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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 0-14680
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GENZYME CORPORATION
(Exact name of Registrant as specified in its charter)
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MASSACHUSETTS
(State or other jurisdiction of 06-1047163
incorporation or organization) (I.R.S. Employer Identification Number)
ONE KENDALL SQUARE 02139
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(617) 252-7500
(Registrant's telephone number, including area code)
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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:
GENZYME GENERAL DIVISION COMMON STOCK, $0.01 PAR VALUE ("GGD STOCK")
GENZYME TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("GTR STOCK")
GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK, $0.01 PAR VALUE ("GMO STOCK")
GGD STOCK PURCHASE RIGHTS
GTR STOCK PURCHASE RIGHTS
GMO STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Aggregate market value of voting stock held by non-affiliates of the Registrant
as of March 1, 1998: $2,470,667,321
Number of shares of the Registrant's GGD Stock outstanding as of March 1, 1998:
77,952,860
Number of shares of the Registrant's GTR Stock outstanding as of March 1, 1998:
20,022,438
Number of shares of the Registrant's GMO Stock outstanding as of March 1, 1998
3,928,572
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Reports to Stockholders for its General
Division, Tissue Repair Division and Molecular Oncology Division for the fiscal
year ended December 31, 1997 are incorporated by reference into Parts I and II
of this Form 10-K/A and portions of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held May 28, 1998 are incorporated by
reference into Part III of this Form 10-K.
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This Annual Report on Form 10-K/A constitutes Amendment No. 1 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1997 (as amended,
hereinafter referred to as this "Annual Report on Form 10-K") and is being
filed (i) to add Exhibits 4.14, 4.15, 10.49 and 10.50 and to include such
exhibits in the list of exhibits set forth in Item 14(3)(c) and (ii) to make
certain immaterial corrections in Item 1 and in Exhibits 13.1, 13.2, 13.3 and 27
and a correction in Exhibit 21.
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Corporation ("Genzyme" or the
"Company") contains forward-looking statements concerning, among other things,
the Company's expected future revenues, operations and expenditures, estimates
of the potential markets for the Company's products and services, assessments of
competitors and potential competitors, projected timetables for the preclinical
and clinical development, regulatory approval and market introduction of the
Company's products and services and estimates of the capacity of manufacturing
and other facilities to support such products and services. All such
forward-looking statements are necessarily only estimates of future results and
the actual results achieved by the Company may differ materially from these
projections due to a number of factors, including (i) the Company's ability to
successfully complete preclinical and clinical development and obtain timely
regulatory approval and patent and other proprietary rights protection of its
products and services, (ii) the content and timing of decisions made by the U.S.
Food and Drug Administration (the "FDA") and other agencies regarding the
indications for which the Company's products may be approved, (iii) the accuracy
of the Company's estimates of the size and characteristics of markets to be
addressed by the Company's products and services, (iv) market acceptance of the
Company's products and services, (v) the Company's ability to obtain
reimbursement for its products from third-party payers, where appropriate, and
(vi) the accuracy of the Company's information concerning the products and
resources of competitors and potential competitors. See also "Factors Affecting
Future Operating Results" under the headings (x) "Management's Discussion and
Analysis of Genzyme General's Financial Condition and Results of Operations" and
"Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations" in the Genzyme General Annual
Report for the fiscal year ended December 31, 1997 (the "1997 Genzyme General
Annual Report"), (y) "Management's Discussion and Analysis of Genzyme Tissue
Repair's Financial Condition and Results of Operations" in the Genzyme Tissue
Repair Annual Report for the fiscal year ended December 31, 1997 (the "1997 GTR
Annual Report") and (z) "Management's Discussion and Analysis of Genzyme
Molecular Oncology's Financial Condition and Results of Operations" in the
Genzyme Molecular Oncology Annual Report for the fiscal year ended December 31,
1997 (the "1997 GMO Annual Report") set forth in Exhibits 13.1, 13.2 and 13.3,
respectively, to this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Genzyme is a biotechnology company that develops innovative products and
services for major unmet medical needs. Genzyme has three divisions: Genzyme
General Division ("Genzyme General"), which develops and markets therapeutic and
surgical products and diagnostic services and products; Genzyme Tissue Repair
Division ("Genzyme Tissue Repair" or "GTR"), which develops and markets
biological products for the treatment of cartilage damage, severe burns, chronic
skin ulcers and neurodegenerative diseases; and Genzyme Molecular Oncology
Division ("Genzyme Molecular Oncology" or "GMO"), which was formed in June 1997
in connection with the acquisition of PharmaGenics, Inc. ("PharmaGenics") and
develops gene-based approaches to cancer therapy through genomics, gene therapy
and a small molecule drug discovery program. Genzyme has three outstanding
series of common stock, each of which is intended to reflect the value and track
the performance of one of Genzyme's three divisions: Genzyme General Division
Common Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR
Stock") and Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). GGD
Stock and GTR Stock are listed on the Nasdaq National Market under the symbols
"GENZ" and "GENZL," respectively. GMO Stock is not yet publicly traded.
