Shares. A "United States
person" means a citizen or resident of the United States for United States
federal income tax purposes, a corporation, partnership or other entity created
or organized in or under the laws of the United States or any state thereof, or
an estate or trust, the income of which is subject to United States federal
income tax regardless of its sources. The following discussion does not consider
specific facts and circumstances that may be relevant to a particular Non-U.S.
Holder's tax position. Specifically, this discussion does not address the United
States tax consequences to any person who might own, or be considered as owning
pursuant to certain attribution rules, 5 percent or more of the outstanding
Shares. Furthermore, the following discussion is based on current provisions of
the Code and on administrative and judicial interpretations as of the date
hereof, all of which are subject to change. Each Non-U.S. Holder, as well as
each non-United States person who is or has been engaged in a United States
trade or business or who is an individual who has been present in the United
States for 183 days or more during a taxable year, or who may be eligible for
special treatment under an applicable income tax treaty is urged to consult a
tax advisor with respect to the United States federal income tax consequences of
the disposition of Units or Shares, as well as any tax consequences that may
arise under the laws of any foreign, state, local or other taxing jurisdiction.
A Non-U.S. Holder will not be subject to United States federal income tax
(and no tax will generally be withheld) with respect to gain recognized on a
disposition of the Units or of Callable Common Stock. Backup withholding
requirements may apply to the gross proceeds paid to a Non-U.S. Holder upon the
disposition of the Units or Shares, unless the holder certifies its foreign
status or otherwise establishes an exemption. A Non-U.S. Holder may obtain a
refund of any amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the Internal Revenue Service.
8. CERTAIN EFFECTS OF THE TRANSACTION
Interest in Assets and Earnings. Neither Genzyme or the Purchaser
currently owns any of the outstanding Units. As a result of the Offer and the
Second Step Transaction, Genzyme (directly or indirectly through the Purchaser)
will own the entire equity interest in the Company and will thereby be entitled
to 100% of the Company's net assets and earnings and the current Holders will no
longer have an equity interest in the Company.
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Voting Power. Unless waived by Genzyme and the Purchaser, the Offer is
conditioned upon the tender of at least a majority of the outstanding Units. If
a majority of the outstanding Units are tendered in the Offer, the Purchaser
will have the right under the BVI Law and the Company's Memorandum of
Association and Articles of Association to approve the Second Step Transaction
by written consent in lieu of a meeting of stockholders and without the vote or
consent of any of the remaining Holders. In addition, under the BVI Law, if the
Purchaser acquires at least 90% of the outstanding Units, the Purchaser would
have the power to approve a merger of the Company into the Purchaser, or require
the Company to redeem all of the Shares not held by the Purchaser, in each case
without a vote of the Holders.
NNM Quotation. Depending upon the aggregate market value and the number of
Units not purchased pursuant to the Offer, as well as the identity of the
holders of such Units, the Units may no longer meet the quantitative
requirements of the National Association of Securities Dealers, Inc. the
("NASD") for continued inclusion in the NNM, which require that an issuer have
at least 200,000 publicly held shares, held by at least 400 stockholders or 300
stockholders of round lots, with a market value of at least $1 million, have net
tangible assets of at least $1 million, $2 million or $4 million (depending on
profitability levels during the issuer's four most recent fiscal years) and have
a minimum bid price per shares of $1 (unless the issuer has a public float of at
least $3 million and at least $4 million of net tangible assets).
In the event that the Units no longer meet the requirements for NNM
quotation, it is possible that the Units would continue to trade in the
over-the-counter market and that price or other quotations might still be
available from other sources. The extent of the public market for the Units and
the availability of such quotations would, however, depend upon such factors as
the number of holders and/or the aggregate market value of such Units remaining
at such time, the interest in maintaining a market in such Units on the part of
securities firms, the possible termination of registration of such Units under
the Exchange Act, as described below, and other factors. The Purchaser cannot
predict whether a reduction in the number of Units that might otherwise trade
publicly would have an adverse or beneficial effect on the market price for or
marketability of the Units or whether it would cause future market prices to be
greater or less than the price to be paid in the Offer.
The Purchaser and Genzyme intend to cancel all Callable Warrants purchased
by the Purchaser pursuant to the Offer. Following the Second Step Transaction,
Genzyme does not intend to list the outstanding Callable Warrants on the NNM,
and therefore, any market that may develop for the Callable Warrants may be
adversely affected.
Exchange Act Registration. The Units are currently registered under the
Exchange Act. The purchase of Units pursuant to the Offer or following
consummation of the Offer may result in the Units becoming eligible for
deregistration under the Exchange Act. Registration of the Units may be
terminated upon application of the Company to the Commission if the Units are
not listed on a national securities exchange and there are fewer than 300 record
holders of the Units. There currently are fewer than 300 record holders of the
Units. The termination of the registration of the Units under the Exchange Act,
assuming there are no other securities of the Company subject to registration,
would result in the suspension of the Company's obligation to file reports
pursuant to Section 15(d) of the Exchange Act, thereby substantially reducing
the information required to be furnished by the Company to holders of the Units
and would make certain provisions of the Exchange Act, such as the short-swing
profit recovery provisions of Section 16(b), the requirement of furnishing a
proxy statement in connection with stockholders' meetings pursuant to Section
14(a) and the requirements of Rule 13e-3 under the Exchange Act with respect to
"going private" transactions, no longer applicable to the Units. Furthermore,
"affiliates" of the Company and persons holder "restricted securities" of the
Company may be deprived of the ability to dispose of the securities pursuant to
Rule 144 under the Securities Act. If registration of the Units under the
Exchange Act were terminated, the Units would no longer be "margin securities"
or eligible for NNM quotation. The Purchaser presently intends to seek to cause
the Company to terminate the registration of the Units under the Exchange Act as
soon after the consummation of the Offer or Second Step Transaction as the
requirements for termination of registration are met. In addition, following the
Second Step Transaction, the outstanding Callable Warrants may not meet the
requirements for registration under the Exchange Act, and the provisions of the
Exchange Act described
41
<PAGE> 42
above applicable to transactions in the Units would similarly not apply to
transactions in the Callable Warrants.
Margin Regulations. The Units are currently "margin securities" under the
rule of the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), which has the effect, among other things, of allowing brokers
to extend credit on the collateral of such Units for the purpose of buying,
carrying or trading in securities ("purpose loans"). Depending upon factors such
as the number of record holders of the Units and the number and market value of
publicly held Units, following the purchase of Units pursuant to the Offer or
following consummation of the Offer, the Units might no longer constitute
"margin securities" for purposes of the Federal Reserve Board's margin
regulations and therefore could no longer be used as collateral for purpose
loans made by brokers.
9. FEES AND EXPENSES
The following is an estimate of expenses to be incurred in connection with
the Offer and the Second Step Transaction, other than (i) the fees and expenses
of Robertson, Stephens & Company (see "SPECIAL FACTORS -- Section 5. Reasons for
the Transaction; Purpose and Structure of the Transaction; Plans for the Company
after the Transaction," and (ii) the fees and expenses of Hambrecht & Quist (see
"SPECIAL FACTORS -- Section 4. Recommendation of the Company's Board of
Directors; Fairness of the Transaction"). The Purchase Agreement provides that
all costs and expenses incurred in connection with the Offer and the Second Step
Transaction will be paid by the party incurring such costs and expenses, whether
or not the Offer or the Second Step Transaction is consummated.
Expenses to be paid by Genzyme and the Purchaser:
<TABLE>
<S> <C>
Legal Fees and Expenses................................................... $200,000
Printing and Mailing...................................................... $100,000
Advertising............................................................... $ 65,000
Filing Fees............................................................... $ 21,375
Depositary Fees........................................................... $ 7,500
Information Agent Fees.................................................... $ 15,000
Accounting Fees and Expenses.............................................. $ 50,000
Miscellaneous............................................................. $ 16,125
========
Total........................................................... $475,000
</TABLE>
Expenses to be paid by the Company:
<TABLE>
<S> <C>
Legal Fees and Expenses................................................... $180,000
Printing and Mailing...................................................... $ 25,000
Miscellaneous............................................................. $ 20,000
========
Total........................................................... $225,000
</TABLE>
42
<PAGE> 43
THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Purchaser will accept for payment and pay for all Units
validly tendered prior to the Expiration Date (as defined below) and not
properly withdrawn as provided in "THE TENDER OFFER -- Section 4. Withdrawal
Rights." The term "Expiration Date" means 5:00 p.m., New York City time, on
October 28, 1996, unless and until the Purchaser, in its sole discretion (but
subject to the terms and conditions of the Purchase Agreement), shall have
extended the period during which the Offer is open, in which event the term
"Expiration Date" shall mean the latest time and date at which the Offer, as so
extended by the Purchaser, shall expire.
Subject to the applicable rules and regulations of the Commission, the
Purchaser expressly reserves the right, in its sole discretion (but subject to
the terms and conditions of the Purchase Agreement), at any time and from time
to time, to extend the period during which the Offer is open for any reason,
including the failure to satisfy any of the conditions specified in "THE TENDER
OFFER -- Section 9. Certain Conditions of the Offer," and thereby delay
acceptance for payment of, or payment for, any Units, by giving oral or written
notice of such extension to the Depositary. There can be no assurance that the
Purchaser will exercise its right to extend the Offer. During any such
extension, all Units previously tendered and not properly withdrawn will remain
subject to the Offer, subject to the rights of a tendering Holder to withdraw
such Holder's Units. See "THE TENDER OFFER -- Section 4. Withdrawal Rights."
Subject to the applicable rules and regulations of the Commission, the
Purchaser also expressly reserves the right, in its sole discretion (but subject
to the terms and conditions of the Purchase Agreement), at any time and from
time to time, to (i) delay acceptance for payment of or, regardless of whether
the Units were theretofore accepted for payment, payment for, any Units pending
receipt of any regulatory approvals that may be required as described in "THE
TENDER OFFER -- Section 10. Certain Legal Matters; Regulatory Approvals," (ii)
terminate the Offer and not accept for payment (or pay for) any Units if any of
the conditions referred to in "THE TENDER OFFER -- Section 9. Certain Conditions
of the Offer" have not been satisfied or upon the occurrence and during the
continuance of any of the events specified in "THE TENDER OFFER -- Section 9.
Certain Conditions of the Offer" and (iii) waive any condition or amend the
Offer in any respect, in each case, by giving oral or written notice of such
delay, termination, waiver or amendment to the Depositary and by making a public
announcement thereof. The Purchase Agreement provides that, without the consent
of the Company, as approved by the Special Committee, the Purchaser shall not
amend or waive the Minimum Condition or the Majority Consent Condition (as
defined below), extend the offer, reduce the maximum number of Units to be
purchased, reduce the price to be paid per Unit pursuant to the Offer and amend
any other material term of the Offer in a manner adverse to the Holders.
Pursuant to the Purchase Agreement, if on October 28, 1996, the Minimum
Condition has not been satisfied, the Purchaser may, not later than 9:00 a.m.,
eastern time, on the next business day following the Initial Expiration Date,
elect either (x) to extend the Offer for a period not to exceed 60 days and
amend the Offer to delete the Minimum Condition and add the Majority Consent
Condition, in which case, promptly thereafter, the Company shall commence to
convene a meeting or solicit the written consent of its shareholders for
approval of the Merger Plan, or (y) terminate the Offer and promptly return all
tendered Units, in which case, promptly thereafter, the Company shall commence
to convene a meeting or solicit the written consent of the its shareholders for
approval of the Merger Plan, in either case with such solicitation or meeting to
be conducted in accordance with applicable law and the terms of the Purchase
Agreement. The Majority Consent Condition is defined in the Purchase Agreement
to mean that the sum of (a) the Shares included in the Units tendered and not
withdrawn as of the new expiration date of the Offer (provided such Shares may
be voted in favor of the Merger Plan at the meeting or pursuant to the consent
solicitation by the Purchaser immediately after the purchase of the Units which
include such Shares in the Offer by the Purchaser) plus (b) the number of Shares
held by holders who have voted in favor of the Merger Plan at the meeting or
pursuant to the consent solicitation as of the new expiration date of the Offer
(but excluding any such Shares that would result
43
<PAGE> 44
in double counting with (a) above) represents not less than a majority of the
Shares outstanding. The Purchaser acknowledges (x) that Rule 14e-1(c) under the
Exchange Act requires the Purchaser to pay the consideration offered or return
the Units tendered promptly after the termination or withdrawal of the Offer and
(y) that the Purchaser may not delay acceptance for payment of, or payment for
(except as provided in clause (i) of the first sentence of this paragraph), any
Units upon the occurrence of any of the conditions specified in "THE TENDER
OFFER -- Section 9. Certain Conditions of the Offer" without extending the
period of time during which the Offer is open.
If the Minimum Condition or any other condition specified in "THE TENDER
OFFER -- Section 9. Certain Conditions of the Offer" is not fulfilled by the
Expiration Date, the Purchaser reserves the right (but shall not be obligated)
to (i) decline to purchase any of the Units tendered, return all tendered Units
to tendering Holders and terminate the Offer, (ii) subject to the terms and
conditions of the Purchase Agreement, extend the Offer and retain all tendered
Units until the expiration of the Offer, as extended, subject to the terms and
conditions of the Offer (including any rights of Holders to withdraw their
Units) or (iii) subject to the terms and conditions of the Purchase Agreement,
waive or reduce the condition and, subject to complying with applicable rules
and regulations of the Commission, accept for payment and purchase all Units
validly tendered.
Any extension, delay, termination, waiver or amendment will be followed as
promptly as practicable by a public announcement thereof, such announcement, in
the case of an extension, to be made no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
Without limiting the manner in which the Purchaser may choose to make any public
announcement, except as provided by applicable law (including Rules 14d-4(c),
14d-6(d) and 14e-1 under the Exchange Act, which require that material changes
be promptly disseminated to Holders), the Purchaser will have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a release to the Dow Jones News Service.
If, in accordance with the terms and conditions of the Purchase Agreement,
the Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer, or waives a material condition of the Offer,
the Purchaser will disseminate additional tender offer materials (including by
public announcement as set forth above) and extend the Offer to the extent
required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. The
minimum period during which an offer must remain open following material changes
in the terms of the offer or information concerning the offer, other than a
change in price, a change in percentage of securities sought or a change in any
dealer's soliciting fee, will depend upon the facts and circumstances, including
the relative materiality of the changes. With respect to a change in price or,
subject to certain limitations, a change in the percentage of securities sought
or a change in any dealer's soliciting fee, a minimum ten business day period
from the day of such change is generally required to allow for adequate
dissemination to Holders. Accordingly, if, prior to the Expiration Date, the
Purchaser decreases the number of Units being sought, increases the
consideration offered pursuant to the Offer or adds a dealer's soliciting fee,
and if the Offer is scheduled to expire at any time earlier than the period
ending on the tenth business day from the date that notice of such increase,
decrease or addition is first published, sent or given to the Holders, the Offer
will be extended at least until the expiration of such ten business day period.
For purposes of the Offer, a "business day" means any day other than a Saturday,
Sunday or a federal holiday and consists of the time period from 12:01 a.m.
through 12:00 midnight, New York City time.
The Company has elected to disseminate the Offer to the Holders. This Offer
to Purchase and the related Letter of Transmittal and, if required, other
relevant material will be mailed to record holders of Units and will be
furnished to brokers, dealers, commercial banks, trust companies and similar
persons whose names, or the names of whose nominees, appear on the Company's
list of Holders for subsequent transmittal to beneficial owners of Units.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR UNITS
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Purchaser will purchase by accepting for payment, and paying
for, all Units validly tendered prior to the Expiration Date and not properly
withdrawn
44
<PAGE> 45
(including Units validly tendered and not withdrawn during any extension of the
Offer, if the Offer is extended, subject to the terms and conditions of such
extension), promptly after the Expiration Date. In addition, subject to
complying with Rule 14e-1 under the Exchange Act, the Purchaser expressly
reserves the right, in its sole discretion (but subject to the terms and
conditions of the Purchase Agreement), to delay the acceptance for payment of,
or payment for, Units in order to comply, in whole or in part, with any other
applicable law.
In all cases, payment for Units tendered and accepted for payment pursuant
to the Offer will be made only after timely receipt by the Depositary of (i)
certificates representing the Callable Common Stock and the Callable Warrants
included in the Units ("Unit Certificates"), (ii) the Letter of Transmittal (or
a facsimile thereof), properly completed and duly executed, with any required
signature guarantee, and (iii) any other documents required by the Letter of
Transmittal. Accordingly, payment may be made to tendering Holders at different
times if delivery of the Units and other required documents occurs at different
times.
For purposes of the Offer, the Purchaser will be deemed to have accepted
for payment, and thereby purchased, Units validly tendered and not properly
withdrawn if, as and when the Purchaser gives oral or written notice to the
Depositary of the Purchaser's acceptance for payment of such Units pursuant to
the Offer. Upon the terms and subject to the conditions of the Offer, payment
for Units so accepted for payment pursuant to the Offer will be made by deposit
of the aggregate purchase price therefor with the Depositary, which will act as
agent for tendering Holders for the purpose of receiving payment from the
Purchaser and transmitting such payment to Holders whose Units have been
accepted for payment. UNDER NO CIRCUMSTANCES WILL INTEREST ON THE PURCHASE PRICE
FOR UNITS BE PAID BY THE PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR
ANY DELAY IN MAKING SUCH PAYMENT. Upon the deposit of funds with the Depositary
for the purpose of making payment to validly tendering Holders, the Purchaser's
obligation to make such payment shall be satisfied and such tendering Holders
must thereafter look solely to the Depositary for payment of the amounts owed to
them by reason of the acceptance for payment of Units pursuant to the Offer.
If any tendered Units are not accepted for payment pursuant to the terms
and conditions of the Offer for any reason, or if the Unit Certificates are
submitted for more Units than are tendered, Unit Certificates representing Units
not purchased or not tendered will be returned, without expense to the tendering
Holder, as soon as practicable following expiration of termination of the Offer.
If, prior to the Expiration Date, the Purchaser increases the consideration
to be paid per Unit, the Purchaser will pay such increased consideration for all
Units purchased pursuant to the Offer, whether or not such Units have been
tendered or purchased prior to such increase in consideration.
The Purchase Agreement provides that it shall not be assigned except that
the Purchaser may assign its rights and obligations to Genzyme or to one or more
direct or indirect wholly owned subsidiaries of Genzyme which in a written
instrument shall make all the representations and warranties of the Purchaser
set forth therein and shall agree to assume all of the Purchaser's obligations
thereunder and be bound by all of the terms and conditions of the Purchase
Agreement; provided, however, that no such assignment shall relieve Genzyme or
the Purchaser of its obligations thereunder.
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING UNITS
General. Except as set forth below, in order for Units to be validly
tendered pursuant to the Offer, the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, together with any required
signature guarantees and any other documents required by the Letter of
Transmittal, must be received by the Depositary at one of its addresses set
forth on the back cover of the Offer to Purchase prior to the Expiration Date,
and either (i) Unit Certificates representing tendered Units must be received by
the Depositary at such address prior to the Expiration Date, or (ii) the
guaranteed delivery procedures set forth below must be complied with. Book-entry
transfer procedures are not available to Holders.
No alternative, conditional or contingent tenders will be accepted and no
fractional Units will be purchased. All tendering Holders, by execution of the
Letter of Transmittal (or facsimile thereof), waive any right to receive any
notice of the acceptance of their Units for payment.
45
<PAGE> 46
THE METHOD OF DELIVERY OF UNIT CERTIFICATES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE SOLE OPTION AND RISK OF EACH TENDERING
HOLDER AND, EXCEPT AS OTHERWISE PROVIDED IN THIS SECTION 3, THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a firm that is a bank, broker, dealer, credit union, savings
association or other entity which is a member in good standing of the Securities
Transfer Agents Medallion Program, the Stock Exchanges' Medallion Program or the
New York Stock Exchange, Inc. Medallion Signature Program (an "Eligible
Institution"), unless the Units tendered thereby are tendered (i) by a
registered Holder of Units who has not completed either the box entitled
"Special Delivery Instructions" or the box entitled "Special Payment
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution. See Instruction 1 of the Letter of Transmittal.
If the Unit Certificates are registered in the name of a person other than
the signer of the Letter of Transmittal, or if payment is to be made, or Unit
Certificates for unpurchased Units are to be returned, to a person other than
the registered holder(s), then the tendered Unit Certificates must be endorsed
or accompanied by appropriate stock powers signed exactly as the name(s) of the
registered holder(s) appear on the Unit Certificates with the signature(s) on
such Unit Certificates or stock powers guaranteed by an Eligible Institution as
provided above and in the letter of transmittal. See Instructions 1 and 5 of the
Letter of Transmittal.
Guaranteed Delivery. If a Holder desires to tender Units pursuant to the
Offer and such Holder's Unit Certificates are not immediately available or time
will not permit all of the required documents to reach the Depositary prior to
the Expiration Date, such Units may nevertheless be tendered, provided that all
of the following conditions are satisfied:
(a) such tender is made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Purchaser herewith, is
received by the Depositary, as provided below, prior to the Expiration
Date; and
(c) the Unit Certificates for all tendered Units, in proper form for
transfer, in each case together with the Letter of Transmittal (or a
facsimile thereof) properly completed and duly executed, with any required
signature guarantees and any other documents required by the Letter of
Transmittal are received by the Depositary within three NNM trading days
after the date of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted
by telegram, facsimile transmission or mail to the Depositary and must include a
guarantee by an Eligible Institution in the form set forth in the Notice of
Guaranteed Delivery.
Notwithstanding any other provision hereof, payment for Units accepted for
payment pursuant to the Offer will in all cases be made only after timely
receipt by the Depositary of Unit Certificates therefor, a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), together with
any required signature guarantees and any other documents required by the Letter
of Transmittal. Accordingly, payment might not be made to all tendering Holders
at the same time, and will depend upon when Unit Certificates are received into
the Depositary's account.
Backup Federal Income Tax Withholding. Under the federal income tax laws,
the Depositary may, under certain circumstances, be required to withhold 31% of
the amount of any payments made to certain Holders pursuant to the Offer. TO
PREVENT SUCH BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENTS MADE
TO CERTAIN HOLDERS OF THE PURCHASE PRICE OF UNITS PURCHASED PURSUANT TO THE
OFFER, EACH SUCH HOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH HOLDER'S CORRECT
TAXPAYER IDENTIFICATION NUMBER AND CERTIFY
46
<PAGE> 47
THAT SUCH HOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY
COMPLETING THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL. SEE
INSTRUCTION 9 OF THE LETTER OF TRANSMITTAL.
Appointment as Proxy. By executing the Letter of Transmittal, a tendering
Holder irrevocably appoints designees of the Purchaser as the Holder's
attorneys-in-fact and proxies in the manner set forth in the Letter of
Transmittal, each with full power of substitution with respect to any Units
tendered thereby (and with respect to any and all other Units or other
securities issued or issuable in respect of such Units on or after September 20,
1996). All such powers of attorney and proxies will be considered irrevocable
and coupled with an interest in the tendered Units. This appointment will be
effective when, and only to the extent that, the Purchaser accepts such Units
for payment and deposits the purchase price therefor with the Depositary. Upon
such payment, all prior powers of attorney and proxies given by such Holder with
respect to such Units (and other Units and securities issued or issuable in
respect of such Units on or after September 20, 1996) will, without further
action, be revoked, and no subsequent powers of attorney and proxies may be
given nor any subsequent written consents executed by such Holder (and, if given
or executed, will not be deemed effective). Upon such payment by the Purchaser,
the designees of the Purchaser will, with respect to such Units and other
securities, be empowered to exercise all voting and other rights of such Holder
as they in their sole discretion may deem proper at any annual or special
meeting of the Holders, or any adjournment or postponement thereof, by written
consent in lieu of any such meeting or otherwise. The Purchaser reserves the
right to require that, in order for Units to be deemed validly tendered,
immediately upon the Purchaser's payment for such Units, the Purchaser must be
able to exercise full voting and other rights of a record and beneficial holder,
including voting at any meeting of Holders.
Determination of Validity. All questions as to the validity, form,
eligibility (including the time of receipt) and acceptance for payment of any
tendered Units pursuant to any of the procedures described above will be
determined by the Purchaser, in its sole discretion, which determination will be
final and binding on all parties. The Purchaser reserves the absolute right to
reject any and all tenders of any particular Units determined by it not to be in
appropriate form or the acceptance of or payment for which may, in the opinion
of its counsel, be unlawful. The Purchaser also reserves the absolute right to
waive any of the conditions of the Offer (subject to the terms and conditions of
the Purchase Agreement) or any defect or irregularities in the tender of any
particular Units, whether or not similar defects or irregularities are waived in
the case of any other Units. The Purchaser's interpretations of the terms and
conditions of the Offer (including the Letter of Transmittal and Instructions
thereto) will be final and binding. No tender of Units will be deemed to have
been validly made until all defects and irregularities have been cured or
waived. None of Genzyme, the Purchaser, any of their respective affiliates or
assigns, the Dealer Manager, the Information Agent, the Depositary nor any other
person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification.
The Purchaser's acceptance for payment of Units tendered pursuant to the
Offer will constitute a binding agreement between the tendering Holder and the
Purchaser upon the terms and subject to the conditions of the Offer.
4. WITHDRAWAL RIGHTS
Except as otherwise provided in this Section 4, tenders of Units made
pursuant to the Offer are irrevocable. Units tendered pursuant to the Offer may
be withdrawn at any time prior to the Expiration Date and, unless theretofor
accepted for payment as provided herein, may also be withdrawn at any time after
November 25, 1996.
If the Purchaser extends the Offer, is delayed in, or delays, its
acceptance for payment or payment for Units or is unable to accept for payment
or pay for Units for any reason, then, without prejudice to the Purchaser's
other rights under the Offer, tendered Units may nevertheless be retained by the
Depositary, on behalf of the Purchaser, and may not be withdrawn except to the
extent tendering Holders are entitled to and duly exercise withdrawal rights as
described in this Section 4. Any such delay will be accompanied by an extension
of the Offer to the extent required by law.
47
<PAGE> 48
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission notice of withdrawal must be timely received by the
Depositary at one of its addresses set forth on the back cover of this Offer to
Purchase. Any such notice of withdrawal must specify the name of the person who
tendered the Units to be withdrawn, the number of Units to be withdrawn and the
name of the registered holder of such Units, if different from that of the
person who tendered such Units. If Unit Certificates to be withdrawn have been
delivered or otherwise identified to the Depositary, then, prior to the physical
release of such Unit Certificates, the tendering Holder must also submit the
serial numbers shown on such Unit Certificates to the Depository and the
signatures on the notice of withdrawal must be guaranteed by an Eligible
Institution, unless such Units have been tendered for the account of an Eligible
Institution.
Withdrawals may not be revoked and any Units properly withdrawn will
thereafter be deemed not to have been validly tendered for purposes of the
Offer. However, withdrawn Units may be re-tendered at any time prior to the
Expiration Date by following one of the procedures described in "THE TENDER
OFFER -- Section 3. Procedures for Accepting the Offer and Tendering Units."
All questions as to the form and validity (including the time of receipt)
of any notice of withdrawal will be determined by the Purchaser, in its sole
discretion, whose determination will be final and binding. None of Genzyme, the
Purchaser, any of their affiliates or assigns, the Dealer Manager, the
Information Agent, the Depositary or any other person will be under any duty to
give notification of any defects or irregularities in any notice of withdrawal
or incur any liability for failing to give any such notification.
5. PRICE RANGE OF UNITS; DIVIDENDS
The Units are traded in the over-the-counter market and are included on the
NNM under the symbol "NIIUF". The following table sets forth the high and low
sales prices per Unit on the NNM, as reported in publicly available sources for
each of the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Year Ended December 31, 1994:
First Quarter............................................................. 37 1/2 31 1/2
Second Quarter............................................................ 37 1/4 33 1/2
Third Quarter............................................................. 34 1/2 32
Fourth Quarter............................................................ 34 1/2 25 1/2
Year Ended December 31, 1995:
First Quarter............................................................. 38 3/4 28 1/2
Second Quarter............................................................ 39 3/4 37 7/8
Third Quarter............................................................. 43 1/2 38 3/4
Fourth Quarter............................................................ 47 3/4 41 1/2
Year Ending December 31, 1996:
First Quarter............................................................. 53 38 1/8
Second Quarter............................................................ 52 3/4 41
Third Quarter (through September 26, 1996)................................ 45 1/2 43
</TABLE>
As of September 25, 1996, there were 77 holders of record of the Units and
in excess of 750 beneficial owners of Units.
On September 5, 1996, the last full trading day prior to Genzyme's issuance
of a press release announcing that it had reached an agreement in principle for
the acquisition of the Company at a price $45.00 per Unit net to the seller in
cash, the closing sale price per Unit as reported on the NNM was $44 1/16. On
September 19, 1996, the last full trading day prior to the public announcement
of the execution of the Purchase Agreement and of the Purchaser's intention to
commence the Offer, the closing sale price per Unit as reported on the
48
<PAGE> 49
NNM was $44 1/2. On September 26, 1996, the last full trading day prior to the
commencement of the Offer, the closing sale price per Unit as reported on the
NNM was $44 1/2.
HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE UNITS.
The Company has never declared or paid any cash dividends in respect of the
Callable Common Stock, and is prohibited by the terms of its Memorandum of
Association from doing so without the consent of Genzyme.
6. CERTAIN INFORMATION CONCERNING THE COMPANY
Except as otherwise set forth herein, the information concerning the
Company set forth in this Section 6 and elsewhere in this Offer to Purchase has
been furnished by the Company or has been taken from, or is based upon, publicly
available documents on file with the Commission and other public sources.
Holders are urged to review the publicly available information concerning the
Company before acting on the Offer. Although neither Genzyme nor the Purchaser
has any knowledge of any facts that would indicate that any statements contained
herein which are based on such documents are untrue, neither Genzyme nor the
Purchaser takes any responsibility for the accuracy or completeness of the
information concerning the Company furnished by the Company or contained in such
documents or herein or for any failure by the Company to disclose events which
may have occurred and which may have affected or may affect the significance or
accuracy of any such information but that are unknown to Genzyme or the
Purchaser.
General. The Company, a BVI international business company, is engaged,
through Genzyme, in the research, development and clinical testing of products
for the treatment of CF. See "SPECIAL FACTORS -- Section 1. Establishment of the
Company;" "-- Section 2. Agreements and Relationships Between the Company and
Genzyme" and "-- Section 5. Reasons for the Transaction; Purpose and Structure
of the Transaction; Plans for the Company after the Offering -- Status of the
Programs." The principal executive offices of the Company are located at the
Todman Building, Main Street, Road Town, Tortola, British Virgin Islands.
Directors and Executive Officers. The name, business address, principal
occupation, five-year employment history and citizenship of each of the
directors and executive officers of the Company are set forth in Schedule II
hereto. Schedule II also sets forth information concerning the ownership of
Units by the directors and the executive officers of the Company.
The Company is subject to the disclosure requirements of the Exchange Act
and in accordance therewith is required to file reports, proxy statements and
other information with the Commission relating to its business, financial
condition and other matters. In addition, the Company has filed a statement on
Schedule 14D-9 regarding its recommendation to the Holders with respect to the
Offer. Such reports, proxy statements, Schedule 14D-9 and other information are
available for inspection at the Commission's public reference facilities at 450
Fifth Street, N.W., Washington, D.C. 20549 and should also be available for
inspection at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies may be obtained at
prescribed rates from the Commission's principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549. Certain reports and other information can also be
obtained through the Commission's Electronic Data Gathering, Analysis and
Retrieval System which is publicly available through the Commission's World Wide
Web site (http://www.sec.gov).
Financial Information. Set forth below is certain selected financial data
with respect to the Company excerpted or derived from the audited financial
statements contained in the Company's Annual Report on Form 10-K for its fiscal
year ended December 31, 1995 and the unaudited financial statements contained in
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1996 (the "Company Reports"). More comprehensive financial information is
included in the Company Reports and in other documents filed by the Company with
the Commission (which may be inspected or obtained in the manner set forth
above), and the following data is qualified in its entirety by reference to the
Company Reports and
49
<PAGE> 50
other documents and all of the financial information (including any related
notes) contained therein or incorporated by reference.
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
SUMMARY FINANCIAL DATA
(HISTORICAL)
(Amounts in thousands, except for per share amounts)
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
FROM FROM
MARCH 2, 1992 MARCH 2, 1992
(DATE OF SIX MONTHS ENDED (DATE OF
INCEPTION) TO YEAR ENDED DECEMBER 31, JUNE 30, INCEPTION) TO
DECEMBER 31, ----------------------------- ------------------- JUNE 30,
1992 1993 1994 1995 1995 1996 1996
------------- ------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Investment income..................... $ 2,576 $ 5,567 $ 2,522 $ 1,497 $ 820 $ 453 $ 12,615
Operating costs and expenses:
Selling, general, administrative,
research and development
expenses(1)......................... 10,501 12,807 18,012 24,455 11,810 10,758 76,533
------------- ------- -------- -------- -------- -------- -------------
Net loss................................ $(7,925) $(7,240) $(15,490) $(22,958) $(10,990) $(10,305) $ (63,918)
============= ======= ======== ======== ======== ======== =============
Common Share Data:
Per common share...................... $ (4.17) $ (3.00) $ (6.41) $ (9.51) $ (4.55) $ (4.27) $ (27.59)
============= ======= ======== ======== ======== ======== =============
Average shares outstanding............ 1,901 2,415 2,415 2,415 2,415 2,415 2,317
============= ======= ======== ======== ======== ======== =============
JUNE 30,
Combined Balance Sheet Data: 1996
--------
Cash and investment(2)................ $ 13,814
Working capital....................... 14,183
Total assets.......................... 14,341
Note payable to Genzyme
Corporation(3)...................... 100
Stockholders' equity.................. 14,083
Book value per Neozyme II callable
common share ($10.10 at December 31,
1995)............................... $ 5.83
</TABLE>
- ---------------
(1) In May 1992, Neozyme II paid a technology license fee of $5,000,000 to
Genzyme in consideration for Genzyme entering into the Technology License
Agreement and in recognition of Genzyme's expertise and expenditures in
developing technology licensed to Neozyme II.
(2) Cash and investments includes cash, cash equivalents, and short-term
investments.
(3) In May 1992, Neozyme II issues a note in the principal amount of $100,000
to Genzyme (the "Series 1992 Note") which is due on the day following the
termination of the Purchase Option Agreement with Genzyme and may not be
prepaid.
(4) The ratio of earnings to fixed charges is not presented for Neozyme II due
to the absence of fixed charges.
During the course of discussions between representatives of Genzyme and the
Special Committee that led to the execution of the Purchase Agreement, certain
non-public business and financial information about the Company was reviewed.
The Company does not as a matter of course make public any forecasts or
projections as to future performance or earnings, and the information set forth
below is included in this Offer to Purchase only because such information was
received by representatives of the parties. The forecasted and projected
financial information set forth below was not prepared with a view to public
disclosure or compliance with published guidelines of the Commission or the
guidelines established by the American Institute of Certified Public Accountants
regarding projections and forecasts. None of Genzyme, the Purchaser or the
Company, nor any of their respective financial advisors, assumes any
responsibility for the accuracy of this information. While presented with
numerical specificity, this information is based upon a variety of assumptions
relating to the business of the Company which may not be realized and is subject
to significant
50
<PAGE> 51
uncertainties and contingencies, all of which are difficult to predict and many
of which are beyond the control of the Company. There can be no assurance that
the projected or forecasted results will be realized, and actual results may
vary materially and adversely from those shown. The projections were based on
certain assumptions regarding patient growth, market penetration, royalty income
and other factors. The projections forecast base case net losses of
approximately $8 million to $11 million in each of 1996 through 2002, base case
revenue for 2003, 2004 and 2005 of approximately $26 million, $165 million and
$293 million, respectively, and base case net income for 2003, 2004 and 2005 of
approximately $300,000, $42 million and $76 million, respectively.
7. CERTAIN INFORMATION CONCERNING GENZYME AND THE PURCHASER
Genzyme. Genzyme, a Massachusetts corporation with its principal executive
offices located at One Kendall Square, Cambridge, MA 02139, is a diversified,
integrated human health care company which operates in five major business
areas. Genzyme's business activities in the areas of pharmaceuticals, genetic
diagnostic services and therapeutic diagnostic and surgical products and
pharmaceuticals are organized as the Genzyme General Division. Genzyme's
activities to develop, manufacture and market technologically advanced products
for the treatment or cartilage damage, severe burns and chronic skin ulcers are
conducted through the Genzyme Tissue Repair Division. Genzyme's common stock is
divided into two classes, General Division Common Stock and Tissue Repair
Division Common Stock, each of which is traded in the over-the-counter market
and is included on the NNM under the symbol "GENZ" and "GENZL," respectively.
Genzyme is subject to the disclosure requirements of the Exchange Act and
in accordance therewith is required to file reports, proxy statements and other
information with the Commission relating to its business, financial condition
and other matters. Such reports, proxy statements and other information are
available for inspection and copying at prescribed rates at the offices of the
Commission as set forth in "THE TENDER OFFER -- Section 6. Certain Information
Concerning the Company."
In addition to the Offer described herein, Genzyme has engaged in the
following transactions or negotiations with its affiliates in the last fiscal
year:
(i) IG Laboratories, Inc. In October 1994, Genzyme management began
consulting with its investment bankers regarding the potential acquisition
of all of the shares of the common stock of IG Laboratories, Inc., a
majority owned subsidiary of Genzyme ("IG"), not then owned by Genzyme. At
the same time, the IG Board established a committee (the "IG Independent
Committee") consisting of the directors of IG who were not affiliated with
Genzyme. The IG Independent Committee was charged with investigating and
considering the options available to IG for the further development of its
business or for a business combination with a third party, including
Genzyme. Between October 1994 and February 1995, the IG Independent
Committee consulted independent financial and legal advisors. Such advisors
began meeting with representatives of Genzyme in January 1995.
On February 15, 1995, Genzyme sent a proposal to the IG Independent
Committee to acquire all outstanding shares of IG's common stock not owned
by Genzyme through a merger of IG and Genzyme in which IG stockholders
other than Genzyme would receive shares of Genzyme General Division Common
Stock in exchange for their shares of IG Common Stock. On May 18, 1995,
Genzyme and the IG Independent Committee executed a letter of intent
pursuant to which the IG Independent Committee recommended to the full IG
Board of Directors the acquisition by Genzyme of all the outstanding shares
of IG's Common Stock. Genzyme and IG entered into an Agreement and Plan of
Merger dated as of June 10, 1995 providing, among other things, for the
merger of IG with and into Genzyme and for the exchange of all outstanding
shares of IG Common Stock (other than shares held by IG as treasury stock
or by Genzyme or subsidiaries of IG or Genzyme) for a number of shares of
Genzyme General Division Common Stock determined by dividing $7.00 by the
average of the closing prices reported by the Nasdaq National Market for
Genzyme General Division Common Stock during the ten trading days ending on
the second trading day prior to the closing date. The merger was approved
by a majority of the IG stockholders on September 29, 1995 and was
consummated on October 2 1995, and each outstanding share of IG Common
Stock (other than as indicated above) was converted into .1201 share of
Genzyme General Division Common Stock in accordance with the Merger
Agreement.
51
<PAGE> 52
(ii) Surgical Aids Partnership. On January 30, 1996, Genzyme made a
proposal to a special committee (the "Special Committee") of the Board of
Directors of the general partner of the Genzyme Development Partners, L.P.
(the "Partnership") offering to purchase substantially all of the assets of
the Partnership for approximately $93 million payable in shares of Genzyme
General Division Common Stock. The parties were unable to agree upon the
purchase price, and negotiations have been terminated.
The Purchaser. The Purchaser, a BVI international business company and a
wholly-owned subsidiary of Genzyme, was incorporated in September 1996 solely
for purposes of the transactions contemplated by the Purchase Agreement. It is
not anticipated that, prior to the consummation of the Offer, the Purchaser will
have any significant assets or liabilities (other than those arising under the
Purchase Agreement or otherwise in connection with the Offer or the Second Step
Transaction) or engage in any activities other than those incident to its
formation and capitalization and the Offer and Second Step Transaction. No
meaningful financial information concerning the Purchaser is available. The
principal executive offices of the Purchaser are located at Craigmuir Chambers,
Road Town, Tortola, British Virgin Islands.
Directors and Executive Officers. The name, business address, principal
occupation, five-year employment history and citizenship of each of the
directors and executive officers of Genzyme and the Purchaser are set forth in
Schedule I hereto.
Certain Transactions. Except for the Purchase Agreement and as otherwise
set forth in this Offer to Purchase, neither Genzyme nor the Purchaser
beneficially owns or has a right to acquire, directly or indirectly, any Units
and neither Genzyme nor Purchaser nor, to the best knowledge of Genzyme and the
Purchaser, any of the persons listed in Schedule I to this Offer to Purchase,
nor any associate or majority-owned subsidiary of any of the foregoing, nor any
of the respective executive officers, directors or subsidiaries of any of the
foregoing, has effected any transaction in the Units during the past 60 days.
Set forth in Schedule I hereto is information concerning the ownership of Units
by the directors and executive officers of Genzyme.
Except as provided in the Purchase Agreement and as otherwise set forth in
this Offer to Purchase, neither Genzyme nor the Purchaser nor, to the best
knowledge of Genzyme and the Purchaser, any of the persons listed on Schedule I
hereto, has any contract, arrangement, understanding or relationship with any
other person with respect to any Units or other securities of the Company,
including, but not limited to, any contract, arrangement, understanding or
relationship concerning the transfer or voting of any such Units or other
securities, joint ventures, loan or option arrangements, puts or calls,
guaranties of loans, guaranties against loss or the giving or withholding of
proxies.
Except as set forth in this Offer to Purchase (particularly the sections
entitled "SPECIAL FACTORS -- Section 2. Agreements and Relationships Between the
Company and Genzyme" and "-- Section 3. Background of the Transaction"), since
January 1, 1993, there have been no contacts, negotiations or transactions
between any of Genzyme, the Purchaser, any subsidiary of Genzyme or the
Purchaser or, to the best knowledge of Genzyme and the Purchaser, any of the
persons listed on Schedule I hereto, on the one hand, and the Company or any of
its officers, directors or affiliates, on the other hand, concerning a merger,
consolidation or acquisition, tender offer or other acquisition of securities,
an election of directors, or a sale or other transfer of a material amount of
assets.
Except as set forth in this Offer to Purchaser neither Genzyme nor the
Purchaser nor, to the best knowledge of Genzyme and the Purchaser, any of the
persons listed on Schedule I hereto has, since January 1, 1993, had any business
relationships or transactions with the Company or any of its executive officers,
directors or affiliates that would require disclosure herein under the rules and
regulations of the Commission applicable to the Offer.
Except as described in this Offer to Purchase, Genzyme has no plans or
proposals that relate to or would result in: (i) the acquisition by any person
of additional securities of Genzyme, or the disposition of securities of
Genzyme; (ii) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation involving Genzyme or any of its subsidiaries;
(iii) a sale or transfer of a material amount of assets of Genzyme or any of its
subsidiaries; (iv) any change in the present board of directors or management of
Genzyme including, but not limited to, any plans or proposals to change the
number or the terms of directors, to fill any
52
<PAGE> 53
existing vacancy on the board or to change any material term of the employment
contract of any executive officer; (v) any material change in the present
dividend rate or policy, or indebtedness or capitalization of Genzyme; (vi) any
other material change in Genzyme's corporate structure or business; (vii)
changes in Genzyme's charter, by-laws or instruments corresponding thereto or
other actions which may impede the acquisition of control of Genzyme by any
person; (viii) causing a class of equity security of Genzyme to be delisted from
a national securities exchange or to cease to be authorized to be quoted in an
inter-dealer quotation system of a registered national securities association;
(ix) a class of equity security of Genzyme becoming eligible for termination of
registration pursuant to Section 12(g)(4) of the Exchange Act; or (x) the
suspension of Genzyme's obligation to file reports pursuant to Section 15(d) of
the Exchange Act. Notwithstanding the foregoing, Genzyme from time to time
considers various transactions, including mergers and recapitalizations, which
may affect its corporate structure or certain areas of its business. There can
be no assurance that Genzyme will not effect any such transaction at any point
in the future.
Financial Information. Set forth below is certain selected financial data
with respect to Genzyme excerpted or derived from the audited consolidated
financial statements contained in Genzyme's Annual Report on Form 10-K for its
fiscal year ended December 31, 1995 and the unaudited financial statements
contained in Genzyme's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1996 (the "Genzyme Reports"). More comprehensive financial
information is included in Schedule III hereof, in the Genzyme Reports and in
other documents filed by Genzyme with the Commission (which may be inspected and
copies thereof obtained at the offices of the Commission as set forth in "THE
TENDER OFFER -- Section 6. Certain Information Concerning the Company").
53
<PAGE> 54
GENZYME CORPORATION AND SUBSIDIARIES
SUMMARY FINANCIAL DATA
(HISTORICAL)
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AND RATIO AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data(1):
Net revenues(2).............................. $121,916 $219,079 $270,371 $311,051 $383,783 $181,794 $229,132
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative, research
and development expenses................... 112,483 176,110 220,345 260,953 329,094 155,940 200,309
Amortization expense.......................... 1,200... 3,037 5,964 4,741 4,677 2,430 2,536
Other expenses(3)............................. -- 68,005 75,517 11,215 14,216 -- 1,465
-------- -------- -------- -------- -------- -------- --------
113,683 247,152 301,826 276,909 347,987 158,370 204,310
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)....................... 8,233 (28,073) (31,455) 34,142 35,796 23,424 24,822
Other income and (expenses):
Investment income............................ 12,371 21,981 12,209 9,101 8,814 3,062 9,103
Interest expense............................. (2,088) (7,099) (2,500) (1,354) (1,109) (220) (395)
Other........................................ 6,427... 1,678 9,192 (11,105) (202) (876) (347)
-------- -------- -------- -------- -------- -------- --------
16,710.. 16,560 18,901 (3,358) 7,503 1,966 8,361
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary credit......................... 24,943 (11,513) (12,554) 30,784 43,299 25,390 33,183
Benefit (Provision) for income taxes.......... (12,484) (18,804) 6,459 (14,481) (21,649) (9,394) (13,107)
-------- -------- -------- -------- -------- -------- --------
Extraordinary credit resulting from
utilization of operating loss
carryforwards................................ 8,387 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............................. $ 20,846 $(30,317) $ (6,095) $ 16,303 $ 21,650 $ 15,996 $ 20,076
======== ======== ======== ======== ======== ======== ========
Common Share Data:
Attributable to the General Division:
Net income (loss).......................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $ 24,965 $ 39,318
======== ======== ======== ======== ======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary
credit................................. $ 0.27 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54
Extraordinary credit..................... 0.18 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........................ $ 0.45 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54
======== ======== ======== ======== ======== ======== ========
Average shares outstanding(4).............. 47,108 44,740 52,500 52,338 60,184 56,210 72,880
======== ======== ======== ======== ======== ======== ========
Attributable to the Tissue Repair Division:
Net loss................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $ (8,969) $(19,242)
======== ======== ======== ======== ======== ======== ========
Per common share........................... $ (0.10) $ (0.17) $ (7.43) $ (4.40) $ (2.28) $ (1.03) $ (1.55)
======== ======== ======== ======== ======== ======== ========
Average shares outstanding................. 2,739 3,019 3,245 3,578 9,659 8,721 12,411
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges,
consolidated(5).............................. 5.7x (0.0)x (0.6)x 2.5x 3.4x 3.9x 6.6x
Ratio of EBITDA to interest costs,
consolidated(6).............................. 16.1x 0.9x 2.6x 4.8x 6.6x 7.4x 17.2x
EBITDA(5)..................................... $ 34,501 $ 6,632 $ 6,767 $ 50,364 $ 67,046 $ 37,205 $ 45,574
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and investments(7)........................................................................................ $ 334,535
Working capital(8)............................................................................................. 373,491
Total assets(9)................................................................................................ 1,006,329
Long-term debt and capital lease obligations excluding current portion(10)..................................... 32,921
General Division equity(10).................................................................................... 842,936
Book value per General Division common share ($21.14 at December 31, 1995)..................................... $ 12.16
Tissue Repair Division equity.................................................................................. 38,109
Book value per Tissue Repair Division common share ($3.79 at December 31, 1995)................................ $ 3.00
</TABLE>
- ---------------
(1) In October 1992, Genzyme acquired all the outstanding common shares of
Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling of
interests. Accordingly, Genzyme's financial data has been restated to
include Vivigen for all periods presented.
(2) In July 1993, GTR received a technology license fee of $2,000,000 from
Neozyme I related to expansion of the field of the Vianain(R) debriding
product.
(3) Includes charges related to the purchase of in-process research and
development totaling $51.1 million, $49.0 million, $11.2 million and $14.2
million, respectively, for the years ended December 31, 1992, 1993, 1994
and 1995; impaired goodwill and restructuring costs totaling $26.5 million
for the year ended December 31, 1993, and charges for purchase options and
financing expenses totaling $16.9 million, for the year ended December 31,
1992.
(4) Reflects July 25, 1996 2-for-1 stock split of shares of General Division
Stock.
(5) The ratio of earnings to fixed charges is calculated by dividing the sum of
(i) net income (loss) before income taxes and extraordinary credits and
(ii) fixed charges excluding capitalized interest, by fixed charges. Fixed
charges consist of interest (expensed and capitalized), amortization of
debt issuance costs and the estimated interest portion of rent expense.
Fixed charges exceeded earnings for the years ended December 31, 1992 and
1993 by $12.2 million and $17.3 million, respectively.
(6) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization and extraordinary items. Interest costs
include interest expensed and interest capitalized. EBITDA should not be
considered an alternative measure of the Company's net income, operating
performance, cash flow or liquidity. The ratio of EBITDA to interest costs
is included herein to provide additional information related to the
Company's ability to service debt.
(7) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(8) Genzyme has an available line of credit with a commercial bank of $215
million which may be used by either the General or Tissue Repair Division.
As of June 1996, Genzyme's Tissue Repair Division ("GTR") borrowed $15
million under this credit line at an interest rate of approximately 6.06%
as temporary financing for its manufacturing capacity expansion project. In
July 1996, the General Division used $200 million to finance the
acquisition of DSP.
(9) In April 1996, the Company acquired Genetrix, Inc., in a tax free exchange
of General Division Stock which was accounted for as a purchase. In the
aggregate, approximately 1,380,000 shares of General Division Stock valued
at $36.5 million were issued. In July, the Company acquired DSP for cash of
approximately $250.8 million financed by cash of $50.8 million and line of
credit borrowings of $200 million.
(10) In October 1991, the Company issued $100.0 million of 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3
million. The notes were converted into shares of General Division Stock in
March 1996.
55
<PAGE> 56
GENZYME GENERAL DIVISION
SUMMARY FINANCIAL DATA
(HISTORICAL)
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Statement of Operations Data(1):
Net revenues................................. $119,624 $216,413 $265,687 $310,727 $378,563 $179,517 $225,771
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative, research
and development expenses................... 109,930 172,936 216,839 256,064 300,498 144,113 176,747
Amortization expense.......................... 1,200 3,037 5,964 4,741 4,677 2,430 2,536
Other expenses(2)............................. -- 68,005 50,517 -- 14,216 -- 1,465
-------- -------- -------- -------- -------- -------- --------
111,130 243,978 273,320 260,805 319,391 146,543 180,748
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)....................... 8,494 (27,565) (7,633) 49,922 59,172 32,974 45,023
Other income and (expenses):
Investment income............................ 12,371 21,981 12,209 9,072 7,428 2,481 8,144
Interest expense............................. (2,088) (7,099) (2,500) (1,354) (1,069) (220) (395)
Other........................................ 6,427 1,678 9,192 (11,105) (202) (876) (347)
-------- -------- -------- -------- -------- -------- --------
16,710 16,560 18,901 (3,387) 6,157 1,385 7,402
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary credit......................... 25,204 (11,005) 11,268 46,535 65,329 34,359 52,425
Benefit (Provision) for income taxes.......... (12,589) (19,007) (2,812) (16,341) (30,506) (13,056) (20,909)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary credit..... 12,615 (30,012) 8,456 30,194 34,823 21,303 31,516
Extraordinary credit resulting from
utilization of operating loss
carryforwards................................ 8,323 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............................. 20,938 (30,012) 8,456 30,194 34,823 21,303 31,516
Tax benefit allocated from GTR................ 169 203 9,564 1,860 8,857 3,662 7,802
-------- -------- -------- -------- -------- -------- --------
Net income (loss) attributable to General
Division Stock............................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $ 24,965 $ 39,318
======== ======== ======== ======== ======== ======== ========
Common Share Data:
Attributable to the General Division:
Net income (loss).......................... $ 21,107 $(29,809) $ 18,020 $ 32,054 $ 43,680 $ 24,965 $ 39,318
======== ======== ======== ======== ======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary
credit................................. $ 0.27 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54
Extraordinary credit..................... 0.18 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........................ $ 0.45 $ (0.67) $ 0.34 $ 0.61 $ 0.73 $ 0.44 $ 0.54
======== ======== ======== ======== ======== ======== ========
Average shares outstanding(3).............. 47,108 44,740 52,500 52,338 60,184 56,210 72,880
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
Combined Balance Sheet Data:
Cash and investments(4).............................................................................. $ 298,555
Working capital...................................................................................... 355,426
Total assets(5)...................................................................................... 948,841
Long-term debt and capital lease obligations excluding current portion(5)............................ 32,170
Stockholders' equity(6).............................................................................. 842,936
</TABLE>
- ---------------
(1) In October 1992, Genzyme acquired all the outstanding common shares of
Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling of
interests. Accordingly, Genzyme's financial data has been restated to
include Vivigen for all periods presented.
(2) Includes charges related to the purchase of in-process research and
development totaling $51.1 million, $24.0 million and $14.2 million,
respectively, for the years ended December 31, 1992, 1993, and 1995;
impaired goodwill and restructuring costs
56
<PAGE> 57
totaling $26.5 million for the year ended December 31, 1993, and charges for
purchase options and financing expenses totaling $16.9 million, for the year
ended December 31, 1992.
(3) Reflects July 25, 1996 2-for-1 stock split of shares of General Division
Stock.
(4) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(5) In April 1996, the Company acquired Genetrix, Inc., in a tax free exchange
of General Division Stock which was accounted for as a purchase. In the
aggregate, approximately 1,380,000 shares of General Division Stock valued
at $36.5 million were issued. In July, the General Division acquired DSP for
cash of approximately $250.8 million financed by cash of $50.8 million and
line of credit borrowings of $200 million.
(6) In October 1991, the Company issued $100.0 million of 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3
million. The notes were converted into shares of General Division Stock in
March 1996.
