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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0-14680
GENZYME CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 06-1047163
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE KENDALL SQUARE 02139
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(617) 252-7500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
GENERAL DIVISION COMMON STOCK, PAR VALUE $0.01 ("GGD STOCK")
TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("GTR STOCK")
GGD STOCK PURCHASE RIGHTS
GTR STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 1997: $2,098,604,234
Number of shares of the Registrant's GGD Stock outstanding as of March 1,
1997: 75,682,805
Number of shares of the Registrant's GTR Stock outstanding as of March 1,
1997: 13,188,459
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 29, 1997 are incorporated by reference into Part III
of this Form 10-K.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Corporation ("Genzyme" or the
"Company") contains forward-looking statements concerning, among other things,
the Company's expected future revenues, operations and expenditures, estimates
of the potential markets for the Company's products and services, assessments of
competitors and potential competitors, projected timetables for the preclinical
and clinical development, regulatory approval and market introduction of the
Company's products and services and estimates of the capacity of manufacturing
and other facilities to support such products and services. These
forward-looking statements represent the expectations of Genzyme's management as
of the filing date of this Form 10-K. The Company's actual results could differ
materially from those anticipated by the forward-looking statements due to a
number of factors, including (i) the Company's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval and
patent and other proprietary rights protection for its products and services,
(ii) decisions, and the timing of decisions, made by the U.S. Food and Drug
Administration and other agencies regarding the indications for which the
Company's products may be approved, (iii) the actual size and characteristics of
markets to be addressed by the Company's products and services, (iv) market
acceptance of the Company's products and services, (v) the Company's ability to
obtain reimbursement for its products from third-party payers, where
appropriate, (vi) the accuracy of the Company's information concerning the
products and resources of competitors and potential competitors, and (vii) the
risks and uncertainties described under the caption "Factors Affecting Future
Operating Results" under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Genzyme is a biotechnology and health care products company engaged in the
development of innovative products and services for major unmet medical needs.
The Genzyme General Division ("Genzyme General") develops and markets specialty
therapeutic, surgical and diagnostic products, pharmaceuticals and genetic
diagnostic services. The Company's activities to develop, manufacture and market
biological products for the treatment of cartilage damage, severe burns, chronic
skin ulcers and neurodegenerative diseases are conducted through the Genzyme
Tissue Repair Division ("Genzyme Tissue Repair").
Genzyme currently has two classes of common stock outstanding: General
Division Common Stock ("GGD Stock") and Tissue Repair Division Common Stock
("GTR Stock"). The GGD Stock and the GTR Stock are intended to reflect the value
and track the performance of Genzyme General and Genzyme Tissue Repair,
respectively. In January 1997, Genzyme signed a merger agreement providing for
the merger of PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the
research and development of pharmaceuticals for the treatment of cancer, into
Genzyme in exchange for shares of a new Genzyme security to be designated
Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). The GMO Stock is
intended to reflect the value and track the performance of Genzyme Molecular
Oncology, a new division proposed by Genzyme to develop and market novel
products and services for the diagnosis and treatment of cancer. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Subsequent Events.
For purposes of financial statement presentation, all of the Company's
programs, products, assets and liabilities are allocated to either Genzyme
General or Genzyme Tissue Repair. Notwithstanding this allocation, Genzyme
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each of the divisions. Holders of GGD Stock and GTR
Stock have no specific claim against the assets attributed to the division whose
performance is associated with the class of stock they hold. Liabilities or
contingencies of either division that affect Genzyme's resources or financial
condition could affect the financial condition or results of operations of both
divisions.
Ceredase(R), Cerezyme(R), InSight(R), Pleur-evac(R), Tevdek(R),
Thora-Klex(R), Thyrogen(R) and Vianain(R) are registered trademarks of the
Company. CARTICEL(R) is a registered service mark of Genzyme. Contrast(TM),
Direct LDL(TM), EndoCABG(TM), HAL-S(TM), MelaPure(TM), N-geneous(TM),
Sepracoat(TM), Seprafilm(TM), and Sepragel(TM) are trademarks and Epicel(SM),
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Epicel ASAP(SM) and MASDA(SM) are service marks of the Company. NeuroCell(TM)-PD
and NeuroCell(TM)-HD are trademarks of Diacrin, Inc. ("Diacrin"). Provisc(R) is
a registered trademark of Alcon Laboratories, Inc. ("Alcon"). Pulmozyme(R) is a
registered trademark of Genentech, Inc.
GENZYME GENERAL
OVERVIEW
Genzyme General's Specialty Therapeutics business unit markets Ceredase(R)
enzyme and Cerezyme(R) enzyme, products for the treatment of Gaucher disease.
The Company's results of operations are highly dependent on sales of these
products which, for 1996, totaled $264.6 million. Other specialty therapeutic
products under development include Thyrogen(R) hormone for use in the diagnosis
and treatment of thyroid cancer and gene therapy products for the treatment of
cystic fibrosis ("CF"), cancer, Gaucher disease and cardiovascular disease.
Genzyme General's Surgical Products business unit was formed in July 1996
by combining the business of Deknatel Snowden Pencer, Inc. ("DSP"), a
privately-held company acquired in July by Genzyme that specializes in the
development, manufacture and marketing of cardiovascular devices, precision
surgical instruments and specialty surgical products, with Genzyme General's
line of biomaterial products based on hyaluronic acid ("HA") for use in limiting
the formation of post-operative adhesions (the "Sepra Products").
Genzyme General's Diagnostic Services business unit ("Genzyme Genetics")
applies advanced biotechnology to develop and provide high quality,
sophisticated genetic diagnostic services to health care providers throughout
the U.S. and internationally.
Genzyme General's Diagnostic Products business unit ("Genzyme Diagnostics")
is a primary supplier of diagnostic components (enzymes, substrates, antibodies
and antigens), bulk reagents and devices (including infectious disease kits, the
Direct LDL(TM) and N-geneous(TM) HDL cholesterol test kits and rapid tests for
detection of pregnancy, Strep A and mononucleosis) to manufacturers of clinical
diagnostic reagents and kits as well as directly to clinical reference
laboratories. Genzyme Diagnostics also manufacturers and sells a broad line of
antibody and antigen based ELISA test kits. In addition, Genzyme Diagnostics
distributes a broad line of cytokine and apoptosis research products to
academic, industrial and governmental laboratories.
Genzyme General's Pharmaceuticals business unit ("Genzyme Pharmaceuticals")
develops, manufactures and sells a range of active drug substances,
pharmaceutical intermediates, synthetic phospholipids, peptides and chemicals
to the pharmaceutical and health care industries. Genzyme Pharmaceuticals also
markets MelaPure(TM) brand melatonin, a dietary supplement.
RELATED ENTITIES
GENZYME DEVELOPMENT PARTNERS, L.P. In 1989, Genzyme sponsored Genzyme
Development Partners, L.P. ("GDP"), a research and development limited
partnership that raised $36.75 million through the private placement of limited
partnership interests and warrants to purchase shares of the Company's common
stock. A wholly-owned subsidiary of Genzyme is the general partner of GDP and
holds a 1% partnership interest therein. The Company entered into a contract
with GDP to perform research and development of the Sepra Products for which the
Company was reimbursed its costs plus a 10% fee. The program to develop and
market the Sepra Products is allocated to Genzyme General.
All of GDP's capital available to fund development of the Sepra Products
was spent by the end of the first quarter of 1994. Additional funds will be
required to complete the development and clinical testing of Sepracoat(TM) and
Sepragel(TM). While Genzyme is not obligated to fund additional development of
the Sepra Products, it has funded such development since the first quarter of
1994 and will continue such funding during 1997.
Under the terms of the various agreements between GDP and Genzyme, GDP has
the exclusive right to sell Seprafilm(TM), Sepracoat(TM), Sepragel(TM),
HAL-S(TM) and other HA-based surgical products in the U.S. and Canada through a
joint venture with Genzyme (the "Joint Venture"). Genzyme was granted back an
exclusive license to sell these products outside the U.S. and Canada subject to
a royalty on European sales of these products under certain circumstances.
The Joint Venture was formed in 1989 for the purpose of manufacturing and
marketing GDP's products and commenced operations in 1996 following approval in
August by the U.S. Food and Drug Administration (the "FDA") to market
Seprafilm(TM) in the U.S. (the "Business Commencement Date"). Under the
agreement between GDP and Genzyme governing the Joint Venture (the "Joint
Venture Agreement"), GDP has contributed to the Joint Venture the use of its
technology and $200,000, and Genzyme has contributed its agreement to
manufacture and market the Sepra Products, to make non-interest bearing loans
to the Joint Venture in the amount of any working capital deficiency, to make
capital contributions to the extent deemed necessary by the two venturers in
connection with the business of the Joint Venture and to allow the use of such
trademarks, tradenames and logos as the venturers shall determine to be
necessary and advisable for manufacturing and marketing the Sepra Products. The
cost of Sepra Products purchased by the Joint Venture from Genzyme is
determined pursuant to a formula in the Joint Venture Agreement.
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The Joint Venture Agreement calls for GDP and Genzyme to determine,
following the Business Commencement Date, the allocation of profits and losses
between the parties and the level of reimbursement to Genzyme for providing
general and administrative services to the Joint Venture.
In March 1997, GDP and Genzyme amended and restated the Joint Venture
Agreement (as so amended and restated, the "Amended and Restated Joint Venture
Agreement") to address matters the original Joint Venture Agreement provided
were to be agreed upon on or about the Business Commencement Date and to
address certain other matters. The Amended and Restated Joint Venture Agreement
is retroactive to August 17, 1996, the date of the first commercial sale of
Seprafilm(TM), and provides that:
(1) losses generated by the Joint Venture are allocated (a) the first
$200,000 to GDP and then (b) 40% to GDP and 60% to Genzyme, provided however,
that to the extent a loss allocated to GDP would, pursuant to the terms of GDP
partnership agreement, be allocated to the general partner rather than the
limited partners, such loss is allocated 100% to Genzyme; and
(2) profits are allocated (a) the first $5.6 million to GDP, (b) the
next $8.4 million to Genzyme and (c) thereafter, 40% to GDP and 60% to Genzyme.
The Amended and Restated Joint Venture Agreement also provides that
Genzyme will receive no reimbursement for the general and administrative
services it provides to the Joint Venture until the first year in which the
Joint Venture is projected to generate revenues in excess of $25 million at
which time, Genzyme will receive a quarterly commission equal to 10% of the
Joint Venture's revenues for such quarter. In connection with arriving at
agreement on the foregoing matters, the parties also agreed to amend the Joint
Venture Agreement to provide GDP with enhanced oversight mechanisms, including
an audit right, and to eliminate Genzyme's unilateral right to withdraw from
the Joint Venture.
In connection with negotiating the Amended and Restated Joint Venture
Agreement, the Joint Venture entered into an exclusive marketing and
distribution agreement (the "Marketing and Distribution Agreement") with
Genzyme whereby Genzyme will act as sole distributor of the Sepra Products for
the Joint Venture. The Joint Venture agreed to sell Sepra Products to Genzyme
at the price at which Genzyme is selling the applicable products to the end
user less a distributor's discount (subject to a minimum purchase price) and
also agreed to reimburse Genzyme for certain costs incurred in connection with
market introduction of the Sepra Products. The economic terms of the proposed
Marketing and Distribution Agreement are intended to be substantially similar
to those applicable if Genzyme provided such services in its capacity as a
venturer rather than as a distributor. At the request of a special committee of
directors of the general partner consisting of the two directors who are not
affiliated with Genzyme, Genzyme also entered into a tax indemnification
agreement (the "Tax Indemnification Agreement") with GDP in which Genzyme
agreed, subject to certain limitations, to indemnify the limited partners
against loss of the benefits of certain research and development deductions
certain limited partners have taken (net of potential tax savings due to any
resultant higher tax basis in the limited partnership interests). The Tax
Indemnification Agreement can be waived by GDP in connection with a purchase of
GDP by Genzyme.
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The Joint Venture will be dissolved (a) upon purchase by Genzyme of all of
the limited partnership interests (as described below), (b) if Genzyme does not
exercise its option to purchase the limited partnership interests (i) upon the
sale, license or other disposition of all or a substantial part of its
technology by GDP or (ii) upon 90 days' notice by either venturer at any time
after the expiration of a one-year period commencing after the option to
purchase the limited partnership interests expires, whichever shall first occur,
(c) by operation of law, (d) upon the bankruptcy, retirement, withdrawal or
dissolution of Genzyme, (e) upon mutual consent of Genzyme and GDP or (f) upon
the election by GDP if Genzyme fails to establish to the satisfaction of GDP
that it is capable of and has undertaken to manufacture the Joint Venture's
requirements for the products for a specified period.
Genzyme has the option to buy all of the limited partnership interests in
GDP for an initial payment of either cash or GGD Stock or a combination thereof,
at its option, equal to $25.7 million (which amount will be recovered by
Genzyme as a credit against subsequent royalty payments) and quarterly royalty
payments for a period of ten years after the buy-out date equal to 10% of
product sales in the U.S. and Canada (and 6% of such sales in Europe, but only
to the extent necessary to meet certain projections made in connection with the
initial capitalization of GDP) and 5% of any revenues derived by Genzyme from
sales in the U.S. and Canada (and 3% in Europe, but only in the instances cited
above) of non-HA-based products that are competitive with GDP's products. The
option to purchase all of the limited partnership interests is exercisable
during a 90-day period commencing on August 31, 2001, but such commencement date
will be accelerated under certain circumstances.
GENZYME TRANSGENICS CORPORATION. In February 1993, Genzyme formed Genzyme
Transgenics Corporation ("GTC") and transferred to it all assets and liabilities
of its business in the field of transgenic technology as applied to the
development and production of recombinant proteins for therapeutic and
diagnostic uses in exchange for shares of GTC's stock. In addition, Genzyme
exclusively licensed to GTC all patents, licenses and other intellectual
property in the field (excluding that related to a CF-related protein). As of
December 31, 1996, Genzyme owned approximately 43% of GTC.
In March 1996, Genzyme and GTC entered into a Convertible Debt and
Development Funding Agreement under which (i) Genzyme has made available to GTC
a $10 million credit line of 7% debt payable on March 31, 1998 and convertible
by either party into shares of GTC common stock, (ii) Genzyme has agreed to fund
the development costs associated with transgenic recombinant antithrombin III
("ATIII"), and (iii) in exchange for funding such development costs and for
making available the credit line, Genzyme has received the right to co-market
ATIII with GTC throughout the world, other than Asia. The agreement to fund the
ATIII program was due to expire on March 31, 1997. The parties have agreed to
extend the agreement until June 30, 1997 and are negotiating an agreement to
provide for long-term development of the AT-III program. There can be no
assurance that Genzyme and GTC will reach a definitive agreement to provide for
such development and, if no agreement is reached, Genzyme's co-marketing rights
will terminate.
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Under other contractual arrangements between Genzyme and GTC, Genzyme
General may engage GTC to perform transgenic research and development on
proteins of interest to Genzyme. GTC has contracted with Genzyme for
purification and protein chemistry research and development services to be
performed by Genzyme General. Genzyme leases laboratory and office space to GTC
and provides it with certain administrative and support services for which GTC
pays fees based on Genzyme's costs.
NEOZYME II CORPORATION. Neozyme II Corporation ("Neozyme II") was formed in
March 1992 to contract with Genzyme to conduct research, development and
clinical testing of biotherapeutic products for the treatment of CF. In May
1992, Genzyme and Neozyme II completed an initial public offering of units which
resulted in gross proceeds to Neozyme II of approximately $84.5 million. On
October 28, 1996, Genzyme completed a tender offer for the outstanding units of
Neozyme II for $45 per unit in cash in which 98.8% of the units were tendered
and accepted for payment at an aggregate purchase price of $107.4 million. Each
unit consisted of one share of callable common stock of Neozyme II ("Callable
Common Stock") and one warrant to purchase two shares of GGD Stock and .135
share of GTR Stock. On December 6, 1996, Neozyme II was merged with a subsidiary
of Genzyme and the remaining outstanding shares of Callable Common Stock were
cancelled and converted into the right to receive $29.00 per share in cash. The
Callable Warrants included in the untendered units separated from the shares of
Callable Common Stock converted in the merger and became exercisable on December
6, 1996.
SPECIALTY THERAPEUTICS
Genzyme General's strategy is to use its technological strengths,
particularly its ability to modify and produce DNA and proteins and its
expertise in fermentation, carbohydrate engineering and gene therapy, to develop
safe and effective therapeutic products to address major unmet medical needs.
Genzyme General is currently selling Ceredase(R) enzyme and Cerezyme(R) enzyme
and has several therapeutic products in various stages of the research,
development, clinical testing and regulatory review processes. There can be no
assurance that any of the products under development will be successfully
completed or that FDA approval of any of these product will be obtained.
<TABLE>
SPECIALTY THERAPEUTICS PRODUCT PORTFOLIO
<CAPTION>
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Partners and
Product/Program Indication/Application Status(1) Collaborators
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<S> <C> <C> <C>
Ceredase(R) enzyme/ Treatment of Gaucher Commercial sales
Cerezyme(R) enzyme disease
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Thyrogen(R) recombinant Diagnosis and treatment Phase III clinical trial
human thyroid stimulating of thyroid cancer
hormone metastases
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Transgenic antithrombin Control of blood clotting Phase I/II clinical trial Genzyme Transgenics
III during coronary artery Corporation
bypass surgery
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Gene therapy
CFTR/adenovirus Cystic fibrosis Pilot clinical study
vector
CFTR/lipid vector Cystic fibrosis Pilot clinical study
MART 1/adenovirus Metastatic malignant Pilot clinical study National Cancer Institute
vector melanoma
gp100/adenovirus Metastatic malignant Pilot clinical study National Cancer Institute
vector melanoma
</TABLE>
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<TABLE>
<CAPTION>
Partners and
Product/Program Indication/Application Status(1) Collaborators
- --------------- ---------------------- --------- -------------
<S> <C> <C> <C>
Ex vivo stem Gaucher disease Pilot clinical study University of Pittsburgh,
cells/retrovirus IntroGene B.V.
vector
Various proprietary Cardiovascular disease Research Duke University,
vectors for gene University of California
therapy at San Diego
- -------------------------------------------------------------------------------------------------------------------
[alpha]-galactosidase Fabry disease Preclinical development
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Prolactin Maintenance of immune Preclinical development
system function
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Chitinase Anti-fungal agent Preclinical development
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<FN>
(1) Research status indicates work up to and including small scale production of the targeted product. Preclinical
development status includes work done to increase yields and standardize manufacturing processes and studies
in animals to support an application to the FDA to commence clinical testing in humans. Human clinical trials
for products classified by the FDA as "drugs" or "biologics" are generally conducted in three phases: Phase I,
to determine safety and pharmacokinetics in healthy subjects; Phase II, to provide preliminary evidence of
efficacy in the patient population targeted by the product; and Phase III, sometimes referred to as pivotal
trials, to provide data for proof of safety and effectiveness. Pilot clinical studies are clinical trials for
novel therapies, such as gene therapies, where the product is initially tested in the patient population
targeted by the product for safety, pharmacokinetics and preliminary evidence of efficacy. Following
completion of the pivotal clinical studies, an application for marketing approval of a new drug (an "NDA") or
licensure of a biological product (a "PLA") is submitted to the FDA.
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</TABLE>
CEREDASE(R) ENZYME (ALGLUCERASE INJECTION) AND CEREZYME(R) ENZYME
(IMIGLUCERASE INJECTION). Treatment with Ceredase(R) enzyme or Cerezyme(R)
enzyme replacement therapy currently represents the only safe and effective
treatment for Gaucher disease, a seriously debilitating, sometimes fatal genetic
disorder caused by a deficiency in an important enzyme in the body called
glucocerebrosidase ("GCR"). This deficiency results in the accumulation of the
lipid glucocerebroside in the body. The disease is characterized by an enlarged
liver or spleen, anemia, bleeding problems, bone and joint pain, fatigue and
orthopedic complications such as repeated fractures and bone erosion.
Ceredase(R) enzyme is a modified form of human GCR in which glycoprotein
remodeling technology has been used to target GCR to the cells where the lipid
accumulation occurs. Cerezyme(R) enzyme is a recombinant form of GCR which has
been remodeled in a similar manner.
Genzyme General is marketing these products directly to physicians,
hospitals and treatment centers worldwide through a highly trained sales force.
This marketing effort is directed at identifying and initiating treatment for
the 5,000 Gaucher patients Genzyme General believes exist worldwide. Currently,
approximately one-third of these patients are receiving treatment. Ceredase(R)
enzyme and Cerezyme(R) enzyme, together, are available in approximately 50
countries worldwide. Ceredase(R) enzyme has received marketing approval in 14
countries, most recently Japan and Belgium, with applications pending in two
other countries. Genzyme is the first biotechnology company to obtain drug
approval in Japan without a partner. Cerezyme(R) enzyme has received marketing
approval in four countries, most recently in Canada and Portugal, with
applications pending in the European Union and other countries.
Genzyme General produces Ceredase(R) enzyme from an extract of human
placental tissue supplied by Pasteur Merieux, a French company that is the only
significant commercial source of this material. The current supply available is
not sufficient to produce enough Ceredase(R) enzyme to supply all present
patients. To address supply constraints, Genzyme developed Cerezyme(R) enzyme.
In October of 1996, Genzyme General received FDA approval to manufacture
Cerezyme(R) enzyme in a new, large-scale manufacturing plant located in Boston,
Massachusetts. Once an uninterrupted supply of Cerezyme(R) enzyme can be
produced by the new plant, patients receiving Ceredase(R) enzyme will be
converted
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to Cerezyme(R) enzyme. Genzyme General will be required to continue
manufacturing Ceredase(R) enzyme until the process of patient conversions is
completed, which is expected to occur during the fourth quarter of 1998. Any
disruption in the supply or manufacturing process of Ceredase(R) enzyme during
the conversion period or in the supply or manufacturing process of Cerezyme(R)
enzyme may have a material adverse effect on revenue.
THYROGEN(R) HORMONE. Genzyme General is developing Thyrogen(R) hormone, a
recombinant form of human thyroid stimulating hormone, for use as an adjunct to
the approximately 100,000 to 200,000 diagnostic and therapeutic procedures
undertaken each year to detect and treat metastases of thyroid cancer. Genzyme
General believes that the administration of Thyrogen(R) hormone may increase the
effectiveness and result in fewer adverse side effects for patients undergoing
current standard medical procedures for thyroid cancer.
Thyrogen(R) hormone was demonstrated to be safe and effective in
stimulating the uptake of radioiodine for whole body scanning in a 1992 Phase
I/II clinical study. A Phase III multi-center clinical study completed late in
1993 provided evidence that the use of Thyrogen(R) hormone prior to diagnostic
scanning greatly improved the quality of life in 94% of thyroid cancer patients
tested and was effective in producing scans that were as good as or better than
conventional scans in 86% of those patients. To confirm the results of this
study, Genzyme General is conducting a second Phase III study, results from
which are expected to be available in mid-1997. If the current study confirms
the prior results, marketing applications are expected to be filed by the end of
1997 in the U.S. and Europe and by early 1998 in Canada. Following its NDA
filing, Genzyme plans to make Thyrogen(R) hormone available to patients in the
U.S. who meet certain criteria under a treatment IND that allows Genzyme to
gather additional information regarding use of the product while recovering
appropriate costs of the product and the treatment.
TRANSGENIC ANTITHROMBIN III. ATIII is a human blood protein that acts as
an anticoagulant. Depressed levels of ATIII can lead to increased risk of
thrombosis (clotting) in patients with either hereditary ATIII deficiency or an
acquired ATIII deficiency often associated with multiple disease states, such as
sepsis, various surgeries, multiple trauma and liver disease.
Natural ATIII derived from donated human plasma currently is sold worldwide
for multiple indications. GTC is developing a transgenic source for ATIII to
address anticipated growth in the market to treat ATIII deficiency by protein
replacement therapy. Genzyme General and GTC believe that current sources of
plasma derived ATIII will be inadequate to address this growth. In combination
with Tufts University School of Veterinary Medicine and SMI Genzyme Limited, a
joint venture between GTC and Sumitomo Metal Industries, Ltd., GTC has developed
a herd of transgenic goats at its production facility in central Massachusetts
that produce active recombinant ATIII.
In October 1996, GTC announced that the results of a Phase I trial
conducted in the United Kingdom showed transgenic ATIII was well tolerated in
healthy subjects. In December 1996, GTC commenced a Phase I/II clinical trial of
transgenic ATIII in the U.S.. In this trial, the product will be administered to
27 patients undergoing coronary artery bypass grafting in a dose-escalating
study to determine the safety of transgenic ATIII in this patient population.
GTC expects to complete the trial during the first half of 1997. Genzyme General
is funding the development of transgenic ATIII pursuant to an agreement with GTC
under which Genzyme General has obtained co-marketing rights for the product
outside of Asia. See "Related Entities -- Genzyme Transgenics Corporation."
GENE THERAPY
OVERVIEW. Gene therapy is an innovative technology being developed by
Genzyme General to treat CF, cancer, Gaucher disease and cardiovascular disease.
Gene therapy involves the delivery of a gene responsible for production of a
particular protein of interest into cells of a patient in order to trigger the
cell to produce the encoded protein for some therapeutic purpose.
Genzyme General's gene therapy research began in 1991 as part of its
efforts to develop novel treatments for CF on behalf of Neozyme I Corporation
("Neozyme I"). Genzyme acquired the CF program from Neozyme I and transferred it
to Neozyme II in 1992. Genzyme acquired Neozyme II in October 1996. See
"Business-- Related Entities." Since 1991, Genzyme General has expended over $60
million in gene therapy research and has established a broad proprietary core
technology base that includes gene delivery systems, in vitro and in vivo model
systems, production capabilities and a dedicated clinical and regulatory staff.
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Because of the innovative nature of gene therapy and public policy issues
surrounding the insertion of new genetic information into cells, Genzyme General
expects that early clinical evaluation will continue to entail especially
careful testing in a limited number of patients. Genzyme General is currently
conducting pilot clinical studies of 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.
CYSTIC FIBROSIS. CF is the most common fatal genetic disease affecting the
Caucasian population. Approximately one in every 2,500 infants in the U.S. is
born with the disease and there currently are approximately 30,000 cystic
fibrosis patients in North America. CF is caused by a mutation in the gene
responsible for determining the molecular structure of a protein called cystic
fibrosis transmembrane conductance regulator ("CFTR"). 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.
Genzyme General's work has concentrated on a gene therapy approach to
correct the basic defect in CF cells whereby the mutant genes are augmented with
genes that would enable the patient's cells to produce normal CFTR protein.
Genzyme General's 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. The techniques for
inserting genetic material into cells outside the body are not expected to be
useful in gene therapy for CF, however, because there is no practical way to
remove, treat and implant the treated cells in the airways of CF patients. For
this reason, Genzyme General's proposed gene therapy product will likely need to
be administered directly to the airways of the lung. Genzyme General also
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.
Viral Vectors. In 1993, Genzyme General and collaborators at the
University of Iowa 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. In a
1995 publication reporting the results of a similar study, however, researchers
from the University of North Carolina questioned the efficacy of gene transfer
using adenovirus. In addition, data from a study involving repeat administration
of Genzyme's second generation adenovirus vector to the nasal epithelium of CF
patients showed that, although the virus appeared safe, 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.
During the fourth quarter of 1994, Genzyme General received Recombinant DNA
Advisory Committee ("RAC") approval and submitted a protocol to 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 General 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, Genzyme General is developing lipid-DNA complexes as vectors for gene
therapy. Genzyme General believes that lipid-based vectors may offer advantages
due to their reduced immunogenicity and ease of manufacture relative to viral
vectors. Genzyme General 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 exclusive license agreement with Vical, Inc.
executed in October 1996 for Vical's
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cytofectins for use as non-viral gene delivery vectors for treating CF. The
plasmid expression system containing the DNA also affects expression efficiency,
and Genzyme General 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 General 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 General also initiated a
collaboration with a British academic group for purposes of further studying
Genzyme General's proprietary lipid-DNA complexes.
In December 1995, Genzyme General submitted an IND to the FDA for a nasal
study using a proprietary lipid-DNA complex developed by Genzyme General. 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.
Also in the second quarter of 1996, Genzyme General 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
initiated in the fourth quarter in the United Kingdom. This study is ongoing.
CANCER. There are currently several approaches that can be taken to treat
cancer using gene therapy. Some of these approaches are limited by the inability
of current gene delivery technology to affect every cell in a tissue. To address
these limitations, Genzyme General has focused on two approaches that it
believes may be effective with the current generation of gene delivery vehicles:
immunotherapy and cytotoxic or "suicide" genes. Genzyme General believes that
combinatorial strategies employing two or more gene therapy approaches, or a
gene therapy approach with traditional chemotherapeutic or radiological therapy,
will be useful in treating aggressive forms of the disease, particularly
metastatic cancer.
Immunotherapy - MART-1 and gp100 for Melanoma. Melanoma is a cancer of
the skin affecting melanocytes, the normal cells that color the skin, and is
commonly associated with overexposure to the sun. Melanoma is far more serious
than other types of skin cancer, accounting for three quarters of all deaths
from skin cancer despite representing only 5% of all such cases. The incidence
of melanoma is increasing at a faster rate than that of any other type of cancer
in the U.S. Over 38,000 new cases of melanoma will be diagnosed and more than
7,000 deaths from this disease are projected to occur in the U.S. during 1997.
Worldwide, incidence of melanoma is estimated to be 90,000 new cases per year.
Genzyme General's melanoma gene therapy program has centered on the
delivery of the MART-1 and gp100 genes to dendritic cells to elicit systemic
anti-melanoma T cell responses. Under a Collaborative Research and Development
Agreement ("CRADA") with the National Cancer Institute ("NCI"), Genzyme General
has constructed, in conjunction with Dr. Steven Rosenberg at the NCI, adenoviral
vectors incorporating the MART-1 or gp100 tumor antigen genes. In vitro studies
have demonstrated that cells which do not express either tumor antigen become
targets for destruction by antigen specific T cells following infection with an
adenovirus incorporating the appropriate tumor antigen genes. Subsequent
preclinical animal studies at the NCI demonstrated that: (i) prior immunization
with an adenovirus incorporating the gp100 tumor antigen gene can provide
protection against melanoma cells; (ii) adoptive transfer of spleen cells
derived from animals immunized with the adenovirus carrying the gene
incorporating gp100 can confer protection against melanoma tumor cells,
suggesting that the virus is indeed able to elicit T cell response and (iii)
immunization with the gp100 virus can dramatically reduce the number of lung
metastases in a model of established melanoma particularly when co-administered
with interleukin-2, a T cell growth factor.
These promising preclinical results led to the initiation of two pilot
clinical studies, designed by Dr. Rosenberg and which are currently underway at
the NCI. In these studies, adenovirus vectors carrying either the MART-1
(Ad2/MART-1) or gp100 (Ad2/gp100) gene are being evaluated for safety,
immunologic reactivity and potential
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therapeutic effect when administered alone or in conjunction with recombinant
interleukin-2. Patients in these studies have metastatic melanoma and have not
received alternative therapies during the four weeks prior to administration.
Preliminary results from these studies indicate that the adenoviral vectors
are safe and well tolerated, and that a small but significant number of the 34
patients immunized with Ad2/MART-1 have shown significant tumor regression
following administration of the adenovirus. Clinical evaluation is in process to
determine whether immunization with the adenoviral vector leads to the
generation of an anti-melanoma antigen specific cytotoxic T cell response. Data
gathered from these studies should enable Genzyme General to identify baseline
clinical parameters that correlate with a favorable response to the vaccine and
establish patient inclusion criteria for a Phase II clinical trial. Genzyme
General has the option to license the MART-1 and gp100 genes from the NCI for
use in adenoviral gene therapy for melanoma.
Suicide Gene Therapy for Liver Cancer. Approximately 18,000 new cases
of primary liver cancer are diagnosed in the U.S. each year, and the disease
accounts for approximately 14,000 deaths in the U.S. annually. The annual number
of deaths worldwide from liver cancer is estimated to exceed 250,000, with the
five-year survival rate for localized liver cancer being only 15%. If detected
at an early stage, surgical removal (resection) of the affected portion of the
liver is possible, but diagnosis usually occurs too late for this treatment to
be of benefit. The median survival for patients with non-resectable liver cancer
is about six months.
Genzyme General is collaborating with Dr. Jack Wands at Massachusetts
General Hospital on the development of gene therapies to treat liver cancer. Dr.
Wands has developed proprietary antibodies that can be utilized to target the
delivery of a gene therapy vector to hepatocellular carcinoma ("HCC") cells.
Genzyme General and Dr. Wards are also exploring the use of antibody targeted
vectors to deliver suicide genes to HCC cells. Genzyme General has an option to
license Dr. Ward's technology for gene therapy of HCC.
GAUCHER DISEASE. Genzyme General is collaborating with the University of
Pittsburgh and IntroGene, B.V., in the development of a hematopoietic stem cell
gene therapy for Gaucher disease. A pilot clinical study is in process at the
University of Pittsburgh to determine the safety of an ex vivo retroviral vector
approach. Two patients have completed the treatment protocol to date. Both of
the treated patients have detectable levels of circulating GCR enzyme activity.
The study is currently ongoing.
CARDIOVASCULAR DISEASE. In December 1996, Genzyme General entered into
collaborations with scientists at Duke University and the University of
California, San Diego ("UCSD"), to develop gene therapies for congestive heart
failure, vein graft failure, and restenosis. Additionally, through its
collaboration with UCSD, Genzyme General will be developing a gene therapy
application to protect heart tissue from oxygen damage that can occur during
various types of cardiac procedures. Each collaboration calls for Genzyme
General to provide vectors and research funding to support pre-clinical research
by the academic collaborator and future clinical trials in exchange for rights
to any products resulting from the collaboration.
Other Specialty Therapeutics
[ALPHA]-GAL. Genzyme General is developing a recombinant form of the human
enzyme [alpha]-galactosidase ("[alpha]-Gal") as a treatment for Fabry disease, a
usually fatal inherited disorder of lipid metabolism estimated to afflict
between 2,000 and 4,000 people worldwide. Fabry disease patients experience
clinical symptoms which include pain, numbness, cardiac disease, cerebrovascular
complications and deterioration of kidney function; death general occurs between
40 and 50 years of age. There is no known treatment for the underlying disease
and current medical practice involves pain management and kidney dialysis and/or
transplantation to reduce symptoms.
Genzyme General believes that protein replacement therapy is a rational
approach to the treatment of Fabry disease. To date, it has successfully
produced the recombinant [alpha]-Gal enzyme in mammalian cells and has shown it
can reduce lipid levels in the plasma and tissues of a Fabry mouse model. The
development program is currently focused on producing sufficient quantities of
enzyme for pilot clinical studies, which are expected to begin in late 1997 or
early 1998.
PROLACTIN. Genzyme General is developing a recombinant form of the human
hormone prolactin for use as an immune stimulant. Prolactin acts as a cytokine
on a broad array of immune cell types including lymphocytes, macrophages, bone
marrow and natural killer cells. Potential clinical applications include
immunologic/hematopoietic reconstitution for myelosuppressed and
immunocompromised patient populations and as a vaccine adjuvant.
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To date, Genzyme General has demonstrated the utility of prolactin in
several in vitro and in vivo models and has produced sufficient quantities of
prolactin from mammalian cells to begin pilot clinical studies. Its development
program is currently focused on initiating a Phase I safety/pharmacokinetic
study in the second half of 1997 and identifying a lead clinical indication for
evaluation in 1998.
CHITINASE. Genzyme General is evaluating recombinant human chitinase as a
therapeutic agent for treating systemic fungal infections. These types of
infections are often observed in immunosuppressed individuals such as patients
with AIDS.
Fungi contain the polysaccharide chitin as a component in their cell walls.
It is believed that chitinase, a chitin degrading enzyme produced by human
macrophages, may normally play a role in fighting fungal infections. It is
believed that by augmenting chitinase levels systemically, it may be possible to
significantly enhance the body's capacity to eliminate these type of microbial
infections in immunosuppressed patients. Current therapies for fighting fungal
infections such as amphotericin B are moderately effective but exhibit
significant dose-limiting toxicities. The U.S. market size for a new safe and
effective anti-fungal agent is estimated to be between $250 million and $500
million per year.
Genzyme General has produced recombinant human chitinase in a mammalian
expression system, purified significant quantities of the protein and is in the
process of screening its antifungal activity in a number of different well
characterized cell culture and animal model systems. Data from these studies are
expected to be available in fourth quarter of 1997.
SURGICAL PRODUCTS
The Surgical Products business unit develops, manufactures and markets four
principal product lines: the Sepra Products, cardiovascular fluid management
systems (chest drainage and autotransfusion systems), surgical closure systems
(sutures and needles) and surgical instruments (cardiovascular punches and other
cardiovascular, plastic surgery, endoscopic and general instruments). The fluid
management, closure, and instrument product lines were acquired in 1996 through
Genzyme's acquisition of DSP. DSP employs a 110-person sales force, 60 of which
are located in the U.S., to market products directly to cardiac, general,
gynecologic, colon and rectal surgeons and hospital purchasing departments
throughout the U.S. and Europe. Genzyme General plans to increase the number of
DSP sales representatives in the U.S. to 100 by the end of 1997.
SEPRA PRODUCTS. Genzyme General is developing and selling the Sepra
Products to be used during surgical procedures to limit the formation of
postoperative adhesions. Adhesions are fibrous structures that connect tissues
or organ surfaces that are not normally joined. They are an undesirable side
effect of the body's normal healing process following damage to tissue.
Adhesions can cause significant complications such as bowel obstruction
following abdominal surgery, infertility and pain following gynecological
surgery and restricted limb motion following musculoskeletal surgery. Adhesions
that form as a result of cardiac surgery can increase the complexity, duration
and risk of subsequent cardiac surgery.
The Sepra Products portfolio is comprised of the following products:
* SEPRAFILM(TM) BIORESORBABLE MEMBRANE is a solid formulation of
modified HA and is used to separate and protect tissues and organs that
have been damaged by surgery. The membrane is designed to last several days
in the body.
* SEPRACOAT(TM) COATING SOLUTION is a liquid formulation of HA that,
when used to coat tissues and organ surfaces at the start of and throughout
surgical procedures, forms a temporary physical barrier that may protect
tissues during surgery.
* SEPRAGEL(TM) BIORESORBABLE GEL is a highly viscous gel form of
modified HA and is intended to be used to separate and protect tissues and
organs that have been damaged by surgery. Sepragel(TM) is intended to be
used in laparoscopic procedures and on tissue surfaces that are
inaccessible to Seprafilm(TM). Similar to Seprafilm(TM), the gel is
designed to last several days in the body.
The programs to develop the Sepra Products achieved a number of significant
milestones in 1996. During the third quarter of 1996, the FDA granted approval
to market Seprafilm(TM) in any open abdominal or pelvic surgery. On behalf of
the Joint Venture with GDP, Genzyme General launched Seprafilm(TM) broadly in
the U.S. during the fourth quarter through the DSP sales force. The U.S. sales
force is focusing its efforts on the top 1,000 hospitals that perform 80% of the
targeted procedures for Seprafilm(TM) and the chiefs of surgery at key
institutions and the clinical investigator group and their associates who are
familiar with the product. Genzyme General believes the market opportunity for
Seprafilm(TM) in the U.S. comprises an estimated 3.1 million surgeries annually:
1.8 million open abdominal and 1.3 million open pelvic procedures that carry a
risk of postoperative adhesion-related complications. At the end of February in
the U.S., 476 hospitals had purchased Seprafilm(TM), an increase of 37 percent
from the end of December, and the reorder rate for the product had increased to
39 percent. Revenues from Seprafilm(TM) sales during 1996 were not material.
In February 1996, Seprafilm(TM) was granted the Approval of Conformity
Certificate (the "CE Mark") in accordance with the European Medical Devices
Directive. The CE Mark signifies that a product meets quality standards
necessary for marketing in the 18 countries of the European Union and the
European Economic Area. Genzyme General launched Seprafilm(TM) in Europe during
the second quarter of 1996. Genzyme General believes the number of open
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abdominal and open pelvic procedures that carry a risk of postoperative
adhesion-related complications in Europe is approximately 2 million surgeries
per year. In February 1997, Genzyme signed an agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), Tokyo, to market the Sepra Products in
Japan. Under the terms of this agreement, Kaken was granted co-marketing rights
for Seprafilm(TM) and Sepracoat(TM) in Japan in exchange for a distribution
rights fee and milestone payments to Genzyme. Kaken was also granted an option
to acquire co-marketing rights to Sepragel(TM) in Japan. Genzyme and Kaken will
share equally in the profits of all Sepra Products sold by Kaken.
In January 1996, Genzyme filed a PMA to market Sepracoat(TM) for use in
abdominal, pelvic and cardio-thoracic surgical procedures. In February 1997, the
FDA notified Genzyme that an advisory panel meeting will be held on May 5, 1997
to review the PMA for Sepracoat(TM). The advisory panel will make a
recommendation to the FDA regarding approval of the PMA. The panel's
recommendation will be considered in the FDA's final review of the PMA, but is
not binding on the FDA. Sepracoat(TM) was also granted the CE Mark in 1996 and
Genzyme General initiated marketing efforts for Sepracoat(TM) in Europe during
the fourth quarter of 1996. Sepracoat(TM) is being marketed in Denmark, France,
German, Italy, the Netherlands, Sweden and the United Kingdom as a complement to
Seprafilm(TM).
During the third quarter, Genzyme General received an IDE from the FDA for
Sepragel(TM) and commenced Phase I/II studies of the product for use in
abdominal and gynecological procedures.
A clinical trial for HAL-S(TM) synovial fluid replacement was completed in
November 1995. HAL-S(TM) is a liquid formulation of HA intended to be used
during arthroscopic surgery to maintain normal joint function and reduce pain
and inflammation following surgery. The study evaluated patients undergoing
arthroscopic surgery for repair of meniscal tears, a type of knee damage. The
data from the study showed some improvement in the rehabilitation rate of
patients that received HAL-S(TM). In light of the relatively modest improvement
and small potential market size, however, further development of HAL-S(TM) has
been suspended.
Genzyme General believes that successful initial market penetration and
subsequent maintenance of market share for Seprafilm(TM) and Sepracoat(TM)
require a specialized hospital-based sales force and has deployed the DSP sales
force to accelerate the market introduction of these products in the U.S. and
Europe. Substantial additional efforts to educate surgeons and hospital
administrators as to the benefits of these products will be required, however,
in order for the products to penetrate target markets and gain broad market
acceptance. There can be no assurance that Genzyme General will be successful in
its efforts to implement a commercialization strategy for the Sepra Products.
Funding for the development of the Sepra Products has been provided by GDP,
which has the exclusive right to commercialize these products in the U.S. and
Canada through the Joint Venture. GDP also has the right to a royalty on the
Genzyme General's European sales of these products under certain circumstances.
Since the first quarter of 1994, Genzyme General has funded development of the
Sepra Products on behalf of GDP on an annual basis and is continuing such
funding during 1997. See "Related Entities--GDP."
CARDIOVASCULAR FLUID MANAGEMENT SYSTEMS. This product line consists
primarily of self-contained, disposable chest drainage devices used to drain
blood from the chest cavity following open heart surgery, other surgical
procedures and trauma. If the chest cavity is not properly drained, the patient
may suffer collapsed lungs, which often results in death. In 1967, DSP
introduced the first self-contained, disposable chest drainage unit, Pleur-
evac(R), which quickly became the market leader in chest drainage devices, a
position it still holds today. DSP also sells autotransfusion devices that allow
the collection of blood shed by the patient and its reinfusion postoperatively,
thus eliminating the risks associated with blood transfusions. In December 1995,
DSP acquired a line of dry suction- controlled chest drainage and
autotransfusion devices sold under the Thora-Klex(R) brand name. These products
offer certain advantages over the existing systems sold by DSP and command
higher per unit prices.
SURGICAL CLOSURE SYSTEMS. Surgical sutures, which are sold in packs
consisting of suture/needle combinations, are DSP's oldest product line. DSP
developed Tevdek(R) surgical sutures in 1950, the first coated Dacron-based
suture, followed by Silky Polydek, a softer, easier to handle and tie suture.
DSP emphasizes high quality specialty sutures for cardiovascular and plastic
surgery, utilizing special materials, advanced metallurgy and packaging
innovations. Approximately 50% of DSP's U.S. sales are attributable to high
margin "specials" in which individual surgeons order nonstandard products and
customized suture/needle combinations for specific procedures.
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SURGICAL INSTRUMENTS. DSP sells cardiovascular punches, which are used
during coronary artery bypass surgery to make cleanly cut holes, and hand-held,
reusable instruments such as needleholders, scissors, forceps, graspers,
dissectors and retractors. DSP's instruments are used in cardiovascular,
plastic, endoscopic and general surgery and are sold directly to the surgeon,
the key decision maker on purchases of specialty instruments.
In January 1997, DSP launched a full line of instruments for use in
endoscopic coronary artery bypass graft ("CABG") procedures. This new line is
being marketed under the brand name EndoCABG(TM) System and was the first full
line of instruments for this type of surgery approved by the FDA. The EndoCABG
System includes both disposable and reusable instruments and includes the
complete set of instruments required to perform cardiac bypass grafting
endoscopically.
Traditional cardiac surgery requires the surgeon to saw open the breastbone
to gain access to the heart. Patients who undergo these procedures have severe
scarring, an increased risk of infection, and long recovery periods following
surgery. The new field of minimally invasive cardiac surgery allows the surgeon
to work on the heart through a relatively small incision without cutting the
breastbone. Through the use of endoscopes and specially designed forceps,
scissors, and retractors, the surgeon can perform the same procedure without
exposing the patient to as much pain, trauma, and postoperative risk. A
less-invasive alternative to open heart surgery, balloon angioplasty, was
introduced in the 1980s. Although this procedure offers patients less pain,
trauma and a shorter recovery period, the disadvantage is that a high rate of
arteries becoming blocked again so that patients often need repeat treatment,
sometimes as soon as six months after the initial procedure. About 500,000
single bypass and balloon angioplasty procedures are performed annually in the
U.S. By the year 2000, DSP believes that at least half of these procedures
could be replaced by minimally invasive CABG procedures in which the
EndoCABG(TM) System could be used.
In conjunction with the introduction of the EndoCABG(TM) System, DSP
entered into two agreements to expand the product line and to extend its use to
other cardiac procedures. Under one agreement, the EndoCABG(TM) System will be
expanded so that surgeons can stop the heart with the aid of an aortic occlusion
balloon developed by the Cook Group of Bloomington, Indiana. Under this
agreement, Cook will manufacture the balloons and DSP will market them
exclusively. DSP expects to begin offering the balloons as part of the
EndoCABG(TM) System in the first half of 1998. The other agreement covers a
product development and marketing alliance with CarboMedics, Inc. of Austin,
Texas, a leading manufacturer of mechanical heart valves. Together, the
companies are developing a system of instrumentation and supplies which will
allow cardiac surgeons to introduce CarboMedics's mechanical heart valves
through a small incision in the patient's chest wall. The companies expect to
launch instruments for valve replacement procedures later this year.
During 1996, DSP also signed agreements with leading endoscopic training
centers in the U.S. and Europe. Both centers will use the EndoCABG(TM) System
for minimally invasive cardiac surgery. Since September 1996, the Advanced
Laproscopic Training Center in Atlanta has trained 40 surgeons to perform the
new minimally invasive cardiac surgery using DSP's EndoCABG(TM) System.
Beginning in February 1997, the European Institute of Telesurgery of Strasbourg,
France, has provided European surgeons with the same training offered in the
U.S.
DIAGNOSTIC SERVICES
Genzyme Genetics applies advanced biotechnology to develop and provide high
quality, sophisticated genetic diagnostic services to physicians, hospitals,
universities, medical centers, clinical laboratories, genetic centers and
managed care organizations in the U.S. and internationally through a national
network of laboratories. Testing services currently marketed by Genzyme Genetics
include prenatal genetic diagnostic services, DNA-based diagnosis of a number of
genetic diseases, including some cancers. Genzyme Genetics also employs over 70
board certified genetics professionals who interpret results and provide genetic
counseling and support services to medical practitioners and their patients.
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<TABLE>
DIAGNOSTIC SERVICES PORTFOLIO
<CAPTION>
Product/Program Indication/Application Status
- --------------- ---------------------- ------
<S> <C> <C>
Biochemical testing Screening for certain fetal Commercial
chromosomal abnormalities service
Prenatal cytogenetics Detection of fetal chromosomal Commercial
abnormalities service
InSight(R) molecular genetic testing Rapid detection of selected fetal Commercial
chromosomal abnormalities service
DNA testing Detection of single gene Commercial
disorders (CF, Fragile X, service
Huntington's Disease, Gaucher
Disease, etc.)
MASDA(SM) Service Detection of CF mutations Commercial
Genetic profiling service
Cancer Testing -- cancer Applications used singly or in Commercial
cytogenetics, fluorescent in-situ tandem for detection and service
hybridization "FISH", DNA prognosis of various forms of
cancer
Fetal cell separation Detection of fetal chromosomal Preclinical
abnormalities development
CLAMSS Detection of unknown mutation Research
</TABLE>
PRENATAL AND POSTNATAL GENETIC DIAGNOSTIC SERVICES. Genzyme Genetics offers
three types of genetic diagnostic services: biochemical testing, classical and
molecular cytogenetic testing, and DNA testing. Biochemical testing services
consist primarily of a widely used screening test (AFP3) to determine if further
prenatal genetic testing is appropriate. Classical and molecular cytogenetic
testing involves the analysis of fetal cells obtained through amniocentesis or
chorionic villi sampling ("CVS") to evaluate chromosomal abnormalities. DNA
testing is performed to determine the likelihood that the subject has, or is a
carrier for, a specific genetic disorder.
Genzyme Genetics's strategy is to expand its genetic diagnostics business
by providing a comprehensive range of high quality testing services in a timely,
accurate and convenient manner; by aggressively marketing its services through a
direct sales force; and by maintaining an active research and development
program that enables it to introduce additional testing services based on new
technologies. Genzyme Genetics also has an active program to expand its
laboratory operations through acquisitions. In furtherance of this strategy,
Genzyme Genetics acquired Genetrix, Inc., a Phoenix-based network of prenatal
and cancer genetic testing laboratories, in May 1996.
The InSight(R) test, a faster cytogenetic test based on in situ
hybridization of chromosome-specific DNA probes, was introduced by Genzyme
Genetics in 1991. This technology permits identification of the most frequently
occurring chromosomal abnormalities within 48 hours, as compared to the one to
three weeks required to perform classical cytogenetic testing (karyotyping). The
InSight(R) analysis is provided in conjunction with a complete karyotype.
Genzyme Genetics's cancer diagnostic services based on cytogenetics and a
series of supporting tests currently focus primarily on various forms of
leukemias and lymphomas. Genzyme Genetics also provides testing for numerous
genetic diseases including, fragile X syndrome, spinal muscular atrophy,
Huntington's disease, polycystic kidney disease, sickle cell anemia, and
hemophilia.
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MASDA(SM) SERVICE. Accurate tests for detection of the genetic components
of disease are likely to require the analysis of multiple genes as well as
multiple mutations within these genes. For example, defects in any one of at
least four genes can result in hereditary nonpolyposis colon cancer, and in just
two of those genes more than 100 mutations have been reported. There is,
therefore, a crucial need for methods of rapidly detecting mutations in genes of
known sequence. To meet this need, Genzyme Genetics developed its patented
Multiplex Allele-Specific Diagnostic Assay (the "MASDA(SM) Service"), which can
analyze in a single assay up to 500 samples simultaneously for over 100 known
mutations.
To use the MASDA(SM) Service, a mixture of hundreds of probes is
constructed with each probe specific to one mutation. Individual DNA samples
from numerous patients are then placed in a specific location in an array and
exposed to the probe mixture. Patient samples that contain at least one mutation
will be detected with a positive "signal." By identifying which probe(s) bind to
the patient sample, the exact mutation(s) are revealed. Positive samples are
also treated to produce a visual banding pattern that is unique for each
mutation. This pattern is automatically interpreted by computer analysis to
provide results.
The MASDA(SM) Service not only analyzes different patient samples with
different disease indications in a single assay, it also identifies multiple
mutations in one or more genes in a single patient's DNA sample. In addition,
only those samples with a positive signal need to be tested further in the
mutation identification step. Eliminating samples that lack mutations from
further analysis produces considerable cost savings when compared to
conventional testing methods in which each sample has to undergo extensive
analysis before a negative report can be confirmed.
Genzyme Genetics is pursuing a number of commercialization strategies for
the MASDA(SM) Service. In February 1997, Genzyme Genetics launched a 70-mutation
CF test. Previous CF tests could only identify 32 or fewer mutations, thereby
producing negative results for people with rare mutations. In addition, the
MASDA(SM) Service is also being used to provide genetic profiling services for
clinical trials being conducted by pharmaceutical companies.
Genzyme Genetics has established a federally certified clinical trials
laboratory to support diagnostic assay development using the MASDA(SM) Service.
Ongoing oncology studies in this laboratory include studies of colorectal cancer
with Kaiser Permanente of Northern California and the University of California,
San Francisco and of hereditary breast cancer with the Dana Farber Cancer
Institute. In addition, the laboratory provides population segmentation services
for internal drug development programs and external customers. These studies are
designed to identify genetic markers that might provide information about the
severity of a disease as well as the likelihood that a patient might respond
either favorably or adversely to a therapy.
DEVELOPMENT PROGRAMS. Genzyme Genetics maintains an active program aimed at
identifying and developing new technologies and methods of performing genetic
tests and applying these methods to improve and expand its menu of testing
services. In its own research laboratories and in collaboration with others,
Genzyme Genetics is developing additional platforms for complex mutational
analysis and conducts major research and development programs in such areas as
genomics and rare cell separation and analysis methods.
The MASDA(SM) Service is designed to detect known mutations. Genzyme
Genetics is also developing related technology, called cleavage- and ligation
associated mutation specific sequencing or "CLAMSS," to detect and identify
unknown mutations. These techniques address situations where many different
mutations in a gene give rise to a disease state, but where no single mutation
is responsible for a significant percentage of disease.
In 1995, Genzyme Genetics, together with its collaborators, announced the
full identification of the PKD1 gene, which causes polycystic kidney disease, a
common genetic disorder that leads to renal failure by middle age in most
affected individuals. This group is also involved in the discovery of the gene
for the most common cause of inherited cardiac arrhythmia, long QT syndrome,
also known as "sudden death syndrome."
Genzyme Genetics also continues its efforts to develop methods and
procedures to isolate and genetically analyze fetal cells obtained from maternal
blood samples. The program has demonstrated the feasibility of a separation
technology involving the use of combinations of antibodies that bind selectively
to specific cell types and has developed appropriate immobilization and
analytical methods. At this point, however, the process does not meet Genzyme
Genetics consistency standards well enough to commercialize it as a diagnostic
test.
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Fetal cells obtained from maternal blood serum could potentially be used in
lieu of cells derived from amniotic fluid or chorionic villi for genetic
testing, thereby avoiding the risk associated with amniocentesis or CVS. Genzyme
Genetics believes that successful development of techniques which permit
prenatal genetic testing of samples obtained from mothers on a low risk basis,
using rapid low cost detection methods, can result in a substantial expansion of
the market for prenatal testing. Significant resources continue to be focused on
this research program.
DIAGNOSTIC PRODUCTS
Genzyme Diagnostics is a primary supplier of diagnostic components
(enzymes, substrates, antibodies and antigens), bulk reagents and devices to
manufacturers of clinical diagnostic reagents and kits as well as directly to
clinical reference laboratories. It also manufactures and sells a broad line of
antibody and antigen based ELISA test kits. In addition, Genzyme Diagnostics
distributes a broad product line of research products to academic, industrial
and governmental laboratories for use in immunology and cell biology and has
developed manufacturing expertise in enzyme fermentation, purification, reagent
formulation and immunoassay test development.
<TABLE>
DIAGNOSTIC PRODUCTS PORTFOLIO
Product/Program Indication/Application Status
- --------------- ---------------------- ------
<S> <C> <C>
Cardiovascular products -- Direct Clinical diagnostic testing Product sales
LDL(TM), N-geneous(TM) HDL, ApoE Elisa
and Lp(a) Cholesterol Tests
Diagnostic enzymes, substrates and Raw materials for clinical chemistry Product sales
antibodies and immunoassays for diagnostic
manufacturers
OEM reagents and kits Immunodiagnostic and clinical Product sales
chemistry kits for diagnostic
manufacturers
Research products Research in immunology and cell Product sales
biology, primarily for apoptosis
and cytokines
Rapid tests OEM sales and end-user distribution Product sales
for pregnancy and infectious
disease tests
</TABLE>
CARDIOVASCULAR PRODUCTS. Genzyme Diagnostics sells devices and reagents for
the quantification of LDL and HDL cholesterol levels. In October 1996, Genzyme
Diagnostics launched the N-geneous HDL(TM) cholesterol test in the U.S. The new
test, which is being distributed by Genzyme Diagnostics under a worldwide
agreement with the manufacturer of the test, Daiichi Pure Chemicals Co., Ltd.,
of Tokyo, measures how much high-density lipoprotein cholesterol is present in a
patient's serum. Because the N-geneous HDL(TM) test can be conducted completely
on an automated clinical chemistry analyzer, it is simpler than other HDL
cholesterol tests currently on the market, which require manual pretreatment of
patient samples. The automation of HDL testing with the N-geneous(TM) test will
provide laboratories with significant operational benefits and enable them to
improve results by reducing the probability of error introduced by sample
handling and manual sample pretreatment. Genzyme Diagnostics estimates the U.S.
market for the N-geneous HDL(TM) test to be between 50 and 100 million tests per
year and the global market at approximately 200 million tests per year. In
addition to the U.S., Genzyme Diagnostics is the exclusive marketing partner
for the N-geneous HDL(TM) test in Europe and the rest of the world, with the
exception of Asia, where Genzyme holds co-exclusive distribution rights.
Genzyme Diagnostics has also developed and commercialized an in vitro
diagnostic test kit (the Direct LDL(TM) test kit) for the direct measurement of
LDL cholesterol in blood samples. The correlation between elevated blood
cholesterol levels and increased risk of coronary heart disease, one of the
leading causes of death in the U.S., is well established. A high level of LDL
cholesterol in the blood indicates an increased risk of coronary heart disease.
Prior to the approval of the Direct LDL(TM) test kit, there was no routine
direct standardized test for measuring LDL cholesterol and LDL cholesterol
levels were derived using several indirect measurements and estimates, each
contributing a potential source of error to the calculation. Genzyme
Diagnostics is working to replace the Direct LDL(TM) test kit with a
homogeneous method similar to HDL.
DIAGNOSTIC INTERMEDIATES. Genzyme Diagnostics produces and sells critical
components such as diagnostic enzymes, substrates and reagents for use in
diagnostic kits used for blood analysis in clinical chemistry
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<PAGE> 18
laboratories. One primary area of emphasis is pancreatic function, where Genzyme
Diagnostics provides enzymes, substrates, bulk reagents and patented
methodologies for amylase and lipase determination to diagnostic kit
manufacturers. Genzyme Diagnostics is also a primary supplier of cholesterol
enzymes used in testing for coronary heart disease. Sales of its diagnostic
intermediates are made to over 200 manufacturers and users of diagnostic kits
worldwide through its own technical sales representatives in the U.S. and Europe
and through distributors in Japan.
ELISA TEST KITS. Genzyme Diagnostics manufactures and sells a broad range
of ELISA test kits for infectious disease and endocrinology determinations. In
addition, it supplies monoclonal and polyclonal antibodies plus other
immunoassay raw materials to immunodiagnostic kit manufacturers. Patented
Contrast(TM) rapid tests for pregnancy, Strep A and infectious mononucleosis
determination are also becoming key contributors to Genzyme Diagnostics's
product portfolio.
RESEARCH PRODUCTS. Genzyme Diagnostics research products consist of a
comprehensive line of cytokines, growth factors, antibodies, proteins and
cytokine and apoptosis ELISA systems which play an integral role in activating
and modulating the body's immune system. These research products are used
primarily to conduct research in the areas of immunology and cellular biology.
PHARMACEUTICALS
Genzyme Pharmaceuticals develops, manufactures and sells a range of active
drug substances, pharmaceutical intermediates, synthetic phospholipids,
peptides, biomolecules and chemicals to the pharmaceutical and health care
industries. These products utilize the division's capabilities in multi-step
organic chemical synthesis, fermentation, enzymology and carbohydrate
technology.
<TABLE>
PHARMACEUTICALS PRODUCT PORTFOLIO
<CAPTION>
Product/Program Indication/Application Status
- --------------- ---------------------- ------
<S> <C> <C>
MelaPure(TM) melatonin Dietary supplement Product sales
Clindamycin phosphate Treatment of serious infections Product sales
Hyaluronic acid Ophthalmic products & research Product sales
applications
Active drug substances and Production of oral, topical and Product sales
pharmaceutical intermediates parenteral drugs
Fine chemicals Production of pharmaceutical Product sales
intermediates and electronic chemicals
Synthetic phospholipids Drug delivery systems and Product sales
pharmaceutical components
Synthetic peptides Production of final dosage form Product sales
therapeutics
Amino acid derivatives Production of synthetic peptides Product sales
</TABLE>
MELAPURE(TM) MELATONIN. In 1995, melatonin, a synthetic human hormone
present in a variety of foods and marketed as a dietary supplement, became the
largest selling chemical product manufactured by Genzyme Pharmaceuticals.
Genzyme Pharmaceuticals supplies bulk quantities of melatonin to manufacturers
of final dosage form product and is marketing its MelaPure(TM) brand melatonin
outside the U.S. in a finished dosage form product.
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<PAGE> 19
Although total melatonin revenues in 1996 increased over 1995, sales declined
materially during the second half of 1996 due to declining market demand.
Genzyme Pharmaceuticals does not expect that melatonin sales will return to the
levels experienced during the first half of 1996 during 1997. Melatonin is
regulated as a drug in many countries and, therefore, cannot be marketed without
prior regulatory approval in those countries. Genzyme Pharmaceuticals plans to
start a clinical trial of MelaPure(TM) melatonin for a sleep disorder
indication, which if successful will broaden the market opportunity for
MelaPure(TM) as a regulated product.
CLINDAMYCIN PHOSPHATE. Genzyme Pharmaceuticals currently produces and sells
clindamycin phosphate, an off-patent antibiotic widely used by hospitals for the
treatment of infections. Clindamycin phosphate is sold to pharmaceutical
companies in the U.S., Europe, Japan and the Middle East through Genzyme
Pharmaceuticals' worldwide sales organization.
HYALURONIC ACID. Genzyme Pharmaceuticals currently produces and sells bulk
hyaluronic acid (HA) for a number of applications. Under an agreement with
Alcon, Genzyme Pharmaceuticals supplies pharmaceutical grade HA powder to Alcon
for incorporation into Provisc(R), an HA-based ophthalmic surgical aid product,
which Alcon introduced in 1994. Genzyme Pharmaceuticals also receives a royalty
based on Alcon's product sales. Hyaluronic acid is also sold to a number of
customers for various research and development applications.
ACTIVE DRUG SUBSTANCES AND PHARMACEUTICAL INTERMEDIATES. Genzyme
Pharmaceuticals currently produces drug substances for leading ethical
pharmaceutical companies for formulation into a variety of dosage forms. It also
supplies various pharmaceutical intermediaries which are converted to active
drug substances by the customer.
FINE CHEMICALS. Genzyme Pharmaceuticals has developed a range of high value
fine chemicals and chiral intermediates based on its proprietary technology in
complex organic chemistry. These products include various synthetic starting
materials and liquid crystal chemicals for the electronics industry. It markets
these products through its own sales force directly to chemical and
pharmaceutical companies worldwide.
SYNTHETIC PHOSPHOLIPIDS. Phospholipids are the major structural components
of cell membranes. They are useful in drug delivery systems, emulsion
formulations and as components of pharmaceutical products such as liposomes.
Genzyme Pharmaceuticals has developed proprietary technology for the large scale
manufacture of synthetic phospholipids with high purity and consistency and
currently produces and sells synthetic phospholipids to pharmaceutical and
biotechnology companies for use in the formulation and delivery of certain of
their products.
SYNTHETIC PEPTIDES AND AMINO ACID DERIVATIVES. Synthetic peptides are a
class of biologically active compounds comprised of chains of amino acids. Many
of these compounds have applications as active drug compounds and are used by
the pharmaceutical industry in final dosage form preparations. Genzyme
Pharmaceuticals is a commercial scale GMP manufacturer of synthetic peptides for
many such applications. Amino acid derivatives are the materials used in the
production of synthetic peptides. In addition to producing these materials for
use in its own peptide manufacturing processes, Genzyme Pharmaceuticals sells
amino acid derivatives to the pharmaceutical industry for use in the manufacture
of peptides.
COMPETITION
Genzyme General is engaged in a segment of the human health care products
industry that is extremely competitive. Competitors in the U.S. and elsewhere
are numerous and include major pharmaceutical, chemical, surgical device and
biotechnology companies, many of which have substantially greater resources than
Genzyme. These companies may succeed in developing products that are more
effective than any that have been or may be developed by Genzyme General and may
also prove to be more successful than Genzyme General in producing and marketing
their products.
Each of Genzyme General's business units faces different competitive
challenges:
SPECIALTY THERAPEUTICS
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<PAGE> 20
CEREDASE(R) ENZYME AND CEREZYME(R) ENZYME. Although Genzyme General is not
aware of any current effective alternative to its products for the treatment for
Gaucher disease (Ceredase(R) enzyme and Cerezyme(R) enzyme), competition
potentially could come from other protein replacement therapies or gene therapy.
Genzyme General believes that its proprietary production techniques, exclusive
raw material source for Ceredase(R) enzyme and, to a certain extent, the orphan
drug status of its products give it a number of advantages over potential
competitors using protein replacement therapy for the treatment of Gaucher
disease. Gene therapy techniques are still in experimental stages. Genzyme
General believes that the principal factors that will affect competition for
Ceredase(R) enzyme and Cerezyme(R) enzyme will be clinical effectiveness and
absence of adverse side effects. One company is attempting to develop an
alternative form of recombinant GCR by producing the enzyme in insect cells and
modifying it by applying a coating of polyethylene glycol.
CF. There are a number of organizations, both academic and commercial,
engaged in developing therapies to treat either the symptoms of CF or the cause
of the disease. Several groups are developing gene therapy approaches to the
disease and also have received FDA and RAC approval to initiate limited human
studies of CF gene therapy. In addition, other organizations are investigating
pharmacological and biological agents that would treat CF. One such product,
Pulmozyme(R), which was developed by Genentech, Inc., currently is on the
market. These groups may succeed in developing gene therapy products before
Genzyme General, in obtaining patent protection that may effectively block
Genzyme General from commercializing its gene therapy products or in developing
other drug therapies that relieve the symptoms of CF and, thus, compete with
products under development by Genzyme General.
CANCER. Competition in the field of cancer diagnostics and therapeutics is
intense. Many competitors in this field have greater financial and human
resources, more experience in research, preclinical and clinical development,
superior expertise in obtaining regulatory approvals and more extensive
production and marketing infrastructure than Genzyme General. Genzyme General is
aware of clinical trials sponsored by Rhone-Poulenc Rorer relating to gene
therapy for cancer and expects that other large companies will be initiating
gene therapy clinical trials in the near future. Genzyme General also relies on
its collaborators for support in some of its cancer research and development
programs and intends to rely on these partners for preclinical evaluation and
clinical development of its potential products and services. Certain of its
collaborators are conducting multiple product development programs in fields
similar to those that are the subject of the partner's alliance with Genzyme
General. For instance, the NCI, with whom Genzyme General is collaborating
regarding the use of adenoviral vectors incorporating the MART1 and gp100 tumor
antigen genes for the treatment of melanoma, is currently working with others on
non-adenoviral vector delivery systems for these antigens. Any product candidate
of Genzyme General, therefore, may be subject to competition with a potential
product under development by a third party, including Genzyme General's
collaborators.
SURGICAL PRODUCTS
SEPRA PRODUCTS. Genzyme General believes that its expertise in developing
proprietary fermentation processes and its access to proprietary strains of
micro-organisms used in its HA production process will give it a competitive
advantage in the marketing of the Sepra Products. Its anti-adhesion products
may face significant competition, however, from other HA-based products, from
non-HA-based products and from changes in surgical techniques that would obviate
the use of HA. Genzyme General believes that the principal factor that will
affect competition in this area is acceptance of the product by surgeons, which
depends, in large part, upon product performance, safety and price.
DSP. DSP competes in three medical device categories: cardiovascular fluid
management systems, surgical closure systems and surgical instruments. In each
of these categories, DSP's principal methods of competing are continued
innovative product development, the performance and breadth of its product
lines, brand name recognition, sales force training and educational services,
including sponsorship of training programs in advanced surgical techniques.
DSP's key product in the cardiovascular fluid management category is the
Pleur-evac(R) chest drainage product. DSP believes that it leads the chest
drainage category with a majority share and that this position is sustainable
due to a broad product line possessing patented features and brand name
recognition. The surgical closure category is dominated by Ethicon, a subsidiary
of Johnson & Johnson, and Sherwood, a division of American Home Products
Corporation. DSP had focused on the cardiovascular suture market within this
category and believes that favorable demographics such as the aging population
and lengthening life expectancies will provide continued growth in this market.
Competition within the surgical instruments category varies by segment, such as
cardiovascular, endoscopic and plastic surgery instruments, with no one company
dominating the entire category. Unique features and product innovation within
its surgical instruments line, such as the recently launched EndoCABG(TM)
System, have allowed DSP to compete effectively across this category and to hold
a majority share of the cardiovascular punch segment.
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<PAGE> 21
DIAGNOSTIC SERVICES. The U.S. market for prenatal cytogenetic and
biochemical testing is divided among approximately 500 laboratories, many of
which offer both types of testing. Of this total group, less than 20
laboratories market their services nationally. Genzyme Genetics believes that
the industry as a whole is still quite fragmented, with the top 20 laboratories
accounting for approximately 50% of market revenues, and with no individual
company, including Genzyme Genetics, accounting for more than 18% of the total.
Competitive factors in the genetic diagnostics services business generally
include reputation of the laboratory, range of services offered, pricing,
convenience of sample collection and pick-up, quality of analysis and reporting
and timeliness of delivery of completed reports. Genzyme Genetics believes that
its research and development program, which has enabled it to develop and
introduce testing services based on new technology, and its active sales and
marketing force have played significant roles in the rapid growth of its genetic
diagnostics services business. In addition to Genzyme Genetics, several
companies and academic groups are attempting to develop fetal cell separation
techniques. Genzyme Genetics believes that its combination of separation and
analytical technologies will give it a competitive advantage.
DIAGNOSTIC PRODUCTS. Genzyme Diagnostics acts as a primary supplier of
enzymes and substrates, and generally does not compete with its customers in the
sale of complete diagnostic kits. This philosophy enables Genzyme Diagnostics to
maintain unique relationships with major diagnostic kit manufacturers and to
engage with them in development efforts to produce new or improved kits. The
market in the diagnostic products industry is mature and competition is based on
price, reliability of supply and the purity and specific activity of products.
PHARMACEUTICALS. Competition in the pharmaceuticals business is affected
primarily by production efficiency, product quality and price. Genzyme
Pharmaceuticals believes that its success in this market is due to its technical
expertise and selection of high-value, small volume products that minimize
direct competition with larger production operations in commodity products.
PATENTS AND PROPRIETARY TECHNOLOGY
Genzyme General pursues a policy of obtaining patent protection both in the
U.S. and in selected foreign countries for subject matter considered patentable
and important to its business. In addition, a portion of Genzyme's proprietary
position is based upon patents that Genzyme has licensed from others. These
license agreements generally require Genzyme to pay royalties upon
commercialization of products covered by the licensed technology. In general,
patents issued in the U.S. are effective for a period of seventeen years from
date of issue, although the GATT legislation changes this to twenty years from
the filing date for applications filed after June 8, 1995. The duration of
foreign patents varies in accordance with applicable local law. Genzyme General
also relies on trade secrets, proprietary know-how and continuing technological
innovation to develop and maintain a competitive position in its product areas.