For purposes of financial statement presentation, all of the Company's
programs, products, assets and liabilities are allocated to Genzyme General,
Genzyme Tissue Repair or Genzyme Molecular Oncology. Notwithstanding this
allocation, Genzyme continues to hold title to all of the assets and is
responsible for all of the liabilities allocated to each of the divisions.
Holders of GGD Stock, GTR Stock and GMO Stock have no specific claim against the
assets attributed to the division whose performance is associated with the
series of stock they hold. Liabilities or contingencies of any division that
affect Genzyme's resources or financial condition could affect the financial
condition or results of operations of all three divisions.
Cerezyme(R), Ceredase(R), Thyrogen(R), Seprafilm(R), Pleur-evac(R),
Thora-Klex(R), Tevdek(R), InSight(R), MASDA(R) and Vianain(R) are registered
trademarks of Genzyme. Sepracoat(TM), Sepragel(TM), EndoCABG(TM), Sahara(TM),
N-geneous LDL(TM), N-geneous HDL(TM), Contrast(TM), Carticel(TM) and SAGE(TM)are
trademarks and Epicel(sm)and Epicel ASAP(sm) are service marks of Genzyme.
RenaGel(R) is a registered trademark of GelTex Pharmaceuticals, Inc. ("GelTex").
NeuroCell(TM)-PD and NeuroCell(TM)-HD are trademarks of Diacrin, Inc.
("Diacrin"). Provisc(R) is a registered trademark of Alcon Laboratories, Inc.
("Alcon"). Pulmozyme(R) is a registered trademark of Genentech, Inc.
GENZYME GENERAL -- PRODUCTS AND DEVELOPMENT PROGRAMS
Recent Developments
In January 1998, Genzyme General announced strategic changes in its
pharmaceuticals and surgical products business units. Genzyme General will focus
its efforts within three broad business areas -- therapeutics, surgical products
and diagnostics. The new diagnostics business area comprises two units, genetic
diagnostic services and diagnostic products. The business of the pharmaceuticals
unit has been redirected toward its higher-value products, including
phospholipids, peptides and hyaluronic acid ("HA"), for drug delivery and other
purposes. The fine chemicals, bulk pharmaceuticals such as clindamycin
phosphate, and dietary supplements such as melatonin businesses have been
discontinued. The pharmaceuticals unit's phospholipid and peptide products for
drug delivery have been incorporated into the therapeutics business area and its
HA product for ophthalmic use is included in the surgical products business
unit. Additionally, the surgical products unit has discontinued development of
Sepracoat(TM) coating solution for the U.S. market.