57
<PAGE> 58
GENZYME TISSUE REPAIR DIVISION
SUMMARY FINANCIAL DATA
(HISTORICAL)
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Statement of Operations Data:
Net revenues(1).............................. $ 2,291 $ 2,666 $ 4,684 $ 324 $ 5,220 $ 2,277 $ 3,361
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative, research
and development expenses................... 2,552 3,174 3,506 4,889 28,596 11,827 23,562
Other expenses(2)............................ -- -- 25,000 11,215 -- -- --
------ ------- --------- --------- --------- -------- ---------
2,552 3,174 28,506 16,104 28,596 11,827 23,562
------ ------- --------- --------- --------- -------- ---------
Operating income (loss)....................... (261) (508) (23,822) (15,780) (23,376) (9,550) (20,201)
Other income and (expenses):
Investment income............................ -- -- -- 29 1,386 605 964
Interest expense............................. -- -- -- -- (40) (24) (5)
------ ------- --------- --------- --------- -------- ---------
-- -- -- 29 1,346 581 959
------ ------- --------- --------- --------- -------- ---------
Income (loss) before income taxes and
extraordinary credit......................... (261) (508) (23,822) (15,751) (22,030) (8,969) (19,242)
Benefit (Provision) for income taxes.......... 50 -- (38) -- -- -- --
------ ------- --------- --------- --------- -------- ---------
Net loss...................................... (211) (508) (23,860) (15,751) (22,030) (8,969) (19,242)
Tax benefit allocated to the General
Division..................................... (50) -- (255) -- -- -- --
------ ------- --------- --------- --------- -------- ---------
Net loss..................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $ (8,969) $(19,242)
====== ======= ========= ========= ========= ======== =========
Common Share Data:
Attributable to the Tissue Repair Division:
Net loss................................... $ (261) $ (508) $(24,115) $(15,751) $(22,030) $ (8,969) $(19,242)
====== ======= ========= ========= ========= ======== =========
Per common share........................... $ (0.10) $ (0.17) $ (7.43) $ (4.40) $ (2.28) $ (1.03) $ (1.55)
====== ======= ========= ========= ========= ======== =========
Average shares outstanding................. 2,739 3,019 3,245 3,578 9,659 8,721 12,411
====== ======= ========= ========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
Combined Balance Sheet Data:
Cash and investments(3)......................................................................................... $35,980
Working capital(4).............................................................................................. 18,065
Total assets.................................................................................................... 59,796
Long-term debt and capital lease obligations excluding current portion.......................................... 751
Stockholders' equity............................................................................................ 38,109
</TABLE>
- ---------------
(1) In July 1993, GTR received a technology license fee of $2,000,000 from
Neozyme I related to expansion of the field of the Vianain(R) debriding
product.
(2) Includes charges related to the purchase of in-process research and
development totaling $25 million and $11.2 million, respectively, for the
year ended December 31, 1993 and 1994.
(3) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(4) Genzyme has an available line of credit with a commercial bank of $215
million which may be used by either the General or Tissue Repair Division.
In June 1996, Genzyme's Tissue Repair Division ("GTR") borrowed $15 million
under this credit line at an interest rate of approximately 6.06% as
temporary financing for its manufacturing capacity expansion project.
Set forth below is certain pro forma selected financial data with respect
to Genzyme to give effect to the consummation of the Offer and the Second Step
Transaction (assuming that all outstanding Units are tendered in the Offer).
58
<PAGE> 59
GENZYME CORPORATION AND SUBSIDIARIES
UNAUDITED SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The pro forma statement of operations data and ratios have been prepared as
if the acquisition of Genetrix, Inc. (the "Genetrix Acquisition"), the
acquisition of DSP (the "DSP Acquisition") and the probable merger with Neozyme
II (the "Neozyme II Acquisition") occurred as of January 1, 1995. The pro forma
balance sheet data has been prepared as if the Genetrix Acquisition, DSP
Acquisition and Neozyme II Acquisition occurred on June 30, 1996. The pro forma
summary financial data do not purport to represent what the results of
operations or financial position of the Company would have been if such
transactions had occurred at the date indicated and do not purport to project
results of the Company for any future periods.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Pro Forma Consolidated Statement of Operations Data(1):
Net revenues............................................................................. $476,850 $279,878
Operating costs and expenses:
Cost of products and services sold and selling, general, administrative, research and
development expenses................................................................... 434,406 251,832
Amortization expense..................................................................... 13,551 8,931
Other expenses(2)........................................................................ 17,801 2,011
-------- --------
465,758 262,774
-------- --------
Operating income........................................................................... 11,092 17,104
Other income and (expenses):
Investment income........................................................................ 4,895 6,836
Interest expense......................................................................... (13,511) (6,611)
Other.................................................................................... (1,556) (1,284)
-------- --------
(10,172) (1,059)
-------- --------
Income before income taxes................................................................. 920 16,045
Provision for income taxes................................................................. (9,124) (9,486)
-------- --------
Net income................................................................................. $ (8,204) $ 6,559
======== ========
Attributable to General Division Stock:
Net income............................................................................... $ 13,826 $ 25,801
Per common and common equivalent share................................................... $ 0.22 $ 0.35
Average shares outstanding............................................................... 61,565 73,800
Attributable to TR Stock:
Net loss................................................................................. $(22,030) $(19,242)
Per common share......................................................................... $ (2.28) $ (1.55)
Average shares outstanding............................................................... 9,659 12,411
Ratio of earnings to fixed charges(3), consolidated........................................ 0.7x 2.2x
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
JUNE 30,
1996
------------
<S> <C> <C>
Pro Forma Consolidated Balance Sheet Data(1):
Cash and investments(4).................................................................. $ 190,627
Working capital.......................................................................... 46,565
Total assets............................................................................. 1,115,104
Long-term debt, capital lease obligations excluding current portion, and other noncurrent
liabilities............................................................................ 33,147
Pro Forma General Division equity(5)..................................................... 722,883
Pro Forma Book value per General Division common share................................... $ 10.22
Pro Forma Tissue Repair Division equity.................................................. 38,109
Pro Forma book value per Tissue Repair Division common share............................. $ 3.00
</TABLE>
- ---------------
(1) On May 1, 1996, the Company acquired Genetrix Inc., a privately held genetic
testing laboratory based in Phoenix, Arizona, in a tax-free exchange of
General Division Common Stock. In the aggregate, approximately 1,380,000
shares of General Division Common Stock, valued at approximately $36.5
million, were issued for all the outstanding shares of Genetrix preferred
stock and Genetrix common stock, (together with the Genetrix Preferred Stock
"Genetrix Stock"). The acquisition was accounted for as a purchase. The
total purchase price of approximately $39.7 million included acquisition
costs of $3.8 million. Approximately $35 million of the excess purchase
price was allocated to goodwill and is being amortized over 15 years. On
July 1, 1996, Genzyme completed the acquisition of Deknatel, Snowden,
Pencer, Inc., a privately held specialty surgical products company. The
Company paid approximately $250 million which was partially funded by $200
million borrowed under a revolving credit facility. The total purchase price
of $250.8 million included acquisition costs of $5.8 million. Approximately
$36 million was allocated to tangible net assets, $70 million was allocated
to patents and tradenames (useful life of 12 and 40 years, respectively),
$24.2 million to in-process technology and $127.8 million to goodwill
(useful life of 40 years). The amount allocated to in-process technology was
charged to expense and is reflected as a charge to accumulated deficit in
the pro forma balance sheet but is not reflected in the pro forma statement
of operations as it is a material nonrecurring charge. On September 23,
1996, Genzyme announced that it had signed a definitive Purchase Agreement
with Neozyme II under which Genzyme will commence a tender offer for all
outstanding units of Neozyme II at $45 per Unit in cash. The unaudited pro
forma consolidated financial data presented herein assumes that all
outstanding Units are tendered in the Offer. The total purchase price of
$109.7 million includes acquisition costs of $1.0 million and has been
allocated to the net assets of Neozyme II of $14.1 million and to in-process
technology of $95.6 million. The amount allocated to in-process technology
is reflected as a charge to accumulated deficit in the pro forma balance
sheet and is not reflected in the pro forma statement of operations as it is
a material nonrecurring charge which will be charged to expense upon
completion of the acquisition.
(2) Includes charges related to the purchase of in-process research and
development of $14.2 million for the year ended December 31, 1995.
(3) The ratio of earnings to fixed charges is calculated by dividing the sum of
(i) net income (loss) before income taxes and extraordinary credits and (ii)
fixed charges, by fixed charges. Fixed charges consist of interest (expensed
and capitalized), amortization of debt issuance costs and the estimated
interest portion of rent expense.
(4) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(5) In October 1991, the Company issued $100.0 million of 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3
million. The notes were converted into shares of General Division Stock in
March 1996.
60
<PAGE> 61
GENZYME GENERAL DIVISION
UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
The pro forma statement of operations data has been prepared as if the
Genetrix Acquisition, the DSP Acquisition and the Neozyme II Acquisition
occurred as of January 1, 1995. The pro forma balance sheet data has been
prepared as if the Genetrix Acquisition, DSP Acquisition and the Neozyme II
Acquisition occurred on June 30, 1996. The pro forma summary financial data do
not purport to represent what the results of operations or financial position of
the General Division would have been if such transactions had occurred at the
date indicated and do not purport to project results of the General Division for
any future periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Pro Forma Combined Statement of Operations Data(1):
Net revenues.......................................................... $471,630 $276,517
Operating costs and expenses:
Cost of products and services sold and selling, general,
administrative, research and development expenses................ 405,810 228,270
Amortization expense................................................ 13,551 8,931
Other expenses(2)................................................... 17,801 2,011
------------ ----------
437,162 239,212
------------ ----------
Operating income...................................................... 34,468 37,305
Other income and (expenses):
Investment income................................................... 3,509 5,877
Interest expense.................................................... (13,471) (6,611)
Other............................................................... (1,556) (1,284)
------------ ----------
(11,518) (2,018)
------------ ----------
Income before income taxes............................................ 22,950 35,287
Provision for income taxes............................................ (17,981) (17,288)
------------ ----------
Net income............................................................ 4,969 17,999
Tax benefit allocated from GTR........................................ 8,857 7,802
------------ ----------
Net income attributable to General Division Stock..................... $ 13,826 $ 25,801
============ ==========
Per common and common equivalent share:
Net income.......................................................... $ 0.22 $ 0.35
Average shares outstanding.......................................... 61,565 73,800
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996
----------
<S> <C> <C>
Pro Forma Combined Balance Sheet Data(1):
Cash and investments(3).............................................. $ 154,647
Working capital...................................................... 28,500
Total assets......................................................... 1,057,616
Long-term debt, capital lease obligations excluding current portion,
and other noncurrent liabilities.................................. 32,396
Division equity(4)................................................... 722,883
</TABLE>
- ---------------
(1) On May 1, 1996, the Company acquired Genetrix Inc., a privately held genetic
testing laboratory based in Phoenix, Arizona, in a tax-free exchange of
General Division Common Stock. In the aggregate, approximately 1,380,000
shares of General Division Common Stock, valued at approximately $36.5
million, were issued for all the outstanding shares of Genetrix preferred
stock and Genetrix common
61
<PAGE> 62
stock, together with the Genetrix Preferred Stock "Genetrix Stock". The
acquisition was account for as a purchase. The total purchase price of
approximately $39.7 million included acquisition costs of $3.8 million.
Approximately $35 million of the excess purchase price was allocated to
goodwill and is being amortized over 15 years. On July 1, 1996, Genzyme
completed the acquisition of Deknatel, Snowden, Pencer, Inc., a privately
held specialty surgical products company. The Company paid approximately
$250 million which was partially funded by $200 million borrowed under a
revolving credit facility. The total purchase price of $250.8 million
included acquisition costs of $5.8 million. Approximately $36 million was
allocated to tangible net assets, $70 million was allocated to patents and
tradenames (useful life of 12 and 40 years, respectively), $24.2 million to
in-process technology and $127.8 million to goodwill (useful life of 40
years). The amount allocated to in-process technology was charged to
expense and is reflected as a charge to accumulated deficit in the pro
forma balance sheet but is not reflected in the pro forma statement of
operations as it is a material nonrecurring charge. On September 23, 1996,
Genzyme announced that it had signed a definitive Purchase Agreement with
Neozyme II under which Genzyme will commence a tender offer for all
outstanding units of Neozyme II at $45 per Unit in cash. The unaudited
summary pro forma financial combined financial data presented herein
assumes that all outstanding Units are tendered in the Offer. The total
purchase price of $109.7 million includes acquisition costs of $1.0 million
and has been allocated to the net assets of Neozyme II of $14.1 million and
to in-process technology of $95.6 million. The amount allocated to
in-process technology is reflected as a charge to accumulated deficit in
the pro forma balance sheet and is not reflected in the pro forma statement
of operations as it is a material nonrecurring charge which will be charged
to expense upon completion of the acquisition.
(2) Includes charges related to the purchase of in-process research and
development $14.2 million for the year ended December 31, 1995.
(3) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(4) In October 1991, the Company issued $100.0 million of 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3
million. The notes were converted into shares of General Division Stock in
March 1996.
8. SOURCE AND AMOUNT OF FUNDS. The total amount of funds required by the
Purchaser to purchase 2,415,000 Units pursuant to the Offer, and to pay related
fees and expenses is estimated to be approximately $109 million. The Purchaser
expects to obtain such funds from Genzyme. Genzyme intends to obtain such funds
from its available corporate funds. Obtaining financing is not a condition to
the Offer or the Second Step Transaction.
9. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provisions
of the Offer, and in addition to the condition that Units that would constitute
not less than a majority of the Units outstanding are validly tendered prior to
expiration of the Offer and not withdrawn, the Purchaser shall not be required
to accept for payment and pay for any Units tendered pursuant to the Offer, may
postpone the purchase of, and payment for, Units tendered, and may terminate or
amend the Offer if at any time on or after the date of the Purchase Agreement,
and at or before the time of acceptance for payment of any such Units (whether
or not any Units have theretofore been accepted for payment and paid for
pursuant to the Offer) any of the following shall occur or shall be determined
by the Purchaser to have occurred and remain in effect:
(a) except for matters which affect generally the economy or the
industry in which the Company is engaged and except for continued losses
incurred by the Company as a result of its operations and continued
depletion of its cash resources in the ordinary course of business or
consistent with the annual workplan currently in effect, any change shall
have occurred in the business, properties, assets, liabilities,
capitalization, stockholders' equity, financial condition, operations,
licenses or franchises or results of operations of the Company which has a
Material Adverse Effect (as defined in the Purchase Agreement); or
(b) there shall have been instituted or be pending any action,
proceeding, application or counterclaim before any court or governmental or
regulatory body which (i) challenges the validity of or seeks to restrain
the consummation of or to impose any material limitation, on any
transaction contemplated by the Purchase Agreement or seeks (ii) to obtain
any material amount of damages in connection with such transactions; or
62
<PAGE> 63
(c) any statute, regulation, order or injunction shall have been
enacted, entered, enforced or deemed applicable to the Offer or the Second
Step Transaction that is reasonably likely to, directly or indirectly,
result in any of the consequences referred to in paragraph (b) above; or
(d) the Board of Directors of the Company shall have publicly
(including by amendment of its Schedule 14D-9) withdrawn or modified in a
manner adverse to the Purchaser its approval or recommendation of the Offer
or shall have resolved to do so; or
(e) the representations and warranties of the Company set forth in the
Purchase Agreement shall not be true in any material respect as though made
on such date or the Company shall have failed in any material respect to
perform any material obligation or covenant required in the Purchase
Agreement to be performed or complied with by it; or
(f) the Company shall have entered into, or shall have publicly
announced its intention to enter into, an agreement or agreement in
principle with respect to any Acquisition Proposal (as defined in the
Purchase Agreement).
10. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS. Neither Genzyme nor the
Purchaser is aware of any license or regulatory permit that appears to be
material to the business of the Company that might be adversely affected by the
Purchaser's acquisition of Units as contemplated herein. Neither Genzyme nor the
Purchaser is aware of any other material filing, approval or other action by any
federal or state governmental or administrative authority that would be required
for the acquisition of Units by the Purchaser as contemplated herein, including
any approval required under the Hart-Scott-Rodino Act. Should any such approval
or action be required, it is currently contemplated that such approval or action
would be sought. There is, however, no present intention to delay the purchase
of Units tendered pursuant to the Offer pending the outcome of any such approval
or action. There can be no assurance that any such approval or action, if
needed, would be obtained without substantial conditions or that adverse
consequences might not result to Genzyme's, the Purchaser's or the Company's
business in the event that such approvals were not obtained or such actions were
not taken. The Purchaser's obligation under the Offer to accept for payment and
pay for Units is subject to certain conditions, including conditions relating to
the legal matters discussed in this Section 10. See "THE TENDER OFFER -- Section
9. Certain Conditions of the Offer."
11. DIVIDENDS AND DISTRIBUTIONS. If, on or after September 20, 1996, the
Company should declare or pay any dividend or other distribution (including,
without limitation, the issuance of additional Shares pursuant to a stock
dividend or stock split or the issuance of rights for the purchase of any
securities) with respect to the Callable Common Stock that is payable or
distributable to Holders of record on a date occurring prior to the transfer to
the name of the Purchaser or its nominees or transferees on the Company's stock
transfer records of the Units purchased pursuant to the Offer, then, without
prejudice to the Purchaser's rights described in "THE TENDER OFFER -- Section 9.
Certain Conditions of the Offer," (i) the purchase price per Unit payable by the
Purchaser pursuant to the Offer will be reduced in the amount of any such cash
dividend or distribution and (ii) the whole of any non-cash dividend or
distribution (including, without limitation, additional shares or rights as
aforesaid) will be required to be remitted promptly and transferred by each
tendering Holder to the Depositary for the account of the Purchaser accompanied
by appropriate documentation of transfer and pending such remittance or
appropriate assurance thereof, the Purchaser will be entitled to all rights and
privileges as owner of any such non-cash dividend, distribution or right, and
may withhold the entire purchase price or deduct from the purchase price the
amount of value of such non-cash dividend, distribution or right, as determined
by the Purchaser in its sole discretion.
If, on or after September 20, 1996, the Company should split the shares of
Callable Common Stock or combine or otherwise change the shares of Callable
Common Stock or its capitalization, then, without prejudice to the Purchaser's
rights described in "THE TENDER OFFER -- Section 9. Certain Conditions of the
Offer," appropriate adjustments to reflect such split, combination or change may
be made by the Purchaser in the purchase price and other terms of the Offer,
including, without limitation, the number or type of securities offered to be
purchased.
63
<PAGE> 64
12. FEES AND EXPENSES. Genzyme engaged Robertson, Stephens & Company to
act as its financial advisor and as Dealer Manager. See "SPECIAL
FACTORS -- Reasons for the Transaction; Purpose and Structure of the
Transaction; Plans for the Company after the Transaction" for a description of
Robertson, Stephens & Company's compensation.
Genzyme has retained Corporate Investor Communications, Inc. to act as the
Information Agent and American Stock Transfer & Trust Company as the Depositary
in connection with the Offer. The Information Agent may contact holders of Units
by mail, telephone, telex, telecopy, telegraph and personal interview and may
request brokers, dealers, commercial banks, trust companies and other nominees
to forward the Offer materials to beneficial owners. Each of the Information
Agent and the Depositary will receive reasonable and customary compensation for
its services, will be reimbursed for certain reasonable out-of-pocket expenses
and will be indemnified against certain liabilities and expenses in connection
with the Offer, including, without limitation, certain liabilities under U.S.
federal securities laws.
Neither Genzyme nor the Purchaser will pay any fees or commissions to any
broker or dealer or any other person for soliciting tenders of Units pursuant to
the Offer (other than to the Dealer Manager and the Information Agent). Brokers,
dealers, commercial banks and trust companies will, upon request, be reimbursed
by the Purchaser for customary mailing and handling expenses incurred by them in
forwarding Offer materials to their customers.
13. MISCELLANEOUS. The Offer is being made solely by this Offer to
Purchase and the related Letter of Transmittal and is being made to all holders
of Units. The Purchaser is not aware of any state where the making of the Offer
is prohibited by administrative or judicial action pursuant to any valid state
statute. If the Purchaser becomes aware of any valid state statute prohibiting
the making of the Offer or the acceptance of Units pursuant thereto, the
Purchaser will make a good faith effort to comply with such state statute.If,
after such good faith effort, the Purchaser cannot comply with such state
statute, the Offer will not be made to, nor will tenders be accepted from or on
behalf of, the Holders in such state. In any jurisdiction where the securities,
blue sky or other laws require the Offer to be made by a licensed broker or
dealer, the Offer shall be deemed to be made on behalf of the Purchaser by the
Dealer Manager or one or more registered brokers or dealers that are licensed
under the laws of such jurisdiction.
The Purchaser has filed with the Commission (i) a Schedule 14D-1 together
with exhibits, pursuant to Rule 14d-3 promulgated by the Commission under the
Exchange Act, furnishing certain additional information with respect to the
Offer, (ii) a Schedule 13E-3 together with exhibits, pursuant to Rule 13e-3
promulgated by the Commission under the Exchange Act, furnishing certain
additional information with respect to the Offer, and (iii) a Schedule 13E-4
together with exhibits, pursuant to Rule 13e-4 promulgated by the Commission
under the Exchange Act, furnishing certain additional information with respect
to the Offer. Such statements and any amendments thereto, including exhibits,
may be examined and copies may be obtained at the same places and in the same
manner as set forth with respect to information about the Company in "THE TENDER
OFFER -- Section 6. Certain Information Concerning the Company" (except that
such statement and amendments may not be available in the regional offices of
the Commission).
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF GENZYME, THE PURCHASER OR THE COMPANY NOT CONTAINED
HEREIN OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED.
NEOZYME II ACQUISITION CORP.
September 27, 1996
64
<PAGE> 65
SCHEDULE I
MEMBERS OF THE BOARDS OF DIRECTORS AND
EXECUTIVE OFFICERS OF GENZYME AND THE PURCHASER
1. Directors and Executive Officers of Genzyme. The name, business address
and position with Genzyme, present principal occupation or employment and five
year employment history of each of the directors and executive officers of
Genzyme, together with the names, principal businesses and addresses of any
corporations or other organizations in which such principal occupations are
conducted are set forth below. Unless otherwise indicated, each occupation set
forth refers to Genzyme, each individual is a United States citizen and each
individual's business address is One Kendall Square, Cambridge, MA 02139. Unless
otherwise indicated, no director or executive officer of Genzyme beneficially
owns any Units (or rights to acquire Units).
<TABLE>
<CAPTION>
NAME POSITION WITH GENZYME
- --------------------------------------------- ---------------------------------------------
<S> <C>
Henri A. Termeer............................. Chairman of the Board; President; Chief
Executive Officer
Geoffrey F. Cox.............................. Executive Vice President
David D. Fleming............................. Group Senior Vice President, Diagnostics
John V. Heffernan............................ Senior Vice President, Human Resources
Elliott D. Hillback, Jr...................... Senior Vice President, Genomics
Mark A. Hofer................................ Senior Vice President; Chief Patent Counsel
David J. McLachlan........................... Executive Vice President, Finance; Chief
Financial Officer
Gregory D. Phelps............................ Executive Vice President
James R. Rasmussen........................... Senior Vice President, Research
Alan E. Smith................................ Senior Vice President, Research; Chief
Scientific Officer
Peter Wirth.................................. Executive Vice President, Legal Affairs;
Chief Legal Counsel
Evan M. Lebson............................... Treasurer
John M. McPherson............................ Senior Vice President, Protein Development
Richard A. Moscicki.......................... Senior Vice President, Clinical, Medical and
Regulatory Affairs; Chief Medical Officer
G. Jan van Heek.............................. Group Senior Vice President; Therapeutics
Constantine E. Anagnostopoulos............... Director
Douglas A. Berthiaume........................ Director
Henry E. Blair............................... Director
Charles L. Cooney............................ Director
Robert J. Carpenter.......................... Director
Henry R. Lewis............................... Director
</TABLE>
Mr. Termeer has served as President and a Director of Genzyme since October
1983, as Chief Executive Officer since December 1985 and as Chairman of the
Board since May 1988. For ten years prior to joining Genzyme, Mr. Termeer worked
for Baxter Travenol Laboratories, Inc., a manufacturer of human health care
products. Mr. Termeer is Chairman of the Boards of Genzyme Transgenics
Corporation (an affiliate of Genzyme) and Neozyme II. Mr. Termeer is also a
director of Abiomed, Inc., AutoImmune Inc., GelTex Pharmaceuticals, Inc. and
Xenova Ltd. and a trustee of Hambrecht & Quist Healthcare Investors and
Hambrecht & Quist Life Sciences Investors. Mr. Termeer is a citizen of The
Netherlands and beneficially owns 3,300 Units.
<PAGE> 66
Dr. Cox joined Genzyme in June 1984 and served as Senior Vice President,
Operations of Genzyme from May 1988 until September 1996, when he became an
Executive Vice President. For 14 years prior to joining Genzyme, Dr. Cox worked
for the manufacturing division of British Fermentation Products, Ltd., a
division of Gist-Brocades N.V. Mr. Cox is a citizen of the United Kingdom.
Mr. Fleming joined Genzyme in April 1984. He has served as President of
Genzyme Diagnostics Division since January 1989 and a Senior Vice President of
Genzyme from August 1989 until September 1996. He was named Group Senior Vice
President of Genzyme in September 1996. For 11 years prior to joining Genzyme,
he worked for Baxter Travenol Laboratories, Inc.
Mr. Heffernan joined Genzyme as Vice President, Human Resources in October
1989 and has served as Senior Vice President, Human Resources since May 1992.
Prior to joining Genzyme, he served for more than five years as Vice President,
Human Resources Corporate Staff of GTE Corporation, a diversified communications
and electronics company.
Mr. Hillback became Senior Vice President, Genomics in September 1996. He
served as Senior Vice President and as President of Integrated Genetics
(formerly IG Laboratories, Inc., a majority-owned subsidiary merged into Genzyme
in October 1995) from July 1990 until September 1996. For one year before
joining Genzyme, he was President and Chief Executive Officer of Cellcor
Therapies, Inc., a biotechnology company. Prior to that, Mr. Hillback was
employed for six years in the human health care products business of The BOC
Group, Inc., most recently as President of its Glasrock Home Health Care
subsidiary. For 11 years prior to joining The BOC Group, Inc., he served in
varying capacities at Baxter Travenol Laboratories, Inc. Mr. Hillback is also a
director of IVF America, Inc., an in vitro fertilization services company in
which Genzyme holds a minority interest.
Mr. Hofer joined Genzyme in August 1989 as Vice President and General
Counsel, served as Senior Vice President and General Counsel from May 1992 until
December 1995 and has been Senior Vice President and Chief Patent Counsel since
January 1996. Prior to joining Genzyme, he served as Chief Patent Counsel for
Integrated Genetics, Inc., a biotechnology company, from July 1987 until its
acquisition by Genzyme in August 1989. From March 1981 until July 1987, he
served as Patent Counsel for Johnson & Johnson specializing in biotechnology.
Mr. McLachlan joined Genzyme in December 1989 and served as Senior Vice
President, Finance until September 1996, when he became Executive Vice
President, Finance. He has served as Chief Financial Officer since joining
Genzyme. Prior to joining Genzyme, he served for more than five years as Vice
President of Finance for Adams-Russell Electronics Inc., a defense electronics
manufacturer, and Adams-Russell Co., Inc., a cable television company. Mr.
McLachlan is also a director of HearX, Ltd. Mr. McLachlan beneficially owns
1,400 Units.
Mr. Phelps joined Genzyme as Senior Vice President in November 1991 and was
named Executive Vice President in September 1996. Prior to joining Genzyme, Mr.
Phelps served as President and Chief Executive Officer of Viagene, Inc., a
biotechnology company, from October 1988 to June 1990, and of ZymoGenetics,
Inc., a biotechnology company, from May 1986 to August 1988, and held various
positions at Baxter Travenol Laboratories, Inc., a manufacturer of human health
care products, from 1975 to 1986. Mr. Phelps is also a director of Neozyme II
and Oxtex International Inc. Mr. Phelps beneficially owns 2,500 Units.
Dr. Rasmussen joined Genzyme in June 1984 and has served as Senior Vice
President, Research since August 1989. Prior to joining Genzyme, he was an
Assistant Professor of Chemistry at Cornell University.
Dr. Smith joined Genzyme in August 1989 as Senior Vice President, Research.
He also became Genzyme's Chief Scientific Officer in September 1996. Prior to
joining Genzyme, he served as Vice President-Scientific Director of Integrated
Genetics, Inc., from November 1984 until its acquisition by Genzyme in August
1989. From October 1980 to October 1984, Dr. Smith was head of the Biochemistry
Division of the National Institute for Medical Research, Mill Hill, London,
England. Dr. Smith also serves as a director of Genzyme Transgenics Corporation.
Dr. Smith is a citizen of the United Kingdom.
<PAGE> 67
Mr. Wirth joined Genzyme in January 1996 as Senior Vice President and
General Counsel and became Executive Vice President, Legal Affairs and Chief
Legal Officer in September 1996. He will remain a partner of Palmer & Dodge LLP,
a Boston, Massachusetts law firm, a position he has held since 1982 until
September 30, 1996, at which time he will become of Counsel. Palmer & Dodge LLP
is counsel to Genzyme, the Purchaser and the Company.
Mr. Lebson joined Genzyme in August 1989 as Executive Assistant to the
President and served as Vice President, Financial Operations from April 1990 to
August 1991 and as Vice President and Treasurer from August 1991 to September
1996. He currently serves as Treasurer of Genzyme. Prior to joining Genzyme, he
served as Treasurer and Chief Financial Officer of Integrated Genetics, Inc.
from 1983 until its acquisition by Genzyme in August 1989. Mr. Lebson is also
Vice President and Treasurer of Genzyme Transgenics Corporation.
Dr. McPherson joined Genzyme in August 1989 and served as Vice President,
Therapeutic Protein Development from November 1989 to May 1993 and as Vice
President, Biotherapeutic Product Development since then. He was appointed Vice
President, Research and Development of Genzyme Tissue Repair Division in
December 1994. Prior to joining Genzyme, he was, since April 1988, Director,
Protein Chemistry of Integrated Genetics, Inc.
Dr. Moscicki joined Genzyme in March 1992 as Medical Director, became Vice
President, Medical Affairs in early 1993 and was named Vice President, Clinical,
Medical and Regulatory Affairs in December 1993. In September 1996, he became
Senior Vice President, Clinical, Medical and Regulatory Affairs and Chief
Medical Officer. Since 1979, he has also been a physician staff member at the
Massachusetts General Hospital and a faculty member at the Harvard Medical
School.
Mr. van Heek joined Genzyme in September 1991 as General Manager of its
wholly-owned subsidiary, Genzyme, B.V., and became a Genzyme Vice President and
the President of Genzyme Therapeutics Division in December 1993. In September
1996 he was named Group Senior Vice President, Therapeutics. Prior to joining
Genzyme, he was, since 1988, Vice President/General Manager of the Fenwal
Division of Baxter Healthcare Corporation. Mr. van Heek also has served as
President and Treasurer of Neozyme II from March 1992 to January 1996. Mr. van
Heek is a citizen of The Netherlands and beneficially owns 400 Units.
Dr. Anagnostopoulos is Managing General Partner of Gateway Associates,
which is the general partner of Gateway Venture Partners III, L.P., a venture
capital partnership. From January 1986 to April 1987, Dr. Anagnostopoulos was a
consultant to Monsanto Company, a producer of pharmaceuticals, chemicals,
plastics and textiles, and to Alafi Capital, a venture capital firm. From 1982
through 1985, he served as Corporate Vice President of Monsanto Company. His
principal business address is Gateway Associates, 800 Maryland Avenue, Suite
1190, St. Louis, MO 63105.
Mr. Berthiaume is Chairman, President and Chief Executive Officer of Waters
Corporation, a high technology manufacturer of products used for analysis and
purification, formerly a division of Millipore Corporation. From May 1991 to
August 1994, he was President of the Waters Division of Millipore Corporation,
and from 1988 to 1991, he was Chief Financial Officer of Millipore Corporation.
His principal business address is Waters Corporation, 34 Maple Street, Milford,
MA 01757.
Mr. Blair is a consultant to several companies, including Genzyme. Prior to
January 1990, Mr. Blair was Senior Vice President, Scientific Affairs of
Genzyme. Before joining Genzyme in 1981, he was Associate Director of the New
England Enzyme Center at Tufts University School of Medicine. Mr. Blair is also
a director of Genzyme Transgenics Corporation, Dynagen, Inc. and Celtrix
Pharmaceuticals, Inc. His principal business address is P.O. Box 648, 275 Mill
Way, Barnstable, MA 02630.
Mr. Carpenter is President and Chief Executive Officer of VacTex, Inc., a
privately held biotechnology company which he co-founded in November 1995, and
Chairman of GelTex Pharmaceuticals, Inc., a publicly held pharmaceutical
development company which he co-founded in November 1991 and where he served as
President and Chief Executive Officer until May 1993. Mr. Carpenter was Chairman
of the Board, President and Chief Executive Officer of Integrated Genetics,
Inc., a biotechnology company that merged with Genzyme in 1989. Following the
merger and until 1991, Mr. Carpenter was Executive Vice President of
<PAGE> 68
Genzyme, and Chief Executive Officer and Chairman of the Board of IG
Laboratories, Inc. Mr. Carpenter is also a director of Apex Biosciences, Inc.
and Neozyme II. His principal business address is VacTex, Inc., 70 Walnut
Street, Wellesley, MA 02181. Mr. Carpenter owns 2,000 Units, including 1,000
owned by Mr. Carpenter's wife, as to which he disclaims beneficial ownership.
Dr. Cooney is a Professor of Chemical and Biochemical Engineering and
Co-Director of the Program on the Pharmaceutical Industry at Massachusetts
Institute of Technology ("MIT"). Dr. Cooney joined the MIT faculty as an
Assistant Professor in 1970 and became a Professor in 1982. Dr. Cooney is also a
principal of BioInformation Associates, Inc., a consulting company. His
principal business address is Massachusetts Institute of Technology, 25 Ames
Street, Building 66, Room 472, Cambridge, MA 02139.
Mr. Lewis is a consultant to several companies and Chairman of the Board of
Delphax Systems, a manufacturer of high speed non-impact printers, and a member
of the Board of Dyax Corp., a bioseparation, pharmaceutical discovery and
development company. From 1986 to February 1991, Mr. Lewis was the Vice Chairman
of the Board of Dennison Manufacturing Company, a manufacturer and distributor
of products for the stationery, technical paper, and industrial and retail
systems markets. From 1982 to 1986, Mr. Lewis was a Senior Vice President of
Dennison Manufacturing Company. His principal business address is Protein
Engineering Corporation, 35 Clover Street, Belmont, MA 02178.
2. Directors and Executive Officers of the Purchaser. The name, business
address and position with the Purchaser, present principal occupation or
employment and five year employment history of each of the directors and
executive officers of the Purchaser, together with the names, principal
businesses and addresses of any corporations or other organizations in which
such principal occupations are conducted are set forth below. Unless otherwise
indicated, each individual is a United States citizen, and no director or
executive officer of the Purchaser beneficially owns any Units (or rights to
acquire Units).
<TABLE>
<CAPTION>
NAME POSITION WITH THE PURCHASER
- --------------------------------------------- ---------------------------------------------
<S> <C>
David J. McLachlan........................... President and Treasurer
Peter Wirth.................................. Secretary
</TABLE>
See Section 1 of this Schedule I for information concerning Messrs.
McLachlan and Wirth.
<PAGE> 69
SCHEDULE II
MEMBERS OF THE BOARDS OF DIRECTORS AND
EXECUTIVE OFFICERS OF NEOZYME II
The name, business address and position with Neozyme II, present principal
occupation or employment and five year employment history of each of the
directors and executive officers of Neozyme II, together with the names,
principal businesses and addresses of any corporations or other organizations in
which such principal occupations are conducted are set forth below. Unless
otherwise indicated, each individual is a United States citizen and each
individual's business address is One Kendall Square, Cambridge, MA 02139. Unless
otherwise indicated, no director or executive officer of Neozyme II beneficially
owns any Units (or rights to acquire Units).
<TABLE>
<CAPTION>
NAME POSITION WITH NEOZYME II
- --------------------------------------------------------------------- ------------------------
<S> <C>
Paul M. Edwards...................................................... President and Treasurer
Kennett F. Burnes.................................................... Director
Robert J. Carpenter.................................................. Director
Robert E. Flynn...................................................... Director
Gregory D. Phelps.................................................... Director
Henri A. Termeer..................................................... Director
</TABLE>
Mr. Edwards became President and Treasurer of Neozyme II in January 1996.
Mr. Edwards also serves as Vice President and General Manager -- UK Operations
for Genzyme, a position he has held since April 1993. He joined Genzyme Limited,
a Genzyme subsidiary in the UK, in 1986 as a Production Manager and became its
Director, Manufacturing Operations in 1990. Prior to joining Genzyme Limited,
Mr. Edwards was employed by Beecham Pharmaceuticals from September 1979 in
varying capacities. Mr. Edwards is a citizen of the United Kingdom.
Mr. Burnes is President and Chief Operating Officer of Cabot Corporation, a
specialty chemicals and materials and energy company, a position he has held
since February 1995. From August 1988 through February 1995, he was Executive
Vice President of Cabot Corporation, and from November 1987 through August 1988,
he was Vice President and General Counsel of Cabot Corporation. Prior to joining
Cabot Corporation, Mr. Burnes was a partner at the Boston, Massachusetts law
firm of Choate, Hall & Stewart. Mr. Burnes is also a director of Cabot
Corporation. His principal business address is Cabot Corporation, 75 State
Street, Boston, MA 02109. He beneficially owns 500 Units.
Mr. Carpenter is President and Chief Executive Officer of VacTex, Inc., a
privately held biotechnology company which he co-founded in November 1995, and
Chairman of GelTex Pharmaceuticals, Inc., a publicly held pharmaceutical
development company which he co-founded in November 1991 and where he served as
President and Chief Executive Officer until May 1993. Mr. Carpenter was Chairman
of the Board, President and Chief Executive Officer of Integrated Genetics,
Inc., a biotechnology company that merged with Genzyme in 1989. Following the
merger and until 1991, Mr. Carpenter was Executive Vice President of Genzyme,
and Chief Executive Officer and Chairman of the Board of IG Laboratories, Inc.
Mr. Carpenter is also a director of Apex Biosciences, Inc. and Genzyme. His
principal business address is VacTex, Inc., 70 Walnut Street, Wellesley, MA
02181. Mr. Carpenter owns 2,000 Units, including 1,000 owned by Mr. Carpenter's
wife, as to which he disclaims beneficial ownership.
Mr. Flynn has been President of Houghton & Richards, Inc., a privately held
tool steel sales company, since 1976. He is also a director of the Massachusetts
Cystic Fibrosis Foundation and a trustee of the national Cystic Fibrosis
Foundation. His principal business address is Houghton & Richards Corporation,
P.O. Box 509, Marlborough, MA 01752. He owns 7,850 Units, including 1,600 Units
held in an employee benefit plan trust of which Mr. Flynn is the trustee and in
which Mr. Flynn has a minority interest, 300 Units held by Mr. Flynn as
custodian of accounts for the benefit of his children, 950 Units owned by Mr.
Flynn's spouse and
<PAGE> 70
1,000 Units owned in irrevocable trusts for the benefit of his children. Mr.
Flynn disclaims beneficial ownership of the Units owned by his spouse and the
Units owned in the trusts for the benefit of his children.
Mr. Phelps joined Genzyme as Senior Vice President in November 1991 and was
named Executive Vice President in September 1996. Prior to joining Genzyme, Mr.
Phelps served as President and Chief Executive Officer of Viagene, Inc., a
biotechnology company, from October 1988 to June 1990, and of ZymoGenetics,
Inc., a biotechnology company, from May 1986 to August 1988, and held various
positions at Baxter Travenol Laboratories, Inc., a manufacturer of human health
care products, from 1975 to 1986. Mr. Phelps is also a director of Oxtex
International Inc. Mr. Phelps beneficially owns 2,500 Units.
Mr. Termeer has served as President and a Director of Genzyme since October
1983, as Chief Executive Officer since December 1985 and as Chairman of the
Board since May 1988. For ten years prior to joining Genzyme, Mr. Termeer worked
for Baxter Travenol Laboratories, Inc., a manufacturer of human health care
products. Mr. Termeer is Chairman of the Boards of Genzyme Transgenics
Corporation. Mr. Termeer is also a director of Abiomed, Inc., AutomImmune Inc.,
GelTex Pharmaceuticals, Inc. and Xenova Ltd. and a trustee of Hambrecht & Quist
Healthcare Investors and Hambrecht & Quist Life Sciences Investors. Mr. Termeer
is a citizen of The Netherlands. Mr. Termeer beneficially owns 3,300 Units.
<PAGE> 71
ANNEX I
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415)576-3300
September 20, 1996
CONFIDENTIAL
The Special Committee of The Board of Directors
The Board of Directors
Neozyme II Corporation
Todman Building
Main Street
Road Town, Tortola
British Virgin Islands
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of callable common stock, par value
$1.00 per share ("Common Stock"), of Neozyme II Corporation ("Neozyme" or the
"Company") of the consideration to be received by such holders in connection
with a proposed transaction (the "Proposed Transaction") pursuant to which an
affiliate of Genzyme Corporation ("Genzyme") will offer to purchase the
outstanding units of Neozyme (the "Units") at a purchase price of $45.00 per
Unit in cash (the "Offer"). As of the date hereof, all of the outstanding Common
Stock is owned as part of a Unit, each of which consists of (i) one share of
Common Stock and (ii) one callable warrant to purchase two shares of Genzyme
General Division Common Stock and 0.135 shares of Genzyme Tissue Repair Division
Common Stock. The Offer will be made by means of offering documents (the "Offer
Documents") to be filed with the Securities and Exchange Commission. If the
Offer is consummated, but not all of the Units are tendered and accepted or, if
the Offer is terminated in accordance with Section 1.1(b)(ii) of the Purchase
Agreement, Genzyme has, pursuant to a Purchase Agreement (the "Purchase
Agreement") dated as of September 20, 1996, agreed to effect a second step
transaction (the "Second Step Transaction") in which Genzyme will acquire,
directly or indirectly, all of the remaining Common Stock in exchange for cash
in an amount equal to $29.00 per share of Common Stock.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Special
Committee of the Board of Directors of Neozyme in connection with the Proposed
Transaction, and we will receive a fee for our services, which include the
rendering of this opinion.
SAN FRANCISCO * NEW YORK * BOSTON
MEMBERS NEW YORK STOCK EXCHANGE * AMERICAN STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
<PAGE> 72
The Special Committee of the Board of Directors
The Board of Directors
Neozyme II Corporation
Page 2
We are familiar with Genzyme and have, from time to time, provided financial
advisory services to Genzyme, and we have received fees for rendering these
services. In July 1996, we acted as managing underwriter for a public offering
of Genzyme Transgenics Corporation, an affiliate of Genzyme. In the ordinary
course of business, Hambrecht & Quist acts as a market maker and broker in the
publicly traded securities of Neozyme and Genzyme and receives customary
compensation in connection therewith, and also provides research coverage for
Genzyme. In the ordinary course of business, Hambrecht & Quist actively trades
in the equity securities of Neozyme and Genzyme for its own account and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Hambrecht & Quist may in the future provide
additional investment banking or other financial advisory services to Genzyme.
In connection with our review of the proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements
of Neozyme for recent years and interim periods to date and certain
other relevant financial and operating data of Neozyme made
available to us from published sources and from the internal
records of Neozyme;
(ii) discussed with certain members of the managements of Neozyme and
Genzyme the business, financial condition and prospects of
Neozyme;
(iii) reviewed the publicly available consolidated financial statements
of Genzyme for recent years and interim periods to date;
(iv) reviewed certain internal financial and operating information,
including certain projections, relating to Neozyme prepared by the
management of Genzyme;
(v) reviewed the recent reported prices and trading activity for the
Common Stock and compared such information and certain financial
information of Neozyme with similar information for certain other
companies engaged in businesses we considered comparable to that of
Neozyme;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(vii) reviewed drafts of the Purchase Agreement, the Offer Documents and
certain other materials to be filed with the Securities and
Exchange Commission in connection with the Offer; and
(ix) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations
and financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Neozyme and Genzyme
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification
<PAGE> 73
The Special Committee of the Board of Directors
The Board of Directors
Neozyme II Corporation
Page 3
of such information. We have not prepared any independent valuation or
appraisal of any of the assets or liabilities of Neozyme, nor have we conducted
a physical inspection of the properties and facilities of the Company. With
respect to the financial forecasts and projections made available to us and
used in our analysis, we have assumed that they reflect the best currently
available estimates and judgments of the expected future financial performance
of Neozyme. For purposes of this opinion, we have assumed that Neozyme is not a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the Proposed
Transaction and those activities undertaken in the ordinary course of
conducting its business. Our opinion is necessarily based upon market,
economic, financial and other conditions as they exist and can be evaluated as
of the date of this letter and any change in such conditions would require a
reevaluation of this opinion. We were not requested to, and did not, formally
solicit indications of interest from any other parties in connection with a
possible acquisition of, or business combination with, Neozyme.
It is understood that this letter is for the information of the Special
Committee and the Board of Directors only and may not be used for any other
purpose without our prior written consent; provided, however, that this letter
may be reproduced in full in any filing with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, including Schedules
14D-1, 14-D9 and 13E-3 to be filed in connection with the Offer. This letter
does not constitute a recommendation to any Neozyme stockholder as to whether
such stockholder should accept the Offer. In addition, we express no opinion,
however, as to the adequacy of any consideration received in the Proposed
Transaction by Genzyme or any of its affiliates.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the Units pursuant to the
Offer and the consideration to be received by the holders of the Common Stock
pursuant to the Second Step Transaction is fair to such holders from a
financial point of view.
Very truly yours,
Hambrecht & Quist LLC
By /s/ David G. Golden
----------------------------
David G. Golden
Managing Director
<PAGE> 74
ANNEX II
[ROBERTSON STEPHENS & COMPANY LETTERHEAD]
September 20, 1996
Board of Directors
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139-1562
Members of the Board:
You have asked our opinion with respect to the fairness from a financial point
of view, as of the date hereof, to Genzyme Corporation ("Genzyme"), of the Offer
Price (as defined below) to be paid by Genzyme in the proposed acquisition
(the "Acquisition") of Neozyme II Corporation ("Neozyme") by Neozyme II
Acquisition Corporation (the "Purchaser"), a wholly owned subsidiary of
Genzyme, pursuant to the Purchase Agreement (the "Agreement") proposed to be
entered into among Genzyme, the Purchaser and Neozyme.
Under the terms of the Agreement, the Purchaser will make a tender offer (the
"Offer") to purchase all of the outstanding units (the "Units"), each of which
consists of (i) one share of Callable Common Stock, par value $1.00 per share
(the "Shares"), of Neozyme and (ii) Callable Warrants (the "Warrants") to
purchase two shares of General Division Common Stock of Genzyme and 0.135
shares of Tissue Repair Division Common Stock of Genzyme, at a price of $45.00
per Unit, net to the seller in cash (the "Offer Price"). In addition, if any
Units remain outstanding following the completion of the Offer, Genzyme will
effect a transaction (the "Second Step Transaction") pursuant to which the
Shares associated with such outstanding Units will be acquired, directly or
indirectly, by Genzyme and the Warrants associated with such outstanding Units
will remain outstanding. In the Second Step Transaction, holders of such
outstanding Units will receive $29.00 in cash per Share. The terms and
conditions of the Offer and the Second Step Transaction are set out more fully
in the Agreement.
For purposes of this opinion we have: (i) reviewed financial information
regarding Neozyme furnished to us by Neozyme, including certain financial
forecasts prepared by the management of Neozyme; (ii) reviewed publicly
available information regarding Neozyme; (iii) held discussions with the
management of Neozyme concerning the business, past and current business
operations, financial condition and future prospects of Neozyme; (iv) reviewed
a draft dated September 20, 1996 of the Agreement; (v) reviewed the stock price
and trading history of Neozyme; (vi) reviewed the valuations of publicly traded
companies that we deemed comparable to Neozyme; (vii) compared the financial
terms of the Acquisition with other transactions which we deemed
<PAGE> 75
Board of Directors
Genzyme Corporation
September 20, 1996
Page Two
relevant; (viii) prepared a discounted cash flow analysis of Neozyme; (ix)
analyzed the value of the Warrants; and (x) made such other studies and
inquiries, and reviewed such other data, as we deemed relevant.
In connection with our opinion we have not independently verified any of the
foregoing information and have relied on all such information being complete
and accurate in all material respects. Furthermore, we have not made any
independent appraisal of the properties or assets and liabilities of Neozyme,
nor have we been furnished with any such evaluations or appraisals. With
respect to the financial forecasts (and the assumptions and bases therefor) of
Neozyme provided to us by the management of Neozyme, we have assumed that such
forecasts have been reasonably prepared in good faith on the basis of
reasonable assumptions and reflect the best available estimates and judgments
of the management of Neozyme as to the likely future financial performance of
Neozyme. In that regard we have relied on the assumptions of the management of
Neozyme with respect to the effect on such forecasts of the potential outcome
of Neozyme's pending patent applications. This opinion is necessarily based
upon market, economic and other conditions that exist and can be evaluated as
of the date of this letter, and on information available to us as of the date
hereof.
We have acted as financial advisor to Genzyme in connection with the
Acquisition and will act as Dealer Manager in connection with the Offer. A
portion of our fees in connection with such services will be payable upon
consummation of the Offer. In the ordinary course of our business, we may
actively trade the securities of Genzyme and Neozyme for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Genzyme.
Based upon and subject to the foregoing considerations, it is our opinion that,
as of the date hereof, the Offer Price to be paid by Genzyme in the Acquisition
is fair to Genzyme from a financial point of view.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY LLC
By: Robertson, Stephens & Company Group, L.L.C.
<PAGE> 76
ANNEX III
SECTION 83 OF THE BVI INTERNATIONAL BUSINESS COMPANIES ORDINANCE, 1984
SUMMARY OF STOCKHOLDER APPRAISAL RIGHTS AND TEXT
OF SECTION 83 OF THE BVI INTERNATIONAL BUSINESS COMPANIES ORDINANCE, 1984
Summary of Stockholder Appraisal Rights. No appraisal rights are available
in connection with the Offer. However, if the Second Step Transaction is a
merger, consolidation, sale or other disposition of more than 50 percent of the
assets of the Company, or a redemption, stockholders will have certain rights
under the BVI Law to dissent and demand appraisal of, and to receive payment in
cash of the fair value of, their shares of Callable Common Stock. Such rights to
dissent, if the statutory procedures were complied with, could lead to an
arbitration proceeding to determine the fair value of the Callable Common Stock,
as of the day prior to the date on which the stockholders' vote was taken
approving the Second Step Transaction (excluding any appreciation or
depreciation directly or indirectly induced by the action or its proposal),
required to be paid in cash to such dissenting holders for their shares of
Callable Common Stock. The value determined in an arbitration proceeding could
be the same, more or less than the portion of the purchase price per Unit
attributable to the share of Callable Common Stock included in each Unit in the
Offer or the consideration per share of Callable Common Stock to be paid in the
Second Step Transaction.
RIGHTS OF DISSENTERS
83. (1) A member of a company incorporated under this Ordinance is entitled
to payment of the fair value of his shares upon dissenting from
(a) a merger, if the company is a constituent company, unless the
company is the surviving company and the member continues to hold the same
or similar shares;
(b) a consolidation, if the company is a constituent company;
(c) any sale, transfer, lease, exchange or other disposition of more
than 50 percent of the assets or business of the company, if not made in
the usual or regular course of the business carried on by the company, but
not including
(i) a disposition pursuant to an order of the court having
jurisdiction in the matter;
(ii) a disposition for money on terms requiring all or
substantially all net proceeds to be distributed to the members in
accordance with their respective interests within one year after the
date of disposition; or
(iii) a transfer pursuant to the power described in subsection (2)
of section 9;
(d) a redemption of his shares by the company pursuant to section 81;
and
(e) an arrangement, if permitted by the court.
(2) A member who desires to exercise his entitlement under subsection (1)
must give to the company, before the meeting of members at which the action is
submitted to a vote, or at the meeting but before the vote, written objection to
the action; but an objection is not required from a member to whom the company
did not give notice of the meeting in accordance with this Ordinance or where
the proposed action is authorized by written consent of members without a
meeting.
(3) An objection under subsection (2) must include a statement that the
member proposes to demand payment for his shares if the action is taken.
(4) Within 20 days immediately following the date on which the vote of
members authorizing the action is taken, or the date on which written consent of
members without a meeting is obtained, the company must give written notice of
the authorization or consent to each member who gave written objection or from
whom written objection was not required, except those members who voted for, or
consented to in writing, the proposed action.
<PAGE> 77
(5) A member to whom the company was required to give notice who elects to
dissent must, within 20 days immediately following the date on which the notice
referred to in subsection (4) is given, give to the company a written notice of
his decision to elect to dissent, stating
(a) his name and address;
(b) the number and classes or series of shares in respect of which he
dissents; and
(c) a demand for payment of the fair value of his shares;
and a member who elects to dissent from a merger under section 77 must give
to the company a written notice of his decision to elect to dissent within
20 days immediately following the date on which the copy of the plan or
merger or an outline thereof is given to him in accordance with section 77.
(6) A member who dissents must do so in respect of all shares that he holds
in the company.
(7) Upon the giving of a notice of election to dissent, the member to whom
the notice relates ceases to have any of the rights of a member except the right
to be paid the fair value of his shares.
(8) Within 7 days immediately following the date of the expiration of the
period within which members may give their notices of election to dissent, or
within 7 days immediately following the date on which the proposed action is put
into effect, whichever is later, the company or, in the case of a merger or
consolidation, the surviving company or the consolidated company, must make a
written offer to each dissenting member to purchase his shares at a specified
price that the company determines to be their fair value; and if, within 30 days
immediately following the date on which the offer is made, the company making
the offer and the dissenting member agree upon the price to be paid for his
shares, the company shall pay to the member the amount in money upon the
surrender of the certificates representing his shares.
(9) If the company and a dissenting member fail, within the period of 30
days referred to in subsection (8), to agree on the price to be paid for the
shares owned by the member, within 20 days immediately following the date on
which the period of 30 days expires, the following shall apply:
(a) the company and the dissenting member shall each designate an
appraiser;
(b) the 2 designated appraisers together shall designate a third
appraiser;
(c) the 3 appraisers shall fix the fair value of the shares owned by
the dissenting member as of the close of business on the day prior to the
date on which the vote of members authorizing the action was taken or the
date on which written consent of members without a meeting was obtained,
excluding any appreciation or depreciation directly or indirectly induced
by the action or its proposal, and that value is binding on the company and
the dissenting member for all purposes; and
(d) the company shall pay to the member the amount in money upon the
surrender by him of the certificates representing his shares.
(10) Shares acquired by the company pursuant to subsection (8) or (9) shall
be cancelled but if the shares are shares of a surviving company, they shall be
available for reissue.
(11) The enforcement by a member of his entitlement under this section
excludes the enforcement by the member of a right to which he might otherwise be
entitled by virtue of his holding shares, except that this section does not
exclude the right of the member to institute proceedings to obtain relief on the
ground that the action is illegal.
(12) Only subsections (1) and (8) to (11) shall apply in the case of a
redemption of shares by a company pursuant to the provisions of Section 81 and
in such case the written offer to be made to the dissenting member pursuant to
subsection (8) shall be made within 7 days immediately following the direction
given to a company pursuant to Section 81 to redeem its shares.
<PAGE> 78
Facsimile copies of the Letter of Transmittal, properly completed and duly
elected, will be accepted. The Letter of Transmittal and certificates evidencing
Units and any other required documents should be sent or delivered by each
Holder or such Holder's broker, dealer, commercial bank, trust company or other
nominee to the Depositary at one of its addresses set forth below.