Genzyme's employees, consultants and corporate partners who have access to its
proprietary information have signed confidentiality agreements. Genzyme
General's patent position and proprietary technology are subject to certain
risks and uncertainties. See "Factors Affecting Future Operating
Results--Uncertainty Regarding Patents and Protection of Proprietary Technology"
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GOVERNMENT REGULATION
Governmental regulation, in the U.S. and other countries, is a significant
factor in the production and marketing of many of Genzyme General's products and
in its ongoing research and development activities.
FDA REGULATION. In the U.S., products that do not achieve their principal
intended purpose through chemical action within or on the body and which are not
dependent upon being metabolized by the patient's body in order to be effective
are classified by the FDA as "devices" while other products are classified as
"drugs" or "biologics." Ceredase(R) enzyme and Cerezyme(R) enzyme are regulated
in the U.S. as drugs, as are Thyrogen(R) hormone, Prolactin and Chitinase. Its
gene therapy products, [alpha]-Gal and ATIII are regulated as biologics. The
Sepra Products and DSP's products are regulated as devices. The Direct LDL(TM)
and N-geneous(TM) HDL cholesterol tests are classified as an in vitro diagnostic
devices.
The activities required before drugs or biologics may be marketed in the
U.S. include (i) preclinical laboratory tests, in vitro and in vivo preclinical
studies and formulation and stability studies, (ii) the submission to the FDA
and
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approval of an application for human clinical testing (an "IND"), (iii) adequate
and well controlled human clinical trials to prove the safety and effectiveness
of the drug or biologic, (iv) the submission of a New Drug Application ("NDA")
for a drug or a Product License Application ("PLA") for a biologic or a BLA for
biologics identified by the FDA as "Specified Biologics" and (v) the approval
by the FDA of the NDA, BLA or PLA.
In addition to product approval, the manufacturer of the product may have
to obtain an establishment license (for a biologic that is not considered well
characterized) or a pre-approval Good Manufacturing Practices ("GMP") inspection
(for a drug or well-characterized biologic) from the FDA. Since any license
granted by the FDA is both site and process specific, any material change by a
company in the manufacturing process, equipment or location necessitates
additional FDA review and approval.
Products that are classified as devices also require FDA approval prior to
marketing. Devices are classified as Class I, II or III, depending upon the
information available to assure their safety and effectiveness. In general,
Class I and Class II devices are devices whose safety and effectiveness can
reasonably be assured through general or specific controls, respectively. Class
III devices are life sustaining, life supporting or implantable devices or new
devices which have been found not to be substantially equivalent to legally
marketed devices. The steps required for approval of a Class III device include
(i) preclinical laboratory tests and in vitro and in vivo preclinical studies,
(ii) the submission to the FDA and approval of an investigational device
exemption (an "IDE") to allow initiation of clinical testing, (iii) human
clinical studies to prove safety and effectiveness of the device, (iv) the
submission of a PMA and (v) the approval by the FDA of the PMA. Typically,
clinical testing of devices involves initial testing to evaluate safety and
feasibility and expanded trials to collect sufficient data to prove safety and
effectiveness. In addition, the procedures and the facilities used to
manufacture the device are subject to review and approval by the FDA.
A device (other than a Class III device) which is proved to be
substantially equivalent to a device marketed prior to May 28, 1976, when
government regulations for devices were first introduced, can be marketed after
approval of a 510(k) application rather than the filing of an IDE and a PMA. The
510(k) application must contain a description of the device, its methods of
manufacture and quality control procedures and the results of testing to
demonstrate that the device is substantially equivalent to the device already
marketed.
The time and expense required to perform the clinical testing necessary to
obtain FDA approval can far exceed the time and expense of the research and
development initially required to create the product. Even after initial FDA
approval has been obtained, further studies may be required to provide
additional data on safety or to gain approval for the use of a product as a
treatment for clinical indications other than those initially targeted. In
addition, use of these products during testing and after marketing approval has
been obtained could reveal side effects which, if serious, could delay, impede
or prevent marketing approval, limit uses, force a recall of the product or
expose Genzyme General to product liability claims.
REGULATION OUTSIDE THE U.S.. For marketing outside the U.S., Genzyme
General is subject to foreign regulatory requirements governing human clinical
testing and marketing approval for its products. These requirements vary by
jurisdiction, differ from those in the U.S. and may necessitate additional
pre-clinical or clinical testing whether or not FDA approval has been obtained.
Generally, Genzyme General's initial focus for obtaining marketing approval
outside the U.S. is Europe. European Union ("EU") Directives ("regulations")
generally classify products either as medicinal products or devices. For
medicinal products, like those produced by Genzyme, marketing approval may be
sought using either the centralized procedure of the Committee for Proprietary
Medicine or Products (the "CPMP") or the decentralized (mutual recognition)
process. The CPMP centralized procedure results in a recommendation in all
member states, while the EU multi-state process involves country by country
approval. EU regulations for products classified as devices have been
implemented for some devices. Devices such as Genzyme's Sepra Products must
receive market approval through a centralized procedure, where the device
receives a CE mark allowing distribution to all member states of the European
Union. For those devices where EU regulations have not been implemented,
marketing approval must be obtained on a country by country basis. The CE mark
certification requires the company to receive International Standards
Organization (ISO) certification for each facility involved in the manufacture
or distribution of the device. This certification only comes after the
development of an all inclusive quality system which is reviewed for compliance
to International Quality Standards by a licensed "Notified Body" working within
the EU. After certification is received a product dossier is reviewed which
attests to the product's compliance with EU directive 93/42/EEC for medical
devices. Only after this point is a CE mark granted
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Ceredase(R) enzyme has been registered for sale in the EU through a CPMP
centralized procedure. Genzyme General expects Cerezyme(R) enzyme, Thyrogen(R)
hormone, [alpha]-Gal, Prolactin, Chitinase and the gene therapy products also
will be regulated through centralized CPMP procedure. Seprafilm(TM) and
Sepracoat(TM) have been granted the CE Mark. Genzyme will apply for a CE Mark
for all products sold by DSP.
ORPHAN DRUG ACT. The Orphan Drug Act provides incentives to manufacturers
to develop and market drugs for rare diseases and conditions affecting fewer
than 200,000 persons in the U.S. at the time of application for orphan drug
designation. The first developer to receive FDA marketing approval for an orphan
drug is entitled to a seven-year exclusive marketing period in the U.S. for that
product. However, a drug that is considered by the FDA to be clinically superior
to or different from another approved orphan drug, even though for the same
indication, is not barred from sale in the U.S. during the seven-year exclusive
marketing period. Genzyme General has been accorded orphan drug status for
Ceredase(R) enzyme and Cerezyme(R) enzyme and has received orphan drug
designation for a number of other products currently under development,
including gene therapy products and Thyrogen(R) hormone.
Legislation has been periodically introduced in recent years, however, to
amend the Orphan Drug Act. Such legislation has generally been directed to
shortening the period of automatic market exclusivity and granting certain
marketing rights to simultaneous developers of a drug. The effect on Genzyme of
any amendments ultimately adopted cannot be assessed at this time. It believes
that the commercial success of these products including Ceredase(R) enzyme and
Cerezyme(R) enzyme will depend more significantly on the associated safety and
efficacy profile and on the price relative to competitive or alternative
treatments and other marketing characteristics of each product than on the
exclusivity afforded by the Orphan Drug Act. Additionally, these products may be
protected by patents, exclusive raw material supply contracts and other means.
OTHER GOVERNMENT REGULATION. Genzyme General's operations are or may be
subject to various laws, regulations and recommendations relating to safe
working conditions, laboratory practices, the experimental use of animals and
the purchase, storage, movement, import and export and use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents used in connection with its research work. The
extent of government regulation which might result from future legislation or
administrative action cannot be predicted.
GENZYME TISSUE REPAIR
OVERVIEW
Genzyme Tissue Repair is a leading developer of biological products for the
treatment of cartilage damage, severe burns, chronic skin ulcers, and
neurodegenerative diseases. Genzyme Tissue Repair believes that strong
capabilities in three groups of core technologies -- cell processing,
therapeutic protein development and biomaterials engineering -- enhance its
ability to successfully develop and market a portfolio of novel products and
services for unmet medical needs in the field of tissue repair. Two services,
the CARTICEL(R) Autologous Chondrocyte Service (the "CARTICEL(R) Service") for
repair of knee cartilage damage and the Epicel(SM) Service for permanent skin
replacement for burn victims, and currently are on the market. Development
programs to improve the performance and expand the applications of each of these
services are ongoing. In addition, Genzyme Tissue Repair is developing
recombinant human transforming growth factor beta2 ("TGF-(beta)2") for the
treatment of chronic skin ulcer.
Genzyme Tissue Repair further expanded its product pipeline in 1996 through
a joint venture with Diacrin to develop and commercialize two cellular therapies
neurodegenerative diseases -- NeuroCell(TM)-PD for the treatment of Parkinson's
disease and NeuroCell(TM)-HD for the treatment of Huntington's disease. These
programs are in Phase I clinical trials and involve implantation of porcine
fetal cells to regenerate damaged brain tissue. The joint venture combines
Diacrin's expertise in developing populations of tranplantable porcine fetal
cells with Genzyme Tissue Repair's expertise in cell-based therapies. Genzyme
Tissue Repair will provide 80% of the first $50 million in funding for these
programs and by the joint venture.
CARTILAGE REPAIR
THE CARTICEL(SM) SERVICE
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BACKGROUND AND MARKET OPPORTUNITY. Once damaged, joint cartilage does not
normally regenerate in the body. In addition to causing pain and restricted
mobility, chronic injuries to joint cartilage over time may lead to debilitating
osteoarthritis and can severely hinder a person's normal activities and
occupation.
Many patients with joint cartilage damage undergo arthroscopic surgery to
smooth the surface of the damaged area. Other surgical procedures, such as
microfracture, drilling, and abrasion, allow bone marrow cells to infiltrate the
defect, resulting in the formation of a fibrous cartilage tissue that is less
durable and resilient than normal articular cartilage. These procedures may
provide symptomatic relief, but the benefit usually lasts only a few years,
especially if the patient's pre-injury activity level is maintained.
More severe and chronic forms of knee cartilage damage can lead to greater
deterioration of the joint cartilage and may eventually lead to total knee joint
replacements. Approximately 200,000 total knee replacement operations are
performed annually at a cost of about $25,000 each. The artificial joint
generally lasts only 10 to 15 years and is considered a poor option for people
under the age of 50.
DESCRIPTION OF THE CARTICEL(R) SERVICE. The CARTICEL(R) Service employs a
proprietary process to grow a patient's own cartilage cells for use in treating
damaged knee cartilage. The treatment, also called autologous chondrocyte
implantation ("ACI"), was initially developed at the University of Gotenburg
and Sahlgrenska University Hospital, Gotenburg, Sweden, in an effort to provide
a better therapy for people with joint cartilage damage. The new treatment is
used primarily in patients with cartilage damage to the femoral condyle, an area
of the knee formed by the end of the thigh bone. Patients with this type of
damage generally display symptoms which include locking, catching, localized
pain, and swelling.
The CARTICEL(R) Service starts when an orthopedic surgeon provides Genzyme
Tissue Repair with a biopsy of healthy cartilage from the patient. Technicians
at the company's cell processing facilities in Cambridge and Framingham,
Massachusetts, use proprietary methods to grow millions of new cells for that
patient. The cells are then delivered to the hospital, where the surgeon
implants them into the defect using the ACI procedure. In this procedure, the
physician removes damaged tissue and prepares the defect for introduction of the
cultured cells. A small piece of the periosteum, the membrane covering a bone,
is taken from the patient's lower leg and sutured over the defect to hold the
cells in place. The cultured cells are then implanted under the periosteum in
the defect, where they form a matrix that integrates with surrounding cartilage
to fill the defect.
In addition to standardized cartilage cell processing, the CARTICEL(R)
Service includes an integrated program of surgeon training and rigorous
collection and analysis of outcomes data, which is aimed at providing broad
surgeon access and achieving and maintaining high quality patient outcomes. In
order to gain access to the service, surgeons must complete comprehensive
training in the ACI procedure. Genzyme Tissue Repair's training programs include
clinical, technical and practical orientation modules, providing a concentrated
exposure to ACI technology. Physician training consists of lectures, practice of
the surgical technique and an orientation regarding reimbursement and billing
procedures. As of December 31, 1996, Genzyme Tissue Repair had trained 1,463
surgeons in this program.
CLINICAL RESULTS. At a meeting of the American Academy of Orthopedic
Surgeons ("AAOS"), Genzyme Tissue Repair's academic collaborator, Lars Peterson,
M.D., Ph.D., of the University of Gotenburg, reported results of a study of 92
patients treated more than two years ago with ACI. The results showed that 96%
of those with a single defect on the femoral condyle had good to excellent
results in
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a clinical assessment using five different rating scales. The new data also
support the addition of osteochondritis dissecans ("OCD") as an indication for
ACI. OCD is the separation of a fragment of cartilage and underlying bone from
the articular surface. Of patients treated for this type of lesion, 89% had good
to excellent results. Good to excellent results were also reported in 75% of
patients who had concurrent repair of damage to their anterior cruciate
ligament, in addition to treatment of a cartilage defect on the femoral condyle.
Patients with lesions on the knee cap showed less improvement, however, as only
62% of these patients had good to excellent results. A retrospective analysis of
the medical records of the patients in this study, using the five rating scales,
revealed that their knees were, on average, in poor condition before treatment.
As part of the study, Peterson and his colleagues took 25 biopsies of the
ACI grafts from 14 of the 92 patients. Treatment failures were over-represented
among these biopsies, because patients with good clinical outcomes generally did
not want to undergo the invasive biopsy-collection procedure. In a blinded
fashion, an independent investigator examined the overall tissue appearance and
cellular appearance and evaluated the biopsies using polarized light and
immunohistochemical techniques. The evaluation revealed that 13 of the 25
biopsies were composed of hyaline-like cartilage (the kind normally found on
joint surfaces) with a surface layer of fibrous cartilage (the remnants of a
tissue cap used to hold the autologous cells in place). Six biopsies were
composed of combined hyaline and fibrous cartilage. Six were composed of
fibrous cartilage. Correlation of the histological results with the clinical
data showed that hyaline-like repair tissue was associated with improved
clinical outcomes, while fibrous repair tissue was associated with poor
outcomes. The results of this study confirmed those published two years ago in
the NEW ENGLAND JOURNAL OF MEDICINE, in which Peterson reported on the first 23
patients to undergo 2-year follow-up evaluations.
Genzyme Tissue Repair believes that clinical data collection for analysis
of surgical outcomes will be critical to document and expand the use of the
CARTICEL(R) Service. Accordingly, Genzyme Tissue Repair has established a
registry of patients who receive cells from the CARTICEL(R) Service and requires
that each surgeon obtain consent from the surgeon's institutional review board
("IRB") to collect outcomes data under a protocol developed by Genzyme Tissue
Repair. Data from the registry on 42 patients who had been treated more than 12
months prior to the time of data collection and 121 patients who had been
treated six months prior to data collection were presented at the AAOS meeting
held in February 1997. The registry data showed statistically significant
improvement at both six months and 12 months following ACI treatment with cells
grown by the CARTICEL(R) Service. These improvements were seen in four key
measures: clinician and patient evaluations of overall knee condition, patient
reports of symptoms, and knee examination results. Genzyme Tissue Repair is also
planning a five-year post-marketing evaluation study that will compare the
safety and effectiveness of the CARTICEL(R) Service to other treatment options
available to repair damaged knee cartilage.
GOVERNMENT REGULATION. Based on discussions with the Center for Devices
and Radiological Health, Genzyme Tissue Repair introduced the CARTICEL(R)
Service in March 1995 as an unregulated device. In the absence of specific
regulation, Genzyme Tissue Repair developed a comprehensive manufacturing
process that established rigorous quality standards for autologous cell
services. These standards included internal and external assessments of the
manufacturing and quality system. This system was recently inspected by the FDA
in connection with the Biologics License Application submitted by Genzyme
Tissue Repair described below.
In April 1995, the FDA contacted Genzyme Tissue Repair and asked for more
information regarding the regulatory status of the CARTICEL(R) Service.
Following this request, Genzyme Tissue Repair filed a formal request in May of
1995 with the FDA Commissioner's office to review the regulatory status of the
CARTICEL(R) Service and determine appropriate regulatory jurisdiction. The FDA
was provided with information regarding Genzyme Tissue Repair's quality
standards and the policies that Genzyme Tissue Repair established for the
CARTICEL(R) Service, as well as answers to specific technical questions. The
FDA responded to Genzyme Tissue Repair's request for designation in July 1995,
confirming in its response Genzyme Tissue Repair's belief that a formal
regulatory framework appropriate to the CARTICEL(R) Service had not yet been
established. Furthermore, the FDA informed Genzyme Tissue Repair that it
intended to hold a public hearing to explore the public health impact of and
consider appropriate regulatory controls for autologous cell implants. The FDA
also informed Genzyme Tissue Repair that it would not regulate the provision of
the CARTICEL(R) Service or the Epicel(R) Service prior to the hearing and
development of regulations, and would allow Genzyme Tissue Repair sufficient
time to comply with any new regulations that may be promulgated.
In November 1995, the FDA held a public hearing on the subject of
autologous cells for structural purposes as a starting point for the development
of new regulations. Genzyme Tissue Repair participated in this hearing,
presenting information regarding the development, clinical application and
processing related to the CARTICEL(R) and Epicel(SM) Services. Genzyme Tissue
Repair also advocated the development of appropriate regulations to guide
further development of products and services in this area. Following a public
comment period that closed in February 1996, the FDA announced that it would
review its position and determine if regulations were required in the area of
autologous cells for structural and reconstructive purposes.
In February 1997, the FDA issued regulations that will bring products and
services such as the CARTICEL(R) Service under regulation by November of 1997.
Companies already marketing products and services subject to the regulations are
allowed a transition period ending on November 30, 1997 in which to file and
obtain approval of a Biologics License Application (a "BLA") or an IND, while
continuing to market their products and services.
Genzyme Tissue Repair submitted a BLA for the CARTICEL(R) Service in March
1996 in anticipation of the regulations. In March 1997, an FDA advisory panel
determined by a vote of 11 to zero, with one abstention, that the ACI procedure
using the CARTICEL(R) Service provided a clinical benefit to patients with
damage to the articular cartilage in
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the knee. The panel also made several recommendations concerning Genzyme Tissue
Repair's proposed post-approval study of the CARTICEL(R) Service with regard to
randomization and appropriate controls and endpoints. The FDA did not ask the
panel to make and the panel did not make a recommendation concerning whether to
approve the BLA for the CARTICEL(R) Service. The panel's recommendations will be
considered in the FDA's review of the BLA, but are not binding on the FDA.
Although Genzyme Tissue Repair expects the FDA to complete its review of the BLA
before of the end of November 1997, there can be no assurance that the review
will be completed by then or that the FDA will not require additional data
concerning the safety and efficacy of the CARTICEL(R) Service. A delay in the
approval of the BLA for the CARTICEL(R) Service beyond the transition period
could materially and adversely affect the commercialization of the CARTICEL(R)
Service.
SALES AND MARKETING. Genzyme Tissue Repair is making a substantial effort
to establish the ACI procedure using the CARTICEL(R) Service as the new
standard of care for repair of cartilage damage to the femoral condyle. As part
of these efforts, Genzyme Tissue Repair shifted its focus in 1996 to increasing
the rate of reimbursement approvals by establishing an educational program
third-party payers. As a result of this program, several payers have established
protocols for selecting patients and determining eligibility. Genzyme Tissue
Repair's reimbursement experience has demonstrated that payers with such
protocols have higher approval rates and typically complete reviews in three to
four days, compared to three to four months for payers without protocols. In
addition, one-third of Genzyme Tissue Repair's 60-person U.S. sales and
reimbursement staff is involved directly in claims processing and educating
insurers about the appropriate uses of the CARTICEL(R) Service.
Genzyme Tissue Repair also believes that successful commercialization of
the CARTICEL(R) Service is dependent on its being accepted by and incorporated
into routine use by a large number of orthopedic surgeons. Genzyme Tissue Repair
markets the CARTICEL(R) Service directly to orthopedic surgeons in the U.S. and
Europe. Genzyme Tissue Repair's sales force promotes the CARTICEL(R) Service by
contacting and educating orthopedic surgeons about the service and maintaining
an ongoing relationship with each surgeon who receives training from Genzyme
Tissue Repair; assisting physicians with administrative, clinical and
reimbursement issues involved in arranging to perform the biopsy and
implantation procedures at hospitals; and assisting physicians in obtaining the
necessary approval from the hospital's IRB to collect outcomes data in
accordance with Genzyme Tissue Repair's protocol. Genzyme Tissue Repair further
supports its sales and marketing efforts by attendance at and participation in
orthopedic congresses and symposia.
DEVELOPMENT PROGRAMS. Genzyme Tissue Repair currently has a number of
ongoing development programs relating to the CARTICEL(R) Service, including
work on arthroscopic implantation procedures and development of the CARTICEL(R)
Service for other applications. The primary objectives of these programs are to:
(i) improve Genzyme Tissue Repair's general knowledge of cartilage repair, (ii)
improve the regenerative ability of the implanted, autologous chondrocytes and
(iii) expand the application of the CARTICEL(R) Service to the repair of large
surface area defects.
NEURODEGENERATIVE DISEASES
DIACRIN/GENZYME LLC. In October 1996, Diacrin/Genzyme LLC was established
as a joint venture between Genzyme Tissue Repair and Diacrin to develop and
commercialize two cellular therapies neurodegenerative diseases --
NeuroCell(TM)-PD for the treatment of Parkinson's disease and NeuroCell(TM)-HD
for the treatment of Huntington's disease. These programs are in Phase I
clinical trials and involve implantation of porcine fetal cells to regenerate
damaged brain tissue. With both products, rejection of the porcine cells can be
prevented with the immunosuppressive drug cyclosporin. The joint venture also
has a license to patented technology being developed at Massachusetts General
Hospital, Boston, which is designed to protect donor cells from the host's
immune system without the need for immunosuppressive drugs. In December 1996,
the FDA granted orphan drug designation to NeuroCell(TM)-PD for in advanced
Parkinson's patients and to NeuroCell(TM)-HD for all Huntington's patients. Each
received the designation for use with an antibody pretreatment to prevent
rejection. Genzyme Tissue Repair and Diacrin estimate that the patient
population with advanced Parkinson's disease ranges from 115,000 to 155,000 in
the United States and that the U.S. patient population with Huntington's disease
is approximately 25,000.
Under the terms of the joint venture agreement, Genzyme Tissue Repair will
provide 80% of the first $50 million in funding for products to be developed by
the joint venture. Thereafter, all costs will be shared equally between Genzyme
Tissue Repair and Diacrin. Profits from the joint venture will be shared equally
by the two parties. In order to provide
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initial funding for Diacrin/Genzyme LLC, the Genzyme Board of Directors (the
"Genzyme Board") has approved the allocation of up to $20 million in cash from
Genzyme General to Genzyme Tissue Repair (the "GTR Equity Line") in exchange for
an increase in the number of GTR Designated Shares at a rate determined by
dividing the amount of cash so allocated by the average of the daily closing
prices of one share of GTR Stock for the 20 consecutive trading days commencing
on the 30th trading day prior to the date of allocation. The Company intends to
make monthly allocations of cash under the GTR Equity Line in an amount
corresponding to the funding commitment of Genzyme Tissue Repair under the joint
venture agreement for such month.
NEUROCELL(TM)-PD. Parkinson's disease is a degenerative disease
characterized by the death of nerve cells in the area of the brain involved with
smoothing and coordinating movement. The loss of these nerve cells results in a
variety of motor symptoms such as rigidity and slowed movements, tremors, falls,
and difficulties with speech and swallowing. Therapy with the drug L-dopa is
initially effective, but begins to lose its efficacy in 6 to 12 years and
provides little benefit in the late stages of the disease. The resulting medical
expenses, early retirement, and nursing home care are estimated to be $5.6
billion a year.
NeuroCell(TM)-PD is aimed at these late-stage patients. Enrollment in a
Phase I study of 12 patients conducted at Lahey Hitchcock Clinic, Burlington,
Massachusetts, and Boston University Medical Center has been completed and all
12 patients have been treated. The initial results of the Phase I trial are
similar to those obtained in Parkinson's patients treated with human fetal
cells, some of whom showed marked improvement in symptoms and restored efficacy
of L-dopa. Commercialization of treatments using human fetal cells is not
practical, because of supply constraints, ethical concerns, and inconsistent
quality of the human cells. Based upon these results, the joint venture is
seeking approval from the FDA to start a pivotal Phase II/III trial in 1997.
Separately, a histological study published in the March issue of NATURE
MEDICINE showed that NeuroCell(TM)-PD cells transplanted into one of the
patients in the Phase I trial survived for more than seven months and showed
signs of reconnecting nerve tissue damaged by the disease. The study marks the
first documentation of survival of cells transplanted from another species into
the human brain and of the appropriate growth of non-human neurons for a
potential therapeutic response. The patient, a 69-year-old man, died suddenly of
a pulmonary embolism. An autopsy showed that his death was not related to
treatment with NeuroCell-PD.
NEUROCELL(TM)-HD. Huntington's disease is a fatal genetic disorder that is
usually not evident until middle age. It causes uncontrolled movements, gait and
postural defects, and dementia. Approximately 20,000 Americans are in the late
stages of this disease, and an additional 1,500 are diagnosed each year.
NeuroCell-HD is in a 12-patient Phase I clinical trial at Lahey Hitchcock
Clinic, Boston University Medical Center, and Brigham and Women's Hospital in
Boston. All 12 patients were treated as of the end of the first quarter of 1997.
SKIN REPAIR
THE EPICEL(SM) SERVICE. Each year approximately 2,000,000 people in the
United States suffer burn injuries. According to the National Center for Health
Services, approximately 70,000 of these patients are admitted to hospitals for
serious burn injuries. Genzyme Tissue Repair estimates that approximately 25,000
of the most severely burned patients in the United States are admitted to one of
the 140 specialized burn centers. Industry analysts estimate that approximately
$1 billion is spent in the United States annually for the treatment of burns.
Skin grafts produced using the Epicel(SM) Service are a life-saving product
indicated for patients who suffer severe, full-thickness burns and need
permanent skin replacement. These epidermal grafts are grown from a patient's
own skin cells and, therefore, are not rejected by the patient's immune system.
Starting with a patient biopsy about the size of a postage stamp, Genzyme Tissue
Repair can grow enough skin grafts in three to four weeks to cover a patient's
entire body surface area. Each skin graft consists of a sheet of cultured skin
cells, approximately 25 square centimeters in size and ranging from two to eight
cell layers thick, attached to a piece of surgical dressing material. A 48 hour
shelf life allows these grafts to be delivered anywhere in the U.S., Europe or
Japan from Genzyme Tissue Repair's production laboratories in Cambridge,
Massachusetts.
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Skin grafts produced using the Epicel(SM) Service were first introduced in
1988 and remain the only commercially available laboratory grown skin grafts
shown to provide permanent skin replacement. Most burn wounds involving less
than 60% body surface area are covered with conventional skin grafts within the
three to four weeks it currently takes to grow skin grafts produced using the
Epicel(SM) Service. Therefore, Genzyme Tissue Repair believes that the primary
candidates for the Epicel(SM) Service are the approximately four hundred
patients each year in the U.S. who survive burn injuries covering more than 60%
of their body surface area. Genzyme Tissue Repair markets the Epicel(SM) Service
to burn centers throughout the U.S. and in parts of Europe through its own
direct sales force. Genzyme Tissue Repair also markets the Epicel(SM) Service in
Japan through a distributor.
Genzyme Tissue Repair is currently evaluating alternative approaches for
use of the Epicel(SM) Service which will represent improvements over certain
limitations that have been identified in its clinical utility and production
methods. Methods being evaluated by Genzyme Tissue Repair include use of
synthetic membranes and composite skin grafts. Genzyme Tissue Repair believes
that advances in the field of autologous keratinocyte grafting coupled with one
or both of these technologies may allow the expanded use of autologous
keratinocyte grafting for the treatment of smaller burns as well as for
treatment of cutaneous ulcers which involve large surface areas of the skin. In
the latter case, Genzyme Tissue Repair believes an improved autologous
keratinocyte graft could effectively and economically provide final wound
closure following effective debridement and induction of granulation tissue
deposition at the wound site.
TGF-(BETA)2. Chronic skin ulcers are open, often painful wounds found
predominantly on the lower extremities of elderly patients. Genzyme Tissue
Repair estimates that approximately 2,600,000 cases of chronic or slow healing
skin ulcers are treated in the United States each year at a cost of more than $7
billion, with individual treatments costing up to $40,000 per year.
TGF-(BETA)2 is one of a family of proteins that plays an important role in
the body's ability to promote normal wound healing by stimulating the growth of
connective tissue. Genzyme Tissue Repair has licensed recombinant TGF-(beta)2
from Celtrix Pharmaceuticals, Inc. ("Celtrix") and is collaborating with Celtrix
on the use of TGF-(beta)2 to promote the healing of chronic skin ulcers by
supplementing the body's own production of TGF-(beta)2. The product will consist
of an easy-to-use collagen sponge which serves as a delivery vehicle permitting
the release of a consistent dose of TGF-(beta)2 to the wound surface over time.
In January 1994, Celtrix announced that the results of the Phase II study
of the TGF-(beta)2 wound healing product in the treatment of venous ulcers were
consistent with previous findings which indicated a positive trend in wound
healing. These results also allowed Celtrix to reach several important
conclusions: (i) topically applied TGF-(beta)2 is safe at the doses tested; (ii)
the delivery vehicle is well tolerated and (iii) the ease of treatment enables
patients to apply TGF-(beta)2 therapy themselves. Due to variability in patient
response in placebo groups, however, combined with a greater-than-expected
placebo effect, statistical significance was not achieved in this study.
In the fourth quarter of 1995, Genzyme Tissue Repair began a 12 center,
double-blinded, randomized Phase II clinical trial. The study groups 200
diabetic patients suffering from neurotrophic diabetic foot ulcers into one of
three TGF-(beta)2 impregnated collagen sponge dose groups, a placebo group or a
standard of care control group. The study is currently ongoing.
During the first half of 1995, Genzyme Tissue Repair concentrated its
efforts on refining the formulation and manufacturing process for the
TGF-(beta)2 collagen sponges at Genzyme's Allston, Massachusetts facility for
use in Phase II clinical trials. Genzyme successfully produced 10,000 sponges
using bulk TGF-(beta)2 from Celtrix and collagen slurry from an outside source.
Genzyme plans to manufacture TGF-(beta)2 for phase III clinical trials in its
own facilities. Upon commercialization, Genzyme Tissue Repair will make royalty
payments to Celtrix based on cumulative product sales. Genzyme Tissue Repair is
also obligated to make milestone payments to Celtrix for product development
related achievements.
Genzyme Tissue Repair is also developing recombinant TGF-(beta)2 for
formulation as an intravenous injectable product for administration to multiple
sclerosis ("MS") patients for the prevention of autoimmune damage of nerve
tissue. This program continues work begun by Celtrix on TGF-(beta)2 in people
suffering from MS. In April 1994, Celtrix initiated a Phase I clinical study
with recombinant TGF-(beta)2 in individuals with MS. The study is being
conducted by the National Institute of Neurological Disorders and Stroke. The
initial clinical evaluation of TGF-(beta)2 in patients with MS is an open-label,
ascending-dose safety
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study involving 15 patients with the progressive form of the disease. Genzyme
Tissue Repair continues to conduct toxicity studies of TGF-(beta)2 to support
future Phase II clinical trials. Genzyme Tissue Repair has not committed to a
development and commercialization strategy for TGF-(beta)2 for MS and has begun
exploratory discussions regarding the future grant of a license to a third party
for this indication.
TGF-(beta)2 has also been shown to promote wound healing in animal models
of hard tissue repair. Genzyme Tissue Repair has been approached by a number of
companies in the orthopedic implant market to evaluate the use of TGF-(beta)2 in
conjunction with accelerating the healing process in segmental defect repair and
general use of implants. Genzyme Tissue Repair may grant a license for use of
TGF-(beta)2 for this indication to a third party.
Genzyme Tissue Repair's rights with respect to TGF-(beta)2 derive from a
license and development agreement which Genzyme and Celtrix entered into in June
1994. The agreement provides for a collaboration between the parties to develop
and commercialize TGF-(beta)2 for any therapeutic uses for any clinical
indication (excluding soft tissue augmentation, vascular prostheses, and all
ophthalmic and mucositis indications). Genzyme's rights and obligations under
the agreement with Celtrix have been allocated to Genzyme Tissue Repair.
Pursuant to the license agreement, Genzyme Tissue Repair has worldwide
commercialization rights, excluding Asia, for all systemic indications and
select other indications of TGF-(beta)2. Celtrix has retained the right to
acquire rights to indications not pursued by Genzyme Tissue Repair.
VIANAIN(R) Debriding Product. Vianain(R) Debriding Product is a
proprietary enzyme preparation designed to remove necrotic tissue from the wound
site. Vianain(R) Debriding Product is formulated in a hydrophilic cream delivery
vehicle so that it is highly viscous and easy to apply to and cleanse from the
wound site. Since Vianain(R) Debriding Product is designed to be applied at the
bedside by a nurse or technician, Genzyme Tissue Repair believes it may also be
more cost effective to use than currently available debridement methods. Genzyme
Tissue Repair intends to use the same proprietary preparation of Vianain(R)
Debriding Product to remove necrotic tissue from both burn and skin ulcers.
In October 1995, Genzyme Tissue Repair completed a Phase II clinical trial
of Vianain(R) Debriding Product in burn patients. The results of this
multi-center study indicate that (i) Vianain(R) Debriding Product is a safe and
effective debriding agent; (ii) multiple applications of Vianain(R) Debriding
Product are required to effectively debride the burn wound; (iii) a
significantly higher number of patients treated with Vianain(R) Debriding
Product achieved acceptable debridement of the wound compared to patients
treated with the vehicle alone; (iv) there was insufficient information to
determine if the use of Vianain(R) Debriding Product can speed the determination
of early burn depth; and (v) there was a trend toward decreased time to wound
closure in the Vianain(R) Debriding Product treatment group as compared to the
control group, but this difference was not statistically significant.
A Phase II single-center study evaluating the ability to transplant skin
grafts to full thickness burn injuries directly following treatment with
Vianain(R) Debriding Product in ten patients was completed in May 1995. Clinical
results indicate that the use of Vianain(R) Debriding Product does not yield an
immediately graftable bed in full thickness burns. It appears, however, to be an
effective debulking agent.
Phase I clinical studies for the Vianain(R) Debriding Product for the
treatment of chronic skin ulcers were completed in June 1995. A total of 15
chronic ulcer patients (8 venous, 5 diabetic, 2 pressure) were treated.
Preliminary results indicate that Vianain(R) Debriding Product is a safe and
effective debriding agent. The product appears to be most effective in venous
ulcers; six out of eight patients experienced at least 90% debridement (the
remaining 2 patients showed 50-89% debridement) and seven patients showed a
significant increase in the amount of healthy granulation tissue present.
Genzyme Tissue Repair has not committed to a development and commercialization
strategy for Vianain(R) Debriding Product for chronic skin ulcers and has begun
exploratory discussions regarding the future grant of a license to a third
party for this indication.
PRODUCTION
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Genzyme Tissue Repair has developed and validated a commercial scale,
proprietary chondrocyte processing system for the CARTICEL(R) Service. A total
of 54 validation studies were conducted as part of this process. In addition,
Genzyme Tissue Repair has developed hundreds of standard operating procedures to
ensure the safety and quality of the CARTICEL(R) Service. These procedures
incorporate Genzyme Tissue Repair's quality assurance program, consisting of
facility controls, process controls and final product testing. Furthermore, each
technician undergoes three months of training prior to handling patient cells.
All production and quality control procedures are intended to ensure
traceability of operations. These systems and procedures will require FDA
approval as part of the BLA for the CARTICEL(R) Service. See "The CARTICEL(R)
Service--Government Regulation."
During 1996, Genzyme Tissue Repair's process development efforts are
directed toward expanding autologous chondrocyte culture capacity, streamlining
processing, improving quality at lower production costs and strengthening
Genzyme Tissue Repair's proprietary position. This work includes improving
yields, reducing labor associated with harvesting chondrocytes from cartilage
biopsies, developing methods for extending the viability of both biopsy
specimens and final product cell suspensions, and identifying cell culture
systems that will enable Genzyme Tissue Repair to automate much of the
production process for the CARTICEL(R) Service.
Genzyme Tissue Repair produces materials for its Epicel(SM) Service and
CARTICEL(R) Service in a specialized facility designed for the production of
cell based therapies. During the second half of 1995, Genzyme Tissue Repair
upgraded and increased the processing capacity of that plant for the CARTICEL(R)
Service to approximately 5,000 patients per year. In January 1996, Genzyme
Tissue Repair acquired two adjacent buildings in Framingham, Massachusetts which
it is developing as a CARTICEL(R) Service production facility with annual
capacity of approximately 13,000 patients. This project was completed in 1996.
To avoid excess capacity due to manufacturing process improvements and a lower
than expected rate of reimbursement approvals, however, one of the facilities
acquired by Genzyme Tissue Repair was reallocated to Genzyme General in
exchange for cash. In addition, beginning in January 1997, Genzyme Tissue
Repair leased approximately half of the second facility to Genzyme General for
a term of three years. Genzyme Tissue Repair expects that Vianain(R) and
TGF-(beta)2 will be manufactured for Genzyme Tissue Repair by the Genzyme
General on terms and conditions to be negotiated between the divisions.
COMPETITION
Genzyme Tissue Repair is engaged in a segment of the human health care
products industry that is extremely competitive. Competitors in the U.S. and
elsewhere are numerous and include major pharmaceutical, chemical, surgical
device and biotechnology companies, many of which have substantially greater
resources than Genzyme. These companies may succeed in developing products and
services that are more effective than any that have been or may be developed by
Genzyme Tissue Repair and may also prove to be more successful than Genzyme
Tissue Repair in producing and marketing their products and services.
Each of Genzyme Tissue Repair's products and services faces different
competitive challenges:
THE CARTICEL(R) SERVICE. Genzyme Tissue Repair is aware of four companies,
Advanced Tissue Sciences, Inc. ("ATS"), in conjunction with Smith and Nephew
PLC, Integra LifeSciences Corp. ("Integra"), LifeCell Corp. and Verigen,
Inc. that are engaged in research on cultured cartilage products.
EPICEL(SM) SERVICE. Genzyme Tissue Repair is the only commercial provider
of cultured skin grafts that have been shown to provide permanent skin
replacement for burn patients in the U.S. However, Genzyme Tissue Repair may
face competition from companies using other approaches to culture skin tissue.
Integra is marketing a collagen-based dermal replacement product for severely
burned patients. This product will still require a skin graft from the patient
or the Epicel(SM) Service to close a full-thickness wound, however, and
therefore will not compete directly with the Epicel(SM) Service. ATS also has
received approval for a temporary wound covering for burns. Organogenesis, Inc.
has submitted a PMA for a product to be used for the closure of venous stasis
ulcers. LifeCell Corp. currently has freeze-dried enzymatically processed human
cadaver dermis on the market.
TGF-(BETA)2. The use of growth factors is emerging as a treatment for
partial-thickness or very small full-thickness wounds. A number of companies are
currently conducting or planning to conduct clinical trials with growth factors,
although to date, no recombinant growth factor product has received FDA
approval. Potential competitors include Chiron Corp., in collaboration with the
Ethicon division of Johnson & Johnson, Curative Technologies, Inc., and Scios
Novo, Inc.. Curative Technologies, Inc., also has one product on the market
which does not require FDA approval. Such growth
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factors may prove to be complementary to, as well as competitive with,
TGF-(beta)2. Genzyme Tissue Repair does not believe, however, that growth
factors can provide permanent skin replacement to compete with the Epicel(SM)
Service. Additionally, TGF-(beta)2 will compete with interferon-based
immunomodulators produced by Chiron Corp. and Biogen Inc. for the treatment of
MS.
VIANAIN(R) DEBRIDING PRODUCT. Vianain(R) will compete primarily with
surgical debridement of necrotic tissue or mechanical debridement using
hydrotherepy and daily dressing changes to remove necrotic tissue and, to a
lesser extent, with currently available enzymatic debridement products. Surgical
and mechanical debridement procedures are painful, labor intensive and remove
viable tissue along with necrotic tissue while the enzymatic debridement
products on the market are slow-acting and of limited efficacy. Enzymatic
debridement products currently available commercially include products
manufactured by Knoll Pharmaceuticals, Parke-Davis, Boots-Flinte, Inc., Lederle
Laboratories and Rystan.
PATENTS AND PROPRIETARY RIGHTS
Genzyme Tissue Repair pursues a policy of obtaining patent protection both
in the U.S. and in selected foreign countries for subject matter considered
patentable and important to its business. In addition, a portion of Genzyme
Tissue Repair's proprietary position is based upon patents licensed by Genzyme.
These license agreements generally require Genzyme Tissue Repair to pay
royalties upon commercialization of products covered by the licensed technology.
Genzyme Tissue Repair's patent position and proprietary technology are subject
to certain risks and uncertainties. See "Factors Affecting Future Operating
Results--Uncertainty Regarding Patents and Protection of Proprietary Technology"
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Genzyme Tissue Repair received its first patent in October 1995 for its
method of freezing cells. In addition, Genzyme Tissue Repair has filed and is
preparing several patent applications covering its work in cartilage repair.
Genzyme Tissue Repair possesses substantial know-how in the field of autologous
cell development generally, and for the CARTICEL(R) Service in particular. Such
know-how includes the production of biopsy kits and packaging materials,
procedures for quality control, sterility, segregation and manufacturing, and
product delivery, and the method by which Genzyme Tissue Repair validates assays
for future development. Genzyme Tissue Repair believes that this significant
technological know-how places it in a competitively advantageous position.
Genzyme Tissue Repair's proprietary position in the culturing of epidermal
tissues was originally exclusively licensed from Harvard University and has been
augmented by recently obtained additional patents covering cool storage
technology and packaging of skin grafts produced using the Epicel(SM) Service.
Genzyme Tissue Repair has also exclusively licensed, on a worldwide basis except
for Italy, recent patents covering cryopreservation of such skin grafts. Genzyme
Tissue Repair has extended this basic cryopreservation technology by patenting
additional developments and improvements in the U.S..
Genzyme Tissue Repair also possesses know-how relating to the large-scale
production of cultured epidermal grafts, the growth of other types of mammalian
cells including fibroblasts and epithelial cells, and the formulation of various
types of biomaterials, including HA. In addition to HA know-how, Genzyme Tissue
Repair has rights to a series of issued U.S. patents in tissue repair covering
modified forms of HA.
Genzyme Tissue Repair has pending and issued patents in the U.S. and other
countries covering the enzymatic formulation of the Vianain(R) Debriding Product
and hydrophilic cream delivery vehicle for the product.
Celtrix has obtained patents and filed patent applications in the U.S. and
foreign countries on the composition of TGF-(beta)2, its formulation and its
therapeutic applications in wound healing, cancer, immune therapy and bone
therapy. Genzyme allocated the rights under its license with Celtrix to Genzyme
Tissue Repair at the time of Genzyme Tissue Repair's creation in December 1994.
While Genzyme Tissue Repair seeks a strong patent position, it believes
that its competitive position will also depend on its ability to maintain its
trade secrets and proprietary know-how, to achieve market leadership in key
product areas and to obtain successful clinical results. Genzyme Tissue Repair's
employees, advisors and consultants who have access to Genzyme Tissue Repair
proprietary information are required to sign confidentiality agreements.
GOVERNMENT REGULATION
29
<PAGE> 32
Material developments in respect of the regulation of the CARTICEL(R)
Service are described under the caption "The CARTICEL(R) Service--Government
Regulation."
A federal criminal statute that prohibits the transfer of any human organ
for valuable consideration for use in human transplantation, but which permits
recovery of reasonable costs associated with such activities, has not been
applied to the CARTICEL(R) Service or Epicel(SM) Service. Certain states have
laws requiring the licensure of tissue and organ banks and laws governing the
sale of human organs and the safety and efficacy of drugs, devices and
biologics, including skin, all of which could be interpreted to apply to Genzyme
Tissue Repair's production and distribution of cultured tissue products.
Provisions in certain states' statues prohibit the receipt of valuable
consideration in connection with the sale of human tissue by a tissue bank but
permit licensed tissue banks, including companies, to recover their reasonable
costs associated with such sales.
Federal or state regulation could result in significant expense to Genzyme
Tissue Repair, limit Genzyme Tissue Repair's reimbursement for its services, and
otherwise materially adversely affect Genzyme Tissue Repair's results of
operations.
Autologous products are specifically exempt from the European Device
Directive and Pharmaceutical Directive promulgated by the European Union.
Therefore, each European country is free to impose its own regulations on the
marketing of such products. To date, Genzyme Tissue Repair has not encountered
any local registration requirements for market introduction of the CARTICEL(R)
Service. Genzyme Tissue Repair is currently assessing the regulatory
requirements for commercialization of the CARTICEL(R) Service in Japan.
The FDA has issued draft regulatory guidelines to reduce the risk of
contamination of xenotransplanted cellular products with infectious agents.
Although Genzyme Tissue Repair's management believes the processes used to
produce the porcine cell products under development by the joint venture would
comply with the guidelines as drafted, such guidelines may undergo substantial
revision before definitive guidelines are issued by the FDA. There can be no
assurance that definitive guidelines will be issued by the FDA or that the
processes used by the joint venture will comply with any guidelines that may be
issued.
Genzyme Tissue Repair is also subject to various federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices and the use and disposal of hazardous or
potentially hazardous safety procedures used in connection with Genzyme Tissue
Repair's research work and production operations. Although Genzyme Tissue Repair
believes that its safety procedures comply with the standards prescribed by
federal, state and local regulations, the risk of contamination, injury or other
accidental harm cannot be completely eliminated. In the event of such an
accident, Genzyme Tissue Repair could be held liable for any damages that result
and any liabilities could exceed Genzyme Tissue Repair's resources.
EMPLOYEES OF THE REGISTRANT
As of December 31, 1996, Genzyme (including all consolidated subsidiaries
and excluding GTC) had approximately 3,516 employees. Doctorate degrees are held
by 182 of the Company's employees. Of the Company's employees, 2,908 are located
in the U.S. and Canada, 292 in the United Kingdom, 296 in the rest of Europe
and 20 in Japan and the Far East.
None of the Company's employees are covered by collective bargaining
agreements. The Company considers its employee relations to be excellent.
RESEARCH AND DEVELOPMENT COSTS
The information required by Item 101(c)(xi) of Regulation S-K is incorporated by
reference from Part II, Item 8 "Consolidated Financial Statements and
Supplementary Schedules" and specifically to the "Consolidated Statements of
Operations" and to Note J of "Notes to Consolidated Financial Statements."
SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS
30
<PAGE> 33
The information required by Items 101(c)(1)(i) and (vii) and 101(d) of
Regulation S-K is incorporated by reference from Part II, Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note N of "Notes to Consolidated Financial Statements."
31
<PAGE> 34
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
The current executive officers of Genzyme are as follows:
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Henri A. Termeer 50 Chairman of the Board, President and Chief Executive Officer
Geoffrey F. Cox, Ph.D. 52 Executive Vice President
David J. McLachlan 57 Executive Vice President, Finance and Chief Financial Officer
Gregory D. Phelps 47 Executive Vice President
Peter Wirth 45 Executive Vice President and Chief Legal Officer
David D. Fleming 47 Group Senior Vice President, Diagnostics
John V. Heffernan 57 Senior Vice President, Human Resources
Richard A. Moscicki, M.D. 44 Senior Vice President, Clinical, Medical and Regulatory Affairs and
Chief Medical Officer
Alan E. Smith, Ph.D. 51 Senior Vice President, Research and Chief Scientific Officer
G. Jan van Heek 46 Group Senior Vice President, Therapeutics
</TABLE>
Each officer's term of office extends until the meeting of the Genzyme
Board following the next annual meeting of stockholders and until a successor is
elected and qualified or until his or her earlier resignation or removal.
MR. TERMEER has served as President of Genzyme since October 1983, Chief
Executive Officer since December 1985 and 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 Board of Genzyme Transgenics Corporation ("GTC") and, until its
acquisition by Genzyme in December 1996, was Chairman of the Board of Neozyme II
Corporation ("Neozyme II"). Mr. Termeer is also a director of Abiomed, Inc.,
AutoImmune Inc., Diacrin, Inc. and GelTex Pharmaceuticals, Inc., and a trustee
of Hambrecht & Quist Healthcare Investors and of Hambrecht & Quist Life Sciences
Investors.
DR. COX joined Genzyme in June 1984 and has served as Executive Vice
President since September 1996. From May 1988 until September 1996, he served as
Senior Vice President, Operations of Genzyme. Dr. Cox also is responsible for
Genzyme's diagnostic businesses and global manufacturing operations. For 11
years prior to joining Genzyme, Dr. Cox worked for the manufacturing division of
British Fermentation Products, Ltd., a division of Gist-Brocades N.V. Dr. Cox is
also a director of Aronex Pharmaceuticals, Inc.
MR. MCLACHLAN joined Genzyme in December 1989 and has served as Executive
Vice President, Finance since September 1996. Mr. McLachlan served as Senior
Vice President, Finance from 1989 to September 1996 and has held the position of
Chief Financial Officer since 1989. 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 also serves as a director of HearX, Ltd., a
company providing products and services to the hearing impaired.
MR. PHELPS joined Genzyme in November 1991 and has served as Executive Vice
President since September 1996. Mr. Phelps held the position of Senior Vice
President of Genzyme from November 1991 to September 1996. From December 16,
1994 to September 1996, he also served as President of GTR. Prior to joining
Genzyme, Mr. Phelps served as President and Chief Executive Officer of Viagene,
Inc. from October 1988 to June 1990 and of ZymoGenetics, Inc. from May 1986 to
August 1988, and held various positions at Baxter Travenol Laboratories, Inc.
from 1975 to 1986. Mr. Phelps was a director of Neozyme II prior to its
acquisition by Genzyme in December 1996.
MR. WIRTH joined Genzyme in January 1996 and has served as Executive Vice
President, Legal Affairs and Chief Legal Officer since September 1996. From
January 1996 to September 1996, Mr. Wirth served as Senior Vice President and
General Counsel of Genzyme. Mr. Wirth was also a partner of Palmer & Dodge LLP,
a Boston, Massachusetts law firm, from 1982 through September 1996. Mr. Wirth
remains of counsel to Palmer & Dodge LLP.
32
<PAGE> 35
MR. FLEMING joined Genzyme in April 1984 and has served as Group Senior
Vice President, Diagnostics since September 1996. Prior to that date he served
as President of Genzyme's diagnostics division beginning in January 1989 and as
a Senior Vice President of Genzyme beginning in August 1989. 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.
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. Since September 1996, he has
served as 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.
DR. SMITH joined Genzyme in August 1989 as Senior Vice President, Research
and has also served as Chief Scientific Officer since September 1996. Prior to
joining Genzyme, he served as Vice President-Scientific Director of Integrated
Genetics, Inc. from November 1984 until its merger with 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 and from 1972 to October 1980, he was a member of the scientific staff
at the ICRF. Dr. Smith also serves as a director of GTC.
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. Since September
1996, Mr. van Heek has served as 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 served
as President and Treasurer of Neozyme II from March 1992 to December 1995.
33
<PAGE> 36
ITEM 2. PROPERTIES.
Genzyme's operations are conducted in manufacturing, warehousing, pilot
plant, clinical laboratories, and research and office facilities principally in
the United States, United Kingdom, Netherlands, Switzerland and Germany. All
properties are leased except for certain properties in Haverhill and West
Malling, England, and Coventry, Connecticut, Fall River, Massachusetts,
Framingham, Massachusetts, Allston, Massachusetts and Santa Fe, New Mexico.
Genzyme's principal properties are, for Genzyme General, its manufacturing
facilities for the large scale production of its therapeutic proteins,
biomaterials, diagnostic products and pharmaceuticals and its genetic diagnostic
facilities and, for Genzyme Tissue Repair, its state-of-the art cell processing
facilities for the CARTICEL[R] Service and the Epicel[SM] Service.
GENZYME GENERAL
SPECIALTY THERAPEUTICS
Ceredase[R] enzyme is produced under GMP conditions at Genzyme's FDA inspected
therapeutic products manufacturing facility located in Cambridge,
Massachusetts. The facility, which is owned by the Company, is built on land
held under a 60 year lease. Ceredase[R] enzyme is manufactured under GMP
conditions in the Company's small-scale manufacturing facility in Framingham,
Massachusetts. This facility is also used to make Thryogen[R] hormone for
clinical trial use and, if approved by the FDA, for distribution to patients
under a treatment IND.
SURGICAL PRODUCTS
Genzyme has manufacturing capacity at two UK facilities to produce commercial
quantities of HA powder for its family of HA-based products currently under
development on behalf of the Partnership. Seprafilm[TM] bioresorbable membrane
is produced at commercial scale from the HA powder in the Company's
manufacturing facility in Framingham, Massachusetts.
In July 1996 in connection with the acquisition of DSP, the Company acquired or
assumed the leases for certain office, laboratory and manufacturing facilities
in Fall River, Massachusetts, Coventry, Connecticut, Tucker, Georgia and
Germany for use in manufacturing and warehousing its Surgical Products.
GENZYME GENETICS
The Company's genetic testing business primarily conducts operations in
clinical laboratory and administrative facilities which the Company's owns in
Framingham, Massachusetts and Santa Fe, New Mexico. The Company maintains
certain small-scale laboratories in Florida and California.
DIAGNOSTIC PRODUCTS
Immunobiological products, diagnostic test kits and reagents are produced in
manufacturing facilities in San Carlos, California, Cambridge, Massachusetts
and Russelsheim, Germany.
Diagnostic enzymes and other fermentation products are produced in a
multi-purpose fermentation facility in Maidstone, England and a protein
purification plant in West Malling, England.
In 1996, the Company began construction of a new fermentation facility and
warehousing facility in West Malling, England.
PHARMACEUTICALS
A multi-use pharmaceutical facility in Haverhill, England is used to produce
commercial quantities of active pharmaceutical products, including
phospholipids. A second multi-use pharmaceutical facility in Liestal,
Switzerland is used to produce peptides.
TISSUE REPAIR DIVISION
Production for the CARTICEL[R] Service and Epicel[SM] Service currently occurs
primarily in the Company's cell processing facilities in Cambridge,
Massachusetts. The facility has the capacity to provide the CARTICEL[R] Service
to approximately 5,000 patients per year. In 1996, the Company established a
surgeon training center at its facility in the Netherlands in conjunction with
the CARTICEL[R] program.
Selling and marketing activities for both Genzyme General and Genzyme Tissue
Repair are concentrated at facilities leased by the Company in Cambridge,
Massachusetts and the Netherlands. The Company conducts its research and
development activities primarily at its laboratory facilities in the United
States.
Leases for the Company's facilities contain typical commercial lease provisions
including renewal options, rent escalators and tenant responsibility for
operating expenses. The Company believes that it has or is in the process of
developing adequate manufacturing capacity to support its requirements for the
next several years.
ITEM 3. LEGAL PROCEEDINGS.
As of the filing date of this Form 10-K, there are no pending legal
proceedings deemed material by the Company to which Genzyme or any of its
subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders of Genzyme during
the fourth quarter of the fiscal year ended December 31, 1996.
34
<PAGE> 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company has two classes of common stock: GGD Stock and GTR Stock.
The GGD Stock and the GTR Stock are intended to reflect the value and track the
performance of Genzyme General and Genzyme Tissue Repair, respectively. The
GGD Stock and the GTR Stock are traded on the over-the-counter market and prices
are quoted on the Nasdaq National Market under the symbols GENZ and GENZL,
respectively. On June 7, 1996 the Company declared a 2-for-1 stock split of
shares of the GGD Stock, which was paid in the form of a stock dividend on July
25, 1996. All share and per share amounts have been re-stated to reflect this
split. As of March 1, 1997, there were 2,908 and 3,665 shareholders of record of
GGD Stock and GTR Stock, respectively.
The following table sets forth, for the periods indicated, the high and
low sale prices for the GGD Stock and the GTR Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
GGD Stock
1996:
First Quarter .............. $38 1/2 25 5/8
Second Quarter ............. 31 1/4 23 1/2
Third Quarter .............. 26 3/4 21 3/8
Fourth Quarter ............. 26 1/8 19 3/4
1995:
First Quarter .............. 20 3/4 13 5/8
Second Quarter ............. 22 18
Third Quarter .............. 32 1/8 19 3/4
Fourth Quarter ............. 35 1/50 24
GTR Stock
1996:
First Quarter .............. $28 3/4 $13 7/8
Second Quarter ............. 17 1/8 10 7/8
Third Quarter .............. 11 7/8 6 5/8
Fourth Quarter ............. 11 1/8 6 1/2
1995:
First Quarter .............. 7 3/4 3 1/2
Second Quarter ............. 7 5/8 5 1/8
Third Quarter .............. 16 5/8 6 1/2
Fourth Quarter ............. 18 1/2 11 3/4
</TABLE>
No cash dividends have been paid to date on the GGD Stock or the GTR
Stock and the Company does not anticipate paying cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
GENZYME CORPORATION
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (1)
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales ................................ $424,483 $304,373 $238,645 $183,366 $139,568
Net service sales ................................ 68,950 52,450 50,010 50,511 40,400
Revenues from research and development
contracts:
Related parties ................................ 23,011 26,758 20,883 34,162 35,412
Other .......................................... 2,310 202 1,513 2,332 3,699
-------- -------- -------- -------- --------
518,754 383,783 311,051 270,371 219,079
Operating costs and expenses:
Cost of products sold ............................ 155,930 113,964 92,226 64,704 52,514
Cost of services sold ............................ 54,082 35,868 32,403 34,558 27,254
Selling, general and administrative .............. 162,264 110,447 80,990 72,752 56,667
Research and development (including research
and development related to contracts) ........... 80,849 68,845 55,334 48,331 39,675
Amortization of intangibles ...................... 8,849 4,647 4,741 5,964 3,037
Purchase of in-process research and
development(2) ................................. 130,639 14,216 11,215 49,000 51,100
Goodwill impairment and restructuring(3) ......... 1,465 - 26,517 -
Charge for purchase options and financing
exercises(4) .................................... - - - - 16,905
-------- -------- -------- -------- --------
594,078 347,987 276,909 301,826 247,152
-------- -------- -------- -------- --------
Operating income (loss) ............................. (75,324) 35,796 34,142 (31,455) (28,073)
Other income and (expenses):
Minority interest in net loss of subsidiaries .... - 1,608 1,659 9,892 1,678
Equity in loss of unconsolidated subsidiaries .... (4,360) (1,810) (1,353) - -
Gain on investments and charges for impaired
investments..................................... 1,711 - (9,431) (700) -
Settlement of lawsuit ............................ - - (1,980) - -
Investment income ................................ 15,341 8,814 9,101 12,209 21,981
Interest expense ................................. (6,990) (1,109) (1,354) (2,500) (7,099)
-------- -------- -------- -------- --------
5,702 7,503 (3,358) 18,901 16,560
-------- -------- -------- -------- --------
Income (loss) before income taxes ................... (69,622) 43,299 30,784 (12,554) (11,513)
Benefit (provision) for income taxes ................ (3,195) (21,649) (14,481) 6,459 (18,804)
-------- -------- -------- -------- --------
Net income (loss) ................................... $(72,817) $ 21,650 $ 16,303 $ (6,095) $(30,317)
======== ======== ======== ======== ========
</TABLE>
35
<PAGE> 38
SELECTED FINANCIAL DATA (CONTINUED)
GENZYME CORPORATION (CONTINUED)
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS DATA (CONTINUED)(1)
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ATTRIBUTABLE TO THE GENERAL DIVISION:
Net income (loss) (5,6) ........................ $ (30,502) $ 43,680 $ 32,054 $ 18,020 $(29,809)
========== ======== ======== ======== ========
Per common and common equivalent share (5,6):
Net income (loss) ........................... $ (0.45) $ 0.73 $ 0.61 $ 0.34 $ (0.67)
========== ======== ======== ======== ========
Average shares outstanding .................. 68,289 60,184 52,338 52,500 44,740
========== ======== ======== ======== ========
ATTRIBUTABLE TO THE TISSUE REPAIR DIVISION:
Net loss (5) ................................... $ (42,315) $(22,030) $(15,751) $(24,115) $ (508)
========== ======== ======== ======== ========
Per common share (5) ........................... $ (3.38) $ (2.28) $ (4.40) $ (7.43) $ (0.17)
========== ======== ======== ======== ========
Average shares outstanding ............... 12,525 9,659 3,578 3,245 3,019
========== ======== ======== ======== ========
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEET DATA (1): DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON SHARE DATA: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and investments (7) ........................... $ 187,955 $326,236 $153,460 $168,953
$248,325
Working capital .................................... 395,605 352,410 103,871 99,605 166,324
Total assets ....................................... 1,270,508 905,201 658,408 542,052 481,896
Long-term debt and capital lease obligations
excluding current portion (8) ..................... 241,998 124,473 126,729 144,674 105,369
Stockholders' equity (9) ........................... 902,309 705,207 418,964 334,072 322,613
</TABLE>
There were no cash dividends paid.
- ------------------------
(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 1992, 1993, 1994 ,1995 and 1996, respectively, Genzyme acquired all of
the rights to four of the Neozyme I Corporation ("Neozyme I") development
programs and Medix Biotech, Inc. ("Medix"); all of the rights to the remaining
two Neozyme I development programs; all of the outstanding stock of BioSurface
Technology, Inc. ("BioSurface"); the publicly-held, minority interest in IG; and
the assets of Deknatel Snowden Pencer, Inc. ("DSP") and all of the Callable
Common Stock of Neozyme II Corporation ("Neozyme II"). In connection with these
transactions, all of which were accounted for as purchases, Genzyme charged to
operations the following amounts which represented the purchase of in-process
research and development: 1992, $51.1 million; 1993, $49.0 million, 1994, $11.2
million, 1995, $14.2 million and in 1996, $130.6 million.
(3) In 1993, the Company incurred restructuring charges of $2.8 million related
to the consolidation of laboratory operations in its diagnostic services
business and wrote off $23.7 million for the value of impaired goodwill
associated primarily with IG's acquisition of Genetic Design, Inc. ("GDI") in
1992. In 1996, the Company incurred additional restructuring charges of $1.0
million related to the consolidation of laboratory operations in its diagnostic
services business and $0.5 million related to the consolidation of foreign
operations in its surgical products business in connection with certain
acquisitions.
(4) In 1992, Genzyme sponsored formation of Neozyme II. In connection with this
transaction, Genzyme obtained the option to acquire all of the equity of Neozyme
II under certain circumstances in exchange for the issuance of warrants to
acquire the Company's stock. The value assigned to this option ($16.9 million)
was charged to operations in the period the option was obtained due to
uncertainty as to Genzyme's future exercise of this option.
(5) Net income (loss) attributable to the General Division and the Tissue Repair
Division and net income (loss) per share for the years ended December 31, 1992,
and 1993 give effect to the management and accounting policies adopted by the
Board in connection with the creation of GTR and, accordingly, are pro forma
presentations.
36
<PAGE> 39
(6) Reflects July 25, 1996 2-for-1 stock split of General Division Stock
effected by means of a 100% stock dividend paid to stockholders of record on
July 11, 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.
(7) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(8) In October 1991, the Company issued $100.0 million of 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3 million.
The notes were converted into shares of GGD Stock in March 1996. In June 1996,
the Company's $15.0 million credit line with a commerical was increased to
$215.0 million in connection with the acquisition of Deknatel Snowden Pencer,
Inc. ("DSP") in July 1996. In November 1996, this credit line was re-financed
with a syndicated group of banks and the revolving line of credit was increased
to $225.0 million. As of December 1996, the Company borrowed $218.0 million
under this credit facility of which $200.0 million was allocated to the
General Division and $18.0 million to GTR to finance operations. In July 1996,
Genzyme made a final payment of approximately $7.6 million for a company
acquired in 1994.
(9) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as General Division Common Stock on a share-for-share basis and a
second class of common stock designated as Tissue Repair Common Stock ("TR
Stock") was distributed on the basis of .135 of one share of TR Stock for each
share of Genzyme's previous common stock held by shareholders of record on
December 16, 1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock
valued at $25.3 million in connection with the acquisition of BioSurface. In
September 1995, GTR completed the sale of 3,000,000 shares of TR Stock for net
proceeds of $42.3 million. In October 1995, the General Division completed the
sale of 5,750,000 shares of General Division Stock for net proceeds of $141.3
million.
37
<PAGE> 40
SELECTED FINANCIAL DATA (CONTINUED)
GENERAL DIVISION
<TABLE>
COMBINED STATEMENT OF OPERATIONS DATA (1)
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales ........................................ $424,483 $304,373 $238,645 $183,366 $139,568
Net service sales ........................................ 61,638 47,230 49,686 50,511 40,400
Revenues from research and development
contracts:
Related parties ........................................ 23,011 26,758 20,883 29,478 32,746
Other .................................................. 2,310 202 1,513 2,332 3,699
-------- -------- -------- -------- --------
511,442 378,563 310,727 265,687 216,413
Operating costs and expenses:
Cost of products sold .................................... 155,930 113,964 92,226 64,704 52,514
Cost of services sold .................................... 42,889 31,137 32,116 34,558 27,254
Selling, general and administrative ...................... 135,153 97,520 80,026 72,051 55,844
Research and development (including
research and development related to contracts) .......... 69,969 57,907 51,696 45,526 37,324
Amortization of intangibles .............................. 8,849 4,647 4,741 5,964 3,037
Purchase of in-process research and
development (2) ......................................... 130,639 14,216 - 24,000 51,100
Goodwill impairment and restructuring charges (3) ........ 1,465 - - 26,517 -
Charge for purchase options and financing
exercises (4) ........................................... - - - - 16,905
-------- -------- -------- -------- --------
544,894 319,391 260,805 273,320 243,978
-------- -------- -------- -------- --------
Operating income (loss) ...................................... (33,452) 59,172 49,922 (7,633) (27,565)
Other income and (expenses):
Minority interest in net loss of subsidiaries ............ - 1,608 1,659 9,892 1,678
Equity in loss of unconsolidated subsidiary .............. (2,633) (1,810) (1,353) - -
Gain on investments and charges for impaired investments.. 1,711 - (9,431) (700) -
Settlement of lawsuit .................................... - - (1,980) - -
Investment income ........................................ 13,909 7,428 9,072 12,209 21,981
Interest expense ......................................... (6,842) (1,069) (1,354) (2,500) (7,099)
-------- -------- -------- -------- --------
6,145 6,157 (3,387) 18,901 16,560
-------- -------- -------- -------- --------
Income (loss) before income taxes ............................ (27,307) 65,329 46,535 11,268 (11,005)
Provision for income taxes ................................... (20,122) (30,506) (16,341) (2,812) (19,007)
-------- -------- -------- -------- --------
Net income (loss) ............................................ (47,513) 34,823 30,194 8,456 (30,012)
Tax benefit allocated from Tissue Repair Division ............ 17,011 8,857 1,860 9,564 203
-------- -------- -------- -------- --------
Net income (loss) attributable to General Stock (5,6) ........ $(30,502) $ 43,680 $ 32,054 $ 18,020 $(29,809)
======== ======== ======== ======== ========
</TABLE>
38
<PAGE> 41
SELECTED FINANCIAL DATA (CONTINUED)
GENERAL DIVISION (CONTINUED)
<TABLE>
COMBINED STATEMENT OF OPERATIONS DATA (CONTINUED)(1)
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
GENERAL DIVISION COMMON SHARE DATA:
Net income (loss) attributable to General Stock (5,6) ... $ (30,502) $ 43,680 $ 32,054 $ 18,020 $(29,809)
========== ======== ======== ======== ========
Per General Division Common and common
equivalent share (5,6):
Net income (loss) ................................... $ (0.45) $ 0.73 $ 0.61 $ 0.34 $ (0.67)
========== ======== ======== ======== ========
Average shares outstanding .......................... 68,289 60,184 52,338 52,500 44,740
========== ======== ======== ======== ========
</TABLE>
<TABLE>
COMBINED BALANCE SHEET DATA (1): DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and investments (7) ................................ $ 171,725 $278,663 $128,652 $168,953 $248,325
Working capital ......................................... 381,373 308,036 83,314 99,503 166,101
Total assets ............................................ 1,229,519 854,586 630,144 532,357 481,896
Long-term debt and capital lease obligations
excluding current portion (8) .......................... 223,998 124,473 126,555 144,674 105,369
Division equity (9) ..................................... 884,225 659,281 395,651 324,391 322,390
</TABLE>
There were no cash dividends paid.
- ------------------
(1) In October 1992, the General Division acquired all the outstanding common
shares of Vivigen, Inc. ("Vivigen") in a transaction accounted for as a pooling
of interests. Accordingly, the General Division's financial data has been
restated to include Vivigen for all periods presented.
(2) In 1992, 1993, 1994 and 1995, respectively, the General Division acquired
all of the rights to four of the Neozyme I Corporation ("Neozyme I") development
programs and Medix Biotech, Inc. ("Medix"); all of the rights to one of the two
remaining Neozyme I development programs; all of the outstanding stock of
BioSurface Technology, Inc. ("BioSurface"); the publicly-held, minority interest
in IG; and the assets of Deknatel Snowden Pencer, Inc. ("DSP") and all of the
Callable Common Stock of Neozyme II Corporation ("Neozyme II"). In connection
with these transactions, all of which were accounted for as purchases, Genzyme
charged to operations the following amounts which represented the purchase of
in-process research and development: 1992, $51.1 million; 1993, $49.0 million,
1994, $11.2 million, 1995, $14.2 million and in 1996, $130.6 million.
(3) In 1993, the General Division incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its diagnostic services
business and wrote off $23.7 million for the value of impaired goodwill
associated primarily with IG's acquisition of Genetic Design, Inc. ("GDI") in
1992. In 1996, the General Division incurred additional restructuring charges of
$1.0 million related to the consolidation of laboratory operations in its
diagnostic services business and $0.5 million related to the consolidation of
foreign operations in its surgical products business in connection with certain
acquisitions.
(4) In 1992, the General Division sponsored formation of Neozyme II. In
connection with this transaction, the General Division obtained the option to
acquire all of the equity of Neozyme II under certain circumstances in exchange
for the issuance of warrants to acquire the General Division's stock. The value
assigned to this option ($16.9 million) was charged to operations in the period
each option was obtained due to uncertainty as to the General Division's future
exercise of this option.
(5) Net income (loss) attributable to General Division Stock and net income
(loss) per common and common equivalent share for the years ended December 31,
1992, and 1993 give effect to the provisions of Management and Accounting
Policies adopted by the Board in connection with the creation of GTR and
accordingly, are pro forma presentations.
(6) Reflects July 25, 1996 2-for-1 stock split of General Division Stock
effected by means of a 100% stock dividend paid to stockholders of record on
July 11, 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.
(7) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
39
<PAGE> 42
(8) In October 1991, the Company issued $100.0 million of 6 3/4% convertible
subordinated notes due October 2001 and received net proceeds of $97.3 million.