Therapeutics
Cerezyme(R) Enzyme (Imiglucerase Injection)/Ceredase(R) Enzyme (Alglucerase
Injection). Treatment with Cerezyme(R) enzyme or Ceredase(R) enzyme replacement
therapy currently represents the only safe and effective treatment for Type I
Gaucher disease, a seriously debilitating, sometimes fatal, genetic disorder
caused by a deficiency in an important enzyme in the body called
glucocerebrosidase ("GCR"). This deficiency results in the accumulation of the
lipid glucocerebroside in the body. The disease is characterized
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by an enlarged liver or spleen, anemia, bleeding problems, bone and joint pain,
fatigue and orthopedic complications such as repeated fractures and bone
erosion. Ceredase(R) enzyme is a modified form of human GCR in which
glycoprotein remodeling technology has been used to target GCR to the cells
where the lipid accumulation occurs. Cerezyme(R) enzyme is a recombinant form of
GCR which has been remodeled in a similar manner.
Genzyme General is marketing these products directly to physicians,
hospitals and treatment centers worldwide through a highly trained sales force.
This marketing effort is directed at identifying and initiating treatment for
the 5,000 Gaucher patients Genzyme General believes exist worldwide. Currently,
approximately 44% of these patients are receiving treatment. Cerezyme(R) enzyme
and Ceredase(R) enzyme, together, are available in approximately 50 countries
worldwide. Cerezyme(R) enzyme has received marketing approval in five countries
as well as the 15 countries forming the European Union ("EU"). Ceredase(R)
enzyme has received marketing approval in 13 countries. The Company's results of
operations are highly dependent on sales of these products which, for 1997,
totaled approximately $332.7 million.
Genzyme General produces Ceredase(R) enzyme from an extract of human
placental tissue supplied by Pasteur Merieux, a French company that is the only
significant commercial source of this material. Historically, the supply
available was not sufficient to produce enough Ceredase(R) enzyme to treat all
known patients. To address supply constraints, Genzyme developed Cerezyme(R)
enzyme and received approval from the FDA in October 1996 to manufacture
Cerezyme(R) enzyme in Boston, Massachusetts. Patients receiving Ceredase(R)
enzyme are currently being converted to Cerezyme(R) enzyme. Genzyme General will
continue to manufacture Ceredase(R) enzyme until the process of patient
conversions is completed. The conversion process is approximately 97% completed
in the U.S. and is expected to be nearly completed on a worldwide basis by the
end of 1998.
Synthetic Phospholipids. Phospholipids are the major structural components
of cell membranes. They are useful in drug delivery systems, emulsion
formulations and as components of pharmaceutical products such as liposomes.
Genzyme General has developed proprietary technology for the large scale
manufacture of synthetic phospholipids with high purity and consistency and
currently produces and sells synthetic phospholipids to pharmaceutical and
biotechnology companies for use in the formulation and delivery of certain of
their products.
Synthetic Peptides and Amino Acid Derivatives. Synthetic peptides are a
class of biologically active compounds comprised of chains of amino acids. Many
of these compounds have applications as active drug compounds and are used by
the pharmaceutical industry in final dosage form preparations. Genzyme General
is a commercial scale contract manufacturer for third parties of synthetic
peptides for many such applications. Amino acid derivatives are the materials
used in the production of synthetic peptides. In addition to producing these
materials for use in its own peptide manufacturing processes, Genzyme General
sells amino acid derivatives to the pharmaceutical industry.
RenaGel(R) Non-Absorbed Phosphate Binder. RenaGel(R) phosphate binder is
designed to be used in the treatment of chronic kidney failure patients to
remove dietary phosphorus in the gastrointestinal tract without being absorbed
into the bloodstream. Elevated serum phosphorus levels can cause serious
complications in chronic kidney failure patients, such as renal bone disease and
soft tissue and vascular calcifications. There are an estimated 214,000
end-stage renal failure patients in the U.S., 95% of whom receive a phosphate
control product, and 180,000 end-stage renal failure patents in Europe. Genzyme
and GelTex have formed a joint venture for the final development and
commercialization of RenaGel(R) phosphate binder. Genzyme General, as the
exclusive distributor for the joint venture, will commercialize RenaGel(R)
phosphate binder worldwide, excluding Japan and Pacific Rim countries, upon
receipt of regulatory approvals. An application for marketing approval of a new
drug ("NDA") was submitted to the FDA for RenaGel(R) phosphate binder in
November 1997, and the FDA determined that the NDA was acceptable for filing.