AMERICAN STOCK TRANSFER & TRUST COMPANY
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
American Stock Transfer American Stock Transfer American Stock Transfer
& Trust Company & Trust Company & Trust Company
6201 15th Avenue 6201 15th Avenue 40 Wall Street, 46th Floor
Third Floor, Inside Delivery Third Floor, Inside Delivery New York, New York
Brooklyn, New York 11219 Brooklyn, New York 11219
</TABLE>
By Facsimile Transmission:
(718) 234-5001
For confirmation:
(718) 921-8222
Questions or requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
set forth below. Additional copies of this Offer to Purchase, the Letter of
Transmittal and the Notice of Guaranteed Delivery may be obtained from the
Information Agent. Holders may also contact brokers, dealers, commercial banks
or trust companies for assistance concerning the Offer.
The Information Agent for the Offer is:
CORPORATE INVESTOR COMMUNICATIONS, INC.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
(201) 896-1900 (call collect)
or
Call Toll-Free (888) 463-6242
The Dealer Manager for the Offer is:
ROBERTSON, STEPHENS & COMPANY LLC
555 California Street
San Francisco, California 94104
Call Toll-Free (800) 357-8435
<PAGE> 1
Exhibit (C)(1)
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") dated as of September 20, 1996
is among Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Neozyme
II Acquisition Corp. (the "Purchaser"), a British Virgin Islands ("BVI")
international business company and a wholly-owned subsidiary of Genzyme, and
Neozyme II Corporation (the "Company"), a BVI international business company.
BACKGROUND
A. The respective Boards of Directors of Genzyme, the Purchaser and the
Company have duly approved the acquisition of the Company pursuant to the terms
of this Agreement.
B. In furtherance of such acquisition, it is proposed that the Purchaser
will make a tender offer (the "Offer") to purchase all of the outstanding units
(the "Units"), each of which consists of one share of Callable Common Stock, par
value $1.00 per share, of the Company (individually, a "Share" and,
collectively, the "Shares") and Callable Warrants (the "Callable Warrants") to
purchase two shares of General Division Common Stock of Genzyme and .135 shares
of Tissue Repair Division Common Stock of Genzyme. The Shares included in the
Units represent all of the issued and outstanding capital stock of the Company.
The Offer will be at a price of $45.00 per Unit in cash and will be subject to
the Minimum Condition (as defined in ANNEX I hereto), and on the terms and
subject to the other conditions set forth in the Offer Documents (as defined in
Section 1.1(b)).
C. If the Offer is consummated, but not all of the Units are tendered and
accepted, Genzyme has agreed to effect a transaction (as more fully described in
Section 2.1) in which Genzyme will acquire, directly or indirectly, all of the
remaining Shares of the Company in exchange for cash in an amount per Share
equal to $29.00 (the "Second Step Consideration"). The Callable Warrants
associated with each such Share shall remain outstanding following consummation
of the Second Step Transaction (as defined in Section 2.1). In order to effect
the Second Step Transaction as promptly as practicable following completion of
the Offer, the Board of Directors of the Company has duly authorized a merger
(the "Merger") of the Company with a wholly- owned subsidiary of the Purchaser
on the terms and subject to the conditions of this Agreement and pursuant to the
plan of merger set forth as ANNEX II hereto (the "Merger Plan") in accordance
with the applicable provisions of the BVI International Business Companies
Ordinance, 1984 (the "BVI Law"). At the request of Genzyme in accordance with
the terms of this Agreement, the Company will solicit the written consents of
its shareholders for the approval of the Merger Plan. At Genzyme's option and
subject to compliance with applicable laws, such solicitation may occur while
the Offer is pending or following its consummation.
D. If the Offer is terminated because the Minimum Condition has not been
satisfied, upon the election and at the request of Genzyme in accordance with
Section 1.1(b)(ii) of this Agreement, the Company shall take all action
(coordinating the timing thereof with Genzyme and the Purchaser) necessary, in
accordance with applicable law and the Company's
-1-
<PAGE> 2
Memorandum of Association and Articles of Association, to convene a meeting of
its shareholders to consider and vote upon the approval of the Merger Plan, or
to solicit the written consent of its shareholders to approve the Merger Plan.
E. The Board of Directors of the Company, on the recommendation of a
special committee of the Board of Directors consisting of all of the directors
of the Company who are not officers or directors of Genzyme (the "Special
Committee"), has determined that the Offer and the Second Step Transaction are
fair to, and in the best interests of the holders of the Units and has duly
approved the Offer and the Second Step Transaction and resolved to recommend
acceptance of the Offer by the holders of the Units.
Accordingly, in consideration of the mutual representations, warranties and
covenants contained herein, the parties hereto agree as follows:
1. THE OFFER
1.1. The Offer.
---------
(a) Provided that this Agreement shall not have been terminated in
accordance with Section 8.1 hereof and nothing shall have occurred and be
continuing that would result in a failure to satisfy any of the conditions set
forth in ANNEX I hereto, the Purchaser shall, as soon as practicable after the
date hereof, and in any event within five business days of the day on which the
Purchaser's intention to make the Offer is publicly announced, which
announcement will be made promptly following the execution of this Agreement,
commence (within the meaning of Rule 14d-2(a) of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act")), the Offer for all Units, subject
to the Minimum Condition (as defined in ANNEX I hereto), at a price of $45.00
per Unit, net to the seller in cash, without interest thereon. The Purchaser
shall conduct the Offer in compliance in all material respects with applicable
laws and consummate the Offer, on the terms and subject to the conditions
thereof. Genzyme represents that it has, and will provide to the Purchaser on a
timely basis, the funds necessary to purchase the Units pursuant to the Offer
and to consummate the Second Step Transaction.
(b) The Offer shall be made by means of the Offer Documents (as
defined below), which shall not contain any condition not set forth in ANNEX I
hereto and shall be open for a period of 21 business days (such 21st business
day being referred to herein as the "Initial Expiration Date"). Without the
consent of the Company, as approved by the Special Committee, the Purchaser
shall not amend or waive the Minimum Condition (as defined in ANNEX I hereto) or
the Majority Consent Condition (as defined below), extend the Offer, reduce the
maximum number of Units to be purchased, reduce the price to be paid per Unit
pursuant to the Offer or amend any other material term of the Offer in a manner
adverse to the holders of the Units; provided, however, that if, on the Initial
Expiration Date, the Minimum Condition has not been satisfied, the Purchaser
may, not later than 9:00 a.m., eastern time, on the next business day following
the Initial Expiration Date, elect either (x) to amend the Offer and, subject to
compliance with applicable laws, proceed in accordance with subsection (i) below
or (y) to terminate the Offer and, subject to compliance with applicable laws,
proceed in accordance with subsection (ii) below. If, on the Initial Expiration
Date, the Minimum Condition has not been satisfied and the Purchaser does not
elect to proceed pursuant to subsection (i) or (ii) below
-2-
<PAGE> 3
within the time period and as described in the preceding sentence, then the
Company shall have the right to terminate this Agreement in accordance with
Section 8.1(b)(i) and Genzyme and the Purchaser shall have the right to
terminate this Agreement in accordance with Section 8.1(c)(i).
(i) If the Purchaser elects to amend the Offer and proceed under this
subsection 1.1(b)(i), the Purchaser will (a) extend the Offer for
a period not to exceed sixty days, (b) amend the Offer to delete
the Minimum Condition, (c) amend the Offer to add the Majority
Consent Condition (as defined below), and (d) amend the Offer
Documents to reflect the foregoing and cause the dissemination of
such revised documents in accordance with applicable laws. In
such event, the Company shall promptly commence (coordinating the
timing thereof with Genzyme and the Purchaser) to convene a
meeting of its shareholders or solicit the written consent of its
shareholders for approval of the Merger Plan, such solicitation
or meeting to be conducted in accordance with applicable laws and
the terms of this Agreement. The Majority Consent Condition shall
mean that the sum of (a) the Shares included in the Units
tendered and not withdrawn as of the new expiration date of the
Offer (provided such Shares may be voted in favor of the Merger
Plan at the meeting or pursuant to the consent solicitation by
the Purchaser immediately after the purchase of the Units which
include such Shares in the Offer by the Purchaser) plus (b) the
number of Shares held by holders who have voted in favor of the
Merger Plan at the meeting or pursuant to the consent
solicitation as of the new expiration date of the Offer (but
excluding any such Shares that would result in double counting
with (a) above) represents not less than a majority of the Shares
outstanding.
(ii) If the Purchaser elects to terminate the Offer and proceed under
this subsection 1.1(b)(ii), the Purchaser will promptly return
all tendered Units. In such event, the Company shall promptly
commence (coordinating the timing thereof with Genzyme and the
Purchaser) to convene a meeting of its shareholders or solicit
the written consent of its shareholders for approval of the
Merger Plan, such solicitation or meeting to be conducted in
accordance with applicable laws and the terms of this Agreement.
(c) As soon as practicable on the date of commencement of the Offer,
the Purchaser shall file with the Securities and Exchange Commission (the
"Commission") with respect to the Offer (i) a Tender Offer Statement on Schedule
14D-1 (together with all amendments and supplements thereto, the "Schedule
14D-1"), (ii) a Rule 13e-3 Transaction Statement on Schedule 13E-3 (together
with all amendments and supplements thereto, the "Schedule 13E-3") and (iii) an
Issuer Tender Offer Statement on Schedule 13e-4 (together with all amendments
and supplements thereto, the "Schedule 13E-4"), which will contain an offer to
purchase and forms of the related letters of transmittal and summary
advertisement (the Schedule 14D-1, the Schedule 13E-3, the Schedule 13E-4, the
offer to purchase and such other documents, together with any supplements or
amendments thereto, are referred to herein collectively as the "Offer
Documents"), all of which Offer Documents will be subject to review
-3-
<PAGE> 4
by the Company prior to filing. Genzyme and the Purchaser shall provide the
Company and its counsel with a copy of any written comments or telephonic
notification of any verbal comments Genzyme or the Purchaser may receive from
the Commission or its staff with respect to the Offer Documents promptly after
the receipt thereof and shall provide the Company and its counsel with a copy of
any written responses thereto and telephonic notification of any verbal
responses thereto of Genzyme or the Purchaser or their counsel.
1.2. Company Action
--------------
(a) In connection with the Offer, the Company will comply with the
requirements of Rule 14d-5(b) of the Exchange Act and will, or will cause its
agent to, mail, via first class mail, postage prepaid the Offer Documents and,
if applicable, the Proxy Statement (as defined in 1.2(c)) to the record holders
of the Units in accordance with Rule 14d-5(b). The Company will cooperate with
the Purchaser to the end that any additional Offer Documents furnished to it (or
its agent) are mailed as soon as practicable. The Purchaser shall pay all costs
and expenses of such mailing.
(b) The Company represents and warrants that the Board of Directors of
the Company (the "Company's Directors"), on the recommendation of the Special
Committee, (i) has duly adopted and approved the Offer, the Second Step
Transaction, this Agreement and the transactions contemplated hereby and
thereby, (ii) has determined that the Offer and the Second Step Transaction are
fair to and in the best interests of the shareholders of the Company and (iii)
after consideration of its fiduciary duties under applicable laws, has resolved
to recommend acceptance of the Offer by holders of Units. The Company agrees to
file with the Commission as soon as reasonably practicable on the date of the
commencement of the Offer a Solicitation/Recommendation Statement on Schedule
14D-9 (together with all amendments and supplements thereto, the "Schedule
14D-9") and to disseminate the Schedule 14D-9 to the extent required by Rule
14d-9 under the Exchange Act and any other applicable U.S. federal securities
laws. Subject to the fiduciary duties of the Company's Directors, as advised by
counsel, the Offer Documents and the Schedule 14D-9 shall contain the
recommendation of the Company's Directors that the holders of Units accept the
Offer, and the Company hereby consents to the inclusion in the Offer Documents
of such recommendation. The Company shall provide Genzyme and its counsel with a
copy of any written comments or telephonic notification of any verbal comments
the Company may receive from the Commission or its staff with respect to the
Schedule 14D-9 promptly after the receipt thereof and shall provide Genzyme and
its counsel with a copy of any written responses thereto and telephonic
notification of any verbal responses thereto of the Company or its counsel.
(c) At the request of Genzyme, the Company shall take all action
(coordinating the timing thereof with Genzyme and the Purchaser) necessary, in
accordance with applicable law and the Company's Memorandum of Association and
Articles of Association, to convene a meeting of its shareholders (the
"Shareholders' Meeting"), as promptly as practicable after the purchase of Units
pursuant to the Offer to consider and vote upon the approval of the Merger Plan,
or to solicit the written consent of its shareholders to approve the Merger Plan
(the "Consent Solicitation") promptly after such purchase or, promptly after the
request of Genzyme, after the commencement of the Offer and while it is pending
or following the termination of the Offer upon the election of Genzyme pursuant
to Section 1.1(b)(ii). If required by applicable
-4-
<PAGE> 5
law, the Company shall promptly prepare and file with the Commission, and use
its reasonable best efforts to have cleared by the Commission, a proxy, consent
solicitation or information statement relating to the Second Step Transaction
(the "Proxy Statement") in compliance with applicable law. Subject to the
fiduciary duties of the Company's Directors, as advised by counsel, the Proxy
Statement shall contain a statement as to the approval of the Merger Plan by the
Company's Board of Directors and the determination by the Company's Board of
Directors that the Second Step Transaction is fair to and in the best interests
of the holders of the Shares, and the Company hereby consents to the inclusion
in the proxy, consent solicitation or information statement of such statement.
(d) The Special Committee and the Company's Directors have received
the written opinion of Hambrecht & Quist LLC (the "Financial Adviser") that, on
the basis of and subject to the matters set forth therein, the cash
consideration of $45.00 per Unit to be received by holders of the Units pursuant
to the Offer is fair to the holders of the Units from a financial point of view
and the Second Step Consideration to be received by the holders of the Shares
pursuant to the Second Step Transaction is fair to the holders of the Shares
from a financial point of view (the "Fairness Opinion"). The Company has
provided Genzyme and the Purchaser with a copy of the Fairness Opinion for
inclusion in the Offer Documents.
1.3. Directors.
---------
(a) Promptly upon the acceptance for payment of and payment by the
Purchaser for any Units pursuant to the Offer, and from time to time thereafter
as Units are accepted for payment and paid for by the Purchaser, subject to
compliance with Section 14(f) of the Exchange Act, the Purchaser shall be
entitled to designate such number of the Company's Class A Directors, rounded to
the nearest whole number, as will give the Purchaser representation on the
Company's Board of Directors equal to at least that number of directors which
equals the product of the total number of the Company's Directors (after giving
effect to the directors elected pursuant to this sentence) multiplied by the
percentage that such number of Units so accepted for payment and paid for by the
Purchaser bears to the number of Units outstanding, and the Company shall,
promptly following any such designation by the Purchaser, take such actions as
are necessary to cause the Purchaser's designees to be so elected, including
increasing the size of the Board of Directors or securing the resignations of
incumbent directors or both; provided, however, that notwithstanding the
Purchaser's right to designate certain of the Company's Directors, until the
Effective Date (as defined in Section 2.3 hereof), the Company's Class A
Directors shall include at least two directors who are directors on the date
hereof and who are not officers or directors of Genzyme or the Purchaser (the
"Independent Directors"); provided further that, if the number of Independent
Directors shall be reduced below two for any reason whatsoever, any remaining
Independent Director shall be entitled to designate a person who is not an
officer or director of Genzyme or the Purchaser to fill such vacancy and such
person shall be deemed to be an Independent Director for purposes of this
Agreement or, if no Independent Directors then remain, the other directors shall
designate two persons to fill such vacancies who shall not be designees,
shareholders, directors, officers or affiliates of Genzyme or the Purchaser, and
such persons shall be deemed to be Independent Directors for purposes of this
Agreement. Subject to applicable law, the Company shall take all action
necessary to effect the election of directors as provided in this Section
1.3(a), including mailing to its shareholders the information required by
Section 14(f) of the Exchange Act and Rule 14f-1
-5-
<PAGE> 6
promulgated thereunder. Genzyme and the Purchaser shall supply to the Company
and be solely responsible for any information with respect to them and their
nominees, officers, directors and affiliates required by Section 14(f) and Rule
14f-1.
(b) Notwithstanding anything in this Agreement to the contrary,
subject to the terms of the Company's Memorandum of Association and Articles of
Association, in the event that the Purchaser's designees are appointed or
elected as Company Directors, after the acceptance for payment of Units pursuant
to the Offer and prior to the Effective Date, the affirmative vote of a majority
(or, if there are only one or two Independent Directors, the single or unanimous
vote, as the case may be) of the Independent Directors (who shall act as an
independent committee of the Board of Directors for this purpose) shall be
required, and alone shall be sufficient, to (i) amend or terminate this
Agreement by the Company, (ii) exercise or waive any of the Company's rights or
remedies hereunder, (iii) extend the time for performance of Genzyme's and the
Purchaser's respective obligations hereunder, or (iv) approve any other action
by the Company that the Independent Directors determine could adversely affect
the interests of the shareholders of the Company (other than Genzyme, the
Purchaser and their affiliates) with respect to the transactions contemplated
hereby.
2. THE SECOND STEP TRANSACTION
2.1. Consummation of the Second Step Transaction.
-------------------------------------------
(a) If the Offer is consummated and 90% or more of the Units are
tendered and accepted, the Purchaser will, as soon as practicable following
satisfaction or waiver of the conditions set forth in Section 7.1 hereof, either
(i) effect a merger of the Company into the Purchaser pursuant to Section 77 of
the BVI Law (the "Short Form Merger") or (ii) cause the Company to redeem all
Shares not held by the Purchaser pursuant to Section 81 of the BVI Law (the
"Redemption").
(b) If the Offer is consummated and less than 90% but more that 50% of
the Units are tendered and accepted, the Purchaser will own a majority of the
Shares and will vote those shares in favor of and will effect, as soon as
practicable following satisfaction or waiver of the conditions set forth in
Section 7.1 hereof, the Merger.
(c) If the Offer is not consummated on the Initial Expiration Date
because the Minimum Condition is not met and the Purchaser elects to proceed as
described in Section 1.1(b)(i), the Company, the Purchaser and Genzyme shall
take the actions set forth in Section 1.1(b)(i). As soon as practicable
following satisfaction of the Majority Consent Condition and satisfaction or
waiver of the conditions set forth in Annex I (other than the Minimum Condition)
and Section 7.1, the Purchaser will purchase all Units validly tendered and not
withdrawn, vote the Shares thus acquired in favor of the Merger Plan and effect
the Merger.
(d) If the Offer is not consummated because the Minimum Condition is
not met and the Purchaser elects to proceed as described in Section 1.1(b)(ii),
the Company, the Purchaser and Genzyme shall take the actions set forth in
Section 1.1(b)(ii). As soon as practicable following satisfaction or waiver of
the conditions set forth in Article 7 hereof, the Purchaser will effect the
Merger.
-6-
<PAGE> 7
(e) The Short Form Merger, the Redemption and the Merger referred to
in subsections (a) - (d) above are referred to herein as the "Second Step
Transaction." The date of consummation of the Second Step Transaction is
referred to herein as the "Effective Date."
2.2. SECOND STEP CONSIDERATION.
(a) On the Effective Date, as a result of the Short Form Merger, if
applicable. the Company will be merged with and into the Purchaser, with the
Purchaser as the surviving corporation and:
(i) The holder of each Share issued and outstanding immediately
prior to the Effective Date (other than Shares owned by Genzyme, the Purchaser,
the Company or any direct or indirect subsidiary of any of them and any
Dissenting Shares (as defined in subsection (d) below)) shall be entitled to
receive an amount in cash per Share equal to the Second Step Consideration.
(ii) Shares owned by Genzyme, the Purchaser or the Company or any
direct or indirect subsidiary of any of them shall be cancelled.
(b) On the Effective Date, as a result of the Redemption, if
applicable, the holder of each Share issued and outstanding immediately prior to
the Effective Date (other than Shares owned by the Purchaser and any Dissenting
Shares) shall be entitled to receive an amount in cash per Share equal to the
Second Step Consideration.
(c) On the Effective Date, as a result of the Merger pursuant to
Sections 2.1(b)-(d), if applicable, a wholly-owned subsidiary of the Purchaser
will be merged with and into the Company, with the Company as the surviving
corporation and:
(i) The holder of each Share issued and outstanding immediately
prior to the Effective Date (other than Shares owned by Genzyme, the Purchaser,
the Company or any direct or indirect subsidiary of any of them and any
Dissenting Shares) shall be entitled to receive an amount in cash per Share
equal to the Second Step Consideration.
(ii) Shares owned by Genzyme, the Purchaser or the Company or any
direct or indirect subsidiary of any of them shall be cancelled.
(iii) Each issued and outstanding share of capital stock of the
subsidiary of the Purchaser that is a party to the Merger Plan shall be
converted into one fully paid and nonassessable share of common stock of the
surviving corporation.
(d) (i) In the case of the Short Form Merger, the Redemption or the
Merger, shares of capital stock of the Company held by a shareholder who has
properly exercised dissenters rights with respect thereto in accordance with
Section 83 of the BVI Law (collectively, the "Dissenting Shares") shall not be
converted into the Second Step Consideration. From and after the Effective Date,
a shareholder who has properly exercised such dissenters' rights shall no longer
retain any rights of a shareholder of the Company, except those provided under
the BVI Law. If after the Effective Date such holder withdraws or loses his
right to demand
-7-
<PAGE> 8
payment for his Shares, such Shares shall be treated as if they had been
converted as of the Effective Date into the right to receive the Second Step
Consideration payable in respect of such Shares pursuant to Section 2.2(a)(i).
(ii) The Company shall give Genzyme (i) prompt notice of any demands
for payment, or notices of intent to demand payment, with respect to any shares
of capital stock of the Company, any withdrawal of any such demands and any
other instruments served pursuant to the BVI Law and received by the Company and
(ii) the right to participate in all negotiations and proceedings with respect
to any such demands. The Company shall cooperate with Genzyme concerning, and
shall not, except with the prior written consent of Genzyme, voluntarily make
any payment with respect to, or offer to settle or settle, any such demands.
2.3. Exchange of Certificates.
-------------------------
(a) Genzyme shall authorize one or more persons to act as Payment
Agent for the Second Step Consideration (the "Payment Agent"). Genzyme shall
deposit with the Payment Agent in trust for the benefit of the holders of
certificates representing Shares converted pursuant to Section 2.2(a)(i), on or
prior to the Effective Time, immediately available funds in an amount equal to
the product of the Second Step Consideration multiplied by the number of Shares
entitled to payment pursuant to Section 2.2(a)(i). As soon as practicable after
the Effective Time, Genzyme shall cause the Payment Agent to mail to all former
holders of record of Shares instructions for surrendering their certificates
representing Shares in exchange for the Second Step Consideration. Upon
surrender of a Share certificate for cancellation to the Payment Agent, the
Payment Agent shall pay to the holder of such certificate the Second Step
Consideration multiplied by the number of Shares represented by such
certificate, and the certificate so surrendered shall forthwith be canceled.
Notwithstanding the foregoing, if delivery of the Second Step Consideration is
to be made to any person other than the person in whose name the certificate
surrendered is registered, it shall be a condition of such delivery that the
certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such delivery shall pay any
transfer or other taxes required by reason of such delivery or establish to the
satisfaction of Genzyme that such tax has been paid or is not applicable.
Furthermore, neither Genzyme nor any affiliate of Genzyme shall be liable to a
holder of Shares for any Second Step Consideration delivered to a public
official pursuant to applicable abandoned property, escheat and similar laws.
After the Effective Time, there shall be no transfers of the Shares on the stock
transfer books of the Company.
(b) The Payment Agent shall make the payments referred to in Section
2.2(a)(i) out of the funds supplied by Genzyme. Promptly following the date that
is six months after the Effective Date, the Payment Agent shall, upon request by
Genzyme, deliver to Genzyme all cash, certificates and other documents in its
possession relating to the transactions described in this Agreement, and the
Payment Agent's duties shall terminate. Thereafter, each holder of a certificate
formerly representing a Share may surrender such certificate to Genzyme and
(subject to applicable abandoned property, escheat and similar laws) receive in
exchange therefor the Second Step Consideration, without any interest thereon
but shall have no greater rights against Genzyme than may be accorded to general
creditors of Genzyme under applicable law.
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(c) From and after the Effective Date, holders of certificates
theretofore evidencing Shares shall cease to have any rights as shareholders of
the Company, except as provided herein or by law. Until surrendered in
accordance with the provisions of this Section, each Share certificate (other
than for Dissenting Shares) shall represent for all purposes only the right to
receive the Second Step Consideration multiplied by the number of Shares
represented by such certificate.
2.4. CALLABLE WARRANTS. On the Effective Date, the Callable Warrants
associated with the Shares converted into the right to receive the Second Step
Consideration will become exercisable in accordance with its terms and at the
exercise price computed as stated therein. On the day following the Effective
Date, such Callable Warrants will separate and be transferable separately from
the right to receive the Second Step Consideration on account of the Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND GENZYME
The Purchaser and Genzyme represent and warrant to the Company as follows:
3.1. ORGANIZATION. Each of Genzyme and the Purchaser (i) is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization; and (ii) has the requisite corporate power and
authority to enter into, execute and deliver this Agreement and to perform fully
its respective obligations hereunder.
3.2. AUTHORITY. The execution and delivery of this Agreement have been duly
authorized by the Board of Directors of each of Genzyme and the Purchaser. No
other corporate action on the part of Genzyme or the Purchaser is necessary to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by each of Genzyme and the Purchaser and constitutes a
valid and binding obligation of each, enforceable in accordance with its terms.
3.3. Compliance.
-----------
(a) Neither the execution, delivery and performance by Genzyme and the
Purchaser of this Agreement, nor the consummation by Genzyme and the Purchaser
of the transactions contemplated hereby, will (a) violate, conflict with, or
result in a breach of, any provision of the charter or bylaws of Genzyme or the
Purchaser, (b) violate, conflict with or result in a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, lease, agreement or other instrument or obligation to which
Genzyme or the Purchaser is a party, or by which its properties or assets may be
bound or (c) subject to compliance with the laws referred to in the next
paragraph, violate any law or any order, judgment, injunction, decree or
requirement of any court, arbitrator or governmental or regulatory body
applicable to Genzyme or the Purchaser or by which any of their assets or
properties is bound, except, in each case, for such violations, breaches or
defaults that, in the aggregate, would not materially impair the ability of the
Purchaser or Genzyme to perform its obligations hereunder.
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<PAGE> 10
(b) Other than in connection with or in compliance with the provisions
of the BVI Law, the U.S. Securities Act of 1933, as amended (the "Securities
Act"), the Exchange Act, the "takeover" or "blue sky" laws of various states of
the United States, (and assuming that the Company will, prior to consummation of
the Offer, have total assets of less than $10 million as shown on its last
regularly prepared balance sheet prior to such date) no notice to, filing with
or authorization, consent or approval of, any domestic or foreign public body or
authority is necessary for the consummation by the Purchaser and Genzyme of the
transactions contemplated by this Agreement, except for such notices, filings,
authorizations, consents or approvals the absence of which would not, in the
aggregate, materially impair the ability of the Purchaser or Genzyme to perform
its obligations hereunder.
3.4. COMMISSION FILINGS. The Offer Documents, and any information provided
in writing by or on behalf of the Purchaser or Genzyme which is included in the
Schedule 14D-9, on the date the Offer Documents or Schedule 14D-9, as the case
may be, are filed with the Commission or first published, sent or given to
security holders, as the case may be, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided that no
representation or warranty is made with respect to any information provided in
writing by or on behalf of the Company and included in the Offer Documents. The
information supplied by the Purchaser or Genzyme for inclusion in the Proxy
Statement will not, on the date the Proxy Statement (or any amendment or
supplement thereto) is first mailed to shareholders of the Company, at the time
of the Shareholders' Meeting, if any, and on the Effective Date, contain any
statement which at such time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein in the light of the circumstances under which they
are made, not false or misleading or necessary to correct any statement in any
earlier communication with respect to the solicitation of consents or proxies
for the Shareholders' Meeting which shall have become false or misleading. The
Offer Documents shall comply in all material respects as to form with the
requirements of the Exchange Act and the rules and regulations thereunder.
Genzyme and the Purchaser agree to correct the Offer Documents promptly if and
to the extent that any of them shall have become false or misleading (provided
that, with respect to any false or misleading information provided by or on
behalf of the Company and included in the Offer Documents, the Company shall
have provided Genzyme and the Purchaser with correct information) and Genzyme
and the Purchaser shall take all steps necessary to cause the Offer Documents as
so corrected to be filed with the Commission and to be disseminated to the
holders of the Units, in each case as and to the extent required by applicable
U.S. federal securities laws.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser and Genzyme as
follows:
4.1. ORGANIZATION. The Company is an international business company duly
organized, validly existing and in good standing under the laws of the BVI and
has the requisite corporate power and authority to enter into, execute and
deliver this Agreement and, subject to the
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<PAGE> 11
approval of the Second Step Transaction by the Company's shareholders (if
required under the BVI law), to perform fully its obligations hereunder.
4.2. AUTHORITY. The execution and delivery of this Agreement have been duly
authorized by the Board of Directors of the Company. No other corporate action
on the part of the Company is necessary to consummate the transactions
contemplated hereby (other than approval of the Merger Plan by the shareholders
of the Company to the extent required by the BVI law). This Agreement has been
duly executed and delivered by the Company and, subject to the foregoing,
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms.
4.3. Compliance.
-----------
(a) Neither the execution, delivery and performance by the Company of
this Agreement, nor the consummation by the Company of the transactions
contemplated hereby, will (a) violate, conflict with, or result in a breach of,
any provision of the Memorandum of Association or Articles of Association of the
Company, (b) violate, conflict with or result in a default (or give rise to any
right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, lease, agreement or other instrument or obligation to which
the Company is a party, or by which its properties or assets may be bound or (c)
subject to compliance with the laws referred to in the next paragraph, violate
any law or any order, judgment, injunction, decree or requirement of any court,
arbitrator or governmental or regulatory body applicable to the Company or by
which any of its assets or properties is bound, except, in each case, for such
violations, breaches or defaults that, in the aggregate, would not have a
material adverse effect on the financial condition, business or operations of
the Company (a "Material Adverse Effect"), or materially impair the ability of
the Company to perform its obligations hereunder.
(b) Other than in connection with or in compliance with the provisions
of the BVI Law, the Securities Act, the Exchange Act, the "takeover" or "blue
sky" laws of various states of the United States, (and assuming that the Company
will, prior to consummation of the Offer, have total assets of less than $10
million as shown on its last regularly prepared balance sheet prior to such
date) no notice to, filing with or authorization, consent or approval of, any
domestic or foreign public body or authority is necessary for the consummation
by the Company of the transactions contemplated by this Agreement, except for
such notices, filings, authorizations, consents or approvals the absence of
which would not, in the aggregate materially impair the ability of the Company
to perform its obligations hereunder.
4.4. CAPITALIZATION. The authorized capital stock of the Company consists
of 9,000,000 shares of Callable Common Stock, par value $1.00 per share. As of
the date of this Agreement, 2,415,000 Shares were validly issued and
outstanding, fully paid and nonassessable (all of which are included in the
Units); and no Shares were held in the treasury of the Company. Except as set
forth above in this Section 4.4 and the Purchase Option Agreement, there are no
other shares of capital stock or other securities of the Company outstanding and
no other outstanding options, warrants, rights to subscribe to (including any
preemptive rights), calls or commitments of any character whatsoever to which
the Company is a party or may be bound requiring the issuance, transfer or sale
of any shares of capital stock or other securities of the Company or any
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<PAGE> 12
securities or rights convertible into or exchangeable or exercisable for any
such shares or securities, and there are no contracts, commitments,
understandings or arrangements by which the Company is or may become bound to
issue additional shares of its capital stock or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or securities
convertible into or exchangeable or exercisable for any such shares.
4.5. COMMISSION FILINGS. The Schedule 14D-9 and any information provided in
writing by or on behalf of the Company which is included in the Offer Documents,
on the date the Schedule 14D-9 or the Offer Documents, as the case may be, are
filed with the Commission or first published, sent or given to security holders,
as the case may be, will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided that no representation or warranty is
made with respect to any information provided in writing by or on behalf of
Genzyme or the Purchaser and included in the Schedule 14D-9. The Proxy Statement
will not, on the date it (or any amendment or supplement thereto) is first
mailed to shareholders of the Company, at the time of the Shareholders' Meeting,
if any, and on the Effective Date, contain any statement which at such time and
in light of the circumstances under which it is made, is false or misleading
with respect to any material fact, or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein
in the light of the circumstances under which they are made, not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of consents or proxies for the Shareholders'
Meeting which shall have become false or misleading; provided that no
representation or warranty is made with respect to any information provided in
writing by or on behalf of Genzyme or the Purchaser and included in the Proxy
Statement. The Schedule 14D-9 and the Proxy Statement shall comply in all
material respects as to form with the requirements of the Exchange Act and the
rules and regulations thereunder. The Company agrees promptly to correct the
Schedule 14D-9 and the Proxy Statement if and to the extent that either shall
have become false or misleading (provided that, with respect to any false or
misleading information provided by or on behalf of Genzyme or the Purchaser and
included in the Schedule 14D-9 or the Proxy Statement, Genzyme or the Purchaser
shall have provided the Company with correct information) and the Company shall
take all steps necessary to cause the Schedule 14D-9 or the Proxy Statement as
so corrected to be filed with the Commission and to be disseminated to the
holders of the Units and to the Company's shareholders, as the case may be, as
and to the extent required by applicable U.S. federal securities laws.
5. CONDUCT OF BUSINESS
5.1. CONDUCT PRIOR TO EFFECTIVE DATE. Except as otherwise expressly
contemplated hereby, the Company covenants and agrees that, unless Genzyme shall
otherwise agree in writing, prior to the Effective Date or such earlier time as
designees of the Purchaser constitute a majority of the Company's Directors
(determined on the basis of combined voting power of the Company's Class A and
Class B directors):
(a) The business of the Company shall in all material respects be conducted
only in, and the Company shall not take any material action except in, the
ordinary course of business and consistent with past practice, and the Company
shall use all reasonable efforts, consistent
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<PAGE> 13
with past practice or the annual workplan currently in effect, to maintain and
preserve its business organization, assets and advantageous business
relationships;
(b) The Company shall not make any tax election or, except in the ordinary
course of business and consistent with past practice, settle or compromise any
federal, state, local or foreign tax liability; and
(c) The Company shall not agree in writing or otherwise, to take any of the
foregoing actions or any action that would make any representation or warranty
in Article 1 or Article 4 hereof untrue or incorrect in any material respect or
that would materially impair or prevent the occurrence of any condition in ANNEX
I prior to consummation of the Offer and, thereafter, Article 7 hereof.
5.2. COMMISSION FILINGS AND OTHER MATTERS. The Company shall promptly
provide Genzyme (or its counsel) with copies of all filings made by the Company
with the Commission or any other state or federal governmental entity in
connection with this Agreement and the transactions contemplated hereby.
5.3. CONDUCT OF BUSINESS AFTER THE INITIAL EXPIRATION DATE. Notwithstanding
any other provision contained herein, if the Minimum Condition has not been
satisfied on the Initial Expiration Date and the Purchaser elects to amend the
Offer in accordance with Section 1.1(b)(i) or to terminate the Offer in
accordance with Section 1.1(b)(ii), then until the earlier of the Effective Date
or the termination of this Agreement, the Special Committee shall be authorized
to take such actions as it may deem appropriate to reduce or eliminate any
discretionary spending by the Company or by Genzyme on behalf of the Company not
contractually committed to with a person or entity that is not a party to this
Agreement; provided that, Genzyme may elect to continue such spending on its own
account and to the extent it elects to do so, the Company will, if the Merger is
effected, reimburse Genzyme for such expenditures immediately prior to the
Effective Date.
6. ADDITIONAL AGREEMENTS
6.1. PREPARATION OF PROXY STATEMENT. Genzyme, the Purchaser and the Company
shall cooperate with each other in the preparation of the Proxy Statement (if
required), and the Company shall notify Genzyme of the receipt of any comments
of the Commission with respect to the Proxy Statement and of any requests by the
Commission for any amendment or supplement thereto or for additional information
and shall provide to Genzyme promptly copies of all correspondence between the
Company or any representative of the Company and the Commission. The Company
shall give Genzyme and its counsel the opportunity to review the Proxy Statement
prior to its being filed with the Commission and shall give Genzyme and its
counsel the opportunity to review all amendments and supplements to the Proxy
Statement and all responses to requests for additional information and replies
to comments prior to their being filed with, or sent to, the Commission. Each of
the Company, Genzyme and the Purchaser agrees to use its reasonable best
efforts, after consultation with the others, to respond promptly to all such
comments of and requests by the Commission and to cause the Proxy Statement and
all required amendments and supplements thereto to be mailed to the holders of
Shares entitled to vote upon the approval of the Second Step Transaction at the
earliest practicable time.
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<PAGE> 14
6.2. FEES AND EXPENSES. Each party shall bear all fees and expenses
incurred by it in connection with the negotiation and performance of this
Agreement and no party may recover any such fees and expenses from any other
party upon any termination of this Agreement except as provided in Article 8.
6.3. ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all reasonable efforts to
consummate and make effective as promptly as practicable the transactions
contemplated by the Offer and this Agreement, and to cooperate with each of the
other parties hereto in connection with the foregoing, including using all
reasonable efforts (which shall not be construed to require the payment of any
money to a third party or the divestiture of any business or assets): (A) to
obtain all necessary waivers, consents and approvals from other parties to
agreements; (B) to obtain all necessary consents, approvals and authorizations
as are required by law; (C) to lift or rescind any injunction or restraining
order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby; (D) to effect all necessary
registrations and filings and submissions of information requested by
governmental authorities; and (E) to fulfill all conditions to this Agreement.
Each of the Company, Genzyme and the Purchaser further covenants and agrees
that, prior to the exercise by Genzyme or the Purchaser of its right to
terminate the Offer under paragraphs (b) or (c) of ANNEX I hereto, each of the
Company, Genzyme and the Purchaser shall use their respective reasonable best
efforts (which shall not be construed to require the payment of any money to a
third party or the divestiture of any business or assets) to prevent the entry
of an injunction or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby .
6.4. NO SOLICITATION.
(a) The Company shall not, directly or indirectly, through any
officer, director, employee, financial advisor, representative or agent of the
Company, (i) solicit or initiate any inquiries or proposals regarding a merger,
consolidation, business combination, sale of substantial assets, sale of shares
of capital stock (including without limitation by way of a tender offer) or
similar transactions involving the Company, other than the transactions
contemplated by this Agreement (any of the foregoing inquiries or proposals
being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage
in negotiations or discussions concerning, or provide any non-public information
to any person or entity relating to, any Acquisition Proposal, or (iii) agree
to, approve or recommend any Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent the Company, the Company's
Directors or the Special Committee (through any officer, director, employee,
financial advisor, representative or agent) from (A) engaging in negotiations or
discussions in response to an inquiry that was not solicited after the date
hereof; (B) furnishing non-public information to any person or entity in
connection with an unsolicited written Acquisition Proposal by such person or
entity or recommending an unsolicited written Acquisition Proposal to the
shareholders of the Company, if and only to the extent that (1) the Company's
Directors or the Special Committee, as the case may be, believe in good faith
after consultation with its financial advisor that the party requesting such
non-public information or making such Acquisition Proposal is capable of
financing a transaction more favorable to the Company's shareholders from a
financial point of view than the transaction contemplated by this Agreement and
the Company's Directors or the Special Committee, as the case may be, determine
in good
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<PAGE> 15
faith after consultation with outside legal counsel that such action is
necessary to comply with their fiduciary duties to shareholders under applicable
law and (2) prior to furnishing such non-public information to such person or
entity, the Company's Directors or the Special Committee, as the case may be,
receive from such person or entity an executed confidentiality agreement on
customary terms; or (C) complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
(b) The Company shall notify Genzyme in writing in reasonable detail
within 24 hours after receipt by the Company (or its advisors) of any written
Acquisition Proposal or any written request for non-public information to which
the Company intends to affirmatively respond.
(c) Genzyme and the Company acknowledge and confirm that neither (x)
Section 2.3 ("Restrictions Upon Use of Licensed Technology") of the Technology
License Agreement dated April 28, 1992 between them, nor (y) Section 12 of the
Company's Memorandum of Association, is intended or shall be deemed, to prohibit
or restrict any discussions, negotiations or other activity by the Company
permitted by subsection (a) above.
6.5. NOTIFICATION OF BREACH. The Company shall give prompt notice to
Genzyme, and Genzyme and the Purchaser shall give prompt notice to the Company,
of the occurrence or failure to occur of any event which occurrence or failure
to occur causes (x) any representation or warranty made by it in this Agreement
to be untrue or inaccurate in any material respect at any time from the date
hereof to the date of purchase of, and payment for, Units pursuant to the Offer,
or (y) any material failure to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement; provided,
however, that no such notification shall be deemed to cure any breach or
otherwise affect the representations or warranties of such party or the
conditions to the obligations of the parties hereunder.
6.6. ACCESS TO INFORMATION. Except as prohibited by BVI law, the Company
shall afford to Genzyme and to the officers, employees and agents of Genzyme
reasonable access during regular business hours, from the date hereof to the
Effective Date, to the Company's officers, employees, agents, properties, books,
records and contracts, and shall furnish Genzyme all financial, operating and
other data and information as Genzyme, through its officers, employees or
agents, may reasonably request; provided, however, that such access shall not
unreasonably interfere with any of the operations of the Company.
6.7. DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) As of the Effective Date, proper provision will be made so that
any affiliate of Genzyme that succeeds to the assets and liabilities of the
Company, or at Genzyme's option, Genzyme, shall assume all of the obligations of
the Company under the indemnification agreements between the Company and the
Independent Directors as in effect on the date of this Agreement and, if amended
prior to the Effective Date, on the Effective Date. In the event of a transfer
by such successor entity of all or substantially all of its assets or a merger
or consolidation in which such entity is not the surviving entity, proper
provision will also be made so that the successors and assigns of such entity,
or at Genzyme's option, Genzyme, shall assume the obligations of the Company
under such agreements. In addition, the Company and,
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from and after consummation of the Offer or, if the Purchaser elects to proceed
under Section 1.1(b)(ii), the Merger, Genzyme shall, to the fullest extent
permitted by applicable law, indemnify and hold harmless each present and former
director or officer of the Company (collectively, "Indemnified Parties") against
all costs and expenses (including attorneys' fees) judgments, fines, losses,
claims, damages, liabilities and settlement amounts paid in connection with any
claim, action, suit, proceeding or investigation (whether arising before or
after the consummation of the Offer) arising out of any act or omission in their
capacity as officer, director or employee of the Company (and shall pay any
expenses in advance of the final disposition of such action or proceeding to
each Indemnified Party to the fullest extent permitted by law). If
indemnification is sought hereunder by any Indemnified Party, then such
Indemnified Party shall promptly notify Genzyme in writing of the claim for
which indemnification is sought; provided, however, that the failure to so
notify Genzyme shall not relieve Genzyme from any liability unless and to the
extent that such failure results in a forfeiture by the Indemnified Party of
substantive rights or defenses. Following such notification, Genzyme may elect
to assume the defense of such claim, and, upon such election, Genzyme shall not
be liable for any legal costs subsequently incurred by such Indemnified Party
(other than reasonable costs of investigation) in connection therewith, unless
Genzyme has failed to provide counsel reasonably satisfactory to such
Indemnified Party in a timely manner or counsel that has been provided by
Genzyme reasonably determines that its representation of such Indemnified Party
would present it with a conflict of interest. The Indemnified Party will
cooperate with Genzyme in the investigation and defense of any claim and shall
not settle any claim without Genzyme's prior written consent.
(b) Genzyme shall maintain in effect for three years from the
Effective Date, if available, directors' and officers' liability insurance
policies covering the directors and officers of the Company, with coverages and
other terms at least as favorable as is currently in effect; provided, however,
that Genzyme shall not be required to spend more than an amount per year equal
to 150% of the current annual premium paid by the Company for such insurance.
Following such three year period, and until the sixth anniversary of the
Effective Date, Genzyme will assume the indemnification obligations of the
Company under the indemnification agreements referred to in subsection (a) above
to the extent it has not already done so.
6.8. GENZYME'S GUARANTY. Genzyme unconditionally guarantees the Purchaser's
obligations (and the obligations of any other affiliate of Genzyme that is a
party to the Merger Plan) under this Agreement and agrees to be primarily liable
for any breach of this Agreement by the Purchaser (or such other affiliate of
Genzyme).
7. CONDITIONS
7.1. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE SECOND STEP
TRANSACTION. The respective obligations of each party to effect the Second Step
Transaction shall be subject to the fulfillment at or prior to the Effective
Date of each of the following conditions:
(a) the Purchaser shall have made the Offer on the terms and
conditions set forth therein and shall have purchased, or caused to be
purchased, all Units validly tendered and not withdrawn pursuant to the Offer;
provided, however, this condition shall not be applicable to the obligations of
Genzyme or the Purchaser if, in breach of this Agreement or the terms of the
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Offer, the Purchaser fails to purchase any Units validly tendered and not
withdrawn pursuant to the Offer and provided further than this condition shall
not be applicable if the Purchaser has exercised its option described in Section
1.1(b)(ii);
(b) the Merger Plan shall have been approved and adopted by the
requisite vote or consent, if any, of the shareholders of the Company required
by the BVI Law and the Company's Memorandum of Association and Articles of
Association; and
(c) no preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental or
regulatory body nor any statute, rule, regulation or order promulgated or
enacted by any governmental body shall be in effect, which would make the
acquisition by Genzyme or the Purchaser of the Shares illegal or otherwise
prevent the consummation of the Second Step Transaction.
7.2. CONDITIONS TO OBLIGATION OF THE PURCHASER TO EFFECT A MERGER PURSUANT
TO SECTION 1.1(b)(ii). In addition to the fulfillment of the condition set forth
in subsection 7.1(b), the Purchaser shall not be obligated to effect a Merger
pursuant to Section 1.1(b)(ii) if on or before the Effective Date any of the
following shall occur or shall be determined by the Purchaser to have occurred
and remain in effect:
(a) except for matters which affect generally the economy or the
industry in which the Company is engaged and except for continued losses
incurred by the Company as a result of its operations and continued depletion of
its cash resources in the ordinary course of business or consistent with the
annual workplan currently in effect, any change shall have occurred in the
business, properties, assets, liabilities, capitalization, stockholders equity,
financial condition, operations, licenses or franchises or results of operations
of the Company which has a Material Adverse Effect; or
(b) there shall have been instituted or be pending any action,
proceeding, application or counterclaim before any court or governmental or
regulatory body which (i) challenges the validity of or seeks to restrain the
consummation of or to impose any material limitation, on any transaction
contemplated by this Agreement or seeks (ii) to obtain any material amount of
damages in connection with such transactions; or
(c) any statute, regulation, order or injunction shall have been
enacted, entered, enforced or deemed applicable to the Merger that is reasonably
likely to, directly or indirectly, result in any of the consequences referred to
in subsection 7.2(b); or
(d) the representations and warranties of the Company set forth in the
Purchase Agreement shall not be true in any material respect as though made on
such date, or the Company shall have failed in any material respect to perform
any material obligation or covenant required in the Purchase Agreement to be
performed or complied with by it; or
(e) the Company shall have entered into, or shall have publicly
announced its intention to enter into, an agreement or agreement in principle
with respect to any Acquisition Proposal.
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8. TERMINATION, AMENDMENT AND WAIVER
8.1. TERMINATION. This Agreement may be terminated at any time prior to the
Effective Date, as follows:
(a) Subject to Section 1.3(b), by mutual written consent of the Boards
of Directors of the Purchaser, Genzyme and the Company (upon the approval of the
Special Committee); or
(b) By the Company upon approval of the Special Committee:
(i) if (A) the Purchaser shall have terminated the Offer without
the purchase of any Units thereunder; or (B) the Purchaser shall not have paid
for all Units validly tendered pursuant to the Offer and not withdrawn within 90
days after the commencement of the Offer, unless such termination of the Offer
or failure to pay for Units shall have been caused by or resulted from (a) the
failure of the Company to perform in any material respect any of its covenants
or agreements contained in this Agreement, (b) the material breach by the
Company of any of its representations or warranties contained in this Agreement,
or (c) an election by the Purchaser pursuant to Section 1.1(b)(ii) of this
Agreement to terminate the Offer; or
(ii) if the Effective Date shall not have occurred on or before
the six-month anniversary of the date of this Agreement due to a failure of any
of the conditions to the obligation of the Company to effect the Second Step
Transaction set forth in Section 7.1 or if the Purchaser has elected to proceed
under Section 1.1(b)(i), if the Effective Date shall not have occurred on or
before the six-month anniversary of the date of this Agreement; or
(iii) prior to the purchase of any Units pursuant to the Offer,
or the Effective Date if the Purchaser has elected to proceed under Section
1.1(b)(ii), if the Purchaser or Genzyme has materially failed to perform any of
its obligations under this Agreement and such nonperformance has a material
adverse effect on the Purchaser's or Genzyme's ability to consummate the Offer
or the Second Step Transaction; or
(iv) if, in the event that the Minimum Condition shall not have
been satisfied on the Initial Expiration Date and the Purchaser shall have
amended the Offer or terminated the Offer pursuant to the proviso in the second
sentence of Section 1.1(b), the Purchaser has materially failed to perform any
of its obligations under Section 1.1(b); or
(v) if, prior to the purchase of Shares pursuant to the Offer, or the
Effective Date if the Purchaser has elected to proceed under Section 1.1(b)(ii),
the Special Committee shall have withdrawn or modified its approval or
recommendation of the Offer or this Agreement in order to approve the execution
by the Company of a definitive agreement providing for the acquisition of the
Company or substantially all of its assets or a merger or other business
combination or in order to approve a tender offer for all of the Shares or Units
by a third party, in any case, as determined by the Special Committee, on terms
more favorable to the Company's stockholders than the Offer (a "Superior
Transaction"), provided, that (i) the Company shall have provided Genzyme with
at least five business days' written notice of such Superior
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<PAGE> 19
Transaction, including a copy of the proposed agreement and (ii) the Company
shall not have violated Section 6.4 in connection with such Superior
Transaction.
(c) By Genzyme or the Purchaser:
(i) if, due to an occurrence that would result in a failure to
satisfy any condition set forth in Annex I or the Majority Consent Condition if
the Purchaser has elected to proceed pursuant to Section 1.1(b)(i), the
Purchaser shall have (A) failed to commence the Offer within 5 business days of
the date on which the Purchaser's intention to make the Offer is publicly
announced; (B) terminated the Offer without the purchase of any Units
thereunder; or (C) failed to pay for all Units validly tendered pursuant to the
Offer and not withdrawn within 90 days after commencement of the Offer, unless
such failure or termination shall have been caused by or results from (x) the
failure of Genzyme or the Purchaser to perform in any material respect any of
its covenants or agreements contained in this Agreement, (y) the material breach
by Genzyme or the Purchaser of any of its representations or warranties
contained in this Agreement, or (z) the Purchaser's election to proceed pursuant
to Section 1.1(b)(ii); or
(ii) if the Effective Date shall not have occurred on or before
the six-month anniversary of the date of this Agreement due to (i) a failure of
any of the conditions to the obligations of Genzyme or the Purchaser to effect
the Second Step Transaction set forth in Section 7.1, or (ii) in the event that
the Purchaser has elected to proceed under Section 1.1(b)(ii), a failure of any
of the conditions to the obligations of Genzyme or the Purchaser to effect the
Second Step Transaction set forth in Section 7.2; or
(iii) if, prior to the purchase of Units pursuant to the Offer,
or the Effective Date if the Purchaser has elected to proceed under Section
1.1(b)(ii), the Company's Directors shall have publicly withdrawn or modified in
a manner adverse to the Purchaser their approval or recommendation of the Offer
or this Agreement or recommended acceptance of a Superior Transaction or shall
have resolved to do any of the foregoing.
8.2. EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 8.1, all obligations and agreements of the
parties set forth in this Agreement shall forthwith terminate and be of no
further force or effect, and there shall be no liability on the part of Genzyme,
the Purchaser or the Company hereunder except (a) as provided in Sections 8.3
and 8.4 and (b) that the foregoing shall not relieve any party for liability for
any breach of this Agreement occurring prior to such termination.
8.3. ANCILLARY AGREEMENTS. In the event of any termination of this
Agreement (x) by the Company pursuant to Section 8.1(b)(v) or by Genzyme or the
Purchaser pursuant to Section 8.1(c)(iii), in either case as a result of a
Superior Transaction in connection with which the Company shall not have
violated Section 6.4, or (y) by Genzyme or the Purchaser pursuant to Section
8.1(c)(i), unless such termination is based upon the failure of the Company to
perform in any material respect of its covenants or agreements contained in this
Agreement, Genzyme agrees that, effective upon consummation of a Superior
Transaction, it shall, at the Company's request:
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<PAGE> 20
(a) consent to the Superior Transaction in its capacity as holder of
the Company's Series 1992 Note dated April 28, 1992 and pursuant to all
applicable provisions of the Company's Memorandum of Association;
(b) terminate the Purchase Option Agreement dated as of April 28, 1992
among Genzyme and the underwriters named therein, in which event the Series 1992
Note will become due and payable in accordance with its terms;
(c) consent to the assignment by the Company of the Technology License
Agreement dated as of April 28, 1992 between Genzyme and the Company;
(d) at the option of Genzyme, terminate or consent to the assignment
by the Company of each of the following agreements, each of which are dated as
of April 28, 1992:
(i) the Research and Development Agreement between Genzyme and
the Company;
(ii) the Services Agreement between Genzyme Limited (a subsidiary
of Genzyme) and the Company; and
(iii) the Administrative Agreement between Genzyme and the
Company.
The termination of any of the foregoing agreements pursuant to this Section 8.3
shall not terminate any provision of such agreement which, by its terms,
survives termination of such agreement.
8.4. TERMINATION FEE. In consideration of Genzyme's agreement set forth in
Section 8.3 and its expenses incurred in connection with the transactions
contemplated by this Agreement, in the event of the termination of this
Agreement (A) by the Company pursuant to Section 8.1(b)(v) or (B) by Genzyme or
the Purchaser pursuant to (x) Section 8.1(c)(iii) or (y) Section 8.1(c)(i) or
(ii) if such termination is based upon the failure of the Company to perform in
any material respect any of its covenants or agreements contained in this
Agreement, the Company shall pay Genzyme a termination fee of $500,000 upon
consummation of any Superior Transaction.
8.5. AMENDMENT. This Agreement may not be amended except, subject to
Section 1.3, by action of the Board of Directors of each of the parties hereto
set forth in an instrument in writing signed on behalf of each of the parties
hereto; provided, however, that the Board of Directors of the Company shall not
act to amend this Agreement without the approval of the Special Committee.
8.6. WAIVER. At any time prior to the Effective Date, whether before or
after any special meeting or written action of the shareholders of the Company
to approve the Second Step Transaction, any party hereto, subject to Section
1.3(b), by action taken by its Board of Directors (and, in the case of the
Company, subject to the approval of the Special Committee), may (i) extend the
time for the performance of any of the obligations or other acts of any other
party hereto or (ii) subject to the second sentence of Section 1.1(b) and the
proviso contained
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<PAGE> 21
in Section 8.5, waive compliance with any of the agreements of any other party
or with any conditions to its own obligations. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party by a duly authorized
officer.