The notes were converted into shares of GGD Stock in March 1996. In June 1996,
the Company's $15.0 million credit line with a commerical was increased to
$215.0 million in connection with the acquisition of Deknatel Snowden Pencer,
Inc. ("DSP") in July 1996. In November 1996, this credit line was re-financed
with a syndicated group of banks and the revolving line of credit was increased
to $225.0 million. As of December 1996, the Company borrowed $218.0 million
under this credit facility of which $200.0 million was allocated to the General
Division and $18.0 million to GTR to finance operations. In July 1996, Genzyme
made a final payment of approximately $7.6 million for a company acquired in
1994.
(9) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as General Division Common Stock on a share-for-share basis and a
second class of common stock designated as Tissue Repair Common Stock ("TR
Stock") was distributed on the basis of .135 of one share of TR Stock for each
share of Genzyme's previous common stock held by shareholders of record on
December 16, 1994. In October 1995, the General Division completed the sale of
5,750,000 shares of General Division Stock for net proceeds of $141.3 million.
40
<PAGE> 43
SELECTED FINANCIAL DATA (CONTINUED)
TISSUE REPAIR DIVISION
<TABLE>
COMBINED STATEMENT OF OPERATIONS DATA
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Net service sales ........................................ $ 7,312 $ 5,220 $ 324 $ - $ -
Related party revenues:
Technology license fee(1) .............................. - - - 2,000 -
Revenues from research and development
contracts: ......................................... - - - 2,684 2,666
-------- -------- -------- -------- ------
7,312 5,220 324 4,684 2,666
Operating costs and expenses:
Cost of services sold .................................... 11,193 4,731 287 - -
Selling, general and administrative ...................... 27,111 12,927 964 701 823
Research and development (including
research and development related to contracts) .......... 10,880 10,938 3,638 2,805 2,351
Purchase of in-process research and
development (2) ......................................... - - 11,215 25,000 -
-------- -------- -------- -------- ------
49,184 28,596 16,104 28,506 3,174
-------- -------- -------- -------- ------
Operating loss ............................................... (41,872) (23,376) (15,780) (23,822) (508)
Other income and (expenses):
Equity in loss of joint venture .......................... (1,727) - - - -
Investment income ........................................ 1,432 1,386 29 - -
Interest expense ......................................... (148) (40) - - -
-------- -------- -------- -------- ------
(443) 1,346 29 - -
-------- -------- -------- -------- ------
Loss before income taxes ..................................... (42,315) (22,030) (15,751) (23,822) (508)
Provision for income taxes ................................... - - - (38) -
-------- -------- -------- -------- ------
Tax benefit allocated to General Division .................... - - - (255) -
-------- -------- -------- -------- ------
Net loss attributable to Tissue Repair Division stock (4) .... $(42,315) $(22,030) $(15,751) $(24,115) $ (508)
-------- -------- -------- -------- ------
Per Tissue Repair Division common share:
Net loss(4) .............................................. $ (3.38) $ (2.28) $ (4.40) $ (7.43) $(0.17)
-------- -------- -------- -------- ------
Weighted average shares outstanding(4) ................... 12,525 9,659 3,578 3,245 3,019
-------- -------- -------- -------- ------
</TABLE>
41
<PAGE> 44
SELECTED FINANCIAL DATA (CONTINUED)
TISSUE REPAIR DIVISION (CONTINUED)
<TABLE>
(DOLLARS IN THOUSANDS) DECEMBER 31,
- -----------------------------------------------------------------------------------------
<CAPTION>
COMBINED BALANCE SHEET DATA (1): 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Cash and investments (5)............ $16,230 $47,573 $24,808 $ - $ -
Working capital .................... 14,232 44,374 20,557 - (149)
Total assets ....................... 42,593 52,649 28,435 - -
Long-term debt(6) .................. 18,000 - - - -
Division equity(7) ................. 18,084 45,926 23,313 - (149)
</TABLE>
There were no cash dividends paid.
- --------------------
NOTES TO SELECTED FINANCIAL DATA:
(1) GTR received a $2.0 million technology license fee from Neozyme I in July
1993 related to the expansion of the Vianain(R) debriding product.
(2) GTR acquired (a) the rights to the Neozyme Corporation ("Neozyme I")
Vianain(R) development program in 1993, and (b) all of the outstanding stock of
BioSurface Technology, Inc. ("BioSurface") in 1994. These acquisitions were
accounted for as purchases. In-process research and development acquired in
connection with the acquisitions was charged to operations.
(3) In 1996, GTR entered into a joint venture with Diacrin, Inc., Diacrin/
Genzyme Ltd. and received $1.9 million in cash from the General Division to find
the joint venture in exchange for 231,645 TR Designated Shares. GTR realized a
net loss of $1.7 million from the joint venture in 1996.
(4) Net loss attributable to the Tissue Repair Division and net loss per share
for the years ended December 31, 1992 and 1993 give effect to the management and
accounting policies adopted by the Genzyme Board in connection with the creation
of GTR and, accordingly, are pro forma presentations.
(5) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(6) In December 1996, GTR borrowed $18.0 million under Genzyme's $225.0 million
revolving credit facility to fund operations.
(7) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as General Division Common Stock on a share-for-share basis and a
second class of common stock designated as Tissue Repair Common Stock ("TR
Stock") was distributed on the basis of .135 of one share of TR Stock for each
share of Genzyme's previous common stock held by shareholders of record on
December 16, 1994. In December 1994, Genzyme issued 5,000,000 shares of TR Stock
valued at $25.3 million in connection with the acquisition of BioSurface. In
September 1995, GTR completed the sale of 3,000,000 shares of TR Stock for net
proceeds of $42.3 million. In June 1996, GTR received $10 million from the
General Division in exchange for 1,000,000 TR Designated Shares issued pursuant
to the terms of the purchase option agreement between the General Division and
GTR.
42
<PAGE> 45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of Genzyme's management as
of the filing date of this Form 10-K. The Company's actual results could differ
materially from those anticipated by the forward-looking statements due to the
risks and uncertainties described under the caption "Factors Affecting Future
Operating Results". Stockholders and potential investors should consider
carefully these risks and uncertainties in evaluating Genzyme's financial
condition and results of operations.
Genzyme provides its stockholders with three separate sets of financial
statements: one for the Company and its subsidiaries on a consolidated basis and
one for each of Genzyme General and Genzyme Tissue Repair. The financial
statements of each division include the financial position, results of
operations and cash flows of programs and products allocated to the division
under the Company's Articles of Organization, as amended (the "Genzyme
Charter"), and the management and accounting policies adopted by the Genzyme
Board of Directors (the "Genzyme Board") to govern the relationship of the
divisions. The financial information of Genzyme General and Genzyme Tissue
Repair, taken together, include all accounts which comprise the consolidated
financial information presented for Genzyme and its subsidiaries.
For purposes of financial statement presentation, all of the Company's
programs, products, assets and liabilities are allocated to either Genzyme
General or Genzyme Tissue Repair. Notwithstanding this allocation, Genzyme
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each of the divisions. Holders of Genzyme General Stock
and Genzyme Tissue Repair Stock have no specific claim against the assets
attributed to the division whose performance is associated with the class of
stock they hold. Liabilities or contingencies of either division that affect
Genzyme's resources or financial condition could affect the financial condition
or results of operations of both divisions. Stockholders and potential investors
should, therefore, read this discussion and analysis of financial position and
results of operations in conjunction with the financial statements and related
notes of Genzyme, Genzyme General and Genzyme Tissue Repair included with this
Form 10-K.
RESULTS OF OPERATIONS
GENZYME CORPORATION AND SUBSIDIARIES
Since the operating results of Genzyme and its subsidiaries reflect
the combined operations of Genzyme General and Genzyme Tissue Repair, this
discussion summarizes the key factors management considers necessary in
reviewing Genzyme's consolidated results of operations. Detailed discussion and
analysis of each division's results of operations are provided below under
separate headings.
1996 COMPARED TO 1995
REVENUES. Total revenues for 1996 were $518.8 million, an increase of
35% over 1995. Product revenues consist of product sales by Genzyme General and
increased 39% to $424.5 million in 1996. The increase resulted primarily from
the addition of sales from DSP and to increased sales of Ceredase(R) enzyme and
Cerezyme(R) enzyme.
Service revenues consist of sales of genetic testing services by
Genzyme Genetics and sales of Genzyme Tissue Repair's CARTICEL(R) and EpicelSM
Services. Service revenues in 1996 increased 31% to $69.0 million, resulting
largely from higher unit volumes at Genzyme Genetics, due primarily to the
acquisition of Genetrix.
Revenues from research and development contracts for 1996 were
attributable entirely to Genzyme General and decreased 6% to $25.3 million due
to the loss of revenues from Neozyme II as a result of its acquisition by the
Company in the fourth quarter.
MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 57%,
compared to 58% for 1995. Product margins for 1996 were 63%, level with 1995, as
increased sales of higher margin products from the Company's existing product
lines were offset by lower margin product lines acquired with DSP. Service
margins for 1996 decreased to 22%
43
<PAGE> 46
from 32% due primarily to increased costs associated with Genzyme Tissue
Repair's sales of the CARTICEL(R) Service and increased costs during the
consolidation period associated with Genzyme General's acquisition of Genetrix.
Selling, general and administrative ("SG&A") expenses for 1996 were
$162.3 million, an increase of 41% over 1995. The increase resulted primarily
from the acquisitions of DSP and Genetrix and increased staffing in support of
the growth in several product lines and the growth in sales of the CARTICEL(R)
Service.
Research and development expenses for 1996 were $80.8 million, an
increase of 17% over 1995 due to Genzyme General's commitment to fund
development costs of the ATIII program being conducted by GTC and increased
spending on internal programs.
Genzyme recorded the following acquisition-related charges in 1996:
$24.2 million and $106.5 million for the purchase of in-process research and
development in connection with the acquisitions of DSP and Neozyme II,
respectively; $8.8 million for the amortization of intangible assets including
goodwill recorded in connection with the acquisitions of DSP, Genetrix and, in
1995, the publicly-held, minority interest in IG Laboratories, Inc. ("IG"); and
$1.5 for restructuring charges incurred in connection with the acquisitions of
DSP and Genetrix.
OTHER INCOME AND EXPENSES. Other income and expenses decreased 24% to
$5.7 million, as increases in interest expenses and Genzyme's equity in the net
loss of GTC offset a 74% increase in investment income. Interest expense for
1996 was $7.0 million, compared to $1.1 million in 1995. The increase resulted
from interest on funds borrowed to finance portions of the acquisitions of DSP
and Neozyme II.
The tax provision for 1996 varies from the U.S. statutory tax rate
because of the provision for state income taxes, nondeductible intangible
amortization, losses of unconsolidated affiliates, benefits from operating loss
carryforwards and nondeductible charges in connection with tax-free
acquisitions. In 1996, the effective tax rate before these acquisitions was 41%,
compared to 37% in 1995. The increase in the rate was due to higher
nondeductible intangible amortization in 1996 and to lower benefits from
operating loss carryforwards available in 1996. The tax provision in 1996
resulted from taxes on foreign earnings and taxes on earnings before
acquisition-related charges comprising charges for intangible amortization and
incomplete technologies accruing from the acquisitions of DSP and Genetrix.
1995 COMPARED TO 1994
REVENUES. Total revenues for 1995 were $383.8 million, an increase of
23% over 1994. Product revenues from Genzyme General in 1995 increased 28% to
$304.4 million. The increase resulted primarily from increased sales of
Ceredase(R) enzyme and Cerezyme(R) enzyme and increased product sales by the
Pharmaceuticals and Diagnostic Products business units.
Service revenues in 1995 increased 4.9% to $52.5 million, as the
addition of a full year of revenues from the acquisition of BioSurface
Technology, Inc. ("BioSurface"), acquired in December 1994, offset a 5% decline
in Genzyme General's sales of genetic testing services.
Revenues from research and development contracts for 1995 were $27.0
million, an increase of 20% from 1994. Revenues from Neozyme II increased 36% to
$24.2 million due primarily to increased activity from collaborations with third
parties and increased clinical trial activity.
MARGINS AND OPERATING EXPENSES. Gross margins for 1995 were 58%,
compared to 57% for 1994. Product margins for 1995 increased to 63% from 61% in
1994 due primarily to higher margins on Ceredase(R) enzyme and to the sale of
higher margin products and cost reductions by the Genzyme General's
Pharmaceuticals business unit. Service margins for 1995 decreased to 32% from
35% due primarily to increased costs associated with introduction of the
CARTICEL(R) Service by Genzyme Tissue Repair and price pressure on genetic
testing services at Genzyme General.
SG&A expenses for 1995 were $115.1 million, an increase of 34% over
1994. The increase resulted primarily from increased staffing in support of the
growth in several product lines, the launch of the CARTICEL(R) Service by
Genzyme Tissue Repair and ongoing operating expenses associated with Sygena A.G.
("Sygena"), a Swiss pharmaceutical company acquired by Genzyme General in July
1994.
44
<PAGE> 47
Research and development expenses for 1995 were $68.8 million, an
increase of 24% over 1994 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs.
Genzyme recorded a charge in 1995 of $14.2 million for the purchase of
in-process research and development in connection with the acquisition of IG.
OTHER INCOME AND EXPENSES. Other income (expenses) were $7.5
million, compared to of ($3.4 million) in 1994 that was attributable to the
write-off of impaired value of certain equity investments in the amount of $9.4
million and the settlement of a lawsuit with a payment of $2.0 million. Interest
expense for 1995 was $1.1 million, net of capitalized interest of $9.0 million.
Interest relating to Genzyme's 6 3/4% convertible subordinated notes was $6.7
million. These notes were converted to General Division Stock and GTR Stock in
March 1996.
The tax provision for 1995 varies from the U.S. statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generated no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate for 1995 was 50%, compared to 47% in
1994, largely due to the non-deductibility of the charges for in-process
research and development of $14.2 and $11.2 in 1995 and 1994, respectively. The
remainder of the increase was due to changes in U.S. versus foreign taxable
income.
GENZYME GENERAL
1996 COMPARED TO 1995
REVENUES. Total revenues for 1996 were $511.4 million, an increase of
35% over 1995. Product and service revenues were $486.1 million, an increase of
38% over 1995. Revenues from research and development contracts for 1996 were
$25.3 million, a decrease of 6% from 1995.
Product revenues in 1996 increased 39% to $424.5 million, due
primarily to the addition of sales through the acquisition DSP and to increased
sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Increases in sales by each
of the Diagnostic Products and Pharmaceuticals business units accounted for the
remainder of the increase in product revenues in 1996.
Sales of Specialty Therapeutic products in 1996 consisted entirely of
sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Sales of Ceredase(R) enzyme
and Cerezyme(R) enzyme in 1996 increased 23% to $264.6 million due to increased
shipments resulting from the introduction of these products in Japan and
continued growth in new patient accruals in existing markets. Genzyme General's
results of operations are highly dependent on sales of Ceredase(R) enzyme and
Cerezyme(R) enzyme, which together represented 62% of consolidated product sales
in 1996 compared to 71% in 1995. In October 1996, Genzyme General received FDA
approval to manufacture Cerezyme(R) enzyme in a new, large-scale manufacturing
plant located in Boston, Massachusetts. Conversion of patients receiving
Ceredase(R) enzyme to Cerezyme(R) enzyme commenced in the fourth quarter of
1996. Genzyme General will be required to continue manufacturing Ceredase(R)
enzyme until the process of patient conversions is completed, which is expected
to occur during the fourth quarter of 1998. Genzyme General may be required to
record a charge to earnings for the inventory of Ceredase(R) enzyme remaining
upon completion of the patient conversion process, if any.
The Surgical Products business unit was formed in July 1996 by
combining the business of DSP with Genzyme General's Sepra Products. Product
sales by the Surgical Products business unit for the period beginning with the
DSP acquisition on July 1, 1996 and ending December 31, 1996 were $50.7 million
and were generated primarily from sales by DSP. DSP's product sales for the
first half of 1996 and for the years ending December 31, 1995 and 1994, which
are not included in the results of Genzyme General, were $53.2 million, $95.2
million and $90.5 million, respectively.
During the third quarter of 1996, the FDA granted approval to market
Seprafilm(TM) in the United States. Seprafilm(TM) is the first Sepra Product to
obtain FDA marketing approval and was launched broadly in the United States
during the fourth quarter. Seprafilm(TM) is being marketed in the United States
and Canada by Genzyme General on behalf of the Joint Venture between Genzyme and
GDP. In March 1997, Genzyme and GDP reached agreement concerning the operation
of and allocations of profits and losses from the Joint Venture. Under the terms
of this agreement, Genzyme will act as the sole distributor of the Sepra
Products for the Joint Venture, purchasing products from the joint venture at a
distributor discount, earning reimbursement for market introduction costs
and, in the first year in which the Joint Venture generates revenues in excess
of $25 million, reimbursement for general and administrative expense. Genzyme
has agreed to indemnify the limited partners against loss of tax benefits from
research and development deductions certain limited partners have taken. (See
"Business--Related Entities--Genzyme Development Partners, L.P."). Genzyme
consolidates 100% of the losses generated by the Joint Venture.
45
<PAGE> 48
GDP will receive the first $5.6 million in profits generated by the Joint
Venture, Genzyme will receive the next $8.4 million in profits and, thereafter,
Genzyme and GDP will receive 60% and 40% shares, respectively, in the profits of
the Joint Venture.
Product sales by the Diagnostic Products and Pharmaceuticals business
units increased 15% and 45%, respectively, over 1995. The increase in Diagnostic
Products sales resulted from growth in each of its product lines, most notably
in sales of the Direct LDL[TM] test and diagnostic intermediates. The increase
in Pharmaceuticals sales was generated primarily from sales of Melatonin during
the first half of 1996 and from sales of pharmaceutical grade HA Powder.
Melatonin sales declined materially during the second half of 1996 due to
declining market demand. Genzyme General does not expect that Melatonin sales
will return to the levels experienced during the first half of 1996.
Revenues for Genzyme Genetics in 1996 increased 31% to $61.6 million,
due to higher unit volumes that were primarily attributable to the acquisition
of Genetrix, which was included in Genzyme General's results of operations from
May 1, 1996 forward, and to changes in service pricing. On November 1, 1996, the
assets of Genzyme General's identity testing services laboratory, Genetic
Design, Inc. ("GDI"), were sold. GDI contributed $11.6 in Genzyme Genetics
revenues through October 31, 1996.
International sales as a percentage of total sales in 1996 decreased
to 35% from 36% in 1995, as the addition of domestic sales by DSP offset a 35%
increase in combined international sales of Ceredase(R) enzyme and Cerezyme(R)
enzyme.
Revenues from research and development contracts for 1996 decreased 6%
to $25.3 million, as a decrease in revenues from Neozyme II was partially offset
by an increase in revenues from research and development contracts with other
third parties. Revenues from Neozyme II decreased 18% to $19.8 million in 1996
due to the acquisition of Neozyme II in the fourth quarter. Genzyme General
expects that revenues from research and development contracts in 1997 will
decrease from 1996 due to the absence of revenues from Neozyme II unless Genzyme
General establishes additional collaborations that will provide significant
research and development funding in 1997.
MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 59%, level
with 1995. Genzyme General provides a broad range of health care products and
services, resulting in a range of gross margins depending on the particular
market conditions of each product or service. Product margins for 1996 were 63%,
level with 1995, as sales of higher margin products and cost reductions by both
the Pharmaceuticals and Diagnostic Products business units and higher margins on
Ceredase(R) enzyme resulting from manufacturing process improvements were offset
by lower margin product lines acquired with DSP. Service margins for 1996
decreased to 30% from 34% in 1995 due to the consolidation of Genzyme Genetics
with Genetrix, which require the operation of redundant facilities and staffing
until the consolidation is completed. Genzyme General expects service margins to
improve during 1997 due to the sale of GDI and the realization of economies of
scale from the consolidation of testing operations.
SG&A expenses for 1996 were $135.2 million, an increase of 32% over
1995. The increase was due primarily to the acquisitions of DSP and Genetrix and
increased staffing in support of the growth in several product lines, most
notably in support of the North American introduction of the SeprafilmTM. DSP
added $12.1 million in SG&A expenses in 1996. For the first half of 1996 and for
1995 and 1994, DSP incurred SG&A expenses of $15.7 million, $25.3 million and
$27.6 million, respectively, which are not included in the results of Genzyme
General. Genetrix did not contribute materially to SG&A expenses in 1996 due to
the consolidation of its operations with Genzyme Genetics.
Research and development expenses for 1996 were $70.0 million, an
increase of 21% over 1995 due to Genzyme General's funding of development costs
of the ATIII program being conducted by GTC and increased spending on internal
programs, most notably Thyrogen(R).
Genzyme recorded charges related to the following acquisitions
completed in 1996:
GENETRIX. On May 1, 1996, Genzyme acquired Genetrix in exchange for
approximately 1,380,000 shares of Genzyme General Stock valued at approximately
$36.5 million. Genzyme General recorded a charge in 1996 of $1.5 million for
amortization of goodwill and a restructuring charge of $1.0 million in
connection with the Genetrix acquisition.
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DSP. On July 1, 1996, Genzyme acquired DSP for cash in the amount of
$192.0 million, incurred acquisition costs in the amount of $4.6 million and
assumed debt obligations of DSP of approximately $55.6 million. Genzyme General
recorded charges of $24.2 million for the purchase of in-process research and
development and $0.5 million for restructuring in connection with the
acquisition of DSP.
NEOZYME II. On October 28, 1996, Genzyme, through a wholly-owned
subsidiary ("Acquisition Corp.") completed a tender offer for outstanding Units
of Neozyme II for $45 per Unit in cash. A total of 2,385,686 Units, or 98.8%,
were tendered and accepted for payment. Each Neozyme II Unit consisted of one
share of Callable Common Stock and one Callable Warrant to purchase two shares
of Genzyme General Stock and 0.135 share of Genzyme Tissue Repair Stock. On
December 6, 1996, Neozyme II was merged with Acquisition Corp. and the remaining
outstanding shares of Callable Common Stock (other than shares held by
Acquisition Corp.) were thereby cancelled and converted into the right to
receive $29.00 per share in cash. The Callable Warrants included in the
untendered Units separated from the shares of Callable Common Stock converted in
the merger and became exercisable on December 6, 1996. Genzyme General recorded
a charge of $106.5 million for the purchase of in- process research and
development in connection with the acquisition of Neozyme II.
OTHER INCOME AND EXPENSES. Other income (expense) decreased less
than 1% to $6.1 million, as increases in interest expenses offset an 87%
increase in investment income. Investment income for 1996 was $13.9 million,
compared with $7.4 million for 1995. The increase resulted from higher average
cash and investment balances. Investment income for 1996 did not include any
material gain or loss on sales of securities. Interest expense for 1996 was $6.8
million, compared to $1.1 million in 1995. The increase resulted from interest
on funds borrowed to finance portions of the acquisitions of DSP and Neozyme II
and lower capitalized interest in 1996 than in 1995.
The tax provision for 1996 varies from the U.S. statutory tax rate
because of the provision for state income taxes, losses of unconsolidated
affiliates, nondeductible intangible amortization, benefits from operating loss
carryforwards and nondeductible charges in connection with tax-free
acquisitions. In 1996, the effective tax rate before these acquisitions was 41%,
compared to 38% in 1995. The increase in the rate was due to higher
nondeductible intangible amortization in 1996 and to lower benefits from
operating loss carryforwards available in 1996. The tax provision in 1996
resulted from taxes on foreign earnings and taxes on earnings before
acquisition-related charges comprising charges for intangible amortization and
incomplete technologies accruing from the acquisitions of DSP of Genetrix. The
allocated tax benefit generated by Genzyme Tissue Repair of $17.0 million in
1996 and $8.9 million in 1995 reduced Genzyme General's tax rate to (12%) and
33%, respectively.
1995 COMPARED TO 1994
REVENUES. Total revenues for 1995 were $378.6 million, an increase of
22% over 1994. Product and service revenues were $351.6 million, an increase of
22% over 1994. Revenues from research and development contracts for 1996 were
$27.0 million, an increase of 20% from 1994.
Product revenues for 1995 increased 28% to $304.4 million, due
primarily to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme.
Increases in sales by each of the Diagnostic Products and Pharmaceuticals
business units accounted for the remainder of the increase in product revenues
in 1995.
Sales of Specialty Therapeutic products in 1995 consisted primarily of
sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. HA Powder sales were
reclassified as Pharmaceuticals product sales beginning in the fourth quarter of
1995. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1995 increased 24%
to $215.4 million due to increased shipments of these products, for which the
rate of new patient accruals more than offset dosage reductions. Ceredase(R)
enzyme and Cerezyme(R) enzyme, together, represented 71% of consolidated product
sales in 1995 compared to 72% in 1994.
Product sales by the Diagnostic Products and Pharmaceuticals business
units increased 22% and 72%, respectively, over 1994. The increase in Diagnostic
Products sales resulted from growth in each of its product lines, most notably
in sales of the Direct LDLTM test sales. The increase in Pharmaceuticals sales
was generated primarily from sales of Melatonin during the second half of 1995
and a full year of operations of Sygena.
Revenues for the Diagnostic Services business unit in 1995 decreased
5% to $47.2 million from $49.7 million for 1994. The drop in service revenues
resulted from declines in identity testing revenues at GDI and the impact of
increasing price pressures on the public paternity testing services performed by
GDI. Medical testing also experienced increased price competition due to
increases in the number of HMO contracts.
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International sales represented approximately 36% of total sales in
1995 compared with 31% in 1994. This increase was due primarily to a 49%
increase in the combined international sales of Ceredase(R) enzyme and
Cerezyme(R) enzyme.
Revenues from research and development contracts for 1995 were $27.0
million, an increase of 20% from 1994. Revenues from Neozyme II increased 36% to
$24.2 million for 1995 due primarily to increased activity relating to
collaborations with third parties that began in 1993 along with the production
of clinical trial material.
MARGINS AND OPERATING EXPENSES. Gross margins for 1995 were 59%,
compared to 57% for 1994. Product margins for 1995 increased to 63% from 61% in
1994 due to higher margins on Ceredase(R) enzyme resulting from raw material
yield improvements and to sales of higher margin products and cost reductions by
the Pharmaceuticals business unit. Service margins for 1995 decreased to 34%
from 35% as economies achieved in the consolidation of testing activities did
not fully offset lower sales volume and the effects of price competition.
SG&A expenses for 1995 were $102.2 million, an increase of 21% over
1994. The increase was due primarily to increased staffing in support of the
growth in several product lines, most notably in support of the European
introduction of the Sepra Products, and to the ongoing operating expenses
associated with Sygena.
Research and development expenses for 1995 were $57.9 million, an
increase of 12% over 1994 due to increased efforts on behalf of Neozyme II and
increased spending on internal programs, including the Sepra Products.
In October 1995, Genzyme General acquired the publicly-held,
minority interest in IG for 770,000 shares of Genzyme General Stock valued at
approximately $22.5 million. The acquisition was accounted for as a purchase.
The excess of the purchase price over the fair market value of the net assets
acquired was approximately $18.6 million of which $14.2 million was attributed
to incomplete technology and charged to operations and the balance to goodwill
to be written off over 11 years.
OTHER INCOME AND EXPENSES. Other income and expenses were $6.2
million, compared to a loss of $3.4 million in 1994 that was attributable to the
write-off of impaired value of certain equity investments in the amount of $9.4
million and to settlement of a lawsuit for $2.0 million. In September 1995,
Genzyme General recorded a gain of $950,000 representing the sale of certain
assets by GTC.
Investment income for 1995 was $7.4 million, compared with $9.1
million for 1994. The decrease resulted from lower average cash and investment
balances. Investment income for 1995 included a loss of $0.1 million and 1994
included gains of $1.4 million on sales of securities.
Interest expense for 1995 was $1.1 million, net of capitalized
interest of $9.0 million. Interest relating to the Company's 6 3/4% convertible
subordinated notes was $6.7 million. These notes were converted into General
Division and Tissue Repair Division Stock in March, 1996.
The tax provision for 1995 varies from the U.S. statutory tax rate
because of the provision for state income taxes, losses of majority-owned
subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate was 47% for 1995 compared to 35% for
1994. The increase was due to changes in U.S. versus foreign taxable income and
to certain charges recorded in 1995 for which Genzyme General received no tax
benefit. The allocated tax benefit generated by Genzyme Tissue Repair of $8.9
million in 1995 and $1.9 million in 1994 reduced Genzyme General's tax rate to
33% and 31%, respectively.
GENZYME TISSUE REPAIR
1996 COMPARED TO 1995
REVENUES. Revenues in 1996 increased 40% to $7.3 million from $5.2
million in 1995. Sales of the CARTICEL(R) Service were $3.1 million, compared to
$0.6 million in 1995, the year in which the Service was launched. The increase
in CARTICEL(R) Service sales resulted primarily from the increase in the number
of surgeons trained in the procedure utilizing the service. Sales of the
Epicel(SM) Service in 1996 decreased 9% to $4.2 million, due to a decrease in
the number of burn incidents requiring the Service.
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MARGINS AND OPERATING EXPENSES. Genzyme Tissue Repair's costs of
services sold exceeded revenues by 53% in 1996, compared to a gross profit of 9%
in 1995, due to increased spending for the expansion of manufacturing capacity.
SG&A expenses in 1996 were $27.1 million, an increase of 110% over
1995. The increase resulted from the expenses and staffing to support revenue
growth and increased surgeon training costs related to the CARTICEL(R) Service.
Genzyme Tissue Repair incurs direct SG&A expenses as well as an SG&A charge,
based on actual amounts incurred, from Genzyme General for SG&A work performed
by Genzyme General on behalf of Genzyme Tissue Repair. In 1996, $9.1 million of
SG&A services were provided by Genzyme General, compared to $4.4 million in
1995, due to an increase in the level of operations related to the CARTICEL(R)
Service.
Research and development expenses were $10.9 million in each of 1996
and 1995. Increases in expenses associated with the TGF-(beta)2 program were
offset by decreases in the Vianain(R) program. In 1996, $6.9 million of research
and development services were provided by Genzyme General to Genzyme Tissue
Repair, compared to $4.7 million in 1995.
OTHER INCOME AND EXPENSES. Investment income was $1.4 million in each
of 1996 and 1995, due primarily to level average cash balances during the year.
Interest expense in 1996 was $.1 million, net of capitalized interest on
construction in progress of $.2 million, compared to $.05 million in 1995.
Interest expense increased in 1996 due to interest on borrowings. See "Liquidity
and Capital Resources--Genzyme Tissue Repair Division" for a description of the
borrowings.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint
venture between Genzyme Tissue Repair and Diacrin to develop and commercialize
products and processes using porcine fetal cells for the treatment of
Parkinson's disease and Huntington's disease in humans. Under the terms of the
joint venture agreement, Genzyme Tissue Repair is required to provide 80% of the
first $50 million in funding for products to be developed by the joint venture.
Thereafter, all costs will be shared equally between Genzyme Tissue Repair and
Diacrin. Profits from the joint venture will be shared by the two parties. As of
December 31, 1996, Genzyme Tissue Repair had provided $1.9 million of funding to
the joint venture and realized a net loss of $1.7 million from the joint
venture. Genzyme Tissue Repair's funding commitment to the joint venture is
expected to be approximately $10 million for each of 1997 and 1998.
1995 COMPARED TO 1994
REVENUES. Revenues for 1995 were $5.2 million compared to $0.3 million
in 1994. Revenues in 1994 consisted solely of revenues from the sale of the
Epicel(SM) Service for the period from December 16, 1994, the acquisition date
of BioSurface, through December 31, 1994. Revenues for 1995 consisted primarily
of $4.2 million in sales of Epicel(SM) Service and $0.6 million from sales of
the CARTICEL(R) Service.
MARGINS AND OPERATING EXPENSES. Gross margins decreased to 9% in 1995
from 11% in 1994 due to costs associated with the launch of the CARTICEL(R)
Service. SG&A expenses for 1995 were $12.9 million, compared to $1.0 million in
1994 comprised solely of expenses from BioSurface. In 1995, $4.4 million of SG&A
services were provided by Genzyme General to Genzyme Tissue Repair compared to
$0.8 million in 1994. The increases in SG&A expenses and services provided by
Genzyme General were due to a full year of operations from BioSurface and to the
launch in both the United States and Europe of the CARTICEL(R) Service.
Research and development expenses for 1995 were $10.9 million compared
to $3.6 million in 1994 which included $0.3 million from the operations of
BioSurface. The increase resulted from accelerated clinical trials activity for
certain tissue repair products and increased efforts relating to the CARTICEL(R)
Service. In 1995, $4.7 million of research and development services were
provided by Genzyme General to Genzyme Tissue Repair compared to $3.3 million in
1994.
OTHER INCOME AND EXPENSES. Investment income for 1995 was $1,386,000
compared to $29,000 for 1994. The increase over 1994 was due to higher average
cash balances from the allocation of $10 million from Genzyme General and the
net proceeds from a public offering in October 1995. In 1994, $11.2 million of
incomplete technology from the BioSurface acquisition was charged to operations
as in-process research and development.
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LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
At December 31, 1996, Genzyme had cash, cash equivalents and marketable
securities of $188.0 million, excluding $87.0 million outstanding in respect of
certain warrants exercised immediately prior to year end and received by Genzyme
during the first week of January 1997, compared with $256.6 million at December
31, 1995, excluding long term investments of $69.6 million at December 31, 1995.
Genzyme generated $40.0 million of cash from operations in 1996, compared
to $44.7 in 1995 and $33.0 in 1994. The decrease from 1995 resulted primarily
from increased losses at Genzyme Tissue Repair partially offset by lower working
capital requirements in Genzyme General. Investing activities required cash of
$291.4 million in 1996. Investing activities included the acquisition of DSP and
Neozyme II for net cash of $303.3 million and $63.8 million of spending for
property, plant and equipment, a 28% increase from 1995. This increase was
primarily to build processing capability in Genzyme Tissue Repair for the
CARTICEL service and in Genzyme General for completion of manufacturing capacity
for Cerezyme(R), and for office and laboratory equipment. Turnover of the
investment portfolio provided $89.6 million in funding for these activities with
the balance financed by a revolving line of credit and the exercise of options
and warrants.
In March 1996, Genzyme completed the conversion of its 6 3/4%
convertible notes in the principal amount of $100 million. Holders of the notes
received 18.183 shares of Genzyme General stock and 2.553 shares of Genzyme
Tissue Repair Stock upon conversion of each $1,000 note.
In November 1996, Genzyme refinanced its existing $215 million line of
credit (the "Credit Line") with a revolving credit facility (the "Revolving
Facility") in the amount of $225 million made available through a syndicate of
commercial banks administered by Fleet National Bank. Amounts drawn under the
facility may be allocated to either Genzyme General or Genzyme Tissue Repair
depending upon which division uses the loan proceeds. At December 31, 1996, $218
million had been drawn under the Revolving Facility, of which $200 million was
allocated to Genzyme General to refinance amounts borrowed under the Credit Line
to fund portions of the DSP and Neozyme II acquisitions and $18 million was
allocated to Genzyme Tissue Repair to finance operations and manufacturing
capacity. Amounts borrowed under the Revolving Facility are payable on November
15, 1999.
In December 1996, the Company entered into a $100 million interest
rate swap contract ("the Swap Contract") to effectively convert the variable
interest rate on borrowings under the Revolving Facility to fixed interest
rates. Net proceeds made or received under the Swap Contract are recorded as
adjustments to interest expense. At December 31, 1996 the Swap Contract had a
termination value gain of $125,000.
Genzyme holds an option to acquire all of the partnership interests in
GDP for approximately $26 million plus a continuing royalty payment for a period
of ten years on certain sales of Sepra Products. Genzyme's decision regarding
the exercise of this option will be based, in part, on the progress in the
development and Genzyme's evaluation of the potential commercial success of the
Sepra Products. The exercise price for the purchase option is payable in cash,
shares of Genzyme General Stock or a combination of the two, as determined by
Genzyme at the time the option is exercised.
Genzyme expects that its available cash, investments, cash flow from
research contracts and product and service sales and amounts available under the
Revolving Facility will be sufficient to finance its planned operations and
capital requirements for the foreseeable future. Genzyme's capital requirements
could differ materially from those currently anticipated by management due to
the factors described under the "Factors Affecting Future Operating
Results--Future Capital Needs".
GENZYME GENERAL
At December 31, 1996, Genzyme General had cash, cash equivalents and
marketable securities of $171.7 million, excluding $87.0 million outstanding in
respect of certain warrants exercised immediately prior to year end and received
by Genzyme during the first week of January 1997, compared with $209.1 million,
excluding $69.6 million in long-term investments at December 31, 1995. Genzyme
General generated $80.0 million of cash from operations in 1996, compared to
$64.1 million in 1995. The increase in 1996 over 1995 resulted from higher
profits prior to non-cash charges for incomplete technology and other
acquisition related, non-cash charges, and to lower increases in working
capital.
At December 31, 1996, Genzyme General had accounts receivable of
$115.9 million, an increase of $28.7 million from December 31, 1995 due
primarily to the DSP and Genetrix acquisitions and growth in each of the General
Division's businesses. Accounts receivable at December 31, 1995 were $87.1
million, an increase of $10.5 million from December
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31, 1994 due primarily to the growth in product sales by Specialty Therapeutics
and Pharmaceuticals business units. At December 31, 1996, inventories increased
136% to $123.4 million, due primarily to the acquisition of DSP, increases in
Ceredase(R) enzyme and Cerezyme(R) enzyme inventories and Sepra Product
inventories in support of the launch Seprafilm(TM). Inventories at December 31,
1995 increased 42% to $52.3 million, compared to $36.8 million at December 31,
1994. The increase was due primarily to support of increased business
operations, most notably in the Specialty Therapeutics business unit to build
Ceredase(R) enzyme inventories, in the Pharmaceuticals business unit to meet
high demand for Melatonin and in anticipation of the launch of Seprafilm(TM).
Investing activities required cash of $286.5 million in 1996 and
$145.8 million in 1995. The increase resulted from the acquisition of DSP and
Neozyme II for net cash of $303.3 million and spending for property, plant and
equipment of $42.5 million, a decrease of 13% from 1995 and 58% from 1994. The
decreases are due to lower rates of manufacturing capacity expansion and to the
completion of the large-scale Cerezyme(R) manufacturing capacity in Boston,
Massachusetts. Turnover of the investment portfolio provided $83.1 million in
funding for these activities with the balance financed by a revolving line of
credit and the exercise of options and warrants.
Proceeds from the exercise of stock options, warrants and stock issued
through the employee stock purchase plan increased to $39.1 million in 1996,
compared to $38.3 million in 1995. The increase was due primarily to exercises
of certain warrants, issued in connection with the formation of GDP and Neozyme
II, prior to the scheduled termination of such warrants in October and December,
respectively.
In March 1996, Genzyme entered into a Convertible Debt and Development
Funding Agreement with GTC under which Genzyme agreed to provide through Genzyme
General a revolving line of credit in the amount of $10 million through December
31, 1998 and to fund development costs of the AT-III program through 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-trading day period ending
two days before the conversion (i) at GTC's option only to the extent necessary
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 (ii) by Genzyme General at any time for
up to the full amount outstanding. Pursuant to the terms of this agreement, GTC
borrowed $4.3 million in 1996 from Genzyme General and converted $1.7 million of
this debt plus accrued interest into 219,565 shares of GTC stock. In addition,
on July 31, 1996, GTC sold 3,000,000 shares of its common stock to the public
for $4.00 per share. Genzyme General purchased 900,000 shares in the offering.
Genzyme General expects that its available cash, investments and cash
flow from research contracts and product and service sales will be sufficient to
finance its planned operations and capital requirements for the foreseeable
future. Genzyme General's capital requirements could differ materially from
those currently anticipated by management due to the factors described under the
"Factors Affecting Future Operating Results--Future Capital Needs".
GENZYME TISSUE REPAIR
As of December 31, 1996, Genzyme Tissue Repair had cash and cash
equivalents of $16.2 million, a decrease of $31.3 million from December 31,
1995. In 1996, Genzyme Tissue Repair used $20.6 million of cash for operations
and $18 million for increased manufacturing capacity . These expenditures were
financed by the issuance of common stock through exercises of stock options and
warrants, $56 million from borrowings under the Revolving Facility, of which $38
million was repaid in 1996 and the allocation of $10 million from Genzyme
General as described below.
As of December 31, 1996, Genzyme Tissue Repair had accounts receivable
of $1.7 million, an increase of $.2 million from December 31, 1995. Inventories
increased $1 million to $1.8 million as of December 31, 1996 compared to
December 31, 1995. The increase resulted from an increase in the number of
in-process biopsies for the CARTICEL(R) Service.
Under the terms of the BioSurface acquisition agreement, the Genzyme
Board may elect to allocate up to $30 million from Genzyme General to Genzyme
Tissue Repair in exchange for an increase in the Genzyme Tissue Repair
Designated Shares at a price of $10 per share. In June 1996, the Genzyme Board
voted to allocate $10 million under the agreement in exchange for an increase in
the Genzyme Tissue Repair Designated Shares of 1,000,000 shares.
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In August 1996, the Genzyme Board approved the reallocation of certain
of Genzyme Tissue Repair's Framingham real estate (land, buildings and leasehold
improvements) to Genzyme General for cash of $5.2 million, which was the fair
market value of the property as determined by the Genzyme Board and approximated
the property's cost.
In order to provide initial funding for the joint venture with
Diacrin, the Genzyme Board has approved the allocation of up to $20 million in
cash from Genzyme General to Genzyme Tissue Repair (the "Genzyme Tissue Repair
Equity Line") in exchange for an increase in the number of Genzyme Tissue Repair
Designated Shares at a rate determined by dividing the amount of cash so
allocated by the average of the daily closing prices of one share of Genzyme
Tissue Repair Stock for the 20 consecutive trading days commencing on the 30th
trading day prior to the date of allocation. The Company intends to make monthly
allocations of cash under the Genzyme Tissue Repair Equity Line in an amount
corresponding to the funding commitment of Genzyme Tissue Repair under the joint
venture agreement for such month. As of December 31, 1996 the Company had
allocated $1.9 million from Genzyme General to Genzyme Tissue Repair under the
Genzyme Tissue Repair Equity Line.
Genzyme Tissue Repair does not expect its available cash and
investments will be sufficient to finance planned operations and capital
requirements through the end of 1997 and must raise significant additional
capital in order to continue operations at current levels. Genzyme Tissue
Repair's plans to raise additional capital include consideration of the sale of
additional equity securities, strategic alliances with third parties to fund
further development and marketing of the CARTICEL(R) Service and other business
transactions that would generate capital resources to assure continuation of
Genzyme Tissue Repair's operations and research programs. Pursuant to these
initiatives, Genzyme Tissue Repair raised $13 million in March 1997 in a private
placement of a 5% note convertible into Genzyme Tissue Repair Stock. See
"Subsequent Events". Significant additional funds will be required to continue
operations at current levels through year end, however, and Genzyme Tissue
Repair may be required to delay, scale back or eliminate certain of its programs
or to license third parties to commercialize technologies or products that the
division would otherwise undertake itself if it is not successful in raising
additional capital.
SUBSEQUENT EVENTS
In January 1997, Genzyme signed a merger agreement providing for the
merger of PharmaGenics, Inc., a company engaged in the research and development
of pharmaceuticals for the treatment of cancer, into Genzyme in exchange for
approximately 4,000,000 shares of a new Genzyme security to be designated
Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). The GMO Stock is
intended to reflect the value and track the performance of Genzyme Molecular
Oncology, a new division proposed by Genzyme to develop and market novel
products and services for the diagnosis and treatment of cancer. The shares of
GMO Stock to be issued in the merger represent 40% of the initial equity
interest in Genzyme Molecular Oncology. The remaining 60% will be allocated to
Genzyme General in the form of 6,000,000 GMO Designated Shares. The merger is
subject to the approval of the stockholders of Genzyme and PharmaGenics.
On February 27, 1997, Genzyme Tissue Repair raised $13 million through
the private placement with an institutional investor of a 5% convertible note
due February 27, 2000. The note is an unsecured obligation of Genzyme and is
convertible into Genzyme Tissue Repair Stock. The number of shares of Genzyme
Tissue Repair Stock into which principal of, and interest on, the note are
convertible depends on when a conversion occurs. For conversions occurring
during the period beginning August 28, 1997 and ending May 25, 1998, the
conversion shares are valued at a discount to an average of recent market prices
at the time of conversion. This discount increases monthly from 2% on August 28,
1997 to 11% on May 25, 1998. For conversions occurring after May 25, 1998, the
conversion shares are valued at an 11% discount to the lower of (i) the average
of recent market prices at the time of conversion and (ii) the average of the
market prices during the 25 trading days prior to May 25, 1998. Genzyme agreed
to file a resale registration statement covering sales of Genzyme Tissue Repair
Stock received upon conversion.
FACTORS AFFECTING FUTURE OPERATING RESULTS
DEPENDENCE ON CEREDASE(R) AND CEREZYME(R) ENZYME SALES. Genzyme's
results of operations are highly dependent upon the sales of Ceredase(R) enzyme
and Cerezyme(R) enzyme. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in
1996 were $264.6 million, representing 62% of consolidated product sales in
1996. Genzyme produces Ceredase(R) enzyme from an extract of human placental
tissue supplied by a French company that is the only significant commercial
source of this
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material. The current supply available is not sufficient to produce enough
Ceredase(R) enzyme to supply all present patients.
To address supply constraints, Genzyme has developed Cerezyme(R)
enzyme, a recombinant form of the enzyme. In October of 1996, Genzyme General
received FDA approval to manufacture Cerezyme(R) enzyme in a new, large-scale
manufacturing plant located in Boston, Massachusetts. Once an uninterrupted
supply of Cerezyme(R) enzyme can be produced by the new plant, patients
receiving Ceredase(R) enzyme will be converted to Cerezyme(R) enzyme. Genzyme
General will be required to continue manufacturing Ceredase(R) enzyme until the
process of patient conversions is completed, which is expected to occur during
the fourth quarter of 1998. Any disruption in the supply or manufacturing
process of Ceredase(R) enzyme during the conversion period or in the supply or
manufacturing process of Cerezyme(R) enzyme may have a material adverse effect
on revenue.
NO ASSURANCE OF COMMERCIAL SUCCESS OF THE SEPRA PRODUCTS. The
successful commercialization of the Sepra Products will depend on many factors,
including (i) the response of surgeons to the data from clinical trials, (ii)
Genzyme General's ability to deploy the sales force of DSP to market the Sepra
Products, (iii) Genzyme General's ability to supply sufficient product to meet
market demand and (iv) the number and relative efficacy of competitive products
that may subsequently enter the market. There can be no assurance that Genzyme
General will be successful in its efforts to implement a commercialization
strategy for the Sepra Products.
NO ASSURANCE OF COMMERCIAL SUCCESS OF THE CARTICEL(R) SERVICE. Genzyme
Tissue Repair's future success depends in large part on the successful
commercialization of the CARTICEL(R) Service. The FDA has issued regulations
that will bring products and services such as the CARTICEL(R) Service under
regulation by November of 1997. Companies already marketing products and
services subject to the regulations are allowed a transition period ending on
November 30, 1997 in which to file and obtain approval of a Biologics License
Application (a "BLA"), while continuing to market their products and services.
Genzyme Tissue Repair submitted a BLA for the CARTICEL(R) Service in March 1996
in anticipation of the regulations. Although Genzyme Tissue Repair expects the
FDA to complete its review of the BLA before of the end of November 1997, there
can be no assurance that the review will be completed by then or that the FDA
will not require additional data concerning the safety and efficacy of the
CARTICEL(R) Service. A delay in the approval of the BLA for the CARTICEL(R)
Service beyond the transition period could materially and adversely affect the
commercialization of the CARTICEL(R) Service.
The successful commercialization of the CARTICEL(R) Service will
depend materially on the ability of Genzyme Tissue Repair to obtain approval for
reimbursement of the CARTICEL(R) Service from third party payers. To date,
approvals for reimbursement applications have been lower than anticipated by
Genzyme Tissue Repair and, pending FDA approval of the BLA for the CARTICEL(R)
Service, there can be no assurance that the rate of such approvals will improve
or will not decline. There can also be no assurance that the approval rate will
improve if the BLA is approved. If the approval rate does not improve, the
commercialization of the CARTICEL(R) Service and Genzyme Tissue Repair's future
success may be adversely affected.
COLLABORATION WITH DIACRIN; NO CURRENTLY APPROVED
XENOTRANSPLANTATION-BASED PRODUCTS; RELIANCE ON CELL TRANSPLANTATION TECHNOLOGY.
Genzyme Tissue Repair has formed a joint venture with Diacrin, Inc. to develop
and commercialize populations of transplantable porcine cells for the treatment
of Parkinson's and Huntington's diseases. Products based on xenotransplantation
such as the porcine cells being developed by the joint venture represent a novel
therapeutic approach that has not been subject to extensive clinical testing and
pose a risk that viruses or other animal pathogens will be unintentionally
transmitted to a human patient. The FDA has issued draft regulatory guidelines
to reduce the risk of contamination of xenotransplanted cellular products with
infectious agents. Although Genzyme Tissue Repair's management believes the
processes used to produce the porcine cell products under development by the
joint venture would comply with the guidelines as drafted, such guidelines may
undergo substantial revision before definitive guidelines are issued by the FDA.
There can be no assurance that definitive guidelines will be issued by the FDA
or that the processes used by the joint venture will comply with any guidelines
that may be issued.
No xenotransplantation-based therapeutic product has been approved for
sale by the FDA and there can be no assurance that any products developed by the
joint venture will be approved by the FDA or regulatory authorities in other
countries. There can also be no assurance that xenotransplantation-based
products, including the joint venture's product candidates, will be accepted by
the medical community or third party payers or that the degree of such
acceptance will not limit the size of the market for such products.
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<PAGE> 56
The success of the joint venture will also be dependent upon the
successful development of cell transplantation technology. This technology
currently has limited clinical applications and there can be no assurance that
it will result in the development of any therapeutic products. If the cell
transplantation technology does not result in the development of such products,
the joint venture may be required to change dramatically the scope and direction
of its product development activities.
FUTURE CAPITAL NEEDS. Although Genzyme currently has substantial cash
resources, it has committed to utilize a portion of such funds for certain
purposes, such as (i) completing the market introduction in the United States
and Europe of the Sepra Products, (ii) completing the market introduction of
Genzyme Tissue Repair's CARTICEL(R) Service and developing, producing and
marketing other products through Genzyme Tissue Repair and (iii) making certain
payments to third parties in connection with strategic collaborations. At
December 31, 1996, Genzyme had approximately $265 million in cash and cash
equivalents and marketable securities, which amount includes $87.0 million in
respect of certain warrants exercised immediately prior to year end that was
received by Genzyme during the first week of January 1997, and approximately
$218 million outstanding under the Revolving Facility, $200 million of which was
allocated to Genzyme General. Amounts borrowed under this Revolving Facility are
payable on November 15, 1999. Genzyme's cash resources will be diminished upon
repayment of amounts borrowed, plus accrued interest, under the Revolving
Facility. In addition, should Genzyme exercise its option to acquire the
partnership interests in GDP using cash to pay some or all the exercise price,
its cash resources will be diminished. As a result, Genzyme may have to obtain
additional financing. There can be no assurance that such financing will be
available on terms reasonably acceptable to Genzyme.
TISSUE REPAIR DIVISION OPERATING LOSSES AND CASH REQUIREMENTS. Genzyme
Tissue Repair is expected to experience significant operating losses at least
through the end of 1998 as the market introduction of the CARTICEL(R) Service
continues and as its research and development and clinical trial programs
expand, including its commitment to fund the operations of Diacrin/Genzyme LLC.
There can be no assurance that Genzyme Tissue Repair ever will achieve a
profitable level of operations or that profitability, if achieved, can be
sustained on an ongoing basis. The liabilities or contingencies of Genzyme
Tissue Repair affect Genzyme's resources or financial condition and could affect
the financial condition or results of operations of Genzyme General.
POTENTIAL GENZYME TISSUE REPAIR STOCK DILUTION. Under the terms of the
BioSurface acquisition agreement, the Genzyme Board may elect to allocate up to
$30 million from Genzyme General to Genzyme Tissue Repair in exchange for an
increase in the Genzyme Tissue Repair Designated Shares at a price of $10 per
share. In June 1996, the Genzyme Board voted to allocate $10,000,000 under the
agreement in exchange for an increase in the Genzyme Tissue Repair Designated
shares of 1,000,000 shares. Although these shares have not yet been issued,
Genzyme may issue these and any additional Genzyme Tissue Repair Designated
Shares as a stock dividend to the holders of Genzyme General Stock or in a
public or private sale without any allocation of proceeds to Genzyme Tissue
Repair. In addition, in connection with the formation of the joint venture
between Genzyme Tissue Repair and Diacrin, Inc., the Genzyme Board authorized
the allocation of up to $20 million in cash from Genzyme General to Genzyme
Tissue Repair. Such allocations will result in an increase in the Genzyme Tissue
Repair Designated Shares by a number of shares determined by dividing (i) the
amount of cash allocated by (ii) the average of the daily closing prices of
Genzyme Tissue Repair Stock as reported by the Nasdaq National Market (or the
appropriate exchange on which such shares are then traded) for the 20
consecutive trading days commencing on the 30th day prior to the date of
allocation of such funds. The Genzyme Board has also adopted a policy for the
distribution of Genzyme Tissue Repair Designated shares providing that if, as of
May 31 of each year starting May 31, 1997, the number of Genzyme Tissue Repair
Designated Shares on such date (not including those reserved for issuance with
respect to stock options, stock purchase rights, warrants or other securities
convertible into or exercisable for shares of Genzyme General Stock outstanding
on such date ("Genzyme General Convertible Securities") as a result of
anti-dilution adjustments required by the terms of such instruments or approved
by the Genzyme Board) exceeds ten percent (10%) of the number of shares of
Genzyme Tissue Repair Stock then issued and outstanding, then substantially all
Genzyme Tissue Repair Designated Shares will be distributed to holders of record
of Genzyme General Stock subject to reservation of a number of such shares equal
to the sum of (a) the number of Genzyme Tissue Repair Designated Shares reserved
for issuance upon the exercise or conversion of Genzyme General Convertible
Securities and (b) the number of Genzyme Tissue Repair Designated Shares
reserved by the Genzyme Board as of such date for sale not later than six months
after such date, the proceeds of which sale will be allocated to the General
Division.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY
TECHNOLOGY. Genzyme's success depends, to a large extent, on its ability to
maintain a competitive technological position in its product areas. Proprietary
rights relating to Genzyme's products are protected from unauthorized use by
third parties only to the extent that they are covered by
54
<PAGE> 57
patents or are maintained in confidence as trade secrets. Genzyme has filed for
patents and has rights to numerous patents and patent applications worldwide.
While certain of Genzyme's patents have been allowed or issued, there can be no
assurance that any additional patents will be allowed or will issue or that, to
the extent issued, such patents will effectively protect the proprietary
technology of Genzyme. In addition, Genzyme Tissue Repair does not yet have
significant patent protection covering the methodologies used in providing the
CARTICEL(R) Service. Consequently, Genzyme Tissue Repair is unable to prevent a
competitor from developing the ability to grow cartilage cell cultures and from
offering a service that is similar or superior to the CARTICEL(R) Service.
Genzyme Tissue Repair's results of operations could be materially and adversely
affected if a competitor were to develop such know-how.
Genzyme has also relied upon trade secrets, proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. There can be no assurance that others will not independently develop
such know-how or otherwise obtain access to Genzyme's technology. While
Genzyme's employees, consultants and corporate partners with access to
proprietary information are generally required to enter into confidentiality
agreements, there can be no assurance that these agreements will be honored.
Certain of Genzyme's consultants have developed portions of Genzyme's
proprietary technology at their respective universities or in governmental
laboratories. There can be no assurance that such universities or governmental
authorities will not assert rights to intellectual property arising out of
university or government based research conducted by such consultants.
Parties not affiliated with Genzyme may hold pending or issued patents
relating to technology utilized by Genzyme in its products presently available
or under development. Genzyme may, depending on the final formulation of such
products, need to acquire licenses to, or contest the validity of, such patents
or any other similar patents that may be issued. The extent to which Genzyme may
need to license such rights or contest the validity of such patents depends on
the scope and validity of such patents and ultimately on the final design or
formulation of its products under development. The cost and ability to license
any such rights and the likelihood of successfully contesting the validity of
such patents are uncertain.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of Genzyme's
products are currently in clinical trials to test safety and efficacy in humans
for various conditions. There can be no assurance that Genzyme will not
encounter problems in clinical trials that will cause it to delay or suspend
clinical trials. In addition, there can be no assurance that such clinical
testing, if completed, will ultimately show these products to be safe and
efficacious.
REGULATION BY GOVERNMENT AGENCIES. Most of the products Genzyme plans
to manufacture and sell will require approval by governmental agencies in the
United States and elsewhere. In particular, human therapeutic and diagnostic
products are subject to pre-marketing approval by the FDA and comparable
agencies in foreign countries. The process of obtaining these approvals varies
according to the nature and use of the product and can involve lengthy and
detailed laboratory and clinical testing, sampling activities and other costly
and time-consuming procedures. There can be no assurance that any of the
required approvals will be granted on a timely basis, if at all.
Certain of Genzyme's products, including Ceredase(R) enzyme and
Cerezyme(R) enzyme, have been designated as orphan drugs under the Orphan Drug
Act, which provides incentives to manufacturers to develop and market drugs for
rare diseases. The Orphan Drug Act generally entitles the first developer to
receive FDA marketing approval for an orphan drug to a seven-year exclusive
marketing period in the United States for that product. Legislation has been
periodically introduced in recent years, however, to amend the Orphan Drug Act.
Such legislation has generally been directed to shortening the period of
automatic market exclusivity and granting certain marketing rights to
simultaneous developers of a drug. The effect on Genzyme of any amendments
ultimately adopted cannot be assessed at this time.
A federal criminal statute prohibits the transfer of any human organ
for valuable consideration for use in human transplantation but permits recovery
of reasonable costs associated with such activities. To date, this statute has
not been applied to the CARTICEL(R) Service or the EpicelSM Service. In
addition, certain states have laws requiring the licensure of tissue and organ
banks and laws governing the sale of human organs and the safety and efficacy of
drugs, devices and biologics, including skin, all of which could be interpreted
to apply to Genzyme Tissue Repair's production and distribution of cultured
tissue products. Provisions in certain states' statutes prohibit the receipt of
valuable consideration in connection with the sale of human tissue by a tissue
bank but permit licensed tissue banks, including companies, to recover their
reasonable costs associated with such sales.
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<PAGE> 58
RISKS INHERENT IN INTERNATIONAL OPERATIONS. Foreign operations of
Genzyme accounted for 35% of net sales in 1996 and 1995, compared to 31% in
1994. Financial results of Genzyme could be adversely or beneficially affected
by fluctuations in foreign exchange rates. Fluctuations in the value of foreign
currencies affect the dollar value of Genzyme's net investment in foreign
subsidiaries, with related effects included in a separate component of
stockholders' equity. Operating results of foreign subsidiaries are translated
into U.S. dollars at average monthly exchange rates. In addition, the U.S.
dollar value of transactions based in foreign currency (collections on foreign
sales or payments for foreign purchases) also fluctuates with exchange rates.
The largest foreign currency exposure results from activity in British pounds,
French francs, Swiss francs, Dutch guilders, German marks, Japanese yen, Spanish
pesetas and Italian lire.
Genzyme attempts to manage this exposure by entering into forward
contracts with banks to the extent that the timing of currency flows can
reasonably be anticipated and by offsetting matching foreign currency
denominated assets with foreign currency denominated liabilities. Although to
date Genzyme has not hedged net foreign investments, the Company may engage in
hedging transactions to manage and reduce the Company's foreign exchange risk,
subject to certain restrictions imposed by the Genzyme Board, including that any
such transaction will be effected or disposed of on a securities exchange or
board of trade regulated under the laws of the United States, or with a
counterparty approved in accordance with certain financial strength criteria,
will be liquidated promptly after the purpose for which it is being maintained
is no longer applicable and will not be effected or maintained for the purpose
of speculation. There can be no assurance that Genzyme's attempts to manage its
foreign currency exchange risk will be successful.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT
INITIATIVES. A majority of Genzyme's revenues are attributable directly or
indirectly to payments received from third party payers, including government
health administration authorities and private health insurers. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third party payers are increasingly challenging the prices charged
for medical products and services. Third party payers are also increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products and by refusing in some cases to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted marketing approval. There can be no assurance that any
third party insurance coverage will be available for any products or services
developed by Genzyme. If adequate coverage and reimbursement levels are not
provided by government and other third party payers for Genzyme's products and
services, the market acceptance of these products may be reduced and,
accordingly, Genzyme's revenues and profitability may be adversely affected.
In addition, Congress has from time to time discussed the possible
implementation of broad based health care cost containment measures. While these
discussions have not led to the enactment of any specific health care cost
containment legislation, it is likely that health care measures will again be
proposed in Congress. The effects on Genzyme of any such measures that are
ultimately adopted cannot be measured at this time.
PRODUCT LIABILITY AND LIMITATIONS OF INSURANCE. Genzyme may be subject
to product liability claims in connection with the use or misuse of its products
during testing or after commercialization. While Genzyme has taken, and
continues to take, what it believes are appropriate precautions, there can be no
assurance that Genzyme will avoid significant liability exposure. Genzyme has
only limited amounts of product liability insurance and there can be no
assurance that such insurance will provide sufficient coverage against any or
all potential product liability claims. If Genzyme attempts to obtain additional
insurance in the future, there can be no assurance that it will be able to do so
on acceptable terms, if at all, or that such insurance will provide adequate
coverage against claims asserted.
POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS. The
market prices for securities of biotechnology companies have been volatile.
Factors such as announcements of technological innovations or new commercial
products by Genzyme or its competitors, governmental regulation, patent or
proprietary rights developments, public concern as to the safety or other
implications of biotechnology products and market conditions in general may have
a significant impact on the market price of each series of Genzyme common stock.
No cash dividends have been paid to date on Genzyme common stock, nor does
Genzyme anticipate paying cash dividends on such stock in the foreseeable
future.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
<TABLE>
<CAPTION>
Form 10-K
Page No.
--------
<S> <C>
GENZYME CORPORATION AND SUBSIDIARIES
Report of Independent Accountants ....................................................................... 54
Consolidated Statements of Operations - For the Years Ended December 31, 1996, 1995 and 1994 ............ 55-56
Consolidated Balance Sheets - December 31, 1996 and 1995 ................................................ 57-58
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996, 1995 and 1994 ............ 59-60
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 .... 61-62
Notes to Consolidated Financial Statements .............................................................. 63-83
Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1996, 1995 and 1994 .. 84
GENZYME GENERAL DIVISION
Report of Independent Accountants ....................................................................... 85
Combined Statements of Operations - For the Years Ended December 31, 1996, 1995 and 1994 ................ 86-87
Combined Balance Sheets - December 31, 1996 and 1995 .................................................... 88
Combined Statements of Cash Flows - For the Years Ended December 31, 1996, 1995 and 1994 ................ 89-90
Notes to Combined Financial Statements .................................................................. 91-115
Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1996, 1995 and 1994 .. 116
GENZYME TISSUE REPAIR DIVISION
Report of Independent Accountants ....................................................................... 117
Combined Statements of Operations - For the Years Ended December 31, 1996, 1995 and 1994 ................ 118
Combined Balance Sheets - December 31, 1996 and 1995 .................................................... 119
Combined Statements of Cash Flows - For the Years Ended December 31, 1996, 1995 and 1994 ................ 120
Notes to Combined Financial Statements .................................................................. 121-134
Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1996, 1995 and 1994 .. 135
</TABLE>
All other schedules are omitted since the required information is inapplicable
or has been presented in the related financial statements and the related
notes.
57
<PAGE> 60
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Although the financial statements of the General Division and Tissue Repair
Division separately report the assets, liabilities and stockholders' equity of
Genzyme attributable to each such group, such attribution of assets and
liabilities (including contingent liabilities) and stockholders' equity among
the General Division and Tissue Repair Division does not affect legal title to
such assets or responsibility for such liabilities. Holders of General Division
Stock and Tissue Repair Stock are holders of common stock of Genzyme and
continue to be subject to all the risks associated with an investment in Genzyme
and all of its businesses and liabilities. Financial impacts arising from one
Division that affect the overall cost of Genzyme's capital could affect the
results of operations and financial condition of the other Division.
Accordingly, the consolidated financial information of Genzyme should be read in
connection with the financial information of each Division.
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<PAGE> 61
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, 1996 and 1995, 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, 1996. The consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Genzyme
Corporation and Subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 27, 1997
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<PAGE> 62
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues
Net product sales ............................................. $424,483 $304,373 $238,645
Net service sales ............................................. 68,950 52,450 50,010
Revenues from research and development contracts:
Related parties .............................................. 23,011 26,758 20,883
Other ........................................................ 2,310 202 1,513
-------- -------- --------
518,754 383,783 311,051
Operating costs and expenses:
Cost of products sold ......................................... 155,930 113,964 92,226
Cost of services sold ......................................... 54,082 35,868 32,403
Selling, general and administrative ........................... 162,264 110,447 80,990
Research and development (including research and
development related to contracts) ............................ 80,849 68,845 55,334
Amortization of intangibles ................................... 8,849 4,647 4,741
Purchase of in-process research and development ............... 130,639 14,216 11,215
Restructuring charges ......................................... 1,465 - -
-------- -------- --------
594,078 347,987 276,909
-------- -------- --------
Operating income (loss) ........................................... (75,324) 35,796 34,142
Other income and (expenses):
Minority interest in net loss of subsidiaries ................. - 1,608 1,659
Equity in net loss of unconsolidated subsidiaries ............. (4,360) (1,810) (1,353)
Gain on investments and charge for impaired investments ....... 1,711 - (9,431)
Settlement of lawsuit ......................................... - - (1,980)
Investment income ............................................. 15,341 8,814 9,101
Interest expense .............................................. (6,990) (1,109) (1,354)
-------- -------- --------
5,702 7,503 (3,358)
-------- -------- --------
Income (loss) before income taxes ................................. (69,622) 43,299 30,784
Provision for income taxes ........................................ (3,195) (21,649) (14,481)
-------- -------- --------
Net income (loss) ................................................. $(72,817) $ 21,650 $ 16,303
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE> 63
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<CAPTION>
(Dollars in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ATTRIBUTABLE TO THE GENERAL DIVISION:
Net income (loss) ................................................. $(47,513) $ 34,823 $ 30,194
Tax benefit allocated from Tissue Repair Division ................. 17,011 8,857 1,860
-------- -------- --------
Net income (loss) attributable to General Division Stock ...... $(30,502) $ 43,680 $ 32,054
======== ======== ========
Per common and common equivalent share:
Net income (loss) .............................................. $ (0.45) $ 0.73 $ 0.61
======== ======== ========
Average shares outstanding ..................................... 68,289 60,185 52,338
======== ======== ========
Per common share assuming full dilution:
Net income (loss) .............................................. $ (0.45) $ 0.66 $ 0.57
======== ======== ========
Average shares outstanding ..................................... 68,289 66,621 56,318
======== ======== ========
ATTRIBUTABLE TO THE TISSUE REPAIR DIVISION:
Net loss attributable to TR Stock ................................. $(42,315) $(22,030) $(15,751)
======== ======== ========
Per common share:
Net loss ....................................................... $ (3.38) $ (2.28) $ (4.40)
======== ======== ========
Average shares outstanding ..................................... 12,525 9,659 3,578
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE> 64
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Dollars in thousands) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 93,132 $144,372
Short-term investments ...................................................... 56,608 112,303
Accounts receivable, less allowance of $16,508 in 1996 and $8,159 in 1995 ... 116,833 88,959
Inventories ................................................................. 125,265 53,042
Prepaid expenses and other current assets ................................... 100,287 12,531
Deferred tax assets - current ............................................... 17,493 7,729
---------- --------
Total current assets ...................................................... 509,618 418,936
Property, plant and equipment, net ............................................. 393,839 329,423
Other Assets:
Long-term investments ....................................................... 38,215 69,561
Note receivable - related party ............................................. - 262
Intangibles, net of accumulated amortization of $26,189 in 1996 and
$17,340 in 1995 ............................................................ 247,745 29,934
Deferred tax assets - noncurrent ............................................ 42,221 23,645
Other noncurrent asset ......................................................... 38,870 33,440
---------- --------
367,051 156,842
---------- --------
$1,270,508 $905,201
========== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE> 65
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<CAPTION>
(Dollars in thousands) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................ $ 22,271 $ 21,980
Accrued expenses ............................................................ 70,124 39,418
Income taxes payable ........................................................ 17,926 1,316
Deferred revenue ............................................................ 2,693 1,367
Current portion of long-term debt and capital lease obligations ............. 999 2,445
---------- --------
Total current liabilities ............................................... 114,013 66,526
Noncurrent Liabilities:
Long-term debt and capital lease obligations ................................ 241,998 124,473
Other noncurrent liabilities ................................................ 12,188 8,995
---------- --------
254,186 133,468
Commitments and Contingencies See Notes
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 200,000,000
shares; 75,537,300 and 62,371,700 issued
at December 31, 1996 and 1995, respectively .............................. 755 624
Tissue Repair Division Common Stock, $0.01 par value,
authorized 40,000,000 shares; 13,161,500 and 12,112,700 issued
at December 31, 1996 and 1995, respectively .............................. 132 121
Treasury common stock, at cost:
General Division Common Stock, 105,941 and 52,770 shares at
December 31, 1996 and 1995, respectively ................................. (890) (882)
Additional paid-in capital - General Division ............................... 871,020 616,096
Additional paid-in capital - Tissue Repair Division ......................... 122,385 107,934
Accumulated deficit.......................................................... (89,975) (17,158)
Foreign curency translation adjustments...................................... (745) (3,590)
Unrealized gains/(losses) on investments..................................... (373) 2,062
---------- --------
902,309 705,207
---------- --------
$1,270,508 $905,201
========== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................ $(72,817) $ 21,650 $ 16,303
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 30,192 22,638 18,226
(Gain) loss on sale of investments ............................ (1,663) 110 (1,430)
Loss on disposal of fixed assets .............................. 101 903 -
Non-cash compensation expense ................................. 460 1,013 -
Write-off of impaired equity investments ...................... - - 9,431
Accrued interest/amortization on bonds ........................ 1,195 (355) (2,116)
Provision for bad debts ....................................... 8,332 5,415 4,331
Purchase of in-process research and development for stock ..... 130,639 14,216 11,215
Deferred income taxes ......................................... (28,558) 4,428 1,439
Minority interest in net loss of subsidiaries ................. - (1,608) (1,659)
Equity in net loss of unconsolidated subsidiary ............... 4,360 1,810 1,353
Other ......................................................... 105 1,458 386
Increase (decrease) in cash from working capital changes
net of acquired assets:
Accounts receivable ......................................... (18,395) (15,069) (14,916)
Inventories ................................................. (40,182) (15,906) (10,549)
Prepaid expenses and other current assets ................... (527) (1,680) (1,769)
Accounts payable, accrued expenses and deferred revenue ..... 26,775 5,679 2,782
-------- --------- ---------
Net cash provided by operating activities ................... 40,017 44,702 33,027
INVESTING ACTIVITIES:
Purchases of investments ......................................... (122,093) (142,522) (210,274)
Purchases of restricted investments .............................. - (4,418) (10,000)
Maturities of investments ........................................ 207,399 57,055 265,851
Acquisitions of property, plant and equipment .................... (63,802) (49,988) (101,707)
Acquisitions, net of cash acquired and liabilities assumed ....... (299,078) (322) 5,359
Additional investment in unconsolidated subsidiaries ............. (5,511) (4,428) (1,465)
Loans to affiliates .............................................. (1,676) - -
Other noncurrent assets and other noncurrent liabilities ......... (7,470) (1,265) (3,221)
-------- --------- ---------
Net cash used by investing activities ....................... (292,231) (145,888) (55,457)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................... 41,556 223,139 45,926
Proceeds from issuance of common stock by subsidiary ............. - 1,107 319
Proceeds from issuance of debt ................................... 536,000 - 21,819
Payments of long-term debt and capital lease obligations ......... (378,502) (41,449) (4,793)
-------- --------- ---------
Net cash provided by financing activities ................... 199,054 182,797 63,271
Effect of exchange rate changes on cash ............................. 1,920 (781) (274)
-------- --------- ---------
Increase (decrease) in cash and cash equivalents .................... (51,240) 80,830 40,567
Cash and cash equivalents at beginning of period .................... 144,372 63,542 22,975
-------- --------- ---------
Cash and cash equivalents at end of period .......................... $ 93,132 $ 144,372 $ 63,542
======== ========= =========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest......................................................... $ 6,285 $ 9,944 $ 9,634
Income taxes..................................................... 14,149 19,581 13,506
</TABLE>
Supplemental Disclosures of Non-Cash Transactions:
Acquisition liability -- Note B
Additional investment in unconsolidated affiliate -- Note D
Settlement of note receivable -- Note F
Exercise of warrants -- Note I
Debt conversion -- Note I
The accompanying notes are an integral part of these
consolidated financial statements.