RenaGel(R) phosphate binder also received "Part B" status from the European
Medicines Evaluation Agency ("EMEA"), which status is assigned to innovative
medicinal products having novel characteristics, and means that only one
application need be submitted in order to obtain marketing approval in all 15 EU
countries. Applications for marketing authorization in Europe and Canada are
expected to be submitted in 1998. See Note H., "Investments" to the
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Genzyme Corporation and Subsidiaries Consolidated Financial Statements (the
"Consolidated Financial Statements") for a description of the joint venture
between Genzyme and GelTex.
Thyrogen(R) Hormone. Genzyme General has developed Thyrogen(R) hormone, a
recombinant form of human thyroid stimulating hormone, for use as an adjunct to
the approximately 100,000 to 200,000 diagnostic and therapeutic procedures
undertaken each year to detect and treat metastases of thyroid cancer.
Thyrogen(R) hormone is designed to allow patients to continue taking their
thyroid hormone supplements while they are being screened for metastases,
thereby allowing patients to avoid the debilitating effects of hypothyroidism.
An NDA for Thyrogen(R) hormone was submitted to the FDA on December 12, 1997 for
the diagnostic indication. The FDA has accepted the NDA under its priority
review process, which requires the agency to provide a letter to Genzyme
indicating approval or non-approval within six months of the filing date. FDA
priority review is reserved for therapies that have the potential to improve
treatments for particular diseases or conditions substantially. A marketing
authorization application for Thyrogen(R) hormone was also filed in Europe in
December 1997. Genzyme General expects to file a new drug submission for
Thyrogen(R) hormone in Canada in 1998.
Antithrombin III. Antithrombin III is a plasma protein that helps regulate
blood clotting. Genzyme and Genzyme Transgenics Corporation ("GTC") have formed
a joint venture for the development and commercialization of transgenically
produced recombinant human antithrombin III ("ATIII"). Transgenic ATIII is
produced by GTC in goat milk. A Phase II clinical trial of ATIII was completed
in December 1997, confirming safety of ATIII at all administered doses and
supporting its ability to affect the anticoagulation response to heparin in
patients undergoing coronary artery bypass grafting ("CABG"). The companies will
conduct Phase III clinical trials of ATIII in 1998. Subject to the receipt of
regulatory approvals, Genzyme General will market ATIII worldwide, excluding
Asia, as the exclusive distributor for the joint venture. Genzyme owns
approximately 43% of the outstanding shares of GTC common stock. See Note H.,
"Investments" to the Consolidated Financial Statements for a description of the
relationship between Genzyme and GTC, including the joint venture.
Other Development Programs. In addition to the products and programs
described above, Genzyme General has several therapeutic products in various
stages of the research, development and clinical testing.
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PRODUCT/PROGRAM DESCRIPTION
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CFTR/adenovirus vector Genzyme General is developing a gene therapy approach using
adenovirus vectors to correct the basic defect in cystic
fibrosis ("CF") cells whereby the mutant genes are
augmented with genes that would enable the patient's cells
to produce normal cystic fibrosis transmembrane conductance
regulator ("CFTR") protein.
CFTR/lipid vector Genzyme General is developing lipid-DNA complexes as
vectors for an alternative gene therapy approach to the
treatment of CF.
Ex vivo stem cells/retrovirus vector Through its collaborations with the University of
Pittsburgh and IntroGene B.V., Genzyme General is
developing a hematopoietic stem cell gene therapy for
Gaucher disease.
Various proprietary vectors for gene Through its collaborations with Duke University and the
therapy University of California at San Diego, Genzyme General is
developing gene therapies for congestive heart failure,
vein graft failure and restenosis, as well as a gene
therapy application to protect heart tissue from oxygen
damage that can occur during various types of cardiac
procedures.
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PRODUCT/PROGRAM DESCRIPTION
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Alpha-Gal Genzyme General is developing a recombinant form of the
human enzyme Alpha-galactosidase ("Alpha-Gal") as a
treatment for Fabry disease, a usually fatal inherited
disorder of lipid metabolism.