9. GENERAL PROVISIONS
9.1. CLOSING. Unless this Agreement shall have been terminated pursuant to
the provisions of Article 8, and subject to the provisions of Article 7 hereof,
the closing of the Second Step Transaction pursuant to this Agreement (the
"Closing") shall take place at the offices of Palmer & Dodge LLP, One Beacon
Street, Boston, Massachusetts 02108, as soon as practicable following
consummation of the Offer or at such other place, time and date as the parties
may mutually agree. The date and time of such Closing are hereinafter referred
to as the "Closing Date."
9.2. BROKERS.
(a) The Company represents and warrants that no broker, finder or
investment banker other than the Financial Adviser is entitled to any brokerage,
finder's or other fee or commission in connection with the Offer or the Second
Step Transaction based upon arrangements made by or on behalf of the Company.
The Company has provided to Genzyme a true and complete copy of its agreement
with the Financial Adviser.
(b) Genzyme and the Purchaser represent and warrant that no broker,
finder or investment banker other than Robertson, Stephens & Company LLC is
entitled to any brokerage, finder's or other fee or commission in connection
with the Offer or the Second Step Transaction based upon arrangements made by or
on behalf of Genzyme, the Purchaser or any of their respective subsidiaries or
affiliates.
9.3. PUBLICITY. So long as this Agreement is in effect, except as such
party reasonably believes is required by applicable law or applicable
requirements of the Commission or The Nasdaq Stock Market, Inc., neither the
Company nor Genzyme shall, nor shall either permit any of its subsidiaries to,
issue or cause the publication of any press release or other public announcement
with respect to the transactions contemplated by this Agreement without the
consent of the other party. The parties shall cooperate as to the timing and
contents of any such announcement.
9.4. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been fully given if (i) delivered
personally, (ii) sent by certified or registered mail, return receipt requested,
(iii) sent by overnight courier for delivery on the next business day or (iv)
sent by confirmed telecopy, provided that a hard copy of all such telecopied
materials is thereafter sent within 24 hours in the manner described in clauses
(i), (ii) or (iii), to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
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<PAGE> 22
(a) If to the Purchaser or Genzyme:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Attention: Peter Wirth
Telecopy No.: (617) 252-7600
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Maureen P. Manning
Telecopy No.: (617) 227-4420
(b) If to the Company:
Neozyme II Corporation
One Kendall Square
Cambridge, MA 02139
Attention: President
Telecopy No.: (617) 252-7600
with copies to:
The Special Committee of the Board of Directors
of Neozyme II Corporation
c/o Hambrecht & Quist LLC
230 Park Avenue
New York, NY 10169
Attention: Dennis J. Purcell
Telecopy No.: (212) 207-1519
and
Hale and Dorr
60 State Street
Boston, MA 02109
Attention: Steven D. Singer
Telecopy No.: (617) 526-5000
Notices provided in accordance with this Section 9.4 shall be deemed
delivered (i) on the date of personal delivery, (ii) four business days after
deposit in the mail, (iii) one business day after delivery to an overnight
courier, or (iv) on the date of confirmation of the telecopy transmission, as
the case may be.
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<PAGE> 23
9.5. INTERPRETATION. When a reference is made in this Agreement to
subsidiaries of Genzyme, the Purchaser or the Company, the word "subsidiaries"
means any corporation more than 50 percent of whose outstanding voting
securities, or any partnership, joint venture or other entity more than 50
percent of whose total equity interest, is directly or indirectly owned by
Genzyme, the Purchaser or the Company, as the case may be; and the word
"affiliates" shall have the meaning assigned to such term under Rule 405 of the
Securities Act. For purposes of this Agreement, the Company shall not be deemed
to be an affiliate or subsidiary of Genzyme or the Purchaser.
9.6. REPRESENTATIONS AND WARRANTIES, ETC. The respective representations
and warranties of the Company, Genzyme and the Purchaser contained herein shall
expire upon consummation of the Offer. This Section 9.6 shall have no effect
upon any other obligation of the parties hereto, whether to be performed before
or after the consummation of the Offer.
9.7. MISCELLANEOUS. This Agreement (i) constitutes the entire agreement and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof;
(ii) is not intended to confer upon any other person any rights or remedies
hereunder, create any agreement of employment with any person or otherwise
create any third-party beneficiary hereto, except for the provisions of Section
6.7 (which provisions are intended to be for the benefit of the persons referred
to therein and may be enforced by such persons); (iii) shall not be assigned
except that the Purchaser may assign its rights and obligations to Genzyme or to
one or more direct or indirect wholly-owned subsidiaries of Genzyme which in a
written instrument shall make all the representations and warranties of the
Purchaser set forth herein and shall agree to assume all of the Purchaser's
obligations hereunder and be bound by all of the terms and conditions of this
Agreement; provided, however, that no such assignment shall relieve Genzyme or
the Purchaser of its obligations hereunder; and (iv) shall be governed in all
respects, including validity, interpretation and effect, by the internal laws of
the Commonwealth of Massachusetts, without giving effect to the principles of
conflict of laws thereof. Only the Purchaser (or Genzyme or a direct or indirect
wholly-owned subsidiary of Genzyme to which the Purchaser assigns such rights
and obligations) may commence the Offer or the purchase of Shares thereunder.
9.8. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
9.9. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
9.10. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only and are not intended to affect the meaning or
interpretation of this Agreement.
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<PAGE> 24
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
GENZYME CORPORATION
By /s/ David J. McLachlan
------------------------------------
Senior Vice President, Finance
NEOZYME II ACQUISITION CORP.
By /s/ David J. McLachlan
------------------------------------
President
NEOZYME II CORPORATION
By /s/ Paul M. Edwards
------------------------------------
President
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<PAGE> 25
ANNEX I
CONDITIONS OF THE OFFER
Capitalized terms used in this Annex I have the meanings set forth in the
attached Purchase Agreement.
The Purchaser shall not be required to accept for payment and pay for any
Units tendered pursuant to the Offer, may postpone the purchase of, and payment
for, Units tendered, and may terminate or amend the Offer unless Units that
would constitute not less than a majority of the Units outstanding are validly
tendered prior to expiration of the Offer and not withdrawn (the "Minimum
Condition") and if at or before the time of acceptance for payment of any such
Units (whether or not any Units have theretofore been accepted for payment and
paid for pursuant to the Offer) any of the following shall occur or shall be
determined by the Purchaser to have occurred and remain in effect:
(a) except for matters which affect generally the economy or the industry
in which the Company is engaged and except for continued losses incurred by the
Company as a result of its operations and continued depletion of its cash
resources in the ordinary course of business or consistent with the annual
workplan currently in effect, any change shall have occurred in the business,
properties, assets, liabilities, capitalization, stockholders equity, financial
condition, operations, licenses or franchises or results of operations of the
Company which has a Material Adverse Effect; or
(b) there shall have been instituted or be pending any action, proceeding,
application or counterclaim before any court or governmental or regulatory body
which (i) challenges the validity of or seeks to restrain the consummation of or
to impose any material limitation, on any transaction contemplated by the
Purchase Agreement or seeks (ii) to obtain any material amount of damages in
connection with such transactions; or
(c) any statute, regulation, order or injunction shall have been enacted,
entered, enforced or deemed applicable to the Offer or the Second Step
Transaction that is reasonably likely to, directly or indirectly, result in any
of the consequences referred to in paragraph (b) above; or
(d) the Board of Directors of the Company shall have publicly (including by
amendment of its Schedule 14D-9 relating to the Offer) withdrawn or modified in
a manner adverse to the Purchaser its approval or recommendation of the Offer or
shall have resolved to do so; or
(e) the representations and warranties of the Company set forth in the
Purchase Agreement shall not be true in any material respect as though made on
such date, or the Company shall have failed in any material respect to perform
any material obligation or covenant required in the Purchase Agreement to be
performed or complied with by it; or
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<PAGE> 26
(f) the Company shall have entered into, or shall have publicly announced
its intention to enter into, an agreement or agreement in principle with respect
to any Acquisition Proposal.
The foregoing conditions are for the sole benefit of Genzyme and the Purchaser
and may be waived by Genzyme or the Purchaser, in whole or in part, at any time
in their sole discretion, subject to the limitations set forth in the Purchase
Agreement.
I-2
<PAGE> 27
ANNEX II
PLAN OF MERGER
This Plan of Merger (the "Merger Agreement"), dated as of __________,
1996, is between Neozyme II Merger Corp. ("Merger Corp."), a BVI international
business company and wholly-owned subsidiary of Neozyme II Acquisition Corp.,
and Neozyme II Corporation ("Neozyme"), a BVI international business company.
PRELIMINARY STATEMENT
The Board of Directors of Merger Corp. and Neozyme have determined that
it is advisable for Merger Corp. to merge with and into Neozyme pursuant to
this Merger Agreement.
Accordingly, Merger Corp. and Neozyme hereby agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.1 THE MERGER
In accordance with the provisions of this Merger Agreement and the BVI
International Business Companies Ordinance, 1984 (the "BVI Law"), Merger Corp.
shall be merged with and into Neozyme (the "Merger"). Following the Merger, the
separate existence of Merger Corp. shall cease, and Neozyme shall continue as
the surviving corporation (the "Surviving Corporation").
SECTION 1.2 EFFECTIVENESS
Following approval of this Merger Agreement and the Merger by the
members of Merger Corp. and Neozyme in accordance with the requirements of the
BVI Law, the Merger shall become effective at 11:59 p.m. on _____________, 1996
or at such other time and date that this Merger Agreement is made effective in
accordance with applicable law (the date of the effectiveness of the Merger
being referred to herein as the "Effective Date").
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.1 NAME
The name of the Surviving Corporation upon the effectiveness of the
Merger shall be Neozyme II Corporation.
SECTION 2.2 MEMORANDUM OF ASSOCIATION; ARTICLES OF ASSOCIATION
The Memorandum of Association and Articles of Association of Merger
Corp. as in effect immediately prior to the Merger shall be the Memorandum of
Association and Articles of Association of the Surviving Corporation, without
amendment except that Article 1 of the Memorandum of Association of the
Surviving Corporation shall be amended to read as follows: "The name of the
Corporation is: Neozyme II Corporation."
SECTION 2.3 DIRECTORS AND OFFICERS
The directors, committees of directors and officers of Merger Corp.
immediately prior to the effectiveness of the Merger shall be the directors,
committees and officers of the Surviving Corporation each to hold office and be
constituted, as appropriate, in accordance with the Articles and Memorandum of
Association of the Surviving Corporation.
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<PAGE> 28
ARTICLE 3
MANNER OF CONVERSION OF STOCK
SECTION 3.1 CONVERSION OF MERGER CORP. COMMON STOCK
(a) Immediately prior to the Effective Date, Merger Corp. has
outstanding __________ shares of Common Stock, $1.00 par value per share, which
is its only class of capital stock and all of which shares are entitled to vote
on the Merger as a single class.
(b) On the Effective Date, each share of Common Stock, $1.00 par
value, of Merger Corp. issued and outstanding immediately prior thereto shall,
by virtue of the Merger and without the surrender of stock certificates or any
other action by the holder of such shares or any other person, be converted into
and exchanged for one fully paid and nonassessable share of Common Stock,
$1.00 par value, of the Surviving Corporation.
SECTION 3.2 CONVERSION OF NEOZYME CALLABLE COMMON STOCK
(a) Immediately prior to the Effective Date, Neozyme has outstanding
2,415,000 shares of Callable Common Stock (the "Shares"), $1.00 par value per
share, which is its only class of capital stock and all of which shares are
entitled to vote on the Merger as a single class.
(b) On the Effective Date, by virtue of the Merger and without any
action on the part of Merger Corp. and Neozyme or the holder of any of the
following securities:
(i) Each Share issued and outstanding immediately prior to the
Effective Date (other than Shares to be cancelled pursuant to clause (ii) below
and any Dissenting Shares (as herein defined)) shall be converted into and
become the right to receive an amount in cash per Share equal to $29.00 (the
"Merger Consideration").
(ii) Each Share issued and outstanding immediately prior to the
Effective Date and owned by Genzyme Corporation ("Genzyme"), a Massachusetts
corporation, Neozyme Acquisition Corp., a BVI international business company
and the sole member of Merger Corp. or Neozyme or any direct or indirect
subsidiary of such corporations, shall be canceled, and no payment shall be
made with respect thereto.
(iii) All Dissenting Shares shall be handled in accordance with
Section 3.2(c).
(c) Shares of capital stock of Neozyme held by a shareholder who has
properly exercised dissenters rights with respect thereto in accordance with
Section 83 of the BVI Law (collectively, the "Dissenting Shares") shall not be
converted into Merger Consideration. From and after the Effective Date, a
shareholder who has properly exercised such dissenters' rights shall no longer
retain any rights of a shareholder of Neozyme or the Surviving Corporation,
except those provided under the BVI Law. If after the Effective Date such
holder withdraws or loses his right to demand payment for his Shares, such
Shares shall be treated as if they had been converted as of the Effective Date
into the right to receive the Merger Consideration payable in respect of such
Shares pursuant to Section 3.2(b)(i).
(d) Neozyme shall give Genzyme (i) prompt notice of any demands for
payment, or notices of intent to demand payment, with respect to any shares of
capital stock of Neozyme, any withdrawal of any such demands and any other
instruments served pursuant to the BVI Law and received by Neozyme and (ii)
the right to participate in all negotiations and proceedings with respect to
any such demands. Neozyme shall cooperate with Genzyme concerning, and shall
not, except with the prior written consent of Genzyme, voluntarily make any
payment with respect to, or offer to settle or settle, any such demands.
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<PAGE> 29
SECTION 3.3 EXCHANGE OF CERTIFICATES
(a) Upon surrender of the Share certificate for cancellation to the
Payment Agent selected by Genzyme, the Payment Agent shall pay to the holder of
such certificate the Merger Consideration multiplied by the number of Shares
represented by such certificate, and the certificate so surrendered shall
forthwith be canceled. Notwithstanding the foregoing, if delivery of the Merger
Consideration is to be made to any person other than the person in whose name
the certificate surrendered is registered, it shall be a condition of such
delivery that the certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
delivery shall pay any transfer or other taxes required by reason of such
delivery or establish to the satisfaction of Genzyme that such tax has been
paid or is not applicable. Furthermore, neither Genzyme nor any affiliate of
Genzyme shall be liable to a holder of Shares for any Merger Consideration
delivered to a public official pursuant to applicable abandoned property,
escheat and similar laws. After the Effective Date, there shall be no transfers
of the Shares on the stock transfer books of the Company.
(b) Promptly following the date that is six months after the Effective
Date, the Payment Agent shall, upon request by Genzyme, deliver to Genzyme all
cash, certificates and other documents in its possession relating to the
transactions described in this Merger Agreement, and the Payment Agent's duties
shall terminate. Thereafter, each holder of a certificate formerly representing
a Share may surrender such certificate to Genzyme and (subject to applicable
abandoned property, escheat and similar laws) receive in exchange therefor the
Merger Consideration, without any interest thereon but shall have no greater
rights against Genzyme than may be accorded to general creditors of Genzyme
under applicable law.
ARTICLE 4
GENERAL
SECTION 4.1 TERMINATION OR ABANDONMENT
Prior to the approval of the members of Merger Corp. or of Neozyme, this
Merger Agreement and the Merger may be terminated or abandoned by action of the
Board of Directors of either Neozyme or Merger Corp., or both if, in the
opinion of the Boards of Directors of Merger Corp. and Neozyme, such action
would be in the best interests of such corporations. In the event of the
termination or abandonment of this Agreement, this Agreement shall become void
and have no effect, without any liability on the part of any party or its
members or directors or officers with respect thereto.
SECTION 4.2 WAIVER, MODIFICATION, OR AMENDMENT
Any of the terms or conditions of this Merger Agreement may be waived
before action thereon by the members of Merger Corp. or of Neozyme, by the
party that is entitled to the benefits thereof. This Merger Agreement may be
modified or amended by the Board of Directors of Merger Corp. and Neozyme
before action thereon by the members of Merger Corp. or Neozyme, except as
required by law. Any waiver, modification, or amendment shall be in writing.
SECTION 4.3 MISCELLANEOUS
This Merger Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The headings contained in this Agreement are
solely for convenience of reference and shall not be deemed to affect the
meaning or interpretation of any provision contained herein. This Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and assigns.
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<PAGE> 1
EXHIBIT (g)(1)
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-K, DECEMBER 31, 1995
TABLE OF CONTENTS
ITEM 8 FINANCIAL STATEMENTS AND NOTES
Form 10-K
Page No.
---------
GENZYME CORPORATION AND SUBSIDIARIES
Report of Independent Accountants 2
Consolidated Statements of Operations - For the Years Ended
December 31, 1995, 1994 and 1993. 3
Consolidated Balance Sheets - December 31, 1995 and 1994 5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1995, 1994 and 1993 7
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1994 and 1993 9
Notes to Consolidated Financial Statements 11
GENZYME GENERAL DIVISION
Report of Independent Accountants 34
Combined Statements of Operations - For the Years Ended
December 31, 1995, 1994 and 1993 35
Combined Balance Sheets - December 31, 1995 and 1994 37
Combined Statements of Cash Flows - For the Years Ended
December 31, 1995, 1994 and 1993 38
Notes to Combined Financial Statements 40
GENZYME TISSUE REPAIR DIVISION
Report of Independent Accountants 68
Combined Statements of Operations - For the Years Ended
December 31, 1995, 1994 and 1993. 69
Combined Balance Sheets - December 31, 1995 and 1994 70
Combined Statements of Cash Flows - For the Years Ended
December 31, 1995, 1994 and 1993 71
Notes to Combined Financial Statements 72
All other schedules are omitted since the required information is inapplicable
or has been presented in the related financial statements and the related
notes.
<PAGE> 2
Exhibit (g)(1)
GENZYME CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GENZYME CORPORATION:
We have audited the accompanying consolidated balance sheets
of Genzyme Corporation and Subsidiaries as of December 31, 1995 and
1994 and the related consolidated statements of operations, cash flows
and stockholders' equity and the consolidated financial statement
schedule for each of the three years in the period ended December 31,
1995. The consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated
financial position of Genzyme Corporation and Subsidiaries as of
December 31, 1995 and 1994 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the consolidated
financial statement schedule taken as a whole presents fairly, in all
material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 1, 1996, except as to Note Q
which is March 26, 1996
-2-
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Revenues:
<S> <C> <C> <C>
Net product sales ............................... $ 304,373 $ 238,645 $ 183,366
Net service sales ............................... 52,450 50,010 50,511
Revenues from research and development contracts:
Related parties ................................ 26,758 20,883 34,162
Other .......................................... 202 1,513 2,332
--------- --------- ---------
383,783 311,051 270,371
Operating costs and expenses:
Cost of products sold ........................... 113,964 92,226 64,704
Cost of services sold ........................... 35,868 32,403 34,558
Selling, general and administrative ............. 115,094 85,731 78,716
Research and development (including research
and development related to contracts) .......... 68,845 55,334 48,331
Purchase of in-process research and
development .................................... 14,216 11,215 49,000
Goodwill impairment and restructuring costs ..... -- -- 26,517
--------- --------- ---------
347,987 276,909 301,826
--------- --------- ---------
Operating income (loss) ................................ 35,796 34,142 (31,455)
Other income and (expenses):
Minority interest in net loss of subsidiaries ... 1,608 1,659 9,892
Equity in net loss of unconsolidated subsidiary . (1,810) (1,353) --
Charge for impaired investments ................. -- (9,431) (700)
Settlement of lawsuit ........................... -- (1,980) --
Investment income ............................... 8,814 9,101 12,209
Interest expense ................................ (1,109) (1,354) (2,500)
--------- --------- ---------
7,503 (3,358) 18,901
--------- --------- ---------
Income (loss) before income taxes ...................... 43,299 30,784 (12,554)
Benefit (provision) for income taxes ................... (21,649) (14,481) 6,459
--------- --------- ---------
Net income (loss) ...................................... $ 21,650 $ 16,303 $ (6,095)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
<PAGE> 4
GENZYME CORPORATION AND SUBSIDIARIES
INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
ATTRIBUTABLE TO THE GENERAL DIVISION:
Net income .............................. $ 34,823 $ 30,194 $ 8,456
Tax benefit allocated from
Tissue Repair Division ................. 8,857 1,860 9,564
-------- -------- --------
Net income attributable to
General Division Stock .............. $ 43,680 $ 32,054 $ 18,020
======== ======== ========
Per common and common equivalent share:
Net income ........................... $ 1.45 $ 1.22 $ 0.69
======== ======== ========
Average shares outstanding ........... 30,092 26,169 26,250
======== ======== ========
Per common share assuming full dilution:
Net income ........................... $ 1.31 $ 1.14 $ 0.69
======== ======== ========
Average shares outstanding ........... 33,311 28,159 26,250
======== ======== ========
ATTRIBUTABLE TO THE TISSUE REPAIR
DIVISION:
Net loss ................................ $(22,030) $(15,751) $(23,860)
Tax benefit allocated to General Division -- -- (255)
-------- -------- --------
Net loss attributable to TR Stock .... $(22,030) $(15,751) $(24,115)
======== ======== ========
Per common share:
Net loss ............................. $ (2.28) $ (4.40) $ (7.43)
======== ======== ========
Average shares outstanding ........... 9,659 3,578 3,245
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-4-
<PAGE> 5
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands) DECEMBER 31,
- ---------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................. $144,372 $ 63,542
Short-term investments ..................... 112,303 13,073
Accounts receivable, less allowance
of $8,159 in 1995 and $6,169 in 1994 ..... 88,959 78,127
Inventories ................................ 53,042 36,840
Prepaid expenses and other current assets .. 12,531 11,074
Deferred tax assets - current .............. 7,729 4,072
-------- --------
Total current assets ..................... 418,936 206,728
Property, plant and equipment, net ............ 329,423 296,802
Other Assets:
Long-term investments ...................... 69,561 76,845
Note receivable - related party ............ 262 3,572
Intangibles, net of accumulated amortization
of $17,340 in 1995 and $12,633 in 1994 .... 29,934 29,303
Deferred tax assets - noncurrent ........... 23,645 28,473
Other noncurrent assets .................... 33,440 16,685
-------- --------
156,842 154,878
-------- --------
$905,201 $658,408
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-5-
<PAGE> 6
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Amounts in thousands) DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................................................... $ 21,980 $ 21,387
Accrued expenses .......................................................... 39,418 30,986
Income taxes payable ...................................................... 1,316 6,523
Deferred revenue .......................................................... 1,367 2,604
Current portion of long-term debt
and capital lease obligations ............................................ 2,445 41,357
--------- ---------
Total current liabilities ............................................. 66,526 102,857
Noncurrent Liabilities:
Long-term debt and capital lease obligations .............................. 124,473 126,729
Other noncurrent liabilities .............................................. 8,995 7,548
--------- ---------
133,468 134,277
Minority interest in subsidiaries ............................................ -- 2,310
Commitments and Contingencies (Notes D, H, J, L and Q) ....................... -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, authorized 10,000,000 shares;
no shares issued and outstanding
Preferred Stock, Series A Junior participating, $.01 par value authorized
1,000,000 shares; no shares issued and outstanding
Preferred Stock, Series B Junior participating, $.01 par value authorized
400,000 shares; no shares issued and outstanding
Common Stocks:
General Division Common Stock, $0.01 par value, authorized 100,000,000
shares; 31,185,800 and 26,446,510 issued
at December 31, 1995 and 1994, respectively ............................ 312 264
Tissue Repair Division Common Stock, $0.01 par value,
authorized 40,000,000 shares; 12,112,700 and 8,674,706 issued
at December 31, 1995 and 1994, respectively ............................ 121 87
Treasury common stock, at cost:
General Division Common Stock, 52,770 and 49,686 shares at
December 31, 1995 and 1994, respectively ............................... (882) (755)
Additional paid-in capital ................................................ 724,342 470,826
Accumulated deficit ....................................................... (17,158) (38,808)
Other equity adjustments .................................................. (1,528) (12,650)
--------- ---------
705,207 418,964
--------- ---------
$ 905,201 $ 658,408
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<PAGE> 7
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .................................. $ 21,650 $ 16,303 $ (6,095)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................... 22,638 18,226 16,821
Write-off of impaired goodwill .................. -- -- 23,690
(Gain) loss on sale of investments .............. 110 (1,430) (1,647)
Loss on disposal of fixed assets ................ 903 -- --
Non-cash compensation expense ................... 1,013 -- --
Write-off of impaired equity investments ........ -- 9,431 --
Accrued interest/amortization on bonds .......... (355) (2,116) --
Provision for bad debts ......................... 5,415 4,331 --
Purchase of in-process research and
development for stock .......................... 14,216 11,215 --
Deferred income taxes ........................... 4,428 1,439 (27,068)
Minority interest in net loss of subsidiaries ... (1,608) (1,659) (9,892)
Equity in net loss of unconsolidated subsidiary . 1,810 1,353 --
Other ........................................... 1,458 386 831
Increase (decrease) in cash from working capital:
Accounts receivable ........................... (15,069) (14,916) (10,917)
Inventories ................................... (15,906) (10,549) (2,322)
Prepaid expenses and other current assets ..... (1,680) (1,769) (695)
Accounts payable, accrued expenses and
deferred revenue ............................. 5,679 2,782 17,608
--------- --------- ---------
Net cash provided by operating activities ..... 44,702 33,027 314
INVESTING ACTIVITIES:
Purchases of investments ........................... (142,522) (210,274) (122,723)
Purchases of restricted investments ................ (4,418) (10,000) (10,000)
Maturities of investments .......................... 57,055 265,851 177,043
Property, plant and equipment ...................... (49,988) (101,707) (118,436)
Cash paid as part of IG acquisition ................ (322) 5,359 (9,541)
Additional investment in unconsolidated subsidiary . (4,428) (1,465) --
Other noncurrent assets ............................ (1,265) (3,221) (504)
--------- --------- ---------
Net cash used by investing activities ......... (145,888) (55,457) (84,161)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 223,139 45,926 8,465
Proceeds from issuance of common
stock by subsidiary ............................... 1,107 319 11,136
Proceeds from issuance of debt ..................... -- 21,819 39,360
Payments of long-term debt and capital
lease obligations ................................. (41,449) (4,793) (979)
--------- --------- ---------
Net cash provided by financing activities ..... 182,797 63,271 57,982
Effect of exchange rate changes on cash ............... (781) (274) (135)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ...... 80,830 40,567 (26,000)
Cash and cash equivalents at beginning of period ...... 63,542 22,975 48,975
--------- --------- ---------
Cash and cash equivalents at end of period ............ $ 144,372 $ 63,542 $ 22,975
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-7-
<PAGE> 8
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest .......................... $ 9,944 $ 9,634 $ 7,333
Income taxes ...................... 19,581 13,506 16,066
</TABLE>
Supplemental Disclosures of Non-Cash Transactions:
Settlement of note receivable -- Note F
Acquisition liability -- Note B
The accompanying notes are an integral part of
these financial statements.
-8-
<PAGE> 9
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------- ---------------------
1995 1994 1993 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS:
General Division Common Stock:
Balance at beginning of year ............... 26,447 24,292 23,830 $ 264 $ 243 $ 238
Shares issued in public offering ........... 2,875 -- -- 29 -- --
Issuance of General Division Common
Stock in connection with
acquisitions ............................. 420 -- -- 4 -- --
Exercise of stock options .................. 958 68 254 10 1 3
Issuance from employee stock
purchase plan ............................. 143 126 86 1 1 1
Exercise of warrants ....................... 343 1,961 122 4 19 1
------- ------- ------- ------- ------- -------
Balance at end of year ..................... 31,186 26,447 24,292 $ 312 $ 264 $ 243
======= ======= ======= ======= ======= =======
Tissue Repair Division Common Stock:
Balance at beginning of year ............... 8,675 -- -- $ 87 $ -- $ --
Shares issued in public offering ........... 3,000 -- -- 30 -- --
Issued to BioSurface shareholders .......... -- 5,000 -- -- 50 --
Issued at conversion ....................... -- 3,357 -- -- 34 --
Exercise of stock options .................. 122 -- -- 1 -- --
Issuance from employee stock
purchase plan ............................. 270 4 -- 3 -- --
Exercise of warrants ....................... 46 314 -- -- 3 --
------- ------- ------- ------- ------- -------
Balance at end of year ..................... 12,113 8,675 -- $ 121 $ 87 $ --
======= ======= ======= ======= ======= =======
TREASURY COMMON STOCK (AT COST):
General Division Common Stock:
Balance at beginning of year ............... (50) (50) (50) $ (755) $ (755) $ (751)
Purchases .................................. (3) -- -- (127) -- (4)
------- ------- ------- ------- ------- -------
Balance at end of year ................. (53) (50) (50) $ (882) $ (755) $ (755)
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C>
ADDITIONAL PAID IN CAPITAL:
Balance at beginning of year $ 470,826 $ 397,471 $ 378,854
General Division Common Stock issued in public offering 141,247 -- --
Tissue Repair Division Common Stock issued in public offering 42,262 -- --
Issuance of General Division Common Stock in connection with
acquisitions 23,817 -- --
Tissue Repair Division Common Stock issued
to BioSurface shareholders -- 25,263 --
Tissue Repair Division Common Stock issued at conversion -- (34) --
Exercise of stock options 28,152 1,189 3,846
Issuance from employee stock purchase plan 5,140 3,005 2,358
Exercise of warrants 6,260 41,708 2,261
Gain on sale of stock by subsidiary -- -- 7,553
Tax benefit from disqualified dispositions 5,500 2,224 2,599
Non-cash compensation expense 1,013 -- --
Purchase of Treasury Stock 125 -- --
--------- --------- ---------
Balance at end of year $ 724,342 $ 470,826 $ 397,471
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-9-
<PAGE> 10
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
ACCUMULATED DEFICIT:
Balance at beginning of year $(38,808) $(55,111) $(49,016)
Net income (loss) 21,650 16,303 (6,095)
-------- -------- --------
Balance at end of year $(17,158) $(38,808) $(55,111)
======== ======== ========
OTHER EQUITY ADJUSTMENTS:
Foreign currency adjustments $ (3,590) $ (4,915) (7,776)
Unrealized gains/(losses) on investments 2,062 (7,735) --
-------- -------- --------
Total other equity adjustments $ (1,528) $(12,650) $ (7,776)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
-10-
<PAGE> 11
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Genzyme Corporation (the "Company" or "Genzyme"), is a
diversified human healthcare business with product development, manufacturing
and marketing capabilities in therapeutic and diagnostic products,
pharmaceuticals, diagnostic services and tissue repair.
Basis of Presentation: The approval effective December 16, 1994 (the
"Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994
resulted in the redesignation of Genzyme's common stock. The outstanding shares
of Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's common stock. General Division Stock and TR Stock provide stockholders
with separate securities which are intended to reflect the performance of the
General Division and Tissue Repair Division ("GTR"), respectively, and the
allocation of tax benefits between the divisions pursuant to the management and
accounting policies adopted by the Board of Directors (the "Board") of Genzyme
Corporation. The approval of the Genzyme Stock Proposal did not result in any
transfer of assets and liabilities of the Company or its subsidiaries. The
Company prepares separate financial statements for the General Division and GTR
in addition to consolidated financial information of the Company.
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
Investments in companies and joint ventures in which the Company has a
substantial ownership interest of approximately twenty-percent to fifty-percent,
or in which the Company participates in policy decisions are accounted for using
the equity method. Accordingly, the Company's share of the earnings of these
entities is included in combined net income. Investments of less than 20% are
reported at fair value (see "Investments"). All significant intercompany items
and transactions have been eliminated in consolidation. Certain items in the
consolidated financial statements for the periods prior to December 31, 1994
have been reclassified to conform with the current year's presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents, consisting principally of
money market funds and municipal notes purchased with initial maturities of
three months or less, are valued at cost plus accrued interest, which
approximates market.
Investments: Short-term investments include all investments with
remaining maturities of twelve months or less. Long-term investments include all
investments with remaining maturities greater than twelve months. The Company
classifies its equity investments as available-for-sale and its investments in
debt securities as either held-to-maturity or available-for-sale based on facts
and circumstances present at the time the investments are purchased. Equity
investments are included in "Other noncurrent assets" on the consolidated
balance sheet (See Note D Investments). As of December 31, 1995, the Company
classified all investments in debt
-11-
<PAGE> 12
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
securities as available-for-sale.
These investments are reported at fair value as of the balance sheet
date with unrealized holding gains and losses (the adjustment to fair value)
included as a separate component of Stockholder's equity. If the adjustment to
fair value reflects a decline in the value of the investment, management
considers all available evidence to evaluate the extent to which the decline is
"other than temporary" based on factors including (but not limited to) (i) the
length of time and extent to which the market value has been less than cost;
(ii) the financial condition and near-term prospects of the issuer, including
any specific events which may influence the operations of the issuer; and (iii)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in market
value.
Fair Value of Financial Instruments: The fair value of investments is
obtained from market quotations and is disclosed in Note D. The fair value of
the Company's subordinated debentures is obtained from a market maker in the
debentures and is disclosed in Note H. The fair value of foreign currency
forward contracts is based on forward rates in effect at December 31, 1995 and
is disclosed below (see -- Hedging).
Inventories: Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Provision for depreciation is computed using the straight-line method
over the estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and twenty to forty
years for buildings). Certain specialized manufacturing equipment (with a net
book value of $34.1 million at December 31, 1995) is depreciated over its
remaining useful life using the units-of-production method. The remaining life
and recoverability of such equipment is evaluated periodically based on the
appropriate facts and circumstances. Leasehold improvements are amortized over
the lesser of the useful life or the term of the respective lease. For products
expected to be commercialized, the Company capitalizes, to construction
in-progress, the costs of manufacturing process validation and optimization
incurred beginning when the product is deemed to have demonstrated technological
feasibility and ending when the asset is substantially complete and is ready for
its intended use. Qualified costs include direct labor and material, and
incremental fixed overhead to the extent incurred. These costs are depreciated
using the units of production method.
Issuance of Stock by a Subsidiary: Gains on the issuance of stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the Company
accounts for the change in its proportionate share of subsidiary equity
resulting from the additional equity raised by the subsidiary as an equity
transaction.
Intangibles: Intangible assets consist primarily of goodwill which is
amortized on a straight-line basis over seven to eleven years. The remaining
intangibles, including customer lists, patents and a covenant not to compete are
being amortized on a straight-line basis over five to eleven years. Management's
policy regarding intangible assets is to evaluate the recoverability of its
intangible assets when the facts and circumstances suggest that these assets may
be impaired. This analysis relies on a number of factors, including operating
-12-
<PAGE> 13
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
results, business plans, budgets, economic projections and changes in
management's strategic direction or market emphasis. The test of such
recoverability is a comparison of the asset to expected cumulative
(undiscounted) operating income of the acquired entity over the remaining life
of the asset. If the book value of the intangible asset exceeds undiscounted
cumulative operating income, the write-down is computed as the excess of the
asset over the present value of operating income discounted at the Company's
weighted average cost of capital over the remaining amortization period. (See
Note K - Goodwill Impairment and Restructuring Costs)
Revenue Recognition: Revenues from product sales are recognized when
goods are shipped and are net of third party contractual allowances, as
applicable. Revenues from service sales are recognized when the service
procedures have been completed. Revenues from research and development contracts
are recognized over applicable contractual periods as specified by each
contract.
Translation of Foreign Currencies: The financial statements of the
Company's foreign subsidiaries are translated from local currency into U.S.
dollars using the current exchange rate at the balance sheet date for assets and
liabilities and the average exchange rate prevailing during the period for
revenues and expenses. The local currency for all Company foreign subsidiaries
is considered to be the functional currency for each entity and accordingly,
translation adjustments for these subsidiaries are reported as a separate
component of Stockholder equity. Exchange gains and losses on intercompany
balances of a long-term investment nature are also recorded as a charge or
credit to Stockholder equity. Transaction gains and losses are recorded in
income and totaled $(840,000), $(41,000), and $(322,000) for the years ended
December 31, 1995, 1994 and 1993, respectively.
Hedging: The Company enters into forward contracts to reduce foreign
currency exchange risk. Such contracts are revalued using current exchange rates
at the balance sheet date. Gains and losses on forward contracts intended to
hedge identifiable foreign currency commitments are deferred and included in the
measurement of the related foreign currency transaction. All other gains and
losses on revaluation of forward contracts are included in net income. At
December 31, 1995, the Company had forward exchange contracts valued at
$1,209,000. Related gains and losses were not material to the financial
statements.
Research and Development: Research and development costs are expensed
in the period incurred. Costs of purchased technology which management believes
has not demonstrated technological feasibility and for which there is no
alternative future use are charged to expense in the period of purchase.
Income Taxes: The Company uses the asset and liability method of
accounting for deferred income taxes. The provision for income taxes includes
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. The Company has not provided for possible U.S. taxes on the
undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely. At December 31, 1995, such undistributed foreign
earnings were approximately $1,731,000.
Net Income (Loss) Per Share: The method of calculating income per share
for General Division Stock and TR Stock reflects the terms of the Articles of
Organization, as amended, which provide that dividends may be declared and paid
only out of the lesser of funds of Genzyme legally available therefore and each
division's Available Dividend Amount, as defined. The Company computes income
-13-
<PAGE> 14
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
per share by dividing the income attributable to each class of stock by the
weighted average number of shares of that stock and dilutive common stock
equivalents and other potentially dilutive securities outstanding during the
applicable period. Income attributable to General Division Stock and TR Stock
equals the respective division's net income or loss for the relevant period
determined in accordance with generally accepted accounting principles in effect
at such time, adjusted by the amount of tax benefits allocated to or from either
division pursuant to the accounting policies adopted by the Board of Directors
(the "Board"). The accounting policies provide that, as of the end of any fiscal
quarter of Genzyme, any projected annual tax benefit attributable to any
division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense may be allocated to the other division
without any compensating payment or allocation. Further description of
management and accounting policies are included in the notes to the General
Division financial statements.
Income per share assuming full dilution is determined by dividing net
income plus subordinated debenture interest (net of capitalized amounts) by the
weighted average number of common shares outstanding during the year after
giving effect for common stock equivalents arising from stock options and
warrants and for subordinated debentures assumed converted to common stock.
Net income (loss) attributable to General Division and TR Stock and net
income (loss) per share gives effect to the provisions of the Genzyme Stock
Proposal and, accordingly, periods prior to December 15, 1994 are presented on a
pro forma basis.
Accounting for Stock-Based Compensation: Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), will require the Company to either elect expense recognition under SFAS
123 or its disclosure-only alternative for stock-based employee compensation.
The expense recognition provision encouraged by SFAS 123 would require fair
value-based financial accounting to recognize compensation expense for employee
stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior year. The Company
has determined that it will elect the disclosure-only alternative permitted
under SFAS 123. The Company will be required to disclose pro forma net income
and pro forma earnings per share in the footnotes using the fair value based
method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments to its net
income or earnings per share.
Financial Instruments: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, current and non-current investments. The Company
generally invests its cash investments in investments-grade securities.
Uncertainties: The Company is subject to risks common to companies in
the Biotechnology industry, including but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B ACQUISITIONS
In April 1993, the Company acquired Virotech System-Diagnostika, GmbH
in Germany, for approximately $10,200,000, of which approximately $8,100,000 was
recorded as goodwill. In May 1993 Genzyme srl, a wholly-owned subsidiary of the
-14-
<PAGE> 15
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company located in Italy, acquired certain assets of Omnia Res srl for
approximately $700,000, of which approximately $100,000 was recorded as
goodwill. These acquisitions were accounted for as purchases. Accordingly, the
associated net assets and operations have been included in the Company's
financial statements since the acquisition dates. Pro forma information is not
presented since the impact of the acquisition on financial statement periods
prior to the acquisition is not material.
In July 1994, the Company paid approximately $6,100,000 for
newly-issued shares of common stock representing 51% of the outstanding common
stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance
chemicals used in the development of pharmaceuticals. Based on certain put and
call options in the Acquisition Agreement, which effectively ensure the purchase
by the Company of the remaining outstanding shares during the period from July
1, 1996 through June 30, 1999, the Company accounted for the acquisition as a
purchase of all of the outstanding shares of Sygena, and recorded a deferred
liability at a present value of approximately 9,000,000 Swiss francs for the
purchase of the remaining shares. The excess purchase price over the net assets
acquired was approximately 5,000,000 Swiss francs (approximately $4,000,000) and
was recorded as goodwill. The net assets and operations of Sygena have been
included in the Company's financial statements from the date of acquisition. Pro
forma information is not presented since the impact of the acquisition on
financial statement periods prior to the acquisition is not material.
On December 15, 1994, Genzyme acquired BioSurface Technology, Inc.
("BioSurface") by issuing .575 of one share of TR Stock for each share of
BioSurface common stock. In the aggregate, 5,000,000 shares of TR Stock, valued
at $25,312,500, were issued representing 50% of the initial equity interest in
GTR. The acquisition was accounted for as a purchase. Accordingly, the
associated net assets and operations of BioSurface have been included in the
Company's financial statements since the date of acquisition. The excess of the
purchase price over the fair market value of the net assets acquired,
$11,215,000, was allocated to in-process research and development and charged to
operations.
The following summary, prepared on a pro forma basis, presents the
consolidated results of operations as if BioSurface had been acquired at the
beginning of the periods presented. This pro forma summary does not necessarily
reflect the results of operations as they would have been if Genzyme and
BioSurface constituted a single entity during the periods presented and is not
necessarily indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------ ----------- -----------
<S> <C> <C>
Revenues ....................................... $ 317,047 $ 276,080
Net income (loss) .............................. 19,448 (13,978)
Pro forma net income (loss) per share:
Attributable to General Division ............. 1.22 0.68
Attributable to Tissue Repair Division........ (1.51) (3.78)
</TABLE>
In October 1995, Genzyme acquired the publicly-held minority interest
in its majority-owned subsidiary, IG Laboratories, Inc. ("IG"), by issuing
approximately .125 of one share of General Division Stock for each share of IG
common stock. In the aggregate, approximately 385,255 shares of General Division
Stock, valued at approximately $22.5 million were issued. The acquisition was
accounted for as a purchase. The excess of the purchase price
-15-
<PAGE> 16
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
over the fair market value of the net assets acquired, approximately $18.6
million, was allocated $14.2 million to in-process research and development and
charged to operations, and $4.4 million to goodwill to be amortized over 11
years. Pro forma information is not presented since the impact of the
acquisition on financial statement periods prior to the acquisition is not
material.
In February 1996, Genzyme signed a definitive agreement to acquire
Genetrix Inc., a privately held genetic testing laboratory based in Phoenix,
Arizona, in a tax-free exchange of General Division Stock valued at
approximately $36.8 million. Genetrix Inc. will be merged with Genzyme's
Integrated Genetics diagnostic services business. The transaction will be
accounted for as a pooling of interests.
NOTE C MAJORITY-OWNED SUBSIDIARIES
IG LABORATORIES, INC. IG was an approximately 70%-owned subsidiary for
the years ended December 31, 1993, 1994 and for the period from January 1, 1995
through October 1, 1995. (See Note B).
GENZYME TRANSGENICS CORPORATION. Genzyme Transgenics Corporation
("GTC") was a majority-owned subsidiary for the years ended December 31, 1992,
1993 and for the period from January 1, 1994 through September 30, 1994. (See
Note D).
NOTE D INVESTMENTS
Investments in marketable securities at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
-----------------------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit .................... $ 1,870 $ 1,870 $ 2,979 $ 2,979
Federal agency notes ....................... 26,731 26,767 -- --
Corporate notes ............................ 80,576 80,646 4,281 4,177
U.S. Treasury notes ........................ 3,031 3,020 6,063 5,917
Municipal notes ............................ -- -- -- --
-------- -------- -------- --------
$112,208 $112,303 $ 13,323 $ 13,073
======== ======== ======== ========
Long Term:
Common stock ............................... $ -- $ -- $ -- $ --
Federal agency notes ....................... 4,047 4,053
Corporate notes ............................ 42,518 42,845 57,584 54,420
U.S. Treasury notes ........................ 22,351 22,663 24,716 22,425
Municipal notes ............................ -- -- -- --
-------- -------- -------- --------
$ 68,916 $ 69,561 $ 82,300 $ 76,845
======== ======== ======== ========
</TABLE>
Information regarding the range of contractual maturities of
investments in debt securities at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
------------------------------------------------------------------
<S> <C> <C>
Within 1 year ............................. $112,208 $112,304
After 1 year through 2 years .............. 29,997 30,137
After 2 years through 10 years ............ 38,919 39,423
-------- --------
</TABLE>
-16-
<PAGE> 17
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$181,124 $181,864
======== ========
In August 1993, the Company acquired 502,512 shares of the Series E
Convertible Preferred Stock (the "Series E Stock") of Univax Biologics, Inc.,
for $5.0 million in connection with an agreement to develop and commercialize
certain products. Upon the achievement of specified clinical milestones, the
Company is committed to making future milestone payments. In November 1995,
Univax merged with North American Biologicals, Inc.("NABI") and in connection
with the merger the General Division received 526,315 shares of NABI common
stock in exchange for the Series E Stock. The investment is classified as
available-for-sale and is included in "Other noncurrent assets" in the
consolidated balance sheets at fair market value. At December 31, 1995, this
value was approximately $5.7 million compared to a value of $2.7 million at
December 31, 1994.
In September 1993, the Company acquired 714,286 shares of common stock
of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in connection with an
agreement to develop and commercialize certain products. Upon the achievement of
certain specified clinical milestones, the Company is committed to making future
milestone payments and an additional $5.0 million investment in Argus. In August
1994, pursuant to the Common Stock Purchase Agreement, Argus delivered to the
Company an additional 132,325 shares resulting in a total of 846,611 shares held
by the Company. The investment is classified as available-for-sale and is
included in "Other noncurrent assets" in the consolidated balance sheets at fair
market value. At December 31, 1994, this value was approximately $1.8 million.
The Company believed that a portion of the impairment in the value of the
investment in Argus was "other than temporary" and accordingly, a loss of
approximately $3.3 million was charged to operations in 1994. In September 1995,
Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex. In
connection with this merger, the common stock of Argus was redesignated as
common stock of Aronex. At December 31, 1995 the value of this investment was
$3.7 million.
Pursuant to the Common Stock Purchase Agreement (the "Agreement") dated
as of June 24, 1994 between the Company and Celtrix Pharmaceuticals, Inc.
("Celtrix"), the Company acquired 1,550,388 restricted shares, approximately
11.5% of the common stock of Celtrix outstanding after the acquisition, for
$10.0 million. In November 1994, Celtrix announced a delay in the
commercialization of an application of a key product and in February 1995,
Celtrix announced that it had halted all studies related to another of its key
development products. These announcements resulted in a decline in the fair
market value of the Company's investment. The Company believed that a portion of
the impairment in the value of the investment in Celtrix was "other than
temporary". Accordingly, a loss of approximately $6.1 million was charged to
operations in 1994. In 1995, Celtrix exercised its option to require the Company
to purchase additional shares of Celtrix at fair market value. As a result in
December 1995, the Company acquired an additional 1,472,829 shares at $3 per
share. The investment is classified as available-for-sale and is included in
"Other noncurrent assets". At December 31, 1995, this value was approximately
$7.7 million.
Net realized losses included in investment income for 1995 were
$110,000 Net realized gains included in investment income for 1994 and 1993 were
$1,430,000 and $1,647,000, respectively. Gross unrealized holding gains of
$2,073,000 and unrealized holding losses of $10,000, were recorded at December
31, 1995 in Stockholders' equity as compared to unrealized holding losses of
$5,704,000 recorded at December 31, 1994.
-17-
<PAGE> 18
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1993, GTC, a wholly-owned subsidiary of the Company
specializing in transgenic technology which was incorporated in February 1993,
completed an initial public offering of 1,500,000 shares of its common stock
priced at $8.00 per share. The offering resulted in an increase in the value of
the Company's investment in GTC of $7.6 million which was recorded as an
increase to additional paid-in capital. At December 31, 1993, the Company owned
4,000,000 shares or approximately 73% of the outstanding common stock of GTC.
On October 1, 1994, GTC acquired TSI Corporation ("TSI") in a merger
transaction in which GTC issued two-tenths (0.2) of one share of GTC common
stock for each share of TSI common stock, in a transaction accounted for as a
purchase. As a result of the acquisition, the Company's percentage ownership of
GTC common stock declined from approximately 73% to approximately 40%.
Accordingly, the Company began accounting for its investment in GTC under the
equity method.
In February 1995, GTC exercised its option to sell to the Company
500,000 additional shares of GTC common stock at a price of $8.00 per share. The
$4.0 million acquisition cost has been added to the Company's equity investment
in this subsidiary. In June 1995, the Company converted approximately $4.0
million of GTC debt into equity through the acquisition of 1.3 million shares of
GTC common stock. In July 1995, GTC acquired Biodevelopment Laboratories, Inc.
("BDL"). In connection with the transaction, the Company issued approximately
34,000 shares of General Division Common Stock to former stockholders of BDL in
exchange for approximately 475,000 shares of newly issued GTC stock. In total,
GTC issued approximately 1,207,000 shares of its common stock in the
transaction, resulting in a decrease in the Company's interest in GTC to 48.2%.
Also as part of the BDL transaction, the Company guaranteed a $7.5 million line
of credit from a commercial bank in return for warrants to purchase 145,000
shares of GTC stock.
As of December 31, 1995, GTC had $6.0 million outstanding under this
line of credit. GTC had a working capital deficiency of approximately $25.1
million at December 31, 1995 and had an operating loss of approximately $4.1
million for the year then ended.
The fair market value of the GTC shares, based on quoted market prices,
was $27,601,000 at December 31, 1995. The Company reported equity in GTC's
losses of $1,810,000 in 1995. Following are condensed financial data of GTC:
-18-
<PAGE> 19
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues....................... $38,406 $11,692 $ 3,222
Operating loss................. (2,014) (5,231) (1,327)
Net loss....................... (4,133) (5,284) (1,171)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------
<S> <C> <C>
Current assets................. $16,409 $11,629
Noncurrent assets.............. 41,478 36,364
Current liabilities............ 24,155 19,487
Noncurrent liabilities......... 6,444 9,082
</TABLE>
NOTE E INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
------------------------------------------------------
<S> <C> <C>
Raw materials.............. $12,634 $14,572
Work-in-process............ 14,821 9,247
Finished products.......... 25,587 13,021
------- -------
$53,042 $36,840
======= =======
</TABLE>
NOTE F PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------
<S> <C> <C>
Plant and equipment.................... $109,035 $ 64,350
Land and buildings..................... 46,456 40,157
Leasehold improvements................ 52,803 32,562
Furniture and fixtures................. 7,530 8,426
Construction in progress............... 178,083 198,117
-------- --------
393,907 343,612
Less accumulated depreciation........ (64,484) (46,810)
-------- --------
Property, plant and equipment, net..... $329,423 $296,802
======== ========
</TABLE>
Depreciation expense was $17,961,000, $13,486,000, and $10,857,000 in
1995, 1994 and 1993, respectively.
The Company is constructing a mammalian cell production facility in
Boston, Massachusetts which will be used to produce a recombinant form of
Ceredase(R) enzyme ("Cerezyme(TM)") and other products. The facility is expected
to cost approximately $151 million plus an additional $23 million of Cerezyme(R)
process validation and optimization costs. The facility is expected to be
validated and placed into service in 1996. As of December 31, 1995, the Company
had capitalized, and included in construction in progress, approximately
$151,000,000 of expenditures related to this building and approximately
-19-
<PAGE> 20
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$33,472,000 of process validation and optimization costs related to this and
other facilities. In 1995, 1994 and 1993, the Company capitalized approximately
$9.0, $9.2 and $4.7 million of interest costs, respectively, relating to this
and other facility construction.
In June 1994, the Company acquired its Mountain Road facility in
Framingham, Massachusetts for $26.9 million of which $25.1 million was allocated
to buildings and $1.8 million was allocated to land based on appraised values.
The Company funded the purchase with $1.2 million in cash, settlement of a $4.2
million note receivable (including accrued interest) from the landlord of the
facility and the proceeds of a $21.5 million term loan from a bank (See Note H).
NOTE G ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------
<S> <C> <C>
Professional fees...................... $ 2,679 $ 3,102
Compensation........................... 12,951 8,853
Royalties.............................. 6,702 5,055
Interest............................... 1,857 2,361
Other.................................. 15,229 11,615
------- -------
$39,418 $30,986
======= =======
</TABLE>
NOTE H LONG-TERM DEBT AND LEASES
Long-Term Debt
Long-term debt at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------
<S> <C> <C>
Convertible subordinated notes......... $100,000 $100,000
Note payable, bank (due 1/6/95)........ - 39,000
Mortgage note payable, matures
June 13, 1999......................... 20,863 21,323
Mortgage note payable, matures
November 2014........................ 3,356 3,409
Mortgage note payable, matures
January 1, 2008...................... 747 808
Term notes payable..................... 1,626 2,879
-------- --------
126,592 167,419
Less current portion................... (2,243) (41,020)
-------- --------
$124,349 $126,399
======== ========
</TABLE>
In 1991, the Company issued 6 3/4% Convertible Subordinated Notes due
October 1, 2001 in the aggregate principal amount of $100,000,000. The notes are
convertible into General Division Stock and TR Stock at any time at a conversion
price of $52.875 and, under certain circumstances, may be redeemed by the
Company. Net proceeds from the debentures were $97,250,000. Deferred financing
costs of $2,750,000, classified as "Other noncurrent assets" on the combined
balance sheets, are being amortized to expense over the term of the debt issue.
As of December 31, 1995, the debentures had a market value of approximately $125
million (See Note Q).
On December 21, 1993, the Company borrowed $39,000,000, under a Credit
Agreement (the "Agreement") with a bank. The interest rate in effect at
December 31, 1994 was 6.2875%. The loan was repaid January 6, 1995.
-20-
<PAGE> 21
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The mortgage note due June 1999 is collateralized by land and buildings
with a net book value of $29,108,000 at December 31, 1995, bears interest at
7.73% annually, and is payable monthly based on a twenty year direct reduction
amortization schedule, with the remaining principal due June 13, 1999.
The mortgage note maturing November 2014 is collateralized by land and
buildings with a net book value of $5,188,000 at December 31, 1995 and bears
interest at 10.5%. The mortgage note maturing January 2008 provides the bank
with a "call or review" feature at the end of the first 60 month period,
allowing the bank to adjust the note under specific circumstances. This note
bears interest at a variable rate of prime plus 1% and is collateralized by land
and fixtures. Principal and interest are payable monthly on both of these notes.
The Company maintains a $15.0 million line of credit with Fleet Bank of
Massachusetts, the entire amount, of which, remained available at December 31,
1995.
Operating Leases
Total rent expense under operating leases was $10,006,000, $8,663,000,
and $8,734,000 in 1995, 1994 and 1993 respectively. The Company leases
facilities and personal property under certain operating leases in excess of one
year.
Future minimum payments due under the Company's long-term obligations
and capital and operating leases are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL OPERATING
(DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996...................................... $ 11,160 $240 $ 12,317
1997...................................... 9,381 70 12,071
1998...................................... 9,376 118 11,141
1999...................................... 27,306 - 10,942
2000...................................... 7,253 - 9,305
Thereafter................................ 111,792 - 48,273
-------- ---- --------
Total minimum payments................. 176,268 428 104,049
Less: interest............................ (49,676) (102) -
-------- ---- --------
$126,592 $326 $104,049
======== ==== ========
</TABLE>
NOTE I STOCKHOLDERS' EQUITY
Immediately prior to the Effective Date, as defined in Note A,
approximately 15,791,000 shares of Genzyme common stock were reserved for
issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock
Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the
"Warrants"), and the conversion of the 6 3/4% Convertible Subordinated Notes Due
2001 (the "Notes").