64
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GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
---------------------------- ------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS:
GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ................. 62,372 52,894 48,584 $ 624 $ 529 $ 486
Exercise of stock options .................... 1,371 1,916 136 13 19 1
Issuance from employee stock purchase plan ... 291 286 252 3 3 3
Exercise of warrants ......................... 6,341 686 3,922 63 7 39
Shares issued in public offering ............. - 5,750 - - 58 -
Issuance of General Division Common Stock
in connection with conversion of
convertible subordinated notes .............. 3,782 - - 38 - -
Issuance of General Division Common Stock
in connection with acquisitions ............ 1,380 840 - 14 8 -
------ ------ ------ ----- ----- -----
Balance at end of year ...................... 75,537 62,372 52,894 $ 755 $ 624 $ 529
====== ====== ====== ===== ===== =====
TISSUE REPAIR DIVISION COMMON STOCK:
Balance at beginning of year ................. 12,113 8,675 - $ 121 $ 87 $ -
Issued to BioSurface shareholders ............ - - 5,000 - - 50
Issued at conversion ......................... - - 3,357 - - 34
Exercise of stock options .................... 124 122 - 1 1 -
Issuance from employee stock purchase plan ... 325 270 4 3 3 -
Exercise of warrants ......................... 345 46 314 4 - 3
Shares issued in public offering ............. - 3,000 - - 30 -
Issuance of Tissue Repair Division Common
Stock in connection with conversion of
the General Division's convertible
subordinated notes .......................... 255 - - 3 - -
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 13,162 12,113 8,675 $ 132 $ 121 $ 87
====== ====== ====== ===== ===== =====
TREASURY COMMON STOCK (AT COST):
GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ................. (106) (100) (100) $(882) $(755) $(755)
Purchases .................................... - (6) - (8) (127) -
------ ------ ------ ----- ----- -----
Balance at end of year ......................... (106) (106) (100) $(890) $(882) $(755)
====== ====== ====== ===== ===== =====
</TABLE>
<TABLE>
ADDITIONAL PAID IN CAPITAL - GENERAL DIVISION:
<S> <C> <C> <C>
Balance at beginning of year.................................................. $616,096 $406,991 $397,229
Exercise of stock options .................................................... 13,870 27,903 1,188
Issuance from employee stock purchase plan ................................... 4,695 4,158 2,989
Exercise of warrants ......................................................... 106,101 6,257 41,691
Common Stock issued in public offering ....................................... - 141,218 -
Issuance of Common Stock in connection with conversion of convertible
subordinated notes .......................................................... 101,362 - -
Issuance of General Division Common Stock in connection with acquisitions .... 36,508 23,813 -
Callable Warrants issued in connection with acquisition of Neozyme II ....... 469 - -
Allocation to GTR for designated shares....................................... (11,714) - (38,330)
Tax benefit from disqualified dispositions ................................... 3,500 5,500 2,224
Non-cash compensation expense ................................................ 123 131 -
Treasury Stock acquired....................................................... 10 125 -
-------- -------- --------
Balance at end of year ....................................................... $871,020 $616,096 $406,991
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<CAPTION>
DOLLARS IN THOUSANDS
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ADDITIONAL PAID IN CAPITAL-TISSUE REPAIR DIVISION:
Balance at beginning of year ................................................. $ 107,934 $ 63,573 $ -
Tissue Repair Division Common Stock issued to BioSurface shareholders ........ - - 25,266
Tissue Repair Division Common Stock issued at conversion ..................... - - (34)
Exercise of stock options .................................................... 539 240 -
Issuance from employee stock purchase plan ................................... 1,893 980 14
Exercise of warrants ......................................................... (4) (3) (3)
Tissue Repair Division Common Stock issued in public offering ................ - 42,262 -
Issuance of Tissue Repair Division Common Stock in connection with
the conversion of the General Division's convertible subordinated notes .... (3) - -
Allocation from General Division for designated shares........................ 11,714 - 38,330
Non-cash compensation expense ................................................ 312 882 -
-------- -------- --------
Balance at end of year ....................................................... $ 122,385 $107,934 $ 63,573
========= ======== ========
ACCUMULATED DEFICIT:
Balance at beginning of year ................................................. $ (17,158) $(38,808) $(55,111)
Net income (loss) ............................................................ (72,817) 21,650 16,303
--------- -------- --------
Balance at end of year ....................................................... $ (89,975) $(17,158) $(38,808)
========= ======== ========
Foreign currency translation adjustment:
Balance at beginning of year ................................................. $ (3,590) $ (4,915) $ (7,776)
Translation adjustments ...................................................... 2,845 1,325 2,861
--------- -------- --------
Balance at end of year ....................................................... $ (745) $ (3,590) $ (4,915)
========= ======== ========
Unrealized gains (losses) on investments:
Balance at beginning of year ................................................. $ 2,062 $ (7,735) $ --
Adjustments .................................................................. (2,435) 9,797 (7,735)
--------- -------- --------
Balance at end of year ....................................................... $ (373) $ 2,062 $ (7,735)
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
67
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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
two-for-one 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 statements of the Company.
Although the financial statements of the General Division and Tissue Repair
Division separately report the assets, liabilities and stockholders' equity of
Genzyme attributable to each such group, such attribution of assets and
liabilities (including contingent liabilities) and stockholders' equity among
the General Division and Tissue Repair Division does not affect legal title to
such assets or responsibility for such liabilities. Holders of General Division
Stock and Tissue Repair Stock are holders of common stock of Genzyme and
continue to be subject to all the risks associated with an investment in Genzyme
and all of its businesses and liabilities. Liabilities or contingencies of the
General Division or GTR could affect the results of operations and financial
condition of the other Division.
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 consolidated 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
years ended December 31, 1994 and 1995 have been reclassified to conform with
the December 31, 1996 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. As of December 31, 1996 and 1995, the Company classified all
investments in debt securities as available-for-sale.
68
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
"Other Equity Adjustments" in Stockholders' equity. If the adjustment to fair
value reflects a decline in the value of the investment, management considers
all available evidence to evaluate the extent to which the decline is "other
than temporary" and marks the investment to market through a charge to the
income statement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments is obtained from market quotations. The fair
value of foreign currency forward contracts is based on forward rates in
effect at December 31, 1996 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 allocated to the General Division (with a
net book value of $174.6 million at December 31, 1996) is depreciated over its
remaining useful life using the units-of-production method. The remaining life
and recoverability of such equipment is evaluated periodically based on the
appropriate facts and circumstances. Leasehold improvements are amortized over
the lesser of the useful life or the term of the respective lease. For products
expected to be commercialized, the Company capitalizes, to construction
in-progress, the costs of manufacturing process validation and optimization
incurred beginning when the product is deemed to have demonstrated technological
feasibility and ending when the asset is substantially complete and ready for
its intended use. Qualified costs include incremental labor and direct material,
and incremental fixed overhead and interest. These costs are depreciated using
the units of production method.
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 of goodwill, covenants not to compete, customer lists,
patents, trademarks and trade-names and are being amortized using the
straight-line method over useful lives of five to forty years. Management's
policy regarding intangible assets is to evaluate the recoverability of its
intangible assets when the facts and circumstances suggest that these assets may
be impaired. Evaluations consider factors including operating results, business
plans, economic projections, strategic plans and market emphasis. Evaluations
also compare expected cumulative, un-discounted operating incomes or cash flows
with net book values of related intangible assets. Unrealizable intangible asset
values are charged to operations if these evaluations indicate an impairment in
value.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company's foreign subsidiaries are translated
from local currency into U.S. dollars using the current exchange rate at the
balance sheet date for assets and liabilities and the average exchange rate
prevailing during the period for revenues and expenses. The local currency for
all Company foreign subsidiaries is considered to be the functional currency for
each entity and accordingly, translation adjustments for these subsidiaries are
included in "Other Equity Adjustments" in 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 net losses of
$(0.9) million and $(0.8 million) for the years ended December 31, 1996 and
1995, respectively. Net transaction losses information for 1994 were not
material. Stockholders' equity includes cumulative foreign currency translation
adjustments of $(0.7) million and $(3.6) million at December 31, 1996 and 1995.
HEDGING
FORWARD CONTRACTS
69
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company enters into forward contracts to reduce foreign currency exchange
risk. Such contracts are revalued using current exchange rates at the balance
sheet date. All gains and losses on revaluation of forward contracts
are included in net income. At December 31, 1996 and 1995, the Company had
currency contracts valued at approximately $0.9 million and $1.2 million,
respectively. Related gains and losses were not material to the financial
statements.
INTEREST RATE HEDGE AGREEMENTS
Interest rate hedge agreements are used to reduce interest rate risks and
costs inherent in the Company's debt portfolio. The Company enters into these
agreements to change the fixed/variable interest rate mix of the portfolio to
reduce the Company's aggregate risk to movements in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. The differentials to be received or paid under contracts designated
as hedges are recognized in income over the life of the contracts as
adjustments to interest expense. The fair values of interest rate contracts
is estimated based on the estimated amount necessary to terminate the
agreements.
REVENUE RECOGNITION
Revenues from product sales are recognized when goods are shipped and are net of
third party contractual allowances and rebates, as applicable. Revenues from
service sales are recognized when the service procedures have been completed.
Revenues from research and development contracts are recognized over applicable
contractual periods as specified by each contract.
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,
1996, such undistributed foreign earnings were approximately $9.0 million.
Based on the Company's policy of indefinite reinvestment in non-U.S.
operations, it is not currently practicable to determine the tax liability
associated with the repatriation of these earnings.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to the General Division and the Tissue
Repair Division give effect to the management and accounting policies adopted by
the Board in connection with re-designation of Genzyme common stock as General
Division Stock and the creation of GTR Stock and are reported in lieu of
consolidated per share data. The Company computes earnings (loss) per share for
each Division by dividing the earnings 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. Earnings (loss) 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 management and accounting policies adopted by
the Board of Directors (the "Genzyme Board").
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 and GTR Stock and net income per
share and net income per share assuming full dilution for the year ended
December 31, 1994, give effect to the provisions of the accounting policies
adopted by the Genzyme Board in connection with the creation of the General
Division and, accordingly, are pro forma presentations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation". The Company has disclosed herein
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.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents, current
and non-current investments and accounts receivable. The Company generally
invests its cash investments in investments-grade securities to mitigate risk.
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,
70
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
protection of proprietary technology, estimation by the Company of the size and
characteristics of the markets for the Company's products, acceptance of the
Company's products and services, health care cost containment initiatives,
product liability and compliance with the government regulations, including
those of the U.S. Department of Health and Human Services and the U.S. Food and
Drug Administration.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), which
is effective for fiscal years ending after December 15, 1997, including interim
periods. Earlier adoption is not permitted. However, an entity is permitted to
disclose pro forma earnings per share amounts computed under SFAS 128 in the
notes to the financial statements in periods prior to adoption. The Statement
requires restatement of all prior-period earnings per share data presented after
the effective date. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is substantially similar to
the standard recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, Earnings Per Share. The Company
plans to adopt SFAS in 1997 and has not yet determined the impact.
NOTE B. ACQUISITIONS
The Company allocates all acquisitions to either the General Division or Tissue
Repair Division depending on the nature of the acquired business.
ALLOCATED TO THE GENERAL DIVISION:
SYGENA A.G.
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, 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 $9.0
million Swiss francs for the purchase of the remaining shares. The excess
purchase price over the net assets acquired was approximately $5.0 million
Swiss francs (approximately $4.0 million) and was recorded as goodwill with
a life of ten years. In July 1996, Genzyme paid $7.6 million (9.2 Swiss
Francs) in settlement of the deferred liability and related accrued
interest. 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.
IG LABORATORIES, INC.
In October 1995, Genzyme acquired the publicly-held minority interest in its
majority-owned subsidiary, IG Laboratories, Inc. ("IG"), a genetic testing
business, by issuing approximately 770,510 shares of General Division Stock,
valued at approximately $22.5 million. The acquisition was accounted for as a
purchase. The excess of the purchase price over the fair market value of the
net assets acquired, approximately $18.6 million, was allocated $14.2 million
to in-process research and development and charged to operations, and $4.4
million to goodwill to be amortized over 11 years. Pro forma information is
not presented since the impact of the acquisition on financial statement
periods prior to the acquisition is not material.
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 and Genetrix common
stock. The acquisition was accounted for as a purchase.
The purchase price was allocated to the assets and liabilities of Genetrix
based on their respective estimated fair values at the date of acquisition.
The excess of the purchase price over the fair market value of the net assets
acquired, approximately $39 million, was allocated to goodwill to be
amortized over 15 years. The Company incurred restructuring costs of $1.0
million.
DEKNATEL SNOWDEN PENCER, INC.
On July 1, 1996, Genzyme completed the acquisition of Deknatel Snowden
Pencer, Inc. ("DSP"), a privately held surgical products company. The
purchase price of $252.2 million consisted of cash of approximately $192.0
million, acquisition costs of approximately $4.6 million, and assumed
debt obiligations of DSP of approximately $55.6 million. The excess of the
purchase price over the fair market value of the net assets acquired,
approximately $128.3 million, was allocated to goodwill to be amortized over
40 years. Funds for the acquisition, the repayment of the debt and the
payment of the acquisition costs were provided by borrowings of $200.0
million under a revolving credit facility from Fleet National Bank, due
71
<PAGE> 73
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 1, 1997, with interest payable at LIBOR plus 5/8% and General
Division cash balances. The Company incurred restructuring charges of $0.5
million.
The purchase price was allocated to the assets and liabilities of DSP based
on their estimated respective fair values on the date of acquisition.
Completed technology that has reached technological feasibility was valued
using a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks related to existing and future markets
and assessments of the life expectancy of the completed technology.
In-process technology that has not reached technological feasibility and that
has no alternative future use was valued using the same method. Expected
future cash flows associated with in-process technology are discounted
considering risks and uncertainties related to viability of and to the
potential changes in future target markets and to the completion of the
products expected to be ultimately marketed by Genzyme. The amount allocated
to in-process technology of $24.2 million was charged to operations in July
1996 upon completion of the acquisition.
NEOZYME II CORPORATION
On October 28, 1996, Genzyme, through Neozyme II Acquisition Corporation
("Acquisition Corp."), a wholly-owned subsidiary, completed its tender offer
for the outstanding units (the "Units") of Neozyme II Corporation ("Neozyme
II"), each Unit consisting of (i) one share of Neozyme II Callable Common
Stock ("Callable Common Stock"), $1.00 par value per share, and (ii) one
Callable Warrant (the "Callable Warrants") to purchase two shares of General
Division Stock and 0.135 share of GTR Stock, $0.01 par value per share of
Genzyme for $45 per Unit in cash. A total of 2,385,686 Units, or 98.8
percent, were tendered and accepted for payment resulting in payment of
$107.4 million in December of 1996.
On December 6, 1996, Neozyme II was merged with and into Acquisition Corp.
and as a result of the merger, all outstanding shares of Callable Common
Stock (other than shares held by Genzyme and its subsidiaries) were cancelled
and converted into the right to receive $29.00 in cash per share, for an
aggregate merger consideration of $0.9 million. The Callable Warrants
included in the untendered Units separated from the shares of Callable Common
Stock converted in the merger and accordingly 29,314 of such warrants became
exercisable on December 6, 1996. The exercise price of the Callable Warrants
is $44.202 and was determined by the average closing price of two shares of
General Division Stock and .135 share of GTR Stock for the 20 trading days
prior to December 6, 1996. The Callable Warrants will expire on December 31,
1998. The aggregate purchase price of $111.3 million consisted of $108.2
million of cash, warrants valued at $0.5 million and acquisition costs of
$2.6 million.
The excess purchase price was allocated to Neozyme II's only remaining assets
which were technologies still in the development stage. These technologies
consisted of specific programs for the treatment of cystic fibrosis and have
no alternative future use. Accordingly the statement of operations for the
year ended December 31, 1996 reflects a $106.5 million charge for in-process
technology and a related deferred tax benefit of $21.7 million which were
recorded upon consummation of the acquisition.
ALLOCATED TO THE TISSUE REPAIR DIVISION:
BIOSURFACE TECHNOLOGY, INC.
On December 15, 1994, Genzyme acquired BioSurface Technology, Inc.
("BioSurface") a developer of tissue repair technologies by issuing .575 of
one share of GTR Stock for each share of BioSurface common stock. In the
aggregate, 5,000,000 shares of GTR 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.
Pro forma information is not presented since the impact of the acquisition on
financial statement periods prior to the acquisition is not material.
PRO FORMA FINANCIAL INFORMATION
The following pro forma information presents the results of operations of
Genzyme, Genetrix, DSP and Neozyme II for the years ended December 31, 1996 and
1995, as if the acquisitions had been consummated on January 1, 1995. This pro
forma information does not purport to be indicative of what would have occurred
had the acquisition been made as of those dates or of results which may occur in
the future. The pro forma financial information does not include charges for
in-process technology of $24.2 million and $106.5 million, related to the DSP
and Neozyme II acquisitions, respectively which were recognized as expense upon
consummation of each acquisition in 1996.
72
<PAGE> 74
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues..................................................... $563,586 $476,850
Pro forma net income (loss).................................. 22,831 (7,557)
Attributable to General Division Stock:
Pro forma net income........................................ 65,136 14,473
Pro forma net income per General Division common
and common equivalent shares.............................. $ 0.89 $ 0.24
======== ========
Pro forma weighted average and common equivalent shares
outstanding............................................... 73,492 61,565
======== ========
Pro forma net income (loss) per Tissue Repair Division
common and common equivalent share......................... $ (3.38) $ (2.28)
</TABLE>
NOTE C. MAJORITY-OWNED SUBSIDIARIES
Investments in the Company's majority-owned subsidiaries were attributed to
the General Division on the Effective Date, December 16, 1994.
IG LABORATORIES, INC.
IG was an approximately 70%-owned subsidiary for the year ended December 31,
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 period from January 1, 1994 through September 30, 1994. (See Note D).
NOTE D. INVESTMENTS
<TABLE>
Consolidated investments in marketable securities at December 31 consisted of
the following:
<CAPTION>
1996 1995
-------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit........... $ 1,882 $ 1,882 $ 1,870 $ 1,870
Federal agency notes............... - - 26,731 26,767
Corporate notes.................... 54,732 54,726 80,576 80,646
U.S. Treasury notes................ - - 3,031 3,020
------- ------- -------- -------
$56,614 $56,608 $112,208 $112,303
======= ======= ======== ========
Long Term:
Federal agency notes............... - - $ 4,047 4,053
Corporate notes.................... 16,481 16,485 42,518 42,845
U.S. Treasury notes................ 22,010 21,730 22,351 22,663
------- ------- -------- -------
$38,491 $38,215 $ 68,916 $69,561
======= ======= ======== ========
</TABLE>
<TABLE>
Information regarding the range of contractual maturities of investments in
debt securities at December 31, 1996 is as follows:
<CAPTION>
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
----------------------------------------------------------------------------
<S> <C> <C>
Within 1 year................................... $56,614 $56,608
After 1 year through 2 years.................... 11,399 11,415
After 2 years through 10 years.................. 27,092 26,800
------- -------
$95,105 $94,823
======= =======
</TABLE>
Cash and cash equivalents, consisting principally of money market funds and
munipal notes are valued at cost plus accrued interest.
73
<PAGE> 75
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's investments in unconsolidated entities may be attributed to either
the General Division or Tissue Repair Division. As of December 31, 1996, all
such investments were attributed to the General Division. The following is a
summary of the allocation of these investments:
INVESTMENT IN NABI
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. In November 1995, Univax merged with North American
Biologicals, Inc.("NABI") and in connection with the merger the Company
received 526,315 shares of NABI common stock in exchange for the Series E
Stock. In April 1996, the Company recorded a realized gain of approximately
$1.7 million on the sale of the entire investment in NABI.
INVESTMENT IN ARONEX, INC.
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, 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 of Genzyme at fair market value. At
December 31, 1994, the fair value of the Argus stock was approximately $1.7
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 the Company's operations in 1994. In
September 1995, Argus combined with Triplex Pharmaceuticals and Oncologix to
form Aronex, Inc. and as a result, the Argus shares were redesignated as
Aronex shares. At December 31, 1996 and 1995, the investment in Aronex was
recorded at its fair market value of approximately $4.0 million and $3.7
million, respectively.
INVESTMENT IN CELTRIX In June 1994, the Company acquired 1,550,388 restricted
shares of Celtrix Pharmaceuticals, Inc. ("Centrix'), approximately 11.5% of
the common stock of Celtrix outstanding after the acquisition, for $10.0
million. The announcement of certain adverse events by Celtrix 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 the Company's 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"
in the consolidated balance sheets for Genzyme. At December 31, 1996 and 1995,
the Company's investment in Celtrix had a fair market value of approximately
$6.0 million and $7.7 million, respectively.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
Investment income for 1996 and 1995 includes gross realized losses of $47,000
and $110,000, respectively. Gross realized gains included in investment income
for 1995 and 1994 were $1.4 million, respectively. The realized gain on the
investment in NABI was reported in the gain on investments line item in the
Company's statement of operations for 1996.
Gross unrealized holding losses of $2.7 million and gross unrealized holding
gains of $2.3 million were recorded at December 31, 1996 in Stockholders'
equity as compared to unrealized holding gains of $2.1 million at December 31,
1995 of which $0.7 million represented an unrealized holding gain on the
Company's investment in NABI which was sold in 1996.
INVESTMENT IN GTC As of October 1994, the Company's percentage ownership of
GTC Common Stock ("GTC Stock") declined from approximately 73% to
approximately 40% due primarily to GTC's acquisition of TSI Corporation for
Stock and accordingly, the Company began accounting for its investment in GTC
under the equity method.
74
<PAGE> 76
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired approximately 2,308,800 of the 3,260,800 shares of GTC
Stock issued in 1995 which increased the Company's equity interest in GTC to 48%
as of December 31, 1995.
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 (the "GTC 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 Company
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. Pursuant to the terms of this agreement, GTC
borrowed $4.3 million in 1996 from the General Division, of which $1.7 million
of this debt was converted into 219,565 shares of GTC Stock, $1.2 million was
offset against amounts owed by the General Division to GTC for services provided
in relation to the AT-III program and $1.4 million was repaid by GTC with
accrued interest. As of December 31, 1996, GTC had no amounts outstanding under
the GTC Revolving Line of Credit.
On July 31, 1996, GTC sold 3,000,000 shares of GTC common stock to the public
for $4.00 per share. The General Division purchased 900,000 shares in the
offering. The offering resulted in an increase in the book value of the
Company's investment in GTC and the resulting gain was recorded in income in
1996. As of December 31, 1996, the Company's equity interest in GTC had declined
to 43%, primarily due to the issuance of shares of GTC Stock in the public
offering and as a result of option and warrant exercises.
<TABLE>
The fair market value of the GTC shares, based on quoted market prices, was
$45.5 million and $27.6 million at December 31, 1996 and 1995, respectively. GTC
reported a net loss of approximately $7.7 million for the year ended December
31, 1996. The Company reported equity in GTC's net losses of $2.4 million, $1.8
and $1.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Following are condensed statements of operations and balance sheet
data of GTC:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN THOUSANDS) 1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C>
Revenues......................... $46,834 $32,421 $9,471
Operating loss................... (7,253) (7,855) (5,434)
Net loss......................... (7,746) (4,133) (5,284)
DECEMBER 31,
---------------------
(DOLLARS IN THOUSANDS) 1996 1995
--------------------------------------------------------
Current assets................... $24,642 $16,564
Noncurrent assets................ 42,062 41,478
Current liabilities.............. 24,758 23,575
Noncurrent liabilities........... 6,742 7,179
</TABLE>
NOTE E. INVENTORIES
<TABLE>
Inventories at December 31 consist of the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------------
<S> <C> <C>
Raw materials................ $ 30,379 $12,634
Work-in-process.............. 38,203 14,821
Finished products............ 56,683 25,587
-------- -------
$125,265 $53,042
======== =======
</TABLE>
NOTE F. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
Property, plant, and equipment at December 31 includes the following
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
-----------------------------------------------------------------------
<S> <C> <C>
Plant and equipment.......................... $164,817 $109,035
</TABLE>
75
<PAGE> 77
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Land and buildings........................... 175,620 46,456
Leasehold improvements....................... 58,215 52,803
Furniture and fixtures....................... 14,714 7,530
Construction in progress..................... 69,286 178,083
-------- --------
482,652 393,907
Less accumulated depreciation.............. (88,813) (64,484)
-------- --------
Property, plant and equipment, net........... $393,839 $329,423
======== ========
</TABLE>
Depreciation and amortization expense was $23.1 million, $18.0 million, and
$13.5 million in 1996, 1995 and 1994, respectively.
The Company attributes its property, plant and equipment to either the General
Division or Tissue Repair Division based on use.
The Company has completed construction of a manufacturing facility at Allston
Landing in Boston, Massachusetts to produce a recombinant form of Ceredase(R)
enzyme ("Cerezyme(R)") and other products. The facility cost approximately
$154.1 million plus an additional $22.3 million of process validation and
optimization costs. On October 24, 1996, Genzyme received FDA approval to
manufacture the drug Cerezyme[R] in the Allston Landing facility.
As of December 31, 1996, the Company had capitalized approximately $154.1
million of expenditures related to this building and approximately $33.3 million
of gross process validation and optimization costs with related accumulated
amortization of $1.0 million related to other facilities. In 1996, 1995 and
1994, the Company capitalized approximately $2.2 million, $9.0 million and $9.2
million of interest costs, respectively, relating to this and other facility
construction. Upon receipt of FDA approval for the facility, the Company began
production and transferred the cost out of construction in progress and began
depreciating this facility in July 1996 using the units of production method of
depreciation. Depreciation expense for 1996 related to this facility was $1.7
million.
NOTE G. ACCRUED EXPENSES
<TABLE>
Accrued expenses at December 31 include the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Professional fees...................................... $ 4,402 $ 2,679
Compensation........................................... 22,626 12,951
Royalties.............................................. 8,323 6,702
Rebates................................................ 7,604 2,693
Interest............................................... 1,681 1,857
Other.................................................. 25,488 12,536
-------- --------
$ 70,124 $ 39,418
======== ========
</TABLE>
NOTE H. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Although the Company retains responsibility for the re-payment of all long-term
debt obligations, such debt and leases are allocated to either the General
Division or Tissue Repair Division for reporting purposes based on the intended
use of the funds borrowed under each instrument or facilities or equipment
leased.
<TABLE>
Long-term debt at December 31 is comprised of the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility.............................. $218,000 $ -
Convertible subordinated notes......................... - 100,000
Mortgage note payable, matures June 13, 1999........... 20,375 20,863
</TABLE>
76
<PAGE> 78
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Mortgage note payable, matures November 2014........... 3,298 3,356
Mortgage note payable, matures January 1, 2008......... 685 747
Term notes payable..................................... - 1,626
-------- --------
242,358 126,592
Less current portion................................... (999) (2,243)
-------- --------
$241,359 $124,349
======== ========
</TABLE>
CREDIT FACILITIES
In November 1996, Genzyme refinanced its existing $215.0 million line of credit
(the "Credit Line") with a revolving credit facility (the "Revolving Facility")
made available through a syndicate of commercial banks administered by Fleet
National Bank in the amount of $225.0 million. Amounts drawn under this facility
may be allocated to either the General Division or Tissue Repair Division. As of
December 31, 1996, the Company had $218.0 million of debt outstanding under the
Revolving Facility, due in November 1999, which had been allocated $200.0
million to the General Division and $18.0 million to GTR. The Company had an
interest-rate swap agreement with a notional amount of $100 million.
REVOLVING FACILITY The Company may obtain loans up to a maximum aggregate
principal amount outstanding at any time of $225.0 million under the terms of
the Revolving Facility. Loans bear interest at LIBOR plus an applicable
margin pursuant to the terms and conditions defined in the Credit Agreement.
The notes have certain covenants which require the Company to, among other
things, maintain certain levels of earnings and liquidity ratios. The stock
of Genzyme Securities Corporation, a Massachusetts Securities Corporation, is
pledged as collateral for this facility.
CREDIT LINE
On June 28, 1996, Genzyme's credit line with Fleet National Bank was
increased from $15.0 million to an aggregate of $215.0 million in connection
with the Company's acquisition of DSP (See Note D. - Acquisitions). Until
refinanced with the Revolving Facility in November 1996, borrowings under the
Credit line were allocated $200.0 million to the General Division to finance
the acquisition of DSP and $15.0 million to GTR to fund operations, each with
interest payable at LIBOR plus 5/8%. All funds outstanding under the Credit
Line were repaid before December 31, 1996 with funds borrowed under the
Revolving Facility.
6 3/4% CONVERTIBLE SUBORDINATED NOTES
In 1991, the Company issued 6 3/4% Convertible Subordinated Notes due
October 1, 2001 in the aggregate principal amount of $100.0 million for net
proceeds of $97.3 million. Deferred financing costs of $2.7 million, classified
as "Other noncurrent assets" on the combined balance sheets, were amortized to
expense over the term of the debt issue. Such Notes were allocated to the
General Division on the Effective Date, December 16, 1994. 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 December 16,
1994, would receive, in addition to the shares of General Division Stock into
which the Note was convertible, the same number of shares of GTR Stock as the
holder would have received had the holder converted the Note immediately prior
to the Effective Date. In March 1996, holders of the Notes converted such notes
into General Division Stock and TR Stock pursuant to the amended terms of the
notes. Holders of the Notes received 37.826 shares of General Division Stock
and 2.553 shares of GTR Stock in conversion of each $1,000 Note. As a result of
the conversion, $101.4 million, the face value of the debt less the unamortized
debt financing costs was credited to equity.
MORTGAGE NOTES
The Company's three mortgage notes have been attributed to the General Division.
The mortgage note due June 1999 is collateralized by land and buildings with a
net book value of $28.5 million at December 31, 1996, 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 $5.1 million at December 31, 1996 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.
77
<PAGE> 79
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST RATE HEDGE AGREEMENTS
In December 1996, the Company entered into a $100 million interest rate swap
contract (the "Swap Contract") to effectively convert the variable interest rate
on borrowings under the Revolving Facility to fixed interest rates. Net payments
made or received under the Swap Contract are recorded as adjustments to interest
expense. At December 31, 1996 the Swap Contract had a termination value gain of
$125,000.
OPERATING LEASES
Total rent expense under operating leases was $12.8 million, $10.0 million, and
$8.7 million in 1996, 1995 and 1994 respectively. The Company leases facilities
and personal property under certain operating leases in excess of one year.
<TABLE>
Future minimum payments due under the Company's long-term obligations and
capital and operating leases are as follows:
<CAPTION>
LONG-TERM CAPITAL OPERATING
(DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES
-----------------------------------------------------------------------
<S> <C> <C> <C>
1997............................... $ 3,200 $338 $ 13,033
1998............................... 2,637 316 12,557
1999............................... 277,805 14 11,326
2000............................... 510 - 10,176
2001............................... 504 - 9,222
Thereafter......................... 5,795 - 49,283
-------- ---- --------
Total minimum payments.......... 290,451 668 105,597
Less: interest..................... (48,093) (29) -
-------- ---- --------
$242,358 $639 $105,597
======== ==== ========
</TABLE>
In January 1997, the General Division elected to re-pay $100.0 million of its
outstanding debt plus accrued interest of $0.5 million.
NOTE I. STOCKHOLDERS' EQUITY
Immediately prior to the Effective Date, as defined in Note A, approximately
31,582,000 shares of Genzyme common stock were reserved for issuance under the
Company's 1990 Equity Incentive Plan, 1988 Director Stock Option Plan, 1990
Employee Stock Purchase Plan, outstanding warrants (the "Warrants"), and the
conversion of the 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 GTR Stock that the
holder would have received if the holder had exercised the option immediately
prior to the Effective Date. The Warrants provide that the holder of the Warrant
is entitled to receive the number of shares of General Division Stock and GTR
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 would receive, in addition to the shares of General Division
Stock into which the Note is convertible, the same number of shares of GTR Stock
as the holder would have received had the holder converted the Note immediately
prior to the Effective Date. In March 1996, holders of the notes converted such
notes into General Division Stock and GTR Stock. Holders of the notes received
37.826 shares of General Division Stock and 2.553 shares of GTR Stock in
conversion of each $1,000 note.
78
<PAGE> 80
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $42.3 million
after underwriting discounts and commissions. In October 1995, Genzyme sold
5,750,000 shares of General Division Common Stock to the public for $25.63 per
share for net proceeds of $141.3 million.
At December 31, 1996, approximately 15,768,006 shares of General Division Stock
and 3,664,585 shares of GTR 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.
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 SPLIT
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 Stock 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.
DEFERRED COMPENSATION PLAN
The Company's Directors' Deferred Compensation Plan (the "Deferred Compensation
Plan") allows each member of the Genzyme Board who is not also an officer or
employee of Genzyme to defer receipt of all or a portion of the cash
compensation payable to him or her as a director of Genzyme. Compensation may
be deferred until the termination of services as a director or, subject to
certain restrictions, such other date as may be specified by the director. All
of the current director of Genzyme, other than Mr. Termeer, are eligible to
participate in the plan and as of December 31, 1996, six of the directors have
elected to participate in the plan. The Company has reserved 50,000 shares of
GGD Stock and 100,000 shares of GTR Stock to cover distributions of shares
credited to stock accounts under the Deferred Compensation Plan (subject in
each case to adjustment for stock splits, stock dividends and certain
transactions affecting Genzyme's capital stock). As of December 31, 1996, no
shares of General Division Stock or GTR Stock credited to stock accounts under
the Deferred Compensation Plan have been distributed to participants in the
Deferred Compensation Plan.
STOCK OPTIONS
Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"),
options may be granted to purchase an aggregate of 19,800,000 shares of General
Division Stock and 3,300,000 shares of GTR Stock. The Plan allows the granting
of stock options at not less than fair market value at date of grant, and stock
appreciation rights, performance shares, restricted stock and stock units to
employees and consultants of the Company, each with a maximum term of ten years.
In addition, the Company's has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 200,000 shares
and 70,000 shares, respectively, of General Division Stock and GTR Stock are
automatically granted at fair market value to members of the Board of Directors
of the Company upon their election or reelection as Directors. For each year of
a director's term of office, he or she receives an option to purchase 4,000
shares of General Division Stock and a number of GTR Stock options with a market
value equal to one-quarter of the market value of the stock subject to the
General Division Stock options. All options expire no later than ten years after
the initial grant date and vest over various periods.
At the Effective Date of the Genzyme Stock Proposal, Genzyme granted initial
options to purchase a total of 939,851 shares of GTR 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 GTR 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 GTR 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 1996,
GTR recorded $285,000 of related compensation expense and will record the
balance of $220,000 over the next 2 years
<TABLE>
Stock option activity is summarized below:
<CAPTION>
SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ ---------------- -----------
<S> <C> <C> <C>
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31, 1993.............. 7,690,708 15.35
Granted..................................... 3,238,728 14.93
Exercised................................... (132,756) 8.83
Forfeited and cancelled..................... (423,526) 19.08
Converted at Effective Date................. (10,373,154) 15.15
----------
Outstanding at December 31, 1994.............. -
==========
GENERAL DIVISION STOCK
Converted at Effective Date................. 10,373,154 15.15
Granted..................................... 133,348 14.03
Exercised................................... (2,500) 5.85
Forfeited and cancelled..................... (22,302) 17.40
----------
Outstanding at December 31, 1994.............. 10,481,700 15.13 4,683,967
Granted..................................... 4,141,502 23.25
</TABLE>
79
<PAGE> 81
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Exercised................................... (2,007,654) 13.97
Forfeited and cancelled..................... (442,882) 14.96
----------
Outstanding at December 31, 1995.............. 12,172,666 17.79 5,138,502
Granted..................................... 3,442,484 29.16
Exercised................................... (906,041) 15.70
Forfeited and cancelled..................... (643,626) 22.81
----------
Outstanding at December 31, 1996.............. 14,065,483 20.48 6,505,835
==========
TR STOCK
Converted at Effective Date................. 464,824 5.01
Granted..................................... 940,976 4.75
----------
Outstanding at December 31, 1994.............. 1,405,800 4.84 207,583
Granted..................................... 1,153,053 12.86
Exercised................................... (63,608) 5.15
Forfeited and cancelled..................... (76,202) 4.96
----------
Outstanding at December 31,1995............... 2,419,043 8.66 713,584
Granted..................................... 830,916 12.88
Exercised................................... (102,921) 5.23
Forfeited and cancelled..................... (159,702) 9.50
----------
Outstanding at December 31,1996............... 2,987,336 9.92 1,031,373
==========
</TABLE>
The total exercise proceeds for all options outstanding at December 31, 1996 is
approximately $288,120,000 and $29,646,000 for General Division Stock and TR
Stock, respectively. Information regarding the range of option prices as of
December 31, 1996 is as follows:
<TABLE>
GENERAL DIVISION STOCK:
<CAPTION>
EXERCISABLE
-----------
RANGE OF WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICES AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
OUTSTANDING CONTRACTUAL PRICE OF OPTIONS PRICE
LIFE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.79 - $12.09 1,583,744 3.04 $ 7.87 1,583,344 $ 7.87
$12.38 - $14.53 1,508,927 7.36 $14.03 438,382 $13.53
$14.56 - $15.14 1,497,478 7.27 $14.97 587,858 $14.92
$15.19 - $19.38 1,775,540 6.01 $17.74 1,370,438 $17.69
$19.42 - $21.00 1,553,430 8.17 $19.55 591,411 $19.59
$21.07 - $24.88 1,499,327 6.69 $23.73 1,016,437 $23.50
$25.00 - $28.00 2,035,931 8.84 $26.99 417,938 $25.81
$28.06 - $30.25 2,346,646 9.24 $30.16 447,401 $30.11
$30.31 - $37.25 257,676 8.90 $33.35 52,626 $31.64
$38.00 - $38.00 6,784 9.09 $38.00 0 $38.00
- -----------------------------------------------------------------------------------------------------------
$ 3.79 - $38.00 14,065,483 7.27 $20.48 6,505,835 $17.34
</TABLE>
<TABLE>
TISSUE REPAIR STOCK:
<CAPTION>
EXERCISABLE
-----------
RANGE OF WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICES AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
OUTSTANDING CONTRACTUAL PRICE OF OPTIONS PRICE
LIFE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.32 - $ 4.25 157,420 4.48 $ 3.14 122,017 $ 2.83
$ 4.34 - $ 4.75 766,711 7.95 $ 4.75 461,056 $ 4.75
$ 4.78 - $ 5.49 153,148 6.70 $ 5.19 59,292 $ 5.29
$ 5.50 - $ 6.00 331,471 8.25 $ 5.97 130,277 $ 5.97
$ 6.00 - $11.88 250,390 7.71 $ 8.99 101,236 $ 7.96
</TABLE>
80
<PAGE> 82
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
$12.25 - $12.25 466,284 9.30 $12.25 87,799 $12.25
$12.38 - $17.31 248,694 8.75 $15.10 55,398 $15.64
$17.50 - $17.50 537,207 8.96 $17.50 8,576 $17.50
$17.63 - $25.50 68,136 9.09 $20.77 5,722 $17.71
$25.75 - $25.75 7,875 7.66 $25.75 0 $ 0.00
- -----------------------------------------------------------------------------------------------------------
$ 1.32 - $25.75 2,987,336 8.20 $ 9.92 1,031,373 $ 6.42
</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, 1,500,000 shares of the General Division Stock are
authorized, of which 291,053, 285,868 and 259,876 shares were issued in 1996,
1995 and 1994, respectively, and 600,000 shares of TR Stock are authorized, of
which 325,300, 269,920, and 3,906 shares of TR Stock were issued in 1996, 1995
and 1994, respectively.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related Interpretations in accounting for
its three stock-based compensation plans, the 1990 Equity Incentive Plan (a
stock option plan), the 1990 Employee Stock Purchase Plan (a stock purchase
plan) and the 1988 Director Plan and accordingly, no compensation expense has
been recognized for options granted and shares purchased under the plans
provisions of these plans. Had compensation expense for the stock-based
compensation plans been determined based on the fair value at the grant dates
for options granted and shares purchased under the plans consistent with the
method of Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock-based Compensation", the net (loss) income and (loss)
earnings per share would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(Amounts in thousands, except per share data) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
CONSOLIDATED
Net income (loss):
as reported ............................... $(72,817) $ 21,650
pro forma ................................. $(86,293) $ 17,261
GENERAL DIVISION
Net income (loss):
As reported ............................... $(30,502) $ 43,680
Pro forma ................................. $(40,558) $ 40,429
Primary earnings per share:
As reported ............................... $ (0.45) $ 0.73
Pro forma ................................. $ (0.59) $ 0.67
Fully diluted earnings per share:
As reported ............................... $ (0.45) $ 0.66
Pro forma ................................. $ (0.59) $ 0.61
TISSUE REPAIR
Net income (loss):
As reported ............................... $(42,315) $(22,030)
Pro forma ................................. $(45,735) $(23,168)
Primary and fully diluted loss per share:
As reported ............................... $ (3.38) $ (2.28)
Pro forma ................................. $ (3.65) $ (2.40)
</TABLE>
81
<PAGE> 83
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995 and additional awards are
anticipated in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
the General Division has assumed a risk-free interest rate equal to
approximately 6.37% and 6.33%, expected volatility of 45%, zero dividend yields
and expected lives of four years for 1996 and 1995, respectively. The average
fair value of the options granted during 1996 and 1995 is estimated as $11.98
and $11.52, respectively on the date of grant. In computing these pro forma
amounts, the Tissue Repair Division has assumed a risk-free interest rate equal
to approximately 6.37% and 6.33%, expected volatility of 80%, zero dividend
yields and expected lives of four years for 1996 and 1995, respectively. The
average fair value of the options granted during 1996 and 1995 is estimated as
$9.23 and $10.06, respectively on the date of grant.
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 GTR Stock of a right (a "GTR Stock
Right") on each outstanding share of GTR Stock. The Restated Rights Agreement
provides that each General Division Stock Right, which replaced the Common Stock
Right, and each GTR 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 $26, subject to adjustment, and (ii) in the case of a GTR
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.
<TABLE>
STOCK WARRANTS
The Company has issued warrants which, when exercised, grant the holders two
shares of General Division Stock and .135 share of GTR Stock for each warrant
exercised. These warrants were granted in exchange for the receipt of options to
purchase the partnership interests of Genzyme Development Partners, L.P.
("GDP"), 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 attributed to the General Division (see "GTR
Designated Shares"). The outstanding warrants were issued under the following
terms:
<CAPTION>
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- ------------------------ --------- --------- ---------------
<S> <C> <C> <C> <C>
1992 Investors in Neozyme II:
Callable Warrants 29,314 $44.202 December 6, 1996 to
December 31, 1998
1995 Dr. Richard Warren 6,005 $42.670 Through September 30, 2000
</TABLE>
The warrants granted in exchange for the receipt of options to purchase the
partnership units of GDP expired on October 31, 1996.
On October 28, 1996, the Company completed a tender offer for the outstanding
Units of Neozyme II and acquired 2,385,686 of the 2,415,000 Units outstanding
(See Note B. Acquisitions). On December 6, 1996, Neozyme II was merged with and
into a subsidiary of Genzyme, and the remaining 29,314 Callable Warrants
included in the untendered Units separated from the shares of Callable Common
Stock converted in the merger and became exercisable.
<TABLE>
Warrant activity is summarized below:
<CAPTION>
WARRANTS WARRANT PRICE
-------- -------------
<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
</TABLE>
82
<PAGE> 84
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Granted................................... 6,005 42.67
Exercised................................. (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995.............. 5,597,241 16.01 - 42.67
---------
Exercised................................. (3,170,551) 16.01 - 38.25
Tendered.................................. (2,385,686) N/A
Expired................................... (5,685) 16.01 - 38.25
---------
Outstanding at December 31, 1996.............. 35,319 42.67 - 44.20
=========
</TABLE>
Included in other current assets is $87.0 million for proceeds from warrant
exercises at the end of the year.
GTR DESIGNATED SHARES
Pursuant to Genzyme's Articles of Organization, as amended, GTR Designated
Shares are authorized shares of GTR Stock which are not issued and outstanding,
but which the Genzyme Board may from time to time issue, sell or otherwise
distribute without allocating the proceeds or other benefits of such issuance,
sale or distribution to GTR. GTR Designated Shares are created in certain
circumstances when cash or other assets are transferred from the General
Division to the Tissue Repair Division. The number of GTR Designated Shares will
be decreased by the number of shares of GTR Stock issued by Genzyme, the
proceeds of which are allocated to the General Division; the number of shares of
GTR Stock issued as a dividend to holders of General Division stock; and the
number of shares of GTR Stock issued upon the conversion of convertible
securities, including the Notes, attributed to the General Division. In
addition, the number of GTR Designated Shares can be increased as a result of
certain inter-division transactions.
At the Effective Date, December 14, 1994, 5,000,000 GTR Designated Shares were
established. As a result of the distribution of approximately 3,300,000 shares
of GTR Stock to holders of General Division Stock, the number of GTR Designated
Shares were reduced by a corresponding amount. The remaining 1,700,000 GTR
Designated Shares were reserved for issuance upon the exercise of Genzyme stock
options and warrants and the conversion of Genzyme's convertible notes which
were outstanding on the Effective Date.
83
<PAGE> 85
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the stock proposal Genzyme retains an option to allocate to GTR, at
$10 per GTR Designated Share, up to $30 million from the General Division (the
"Purchase Option") in exchange for a maximum of 3,000,000 of GTR Designated
Shares to be issued in connection with the exercise of the Purchase Option. In
June 1996, pursuant to the terms of the Purchase Option, the Genzyme Board
elected to allocate $10 million in cash from the General Division to the Tissue
Repair Division in exchange for 1,000,000 GTR Designated Shares which were
reserved for issuance at the sole discretion of the Genzyme Board for the
benefit of the General Division stockholders.
In October 1996, the Genzyme Board approved the allocation of up to $20 million
in cash from the General Division to the Tissue Repair Division (the "GTR Equity
Line") to provide initial funding for the joint venture with Diacrin, in
exchange for an increase in the number of GTR Designated Shares at a rate
determined by dividing the amount of cash so allocated by the average of the
daily closing prices of one share of GTR Stock for the 20 consecutive trading
days commencing on the 30th trading day prior to the date of allocation. As of
December 31, 1996, the Company had allocated $1.9 million from the General
Division to the Tissue Repair Division under the GTR Equity Line and 231,645 GTR
Designated Shares were reserved for issuance at the Genzyme Board's discretion.
If, as of May 31 of each year starting May 31, 1997, the number of GTR
Designated Shares on such date (not including those reserved for issuance with
respect to General Division convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds ten percent (10%) of the number of shares of GTR Stock then issued and
outstanding, then substantially all GTR Designated Shares will be distributed to
holders of record of General Division Stock, subject to reservation of a number
of such shares equal to the sum of (a) the number of GTR Designated Shares
reserved for issuance upon the exercise or conversion of General Division
convertible securities and (b) the number of GTR Designated Shares reserved by
the Genzyme Board as of such date for sale not later than six months after such
date, the proceeds of which sale will be allocated to the General Division.
DIVIDEND POLICY
The Company has never paid any cash dividends on shares of its capital stock.
Genzyme currently intends to retain its earnings to finance future growth and
therefore does not anticipate paying any cash dividends on Genzyme Common Stock
in the foreseeable future.
<TABLE>
GTR Designated Shares activity is summarized below:
<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
---------
Stock options exercised................................. (42,728)
Stock warrants exercised............................ (426,984)
Convertible notes conversion........................ (255,249)
Increase from equity line........................... 231,645
Exercise of call.................................... 1,000,000
---------
Balance at December 31, 1996..................... 1,793,592
=========
</TABLE>
NOTE J. RESEARCH AND DEVELOPMENT AGREEMENTS
<TABLE>
Revenues from research and development agreements with related parties include
the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees for research and development activities:
Surgical Aids Partnership ................ -- -- 913
Neozyme II ............................... 19,799 24,198 17,785
GTC ...................................... 3,212 2,560 2,185
------- ------- -------
$23,011 $26,758 $20,883
======= ======= =======
</TABLE>
The Company's allocates all research and development agreements ("R&D
Agreements") with unconsolidated affiliates to either the General Division or
Tissue Repair Division based upon the business nature of such agreements.
GENZYME GENERAL:
- ----------------
THE SURGICAL AIDS PARTNERSHIP
Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme,
is the General Partner of Genzyme Development Partners, L.P. (the
"Partnership" or the "Surgical Aids Partnership"), a Delaware limited
partnership which was formed in September 1989 with the objective to
develop, produce and derive income from the sale of products (the
"Surgical Products") based on hyaluronic acid ("HA"). Such Surgical
Products are intended to be used to limit the incidence and severity of
postoperative adhesions and, in arthroscopic procedures of the joints, as
a synovial fluid replacement. In September 1989, the Company entered into
a development contract valued at approximately $37.0 million with the
Surgical Aids Partnership to perform research and development of the
Products and received a technology license fee of $1.5 million in November
1989 from the Partnership. The Company was reimbursed for its development
costs plus 10% through the first quarter of 1994 when the Partnership's
funds were exhausted.
The Company has an option (the "Purchase Option") to purchase all of the
outstanding partnership interests for a payment of approximately $26.0
million 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 and
certain returns have been earned by the Partnership. Upon exhaustion of
the Partnership's available funds, the terms of the Purchase Option
provided that the Purchase Option would terminate, and the Partnership
would be free to sell, license or otherwise realize upon the value of
its technology, unless Genzyme committed 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 marketing approval
for one of the HAL(TM) products is obtained, whichever was shorter.
Genzyme elected without obligation to fund these activities in 1994,
1995, 1996 using General Division cash and spent approximately $6.5
million, $6.4 million and $6.0 million on the Partnership's programs in
1994, 1995 and 1996, respectively. On August 13, 1996, the U.S. Food and
Drug Administration ("FDA") granted approval to market Seprafilm[R] for
use in any open abdominal or pelvic surgery at
38
<PAGE> 86
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which time Genzyme was no longer required to commit on an annual basis to
provide additional funding for the development programs as a condition of
maintaining its Purchase Option. The Company has agreed to fund the
Partnership's research and development programs through 1997 but, as
General Partner, believes that additional funds will be required to
complete the development, clinical testing and commercialization of the
Partnership's products.
The Company and the Partnership formed a joint venture (the "Joint
Venture"), in September 1989 for the purpose of manufacturing and
marketing the Surgical Products in the United States and Canada for use in
human clinical trials or human surgical procedures, other than in
ophthalmic surgery. In December 1994, the Company allocated its interests
in the Joint Venture to the General Division which acts as General Partner
in the Partnership on behalf of the Company. The Partnership has
contributed its technology and $0.2 million to the Joint Venture and the
General Division has contributed its agreement to manufacture and market
the Surgical Products, to make non-interest bearing loans to the Joint
Venture in the amount of any working capital deficiency, agreed to make
capital contributions to the extent deemed necessary by the two venturers
in connection with the business of the Joint Venture and to allow the use
of such trademarks, tradenames and logos as the venturers shall determine
to be necessary and advisable for manufacturing and marketing the Surgical
Products within the United States and Canada. The Joint Venture began to
engage in active business after receipt of FDA marketing approval for
Seprafilm[TM] in August 1996. For the year ended December 31, 1996, the
Joint Venture earned revenues of $0.5 million from the sale of Surgical
Products and incurred net losses of $3.4 million, primarily attributable
to costs associated with the introduction of the Surgical Products to the
healthcare marketplace. The losses were allocated $3.2 million directly to
the General Division as a joint venturer and $0.2 million to the General
Division as the General Partner of the Partnership, the latter
representing both the General Partner's 1% interest in the losses of the
Joint Venture and the re-allocation of the limited partners' 99% share of
the Partnership's portion of the Joint Ventures losses to the General
Partner pursuant to the terms of the Partnership agreement. Joint Venture
financial statements are not presented as the impact of the Joint
Venture's activities on the Company's statement of operations for the year
ended December 31, 1996 is not considered to be material.
NEOZYME II
In 1992, the Company entered into a development contract with Neozyme II
Corporation ("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. Pursuant to the terms of
the Development Agreement between Genzyme and Neozyme II, Neozyme II was
required to reimburse the Company for research and development expenses
incurred by Genzyme on behalf of the Neozyme II development programs and
fulfilled this obligation through October 1996, at which time Genzyme
acquired 98.8 percent outstanding Neozyme II Units through a tender offer.
(See Note B. Acquisitions)
GTC
See "Note D. Investments" for a complete description of the research and
development funding agreement between the Company and GTC.
TISSUE REPAIR DIVISION:
- -----------------------
DIACRIN/GENZYME LLC On October 1, 1996, Diacrin/Genzyme LLC was
established as a joint venture between the GTR and Diacrin to develop and
commercialize products and processes for use in the treatment of
Parkinson's disease and Huntington's disease in humans using porcine fetal
cells. Under the terms of the joint venture agreement, GTR will provide
80% of the next $50 million in funding for products to be developed by the
joint venture. After that, all costs will be shared equally between GTR
and Diacrin. Profits from the joint venture will be shared by the two
parties. The General Division has agreed to provide funding to GTR in
support of GTR's joint venture efforts in exchange for GTR Designated
Shares. In 1996, the General Division allocated $1.9 million in cash and
231,645 GTR Designated Shares were reserved for issuance at the Genzyme
Board's discretion. As of December 31, 1996, GTR provided $1.9 million of
funding to the joint venture and GTR realized a net loss of $1.7 million
from the joint venture. Joint Venture financial statements are not
presented as the impact of the Joint Venture's activities on the Company's
statement of operations for the year ended December 31, 1996 is not
considered to be material.
NOTE K. COMMITMENTS AND CONTINGENCIES
In December 1994, the Company fully settled litigation brought by Granada
BioSciences, Inc., Houston, Texas, by payment of $2.0 million 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.
39
<PAGE> 87
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From time to time the Company has been subject to legal proceedings and claims
arising in connection with its business. At December 31, 1996, there were no
asserted claims against the Company which, in the opinion of management, if
adversely decided would have a material adverse effect on the Company's
financial position and results of operations.
NOTE L. INCOME TAXES
<TABLE>
Income (loss) before income taxes and the related income tax expense (benefit)
are as follows for the year ended December 31:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (includes $130.3 million in charges for purchased
research and development and acquisition expenses in 1996,
and includes $15.2 million and $11.2 million in charges
for purchased research and development in 1995 and 1994,
respectively) ................................................ $(37,615) $ 40,551 $ 27,217
Foreign ........................................................ 10,308 2,748 3,567
-------- -------- --------
Total .......................................................... $(27,307) $ 43,299 $ 30,784
======== ======== ========
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
------------------------------------------------------------------------------------------------------
Currently payable:
Federal ..................................................... $ 23,174 $ 11,051 $ 8,565
State ....................................................... 4,689 4,803 3,627
Foreign ..................................................... 3,616 1,367 850
-------- -------- --------
Total current ............................................ 31,479 17,221 13,042
Deferred:
Federal ..................................................... (28,448) 4,507 1,092
State ....................................................... 164 (79) 347
-------- -------- --------
Total deferred ........................................... (28,284) 4,428 1,439
-------- -------- --------
Provision for income taxes $ 3,195 $ 21,649 $ 14,481
======== ======== ========
</TABLE>
<TABLE>
Provisions for income taxes were at rates other than the U.S. Federal statutory
tax rate for the following reasons:
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------------------
<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 ....................... 1.4 1.0 2.5
State taxes, net ................................................ 5.2 5.2 5.7
Foreign sales corporation ....................................... (3.6) (2.0) (4.3)
Nondeductible amortization ...................................... 3.6 1.9 2.2
Benefit of tax credits .......................................... -- -- (2.9)
Other, net ...................................................... 3.7 1.1 (6.3)
Utilization of operating loss carryforwards ..................... (4.5) (5.2) --
----- ---- ----
Effective tax rate before certain charges expense ............. 40.8 37.0 31.9
Charge for purchased research and development net of
related tax benefits ........................................... (36.3) 13.0 14.9
----- ---- ----
Effective tax rate expense .................................... 4.5% 50.0% 46.8 %
===== ==== ====
</TABLE>
At December 31 the components of net deferred tax assets were as follows :
40
<PAGE> 88
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
(DOLLARS IN THOUSANDS) 1996 1995
-------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,427 $ 10,216
Intangible amortization 47,988 32,161
Realized and unrealized capital losses 10,798 10,581
Reserves and other 19,670 9,609
-------- --------
Gross deferred tax asset 88,883 62,567
Valuation allowance (15,299) (20,637)
-------- --------
Net deferred tax asset 73,584 41,930
Deferred tax liabilities:
Depreciable assets (13,871) (10,556)
-------- --------
Net deferred tax asset $ 59,713 $ 31,374
======== ========
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses and the purchase of in-process
research and development, the Company placed a valuation allowance of $15.3
million and $20.6 million for December 31, 1996 and December 31, 1995,
respectively, against otherwise recognizable deferred tax assets. During 1996,
the Company determined that it is more likely than not that certain deferred
tax assets will be realized and, accordingly, eliminated the related valuation
allowance of approximately $4.3 million, of which approximately $1.5 million
was recorded as a reduction of goodwill. Realization of the net deferred tax
assets is dependent on generating sufficient taxable income prior to the
expiration of loss carryforwards. Although realization is not assured,
management believes that it is more likely than not that all of the net
deferred tax assets will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At December 31, 1996, 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, 1996 the Company had U.S. net operating loss carryforwards of
$27 million for income tax purposes. These carryforwards expire from 2001 to
2011. Utilization of tax net operating loss carryforwards may be limited under
Section 382 of the Internal Revenue code of 1986. At December 31, 1996 the
Company also had UK operating loss carryforwards for income tax purposes of
approximately $2.9 million which are indefinitely available to offset future
taxable income in the UK.
NOTE M. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all employees of the Company with
the exception of employees of DSP which have a separate retirement savings plan.
The plan allows employees to make contributions up to a specified percentage of
their compensation, a portion of which are matched by the Company. The Company
contributed $1.1 million, $0.7 million, and $0.6 million to the plan in 1996,
1995 and 1994, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and its foreign subsidiaries. Pension expense for 1996, 1995
and 1994 was $601,000, $498,000 and $266,000, respectively. Pension costs are
funded as accrued. Actuarial and other disclosures regarding the plans except
for the plan of DSP and its subsidiary in Germany are not presented because they
are not material.
DSP has a defined benefit pension plan, which covers substantially all U.S.
employees of DSP, excluding those employed by DSP's Snowden Pencer Inc.
subsidiary. Plan assets consist primarily of U.S. government and corporate
securities.
The funded status of the pension plan at December 31, 1996 was as follows
(in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Actual present value of accumulated benefit obligation:
Vested........................................................ $ 4,720
Nonvested..................................................... 481
-------
$ 5,201
=======
Projected benefit obligation.................................... $ 5,201
Plan assets at market value..................................... 4,338
-------
Funded status -- plan assets less projected benefit obligation.. $ (863)
Unrecognized net loss from past experience different from that
assumed and changes in actuarial assumptions.................. (94)
-------
Accrued pension cost.......................................... $ (957)
=======
Assumptions used in computation of 1996 are as follows:
<CAPTION>
1996
-------
<S> <C>
Weighted average discount....................................... 7.75%
Expected long-term rate of return on assets..................... 9.00%
Rate of increase in future compensation levels.................. Plan Frozen
Benefits under the pension plan are generally based on years of service
and the employee's career earnings. Employees become fully vested after
five years.
A summary of the components of net periodic pension cost for 1996 is as
follows (thousands):
<CAPTION>
1996
-------
<S> <C>
Service cost.................................................... $ 0
Interest cost................................................... 195
Actual return on plan assets.................................... (276)
Net amortization and deferral................................... 94
-------
Net periodic pension cost..................................... $ 13
=======
DSP's German subsidiary also has a defined benefit pension plan for its
employees. The funded status of the pension plan at December 31, 1996 was
as follows (in thousands):
<CAPTION>
1996
-------
<S> <C>
Actual present value of accumulated benefit obligation:
Vested........................................................ $ 1,592
Nonvested..................................................... 140
-------
$ 1,732
=======
Projected benefit obligation.................................... $ 1,998
Plan assets at market value..................................... --
-------
Funded status -- plan assets less projected benefit obligation.. $(1,998)
Unrecognized net loss from past experience different from that
assumed and changes in actuarial assumptions.................. (353)
-------
Accrued pension cost.......................................... $(2,351)
=======
Assumptions used in computation of 1996 are as follows:
<CAPTION>
1996
-------
<S> <C>
Expected long-term rate of return on assets..................... 6.5%
Rate of increase in future compensation levels.................. N/A
Weighted average discount....................................... 3.0%
Benefits under the pension plan are generally based on years of service
and the employee's career earnings. Employees become fully vested after
five years.
A summary of the components of net periodic pension cost for 1996 is as
follows (thousands):
<CAPTION>
1996
-------
<S> <C>
Service cost.................................................... $ 129
Interest cost................................................... 129
Net amortization and deferral................................... (20)
-------
Net periodic pension cost..................................... $ 238
=======
</TABLE>
DSP has a savings and investment plan for all U.S. employees. Employee
contributions to the savings plan can be made both on a pre-tax (salary
deferral) and after-tax basis. DSP may make a matching contribution in an
amount equal to 100% of the first 2% of employee salary deferral contributions
and 50% of the next 4% of employee salary deferrals (subject to certain
limitations as defined in the plan). DSP matched pre-tax salary deferrals
totaling $332,000 in fiscal 1996.
Employees of Snowden Pencer, Inc., a subsidiary of DSP, also participate in a
noncontributory profit sharing plan. The plan provides for discretionary
contributions to be determined annually. In 1996, DSP recorded $100,000 charge
for contributions to the plan.
NOTE N. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The Company operates in the human healthcare industry and manufactures and
markets its products in two major geographic areas, the United States and
Europe. The Company's principal manufacturing facilities are located in the
United States, United Kingdom, Switzerland and Germany. The Company purchases
products from its British, Swiss and German subsidiaries for sale to customers
in the United States. Transfer prices from the foreign subsidiaries are intended
to allow the United States parent to produce profit margins commensurate with
its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary
European distributor of the Company's therapeutic products.
Certain information by geographic area follows (dollars in thousands):
41
<PAGE> 89
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
UNITED
STATES NETHERLANDS OTHER ELIMINATION COMBINATION
------ ----------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996
----
Net sales-unaffiliated customers ... $ 361,635 $56,865 $ 74,933 $ -- $ 493,433
Transfers between geographic areas . 101,786 33,659 34,050 (169,495) --
---------- ------- -------- --------- ----------
463,421 90,524 108,983 (169,495) 493,433
Pre-tax income (loss) .............. (72,439) 920 10,156 (8,259) (69,622)
Net income (loss) .................. (51,661) 520 9,193 (30,869) (72,817)
Assets ............................. 1,210,534 33,500 110,890 (85,636) 1,270,508
Liabilities ........................ 306,618 31,930 29,651 368,199
1995
----
Net sales unaffiliated customers . $ 252,358 $70,532 $ 33,933 $ -- $ 356,823
Transfers between geographic 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 geographic 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
</TABLE>
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, France, Japan, Sweden, Switzerland, Italy and Germany. Export
sales from the United States were $27.4 million, $20.5 million, and $23.9
million in 1996, 1995 and 1994, respectively. Export sales by the Netherlands
subsidiary amounted to $56.9 million and $66.2 million in 1996 and 1995,
respectively. The Company's results of operations are highly dependent upon the
sales of Ceredase(R)/Cerezyme(R) enzyme. In 1996, 1995 and 1994, the Company
marketed its Ceredase(R)/Cerezyme(R) enzyme product directly to physicians,
hospitals and treatment centers, and sold products representing approximately
12%, 14% and 17%, respectively, of net revenue to an unaffiliated distributor.
Otherwise, the credit risk associated with trade receivables is mitigated due to
the large number of customers and their broad dispersion over different
industries and geographic areas.
NOTE O. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1996, 1995, and 1994 are displayed in
the following table.
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1996
- ----
Net sales ............................... $113,497 $115,635 $142,883 $146,739
Gross profit ............................ 63,459 65,451 73,212 81,299
Net income (loss) (2) ................... 10,292 9,784 (15,840) (77,053)
Income per share (1):
</TABLE>
42
<PAGE> 90
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Attributable to General Division Stock:
Primary ............................... 0.27 0.27 (0.09) (0.91)
Fully diluted ......................... 0.25 0.27 (0.09) (0.91)
Attributable to GTR Stock .............. (0.71) (0.83) (0.78) (1.02)
1995
- ----
Net sales ................................. $ 88,189 $ 93,605 $ 95,919 $106,070
Gross profit .............................. 47,683 48,433 53,185 57,690
Net income (3) ............................ 8,056 7,940 10,710 (5,056)
Income (loss) per share (1):
Attributable to General Division Stock:
Primary ............................... 0.22 0.23 0.26 0.04
Fully diluted ......................... 0.20 0.22 0.24 0.04
Attributable to GTR 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 (4) ............................ 9,062 8,493 9,006 (10,258)
Income (loss) per share (1):
Attributable to General Division Stock:
Primary ............................... 0.19 0.19 0.18 0.04
Fully diluted ......................... 0.18 0.18 0.17 0.04
Attributable to GTR Stock .............. (0.25) (0.34) (0.32) (3.56)
<FN>
(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 third quarter and fourth quarter of 1996 of $24.2 million and $106.5
million, respectively, for acquired incomplete technology. (See "Note B Acquisitions").
(3) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired incomplete technology.
(See Note B).
(4) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes D and K) for the write
down of investments and the settlement of a lawsuit and an $11.2 million charge for acquired incomplete
technology related to the acquisition of Bio Surface Technology, Inc.
</TABLE>
NOTE P. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments represent various degrees and types of
risk to the Company, including credit, interest rate and liquidity risk.
In the normal course of its business the Company enters into interest rate swap
contracts to hedge its interest rate risk related to its variable rate notes
payable. Credit risk is the possibility that a loss may occur if a counterparty
to a transaction fails to perform according to the terms of the contract. The
notional amount of interest rate contracts is the amount upon which interest
and other payments under the contract are based.
Interest rate swaps generally involve the exchange of fixed and variable rate
interest payments between two parties based on a common notional principal
amount and maturity date. The primary risks associated with interest rate swaps
are the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contracts.
At December 31, 1996, the Company has one swap agreement with a notional value
of approximately $100,000,000. The agreement matures in 1999.
NOTE Q. SUBSEQUENT EVENTS
In January 1997, Genzyme signed a merger agreement providing for the merger of
PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the research and
development of pharmaceuticals for the treatment of cancer, into Genzyme in
exchange for 4,000,000 shares of a new Genzyme security to be designated Genzyme
Molecular Oncology Common Stock ("GMO Stock"). The GMO Stock is intended to
reflect the value and track the performance of the Molecular Oncology Division,
a new division proposed by Genzyme to develop and market novel products for the
diagnosis and treatment of cancer. The 4,000,000 shares of GMO Stock to be
issued in the merger represent 40% of the initial equity interest in the
Molecular Oncology Division. The remaining 60% will be allocated to the General
Division in the form of 6,000,000 GMO Designated Shares. The merger is subject
to the approval of the stockholders of Genzyme and PharmaGenics.
In January 1997, the Tissue Repair Division leased to the General Division
certain laboratory and office space in the building located at the Tissue Repair
Division's Framingham, Massachusetts facility for a 3-year term commencing
January 1, 1997. The General Division will lease approximately half of the
facility at a cost of $839,808 per year. Beginning on July 1, 1997, the Tissue
Repair Division has the option of requiring the General Division to assume
responsibility for an additional 20% of the facility at a cost of $424,056 per
year.
In February 1997, the Tissue Repair Division raised $13 million through the
private placement of a 5% convertible note to Credit Suisse First Boston due
February 27, 2000. The note is convertible beginning May 29, 1997 into shares of
GTR stock at a discount to the average of the closing bid prices of the GTR
Stock on the Nasdaq National Market for the
43
<PAGE> 91
25 trading days immediately preceding the conversion date (the "Average GTR
Stock Price"). The discount will start at 2% beginning six months from the date
the note was issued and will increase to 11% at 15 months after the date of
issue. Thereafter, the conversion price will be the lesser of 89% of the Average
GTR Stock Price preceding the conversion date or the date 15 months after the
date of issue.
44
<PAGE> 92
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
==========================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $8,158,800 $8,331,600 $2,534,000(2) $2,516,000(1) $16,508,400
Inventory Reserve $3,082,200 $1,426,600 $1,261,600 $ 3,247,200
Year ended December 31, 1995:
Allowance for doubtful accounts $6,169,100 $5,390,000 $3,400,100(1) $ 8,159,000
Inventory Reserve $1,131,000 $2,920,700 $ 969,500 $ 3,082,200
Year ended December 31, 1994:
Allowance for doubtful accounts $5,317,600 $4,330,800 $ 176,800(2) $3,656,100(1) $ 6,169,100
Inventory Reserve $1,321,500 $ 514,000 $ 704,500 $ 1,131,000
<FN>
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve acquired in acquisition.
</TABLE>
45
<PAGE> 93
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Although the financial statements of the General Division and Tissue Repair
Division separately report the assets, liabilities and stockholders' equity of
Genzyme attributable to each such group, such attribution of assets and
liabilities (including contingent liabilities) and stockholders' equity among
the General Division and Tissue Repair Division does not affect legal title to
such assets or responsibility for such liabilities. Holders of General Division
Stock and Tissue Repair Stock are holders of common stock of Genzyme and
continue to be subject to all the risks associated with an investment in Genzyme
and all of its businesses and liabilities. Financial impacts arising from one
Division that affect the overall cost of Genzyme's capital could affect the
results of operations and financial condition of the other Division.
Accordingly, the Genzyme consolidated financial information should be read in
connection with the financial information of each Division.