Prolactin Genzyme General is developing a recombinant form of the
human hormone prolactin for use as an immune stimulant.
Potential clinical indications include
immunologic/hematopoietic reconstitution for
myelosuppressed and immunocompromised patient populations
and use as a vaccine adjuvant.
Chitinase Genzyme General is evaluating recombinant human chitinase
as a therapeutic agent for treating systemic fungal
infections, which are often observed in immunosuppressed
individuals.
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Surgical Products
Genzyme General develops, manufactures and markets surgical products for
four principal business lines: the Sepra Products (described below),
cardiovascular fluid management systems (chest drainage and autotransfusion
systems), surgical closure systems (sutures and needles) and surgical
instruments (cardiovascular punches and other cardiovascular, plastic surgery,
endoscopic and general instruments). Genzyme General's sales force markets
products directly to cardiac, general, gynecologic, colon and rectal surgeons
and hospital purchasing departments throughout the U.S. and Europe.
Sepra Products. Genzyme General, on behalf of a joint venture (the "Joint
Venture") between Genzyme Development Partners, L.P. ("GDP") and Genzyme, is
developing and marketing products for use during surgical procedures to limit
the formation of postoperative adhesions (the "Sepra Products"). The Sepra
Products are based on HA, a biopolymer produced naturally by the body to
lubricate and protect tissue. Under the terms of various agreements between GDP
and Genzyme, GDP has the exclusive right to sell the Sepra Products in the U.S.
and Canada though the Joint Venture. Genzyme has the exclusive right to sell
these products outside the U.S. and Canada subject to a royalty on European
sales under certain circumstances. In March 1997, Genzyme and the Joint Venture
entered into an exclusive marketing and distribution agreement whereby Genzyme
acts as the sole distributor of the Sepra Products on behalf of the Joint
Venture.
The Sepra Products portfolio is primarily comprised of Seprafilm(R)
bioresorbable membrane, Sepragel(TM) bioresorbable gel and Sepracoat(TM) coating
solution. Seprafilm(R) bioresorbable membrane is a solid formulation of modified
HA that is used to separate and protect tissues and organs that have been
damaged during surgery. During the third quarter of 1996, the FDA granted
approval to market Seprafilm(R) for use in any open abdominal or pelvic surgery.
Genzyme General launched a broad U.S. marketing effort for Seprafilm(R) during
the fourth quarter of 1996 using the sales force it acquired in connection with
Genzyme's acquisition of Deknatel Snowden Pencer, Inc. in 1996. Genzyme General
is initially targeting the top 300 hospitals that perform 27% of the colorectal
and general abdominal surgeries in which Seprafilm(R) could be used in the
United States. Genzyme is focusing on high-risk colorectal surgeries, where
adhesions are a particular concern. Internationally, Genzyme launched sales of
Seprafilm(R) in Europe in 1996 after the product was granted the Approval of
Conformity Certificate in accordance with the European Medical Devices Directive
(a "CE Mark"). Genzyme also began sales of Seprafilm(R) in Canada and Israel in
1997. Japan granted Seprafilm(R) regulatory approval in 1997, and working with
Kaken Pharmaceuticals Co., Ltd., Genzyme plans to launch Seprafilm(R) in Japan
in 1998.
Because Seprafilm(R) represents such a notable departure from the
techniques of the past, Genzyme General has faced challenges in establishing
Seprafilm(R) as the new standard of care in the surgical industry. To improve
its marketing efforts, Genzyme General hired and trained 20 Seprafilm(R) sales
specialists in 1997. Genzyme General is also initiating a clinical trial
designed to measure long-term outcomes related to small bowel obstruction in
patients who receive Seprafilm(R) during surgery compared to those who do not,
thereby providing information about Seprafilm(R)'s cost effectiveness and role
in reducing intestinal obstructions. Genzyme General is currently developing a
second generation Seprafilm(R) product, which is designed to have
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improved elasticity and ease of use suitable for laparoscopic procedures.
Genzyme General plans to file a supplemental Pre-Marketing Approval application
("PMA") with the FDA and apply for a CE Mark for the second generation
Seprafilm(R) product in 1998.