Pursuant to antidilution provisions in the agreements covering the
options, Genzyme has adjusted each option outstanding on the Effective Date to
provide for separation of the option into an option exercisable for General
Division Stock and an option exercisable for the number of shares of TR Stock
that the holder would have received if the holder had exercised the option
immediately prior to the Effective Date.
The Warrants provide that the holder of the Warrant is entitled to
receive the number of shares of General Division Stock and TR Stock upon
exercise of the Warrant that the holder would have received if the holder had
exercised the Warrant immediately prior to the Effective Date.
-21-
<PAGE> 22
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the indenture under which the Notes were issued, the
conversion privilege of the Notes was adjusted so that the holder of a Note
converted after the Effective Date will receive, in addition to the shares of
General Division Stock into which the Note is convertible, the same number of
shares of TR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
In September 1995, Genzyme sold 3,000,000 shares of Tissue Repair
Common Stock to the public at a price of $15 per share for net proceeds of $42.4
million after underwriting discounts and commissions. In October 1995, Genzyme
sold 2,875,000 shares of General Division Common Stock to the public for $51.25
per share for net proceeds of $141.5 million.
At December 31, 1995, approximately 11,185,804 shares of General
Division Stock and 3,478,585 shares of TR Stock were reserved for issuance under
the 1990 Equity Incentive Plan as amended, the 1988 Director Stock Option Plan
as amended, the 1990 Employee Stock Purchase Plan as amended outstanding
warrants, and the conversion of the Notes.
Preferred Stock. Shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or in
part, the preferences, voting powers, qualifications and special or relative
rights or privileges of any such series before the issuance of any shares of
that series. The Board of Directors shall determine the number of shares
constituting each series of Preferred Stock and each series shall have a
distinguishing designation.
Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as
amended (the "Plan"), options may be granted to purchase an aggregate of
7,600,000 shares of General Division Stock and 2,000,000 shares of TR Stock. The
Plan allows the granting of incentive stock options and nonstatutory stock
options at not less than fair market value at date of grant, and stock
appreciation rights, performance shares, restricted stock and stock units to
employees and consultants of the Company, each with a maximum term of ten years.
In addition, the Company has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 100,000 shares
and 70,000 shares, respectively, of General Division Stock and TR Stock, at a
rate of 1,600 shares and 400 shares, respectively, for each year of service are
automatically granted at fair market value to members of the Board of Directors
of the Company upon their election or reelection as Directors. All options
expire ten years after the initial grant date and vest over various periods.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
<S> <C> <C>
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1992..................... 2,929,067 3.00 - 72.04
Granted............................................ 1,332,240 26.25 - 45.00
Exercised.......................................... (254,171) 4.00 - 37.25
Forfeited and canceled............................. (161,782) 7.75 - 72.04
----------
Outstanding at December 31, 1993..................... 3,845,354 3.00 - 66.16
Granted............................................ 1,619,364 22.63 - 42.00
Exercised.......................................... (66,378) 3.00 - 35.25
Forfeited and canceled............................. (211,763) 8.25 - 66.16
</TABLE>
-22-
<PAGE> 23
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Converted at Effective Date........................ (5,186,577) 5.89 - 65.49
----------
Outstanding at December 31, 1994..................... -
==========
GENERAL DIVISION STOCK
Converted at Effective Date........................ 5,186,577 $ 5.89 - $65.49
Granted............................................ 66,674 27.25 - 32.50
Exercised.......................................... (1,250) 6.02 - 19.38
Forfeited and canceled............................. (11,151) 30.13 - 49.00
-----------
Outstanding at December 31, 1994..................... 5,240,850 5.89 - 65.49
Granted 2,070,751 5.89 - 67.63
Exercised (1,003,827) 5.89 - 60.14
Forfeited and canceled (221,441) 5.89 - 66.63
----------
Outstanding at December 31, 1995..................... 6,086,333 7.57 - 67.63
==========
TR STOCK
Converted at Effective Date........................ 464,824 $ 1.03 - $11.15
Granted............................................ 940,976 4.75 - 5.13
----------
Outstanding at December 31, 1994..................... 1,405,800 1.03 - 11.15
Granted............................................ 1,153,053 3.19 - 17.63
Exercised.......................................... (63,608) 1.68 - 9.58
Forfeited and canceled............................. (76,202) 1.68 - 8.30
----------
Outstanding at December 31, 1995..................... 2,419,043 1.03 - 17.63
==========
</TABLE>
At December 31, 1995, 2,559,198 of the outstanding General Division
Stock options were exercisable resulting in aggregate exercise proceeds of
approximately $78,615,000 and 444,343 of the outstanding TR Stock options were
exercisable resulting in aggregate exercise proceeds of approximately
$2,457,400.
The total exercise proceeds for all options outstanding at December 31,
1995 is approximately $216,568,000 and $20,885,000 for General Division Stock
and TR Stock, respectively. Information regarding the range of option prices is
as follows:
<TABLE>
<CAPTION>
GENERAL DIVISION STOCK TISSUE REPAIR STOCK
---------------------- -------------------
SHARES SHARES
UNDER OPTION OPTION PRICE UNDER OPTION OPTION PRICE
------------ ------------ ------------ ------------
<S> <C> <C> <C>
641,247 $ 7.57 - $18.93 80,998 $1.026 - $ 3.257
1,381,472 19.38 - 29.88 1,033,340 3.300 - 5.088
765,926 30.00 - 32.13 79,855 5.109 - 5.471
785,815 32.24 - 38.84 385,115 5.492 - 6.000
704,394 38.88 110,688 6.003 8.302
726,683 39.00 - 48.75 115,768 8.325 - 16.000
1,080,796 49.00 - 67.63 613,279 16.625 - 17.625
--------- ---------
6,086,333 2,419,043
========= =========
</TABLE>
Employee Stock Purchase Plan. The Company's 1990 Employee Stock
Purchase Plan allows full-time employees, as defined in this plan, to purchase
the Company's stock at 85% of fair market value. Under this plan, 750,000 shares
of the General Division Stock are authorized, of which 142,934, 129,938 and
85,929 shares were issued in 1995, 1994 and 1993, respectively and 600,000
shares of TR Stock are authorized, of which 269,920 and 3,613 shares of TR Stock
were issued in 1995 and 1994, respectively.
-23-
<PAGE> 24
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Rights. In 1989, the Company's Board issued a dividend of one
preferred stock purchase right (a "Common Stock Right") on each share of Common
Stock. At the Effective Date, the Rights Agreement under which the rights were
issued was amended and restated to reflect the change in the capital structure
of the Company and the Board declared a distribution to holders of TR Stock of a
right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated
Rights Agreement provides that each General Division Stock Right, which replaced
the Common Stock Right, and each TR Stock Right, when it becomes exercisable,
will entitle the holder to purchase from the Company (i) in the case of a
General Division Stock Right, one one-hundredth of a share of Series A Junior
Participating Preferred Stock at a price of $52, subject to adjustment, and (ii)
in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior
Participating Preferred Stock at a price of $25, subject to adjustment.
The rights expire on March 28, 1999.
Stock Warrants. The Company has issued warrants which, when exercised,
grant the holders one share of General Division Stock and .135 shares of TR
Stock. These warrants were granted in exchange for the receipt of options to
purchase the partnership interests of Genzyme Development Partners, L.P. (the
"Surgical Aids Partnership") the callable common stock of Neozyme II Corporation
("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held
shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds
from the exercise of these warrants will be allocated to the General Division
(see "TR Designated Shares"). The outstanding warrants were issued under the
following terms:
<TABLE>
<CAPTION>
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- ---------------------------------- -------- --------- ---------------
<S> <C> <C> <C> <C>
1989 Surgical Aids Partnership,
the sales agent and its
affiliates 1,205,416 $ 16.01 November 1, 1991 to
50,285 16.03 October 31, 1996
666,399 22.91
1992 Investors in Neozyme II:
Series N 2,415,000 $38.25 Through December 31, 1996
Callable 2,415,000 See below January 1, 1997 to
December 31, 1998 unless
otherwise terminated
1995 Dr. Richard Warren 6,005 $ 42.67 Through September 30, 2000
</TABLE>
The warrants issued to the Surgical Aids Partnership were issued in
consideration for the granting to Genzyme of an exclusive right to purchase all
of the outstanding partnership interests of the Surgical Aids Partnership.
The warrants issued to investors of Neozyme II were granted in
consideration of the option to purchase the callable common stock of Neozyme II
and had an appraised fair value of $16,905,000. The Callable Warrants
automatically terminate upon Genzyme's exercise of its option to purchase all of
the callable common stock of Neozyme II. These warrants have an exercise price
equal to the sum of the average of the closing sale prices of one share of
General Division Stock and .135 share of TR Stock for the 20 trading days
immediately preceding the exercise thereof.
Warrant activity is summarized below:
-24-
<PAGE> 25
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
-------- -------------
<S> <C> <C>
Outstanding at December 31, 1992..................... 8,283,246 16.01 - 41.31
Exercised........................................ (123,180) 16.01 - 23.86
Expired.......................................... (4,062) 38.79 - 41.31
----------
Outstanding at December 31, 1993..................... 8,156,004 16.01 - 38.25
Exercised........................................ (2,197,774) 16.01 - 22.91
Expired.......................................... (23,849) 16.01 - 22.91
----------
Outstanding at December 31, 1994..................... 5,934,381 16.01 - 38.25
Granted.......................................... 6,005 42.67
Exercised........................................ (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995..................... 5,597,241 16.01 - 42.67
==========
</TABLE>
NOTE J RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994 1993
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology license fees.............................. $ - $ - $ 2,000
Fees for research and development
activities:
Neozyme I....................................... - - 8,983
Surgical Aids Partnership....................... - 913 8,378
Neozyme II...................................... 24,198 17,785 12,651
Research joint venture.......................... 2,560 2,185 2,150
------- ------- -------
$26,758 $20,883 $34,162
======= ======= =======
</TABLE>
Neozyme I and II
In 1992, the Company entered into a development contract with Neozyme
II whereby the Company was engaged to perform all research, development and
clinical testing activities related to products and programs for which Neozyme
II was licensed. The Company received $5,000,000 in 1992 under the technology
license agreement pursuant to which the Company granted Neozyme II exclusive
rights to manufacture and sell the products developed under the technology
license agreements.
The funds for Neozyme II's development contract were raised by the sale
of 2,415,000 units for net proceeds of $78,038,000. Each unit consisted of one
share of Neozyme II callable common stock, one Series N warrant and one callable
warrant to purchase one share of General Division Stock and .135 shares of TR
Stock. Included in accounts receivable as of December 31, 1995 and 1994 was
$2,469,000 and $729,000, respectively, due from Neozyme II.
The Company has an option to purchase all of the shares of the Neozyme
II callable common stock for cash, shares of General Division Stock or any
combination thereof (determined at Genzyme's sole discretion) at $117.00 per
share from January 1, 1996 through December 31, 1996, subject to downward
adjustment if exercised before December 31. Due to the uncertainties inherent in
the very early stages of the research into CFTR, management did not consider the
exercise of the option probable and, accordingly, charged to operations in 1992
the $16,905,000 appraised fair value of this purchase option.
-25-
<PAGE> 26
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1993, the Company exercised its option to purchase one of
the two remaining research programs being funded by Neozyme I, created in 1990
for a purchase price of $24,000,000 in cash. As part of the purchase, the
Company retained $0.6 million to fund the costs of the Neozyme I dissolution
which occurred in 1994, and any future tax liabilities. This transaction was
accounted for as a purchase of in-process research and development and its value
charged to operations in 1993.
The Surgical Aids Partnership
In September 1989, the Company entered into a development contract
valued at approximately $37,000,000 with the Surgical Aids Partnership ("the
Partnership") to perform research and development of products based on
hyaluronic acid for use as surgical aids to reduce the incidence and severity of
postoperative adhesions. The Company received a technology license fee of
$1,500,000 in November 1989 and was reimbursed its development costs plus 10%
through the first quarter of 1994 when the Partnership's funds were exhausted.
The General Partner believes that additional funds will be required to complete
the development, clinical testing and commercialization of the Partnership's
products. Although the Company is not obligated to provide additional funding,
the Purchase Option (see below) terminates unless the Company commits on an
annual basis to provide funding for continuation of the research and development
programs for the next twelve month period or until receipt of FDA approval of
one of the Partnership's products is obtained, whichever is shortest. The
Company spent approximately $6.4 million and $6.5 million on the Partnership's
development programs in 1995 and 1994, respectively and has committed to fund
the programs in 1996, expecting to spend approximately $7.9 million (unaudited).
Included in accounts receivable as of December 31, 1994 was $199,000 due from
the Partnership.
The Company also entered into a joint venture agreement with the
Partnership to manufacture and market the Partnership's products, to share in
the profits, to make non-interest bearing loans for working capital
deficiencies, and to make capital contributions as deemed necessary by the
Partnership in connection with the business of the joint venture. The exact
amounts and timing of these expenditures and contributions cannot be determined
at this time.
The Company also obtained an option (the "Purchase Option") to purchase
all of the outstanding partnership interests for a payment of approximately
$26,000,000 in cash, General Division Stock or a combination thereof determined
at Genzyme's sole discretion, plus future royalty payments. The Purchase Option
does not become exercisable until at least twenty-four months after the first
commercial sale of a product of the Partnership.
Deferred revenue from related parties at December 31 includes the
following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C>
Neozyme II.......................................... 186
Other............................................... 47 38
----- ----
$ 47 $224
===== ====
</TABLE>
NOTE K GOODWILL IMPAIRMENT AND RESTRUCTURING COSTS
In the fourth quarter of 1993, the Company recognized an expense of
$23.7 million to reduce the carrying value of intangibles to the realizable
value based on revised estimates of continuing value and future benefits. The
majority of the write-off, $21.9 million, related to the goodwill recorded in
-26-
<PAGE> 27
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
connection with the acquisition of Genetic Design Inc. ("GDI") in June 1992. The
goodwill write-off was based on an analysis of GDI's business conducted in the
fourth quarter of 1993, including the loss of significant state public paternity
testing contracts, which indicated that the environment for public paternity
testing, GDI's primary business market, had changed significantly since the
acquisition, and therefore called into question the carrying value of the
acquisition-related GDI goodwill. The business review disclosed the development
of a competitive environment which emphasized cost rather than service and
performance, intense price competition from a major competitor, a general
reduction in the ordering of identity tests due to governmental budgetary
restrictions and uncertainties as to the level of federal funding of state
testing activities, a cost structure at GDI which made it difficult for GDI to
continue as an effective competitor in a slow-growth, cost-driven environment
and the decreased likelihood of sufficient support in Congress for passage of
additional social legislation which would significantly increase federal funding
of state testing activities. These changed circumstances resulted in a
determination to reduce the carrying value of GDI goodwill to zero at the end of
1993. The remaining $1.8 million of write-offs consisted of approximately $1.1
million of patent rights resulting from the purchase of Enzymatix Ltd. by
Genzyme Ltd. (UK) and approximately $0.7 million of intangible assets resulting
from the acquisition of a clinical testing laboratory by IG. Also in the fourth
quarter of 1993, the Company incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its Diagnostic Services
business. The expenses were related to severance of $1.2 million for an
estimated 45 employees; lease costs of $0.8 million; equipment movement and
disposal of $0.2 million; costs incurred to restructure the Company's paternity
product line of $0.2 million and other costs of $0.4 million. All costs were
cash expenditures in 1994. The restructuring plan was undertaken to consolidate
lab testing services into the Company's most cost-effective testing locations,
transfer virtually all accounting functions to the Company's headquarters and
streamline the paternity product line at GDI.
NOTE L COMMITMENTS AND CONTINGENCIES
In December 1994, the Company fully settled litigation brought by
Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash. The
dispute arose out of a contract between Granada R&D Ventures, a predecessor of
Granada BioSciences, and Integrated Genetics, prior to its merger with the
Company in 1989, regarding development of recombinant fertility hormones for
cows and other animals.
From time to time the Company has been subject to legal proceedings and
claims arising in connection with its business. At December 31, 1995, there were
no asserted claims against the Company which, in the opinion of management, if
adversely decided would have a material adverse effect on the Company's
financial position and results of operations.
-27-
<PAGE> 28
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M INCOME TAXES
Income (loss) before income taxes and the related income tax expense
(benefit) are as follows for the year ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (includes $15.2 million in charges
for purchased research and development and
acquisition expenses in 1995, and includes
$11.2 million and $49 million in charges
for purchased research and development
in 1994 and 1993 respectively) ........................... $40,551 $27,217 $(14,314)
Foreign.................................................... 2,748 3,567 1,760
------- ------- --------
Total................................................ $43,299 $30,784 $(12,554)
======= ======= ========
Currently payable:
Federal................................................. $11,051 $ 8,565 $ 14,606
State................................................... 4,803 3,627 5,090
Foreign................................................. 1,367 850 913
------- -------- --------
Total current........................................ 17,221 13,042 20,609
Deferred:
Federal................................................. 4,507 1,092 (22,804)
State................................................... (79) 347 (4,264)
-------- -------- --------
Total deferred....................................... 4,428 1,439 (27,068)
------- -------- --------
Provision (benefit) for income taxes....................... $21,649 $14,481 $ (6,459)
======= ======= ========
</TABLE>
Provisions for income taxes were at rates other than the U.S. Federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less
than 80%-owned subsidiaries with
no current tax benefit..................................... 1.0 2.5 23.2
State taxes, net............................................ 5.2 5.7 1.5
Federal rate change......................................... - - (1.0)
Tax exempt interest......................................... - - (3.9)
Foreign sales corporation................................... (2.0) (4.3) (1.7)
Benefit of tax credits...................................... - (2.9) (1.4)
Purchase accounting adjustments............................. - - 1.8
Current year realization of tax
benefits of purchased technology and
purchase options........................................... - - (8.8)
Other, net.................................................. 3.0 (4.1) 2.2
Utilization of operating loss
carryforwards.............................................. (5.2) - (0.5)
----- ----- ----
Effective tax rate before certain
charges - expense.......................................... 37.0 31.9 46.4
Gross charge for purchased research
and development and purchase options
net of related deferred tax benefits....................... 13.0 14.9 (97.8)
---- ---- -----
Effective tax rate - expense (benefit)...................... 50.0% 46.8% (51.4)%
==== ===== =====
</TABLE>
-28-
<PAGE> 29
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31 the components of net deferred tax assets were as
follows :
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 10,216 $ 15,908
Intangible amortization.................................... 24,515 26,630
Purchase of in-process research
and development........................................... 15,666 15,687
Unrealized capital losses.................................. 2,561 5,587
Other...................................................... 9,609 3,977
-------- --------
Gross deferred tax asset................................... 62,567 67,789
Valuation allowance........................................ (20,637) (32,233)
-------- --------
Net deferred tax asset........................................ 41,930 35,556
Deferred tax liabilities:
Depreciable assets......................................... (10,556) (3,011)
--------- ---------
Net deferred tax asset........................................ $ 31,374 $ 32,545
======== ========
</TABLE>
At December 31, 1995 and 1994, valuation allowances of $20.6 million
and $32.2 million, respectively, were recorded to offset a portion of the
deferred tax assets related to the realization of net operating loss
carryforwards, and deductions relating to the purchase of in-process research
and development and the future disposition of certain stock purchase options.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
A total of $1.5 million of the valuation allowance relates to tax
assets arising from the IG Labs acquisition. If any portion of this tax asset is
ultimately realized, the remaining goodwill related to the IG Labs acquisition
will be reduced accordingly.
At December 31, 1995, the Company had U.S. net operating loss
carryforwards of $26.4 million for income tax purposes. These carryforwards
expire from 2000 to 2010. Utilization of tax net operating loss carryforwards
may be limited under section 382 of the Internal Revenue Code of 1986.
At December 31, 1995, the Company also had U.K. operating loss
carry-forwards for income tax purposes of approximately $2.9 million which are
available indefinitely to offset future taxable income in the U.K.
NOTE N BENEFIT PLANS
The Company has defined-benefit pension plans covering substantially
all the employees of its foreign subsidiaries. Pension expense for 1995, 1994
and 1993 was $498,000, $266,000 and $206,000, respectively. Pension costs are
funded as accrued. Actuarial and other disclosures regarding the plans are not
presented because they are not material.
Genzyme has a domestic employee savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees of the Company.
The plan allows employees to make contributions up to a specified percentage of
-29-
<PAGE> 30
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
their compensation, a portion of which are matched by the Company. The Company
contributed $696,000, $587,000, and $342,000 to the plan in 1995, 1994 and 1993,
respectively.
-30-
<PAGE> 31
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The Company operates in one industry, the human healthcare industry,
and manufactures and markets its products in two major geographic areas, the
United States and Europe. The Company's principal manufacturing facilities are
located in the United Kingdom and the United States.
The Company purchases products from its United Kingdom subsidiaries for
sale to United States customers. Transfer prices from the foreign subsidiaries
are intended to allow the United States parent to produce profit margins
commensurate with its sales and marketing effort. The Netherlands subsidiary is
the European distributor of the Company's therapeutic products. Certain
information by geographic area follows (dollars in thousands):
<TABLE>
<CAPTION>
THE
UNITED NETHER- ELIMI- COMBI-
STATES LANDS OTHER NATION NATION
-------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C>
1995
Net sales -
unaffiliated customers............. $252,358 $70,532 $33,933 $ - $356,823
Transfers between geo-
graphic areas...................... 74,697 - 23,658 (98,355) -
-------- ------- ------- -------- --------
327,055 70,532 57,591 (98,355) 356,823
Pre-tax income (loss)............... 43,911 836 1,852 (3,300) 43,299
Net income (loss)................... 23,826 540 584 (3,300) 21,650
Assets.............................. 923,867 27,703 80,287 (126,656) 905,201
Liabilities......................... 161,338 26,652 12,004 - 199,994
1994
Net sales -
unaffiliated customers............. $224,655 $38,535 $25,465 $ - $288,655
Transfers between geo-
graphic areas...................... 38,590 - 12,784 (51,374) -
-------- ------- ------- -------- --------
263,245 38,535 38,249 (51,374) 288,655
Pre-tax income (loss)............... 28,544 578 3,155 (1,493) 30,784
Net income (loss)................... 14,736 417 2,643 (1,493) 16,303
Assets.............................. 637,024 16,384 69,130 (64,130) 658,408
Liabilities......................... 212,027 15,704 11,713 - 239,444
1993
Net sales -
unaffiliated customers............. $214,822 $ - $19,055 $ - $233,877
Transfers between geo-
graphic areas...................... 1,998 - 10,640 (12,638) -
-------- ------- ------- -------- --------
216,820 - 29,695 (12,638) 233,877
Pre-tax income (loss)............... (14,772) 165 1,595 458 (12,554)
Net income (loss) (7,400) 104 743 458 (6,095)
Assets.............................. 547,915 566 45,608 (52,037) 542,052
Liabilities......................... 203,381 384 4,215 - 207,980
</TABLE>
-31-
<PAGE> 32
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Substantially all revenue from research and development contracts is
earned in the United States. Entities comprising Other include the Company's
operations in the United Kingdom, Belgium, Japan, Switzerland, Italy and
Germany. Export sales from the United States were $20,539,000, $23,902,000 and
$33,343,000 in 1995, 1994 and 1993, respectively. Export sales by the
Netherlands subsidiary amounted to $66,216,000 in 1995. In 1995, 1994 and 1993,
the Company marketed its Ceredase(R)/Cerezyme(TM) enzyme product directly to
physicians, hospitals and treatment centers, and sold products representing
approximately 14%, 17% and 18%, respectively, of net revenue to an unaffiliated
distributor.
NOTE P QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per
share amounts) for the years ended December 31, 1995, 1994 and 1993 are
displayed in the following table.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1995
Net sales ................................... $ 88,189 $ 93,605 $ 95,919 $ 106,070
Gross profit ................................ 47,683 48,433 53,185 57,690
Net income (4) .............................. 8,056 7,940 10,710 (5,056)
Income per share (1):
Attributable to General Division:
Primary ................................. 0.43 0.46 0.53 0.08
Fully diluted ........................... 0.40 0.43 0.49 0.07
Attributable to TR Stock ................. (0.45) (0.57) (0.59) (0.64)
1994
Net sales ................................... $ 73,282 $ 75,378 $ 79,180 $ 83,211
Gross profit ................................ 40,049 40,101 41,407 42,469
Net income (3) .............................. 9,062 8,493 9,006 (10,258)
Income per share (1):
Attributable to General Division:
Primary ................................. 0.38 0.37 0.38 0.09
Fully diluted ........................... 0.35 0.35 0.35 0.09
Attributable to TR Stock ................. (0.25) (0.34) (0.32) (3.56)
1993
Net sales ................................... $ 62,292 $ 68,556 $ 72,395 $ 67,128
Gross profit ................................ 32,712 35,489 35,279 31,135
Net income (loss) (2) ....................... 10,889 11,577 13,522 (42,083)
Income (loss) per share
(pro forma) (1) ............................ 0.42 0.44 0.44 (0.67)
</TABLE>
- ------------------
(1) Cumulative quarterly income per share data does not equal the annual
amounts due to changes in the average common and common equivalent
shares outstanding.
(2) Includes charges in the fourth quarter of $50.5 million (See Notes D
and K).
(3) Includes charges in the fourth quarter of 1994 of $11.4 million (See
Notes D and L) for the write down of investments and the settlement of
a lawsuit and an $11.2 million charge for acquired incomplete
technology. (See Note J).
(4) Includes charges in the fourth quarter of 1995 of $14.2 million for
acquired incomplete technology. (See Note B).
-32-
<PAGE> 33
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q SUBSEQUENT EVENTS
In January 1996, Genzyme made a conditional offer to acquire
substantially all the assets of the Partnership for General Division Stock
valued at $93.0 million.
In January 1996, GTR acquired certain real estate in Framingham,
Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values.
In January 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
In February 1996, the Company announced a planned redemption of its
6 3/4% Convertible Subordinated Notes. All holders elected to convert their
notes into shares of General Division Stock and TR Stock. Holders of the notes
received 18.913 shares of General Division Stock and 2.553 shares of TR Stock
in conversion of each $1,000 note. Supplementary earnings per share for the
General Division which gives effect to the conversion of the notes as if such
conversion took place at the beginning of each period presented, is equal to
fully diluted earnings per share.
In March 1996, an advisory panel to the U.S. Food and Drug
Administration ("the FDA") recommended that Genzyme be granted approval to
market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's
recommendation will be considered by the FDA in its final review of Genzyme's
premarket approval application.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving
line of credit in the amount of $10 million and has agreed to fund development
costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under
the Agreement, GTC granted to Genzyme co-marketing rights to AT-III in all
territories other than Asia subject to negotiation and execution of a
development and supply agreement between the parties prior to March 31, 1997.
The line of credit carries a rate of 7% and is convertible into GTC's common
stock at the average market price for the 20 day period ending two days before
the Conversion at GTC's option to maintain GTC's tangible net worth at the end
of each quarter at a level between $4.0 million and $4.2 million or by Genzyme
at any time for up to the full amount outstanding.
In March 1996, the GTR utilized $8.0 million of the Company's $15.0
million available credit line with Fleet Bank.
In March 1996, the Board voted, subject in each case to the approval of
the stockholders, to adopt two amendments to the Company's 1990 Equity
Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 and the aggregate
number of shares of TR Stock that may be subject to grants under the Equity
Plan from 2,000,000 to 3,300,000 subject to adjustment for stock splits, stock
dividends and certain transactions affecting the Company's capital stock.
-33-
<PAGE> 34
GENZYME GENERAL DIVISION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GENZYME CORPORATION:
We have audited the accompanying combined balance sheets of
the Genzyme General Division (as described in Note A) as of December
31, 1995 and 1994 and the related combined statements of operations
and cash flows and the combined financial statement schedule for each
of the three years in the period ended December 31, 1995. The combined
financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our
responsibility is to express an opinion on these combined financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme
General Division present fairly, in all material respects, the
financial position of Genzyme General Division as of December 31, 1995
and 1994 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. In addition, in our
opinion, the combined financial statement schedule taken as a whole
presents fairly, in all material respects, the information required to
be included therein.
As more fully described in Note A to these financial
statements, Genzyme General Division is a business group of Genzyme
Corporation; accordingly, the combined financial statements of Genzyme
General Division should be read in connection with the audited
consolidated financial statements of Genzyme Corporation and
Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 1, 1996, except as to Note R
which is March 26, 1996
-34-
<PAGE> 35
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net product sales........................................ $304,373 $238,645 $183,366
Net service sales......................................... 47,230 49,686 50,511
Revenues from research and development
contracts:
Related parties......................................... 26,758 20,883 29,478
Other................................................... 202 1,513 2,332
-------- -------- --------
378,563 310,727 265,687
Operating costs and expenses:
Cost of products sold..................................... 113,964 92,226 64,704
Cost of services sold..................................... 31,137 32,116 34,558
Selling, general and administrative....................... 102,167 84,767 78,015
Research and development (including research
and development related to contracts).................... 57,907 51,696 45,526
Purchase of in-process research and
development.............................................. 14,216 - 24,000
Goodwill impairment and restructuring costs............... - - 26,517
-------- -------- --------
319,391 260,805 273,320
-------- -------- --------
Operating income (loss)....................................... 59,172 49,922 (7,633)
Other income and (expenses):
Minority interest in net loss of subsidiaries............. 1,608 1,659 9,892
Equity in net loss of unconsolidated subsidiary........... (1,810) (1,353) -
Charge for impaired investments........................... - (9,431) (700)
Settlement of lawsuit..................................... - (1,980) -
Investment income......................................... 7,428 9,072 12,209
Interest expense.......................................... (1,069) (1,354) (2,500)
-------- -------- --------
6,157 (3,387) 18,901
-------- --------- --------
Income before income taxes.................................... 65,329 46,535 11,268
Provision for income taxes.................................... (30,506) (16,341) (2,812)
--------- -------- --------
Net income.................................................... 34,823 30,194 8,456
Tax benefit allocated from
Tissue Repair Division....................................... 8,857 1,860 9,564
-------- -------- --------
Net income attributable to Genzyme
General Division Stock....................................... $ 43,680 $ 32,054 $ 18,020
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-35-
<PAGE> 36
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31,
- ---------------------------------------------------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Net income attributable to Genzyme
General Division Stock ................ $ 43,680 $ 32,054 $18,020
======== ======== =======
Income per General Division Common and
common equivalent share:
Net income ......................... $ 1.45 $ 1.22 $ 0.69
======== ======== =======
Weighted average shares outstanding 30,092 26,169 26,250
======== ======== =======
Income per General Division Common Share
assuming full dilution:
Net income ......................... $ 1.31 $ 1.14 $ 0.69
======== ======== =======
Weighted average shares outstanding 33,311 28,159 26,250
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-36-
<PAGE> 37
GENZYME GENERAL DIVISION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $103,631 $ 46,549
Short-term investments ........................................ 105,471 7,155
Accounts receivable, less allowance of $7,833 in 1995
and $5,992 in 1994 ........................................... 87,121 76,641
Inventories ................................................... 52,281 36,764
Prepaid expenses and other current assets ..................... 12,345 10,790
Due from Tissue Repair Division ............................... 2,034 171
Deferred tax assets - current ................................. 7,729 4,072
-------- --------
Total current assets ........................................ 370,612 182,142
Property, plant and equipment, net ............................... 327,461 295,346
Other Assets:
Long-term investments ......................................... 69,561 74,948
Note receivable - related party ............................... 262 3,572
Intangibles, net of accumulated amortization of $17,340 in 1995
and $12,633 in 1994 .......................................... 29,934 29,303
Deferred tax assets - noncurrent .............................. 23,645 28,473
Other noncurrent assets ....................................... 33,111 16,360
-------- --------
156,513 152,656
-------- --------
$854,586 $630,144
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable .............................................. $ 19,548 $ 20,859
Accrued expenses .............................................. 38,069 27,766
Income taxes payable .......................................... 1,316 6,523
Deferred revenue - related parties ............................ 47 224
Deferred revenue - unaffiliated entities ...................... 1,320 2,380
Current portion of long-term debt and capital lease obligations 2,276 41,076
-------- --------
Total current liabilities ................................... 62,576 98,828
Noncurrent Liabilities:
Long-term debt and capital lease obligations .................. 124,473 126,555
Other noncurrent liabilities .................................. 8,256 6,800
-------- --------
132,729 133,355
Minority interest in subsidiaries ................................ -- 2,310
Commitments and Contingencies (Notes D, F, J, M and R) ............. -- --
Division equity (Note C) ......................................... 659,281 395,651
-------- --------
$854,586 $630,144
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-37-
<PAGE> 38
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net income ......................................... $ 34,823 $ 30,194 $ 8,456
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ................... 22,010 18,200 16,821
Write-off of impaired goodwill .................. -- -- 23,690
Gain (loss) on sale of investments .............. 110 (1,430) (1,647)
Loss on disposal of fixed assets ................ 743 -- --
Non-cash compensation expense ................... 131 -- --
Write-off of impaired equity investments ........ -- 9,431 --
Accrued interest/amortization on bonds .......... (279) (2,072) --
Provision for bad debts ......................... 5,184 4,331 --
Purchase of in-process research
and development for stock ...................... 14,216 -- --
Deferred income taxes ........................... 4,428 1,439 (17,373)
Minority interest in net loss of subsidiaries ... (1,608) (1,659) (9,892)
Equity in net loss of unconsolidated subsidiary . 1,810 1,353 --
Other ........................................... 1,458 386 --
Increase (decrease) in cash from working capital:
Accounts receivable .......................... (14,486) (14,712) (10,917)
Inventories .................................. (15,221) (10,858) (2,322)
Prepaid expenses and other current assets .... (1,778) (1,958) (695)
Accounts payable, accrued expenses
and deferred revenue ........................ 14,423 2,976 18,202
Due from Genzyme Tissue Repair Division ...... (1,863) -- --
--------- --------- ---------
Net cash provided by operating activities .... 64,101 35,621 24,323
INVESTING ACTIVITIES:
Purchases of investments ........................... (125,835) (210,274) (122,723)
Purchases of restricted investments ................ (4,418) (10,000) (10,000)
Sales and maturities of investments ................ 39,064 265,851 177,043
Property, plant and equipment ...................... (48,694) (101,707) (118,436)
Cash paid as part of IG acquisition ................ (322) (222) (9,541)
Additional investment in unconsolidated subsidiary . (4,428) (1,465) --
Other noncurrent assets ............................ (1,172) (3,221) (504)
--------- --------- ---------
Net cash used by investing activities ........ (145,805) (61,038) (84,161)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............. 179,623 45,040 --
Proceeds from issuance of TR Stock ................. -- 872 --
Proceeds from issuance of common stock
by subsidiary ..................................... 1,107 319 --
Issuance of debt ................................... -- 21,819 39,360
Payments of debt and capital lease obligations ..... (41,163) (4,793) (979)
Net cash (to) from Genzyme ......................... -- (13,993) (4,408)
--------- --------- ---------
Net cash provided by financing activities .... 139,567 49,264 33,973
Effect of exchange rate changes on cash ................ (781) (273) (135)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents ........................................... 57,082 23,574 (26,000)
Cash and cash equivalents, beginning of period ......... 46,549 22,975 48,975
--------- --------- ---------
Cash and cash equivalents, end of period ............... $ 103,631 $ 46,549 $ 22,975
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-38-
<PAGE> 39
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
----- ------- -------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................................... $ 9,944 $ 9,634 $ 7,333
Income taxes ............................................... 19,581 13,506 16,066
Supplemental disclosures of non-cash transactions:
Settlement of note receivable -- Note H
Acquisition liability -- Note D
Allocation of tax benefit -- Note B
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-39-
<PAGE> 40
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Genzyme General Division (the "General Division"), a division
of Genzyme Corporation (the "Company" or "Genzyme"), is a diversified human
health care business with product development, manufacturing and marketing
capabilities in therapeutic and diagnostic products, pharmaceuticals, and
diagnostic services.
Basis of Presentation: The approval effective December 16, 1994 (the
"Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994
resulted in the redesignation of Genzyme's common stock. The outstanding shares
of Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's common stock held by stockholders of record on October 14, 1994.
General Division Stock and TR Stock provide stockholders with separate
securities which are intended to reflect the performance of the General Division
and Tissue Repair Division ("GTR"), respectively, and the allocation of tax
benefits between the divisions pursuant to the management and accounting
policies adopted by the Board of Directors (the "Board") of Genzyme Corporation.
Dividends to the holders of General Division Stock will be limited to
the lesser of funds of Genzyme legally available for the payment of dividends
and the Available Tissue Repair Dividend Amount, as defined in Genzyme's
Articles of Organization, as amended. Although there is no requirement to do so,
the Board would declare and pay dividends on General Division Stock, if any,
based primarily on the earnings, financial condition, cash flow and business
requirements of the General Division. There is currently no intention of paying
dividends.
Genzyme, subject to certain conditions, has the right to exchange each
outstanding share of TR Stock for any combination of cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value. In addition,
following a disposition of all or substantially all assets of GTR, the shares of
TR Stock are subject to mandatory exchange by Genzyme for cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value as determined by
the trading prices during a specified period prior to public announcement of the
disposition. Shares of General Division Stock are not subject to either optional
or mandatory exchange.
On all matters as to which common stockholders generally are entitled
to vote, holders of General Division Stock are entitled to one vote per share
and holders of TR Stock are entitled to .29 votes per share from the Effective
Date through December 31, 1996. On January 1, 1997 and on each January 1 every
two years thereafter, the number of votes to which the holder of each share of
TR Stock shall be entitled shall be adjusted and fixed for two-periods to equal
the quotient (expressed as a decimal rounded to the nearest two decimal places)
obtained by dividing the fair market value of one share of TR Stock by the fair
market value of one share of General Division Stock as of such date. If no
shares of General Division Stock are outstanding on such date, or if shares of
TR Stock are entitled to vote separately as a class, each share of TR Stock
shall have one vote. Holders of each class vote together as a single class.
Except in limited circumstances provided under Massachusetts law and in
Genzyme's Articles of Organization, as amended, and in the management and
accounting policies adopted by the Board, holders of each class of common stock
will have no rights to vote on matters as a separate class. Separate meetings
-40-
<PAGE> 41
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
of the holders of each class of common stock will not be held. If, when a
stockholder vote is taken on any matter as to which a separate vote by either
class is not required and the holders of either class of common stock would have
more than the number of votes required to approve any such matter, the holders
of that class will control the outcome of the vote on that matter.
The combined financial statements of the General Division include the
financial position and results of operations and cash flows of all businesses of
Genzyme except those of GTR. The General Division's financial statements are
prepared using amounts included in Genzyme's consolidated financial statements.
Corporate allocations reflected in these financial statements are determined
based upon methods which management believes to be reasonable (see Note B).
Genzyme provides holders of General Division Stock separate financial
statements, management's discussion and analysis, descriptions of businesses and
other relevant information for the General Division in addition to consolidated
financial information of Genzyme. Notwithstanding the attribution of assets and
liabilities (including contingent liabilities) between the General Division and
GTR for the purposes of preparing their respective historical and future
financial statements, this attribution and the change in the capital structure
of Genzyme as a result of the approval of the Genzyme Stock Proposal does not
affect legal title to the assets or responsibility for the liabilities of
Genzyme or any of its subsidiaries. Holders of General Division Stock are
shareholders of Genzyme, which continue to be responsible for all of its
liabilities. Liabilities or contingencies of either division that affect
Genzyme's resources or financial condition could affect the financial condition
or results of operations of both divisions. Accordingly, Genzyme's consolidated
financial statements should be read in connection with the General Division's
financial statements.
Except as stated in the amended articles, the accounting policies
applicable to the preparation of the financial statements of the General
Division may be modified or rescinded at the sole discretion of the Board
without the approval of the shareholders, although there is no intention to do
so.
Principles of Combination: The combined financial statements include
the accounts of the General Division and its wholly-owned subsidiaries.
Investments in companies and joint ventures in which the General Division has a
substantial ownership interest of approximately twenty-percent to fifty-percent,
or in which the General Division participates in policy decisions are accounted
for using the equity method. Accordingly, the General Division's share of the
earnings of these entities is included in combined net income. Investments of
less than 20% are reported at fair value. All significant intercompany items and
transactions have been eliminated in combination. Certain items in the combined
financial statements for the periods prior to December 31, 1994 have been
reclassified to conform with the current year's presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents, consisting principally of
money market funds and municipal notes purchased with initial maturities of
three months or less, are valued at cost plus accrued interest, which
approximates market.
-41-
<PAGE> 42
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Investments: Short-term investments include all investments with
remaining maturities of twelve months or less. Long-term investments include
all investments with remaining maturities greater than twelve months. The
General Division classifies its equity investments as available-for-sale and
its investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time the
investments are purchased. Equity investments are included in "Other noncurrent
assets" on the combined balance sheet (See Note F - Investments). As of
December 31, 1995, the General Division classified all investments in debt
securities as available-for-sale.
These investments are reported at fair value as of the balance sheet
date with unrealized holding gains and losses (the adjustment to fair value)
included in Division equity. If the adjustment to fair value reflects a decline
in the value of the investment, management considers all available evidence to
evaluate the extent to which the decline is "other than temporary" based on
factors including (but not limited to) (i) the length of time and extent to
which the market value has been less than cost; (ii) the financial condition and
near-term prospects of the issuer, including any specific events which may
influence the operations of the issuer; and (iii) the intent and ability of the
holder to retain its investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in market value.
Fair Value of Financial Instruments: The fair value of investments is
obtained from market quotations and is disclosed in Note F. The fair value of
the General Division's subordinated debentures is obtained from a market maker
in the debentures and is disclosed in Note J. The fair value of foreign currency
forward contracts is based on forward rates in effect at December 31, 1995 and
is disclosed below (see -- Hedging).
Inventories: Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Provision for depreciation is generally computed using the
straight-line method over the estimated useful lives of the assets (three to ten
years for plant and equipment, five to seven years for furniture and fixtures,
and twenty to forty years for buildings). Certain manufacturing equipment (with
a net book value of $34.1 million at December 31, 1995) is depreciated over its
remaining useful life using the units-of-production method. The remaining life
and recoverability of such equipment is evaluated periodically based on the
appropriate facts and circumstances. Leasehold improvements are amortized over
the lesser of the useful life or the term of the respective lease. For products
expected to be commercialized, the General Division capitalizes, to construction
in-progress, the costs of manufacturing process validation and optimization
incurred beginning when the product is deemed to have demonstrated technological
feasibility and ending when the asset is substantially complete and is ready for
its intended use. Qualified costs include direct labor and material, and
incremental fixed overhead to the extent incurred. These costs are depreciated
using the units of production method.
Issuance of Stock by a Subsidiary: Gains on the issuance of stock by a
subsidiary are included in net income unless the subsidiary is a research and
development, start-up or development stage company or an entity whose viability
as a going concern is under consideration. In those situations the General
Division accounts for the change in its proportionate share of subsidiary equity
resulting from the additional equity raised by the subsidiary as an equity
-42-
<PAGE> 43
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
transaction.
Intangibles: Intangible assets consist primarily of goodwill which is
amortized on a straight-line basis over seven to eleven years. The remaining
intangibles, including customer lists, patents and a covenant not to compete are
being amortized on a straight-line basis over five to eleven years. Management's
policy is to evaluate the recoverability and useful lives of its intangible
assets when the facts and circumstances suggest that these assets may be
impaired or their useful lives may have changed. This analysis relies on a
number of factors, including operating results, business plans, budgets,
economic projections and changes in management's strategic direction or market
emphasis. The test of such recoverability is a comparison of the asset to
expected cumulative (undiscounted) operating income of the acquired entity over
the remaining life of the asset. If the book value of the intangible asset
exceeds undiscounted cumulative operating income, the write-down is computed as
the excess of the asset over the present value of operating income discounted at
the General Division's weighted average cost of capital over the remaining
amortization period. (See Note M - Goodwill Impairment and Restructuring Costs)
Revenue Recognition: Revenues from product sales are recognized when
goods are shipped and are net of third party contractual allowances, as
applicable. Revenues from service sales are recognized when the service
procedures have been completed. Revenues from research and development contracts
are recognized over applicable contractual periods as specified by each
contract.
Translation of Foreign Currencies: The financial statements of the
General Division's foreign subsidiaries are translated from local currency into
U.S. dollars using the current exchange rate at the balance sheet date for
assets and liabilities and the average exchange rate prevailing during the
period for revenues and expenses. The local currency for all General Division
foreign subsidiaries is considered to be the functional currency for each entity
and accordingly, translation adjustments for these subsidiaries are charged or
credited to Division equity. Exchange gains and losses on intercompany balances
of a long-term investment nature are also recorded as a charge or credit to
Division equity. Transaction gains and losses are recorded in income and totaled
$(840,000), $(41,000), and $(322,000) for the years ended December 31, 1995,
1994 and 1993, respectively.
Hedging: The General Division enters into forward contracts to reduce
foreign currency exchange risk. Such contracts are revalued using current
exchange rates at the balance sheet date. Gains and losses on forward contracts
intended to hedge identifiable foreign currency commitments are deferred and
included in the measurement of the related foreign currency transaction. All
other gains and losses on revaluation of forward contracts are included in net
income. At December 31, 1995, the General Division had forward exchange
contracts valued at $1,209,000. Related gains and losses were not material to
the financial statements.
Research and Development: Research and development costs are expensed
in the period incurred. Costs of purchased technology which management believes
has not demonstrated technological feasibility and for which there is no
alternative future use are charged to expense in the period of purchase.
Income Taxes: The General Division uses the asset and liability method
of accounting for deferred income taxes. The provision for income taxes includes
income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. The General Division has not provided for possible U.S. taxes on
-43-
<PAGE> 44
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
the undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely. At December 31, 1995, such undistributed foreign
earnings were approximately $1,731,000.
Net Income Per Share: The method of calculating income per share for
General Division Stock reflects the terms of the Articles of Organization, as
amended, which provide that dividends may be declared and paid only out of the
lesser of funds of Genzyme legally available therefore and each division's
Available Dividend Amount, as defined. For the purpose of computing net income
per common share of General Division Stock for periods prior to December 12,
1994, the number of shares and share equivalents of General Division Stock prior
to the Effective Date are assumed to be the same as the total number of shares
and share equivalents of Genzyme common stock. The General Division computes
income per share by dividing the income attributable to General Division Stock
by the weighted average number of shares of General Division Stock and dilutive
common stock equivalents and other potentially dilutive securities outstanding
during the applicable period. Income attributable to General Division Stock
equals the General Division's net income or loss for the relevant period
determined in accordance with generally accepted accounting principles in effect
at such time, adjusted by the amount of tax benefits allocated to or from the
General Division pursuant to the accounting policies adopted by the Board. The
accounting policies provide that, as of the end of any fiscal quarter of
Genzyme, any projected annual tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be allocated to the other division without any
compensating payment or allocation.
Income per share assuming full dilution is determined by dividing net
income plus subordinated debenture interest (net of capitalized amounts) by the
weighted average number of common shares outstanding during the year after
giving effect for common stock equivalents arising from stock options and
warrants and for subordinated debentures assumed converted to common stock.
Net income attributable to General Division Stock and net income per
share for the years ended December 31, 1994 and 1993, give effect to the
provisions of the accounting policies adopted by the Board in connection with
the creation of the General Division and, accordingly, are pro forma
presentations.
Accounting for Stock-Based Compensation: Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123"), will require the Company to either elect expense recognition under SFAS
123 or its disclosure-only alternative for stock-based employee compensation.
The expense recognition provision encouraged by SFAS 123 would require fair
value-based financial accounting to recognize compensation expense for employee
stock compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior year. The Company
has determined that it will elect the disclosure-only alternative permitted
under SFAS 123. The Company will be required to disclose pro forma net income
and pro forma earnings per share in the footnotes using the fair value based
method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments to its net
income or earnings per share.
Financial Instruments: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, current and non-current investments. The Company
generally invests its cash investments in investments-grade securities.
-44-
<PAGE> 45
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Uncertainties: The Company is subject to risks common to companies in
the Biotechnology industry, including but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B RELATED PARTY TRANSACTIONS
The following policies may be modified or rescinded by action of the
Board, or the Board may adopt additional policies, without approval of the
shareholders of Genzyme, although the Board has no present intention to do so.
Genzyme allocated certain corporate general and administrative expenses,
research and development expense and income taxes in accordance with the
policies described below.
Financial Matters: As a matter of policy, the Company manages the
financial activities of the General Division and GTR on a centralized basis.
These financial activities include the investment of surplus cash; the issuance,
repayment and repurchase of short-term and long-term debt and the issuance and
repurchase of common stock. In preparing these financial statements for each of
the three years in the period ended December 31, 1995, transactions primarily
related to investments, short-term and long-term debt (including convertible
debt), related net interest and other financial costs have been attributed to
the General Division based upon its cash flows for the periods presented after
giving consideration to the debt and equity structure of the Company. At
December 31, 1995, the Company attributed all of its short-term and long-term
debt to the General Division based upon the specific purpose for which the debt
was incurred and the cash flow requirements of the General Division. All of the
Company's interest costs have been allocated to the General Division (see Note
J). The Company believes this method of allocation to be equitable and a
reasonable estimate of such costs as if the General Division operated on a
stand-alone basis.
To the extent borrowings are deemed to occur between the General
Division and GTR, intercompany accounts have been established bearing interest
at the rate in effect from time to time under the Company's unsecured credit
lines or, if no such credit lines exist, at the prime rate charged by The First
National Bank of Boston from time to time. To date no such borrowings have
occurred; however, at December 31, 1995 GTR owed the General Division $2.0
million for services rendered in the normal course of business.
Shared Services: Genzyme's corporate general and
administrative functions and certain sales and marketing efforts related to
foreign market penetration are performed by the General Division. General,
administrative, sales and marketing expenses have been allocated to GTR based
upon utilization of such services as if the General Division and GTR operated on
a stand-alone basis. Management believes that such allocation is a reasonable
estimate of such expenses. These allocations for the years ended December 31,
1995, 1994 and 1993 were $4,355,000, $833,000 and $701,000, respectively. In
addition, costs incurred by the General Division related to research and
development for GTR products are charged to GTR. These charges for the years
ended December 31, 1995, 1994 and 1993 were $4,730,000, $3,331,000 and
$2,805,000, respectively.
Income Taxes: The General Division is included in the consolidated U.S.
federal income tax return filed by Genzyme. Genzyme allocates current and
deferred taxes to its divisions by determining the tax provision of each
division, in accordance with generally accepted accounting principles, as if it
were a separate taxpayer. Accordingly, the realizability of deferred tax assets
-45-
<PAGE> 46
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
is assessed at the Division level. The sum of the tax provisions calculated for
individual divisions of Genzyme may not equal the consolidated tax provision
under this approach. The treatment of the allocation of a division's projected
tax benefit for purposes of income per share computation is discussed in Note A.
Inter-Division Asset Transfers. The Board may at any time and from time
to time reallocate any program, product or other asset from one Division to any
other Division. All such reallocations will be done at fair market value,
determined by the Board, taking into account, in the case of a program under
development, the commercial potential of the program, the phase of clinical
development of the program, the expenses associated with realizing any income
from the program, the likelihood and timing of any such realization and other
matters that the Board and its financial advisors deem relevant. The
consideration for such reallocation may be paid by one Division to another in
cash or, in lieu of cash or other consideration, the Board may elect to account
for a reallocation of assets from GTR to the General Division as an increase in
the General Designated Shares and a reallocation of assets from the General
Division to GTR as either an increase in the TR Designated Shares or a reduction
in the General Designated Shares, if any, except that a reallocation of assets
from GTR to the General Division may not be accounted for as an increase in
General Designated Shares without a class vote of the holders of TR Stock.
NOTE C DIVISION EQUITY
The following analyzes the Division equity of the General Division for
the periods presented:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period .............. $ 395,651 $ 324,391 $ 322,390
Net income .................................. 34,823 30,194 8,456
Allocation of tax benefits
generated by Tissue Repair Division......... 8,857 11,423 --
Exercise of options.......................... 27,921 1,190 --
Shares issued in connection with
Employee Stock Purchase Plan................ 4,161 2,992 --
Exercise of warrants......................... 6,264 41,730 --
Shares issued in public offering ............ 141,276 -- --
Acquisition of publicly held minority
share of IG................................. 22,460 -- --
Shares issued in connection with GTC's
acquisition of BDL......................... 1,360 -- --
Tax benefit of disqualified
dispositions............................... 5,500 2,224 --
Compensation expense ........................ 131 -- --
Foreign currency translation................. 1,325 2,861 (1,064)
Unrealized gain/(loss) on investments........ 9,552 (7,480) --
Net cash (to) from Genzyme .................. -- (13,874) (5,391)
--------- --------- ---------
$ 659,281 $ 395,651 $ 324,391
========= ========= =========
</TABLE>
In October 1995, Genzyme sold 2,875,000 shares of General Division
Common Stock to the public for $51.25 per share for net proceeds of $141.5
million.
Included in Division Equity is the cumulative foreign currency
translation adjustments of $(3,590,000) and $(4,915,000) at December 31, 1995,
and 1994 respectively.
-46-
<PAGE> 47
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Immediately prior to the Effective Date, as defined in Note A,
approximately 15,791,000 shares of Genzyme common stock were reserved for
issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock
Option Plan, 1990 Employee Stock Purchase Plan, and upon the exercise of
outstanding warrants (the "Warrants"), and the conversion of the 6 3/4%
Convertible Subordinated Notes Due 2001 (the "Notes").
Pursuant to antidilution provisions in the agreements covering the
options, Genzyme has adjusted each option outstanding on the Effective Date to
provide for separation of the option into an option exercisable for General
Division Stock and an option exercisable for the number of shares of TR Stock
that the holder would have received if the holder had exercised the option
immediately prior to the Effective Date.
The Warrants provide that the holder of the Warrant is entitled to
receive the number of shares of General Division Stock and TR Stock upon
exercise of the Warrant that the holder would have received if the holder had
exercised the Warrant immediately prior to the Effective Date.
Pursuant to the indenture under which the Notes were issued, the
conversion privilege of the Notes was adjusted so that the holder of a Note
converted after the Effective Date will receive, in addition to the shares of
General Division Stock into which the Note is convertible, the same number of
shares of TR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
At December 31, 1995, approximately 11,185,804 shares of General
Division Stock were reserved for issuance under the 1990 Equity Incentive Plan
as amended, the 1988 Director Stock Option Plan as amended, the 1990 Employee
Stock Purchase Plan as amended, and upon the exercise of outstanding warrants,
and the conversion of the Notes.
Preferred Stock. Shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or in
part, the preferences, voting powers, qualifications and special or relative
rights or privileges of any such series before the issuance of any shares of
that series. The Board of Directors shall determine the number of shares
constituting each series of Preferred Stock and each series shall have a
distinguishing designation.
Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as
amended (the "Plan"), options may be granted to purchase an aggregate of
7,600,000 shares of General Division Stock and 2,000,000 shares of TR Stock. The
Plan allows the granting of incentive stock options and nonstatutory stock
options at not less than fair market value at date of grant, and stock
appreciation rights, performance shares, restricted stock and stock units to
employees and consultants of the Company, each with a maximum term of ten years.
In addition, the Company has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 100,000 shares
and 70,000 shares, respectively, of General Division Stock and TR Stock, at a
rate of 1,600 shares and 400 shares, respectively, for each year of service are
automatically granted at fair market value to members of the Board of Directors
of the Company upon their election or reelection as Directors. All options
expire ten years after the initial grant date.