46
<PAGE> 94
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 Genzyme General
Division (as described in Note A) as of December 31, 1996 and 1995, 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,
1996. The combined financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility is to
express an opinion on these combined financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme General Division
present fairly, in all material respects, the financial position of Genzyme
General Division as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, 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 conjunction
with the audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 27, 1997
47
<PAGE> 95
GENZYME GENERAL DIVISION
<TABLE>
COMBINED STATEMENTS OF OPERATIONS
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
---- ---- ----
Revenues:
Net product sales ........................................... $424,483 $304,373 $238,645
Net service sales ........................................... 61,638 47,230 49,686
Revenues from research and development contracts:
Related parties ........................................... 23,011 26,758 20,883
Other ..................................................... 2,310 202 1,513
-------- -------- --------
511,442 378,563 310,727
Operating costs and expenses:
Cost of products sold ....................................... 155,930 113,964 92,226
Cost of services sold ....................................... 42,889 31,137 32,116
Selling, general and administrative ......................... 135,153 97,520 80,026
Research and development (including research and
development related to contracts) .......................... 69,969 57,907 51,696
Amortization of intangibles.................................. 8,849 4,647 4,741
Purchase of in-process research and development ............. 130,639 14,216 --
Restructuring charges ....................................... 1,465 -- --
-------- -------- --------
544,894 319,391 260,805
------- ------- --------
Operating income (loss) ......................................... (33,452) 59,172 49,922
Other income and (expenses):
Minority interest in net loss of subsidiaries ............... -- 1,608 1,659
Equity in net loss of unconsolidated subsidiaries ........... (2,633) (1,810) (1,353)
Gain on investments and charge for impaired investments ..... 1,711 -- (9,431)
Settlement of lawsuit ....................................... -- -- (1,980)
Investment income ........................................... 13,909 7,428 9,072
Interest expense ............................................ (6,842) (1,069) (1,354)
-------- -------- --------
6,145 6,157 (3,387)
-------- -------- --------
Income (loss) before income taxes ............................... (27,307) 65,329 46,535
Provision for income taxes ...................................... (20,206) (30,506) (16,341)
-------- -------- --------
Net income (loss) ............................................... (47,513) 34,823 30,194
Tax benefit allocated from Tissue Repair Division ............... 17,011 8,857 1,860
-------- -------- --------
Net income (loss) attributable to Genzyme General Division Stock $(30,502) $ 43,680 $ 32,054
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
48
<PAGE> 96
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income (loss) attributable to Genzyme General Division Stock ...... $(30,502) $ 43,680 $ 32,054
======== ======== ========
Income (loss) per General Division common and common equivalent share:
Net income (loss)...................................................... $ (0.45) $ 0.73 $ 0.61
======== ======== ========
Weighted average shares outstanding................................ 68,289 60,185 52,338
======== ======== ========
Income (loss) per General Division common share assuming full dilution:
Net income (loss).................................................. $ (0.45) $ 0.66 $ 0.57
======== ======== ========
Weighted average shares outstanding................................ 68,289 66,621 56,318
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
<PAGE> 97
<TABLE>
GENZYME GENERAL DIVISION
COMBINED BALANCE SHEETS
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 77,220 $ 103,631
Short-term investments.................................................... 56,290 105,471
Accounts receivable, less allowance of $16,100 in 1996 and $7,833 in 1995 115,156 87,121
Inventories............................................................... 123,442 52,281
Prepaid expenses and other current assets................................. 99,953 12,345
Due from Tissue Repair Division........................................... 1,604 2,034
Deferred tax assets - current............................................. 17,493 7,729
---------- ----------
Total current assets....................................................... 491,158 370,612
Property, plant and equipment, net........................................... 371,610 327,461
Other Assets:
Long-term investments..................................................... 38,215 69,561
Note receivable - related party........................................... - 262
Intangibles, net of accumulated amortization of $26,189 in 1996
and $17,340 in 1995....................................................... 247,745 29,934
Deferred tax assets - noncurrent.......................................... 42,221 23,645
Other noncurrent assets................................................... 38,570 33,111
---------- ----------
366,751 156,513
---------- ----------
$1,229,519 $ 854,586
========== ==========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable.......................................................... $ 20,522 $ 19,548
Accrued expenses.......................................................... 67,645 38,069
Income taxes payable...................................................... 17,926 1,316
Deferred revenue - related parties and unaffiliated entities.............. 2,693 1,367
Current portion of long-term debt and capital lease obligations........... 999 2,276
---------- ----------
Total current liabilities............................................... 109,785 62,576
Noncurrent Liabilities:
Long-term debt and capital lease obligations.............................. 223,998 124,473
Other noncurrent liabilities.............................................. 11,511 8,256
---------- ----------
235,509 132,729
Commitments and Contingencies (See Notes)
Division equity (Note C)..................................................... 884,225 659,281
---------- ----------
$1,229,519 $ 854,586
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
51
<PAGE> 98
<TABLE>
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS
<CAPTION>
(DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1996 1995 1994
<S> <C> <C> <C>
Net income............................................................... $ (47,513) $ 34,823 $ 30,194
Reconciliation of net income (loss) to net cash provided by
operating activities:
Depreciation and amortization......................................... 29,257 22,010 18,200
Gain (loss) on sale of investments.................................... (1,663) 110 (1,430)
Loss on disposal of fixed assets...................................... 42 743 -
Non-cash compensation expense......................................... 148 131 -
Write-off of impaired equity investments.............................. - - 9,431
Accrued interest/amortization on bonds................................ 1,110 (279) (2,072)
Provision for bad debts............................................... 8,094 5,184 4,331
Purchase of in-process research and development....................... 130,639 14,216 -
Deferred income taxes................................................. (28,558) 4,428 1,439
Minority interest in net loss of subsidiaries......................... - (1,608) (1,659)
Equity in net loss of unconsolidated subsidiary....................... 3,646 1,810 1,353
Gain on investment in unconsolidated affiliate........................ (1,013) - -
Other................................................................. 105 1,458 386
Increase (decrease) in cash from working capital changes net of
acquired assets:
Accounts receivable................................................ (18,318) (14,486) (14,712)
Inventories........................................................ (39,120) (15,221) (10,858)
Prepaid expenses and other current assets.......................... (379) (1,778) (1,958)
Accounts payable, accrued expenses and income taxes payable........ 43,342 14,423 2,976
Due from Genzyme Tissue Repair Division............................ 430 (1,863) -
--------- --------- ---------
Net cash provided by operating activities.......................... 80,249 64,101 35,621
INVESTING ACTIVITIES:
Purchases of investments................................................. (117,089) (125,835) (210,274)
Purchases of restricted investments...................................... - (4,418) (10,000)
Sales and maturities of investments...................................... 195,952 39,064 265,851
Acquisition of property, plant and equipment............................. (42,540) (48,694) (101,707)
Acquisition, net of acquired cash and assumes liabilities................ (299,078) (322) (222)
Additional investment in unconsolidated subsidiary....................... (3,600) (4,428) (1,465)
Loans to affiliates...................................................... (1,676) - -
Other noncurrent assets and other non current liabilities................ (7,621) (1,172) (3,221)
--------- --------- ---------
Net cash used by investing activities.............................. (275,652) (145,805) (61,038)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock................................... 39,119 179,623 45,040
Proceeds from issuance of TR Stock....................................... - - 872
Proceeds from issuance of common stock by subsidiary..................... - 1,107 319
Issuance of debt......................................................... 480,000 - 21,819
Payments of debt and capital lease obligations........................... (340,333) (41,163) (4,793)
Net cash allocated to GTR................................................ (11,714) - (13,993)
--------- --------- ---------
Net cash provided by financing activities.......................... 167,072 139,567 49,264
Effect of exchange rate changes on cash...................................... 1,920 (781) (273)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............................. (26,411) 57,082 23,574
Cash and cash equivalents, beginning of period............................... 103,631 46,549 22,975
--------- --------- ---------
Cash and cash equivalents, end of period..................................... $ 77,220 $ 103,631 $ 46,549
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
51
<PAGE> 99
<TABLE>
GENZYME GENERAL DIVISION
COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental cash flow information: Cash paid during the year for:
Interest..................................................... $ 6,169 $ 9,944 $ 9,634
Income taxes.................................................. $14,133 19,581 13,506
<FN>
Supplemental disclosures of non-cash transactions:
Acquisition liability -- Note D
Allocation of tax benefit -- Note B
Warrant Exercises -- Note C
Debt Conversion -- Note C
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
<PAGE> 100
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 combined financial statements of the General Division include the balance
sheets, results of operations and cash flows of Genzyme's diagnostic products,
pharmaceuticals, surgical products, specialty therapeutics and corporate
operations during the periods presented. The General Division's financial
statements are prepared using the amounts included in Genzyme's consolidated
financial statements. Corporate allocations reflected in these financial
statements are determined based upon methods which management believes to be
reasonable.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of all of the
wholly-owned subsidiaries of Genzyme, except for the accounts of the Tissue
Repair Division ("GTR"). The equity method is used to account for investments in
companies and joint ventures in which the General Division has a substantial
ownership interest (20% to 50%), or in which the General Division participates
in policy decisions. Investments of less than 20% are reported at fair value.
All significant intercompany items and transactions have been eliminated in
combination.
ACCOUNTING POLICIES AND FINANCIAL INFORMATION
The Company prepares consolidated financial statements of Genzyme Corporation
and Subsidiaries and separate combined financial statements for the General
Division and Tissue Repair Division (the "Divisions"). Although the financial
statements of each Division separately report the assets, liabilities and
stockholders' equity of Genzyme attributable to each such group, such
attribution of assets and liabilities (including contingent liabilities) and
stockholders' equity among the Divisions does not affect legal title to such
assets or responsibility for such liabilities. Holders of General Division Stock
and TR Stock are holders of common stock of Genzyme and continue to be subject
to all the risks associated with an investment in Genzyme and all of its
businesses and liabilities. Liabilities or contingencies of the General Division
GTR could affect the results of operations and financial condition of the other
division. Accordingly, the combined financial statements of the General Division
and Tissue Repair Division should be read in conjunction with the consolidated
financial statements of Genzyme Corporation and Subsidiaries (the "Consolidated
Financial Statements").
Accounting policies and financial information specific to the General Division
are presented in these General Division combined financial statements.
Accounting policies and financial information relevant to Genzyme, the General
Division and the Tissue Repair Division are presented in the consolidated
financial statements of Genzyme Corporation and Subsidiaries. The Company
prepares the financial statements of the Divisions in accordance with generally
accepted accounting principles, the accounting policies of Genzyme (see Note A.
Summary of Significant Accounting Polices to the
52
<PAGE> 101
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Consolidated Financial Statements which is incorporated herein by reference)
and the divisional accounting policies approved by the Company's Board of
Directors (the "Genzyme Board").
TRANSLATION OF FOREIGN CURRENCIES
Exchange gains and losses on intercompany balances of a long-term investment
nature are charged to division equity. Transaction gains and losses are included
in the results of operations. Net transaction losses were $1.0 million in 1996
and $0.8 million in 1995. Net transaction loss information for 1994 is not
presented as such losses did not have a material impact on the statement of
operations for the year ended December 31, 1994. Division equity includes
deficit cumulative foreign currency translation adjustments of $(0.7) million
and $(3.6) million at December 31, 1996 and 1995.
HEDGING
FORWARD CONTRACTS
The General Division had currency contracts valued at $0.9 million and $1.2
million at December 31, 1996 and 1995. Related gains and losses were not
material to the consolidated financial statements.
54
<PAGE> 102
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE B. RELATED PARTY TRANSACTIONS
Genzyme allocates certain corporate general and administrative expenses,
research and development expenses and income taxes in accordance with the
policies described below. The divisional accounting policies require
transactions between the Divisions be developed and accounted for as if the
transactions were at arm's length between unrelated parties. The following
policies may be further modified or rescinded by action of the Genzyme Board, or
the Genzyme Board may adopt additional policies, without approval of the
stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to
the Genzyme stockholders, although the Genzyme Board has no present intention to
do so.
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, 1996, 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 and the specific purpose for
which the debt was incurred for the periods presented. 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.
Loans may be made from time to time between divisions. Any such loan of $1
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1 million will require approval of the
Genzyme Board, which approval shall include a determination by the Genzyme
Board that the material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating division and to
holders of the common stock representing such division. To date no such
borrowings have occurred.
55
<PAGE> 103
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
INTERDIVISION ASSET TRANSFERS
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program,
the likelihood and timing of any such realization and other matters that the
Genzyme Board and its financial advisors deem relevant. The consideration for
such reallocation may be paid by one division to another in cash or other
consideration, in lieu of cash, with a value equal to the fair market value of
the assets being reallocated or, in the case of a reallocation of assets from
the General Division to the GTR, the Genzyme Board may elect to account for
such reallocation of assets as an increase in GTR Designated Shares.
Notwithstanding the foregoing, no Key GTR Program, as defined in the management
and accounting policies, may be transferred out of GTR without a class vote of
the holders of GTR Stock.
SHARED SERVICES AND OTHER INTERDIVISION TRANSACTIONS
The General Division operates as a division of Genzyme with its own personnel
and financial resources, however, the General Division has access to Genzyme's
extensive research and development capabilities, manufacturing facilities,
worldwide clinical development and regulatory affairs staffs, marketing,
infrastructure and experience in raising capital. Operating activities
transacted directly by the General Division are recorded by the General
Division, however, from time to time, the General Division may engage in
transactions with the Tissue Repair Division or with the Tissue Repair Division
and one or more third parties. Such transactions may include agreements by one
division to provide products and services for use by the other division and
joint ventures or other collaborative arrangements involving one or both
divisions to develop new products and services jointly and with third parties.
Research and development performed by one division for the benefit of the other
division will be charged to the division for which work is performed on a cost
basis. The division performing the research will not recognize revenue as a
result of performing such research. Genzyme's corporate and general and
administrative expenses, which are performed primarily by the General Division,
or other indirect costs are allocated to each division on a cost basis based on
utilization by the division of the services to which such costs relate. Other
interdivisional transactions shall be on terms and conditions that would be
obtainable in transactions negotiated at arm's length with unaffiliated third
parties. Any interdivisional transaction to be performed on terms and conditions
other than those previously set forth and that is material to one or more of the
participating divisions will require the approval of the Genzyme Board, which
approval shall include a determination by the Genzyme Board that the transaction
is fair and reasonable to each participating division and to holders of the
common stock representing each division.
If a division (the "Purchasing Division") requires any product or service from
which the other division ( the "Selling Division") derives revenues from sales
to third parties (a "Commercial Product or Service"), the Purchasing Division
may solicit from the Selling Division a bid to provide such Commercial Product
or Service in addition to any bids solicited by the Purchasing Division from
third parties. Subject to determination by the Genzyme Board that the bid of the
Selling Division is fair and reasonable to each division and to their respective
stockholders and that the Purchasing Division is willing to accept the Selling
Division's bid, the Purchasing Division may accept any bid deemed to offer the
most favorable terms and conditions for providing the Commercial Product or
Service sought by the Purchasing Division.
Genzyme's corporate general and administrative functions and certain selling and
marketing efforts are performed by the General Division. General and
administrative and selling and marketing expenses have been allocated to GTR
based upon utilization of such services as if GTR and General Division operated
on a stand-alone basis. General Division allocations to GTR for general and
administrative and selling and marketing expenses (incurred mostly in connection
with developing European markets) were $9.1 million in 1996, $4.4 million in
1995 and $0.8 million in 1994. General Division allocations to GTR for research
and development expenses were $6.9 million in 1996, $4.7 million in 1995 and
$3.3 million in 1994. Amounts due from GTR for operating activities were $1.6
million and $2.0 million at December 31, 1996 and 1995.
INTER-DIVISION INCOME TAX ALLOCATIONS
The General Division and Tissue Repair are included in the consolidated U.S.
federal income tax return filed by Genzyme. Genzyme allocates current and
deferred taxes to the divisions by determining the tax provision of each
division, in accordance with generally accepted accounting principles, as if it
were a separate taxpayer. The realizability of deferred tax assets is assessed
at the Division level. The sum of division tax provisions may not equal the
consolidated tax provision under this approach. Pursuant to the management and
accounting policies adopted by the Genzyme Board, as of the end of any fiscal
quarter of Genzyme, any projected tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be allocated to any other division without any
compensating payment or allocation. The treatment of such allocation for
purposes of earnings per share computation is discussed in Note A, "Net Income
(Loss) Per Share" in the Consolidated Financial Statements.
56
<PAGE> 104
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE C DIVISION EQUITY
<TABLE>
The following analyzes the Division equity of the General Division for the
periods presented:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period .............................. $ 659,281 $ 395,649 $ 324,391
Net income (loss) ........................................... (47,429) 34,823 30,194
Allocation of tax benefits generated by Tissue Repair
Division ................................................... 16,927 8,857 11,423
Exercise of options ......................................... 13,883 27,922 1,189
Shares issued in connection with Employee Stock
Purchase Plan .............................................. 4,698 4,161 2,992
Exercise of warrants ........................................ 106,164 6,264 41,730
Shares issued in public offering ............................ -- 141,276 --
Issuance of Common Stock in connection with the conversion
of $100M 6 3/4% Convertible Subordinated Notes ............. 101,400 -- --
Shares issued in connection with acquisitions ............... 36,991 23,821 --
Allocation to GTR ........................................... (11,714) -- (13,874)
Tax benefit of disqualified dispositions .................... 3,500 5,500 2,224
Compensation expense ........................................ 123 131
Foreign currency translation ................................ 2,846 1,325 2,860
Unrealized gain/(loss) on investments ....................... (2,445) 9,552 (7,480)
--------- --------- ---------
$ 884,225 $ 659,281 $ 395,649
========= ========= =========
</TABLE>
In October 1995, Genzyme sold 5,750,000 shares of General Division Common Stock
to the public for $25.63 per share for net proceeds of $141.3 million.
Included in Division Equity is the cumulative foreign currency translation
adjustments of $(0.7) million and $(3.6) million at December 31, 1996, and 1995
respectively.
Immediately prior to the Effective Date, as defined in Note A to the
consolidated financial statements, approximately 31,582,000 shares of Genzyme
common stock were reserved for issuance under the Company's 1990 Equity
Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase
Plan, 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 GTR Stock that the
holder would have received if the holder had exercised the option immediately
prior to the Effective Date. The Warrants provide that the holder of the Warrant
is entitled to receive the number of shares of General Division Stock and GTR
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 would receive, in addition to the shares of General Division
Stock into which the Note is convertible, the same number of shares of GTR Stock
as the holder would have received had the holder converted the Note immediately
prior to the Effective Date. In March 1996, holders of the notes converted such
notes into General Division Stock and GTR Stock. Holders of the notes received
37.826 shares of General Division Stock and 2.553 shares of TR Stock in
conversion of each $1,000 note.
57
<PAGE> 105
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
At December 31, 1996, approximately 15,768,006 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.
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 SPLIT
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 Stock and GTR Stock,
voting together as a single class, at a special meeting of the stockholders held
on July 24, 1996. On July 25, 1996, a total of 34,669,435 shares of 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.
DEFERRED COMPENSATION PLAN
The Company's Directors' Deferred Compensation Plan (the "Deferred Compensation
Plan") allows each member of the Genzyme Board who is not also an officer or
employee of Genzyme to defer receipt of all or a portion of the cash
compensation payable to him or her as a director of Genzyme. Compensation may
be deferred until the termination of services as a director or, subject to
certain restrictions, such other date as may be specified by the director. All
of the current directors of Genzyme, other than Mr. Termeer, are eligible to
participate in the plan and as of December 31, 1996, six of the directors have
elected to participate in the plan. The Company has reserved 50,000 shares of
GGD Stock and 100,000 shares of GTR Stock to cover distributions of shares
credited to stock accounts under the Deferred Compensation Plan (subject in
each case to adjustment for stock splits, stock dividends and certain
transactions affecting Genzyme's capital stock). As of December 31, 1996, no
shares of General Division Stock or GTR Stock credited to stock accounts under
the Deferred Compensation Plan have been distributed to participants in the
Deferred Compensation Plan.
STOCK OPTIONS
Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"),
options may be granted to purchase an aggregate of 19,800,000 shares of General
Division Stock and 3,300,000 shares of TR Stock. The Plan allows the granting of
stock options at not less than fair market value at date of grant, and stock
appreciation rights, performance shares, restricted stock and stock units to
employees and consultants of the Company, each with a maximum term of ten 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 200,000 shares
and 70,000 shares, respectively, of General Division Stock and TR Stock, are
automatically granted at fair market value to members of the Board of Directors
of the Company upon their election or reelection as Directors. For each year of
a director's term of office, he or she receives an option to purchase 4,000
shares of General Division Stock and a number of TR Stock options with a market
value equal to one-quarter of the market value of the stock subject to the
General Division Stock options. All options expire ten years after the initial
grant date and vest over various periods.
<TABLE>
Stock option activity is summarized below:
<CAPTION>
SHARES WEIGTED AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ --------------- -----------
<S> <C> <C> <C>
GENZYME CORPORATION COMMON STOCK
--------------------------------
Outstanding at December 31, 1993..... 7,690,708 15.35
Granted............................ 3,238,728 14.93
Exercised.......................... (132,756) 8.83
Forfeited and cancelled............ (423,526) 19.07
Converted at Effective Date........ (10,373,154) 15.15
----------- -----
Outstanding at December 31, 1994..... - -
=========== =====
GENERAL DIVISION STOCK
----------------------
Converted at Effective Date........ 10,373,154 15.15
Granted............................ 133,348 14.03
Exercised.......................... (2,500) 5.85
Forfeited and cancelled............ (22,302) 17.40
----------- -----
Outstanding at December 31, 1994..... 10,481,700 15.13 4,683,967
=========== ===== =========
Granted............................ 4,141,502 23.25
Exercised.......................... (2,007,654) 13.97
Forfeited and cancelled............ (442,882) 14.96
----------- -----
Outstanding at December 31, 1995..... 12,172,666 17.79 5,138,502
=========== ===== =========
Granted............................ 3,442,484 29.16
Exercised.......................... (906,041) 15.70
Forfeited and cancelled............ (643,626) 22.81
----------- -----
Outstanding at December 31, 1996..... 14,065,483 20.48 6,505,835
=========== ===== =========
</TABLE>
The total proceeds for all options outstanding at December 31, 1996 is
approximately $288,120,000.
58
<PAGE> 106
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Information regarding the range of option prices as of December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Exercisable
---------------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price of options Price
- ------------------ ---------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 3.79 - 12.09 1,583,744 3.04 $7.87 1,583,344 $ 7.87
12.38 - 14.53 1,508,927 7.36 14.03 438,382 13.53
14.56 - 15.14 1,497,478 7.27 14.97 587,858 14.92
15.19 - 19.38 1,775,540 6.01 17.74 1,370,438 17.69
19.42 - 21.00 1,553,430 8.17 19.55 591,411 19.59
21.07 - 24.88 1,499,327 6.69 23.73 1,016,437 23.50
25.00 - 28.00 2,035,931 8.84 26.99 417,938 25.81
28.06 - 30.25 2,346,646 9.24 30.16 447,401 30.11
30.31 - 37.25 257,676 8.90 33.35 52,626 31.64
38.00 - 38.00 6,784 9.09 38.00 0 38.00
- ------------------ ---------- ---- -------- --------- --------
$ 3.79 38.00 14,065,483 7.27 $20.48 6,505,835 $17.34
</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, 1,500,000 shares of the General Division Stock are
authorized of which 291,053, 285,868 and 259,876 shares were issued in 1996,
1995 and 1994, respectively.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related Interpretations in accounting for
its three stock-based compensation plans, the 1990 Equity Incentive Plan (a
stock option plan), the 1990 Employee Stock Purchase Plan (a stock purchase
plan) and the 1998 Director's plan and accordingly, no compensation expense has
been recognized for options granted and shares purchased under the plans
provisions of these plans. Had compensation expense for the stock-based
compensation plans been determined based on the fair value at the grant dates
for options granted and shares purchased under the plans consistent with the
method of Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock-based Compensation", the General Division's net (loss)
income and (loss) earnings per share would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
(Amounts in thousands, except per share data) 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
GENERAL DIVISION Net (loss) income:
As reported $(30,502) $43,680
Pro forma $(40,558) $40,429
Primary (loss) earnings per share:
As reported $ (0.45) $ 0.73
Pro forma $ (0.59) $ 0.67
Fully diluted (loss) earnings per share:
As reported $ (0.45) $ 0.66
Pro forma $ (0.59) $ 0.61
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995 and additional awards are
anticipated in future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. In computing these pro forma
amounts, the General Division has assumed a risk-free interest rate equal to
approximately 6.37% and 6.33%, expected volatility of 45%, zero dividend yields
and expected lives of four years for 1996 and 1995, respectively.
59
<PAGE> 107
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
The average fair value of the options granted during 1996 and 1995 is estimated
as $11.98 and $11.53, respectively on the date of grant.
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 GTR Stock of a right (a "GTR Stock
Right") on each outstanding share of GTR Stock. The Restated Rights Agreement
provides that each General Division Stock Right, which replaced the Common Stock
Right, and each GTR 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 $26, subject to adjustment, and (ii) in the case of a GTR
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.
<TABLE>
STOCK WARRANTS
The Company has issued warrants which, when exercised, grant the holders two
shares of General Division Stock and .135 share of GTR Stock for each warrant
exercised. These warrants were granted in exchange for the receipt of options to
purchase the partnership interests of Genzyme Development Partners, L.P.
("GDP"), 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 attributed to the General Division (see "TR
Designated Shares"). The outstanding warrants were issued under the following
terms:
<CAPTION>
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- --------- -------- --------- ---------------
<S> <C> <C> <C>
1992 Investors in Neozyme II:
Callable Warrants 29,314 $44.202 December 6, 1996 to
December 31, 1998
1995 Dr. Richard Warren 6,005 $42.670 Through September 30, 2000
</TABLE>
The warrants granted in exchange for the receipt of options to purchase the
partnership units of GDP expired on October 31, 1996.
On October 28, 1996, the Company completed a tender offer for the outstanding
Units of Neozyme II and acquired 2,385,686 of the 2,415,000 Units outstanding
(see Note B Acquisition). On December 6, 1996, Neozyme II was merged with and
into Genzyme, and the remaining 29,314 Callable Warrants included in the
untendered Units separated from the shares of Callable Common Stock converted in
the merger and became exercisable.
<TABLE>
Warrant activity is summarized below:
<CAPTION>
WARRANTS WARRANT PRICE
-------- -------------
<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
----------
Exercised.......................... (3,170,551) 16.01 - 38.25
Tendered........................... (2,385,686) N/A
Expired............................ (5,685) 16.01 - 38.25
----------
Outstanding at December 31, 1996....... 35,319 42.67 - 44.20
==========
</TABLE>
Included in other current assets at December 31, 1996 is $87 million for
proceeds from warrant exercises at the end of the year.
GTR DESIGNATED SHARES
60
<PAGE> 108
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Pursuant to Genzyme's Articles of Organization, as amended, GTR Designated
Shares are authorized shares of GTR 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 the Tissue Repair Division. At the Effective Date, 5,000,000 GTR
Designated Shares were established. As a result of the distribution of
approximately 3,300,000 shares of GTR Stock to holders of General Division
Stock, the number of GTR Designated Shares were reduced by a corresponding
amount. The remaining 1,700,000 GTR Designated Shares were reserved for issuance
upon the exercise of Genzyme stock options and warrants and the conversion of
Genzyme's convertible notes which were outstanding on the Effective Date.
GTR: The number of GTR Designated Shares will be decreased by the number of
shares of GTR Stock issued by Genzyme, the proceeds of which are allocated to
the General Division; the number of shares of GTR Stock issued as a dividend to
holders of General Division stock; and the number of shares of GTR Stock issued
upon the conversion of convertible securities, including the Notes, attributed
to the General Division. In addition, the number of GTR Designated Shares can be
increased as a result of certain inter-division transactions.
The number of GTR Designated Shares will be decreased by the number of shares of
GTR Stock issued by Genzyme, the proceeds of which are allocated to the General
Division; the number of shares of GTR Stock issued as a dividend to holders of
General Division stock; and the number of shares of GTR Stock issued upon the
conversion of convertible securities, including the Notes, attributed to the
General Division. In addition, the number of GTR Designated Shares can be
increased as a result of certain inter-division transactions. In October 1996,
the Genzyme Board approved the allocation of up to $20 million in cash from the
General Division to the Tissue Repair Division (the "GTR Equity Line") to
provide initial funding for the joint venture with Diacrin, in exchange for an
increase in the number of GTR Designated Shares at a rate determined by dividing
the amount of cash so allocated by the average of the daily closing prices of
one share of GTR Stock for the 20 consecutive trading days commencing on the
30th trading day prior to the date of allocation. As of December 31, 1996, the
Company had allocated $1.9 million from the General Division to the Tissue
Repair Division under the Equity Line and 231,645 GTR Designated Shares were
reserved for issuance at the Genzyme Board's discretion.
If, as of May 31 of each year starting May 31, 1997, the number of GTR
Designated Shares on such date (not including those reserved for issuance with
respect to General Division convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds ten percent (10%) of the number of shares of GTR Stock then issued and
outstanding, then substantially all GTR Designated Shares will be distributed to
holders of record of General Division Stock, subject to reservation of a number
of such shares equal to the sum of (a) the number of GTR Designated Shares
reserved for issuance upon the exercise or conversion of General Division
convertible securities and (b) the number of GTR Designated Shares reserved by
the Genzyme Board as of such date for sale not later than six months after such
date, the proceeds of which sale will be allocated to the General Division.
GTR Designated Share activity is summarized below:
<TABLE>
<CAPTION>
GTR 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
----------
Stock options exercised ..................................................... (42,728)
Stock warrants exercised .................................................... (426,984)
Convertible notes conversion ................................................ (255,249)
Increase from equity line ................................................... 231,645
Exercise of call ............................................................ 1,000,000
----------
Balance at December 31, 1996 ............................................. 1,793,592
==========
</TABLE>
DIVIDEND POLICY
The General Division has never paid any cash dividends on shares of its capital
stock. The General Division currently intends to return its earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends on
General Division common stock in the foreseeable future.
NOTE D ACQUISITIONS
Incorporated by reference herein are the disclosures related to the
acquisitions of Sygena A.G., I.G. Laboratories, Genetrix, Inc., Deknatel
Snowden Pencer, Inc. and Neozyme II included in Note B, Acquisitions included
in the Consolidated Financial Statements.
61
<PAGE> 109
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
<PAGE> 110
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
PRO FORMA FINANCIAL INFORMATION
The following pro forma information presents the results of operations of the
General Division, Genetrix, DSP and Neozyme II for the years ended December 31,
1996 and 1995, with pro forma adjustments as if the acquisitions had been
consummated as of January 1, 1995. This pro forma information does not purport
to be indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future. The pro forma financial
information does not include charges for in-process technology of $24.2 million
and $106.5 million, related to the DSP and Neozyme II acquisitions, respectively
which were recognized as expense upon consummation of each acquisition in 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED)
---------------------------------------------------------------------------------
<S> <C> <C>
Pro forma revenues .................................. $556,274 $471,630
Pro forma net income attributable to General
Division Stocks.......... ......................... 65,136 14,473
Pro forma net income per General Division
common and common equivalent share ................ $ 0.89 $ 0.24
</TABLE>
NOTE E MAJORITY-OWNED SUBSIDIARIES
INTEGRATED GENETICS, INC.
IG was an approximately seventy-percent-owned subsidiary for the year ended
December 31, 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 through
September 30, 1994. (See Note F).
NOTE F INVESTMENTS
INVESTMENTS
<TABLE>
Investments in marketable securities at December 31 consisted of the following:
<CAPTION>
1996 1995
-------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit.......................... $ 1,564 $ 1,564 $ 1,870 $ 1,870
Federal agency notes............................. -- -- 25,696 25,731
Corporate notes.................................. 54,732 54,726 77,800 77,870
------- ------- -------- --------
$56,296 $56,290 $105,366 $105,471
======= ======= ======== ========
Long Term:
Federal agency notes............................. -- -- 4,047 4,053
Corporate notes.................................. 16,481 16,485 42,518 42,845
U.S. Treasury notes.............................. 22,010 21,730 22,351 22,663
------- ------- -------- --------
$38,491 $38,215 $ 68,916 $ 69,561
======= ======= ======== ========
</TABLE>
Cash and cash equivalents, consisting principally of money market funds and
municipal notes are valued at cost plus accrued interest.
63
<PAGE> 111
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
Information regarding the range of contractual maturities of investments in debt securities at December 31,
1996 is as follows:
<CAPTION>
MARKET
(DOLLARS IN THOUSANDS) COST VALUE
--------------------------------------------------------------------------------------
<S> <C> <C>
Within 1 year........................................ $56,296 $56,290
After 1 year through 2 years......................... 11,399 11,415
After 2 years through 10 years....................... 27,092 26,800
------- -------
$94,787 $94,505
======= =======
</TABLE>
The disclosures relating to the Investments in NABI, Avonex, Inc., Celtrix,
Inc., and G.T.C. are included in Note D to the Consolidated Financial Statements
and are incorporated by reference herein.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
Investment income for 1996 and 1995 includes gross realized losses of $47,000
and $110,000, respectively. Gross realized gains included in investment income
for 1995 were $1.4 million. The realized gain on the investment in NABI was
reported as a separate line item in the Company's statement of operations for
1996.
Gross unrealized holding losses of $2.7 million and unrealized holding gains
of $2.3 million, were recorded at December 31, 1996 in Division equity as
compared to unrealized holding gains of $2.1 million at December 31, 1995, of
which $0.7 million represented an unrealized holding gain on the Company's
investment in NABI which was sold in 1996, at December 31, 1995.
64
<PAGE> 112
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENT
NOTE G INVENTORIES
<TABLE>
Inventories at December 31 consist of the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------------------
<S> <C> <C>
Raw materials..................................... $ 30,243 $12,527
Work-in-process................................... 36,516 14,167
Finished products................................. 56,683 25,587
-------- -------
$123,442 $52,281
</TABLE>
NOTE H PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following
65
<PAGE> 113
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
(DOLLARS IN THOUSANDS) 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment................................................ $163,413 $106,877
Land and buildings................................................. 173,296 46,456
Leasehold improvements............................................. 55,828 52,521
Furniture and fixtures............................................. 12,996 7,530
Construction in progress........................................... 53,298 177,903
-------- --------
458,831 391,287
Less accumulated depreciation.................................... (87,221) (63,826)
-------- --------
Property, plant and equipment, net................................. $371,610 $327,461
======== ========
</TABLE>
Depreciation expense was $22.1 million, $17.3 million, and $13.5 million in
1996, 1995 and 1994, respectively.
The Company attributes its property, plant and equipment to either the General
Division or Tissue Repair Division based on use.
The General Division has completed construction of the Company's manufacturing
facility at Allston Landing in Boston to produce a recombinant form of
Ceredase(R) enzyme ("Cerezyme(R)") and other products. The facility cost
approximately $154.1 million plus an additional $22.3 million of process
validation and optimization costs. On October 24, 1996, Genzyme received FDA
approval to manufacture the drug Cerezyme[R] in the Allston Landing facility.
As of December 31, 1996, the Company had capitalized, approximately $154.1
million of expenditures related to this building and approximately $33.3 million
of gross process validation and optimization costs related to this and other
facilities. In 1996, 1995 and 1994, the Company capitalized approximately $2.2
million, $9.0 million and $9.2 million of interest costs, respectively, relating
to this and other facility construction. Upon receipt of FDA approval for the
facility, the Company began production and transferred the costs out of
construction in progress and began depreciating this facility in July 1996 using
the units of production method of depreciation. Depreciation expense for 1996
related to this facility was $1.7 million.
In August 1996, GTR effected an interdivisional transfer of certain land and a
building in Framingham, Massachusetts, acquired in January 1996, to the General
Division for $5.2 million, which represented the cost and approximate fair
market value of the property at the date of the sale.
NOTE I ACCRUED EXPENSES
<TABLE>
Accrued expenses at December 31 include the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
-------------------------------------------------------------
<S> <C> <C>
Professional fees........................ $ 3,757 $ 2,472
Compensation............................. 21,252 12,025
Royalties................................ 8,210 6,606
Rebates.................................. 7,604 2,693
Interest................................. 1,677 1,857
Other.................................... 25,145 12,416
------- -------
$67,645 $38,069
======= =======
</TABLE>
NOTE J. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
<TABLE>
Long-term debt at December 31 is comprised of the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility..................................... $200,000 $
Convertible subordinated notes................................ - 100,000
Mortgage note payable, matures June 13, 1999.................. 20,375 20,863
Mortgage note payable, matures November 2014.................. 3,298 3,356
Mortgage note payable, matures January 1, 2008................ 685 747
Term notes payable............................................ - 1,626
------- -------
224,358 126,592
Less current portion.......................................... (999) (2,243)
------- -------
$223,359 $124,349
======== ========
</TABLE>
66
<PAGE> 114
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
CREDIT FACILITIES
In November 1996, the General Division refinanced its existing $215.0 million
line of credit (the "Credit Line") with a revolving credit facility (the
"Revolving Facility") made available through a syndicate of commercial banks
administered by Fleet National Bank in the amount of $225.0 million. Amounts
drawn under this facility may be allocated to either the General Division or
Tissue Repair Division. As of December 31, 1996, outstanding debt of $218.0
million under the Revolving Facility had been allocated $200.0 million to the
General Division and $18.0 million to GTR.
REVOLVING FACILITY
The General Division may obtain loans up to a maximum aggregate principal
amount outstanding at any time of $225.0 million under the terms of the
Revolving Facility. Loans bear interest at LIBOR plus an applicable margin
pursuant to the terms and conditions defined in the Credit Agreement. The
notes have certain covenants which require the Company to, among other
things, maintain certain levels of earnings and liquidity ratios. The Stock
of Genzyme Securities Corporation, a Massachusetts Securities Corporation,
is pledged as collateral for this facility.
CREDIT LINE
On June 28, 1996, Genzyme's credit line with Fleet National Bank was
increased from $15.0 million to an aggregate of $215.0 million in connection
with the Company's acquisition of DSP (See Note D. Acquisitions). Until
refinanced with the Revolving Facility in November 1996, borrowings under the
Credit line were allocated $200.0 million to the General Division to finance
the acquisition of DSP and $15.0 million to GTR to fund operations, each with
interest payable at LIBOR plus 5/8%. All funds outstanding under the Credit
Line were repaid before December 31, 1996 with funds borrowed under the
Revolving Facility.
$100M 6 3/4% CONVERTIBLE SUBORDINATED NOTES
In 1991, the General Division issued 6 3/4% Convertible Subordinated Notes due
October 1, 2001 in the aggregate principal amount of $100.0 million for net
proceeds of $97.3 million. Deferred financing costs of $2.7 million, classified
as "Other noncurrent assets" on the combined balance sheets, were amortized to
expense over the term of the debt issue. 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 December 16, 1994, would receive, in
addition to the shares of General Division Stock into which the Note was
convertible, the same number of shares of GTR Stock as the holder would have
received had the holder converted the Note immediately prior to the Effective
Date. In March 1996, holders of the Notes converted such notes into General
Division Stock and GTR Stock pursuant to the amended terms of the notes. Holders
of the Notes received 37.826 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
$101.4 million, the face value of the debt less the unamortized debt financing
costs was credited to Division Equity.
MORTGAGE NOTES
The Company's three mortgage notes have been attributed to the General Division.
The mortgage note due June 1999 is collateralized by land and buildings with a
net book value of $28.5 million at December 31, 1996, 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 $5.1 million at December 31, 1996 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.
67
<PAGE> 115
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
INTEREST RATE HEDGE AGREEMENTS
In December 1996, the Company entered into a $100 million interest rate swap
contract (the "Swap Contract") to effectively convert the variable interest
rate on borrowings under the Revolving Facility to fixed interest rates. Net
payments made or received on these Swap Contracts are recorded as adjustments
to interest expense. At December 31, 1996 the Swap Contract had a termination
value gain of $125,000.
OPERATING LEASES
Total rent expense under operating leases was $10.7 million, $8.6 million, and
$8.7 million in 1996, 1995 and 1994 respectively. The General Division leases
facilities and personal property under certain operating leases in excess of one
year.
In January 1997, the General Division repaid $100.0 million of its
outstanding debt plus accrued interest of $0.5 million.
<TABLE>
Future minimum payments due under the General Division's long-term obligations and capital and operating
leases are as follows:
<CAPTION>
LONG-TERM CAPITAL OPERATING
(DOLLARS IN THOUSANDS) OBLIGATIONS LEASES LEASES
----------------------------------------------------------------------
<S> <C> <C> <C>
1996.............................. $ 2,643 $338 $11,240
1997.............................. 2,637 316 10,798
1998.............................. 256,565 14 9,678
1999.............................. 510 - 8,553
2000.............................. 504 - 7,601
Thereafter........................ 5,795 - 44,107
-------- ---- -------
Total minimum payments......... 268,654 668 91,977
Less: interest.................... (44,296) (29) -
-------- ---- -------
$224,358 $639 $91,977
======== ==== =======
</TABLE>
NOTE K RESEARCH AND DEVELOPMENT AGREEMENTS
<TABLE>
Revenues from research and development agreements with related parties
include the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees for research and development activities:
Surgical Aids Partnership...................................... - - 913
Neozyme II..................................................... 19,799 24,198 17,785
GTC............................................................ 3,212 2,560 2,185
------- ------- -------
$23,011 $26,758 $20,883
======= ======= =======
</TABLE>
The disclosures relating to the Surgical Aids Partnership and Neozyme II
are included in Note J to the Consolidated Financial Statements and are
incorporated by reference herein.
68
<PAGE> 116
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE L. COMMITMENTS AND CONTINGENCIES
69
<PAGE> 117
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
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, 1996, 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.
NOTE M. INCOME TAXES
<TABLE>
Income (loss) before income taxes and the related income tax expense (benefit) are as follows for the year
ended December 31:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995 1994
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (includes $130.6 million and $15.2 million in charges
for purchased research and development and acquisition
expenses in 1996 and 1995, respectively)......................... $(37,615) $62,633 $42,968
Foreign........................................................... 10,308 2,696 3,567
-------- ------- -------
Total....................................................... $(27,307) $65,329 $46,535
======== ======= =======
Currently payable:
Federal........................................................ $37,985 $18,780 $10,727
State.......................................................... 6,889 5,949 3,965
Foreign........................................................ 3,616 1,349 850
-------- ------- -------
Total current............................................... 48,490 26,078 15,542
Deferred:
Federal........................................................ (28,448) 4,507 518
State.......................................................... 164 (79) 281
-------- ------- -------
Total deferred.............................................. (28,284) 4,428 799
-------- ------- -------
Provision for income taxes........................................ $ 20,206 $30,506 $16,341
======== ======= =======
</TABLE>
<TABLE>
Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following
reasons:
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------
<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 0.8 1.6
State taxes, net................................................... 5.2 5.2 5.8
Foreign sales corporation.......................................... (2.1) (1.4) (2.8)
Nondeductible amortization......................................... 2.1 1.4 1.5
Benefit of tax credits............................................. - - (1.9)
Other, net......................................................... 2.2 0.7 (4.2)
Utilization of operating loss carryforwards........................ (2.6) (3.8) -
------ ---- ----
Effective tax rate before certain charges........................ 40.6 37.9 35.0
Charge for purchased research and development
</TABLE>
70
<PAGE> 118
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
net of related deferred tax benefits............................... 33.4 8.8 -
------ ---- ----
74.0 46.7 35.0
Allocated tax benefits generated by Tissue Repair Division ........ (62.3) (13.6) (4.0)
------ ---- ----
Effective tax rate attributable to General Division Stockholders. 11.7% 33.1% 31.0%
====== ==== ====
</TABLE>
<TABLE>
At December 31 the components of net deferred tax assets were as follows :
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................... $ 10,427 $ 10,216
Intangible amortization ............................. 36,706 23,746
Realized and Unrealized capital losses .............. 10,798 10,581
Reserves and other .................................. 17,687 9,609
Allocation of tax benefit from Tissue Repair Division 13,265 8,415
-------- --------
Gross deferred tax asset ........................ 88,883 62,567
Valuation allowance ................................. (15,299) (20,637)
-------- --------
Net deferred tax asset .......................... 73,584 41,930
Deferred tax liabilities:
Depreciable assets .................................. (13,871) (10,556)
-------- --------
Net deferred tax asset .......................... $ 59,713 $ 31,374
======== ========
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses and the purchase of in-process
research and development, the Company placed a valuation allowance of $15.3
million and $20.6 million for December 31, 1996 and December 31, 1995,
respectively, against otherwise recognizable deferred tax assets. During 1996,
the Company determined that it is more likely than not that certain deferred
tax assets will be realized and, accordingly, eliminated the related valuation
allowance of approximately $4.3 million, of which approximately $1.5 million
was recorded as a reduction of goodwill. Realization of the net deferred tax
assets is dependent on generating sufficient taxable income prior to the
expiration of loss carryforwards. Although realization is not assured,
management believes that it is more likely than not that all of the net
deferred tax assets will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At December 31, 1996 the Company had U.S. net operating loss carryforwards of
$27 million for income tax purposes. These carryforwards expire from 2001 to
2011. Utilization of tax net operating loss carryforwards may be limited under
Section 382 of the Internal Revenue code of 1986. At December 31, 1996 the
Company also had UK operating loss carryforwards for income tax purposes of
approximately $2.9 million which are indefinitely available to offset future
taxable income in the UK.
NOTE O. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all employees of the General
Division except for the employees of DSP which have a separate retirement
savings plan. The plan allows employees to make contributions up to a specified
percentage of their compensation, a portion of which are matched by the General
Division. The General Division contributed $1.1 million, $0.7 million, and $0.6
million to the plan in 1996, 1995 and 1994, respectively.
The General Division has defined-benefit pension plans covering substantially
all the employees of DSP and its foreign subsidiaries. Pension expense for 1996,
1995 and 1994 was $601,000, $498,000 and $266,000, respectively. Pension costs
are funded as accrued. Actuarial and other disclosures regarding the plans,
except for the plan of DSP and its subsidiary in Germany, are not presented
because they are not material.
DSP has a defined benefit pension plan, which covers substantially all U.S.
employees of DSP, excluding those employed by DSP's Snowden Pencer Inc.
subsidiary. Plan assets consist primarily of U.S. government and corporate
securities.
The funded status of the pension plan at December 31, 1996 was as follows
(in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Actual present value of accumulated benefit obligation:
Vested........................................................ $ 4,720
Nonvested..................................................... 481
-------
$ 5,201
=======
Projected benefit obligation.................................... $ 5,201
Plan assets at market value..................................... 4,338
-------
Funded status -- plan assets less projected benefit obligation.. $ (863)
Unrecognized net loss from past experience different from that
assumed and changes in actuarial assumptions.................. (94)
-------
Accrued pension cost.......................................... $ (957)
=======
Assumptions used in computation of 1996 are as follows:
<CAPTION>
1996
-------
<S> <C>
Weighted average discount....................................... 7.75%
Expected long-term rate of return on assets..................... 9.00%
Rate of increase in future compensation levels.................. Plan Frozen
Benefits under the pension plan are generally based on years of service
and the employee's career earnings. Employees become fully vested after
five years.
A summary of the components of net periodic pension cost for 1996 is as
follows (thousands):
<CAPTION>
1996
-------
<S> <C>
Service cost.................................................... $ 0
Interest cost................................................... 195
Actual return on plan assets.................................... (276)
Net amortization and deferral................................... 94
-------
Net periodic pension cost..................................... $ 13
=======
DSP's German subsidiary also has a defined benefit pension plan for its
employees. The funded status of the pension plan at December 31, 1996 was
as follows (in thousands):
<CAPTION>
1996
-------
<S> <C>
Actual present value of accumulated benefit obligation:
Vested........................................................ $ 1,592
Nonvested..................................................... 140
-------
$ 1,732
=======
Projected benefit obligation.................................... $ 1,998
Plan assets at market value..................................... --
-------
Funded status -- plan assets less projected benefit obligation.. $(1,998)
Unrecognized net loss from past experience different from that
assumed and changes in actuarial assumptions.................. (353)
-------
Accrued pension cost.......................................... $(2,351)
=======
Assumptions used in computation of 1996 are as follows:
<CAPTION>
1996
-------
<S> <C>
Expected long-term rate of return on assets..................... 6.5%
Rate of increase in future compensation levels.................. N/A
Weighted average discount....................................... 3.0%
Benefits under the pension plan are generally based on years of service
and the employee's career earnings. Employees become fully vested after
five years.
A summary of the components of net periodic pension cost for 1996 is as
follows (thousands):
<CAPTION>
1996
-------
<S> <C>
Service cost.................................................... $ 129
Interest cost................................................... 129
Net amortization and deferral................................... (20)
-------
Net periodic pension cost..................................... $ 238
=======
</TABLE>
DSP has a savings and investment plan for all U.S. employees. Employee
contributions to the savings plan can be made both on a pre-tax (salary
deferral) and after-tax basis. DSP may make a matching contribution in an
amount equal to 100% of the first 2% of employee salary deferral contributions
and 50% of the next 4% of employee salary deferrals (subject to certain
limitations as defined in the plan). DSP matched pre-tax salary deferrals
totaling $332,000 in fiscal 1996.
Employees of Snowden Pencer, Inc., a subsidiary of DSP, also participate in a
noncontributory profit sharing plan. The plan provides for discretionary
contributions to be determined annually. In 1996, DSP recorded $100,000 charge
for contributions to the plan.
NOTE P. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS
AND SUPPLIERS
The General Division operates in 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 States, United Kingdom, Switzerland and Germany. The General Division
purchases products from its British, Swiss and German subsidiaries for sale to
customers in the United States. Transfer prices from the foreign subsidiaries
are intended
71
<PAGE> 119
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
to allow the United States parent to produce profit margins commensurate with
its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary
European distributor of the General Division's therapeutic products.
<TABLE>
Certain information by geographic area follows (dollars in thousands):
<CAPTION>
UNITED
STATES NETHERLANDS OTHER ELIMINATION COMBINATION
------ ----------- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996
- ----
Net sales -
unaffiliated customers ................. $ 354,323 $56,865 $74,933 $ - $ 486,121
Transfers between geographic areas ..... 101,786 33,659 34,050 (169,495) -
---------- ------- ------- --------- ----------
456,109 90,524 108,983 (169,495) 486,121
Pre-tax income (loss)................... (30,124) 920 10,156 (8,259) (27,307)
Net income (loss)....................... (9,346) 520 9,193 (30,869) (30,502)
Assets ................................. 1,167,545 33,500 110,890 (85,697) 1,226,238
Liabilities ............................ 283,713 31,930 29,651 345,294
1995
- ----
Net sales
unaffiliated customers ................. $ 247,138 $70,532 $33,933 $ - $ 351,603
Transfers between geographic areas...... 74,697 - 23,658 (98,355) -
---------- ------- ------- --------- ----------
321,835 70,532 57,591 (98,355) 351,603
Pre-tax income (loss)................... 65,941 836 1,852 (3,300) 65,329
Net income (loss)....................... 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 geographic areas ..... 38,590 - 12,784 (51,374) -
---------- ------- ------- --------- ----------
262,921 38,535 38,249 (51,374) 288,331
Pre-tax income (loss)................... 44,295 578 3,155 (1,493) 46,535
Net income (loss)....................... 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
</TABLE>
All revenue from research and development contracts is earned in the United
States. Entities comprising Other include the General Division's operations in
the United Kingdom, Belgium, France, Japan, Sweden, Switzerland, Italy and
Germany. Export sales from the United States were $27.4 million, $20.5 million,
and $23.9 million in 1996, 1995 and 1994, respectively. Export sales by the
Netherlands subsidiary amounted to $56.9 million and $66.2 million in 1996 and
1995, respectively. The General Division's results of operations are highly
dependent upon the sales of Ceredase(R)/Cerezyme(R) enzyme. In 1996, 1995 and
1994, the General Division marketed its Ceredase(R)/Cerezyme(R) enzyme product
directly to physicians, hospitals and treatment centers, and sold products
representing approximately 12%, 14% and 17%, respectively, of net revenue to an
unaffiliated distributor. Otherwise, the credit risk associated with trade
receivables is mitigated due to the large number of customers and their broad
dispension over different industries and geographic areas.
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1996, 1995 and 1994 are displayed in
the following table.
72
<PAGE> 120
GENZYME GENERAL DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1996
- ----
Net sales ................. $111,783 $113,988 $141,022 $144,649
Gross profit .............. 64,171 67,260 73,867 82,004
Net income (loss) (2) ..... 19,034 20,284 (5,908) (63,912)
Income (loss) per share(1):
Primary (1)............... 0.27 0.27 (0.09) (0.91)
Fully Diluted............. 0.25 0.27 (0.09) (0.91)
1995
- ----
Net sales ................. $87,159 $92,358 $94,484 $104,562
Gross profit .............. 47,378 48,066 53,100 57,958
Net income (3) ............ 11,998 12,967 16,092 2,623
Income per share (1):
Primary ............... 0.22 0.23 0.26 0.04
Fully diluted ......... 0.20 0.22 0.24 0.04
1994
- ----
Net sales ................. $73,282 $75,378 $79,180 $ 82,887
Gross profit .............. 40,049 40,101 41,407 42,432
Net income (4) ............ 9,877 9,622 10,065 2,490
Income per share (1):
Primary ............... 0.19 0.19 0.18 0.04
Fully diluted ......... 0.18 0.18 0.17 0.04
<FN>
- ------------------
(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 third quarter of 1996 and fourth quarter of $24.2
million and $106.5 million for acquired incomplete technology (See Note B.
Acquisitions).
(3) Includes charges in the fourth quarter of 1995 of $14.2 million for acquired
incomplete technology. (See Note B Acquisitions).
(4) Includes charges in the fourth quarter of 1994 of $11.4 million (See Notes F
and L) for the write down of investments and the settlement of a lawsuit and an
$11.2 million charge for acquired incomplete technology.
NOTE R
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments represent various degrees and types of
risk to the General Division, including credit, interest rate and liquidity
risk.
In the normal course of its business the General Division enters into interest
rate swap contracts to hedge its interest rate risk related to its variable
rate notes payable. Credit risk is the possibility that a loss may occur if a
counterparty to a transaction fails to perform according to the terms of the
contract. The notional amount of interest rate contracts is the amount upon
which interest and other payments under the contract are based.
Interest rate swaps generally involve the exchange of fixed and variable rate
interest payments between two parties based on a common notional principal
amount and maturity date. The primary risks associated with interest rate swaps
are the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contracts.
At December 31, 1996, the Company has one swap agreement with a notional value
of approximately $100,000,000. The agreement matures in 1999.
</TABLE>
NOTE S SUBSEQUENT EVENTS
In January 1997, Genzyme signed a merger agreement providing for the merger of
PharmaGenics, Inc. ("PharmaGenics"), a company engaged in the research and
development of pharmaceuticals for the treatment of cancer, into Genzyme in
exchange for 4,000,000 shares of a new Genzyme security to be designated Genzyme
Molecular Oncology Common Stock ("GMO Stock"). The GMO Stock is intended to
reflect the value and track the performance of the Molecular Oncology Division,
a new division proposed by Genzyme to develop and market novel products for the
diagnosis and treatment of cancer. The 4,000,000 shares of GMO Stock to be
issued in the merger represent 40% of the initial equity interest in the
Molecular Oncology Division. The remaining 60% will be allocated to the General
Division in the form of 6,000,000 GMO Designated Shares. The merger is subject
to the approval of the stockholders of Genzyme and PharmaGenics.
In January 1997, the Tissue Repair Division leased to the General Division
certain laboratory and office space in the building located at the Tissue Repair
Division's Framingham, Massachusetts facility for a 3-year term commencing
January 1, 1997. The General Division will lease approximately half of the
facility at a cost of $839,808 per year. Beginning on July 1, 1997, the Tissue
Repair Division has the option of requiring the General Division to assume
responsibility for an additional 20% of the facility at a cost of $424,056 per
year.
73
<PAGE> 121
<TABLE>
GENZYME GENERAL DIVISION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
==========================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts ... $7,833,800 $8,093,600 $2,534,000(2) $2,361,000(1) $16,100,400
Inventory Reserve ................. $3,082,200 $1,426,600 - $1,261,600 $ 3,247,200
Year ended December 31, 1995:
Allowance for doubtful accounts ... $5,992,300 $5,180,000 - $3,338,500(1) $ 7,833,800
Inventory Reserve ................. $1,131,000 $2,920,700 - $ 969,500 $ 3,082,200
Year ended December 31, 1994:
Allowance for doubtful accounts ... $5,317,600 $4,330,800 - $3,656,100(1) $ 5,992,300
Inventory Reserve ................. $1,321,500 $ 514,000 - $ 704,500 $ 1,131,000
<FN>
- ----------
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve acquired in acquisition.
</TABLE>
74
<PAGE> 122
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
EXPLANATORY NOTE REGARDING FINANCIAL INFORMATION
Although the financial statements of the General Division and Tissue Repair
Division separately report the assets, liabilities and stockholders' equity of
Genzyme attributable to each such group, such attribution of assets and
liabilities (including contingent liabilities) and stockholders' equity among
the General Division and Tissue Repair Division does not affect legal title to
such assets or responsibility for such liabilities. Holders of General Division
Stock and Tissue Repair Stock are holders of common stock of Genzyme and
continue to be subject to all the risks associated with an investment in Genzyme
and all of its businesses and liabilities. Financial impacts arising from one
Division that affect the overall cost of Genzyme's capital could affect the
results of operations and financial condition of the other Division.
Accordingly, the Genzyme consolidated financial information should be read in
connection with the financial information of the Tissue Repair Division.
75
<PAGE> 123
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
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, 1996 and 1995, 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, 1996. The combined financial statements and financial statement
schedule are the responsibility of Genzyme Corporation's management. Our
responsibility is to express an opinion on these combined financial statements
and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme Tissue Repair
Division present fairly, in all material respects, the financial position of
Genzyme Tissue Repair Division as of December 31, 1996 and 1995 and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, 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.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 27, 1997
76
<PAGE> 124
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF OPERATIONS
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net service sales ................................... $ 7,312 $ 5,220 $ 324
Operating costs and expenses:
Cost of services sold ............................... 11,193 4,731 287
Selling, general and administrative ................. 27,111 12,927 964
Research and development expense .................... 10,880 10,938 3,638
Purchase of in-process research and development ..... - - 11,215
-------- -------- --------
49,184 28,596 16,104
-------- -------- --------
Operating loss .......................................... (41,872) (23,376) (15,780)
Other income and (expenses):
Equity in net loss of joint venture ................. (1,727) - -
Investment income ................................... 1,432 1,386 29
Interest expense .................................... (148) (40) -
-------- -------- --------
(443) 1,346 29
-------- -------- --------
Net loss attributable to Genzyme Tissue Repair Stock .... $(42,315) $(22,030) $(15,751)
======== ======== ========
Loss per Tissue Repair Division common share:
Net loss ................................................ $ (3.38) $ (2.28) $ (4.40)
======== ======== ========
Weighted average shares outstanding ................. 12,525 9,659 3,578
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
<PAGE> 125
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED BALANCE SHEETS
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- ------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $15,912 $40,741
Short-term investments ............................................. 318 6,832
Accounts receivable less allowance of $408 in 1996 and $325 in 1995. 1,677 1,838
Inventories ........................................................ 1,823 761
Prepaid expenses and other current assets .......................... 334 186
------- -------
Total current assets .................................................. 20,064 50,358
Property, plant and equipment, net .................................... 22,229 1,962
Noncurrent assets:
Other .............................................................. 300 329
------- -------
$42,593 $52,649
======= =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable ................................................... $ 1,749 2,432
Accrued expenses ................................................... 2,479 1,349
Payable to Genzyme General
Division ........................................................... 1,604 2,034
Current portion of capital lease obligations........................ 169
------- -------
Total current liabilities ........................................ 5,832 5,984
Noncurrent Liabilities:
Long-term debt...................................................... 18,000 -
Other .............................................................. 677 739
------- -------
18,677 739
Commitments and Contingencies (See Notes)
Division equity (Note C) .............................................. 18,084 45,926
------- -------
$42,593 $52,649
======= =======
</TABLE>
The accompanying notes are an integral part
of these combined financial statements
78
<PAGE> 126
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED STATEMENTS OF CASH FLOWS
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net loss ..................................................... $(42,315) $(22,030) $(15,751)
Reconciliation of net income to net
cash used by operating activities:
Depreciation and amortization ............................. 935 628 26
Loss on disposal of property, plant and equipment ........... 59 160 -
Non-cash compensation expense ............................. 312 882 -
Accrued interest/amortization on bonds .................... 85 (76) (45)
Provision for bad debts ................................... 238 210 -
Equity in net loss of joint venture ....................... 1,727 - -
Purchase of in-process research and development ........... - - 11,215
Increase (decrease) in cash from working capital:
Accounts receivable .................................... (77) (562) (204)
Inventories ............................................ (1,062) (685) 309
Prepaid expenses and other current assets .............. (148) 98 18
Accounts payable, accrued expenses and other
current liabilities .................................. 444 33 1,666
Payable to Genzyme General Division .................... (430) 1,863 171
-------- -------- --------
Net cash used by operating activities .................. (40,232) (19,479) (2,595)
INVESTING ACTIVITIES:
Purchases of investments ..................................... (5,004) (16,687) -
Sales and maturities of investments .......................... 11,447 17,991 -
Purchase of property, plant and equipment .................... (26,573) (1,294) -
Sale of property, plant and equipment ........................ 5,311 - -
Investment in joint venture .................................. (1,911) - -
Cash from acquisition of BioSurface Technology, Inc. ......... - - 5,581
Other noncurrent assets and liabilities ...................... 151 (13) -
-------- -------- --------
Net cash (used) provided by investing activities ....... (16,579) (3) 5,581
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................... 2,437 43,516 14
Proceeds from issuance of debt ............................... 56,000 - -
Payments of debts ............................................ (38,000) - -
Payments of capital lease obligations ........................ (169) (286) -
Allocation from General Division.............................. 11,714 - 13,993
-------- -------- --------
Net cash provided by financing activities .............. 31,982 43,230 14,007
Increase (decrease) in cash and cash equivalents ................. (24,829) 23,748 16,993
Cash and cash equivalents, beginning of period ................... 40,741 16,993 -
-------- -------- --------
Cash and cash equivalents, end of period ......................... $ 15,912 $ 40,741 $ 16,993
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................................... $ 334 $ 40 $ -
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
79
<PAGE> 127
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
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 combined financial statements of the Tissue Repair Division include the
balance sheets, results of operations and cash flows of the tissue repair
operations of Genzyme during the periods presented. GTR's financial statements
are prepared using the amounts which are also included in Genzyme's consolidated
financial statements. Corporate allocations reflected in these financial
statements are determined based upon methods which management believes to be
reasonable.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements reflect the combined accounts of
all of Genzyme's tissue repair businesses. All material intradivisional items
and transactions have been eliminated in combination. The equity method is used
to account for investments in companies and joint ventures in which GTR has a
substantial ownership interest (20% to 50%), or in which the Tissue Repair
Division participates in policy decisions. Accordingly, GTR's share of the
earnings or losses of such entities is included in computation of GTR's net
income (loss). Investments of less than 20% are reported at fair value.
ACCOUNTING POLICIES AND FINANCIAL INFORMATION
The Company prepares the consolidated financial statements of Genzyme
Corporation and Subsidiaries and separate combined financial statements for the
General Division and the Tissue Repair Division (the "Divisions"). Although the
financial statements of each division separately reports the assets,
liabilities and stockholders' equity of Genzyme attributable to each such group,
such attribution of assets and liabilities (including contingent liabilities)
and stockholders' equity among the Divisions does not affect legal title to such
assets or responsibility for such liabilities. Holders of Genzyme General
Division Common Stock ("General Division Stock") and Genzyzme Tissue Repair
Common Stock ("GTR Stock") are holders of common stock of Genzyme and continue
to be subject to all the risks associated with an investment in Genzyme and all
of its businesses and liabilities. Financial impacts arising from one division
that affect the overall cost of Genzyme's capital could affect the results of
operations and financial condition of the other division. Accordingly, the
combined financial statements of the General Division and the Tissue Repair
Division, should each be read in conjunction with the consolidated financial
statements of Genzyme Corporation and Subsidiaries (the "Consolidated Financial
Statements").
Accounting policies and financial information specific to the Tissue Repair
Division are presented in these Tissue Repair Division combined financial
statements. Accounting policies and financial information relevant to Genzyme,
the General Division and the Tissue Repair Division are presented in the
consolidated financial statements of Genzyme Corporation and Subsidiaries. The
Company preparing the financial statements of the Divisions in accordance with
generally accepted accounting principles, the accounting policies of Genzyme
(see Note A, Summary of Significant Accounting Policies to the Consolidated
Financial Statements which is incorporated herein by reference), and the
divisional accounting policies approved by the Company's Board of Directors
(the "Genzyme Board").
80
<PAGE> 128
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
81
<PAGE> 129
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE B. - RELATED PARTY TRANSACTIONS
Genzyme allocates certain corporate general and administrative expenses,
research and development expenses and income taxes in accordance with the
policies described below. The divisional accounting policies require
transactions between the Divisions be developed and accounted for as if the
transactions were at arm's length between unrelated parties. The following
policies may be further modified or rescinded by action of the Genzyme Board, or
the Genzyme Board may adopt additional policies, without approval of the
stockholders of Genzyme, subject only to the Genzyme Board's fiduciary duty to
the Genzyme stockholders, although the Genzyme Board has no present intention to
do so.
ACCESS TO TECHNOLOGY AND KNOW-HOW
GTR has free access to all technology and know-how of Genzyme that may prove
useful in GTR's business, subject to any obligations or limitations applicable
to Genzyme. The costs of developing this technology remain in the business unit
responsible for its development.
FINANCIAL MATTERS
As a matter of policy, the Company manages the financial activities of the
General Division and Tissue Repair Division 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, 1996, the Company attributed $18
million of its long-term debt plus related interest costs to GTR based upon the
specific purpose for which the debt was incurred and the cash flow requirements
of 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.
Loans may be made from time to time between divisions. Any such loan of $1
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1 million will require approval of the
Genzyme Board, which approval shall include a determination by the Genzyme Board
that the material terms of such loan, including the interest rate and maturity
date, are fair and reasonable to each participating division and to holders of
the common stock representing such division. To date no such borrowings have
occurred, however at December 31, 1996, GTR owed the General Division $1.6
million for services rendered in the normal course of business.
SHARED SERVICES AND OTHER INTERDIVISION TRANSACTIONS
The Tissue Repair Division operates as a division of Genzyme with its own
personnel and financial resources, however, GTR has access to Genzyme's
extensive research and development capabilities, manufacturing facilities,
worldwide clinical development and regulatory affairs staffs, marketing,
infrastructure and experience in raising capital. Operating activities
transacted directly by the Tissue Repair Division are recorded by GTR, however,
from time to time, the Tissue Repair Division may engage in transactions with
the General Division or with the General Division and one or more third parties.
Such transactions may include agreements by one division to provide products and
services for use by the other division and joint ventures or other collaborative
arrangements involving one or both divisions to develop new products and
services jointly and with third parties. Research and development performed by
one division for the benefit of the other division will be charged to the
division for which work is performed on a cost basis. The division performing
the research will not recognize revenue as a result of performing such research.
Genzyme's corporate and general and administrative expenses, which are performed
primarily by the General Division, or other indirect costs are allocated to each
division on a cost basis based on utilization by the division of the services to
which such costs relate. Other interdivisional transactions shall be on terms
and conditions that would be obtainable in transactions negotiated at arm's
length with unaffiliated third parties. Any interdivisional transaction to be
performed on terms and conditions other than those previously set forth and that
is material to one or more of the participating divisions will require the
approval of the Genzyme Board, which approval shall include a determination by
the Genzyme Board that the transaction is fair and reasonable to each
participating division and to holders of the common stock representing each
division.
If a division (the "Purchasing Division") requires any product or service from
which the other division ( the "Selling Division") derives revenues from sales
to third parties (a "Commercial Product or Service"), the Purchasing Division
may solicit from the Selling Division a bid to provide such Commercial Product
or Service in addition to any bids solicited by the Purchasing Division from
third parties. Subject to determination by the Genzyme Board that the bid of the
Selling Division is fair and reasonable to each division and to their respective
stockholders and that the Purchasing
82
<PAGE> 130
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Division is willing to accept the Selling Division's bid, the Purchasing
Division may accept any bid deemed to offer the most favorable terms and
conditions for providing the Commercial Product or Service sought by the
Purchasing Division.
General and administrative, selling and marketing and research and development
expenses have been allocated to GTR as if GTR operated on a stand-alone basis.
Management believes that such allocation is a reasonable estimate of such
expenses. General Division allocations to GTR for general and administrative and
selling and marketing expenses (incurred mostly in connection with developing
European markets) were $9.1 million in 1996, $4.4 million in 1995 and $0.8
million in 1994. General Division allocations to GTR for research and
development expenses were $6.9 million in 1996, $4.7 million in 1995 and $3.3
million in 1994. Amounts payable by GTR to the General Division for operating
activities were $1.6 million and $2.0 million at December 31, 1996 and 1995.
INCOME TAXES
GTR is included in the consolidated U.S. federal income tax return filed by
Genzyme. Genzyme allocates current and deferred taxes to the Divisions using the
asset and liability method of accounting for income taxes and as if the
Divisions were separate taxpayers. Accordingly, the realizability of deferred
tax assets is assessed at the division level. The sum of the amounts calculated
for individual divisions of Genzyme may not equal the consolidated amount under
this approach. The accounting policies provide that, as of the end of any fiscal
quarter of Genzyme, any projected annual tax benefit attributable to any
division that cannot be utilized by such division to offset or reduce its
current or deferred income tax expense may be attributed to the other division
without any compensating payment or allocation.
INTER-DIVISION ASSET TRANSFERS
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program,
the likehood and timing of any such realization and other matters that the
Genzyme Board and its financial advisors deem relevant. The consideration for
such reallocation may be paid by one division to another in cash or other
consideration, in lieu of cash, with a value equal to the fair market value of
the assets being reallocated or, in the case of a reallocation of assets from
the General Division to the Tissue Repair Division, the Genzyme Board may elect
to account for such reallocation of assets as an increase in GTR Designated
Shares. Notwithstanding the foregoing, no key GTR Program, as defined in the
management and accounting policies, may be transferred out of GTR without a
class vote of the holders of GTR Stock.
NOTE C. DIVISION EQUITY
<TABLE>
The following analyzes the equity of GTR for the periods presented:
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- -----------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period .................. $ 45,926 $ 23,313 $ -
Net loss ........................................ (42,315) (22,030) (15,751)
Shares issued in connection with acquisition of
BioSurface Technology, Inc. .................... - - 25,313
Exercise of stock options ....................... 540 241 -
Shares issued in connection with Employee Stock
Purchase Plan .................................. 1,896 983 14
Shares issued in public offering ................ - 42,292 -
Allocation from General Division ................ 11,714 - 13,993
Non-cash compensation expense ................... 312 882 -
Unrealized gain (loss) on investments ........... 11 245 (256)
-------- -------- --------
Balance at end of period ........................ $ 18,084 $ 45,926 $ 23,313
======== ======== ========
</TABLE>
83
<PAGE> 131
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Immediately prior to the Effective Date, as defined in Note A to the
Consolidated Financial Statements, approximately 31,582,000 shares of Genzyme
common stock were reserved for issuance under the Company's 1990 Equity
Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase
Plan, outstanding warrants (the "Warrants"), and 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 GTR 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 GTR Stock rounded down to the nearest whole
number). Upon exercise of these options, all proceeds will be allocated to the
General Division (See GTR Designated Shares). The Warrants provide that the
holder of the Warrant is entitled to receive the number of shares of General
Division Stock and GTR 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 GTR Stock as the holder would have received had the holder converted
the Note immediately prior to the Effective Date.
At December 31, 1996, approximately 3,664,585 shares of GTR 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.
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.
DEFERRED COMPENSATION PLAN
The Company's Directors' Deferred Compensation Plan (the "Deferred Compensation
Plan") allows each member of the Genzyme Board who is not also an officer or
employee of Genzyme to defer receipt of all or a portion of the cash
compensation payable to him or her as a director of Genzyme. Compensation may
be deferred until the termination of services as a director or, subject to
certain restrictions, such other date as may be specified by the director. All
of the current directors of Genzyme, other than Mr. Termeer, are eligible to
participate in the plan and as of December 31, 1996, six of the directors have
elected to participate in the plan. The Company has reserved 50,000 shares of
GGD Stock and 100,000 shares of GTR Stock to cover distributions of shares
credited to stock accounts under the Deferred Compensation Plan (subject in
each case to adjustment for stock splits, stock dividends and certain
transactions affecting Genzyme's capital stock). As of December 31, 1996, no
shares of General Division Stock or GTR Stock credited to stock accounts under
the Deferred Compensation Plan have been distributed to participants in the
Deferred Compensation Plan.