Sepragel(TM) bioresorbable gel is a highly viscous gel form of modified HA
and is intended to be used in laparoscopic procedures and on tissue surfaces
that are inaccessible to Seprafilm(R). Genzyme is continuing development of an
alternative formulation for Sepragel(TM) with improved properties. Once work on
the formulation is completed, additional patients are expected to be enrolled
over the next 12 months in the Phase I clinical trial.
Sepracoat(TM) coating solution is a liquid formulation of HA that, when
used to coat tissues and organ surfaces at the start of and throughout surgical
procedures, forms a temporary physical barrier that may protect tissues during
surgery. In January 1996, Genzyme filed a PMA with the FDA to market
Sepracoat(TM) for use in abdominal, pelvic and cardio-thoracic surgical
procedures. In 1997, an advisory panel to the FDA recommended that Genzyme not
be granted approval to market Sepracoat(TM) for the reduction of adhesions in
abdominal and pelvic surgery. Genzyme General has since ceased development of
Sepracoat(TM) for the U.S. market.
Genzyme General believes that successful initial market penetration and
subsequent maintenance of market share for Seprafilm(R) require a specialized
hospital-based sales force and has deployed its surgical products sales force
and additional sales specialists to accelerate the market introduction of these
products in the U.S. and Europe. Substantial additional efforts to educate
surgeons and hospital administrators as to the benefits of these products will
also be required in order for the products to penetrate target markets and gain
broad market acceptance. There can be no assurance that Genzyme General will be
successful in its efforts to implement a commercialization strategy for the
Sepra Products. See Note L., "Research and Development Agreements" to the
Consolidated Financial Statements for a description of the relationship between
Genzyme, GDP and the Joint Venture and details concerning funding of the
development of the Sepra Products.
Bulk and Pharmaceutical Grade Hyaluronic Acid. Genzyme General currently
produces and sells bulk HA for a number of applications. Under an agreement with
Alcon, Genzyme General supplies pharmaceutical grade HA powder to Alcon for
incorporation into Provisc(R), an HA-based ophthalmic surgical aid product,
which Alcon introduced in 1994. Genzyme General also receives a royalty based on
Alcon's product sales. In addition, HA is sold to a number of customers for
various research and development applications.
Cardiovascular Fluid Management Systems. This product line consists
primarily of self-contained, disposable chest drainage devices used to drain
blood from the chest cavity following open heart surgery, other surgical
procedures and trauma. Genzyme General also sells autotransfusion devices that
allow the collection of blood shed by the patient and its reinfusion
postoperatively, thus eliminating the risks associated with blood transfusions.
Genzyme General's self-contained, disposable chest drainage unit, Pleur-evac(R),
was introduced in 1967 and is the market leader in chest drainage devices.
Genzyme General also sells a line of dry suction-controlled chest drainage and
autotransfusion devices under the Sahara(TM) and Thora-Klex(R) brand names.
Surgical Closure Systems. Surgical sutures, including Tevdek(R) and Silkey
Polydek, are sold in packs consisting of suture/needle combinations and are
Genzyme General's oldest product line. Genzyme General emphasizes high quality
specialty sutures for cardiovascular and plastic surgery, utilizing special
materials, advanced metallurgy and packaging innovations. Approximately 50% of
Genzyme General's U.S. sales of surgical products are attributable to high
margin "specials" in which individual surgeons order nonstandard products and
customized suture/needle combinations for specific procedures.
Surgical Instruments. Genzyme General sells cardiovascular punches, which
are used during coronary artery bypass surgery to make cleanly cut holes, and
hand-held, reusable instruments such as needleholders, scissors, forceps,
graspers, dissectors and retractors. Genzyme General's instruments are used in
cardiovascular, plastic, endoscopic and general surgery and are sold directly to
the surgeon, the key decision maker on purchases of specialty instruments.