Stock option activity is summarized below:
SHARES
-47-
<PAGE> 48
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
UNDER OPTION OPTION PRICE
------------ ------------
<S> <C> <C>
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1992..................... 2,929,067 3.00 - 72.04
Granted............................................ 1,332,240 26.25 - 45.00
Exercised.......................................... (254,171) 4.00 - 37.25
Forfeited and canceled............................. (161,782) 7.75 - 72.04
----------
Outstanding at December 31, 1993..................... 3,845,354 3.00 - 66.16
Granted............................................ 1,619,364 22.63 - 42.00
Exercised.......................................... (66,378) 3.00 - 35.25
Forfeited and canceled............................. (211,763) 8.25 - 66.16
Converted at Effective Date........................ (5,186,577) 5.89 - 65.49
----------
Outstanding at December 31, 1994..................... -
==========
GENERAL DIVISION STOCK
Converted at Effective Date........................ 5,186,577 $ 5.89 - $65.49
Granted............................................ 66,674 27.25 - 32.50
Exercised.......................................... (1,250) 6.02 - 19.38
Forfeited and canceled............................. (11,151) 30.13 - 49.00
-----------
Outstanding at December 31, 1994..................... 5,240,850 5.89 - 65.49
Granted 2,070,751 5.89 - 67.63
Exercised (1,003,827) 5.89 - 60.14
Forfeited and canceled (221,441) 5.89 - 66.63
----------
Outstanding at December 31, 1995..................... 6,086,333 7.57 - 67.63
==========
</TABLE>
At December 31, 1995 and 1994, 2,559,198 and 2,336,498 of the
outstanding options were exercisable resulting in aggregate exercise proceeds of
approximately $78,867,000 and $63,343,000, respectively.
The total exercise proceeds for all options outstanding at December 31,
1995 is approximately $216,568,000. Information regarding the range of option
prices is as follows:
<TABLE>
<CAPTION>
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
<S> <C>
641,247 $ 7.57 - $18.93
1,381,472 19.38 - 29.88
765,926 30.00 - 32.13
785,815 32.24 - 38.84
704,394 38.88
726,683 39.00 - 48.75
1,080,796 49.00 - 67.63
---------
6,086,333
=========
</TABLE>
Employee Stock Purchase Plan. The Company's 1990 Employee Stock
Purchase Plan allows full-time employees, as defined in this plan, to purchase
the Company's stock at 85% of fair market value. Under this plan, 750,000 shares
of the General Division Stock are authorized of which 142,934, 129,938 and
85,929 shares were issued in 1995, 1994 and 1993, respectively.
Stock Rights. In 1989, the Company's Board issued a dividend of one
preferred stock purchase right (a "Common Stock Right") on each share of Common
Stock. At the Effective Date, the Rights Agreement under which the rights were
issued was amended and restated to reflect the change in the capital structure
-48-
<PAGE> 49
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
of the Company and the Board declared a distribution to holders of TR Stock of a
right (a "TR Stock Right") on each outstanding share of TR Stock. The Restated
Rights Agreement provides that each General Division Stock Right, which replaced
the Common Stock Right, and each TR Stock Right, when it becomes exercisable,
will entitle the holder to purchase from the Company (i) in the case of a
General Division Stock Right, one one-hundredth of a share of Series A Junior
Participating Preferred Stock at a price of $52, subject to adjustment, and (ii)
in the case of a TR Stock Right, one one-hundredth of a share of Series B Junior
Participating Preferred Stock at a price of $25, subject to adjustment. The
rights expire on March 28, 1999.
Stock Warrants. The Company has issued warrants which, when exercised,
grant the holders one share of General Division Stock and .135 shares of TR
Stock. These warrants were granted in exchange for the receipt of options to
purchase the partnership interests of Genzyme Development Partners, L.P. (the
"Surgical Aids Partnership") the callable common stock of Neozyme II Corporation
("Neozyme II"), and in connection with Genzyme's purchase of the publicly-held
shares of IG Laboratories, Inc.("IG") in exchange for IG warrants. All proceeds
from the exercise of these warrants will be allocated to the General Division
(see "TR Designated Shares"). The outstanding warrants were issued under the
following terms:
<TABLE>
<CAPTION>
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- --------- -------- --------- ---------------
<S> <C> <C> <C> <C>
1989 Surgical Aids Partnership,
the sales agent and its
affiliates 1,205,416 $16.01 November 1, 1991 to
50,285 16.03 October 31, 1996
666,399 22.91
1992 Investors in Neozyme II:
Series N 2,415,000 $38.25 Through December 31, 1996
Callable 2,415,000 See below January 1, 1997 to
December 31, 1998 unless
otherwise terminated
1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
</TABLE>
The warrants issued to the Surgical Aids Partnership were issued in
consideration for the granting to Genzyme of an exclusive right to purchase all
of the outstanding partnership interests of the Surgical Aids Partnership.
The warrants issued to investors of Neozyme II were granted in
consideration of the option to purchase the callable common stock of Neozyme II
and had an appraised fair value of $16,905,000. The Callable Warrants
automatically terminate upon the General Division's exercise of its option to
purchase all of the callable common stock of Neozyme II. These warrants have an
exercise price equal to the sum of the average of the closing sale prices of
one share of General Division Stock and .135 share of TR Stock for the 20
trading days immediately preceding the exercise thereof.
Warrant activity is summarized below:
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
-------- -------------
<S> <C> <C>
Outstanding at December 31, 1992..................... 8,283,246 16.01 - 41.31
Exercised........................................ (123,180) 16.01 - 23.86
Expired.......................................... (4,062) 38.79 - 41.31
----------
</TABLE>
-49-
<PAGE> 50
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C>
Outstanding at December 31, 1993 8,156,004 16.01 - 38.25
Exercised ..................... (2,197,774) 16.01 - 22.91
Expired ....................... (23,849) 16.01 - 22.91
----------
Outstanding at December 31, 1994 5,934,381 16.01 - 38.25
Granted ....................... 6,005 42.67
Exercised ..................... (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995 .. 5,597,241 16.01 - 42.67
==========
</TABLE>
TR Designated Shares. Pursuant to Genzyme's Articles of Organization,
as amended, TR Designated Shares are authorized shares of TR Stock which are not
issued and outstanding, but which the Board may from time to time issue, sell or
otherwise distribute without allocating the proceeds or other benefits of such
issuance, sale or distribution to GTR. At the Effective Date, 5,000,000 TR
Designated Shares were established. As a result of the distribution of
approximately 3,300,000 shares of TR Stock to holders of General Division Stock,
the number of TR Designated Shares were reduced by a corresponding amount. The
remaining 1,700,000 TR Designated Shares were reserved for issuance upon the
exercise of Genzyme stock options and warrants and the conversion of Genzyme's
convertible notes which were outstanding on the Effective Date. TR Designated
Share activity is summarized below:
<TABLE>
<CAPTION>
TR DESIGNATED
SHARES
------
<S> <C>
Established at Effective Date.................................. 5,000,000
Stock dividend to holders of
Genzyme Common Stock.......................................... (3,356,713)
Stock options exercised........................................ (168)
Stock warrants exercised....................................... (233,412)
----------
Balance at December 31, 1994................................ 1,409,707
Stock options exercised........................................ (72,942)
Stock warrants exercised....................................... (46,244)
ESPP shares issued (3,613)
----------
Outstanding at December 31, 1995............................ 1,286,908
==========
</TABLE>
The number of TR Designated Shares will be decreased by the number of
shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the
General Division; the number of shares of TR Stock issued as a dividend to
holders of General Division stock; and the number of shares of TR Stock issued
upon the conversion of convertible securities, including the Notes, attributed
to the General Division. In addition, the number of TR Designated Shares can be
increased as a result of certain inter-division transactions. The remaining TR
Designated Shares are reserved for issuance upon the exercise of the Notes, the
aforementioned warrants and the stock options which resulted from the conversion
of Genzyme options into TR Stock and General Division Stock options (See Note
M).
NOTE D ACQUISITIONS
In April 1993, the General Division acquired Virotech
System-Diagnostika, GmbH in Germany, for approximately $10,200,000, of which
approximately $8,100,000 was recorded as goodwill. In May 1993 Genzyme srl, a
wholly-owned subsidiary of the General Division located in Italy, acquired
certain assets of Omnia Res srl for approximately $700,000, of which
approximately $100,000 was recorded as goodwill. These acquisitions were
accounted for as purchases.
-50-
<PAGE> 51
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Accordingly, the associated net assets and operations have been included in the
General Division's financial statements since the acquisition dates. Pro forma
information is not presented since the impact of the acquisition on financial
statement periods prior to the acquisitions is not material.
In July 1994, the General Division paid approximately $6,100,000 for
newly-issued shares of common stock representing 51% of the outstanding common
stock of Sygena A.G. ("Sygena"), a Swiss manufacturer of high performance
chemicals used in the development of pharmaceuticals. Based on certain put and
call options in the Acquisition Agreement, which effectively ensure the
purchase by the General Division of the remaining outstanding shares during the
period from July 1, 1996 through June 30, 1999, the General Division accounted
for the acquisition as a purchase of all of the outstanding shares of Sygena,
and recorded a deferred liability at a present value of approximately 8,600,000
Swiss francs (approximately 9,400,000 Swiss francs or $8,129,000 at December
31, 1995) for the purchase of the remaining shares. The excess purchase price
over the net assets acquired was approximately 5,399,600 Swiss francs
(approximately $4,120,000) and was recorded as goodwill. The net assets and
operations of Sygena have been included in the General Division's financial
statements from the date of acquisition. Pro forma information is not presented
since the impact of the acquisition on financial statement periods prior to the
acquisition is not material.
On December 15, 1994, the General Division acquired BioSurface
Technology, Inc. ("BioSurface") by issuing .575 of one share of TR Stock for
each share of BioSurface common stock. In the aggregate, 5,000,000 shares of TR
Stock, valued at $25,312,500, were issued representing 50% of the initial equity
interest in GTR. The acquisition was accounted for as a purchase. Accordingly,
the associated net assets and operations of BioSurface have been included in the
General Division's financial statements since the date of acquisition. The
excess of the purchase price over the fair market value of the net assets
acquired, $11,215,000, was allocated to in-process research and development and
charged to operations. Pro forma information is not presented since the impact
of the acquisition on financial statement periods prior to the acquisition is
not material.
The following summary, prepared on a pro forma basis, presents the
consolidated results of operations as if BioSurface had been acquired at the
beginning of the periods presented. This pro forma summary does not necessarily
reflect the results of operations as they would have been if Genzyme and
BioSurface constituted a single entity during the periods presented and is not
necessarily indicative of results which may be obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues................................................................. $317,047 $276,080
Net income (loss)........................................................ 19,448 (13,978)
Pro forma net income (loss) per share:
Attributable to General Division..................................... 1.22 0.68
Attributable to Tissue Repair Division............................... (1.51) (3.78)
</TABLE>
In October 1995, the General Division acquired the publicly-held
minority interest in its majority-owned subsidiary, IG Laboratories, Inc.
("IG"), by issuing approximately .125 of one share of General Division Stock for
each share of IG common stock. In the aggregate, approximately 385,255 shares of
General Division Stock, valued at approximately $22,460,000 were issued. The
-51-
<PAGE> 52
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
acquisition was accounted for as a purchase. The excess of the purchase price
over the fair market value of the net assets acquired, approximately
$18,563,000, was allocated $14,216,000 to in-process research and development
and charged to operations, and $4,347,000 to Goodwill to be amortized over 11
years.
NOTE E MAJORITY-OWNED SUBSIDIARIES
INTEGRATED GENETICS, INC. IG was an approximately seventy-percent-
owned subsidiary for the years ended December 31, 1993 and 1994 and for the
period from January 1, 1995 through October 1, 1995. (See Note D).
GENZYME TRANSGENICS CORPORATION. Genzyme Transgenics Corporation
("GTC") was a majority-owned subsidiary for the year ended December 31, 1993 and
for the period from January 1, 1994 through September 30, 1994. (See Note F).
NOTE F INVESTMENTS
Investments in marketable securities at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit $ 1,870 $ 1,870 $ 2,979 $ 2,979
Federal agency notes .. 25,696 25,731 -- --
Corporate notes ....... 77,800 77,870 4,281 4,176
U.S. Treasury notes ... -- -- -- --
Municipal notes ....... -- -- -- --
-------- -------- -------- --------
$105,366 $105,471 $ 7,260 $ 7,155
======== ======== ======== ========
Long Term:
Common stock .......... $ -- $ -- $ -- $ --
Federal agency notes .. 4,047 4,053
Corporate notes ....... 42,518 42,845 57,584 54,420
U.S. Treasury notes ... 22,351 22,663 22,709 20,528
Municipal notes ....... -- -- -- --
-------- -------- -------- --------
$ 68,916 $ 69,561 $ 80,293 $ 74,948
======== ======== ======== ========
</TABLE>
Information regarding the range of contractual maturities of
investments in debt securities at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
---------------------------------------------------------------------------
<S> <C> <C>
Within 1 year................................... $105,371 $105,472
After 1 year through 2 years.................... 29,997 30,137
After 2 years through 10 years.................. 38,919 39,423
-------- --------
$174,287 $175,032
========= ========
</TABLE>
In August 1993, the General Division acquired 502,512 shares of the
Series E Convertible Preferred Stock (the "Series E Stock") of Univax Biologics,
Inc., for $5.0 million in connection with an agreement to develop and
commercialize certain products. Upon the achievement of specified clinical
milestones, the General Division is committed to making future milestone
payments. In November 1995, Univax merged with North American Biologicals,
Inc.("NABI") and in connection with the merger the General Division received
526,315 shares of NABI
-52-
<PAGE> 53
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
common stock in exchange for the Series E Stock. The investment is classified as
available-for-sale and is included in "Other noncurrent assets" in the
consolidated balance sheets at fair market value. At December 31, 1995, this
value was approximately $5.7 million compared to a value of $2.7 million at
December 31, 1994. At that time, General Division believed the decline in value
was temporary and accordingly, an unrealized loss of approximately $2,300,000
was recorded as a charge to Stockholders' equity.
In September 1993, the General Division acquired 714,286 shares of
common stock of Argus Pharmaceuticals, Inc. ("Argus") for $5.0 million in
connection with an agreement to develop and commercialize certain products. Upon
the achievement of certain specified clinical milestones, the General Division
is committed to making future milestone payments and an additional $5.0 million
investment in Argus. In August 1994, pursuant to the Common Stock Purchase
Agreement, Argus delivered to the General Division an additional 132,325 shares
resulting in a total of 846,611 shares held by the General Division. The
investment is classified as available-for-sale and is included in "Other
noncurrent assets" in the combined balance sheets at fair market value. At
December 31, 1994, this value was approximately $1.8 million. The General
Division believed that a portion of the impairment in the value of the
investment in Argus was "other than temporary" and accordingly, a loss of
approximately $3.3 million was charged to operations in 1994. In September 1995,
Argus combined with Triplex Pharmaceuticals and Oncologix to form Aronex. In
connection with this merger, the common stock of Argus was redesignated as
common stock of Aronex. At December 31,1995 the value of this investment was
$3.7 million.
Pursuant to the Common Stock Purchase Agreement (the "Agreement") dated
as of June 24, 1994 between the General Division and Celtrix Pharmaceuticals,
Inc. ("Celtrix"), the General Division acquired 1,550,388 restricted shares,
approximately 11.5% of the common stock of Celtrix outstanding after the
acquisition, for $10.0 million. In November 1994, Celtrix announced a delay in
the commercialization of an application of a key product and in February 1995,
Celtrix announced that it had halted all studies related to another of its key
development products. These announcements resulted in a decline in the fair
market value of the General Division's investment. The General Division believed
that a portion of the impairment in the value of the investment in Celtrix was
"other than temporary". Accordingly, a loss of approximately $6.1 million was
charged to operations in 1994. In 1995, Celtrix exercised its option to require
the Company to purchase additional shares of Celtrix at fair market value. As a
result in December 1995, the General Division acquired an additional 1,472,829
shares at $3 per share. The investment is classified as available-for-sale. At
December 31, 1995, this value was approximately $7.7 million.
Gross realized losses included in investment income for 1995 were
$110,000. Net realized gains included in investment income for 1994 and 1993
were $1,430,000 and $1,647,000, respectively. Gross unrealized gains in the
investment portfolio at December 31, 1995 were $2,073,000. Gross unrealized
losses in the investment portfolio at December 31, 1994 were $5,449,000.
In July 1993, GTC, a wholly-owned subsidiary of the Company
specializing in transgenic technology which was incorporated in February 1993,
completed an initial public offering of 1,500,000 shares of its common stock
priced at $8.00 per share. The offering resulted in an increase in the value of
the Company's investment in GTC of $7.6 million which was recorded as an
increase to additional paid-in capital. At December 31, 1993, the Company owned
4,000,000 shares or approximately 73% of the outstanding common stock of GTC.
-53-
<PAGE> 54
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
On October 1, 1994, GTC acquired TSI Corporation ("TSI") in a merger
transaction in which GTC issued two-tenths (0.2) of one share of GTC common
stock for each share of TSI common stock, in a transaction accounted for as a
purchase. As a result of the acquisition, the Company's percentage ownership of
GTC common stock declined from approximately 73% to approximately 40%.
Accordingly, the General Division began accounting for its investment in GTC
under the equity method.
In February 1995, GTC exercised its option to sell to the General
Division 500,000 additional shares of GTC common stock at a price of $8.00 per
share. The $4.0 million acquisition cost has been added to the General
Division's equity investment in this subsidiary. In June 1995, the General
Division converted approximately $4.0 million of GTC debt into equity through
the acquisition of 1.3 million shares of GTC common stock. In July 1995, GTC
acquired Biodevelopment Laboratories, Inc. ("BDL"). In connection with the
transaction, the General Division issued approximately 34,000 shares of General
Division Stock to former stockholders of BDL in exchange for approximately
475,000 shares of newly issued GTC stock. In total, GTC issued approximately
1,207,000 shares of its common stock in the transaction, resulting in a decrease
in the General Division's interest in GTC to 48.2%. Also as part of the BDL
transaction, the Company guaranteed a $7.5 million line of credit from a
commercial bank in return for warrants to purchase 145,000 shares of GTC stock.
As of December 31, 1995, GTC had $6.0 million outstanding under this
line of credit. GTC had a working capital deficiency of approximately $25.1
million at December 31, 1995 and had an operating loss of approximately $4.1
million for the year then ended. Although GTC is actively seeking other
sources of financing and is directing substantial efforts to generating
positive cash flow, it is at least reasonably possible that GTC will not
generate sufficient cash flows to fund its ongoing operations and will not be
able to repay amounts outstanding under the line of credit. If this occurs, the
General Division will be responsible for at least a portion of the amounts
outstanding. (See Note R)
The fair market value of the GTC shares, based on quoted market prices,
was $27,601,000 at December 31, 1995. The Company reported equity in GTC's
losses of $1,810,000 in 1995. Following are condensed financial data of GTC:
-54-
<PAGE> 55
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues...................................... $38,406 $11,692 $ 3,222
Operating loss................................ (2,014) (5,231) (1,327)
Net loss...................................... (4,133) (5,284) (1,171)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1995 1994
-------------------------------------------------------------------------
<S> <C> <C>
Current assets................................ $16,409 $11,629
Noncurrent assets............................. 41,478 36,364
Current liabilities........................... 24,155 19,487
Noncurrent liabilities........................ 6,444 9,082
</TABLE>
NOTE G INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
------------------------------------------------------------------
<S> <C> <C>
Raw materials.......................... $12,527 $14,517
Work-in-process........................ 14,167 9,227
Finished products...................... 25,587 13,020
------- -------
$52,281 $36,764
======= =======
</TABLE>
NOTE H PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment...................................... $106,877 $ 63,084
Land and buildings....................................... 46,456 40,157
Leasehold improvements................................... 52,521 32,367
Furniture and fixtures................................... 7,530 8,405
Construction in progress................................. 177,903 198,117
-------- --------
391,287 342,130
Less accumulated depreciation.......................... (63,826) (46,784)
-------- --------
Property, plant and equipment, net....................... $327,461 $295,346
======== ========
</TABLE>
Depreciation expense was $17,333,000, $13,459,000, and $10,857,000 in
1995, 1994 and 1993, respectively.
The General Division is constructing a mammalian cell production
facility in Boston, Massachusetts which will be used to produce a recombinant
form of Ceredase(R) enzyme ("Cerezyme(R)") and other products. The facility is
expected to cost approximately $151 million plus an additional $23 million of
Cerezyme(R)
-55-
<PAGE> 56
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
process validation and optimization costs. The facility is expected to be
validated and placed into service in 1996. As of December 31, 1995, the General
Division had capitalized, and included in construction in progress,
approximately $151,000,000 of expenditures related to this building and
approximately $33,472,000 of process validation and optimization costs related
to this and other facilities. In 1995, 1994 and 1993, the General Division
capitalized approximately $9.0, $9.2 and $4.7 million of interest costs,
respectively, relating to this and other facility construction.
In June 1994, the General Division acquired its Mountain Road facility
in Framingham, Massachusetts for $26.9 million of which $25.1 million was
allocated to buildings and $1.8 million was allocated to land based on appraised
values. The General Division funded the purchase with $1.2 million in cash,
settlement of a $4.2 million note receivable (including accrued interest) from
the landlord of the facility and the proceeds of a $21.5 million term loan from
a bank (See Note J.)
NOTE I ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------------------
<S> <C> <C>
Professional fees........................................ $ 2,472 $ 924
Compensation............................................. 12,025 8,004
Royalties................................................ 6,606 4,949
Interest................................................. 1,857 2,361
Other.................................................... 15,109 11,528
------- -------
$38,069 $27,766
======= =======
</TABLE>
NOTE J LONG-TERM DEBT AND LEASES
Long-Term Debt
Long-term debt at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C>
Convertible subordinated notes........................... $100,000 $100,000
Note payable, bank (due 1/6/95........................... - 39,000
Mortgage note payable, matures
June 13, 1999........................................... 20,863 21,323
Mortgage note payable, matures
November 2014........................................... 3,356 3,409
Mortgage note payable, matures
January 1, 2008......................................... 747 808
Term notes payable....................................... 1,626 2,879
-------- --------
126,592 167,419
Less current portion..................................... (2,243) (41,020)
-------- --------
$124,349 $126,399
======== ========
</TABLE>
In 1991, the Company issued 6 3/4% Convertible Subordinated
Notes due October 1, 2001 in the aggregate principal amount of $100,000,000. The
notes are convertible into General Division Stock and TR Stock at any time at a
conversion price of $52.875 and, under certain circumstances, may be redeemed by
the Company. Net proceeds from the debentures were $97,250,000. Deferred
financing costs of $2,750,000, classified as "Other noncurrent assets" on the
combined balance sheets, are being amortized to expense over the term of the
debt issue. As of December 31, 1995, the debentures had a market value of
-56-
<PAGE> 57
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
approximately $125 million (See Note R).
On December 21, 1993, the Company borrowed $39,000,000, under a Credit
Agreement (the "Agreement") with a bank. The interest rate in effect at December
31, 1994 was 6.2875%. The loan was repaid January 6, 1995.
The mortgage note due June 1999 is collateralized by land and buildings
with a net book value of $29,108,000 at December 31, 1995, bears interest at
7.73% annually, and is payable monthly based on a twenty year direct reduction
amortization schedule, with the remaining principal due June 13, 1999.
The mortgage note maturing November 2014 is collateralized by land and
buildings with a net book value of $5,188,000 at December 31, 1995 and bears
interest at 10.5%. The mortgage note maturing January 2008 provides the bank
with a "call or review" feature at the end of the first 60 month period,
allowing the bank to adjust the note under specific circumstances. This note
bears interest at a variable rate of prime plus 1% and is collateralized by land
and fixtures. Principal and interest are payable monthly on both of these notes.
The Company maintains a $15.0 million line of credit with Fleet Bank of
Massachusetts, the entire amount, of which, remained available at December 31,
1995.
Operating Leases
Total rent expense under operating leases was $8,603,000, $8,578,000,
and $8,734,000 in 1995, 1994 and 1993 respectively. The General Division leases
facilities and personal property under certain operating leases in excess of one
year.
Future minimum payments due under the General Division's long-term
obligations and capital and operating leases are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL OPERATING
(DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996...................................... $ 11,160 $ 67 $10,643
1997...................................... 9,381 70 10,441
1998...................................... 9,376 118 9,575
1999...................................... 27,306 - 9,381
2000...................................... 7,253 - 7,744
Thereafter................................ 111,792 - 43,158
-------- ---- -------
Total minimum payments................. 176,268 255 90,942
Less: interest............................ (49,676) (98) -
-------- ---- -------
$126,592 $157 $90,942
======== ==== =======
</TABLE>
NOTE K RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994 1993
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees for research and development
activities:
Neozyme I....................................... $ - $ - $ 6,299
Surgical Aids Partnership....................... - 913 8,378
Neozyme II...................................... 24,198 17,785 12,651
Research joint venture.......................... 2,560 2,185 2,150
------- ------- -------
</TABLE>
-57-
<PAGE> 58
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
$26,758 $20,883 $29,478
======= ======= =======
</TABLE>
Neozyme I and II
In 1992, the General Division entered into a development contract with
Neozyme II whereby the General Division was engaged to perform all research,
development and clinical testing activities related to products and programs for
which Neozyme II was licensed. The General Division received $5,000,000 in 1992
under the technology license agreement pursuant to which the General Division
granted Neozyme II exclusive rights to manufacture and sell the products
developed under the technology license agreements.
The funds for Neozyme II's development contract were raised by the
sale of 2,415,000 units for net proceeds of $78,038,000. Each unit consisted of
one share of Neozyme II callable common stock, one Series N warrant and one
callable warrant to purchase one share of General Division Stock and .135 shares
of TR Stock. Included in accounts receivable as of December 31, 1995 and 1994
was $2,469,000 and $729,000, respectively, due from Neozyme II.
The General Division has an option to purchase all of the shares of
the Neozyme II callable common stock for cash, shares of General Division Stock
or any combination thereof (determined at Genzyme's sole discretion) at
$117.00 per share from January 1, 1996 through December 31, 1996, subject to
downward adjustment if exercised before December 31 in any exercise period. Due
to the uncertainties inherent in the very early stages of the research into
CFTR, management did not consider the exercise of the option probable and,
accordingly, charged to operations in 1992 the $16,905,000 appraised fair value
of this purchase option.
In December 1993, the General Division exercised its option to
purchase one of the two remaining research programs being funded by Neozyme I
(a special purpose accelerated research corporation created in 1990) for a
purchase price of $24,000,000 in cash. As part of the purchase, the General
Division retained $0.6 million to fund the costs of the Neozyme I dissolution
which occurred in 1994, and any future tax liabilities. This transaction was
accounted for as a purchase of in-process research and development and its
value charged to operations in 1993.
The Surgical Aids Partnership
In September 1989, the General Division entered into a development
contract valued at approximately $37,000,000 with the Surgical Aids Partnership
("the Partnership") to perform research and development of products based on
hyaluronic acid for use as surgical aids to reduce the incidence and severity of
postoperative adhesions. The General Division received a technology license fee
of $1,500,000 in November 1989 and was reimbursed its development costs plus 10%
through the first quarter of 1994 when the Partnerships funds were exhausted.
The General Partner believes that additional funds will be required to complete
the development, clinical testing and commercialization of the Partnership's
products. Although the General Division is not obligated to provide additional
funding, the Purchase Option (see below) terminates unless the General Division
commits on an annual basis to provide funding for continuation of the research
and development programs for the next twelve month period or until receipt of
FDA approval of one of the Partnership's products is obtained, whichever is
shortest. The General Division spent approximately $6.4 million and $6.5 million
on the Partnership's development programs in 1995 and 1994, respectively, and
has committed to fund the programs in 1996, expecting to spend approximately
$7.9 million (unaudited). Included in accounts receivable as of
-58-
<PAGE> 59
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1994 was $199,000 due from the Partnership.
The General Division also entered into a joint venture agreement with
the Partnership to manufacture and market the Partnership's products, to share
in the profits, to make non-interest bearing loans for working capital
deficiencies, and to make capital contributions as deemed necessary by the
Partnership in connection with the business of the joint venture. The exact
amounts and timing of these expenditures and contributions cannot be determined
at this time.
The General Division also obtained an option (the "Purchase Option") to
purchase all of the outstanding partnership interests for a payment of
approximately $26,000,000 in cash, General Division Stock or a combination
thereof determined at Genzyme's sole discretion, plus future royalty payments.
The Purchase Option does not become exercisable until at least twenty-four
months after the first commercial sale of a product of the Partnership.
Deferred revenue from related parties at December 31 includes the
following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C>
Neozyme II ........................................ - 186
Research joint venture ............................. - -
Other ............................................. 47 38
---- ----
$ 47 $224
==== ====
</TABLE>
NOTE L GOODWILL IMPAIRMENT AND RESTRUCTURING COSTS
In the fourth quarter of 1993, the General Division recognized an
expense of $23.7 million to reduce the carrying value of intangibles to the
realizable value based on revised estimates of continuing value and future
benefits. The majority of the write-off, $21.9 million, related to the goodwill
recorded in connection with the acquisition of Genetic Design, Inc. ("GDI") in
June 1992. The goodwill write-off was based on an analysis of GDI's business
conducted in the fourth quarter of 1993, including the loss of significant state
public paternity testing contracts, which indicated that the environment for
public paternity testing, GDI's primary business market, had changed
significantly since the acquisition, and therefore called into question the
carrying value of the acquisition-related GDI goodwill. The business review
disclosed the development of a competitive environment which emphasized cost
rather than service and performance, intense price competition from a major
competitor, a general reduction in the ordering of identity tests due to
governmental budgetary restrictions and uncertainties as to the level of federal
funding of state testing activities, a cost structure at GDI which made it
difficult for GDI to continue as an effective competitor in a slow-growth,
cost-driven environment and the decreased likelihood of sufficient support in
Congress for passage of additional social legislation which would significantly
increase federal funding of state testing activities. These changed
circumstances resulted in a determination to reduce the carrying value of GDI
goodwill to zero at the end of 1993. The remaining $1.8 million of write-offs
consisted of approximately $1.1 million of patent rights resulting from the
purchase of Enzymatix Ltd. by Genzyme Ltd. (UK) and approximately $0.7 million
of intangible assets resulting from the acquisition of a clinical testing
laboratory by IG. Also in the fourth quarter of 1993, the General Division
incurred restructuring charges of $2.8 million related to the consolidation of
laboratory operations in its Diagnostic Services business. The expenses were
related to severance of $1.2 million for an estimated 45 employees; lease costs
of $0.8 million;
-59-
<PAGE> 60
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
equipment movement and disposal of $0.2 million; costs incurred to restructure
the General Division's paternity product line of $0.2 million and other costs of
$0.4 million. All costs were cash expenditures in 1994. The restructuring plan
was undertaken to consolidate lab testing services into the General Division's
most cost-effective testing locations, transfer virtually all accounting
functions to the General Division's headquarters and streamline the paternity
product line at GDI.
NOTE M COMMITMENTS AND CONTINGENCIES
In December 1994, the General Division fully settled litigation brought
by Granada BioSciences, Inc., Houston, Texas, by payment of $1,980,000 in cash.
The dispute arose out of a contract between Granada R&D Ventures, a predecessor
of Granada BioSciences, and Integrated Genetics, prior to its merger with the
General Division in 1989, regarding development of recombinant fertility
hormones for cows and other animals.
From time to time the General Division has been subject to legal
proceedings and claims arising in connection with its business. At December 31,
1995, there were no asserted claims against the General Division which, in the
opinion of management, if adversely decided would have a material adverse effect
on the General Division's financial position and results of operations.
Genzyme's commitment to allocate up to $30 million from the General
Division to fund the operations of GTR was eliminated when GTR sold newly issued
TR Stock to the public in September, 1995; however, Genzyme has the right to
make voluntary allocations of up to $30 million from the General Division to
GTR. Such allocations would reduce the Funding Commitment on a dollar-for-dollar
basis and increase the number of TR Designated Shares at the rate of one share
for each $10 so allocated.
-60-
<PAGE> 61
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE N INCOME TAXES
Income (loss) before income taxes and the related income tax expense
(benefit) are as follows for the year ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (includes $15.2 million in charges
for purchased research and development and
acquisition expenses in 1995, and
$24 million in charges for purchased
research and development in 1993) ........................... $62,633 $42,968 $ 9,508
Foreign ..................................................... 2,696 3,567 1,760
------- ------- --------
Total .................................................. $65,329 $46,535 $ 11,268
======= ======= ========
Currently payable:
Federal .................................................. $18,780 $10,727 $ 14,276
State .................................................... 5,949 3,965 4,996
Foreign .................................................. 1,349 850 913
------- ------- --------
Total current ......................................... 26,078 15,542 20,185
Deferred:
Federal ................................................... 4,507 518 (14,638)
State ................................................... (79) 281 (2,735)
------- ------- --------
Total deferred ......................................... 4,428 799 (17,373)
------- ------- --------
Provision for income taxes ................................... $30,506 $16,341 $ 2,812
======= ======= ========
</TABLE>
Provisions for income taxes were at rates other than the U.S. Federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate ................................... 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less
than 80%-owned subsidiaries with
no current tax benefit ...................................... 0.8 1.6 24.0
State taxes, net ............................................ 5.2 5.8 4.2
Federal rate change .......................................... - - (1.0)
Tax exempt interest .......................................... - - (4.0)
Foreign sales corporation .................................... (1.4) (2.8) (1.8)
Benefit of tax credits ....................................... - (1.9) (1.4)
Purchase accounting adjustments .............................. - - 1.8
Current year realization of tax
benefits of purchased technology and
purchase options ........................................... - - (9.1)
Other, net .................................................. 2.1 (2.7) 2.2
Utilization of operating loss
carryforwards ............................................... (3.8) - (0.5)
---- ----- -----
Effective tax rate before certain charges .................. 37.9 35.0 49.4
Gross charge for purchased research
and development and purchase options
net of related deferred tax benefits ........................ 8.8 - (24.4)
----- ----- -----
46.7 35.0 25.0
Allocated tax benefits generated by
Tissue Repair Division ...................................... (13.6) (4.0) (84.9)
----- ----- -----
Effective tax rate attributable to
General Division Stockholders.............................. 33.1% 31.0% (59.9%)
===== ===== =====
</TABLE>
-61-
<PAGE> 62
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
At December 31 the components of net deferred tax assets were as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .......................... $ 10,216 $ 15,908
Intangible amortization ................................... 16,100 17,575
Purchase of in-process research
and development ......................................... 15,666 15,687
Unrealized capital losses.................................. 2,561 5,587
Other .................................................... 9,609 3,977
Allocation of tax benefit from
Tissue Repair Division .................................. 8,415 9,055
-------- --------
Gross deferred tax asset ............................. 62,567 67,789
Valuation allowance ....................................... (20,637) (32,233)
-------- --------
Net deferred tax asset ............................... 41,930 35,556
Deferred tax liabilities:
Depreciable assets ........................................ (10,556) (3,011)
-------- --------
Net deferred tax asset ............................... $ 31,374 $ 32,545
======== ========
</TABLE>
At December 31, 1995 and 1994, valuation allowances of $20.6 million
and $32.2 million, respectively, were recorded to offset a portion of the
deferred tax assets related to the realization of net operating loss
carryforwards, and deductions relating to the purchase of in-process research
and development and the future disposition of certain stock purchase options.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
A total of $1.5 million of the valuation allowance relates to tax
assets arising from the IG Labs acquisition (See Note D). If any portion of this
tax asset is ultimately realized, the remaining goodwill relating to the IG Labs
acquisition will be reduced accordingly.
At December 31, 1995, the General Division had U.S. net operating loss
carryforwards of $26.4 million for income tax purposes. These carryforwards
expire from 2000 to 2010. Utilization of tax net operating loss carryforwards
may be limited under section 382 of the Internal Revenue Code of 1986.
At December 31, 1995, the General Division also had U.K. operating loss
carryforwards for income tax purposes of approximately $2.9 million which are
available indefinitely to offset future taxable income in the U.K.
NOTE O BENEFIT PLANS
The General Division has defined-benefit pension plans covering
substantially all the employees of its foreign subsidiaries. Pension expense for
1995, 1994 and 1993 was $498,000, $266,000 and $206,000, respectively. Pension
costs are funded as accrued. Actuarial and other disclosures regarding the plans
are not presented because they are not material.
Genzyme has a domestic employee savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees of the General
Division. The plan allows employees to make contributions up to a specified
percentage of their compensation, a portion of which are matched by the General
-62-
<PAGE> 63
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Division. The General Division contributed $660,000, $587,000, and $342,000 to
the plan in 1995, 1994 and 1993, respectively.
-63-
<PAGE> 64
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE P FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The General Division operates in one industry, the human healthcare
industry and manufactures and markets its products in two major geographic
areas, the United States and Europe. The General Division's principal
manufacturing facilities are located in the United Kingdom and the United
States.
The General Division purchases products from its United Kingdom
subsidiaries for sale to United States customers. Transfer prices from the
foreign subsidiaries are intended to allow the United States parent to produce
profit margins commensurate with its sales and marketing effort. The
Netherlands subsidiary is the European distributor of the General Division's
therapeutic products. Certain information by geographic area follows (dollars
in thousands):
<TABLE>
<CAPTION>
THE
UNITED NETHER- ELIMI- COMBI-
STATES LANDS OTHER NATION NATION
------ ------- ----- ------ ------
<S> <C> <C> <C> <C> <C>
1995
Net sales -
unaffiliated customers ..... $ 247,138 $ 70,532 $ 33,933 $ -- $ 351,603
Transfers between geo-
graphic areas .............. 74,697 -- 23,658 (98,355) --
--------- --------- --------- --------- ---------
321,835 70,532 57,591 (98,355) 351,603
Pre-tax income .............. 65,941 836 1,852 (3,300) 65,329
Net income .................. 45,856 540 584 (3,300) 43,680
Assets ...................... 873,252 27,703 80,287 (126,656) 854,586
Liabilities ................. 156,650 26,652 12,003 -- 195,305
1994
Net sales -
unaffiliated customers ..... $ 224,331 $ 38,535 $ 25,465 $ -- $ 288,331
Transfers between geo-
graphic areas .............. 38,590 -- 12,784 (51,374) --
--------- --------- --------- --------- ---------
262,921 38,535 38,249 (51,374) 288,331
Pre-tax income .............. 44,295 578 3,155 (1,493) 46,535
Net income .................. 28,627 417 2,643 (1,493) 30,194
Assets ...................... 608,760 16,384 69,130 (64,130) 630,144
Liabilities ................. 204,766 15,704 11,713 -- 232,183
1993
Net sales -
unaffiliated customers ..... $ 214,822 $ -- $ 19,055 $ -- $ 233,877
Transfers between geo-
graphic areas .............. 1,998 -- 10,640 (12,638) --
--------- --------- --------- --------- ---------
216,820 -- 29,695 (12,638) 233,877
Pre-tax income .............. 9,050 165 1,595 458 11,268
Net income .................. 7,151 104 743 458 8,456
Assets ...................... 538,220 566 45,608 (52,037) 532,357
Liabilities ................. 203,367 384 4,215 -- 207,966
</TABLE>
-64-
<PAGE> 65
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Substantially all revenue from research and development contracts is
earned in the United States. Entities comprising Other include the Division's
operations in the United Kingdom, Belgium, Japan, Switzerland, Italy, France and
Germany. Export sales from the United States were $20,539,000, $23,902,000 and
$33,343,000 in 1995, 1994 and 1993, respectively. Export sales by the
Netherlands subsidiary amounted to $66,216,000 and $35,973,000 in 1995 and 1994
respectively. In 1995, 1994 and 1993, the Company marketed its Ceredase(R)/
Cerezyme(R) enzyme product directly to physicians, hospitals and treatment
centers, and sold products representing approximately 14%, 17% and 18%,
respectively, of net revenue to an unaffiliated distributor.
NOTE Q QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except
per share amounts) for the years ended December 31, 1995, 1994 and 1993 are
displayed in the following table.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1995
Net sales ................................................ $87,159 $92,358 $94,484 $104,562
Gross profit ............................................ 47,378 48,066 53,100 57,958
Net income (4)............................................ 11,998 12,967 16,092 2,623
Income per share (1):
Primary ............................................. 0.43 0.46 0.53 0.08
Fully diluted ........................................ 0.40 0.43 0.49 0.07
1994
Net sales ................................................ $73,282 $75,378 $79,180 $ 82,887
Gross profit ............................................ 40,049 40,101 41,407 42,432
Net income (3) ........................................... 9,877 9,622 10,065 2,490
Income per share (1):
Primary .............................................. 0.38 0.37 0.38 0.09
Fully diluted......................................... 0.35 0.35 0.35 0.09
1993
Net sales ................................................ $61,651 $ 67,801 $69,674 $ 66,561
Gross profit ............................................ 32,712 35,489 35,279 31,135
Net income (loss) (2)..................................... 10,965 11,703 11,635 (16,283)
Income (loss) per share
(pro forma) (1).......................................... 0.42 0.44 0.44 (0.67)
</TABLE>
- -------------------
(1) Cumulative quarterly income per share data does not equal the annual amounts
due to changes in the average common and common equivalent shares outstanding.
(2) Includes charges in the fourth quarter of $50.5 million (See Notes F and L).
(3) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes F
and M) for the write down of investments and the settlement of a lawsuit and an
$11.2 million charge for acquired incomplete technology. (See Note D).
(4) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired
incomplete technology. (See Note B).
NOTE R SUBSEQUENT EVENTS
-65-
<PAGE> 66
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
In January 1996, Genzyme made a conditional offer to acquire
substantially all the assets of the Partnership for General Division Stock
valued at $93.0 million.
In February 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme. The loan is due on March 31, 1996 and accrues interest at
a rate of 6 1/2% per annum.
In February 1996, the General Division signed a definitive agreement to
acquire Genetrix Inc., a privately held genetic testing laboratory based in
Phoenix, Arizona, in a tax-free exchange of General Division Stock valued at
approximately $36.8 million. Genetrix Inc. will be merged with the General
Division's Integrated Genetics diagnostic services business. The transaction
will be accounted for as a pooling of interests.
In February 1996, the General Division announced a planned redemption
of its 6 3/4% Convertible Subordinated Notes. All holders elected to convert
their notes into shares of General Division Stock and TR Stock. Holders of the
notes received 18.913 shares of General Division Stock and 2.553 shares of TR
Stock in conversion of each $1,000 note. Supplementary earnings per share for
the General Division which gives effect to the conversion of the notes as if
such conversion took place at the beginning of each period presented, is equal
to fully diluted earnings per share.
In March 1996, an advisory panel to the U.S. Food and Drug
Administration ("the FDA") recommended that Genzyme be granted approval to
market one of the HA Products, Seprafilm(TM) bioresorbable membrane. The panel's
recommendation will be considered by the FDA in its final review of Genzyme's
premarket approval application.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with the General Division under which the General Division
agreed to provide a revolving line of credit in the amount of $10 million and
has agreed to fund development costs of the Antithrombin III ("AT-III") program
through March 31, 1997. Under the Agreement GTC granted to the General Division
co-marketing rights to AT-III in all territories other than Asia subject to
negotiation and execution of a development and supply agreement between the
parties prior to March 31, 1997. The line of credit carries a rate of 7% and is
convertible into GTC's Common Stock at the average market price for the 20 day
period ending two days before the Conversion at GTC's option to maintain GTC's
tangible net worth at the end of each quarter at a level between $4.0 million
and $4.2 million or by Genzyme at any time for up to the full amount
outstanding.
In March 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 subject to adjustment
for stock splits, stock dividends and certain transactions affecting the
Company's capital stock.
-66-
<PAGE> 67
GENZYME TISSUE REPAIR DIVISION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of GENZYME CORPORATION:
We have audited the accompanying combined balance sheets of
Genzyme Tissue Repair Division (as described in Note A) as of December
31, 1995 and 1994, and the related combined statements of operations
and cash flows and the combined financial statement schedule for each
of the three years in the period ended December 31, 1995. The combined
financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility
is to express an opinion on these combined financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the combined financial statements of Genzyme
Tissue Repair Division present fairly, in all material respects, the
financial position of Genzyme Tissue Repair Division as of December 31,
1995 and 1994 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. In addition,
in our opinion, the combined financial statement schedule taken as a
whole presents fairly, in all material respects, the information
required to be included therein.
As more fully described in Note A to these financial
statements, Genzyme Tissue Repair Division is a business group of
Genzyme Corporation; accordingly, the combined financial statements of
Genzyme Tissue Repair Division should be read in conjunction with the
audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 1, 1996, except as to Note O
which is March 26, 1996
-67-
<PAGE> 68
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
- ------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net service sales............................. $ 5,220 $ 324 $ -
Related party revenues:
Technology license fee..................... - - 2,000
Revenues from research and development
contracts................................. - - 2,684
-------- -------- --------
5,220 324 4,684
Operating costs and expenses:
Cost of services sold......................... 4,731 287 -
Selling, general and administrative........... 12,927 964 701
Research and development (including research
and development related to contracts)........ 10,938 3,638 2,805
Purchase of in-process research and
development.................................. - 11,215 25,000
-------- -------- --------
28,596 16,104 28,506
-------- -------- --------
Operating loss ................................... (23,376) (15,780) (23,822)
Other income and (expenses):
Investment income............................. 1,386 29 -
Interest expense.............................. (40) - -
-------- -------- --------
1,346 29 -
-------- -------- --------
Loss before income taxes.......................... (22,030) (15,751) (23,822)
Provision for income taxes........................ - - (38)
-------- -------- --------
Net loss.......................................... (22,030) (15,751) (23,860)
Tax benefit allocated to General
Division ........................................ - - (255)
-------- -------- --------
Net loss attributable to Tissue Repair Stock...... $(22,030) $(15,751) $(24,115)
======== ======== ========
Per Tissue Repair Division Common Share:
Net loss...................................... $ (2.28) $ (4.40) $ (7.43)
======== ======== ========
Weighted average shares outstanding........... 9,659 3,578 3,245
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
-68-
<PAGE> 69
GENZYME TISSUE REPAIR DIVISION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $40,741 $16,993
Short-term investments................................. 6,832 5,918
Accounts receivable, less allowance of $325 in 1995
and $177 in 1994...................................... 1,838 1,486
Inventories............................................ 761 76
Prepaid expenses and other current assets.............. 186 284
------- -------
Total current assets................................. 50,358 24,757
Property, plant and equipment, net........................ 1,962 1,456
Other Assets:
Long-term investments.................................. - 1,897
Other noncurrent assets................................ 329 325
------- -------
329 2,222
------- -------
$52,649 $28,435
======= =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable....................................... $ 2,432 $ 528
Accrued expenses....................................... 1,349 3,220
Payable to Genzyme General Division.................... 2,034 171
Current portion of capital lease obligations........... 169 281
------- -------
Total current liabilities............................ 5,984 4,200
Noncurrent Liabilities:
Capital lease obligations.............................. - 174
Other noncurrent liabilities........................... 739 748
------- -------
739 922
Commitments and Contingencies (Notes D, J, M and O)....... - -
Division Equity (Note C).................................. 45,926 23,313
------- -------
$52,649 $28,435
======= =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
-69-
<PAGE> 70
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(22,030) $(15,751) $(23,860)
Reconciliation of net loss to net
cash used by operating activities:
Depreciation and amortization.................... 628 26 -
Loss on disposal of assets....................... 160 - -
Non-cash compensation expense.................... 882 - -
Accrued interest/amortization on bonds........... (76) (45) -
Provision for bad debts.......................... 231 - -
Purchase of in-process research and
development for stock........................... - 11,215 -
Increase (decrease) in cash from working capital:
Accounts receivable........................... (583) (204) -
Inventories................................... (685) 309 -
Prepaid expenses and other current assets..... 98 18 -
Accounts payable, accrued expenses
and deferred revenue......................... 33 1,666 (149)
Payable to Genzyme General Division........... 1,863 171 -
-------- -------- --------
Net cash flow used by operating activities.... (19,479) (2,595) (24,009)
INVESTING ACTIVITIES:
Cash acquired in aquisition for stock, net.......... - 5,581 -
Purchases of investments............................ (16,687) - -
Sales and maturities of investments................. 17,991 - -
Purchase of property, plant & equipment............. (1,294) - -
Investments in non-current assets................... (13) - -
-------- -------- --------
Net cash flow provided (used) by investing
activities................................... (3) 5,581 -
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............. 43,516 14 -
Net cash from Genzyme............................... - 13,993 24,009
Payment of debt and capital leases.................. (286) - -
-------- -------- --------
Net cash provided by financing activities..... 43,230 14,007 24,009
-------- -------- --------
Increase in cash and cash equivalents................... 23,748 16,993 -
Cash and cash equivalents, beginning of period.......... 16,993 - -
-------- -------- --------
Cash and cash equivalents, end of period................ $ 40,741 $ 16,993 $ -
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
-70-
<PAGE> 71
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Genzyme Tissue Repair Division ("GTR"), a division of Genzyme
Corporation (the "Company" or "Genzyme"), develops and commercializes products
and services for the prevention or repair of tissue injury as a consequence of
accidental or disease related trauma. GTR uses cell, enzyme, growth factor and
matrix technologies to develop products that will augment or positively modify
naturally-occurring biological processes involved in tissue repair.
Basis of Presentation: The approval effective December 16, 1994 (the
"Effective Date") by the stockholders of Genzyme of the Genzyme Stock Proposal
as described in Genzyme's Prospectus/Proxy Statement dated November 10, 1994
resulted in the redesignation of Genzyme's common stock. The outstanding shares
of Genzyme common stock were redesignated as General Division Common Stock
("General Division Stock") on a share-for-share basis and a second class of
common stock, designated as Tissue Repair Division Common Stock ("TR Stock") was
distributed on the basis of .135 of one share of TR Stock for each share of
Genzyme's previous common stock held by stockholders of record on October 14,
1994. General Division Stock and TR Stock provide stockholders with separate
securities which are intended to reflect the performance of the Genzyme General
Division (the "General Division") and GTR, respectively.
Net income (loss) per common share has been included in the Statements
of Operations. For the purpose of computing net loss per common share of TR
Stock, the number of shares of TR Stock prior to the Effective Date are assumed
to be the total number of shares of Genzyme common stock multiplied by .135.
Dividends to the holders of TR Stock will be limited to the lesser of
funds of Genzyme legally available for the payment of dividends and the
Available Tissue Repair Dividend Amount, as defined in Genzyme's Articles of
Organization, as amended. Although there is no requirement to do so, the Board
would declare and pay dividends on TR Stock, if any, based primarily on the
earnings, financial condition, cash flow and business requirements of GTR. There
is currently no intention of paying dividends.
Genzyme, subject to certain conditions, has the right to exchange each
outstanding share of TR Stock for any combination of cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value. In addition,
following a disposition of all or substantially all assets of GTR, the shares of
TR Stock are subject to mandatory exchange by Genzyme for cash and/or shares of
General Division Stock at a 30% premium over Fair Market Value as determined by
the trading prices during a specified period prior to public announcement of the
disposition. Shares of General Division Stock are not subject to either optional
or mandatory exchange.
Holders of General Division Stock and TR Stock each are entitled to one
vote per share and vote together as a single class on all matters as to which
common stockholders generally are entitled to vote. Except in limited
circumstances provided under Massachusetts law and in Genzyme's Articles of
Organization, as amended, and in the management and accounting policies adopted
by Genzyme's Board of Directors (the "Board"), holders of each class of common
stock will have no rights to vote on matters as a separate class. Separate
meetings of the holders of each class of common stock will not be held. If, when
a stockholder vote is taken on any matter as to which a separate vote by either
class is not required and the holders of either class of common stock would have
more than the number of votes required to approve any such matter, the holders
of that class will control the outcome of the vote on that matter.
-71-
<PAGE> 72
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The financial statements of GTR include the financial position, results
of operations and cash flows of the tissue repair operations of Genzyme. GTR's
financial statements are prepared using the amounts included in Genzyme's
consolidated financial statements. Corporate allocations reflected in these
financial statements are determined based upon methods which management believes
to be reasonable (see Note B).
Genzyme provides holders of TR Stock separate financial statements,
management's discussion and analysis, descriptions of businesses and other
relevant information for GTR in addition to consolidated financial information
of Genzyme. Notwithstanding the attribution of assets and liabilities (including
contingent liabilities) between the General Division and GTR for the purposes of
preparing their respective historical and future financial statements, this
attribution and the change in the capital structure of Genzyme as a result of
the approval of the Genzyme Stock Proposal does not affect legal title to the
assets or responsibility for the liabilities of Genzyme or any of its
subsidiaries. Holders of TR Stock are shareholders of Genzyme, which continue to
be responsible for all of its liabilities. Liabilities or contingencies of
either division that affect Genzyme's resources or financial condition could
affect the financial condition or results of operations of both divisions.
Accordingly, Genzyme's consolidated financial statements should be read in
connection with GTR's financial statements.
Except as stated in the amended articles, the accounting policies
applicable to the preparation of the financial statements of GTR may be modified
or rescinded at the sole discretion of the Board without the approval of the
shareholders, although there is no intention to do so.
Principles of Combination: The accompanying combined financial
statements reflect the combined accounts of all of Genzyme's tissue repair
businesses. All material intercompany items and transactions have been
eliminated in combination.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents, consisting principally of
money market funds and municipal notes purchased with initial maturities of
three months or less, are valued at cost plus accrued interest, which
approximates market.
Investments: Short-term investments include all investments with
remaining maturities of twelve months or less. Long-term investments include all
investments with remaining maturities greater than twelve months. GTR classifies
its equity investments as available-for-sale and its investments in debt
securities as either held-to-maturity or available-for-sale based on facts and
circumstances present at the time the investments are purchased. As of December
31, 1995, the Company classified all investments, consisting solely of debt
securities, as available-for-sale (See Note F - Investments).
Fair Value of Financial Instruments: The fair value of investments is
obtained from market quotations and is disclosed in Note F.
Inventories: Inventories are valued at the lower of cost (first-in,
-72-
<PAGE> 73
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
first-out method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Provision for depreciation is computed using the straight-line method
over the estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and twenty-five to
forty years for buildings). Leasehold improvements are amortized over the lesser
of the useful life or the term of the respective lease.
Revenue Recognition: GTR's two commercial tissue repair services are
autologous epidermal skin grafts produced using the Epicel[SM] Service and the
culturing of autologous cartilage cells using the CARTICEL[SM] Service. GTR
recognizes service revenue at the time skin grafts or cartilage cells are
shipped. Cancellation charges may be assessed upon the cancellation of an
Epicel[SM] order. These charges are dependent upon order size and stage of skin
graft growth and are recognized upon order cancellation and when collection is
determined to be probable. Revenues from research and development contracts are
recognized over applicable contractual periods as specified by each contract.
Non-refundable technology license fees are recognized as revenue upon
consummation of the related agreement.
Research and Development: Research and development costs are expensed
in the period incurred. Costs of purchased technology which management believes
has not demonstrated technological feasibility and for which there is no
alternative future use are charged to expense in the period of purchase.
Income Taxes: GTR uses the asset and liability method of accounting for
deferred income taxes. The provision for income taxes includes income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. See Note B for
allocation of Genzyme's income taxes to GTR.