STOCK OPTIONS
Pursuant to the Company's 1990 Equity Incentive Plan as amended (the "Plan"),
options may be granted to purchase an aggregate of 3,300,000 shares of GTR
Stock. The Plan allows the granting of stock options at not less than fair
market value at date of grant, and stock appreciation rights, performance
shares, restricted stock and stock units to employees and consultants of the
Company, each with a maximum term of ten 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 TR Stock, are automatically
granted at fair market value to members of the Board of Directors of the Company
upon their election or reelection as Directors. For each year of a director's
term of office, he or she receives an option to purchase 4,000 shares of General
Division Stock and a number of GTR Stock options with a market value equal to
one-quarter of the market value of the stock subject to the General Division
Stock options. All options expire ten years after the initial grant date and
vest over various periods.
At the Effective Date of the Genzyme Stock Proposal, Genzyme granted initial
options to purchase a total of 939,851 shares of GTR 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 GTR 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 GTR 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 1996,
GTR recorded $285,000 of related compensation expense and will record the
remaining balance of $220,000 over the next 2 years.
84
<PAGE> 132
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
Stock option activity is summarized below:
<CAPTION>
SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C>
GENZYME CORPORATION COMMON STOCK
Outstanding at December 31,
1993.......................... 7,690,708 $15.35
Granted ...................... 3,238,728 14.93
Exercised .................... (132,756) 8.83
Forfeited and cancelled ...... (423,526) 19.08
Converted at Effective Date .. (10,373,154) 15.15
-----------
Outstanding at December 31,
1994.......................... -
===========
GTR STOCK
Converted at Effective Date .. 464,824 5.01
Granted ...................... 940,976 4.75
-----------
Outstanding at December 31,
1994.......................... 1,405,800 4.84 207,583
Granted ...................... 1,153,053 12.86
Exercised .................... (63,608) 5.15
Forfeited and cancelled ...... (76,202) 4.69
-----------
Outstanding at December 31,
1995.......................... 2,419,043 8.66 713,584
Granted ...................... 830,916 12.88
Exercised .................... (102,921) 5.23
Forfeited and cancelled ...... (159,702) 9.50
-----------
Outstanding at December 31,
1996.......................... 2,987,336 $ 9.92 1,031,373
===========
</TABLE>
<TABLE>
The total exercise proceeds for all options outstanding at December 31, 1996 is
approximately $29,646,000. Information regarding the range of option prices as
of December 31, 1996 is as follows:
<CAPTION>
EXERCISABLE
-----------------------------
RANGE OF NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE OF OPTIONS AVERAGE
REMAINING EXERCISE EXERCISE PRICE
CONTRACTUAL PRICE
LIFE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.32 - 4.25 157,420 4.48 3.14 122,017 2.83
4.34 - 4.75 766,711 7.95 4.75 461,056 4.75
4.78 - 5.49 153,148 6.70 5.19 59,292 5.29
5.50 - 6.00 331,471 8.25 5.97 130,277 5.97
6.00 - 11.88 250,390 7.71 8.99 101,236 7.96
12.25 - 12.25 466,284 9.30 12.25 87,799 12.25
12.38 - 17.31 248,694 8.75 15.10 55,398 15.64
17.50 - 17.50 537,207 8.96 17.50 8,576 17.50
17.62 - 25.50 68,136 9.09 20.77 5,722 17.71
25.75 - 25.75 7,875 7.66 25.75 0 0.00
- -----------------------------------------------------------------------------------------------------------
1.32 - 25.75 2,987,336 8.20 9.92 1,031,373 6.42
</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
GTR Stock are authorized, of which 325,300, and 269,920 and 3,906 shares of GTR
Stock were issued in 1996, 1995 and 1994, respectively.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related Interpretations in accounting for
its three stock-based compensation plans, the 1990 Equity Incentive Plan (a
stock option plan), the 1990 Employee Stock Purchase Plan (a stock purchase
plan) and the 1988 Directors' Stock Option Plan (a stock purchase plan) and
accordingly no compensation expense was recognized for options granted on the
effective date of the Genzyme stock proposal.
85
<PAGE> 133
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Compensation expense has not been recognized for subsequent grants and shares
purchased under the provisions of these plans. Had compensation expense for the
stock-based compensation plans been determined based on the fair value at the
grant dates for options granted and shares purchased under the plans consistent
with the method of Statement of Financial Accounting Standards No. 123 ("SFAS
123") "Accounting for Stock-based Compensation", the Tissue Repair Division's
net loss and loss earnings per share would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(Amounts in thousands, except per share data) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
TISSUE REPAIR DIVISION
Net loss:
As reported...................................... $(42,315) $(22,030)
Pro forma........................................ $(45,735) $(23,168)
Primary and fully diluted loss per share:
As reported...................................... $ (3.38) $ (2.28)
Pro forma........................................ $ (3.65) $ (2.40)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995 and additional awards are
anticipated in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
the Tissue Repair Division has assumed a risk-free interest rate equal to
approximately 6.37% and 6.33%, expected volatility of 80%, zero dividend yields
and expected lives of four years for 1996 and 1995, respectively. The average
fair value of the options granted during 1996 and 1995 is estimated as $9.23 and
$10.06, respectively on the date of grant.
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 GTR Stock of a right
(a "GTR Stock Right") on each outstanding share of GTR Stock. The Restated
Rights Agreement provides that each General Division Stock Right, which replaced
the Common Stock Right, and each GTR 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 GTR 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 two
shares of General Division Stock and .135 shares of GTR Stock for each warrant
exercised. 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 "GTR Designated Shares").
<TABLE>
The outstanding warrants as of December 31, 1996 were issued under the following
terms:
<CAPTION>
EXERCISE
ISSUE NUMBER OF PRICE
DATE ISSUED TO WARRANTS PER SHARE EXERCISE PERIOD
- ---- --------- -------- --------- ---------------
<C> <C> <C> <C> <C>
1992 Investors in Neozyme II:
Callable Warrants 29,314 $44.202 December 6, 1996
December 31, 1998
1995 Dr. Richard Warren 6,005 $42.67 Through September 30, 2000
</TABLE>
The warrants granted in exchange for the receipt of options to purchase the
partnership units of GDP expired on October 31, 1996.
On October 28, 1996, the Company completed a tender offer for the outstanding
Units of Neozyme II and acquired 2,385,686 of the 2,415,000 Units outstanding.
On December 6, 1996,
86
<PAGE> 134
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
Neozyme II was merged with and into a subsidiary of Genzyme, and the remaining
29,314 Callable Warrants included in the untendered Units separated from the
shares of Callable Common Stock converted in the merger and became exercisable.
<TABLE>
Warrant activity is summarized below:
<CAPTION>
WARRANTS WARRANT PRICE
-------- -------------
<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
----------
Exercised................................. (3,170,551) 42.67
Tendered.................................. (2,385,686) N/A
Expired................................... (5,685) 16.01 - 38.25
----------
Outstanding at December 31, 1996.............. 35,319 $42.67 - $44.20
==========
</TABLE>
GTR DESIGNATED SHARES.
Pursuant to Genzyme's Articles of Organization, as
amended, GTR Designated Shares are authorized shares of GTR Stock which are not
issued and outstanding, but which the Genzyme Board may from time to time issue,
sell or otherwise distribute without allocating the proceeds or other benefits
of such issuance, sale or distribution to GTR. GTR Designated Shares are
created in certain circumstances when cash or other assets are transferred from
the General Division to the Tissue Repair Division. The number of GTR Designated
Shares will be decreased by the number of shares of GTR Stock issued by Genzyme,
the proceeds of which are allocated to the General Division; the number of
shares of GTR Stock issued as a dividend to holders of General Division stock;
and the number of shares of GTR Stock issued upon the conversion of convertible
securities, including the Notes, attributed to the General Division. In
addition, the number of GTR Designated Shares can be increased as a result of
certain inter-division transactions.
87
<PAGE> 135
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
At the Effective Date, December 14, 1994, 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.
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 $42.3 million in net proceeds from
the offering after underwriting discounts.
Genzyme retains an option to allocate to GTR, at $10 per GTR Designated Share,
up to $30 million from the General Division (the "Purchase Option") in exchange
for a maximum of 3,000,000 of TR Designated Shares to be issued in connection
with the exercise of the Purchase Option. In June 1996, pursuant to the terms of
the Purchase Option, the Genzyme Board approved the allocation of $10 million
in cash from the General Division to the Tissue Repair Division in exchange for
1,000,000 GTR Designated Shares which were reserved for issuance at the sole
discretion of the Genzyme Board for the benefit of the General Division
stockholders.
If, as of May 31 of each year starting May 31, 1997, the number of TR
Designated Shares on such date (not including those reserved for issuance with
respect to General Division convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds ten percent (10%) of the number of shares of GTR Stock then issued and
outstanding, then substantially all TR Designated Shares will be distributed
to holders of record of General Division Stock, subject to reservation of a
number of such shares equal to the sum of (a) the number of TR Designated
Shares reserved for issuance upon the exercise or conversion of General
Division convertible securities and (b) the number of TR Designated Shares
reserved by the Genzyme Board as of such date for sale not later than six
months after such date, the proceeds of which sale will be allocated to the
General Division.
In October 1996, the Genzyme Board approved the allocation of up to $20 million
in cash from the General Division to the Tissue Repair Division (the "GTR Equity
Line") to provide initial funding for the joint venture with Diacrin, Inc.
("Diacrin") (See Note D), in exchange for an increase in the number of GTR
Designated Shares at a rate determined by dividing the amount of cash so
allocated by the average of the daily closing prices of one share of GTR Stock
for the 20 consecutive trading days commencing on the 30th trading day prior to
the date of allocation. As of December 31, 1996, the Company had allocated $1.9
million from the General Division to the Tissue Repair Division under the GTR
Equity Line and 231,645 GTR Designated Shares were reserved for issuance at the
Genzyme Board's discretion.
<TABLE>
GTR Designated Shares activity is summarized below:
<CAPTION>
GTR 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
---------
Stock options exercised................................. (42,728)
Stock warrants exercised................................ (426,984)
Convertible notes conversion............................ (255,249)
Increase from equity line............................... 231,645
Exercise of purchase option............................. 1,000,000
---------
Balance at December 31, 1996........................ 1,793,592
=========
</TABLE>
DIVIDEND POLICY
The Company has never paid any cash dividends on shares of its capital stock.
Genzyme currently intends to retain its earnings to finance future growth and
therefore does not anticipate paying any cash dividends on GTR Common Stock
in the foreseeable future.
NOTE D. INVESTMENTS AND OTHER NONCURRENT ASSETS
<TABLE>
Investments in marketable securities at December 31 consisted of the following:
<CAPTION>
1996 1995
--------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit... $318 $318 $ - $ -
Federal agency notes ..... - - 1,035 1,036
Corporate notes .......... - - 2,776 2,776
U.S. Treasury notes ...... - - 3,031 3,020
---- ---- ------ ------
$318 $318 $6,842 $6,832
==== ==== ====== ======
</TABLE>
Cash and cash equivalents, consisting principally of money market funds and
municipal notes are valued at cost plus accrued interest.
Gross unrealized losses in GTR's investment portfolio at December 31, 1995 were
$10,000. GTR held no investments in marketable securities as of December 31,
1996.
88
<PAGE> 136
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
As of December 31, 1996, the Tissue Repair Division retained a $318,000
certificate of deposit related to certain leased equipment which was
subsequently converted into cash in March 1997.
DIACRIN/GENZYME LLC
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between the Tissue Repair Division and Diacrin to develop and commercialize
products and processes for use in the treatment of Parkinson's disease and
Huntington's disease in humans using porcine fetal cells. Under the terms of the
joint venture agreement, the Tissue Repair Division will provide 80% of the
first $50 million in funding for products to be developed by the joint venture.
After that, all costs will be shared equally between GTR and Diacrin. Profits
from the joint venture will be shared equally by the two parties. In order to
provide initial funding for the joint venture with Diacrin, the Genzyme Board
has approved the monthly allocations in an amount corresponding to the funding
commitment of GTR under the joint venture of up to an aggregate total of $20
million in cash from the General Division to the Tissue Repair Division pursuant
to the terms of the GTR Equity Line (See Note C. Division Equity, GTR Designated
Shares). As of December 31, 1996, $1.9 million of General Division cash had been
allocated to the Tissue Repair Division under the GTR Equity Line and 231,645
GTR Designated Shares have been reserved for issuance at the sole discretion
of the Genzyme Board. As of December 31, 1996, GTR provided $1.9 million of
funding to the joint venture and realized a net loss of $1.7 million from the
joint venture.
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 GTR Stock, valued at $25.3 million, 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, $11.2 million, was charged to in-process research
and development.
NOTE F. INVENTORIES
<TABLE>
Inventories at December 31 consist of the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
--------------------------------------------------------
<S> <C> <C>
Raw materials......................... $ 136 $107
Work-in-process....................... 1,687 654
------ ----
$1,823 $761
====== ====
</TABLE>
NOTE G. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
Property, plant, and equipment at December 31 includes the following
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------
<S> <C> <C>
Plant and equipment .................... $ 1,404 $1,180
Land and buildings ..................... 2,324 -
Leasehold improvements ................. 2,387 282
Furniture and fixtures ................. 1,718 978
Construction in progress ............... 15,988 179
------- ------
23,821 2,619
Less accumulated depreciation ........ (1,592) (657)
------- ------
Property, plant and equipment, net .... $22,229 $1,962
======= ======
</TABLE>
Depreciation expense was $935,000 in 1996, $628,000 in 1995, and $26,000 in
1994.
The net book value of laboratory, computer and office equipment under capital
leases at December 31, 1996, 1995 and 1994 totaled $0, $146,000 and $470,000,
respectively.
89
<PAGE> 137
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
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 August 1996,
GTR effected an interdivisional transfer of certain land and a building to the
General Division for $5.2 million, which represented the approximate fair
market value of the property at the date of the sale.
NOTE H. - ACCRUED EXPENSES
<TABLE>
Accrued expenses at December 31 include the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
-----------------------------------------------
<S> <C> <C>
Professional fees ....... $ 743 $ 207
Compensation ............ 1,375 926
Royalties ............... 113 96
Interest ................ 3 -
Other ................... 245 120
------ ------
$2,479 $1,349
====== ======
</TABLE>
NOTE I. - LONG-TERM DEBT AND LEASES
<TABLE>
Long-term debt at December 31 is comprised of the following:
<CAPTION>
(DOLLARS IN THOUSANDS) 1996 1995
------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility ............................. $ 18,000 $ -
</TABLE>
Although the Company retains responsibility for the re-payment of all long-term
debt obligations, such debt is allocated to either the General Division or
Tissue Repair Division for reporting purposes based on the intended use of the
funds borrowed under each instrument.
CREDIT FACILITIES
In November 1996, Genzyme refinanced its existing $215.0 million line of credit
(the "Credit Line") with a revolving credit facility (the "Revolving Facility")
made available through a syndicate of commercial banks administered by Fleet
National Bank in the amount of $225.0 million. Amounts drawn under each facility
could be allocated to either the General Division or Tissue Repair Division. In
December 1996, GTR borrowed $18.0 million to finance operations.
REVOLVING FACILITY
The Company may request loans up to a maximum aggregate principal amount
outstanding at any time of $225.0 million under the terms of the Revolving
Facility. Loans bear interest at LIBOR plus an applicable margin pursuant to the
terms and conditions defined in the credit agreement. The notes have certain
covenants which require the Company to, among other things, maintain certain
levels of earnings and liquidity ratios. The Stock of Genzyme Securities
Corporation, a Massachusetts Securities Corporation, is pledged as collateral
for this facility.
CREDIT LINE
Until November 1996, Genzyme maintained a $225.0 million Credit Line with Fleet
National Bank with interest payable at LIBOR plus 5/8% until November 1996.
Prior to the November re-financing of the Credit Line, GTR borrowed a total of
$38 million to finance operations and planned manufacturing capacity expansion,
all of which was repaid with accrued interest of $302,527 by December 31, 1996.
90
<PAGE> 138
GENZYME TISSUE REPAIR DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
OPERATING LEASES
GTR rents facilities and equipment under noncancellable operating leases
expiring through 2001. Rent expense under all operating leases was $2.1 million
in 1996 and $1.4 million in 1995.
<TABLE>
Future minimum payments due under the Tissue Repair Division's long-term debt
and non-cancellable operating leases are as follows:
<CAPTION>
LONG-TERM OPERATING
(DOLLARS IN THOUSANDS) DEBT LEASES
-------------------------------------------------------------------
<S> <C> <C>
1997........................................ $ - $1,749
1998........................................ - 1,637
1999........................................ 21,240 1,612
2000........................................ - 1,610
2001........................................ - 222
Thereafter.................................. - -
------- ------
Total minimum payments.................... 21,240 $6,830
Less: Interest............................ (3,240) -
------- ------
$18,000 $6,830
======= ======
</TABLE>
NOTE J. - COMMITMENTS AND CONTINGENCIES
From time to time the Tissue Repair Division has been subject to legal
proceedings and claims arising in connection with its business. At December 31,
1996, there were no asserted claims against the Tissue Repair Division which, in
the opinion of management, if adversely decided would have a material adverse
effect on the Tissue Repair Division's financial position and results of
operations.
NOTE K. - INCOME TAXES
<TABLE>
The following summarizes GTR's provision for (benefit from) income taxes (in
thousands):
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes:
Current.............................................. $ - $ - $(132)
Deferred............................................. - - 132
State income taxes:
Current.............................................. - - -
Deferred............................................. - - -
----- ---- -----
Total income tax expense (benefit)........................ $ - $ - $ -
===== ===== =====
</TABLE>
<TABLE>
The differences between the effective tax rates and the U.S. federal statutory
tax rates were as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal income tax statutory rate.................... (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit................ (5.2) (5.2) (6.0)
Deductions subject to deferred tax valuation allowance.... 40.2 40.2 41.0
----- ----- -----
Effective tax rate........................................ - - % - %
===== ===== =====
</TABLE>
At December 31, 1996 and 1995, the components of deferred tax assets and
liabilities were as follows (in thousands):
91
<PAGE> 139
GENZYME TISSUE REPAIR DIVISION
<TABLE>
NOTES TO COMBINED FINANCIAL STATEMENTS
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred assets
Net operating loss carryforward..................... $24,802 $11,511
Intangible amortization............................. 11,282 8,415
Reserves and other.................................. 1,983 354
------- -------
Total deferred tax assets........................ 38,067 20,280
Valuation allowance................................. (38,067) (20,280)
------- -------
Net deferred tax assets.......................... $ - $ -
======= =======
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses and the purchase of in-process
research and development, the Company placed a valuation allowance of $38.1
million and $20.3 million for December 31, 1996 and December 31, 1995,
respectively, against otherwise recognizable deferred tax assets.
The deferred tax assets of GTR cannot be utilized by the Division to offset or
reduce current or deferred income tax expense. Accordingly, the deferred tax
assets have been allocated to the General Division in accordance with the
management and accounting policies.
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 $165,000, $36,000
and $0 in contributions to the plan in 1996, 1995 and 1994, respectively.
NOTE M. - QUARTERLY RESULTS (UNAUDITED)
<TABLE>
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1996, 1995 and 1994 are displayed in
the following table.
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1996
- ----
Net sales............................ $ 1,714 $ 1,647 $ 1,861 $ 2,090
Gross profit......................... (712) (1,809) (655) (705)
Net loss............................. (8,742) (10,500) (9,932) (13,141)
Loss per share....................... $ (.71) $ (.83) $ (.78) $ (1.02)
1995
- ----
Net sales............................ $ 1,030 $ 1,247 $ 1,435 $ 1,508
Gross profit......................... 305 367 85 (268)
Net loss............................. (3,942) (5,027) (5,382) (7,679)
Loss per share....................... $ (0.45) $ (0.57) $ (0.59) $ (0.64)
</TABLE>
92
<PAGE> 140
GENZYME TISSUE REPAIR DIVISION
<TABLE>
NOTES TO COMBINED FINANCIAL STATEMENTS
<CAPTION>
1ST 2ND 3RD 4TH
QTR QTR QTR QTR
--- --- --- ---
<S> <C> <C> <C> <C>
1994
- ----
Net sales............................ $ - $ - $ - $ 324
Gross profit......................... - - - 37
Net loss (1)......................... (815) (1,129) (1,059) (12,747)
Loss per share (1):.................. $ (0.25) $ (0.34) $(0.32) $ (3.56)
</TABLE>
- ------------------
(1) Includes charges related to the purchase of in-process research and
development in the fourth quarter of $11.2 million related to the acquisition of
BioSurface Technology, Inc.(See Note E).
NOTE N. - SUBSEQUENT EVENTS
In January 1997, the Tissue Repair Division leased to the General Division
certain laboratory and office space in the building located at the Tissue Repair
Division's Framingham, Massachusetts facility for a 3-year term commencing
January 1, 1997. The General Division will lease approximately half of the
facility at a cost of $839,808 per year. Beginning on July 1, 1997, the Tissue
Repair Division has the option of requiring the General Division to assume
responsibility for an additional 20% of the facility at a cost of $424,056 per
year.
In February 1997, the Tissue Repair Division completed a $13 million
private placement of a 5% convertible note to Credit Suisse First Boston due
February 27, 2000. The note is convertible beginning May 29, 1997 into shares of
GTR stock at a discount to the average of the closing bid prices of the GTR
Stock on the Nasdaq National Market for the 25 trading days immediately
preceding the conversion date (the "Average GTR Stock Price"). The discount will
start at 2% beginning six months from the date the note was issued and will
increase to 11% at 15 months after the date of issue. Thereafter, the conversion
price will be the lesser of 89% of the Average GTR Stock Price, as defined,
preceding the conversion date or the date 15 months after the date of issue.
93
<PAGE> 141
<TABLE>
GENZYME TISSUE REPAIR DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
=========================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $325,000 $238,000 - $155,000(1) $408,000
Year ended December 31, 1995:
Allowance for doubtful accounts $176,800 $210,000 - $ 61,600(1) $325,200
Year ended December 31, 1994:
Allowance for doubtful accounts $ - $ - $176,800(2) $ - $176,800
- ----------
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve acquired in acquisition.
</TABLE>
94
<PAGE> 142
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the period from January 1, 1995 to the filing date of this
Form 10-K, no independent accountant who was previously engaged as the
principal accountant to audit Genzyme's financial statements has resigned,
indicated it has declined to stand for re-election after completion of the
current audit or was dismissed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption
"Executive Officers of the Registrant" in Part I, Item 1A hereof and the
remainder is incorporated herein by reference from the discussion responsive
thereto under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement relating to the
1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the following captions in the Company's
Proxy Statement relating to the 1997 Annual Meeting of Stockholders: "Election
of Directors - Director Compensation", "Executive Compensation" and
"Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the
Company's Proxy Statement relating to the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from (1)
the discussion responsive thereto under the caption "Certain Transactions" in
the Company's Proxy Statement relating to the 1997 Annual Meeting of
Stockholders, and (2) from the discussion herein under Item 1 "Business-Related
Entities."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The financial statements are listed under Part II, Item 8 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedules are listed under Part II, Item 8 of
this Report.
3. EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this report.
(B) REPORTS ON FORM 8-K
A report on Form 8-K was filed with the Commission during the fourth
quarter of 1996 to report the following items as of the date indicated:
Genzyme filed a report on Form 8-K dated November 5, 1996 reporting
under Item 2 of Form 8-K the completion of a tender offer for the
outstanding units of Neozyme II for $45 per unit in cash in which 98.8%
of the units were tendered and accepted for payment. The report also
incorporated by reference under Item 5 unaudited pro forma financial
statements and the related notes thereto filed as Exhibit 99.1 to such
report on Form 8-K for both Genzyme and Genzyme General giving effect to
the acquisition by Genzyme of Genetrix on May 1, 1996 (the "Genetrix
Acquisition"), the acquisition of DSP on July 1, 1996 (the "DSP
Acquisition"), and the acquisition of Neozyme II (the "Neozyme II
Acquisition") (collectively, the "Acquisitions"), including:
(1) Pro forma condensed statements of operations for both Genzyme and
Genzyme General assuming that the Acquisitions occurred as of
January 1, 1995, using the purchase accounting method,
(2) Pro forma balance sheets for both Genzyme and Genzyme General
assuming that the DSP Acquisition and Neozyme II Acquisition each
occurred as of June 30, 1996, which also reflected the effect of the
Genetrix Acquisition which was completed on May 1, 1996,
(3) Historical balance sheets for DSP as of December 31, 1994 and 1995
and June 30, 1996 (unaudited), and
(4) Historical statements of operations for DSP have been presented for
the years ended September 30, 1994 and 1995 and for the nine-months
ended June 30, 1995 and 1996 (unaudited)
In addition, historical financial statements and notes thereto of DSP
and Neozyme II were filed therewith as Exhibits 99.2 and 99.3,
respectively, to such report on Form 8-K and incorporated by reference
into Item 5.
95
<PAGE> 143
(C) EXHIBITS
96
<PAGE> 144
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*3.1 Restated Articles of Organization of Genzyme. Filed as Exhibit 3.1 to
Genzyme's Form 10-Q for the quarter ended June 30, 1996.
*3.2 By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated
December 31, 1991.
*4.1 Amended and Restated Rights Agreement, dated as of October 13, 1994
between Genzyme and American Stock Transfer and Trust Company. Filed as
Exhibit 4 to Genzyme's Form 8-K dated December 29, 1994.
*4.2 Specimen Callable Warrant to purchase Genzyme Common Stock issued to
shareholders of Neozyme II. Filed as Exhibit 28.6 to Genzyme's Form 10-Q
for the quarter ended March 31, 1992.
*4.3 Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4 to the Form
8-K of IG Laboratories, Inc., dated October 11, 1990, Commission File
No. 0-18439.
*10.1 Leases by Whatman Reeve Angel Limited to Whatman Biochemicals Limited
dated May 1, 1981. Filed as Exhibit 10.12 to Genzyme's Registration
Statement on Form S-1, File No. 33-4904.
*10.2 Lease dated as of September 15, 1989 for 95-111 Binney Street,
Cambridge, Massachusetts between Genzyme and the Trustees of the
Cambridge East Trust. Filed as Exhibit 10.2 to Genzyme's Form 10-K for
1992, and incorporated herein by reference. First amendment of lease
dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's Form 10-K
for 1993.
*10.3 Lease dated December 20, 1988 for Building 1400, One Kendall Square,
Cambridge, Massachusetts between Genzyme and the Trustees of Old Binney
Realty Trust, as amended by letters dated December 20, 1988, January 19,
1989 and January 31, 1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K
for 1988, and incorporated herein by reference. Addendum dated September
20, 1991 to Lease for Building 1400, One Kendall Square, Cambridge,
Massachusetts. Filed as Exhibit 19.1 to Genzyme's Form 10-Q dated
September 30, 1991, and incorporated herein by reference. Addenda dated
August 2, 1990 and April 6, 1993 to Lease for Building 1400, One Kendall
Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to Genzyme's
Form 10-K for 1993.
*10.4 Lease dated December 20, 1988 for Building 700, One Kendall Square,
Cambridge, Massachusetts between Genzyme and Trustees of Old Kendall
Realty Trust, as amended by letters dated December 20, 1988 and January
31, 1989. Filed as Exhibit 10.19 to Genzyme's Form 10-K for 1988.
*10.5 Lease dated September 30, 1985 for 51 New York Avenue, Framingham,
Massachusetts. Filed as Exhibit 10.8 to Genzyme's Form 10-K for 1990,
and incorporated herein by reference. Amendment No. 1, dated
'97
<PAGE> 145
EXHIBIT
NO. DESCRIPTION
- ------- -----------
October 11, 1990, and Amendment No. 2, dated May 12, 1993, to lease for
51 New York Avenue, Framingham, Massachusetts. Filed as Exhibit 10.5 to
Genzyme's Form 10-K for 1993.
*10.6 Lease dated April 30, 1990 for 64 Sidney Street, Cambridge,
Massachusetts between BioSurface Technology, Inc. ("BioSurface") and
Forest City 64 Sidney Street, Inc. Filed as Exhibit 10.22 to
BioSurface's Registration Statement on Form S-1, File No. 33-55874.
*10.7 Sublease Lease dated May 22, 1992 for three buildings at 74-84 New York
Avenue, Framingham, Massachusetts between Genzyme and Prime Computer,
Inc. Filed as Exhibit 10.7 to Genzyme's Form 10-K for 1993.
*10.8 Lease dated May 22, 1992 for three buildings at 74-84 New York Avenue,
Framingham, Massachusetts between Genzyme and Mark L. Fins, David J.
Winstanley and Bruce A. Gurall, tenants in common. Filed as Exhibit 10.8
to Genzyme's Form 10-K for 1993.
*10.9 Lease dated June 1, 1992 for land at Allston Landing, Allston,
Massachusetts between Allston Landing Limited Partnership and the
Massachusetts Turnpike Authority. Filed as Exhibit 10.9 to Genzyme's
Form 10-K for 1993.
*10.10 Underlease for Block 13 building at Kings Hill Business Park West
Malling Kent among Rouse and Associates Block 13 Limited, Genzyme (UK)
Limited and Genzyme Corporation. Filed as Exhibit 10.11 to Genzyme's
Registration Statement on Form 8-B dated December 31, 1991, filed on
March 2, 1992.
*10.11 Agreement of Limited Partnership dated as of September 13, 1989 between
Genzyme Development Corporation II, as General Partner, and each of the
Limited Partners named therein. Filed as Exhibit 10(aa) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343.
*10.12 Cross License Agreement dated as of September 13, 1989 between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as Exhibit
10(bb) to Genzyme's Registration Statement on Form S-4, File No.
33-32343.
*10.13 Development Agreement dated as of September 13, 1989 between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as Exhibit
10(cc) to Genzyme's Registration Statement on Form S-4, File No.
33-32343.
*10.14 Amendment No. 1 dated January 4, 1994 to Development Agreement dated as
of September 13, 1989 between Genzyme and Genzyme Development Partners,
L.P. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993.
*10.15 Notice dated January 4, 1994 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.15 to Genzyme's Form 10-K for 1993.
*10.16 Notice dated January 13, 1995 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.16 to Genzyme's Form 10-K for 1994.
*10.17 Notice dated February 22, 1996 from Genzyme to Genzyme Development
Partners, L.P. Filed as Exhibit 10.17 to Genzyme's Form 10-K for 1995.
*10.18 Partnership Purchase Option Agreement dated as of September 13, 1989
between Genzyme Corporation, Genzyme Development Corporation II, Genzyme
Development Partners, L.P. each Class A Limited Partner and the Class B
Limited Partner. Filed as Exhibit 10(dd) to Genzyme's Registration
Statement on Form S-4, File No. 33-32343.
*10.19 Partnership Purchase Agreement, undated and unexecuted, between Genzyme
Corporation, Genzyme Development Corporation II, Genzyme Development
Partners, L.P., each Class A Limited Partner and the Class B Limited
Partner, as the case may be. Filed as Exhibit 10(ee) to Genzyme's
Registration Statement on Form S-4, File No. 33-32343.
98
<PAGE> 146
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.20 Joint Venture Agreement dated as of September 13, 1989 between Genzyme
Corporation and Genzyme Development Partners, L.P. Filed as Exhibit
10(ff) to Genzyme's Registration Statement on Form S-4, File No.
33-32343.
*10.21 Technology License and Supply Agreement dated as of September 8, 1989
between Imedex and Genzyme. Filed as Exhibit 10.30 to Genzyme's Form
10-K for 1990.**
*10.22 1988 Director Stock Option Plan. Filed as Annex VIII to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.23 1990 Equity Incentive Plan. Filed as Annex VII to Genzyme's Registration
Statement on Form S-4, File No. 33-83346.
*10.24 1990 Employee Stock Purchase Plan. Filed as Annex IX to Genzyme's
Registration Statement on Form S-4, File No. 33-83346.
*10.25 Executive Employment Agreement dated as of January 1, 1990 between
Genzyme and Henri A. Termeer. Filed as Exhibit 10.32 to Genzyme's Form
10-K for 1990.
*10.26 Form of Severance Agreement between Genzyme and certain senior
executives, together with schedule identifying the provisions applicable
to each executive. Filed as Exhibit 10.33 to Genzyme's Form 10-K for
1990, and incorporated herein by reference. Current schedule identifying
the executives filed as Exhibit 10.32 to Genzyme's Form 10-K for 1993.
*10.27 Form of Indemnification Agreement between Genzyme and certain senior
executives, together with schedule identifying the provisions applicable
to each executive. Filed as Exhibit 10.34 to Genzyme's Form 10-K for
1990, and incorporated herein by reference. Current schedule identifying
the executives filed as Exhibit 10.33 to Genzyme's Form 10-K for 1993.
*10.28 Consulting Agreement dated March 1, 1993 between Genzyme and Henry E.
Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for 1992, and
incorporated herein by reference. Consulting Agreement dated February 3,
1994 between Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to
Genzyme's Form 10-K for 1993.
*10.29 Technology Transfer Agreement between Genzyme and Genzyme Transgenics
Corporation ("GTC") dated as of May 1, 1993. Filed as Exhibit 2.1 to the
Registration Statement on Form S-1 of GTC (File No. 33-62872).
99
<PAGE> 147
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*10.30 Research and Development Agreement between Genzyme and GTC dated as of
May 1, 1993. Filed as Exhibit 10.1 to the Registration Statement on Form
S-1 of GTC (File No. 33-62872).
*10.31 Services Agreement between Genzyme and GTC dated as of May 1, 1993.
Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of GTC
(File No. 33-62872).
*10.32 Series A Convertible Preferred Stock Purchase Agreement between Genzyme
and GTC dated as of May 1, 1993. Filed as Exhibit 10.5 to the
Registration Statement on Form S-1 of GTC (File No. 33-62872).
*10.33 Convertible Debt and Development Funding Agreement dated as of March 29,
1996 between Genzyme and GTC. Filed as Exhibit 10.39 to Genzyme's Form
10-K for 1995.
*10.34 Common Stock Purchase Agreement between Argus Pharmaceuticals, Inc. and
Genzyme Corporation dated as of September 10, 1993. Filed as Exhibit A
to Schedule 13D filed by Genzyme on September 20, 1993.* *
*10.35 Agreement and Plan of Reorganization dated as of July 25, 1994, as
amended, among Genzyme Corporation, Phoenix Acquisition Corporation and
BioSurface Technology, Inc. Filed as Annex X to Genzyme's Registration
Statement on Form S-4, File No. 33-83346.
*10.36 Agreement and Plan of Merger dated as of January 11, 1996 among Genzyme,
Genetrix, Inc and the Principal Stockholders of Genetrix. Filed as
Exhibit 2 to Genzyme's Registration Statement on Form S-4, File No.
333-1105.
*10.37 License and Development Agreement between Celtrix Pharmaceuticals, Inc.
("Celtrix") and Genzyme Corporation dated as of June 24, 1994. Filed as
Exhibit 10.42 to Celtrix's Annual Report on Form 10-K for the fiscal
year ended March 31, 1994.**
*10.38 Common Stock Purchase Agreement dated as of June 24, 1994 between
Celtrix and Genzyme Corporation. Filed as Exhibit A to Schedule 13D
filed by Genzyme on July 5, 1994.
10.39 Credit Agreement dated November 14, 1996 among Genzyme and those of its
subsidiaries party thereto, Fleet National Bank, as Administrative
Agent, and The First National Bank of Boston, as Documentation Agent.
Filed herewith.
11 Computation of weighted average shares used in computing per share
amounts. Filed herewith.
21 Subsidiaries of the Registrant. Filed herewith.
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith.
23.2 Consent of Coopers & Lybrand L.L.P. relating to the Annual Report of
Genzyme Corporation Retirement Savings Plan on Form 11-K. To be filed by
amendment.
27.1 Financial Data Schedule for Genzyme General Division (for EDGAR filing
purposes only).
27.2 Financial Data Schedule for Genzyme Tissue Repair Division (for EDGAR
filing purposes only).
99 Information, financial statements and exhibits required by Form 11-K
with respect to the Genzyme Corporation Retirement Savings Plan. To be
filed by amendment.
* Indicates exhibit previously filed with the Securities and Exchange Commission
and incorporated by reference. Exhibits filed with Forms 10-K, 10-Q, 8-K or 8-B
of Genzyme Corporation were filed under Commission File No. 0-14680.
* * Confidential treatment has been granted for the deleted portions of Exhibits
10.21, 10.34 and 10.37.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.22 through 10.28 above are management contracts or compensatory
plans or arrangements in which the executive officers or directors of Genzyme
participate.
100
<PAGE> 148
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENZYME CORPORATION
Dated: March 28, 1997 By: /s/ David J. McLachlan
-------------------------------
David J. McLachlan
Executive Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Henri A. Termeer Director and Principal March 28, 1997
- ----------------------------------- Executive Officer
Henri A. Termeer
Director March 28, 1997
- -----------------------------------
Constantine E. Anagnostopoulos
/s/ Douglas A. Berthiaume Director March 28, 1997
- -----------------------------------
Douglas A. Berthiaume
/s/ Henry E. Blair Director March 28, 1997
- -----------------------------------
Henry E. Blair
/s/ Charles L. Cooney Director March 28, 1997
- -----------------------------------
Charles L. Cooney
/s/ Henry R. Lewis Director March 28, 1997
- -----------------------------------
Henry R. Lewis
/s/ Robert J. Carpenter Director March 28, 1997
- -----------------------------------
Robert J. Carpenter
/s/ David J. McLachlan Principal Financial and March 28, 1997
- ----------------------------------- Accounting Officer
David J. McLachlan
101
<PAGE> 1
CREDIT AGREEMENT
AMONG
GENZYME CORPORATION,
THE SUBSIDIARY GUARANTORS PARTY HERETO,
THE LENDERS PARTY HERETO,
FLEET NATIONAL BANK,
AS ADMINISTRATIVE AGENT
AND
THE FIRST NATIONAL BANK OF BOSTON,
AS DOCUMENTATION AGENT
DATED: NOVEMBER 14, 1996
<PAGE> 2
TABLE OF CONTENTS
-----------------
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS .......................... 1
1.1 Certain Defined Terms ........................................... 1
1.2 Accounting Terms and Determinations ............................. 14
1.3 Types of Loans .................................................. 15
SECTION 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS ................... 15
2.1 Revolving Credit Loans .......................................... 15
2.2 Borrowings of Revolving Credit Loans ............................ 15
2.3 Changes of Commitments .......................................... 15
2.4 Commitment Fee .................................................. 16
2.5 Lending Offices ................................................. 16
2.6 Several Obligations; Remedies Independent ....................... 16
2.7 Notes ........................................................... 16
2.8 Optional Prepayments and Conversions or Continuations of Loans .. 17
2.9 Extension to Revolving Credit Commitment Termination Date ....... 17
SECTION 3. PAYMENTS OF PRINCIPAL AND INTEREST .......................... 18
3.1 Repayment of Loans .............................................. 18
3.2 Interest ........................................................ 18
SECTION 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. ............ 19
4.1 Payments ........................................................ 19
4.2 Pro Rata Treatment .............................................. 19
4.3 Computations .................................................... 20
4.4 Minimum Amounts ................................................. 20
4.5 Certain Notices ................................................. 20
4.6 Non-Receipt of Funds by the Administrative Agent ................ 21
4.7 Sharing of Payments, Etc. ....................................... 22
SECTION 5. YIELD PROTECTION, ETC. ...................................... 23
5.1 Additional Costs ................................................ 23
5.2 Limitation on Types of Loans .................................... 25
5.3 Illegality ...................................................... 26
5.4 Treatment of Affected Loans ..................................... 26
5.5 Compensation .................................................... 26
SECTION 6. GUARANTEE ................................................... 27
6.1 Guarantee ....................................................... 27
6.2 Obligations Unconditional ....................................... 28
6.3 Reinstatement ................................................... 28
6.4 Subrogation ..................................................... 29
6.5 Remedies ........................................................ 29
6.6 Continuing Guarantee ............................................ 29
<PAGE> 3
6.7 Rights of Contribution .......................................... 29
6.8 Limitation on Guarantee Obligations ............................. 30
SECTION 7. CONDITIONS PRECEDENT ........................................ 30
7.1 Initial Loan .................................................... 30
7.2 Initial and Subsequent Extensions of Credit ..................... 32
SECTION 8. REPRESENTATIONS AND WARRANTIES .............................. 32
8.1 Existence ....................................................... 32
8.2 Financial Condition ............................................. 33
8.3 Litigation ...................................................... 33
8.4 No Breach ....................................................... 33
8.5 Action .......................................................... 34
8.6 Approvals ....................................................... 34
8.7 Use of Credit ................................................... 34
8.8 ERISA ........................................................... 34
8.9 Taxes ........................................................... 34
8.10 Investment Company Act ......................................... 35
8.11 Public Utility Holding Company Act ............................. 35
8.12 Borrowing Agreements and Liens ................................. 35
8.13 Compliance with Laws Including Environmental and Safety
Matters ........................................................ 35
8.14 Subsidiaries, Etc. ............................................. 36
8.15 Title to Assets; Etc. .......................................... 36
8.16 Intellectual Property Rights ................................... 36
8.17 True and Complete Disclosure ................................... 36
SECTION 9. COVENANTS OF THE COMPANY .................................... 37
9.1 Financial Statements Etc. ....................................... 37
9.2 Litigation ...................................................... 38
9.3 Existence, Etc. ................................................. 38
9.4 Insurance ....................................................... 39
9.5 Prohibition of Fundamental Changes .............................. 40
9.6 Limitation on Liens ............................................. 41
9.7 Indebtedness .................................................... 42
9.8 Investments ..................................................... 43
9.9 Financial Covenants ............................................. 43
9.10 Lines of Business .............................................. 44
9.11 Use of Proceeds ................................................ 45
9.12 Certain Obligations Respecting Subsidiaries .................... 45
9.13 Additional Subsidiary Guarantors ............................... 46
SECTION 10. EVENTS OF DEFAULT .......................................... 46
SECTION 11. THE AGENTS ................................................. 48
11.1 Appointment, Powers and Immunities ............................. 48
11.2 Reliance by Agents ............................................. 49
<PAGE> 4
11.3 Defaults ....................................................... 50
11.4 Rights as a Lender ............................................. 50
11.5 Indemnification ................................................ 50
11.6 Non-Reliance on Agents and Other Lenders ....................... 50
11.7 Failure to Act ................................................. 51
11.8 Resignation or Removal of Agents ............................... 51
11.9 Consents under Other Loan Documents ............................ 51
SECTION 12. MISCELLANEOUS .............................................. 52
12.1 Waiver ........................................................ 52
12.2 Notices ....................................................... 52
12.3 Expenses, Etc. ................................................ 52
12.4 Indemnification ............................................... 53
12.5 Amendments, Etc. .............................................. 53
12.6 Successors and Assigns ........................................ 54
12.7 Assignments and Participations ................................ 54
12.8 Survival ...................................................... 56
12.9 Captions ...................................................... 56
12.10 Counterparts .................................................. 56
12.11 Governing Law; Submission to Jurisdiction ..................... 56
12.12 Waiver of Jury Trial .......................................... 56
12.13 Confidentiality ............................................... 57
Schedules:
Schedule 7.1 Indebtedness to be paid at closing
Schedule 8.3 Litigation
Schedule 8.12A Credit Agreements, Indentures, Guarantees, Letters of Credit,
Etc.
Schedule 8.12B Liens Securing Indebtedness
Schedule 8.14 Subsidiaries
Exhibits:
Exhibit A Form of Revolving Credit Note
Exhibit B Form of Legal Opinion
Exhibit C Form of Compliance Certificate
Exhibit D Form of Joinder Agreement
Exhibit E Form of Notice of Assignment
Exhibit F Form of Pledge Agreement
<PAGE> 5
CREDIT AGREEMENT
CREDIT AGREEMENT ("Agreement" or "Credit Agreement") dated as of November
14, 1996 among and between:
GENZYME CORPORATION, a corporation duly organized and validly existing
under the laws of The Commonwealth of Massachusetts (together with its permitted
successors and assigns, the "Company");
Each of the Subsidiaries of the Company identified under the caption
"SUBSIDIARY GUARANTORS" on the signature pages hereto or that may hereafter
become a "SUBSIDIARY GUARANTOR" pursuant to Section 9.13 hereof (together with
its permitted successors and assigns, individually, a "SUBSIDIARY GUARANTOR"
and, collectively, the "Subsidiary Guarantors" and, together with the Company,
the "OBLIGORS");
Each of the lenders identified under the caption "LENDERS" on the
signature pages hereto or that may hereafter become a "Lender" pursuant to
Section 12.7(b) hereof (together with its successors and permitted assigns,
individually, a "Lender" and, collectively, the "LENDERS");
FLEET NATIONAL BANK ("FLEET") as administrative agent for the Lenders (in
such capacity, together with the successors in such capacity, the
"ADMINISTRATIVE AGENT");
THE FIRST NATIONAL BANK OF BOSTON ("BANKBOSTON") as documentation agent
for the Lenders (in such capacity, together with the successors in such
capacity, the "Documentation Agent" and together with the Administrative Agent,
the "AGENT" or "AGENTS");
The Company has requested that the Lenders extend credit to the Company in
an aggregate principal or stated amount not exceeding $225,000,000; and
To induce the Lenders to extend such credit, the Obligors, the Lenders and
the Agents propose to enter into this Agreement pursuant to which, INTER ALIA,
(1) the Lenders will make loans to the Company and (2) each Subsidiary Guarantor
will guarantee the credit so extended to the Company. Each of the Obligors
expects to derive benefit, directly or indirectly, from the credit so extended
to the Company, both in its separate capacity and as a member of the integrated
group, since the successful operation of each of the Obligors is dependent on
the continued successful performance of the functions of the integrated group as
a whole.
Accordingly, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters
----------------------------------
1.1. CERTAIN DEFINED TERMS. As used herein, the following terms shall have
the following meanings (all terms defined in this Section 1.1 or in other
provisions of this Agreement in the singular to have the same meanings when used
in the plural and vice versa).
"Accounts Receivable" shall mean, on any date, the net amount of accounts
receivable of Company and its Consolidated Subsidiaries, excluding any such
accounts which are more than
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<PAGE> 6
120 days old, after deducting all returns, discounts and allowances thereon and
reserves relating thereto, determined in accordance with GAAP.
"ADJUSTED LIBO RATE" shall mean, for any LIBOR Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Administrative Agent to be equal to the rate of interest specified in the
definition of "LIBO Rate" in this Section 1.1 for the Interest Period for such
Loan divided by 1 minus the Reserve Requirement (if any) for such Loan for such
Interest Period.
"ADMINISTRATIVE AGENT" shall have the meaning given such term in the
preamble hereto, as it may be amended, modified, or changed from time to time.
"Affiliate" shall mean any Person that directly or indirectly controls, or
is under common control with, or is controlled by, the Company and, if such
Person is an individual, any member of the immediate family (including parents,
spouse, children and siblings) of such individual and any trust whose principal
beneficiary is such individual or one or more members of such immediate family
and any Person who is controlled by any such member or trust. As used in this
definition, "control" (including, with its correlative meanings, "CONTROLLED BY"
and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly,
of power to direct or cause the direction of management or policies (whether
through ownership of securities or partnership or other ownership interests, by
contract or otherwise), or that, in any event, any Person that owns directly or
indirectly securities having 33% or more of the voting power for the election of
directors or other governing body of a corporation or 33% or more of the
partnership or other ownership interests of any other Person will be deemed to
control such corporation, partnership or other Person. Notwithstanding the
foregoing, (a) the Company and its Subsidiaries shall not be Affiliates of each
other and (b) neither any Agent nor any Lender shall be an Affiliate of the
Company or any of its Subsidiaries.
"AGENTS" shall have the meaning given in the preamble hereto, as it may be
amended, modified or changed from time to time.
"APPLICABLE COMMITMENT FEE RATE" shall mean, for any period set forth
below, the percentage set forth below opposite such period under the caption
"APPLICABLE COMMITMENT FEE RATE", and "APPLICABLE MARGIN" shall mean, for any
period set forth below for either Type of Loan set forth below, the percentage
set forth below opposite such period under the caption "APPLICABLE MARGIN" and
under the caption for such Type of Loan:
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<PAGE> 7
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Applicable Margin
============================================================================
Applicable
Period Commitment Fee Rate Prime Rate Loans LIBOR Loans
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Level I Period 0.150% 0.000% 0.375%
- ----------------------------------------------------------------------------
Level II Period 0.200% 0.000% 0.500%
- ----------------------------------------------------------------------------
Level III Period 0.250% 0.000% 0.625%
- ----------------------------------------------------------------------------
Level IV Period 0.375% 0.000% 0.875%
- ----------------------------------------------------------------------------
</TABLE>
"APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each Type
of Loan, the "Lending Office" of such Lender (or of an affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
office of such Lender (or of an affiliate of such Lender) as such Lender may
from time to time specify to the Administrative Agent and the Company as the
office by which its Loans of such Type are to be made and maintained.
"BANKRUPTCY CODE" shall mean the Federal Bankruptcy Code of 1978, as
amended from time to time.
"BASLE ACCORD" shall mean the proposals for risk-based capital framework
described by the Basle Committee on Banking Regulations and Supervisory
Practices in its paper entitled "International Convergence of Capital
Measurement and Capital Standards" dated July 1988, as amended, modified and
supplemented and in effect from time to time or any replacement thereof.
"BUSINESS DAY" shall mean (a) any day on which commercial banks are not
authorized or required to close in Boston, Massachusetts and (b) if such day
relates to the giving of notices or quotes in connection with a borrowing of, a
payment or prepayment of principal of or interest on, a Conversion of or into,
or an Interest Period for, a LIBOR Loan or a notice by the Company with respect
to any such borrowing, payment, prepayment, Conversion or Interest Period, then
any day referred to in clause (a) that is also a day on which dealings in Dollar
deposits are carried out in the London interbank market.
"CAPITAL EXPENDITURES" shall mean, for any period, expenditures
(including, without limitation, the aggregate amount of Capital Lease
Obligations incurred during such period) made by the Company or any of its
Subsidiaries to acquire or construct fixed assets, plant and equipment
(including renewals, improvements and replacements, but excluding repairs)
during such period computed in accordance with GAAP.
"CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, all obligations of
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) property to the extent such obligations are required
to be classified and accounted for as a capital lease on a balance sheet of such
Person under GAAP, and, for purposes of this Agreement, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP.
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<PAGE> 8
"CASH EQUIVALENTS" shall mean any interest bearing investment of Company
and its Wholly Owned Subsidiaries which meets the definition of a "cash
equivalent" under GAAP (i.e., purchased with a remaining maturity of 90 days or
less). Such investments shall be at least investment grade (A1/P1 for commercial
paper, BBB or better for bonds and similar investments).
"CLOSING DATE" the date upon which the initial Loans hereunder are made.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"COMMITMENTS" shall mean the Revolving Credit Commitments.
"COMPANY" shall have the meaning given in the preamble, and its successors
and permitted assigns hereunder.
"COMPLIANCE CERTIFICATE" shall mean the compliance certificate provided
for under Section 9.1(c)(ii) in substantially the form of Exhibit C.
"CONSOLIDATED" shall mean, when used with reference to any term, that term
(or the term "combined" in the case of partnerships, joint ventures and
Affiliates that are not Subsidiaries) as applied to the accounts of Company (or
any other specified Person) and all of its Subsidiaries (or other specified
Persons) or such of its Subsidiaries as may be specified, consolidated (or
combined) in accordance with GAAP and with appropriate deductions for minority
interests in Subsidiaries, if required by GAAP.
"CONSOLIDATED EBITDA" shall mean, for any period, the sum, for the
Company, of the following: (a) Consolidated Operating Income for such period
PLUS (b) depreciation and amortization, but only to the extent deducted in
determining Consolidated Operating Income for such period.
"CONSOLIDATED DEBT COVERAGE RATIO" shall mean, at any date, the ratio, for
the Company and its Consolidated Subsidiaries, of (a) the sum of (i)
Unrestricted Cash on such date plus (ii) Marketable Investments on such date to
(b) Consolidated Funded Debt on such date.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" shall mean, for any period, the
ratio of (a) the sum of (i) Consolidated EBITDA for such period LESS (ii) the
aggregate amount of Capital Expenditures made during such period LESS (iii) the
amount of the taxes paid during such period less (iv) the aggregate amount of
all Dividend Payments made during such period to (b) all Interest expense for
such period.
"CONSOLIDATED FUNDED DEBT" shall mean, at any time, the outstanding
balance of all Indebtedness in respect of borrowed money, Capital Lease
Obligations, letters of credit and trade acceptances for the Company and its
Consolidated Subsidiaries.
"CONSOLIDATED NET INCOME" shall mean, for any period, net income (or loss)
for the Company and its Consolidated Subsidiaries (determined in accordance with
GAAP), PROVIDED, HOWEVER, that Consolidated Net Income shall not include amounts
included in computing net
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<PAGE> 9
income (or loss) in respect of (a) the write-up of assets (other than Marketable
Investments) after December 31, 1995 and (b) extraordinary and non-recurring
gains or losses.
"CONSOLIDATED NET WORTH" shall mean, as at any date, the shareholder's
equity of the Company and its Consolidated Subsidiaries.
"CONSOLIDATED OPERATING INCOME" shall mean, for any period, the
Consolidated Net Income of the Company for such period, provided, however, that,
to the extent the following items have been included in determining Consolidated
Net Income, they shall NOT be considered in computing Consolidated Operating
Income: provision for income taxes, interest expense, equity in the operating
results of unconsolidated Subsidiaries and non-operating, non-cash items
including, but not limited to, write-off of acquired technology or acquired,
in-process research and development which, in accordance with GAAP, must be
charged to income. Furthermore, all charges arising from the acquisition of
Neozyme II Corporation and/or Deknatel Snowden Pencer, Inc. which are included
in the determination of Consolidated Net Income for any period shall be excluded
from the computation of Consolidated Operating Income whether such charges be of
a cash or non-cash nature.
"CONSOLIDATED QUICK RATIO" shall mean, at any date, the ratio, for the
Company and its Consolidated Subsidiaries, of (a) the sum of (i) Unrestricted
Cash on such date plus (ii) Marketable Investments on such date plus (iii)
Accounts Receivable on such date to (b) the sum of (i) Current Liabilities on
such date plus (ii) $50,000,000.
"CONSOLIDATED TANGIBLE NET WORTH" shall mean, as at any date, for the
Company and its Consolidated Subsidiaries, the Consolidated Net Worth of the
Company and its Consolidated Subsidiaries less all intangible assets of the
Company and its Consolidated Subsidiaries.
"CONSOLIDATED TOTAL LIABILITIES" shall mean, as at any date, the sum, for
the Company and its Consolidated Subsidiaries, of all Indebtedness and other
liabilities, in each case, that should be classified as liabilities on a balance
sheet, including, without limitation, all reserves and all deferred taxes and
other deferred items.
"CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the continuation
pursuant to Section 2.8 hereof of a LIBOR Loan from one Interest Period to the
next Interest Period.
"CONVERT", "CONVERSION" and "CONVERTED" shall refer to a conversion
pursuant to Section 2.8 hereof of one Type of Loans into another Type of Loans,
which may be accompanied by the transfer by a Lender (at its sole discretion,
but subject to Section 5.1(d) hereof) of a Loan from one Applicable Lending
Office to another.
"CURRENT LIABILITIES" shall mean any liability that in accordance with
GAAP would be classified as such.
"DEFAULT" shall mean an Event of Default or an event that with notice or
lapse of time or both would become an Event of Default.
-5-
<PAGE> 10
"DIVIDEND PAYMENT" shall mean dividends (in cash, Property or obligations)
on, or other payments or distributions on account of, or the setting apart of
money for a sinking or other analogous fund for, or the purchase, redemption,
retirement or other acquisition of, any shares of any class of stock of, or any
partnership or other equity interest issued by, the Company or of any warrants,
options or other rights to acquire the same (or to make any payments to any
Person, such as "phantom stock" payments, where the amount thereof is calculated
with reference to the fair market or equity value of the Company or any of its
Subsidiaries), but excluding dividends payable solely in shares of common stock
of the Company.
"DOLLARS" and "$" shall mean lawful money of the United States of America.
"ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, any written
or oral notice, claim, demand or other communication (collectively, a "claim")
by any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, governmental response costs, damages to
natural resources or other Property, personal injuries, fines or penalties
arising out of, based on or resulting from (a) the presence, or Release into the
environment, of any Hazardous Material at any location, whether or not owned by
such Person, or (b) circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law. The term "Environmental Claim" shall
include, without limitation, any claim by any governmental authority for
enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law, and any claim by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from the presence of Hazardous Materials or arising
from alleged injury or threat of injury to the environment.
"ENVIRONMENTAL LAWS" shall mean any and all present and future Federal,
state, local and foreign laws, rules or regulations, and any orders or decrees,
in each case as now or hereafter in effect, relating to the regulation or
protection of the environment or to emissions, discharges, releases or
threatened releases of pollutants, contaminants or toxic or hazardous substances
or wastes into the indoor or outdoor environment, including, without limitation,
ambient air, soil, surface water, ground water, wetlands, land or subsurface
strata, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants
or toxic or hazardous substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA AFFILIATE" shall mean any corporation or trade or business that is
a member of any group of organizations (a) described in Section 414(b) or (c) of
the Code of which the Company is a member and (b) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the Company
is a member.
"EVENT OF DEFAULT" shall have the meaning assigned to such term in Section
10 hereof.
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<PAGE> 11
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day, provided that (a) if the day for which such rate is to be determined is not
a Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Business Day as so published on the next
succeeding Business Day and (b) if such rate is not so published for any
Business Day, the Federal Funds Rate for such Business Day shall be the average
rate charged to Fleet on such Business Day on such transactions as determined by
the Administrative Agent.
"GAAP" shall mean generally accepted accounting principles applied on a
basis consistent with those that, in accordance with the last sentence of
Section 1.2(a) hereof, are to be used in making the calculations for purposes of
determining compliance with this Agreement.
"GUARANTEE" shall mean a guarantee, an endorsement, a contingent agreement
to purchase or to furnish funds for the payment or maintenance of, or otherwise
to be or become contingently liable under or with respect to, the Indebtedness,
other obligations, net worth, working capital or earnings of any Person, or a
guarantee of the payment of dividends or other distributions upon the stock or
equity interests of any Person, or an agreement to purchase, sell or lease (as
lessee or lessor) Property, products, materials, supplies or services primarily
for the purpose of enabling a debtor to make payment of such debtor's
obligations or an agreement to assure a creditor against loss, and including,
without limitation, causing a bank or other financial institution to issue a
letter of credit or other similar instrument for the benefit of another Person,
but excluding endorsements for collection or deposit in the ordinary course of
business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a
correlative meaning.
"GUARANTEED OBLIGATIONS" shall have the meaning assigned to such term in
Section 6.1 hereof.
"HAZARDOUS MATERIAL" shall mean, collectively, (a) any petroleum or
petroleum products, explosives, radioactive materials, asbestos, urea
formaldehyde foam insulation, and transformers or other equipment that contain
polychlorinated biphenyls ("PCB's") in concentrations that are regulated under
the Toxic Substances Control Act, as amended, or any other Environmental Law,
(b) any chemicals or other materials or substances that are now or hereafter
become defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances", "toxic pollutants",
"contaminants", "pollutants" or words of similar import under any Environmental
Law and (c) any other chemical or other material or substance, exposure to which
is now or hereafter prohibited, limited or regulated under any Environmental
Law.
"INDEBTEDNESS" shall mean, for the Company and its Consolidated
Subsidiaries: (a) obligations created, issued or incurred by such Person for
borrowed money (whether by loan, the issuance and sale of debt securities or the
sale of Property to another Person subject to an understanding or agreement,
contingent or otherwise, to repurchase such Property from such Person); (b)
obligations of such Person to pay the deferred purchase or acquisition price of
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<PAGE> 12
Property or services, other than trade accounts payable (other than for borrowed
money) arising, and accrued expenses incurred, in the ordinary course of
business so long as such trade accounts payable are payable within 120 days of
the date the respective goods or services are delivered or rendered; (c)
Indebtedness of others secured by a Lien on the Property of such Person, whether
or not the respective indebtedness so secured has been assumed by such Person;
(d) obligations of such Person, contingent or otherwise, in respect of letters
of credit, bankers' acceptances or similar instruments issued or accepted by
banks and other financial institutions for account of such person; (e) Capital
Lease Obligations of such Person; and (f) Guarantees by such Person of
Indebtedness of others.
"INTELLECTUAL PROPERTY" shall mean "Intellectual Property," as defined in
Section 101(60) of the Bankruptcy Code, now or hereafter owned by Company or any
of its Subsidiaries, together with all of the following property now or
hereafter owned by Company or any of its Subsidiaries: all domestic and foreign
patents and patent applications; inventions, discoveries and improvements,
whether or not patentable; trademarks, trademark applications and registrations;
service marks, service mark applications and registrations; copyrights,
copyright applications and registrations; all licenses therefor; trade secrets
and all other proprietary information.
"INTEREST" shall mean, for any period, the sum, for the Company and its
Consolidated Subsidiaries, of the following: (a) all interest in respect of
Indebtedness (including, without limitation, the interest component of any
payments in respect of Capital Lease Obligations) accrued or capitalized during
such period (whether or not actually paid during such period); and (b) all other
amounts that would be accrued or capitalized during such period as "interest
expense" in accordance with GAAP.
"INTEREST PERIOD" shall mean: with respect to any LIBOR Loan, each period
commencing on the date such LIBOR Loan is made or Converted from a Loan of
another Type or the day after the last day of the next preceding Interest Period
for such Loan and ending on the numerically corresponding day in the first,
second, third or sixth calendar month thereafter, as the Company may select as
provided in Section 4.5 hereof, except that each Interest Period that commences
on the last Business Day of a calendar month (or on any day for which there is
no numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month;
PROVIDED, THAT, notwithstanding the foregoing:
(i) if any Interest Period for any Revolving Credit Loan would
otherwise end after the Revolving Credit Commitment Termination Date, such
Interest Period shall not be available hereunder;
(ii) each Interest Period that would otherwise end on a day that is
not a Business Day shall end on the next succeeding Business Day (or, if
such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day); and
(iii) notwithstanding clauses (i) and (ii) above, no Interest Period
for
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<PAGE> 13
any LIBOR Loan shall have a duration of less than one month and, if the
Interest Period for any LIBOR Loan would otherwise be a shorter period,
such Loan shall not be available as a LIBOR Loan hereunder for such
period.
"INVESTMENT" shall mean, for any Person: (a) the acquisition (whether for
cash, Property, services or securities or otherwise) of capital stock, bonds,
notes, debentures, partnership or other ownership interests or other securities
of any other Person or any agreement to make any such acquisition (including,
without limitation, any "short sale" or any sale of any securities at a time
when such securities are not owned by the Person entering into such sale); (b)
the making of any deposit with, or advance, loan or other extension of credit
to, any other Person (including the purchase of Property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such Property to such Person), but excluding any such advance, loan or extension
of credit arising in connection with the sale of inventory or supplies by such
Person in the ordinary course of business so long as such advance, loan or
extension of credit is made on terms (including as to maturity) consistent with
those terms offered by the Company on the date hereof; and (c) the entering into
of any Guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of any other Person and (without duplication)
any amount committed to be advanced, lent or extended to such Person.
"LEVEL I PERIOD" shall mean any period (a) from and including the Business
Day immediately following the Business Day on which a senior financial officer
of the Company shall have delivered to the Administrative Agent a Compliance
Certificate, together with the related financial statements referred to in
Section 9.1 hereof, demonstrating in reasonable detail that the Consolidated
Debt Coverage Ratio, as of the last day of the fiscal quarter of the Company
most recently ended, is greater than or equal to 2.0 to 1.0 or that the
Consolidated Fixed Charge Coverage Ratio for such period was greater than 5.5 to
1.0, to but excluding the next succeeding Reporting Date and (b) during which no
Event of Default shall have occurred and be continuing.
"LEVEL II PERIOD" shall mean any period, other than a Level I Period, (a)
from and including the Business Day immediately following the Business Day on
which a senior financial officer of the Company shall have delivered to the
Administrative Agent a Compliance Certificate, together with the related
financial statements referred to in Section 9.1 hereof, demonstrating in
reasonable detail that the Consolidated Debt Coverage Ratio, as of the last day
of the fiscal quarter of the Company most recently ended, is less than to 2.0 to
1.0 and greater than or equal to 1.0 to 1.0 or that the Consolidated Fixed
Charge Coverage Ratio for such period was greater than or equal to 4.5 to 1.0
and less than or equal to 5.5 to 1.0, to but excluding the next succeeding
Reporting Date and (b) during which no Event of Default shall have occurred and
be continuing.
"LEVEL III PERIOD" shall mean any period, other than a Level I Period or
Level II Period, (a) from and including the Business Day immediately following
the Business Day on which a senior financial officer of the Company shall have
delivered to the Administrative Agent a Compliance Certificate, together with
the related financial statements referred to in Section 9.1 hereof,
demonstrating in reasonable detail that the Consolidated Debt Coverage Ratio, as
of the last day of the fiscal quarter of the Company most recently ended, is
less than to 1.0 to 1.0 and that the Consolidated Fixed Charge Coverage Ratio
for such period was greater than or equal to 3.5 to 1.0 and less than 4.5 to
1.0, to but excluding the next succeeding Reporting Date and (b) during which no
Event of Default shall have occurred and be continuing.
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<PAGE> 14
"LEVEL IV PERIOD" shall mean any period, other than a Level I Period,
Level II Period or Level III Period.
"LIBO RATE" shall mean, with respect to any LIBOR Loan for any Interest
Period therefor, the simple average (rounded upwards, if necessary, to the
nearest 1/32 of 1%), as determined by the Administrative Agent, of the rates per
annum quoted to Fleet at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) on the date two Business Days prior to the first day
of such Interest Period for the offering by leading banks in the London
interbank market of Dollar deposits having a term comparable to such Interest
Period and in an amount comparable to the principal amount of the LIBOR Loan to
be made by the Lenders for such Interest Period.
"LIBOR LOANS" shall mean loans bearing interest at the rate determined
under Section 3.2(b).
"LIEN" shall mean, with respect to any Property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
property. For purposes of this Agreement and the other Loan Documents, a Person
shall be deemed to own subject to a Lien any Property that it has acquired or
holds subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement (other than an
operating lease) relating to such Property.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Pledge
Agreement and all other agreements, instruments and documents entered into
pursuant hereto or thereto as such may be amended, modified or changed from time
to time.
"LOANS" shall mean Prime Rate Loans and LIBOR Loans.
"MARGIN STOCK" shall mean "margin stock" within the meaning of Regulations
U and X.
"MARKETABLE INVESTMENTS" shall mean any interest-bearing debt obligations
owned by Company and its Wholly-Owned Subsidiaries (excluding directors'
qualifying shares and items included as Cash Equivalents) which meet the
definition of marketable securities under GAAP. Such amounts shall exclude
common or preferred stock. Such securities shall include obligations issued by
the U.S. Treasury and other agencies of the U.S. government, corporate bonds,
bank notes, mortgage and asset backed securities, finance company securities and
auction rate preferred stocks. Such securities shall be rated investment grade
(BBB or better for bonds or similar securities, A1/P1 for commercial paper and
notes) and shall otherwise be reasonably liquid investments.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the
business, operations or financial condition or material Property of the Company
and its Subsidiaries, taken as a whole, (b) the validity or enforceability of
any of the Loan Documents or the rights and remedies of the Lenders and the
Agents thereunder or (c) the ability of the Obligors to perform their
obligations hereunder including the timely payment of the principal of or
interest on the Loans or other amounts in connection therewith.
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<PAGE> 15
"MATERIAL SUBSIDIARY" shall mean any Subsidiary of the Company, the value
of the assets of which exceeds five percent (5%) of the consolidated assets of
the Company and its Subsidiaries, taken as a whole, and, for the purposes of
Sections 6 and 9.13 hereof means such a Subsidiary of the Company that is
organized under the laws of the United States, provided that Genzyme Securities
Corporation shall not be deemed to be a Material Subsidiary for purposes of
Sections 6 and 9.13 hereof.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan defined as such in
Section 3(37) of ERISA to which contributions have been made by the Company or
any ERISA Affiliate and that is covered by Title IV of ERISA.
"NET EQUITY PROCEEDS" shall mean the aggregate amount of all cash payments
and the fair market value of any non-cash consideration received by the Company
and its Subsidiaries directly or indirectly in connection with any Investment in
the Company or any Subsidiary; PROVIDED that Net Equity Proceeds shall be net of
the amount of any legal expenses, commissions other fees and expenses paid by
the Company and its Subsidiaries to any non-Affiliated Person in connection with
such Investment.
"NOTES" shall mean the Revolving Credit Notes.
"OBLIGATIONS" shall mean any and all of the Revolving Credit Loans,
including any principal, interest, charges, fees, costs and expenses (including
interest arising after the filing of any bankruptcy petition and notwithstanding
any law to the contrary) and all other obligations liabilities and indebtedness
of the Company or any Obligor of any kind, nature or description arising under
this Agreement, the Notes or any other Loan Documents.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
"PLAN" shall mean an employee benefit or other plan established or
maintained by the Company or any ERISA Affiliate and that is covered by Title IV
of ERISA, other than a Multiemployer Plan.
"PLEDGE AGREEMENT" shall mean the Pledge Agreement provided under Section
7.1(f) as the same such shall be modified, amended and supplemented from time to
time.
"POST-DEFAULT RATE" shall mean a rate per annum equal to 4% PLUS the
interest rate for a Loan as provided in one of the lettered paragraphs of
Section 3.2 for a Level IV Period.
"PRIME RATE" shall mean for any day the rate equal to the higher from time
to time of (A) the rate of interest announced by Fleet at the Principal Office
from time to time as its prime rate; and (B) a rate equal to 1/2 of 1% per annum
above the weighted average of the rates on overnight
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<PAGE> 16
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, as determined on any day by Fleet.
"PRIME RATE LOANS" shall mean loans bearing interest at the rate
determined under Section 3.2(a).
"PRINCIPAL OFFICE" shall mean the principal office of Fleet, located on
the date hereof at 75 State Street, Boston, Massachusetts 02109.
"PROPERTY" shall mean any right or interest in or to property of any kind
whatsoever, whether real, personal or mixed and whether tangible or intangible.
"QUARTERLY DATES" shall mean the last Business Day of March, June,
September and December of each year, the first of which shall be the first such
day after the date hereof.
"REGULATIONS A, D, U AND X" shall mean, respectively, Regulations A, D, U
and X of the Board of Governors of the Federal Reserve System (or any
successor), as the same may be modified and supplemented and in effect from time
to time.
"REGULATORY CHANGE" shall mean, with respect to any Lender, any change
after the date hereof in Federal, state or foreign law or regulations
(including, without limitation, Regulation D) or the adoption or making after
such date of any interpretation, directive or request applying to a class of
banks including such Lender of or under any Federal, state or foreign law or
regulations (whether or not having the force of law and whether or not failure
to comply therewith would be unlawful) by any court or governmental or monetary
authority charged with the interpretation or administration thereof.
"RELEASE" shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor environment, including, without limitation, the movement
of Hazardous Materials through ambient air, soil, surface water, ground water,
wetlands, land or subsurface strata.
"REPLACEMENT LENDERS" shall mean any Lender acceptable to the
Administrative Agent that becomes a Lender pursuant to the Company's right to
replace Lenders under Section 2.9.
"REPORTING DATE" shall mean the first to occur of (i) the Business Day
following the Business Day that the Administrative Agent receives a Compliance
Certificate of the Company providing the information required to determine
whether a period is a Level I Period, Level II Period, Level III Period or Level
IV Period and (ii) the first Business Day after the date on which the quarterly
or annual financial statement and Compliance Certificate is required to be
delivered to the Lenders pursuant to Section 9.1(a) or (b) and (c).