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In September 1997, the surgical products business area created a unit
focused on the development and marketing of broad and flexible systems for
minimally invasive cardiovascular procedures. Genzyme General intends to
leverage the core products under the Deknatel and Snowden Pencer brand names by
combining these disposable and reusable devises with new minimally invasive
cardiovascular systems. Genzyme General believes that up to 30% of the 430,000
conventional CABG and valve replacement procedures performed in the U.S. will be
performed in a minimally invasive fashion in the next five years.
Genzyme General entered into two agreements to expand its line of minimally
invasive cardiac systems and to extend its use to other cardiac procedures.
Under one agreement, this product line will be expanded so that surgeons can
stop the heart with the aid of an aortic occlusion balloon developed by the Cook
Group. Genzyme General will market the balloons exclusively and expects to begin
offering the balloons as part of Genzyme General's line of instruments for use
in endoscopic CABG procedures, called the EndoCABG(TM) System, in the first half
of 1998. The other agreement covers a product development and marketing alliance
with CarboMedics, Inc. ("CarboMedics"), pursuant to which the companies are
developing a system of instrumentation and supplies which will allow cardiac
surgeons to introduce CarboMedics's mechanical heart valves through a small
incision in the patient's chest wall.
Diagnostics
Genetic Diagnostic Services
Genzyme General applies advanced biotechnology to develop and provide high
quality, sophisticated genetic diagnostic services to physicians, hospitals,
universities, medical centers, clinical laboratories, genetic centers and
managed care organizations in the U.S. and internationally through a national
network of laboratories and a direct sales force. Genzyme General offers three
types of genetic diagnostic services: biochemical testing, classical and
molecular cytogenetic testing, and DNA testing. Biochemical testing services
consist primarily of a widely used screening test (AFP3) to determine if further
prenatal genetic testing is appropriate. Classical and molecular cytogenetic
testing involves the analysis of fetal cells obtained through amniocentesis or
chorionic villi sampling ("CVS") to evaluate chromosomal abnormalities. DNA
testing is performed to determine the likelihood that the subject has, or is a
carrier for, a specific genetic disorder, such as CF, Fragile X syndrome,
Huntington's disease, spinal muscular atrophy, polycystic kidney disease, sickle
cell anemia, hemophilia and Gaucher disease. Genzyme General employs over 70
board certified genetics professionals who interpret results and provide genetic
counseling and support services to medical practitioners and their patients.
InSight(R) Test. Genzyme General's InSight(R) test is a faster cytogenetic
test based on in situ hybridization of chromosome-specific DNA probes. This
technology permits identification of the most frequently occurring chromosomal
abnormalities within 48 hours, as compared to the one to three weeks required to
perform classical cytogenetic testing (karyotyping). The InSight(R) analysis is
provided in conjunction with a complete karyotype.
MASDA(R) Service. Genzyme General's patented Multiplex Allele-Specific
Diagnostic Assay (the "MASDA(R) Service") can analyze in a single assay up to
500 DNA samples simultaneously for over 100 known gene mutations. The MASDA(R)
Service not only analyzes different patient samples for different disease
indications in a single assay, it also identifies multiple mutations in one or
more genes in a single patient's DNA sample. Genzyme General is pursuing a
number of commercialization strategies for the MASDA(R) Service. In February
1997, Genzyme General launched a 70-mutation CF test, called the "CF-70" test.
Previous CF tests could only identify 32 or fewer mutations, thereby producing
negative results for people with rare mutations. In addition, the MASDA(R)
Service is also being used to provide genetic profiling services for clinical
trials being conducted by pharmaceutical companies.
Genzyme General has established a federally certified clinical trials
laboratory to support diagnostic assay development using the MASDA(R) Service.
In addition, the laboratory provides population segmentation services for
internal drug development programs and external customers. These studies are
designed to identify genetic markers that might provide information about the
severity of a disease as well as the likelihood that a patient might respond
either favorably or adversely to a therapy.