Net Loss Per Share: The method of calculating earnings per share for TR
Stock reflects the terms of the Articles of Organization, as amended, which
provide that dividends may be declared and paid only out of the lesser of funds
of Genzyme legally available therefore and each division's Available Dividend
Amount, as defined. For the purpose of computing net income per common share of
TR Stock for periods prior to December 12, 1994, the number of shares and share
equivalents of TR Stock prior to the Effective Date are assumed to be the same
as the total number of shares and share equivalents of Genzyme common stock
multiplied by .135. GTR computes income per share by dividing the income
attributable to TR Stock by the weighted average number of shares of TR stock
and dilutive common stock equivalents and other potentially dilutive securities
outstanding during the applicable period. Income attributable to TR Stock equals
GTR's net income or loss for the relevant period determined in accordance with
generally accepted accounting principles in effect at such time, adjusted by the
amount of tax benefits allocated to or from GTR pursuant to the accounting
policies adopted by the Board. The accounting policies provide that, as of the
end of any fiscal quarter of Genzyme, any projected annual tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to the
other division without any compensating payment or allocation. Net loss
attributable to TR Stock and net loss per common and common equivalent share for
the years ended December 31, 1993 and 1994 give effect to the provisions of the
management and accounting policies adopted by the Board in connection with the
creation of GTR and, accordingly, are pro forma presentations.
Accounting for Stock-Based Compensation: Statement of Financial
Accounting
-73-
<PAGE> 74
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), will
require the Company to either elect expense recognition under SFAS 123 or its
disclosure-only alternative for stock-based employee compensation. The expense
recognition provision encouraged by SFAS 123 would require fair value-based
financial accounting to recognize compensation expense for employee stock
compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements with comparable disclosures for the prior year. The Company
has determined that it will elect the disclosure-only alternative permitted
under SFAS 123. The Company will be required to disclose pro forma net income
and pro forma earnings per share in the footnotes using the fair value based
method beginning in fiscal 1996 with comparable disclosures for fiscal 1995. The
Company has not determined the impact of these pro forma adjustments to its net
income or earnings per share.
Financial Instruments: Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash and cash equivalents, current and non-current investments. The Company
generally invests its cash investments in investments-grade securities.
Uncertainties: The Company is subject to risks common to companies in
the Biotechnology industry including, but not limited to, development by the
Company or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B RELATED PARTY TRANSACTIONS
The following policies may be modified or rescinded by action of the
Board, or the Board may adopt additional policies, without approval of the
shareholders of Genzyme, although the Board has no present intention to do so.
Genzyme allocates certain corporate general and administrative expenses,
research and development expense and income taxes in accordance with the
policies described below.
Financial Matters: As a matter of policy, the Company manages the
financial activities of the General Division and GTR on a centralized basis.
These financial activities include the investment of surplus cash; the issuance,
repayment and repurchase of short-term and long-term debt and the issuance and
repurchase of common stock. At December 31, 1995, the Company attributed none of
its short-term and long-term debt to GTR based upon the specific purpose for
which the debt was incurred and the cash flow requirements of GTR. Accordingly,
none of the Company's interest expense has been allocated to GTR. The Company
believes this method of allocation to be equitable and a reasonable estimate of
such costs as if GTR operated on a stand-alone basis.
To the extent borrowings are deemed to occur between GTR and the
General Division, intercompany accounts have been established bearing interest
at the rate in effect from time to time under the Company's unsecured credit
lines or, if no such credit lines exist, at the prime rate charged by The First
National Bank of Boston from time to time. To date no such borrowings have
occurred, however at December 31, 1995 GTR owed the General Division $2.0
million for services rendered in the normal course of business.
Shared Services: Genzyme's corporate general and administrative
functions and certain sales and marketing efforts related to foreign market
penetration are performed by the General Division. General, administrative,
sales and marketing expenses have been allocated to GTR based upon utilization
of such services as if the General Division and GTR operated on a stand-alone
basis.
-74-
<PAGE> 75
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Management believes that such allocation is a reasonable estimate of such
expenses. These allocations for the years ended December 31, 1995, 1994 and 1993
were $4,355,000, $833,000 and $701,000, respectively. In addition, costs
incurred by the General Division related to research and development for GTR
products are charged to GTR. These charges for the years ended December 31,
1995, 1994 and 1993 were $4,730,000 $3,331,000 and $2,805,000, respectively.
Income Taxes: GTR is included in the consolidated U.S. federal income
tax return filed by Genzyme. Genzyme allocates current and deferred taxes to its
divisions by applying the provisions of FAS 109 to each division as if it were a
separate taxpayer. Accordingly, the realizability of deferred tax assets is
assessed at the GTR level. The sum of the amounts calculated for individual
divisions of Genzyme may not equal the consolidated amount under this approach.
GTR reports current and deferred tax assets and liabilities as a net
intercompany payable or receivable.
Under the terms of the Genzyme Stock Proposal, as of the end of any
fiscal quarter of Genzyme Corporation, any projected tax benefit attributable to
any division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense may be allocated to any other division
without any compensating payment or allocation. The treatment of such allocation
for purposes of earnings per share computation is discussed in Note A.
Inter-Division Asset Transfers. The Board may at any time and from time
to time reallocate any program, product or other asset from one division to any
other division. All such reallocations will be done at fair market value,
determined by the Board, taking into account, in the case of a program under
development, the commercial potential of the program, the phase of clinical
development of the program, the expenses associated with realizing any income
from the program, the likelihood and timing of any such realization and other
matters that the Board and its financial advisors deem relevant. The
consideration for such reallocation may be paid by one Division to another in
cash or, in lieu of cash or other consideration, the Board may elect to account
for a reallocation of assets from GTR to the General Division as an increase in
the General Designated Shares and a reallocation of assets from the General
Division to GTR as either an increase in the TR Designated Shares or a reduction
in the General Designated Shares, if any, except that a reallocation of assets
from GTR to the General Division may not be accounted for as an increase in
General Designated Shares without a class vote of the holders of TR Stock.
NOTE C DIVISION EQUITY
The following analyzes the equity of GTR for the periods presented:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period........... $ 23,313 $ - $ (149)
Net loss................................. (22,030) (15,751) (23,860)
Shares issued in connection with
acquisition of BioSurface............... - 25,312 -
Shares issued in connection with
Employee Stock Purchase Plan............ 983 14 -
Exercise of stock options................ 241
Shares issued in public offering......... 42,292
Compensation expense..................... 882
Unrealized gain(loss) on investments..... 245 (255) -
</TABLE>
-75-
<PAGE> 76
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
Net cash from Genzyme.................... - 13,993 24,009
-------- -------- --------
Balance at end of period............... $ 45,926 $ 23,313 $ -
======== ======== ========
</TABLE>
Immediately prior to the Effective Date, as defined in Note A,
approximately 15,791,000 shares of Genzyme common stock were reserved for
issuance under the Company's 1990 Equity Incentive Plan, 1988 Director Stock
Option Plan, 1990 Employee Stock Purchase Plan, outstanding warrants (the
"Warrants"), and conversion of the 6 3/4% Convertible Subordinated Notes Due
2001 (the "Notes").
Pursuant to antidilution provisions in the agreements covering the
options, Genzyme has adjusted each option outstanding on the Effective Date to
provide for separation of the option into an option exercisable for General
Division Stock and an option exercisable for the number of shares of TR Stock
that the holder would have received if the holder had exercised the option
immediately prior to the Effective Date (with any resultant fractional shares of
TR Stock rounded down to the nearest whole number). Upon exercise of these
options, all proceeds will be allocated to the General Division (See TR
Designated Shares).
The Warrants provide that the holder of the Warrant is entitled to
receive the number of shares of General Division Stock and TR Stock upon
exercise of the Warrant that the holder would have received if the holder had
exercised the Warrant immediately prior to the Effective Date.
Pursuant to the indenture under which the Notes were issued, the
conversion privilege of the Notes was adjusted so that the holder of a Note
converted after the Effective Date will receive, in addition to the shares of
General Division Stock into which the Note is convertible, the same number of
shares of TR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
In September 1995, GTR sold 3,000,000 shares of TR Stock to the public
at a price of $15 per share for net proceeds of $42.4 million after
underwriting discounts and commissions.
At December 31, 1995, approximately 3,478,585 shares of TR Stock were
reserved for issuance under the 1990 Equity Incentive Plan as amended, the 1988
Director Stock Option Plan as amended, the 1990 Employee Stock Purchase Plan as
amended, outstanding warrants, and conversion of the Notes.
Preferred Stock. Shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or in
part, the preferences, voting powers, qualifications and special or relative
rights or privileges of any such series before the issuance of any shares of
that series. The Board of Directors shall determine the number of shares
constituting each series of Preferred Stock and each series shall have a
distinguishing designation.
Stock Options. Pursuant to the Company's 1990 Equity Incentive Plan as
amended (the "Plan"), options may be granted to purchase an aggregate of
2,000,000 shares of TR Stock. The Plan allows the granting of incentive stock
and nonstatutory stock options at not less than fair market value at date of
grant, and stock appreciation rights, performance shares, restricted stock and
stock units to employees and consultants of the Company, each with a maximum
term of ten years. In addition, the Company has a 1988 Director Stock Option
Plan, as amended, pursuant to which nonstatutory stock options up to a maximum
of 70,000 shares of TR Stock, at a rate of 400 shares for each year of service
are automatically granted at fair market value to members of the Board of
Directors of the Company upon their election or reelection as Directors. All
options expire ten years after the initial grant date and are subject to various
vesting provisions.
-76-
<PAGE> 77
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
At the Effective Date of the Genzyme Stock Proposal, Genzyme granted
initial options to purchase a total of 939,851 shares of TR Stock to employees
of the Company who will devote a substantial portion of their efforts to GTR.
These options, (i) had an exercise price of $4.75, the closing price of TR Stock
on the first date such shares were traded on the NASDAQ National Market System
or the closing price of such shares on the six-month anniversary of such date,
(ii) become exercisable 20% on the effective date of the grant and 20% on each
of the next four anniversaries thereof and (iii) have a term of ten years. At
the six month anniversary date the closing price of the TR Stock was $6.25 and
accordingly, compensation expense equal to 939,851 shares multiplied by the
difference in the exercise price of $4.75 and $6.25, the six month anniversary
price, will be recognized over the period of service of the holders. In 1995,
GTR recorded $882,000 of related compensation expense and will record the
balance of $505,000 over the next 3 years.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
<S> <C> <C>
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1992........ 2,929,067 3.00 - 72.04
Granted............................... 1,332,240 26.25 - 45.00
Exercised............................. (254,171) 4.00 - 37.25
Forfeited and canceled................ (161,782) 7.75 - 72.04
----------
Outstanding at December 31, 1993........ 3,845,354 3.00 - 66.16
Granted............................... 1,619,364 22.63 - 42.00
Exercised............................. (66,378) 3.00 - 35.25
Forfeited and canceled................ (211,763) 8.25 - 66.16
Converted at Effective Date........... (5,186,577) 6.02 - 65.49
----------
Outstanding at December 31, 1994........ -
==========
TR STOCK
Converted at Effective Date........... 464,824 $ 1.03 - $11.15
Granted............................... 940,976 4.75 - 5.13
----------
Outstanding at December 31, 1994........ 1,405,800 1.03 - 11.15
Granted............................... 1,153,053 3.19 - 17.63
Exercised............................. (63,608) 1.68 - 9.58
Forfeited and canceled................ (76,202) 1.68 - 8.30
----------
Outstanding at December 31,1995 2,419,043 1.03 - 17.63
==========
</TABLE>
At December 31, 1995 and 1994, 444,343 and 327,393 of the outstanding
options were exercisable with aggregate exercise proceeds of approximately
$2,457,400 and $1,657,800, respectively.
The total exercise proceeds for all options outstanding at December 31,
1995 is approximately $20,885,000 Information regarding the range of option
prices is as follows:
<TABLE>
<CAPTION>
SHARES
UNDER OPTION OPTION PRICE
------------ ------------
<S> <C>
80,998 $1.026 - $ 3.257
1,033,340 3.300 - 5.088
79,855 5.109 - 5.471
385,115 5.492 - 6.000
110,688 6.003 8.302
</TABLE>
-77-
<PAGE> 78
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
115,768 8.325 - 16.000
613,279 16.625 - 17.625
---------
2,419,043
=========
</TABLE>
Employee Stock Purchase Plan. The Company's 1990 Employee Stock
Purchase Plan allows employees to purchase the Company's stock at 85% of fair
market value. Under this plan 600,000 shares of TR Stock are authorized, of
which 269,920 and 3,613 shares of TR Stock were issued in 1995 and 1994,
respectively.
Stock Rights. In 1989, the Company's Board of Directors issued a
dividend of one preferred stock purchase right (a "Common Stock Right") on each
share of Common Stock. At the Effective Date, the Rights Agreement under which
the rights were issued was amended and restated to reflect the change in the
capital structure of the Company and the Board declared a distribution to
holders of TR Stock of a right (a "TR Stock Right") on each outstanding share of
TR Stock. The Restated Rights Agreement provides that each General Division
Stock Right, which replaced the Common Stock Right, and each TR Stock Right,
when it becomes exercisable, will entitle the holder to purchase from the
Company (i) in the case of a General Division Stock Right, one one-hundredth of
a share of Series A Junior Participating Preferred Stock at a price of $52,
subject to adjustment, and (ii) in the case of a TR Stock Right, one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $25, subject to adjustment. The rights expire on March 28, 1999.
Stock Warrants. The Company has issued warrants which, when exercised,
grant the holders one share of General Division Stock and .135 shares of TR
Stock. These warrants were granted in exchange for the receipt of options by the
General Division to purchase the partnership interests of Genzyme Development
Partners, L.P. (the "Surgical Aids Partnership") the callable common stock of
Neozyme II Corporation ("Neozyme II"), and in connection to Genzyme's purchase
of the publicly-held shares of IG Laboratories, Inc.("IG") in exchange for IG
warrants. All proceeds from the exercise of these warrants will be allocated to
the General Division (see "TR Designated Shares"). The outstanding warrants were
issued under the following terms:
<TABLE>
<CAPTION>
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- --------- -------- --------- ---------------
<S> <C> <C> <C> <C>
1989 Surgical Aids Partnership,
the sales agent and its
affiliates 1,205,416 $16.01 November 1, 1991 to
50,285 16.03 October 31, 1996
666,399 22.91
1992 Investors in Neozyme II:
Series N 2,415,000 $38.25 Through December 31, 1996
Callable 2,415,000 See below January 1, 1997 to
December 31, 1998 unless
otherwise terminated
1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
</TABLE>
The warrants issued to the Surgical Aids Partnership were issued in
consideration for the granting to Genzyme of an exclusive right to purchase all
of the outstanding partnership interests of the Surgical Aids Partnership.
The warrants issued to investors of Neozyme II were granted in
consideration
-78-
<PAGE> 79
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
of the option to purchase the callable common stock of Neozyme II and had an
appraised fair value of $16,905,000. The Callable Warrants automatically
terminate upon General Division's exercise of its option to purchase all of the
callable common stock of Neozyme II. These warrants have an exercise price equal
to the sum of the average of the closing sale prices of one share of General
Division Stock and .135 share of TR Stock for the 20 trading days immediately
preceding the exercise thereof.
Warrant activity is summarized below:
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
<S> <C> <C>
Outstanding at December 31, 1992........... 8,283,246 16.01 - 41.31
Exercised.............................. (123,180) 16.01 - 23.86
Expired................................ (4,062) 38.79 - 41.31
----------
Outstanding at December 31, 1993........... 8,156,004 16.01 - 38.25
Exercised.............................. (2,197,774) 16.01 - 22.91
Expired................................ (23,849) 16.01 - 22.91
----------
Outstanding at December 31, 1994........... 5,934,381 16.01 - 38.25
Granted................................ 6,005 42.67
Exercised.............................. (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995........... 5,597,241 16.01 - 42.67
==========
</TABLE>
TR Designated Shares. Pursuant to Genzyme's Articles of Organization,
as amended, TR Designated Shares are authorized shares of TR Stock which are not
issued and outstanding, but which the Board may from time to time issue, sell or
otherwise distribute without allocating the proceeds or other benefits of such
issuance, sale or distribution to GTR. At the Effective Date, 5,000,000 TR
Designated Shares were established. As a result of the distribution of
approximately 3,300,000 shares of TR Stock to holders of General Division Stock,
the number of TR Designated Shares were reduced by a corresponding amount. The
remaining 1,700,000 TR Designated Shares were reserved for issuance upon the
exercise of Genzyme stock options and warrants and the conversion of Genzyme's
convertible notes which were outstanding on the Effective Date. TR Designated
Share activity is summarized below:
<TABLE>
<CAPTION>
TR DESIGNATED
SHARES
-------------
<S> <C>
Established at Effective Date.................. 5,000,000
Stock dividend to holders of
Genzyme Common Stock.......................... (3,356,713)
Stock options exercised........................ (168)
Stock warrants exercised....................... (233,412)
----------
Balance at December 31, 1994................ 1,409,707
Stock options exercised........................ (72,942)
Stock warrants exercised....................... (46,244)
ESPP shares issued (3,613)
----------
Balance at December 31, 1995................ 1,286,908
==========
</TABLE>
The number of TR Designated Shares will be decreased by the number of
shares of TR Stock issued by Genzyme, the proceeds of which are allocated to the
General Division; the number of shares of TR Stock issued as a dividend to
holders of General Division stock; and the number of shares of TR Stock issued
upon the conversion of convertible securities, including the Notes, attributed
to the General Division. In addition, the number of TR Designated Shares can be
increased as a result of certain inter-division transactions. The remaining TR
-79-
<PAGE> 80
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Designated Shares are reserved for issuance upon the exercise of the Notes, the
aforementioned warrants and the stock options which resulted from the conversion
of Genzyme options into TR Stock and General Division Stock options (See Note
M).
NOTE D RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1995 1994 1993
<S> <C> <C> <C>
Technology license fees........ $- $- $2,000
Fees for research and
development activities:
Neozyme I.................. - - 2,684
-- -- ------
$- $- $4,684
== == ======
</TABLE>
Neozyme I
In 1990, GTR entered into a development contract with Neozyme I,
whereby GTR was engaged to perform all research, development and clinical
testing activities related to products and programs in the field of the
Vianain(R) debriding product for which Neozyme I was licensed. GTR received
$549,000 in 1990 under a technology license agreement (the "Agreement") pursuant
to which GTR granted Neozyme I exclusive rights to manufacture and sell
Vianain(R). In July 1993, GTR received an additional technology license fee of
$2,000,000 from Neozyme I related to expansion of the field of the Vianain(R)
debriding product. In December 1993, GTR exercised its option to purchase the
Vianain(R) research program being funded by Neozyme I for a purchase price of
$25,000,000 in cash. The transaction was accounted for as a purchase of
in-process research and development and the value charged to operations in the
fourth quarter of 1993.
Celtrix Pharmaceuticals, Inc.
In connection with the Common Stock Purchase Agreement dated June 24,
1994 between Genzyme and Celtrix Pharmaceuticals, Inc. ("Celtrix"), GTR entered
into a License and Development Agreement (the "License Agreement") with Celtrix.
The License Agreement granted GTR worldwide rights (excluding Asia) to
manufacture and market products based on Transforming Growth Factor Beta2 for
certain applications. In exchange, GTR agreed to fund development work relating
to the products at both Celtrix and the General Division and to make milestone
and royalty payments to Celtrix.
NOTE E ACQUISITION OF BIOSURFACE TECHNOLOGY, INC.
On December 15, 1994, Genzyme acquired BioSurface Technology, Inc.
("BST") by issuing .575 of one share of TR Stock for each share of BST common
stock. In the aggregate, 5,000,000 shares of TR Stock, valued at $25,312,500,
were issued representing 50% of the initial equity interest in GTR. The
acquisition was accounted for as a purchase. Accordingly, the associated net
assets and operations of BST have been included in GTR's financial statements
since the date of acquisition. The excess of the purchase price over the fair
market value of the net assets acquired, $11,215,000, was charged to in-process
research and development.
The following summary, prepared on a pro forma basis, presents the
-80-
<PAGE> 81
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
consolidated results of operations as if BST had been acquired at the beginning
of the periods presented. This pro forma summary does not necessarily reflect
the results of operations as they would have been if GTR and BST constituted a
single entity during the periods presented and is not necessarily indicative of
results which may be obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993
(Unaudited) (Unaudited)
--------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Revenues....................... $ 6,320 $ 10,393
Net loss....................... (12,606) (31,617)
Pro forma net loss per share... (1.51) (3.78)
</TABLE>
NOTE F INVESTMENTS
Investments in marketable securities at December 31 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Federal agency notes......... $1,035 $1,036 $ - $ -
Corporate notes.............. 2,776 2,776 - -
U.S. Treasury notes.......... 3,031 3,020 6,063 5,918
------ ------ ------ ------
$6,842 $6,832 $6,063 $5,918
====== ====== ====== ======
Long Term:
U.S. Treasury notes.......... $ - $ - $2,007 $1,897
====== ====== ====== ======
</TABLE>
Gross unrealized losses in the investment portfolio at December 31,
1995 were $10,000 as compared to $255,000 at December 31, 1994.
Information regarding the range of contractual maturities of
investments in debt securities at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
------------------------------------------------------------------------
<S> <C> <C>
Within 1 year................. $6,842 $6,832
====== ======
</TABLE>
NOTE G INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
--------------------------------------------------------------
<S> <C> <C>
Raw materials.............. $107 $55
Work-in-process............ 654 21
---- ---
$761 $76
==== ===
</TABLE>
NOTE H PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
-----------------------------------------------------------------
<S> <C> <C>
Laboratory equipment................... $1,180 $1,266
Computer and office equipment.......... 978 21
</TABLE>
-81-
<PAGE> 82
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C>
Leasehold improvements................. 282 195
Assets under construction 179 -
------ ------
2,619 1,482
Less accumulated depreciation.......... (657) (26)
------ ------
$1,962 $1,456
====== ======
</TABLE>
The net book value of laboratory, computer and office equipment under
capital leases at December 31, 1995 and 1994 totaled $146,000 and $470,000,
respectively.
Depreciation expense was $628,000, $26,000 and $0 in 1995, 1994 and
1993, respectively.
NOTE I ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994
---------------------------------------------------------------
<S> <C> <C>
Professional fees...................... $ 207 $2,178
Compensation........................... 926 849
Royalties.............................. 96 106
Other.................................. 120 87
------ ------
$1,349 $3,220
====== ======
</TABLE>
NOTE J LEASE COMMITMENTS
Capital Leases
GTR leases certain laboratory, computer and office equipment under
capital leases. In connection with master lease agreements, GTR has granted the
lessors certain security interests in a certificate of deposit. This collateral
of approximately $293,000 is included in other noncurrent assets at December 31,
1995.
Operating Leases
Total rent expense under operating leases was $1,403,000 and $1,352,000
in 1995 and 1994, respectively. GTR leases facilities and personal property
under certain operating leases in excess of one year.
Future minimum payments due under GTR's capital and operating leases are
as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(DOLLARS IN THOUSANDS) LEASES LEASES
------------------------------------------------------------------------
<S> <C> <C>
1996................................ $173 $ 1,674
1997................................ - 1,630
1998................................ - 1,566
1999................................ - 1,561
2000................................ - 1,561
Thereafter.......................... - 5,115
---- -------
Total minimum payments........... 173 13,107
Less: interest...................... 4 -
---- -------
$169 $13,107
==== =======
</TABLE>
NOTE K INCOME TAXES
-82-
<PAGE> 83
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes GTR's provision for (benefit from) income taxes
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal income taxes:
Current........................... $ - $(132) $ 132
Deferred.......................... - 132 (132)
State income taxes:
Current........................... - - 38
Deferred.......................... - - -
---- ----- -----
Total income tax expense (benefit)..... $ - $ - $ 38
==== ===== =====
</TABLE>
The differences between the effective tax rates and the U.S. federal
statutory tax rates were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
U.S. Federal income tax statutory rate.. (35.0)% (35.0)% (34.0)%
State income taxes, net of federal
benefit................................ (5.2) (6.0) 0.2
Deductions subject to deferred tax
valuation allowance.................... 40.2 41.0 35.0
Benefit from net operating loss
carryforward........................... - - (1.0)
----- ----- -----
Effective tax rate...................... -% -% .2%
===== ===== =====
</TABLE>
At December 31, 1995 and 1994, the components of deferred tax assets
and liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred assets
Net operating loss carryforward...... $ 11,865 $ 2,368
Intangible amortization.............. 8,415 9,055
-------- --------
Total deferred tax assets......... 20,280 11,423
Tax benefit allocated to
General Division.................... (20,280) (11,423)
-------- --------
Net deferred tax assets........... $ - $ -
======== ========
</TABLE>
The deferred tax assets of GTR cannot be utilized by the Division to
offset or reduce current or deferred income tax expense. Accordingly, the
deferred tax assets have been allocated to the General Division.
GTR reports current and deferred tax assets and liabilities as a net
intercompany payable or receivable. GTR's 1995 tax expense has been funded by
Genzyme.
NOTE L BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees of GTR. The plan
allows employees to make contributions up to a specified percentage of their
compensation, a portion of which are matched by GTR. GTR made $35,587 and $0 in
contributions to the plan in 1995 and 1994, respectively.
NOTE M GENERAL DIVISION FUNDING COMMITMENT AND PURCHASE OPTION
-83-
<PAGE> 84
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Genzyme's former obligation to allocate up to $30 million in cash from
the General Division to GTR in the period through June 1998 (the "Funding
Commitment") was eliminated by the consummation of GTR's public offering on
September 22, 1995, which provided GTR with $42.4 million in net proceeds from
the offering after underwriting discounts. Notwithstanding the elimination of
the Funding Commitment, Genzyme still has an option to allocate to GTR, at $10
per TR Designated Share, up to $30 million from the General Division (the
"Purchase Option"). Consequently, a maximum of 3,000,000 of TR Designated Shares
may be issued in connection with the exercise of the Purchase Option.
NOTE N QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per
share amounts) for the years ended December 31, 1995 and 1994 are displayed in
the following table:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1995
Net sales..................... $ 1,030 $ 1,247 $ 1,435 $ 1,508
Gross profit(loss)............ 305 367 85 (268)
Net loss...................... (3,942) (5,027) (5,382) (7,679)
Loss per common share......... (0.45) (0.57) (0.59) (0.64)
1994
Net sales..................... $ - $ - $ - $ 324
Gross profit(loss)............ - - - 37
Net loss (1).................. (815) (1,129) (1,059) (12,747)
Loss per common share (1)..... (0.25) (0.34) (0.32) (3.56)
</TABLE>
- ----------------
(1) Includes special charges related to the purchase of in-process research
and development in the fourth quarter of $11,215 (See Note E).
NOTE O SUBSEQUENT EVENTS
In January 1996, GTR acquired certain real estate in Framingham,
Massachusetts for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values.
In March 1996, GTR utilized $8.0 million of the Company's $15.0 million
line of credit with Fleet Bank of Massachusetts.
In March 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of shares of TR Stock that may be subject to grants
under the Equity Plan from 2,000,000 to 3,300,000 subject to adjustment for
stock splits, stock dividends and certain transactions affecting the Company's
capital stock.
-84-
<PAGE> 85
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. Unaudited Condensed Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 1996 and 1995............. 87
Condensed Consolidated Balance Sheets as of June 30,
1996 and December 31, 1995........................................ 89
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 .......................... 90
Notes to Unaudited Condensed Consolidated Financial Statements.... 91
GENZYME GENERAL DIVISION
Condensed Combined Statements of Operations for
the Three and Six Months Ended June 30, 1996 and 1995.............. 94
Condensed Combined Balance Sheets as of June 30,
1996 and December 31, 1995........................................ 96
Condensed Combined Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 .......................... 97
Notes to Unaudited Condensed Combined Financial Statements........ 98
GENZYME TISSUE REPAIR DIVISION
Condensed Combined Statements of Operations for
the Three and Six Months Ended June 30, 1996 and 1995.............. 100
Condensed Combined Balance Sheets as of June 30,
1996 and December 31, 1995........................................ 101
Condensed Combined Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 .......................... 102
Notes to Unaudited Condensed Combined Financial Statements........ 103
-86-
<PAGE> 86
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales ............................... $ 91,087 $74,054 $183,902 $142,325
Net service sales ............................... 18,408 13,048 33,029 26,542
Revenues from research and development contracts:
Related parties ............................... 5,956 6,497 11,999 12,823
Other ......................................... 184 6 202 104
-------- ------- -------- --------
115,635 93,605 229,132 181,794
Operating costs and expenses:
Cost of products sold ........................... 29,164 30,843 62,488 56,974
Cost of services sold ........................... 14,880 7,826 25,533 15,777
Selling, general and administrative ............. 39,997 25,902 78,569 51,893
Research and development (including research
and development related to contracts) .......... 18,565 17,263 36,255 33,726
Other ........................................... 1,465 - 1,465 -
-------- ------- -------- --------
104,071 81,834 204,310 158,370
-------- ------- -------- --------
Operating income ................................... 11,564 11,771 24,822 23,424
Other income and (expenses):
Minority interest in net loss of subsidiaries ... - 501 - 866
Equity in net loss of unconsolidated affiliate .. (1,121) (793) (2,058) (1,742)
Gain on investments ............................. 1,711 - 1,711 -
Investment income ............................... 4,615 1,297 9,103 3,062
Interest expense ................................ (186) (173) (395) (220)
-------- ------- -------- --------
5,019 832 8,361 1,966
-------- ------- -------- --------
Income before income taxes ......................... 16,583 12,603 33,183 25,390
Provision for income taxes ......................... (6,799) (4,663) (13,107) (9,394)
-------- ------- -------- --------
Net income ......................................... $ 9,784 $ 7,940 $ 20,076 $ 15,996
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
-87-
<PAGE> 87
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL DIVISION:
Net income ..................................... $ 15,979 $10,932 $ 31,516 $21,303
Allocated tax benefit generated by Genzyme
Tissue Repair Division ........................ 4,305 2,035 7,802 3,662
-------- ------- -------- -------
Net income attributable to General
Division Stock .............................. $ 20,284 $12,967 $ 39,318 $24,965
======== ======= ======== =======
Income per General Division common and
common equivalent share:
Net income(1).................................. $ 0.27 $ 0.23 $ 0.54 $ 0.44
======== ======= ======== =======
Average shares outstanding(1) ................. 73,908 56,636 72,880 56,210
======== ======= ======== =======
Income per General Division Common Share
assuming full dilution:
Net income(1).................................. $ 0.27 $ 0.21 $ 0.53 $ 0.41
======== ======= ======== =======
Average fully diluted shares outstanding(1) ... 73,934 60,646 74,300 60,470
======== ======= ======== =======
ATTRIBUTABLE TO GENZYME TISSUE REPAIR
DIVISION:
Net loss attributable to TR Stock .............. $(10,500) $(5,027) $(19,242) $(8,969)
======== ======= ======== =======
Per common share:
Net loss ...................................... $ (0.83) $ (0.57) $ (1.55) $ (1.03)
======== ======= ======== =======
Average shares outstanding ..................... 12,576 8,763 12,411 8,721
======== ======= ======== =======
<FN>
- -------------
(1) Reflects for July 25, 1996 2-for-1 stock split. (See Footnote 12 -- "Subsequent Events").
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
-88-
<PAGE> 88
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31,
- -----------------------------------------------------------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................... $ 119,331 $144,372
Short-term investments ........................ 163,063 112,303
Accounts receivable, less allowance
for doubtful accounts ........................ 97,935 88,959
Inventories ................................... 64,363 53,042
Prepaid expenses and other current assets ..... 13,433 12,531
Deferred tax assets - current ................. 7,729 7,729
---------- --------
Total current assets ........................ 465,854 418,936
Property, plant and equipment, net .............. 365,341 329,423
Other Assets:
Long-term investments ......................... 52,141 69,561
Note receivable - related party ............... 1,467 262
Intangibles, net of accumulated amortization .. 64,049 29,934
Deferred tax assets - noncurrent .............. 27,487 23,645
Other noncurrent assets ....................... 29,990 33,440
---------- --------
175,134 156,842
---------- --------
$1,006,329 $905,201
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .............................. $ 13,436 $ 21,980
Accrued expenses .............................. 49,065 39,418
Short-term borrowings ......................... 15,000 -
Income taxes payable .......................... 8,828 1,316
Deferred revenue .............................. 3,273 1,367
Current portion of long-term debt and
capital lease obligations .................... 2,761 2,445
---------- --------
Total current liabilities ................... 92,363 66,526
Noncurrent Liabilities:
Long-term debt and capital lease obligations .. 24,242 124,473
Other noncurrent liabilities .................. 8,679 8,995
---------- --------
32,921 133,468
Stockholders' Equity:
General Division Stock, $.01 par value ........ 347 312
TR Stock, $.01 par value ...................... 124 121
Treasury Stock - at cost ...................... (881) (882)
Additional paid-in capital .................... 879,513 724,342
Accumulated earnings (deficit) ................ 2,918 (17,158)
Other equity adjustments ...................... (976) (1,528)
---------- --------
881,045 705,207
---------- --------
$1,006,329 $905,201
========== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
-89-
<PAGE> 89
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ......................................... $ 20,076 $ 15,996
Reconciliation of net income to net
cash from operating activities:
Depreciation and amortization .................... 11,966 11,595
Provision for bad debts .......................... 3,797 3,699
(Gain)/loss on sale of investments ............... (1,711) 110
Loss on disposal of fixed assets ................. 41 32
Accrued interest/amortization on bonds ........... 176 514
Minority interest in net loss of subsidiaries .... - (866)
Equity in net loss of unconsolidated affiliate ... 1,719 1,742
Other ............................................ (136) 1,173
Decrease in cash from working capital:
Accounts receivable ............................ (9,849) (4,363)
Inventories .................................... (12,138) (4,183)
Prepaid expenses and other current assets ...... (361) (710)
Accounts payable, accrued expenses
and deferred revenue .......................... 4,432 (14,738)
-------- --------
Net cash provided by operating activities ...... 18,012 10,001
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate ............. (1,674) (4,000)
Loans to affiliate ................................. (1,468) (1,857)
Purchases of investments ........................... (75,935) (22,027)
Sales and maturities of investments ................ 46,934 45,918
Property, plant and equipment ...................... (41,140) (25,675)
Other noncurrent assets ............................ (2,758) (541)
-------- --------
Net cash used by investing activities .......... (76,041) (8,182)
FINANCING ACTIVITIES:
Issuance of common stock ........................... 17,311 6,846
Issuance of common stock by subsidiary ............. - 260
Short-term borrowings under bank credit agreement .. 23,000 -
Issuance of debt ................................... - 77
Payments of debt and capital lease obligations ..... (8,552) (39,341)
-------- --------
Net cash provided by (used by) financing
activities ................................... 31,759 (32,158)
Effect of exchange rate changes on cash ............... 1,229 (1,655)
-------- --------
Decrease in cash and cash equivalents ................. (25,041) (31,994)
Cash and cash equivalents, beginning of period ........ 144,372 63,542
-------- --------
Cash and cash equivalents, end of period .............. $119,331 $ 31,548
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest .......................................... $ 1,196 $ 5,197
Income taxes ...................................... 6,114 14,405
</TABLE>
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
Acquisition of Genetrix, Inc -- Note 9
Conversion of 6 3/4% convertible subordinaated
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
-90-
<PAGE> 90
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
These unaudited, condensed, consolidated financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1995 and the financial
statements and footnotes included therein. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission
rules and regulations. Certain items in the 1995 financial statements have
been reclassified to conform with the 1996 presentation.
The financial statements for the three and six months ended June 30,
1996 and 1995 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normally recurring accruals) necessary for
a fair presentation of the results for the periods presented.
2. Accounting Policies:
-------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of the financial statements included in the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1995.
3. Investments:
-----------
As of June 30, 1996, the Company's investment portfolio, consisting
primarily of debt securities classified as available for sale, was adjusted
to its market value. As a result, gross unrealized holding gains of
approximately $14,000 and gross unrealized holding losses totaling
approximately $1,300,000 were recorded in a separate component of
Stockholders' equity.
In April 1996, the Company recorded a realized gain of approximately
$1,711,000 on the sale of its investment in NABI.
As of June 30, 1996, the carrying values of the Company's investments
in Aronex, Inc., Celtrix Pharmaceuticals, Inc. and Integramed America, Inc.
(formerly IVF America, Inc.), included in Other Noncurrent Assets in the
unaudited, condensed, consolidated balance sheets, were adjusted to their
respective market values. Gross unrealized holding gains of approximately
$4,788,000 were recorded in a separate component of Stockholders' Equity.
<TABLE>
4. Inventories:
-----------
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw Materials ............ $13,981,000 $12,634,000
Work-in-process .......... 31,884,000 14,821,000
Finished products ........ 18,498,000 25,587,000
----------- -----------
$64,363,000 $53,042,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
--------------------------
The tax provision for the three and six months ended June 30, 1996
varies from the U.S. statutory tax rate because of the provision for state
income taxes, the Company's share of losses of subsidiaries which
generate no current tax benefit, tax credits, taxes on foreign earnings
and differences in tax bases due to acquisitions. The effective tax rate
was 41% and 39.5%, respectively, for the three and six months ended
June 30, 1996, slight increases over the corresponding periods in 1995.
-91-
<PAGE> 91
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Additional Investments in Unconsolidated Affiliate:
--------------------------------------------------
Pursuant to the terms of the Convertible Debt and Development Funding
Agreement executed between Genzyme and Genzyme Transgenics Corporation
("GTC") in March 1996, GTC borrowed an additional $500,000 per month in
April, May and June 1996 from Genzyme. On June 28, 1996, at GTC's request
and in accordance with the Agreement, Genzyme converted $1.5 million plus
accrued interest of approximately $23,000 into 193,321 shares of GTC
Common Stock which increased Genzyme's interest in GTC to 48.1%.
On July 31, 1996, GTC sold 3,000,000 shares of its Common Stock to the
public for $4.00 per share. Genzyme purchased 900,000 shares in the
offering after which Genzyme will own a 44.8% interest in GTC.
7. Allocation by the General Division to GTR for TR Designated Shares:
------------------------------------------------------------------
In June 1996, pursuant to the terms of an option held by Genzyme to
allocate up to $30 million from Genzyme General Division (the General
Division) to Genzyme Tissue Repair Division ("GTR"), the Board of Directors
voted to allocate $10 million of cash from the General Division to GTR in
June 1996 in exchange for an increase in the TR Designated Shares of
1,000,000 shares, which shares have been reserved for distribution at the
discretion of the Board of Directors.
8. Short-Term Borrowing Arrangements:
---------------------------------
Genzyme has an available line of credit with a commercial bank of $215
million, which may be used by either the General Division or GTR.
In March 1996, GTR utilized $8.0 million under this line of credit
as temporary financing for the acquisition of certain land and
buildings in Framingham, Massachusetts (the "Acquisition") that were
purchased for $6.8 million in cash in January 1996 as part of the planned
expansion of manufacturing capacity for the CARTICEL[Service Mark] Service
programs. In May 1996, GTR repaid the entire $8.0 million borrowed plus
accrued interest of approximately $65,000. In June 1996, GTR borrowed $15.0
million under the same credit line at an interest rate of approximately
6.06% to provide further interim financing for the Acquisition and related
required renovations until a suitable permanent financing arrangement can
be obtained.
9. Acquisition of Genetrix, Inc.:
------------------------------
On April 30, 1996, the Company acquired Genetrix Inc., a privately
held genetic testing laboratory based in Phoenix, Arizona, in a tax-free
exchange of General Division Stock. In the aggregate, approximately
690,000 shares of General Division Stock valued at approximately $36.5
million were issued. The acquisition was accounted for as a purchase. The
excess of the purchase price over the fair market value of the net assets
acquired, approximately $34.6 million, was allocated to Goodwill to be
amortized over 15 years.
10. Withdrawal of Offer to Acquire the Assets of Genzyme Development
-----------------------------------------------------------------
Partners, L.P.:
---------------
On May 3, 1996, Genzyme announced that it was withdrawing its offer to
acquire substantially all of the assets of Genzyme Development Partners,
L.P. (the "Partnership") for shares of Genzyme General Division Common
Stock valued at $93 million at the time the offer was made. The withdrawal
of the offer by Genzyme does not affect the respective rights and
obligations of the Partnership and Genzyme under any of the existing
agreements between the parties.
11. Long-Term Debt:
---------------
In March 1996, holders of the Company's 6 3/4% percent convertible
subordinated notes in the principal amount of $100 million converted such
notes into General Division and TR Stock. Holders of the notes received
18.913 shares of General Division Stock and 2.553 shares of TR Stock in
conversion of each $1,000 note. As a result of the conversion, the holders
forfeited interest which would have been payable by the Company on April 1,
1996. The carrying amount of the debt, net of unamortized discount, plus
accrued interest of approximately $2,914,000 was credited to Stockholders'
Equity.
12. Subsequent Event:
----------------
On July 1, 1996, Genzyme completed the acquisition of Deknatel Snowden
Pencer, Inc. ("DSP"), a privately held surgical products company, for
approximately $250.0 million. The purchase price consisted of cash of
approximately $190.0 million. Genzyme also assumed and subsequently repaid
debt of DSP of approximately $56.5 million, and Genzyme paid acquisition
costs of approximately $3.5 million. Funds for the acquisition, the
repayment of the debt and the payment of the acquisition costs were
provided by borrowings of $200.0 million under a revolving credit facility
from Fleet National Bank, due September 1, 1997, with interest payable at
LIBOR plus 5/8% (6.16% at July 1, 1996) and approximately $50.0 million was
provided from the Company's cash balances.
-92-
<PAGE> 92
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Subsequent Event (continued):
----------------------------
DSP designs, manufactures and markets cardiovascular devices,
precision instruments and specialty surgical products. DSP had net sales of
$95.3 million in the fiscal year ending September 30, 1995. Its 70-person
sales force calls directly on cardiovascular, general and gynecological
surgeons throughout the U.S. and Europe and has a strong presence in the
operating rooms of major hospitals. Genzyme will retain DSP personnel and
facilities and continue to pursue DSP's growth strategy.
Genzyme plans to use DSP's sales force to accelerate the introduction
of its Seprafilm[Trademark] bioresorbable membrane to the U.S.
surgical market once Seprafilm[Trademark] is approved by the U.S. Food and
Drug Administration.
In June 1996, the Board of Directors declared a 2-for-1 stock split of
shares of General Division Stock to be effected by means of a 100% stock
dividend payable on July 25, 1996 to stockholders of record on July 11,
1996, subject to increasing the authorized shares of General Division Stock
from 100,000,000 to 200,000,000 shares (the "Amendment"). The Amendment was
approved by holders of a majority in interest of the outstanding General
Division and TR Stock, voting together as a single class, at a special
meeting of the stockholders held on July 24, 1996. On July 25, 1996, a
total of 34,669,435 shares of General Division Stock were distributed to
stockholders in connection with the dividend. All share and per share
amounts have been re-stated to reflect this split.
In July 1996, the Company agreed to make a final payment of
approximately $7.6 million for a company acquired in 1994.
On July 31, 1996, GTC sold 3,000,000 shares of its Common Stock to
the public for $4.00 per share. Genzyme purchased 900,000 shares in the
offering after which Genzyme will own a 44.8% interest in GTC.
On August 13, 1996, the FDA granted approval to market Seprafilm
[Registered Trademark] for use in any open abdominal or pelvic surgery.
There are estimated to be approximately 3.1 million such surgeries
performed annually in the United States. Genzyme, on behalf of the Joint
Venture formed between Genzyme and the Partnership, expects to launch
Seprafilm[Registered Trademark] broadly in the United States in October,
using the DSP sales force. Under the terms of the agreements between
Genzyme and the Partnership, the Joint Venture will manufacture and market
Seprafilm[Registered Trademark] in North America under contract with
Genzyme. Genzyme and the Partnership expect to conclude negotiations
during the third quarter to establish definitive terms for the Joint
Venture, including the allocation between the parties of profits and
losses from the Joint Venture.
-93-
<PAGE> 93
GENZYME GENERAL DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30, JUNE 30,
- ----------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales ................................. $ 91,087 $74,054 $183,902 $142,325
Net service sales ................................. 16,761 11,801 29,668 24,265
Revenues from research and development contracts:
Related parties ................................. 5,956 6,497 11,999 12,823
Other ........................................... 184 6 202 104
-------- ------- -------- --------
113,988 92,358 225,771 179,517
Operating costs and expenses:
Cost of products sold ............................. 29,164 29,963 62,488 55,369
Cost of services sold ............................. 11,424 7,826 19,651 15,777
Selling, general and administrative ............... 33,267 23,361 65,593 47,600
Research and development (including research
and development related to contracts) ........... 16,215 14,148 31,551 27,797
Other ............................................. 1,465 - 1,465 -
-------- ------- -------- --------
91,535 75,298 180,748 146,543
-------- ------- -------- --------
Operating income ..................................... 22,453 17,060 45,023 32,974
Other income and (expenses)
Minority interest in net loss of subsidiaries ..... - 501 - 866
Equity in net loss of unconsolidated affiliate .... (1,121) (793) (2,058) (1,742)
Gain on investments ............................... 1,711 - 1,711 -
Investment income ................................. 4,226 1,035 8,144 2,481
Interest expense .................................. (186) (173) (395) (220)
-------- ------- -------- --------
4,630 570 7,402 1,385
-------- ------- -------- --------
Income before income taxes ........................... 27,083 17,630 52,425 34,359
Provision for income taxes ........................... (11,104) (6,698) (20,909) (13,056)
-------- ------- -------- --------
Net income ........................................... 15,979 10,932 31,516 21,303
Allocated tax benefit generated by Genzyme
Tissue Repair Division .............................. 4,305 2,035 7,802 3,662
-------- ------- -------- --------
Net income attributable to Genzyme
General Division Stock .............................. $ 20,284 $12,967 $ 39,318 $ 24,965
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-94-
<PAGE> 94
GENZYME GENERAL DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to Genzyme
General Division Stock .......................... $20,284 $12,967 $39,318 $24,965
======= ======= ======= =======
Income per General Division common and
common equivalent share:
Net income(1) ................................. $ 0.27 $ 0.23 $ 0.54 $ 0.44
======= ======= ======= =======
Average shares outstanding(1) ................. 73,908 56,636 72,880 56,210
======= ======= ======= =======
Income per General Division Common Share
assuming full dilution:
Net income(1) ................................. $ 0.27 $ 0.21 $ 0.53 $ 0.41
======= ======= ======= =======
Average fully diluted shares outstanding(1) ... 73,934 60,646 74,300 60,470
======= ======= ======= =======
<FN>
(1) Reflects for July 25, 1996 2-for-1 stock split. (See Footnote 11 - "Subsequent Events".)
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-95-
<PAGE> 95
GENZYME GENERAL DIVISION
<TABLE>
COMBINED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31,
- ---------------------------------------------------------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 85,354 $103,631
Short-term investments ....................... 161,060 105,471
Accounts receivable, less allowance
for doubtful accounts........................ 96,719 87,121
Inventories .................................. 62,989 52,281
Prepaid expenses and other current assets .... 13,002 12,345
Due from Genzyme Tissue Repair Division ...... 2,308 2,034
Deferred tax assets - current ................ 7,729 7,729
-------- --------
Total current assets ....................... 429,161 370,612
Property, plant and equipment, net ............. 344,658 327,461
Other Assets:
Long-term investments ........................ 52,141 69,561
Note receivable - affiliate .................. 1,467 262
Intangibles, net of accumulated amortization.. 64,049 29,934
Deferred tax assets - noncurrent ............. 27,487 23,645
Other noncurrent assets ...................... 29,878 33,111
-------- --------
175,022 156,513
-------- --------
$948,841 $854,586
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable ............................. $ 12,063 $ 19,548
Accrued expenses ............................. 46,847 38,069
Income taxes payable ......................... 8,828 1,316
Deferred revenue ............................. 3,273 1,367
Current portion of long-term debt and
capital lease obligations ................... 2,724 2,276
-------- --------
Total current liabilities .................. 73,735 62,576
Noncurrent Liabilities:
Long-term debt and capital lease obligations.. 24,242 124,473
Other noncurrent liabilities ................. 7,928 8,256
-------- --------
32,170 132,729
Division equity ................................ 842,936 659,281
-------- --------
$948,841 $854,586
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-96-
<PAGE> 96
GENZYME GENERAL DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
- -------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................ $ 39,318 $ 24,965
Reconciliation of net income to net
cash from operating activities:
Depreciation and amortization ................... 11,708 11,282
Provision for bad debts ......................... 3,641 3,699
(Gain)/loss on sale of investments .............. (1,711) 110
Loss on disposal of fixed assets ................ 41 32
Accrued interest/amortization on bonds .......... 102 613
Minority interest in net loss of subsidiaries ... - (866)
Equity in net loss of unconsolidated affiliate .. 1,719 1,742
Other ........................................... (110) 1,173
Decrease in cash from working capital:
Accounts receivable ........................... (10,315) (4,854)
Inventories ................................... (11,525) (4,149)
Prepaid expenses and other current assets ..... (116) (806)
Accounts payable, accrued expenses
and deferred revenue ......................... 4,623 (13,350)
Due from Genzyme Tissue Repair Division ....... (185) (655)
-------- --------
Net cash provided by operating activities ..... 37,190 18,936
INVESTING ACTIVITIES:
Cash allocated to Genzyme Tissue Repair Division .. (10,000) -
Investment in unconsolidated affiliate ............ (1,674) (4,000)
Loans to affiliate ................................ (1,468) (1,857)
Purchases of investments .......................... (70,931) (11,070)
Sales and maturities of investments ............... 37,172 37,831
Property, plant and equipment ..................... (22,161) (25,516)
Other noncurrent assets ........................... (2,987) (549)
-------- --------
Net cash provided by investing activities ..... (72,049) (5,161)
-------- --------
FINANCING ACTIVITIES:
Issuance of General Division Common Stock ......... 15,773 6,461
Issuance of common stock by subsidiary ............ - 260
Issuance of debt - 77
Payments of debt and capital lease obligations .... (420) (39,181)
-------- --------
Net cash provided by financing activities ...... 15,353 (32,383)
Effect of exchange rate changes on cash .............. 1,229 (1,655)
-------- --------
Decrease in cash and cash equivalents ................ (18,277) (20,263)
Cash and cash equivalents, beginning of period ....... 103,631 46,549
-------- --------
Cash and cash equivalents, end of period ............. $ 85,354 $ 26,286
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest ......................................... $ 1,125 $ 5,173
Income taxes ..................................... 5,543 14,405
</TABLE>
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
Acquisition of Genetrix, Inc. -- Note 8
Conversion of 6 3/4% convertible subordinated notes in the principal amount
of $100 million -- Note 10
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-97-
<PAGE> 97
GENZYME GENERAL DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
These unaudited, condensed, combined financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1995 and the financial statements and
footnotes for Genzyme General Division included therein. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. The financial statements for the
three and six months ended June 30, 1996 and 1995 are unaudited but
include, in the Division's opinion, all adjustments (consisting only of
normally recurring accruals) necessary for a fair presentation of the
results for the periods presented.
2. Accounting Policies:
-------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of the General Division's financial
statements included in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1995.
3. Investments:
-----------
As of June 30, 1996, the General Division's investment portfolio,
consisting primarily of debt securities classified as available for sale,
was adjusted to its market value. As a result, gross unrealized holding
gains of approximately $14,000 and gross unrealized holding losses totaling
approximately $1,293,000 were recorded in a separate component of Division
equity.
In April 1996, the General Division recorded a realized gain of
approximately $1,711,000 on the sale of its investment in NABI.
As of June 30, 1996, the carrying values of the General Division's
investments in Aronex, Inc., Celtrix Pharmaceuticals, Inc. and Integramed
America, Inc. (formerly IVF America, Inc.), included in Other Noncurrent
Assets in the unaudited, condensed, combined balance sheets, were adjusted
to their respective market values. Gross unrealized holding gains of
approximately $4,788,000 were recorded in a separate component of Division
equity.
<TABLE>
4. Inventories:
-----------
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw Materials.............. $13,855,000 $12,527,000
Work-in-process............ 30,636,000 14,167,000
Finished products.......... 18,498,000 25,587,000
----------- -----------
$62,989,000 $52,281,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
--------------------------
The tax provision for the three and six months ended June 30, 1996
varies from the U.S. statutory tax rate because of the provision for state
income taxes, the General Division's share of losses of subsidiaries which
generate no current tax benefit, tax credits, taxes on foreign earnings
and differences in tax bases due to acquisitions. The effective tax rate
was 41% and 39.9% for the three and six months ended June 30, 1996, slight
increases over the corresponding periods in 1995. The allocated tax
benefit generated by GTR of $4.3 million and $2.0 million in the second
quarter of 1996 and 1995, respectively, reduced the General Division's tax
rate for those periods to 25.1% and 26.4%, respectively. For the six
months ended June 30, 1996 and 1995, the allocated tax benefit generated
by GTR of $7.8 million
-98-
<PAGE> 98
GENZYME GENERAL DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
5. Provision for Income Taxes (continued):
--------------------------------------
and $3.7 million, respectively, reduced the General Division's tax rate for
the respective six month periods to 25% and 27.3%.
6. Additional Investments in Unconsolidated Affiliate:
--------------------------------------------------
Pursuant to the terms of the Convertible Debt and Development Funding
Agreement executed between Genzyme and GTC in March 1996, GTC borrowed an
additional $500,000 per month in April, May and June 1996 from the General
Division. On June 28, 1996, at GTC's request, the General Division
converted $1.5 million plus accrued interest of approximately $23,000 into
193,321 shares of GTC Common Stock which increased the General Division's
interest in GTC to 48.1%.
On July 31, 1996, GTC sold 3,000,000 shares of its common stock to
the public for $4.00 per share. Genzyme purchased 900,000 shares in the
offering after which Genzyme will own a 44.8% interest in GTC.
7. Allocation by the General Division to GTR for TR Designated Shares:
------------------------------------------------------------------
In June 1996, pursuant to the terms of an option held by Genzyme to
allocate up to $30 million from the General Division to GTR, the Board of
Directors voted to allocate $10 million of cash from the General Division
to GTR in exvchange for an increase in the TR Designated Shares of
1,000,000 shares, which shares have been reserved for distribution at the
discretion of the Board of Directors.
8. Acquisition of Genetrix, Inc.
-----------------------------
On April 30, 1996, the General Division acquired Genetrix, Inc., a
privately held genetic testing laboratory based in Phoenix, Arizona, in a
tax-free exchange of General Division Stock. In the aggregate,
approximately 690,000 shares of General Division Stock valued at
approxmiately $36.5 million were issued. The acquisition was accounted for
as a purchase. The excess of the purchase price over the fair market value
of the net assets acquired, approximately $34.6 million, was allocated to
Goodwill to be amortized over 15 years.
9. Withdrawal of Offer to Acquire the Assets of
Genzyme Development Partners, L.P.:
--------------------------------------------
On May 3, 1996, Genzyme announced that it was withdrawing its offer
to acquire substantially all of the assets of Genzyme Development
Partners, L.P. (the "Partnership") for shares of Genzyme General Division
Common Stock valued at $93 million at the time the offer was made. The
withdrawal of the offer by Genzyme does not affect the respective rights
and obligations of the Partnership and Genzyme under any of the existing
agreements between the parties.
10. Long-Term Debt:
--------------
In March 1996, holders of the Company's 6 3/4% percent convertible
subordinated notes in the principal amount of $100 million converted such
notes into General Division and TR Stock. Holders of the notes received
18.913 shares of General Division Stock and 2.553 shares of TR Stock in
conversion of each $1,000 note. As a result of the conversion, the holders
forfeited interest which would have been payable by the Company on
April 1, 1996. The carrying amount of the debt, net of unamortized
discount, plus accrued interest of approximately $2,914,000 was credited
to Stockholders' Equity.