"REQUIRED LENDERS" shall mean Lenders having at least 51% of the aggregate
amount of the Commitments or, if the Commitments shall have terminated, Lenders
holding at least 51% of the aggregate unpaid principal amount of the Loans.
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<PAGE> 17
"RESERVE REQUIREMENT" shall mean, for any Interest Period for a LIBOR
Loan, the average maximum rate at which reserves (including, without limitation,
any marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding one billion Dollars
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any Regulatory Change with respect to (i) any category of liabilities
that includes deposits by reference to which the LIBOR Loan is to be determined
or (ii) any category of extensions of credit or other assets that includes LIBOR
Loans.
"REVOLVING CREDIT COMMITMENT" shall mean, for each Revolving Credit
Lender, the obligation of such Lender to make Revolving Credit Loans in an
aggregate principal amount at any one time outstanding up to but not exceeding
(a) in the case of any such Lender originally party hereto, the sum of (i) the
amount set opposite the name of such Lender on the signature pages hereto under
the caption "Revolving Credit Commitment" plus (ii) the aggregate amount of
Revolving Credit Commitments acquired by such Lender from other Lenders pursuant
to Section 12.7(b) hereof minus (iii) the aggregate amount of Revolving Credit
Commitments transferred by such Lender to one or more other Lenders pursuant to
Section 12.7(b) hereof and (b) in the case of any such Lender that was not
originally party hereto, (i) the aggregate amount of Revolving Credit
Commitments acquired by such Lender from other Lenders pursuant to Section
12.7(b) hereof minus (ii) the aggregate amount of Revolving Credit Commitments
transferred by such Lender to one or more other Lenders pursuant to Section
12.7(b) hereof, in each case, as such obligation may be reduced from time to
time pursuant to Section 2.3 hereof.
"REVOLVING CREDIT COMMITMENT PERCENTAGE" shall mean, with respect to any
Revolving Credit Lender, the ratio of (a) the amount of the Revolving Credit
Commitment of such Lender to (b) the aggregate amount of the Revolving Credit
Commitments of all of the Lenders.
"REVOLVING CREDIT COMMITMENT TERMINATION DATE" shall be November 15, 1999,
which date is subject to extension as provided in Section 2.9.
"REVOLVING CREDIT LENDERS" shall mean the Lenders from time to time
holding Revolving Credit Loans and/or Revolving Credit Commitments.
"REVOLVING CREDIT LOANS" shall mean the loans provided for in Section 2.1
hereof, which may be Prime Rate Loans and/or LIBOR Loans.
"REVOLVING CREDIT NOTES" shall mean the promissory notes provided for by
Section 2.7(a) hereof and all promissory notes delivered in substitution or
exchange for any thereof, in each case as the same shall be modified and
supplemented and in effect from time to time.
"SUBORDINATED DEBT" shall mean Indebtedness of Company and its
Subsidiaries that by its terms is fully subordinated to the payment and
enforcement of the Loans in a manner satisfactory to the Required Lenders.
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<PAGE> 18
"SUBSIDIARY" shall mean, with respect to any Person, any corporation,
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions of such corporation, partnership or other entity (irrespective of
whether or not at the time securities or other ownership interests of any other
class or classes of such corporation, partnership or other entity shall have or
might have voting power by reason of the happening of any contingency), or of
which at least a majority of the limited partnership interests or other similar
ownership interests issued by any limited partnership or other similar entity,
is at the time directly or indirectly owned or controlled by such Person or one
or more Subsidiaries of such Person or by such Person and one or more
Subsidiaries of such Person.
"TAXES" shall mean any present or future tax (including, without
limitation, any income, documentary, sales, stamp, registration, property or
excise tax), assessment or other charge, levy, impost, fee, compulsory loan,
charge or withholding.
"TYPE" shall have the meaning given such term in Section 1.3 hereof.
"UNRESTRICTED CASH" shall mean cash and Cash Equivalents of the Company
and its Wholly Owned Subsidiaries that are readily available to Company and not
subject to any limitation or restriction on their use by the Company.
"U.S. PERSON" shall mean a citizen or resident of the United States of
America, a corporation, partnership or other entity created or organized in or
under any laws of the United States of America or any State thereof, or any
estate or trust that is subject to Federal income taxation regardless of the
source of its income.
"WHOLLY OWNED SUBSIDIARY" shall mean, with respect to any Person, any
corporation, partnership or other entity to which all of the equity securities
or other ownership interests (other than, in the case of a corporation,
directors' qualifying shares or, in the case of a limited partnership, not more
than 1% of the aggregate partnership interests issued by such limited
partnership) are directly or indirectly owned or controlled by such Person or
one or more Wholly Owned Subsidiaries of such Person or by such Person and one
or more Wholly Owned Subsidiaries of such Person.
1.2O Accounting Terms and Determinations.
-----------------------------------
(a) Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered
to the Lenders hereunder shall (unless otherwise disclosed to the Lenders
in writing at the time of delivery thereof in the manner described in
subsection (b) below) be prepared, in accordance with GAAP applied on a
basis consistent with those used in the preparation of the latest annual
or quarterly financial statements furnished to the Lenders hereunder
(which, prior to the delivery of the first annual or quarterly financial
statements under Section 9.1 hereof, shall mean the audited financial
statements as at December 31, 1995 referred to in Section 8.2 hereof).
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<PAGE> 19
(b) To enable the ready and consistent determination of compliance
with the covenants set forth in Section 9 hereof, the Company will not
change its fiscal year.
1.3 TYPES OF LOANS Loans hereunder are distinguished by "Type". The "Type"
of a Loan refers to whether such Loan is a Prime Rate Loan or a LIBOR Loan.
Section 2. Commitments, Loans, Notes and Prepayments.
-----------------------------------------
2.1O REVOLVING CREDIT LOANS. Each Lender severally agrees, on the terms
and conditions of this Agreement, to make loans to the Company in Dollars during
the period from and including the Closing Date to but not including the
Revolving Credit Commitment Termination Date in an aggregate principal amount at
any one time outstanding up to but not exceeding the amount of the Revolving
Credit Commitment of such Lender as in effect from time to time (such Loans
being herein called "REVOLVING CREDIT LOANS"); PROVIDED THAT in no event shall
the Revolving Credit Loans at any time outstanding exceed the aggregate amount
of the Revolving Credit Commitments as in effect from time to time. Subject to
the terms and conditions of this Agreement, during such period the Company may
borrow, repay and reborrow the amount of the Revolving Credit Commitments by
means of Prime Rate Loans and LIBOR Loans and may Convert Revolving Credit Loans
of one Type into Revolving Credit Loans of another Type (as provided in Section
2.8 hereof) or Continue Revolving Credit Loans of one Type as Revolving Credit
Loans of the same Type (as provided in Section 2.8 hereof); and PROVIDED FURTHER
that no more than five separate Interest Periods in respect of LIBOR Loans may
be outstanding at any one time.
2.2. BORROWINGS OF REVOLVING CREDIT LOANS. The Company shall give
the Administrative Agent notice of each borrowing hereunder as provided in
Section 4.5 hereof. Not later than 1:00 p.m. Boston, Massachusetts time on the
date specified for each borrowing of Revolving Credit Loans hereunder, each
Lender shall make available the amount of the Loan or Loans to be made by it on
such date to the Administrative Agent, at account number 1510351 maintained by
the Administrative Agent with Fleet at the Principal Office, in immediately
available funds, for the account of the Company. The amount so received by the
Administrative Agent shall, subject to the terms and conditions of this
Agreement, be made available to the Company by depositing the same, in
immediately available funds, in an account of the Company maintained with Fleet
at the Principal Office designated for the Company.
2.3. Changes of Commitments.
----------------------
(a) The aggregate amount of the Revolving Credit Commitments shall
be automatically reduced to zero on the Revolving Credit Commitment
Termination Date.
(b) The Company shall have the right at any time or from time to
time to reduce the aggregate unused amount of the Revolving Credit
Commitments (for which purpose the Revolving Credit Commitments shall be
deemed to be utilized by the amount of the Revolving Credit Loans);
PROVIDED that (x) the Company shall give notice of each such termination
or reduction as provided in Section 4.5 hereof and (y) each partial
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reduction shall be in an aggregate amount at least equal to $5,000,000 (or
any integral multiple of $1,000,000 in excess thereof).
(c) The Commitments once terminated or reduced may not be
reinstated.
2.4. COMMITMENT FEE. The Company shall pay to the Administrative
Agent for the account of each Lender a commitment fee on the daily average
unused amount of such Lender's Commitment, for the period from and including the
date hereof to but not including the date such Commitment is terminated or
expires, at a rate per annum equal to the Applicable Commitment Fee Rate.
Accrued commitment fees shall be payable in arrears on each Quarterly Date and
on the date the Revolving Credit Commitments are terminated or expire.
Notwithstanding the foregoing, on any day during the period prior to the
Reporting Date occurring in March, 1997, the Applicable Commitment Fee Rate
shall be the percentage set forth in the definition of Applicable Commitment Fee
Rate opposite the designation "Level II Period".
2.5 LENDING OFFICES. The Loans of each Type made by each Lender shall be
made and maintained at such Lender's Applicable Lending Office for Loans of such
Type.
2.6. SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT. The failure of any
Lender to make any Loan to be made by it on the date specified therefor shall
not relieve any other Lender of its obligation to make its Loan on such date,
but neither any Lender nor any Agent shall be responsible for the failure of any
other Lender to make a Loan to be made by such other Lender, and (except as
otherwise provided in Section 4.6 hereof) no Lender shall have any obligation to
any Agent or any other Lender for the failure by such Lender to make any Loan
required to be made by such Lender. The amounts payable by the Company at any
time hereunder and under the Note to each Lender shall be a separate and
independent debt and each Lender shall be entitled to protect and enforce its
rights arising out of this Agreement and the Notes, and it shall not be
necessary for any other Lender or any Agent to consent to, or be joined as an
additional party in, any proceedings for such purposes.
2.7. Notes.
-----
(a) The Revolving Credit Loans made by each Lender shall be
evidenced by a single promissory note of the Company substantially in the
form of Exhibit A hereto, dated the date hereof, payable to such Lender in
a principal amount equal to the amount of its Revolving Credit Commitment
as originally in effect and otherwise duly completed.
(b) The date, amount, Type, interest rate and duration of Interest
Period (if applicable) of each Loan made by each Lender to the Company,
and each payment made on account of the principal thereof, shall be
recorded by such Lender on its books and, prior to any transfer of any
Note evidencing the Loans held by it, endorsed by such Lender on the
schedule attached to such Note or any continuation thereof; PROVIDED that
the failure of such Lender to make any such recordation or endorsement
shall not affect the obligations of the Company to make a payment when due
of any amount owing hereunder or under such Note in respect of such Loans.
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<PAGE> 21
(c) No Lender shall be entitled to have its Notes substituted or
exchanged for any reason, or subdivided for promissory notes of lesser
denominations, except in connection with a permitted assignment of all or
any portion of such Lender's relevant Commitment, Loans and Note pursuant
to Section 12.7 hereof (and, if requested by any Lender, the Company
agrees to so exchange any Note).
2.8. OPTIONAL PREPAYMENTS AND CONVERSIONS OR CONTINUATIONS OF LOANS.
Subject to Section 4.4 hereof, the Company shall have the right to prepay Loans
or to Convert Loans of one Type into Loans of another Type or Continue Loans of
one Type as Loans of the same Type, at any time or from time to time, PROVIDED
that:
(a) the Company shall give the Administrative Agent notice of each
such prepayment, Conversion or Continuation as provided in Section 4.5
hereof (and, upon the date specified in any such notice of prepayment, the
amount to be prepaid shall become due and payable hereunder); and
(b) any prepayment or Conversion of LIBOR Loans on any day other
than the last day of an Interest Period for such Loans shall be subject to
the payment of any compensation payable pursuant to Section 5.5 hereof.
Notwithstanding the foregoing, and without limiting the rights and remedies of
the Lenders under Section 10 hereof, in the event that any Event of Default
shall have occurred and be continuing, the Administrative Agent may (and at the
request of the Required Lenders shall) suspend the right of the Company to
Convert any Loan into a LIBOR Loan, or to make or Continue any Loan as a LIBOR
Loan, in which event all Loans shall be Converted (on the last day(s) of the
respective Interest Periods therefor) or made or Continued, as the case may be,
as Prime Rate Loans.
2.9. EXTENSION TO REVOLVING CREDIT COMMITMENT TERMINATION DATE. The
Company may by notice to the Lenders given at least ninety (90) days prior to
the first and second anniversary of the Closing Date, request that the Revolving
Credit Commitment Termination Date be extended by one year for each such
request, for total extensions not to exceed two years. The Revolving Credit
Commitment of any Lender that declines to accept such a request for an extension
or does not respond within the forty-five (45) days after the date of such
request will terminate on the Revolving Credit Commitment Termination Date as
then in effect (without regard to any extensions granted by the other Lenders).
The Company may substitute a Replacement Lender for any such Lender that so
declines the Company's extension request; PROVIDED that prior to contacting any
potential Replacement Lender, the Company shall notify the Lenders that have
agreed to the requested extension which notification shall state the amount of
available Commitments and any extending Lender shall have the right, exercised
by notice to the Company within fifteen (15) days after such notification by the
Company, to increase its Revolving Credit Commitment, up to an aggregate amount
equal to the available Commitments provided that if more than one extending
Lender exercises such right, the available Commitments shall be allocated among
such extending Lenders in such manner as the Administrative Agent and Company
shall determine. No extension shall be granted unless Commitments from the
extending Lenders and Replacement Lenders, if any, equal the aggregate
Commitments requested by the Company (which shall be in an aggregate amount not
less than $175,000,000, or, if prior to the
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<PAGE> 22
request for any such extension, the aggregate Commitments have been reduced to
less than $175,000,000 pursuant to the exercise of the Company's rights in
Section 2.3 hereof, such lesser amount), are given within the foregoing period
and the Company may, at any time during such period, terminate its request for
an extension by notice to the Lenders and Administrative Agent.
Section 3. Payments of Principal and Interest.
----------------------------------
3.1. REPAYMENT OF LOANS. The Company hereby promises to pay to the
Administrative Agent for account of each Lender the entire outstanding principal
amount of such Lender's Revolving Credit Loans, and each Revolving Credit Loan
shall mature, on the Revolving Credit Commitment Termination Date.
3.2. INTEREST. The Company hereby promises to pay to the Administrative
Agent for account of each Lender interest on the unpaid principal amount of each
Revolving Credit Loan made by such Lender for the period from and including the
date of such Loan to but excluding the date such Revolving Credit Loan shall be
paid in full, at the following rates per annum:
(a) if such Loan is outstanding as a Prime Rate Loan, the Prime Rate
(as in effect from time to time) PLUS the Applicable Margin; and
(b) if such Loan is outstanding as a LIBOR Loan, for each Interest
Period relating thereto, the Adjusted LIBO Rate for such Loan for such
Interest Period PLUS the Applicable Margin.
Notwithstanding the foregoing, on any day during the period prior to the
Reporting Date occurring in March, 1997, the Applicable Margin shall mean the
respective percentages set forth in the definition of "Applicable Margin"
opposite the designation "Level II Period".
During any period when an Event of Default shall have occurred and be
continuing and upon notice from the Administrative Agent of an election to
charge interest at the applicable Post-Default Rate, the Company hereby promises
to pay to the Administrative Agent for account of each Lender interest at the
applicable Post-Default Rate on (i) each Loan and (ii) any amount owing
hereunder (other than overdue principal of a Loan) that is not paid when due
(whether at stated maturity, by acceleration, by mandatory or voluntary
prepayment or otherwise).
Accrued interest on each Loan shall be payable in arrears (i) in the case
of a Prime Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of a
LIBOR Loan, on the last day of each Interest Period therefor and, if such
Interest Period is longer than three months, at three-month intervals following
the first day of such Interest Period, and (iii) in the case of any Loan, upon
the payment or prepayment thereof or the Conversion of such Loan to a Loan of
another Type (but only on the principal amount so paid, prepaid or Converted),
except that interest payable at the Post-Default Rate shall be payable from time
to time on demand. Promptly after the determination of any interest rate
provided for herein or any change therein, the Administrative Agent shall give
notice thereof to the Lenders to which such interest is payable and to the
Company.
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Section 4. Payments; Pro Rata Treatment; Computations; Etc.
-----------------------------------------------
4.1. Payments.
--------
(a) Except to the extent otherwise provided in this Agreement, all
payments of principal, interest, and other amounts to be made by the
Company under this Agreement and the Notes, and, except to the extent
otherwise provided therein, all payments to be made by the Obligors under
any other Loan Document, shall be made in Dollars, in immediately
available funds, without deduction, set-off or counterclaim, to the
Administrative Agent at account number 58386988 maintained by the Company
with Fleet at the Principal Office, not later than 1:00 p.m. Boston,
Massachusetts time on the date on which such payment shall become due
(each such payment made after such time on such due date to be deemed to
have been made on the next succeeding Business Day). The Obligors
authorize the Administrative Agent to debit such account for all such
payments.
(b) If any such payment owing to any Lender is not made when due
(beyond any applicable grace period), such Lender may (but shall not be
obligated to) debit the amount of any such payment to any ordinary deposit
account of the Company with such Lender (with notice to the Company and
the Administrative Agent).
(c) The Company shall, at the time of making each payment under this
Agreement or any Note for account of any Lender, subject to Section 4.2
specify to the Administrative Agent(which shall so notify the intended
recipient(s) thereof) the amount payable on the Loans, or other amounts
payable by the Company hereunder to which such payment is to be applied
(and in the event that the Company fails to so specify, or if an Event of
Default has occurred and is continuing, the Administrative Agent may
distribute such payment to the Lenders for application in such manner as
it, subject to Section 4.2 hereof, may determine to be appropriate).
(d) Each payment received by the Administrative Agent under this
Agreement or any Note for account of any Lender shall be paid by the
Administrative Agent promptly to such Lender, in immediately available
funds, for account of such Lender's Applicable Lending Office for the Loan
or other obligation in respect of which such payment is made.
(e) If the due date of any payment under this Agreement or any Note
would otherwise fall on a day that is not a Business Day, such date shall
be extended to the next succeeding Business Day, and interest shall be
payable for any principal so extended for the period of such extension.
(f) Any payment of principal or interest on the Loans not paid
within ten (10) days after the date such payment is due shall be subject
to a late charge equal to five percent (5%) of the amount overdue.
4.2. PRO RATA TREATMENT. Except to the extent otherwise provided herein:
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<PAGE> 24
(a) each borrowing of Loans from the Lenders under Section 2.1
hereof shall be made from the Lenders, each payment of commitment fee
under Section 2.4 hereof in respect of Commitments shall be made for
account of the Lenders, and each termination or reduction of the amount of
the Commitments under Section 2.3 hereof shall be applied to the
respective Commitments of the Lenders, pro rata according to the amounts
of their respective Commitments;
(b) except as otherwise provided in Section 5.4 hereof, LIBOR Loans
having the same Interest Period shall be allocated pro rata among the
Lenders according to the amounts of their respective Revolving Credit
Commitments (in the case of the making of Loans) or their respective
Revolving Credit Loans (in the case of Conversions and Continuations of
Loans);
(c) each payment or prepayment of principal of Revolving Credit
Loans by the Company shall be made for account of the Lenders pro rata in
accordance with the respective unpaid principal amounts of the Loans held
by them; and
(d) each payment of interest on Revolving Credit Loans by the
Company shall be made for account of the Lenders pro rata in accordance
with the amounts of interest on such Loans then due and payable to the
respective Lenders.
4.3. COMPUTATIONS. Interest on Loans and commitment fees shall be computed
on the basis of a year of 360 days and actual days elapsed, including the first
day but excluding the last day occurring in the period for which payable.
4.4. MINIMUM AMOUNTS. Except for Conversions or prepayments made pursuant
to Section 5.4 hereof, each borrowing, Conversion and partial prepayment of
principal of Loans shall be in an aggregate amount equal to $5,000,000 or an
integral multiple of $1,000,000 in excess thereof (borrowings, Conversions or
prepayments of or into Loans of different Types or, in the case of LIBOR Loans,
having different Interest Periods at the same time hereunder to be deemed
separate borrowings, Conversions and prepayments for purposes of the foregoing,
one for each Type or Interest Period).
4.5. CERTAIN NOTICES. Notices by the Company to the Administrative Agent
of terminations or reductions of the Commitments, of borrowings, Conversions,
Continuations and optional prepayments of Loans and of Types of Loans and of the
duration of Interest Periods shall be irrevocable and shall be effective only if
received by the Administrative Agent not later than 10:00 a.m. Boston,
Massachusetts time on the number of Business Days prior to the date of the
relevant termination, reduction, borrowing, Conversion, Continuation or
prepayment or the first day of such Interest Period specified below:
Number of
Business
Notice Days Prior
------ ----------
Termination or reduction
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<PAGE> 25
of Commitments 3
Borrowing or prepayment of,
or Conversion into,
Prime Rate Loans next Business Day
Borrowing or prepayment of, Conversions
into, Continuations
as, or duration of Interest
Period for, LIBOR Loans 3
Each such notice of termination or reduction shall specify the amount of
the Commitments to be terminated or reduced. Each such notice of borrowing,
Conversion, Continuation or optional prepayment shall specify the amount to be
borrowed, Converted, Continued or prepaid (subject to Section 4.4 hereof) and
Type of each Loan to be borrowed, Converted, Continued or prepaid and the date
of borrowing, Conversion, Continuation or optional prepayment (which shall be a
Business Day). Each such notice of the duration of an Interest Period shall
specify the Loans to which such Interest Period is to relate. The Administrative
Agent shall promptly notify the Lenders of the contents of each such notice. In
the event that the Company fails to select the Type of Loan, or the duration of
any Interest Period for any LIBOR Loan, within the time period and otherwise as
provided in this Section 4.5, such Loan (if outstanding as a LIBOR Loan) will be
automatically Converted into a Prime Rate Loan on the last day of the then
current Interest Period for such Loan or (if outstanding as a Prime Rate Loan)
will remain as, or (if not then outstanding) will be made as, a Prime Rate Loan.
4.6. RECEIPT OF FUNDS BY THE ADMINISTRATIVE AGENT. Unless the
Administrative Agent shall have been notified by a Lender or the Company (the
"PAYOR") prior to the date on which the Payor is to make payment to the
Administrative Agent of (in the case of a Lender) the proceeds of a Loan to be
made by such Lender hereunder or (in the case of the Company) a payment to the
Administrative Agent for account of one or more of the Lenders hereunder (such
payment being herein called the "REQUIRED PAYMENT"), which notice shall be
effective upon receipt, that the Payor does not intend to make the Required
Payment to the Administrative Agent, the Administrative Agent may assume that
the Required Payment has been made and may, in reliance upon such assumption
(but shall not be required to), make the amount thereof available to the
intended recipient(s) on such date; and, if the Payor has not in fact made the
Required Payment to the Administrative Agent and the Administrative Agent has
made the payment to the recipient(s), the recipient(s) of such payment shall, on
demand, repay to the Administrative Agent the amount so made available together
with interest thereon in respect of each day during the period commencing on the
date (the "ADVANCE DATE") such amount was so made available by the
Administrative Agent until the date the Administrative Agent recovers such
amount at a rate per annum equal to the Federal Funds Rate for such day and, if
such recipient(s) shall fail promptly to make such payment, the Administrative
Agent shall be entitled to recover such amount, on demand, from the Payor,
together with interest as aforesaid, PROVIDED that if neither the recipient(s)
nor the Payor shall return the Required Payment to the Administrative Agent
within
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three Business Days of the date of the notice from the Administrative Agent,
then the Payor and the recipient(s) shall each be obligated to pay interest on
the Required Payment as follows:
(i) if the Required Payment shall represent a payment to be made by
the Company to the Lenders, the Company and the recipient(s) shall each be
obligated retroactively to the Advance Date to pay interest in respect of
the Required Payment at the Post-Default Rate (without duplication of the
obligation of the Company under Section 3.2 hereof to pay interest on the
Required Payment at the Post-Default Rate), it being understood that the
return by the recipient(s) of the Required Payment to the Administrative
Agent shall not limit such obligation of the Company under said Section
3.2 to pay interest at the Post-Default Rate in respect of the Required
Payment; and
(ii) if the Required Payment shall represent proceeds of a Loan to
be made by the Lenders to the Company, the Payor and the Company shall
each be obligated retroactively to the Advance Date to pay interest in
respect of the Required Payment pursuant to Section 3.2 hereof (without
duplication of the obligation of the Company under Section 3.2 hereof to
pay interest on the Required Payment), it being understood that the return
by the Company of the Required Payment to the Administrative Agent shall
not limit any claim the Company may have against the Payor in respect of
such Required Payment.
4.7. Sharing of Payments, Etc.
------------------------
(a) Each Obligor agrees that, in addition to (and without limitation
of) any right of set-off, banker's lien or counterclaim a Lender may
otherwise have, each Lender shall be entitled, at its option (to the
fullest extent permitted by law), to set off and apply any deposit
(general or special, time or demand, provisional or final), or other
indebtedness, held by it for the credit or account of such Obligor at any
of its offices, in Dollars or in any other currency, against any principal
of or interest on any of such Lender's Loans, or any other amount payable
to such Lender hereunder, that is not paid when due (regardless of whether
such deposit or other indebtedness are then due to such Obligor and of the
existence or adequacy of any security therefor), in which case it shall
promptly notify such Obligor and the Administrative Agent thereof,
PROVIDED that such Lender's failure to give such notice shall not affect
the validity thereof.
(b) If any Lender shall obtain from any Obligor payment of any
principal of or interest on any Loan owing to it or payment of any other
amount under this Agreement or any other Loan Document through the
exercise any right of set-off, banker's lien or counterclaim or similar
right or otherwise (other than from the Administrative Agent as provided
herein), and, as a result of such payment, such Lender shall have received
a greater percentage of the principal of or interest on the Loans or such
other amounts then due hereunder or thereunder by such Obligor to such
Lender than the percentage received by any other Lender, it shall promptly
purchase from such other Lenders participations in (or, if and to the
extent specified by such Lender, direct interests in) the Loans or such
other amounts, respectively, owing to such other Lenders (or in interest
due thereon, as
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<PAGE> 27
the case may be) in such amounts, and make such other adjustments from
time to time as shall be equitable, to the end that all the Lenders shall
share the benefit of such excess payment (net of any expenses that may be
incurred by such Lender in obtaining or preserving such excess payment)
pro rata in accordance with the unpaid principal of and/or interest on the
Loans or such other amounts, respectively, owing to each of the Lenders.
To such end all the Lenders shall make appropriate adjustments among
themselves (by the resale of participations sold or otherwise) if such
payment is rescinded or must otherwise be restored.
(c) The Company agrees that any Lender so purchasing such a
participation (or direct interest) may exercise all rights of set-off,
banker's lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans or
other amounts (as the case may be) owing to such Lender in the amount of
such participation.
(d) Nothing contained herein shall require any Lender to exercise
any such right or shall affect the right of any Lender to exercise, and
retain the benefits of exercising, any such right with respect to any
other indebtedness or obligation of any Obligor. If, under any applicable
bankruptcy, insolvency or other similar law, any Lender receives a secured
claim in lieu of a set-off to which this Section 4.7 applies, such Lender
shall, to the extent practicable, exercise its rights in respect of such
secured claim in a manner consistent with the rights of the Lenders
entitled under this Section 4.7 to share in the benefits of any recovery
on such secured claim.
Section 5. Yield Protection, Etc.
---------------------
5.1. Additional Costs.
----------------
(a) The Company shall pay directly to each Lender from time to time
such amounts as such Lender may determine to be necessary to compensate
such Lender for any costs that such Lender determines are attributable to
its making or maintaining of any LIBOR Loans or its obligation to make any
LIBOR Loans hereunder, or any reduction in any amount receivable by such
Lender hereunder in respect of any of such Loans or such obligation (such
increases in costs and reductions in amounts receivable being herein
called "ADDITIONAL COSTS"), resulting from any Regulatory Change that:
(i) shall subject any Lender (or its Applicable Lending Office
for any of such Loans) to any tax, duty or other charge in respect
of such Loans or its Note or changes the basis of taxation of any
amounts payable to such Lender under this Agreement or its Note in
respect of any of such Loans (excluding any Taxes based on net
income or in lieu of net income imposed on such Lender by the
jurisdiction in which such Lender has its principal office or its
Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit or
similar requirements (other than any thereof, including, without
limitation, the
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<PAGE> 28
Reserve Requirement, utilized in the determination of the Adjusted
LIBO Rate or LIBO Rate for such Loan) relating to any extensions of
credit or other assets of, or any deposits with or other liabilities
of, such Lender (including, without limitation, any of such Loans or
any deposits referred to in the definition of "LIBO Rate" in Section
1.1 hereof), or any commitment of such Lender (including, without
limitation, the Commitments of such Lender hereunder); or
(iii) imposes any other condition affecting this Agreement or
its Note (or any of such extensions of credit or liabilities) or its
Commitment.
If any Lender requests compensation from the Company under this Section 5.1(a),
the Company may, by notice to such Lender (with a copy to the Administrative
Agent), suspend the obligation of such Lender thereafter to make or Continue
LIBOR Loans, or to Convert Prime Rate Loans into LIBOR Loans, until the
Regulatory Change giving rise to such request ceases to be in effect (in which
case the provisions of Section 5.4 hereof shall be applicable), PROVIDED that
such suspension shall not affect the right of such Lender to receive the
compensation so requested.
(b) Without limiting the effect of the provisions of paragraph (a)
of this Section 5.1, in the event that, by reason of any Regulatory
Change, any Lender either (i) incurs Additional Costs based on or measured
by the excess above a specified level of the amount of a category of
deposits or other liabilities of such Lender that includes deposits by
reference to which the interest rate on LIBOR Loans is determined as
provided in this Agreement or a category of extensions of credit or other
assets of such Lender that includes LIBOR Loans or (ii) becomes subject to
restrictions on the amount of such a category of liabilities or assets
that it may hold, then, if such Lender so elects by notice to the Company
(with a copy to the Administrative Agent), the obligation of such Lender
to make or Continue, or to Convert Prime Rate Loans into, LIBOR Loans
hereunder shall be suspended until such Regulatory Change ceases to be in
effect (in which case the provisions of Section 5.4 hereof shall be
applicable).
(c) Without limiting the effect of the foregoing provisions of this
Section 5.1 (but without duplication), the Company shall pay directly to
each Lender from time to time on request such amounts as such Lender may
determine to be necessary to compensate such Lender (or, without
duplication, the bank holding company of which such Lender is a
subsidiary) for any costs that it determines are attributable to the
maintenance by such Lender (or any Applicable Lending Office or such bank
holding company), pursuant to any law or regulation or any interpretation,
directive or request (whether or not having the force of law and whether
or not failure to comply therewith would be unlawful) of any court or
governmental or monetary authority (i) following any Regulatory Change or
(ii) implementing any risk-based capital guideline or other requirement
(whether or not having the force of law and whether or not the failure to
comply therewith would be unlawful) hereafter issued by any government or
governmental or supervisory authority implementing at the national level
the Basle Accord, of capital in respect of its Commitments or Loans (such
compensation to include, without limitation, an amount equal to any
reduction of the rate of return on assets or equity of such Lender (or any
Applicable Lending Office or such bank holding company) to a level below
that
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<PAGE> 29
which such Lender (or any Applicable Lending Office or such bank holding
company) could have achieved but for such law, regulation, interpretation,
directive or request).
(d) Each Lender shall notify the Company of any event occurring
after the date hereof entitling such Lender to compensation under
paragraph (a) or (c) of this Section 5.1 as promptly as practicable, but
in any event within 45 days, after such Lender obtains actual knowledge
thereof; PROVIDED that if (i) any Lender fails to give such notice within
45 days after it obtains actual knowledge of such an event, such Lender
shall, with respect to compensation payable pursuant to this Section 5.1
in respect of any costs resulting from such event, only be entitled to
payment under this Section 5.1 for costs incurred from and after the date
45 days prior to the date that such Lender does give such notice and (ii)
each Lender will designate a different Applicable Lending Office for the
Loans of such Lender affected by such event if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in
the reasonable opinion of such Lender, be disadvantageous to such Lender
(including, without limitation, by reason of any economic, legal or
regulatory cost or disadvantage that such Lender may bear or suffer by
reason of such designation). Each Lender will furnish to the Company a
certificate setting forth in reasonable detail the basis and amount of
each request by such Lender for compensation under paragraph (a) or (c) of
this Section 5.1. Determinations and allocations by any Lender for
purposes of this Section 5.1 of the effect of any Regulatory Change
pursuant to paragraph (a) or (b) of this Section 5.1, or of the effect of
capital maintained pursuant to paragraph (c) of this Section 5.1, on its
costs or rate of return of maintaining Loans or its obligation to make
Loans, or on amounts receivable by it in respect of Loans, and of the
amounts required to compensate such Lender under this Section 5.1, shall
be conclusive, PROVIDED that such determinations and allocations are made
on a reasonable basis.
5.2. LIMITATION ON TYPES OF LOANS. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any LIBO Rate for any
Interest Period:
(a) the Administrative Agent determines, which determination shall
be conclusive, that quotations of interest rates for the relevant deposits
referred to in the definition of "LIBO Rate" in Section 1.1 hereof are not
being provided in the relevant amounts or for the relevant maturities for
purposes of determining rates of interest for LIBOR Loans as provided
herein; or
(b) the Required Lenders determine which determination shall be
conclusive, and notify (or notifies, as the case may be) the
Administrative Agent that the relevant rates of interest referred to in
the definition of "LIBO Rate" in Section 1.1 hereof upon the basis of
which the rate of interest for LIBOR Loans for such Interest Period is to
be determined do not adequately and accurately reflect the cost to such
Lenders of making or maintaining LIBOR Loans for such Interest Period;
then the Administrative Agent shall give the Company and each Lender prompt
notice thereof and, so long as such condition remains in effect, the Lenders
shall be under no obligation to make additional LIBOR Loans, to Continue LIBOR
Loans or to Convert Prime Rate Loans into
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<PAGE> 30
LIBOR Loans, and the Company shall, on the last day(s) of the then current
Interest Period(s) for the outstanding LIBOR Loans, either prepay such Loans or
Convert such Loans into Prime Rate Loans in accordance with Section 2.8 hereof.
5.3. ILLEGALITY. Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for any Lender or its Applicable Lending
Office to honor its obligation to make or maintain LIBOR Loans hereunder (and,
in the sole opinion of such Lender, the designation of a different Applicable
Lending Office would either not avoid such unlawfulness or would be
disadvantageous to such Lender), then such Lender shall promptly notify the
Company thereof (with a copy to the Administrative Agent) and such Lender's
obligation to make or Continue, or to Convert Loans of any other Type into,
LIBOR Loans shall be suspended until such time as such Lender may again make and
maintain LIBOR Loans (in which case the provisions of Section 5.4 hereof shall
be applicable).
5.4. TREATMENT OF AFFECTED LOANS. If the obligation of any Lender to make
LIBOR Loans or to Continue, or to Convert Prime Rate Loans into, LIBOR Loans
shall be suspended pursuant to Section 5.1 or 5.3 hereof, such Lender's LIBOR
Loans shall be automatically Converted into Prime Rate Loans on the last day(s)
of the then current Interest Period(s) for LIBOR Loans (or, in the case of a
Conversion required by Section 5.1(b) or 5.3 hereof, on such earlier date as is
required pursuant to applicable law or regulation and as such Lender may specify
to the Company with a copy to the Administrative Agent) and, unless and until
such Lender gives notice as provided below that the circumstances specified in
Section 5.1 or 5.3 hereof that gave rise to such Conversion no longer exist:
(a) to the extent that such Lender's LIBOR Loans have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Lender's LIBOR Loans shall be applied instead to its
Prime Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such
Lender as LIBOR Loans shall be made or Continued instead as Prime Rate
Loans, and all Prime Rate Loans of such Lender that would otherwise be
Converted into LIBOR Loans shall remain as Prime Rate Loans.
If such Lender gives notice to the Company with a copy to the Administrative
Agent that the circumstances specified in Section 5.1 or 5.3 hereof that gave
rise to the Conversion of such Lender's LIBOR Loans pursuant to this Section 5.4
no longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when LIBOR Loans made by other Lenders are
outstanding, such Lender's Prime Rate Loans shall be automatically Converted, on
the first day(s) of the next succeeding Interest Period(s) for such outstanding
LIBOR Loans, to the extent necessary so that, after giving effect thereto, all
Loans held by the Lenders holding LIBOR Loans and by such Lender are held pro
rata (as to principal amounts, Types and Interest Periods) in accordance with
their respective Commitments.
5.5. COMPENSATION. The Company shall pay to the Administrative Agent for
account of each Lender, upon the request of such Lender through the
Administrative Agent, such
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<PAGE> 31
amount or amounts as shall be sufficient (in the reasonable opinion of such
Lender) to compensate it for any loss, cost or expense that such Lender
determines is attributable to:
(a) any payment, mandatory or optional prepayment or Conversion of a
LIBOR Loan made by such Lender for any reason (including, without
limitation, the acceleration of the Loans pursuant to Section 10 hereof)
on a date other than the last day of the Interest Period for such Loan; or
(b) any failure by the Company for any reason (including, without
limitation, the failure of any of the conditions precedent specified in
Section 7 hereof to be satisfied) to borrow, Continue or Convert a LIBOR
Loan from such Lender on the date for such borrowing, Continuation or
Conversion specified in the relevant notice given pursuant to Sections 2.2
and 4.5 hereof.
Without limiting the effect of the preceding sentence, such compensation shall,
if so requested, include an amount equal to the product of: (a) the amount so
paid, prepaid, Converted or not borrowed times (b) the excess of (i) the amount
of interest that otherwise would have accrued on the principal amount so paid,
prepaid, Converted or not borrowed for the period from the date of such payment,
prepayment, Conversion or failure to borrow to the last day of the then current
Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan that would have commenced on the date specified
for such borrowing) at the applicable rate of interest for such Loan provided
for herein (excluding, however, any Applicable Margin included therein) less
(ii) the amount of interest that otherwise would have accrued on such principal
amount at a rate per annum equal to the interest component of the amount such
Lender would have bid in the London interbank market (for Dollar deposits of
leading banks in amounts comparable to such principal amount and with maturities
comparable to such period (as reasonably determined by such Lender), which
product shall be multiplied by a fraction the numerator of which is the number
of days from the date of such occurrence to the last day of the applicable
Interest Period and the denominator of which is 360 days.
Section 6. Guarantee.
---------
6.1 GUARANTEE. The Subsidiary Guarantors hereby jointly and severally
guarantee to each Lender and each Agent and their respective successors and
assigns the prompt payment in full when due (whether at stated maturity, by
acceleration or otherwise) of the principal of and interest on the Loans made by
the Lenders to, and the Notes held by each Lender of, the Company and all other
amounts from time to time owing to the Lenders or any Agent by the Company under
this Agreement and under the Notes and by any Obligor under any of the other
Loan Documents, in each case strictly in accordance with the terms thereof (such
obligations being herein collectively called the "GUARANTEED OBLIGATIONS"). The
Subsidiary Guarantors hereby further jointly and severally agree that if the
Company shall fail to pay in full when due (whether at stated maturity, by
acceleration or otherwise) any of the Guaranteed Obligations, the Subsidiary
Guarantors will promptly pay the same, without any demand or notice whatsoever,
and that in the case of any extension of time of payment or renewal of any of
the Guaranteed Obligations, the same will be promptly paid in full when due
(whether at extended maturity, by acceleration or otherwise) in accordance with
the terms of such extension or renewal.
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<PAGE> 32
6.2. OBLIGATIONS UNCONDITIONAL. The obligations of the Subsidiary
Guarantors under Section 6.1 hereof are absolute and unconditional, joint and
several, irrespective of the value, genuineness, validity, regularity or
enforceability of the obligations of the Company under this Agreement, the
Notes, the other Loan Documents or any other agreement or instrument referred to
herein or therein, or any substitution, release or exchange of any other
guarantee of or security for any of the Guaranteed Obligations, and, to the
fullest extent permitted by applicable law, irrespective of any other
circumstance whatsoever that might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor, it being the intent of this
Section 6.2 that the obligations of the Subsidiary Guarantors hereunder shall be
absolute and unconditional, joint and several, under any and all circumstances.
Without limiting the generality of the foregoing, it is agreed that the
occurrence of any one or more of the following shall not alter or impair the
liability of the Subsidiary Guarantors hereunder which shall remain absolute and
unconditional as described above:
(i) at any time or from time to time, without notice to the
Subsidiary Guarantors, the time for any performance of or compliance with
any of the Guaranteed Obligations shall be extended, or such performance
or compliance shall be waived;
(ii) any of the acts mentioned in any of the provisions of this
Agreement or the Notes or any other agreement or instrument referred to
herein or therein shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall be
accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under this Agreement
or the Notes or any other agreement or instrument referred to herein or
therein shall be waived or any other guarantee of any of the Guaranteed
Obligations or any security therefor shall be released or exchanged in
whole or in part or otherwise dealt with; or
(iv) any lien or security interest granted to, or in favor of, any
Agent or Agents or any Lender or Lenders as security for any of the
Guaranteed Obligations shall fail to be perfected.
The Subsidiary Guarantors hereby expressly waive diligence, presentment, demand
of payment, protest and all notices whatsoever, and any requirement that any
Agent or any Lender exhaust any right, power or remedy or proceed against the
Company under this Agreement or the Notes or the other Loan Documents or any
other agreement or instrument referred to herein or therein, or against any
other Person under any other guarantee of, or security for, any of the
Guaranteed Obligations.
6.3. REINSTATEMENT. The obligations of the Subsidiary Guarantors under
this Section 6 shall be automatically reinstated if and to the extent that for
any reason any payment by or on behalf of the Company in respect of the
Guaranteed Obligations is rescinded or must be otherwise restored by any holder
of any of the Guaranteed Obligations, whether as a result of any
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<PAGE> 33
proceedings in bankruptcy or reorganization or otherwise and the Subsidiary
Guarantors jointly and severally agree that they will indemnify each Agent and
each Lender on demand for all reasonable costs and expenses (including, without
limitation, fees of counsel) incurred by such Agent or such Lender in connection
with such rescission or restoration, including any such costs and expenses
incurred in defending against any claim alleging that such payment constituted a
preference, fraudulent transfer or similar payment under any bankruptcy,
insolvency or similar law.
6.4. SUBROGATION. Each Subsidiary Guarantor hereby agrees that, until the
payment and satisfaction in full of all Guaranteed Obligations and the
expiration and termination of the Commitments of the Lenders under this
Agreement, such Subsidiary Guarantor shall not exercise any right or remedy
arising by reason of any performance by such Subsidiary Guarantor of its
guarantee in Section 6.1 hereof, whether by subrogation or otherwise, against
the Company or any other Obligor or any other guarantor of any of the Guaranteed
Obligations or any security for any of the Guaranteed Obligations.
6.5. REMEDIES. The Subsidiary Guarantors jointly and severally agree that,
as between the Subsidiary Guarantors and the Lenders, the obligations of the
Company under this Agreement and the Notes may be declared to be forthwith due
and payable as provided in Section 10 hereof (and shall be deemed to have become
automatically due and payable in the circumstances provided in said Section
10(g) or (h)) for purposes of Section 6.1 hereof notwithstanding any stay,
injunction or other prohibition preventing such declaration (or such obligations
from becoming automatically due and payable) as against the Company and that, in
the event of such declaration (or such obligations being deemed to have become
automatically due and payable), such obligations (whether or not due and payable
by the Company) shall forthwith become due and payable by the Subsidiary
Guarantors for purposes of said Section 6.1.
6.6. CONTINUING GUARANTEE. The guarantee in this Section 6 is a continuing
guarantee, and shall apply to all Guaranteed Obligations whenever arising.
6.7. RIGHTS OF CONTRIBUTION. The Subsidiary Guarantors hereby agree, as
between themselves, that if any Subsidiary Guarantor (an "EXCESS FUNDING
GUARANTOR") shall pay Guaranteed Obligations in excess of such Excess Funding
Guarantor's Pro Rata Share (as defined below) of such Guaranteed Obligations
(such excess payment, an "EXCESS PAYMENT"), each other Subsidiary Guarantor
shall, on demand of such Excess Funding Guarantor (but subject to the next
sentence hereof), pay to such Excess Funding Guarantor an amount equal to such
other Subsidiary Guarantor's Pro Rata Share (such Pro Rata Share, for the
purpose of determining the amount due to the Excess Funding Guarantor under this
Section 6.7, to be determined without reference to the Excess Funding Guarantor)
of such Excess Payment. The payment obligation of each other Subsidiary
Guarantor to an Excess Funding Guarantor under this Section 6.7 shall be
subordinate and subject in right of payment to the prior payment in full of the
Obligations, and such Excess Funding Guarantor shall not exercise any right or
remedy with respect to such Excess Payment until payment and satisfaction in
full of the Obligations. For the purposes hereof, "PRO RATA SHARE" shall mean,
with respect to each Subsidiary Guarantor, the ratio (expressed as a percentage)
of (a) the net worth of such Subsidiary Guarantor (determined on an
unconsolidated basis in accordance with GAAP as of the last day of the fiscal
quarter of such Subsidiary
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<PAGE> 34
Guarantor most recently ended prior to the date such Person became a Subsidiary
Guarantor) to (b) the sum of the amounts determined pursuant to clause (a) for
all of the Subsidiary Guarantors.
6.8. LIMITATION ON GUARANTEE OBLIGATIONS. In any action or proceeding
involving any state corporate or partnership law, or any state or Federal
bankruptcy, insolvency, reorganization or other law affecting the rights of
creditors generally, if the obligations of any Subsidiary Guarantor under
Section 6.1 hereof would otherwise, taking into account the provisions of
Section 6.7 hereof, be held or determined to be void, invalid or unenforceable,
or subordinated to the claims of any other creditors, on account of the amount
of its liability under said Section 6.1, then, notwithstanding any other
provision hereof to the contrary, the amount of such liability shall, without
any further action by such Subsidiary Guarantor, any Lender, any Agent or any
other Person, be automatically limited and reduced to the highest amount that is
valid and enforceable and not subordinated to the claims of other creditors as
determined in such action or proceeding.
Section 7. Conditions Precedent.
--------------------
7.1 INITIAL LOAN. The obligation of any Lender to make its initial Loan
hereunder is subject to the satisfaction of each of the following conditions
(with each document being satisfactory to each Agent and each Lender in form and
substance):
(a) CORPORATE DOCUMENTS. The receipt by the Administrative Agent of
(i) certified copies of the charter and by-laws (or equivalent
constitutional documents) of each Obligor and GSC, (ii) a long-form good
standing certificate issued by the Secretary of State of the jurisdiction
of incorporation or organization of each Obligor and GSC and (iii)
certified copies of all corporate or partnership authority for each
Obligor (including, without limitation, board of director resolutions and
evidence of the incumbency, including specimen signatures, of officers)
with respect to the execution, delivery and performance of such of the
Loan Documents to which such Obligor is intended to be a party and each
other document to be delivered by such Obligor from time to time in
connection herewith and the extensions of credit hereunder (and each Agent
and each Lender may conclusively rely on such certificate until it
receives notice in writing from such Obligor to the contrary).
(b) OFFICER'S CERTIFICATE. The receipt by the Administrative Agent
of a certificate of a senior officer of the Company, dated the Closing
Date, to the effect set forth in the first sentence of Section 7.2 hereof.
(c) BORROWING NOTICE. The receipt by the Administrative Agent of the
notice of borrowing required by Sections 2.2 and 4.5 hereof, which notice
of borrowing shall specify a borrowing date.
(d) OPINIONS OF COUNSEL TO THE OBLIGORS. The receipt by the
Administrative Agent of an opinion, dated the Closing Date, of Palmer &
Dodge, special counsel to the Obligors, substantially in the form of
Exhibit B hereto and covering such other matters as any Agent or any
Lender may reasonably request.
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(e) NOTES. The receipt by the Administrative Agent of Notes, duly
completed and executed for each Lender.
(f) PLEDGE AGREEMENT. The receipt by the Administrative Agent of the
Pledge Agreement in the form of Exhibit F, together with the certificates
for all shares of capital stock of Genzyme Securities Corporation pledged
thereunder and undated executed stock powers.
(g) SEARCH RESULTS. The receipt by the Administrative Agent of
results satisfactory to the Administrative Agent of UCC, Federal and state
tax lien and judgment searches conducted by a search firm acceptable to
the Administrative Agent with respect to each Obligor in each jurisdiction
specified by the Administrative Agent.
(h) INSURANCE. The receipt by the Administrative Agent of (i)
certificates of insurance evidencing the existence of all insurance
required to be maintained pursuant to Section 9.4 hereof and (ii) a
certificate of a senior financial officer of the Company stating that the
insurance obtained by it in accordance with the requirements of said
Section 9.4 is in full force and effect and that all premiums then due and
payable thereon have been paid.
(i) REPAYMENT OF EXISTING INDEBTEDNESS. Evidence that the principal
of and interest on, and all other amounts owing in respect of, the
Indebtedness (including, without limitation, any contingent or other
amounts payable in respect of letters of credit) indicated on Schedule 7.1
hereto that is to be repaid on the Closing Date shall have been (or shall
be simultaneously) paid in full, that any commitments to extend credit
under the agreements or instruments relating to such Indebtedness shall
have been canceled or terminated and that all Guarantees in respect of,
and all Liens securing, any such Indebtedness shall have been released (or
arrangements for such release satisfactory to the Required Lenders shall
have been made); in addition, the Administrative Agent shall have received
from any Person holding any Lien securing any such Indebtedness, such
Uniform Commercial Code termination statements, mortgage releases and
other instruments, in each case in proper form for recording, as the
Administrative Agent shall have requested to release and terminate of
record the Liens securing such Indebtedness (or arrangements for such
release and termination satisfactory to the Required Lenders shall have
been made).
(j) NO ADVERSE LITIGATION OR PROCEEDING. The receipt by the
Administrative Agent of a certificate of a senior officer of the Company
to the effect that, on and as of the Closing Date and except as disclosed
in Schedule 8.3 hereto, no litigation or proceeding shall exist or (to the
Company's knowledge) be threatened against the Company or any of its
Subsidiaries, and, to the Company's knowledge, no law or regulation shall
have been proposed (unless withdrawn) that could reasonably be expected to
(i) have a Material Adverse Effect, (ii) materially and adversely affect
the ability of the Obligors to perform their respective obligations under
this Agreement or the other Loan Documents, (iii) materially and adversely
affect the rights and remedies of the Agents and the Lenders under this
Agreement or the Loan Documents or (iv) purport to adversely affect the
Revolving Credit Loans or Commitments.
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(k) CONSENTS, ETC. The receipt by the Administrative Agent of a
certificate of a senior officer of the Company to the effect that, on and
as of the Closing Date, all necessary governmental and third party
consents and approvals in connection with the transactions contemplated by
this Agreement have been obtained and remain in effect and that all
applicable waiting periods have expired.
(l) PAYMENT OF FEES. The payment by the Company of such fees as the
Company shall have agreed to pay or deliver to any Lender or any Agent in
connection herewith, including, without limitation, the reasonable fees
and expenses of Brown, Rudnick, Freed & Gesmer, special counsel to Fleet
in connection with the negotiation, preparation, execution and delivery of
this Agreement and the Notes and the other Loan Documents and the making
of the extensions of credit hereunder (to the extent that statements for
such fees and expenses have been delivered to the Company).
(m) OTHER DOCUMENTS. Such other documents as any Agent or any Lender
or special counsel to Fleet may reasonably request.
7.2. INITIAL AND SUBSEQUENT EXTENSIONS OF CREDIT. The obligation of any
Lender to make any Loan or otherwise extend any credit to the Company upon the
occasion of each borrowing or other extension of credit hereunder is subject to
the further conditions precedent that, both immediately prior to such borrowing
or other extension of credit and also after giving effect thereto and to the
intended use thereof:
(a) no Default shall have occurred and be continuing; and
(b) the representations and warranties made by the Company in
Section 8 hereof, and by each Obligor in each of the other Loan Documents
to which it is a party, shall be true and complete in all material
respects on and as of the date of the making of such Loan or other
extension of credit with the same force and effect as if made on and as of
such date (or, if any such representation or warranty is expressly stated
to have been made as of a specific date, as of such specific date).
Each notice of borrowing by the Company hereunder shall constitute a
certification by the Company to the effect set forth in the preceding sentence
(both as of the date of such notice or request and, unless the Company otherwise
notifies the Administrative Agent prior to the date of such borrowing or
issuance, as of the date of such borrowing or issuance).
Section 8. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to the Agents and the Lenders that:
8.1 EXISTENCE. Each of the Company and the Material Subsidiaries: (a)
is a corporation, partnership, limited liability company or other entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; (b) has all requisite corporate, partnership
or other power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being or as proposed to be conducted, except to the extent that the failure
to have any such license,
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authorization, consent or approval would not reasonably be expected (either
individually or in the aggregate) to have a Material Adverse Effect; and (c) is
qualified to do business and is in good standing in all jurisdictions in which
the nature of the business conducted by it makes such qualification necessary
and where failure so to qualify would not reasonably be expected (either
individually or in the aggregate) to have a Material Adverse Effect.
8.2. FINANCIAL CONDITION. The Company has heretofore furnished to each of
the Lenders the audited Consolidated balance sheet of the Company as at December
31, 1995 and the related Consolidated statements of earnings, shareholders'
equity and cash flows of the Company for the fiscal year ended on said date,
with the report thereon of Coopers & Lybrand, and the unaudited Consolidated
balance sheet of the Company as at June 30, 1996, and the related unaudited
Consolidated statements of income and cash flows for the period ended on said
date. All such financial statements fairly present in all material respects the
Consolidated financial position of the Company as at said dates and the
Consolidated results of its operations for the fiscal year and period ended on
said dates (subject, in the case of such financial statements as at June 30,
1996, to normal year-end audit adjustments), all in accordance with generally
accepted accounting principles and practices applied on a consistent basis. The
Company does not on the date hereof have any material contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments, except as referred to or
reflected or provided for in said balance sheets or the notes thereto as at said
dates. Since June 30, 1996, there has been no material adverse change in the
business, operations or financial condition of the Company from that set forth
in said financial statements as at said date.
8.3. LITIGATION. Except as disclosed in Schedule 8.3 hereto, there are no
legal or arbitral proceedings, or any proceedings by or before any governmental
or regulatory authority or agency, now pending or (to the knowledge of the
Company) threatened against the Company, or any of its Subsidiaries that, if
adversely determined could (either individually or in the aggregate) be
reasonably expected to have a Material Adverse Effect.
8.4. NO BREACH. The execution and delivery of this Agreement and the Notes
and the other Loan Documents, the consummation of the transactions herein and
therein contemplated and the compliance with the terms and provisions hereof and
thereof do not and will not: (a) conflict with, violate or result in a breach
of, or require any consent under the charter or by-laws (or equivalent
constitutional documents) of any Obligor; (b) violate or result in a breach of
any applicable law or regulation; (c) conflict with, violate or result in a
breach of, or require any consent under any order, writ, injunction or decree of
any court or governmental authority or agency, or any agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which any of them
or any of their Property is bound or to which any of them is subject; (d)
constitute a default, or result in the termination of any commitment to extend
credit, under any such agreement or instrument; or (e) result in the creation or
imposition of any Lien upon any Property of the Company or any of its
Subsidiaries pursuant to the terms of any such agreement or instrument (except
for any Lien created by the Pledge Agreement); except to the extent, with
respect to the foregoing clauses (c) and (d), any such conflict, violation,
breach or default, or the failure to have any such consent, (i) could not
reasonably be expected (either individually or in the aggregate) to have a
Material Adverse Effect and (ii) does not and will not result in any liability
of
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the Administrative Agent or any Lender or in the acceleration or required
prepayment of any Indebtedness or the termination of any commitments to extend
credit.
8.5. ACTION. Each Obligor has all necessary corporate or partnership
power, authority and legal right to execute, deliver and perform its obligations
under each of the Loan Documents to which it is a party; the execution, delivery
and performance by each Obligor of each of the Loan Documents to which it is a
party have been duly authorized by all necessary corporate or partnership action
on its part (including, without limitation, any required shareholder approvals);
and this Agreement has been duly and validly executed and delivered by each
Obligor and constitutes, and each of the Notes and the other Loan Documents to
which it is a party when executed and delivered by such Obligor (in the case of
the Notes, for value) will constitute, its legal, valid and binding obligation,
enforceable against each Obligor in accordance with its terms.
8.6. APPROVALS. No authorizations, approvals or consents of, and no
filings or registrations with, any governmental or regulatory authority or
agency, or any securities exchange, are necessary for the execution, delivery or
performance by any Obligor of the Loan Documents to which it is a party or for
the legality, validity or enforceability hereof or thereof, except for
approvals, authorizations, consents, filings and registrations that have already
been obtained or made.
8.7. USE OF CREDIT. None of the Obligors is engaged principally, or as one
of its important activities, in the business of extending credit for the
purpose, whether immediate, incidental or ultimate, of buying or carrying Margin
Stock, and no part of the proceeds of the Loans or other extensions of credit
hereunder will be used to buy or carry any Margin Stock.
8.8. ERISA. Each Plan, and, to the knowledge of the Company, each
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law, and no event
or condition has occurred and is continuing as to which the Company would be
under an obligation to furnish a report to the Lenders under Section 9.1(e)
hereof.
8.9. TAXES. The Company and its Subsidiaries have filed all income tax
returns and all other material tax returns in all jurisdictions in which such
returns are required to have been filed by any of them and have paid all taxes
shown to be due and payable on such returns and all other taxes and assessments
in any material amount payable by any of them pursuant to any assessment
received by the Company or any of its Subsidiaries, except for any such taxes
and assessments (x) the amount, applicability or validity of which is currently
being contested in good faith by appropriate proceedings and (y) with respect to
which the Company or one of its Subsidiaries (as the case may be) has set aside
on its books adequate reserves in accordance with generally accepted accounting
principles. The charges, accruals and reserves on the books of the Company and
its Subsidiaries in respect of taxes and other governmental charges are, in the
opinion of the Company, adequate. The Company has not given or been requested to
give a waiver of the statute of limitations relating to the payment of any
Federal, state, local and foreign taxes or other impositions in respect of the
Company or any of its Subsidiaries.
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8.10. INVESTMENT COMPANY ACT. None of the Obligors is an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
8.11. PUBLIC UTILITY HOLDING COMPANY ACT. None of the Obligors is a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended, or an "electric company," within the
meaning of Massachusetts General Laws, Chapter 164, as amended.
8.12. Borrowing Agreements and Liens.
------------------------------
(a) Part A of Schedule 8.12 hereto includes a complete and correct
list, as of the date hereof, of each credit agreement, loan agreement,
indenture, purchase agreement, guarantee, letter of credit or other
arrangement providing for or otherwise relating to any Indebtedness or any
extension of credit (or commitment for any extension of credit) to, or
guarantee by, the Company or any of its Subsidiaries the aggregate
principal or stated amount of which equals or exceeds (or may equal or
exceed) $1,000,000, and the aggregate principal or stated amount
outstanding or that may become outstanding under each such arrangement is,
as of the date hereof, correctly described in Part A of said Schedule
8.12.
(b) Part B of Schedule 8.12 hereto is a complete and correct list,
as of the date hereof, of each Lien securing Indebtedness of any Person
the aggregate principal or stated amount of which equals or exceeds (or
may equal or exceed) $1,000,000 and covering any property of the Company
or any of its Subsidiaries, and the aggregate Indebtedness secured (or
that may be secured) by each such Lien and the property covered by each
such Lien is, as of the date hereof, correctly described in said Schedule
8.12.
8.13. COMPLIANCE WITH LAWS INCLUDING ENVIRONMENTAL AND SAFETY MATTERS.
Each of the Company and its Subsidiaries is in compliance in all material
respects with all applicable federal, state, county and local statutes, laws,
rules, regulations, codes and ordinances and orders and directives including,
without limitation, all Environmental Laws, health and safety statutes and
regulations and specifically the Federal Food, Drug and Cosmetic Act, and the
regulations promulgated thereunder, the effect of the non-compliance with which
would have a Material Adverse Effect. To the knowledge of the Company, the
Company and its Subsidiaries are not subject to any material judicial or
administrative proceedings alleging the violation of any applicable law or
regulation and neither the Company or its Subsidiaries is the subject of any
federal, state or local investigation regarding, among other matters, the
Release of any Hazardous Material into the environment, the results of which
would reasonably be likely to materially and adversely affect the Company and
its Subsidiaries' financial condition, operations, business or prospects, taken
as a whole. Neither the Company or its Subsidiaries has any contingent
liabilities in connection with any Release of any Hazardous Material into the
environment which would reasonably be likely to materially and adversely affect
the Company and its Subsidiaries' financial condition, operations, businesses or
prospects, taken as a whole.
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8.14. SUBSIDIARIES, ETC. Set forth on Schedule 8.14 hereto is a complete
and correct list of all of the Subsidiaries of the Company as of the date hereof
together with, for each such Subsidiary, (i) the jurisdiction of organization of
such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary
and (iii) the nature of the ownership interests held by each such Person and the
percentage of ownership of such Subsidiary represented by such ownership
interests except as disclosed in Schedule 8.14 hereto, (x) each of the Company
and its Subsidiaries owns, free and clear of Liens, and has the unencumbered
right to vote, all outstanding ownership interests in each Person shown to be
held by it in Schedule 8.14 hereto, and (y) all of the issued and outstanding
capital stock of each such Person organized as a corporation is validly issued,
fully paid and nonassessable.
8.15. TITLE TO ASSETS; ETC. The Company and its Subsidiaries own and have
on the date hereof good and marketable or merchantable title (subject only to
Liens permitted by Section 9.6 hereof) to the material Properties shown to be
owned in the audited financial statements referred to in Section 8.2 hereof
(other than properties disposed of in the ordinary course of business or
otherwise permitted to be disposed of pursuant to Section 9.5 hereof). The
Company and its Subsidiaries own and have on the date hereof good and marketable
or merchantable title to, or lease, and enjoy on the date hereof peaceful and
undisturbed possession of, all material Properties (subject only to Liens
permitted by Section 9.6 hereof) that are necessary for the operation and
conduct of its businesses.
8.16. INTELLECTUAL PROPERTY RIGHTS. Except with respect to events or
matters which are not reasonably expected to have a Material Adverse Effect, (a)
the Company and its Subsidiaries own or license all material Intellectual
Property necessary for the conduct of its business as presently conducted; (b)
all material agreements pursuant to which the Company and its Subsidiaries
license the manufacture, marketing or sale of products employing its
Intellectual Property are in full force and effect; (c) no claims, demands,
suits, or proceedings are pending or, to the knowledge of the Company and its
Subsidiaries, threatened which impair their rights in any material Intellectual
Property used in the conduct of their business or any material agreement
relating thereto; and (d) the Company and its Subsidiaries have not infringed
(without any license therefor) any Intellectual Property of any other Person,
and the present conduct of the Company and its Subsidiaries' business does not
infringe any such rights in any way which would have a Material Adverse Effect.
8.17. TRUE AND COMPLETE DISCLOSURE. The reports, financial statements,
exhibits, schedules and other documents furnished by or on behalf of the
Obligors to the Administrative Agent or any Lender in connection with the
negotiation, preparation or delivery of this Agreement and the other Loan
Documents or included herein or therein or delivered pursuant hereto or thereto,
when taken as a whole do not contain any untrue statement of material fact or
omit to state any material fact necessary to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading. All written information furnished after the date hereof by the
Company and its Subsidiaries to the Administrative Agent and the Lenders in
connection with this Agreement and the other Loan Documents and the transactions
contemplated hereby and thereby will be true, complete and accurate in every
material respect, or (in the case of projections) based on reasonable estimates,
on the date as of which such information is stated or certified. There is no
fact known to the Company that could reasonably
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be expected to have a Material Adverse Effect that has not been disclosed
herein, in the other Loan Documents or in a report, financial statement,
exhibit, schedule, disclosure letter or other writing furnished to the Lenders
for use in connection with the transactions contemplated hereby or thereby.
Section 9. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Lenders and the Agents that, so long as any Commitment, or Loan is outstanding
and until payment in full of all amounts payable by the Company hereunder:
9.1. FINANCIAL STATEMENTS ETC.: The Company shall deliver to each of the
Lenders:
(a) as soon as available and in any event within 45 days after the
end of the first three quarterly fiscal periods of each fiscal year of the
Company, Consolidated statements of earnings, shareholders' equity and
cash flows of the Company and its Subsidiaries for such period and for the
period from the beginning of the respective fiscal year to the end of such
period, and the related Consolidated balance sheets of the Company and its
Subsidiaries as at the end of such period, setting forth in each case in
comparative form, to the extent such figures appear therein, the
corresponding Consolidated figures for the corresponding periods in the
preceding fiscal year accompanied by a certificate of a senior financial
officer of the Company, which certificate shall state that said
Consolidated financial statements present fairly in all material respects
the Consolidated financial position and results of operations of the
Company and its Subsidiaries, in accordance with GAAP, consistently
applied, as at the end of, and for, such period (subject to normal
year-end audit adjustments);
(b) as soon as available and in any event within 90 days after the
end of each fiscal year of the Company, Consolidated statements of
earnings, shareholders' equity and cash flows of the Company and its
Subsidiaries for such fiscal year and the related Consolidated balance
sheets of the Company and its Subsidiaries as at the end of such fiscal
year, setting forth in each case in comparative form, to the extent such
figures appear therein, the corresponding Consolidated figures for the
preceding fiscal year, and accompanied by a report thereon of independent
certified public accountants of recognized national standing, which report
shall state that said Consolidated financial statements present fairly in
all material respects the Consolidated financial position and results of
operations of the Company and its Subsidiaries as at the end of, and for,
such fiscal year in accordance with GAAP, consistently applied;
(c) simultaneously with the delivery of the financial statements
required under Section 9.1(a) and (b) above, (i) a copy of the Company's
Form 10-Q or 10-K filing made for the periods covered by such financial
statements or, if such filings are not available, a brief narrative
description of material businesses and financial trends and developments
and significant transactions that have occurred in the period or periods
covered thereby, together with (ii) a Compliance Certificate as of the
date of such financial statements, in the form attached as Exhibit C
hereto;
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(d) promptly upon their becoming available, copies of all (i)
regular, periodic and special reports that the Company shall have filed
with the Securities and Exchange Commission (or any governmental agency
substituted therefor) pursuant to the Securities Exchange Act of 1934, as
amended (ii) financial statements, reports, notices or proxy or other
statements sent to shareholders of the Company, and (iii) press releases
and other statements generally made available by the Company to the public
concerning material developments in the business of the Company;
(e) as soon as possible and in any event within five (5) days after
any officer of Company obtains knowledge thereof: (i) Company's failure to
make any required payment to any Plan in sufficient amount to comply with
ERISA and the Code on or before the due date for such payment; (ii) the
occurrence or expected occurrence of any "reportable event" under ERISA,
"prohibited transaction" or "accumulated funding deficiency" with respect
to any Plan; (iii) receipt by Company of any notice (A) from a
Multiemployer Plan regarding the imposition of withdrawal liability; or
(B) of the institution, or expectancy of the institution, of any
proceeding or any other action which may result in the termination of any
Plan, or Company's withdrawal or partial withdrawal from any Plan;
(f) promptly after the Company knows that any Default has occurred,
a notice of such Default describing the same in reasonable detail and,
together with such notice or as soon thereafter as possible, a description
of the action that the Company has taken or proposes to take with respect
thereto (a "Notice of Default");
(g) within thirty (30) days of obtaining knowledge thereof, the
Company shall provide Lender with a written notice and reasonable
description of any events or conditions which, if they existed and were
known to the Company on the date of this Agreement, would have violated
the warranty and representation made in Section 8.16 (dealing with
Intellectual Property Rights); and
(h) from time to time such other information regarding the Property,
operations, business, financial condition or prospects of the Company or
any of its Subsidiaries as any Lender or any Agent may reasonably request.
9.2. LITIGATION. Promptly after the Company obtains knowledge thereof, the
Company will give notice to each Lender of all legal or arbitral proceedings,
and of all proceedings by or before any governmental or regulatory authority or
agency, and any material development in respect of such legal or other
proceedings, affecting the Company or any of its Subsidiaries, except
proceedings that, if adversely determined, would not (either individually or in
the aggregate) reasonably be expected to have a Material Adverse Effect.
9.3. EXISTENCE, ETC. The Company:
(a) will, and will cause each of its Material Subsidiaries to,
preserve and maintain its legal existence and all of its material rights,
privileges, licenses and franchises
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<PAGE> 43
(PROVIDED that nothing in this Section 9.3 shall prohibit any transaction
expressly permitted under Section 9.5 hereof);
(b) will, and will cause each of its Subsidiaries to, comply with
the requirements of all applicable laws, rules, regulations and orders of
governmental or regulatory authorities if failure to comply with such
requirements could reasonably be expected (either individually or in the
aggregate) to have a Material Adverse Effect;
(c) will, and will cause each of its Subsidiaries to, pay and
discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior
to the date on which penalties attach thereto, except for any such tax,
assessment, charge or levy the payment of which is being contested in good
faith and by proper proceedings and against which adequate reserves are
being maintained in accordance with generally accepted accounting
principles consistently applied, and except for any such tax, assessment,
charge or levy the failure to pay which would not have a Material Adverse
Effect;
(d) will, and will cause each Obligor to, maintain all of its
Properties used or useful in its business in good working order and
condition, ordinary wear and tear excepted;
(e) will, and will cause each of its Subsidiaries to, keep adequate
records and books of account, in which complete entries will be made in
accordance with generally accepted accounting principles consistently
applied; and
(f) will, and will cause each of its Material Subsidiaries to,
permit representatives of any Lender or any Agent, upon reasonable advance
notice to the Company or such Material Subsidiary and during normal
business hours, to examine, copy and make extracts from its books and
records, to inspect any of its Properties, and to discuss its business and
affairs with its officers, all to the extent reasonably requested by such
Lender or the Administrative Agent (as the case may be); PROVIDED THAT (i)
the Agents and the Lenders will endeavor to cooperate with the Company or
such Material Subsidiary in order to minimize any interference with its
normal business operations that may result from any such inspection and
(ii) except as otherwise provided in Section 12.3 hereof, all expenses of
the Agents and the Lenders in connection with the exercise of their rights
under this Section 9.3(f) shall be for their own account.
9.4. INSURANCE. The Company will, and will cause each of its Subsidiaries
to, maintain insurance with financially sound and reputable insurance companies,
and with respect to Property and risks of a character usually maintained by
corporations engaged in the same or similar business similarly situated, against
loss, damage and liability of the kinds and in the amounts customarily
maintained by such corporations.
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9.5. Prohibition of Fundamental Changes.
----------------------------------
(a) MERGER, CONSOLIDATION, ETC. The Company will not, nor will it
permit any of its Subsidiaries to, enter into any transaction of merger or
consolidation or amalgamation, or liquidate, wind up or dissolve itself
(or suffer any liquidation or dissolution).
(b) ACQUISITIONS. The Company will not, nor will it permit any of
its Subsidiaries to, acquire any business or Property from, or capital
stock of, or be a party to any acquisition of, any Person.
(c) SALE OF ASSETS. The Company will not, nor will it permit any of
its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose
of, in one transaction or a series of transactions, any part of its
business or Property, whether now owned or hereafter acquired (including,
without limitation, receivables and leasehold interests) other than the
sale of inventory in the course of business.