11. Subsequent Events:
-----------------
On July 1, 1996, the General Division completed the acquisition of
DSP, a privately held surgical products company, for approximately
$250.0 million. The purchase price consisted of cash of approximately
$190.0 million. The General Division also assumed and subsequently repaid
debt of DSP of approximately $56.5 million, and the General Division paid
acquisition costs of approximately $3.5 million. Funds for the
acquisition, the repayment of the debt and the payment of the acquisition
costs were provided by borrowings of $200.0 million under a revolving
credit facility from Fleet National Bank, due September 1, 1997, with
interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996) and
approximately $50.0 million was provided from General Division cash
balances.
DSP designs, manufactures and markets cardiovascular devices,
precision instruments and specialty surgical products. DSP had net sales
of $95.3 million in the fiscal year ending September 30, 1995. Its
70-person sales force calls directly on cardiovascular, general and
gynecological surgeons throughout the U.S. and Europe and has a strong
presence in the operating rooms of major hospitals. The General Division
will retain DSP personnel and facilities and continue to pursue DSP's
growth strategy.
The General Division plans to use DSP's sales force to accelerate the
introduction of its Seprafilm[Registered Trademark] bioresorbable membrane
to the U.S. surgical market once Seprafilm[Trademark] is approved by the
U.S. Food and Drug Administration.
In June 1996, the Board of Directors declared a 2-for-1 stock split
of shares of General Division Stock to be effected by means of a 100%
stock dividend payable on July 25, 1996 to stockholders of record on
July 11, 1996, subject to increasing the authorized shares of General
Division Stock from 100,000,000 to 200,000,000 shares (the "Amendment").
The Amendment was approved by holders of a majority in interest of the
outstanding General Division and TR Stock, voting together as a single
class, at a special meeting of the stockholders held on July 24, 1996.
On July 25, 1996, a total 34,669,435 shares of General Division Stock were
distributed to stockholders in connection with the dividend. All share and
per share amounts have been re-stated to reflect this split.
In July 1996, the General Division agreed to make a final payment of
approximately $7.6 million for a company acquired in 1994.
On July 31, 1996, GTC sold 3,000,000 shares of its Common Stock to
the public for $4.00 per share. Genzyme purchased 900,000 shares in the
offering after which Genzyme will own a 44.8% interest in GTC.
On August 13, 1996, the FDA granted approval to market Seprafilm
[Registered Trademark] for use in any open abdominal or pelvic surgery.
There are estimated to be approximately 3.1 million such surgeries
performed annually in the United States. Genzyme, on behalf of the Joint
Venture formed between Genzyme and the Partnership, expects to launch
Seprafilm[Registered Trademark] broadly in the United States in October,
using the DSP sales force. Under the terms of the agreements between
Genzyme and the Partnership, the Joint Venture will manufacture and market
Seprafilm[Registered Trademark] in North America under contract with
Genzyme. Genzyme and the Partnership expect to conclude negotiations
during the third quarter to establish definitive terms for the Joint
Venture, including the allocation between the parties of profits and
losses from the Joint Venture.
-99-
<PAGE> 99
GENZYME TISSUE REPAIR DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net service sales .................... $ 1,647 $ 1,247 $ 3,361 $ 2,277
Operating costs and expenses:
Cost of services sold ................ 3,456 880 5,882 1,605
Selling, general and administrative .. 6,730 2,541 12,976 4,293
Research and development ............. 2,350 3,115 4,704 5,929
-------- ------- -------- -------
12,536 6,536 23,562 11,827
-------- ------- -------- -------
Operating loss .......................... (10,889) (5,289) (20,201) (9,550)
======== ======= ======== =======
Investment income ....................... 389 262 959 581
======== ======= ======== =======
Net loss ................................ $(10,500) $(5,027) $(19,242) $(8,969)
======== ======= ======== =======
Per Tissue Repair Division Common share:
Net loss ............................. $ (0.83) $ (0.57) $ (1.55) $ (1.03)
======== ======= ======== =======
Average shares outstanding ........... 12,576 8,763 12,411 8,721
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-100-
<PAGE> 100
GENZYME TISSUE REPAIR DIVISION
<TABLE>
COMBINED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31,
- -------------------------------------------------------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................... $33,977 $40,741
Short-term investments ....................... 2,003 6,832
Accounts receivable, less allowance
for doubtful accounts ....................... 1,216 1,838
Inventories .................................. 1,374 761
Prepaid expenses and other current assets .... 431 186
------- -------
Total current assets ....................... 39,001 50,358
Property, plant and equipment, net ............. 20,683 1,962
Other Assets:
Other noncurrent assets ...................... 112 329
------- -------
112 329
------- -------
$59,796 $52,649
======= =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable ............................. $ 1,373 $ 2,432
Accrued expenses ............................. 2,218 1,349
Payable to Genzyme General Division .......... 2,308 2,034
Short-term borrowings ........................ 15,000 -
Current portion of capital lease obligations . 37 169
------- -------
Total current liabilities .................. 20,936 5,984
Noncurrent Liabilities:
Other noncurrent liabilities ................. 751 739
------- -------
751 739
Division equity ................................ 38,109 45,926
------- -------
$59,796 $52,649
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-101-
<PAGE> 101
GENZYME TISSUE REPAIR DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................. $(19,242) $ (8,969)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization ...................... 258 313
Provision for bad debts ............................ 156
Accrued interest/amortization on bonds ............. 74 (99)
Other .............................................. (26) -
Increase (decrease) in cash from working capital:
Accounts receivable .............................. 466 491
Inventories ...................................... (613) (34)
Prepaid expenses and other current assets ........ (245) 96
Accounts payable, accrued expenses
and deferred revenue ............................ (191) (1,388)
Due to Genzyme General Division .................. 185 655
-------- --------
Net cash used by operating activities ............ (19,178) (8,935)
INVESTING ACTIVITIES:
Purchases of investments ............................. (5,004) (10,957)
Sales and maturities of investments .................. 9,762 8,087
Property, plant and equipment ........................ (18,979) (159)
Other noncurrent assets .............................. 217 8
-------- --------
Net cash used by investing activities ............ (14,004) (3,021)
FINANCING ACTIVITIES:
Proceeds from issuance of TR Stock .................... 1,538 385
Short-term borrowings under bank credit agreement ..... 23,000 -
Payments of debt and capital lease obligations ........ (8,132) (139)
Cash allocated from Genzyme General Division .......... 10,000 -
Other ................................................. 12 (21)
-------- --------
Net cash provided by financing activities ........ 26,418 225
-------- --------
Decrease in cash and cash equivalents ................... (6,764) (11,731)
Cash and cash equivalents, beginning of period .......... 40,741 16,993
-------- --------
Cash and cash equivalents, end of period ................ $ 33,977 $ 5,262
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for interest ............. $ 71 $ 24
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-102-
<PAGE> 102
GENZYME TISSUE REPAIR DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
These unaudited, condensed, combined financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1995 and the financial statements and
footnotes for GTR included therein. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission
rules and regulations.
The financial statements for the three and six months ended June 30,
1996 and 1995 are unaudited but include, in GTR's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. Accounting Policies:
-------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of GTR's financial statements included in the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1995.
3. Investments:
-----------
As of June 30, 1996, GTR's investment portfolio, consisting primarily
of debt securities classified as available for sale, was adjusted to its
market value. As a result, gross unrealized holding losses totaling
approximately $7,000 were recorded in a separate component of Division
equity.
<TABLE>
4. Inventories:
-----------
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw Materials.............. $ 126,000 $107,000
Work-in-process............ 1,248,000 654,000
---------- --------
$1,374,000 $761,000
========== ========
</TABLE>
5. Allocation by the General Division to GTR for TR Designated Shares:
------------------------------------------------------------------
In June 1996, pursuant to the terms of an option held by Genzyme to
allocate up to $30 million from Genzyme General Divisison (the General
Division) to Genzyme Tissue Repair Division ("GTR"), the Board of Directors
voted to allocate $10 million of cash from the General Division to GTR in
June 1996 in exchange for an increase in the TR Designated Shares of
1,000,000 shares, which shares have been reserved for distribution at
the discretion of the Board of Directors.
6. Short-Term Borrowing Arrangements:
---------------------------------
Genzyme has an available line of credit with a commercial bank of $215
million, which may be used by either the General or Tissue Repair Division.
In March 1996, GTR utilized $8.0 million under this credit line as
temporary financing for the acquisition of certain land and buildings in
Framingham, Massachusetts (the "Acquisition") that were purchased for $6.8
million in cash in January 1996 as part of the planned expansion of
manufacturing capacity for the CARTICEL[Service Mark] Service programs. In
May 1996, GTR repaid the entire $8.0 million borrowed plus accrued
interest of approximately $65,000. In June 1996, GTR borrowed $15.0
million under the same credit line at an interest rate of approximately
6.06% to provide further interim financing for the Acquisition and related
required renovations until a suitable permanent financing arrangement can
be obtained.
-103-
<PAGE> 1
EXHIBIT (g)(2)
GENZYME CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION:
These unaudited condensed pro forma financial statements and the related
notes are presented to give effect to the acquisition (the "Genetrix
Acquisition") of Genetrix, Inc. ("Genetrix") with and into Genzyme Corporation
("Genzyme") using shares of the common stock of the Genzyme General Division
(the "General Division")(as described in Note 2), the acquisition (the "DSP
Acquisition") of the assets of Deknatel Snowden Pencer, Inc. ("DSP") by Genzyme
(as described in Note 3) and the probable acquisition of Neozyme II with and
into Genzyme (the "Neozyme II Acquisition") (as described in Note 4). Pro forma
condensed statements of operations have been presented for both Genzyme and the
General Division assuming that the Genetrix, DSP and Neozyme II acquisitions
each occurred as of January 1, 1995, using the purchase accounting method. Pro
forma balance sheets have been presented for both Genzyme and the General
Division assuming that the DSP Acquisition and the Neozyme II Acquisition
occurred as of June 30, 1996. The historical Genzyme Corporation and Genzyme
General Division results included in the pro forma balance sheets reflect the
effect of the Genetrix Acquisition which was completed on May 1, 1996. To
distinguish the effect of each transaction, subtotal columns have been included
on each financial statement to give effect to the Genetrix Acquisition, after
certain pro forma adjustments, and the DSP Acquisition, after certain pro forma
adjustments, before consideration of the Neozyme II Acquisition and any related
pro forma adjustments. The notes to the unaudited pro forma financial statements
are defined as related either to the Genetrix Acquisition, the DSP Acquisition
or the Neozyme II Acquisition.
Year end for Genzyme, Genetrix and Neozyme II is December 31, while year
end for DSP prior to the acquisition by Genzyme was September 30. The pro forma
financial statements for the year ended December 31, 1995, herein, are based on
the historical income statements of Genzyme, Genetrix, and Neozyme II for the
year ended December 31, 1995 and the historical income statement for DSP for the
year ended September 30, 1995. Revenues and operating costs and expenses for DSP
for the three months ended December 31, 1995 were $22,001,000 and $18,260,000,
respectively.
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
(Amounts in thousands)
<CAPTION>
HISTORICAL PRO
GENZYME HISTORICAL FORMA
CORP. DSP ADJS.
---------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 119,331 $ 1,703 $(50,750)
Short-term investments.................... 163,063 -- --
Accounts receivable, less allowance for
doubtful accounts....................... 97,935 15,377
Inventories............................... 64,363 24,240 5,315
Prepaid expenses and other current
assets.................................. 13,433 681 --
Deferred tax assets -- current............ 7,729 --
---------- -------- --------
Total current assets.............. 465,854 42,001 (45,435)
Property, plant and equipment, net........ 365,341 17,475 --
Other Assets:
Long-term investments..................... 52,141 -- --
Notes receivable-related party............ 1,467 -- --
Intangibles, net of accumulated
amortization............................ 64,049 49,176 151,297
Deferred tax assets -- noncurrent......... 27,487 (733) (10,168)
Other noncurrent assets................... 29,990 152 --
---------- -------- --------
Total other assets........................ 175,134 48,595 141,129
---------- -------- --------
Total assets...................... $1,006,329 $108,071 $ 95,694
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA PRO
FOOT GENZYME PRO FOOT FORMA
NOTE CORP. HISTORICAL FORMA NOTE GENZYME
REF. & DSP NEOZYME II ADJS. REF. CORP.
---- --------- ---------- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. (C) $ 70,284 $ 8,636 $ -- $ 78,920
Short-term investments.................... 163,063 5,178 (108,675) (K) 59,566
Accounts receivable, less allowance for
doubtful accounts....................... 113,312 -- -- 113,312
Inventories............................... (D) 93,918 -- -- 93,918
Prepaid expenses and other current
assets.................................. 14,114 527 (556) (I) 14,085
Deferred tax assets -- current............ 7,729 -- -- 7,729
---------- ------- --------- ----------
Total current assets.............. 462,420 14,341 (109,231) 367,530
Property, plant and equipment, net........ 382,816 -- -- 382,816
Other Assets:
Long-term investments..................... 52,141 -- -- 52,141
Notes receivable-related party............ 1,467 -- -- 1,467
Intangibles, net of accumulated
amortization............................ (E) 264,522 -- -- 264,522
Deferred tax assets -- noncurrent......... (E) 16,586 -- -- 16,586
Other noncurrent assets................... 30,142 -- (100) (I) 30,042
---------- ------- --------- ----------
Total other assets........................ 364,858 -- (100) 364,758
---------- ------- --------- ----------
Total assets...................... $1,210,094 $14,341 $(109,331) $1,115,104
========== ======= ========= ==========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
JUNE 30, 1996
(Amounts in thousands)
<CAPTION>
HISTORICAL PRO
GENZYME HISTORICAL FORMA
CORP. DSP ADJS.
---------- ---------- ---------
<S> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 13,436 $ 4,434 $ --
Accrued expenses.......................... 49,065 19,898 3,500
Income taxes payable...................... 8,828 -- --
Deferred revenue.......................... 3,273 -- --
Short-term borrowings..................... 15,000 -- 200,000
Current portion of long-term debt and
capital lease obligations............... 2,761 9,418 (9,250)
---------- ---------- --------
Total current liabilities......... 92,363 33,750 194,250
Noncurrent liabilities:
Long-term debt and capital lease
obligations............................. 24,242 45,726 (45,500)
Note payable to Genzyme................... -- -- --
Other noncurrent liabilities.............. 8,679 -- --
---------- ---------- --------
32,921 45,726 (45,500)
Stockholders' Equity:
General Division Stock, $.01 par value.... 347 --
TR Stock, $.01 par value.................. 124 --
Treasury Stock, at cost................... (881) --
Neozyme II callable common stock..........
DSP, Inc. common stock.................... -- 5 (5)
Additional paid-in capital................ 879,513 46,260 (46,260)
Accumulated earnings (deficit)............ 2,918 (17,379) 17,379
(24,170)
Other equity adjustments.................. (976) (291) --
---------- ---------- --------
Total stockholders' equity........ 881,045 28,595 (53,056)
---------- ---------- --------
Total liabilities and stockholders'
equity.................................. $1,006,329 $ 108,071 $ 95,694
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA PRO
FOOT GENZYME PRO FOOT FORMA
NOTE CORP. HISTORICAL FORMA NOTE GENZYME
REF. & DSP NEOZYME II ADJS. REF. CORP.
---- --------- ---------- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 17,870 $ -- $ -- $ 17,870
Accrued expenses.......................... (F) 72,463 158 971 (I, K) 73,592
Income taxes payable...................... 8,828 -- 8,828
Deferred revenue.......................... 3,273 -- (527) (I) 2,746
Short-term borrowings..................... (G) 215,000 -- -- 215,000
Current portion of long-term debt and
capital lease obligations............... (A) 2,929 -- -- 2,929
---------- -------- --------- ----------
Total current liabilities......... 320,363 158 444 320,965
Noncurrent liabilities:
Long-term debt and capital lease
obligations............................. (A) 24,468 -- -- 24,468
Note payable to Genzyme................... -- 100 (100) (I) --
Other noncurrent liabilities.............. 8,679 -- -- 8,679
---------- -------- --------- ----------
33,147 100 (100) 33,147
Stockholders' Equity:
General Division Stock, $.01 par value.... 347 -- -- 347
TR Stock, $.01 par value.................. 124 -- -- 124
Treasury Stock, at cost................... (881) -- -- (881)
Neozyme II callable common stock.......... -- 2,415 (2,415) (J) --
DSP, Inc. common stock.................... (B) -- -- -- --
Additional paid-in capital................ (B) 879,513 75,620 (75,620) (J) 879,513
Accumulated earnings (deficit)............ (B) (21,252) (63,918) 63,918 (J) (116,810)
(109,675) (K)
(H) 14,117 (K)
Other equity adjustments.................. (1,267) (34) -- (1,301)
---------- -------- --------- ----------
Total stockholders' equity........ 856,584 14,083 (109,675) 760,992
---------- -------- --------- ----------
Total liabilities and stockholders'
equity.................................. $1,210,094 $ 14,341 $(109,331) $1,115,104
========== ======== ========= ==========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 4
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT GENZYME
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL
CORP. INC. ADJS. REF. GENETRIX DSP
---------- ---------- -------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................................... $229,132 $7,239 $ -- $236,371 $54,138
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative, research
and development expenses.................... 200,309 7,265 (33) [M] 207,541 44,892
Amortization expense.......................... 2,536 187 770 [L] 3,493 3,532
Other expenses................................ 1,465 -- 1,465 546
-------- ------ ------- -------- -------
Total operating expenses........................ 204,310 7,452 737 212,499 48,970
-------- ------ ------- -------- -------
Operating income................................ 24,822 (213) (737) 23,872 5,168
Other income and (expenses):
Investment income............................. 9,103 -- -- 9,103 --
Interest expense.............................. (395) (115) 59 [N] (451) (3,039)
Other......................................... (347) (43) -- (390) (894)
-------- ------ ------- -------- -------
8,361 (158) 59 8,262 (3,933)
-------- ------ ------- -------- -------
Income before income taxes...................... 33,183 (371) (678) 32,134 1,235
Provision for income taxes...................... (13,107) -- 109 [O] (12,998) (1,004)
-------- ------ ------- -------- -------
Net income...................................... $ 20,076 $ (371) $ (569) $ 19,136 $ 231
======== ====== ======= ======== =======
Attributable to the General Division:
Net income.................................... $ 31,516 $ 30,576
Tax benefit allocated from Tissue Repair
Division.................................. 7,802 7,802
-------- --------
Net income attributable to General
Division Stock................................ $ 39,318 $ 38,378
======== ========
</TABLE>
<TABLE>
<CAPTION> PRO
FORMA
GENZYME PRO
PRO FOOT CORP. PRO FOOT FORMA
FORMA NOTE GENETRIX HISTORICAL FORMA NOTE GENZYME
ADJS. REF. AND DSP NEOZYME II ADJS. REF. CORP.
-------- ---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................................... $ -- $290,509 $ -- $(10,631) [U] $279,878
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative, research
and development expenses.................... (725) [Q] 251,708 10,758 (10,634) [U] 251,832
Amortization expense.......................... 1,906 [P] 8,931 -- -- 8,931
Other expenses................................ -- 2,011 -- -- 2,011
------- -------- -------- -------- --------
Total operating expenses........................ 1,181 262,650 10,758 (10,634) 262,774
------- -------- -------- -------- --------
Operating income................................ (1,181) 27,859 (10,758) 3 17,104
Other income and (expenses):
Investment income............................. -- 9,103 453 (2,720) [U,V] 6,836
Interest expense.............................. (3,121) [R] (6,611) -- -- (6,611)
Other......................................... -- (1,284) -- -- (1,284)
------- -------- -------- -------- --------
(3,121) 1,208 453 (2,720) (1,059)
------- -------- -------- -------- --------
Income before income taxes...................... (4,302) 29,067 (10,305) (2,717) 16,045
Provision for income taxes...................... (1,018) [T] (15,020) -- 5,534 [W] (9,486)
------- -------- -------- -------- --------
Net income...................................... $(5,320) $ 14,047 $(10,305) $ 2,817 $ 6,559
======= ======== ======== ======== ========
Attributable to the General Division:
Net income.................................... $ 25,487 $ 17,999
Tax benefit allocated from Tissue Repair
Division.................................. 7,802 7,802
-------- --------
Net income attributable to General
Division Stock................................ $ 33,289 $ 25,801
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 5
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT GENZYME PRO
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA
CORP. INC. ADJS. REF. GENETRIX DSP ADJS.
---------- ---------- -------- ----- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share....................... $ 0.54 $ 0.52
======== ========
Pro forma weighted average shares
outstanding................................. 72,880 920 73,800
======== === ========
Income per General Division common and common
equivalent share assuming
full dilution............................... $ 0.53 $ 0.51
======== ========
Pro forma fully diluted weighted average
shares outstanding.......................... 74,300 920 75,220
======== === ========
Attributable to the Tissue Repair Division:
Net loss.................................... $(19,242) $(19,242)
Tax benefit allocated to the General
Division.................................. -- --
-------- --------
Net income (loss) attributable to TR Stock.... $(19,242) $(19,242)
======== ========
Loss per Tissue Repair Division common
share....................................... $ (1.55) $ (1.55)
======== ========
Historical weighted average shares
outstanding................................. 12,411 12,411
======== ========
</TABLE>
<TABLE>
<CAPTION> PRO
FORMA
GENZYME PRO
FOOT CORP. PRO FOOT FORMA
NOTE GENETRIX HISTORICAL FORMA NOTE GENZYME
REF. AND DSP NEOZYME II ADJS. REF. CORP.
---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share....................... $ 0.45 $ 0.35
======== ========
Pro forma weighted average shares
outstanding................................. 73,800 73,800
======== ========
Income per General Division common and common
equivalent share assuming
full dilution............................... $ 0.44 $ 0.34
======== ========
Pro forma fully diluted weighted average
shares outstanding.......................... 75,220 75,220
======== ========
Attributable to the Tissue Repair Division:
Net loss.................................... $(19,242) $(19,242)
Tax benefit allocated to the General
Division.................................. -- --
-------- ========
Net income (loss) attributable to TR Stock.... $(19,242) $(19,242)
======== ========
Loss per Tissue Repair Division common
share....................................... $ (1.55) $ (1.55)
======== ========
Historical weighted average shares
outstanding................................. 12,411 12,411
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 6
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT GENZYME
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL
CORP. INC. ADJS. REF. GENETRIX DSP
---------- ---------- -------- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues..................................... $383,783 $22,006 $ -- $405,789 $95,259
Operating costs and expenses:
Cost of products and services sold and selling,
general, administrative, research and
development expenses......................... 329,094 22,151 (100) (M) 351,145 79,146
Amortization expense........................... 4,677 -- 2,310 (L) 6,987 2,750
Other expenses................................. 14,216 -- -- 14,216 3,585
--------- ------- ------- -------- -------
Total operating expenses......................... 347,987 22,151 2,210 372,348 85,481
--------- ------- ------- -------- -------
Operating income................................. 35,796 (145) (2,210) 33,441 9,778
Other income and (expenses):
Investment income.............................. 8,814 25 -- 8,839 --
Interest expense............................... (1,109) (260) 178 (N) (1,191) (6,937)
Other.......................................... (202) -- -- (202) (1,354)
--------- ------- ------- -------- -------
7,503 (235) 178 7,446 (8,291)
--------- ------- ------- -------- -------
Income before income taxes....................... 43,299 (380) (2,032) 40,887 1,487
Provision for income taxes....................... (21,649) -- 43 (O) (21,606) (172)
--------- ------- ------- -------- -------
Net income....................................... $ 21,650 $ (380) $(1,989) $ 19,281 $ 1,315
======== ======= ======= ======== =======
Applicable to the General Division:
Net income..................................... $ 34,823 $ 32,454
Tax benefit allocated from Tissue Repair
Division................................... 8,857 8,857
-------- --------
Net income attributable to General Division
Stock.......................................... $ 43,680 $ 41,311
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA PRO
PRO FOOT GENZYME, PRO FOOT FORMA
FORMA NOTE GENETRIX, HISTORICAL FORMA NOTE GENZYME
ADJS. REF. & DSP NEOZYME II ADJS. REF. CORP.
-------- ---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................................... $ -- $501,048 $ -- $(24,198) [U] $476,850
Operating costs and expenses:
Cost of products and services sold and selling,
general, administrative, research and
development expenses......................... (1,450) (Q) 434,156 24,455 (24,205) [U] 434,406
5,315 (S)
Amortization expense........................... 3,814 (P) 13,551 -- -- 13,551
Other expenses................................. 17,801 -- -- 17,801
-------- -------- -------- -------- --------
Total operating expenses......................... 7,679 465,508 24,455 (24,205) 465,758
-------- -------- -------- -------- --------
Operating income................................. (7,679) 35,540 (24,455) 7 11,092
Other income and (expenses):
Investment income.............................. -- 8,839 1,497 (5,441) [U,V] 4,895
Interest expense............................... (5,383) (R) (13,511) -- -- (13,511)
Other.......................................... -- (1,556) -- -- (1,556)
-------- -------- -------- -------- --------
(5,383) (6,228) 1,497 (5,441) (10,172)
-------- -------- -------- -------- --------
Income before income taxes....................... (13,062) 29,312 (22,958) (5,434) 920
Provision for income taxes....................... 587 (T) (21,191) -- 12,067 [W] (9,124)
-------- -------- -------- -------- --------
Net income....................................... $(12,475) $ 8,121 $(22,958) $ 6,633 $ (8,204)
======== ======== ======== ======== ========
Applicable to the General Division:
Net income..................................... $ 21,294 $ 4,969
Tax benefit allocated from Tissue Repair
Division................................... 8,857 8,857
-------- --------
Net income attributable to General Division
Stock.......................................... $ 30,151 $ 13,826
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 7
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT GENZYME
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL
CORP. INC. ADJS. REF. GENETRIX DSP
---------- ---------- -------- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share........................ $ 0.73 $ 0.67
======== ========
Pro forma weighted average shares outstanding.... 60,185 1,380 61,565
======== ===== ========
Income per General Division common and common
equivalent share assuming full dilution........ $ 0.66 $ 0.61
======== ========
Pro forma fully diluted weighted average shares
outstanding.................................... 66,621 1,380 68,001
======== ===== ========
Applicable to the Tissue Repair Division:
Net loss....................................... $(22,030) $(22,030)
Tax benefit allocated to the General
Division..................................... -- --
-------- --------
Net income (loss) attributable to TR Stock....... $(22,030) $(22,030)
======== ========
Loss per Tissue Repair Division common share..... $ (2.28) $ (2.28)
======== ========
Historical weighted average shares outstanding... 9,659 9,659
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA PRO
PRO FOOT GENZYME, PRO FOOT FORMA
FORMA NOTE GENETRIX, HISTORICAL FORMA NOTE GENZYME
ADJS. REF. & DSP NEOZYME II ADJS. REF. CORP.
-------- ---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share........................ $ 0.49 $ 0.22
-------- --------
Pro forma weighted average shares outstanding.... 61,565 61,565
======== ========
Income per General Division common and common
equivalent share assuming full dilution........ $ 0.44 $ 0.20
======== ========
Pro forma fully diluted weighted average shares
outstanding.................................... 68,001 68,001
======== ========
Applicable to the Tissue Repair Division:
Net loss....................................... $(22,030) $(22,030)
Tax benefit allocated to the General
Division..................................... -- --
-------- --------
Net income (loss) attributable to TR Stock....... $(22,030) $(22,030)
======== ========
Loss per Tissue Repair Division common share..... $ (2.28) $ (2.28)
======== ========
Historical weighted average shares outstanding... 9,659 9,659
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 8
GENZYME GENERAL DIVISION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1996
(Amounts in thousands)
<CAPTION>
HISTORICAL
GENZYME PRO
GENERAL HISTORICAL FORMA
DIVISION DSP ADJS.
---------- ---------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 85,354 $ 1,703 $(50,750)
Short-term investments..................... 161,060 -- --
Accounts receivable, less allowance for
doubtful accounts........................ 96,719 15,377
Inventories................................ 62,989 24,240 5,315
Prepaid expenses and other current
assets................................... 13,002 681 --
Due from Tissue Repair Division............ 2,308 -- --
Deferred tax assets -- current............. 7,729 -- --
-------- -------- --------
Total current assets................. 429,161 42,001 (45,435)
Property, plant & equipment, net............. 344,658 17,475 --
Other Assets:
Long-term investments...................... 52,141 -- --
Notes receivable-related party............. 1,467 -- --
Intangibles, net of accumulated
amortization............................. 64,049 49,176 151,297
Deferred tax assets -- noncurrent.......... 27,487 (733) (10,168)
Other noncurrent assets.................... 29,878 152 --
-------- -------- --------
Total other assets................... 175,022 48,595 141,129
-------- -------- --------
Total assets......................... $948,841 $108,071 $ 95,694
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
FOOT DIVISION PRO FOOT GENZYME
NOTE AND HISTORICAL FORMA NOTE GENERAL
REF. DSP NEOZYME II ADJS. REF. DIVISION
---- --------- ---------- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. [Z] $ 36,307 $ 8,636 $ -- $ 44,943
Short-term investments..................... 161,060 5,178 (108,675) [AH] 57,563
Accounts receivable, less allowance for
doubtful accounts........................ 112,096 -- -- 112,096
Inventories................................ [AA] 92,544 -- -- 92,544
Prepaid expenses and other current
assets................................... 13,683 527 (556) [AF] 13,654
Due from Tissue Repair Division............ 2,308 -- -- 2,308
Deferred tax assets -- current............. 7,729 -- -- 7,729
---------- ------- --------- ----------
Total current assets................. 425,727 14,341 (109,231) 330,837
Property, plant & equipment, net............. 362,133 -- -- 362,133
Other Assets:
Long-term investments...................... 52,141 -- -- 52,141
Notes receivable-related party............. 1,467 -- -- 1,467
Intangibles, net of accumulated
amortization............................. [AB] 264,522 -- -- 264,522
Deferred tax assets -- noncurrent.......... [AB] 16,586 -- -- 16,586
Other noncurrent assets.................... 30,030 -- (100) [AF] 29,930
---------- ------- --------- ----------
Total other assets................... 364,746 -- (100) 364,646
---------- ------- --------- ----------
Total assets......................... $1,152,606 $14,341 $(109,331) $1,057,616
========== ======= ========= ==========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 9
GENZYME GENERAL DIVISION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS -- (CONTINUED)
JUNE 30, 1996
(Amounts in thousands)
<CAPTION>
HISTORICAL
GENZYME PRO
GENERAL HISTORICAL FORMA
DIVISION DSP ADJS.
---------- ---------- --------
<S> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................... $ 12,063 $ 4,434 $ --
Accrued expenses........................... 46,847 19,898 3,500
Income taxes payable....................... 8,828 -- --
Deferred revenue........................... 3,273 -- --
Short-term borrowings...................... -- -- 200,000
Current portion of long-term debt and
capital lease obligations................ 2,724 9,418 (9,250)
-------- -------- --------
Total current liabilities............ 73,735 33,750 194,250
Noncurrent Liabilities:
Long-term debt and capital lease
obligations.............................. 24,242 45,726 (45,500)
Note Payable to Genzyme.................... -- -- --
Other noncurrent liabilities................. 7,928 -- --
-------- -------- --------
32,170 45,726 (45,500)
Division Equity:
Division equity............................ 842,936
(291)
-- (24,170)
DSP, Inc. common stock..................... -- 5 (5)
Neozyme II, Corp. callable common stock.... -- -- --
Additional paid-in capital................. -- 46,260 (46,260)
Accumulated deficit........................ -- (17,379) 17,379
-------- -------- --------
Total division equity................ 842,936 28,595 (53,056)
-------- -------- --------
Total liabilities and division equity........ $948,841 $108,071 $ 95,694
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
FOOT DIVISION PRO FOOT GENZYME
NOTE AND HISTORICAL FORMA NOTE GENERAL
REF. DSP NEOZYME II ADJS. REF. DIVISION
---- --------- ---------- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................... $ 16,497 -- -- $ 16,497
Accrued expenses........................... [AC] 70,245 158 971 [AH] 71,374
Income taxes payable....................... 8,828 -- 8,828
Deferred revenue........................... 3,273 -- (527) [AF] 2,746
Short-term borrowings...................... [AD] 200,000 -- -- 200,000
Current portion of long-term debt and
capital lease obligations................ [X] 2,892 -- -- 2,892
---------- -------- --------- ----------
Total current liabilities............ 301,735 158 444 302,337
Noncurrent Liabilities:
Long-term debt and capital lease
obligations.............................. [X] 24,468 -- -- 24,468
Note Payable to Genzyme.................... -- 100 (100) [AF] --
Other noncurrent liabilities................. 7,928 -- -- 7,928
---------- -------- --------- ----------
32,396 100 (100) 32,396
Division Equity:
Division equity............................ [AE] 818,475 (34) (109,675) [AH] 722,883
14,117 [AH]
DSP, Inc. common stock..................... [Y] -- -- --
Neozyme II, Corp. callable common stock.... 2,415 (2,415) [AG] --
Additional paid-in capital................. [Y] -- 75,620 (75,620) [AG] --
Accumulated deficit........................ [Y] -- (63,918) 63,918 [AG] --
---------- -------- --------- ----------
Total division equity................ 818,475 14,083 (109,675) 722,883
---------- -------- --------- ----------
Total liabilities and division equity........ $1,152,606 $ 14,341 $(109,331) $1,057,616
========== ======== ========= ==========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 10
GENZYME GENERAL DIVISION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT DIVISION PRO
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS.
---------- ---------- ------- ----- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................................. $225,771 $7,239 $ -- $233,010 $54,138 $ --
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative,
research and development expenses........ 176,747 7,265 (33) [AJ] 183,979 44,892 (725)
Amortization expense....................... 2,536 187 770 [AI] 3,493 3,532 1,906
Other expenses............................. 1,465 -- -- 1,465 546 --
-------- ------ ------- -------- ------- -------
Total operating expenses..................... 180,748 7,452 737 188,937 48,970 1,181
-------- ------ ------- -------- ------- -------
Operating income............................. 45,023 (213) (737) 44,073 5,168 (1,181)
Other income and (expenses):
Investment income.......................... 8,144 -- -- 8,144 -- --
Interest expense........................... (395) (115) 59 [AK] (451) (3,039) (3,121)
Other...................................... (347) (43) -- (390) (894) --
-------- ------ ------- -------- ------- -------
7,402 (158) 59 7,303 (3,933) (3,121)
-------- ------ ------- -------- ------- -------
Income before income taxes................... 52,425 (371) (678) 51,376 1,235 (4,302)
Provision for income taxes................... (20,909) -- 109 [AL] (20,800) (1,004) (1,018)
-------- ------ ------- -------- ------- -------
Net income (loss)............................ 31,516 (371) (569) 30,576 231 (5,320)
Tax benefit allocated from Tissue Repair
Division................................... 7,802 -- -- 7,802 -- --
-------- ------ ------- -------- ------- -------
Net income attributable to General Division
Stock...................................... $ 39,318 $ (371) $ (569) $ 38,378 $ 231 $(5,320)
======== ====== ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME
GENERAL PRO
DIVISION, FORMA
FOOT GENETRIX PRO FOOT GENZYME
NOTE AND HISTORICAL FORMA NOTE GENERAL
REF. DSP NEOZYME II ADJS. REF. DIVISION
---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................. $287,148 $ -- $(10,631) [AR] $276,517
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative,
research and development expenses........ [AN] 228,146 10,758 (10,634) [AR] 228,270
Amortization expense....................... [AM] 8,931 -- -- 8,931
Other expenses............................. 2,011 -- -- 2,011
-------- -------- -------- --------
Total operating expenses..................... 239,088 10,758 (10,634) 239,212
-------- -------- -------- --------
Operating income............................. 48,060 (10,758) 3 37,305
Other income and (expenses):
Investment income.......................... 8,144 453 (2,720) [AJ] 5,877
Interest expense........................... [AO] (6,611) -- -- (6,611)
Other...................................... (1,284) -- -- (1,284)
-------- -------- -------- --------
249 453 (2,720) (2,018)
-------- -------- -------- --------
Income before income taxes................... 48,309 (10,305) (2,717) 35,287
Provision for income taxes................... [AQ] (22,822) -- 5,534 [AS] (17,288)
-------- -------- -------- --------
Net income (loss)............................ 25,487 (10,305) 2,817 17,999
Tax benefit allocated from Tissue Repair
Division................................... 7,802 -- -- 7,802
-------- -------- -------- --------
Net income attributable to General Division
Stock...................................... $ 33,289 $(10,305) $ 2,817 $ 25,801
======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 11
GENZYME GENERAL DIVISION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT DIVISION PRO
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS
---------- ---------- ------- ----- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share...................... $ 0.54 $ 0.52
======= =======
Pro forma weighted average shares
outstanding.................................. 72,880 920 73,800
======= === =======
Income per General Division common and common
equivalent share assuming full dilution...... $ 0.53 $ 0.51
======= =======
Pro forma fully diluted weighted average shares
outstanding.................................. 74,300 920 75,220
======= === =======
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
FOOT DIVISION, PRO FOOT GENZYME
NOTE GENETRIX, HISTORICAL FORMA NOTE GENERAL
REF. & DSP NEOZYME II ADJS. REF. DIVISION
---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share...................... $ 0.45 $ 0.35
======= =======
Pro forma weighted average shares
outstanding.................................. 73,800 73,800
======= =======
Income per General Division common and common
equivalent share assuming full dilution...... $ 0.44 $ 0.34
======= =======
Pro forma fully diluted weighted average shares
outstanding.................................. 75,220 75,220
======= =======
</TABLE>
See notes to unaudited pro forma financial statements.
<PAGE> 12
GENZYME GENERAL DIVISION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT DIVISION PRO
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS.
---------- ---------- -------- ---- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................................. $378,563 $22,006 $ -- $400,569 $95,259 $ --
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative,
research and development expenses........ 300,498 22,151 (100) (AJ) 322,549 79,146 (1,450)
5,315
Amortization expense....................... 4,677 -- 2,310 (AI) 6,987 2,750 3,814
Other expenses............................. 14,216 -- -- 14,216 3,585
-------- ------- ------- -------- ------- --------
Total operating expenses..................... 319,391 22,151 2,210 343,752 85,481 7,679
-------- ------- ------- -------- ------- --------
Operating income............................. 59,172 (145) (2,210) 56,817 9,778 (7,679)
Other income and (expenses):
Investment income.......................... 7,428 25 -- 7,453 -- --
Interest expense........................... (1,069) (260) 178 (AK) (1,151) (6,937) (5,383)
Other...................................... (202) -- -- (202) (1,354) --
-------- ------- ------- -------- ------- --------
6,157 (235) 178 6,100 (8,291) (5,383)
-------- ------- ------- -------- ------- --------
Income before income taxes................... 65,329 (380) (2,032) 62,917 1,487 (13,062)
Provision for income taxes................... (30,506) -- 43 (AL) (30,463) (172) 587
-------- ------- ------- -------- ------- --------
Net income................................... 34,823 $ (380) $(1,989) 32,454 $ 1,315 $(12,475)
======= ======= ======= ========
Tax benefit allocated from
Tissue Repair Division..................... 8,857 8,857
-------- --------
Net income attributable to
General Division Stock..................... $ 43,680 $ 41,311
======== ========
</TABLE>
<TABLE>
<CAPTION> PRO
FORMA
GENZYME PRO
GENERAL FORMA
FOOT DIVISION PRO FOOT GENZYME
NOTE GENETRIX HISTORICAL FORMA NOTE GENERAL
REF. AND DSP NEOZYME II ADJS. REF. DIVISION
---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................. $495,828 $ -- $(24,198) [AR] $471,630
Operating costs and expenses:
Cost of products and services sold and
selling, general, administrative,
research and development expenses........ (AN) 405,560 24,455 (24,205) [AR] 405,810
(AP)
Amortization expense....................... (AM) 13,551 -- -- 13,551
Other expenses............................. 17,801 -- -- 17,801
------- -------- -------- --------
Total operating expenses..................... 436,912 24,455 (24,205) 437,162
------- -------- -------- --------
Operating income............................. 58,916 (24,455) 7 34,468
Other income and (expenses):
Investment income.......................... -- 7,453 1,497 (5,441) [AT] 3,509
Interest expense........................... (AO) (13,471) -- -- (13,471)
Other...................................... (1,556) -- -- (1,556)
-------- -------- -------- --------
(7,574) 1,497 (5,441) (11,518)
-------- -------- -------- --------
Income before income taxes................... 51,342 (22,958) (5,434) 22,950
Provision for income taxes................... (AQ) (30,048) -- 12,067 [AS] (17,981)
-------- -------- -------- --------
Net income................................... $21,294 $(22,958) $ (6,633) $ 4,969
======== ========
Tax benefit allocated from
Tissue Repair Division..................... 8,857 8,857
------- --------
Net income attributable to
General Division Stock..................... $30,151 $ 13,826
======= ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-119
<PAGE> 13
GENZYME GENERAL DIVISION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts in thousands, except per share information)
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT DIVISION PRO
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS.
---------- ---------- -------- ---- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share........................ $ 0.73 $ 0.67
======= =======
Pro forma weighted average shares outstanding.... 60,185 1,380 61,565
======= ===== =======
Income per General Division common and common
equivalent share assuming
full dilution.................................. $ 0.66 $ 0.61
======= =======
Pro forma fully diluted weighted average shares
outstanding.................................... 66,621 1,380 68,001
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
FOOT DIVISION PRO FOOT GENZYME
NOTE GENETRIX HISTORICAL FORMA NOTE GENERAL
REF. AND DSP NEOZYME II ADJS. REF. DIVISION
---- -------- ---------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) per General Division common and
common equivalent share........................ $ .49 $ .22
======= =======
Pro forma weighted average shares outstanding.... 61,565 61,565
======= =======
Income per General Division common and common
equivalent share assuming
full dilution.................................. $ .44 $ 0.20
======= =======
Pro forma fully diluted weighted average shares
outstanding.................................... 68,001 68,001
======= =======
</TABLE>
See notes to unaudited pro forma financial statements.
F-120
<PAGE> 14
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND PROCEDURES:
The accounting policies and procedures for Genzyme, Genetrix, DSP and
Neozyme II are in conformity in all material respects. The pro forma financial
statements include both Genzyme, the registrant, and the General Division, the
stock of which was used to effect the Genetrix Acquisition, the borrower of the
$200 million under the revolving credit facility used to effect the DSP
Acquisition and the cash of which will be used to effect the Neozyme II
Acquisition.
Amounts at the effective time of the acquisitions may differ from the
information presented in the pro forma financial statements based on subsequent
changes in the purchase price allocations and any other related items which may
impact the amounts reflected herein.
2. GENZYME CORPORATION'S ACQUISITION OF GENETRIX, INC.:
On May 1, 1996, the Company acquired Genetrix Inc., a privately held
genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of
General Division Stock. In the aggregate, approximately 1,380,000 shares of
General Division Stock, valued at approximately $36.5 million, were issued for
all the outstanding shares of Genetrix preferred stock ("Genetrix Preferred
Stock") and Genetrix common stock ("Genetrix Common Stock", together with the
Genetrix Preferred Stock "Genetrix Stock"). The acquisition was accounted for as
a purchase.
The historical balance sheets for Genzyme Corporation and Genzyme General
Division as of June 30, 1996 reflect the acquisition of Genetrix which was
completed on May 1, 1996. The pro forma statement of operations for the period
ended June 30, 1996 include pro forma accounts for Genetrix for the four month
period ended April 30, 1996. The pro forma statements of operations for the year
ended December 31, 1995 included pro forma amounts for Genetrix for the twelve
month period then ended.
3. GENZYME CORPORATION'S ACQUISITION OF DEKNATEL SNOWDEN PENCER, INC.:
On July 1, 1996, Genzyme completed the acquisition of Deknatel Snowden
Pencer, Inc., a privately held specialty surgical products company. The pro
forma balance sheets and statements of operations are presented assuming that
this transaction occurred as of June 30, 1996 and January 1, 1995, respectively,
using the purchase accounting method.
<TABLE>
The purchase price was $250.8 million and consisted of cash of $245.0
million and acquisition costs of $5.8 million. The following is a summary of the
allocation of the purchase price to net assets acquired as a result of the
acquisition of DSP (amounts in thousands):
<CAPTION>
Allocation of Purchase Price:
<S> <C>
Current Assets $ 47,468
Property and Equipment 17,475
Patents 17,000
Trade Names 56,000
In-process technology 24,170
Goodwill 127,764
Current Liabilites (28,226)
Deferred income taxes (10,901)
--------
$250,750
========
</TABLE>
The purchase price was allocated to the assets and liabilities of DSP based
on their estimated respective fair values. The final purchase price and
allocation of purchase price may vary from the value presented above.
The pro forma adjustments to the pro forma statements of operations do not
give effect to the charge for in-process technology in the amount of
$24,170,000 which is expected to be charged to operations upon consummation of
the acquisition.
4. GENZYME CORPORATION'S PROBABLE ACQUISITION OF NEOZYME II CORP.:
On September 23, 1996, Genzyme announced that it has signed a definitive
acquisition agreement with Neozyme II Corp. under which Genzyme will commence a
tender offer for all outstanding units of Neozyme II at $45 per unit in cash.
Each Neozyme II unit consists of one share of Neozyme II callable common stock
and one callable warrant to purchase two shares of Genzyme General Division
Stock and 0.135 share of GTR Stock. The total purchase price of $108,675,000
plus estimated acquisition costs of $1 million has been allocated to acquired
cash and short-term investments of $13,848,000, prepaid research and
development of $527,000 which offsets Deferred Revenue recorded by Genzyme,
assumed liabilites of $258,000, $129,000 of which offsets a note receivable and
the interest related there to recorded by Genzyme and a charge for in-process
technology of $94,558,000.
<PAGE> 15
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
Under the agreement, if the tender offer is successfully completed, a
second-step transaction will be effected in which the Neozyme II unit-holders
who had not tendered their units will be entitled to receive $29 in cash for
each share of callable common stock included in the untendered units. The
callable warrants that had been included in the units acquired in the
second-step transaction will remain outstanding.
Genzyme's obligation to purchase units in the tender offer will be subject
to the satisfaction of certain conditions, including the minimum condition of
the tender of at least a majority of the outstanding units. If less than a
majority of the outstanding units is tendered, Genzyme has the right under
certain circumstances to terminate the tender offer and seek the approval of the
holders of the units for the second-step transaction. Alternatively, Genzyme has
the right under certain circumstances, if a majority approves the second-step
transaction through a combination of shares of callable common stock included in
units tendered and untendered shares voting in favor of the transaction, to
waive the minimum condition and accept the tendered units.
The pro forma financial statements assume that the full 2,415,000 callable
common shares of Neozyme II are purchased under the tender offer. The pro forma
adjustments to the pro forma statements of operations do not give effect to the
charge for in-process technology in the amount of $95,558,000 which is
expected to be charged to operations upon consummation of the acquisition.
5. PRO FORMA ADJUSTMENTS RELATED TO THE GENETRIX ACQUISITION, DSP ACQUISITION
AND THE PROBABLE NEOZYME II ACQUISITION:
These adjustments reflect the retirement of all DSP Common Stock and the
retirement of all Neozyme II callable Common Stock.
I. Pro Forma Adjustments to Genzyme Corporation's Consolidated Balance
Sheets:
Related to the DSP Acquisition:
A. Eliminate DSP's current portion of long-term debt and long-term
debt, $9.3 million and $45.5 million, respectively, which was
assumed by Genzyme and subsequently repaid.
B. Eliminate DSP's Common Stock of $5,000, Additional paid-in capital
of $46.3 million and Accumulated deficit of $17.4 million.
C. To record cash payments, including acquisition costs, totaling
$50.8 million in connection with the acquisition of DSP.
D. To record a $5.3 million adjustment to the estimated fair value
of the inventory acquired.
E. To record the adjustments to the estimated fair values of
Patents, Tradenames, and Goodwill acquired and the offset to the
related deferred tax liability.
F. To record estimated additional liabilities assumed as a result of
the acquisition, including unfunded pension liabilities.
G. To record the $200 million borrowing under a revolving credit
facility with a commercial bank, due September 1, 1997 with
interest payable at LIBOR Plus 5/8% (6.16% at July 1, 1996)
H. To record the impact to retained earning of the charge for
acquired in-process technology.
<PAGE> 16
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
Related to the Neozyme II Acquisition:
I. Eliminate Series 1992 Note Payable issued by Neozyme II to Genzyme
of $100,000 and related accrued interest of $29,000 and prepaid
research and development costs paid by Neozyme II to Genzyme of
$527,000.
J. Eliminate Neozyme II's callable Common Stock of $2.4 million,
Additional Paid-in capital of $75.6 million and Retained Deficit
of $63.9 million.
K. Record the acquisition of Neozyme II as a purchase of in-process
technology of $95,558,000 net of the fair value of the net
assets acquired of $14,117,000 and estimated acquisition
costs of $1 million.
II. Pro Forma Adjustments to Genzyme Corporation's Consolidated Statements of
Operations:
Related to the Genetrix Acquisition:
L. Record amortization expense based on $35.0 million of Goodwill
being amortized over 15 years, or $770,000 for the four months
ended April 30, 1996 and $2.3 million for the year ended December
31, 1995.
M. Eliminate certain administrative costs (i.e. audit, legal and
filing fees) of Genetrix which would not be incurred on a combined
basis, $33,000 for the four months ended April 30, 1996 and
$100,000 for the year ended December 31, 1995.
N. Eliminate interest expense related to debt assumed by Genzyme and
subsequently repaid.
O. Record income tax (provision) benefit.
Related to the DSP Acquisition:
P. Record amortization expense based on amortization of Patents,
Tradenames and Goodwill over 12 years, 40 years and 40 years,
respectively, an adjustment of $1,906,000 to amortization
expense for the six months ended June 30, 1996 and $3.8 million
for the year ended December 31, 1995.
Q. Eliminate certain administrative costs (i.e. senior management
salaries and related expenses and professional fees) of DSP which
would not be incurred on a combined basis, $725,000 for the six
months ended June 30, 1996 and $1.5 million for the year ended
December 31, 1995.
R. Reverse interest expense of DSP long-term debt, which was assumed
and repaid, in the amounts of $3,039,000 and $4,493,000 for the
six months ended June 30, 1996 and the year ended December 31,
1995, respectively, and record interest expense related to the
$200 million borrowed under a revolving credit line from a
commercial bank at LIBOR plus 5/8% (6.16% at July 1, 1996).
Interest expense under the $200 million borrowing is $6.2 million
for the six months ended June 30, 1996 and $12.3 million for the
year ended December 31, 1995.
S. To record the cost of sales associated with the step-up in
valuation of Inventory under the purchase accounting for the year
ended December 31, 1995 of $5.3 million.
<PAGE> 17
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
T. Record income tax (provision) benefit.
Related to the Neozyme II Acquisition:
U. Eliminate intercompany research and development revenue
(Genzyme)/expense (Neozyme II) and service fees of $10,631,000 for
the six months ending June 30, 1996 and $24,198,000 for the year
ended December 31, 1995 and eliminate intercompany interest
income/expense related to Series 1992 Note Payable or $3,000 for
the six months ending June 30, 1996 and $7,000 for the year ended
December 31, 1995.
V. Reduce investment income at 5% per annum related to $108,675,000
cash and eqivalent used to finance Neozyme II Acquisition.
W. Record income tax (provision) benefit.
III. Pro Forma Adjustments to Genzyme General Division's Combined Balance
Sheets:
Related to the DSP Acquisition:
X. Eliminate DSP's current portion of long-term debt and long-term
Debt, $9.3 million and $45.5 million, respectively, which was
assumed by Genzyme and subsequently repaid.
Y. Eliminate DSP's Common Stock of $5,000, Additional paid-in capital
of $46.3 million and Accumulated Deficit of $17.4 million.
Z. To record cash payments, including acquisition costs, totaling
$50.8 million in connection with the Acquisition of DSP.
AA. To record a $5.3 million adjustment to the estimated fair value
of the inventory acquired.
AB. To record the adjustments to the estimated fair values of Patents,
Tradenames, and Goodwill acquired and the offset to the related
deferred tax liability.
AC. To record estimated additional liabilites assumed as a result of
the acquisition, including unfunded pension liability.
AD. To record the $200 million borrowing under a revolving credit
facility with a commercial bank, due September 1, 1997 with
interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996).
AE. To record the impact to retained earnings of the charge for
acquired in-process technology.
<PAGE> 18
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
Related to the Neozyme II Acquisition:
AF. Eliminate Series 1992 Note Payable to Genzyme issued by Neozyme
II of $100,000, and related accrued interest of $29,000 and
prepaid research development costs paid by Neozyme II to
Genzyme of $527,000.
AG. Eliminate Neozyme II's Callable Common Stock of $2.4 million
additional paid in capital of $75.6 million and Retained Deficit
of $63.8 million.
AH. Record acquisition of Neozyme II as a purchase of in-process
technology of $109,675,000 net of the estimated fair value of the
net assets acquired of $14,117,000 and estimated acquisition
costs of $1 million.
IV. Pro Forma Adjustments to Genzyme General Division's Statements of
Operations:
Related to the Genetrix Acquisition:
AI. Record amortization expense, based on $35.0 million of Goodwill
over 15 years, of $777,000 for the four months ended April 30,
1996 and $2.3 million for the year ended December 31, 1995.
AJ. Eliminate certain administrative costs (i.e. audit, legal and
filing fees) of Genetrix which would not be incurred on a
combined basis, $33,000 for the four months ended April 30, 1996
and $100,000 for the year ended December 31, 1995.
AK. Eliminate interest expense on debt assumed by Genzyme and
subsequently repaid.
AL. Record income tax (provision) benefit.
Related to the DSP Acquisition:
AM. Record amortization expense based on amortization of Patents,
Tradenames, Goodwill over 12, 40 and 40 years, respectively,
an adjustment of $1,906,000 to amortization expense for the six
months ended June 30, 1996 and $3.8 million for the year ended
December 31, 1995.
AN. Eliminate certain administrative costs (i.e. senior management
salaries and related expenses and professional fees) of DSP which
would not be incurred on a combined basis, $725,000 for the six
months ended June 30, 1996 and $1.5 million for the year ended
December 31, 1995.
AO. Reverse interest expense of DSP long-term debt, which was assumed
and repaid, in the amounts of $3,039,000 and $4,493,000 for the
six months ended June 30, 1996 and the year ended December 31,
1995, respectively, and record interest expense related to a
$200 million borrowed at 6.16% per annum. For the six months
ended June 30, 1996, interest expense is $6.2 million and $12.3
million for the year ended December 31, 1995.
AP. To record the cost of sales associated with the step-up in
valuation of Inventory under the purchase accounting for the year
ended 31, 1995 of $5.3 million.
AQ. Record income tax (provision) benefit.
Related to the Neozyme II Acquisition:
AR. Eliminate intercompany research and development revenue
(Genzyme)/expense (Neozyme II) and service fees of $10,631,000
for the six months ending June 30, 1996 and $24,198,000 for the
year ended December 31, 1996. Eliminate intercompany interest
income and interest expense related to $100,000 Series 1992 Note
Payable issued by Neozyme II to Genzyme of 3,000 for the six
months ending June 30, 1996 and 7,000 for the year ended
December 31, 1995.
AS. Record income tax (provision) benefit.
AT. Reduce investment income at 5% per annum related to $108,675,000
cash and equivalent used to finance Neozyme II Acquisition.
18