(d) EXCEPTIONS. Notwithstanding the foregoing provisions of this
Section 9.5:
(i) any Subsidiary of the Company may be merged or
consolidated with or into, or have its assets liquidated and
distributed to, the Company or any other Subsidiary of the Company;
PROVIDED that (x) if any such merger or consolidation shall be with
the Company, the Company shall be the Person surviving such merger
or consolidation, (y) if any such merger or consolidation shall be
between any Subsidiary of the Company and a Wholly Owned Subsidiary
of the Company, such Wholly Owned Subsidiary shall be the Person
surviving such merger or consolidation and (z) if any such merger or
consolidation shall be between a Subsidiary Guarantor and a
Subsidiary of the Company that is not a Subsidiary Guarantor, and
such Subsidiary Guarantor is not the continuing or surviving Person,
then the continuing or surviving Person shall have assumed all of
the obligations of such Subsidiary Guarantor hereunder and under the
other Loan Documents;
(ii) the Company and its Subsidiaries may acquire any assets
used or useful in the lines of business permitted under Section 9.10
or the stock or other equity interests of any Person that is engaged
in a line of business permitted to the Company under Section 9.10 or
merge any Person that is in a line or lines of business permitted
under Section 9.10 with a Subsidiary or a Subsidiary with any such
Person (provided that the conditions in the provisos in Section
9.5(d)(i) are satisfied with respect to such merger) provided that
at the time of the consummation of any such transaction and after
giving effect thereto, the Company shall be in compliance with the
covenants in Section 9.9 as of the end of the most recent fiscal
quarter or annual period of the Company and the transaction will not
be reasonably likely to result in the noncompliance with such
financial covenants;
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<PAGE> 45
(iii) the Company or any of its Subsidiaries may purchase
inventory and other Property to be sold or used in the ordinary
course of business, make Investments permitted by Section 9.8 hereof
and make Capital Expenditures in the ordinary course of its
business;
(iv) the Company or any Subsidiary of the Company may convey,
sell, lease, transfer or otherwise dispose of any or all of its
Property to the Company or any other Subsidiary of the Company (and
the Company or such other Subsidiary may acquire such Property);
PROVIDED that if any such conveyance, sale, lease, transfer or other
disposition is to a Subsidiary that is not a Subsidiary Guarantor
and relates to all or any material part of the Property of the
Company or a Subsidiary Guarantor, then the transferee Subsidiary
shall have assumed all of the obligations of the Company or such
Subsidiary Guarantor hereunder and under the other Loan Documents;
and PROVIDED, further, that the Company or such Subsidiary Guarantor
shall remain fully obligated as an Obligor hereunder;
(v) the Company or any Subsidiary may convey, sell, lease,
transfer or otherwise dispose of any non-material Property (of the
Company and its Subsidiaries, taken as a whole) including equity
interests in any Person and the licensing of patents and product
rights; and
(vi) the Company or any Subsidiary may lease or sublease any
of its real Property.
9.6. LIMITATION ON LIENS. The Company will not, nor will it permit any of
its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any
of its Property, whether now owned or hereafter acquired, except:
(a) Liens in existence on the date hereof, including, without
limitation, Liens required to be listed on Schedule 8.12 (parts A and B)
hereto (excluding, however, Liens securing Indebtedness to be repaid with
the proceeds of Loans hereunder, as indicated on said Schedule 8.12 (parts
A and B), from and after the date of such repayment);
(b) Liens imposed by any governmental authority for taxes,
assessments or charges not in excess of $1,000,000 or not yet due or that
are being contested in good faith and by appropriate proceedings if
adequate reserves with respect thereto are maintained on the books of the
Company or the affected Subsidiaries, as the case may be, in accordance
with GAAP;
(c) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
that are not overdue or that are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are
maintained or the books of the Company or the affected Subsidiaries, as
the case may be, in accordance with GAAP;
(d) pledges or deposits under worker's compensation, unemployment
insurance and other social security legislation;
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<PAGE> 46
(e) (i) deposits to secure the performance of bids, trade contracts
(other than for Indebtedness), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business and (ii) Liens arising from a
seller's title retention provisions with respect to goods or services
acquired in the ordinary course of business;
(f) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on
the use of Property or imperfections in title thereto that, in the
aggregate, are not material in amount, and that do not in any case
materially detract from the value of the Property subject thereto or
interfere with the ordinary conduct of the business of the Company or any
of its Subsidiaries;
(g) Liens on Property of any Person that becomes a Subsidiary of the
Company after the date hereof, PROVIDED that such Liens are in existence
at the time such Person becomes a Subsidiary of the Company and were not
created in anticipation thereof;
(h) Liens upon fixed or capital assets to secure purchase money
Indebtedness or Capital Lease Obligations of the Company or a Subsidiary;
PROVIDED, THAT, (i) such Lien does not extend to or cover any other
Property of the Company or such Subsidiary and (ii) such Lien does not
secure any Indebtedness other than the Indebtedness so incurred;
(i) Liens on the Genzyme Tissue Repair manufacturing facility and
equipment securing the repayment of Indebtedness permitted under Section
9.7(i);
(j) Liens on the Genzyme (UK) Limited manufacturing facility and
equipment securing the repayment of the Indebtedness permitted under
Section 9.7(i);
(k) Liens arising from or upon any judgment or award, provided that
such judgment or award is being contested in good faith by proper appeal
proceedings, such judgment or award is not secured by any Lien which is
not discharged within thirty (30) days, and only so long as execution
thereon shall be stayed;
(l) Liens securing Indebtedness otherwise permitted under Section
9.7 that does not exceed, in the aggregate, $1,000,000 at any one time
outstanding; and
(m) Liens now or hereafter granted to the Agents or Lenders under
the Loan Documents.
9.7. INDEBTEDNESS. The Company will not, nor will it permit any of its
Subsidiaries to, create, incur or suffer to exist any Indebtedness except:
(a) Indebtedness to the Lenders hereunder and under the other Loan
Documents;
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(b) Indebtedness outstanding on the date hereof including
Indebtedness in excess of $1,000,000 that is required to be listed on
Schedule 8.12 hereto (excluding however, the Indebtedness to be repaid
with the proceeds of Loans hereunder, as indicated on said Schedule 8.12,
from and after the date of such repayment);
(c) Indebtedness of (i) Subsidiaries of the Company to the Company,
(ii) the Company to any of its Subsidiaries or (iii) of Subsidiaries to
Subsidiaries;
(d) Indebtedness constituting Capital Lease Obligations incurred in
the ordinary course of Company's or such Subsidiaries' business;
(e) Indebtedness under or in respect of currency exchange contracts
or interest rate protection obligations incurred in the ordinary course of
business;
(f) Indebtedness in connection with performance bonds or letters of
credit obtained and issued in the ordinary course of business, including
letters of credit related to insurance associated with claims for
work-related injuries;
(g) Subordinated Debt;
(h) Indebtedness incurred to renew, extend, refinance or refund any
Indebtedness expressly permitted by any of the clauses of this Section
9.7; and
(i) additional Indebtedness of the Company and its Subsidiaries,
including Indebtedness incurred to finance the construction of
manufacturing facilities and the acquisition of the equipment for the
Genzyme Tissue Repair Division and for Genzyme (UK) Limited, up to but not
exceeding $35,000,000 at any one time outstanding.
9.8. INVESTMENTS. The Company will not, nor will it permit any of its
Subsidiaries to, make or permit to remain outstanding any Investments except
Investments made in the ordinary course of business of the Company o9.9ts
SubFinancial Covenants.uld be permitted under the terms of Section 9.5
9.9. Financial Covenants.
-------------------
(a) CONSOLIDATED QUICK RATIO. The Company will not permit the
Consolidated Quick Ratio on the last day of any fiscal quarter of the
Company to be less than 1.50 to 1.00 (commencing with the fiscal quarter
of the Company ending in December, 1996).
(b) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. The Company will not
permit the Consolidated Fixed Charge Coverage Ratio for any period of four
consecutive fiscal quarters of the Company (commencing with the period of
four consecutive fiscal quarters of the Company ending in December, 1996)
to be less than the amount set forth
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below opposite such quarter end.
Fiscal Quarter Ending In Ratio
------------------------ -----
December, 1996 1.25 to 1.00
March, 1997 1.50 to 1.00
June, 1997 1.75 to 1.00
September, 1997 2.00 to 1.00
December, 1997 2.25 to 1.00
March, 1998 2.50 to 1.00
June, 1998 2.75 to 1.00
September, 1998 and 3.00 to 1.00
thereafter
(c) CONSOLIDATED FUNDED DEBT TO EBITDA RATIO. The Company will not
permit, as of the last day of any fiscal quarter (commencing with the
fiscal quarter of the Company ending in December, 1996), the ratio of
Consolidated Funded Debt to Consolidated EBITDA of the Company for the
period of four consecutive fiscal quarters then ended to exceed 2.25 to
1.00 at each fiscal quarter end through the fiscal quarter ending in
September, 1998, and 2.00 to 1.00 at each fiscal quarter end thereafter.
(d) CONSOLIDATED TANGIBLE NET WORTH. The Company will not permit the
Consolidated Tangible Net Worth on the last day of any fiscal quarter of
the Company to be less than the amount set forth below opposite such
quarter end:
Fiscal Quarter Ending In Amount
------------------------ ------
December, 1996 $400,000,000
Each fiscal quarter thereafter The minimum amount at the end of the
prior fiscal quarter plus 50%
of the Company's Consolidated Net
Income for the current fiscal
quarter (but without taking into
account any Consolidated Net Income
that is less than zero) plus 50% of
the Company's Net Equity Proceeds
received during the current fiscal
quarter.
9.10. LINES OF BUSINESS. The Company will not, and will not permit any of
its Subsidiaries to, engage to any significant extent in any line or lines of
business activity other than the biotechnology, pharmaceutical, medical devices,
medical products, and medical services and diagnostic services businesses.
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<PAGE> 49
9.11. USE OF PROCEEDS. The Company will use the proceeds of the Loans
hereunder to finance transactions permitted under Section 9.5 and to finance the
ongoing working capital and other general corporate needs of the Company and its
Subsidiaries (in each case, in compliance with all applicable legal and
regulatory requirements, including, without limitation, Regulations U and X and
the Securities Act of 1933 and the Securities Exchange Act of 1934); PROVIDED
that neither any Agent nor any Lender shall have any responsibility as to the
use of any of such proceeds.
9.12. Certain Obligations Respecting Subsidiaries.
-------------------------------------------
(a) Except as permitted under Section 9.5 hereof, the Company will,
and will cause each of its Subsidiaries to, take such action from time to
time as shall be necessary to ensure that the Company and each of its
Subsidiaries at all times collectively own (subject to no Lien other than
the Lien granted under the Pledge Agreement) at least the same percentage
of the issued and outstanding shares of each class of stock or other
equity ownership interests of each of its Subsidiaries as is collectively
owned by the Company and its Subsidiaries on the Closing Date.
(b) The Company will not, and will not permit any of its Material
Subsidiaries to, enter into, after the Closing Date, any indenture,
agreement, instrument or other arrangement (other than entering into one
or more of the Loan Documents) that, directly or indirectly, prohibits or
restrains, or has the effect of prohibiting or restraining, or imposes
materially adverse conditions upon, the incurrence or payment of
Indebtedness, the granting of Liens, the declaration or payment of
dividends, the making of loans, advances or other Investments or the sale,
assignment, transfer or other disposition of Property, other than (i) any
indenture, agreement, instrument or other arrangement relating to
Indebtedness of a Subsidiary of the Company acquired by the Company after
the date hereof which was entered into by such Subsidiary prior to the
date on which the Company acquired such Subsidiary (and which was not
entered into in contemplation of such acquisition), provided that the
terms and conditions thereof only relate to such Subsidiary and not the
Company or its other Subsidiaries and are no more restrictive than the
terms and conditions hereof, (ii) any indenture, agreement, instrument or
other arrangement effecting the refinancing of any Indebtedness referred
to in clause (i) above so long as the prohibitions and restrictions
contained in the documents relating to such refinancing are as a whole no
less favorable to the Lenders or the obligor in respect of such
Indebtedness than the prohibitions and restrictions contained in the
documents relating to the Indebtedness being refinanced, (iii) customary
non-assignment provisions in leases governing leasehold interests to the
extent such provisions restrict transfer of rights under the related
lease, (iv) restrictions on the transfer of or the granting of Liens on
Property of the Company or any of its Subsidiaries subject to a Lien
expressly permitted by Section 9.6 hereof securing Indebtedness expressly
permitted by Section 9.7 hereof to the extent such restrictions are
contained in documents evidencing or relating to such Indebtedness and (v)
restrictions on the transfer of Property of the Company or any of its
Subsidiaries that is the subject of a disposition expressly permitted by
Section 9.5 hereof to the extent such restrictions are contained in the
documents relating to such disposition.
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<PAGE> 50
9.13. ADDITIONAL SUBSIDIARY GUARANTORS. In the event that the Company
shall, after the date of this Agreement, hold or acquire any Material Subsidiary
that is not already a Subsidiary Guarantor, the Company will, and will cause
each of its other Subsidiaries to, cause such Material Subsidiary (a) to execute
and deliver to each Agent and each Lender a joinder agreement in the form of
Exhibit D hereto, (b) to execute and deliver to the Administrative Agent and
each Lender a written instrument in form and substance satisfactory to the
Required Lenders and the Administrative Agent pursuant to which such Material
Subsidiary shall become an "Obligor" hereunder and (c) to deliver such proof of
corporate action, incumbency of officers, opinions of counsel (it being agreed
that any such opinion may be an opinion of internal counsel qualified to
practice law in the jurisdiction(s) relevant to such opinion) and other
documents as are consistent with those delivered by the Company pursuant to
Section 7.1 hereof or as the Administrative Agent shall have reasonably
requested. Upon execution and delivery by such Material Subsidiary of any
agreement referred to in the foregoing clauses, each of the representations and
warranties in Section 8 hereof with respect to such Material Subsidiary and each
Loan Document to which it shall have become a party shall be deemed made by the
Company.
Section 10. EVENTS OF DEFAULT. If one or more of the following events
(herein called "EVENTS OF DEFAULT") shall occur and be continuing:
(a) The Company shall default in the payment when due (whether at
stated maturity or upon mandatory or optional prepayment) of any principal
of or interest on any Loan, provided, however, that as to the non-payment
of interest, there shall be a one (1) Business Day grace period without
any requirement of notice, but the Company shall not be entitled to such
grace period more than once in any consecutive twelve-month period; or
(b) The Company shall default in the payment of any fee or any other
amount (other than principal of or interest on any Loan) payable by it
hereunder or under any other Loan Document and such default shall continue
unremedied for a period of five (5) days after notice to the Company from
the Administrative Agent; or
(c) The Company or any of its Subsidiaries shall default in the
payment when due of any principal of or interest on any of its other
Indebtedness aggregating to at least $1,000,000 (after the expiration of
any grace period originally provided for); or any event specified in any
note, agreement, indenture or other document evidencing or relating to any
such Indebtedness shall occur if the effect of such event is to cause, or
(with the giving of any notice or the lapse of time or both) to permit the
holder or holders of such Indebtedness (or a trustee or agent on behalf of
such holder or holders) to cause, such Indebtedness to become due, or to
be prepaid in full (whether by redemption, purchase, offer to purchase or
otherwise), prior to its stated maturity; or
(d) Any representation, warranty or certification made or deemed
made herein or in any other Loan Document (or in any modification or
supplement hereto or thereto) by any Obligor, or any certificate furnished
to any Lender or any Agent pursuant
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<PAGE> 51
to the provisions hereof or thereof, shall prove to have been false or
misleading as of the time made or furnished in any material respect; or
(e) (i) The Company shall default in the performance of any of its
obligations under any of Sections 9.1(c), 9.1 (e), 9.1(f), 9.5, 9.6, 9.7,
9.9, 9.10, 9.11, 9.12, and 9.13 hereof; or
(ii) Any Obligor shall default in the performance of any of its
other obligations in this Agreement or any other Loan Document and such
default (if remediable) shall continue unremedied for a period of 30 or
more days after notice thereof to the Company by the Administrative Agent
or any Lender (through the Agent); or
(f) The Company or any of its Material Subsidiaries shall admit in
writing its inability to, or be generally unable to, pay its debts as such
debts become due; or
(g) The Company or any of its Material Subsidiaries shall (i) apply
for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, examiner or liquidator of itself or of all
or a substantial part of its Property, (ii) make a general assignment for
the benefit of its creditors, (iii) commence a voluntary case under the
Bankruptcy Code, (iv) file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or readjustment of
debts, (v) fail to convert in a timely and appropriate manner, or
acquiesce in writing to, any petition filed against it in an involuntary
case under the Bankruptcy Code, (vi) cause or be subject to any event with
respect to it which, under the applicable laws of any foreign
jurisdiction, has an analogous effect to any of the events specified in
the foregoing clauses (i) to (v) or (vii) take any corporate action for
the purpose of effecting any of the foregoing; or
(h) A proceeding or case shall be commenced, without the application
or consent of the Company or any of its Material Subsidiaries, in any
court of competent jurisdiction, seeking (i) its reorganization,
liquidation, dissolution, arrangement or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a receiver, custodian,
trustee, examiner, liquidator or the like of the Company or such Material
Subsidiary or of all or any substantial part of its Property, (iii)
similar relief in respect of the Company or such Material Subsidiary under
any law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, and such proceeding or case shall
continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and
in effect, for a period of 60 or more days or (iv) relief with respect to
it which, under the applicable laws of any foreign jurisdiction, has an
analogous effect to any of the actions specified in foregoing clauses (i)
to (iii); or an order for relief against the Company or such Material
Subsidiary shall be entered in an involuntary case under the Bankruptcy
Code; or
(i) A final judgment or judgments for the payment of money in excess
of $1,000,000 in the aggregate (exclusive of judgment amounts fully
covered by insurance where the insurer has a claims paying ability rated
AA- or better from S&P or a financial
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<PAGE> 52
strength rating of AA or better from Moody's) shall be rendered by one or
more courts, administrative tribunals or other bodies having jurisdiction
against the Company or any of its Subsidiaries and the same shall not be
discharged (or provision shall not be made for such discharge) or vacated,
or a stay of execution thereof shall not be procured, within 30 days from
the date of entry thereof and the Company or the relevant Subsidiary shall
not, within said period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal therefrom and cause
the execution thereof to be stayed during such appeal; or
(j) An event or condition specified in Section 9.1(e) hereof shall
occur or exist with respect to any Plan or Multiemployer Plan and, as a
result of such event or condition, together with all other such events or
conditions, the Company or any ERISA Affiliate shall incur or in the
opinion of the Required Lenders shall be reasonably likely to incur a
liability to a Plan, a Multiemployer Plan or the PBGC (or any combination
of the foregoing) that, in the determination of the Required Lenders,
would (either individually or in the aggregate) have a Material Adverse
Effect; or
(k) There shall have been asserted against the Company or any of its
Subsidiaries an Environmental Claim that, in the judgment of the Required
Lenders is reasonably likely to be determined adversely to the Company or
any of its Subsidiaries, and the amount thereof (either individually or in
the aggregate) is reasonably likely to have a Material Adverse Effect
(insofar as such amount is payable by the Company or any of its
Subsidiaries but after deducting any portion thereof that is reasonably
expected to be paid by other creditworthy Persons jointly and severally
liable therefor);
THEREUPON: (1) in the case of an Event of Default other than one referred to in
clause (g) or (h) of this Section 10 with respect to any Obligor, upon request
of the Required Lenders, (A) the Administrative Agent shall, by notice to the
Company, terminate the Commitments and they shall thereupon terminate, and (B)
the Administrative Agent shall, by notice to the Company declare the principal
amount then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Obligors hereunder and under the Notes (including,
without limitation, any amounts payable under Section 5.5 hereof) to be
forthwith due and payable, whereupon such amounts shall be immediately due and
payable without presentment, demand, protest or other formalities of any kind,
all of which are hereby expressly waived by each Obligor; and (2) in the case of
the occurrence of an Event of Default referred to in clause (g) or (h) of this
Section 10 with respect to any Obligor, the Commitments shall automatically be
terminated and the principal amount then outstanding of, and the accrued
interest on, the Loans and all other amounts payable by the Obligors hereunder
and under the Notes (including, without limitation, any amounts payable under
Section 5.5 hereof) shall automatically become immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are hereby expressly waived by each Obligor.
Section 11. The Agents
----------
11.1. APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby appoints
and authorizes each Agent to act as its agent hereunder and under the other Loan
Documents with
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such powers as are specifically delegated to each such Agent by the terms of
this Agreement and of the other Loan Documents, together with such other powers
as are reasonably incidental thereto. Each Agent (which term as used in this
sentence and in Section 11.5 and the first sentence of Section 11.6 hereof shall
include reference to their respective affiliates and their own and their
affiliates' officers, directors, employees and agents):
(a) shall have no duties or responsibilities except those expressly
set forth in this Agreement and in the other Loan Documents, and shall not
by reason of this Agreement or any other Loan Document be a trustee for
any Lender;
(b) shall not be responsible to the Lenders for any recitals,
statements, presentations or warranties contained in this Agreement or in
any other Loan Document, or in any certificate or other document referred
to or provided for in, or received by any of them under, this Agreement or
any other Loan Document, or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement, any Note or
any other Loan Document or any other document referred to or provided for
herein or therein or for any failure by the Company or any other Person to
perform any of its obligations hereunder or thereunder;
(c) shall not, except to the extent expressly instructed by the
Required Lenders, be required to initiate or conduct any litigation or
collection proceedings hereunder or under any other Loan Document; and
(d) shall not be responsible for any action taken or omitted to be
taken by it hereunder or under any other Loan Document or under any other
document or instrument referred to or provided for herein or therein or in
connection herewith or therewith, except for its own gross negligence, bad
faith or willful misconduct.
Each Agent may employ agents and attorneys-in-fact and shall not be responsible
for the negligence or misconduct of any such agents or attorneys-in-fact
selected by it in good faith. Each Agent may deem and treat the payee of a Note
as the holder thereof for all purposes hereof unless and until a notice of the
assignment or transfer thereof shall have been filed with the Agent, together
with the consent of the Company to such assignment or transfer (to the extent
provided in Section 12.7(b) hereof).
11.2. RELIANCE BY AGENTS. Each Agent shall be entitled to rely upon any
certification, notice or other communication (including, without limitation, any
thereof by telephone, telecopy, telegram or cable) believed by it to be genuine
and correct and to have been signed or sent by or on behalf of the proper Person
or Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by such Agent. As to any matters not
expressly provided for by this Agreement or any other Loan Document, each Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder or thereunder in accordance with instructions given by the Required
Lenders or, if provided herein, in accordance with the instructions given by all
of the Lenders as is required in such circumstance, and such instructions of
such Lenders and any action taken or failure to act pursuant thereto shall be
binding on all of the Lenders.
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11.3. DEFAULTS. No Agent shall be deemed to have knowledge or notice of
the occurrence of a Default unless the Administrative Agent has received notice
from a Lender or the Company specifying such Default and stating that such
notice is a "Notice of Default". In the event that an Agent receives such a
notice of the occurrence of a Default, such Agent shall give prompt notice
thereof to the other Agent and the Lenders. The Administrative Agent shall
(subject to Sections 11.1 and 11.7 hereof) take such action with respect to such
Default as shall be directed by the Required Lenders, PROVIDED that, unless and
until the Administrative Agent shall have received such directions, the
Administrative Agent may but shall not be obligated to take such action, or
refrain from taking such action, with respect to such Default as it shall deem
advisable in the best interest of the other Agent and the Lenders except to the
extent that this Agreement expressly requires that such action be taken, or not
be taken, only with the consent or upon the authorization of the Required
Lenders or all of the Lenders.
11.4. RIGHTS AS A LENDER. With respect to its Commitments and the Loans
made by it, Fleet (and any successor acting as Administrative Agent) and
BankBoston (and any successor acting as Documentation Agent) in their capacity
as a Lender hereunder shall have the same rights and powers hereunder as any
other Lender and may exercise the same as though it were not acting as an Agent,
and the term "Lender" or "Lenders" shall, unless the context otherwise
indicates, include any such Agent in its individual capacity. Fleet (and any
successor acting as Administrative Agent) and The First National Bank of Boston
(and any successor acting as Documentation Agent) and their respective
affiliates may (without having to account therefor to any Lender) accept
deposits from, lend money to, make investments in and generally engage in any
kind of banking, trust or other business with the Obligors (and any of their
Subsidiaries or Affiliates) as if they were not acting as an Agent, and Fleet
(and any such successor) and BankBoston (and any such successor) and their
respective affiliates may accept fees and other consideration from the Obligors
for services in connection with this Agreement or otherwise without having to
account for the same to the Lenders.
11.5. INDEMNIFICATION. The Lenders agree to indemnify each of the Agents
(to the extent not reimbursed under Section 12.3 hereof, but without limiting
the obligations of the Company under said Section 12.3) ratably in accordance
with their respective Commitments, for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever that may be imposed on, incurred
by or asserted against any Agent (including by any Lender) arising out of or by
reason of any investigation in or in any way relating to or arising out of this
Agreement or any other Loan Document or any other documents contemplated by or
referred to herein or therein or the transactions contemplated hereby or thereby
(including, without limitation, the costs and expenses that the Company is
obligated to pay under Section 12.3 hereof, but excluding, unless a Default has
occurred and is continuing, normal administrative costs and expenses incident to
the performance of its agency duties hereunder) or the enforcement of any of the
terms hereof or thereof or of any such other documents, PROVIDED that no Lender
shall be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the person to be indemnified.
11.6. NON-RELIANCE ON AGENTS AND OTHER LENDERS. Each Lender agrees that it
has, independently and without reliance on the Agents or any other Lender, and
based on such
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<PAGE> 55
documents and information as it has deemed appropriate, made its own credit
analysis of the Company and its Subsidiaries and decision to enter into this
Agreement and that it will, independently and without reliance upon the Agents
or any other Lender, and based on such documents and information as it shall
deem appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement or under any other Loan
Document. No Agent shall be required to keep itself informed, as to the
performance or observance by any Obligor of this Agreement or any of the other
Loan Documents or any other document referred to or provided for herein or
therein or to inspect the Properties or books of the Company or any of its
Subsidiaries. Except for notices, reports and other documents and information
expressly required to be furnished to the Lenders by the Agents hereunder, the
Agents shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the affairs, financial condition or
business of the Company or any of its Subsidiaries (or any of their affiliates)
that may come into the possession of an Agent or any of their respective
affiliates.
11.7. FAILURE TO ACT. Except for action expressly required of any Agent
hereunder and under the other Loan Documents, each Agent shall in all cases be
fully justified in failing or refusing to act hereunder and thereunder unless it
shall receive further assurances to its satisfaction from the Lenders of their
indemnification obligations under Section 11.5 hereof against any and all
liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.
11.8. RESIGNATION OR REMOVAL OF AGENTS. Subject to the appointment and
acceptance of a successor Agent as provided below, an Agent may resign at any
time by giving notice thereof to the Lenders and the Company. Upon any such
resignation, the Required Lenders shall have the right to appoint a successor
Agent to such capacity (and in that connection, so long as no Event of Default
shall have occurred and be continuing, subject to the consent of the Company,
not to be unreasonably withheld or delayed). If no successor Agent shall have
been so appointed by the Required Lenders and shall have accepted such
appointment within 30 days after the retiring Agent's giving of notice of
resignation then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent to such capacity, that shall be a bank with a combined capital
and surplus of at least $250,000,000 (and in that connection, so long as no
Event of Default shall have occurred and be continuing, subject to the consent
of the Company, not to be unreasonably withheld or delayed)). Upon the
acceptance of any appointment as an Agent hereunder by a successor Agent, (a)
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent and (b) the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation hereunder as an Agent, the provisions of this
Section 11 shall continue in effect for its benefit in respect of any actions
taken or omitted to be taken by it while it was acting as the Agent.
11.9. CONSENTS UNDER OTHER LOAN DOCUMENTS. Except as otherwise provided in
Section 12.5 hereof with respect to this Agreement, the Administrative Agent
may, with the prior consent of the Required Lenders (but not otherwise), consent
to any modification, supplement or waiver under any of the other Loan Documents,
PROVIDED that, without the prior consent of each Lender, the Administrative
Agent shall not (except as provided herein) release any collateral or
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<PAGE> 56
any Obligor or otherwise terminate any Lien under any Loan Document providing
for collateral security, or agree to additional obligations being secured by
such collateral security.
Section 12. Miscellaneous
-------------
12.1 WAIVER. No failure on the part of any Agent or any Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under this Agreement or any Note shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement or any Note preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Each Obligor irrevocably waives, to the fullest extent permitted by
applicable law, any claim that any action or proceeding commenced by any Agent
or any Lender relating in any way to this Agreement should be dismissed or
stayed by reason, or pending the resolution, of any action or proceeding
commenced by any Obligor relating in any way to this Agreement whether or not
commenced earlier. To the fullest extent permitted by applicable law, the
Obligors shall take all measures necessary for any such action or proceeding
commenced by any Agent or any Lender to proceed to judgment prior to the entry
of judgment in any such action or proceeding commenced by any Obligor.
12.2. NOTICES. All notices, requests and other communications provided for
herein and under the Security Documents (including, without limitation, any
modifications of, or waivers, requests or consents under, this Agreement) shall
be given or made in writing (including, without limitation, by telecopy), or,
with respect to notices given pursuant to Section 2.3 hereof or Section 4.5
hereof, by telephone, confirmed in writing by telecopier by the close of
business on the day the notice is given, delivered (or telephoned, as the case
may be) to the intended recipient at the "Address for Notices" specified below
its name on the signature pages hereof (below the name of the Company, in the
case of any Subsidiary Guarantor); or, as to any party, at such other address as
shall be designated by such party in a notice to each other party. Except as
otherwise provided in this Agreement, all such communications shall be deemed to
have been duly given when transmitted by telecopier or personally delivered or,
in the case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
12.3. EXPENSES, ETC. The Company agrees to pay or reimburse each of the
Lenders and each of the Agents for: (a) all reasonable out-of-pocket costs and
expenses of the Agents (including, without limitation, the reasonable fees and
expenses of Brown, Rudnick, Freed & Gesmer, special counsel to Fleet) in
connection with (i) the negotiation, preparation, execution and delivery of this
Agreement and the other Loan Documents and the extensions of credit hereunder,
(ii) the syndication of the Commitments and the Loans and (iii) the negotiation
or preparation of any modification, supplement or waiver of any of the terms of
this Agreement or any of the other Loan Documents (whether or not consummated);
(b) all reasonable out-of-pocket costs and expenses of each of the Lenders and
each of the Agents (including, without limitation, the reasonable fees and
expenses of legal counsel) in connection with (i) any Default and any
enforcement or collection proceedings resulting therefrom, including, without
limitation, all manner of participation in or other involvement with (x)
bankruptcy, insolvency, receivership,
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<PAGE> 57
foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory
proceedings and (z) workout, restructuring or other negotiations or proceedings
(whether or not the workout, restructuring or transaction contemplated thereby
is consummated) and (ii) the enforcement of this Section 12.3; and (c) all
transfer, stamp, documentary or other similar taxes, assessments or charges
levied by any governmental or revenue authority in respect of this Agreement or
any of the other Loan Documents or any other document referred to herein or
therein and all reasonable costs, expenses, taxes, assessments and other charges
incurred in connection with any filing, registration, recording or perfection of
any security interest contemplated by any Loan Document or any other document
referred to therein.
12.4. INDEMNIFICATION. The Company hereby agrees to indemnify each Agent,
each Lender, their affiliates and their respective directors, officers,
employees, attorneys and agents from, and hold each of them harmless against,
any and all losses, liabilities, claims, damages or expenses incurred by any of
them (including, without limitation, any and all losses, liabilities, claims,
damages or expenses incurred by any Agent to any Lender, whether or not any
Agent or any Lender is a party thereto) arising out of or by reason of any
investigation or litigation or other proceedings (including any threatened
investigation or litigation or other proceedings) relating to the extensions of
credit hereunder or any actual or proposed use by the Company or any of its
Subsidiaries of the proceeds of any of the extensions of credit hereunder,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation or litigation or other
proceedings (but excluding any such losses, liabilities, claims, damages or
expenses incurred by reason of the gross negligence or willful misconduct of the
Person to be indemnified). Without limiting the generality of the foregoing, the
Company will indemnify each Agent and each Lender from, and hold each Agent and
each Lender harmless against, any losses, liabilities, claims, damages or
expenses described in the preceding sentence (but excluding, as provided in the
preceding sentence, any loss, liability, claim, damage or expense incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified) arising under any Environmental Law as a result of (i) the past,
present or future operations of the Company or any of its Subsidiaries (or any
predecessor in interest to the Company or any of its Subsidiaries), (ii) the
past, present or future condition of any site or facility owned, operated or
leased at any time by the Company or any of its Subsidiaries (or any such
predecessor in interest) or (iii) any Release or threatened Release of any
Hazardous Materials at or from any such site or facility, including any such
Release or threatened Release that shall occur during any period when any Agent
or any Lender shall be in possession of any such site or facility following the
exercise by the Administrative Agent or any Lender of any of its rights and
remedies hereunder.
12.5. AMENDMENTS, ETC.. Except as otherwise expressly provided in this
Agreement, any provision of this Agreement may be modified or supplemented only
by an instrument in writing signed by the Company, the Administrative Agent and
the Required Lenders, or by the Company and the Administrative Agent acting with
the consent of the Required Lenders, and any provision of this Agreement may be
waived by the Required Lenders or by the Administrative Agent acting with the
consent of the Required Lenders; PROVIDED that: (a) no modification, supplement
or waiver shall, unless by an instrument signed by all of the Lenders or by the
Administrative Agent acting with the consent of all of the Lenders: (i)
increase, or extend the term of any of the Commitments, or extend the time or
waive any requirement for the reduction or termination of any of the
Commitments, (ii) extend the date fixed for the payment
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<PAGE> 58
of principal of or interest on any Loan, or any fee hereunder, (iii) reduce the
amount of any such payment of principal, (iv) reduce the rate at which interest
is payable thereon or any fee is payable hereunder, (v) alter the rights or
obligations of the Company to prepay Loans, (vi) alter the terms of Section 4.2,
4.7 or 11.9 hereof or this Section 12.5, (vii) modify the definition of the term
"Required Lenders", or modify in any other manner the number or percentage of
the Lenders required to make any determinations or waive any rights hereunder or
to modify any provision hereof, (viii) release any Obligor hereunder, or (ix)
waive any of the conditions precedent set forth in Section 7.1 hereof; (b) any
modification or supplement of Section 11 hereof shall require the consent of the
Administrative Agent; and (c) any modification or supplement of Section 6 hereof
shall require the consent of each Subsidiary Guarantor (PROVIDED that any
Subsidiary of the Company may become a party to this Agreement as a "Subsidiary
Guarantor" hereunder as provided in Section 9.13 hereof).
12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
12.7. Assignments and Participations.
------------------------------
(a) No Obligor may assign any of its rights or obligations hereunder
or under the Notes without the prior consent of all of the Lenders and the
Agent.
(b) Each Lender may assign any of its Loans, its Note and its
Commitment but only with the consent of the Company and the Administrative
Agent; PROVIDED THAT
(i) no such consent by the Company or the Administrative Agent
shall be required in the case of any assignment to another Lender,
and no such consent by the Company shall be required in the case of
any assignment effected while an Event of Default has occurred and
is continuing;
(ii) except to the extent the Company and the Administrative
Agent shall otherwise consent, any such partial assignment (other
than to another Lender) shall be in an amount at least equal to
$5,000,000;
(iii) upon each such assignment, the assignor and assignee
shall deliver to the Company and the Administrative Agent a Notice
of Assignment in the form of Exhibit E hereto; and
(iv) no consent required of the Company or the Administrative
Agent under this Section 12.7(b) shall be unreasonably withheld or
delayed.
Upon execution and delivery by the assignor and the assignee to the
Company and the Administrative Agent of such Notice of Assignment and upon
the consent thereto by the Company and the Administrative Agent, the
assignee shall have, to the extent of such assignment (unless otherwise
consented to by the Company and the Administrative Agent), the
obligations, rights and benefits of a Lender hereunder holding the
Commitment(s) and Loans (or portions thereof) assigned to it and specified
in such Notice
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<PAGE> 59
of Assignment (in addition to the Commitment(s) and Loans, if any,
theretofore held by such assignee) and the assigning Lender shall, to the
extent of such assignment, be released from the Commitment(s) (or
portion(s) thereof) so assigned. Upon each such assignment the assigning
Lender shall pay the Administrative Agent an assignment fee of $3,000.
(c) A Lender may sell or agree to sell to one or more other Persons
a participation in all or any part of any Loans held by it, or in its
Commitments, in which event each purchaser of a participation (a
"Participant"), except with respect to a Lender as otherwise provided in
Section 4.7(c) hereof, shall not have any rights or benefits under this
Agreement or any Note or any other Loan Document (the Participant's rights
against such Lender in respect of such participation to be those set forth
in the agreements executed by such Lender in favor of the Participant).
All amounts payable by the Company to any Lender under Section 5 hereof in
respect of Loans held by it, and its Commitments, shall be determined as
if such Lender had not sold or agreed to sell any participations in such
Loans and Commitments, and as if such Lender were funding each of such
Loan and Commitments in the same way that it is funding the portion of
such Loan and Commitments in which no participations have been sold. In no
event shall a Lender that sells a participation agree with the Participant
to take or refrain from taking any action hereunder or under any other
Loan Document except that such Lender may agree with the Participant that
it will not, without the consent of the Participant, agree to (i) increase
or extend the term, or extend the time or waive any requirement for the
reduction or termination, of such Lender's related Commitment, (ii) extend
the date fixed for the payment of principal of or interest on the related
Loan or Loans, or any portion of any fee hereunder payable to the
Participant, (iii) reduce the amount of any such payment of principal,
(iv) reduce the rate at which interest is payable thereon, or any fee
hereunder payable to the Participant, to a level below the rate at which
the Participant is entitled to receive such interest or fee, (v) alter the
rights or obligations of the Company to prepay the related Loans or (vi)
consent to any modification, supplement or waiver hereof or of any of the
other Loan Documents to the extent that the same, under Section 11.9 or
12.4 hereof, requires the consent of each Lender.
(d) In addition to the assignments and participations permitted
under the foregoing provisions of this Section 12.7, any Lender may
(without notice to the Company, the Administrative Agent or any other
Agent or Lender and without payment of any fee) (i) assign and pledge all
or any portion of its Loans, and Notes to any Federal Reserve Lender as
collateral security pursuant to Regulation A and any Operating Circular
issued by such Federal Reserve Lender and (ii) assign all or any portion
of its rights under this Agreement and its Loans, and Note to an Affiliate
provided that the Company shall not be required to pay anyincrease in the
cost of borrowing as a result of such assignment and LIBOR Loans must
continue to be made available by such Assignee. Unless the Administrative
Agent and the Company shall otherwise consent thereto, no such assignment
shall release the assigning Lender from its obligations hereunder.
(e) A Lender may furnish any information concerning the Company or
any of its Subsidiaries in the possession of such Lender from time to time
to assignees and
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<PAGE> 60
participants (including prospective assignees and participants), subject,
however, to the provisions of Section 12.13 hereof.
(f) Anything in this Section 12.7 to the contrary notwithstanding,
no Lender may assign or participate any interest in any Commitment or Loan
held by it hereunder to the Company or any of its Affiliates or
Subsidiaries, and the Company shall not, and shall not permit any of its
Subsidiaries to, acquire any such interest in any Commitment or Loan,
without the prior consent of each Lender.
12.8. SURVIVAL. The obligations of the Company under Sections 5.1, 5.5,
and 12.3 hereof, the obligations of each Subsidiary Guarantor under Section 6.3
hereof, and the obligations of the Lenders under Section 11.5 hereof, shall
survive the repayment of the Loans and the termination of the Commitments and,
in the case of any Lender that may assign any interest in its Commitments or
Loans hereunder, shall survive the making of such assignment, notwithstanding
that such assigning Lender may cease to be a "Lender" hereunder. In addition,
each representation and warranty made, or deemed to be made by a notice of
borrowing herein or pursuant hereto shall survive the making of such
representation and warranty, and no Lender shall be deemed to have waived, by
reason of making any extension of credit, any Default that may arise by reason
of such representation or warranty proving to have been false or misleading,
notwithstanding that such Lender or any Agent may have had notice or knowledge
or reason to believe that such representation or warranty was false or
misleading at the time such extension of credit was made.
12.9. CAPTIONS. The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Agreement.
12.10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and the
Notes shall be governed by, and construed12.11ccorGoverning Law; Submission to
Jurisdiction of The Commonwealth of Massachusetts. Each Obligor hereby submits
to the nonexclusive jurisdiction of the United States District Court for the
District of Massachusetts and of the Superior Court of the Commonwealth of
Massachusetts sitting in Suffolk County, and any appellate court in the
Commonwealth of Massachusetts, for the purposes of all legal proceedings arising
out of or relating to this Agreement or the transactions contemplated hereby.
Each Obligor hereby irrevocably waives, to the fullest extent permitted by
applicable law, any objection that it may now or hereafter have to the laying of
the venue of any such proceeding brought in such a court and any claim that any
such proceeding brought in such a court has been brought in an inconvenient
forum.
12.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENTS AND THE
LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN
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<PAGE> 61
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
12.13. Confidentiality.
---------------
(a) The Company acknowledges that from time to time financial advisory,
investment banking and other services may be offered or provided to the Company
or one or more of its Subsidiaries (in connection with this Agreement or
otherwise) by any Lender or by one or more subsidiaries or affiliates of such
Lender and the Company hereby authorizes each Lender to share any information
delivered to such Lender by the Company and its Subsidiaries pursuant to this
Agreement and the other Loan Documents, or in connection with the decision of
such Lender to enter into this Agreement, to any such subsidiary or affiliate,
it being understood that any such subsidiary or affiliate receiving such
information shall be bound by the provisions of paragraph (b) below as if it
were a Lender hereunder. Such authorization shall survive the repayment of the
Loans and the termination of the Commitments.
(b) Each Lender and each Agent agrees (on behalf of itself and each of its
affiliates, directors, officers, employees and representatives) to keep
confidential, in accordance with their customary procedures for handling
confidential information of the same nature and in accordance with safe and
sound banking practices, any non-public information supplied to it by the
Company pursuant to this Agreement and the other Documents, provided that
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statute, rule, regulation or judicial process, (ii) to
counsel for any of the Lenders or the Agents, (iii) to bank examiners, auditors
or accountants, (iv) to any other Agent or any other Lender, (v) in connection
with any litigation to which any one or more of the Lenders or one or more of
the Agents is a party in which such Lender or Agent has been required or, in the
opinion of its legal counsel, deems it necessary to produce such information,
(vi) to a subsidiary or affiliate of such Lender as provided in paragraph (a)
above or (vii) to any assignee or participant (or prospective assignee or
participant) assignee or participant (or prospective assignee or participant);
provided, further, that (x) unless specifically prohibited by applicable law or
court order, each Lender and each Agent shall, prior to disclosure thereof,
notify the Company of any request for disclosure of any such non-public
information, except when the request is (A) made by any governmental agency or
representative thereof or (B) pursuant to legal process and (y) that in no event
shall any Lender or any Agent be obligated to return any materials furnished by
the Company. The obligations of each Lender under this Section 12.13 shall
supersede and replace the obligations of such Lender under the confidentiality
letter in respect of this financing signed and delivered by such Lender to the
Company prior to the date hereof.
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<PAGE> 62
IT WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as an instrument under seal as of the day and year
first above written.
GENZYME CORPORATION
-------------------
By:
------------------------------------
Title:
Address for Notices:
Genzyme Corporation
One The Mountain Road
Framingham, Massachusetts 01701
Attention: Evan M. Lebson, Treasurer
Telecopier No.: (508) 872-0827
Telephone No.: (508) _________
SUBSIDIARY GUARANTORS
---------------------
DEKNATEL SNOWDEN PENCER, INC.
-----------------------------
By:
------------------------------------
Title:
Address for Notices:
c/o Genzyme Corporation
One Mountain Road
Framingham, MA 01701
Attention: Evan M. Lebson, Treasurer
Telecopier No.: (508) 872-0827
Telephone No.: (508)
---------------------------------------
---------------------------------------
---------------------------------------
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<PAGE> 63
DSP WORLDWIDE, INC.
By:
------------------------------------
Title:
Address for Notices:
--------------------
c/o Genzyme Corporation
One Mountain Road
Framingham, MA 01701
Attention: Evan M. Lebson, Treasurer
Telecopier No.: (508) 872-0827
Telephone No.: (508)
---------------------------------------
---------------------------------------
---------------------------------------
ALLSTON LANDING LIMITED PARTNERSHIP
By: Allston Landing Corporation,
its General Partner
By:
------------------------------------
Title:
Address for Notices:
--------------------
c/o Genzyme Corporation
One Mountain Road
Framingham, MA 01701
Attention: Evan M. Lebson, Treasurer
Telecopier No.: (508) 872-0827
Telephone No.: (508)
---------------------------------------
---------------------------------------
---------------------------------------
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<PAGE> 64
ADMINISTRATIVE AGENT
--------------------
FLEET NATIONAL BANK
By:
------------------------------------
Title:
Address For Notices:
--------------------
Fleet National Bank
75 State Street
Boston, MA 02109
Telecopier No.: (617) 346-1633
Telephone No.: (617) 346-4668
Attention: High Tech Group
Documentation Agent
-------------------
THE FIRST NATIONAL BANK OF BOSTON
By:
------------------------------------
Title:
Address For Notices:
--------------------
100 Federal Street
Mail Stop 010806
Boston, MA 02110
Telecopier No.:
Telephone No.:
Attention: High Tech Division
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<PAGE> 65
LENDERS
-------
Revolving Credit Commitment FLEET NATIONAL BANK
- ---------------------------
$35,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Fleet National Bank
75 State Street
Boston, MA 02109
Telecopier No.: (617) 346-1633
Telephone No.: (617) 346-4668
Attention: High Tech Group
Lending Office For All Loans
----------------------------
Fleet National Bank
75 State Street
Boston, MA 02109
Telecopier No.: (617) 346-1633
Telephone No.: (617) 346-4668
Attention: High Tech Group
-61-
<PAGE> 66
Revolving Credit Commitment THE FIRST NATIONAL BANK OF BOSTON
- ---------------------------
$22,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The First National Bank of Boston
100 Federal Street
Mail Stop 01-08-04
Boston, MA 02110
Telecopier No.: 617-434-9820
Telephone No.: 617-434-9625
Attention: Commercial Loan Services
Lending Office For All Loans:
-----------------------------
The First National Bank of Boston
100 Federal Street
Mail Stop 01-08-04
Boston, MA 02110
Telecopier No.: 617-434-9820
Telephone No.: 617-434-9625
Attention: Commercial Loan Services
-62-
<PAGE> 67
Revolving Credit Commitment BANK OF TOKYO-MITSUBISHI TRUST COMPANY
- ---------------------------
$13,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Bank of Tokyo-Mitsubishi Trust Company
125 Summer Street
Boston, MA 02110
Attention: Michael J. Cronin
Telecopier No.: 617-330-7422
Telephone No.: 617-330-1059
Lending Office For All Loans:
-----------------------------
Bank of Tokyo-Mitsubishi Trust Company
1251 Avenue of the Americas
New York, NY 10116-3138
Attention: Loan Operations Department
Telecopier No.: 201-413-8225
Telephone No.: 201-413-8515
-63-
<PAGE> 68
Revolving Credit Commitment CREDIT LYONNAIS NEW YORK BRANCH
- ---------------------------
$13,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, NY 10019
Attention: David O'Connell
Telecopier No.: 617-723-4883
Telephone No.: 617-723-2615
Lending Office For All Loans:
-----------------------------
Credit Lyonnais New York Branch
1301 Avenue of the Americas
New York, NY 10019
Attention: David O'Connell
Telecopier No.: 212-459-3187
Telephone No.: 212-261-7050
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<PAGE> 69
Revolving Credit Commitment THE FUJI BANK, LIMITED, NEW YORK BRANCH
- ---------------------------
$13,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The Fuji Bank, Limited, New York Branch
Two World Trade Center, 79th Floor
New York, NY 10048
Telecopier No.: 212-488-8216
Telephone No.: 212-898-2065
Attention: Kathleen Barsotti
Lending Office For All Loans:
-----------------------------
The Fuji Bank, Limited, New York Branch
Two World Trade Center, 79th Floor
New York, NY 10048
Telecopier No.: 212-488-8216
Telephone No.: 212-898-2065
Attention: Kathleen Barsotti
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<PAGE> 70
Revolving Credit Commitment MELLON BANK, N.A.
- ---------------------------
$13,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Mellon Bank, N.A.
One Boston Place
Sixth Floor
Boston, MA 02108
Telecopier No.: 617-722-3516
Telephone No.: 617-722-7994
Attention: Rita C. Long
Lending Office For All Loans:
-----------------------------
Mellon Bank, N.A.
3 Mellon Bank Center
Room 2303
Pittsburgh, PA 15229
Telecopier No.: 412-236-2027
Telephone No.: 412-234-3699
Attention: Sandra A. Castelli
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<PAGE> 71
Revolving Credit Commitment NATIONSBANK, N.A.
- ---------------------------
$13,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
NationsBank, N.A.
101 North Tyron Street, 15th Floor
Charlotte, NC 28225
Telecopier No.: 704-386-8694
Telephone No.: 704-388-1111
Attention: Jacquetta Banks
Lending Office For All Loans:
-----------------------------
NationsBank, N.A.
101 North Tyron Street, 15th Floor
Charlotte, NC 28225
Telecopier No.: 704-386-8694
Telephone No.: 704-388-1111
Attention: Jacquetta Banks
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<PAGE> 72
Revolving Credit Commitment REPUBLIC NATIONAL BANK OF NEW YORK
- ---------------------------
$13,000,000.00
- --------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Republic National Bank of New York
450 5th Avenue, 25th Floor
New York, NY 10018
Telecopier No.: 212-525-8370
Telephone No.: 212-525-5758
Attention: Patrick Hildreth
Lending Office For All Loans:
-----------------------------
Republic National Bank of New York
450 5th Avenue, 25th Floor
New York, NY 10018
Telecopier No.: 212-525-8370
Telephone No.: 212-525-5758
Attention: Patrick Hildreth
-68-
<PAGE> 73
Revolving Credit Commitment ABN AMRO BANK N.V.
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
By:
------------------------------------
Title:
Address For Notices:
--------------------
ABN AMRO Bank N.V.
One Post Office Square, 39th Floor
Boston, MA 02109
Telecopier No.: 617-988-7910
Telephone No.: 617-988-7908
Attention: Donna Connolly
Lending Office For All Loans:
-----------------------------
ABN AMRO Bank N.V.
One Post Office Square, 39th Floor
Boston, MA 02109
Telecopier No.: 617-988-7910
Telephone No.: 617-988-7908
Attention: Donna Connolly
-69-
<PAGE> 74
Revolving Credit Commitment Bank Leumi Trust Company Of New York
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Bank Leumi Trust Company of New York
562 Fifth Avenue
New York, NY 10036
Telecopier No.: 212-626-1329
Telephone No.: 212-626-1376
Attention: John Koenigsberg
Lending Office For All Loans:
-----------------------------
Bank Leumi Trust Company of New York
562 Fifth Avenue
New York, NY 10036
Telecopier No.: 212-626-1329
Telephone No.: 212-626-1376
Attention: John Koenigsberg
-70-
<PAGE> 75
Revolving Credit Commitment THE BANK OF NOVA SCOTIA
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The Bank of Nova Scotia
600 Peachtree Street, Northeast
Atlanta, GA 30308
Telecopier No.: 404-888-8998
Telephone No.: 404-871-1558
Attention: Ruth Alexander
Lending Office For All Loans:
-----------------------------
The Bank of Nova Scotia
600 Peachtree Street, Northeast
Atlanta, GA 30308
Telecopier No.: 404-888-8998
Telephone No.: 404-871-1558
Attention: Ruth Alexander
-71-
<PAGE> 76
Revolving Credit Commitment CITIZENS BANK OF MASSACHUSETTS
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
Citizens Bank of Massachusetts
55 Summer Street
Boston, MA 02110
Telecopier No.: 617-422-8854
Telephone No.: 617-422-8293
Attention: Anne Forbes Van Nest
Lending Office For All Loans:
-----------------------------
Citizens Bank of Massachusetts
55 Summer Street
Boston, MA 02110
Attention: Anne Forbes Van Nest
Telecopier No.: 617-422-8854
Telephone No.: 617-422-8293
-72-
<PAGE> 77
Revolving Credit Commitment CORESTATES BANK, N.A.
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
CoreStates Bank, N.A.
1339 Chestnut Street
P.O. Box 7618
Philadelphia, PA 19101-7618
Telecopier No.: 215-973-6745
Telephone No.: 212-786-2162
Lending Office For All Loans:
-----------------------------
CoreStates Bank, N.A.
1339 Chestnut Street
P.O. Box 7618
Philadelphia, PA 19101-7618
Telecopier No.: 215-973-6745
Telephone No.: 212-786-2162
-73-
<PAGE> 78
REvolving Credit Commitment CREDIT SUISSE
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
By:
------------------------------------
Title:
Address For Notices:
--------------------
Credit Suisse
Tower 49, 12 East 49th Street
New York, NY 10017
Telecopier No.: 212-238-5441
Telephone No.: 212-238-5473
Attention: Andreas Tschopp
Lending Office For All Loans:
-----------------------------
Credit Suisse
Tower 49, 12 East 49th Street
New York, NY 10017
Telecopier No.: 212-238-5441
Telephone No.: 212-238-5473
Attention: Andreas Tschopp
-74-
<PAGE> 79
Revolving Credit Commitment KREDIETBANK, N.V.
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
By:
------------------------------------
Title:
Address For Notices:
--------------------
Kredietbank, N.V.
125 West 55th Street
New York, NY 10019
Telecopier No.: 212-956-5580
Telephone No.: 212-541-0704
Attention: Robert Surdam
Lending Office For All Loans:
-----------------------------
Kredietbank, N.V.
125 West 55th Street
New York, NY 10019
Telecopier No.: 212-956-5580
Telephone No.: 212-541-0704
Attention: Robert Surdam
-75-
<PAGE> 80
Revolving Credit Commitment LTCB TRUST CO.
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
LTCB Trust Co.
165 Broadway, 49th Floor
New York, NY 10006
Telecopier No.: 212-608-2371
Telephone No.: 212-335-4551
Attention: David Manheim
Lending Office For All Loans:
-----------------------------
LTCB Trust Co.
165 Broadway, 49th Floor
New York, NY 10006
Telecopier No.: 212-608-2371
Telephone No.: 212-335-4551
Attention: David Manheim
-76-
<PAGE> 81
Revolving Credit Commitment THE NORTHERN TRUST COMPANY
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Telecopier No.: 312-444-3508
Telephone No.: 312-444-3504
Attention: James McCall
Lending Office For All Loans:
-----------------------------
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Telecopier No.: 312-444-3508
Telephone No.: 312-444-3504
Attention: James McCall
-77-
<PAGE> 82
Revolving Credit Commitment THE SAKURA BANK, LIMITED
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The Sakura Bank, Limited
277 Park Avenue
45th Floor
New York, NY 10172
Attention: Koji Suzuki
Telecopier No.: 212-888-7651
Telephone No.: 212-756-6814
Lending Office For All Loans:
-----------------------------
The Sakura Bank, Limited
277 Park Avenue
45th Floor
New York, NY 10172
Attention: Koji Suzuki
Telecopier No.: 212-888-7651
Telephone No.: 212-756-6814
-78-
<PAGE> 83
Revolving Credit Commitment THE SANWA BANK, LIMITED
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The Sanwa Bank, Limited
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
Telecopier No.: 212-754-2368
Telephone No.: 212-339-6390
Attention: Renko Hara
Lending Office For All Loans:
-----------------------------
The Sanwa Bank, Limited:
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
Telecopier No.: 212-754-2368
Telephone No.: 212-339-6390
Attention: Renko Hara
-79-
<PAGE> 84
Revolving Credit Commitment THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH
- ---------------------------
$7,500,000.00
- -------------
By:
------------------------------------
Title:
Address For Notices:
--------------------
The Sumitomo Bank, Limited, New York Branch
277 Park Avenue
New York, NY 10172
Attention: Thomas Miressi
Telecopier No.: 212-224-5188
Telephone No.: 212-224-4128
Lending Office For All Loans:
-----------------------------
The Sumitomo Bank, Limited, New York Branch
277 Park Avenue
New York, NY 10172
Attention: Thomas Miressi
Telecopier No.: 212-224-5188
Telephone No.: 212-224-4128
-80-
<PAGE> 85
EXHIBIT A
[Form of Revolving Credit Note]
PROMISSORY NOTE
$______________ __________ __, 199_
Boston, Massachusetts
FOR VALUE RECEIVED, GENZYME CORPORATION, a Massachusetts corporation (the
"COMPANY"), hereby promises to pay to _______________ (the "LENDER"), for
account of its respective Applicable Lending Offices provided for by the Credit
Agreement referred to below, at the principal office of Fleet National Bank,
Boston, Massachusetts 02109, the principal sum of ________________ Dollars (or
such lesser amount as shall equal the aggregate unpaid principal amount of the
Revolving Credit Loans made by the Lender to the Company under the Credit
Agreement), in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of each
such Revolving Credit Loan, at such office, in like money and funds, for the
period commencing on the date of such Revolving Credit Loan until such Revolving
Credit Loan shall be paid in full, at the rates per annum and on the dates
provided in the Credit Agreement.
The date, amount, Type, interest rate and duration of Interest Period (if
applicable) of each Revolving Credit Loan made by the Lender to the Company, and
each payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of this Note, endorsed by the
Lender on the schedule attached hereto or any continuation thereof, PROVIDED
that the failure of the Lender to make any such recordation or endorsement shall
not affect the obligations of the Company to make a payment when due of any
amount owing under the Credit Agreement or hereunder in respect of the Revolving
Credit Loans made by the Lender.
This Note is one of the Revolving Credit Notes referred to in the Credit
Agreement dated as of ________ __, 1996 (as modified and supplemented and in
effect from time to time, the "CREDIT AGREEMENT") between the Company, the
Subsidiary Guarantors party thereto, the Lenders party thereto and Fleet
National Bank, as Administrative Agent and The First National Bank of Boston, as
Documentation Agent, and evidences Revolving Credit Loans made by the Lender
thereunder. Terms used but not defined in this Note have the respective meanings
assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of this
Note upon the occurrence of certain events and for prepayments of Loans upon the
terms and conditions specified therein.
Except as permitted by Section 12.7 of the Credit Agreement, this Note may
not be assigned by the Lender to any other Person.
1
<PAGE> 86
This Note shall be deemed to be an instrument under seal governed by, and
construed in accordance with, the law of The Commonwealth of Massachusetts.
ATTEST: GENZYME CORPORATION
By:
- ------------------------------ --------------------------------
Title:
2
<PAGE> 87
SCHEDULE OF REVOLVING CREDIT LOANS
This Note evidences Revolving Credit Loans made, Continued or Converted
under the within-described Credit Agreement to the Company, on the dates, in the
principal amounts, of the Types, bearing interest at the rates and having
Interest Periods (if applicable) of the durations set forth below, subject to
the payments, Continuations, Conversions and prepayments of principal set forth
below:
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
Amount
Date Paid,
Made, Prepaid,
Continued or Principal Duration of Continued Unpaid
Converted Amount of Type of Loan Interest Rate Interest or Principal Notation
Loan Period Converted Amount Made By
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 88
EXHIBIT C TO CREDIT AGREEMENT
-----------------------------
FORM OF COMPLIANCE CERTIFICATE
------------------------------
COMPLIANCE CERTIFICATE
----------------------
This Compliance Certificate is provided pursuant to Section [_______]
[________] [________] of that certain Credit Agreement (the "Agreement") dated
as of __________, 1996, between Genzyme Corporation ("Company"), the Subsidiary
Guarantors party thereto, the Lenders party thereto and Fleet National Bank
("Administrative Agent") and The First National Bank of Boston ("Documentation
Agent"). The capitalized terms used herein shall have the meanings ascribed to
such terms in the Agreement. The undersigned hereby certifies as follows as of
this date:
1. The representations and warranties made by the Company in the Agreement
and by the Company and each Obligor in each certificate, document or financial
or other statement furnished under or in connection therewith are true and
accurate in all material respects.
2. The financial information and calculations shown on the attached
Schedule A are true and accurate as of the date hereof and the Company is in
compliance with the financial covenants set forth in Section 9.9 of the
Agreement.
3. No Default or Event of Default under the Agreement has occurred.
IN WITNESS WHEREOF, this Certificate has been duly executed and delivered
as a sealed instrument at Boston, Massachusetts on this ____ day of ________,
199_.
GENZYME CORPORATION
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
1
<PAGE> 89
SCHEDULE A
----------
TO EXHIBIT C
------------
Section 9.9(a) Consolidated Quick Ratio
- -------------- ------------------------
cash -- $__________
Cash Equivalents -- $___________
Marketable Investments -- $____________
Accounts Receivable -- $___________
Current Liabilities + $50,000,000 -- $____________
Actual Ratio -- ____________
Minimum Ratio -- 1.50 to 1.00
SECTION 9.9(b) CONSOLIDATED FIXED CHARGE COVERAGE RATIO
Consolidated EBITDA -- $___________
Capital Expenditures -- $____________
Taxes -- $___________
Dividend Payments -- $___________
Interest Expense -- $___________
Actual Ratio -- ___________
Minimum Ratio -- ___________
SECTION 9.9(c) CONSOLIDATED FUNDED DEBT TO EBITDA RATIO
Consolidated Funded Debt -- $_________
Consolidated EBITDA -- $___________
Actual Ratio -- ___________
Maximum Ratio -- __________
1
<PAGE> 90
SECTION 9.9(d) CONSOLIDATED TANGIBLE NET WORTH
- -------------- -------------------------------
Consolidated Net Worth -- $__________
Intangible Assets -- $__________
Consolidated Tangible Net Worth -- $__________
Actual Ratio -- __________
Minimum Ratio -- __________
LEVEL CALCULATION
- -----------------
CONSOLIDATED DEBT COVERAGE RATIO
- --------------------------------
cash -- $__________
Cash Equivalents -- $__________
Marketable Investments -- $__________
Consolidated Funded Debt -- $__________
Ratio -- __________
CONSOLIDATED FIXED CHARGE COVERAGE RATIO
- ----------------------------------------
Consolidated EBITDA -- $__________
Capital Expenditures -- $__________
Taxes -- $__________
Dividend Payments -- $__________
Interest Expense -- $__________
Ratio -- __________
Level Period (I, II, III or IV) for Applicable Margin and Applicable Commitment
Fee determination:
-------------------
2
<PAGE> 91
EXHIBIT D
[Form of Joinder Agreement]
This Joinder Agreement is delivered pursuant to Section 9.13 of the Credit
Agreement dated as of ___________________, 1996 (the "CREDIT AGREEMENT") between
Genzyme Corporation Incorporated (the "COMPANY"), the Subsidiary Guarantors
party thereto, the Lenders party thereto, Fleet National Bank, as Administrative
Agent, and The First National Bank of Boston, as Documentation Agent.
The undersigned hereby agrees to become a "Subsidiary Guarantor" as such
term is used in the Credit Agreement and, by virtue of its execution and
delivery of this Joinder Agreement, agrees to assume all of the obligations and
liabilities of a Subsidiary Guarantor under the Credit Agreement and the other
Loan Documents.
IN WITNESS WHEREOF, the undersigned has caused this Joinder Agreement to
be duly executed on this _____ day of _____________, _____.
[NAME OF SUBSIDIARY]
By:
-----------------------------------
Title:
Address for Notices:
[Address]
1
<PAGE> 92
EXHIBIT E
[Form of Notice of Assignment]
NOTICE OF ASSIGNMENT
[Date]
Genzyme Corporation
One Mountain Road
Framingham, Massachusetts 01701
Attention: Mr. Evan M. Lebson, Treasurer
Fleet National Bank,
as Administrative Agent
75 State Street
Boston, Massachusetts 02109
Attention: High Tech Group
Re: Credit Agreement dated as of _________________, 1996 (the
"CREDIT AGREEMENT"), between Genzyme Corporation (the
"COMPANY"), the Subsidiary Guarantors party thereto, the
Lenders party thereto and Fleet National Bank, as
Administrative Agent and The First National Bank of Boston, as
Documentation Agent
Ladies and Gentlemen:
We hereby give notice that, effective as of the date hereof, [Name of
Assignor] (the "ASSIGNOR") has assigned its rights and obligations with respect
to _____% (representing $__________ of the Assignor's outstanding Revolving
Credit Commitment and Revolving Credit Loans (such interest in such rights and
obligations being hereinafter referred to as the "ASSIGNED INTEREST") under the
Credit Agreement to [Name of Assignee] (the "ASSIGNEE"). The Assignee hereby
agrees (a) to become a "Lender" pursuant to Section 12.7(b) of the Credit
Agreement (if not already a Lender under the Credit Agreement) and (b) to assume
all the obligations of the Assignor thereunder with respect to the Assigned
Interest.
The address for notices, Applicable Lender Office(s) and payment
instructions for the Assignee are as follows:
Address for Notices:
------------------------
------------------------
------------------------
1
<PAGE> 93
Attention:
Telephone:
Telecopier:
Lending Office for Prime Rate
Loans and LIBOR Loans:
------------------------
------------------------
------------------------
Payment Instructions:
------------------------
------------------------
------------------------
Please sign and return the enclosed copy of this letter to the undersigned
to indicate your receipt hereof, and your consent to or notice of (as
applicable) the above-mentioned assignment and assumption, and your agreement to
the release of the Assignor from its obligations under the Credit Agreement with
respect to the Assigned Interest. As a condition to the effectiveness of the
above-mentioned assignment and assumption, the Assignee hereby agrees to pay to
the Administrative Agent on the date hereof an assignment fee of $3,000.
Very truly yours,
[NAME OF ASSIGNOR]
By:
---------------------------
Title
[NAME OF ASSIGNEE]
By:
---------------------------
Title
ACKNOWLEDGED OR CONSENTED TO
(AS APPLICABLE):
GENZYME CORPORATION
2
<PAGE> 94
By:
------------------------
Title:
FLEET NATIONAL BANK,
as Administrative Agent
By:
------------------------
Title:
3
<PAGE> 1
GENZYME CORPORATION AND SUBSIDIARIES
EXHIBIT 11 -- COMPUTATION OF WEIGHTED AVERAGE SHARES
USED IN COMPUTING EARNINGS PER SHARE AMOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
COMMON COMMON COMMON
AND ASSUMING AND ASSUMING AND ASSUMING
COMMON FULL COMMON FULL COMMON FULL
EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT
SHARE DILUTION SHARE DILUTION SHARE DILUTION
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
APPLICABLE TO GENERAL DIVISION STOCK (PRO FORMA):
Common stock outstanding, beginning of year............ 62,372 62,372 52,894 52,894 24,292 24,292
Weighted average common stock issued during the year... 5,917 5,917 2,640 4,882 178 178
Weighted average common stock assuming exercise
of options........................................... -- -- 2,756 3,012 546 596
Weighted average common stock assuming exercise
of warrants.......................................... -- -- 2,052 1,153 1,202
Weighted average common stock assuming conversion
of 6 3/4% Convertible Subordinated Notes............. -- -- (A) 3,782 (A) 1,891
------ ------ ------ ------ ------ ------
Weighted average number of shares outstanding.......... 68,289 68,289 60,186 66,622 26,169 28,159
====== ====== ====== ====== ====== ======
APPLICABLE TO TR STOCK (PRO FORMA):
Common stock outstanding, beginning of year............ 12,113 8,675 3,279
Weighted average common stock issued during the year... 1,048 984 299
Weighted average common stock assuming exercise
of options........................................... (B) (B) (B)
Weighted average common stock assuming exercise
of warrants.......................................... (B) (B) (B)
Weighted average common stock assuming conversion
of 6 3/4% Convertible Subordinated Notes............. (A) (A) (A)
------ ------ ------
Weighted average number of shares outstanding.......... 13,161 9,659 3,578
====== ====== ======
</TABLE>
(A) These securities are "other potentially dilutive" securities which effect is
included, to the extent such effect is dilutive, in the determination of
weighted average shares assuming full dilution.
(B) The effect of assumed conversion is antidilutive.
<PAGE> 1
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OF GENZYME
<TABLE>
<CAPTION>
JURISDICTION OF
NAME DIRECT PARENT OWNERSHIP INCORPORATION
- ---- ------------- --------- -------------
<S> <C> <C> <C>
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation II
Deknatel Snowden Genzyme Corporation 100% Delaware
Pencer, Inc.
Genzyme B.V. Genzyme Corporation 100% Netherlands
Genzyme GmbH Genzyme B.V. 100% Germany
Genzyme Finance S.A. Genzyme B.V. 100% France
Genzyme Japan K.K. Genzyme Corporation 100% Japan
Genzyme Limited Genzyme Corporation 100% U.K.
Genzyme Limited Genzyme Corporation 100% Israel
Genzyme Securities Genzyme Corporation 100% Massachusetts
Corporation
Genzyme Transgenics Genzyme Corporation 43% Massachusetts
Corporation
Genzyme Virotech GmbH Genzyme Corporation 100% Germany
Medix Biotech, Inc. Genzyme Corporation 100% California
Sygena A.G. Genzyme Corporation 100% Switzerland
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329,
33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437,
333-10003, 33-30007, 33-68208, 33-58351, 333-10005, 33-22464, 33-29440,
33-51416, 33-68186, 33-58353, 33-58355, 33-60435, 33-21241) and on Form S-3
(File Nos. 33-61853, 333-15597) of our reports, dated February 27, 1997 on our
audits of the consolidated financial statements and financial statement
schedule of Genzyme Corporation, the combined financial statements and
financial statement schedule of Genzyme General Division and the combined
financial statements and financial statement schedule of Genzyme Tissue Repair
Division as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996, which reports are included in this Annual
Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS PRESENTED
IN THE 1996 ANNUAL REPORT ON FORM-10K FOR GENZYME CORPORATION.
</LEGEND>
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 93,132
<SECURITIES> 56,608
<RECEIVABLES> 116,833
<ALLOWANCES> 16,508
<INVENTORY> 125,265
<CURRENT-ASSETS> 509,618
<PP&E> 393,839
<DEPRECIATION> 20,172
<TOTAL-ASSETS> 1,270,508
<CURRENT-LIABILITIES> 114,013
<BONDS> 241,998
887
0
<COMMON> 0
<OTHER-SE> 901,422
<TOTAL-LIABILITY-AND-EQUITY> 1,270,508
<SALES> 424,483
<TOTAL-REVENUES> 518,754
<CGS> 155,930
<TOTAL-COSTS> 210,012
<OTHER-EXPENSES> 384,066
<LOSS-PROVISION> 8,338
<INTEREST-EXPENSE> 6,990
<INCOME-PRETAX> (69,622)
<INCOME-TAX> (3,195)
<INCOME-CONTINUING> (72,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,817)
<EPS-PRIMARY> (0.45)<F1>
<EPS-DILUTED> (0.45)<F1>
<FN>
<F1>THE COMPANY HAS TWO CLASSES OF TRACKING STOCK WHICH ARE INTENDED TO REFLECT
THE VALUE AND TRACK THE PERFORMANCE OF GENZYME'S GENERAL DIVISION AND TISSUE
REPAIR DIVISION. EARNINGS (LOSS) PER SHARE IS REPORTED AS ATTRIBUTABLE TO EITHER
GENERAL DIVISION COMMON STOCK OR TISSUE REPAIR DIVISION COMMON STOCK.
CONSOLIDATED EPS IS NOT APPLICABLE FOR THE YEAR ENDED DECEMBER 31, 1996, THE
GENERAL DIVISION'S CAPITAL NET LOSS OF $0.45 PER GENERAL DIVISION COMMON SHARE
AND GTR REPORTED A NET LOSS OF $3.38 PER SHARE OF GTR STOCK.
</FN>
</TABLE>