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Development Programs. Genzyme General is developing additional platforms
for complex mutational analysis and conducts major research and development
programs in such areas as genomics and rare cell separation and analysis
methods. For example, Genzyme General is continuing its efforts to develop
methods and procedures to isolate and genetically analyze fetal cells obtained
from maternal blood samples. Fetal cells obtained from maternal blood serum
could potentially be used in lieu of cells derived from amniotic fluid or
chorionic villi for genetic testing, thereby avoiding the risk associated with
amniocentesis or CVS. Genzyme General also is developing a technology called
cleavage and ligation associated mutation specific sequencing, or "CLAMSS," to
detect and identify unknown mutations in genes.
Diagnostic Products
Genzyme General is a primary supplier of diagnostic components (enzymes,
substrates, antibodies and antigens), bulk reagents and devices to manufacturers
of clinical diagnostic reagents and kits as well as directly to clinical
reference laboratories. It also manufactures and sells a broad line of antibody
and antigen-based ELISA test kits. In addition, Genzyme General distributes a
broad product line of research products to academic, industrial and governmental
laboratories for use in immunology and cell biology and has developed
manufacturing expertise in enzyme fermentation, purification, reagent
formulation and immunoassay test development.
Cardiovascular Products. Genzyme General sells devices and reagents for
the quantification of low-density lipoprotein ("LDL") and high-density
lipoprotein ("HDL") cholesterol levels. In September 1997, Genzyme General
introduced a second-generation homogenous direct LDL cholesterol test, called
N-geneous LDL(TM), and a second-generation homogenous HDL test, N-geneous
HDL(TM), in the U.S. Both of the new tests accurately measure cholesterol levels
that are present in a patient's serum or plasma directly without the labor
intensive pretreatment steps that were needed previously and are easily
adaptable to automated chemistry analyzers. N-geneous LDL(TM) is the only
homogenous LDL test available for sale in the U.S. Both tests are being
distributed in the U.S. by Genzyme General under a worldwide agreement with the
manufacturer of the tests, Daiichi Pure Chemicals Co., Ltd., of Tokyo. In
addition to the U.S., Genzyme General is also the exclusive marketing partner
for the N-geneous LDL(TM) and N-geneous HDL(TM) tests in Europe and the rest of
the world, with the exception of Asia, where Genzyme holds co-exclusive
distribution rights.
Diagnostic Intermediates. Genzyme General produces and sells intermediates
such as diagnostic enzymes, substrates and reagents for use in diagnostic kits
used for blood analysis in clinical chemistry laboratories. One area of emphasis
is pancreatic function, where Genzyme General provides enzymes, substrates, bulk
reagents and patented methodologies for amylase and lipase determination to
diagnostic kit manufacturers. Genzyme General is also a primary supplier of
cholesterol enzymes used in testing for coronary heart disease. Sales of its
diagnostic intermediates are made to over 200 manufacturers and users of
diagnostic kits worldwide through its own technical sales representatives in the
U.S. and Europe and through distributors in Japan.
ELISA Test Kits. Genzyme General manufactures and sells a broad range of
ELISA test kits for infectious disease and endocrinology determinations. In
addition, it supplies monoclonal and polyclonal antibodies plus other
immunoassay raw materials to immunodiagnostic kit manufacturers. Patented
Contrast(TM) rapid tests for pregnancy, Strep A and infectious mononucleosis
determination are also becoming key contributors to Genzyme Generals' product
portfolio.
Research Products. The diagnostics business unit's research products
consist of a comprehensive line of cytokines, growth factors, antibodies,
proteins and cytokine and apoptosis ELISA systems which play an integral role in
activating and modulating the body's immune system. These research products are
used primarily to conduct research in the areas of immunology and cellular
biology.
GENZYME TISSUE REPAIR -- PRODUCTS AND DEVELOPMENT PRODUCTS
GTR is a leading developer of biological products for the treatment of
cartilage damage, severe burns, chronic ulcers, and neurodegenerative diseases.
GTR believes that strong capabilities in three groups of core
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technologies -- cell processing, therapeutic protein development and
biomaterials -- enhance its ability to successfully develop and market a
portfolio of novel products and services in the field of tissue repair.
Carticel(TM) Autologous Cultured Chondrocytes ("Carticel(TM) AuCC"). GTR's
lead product, Carticel(TM) AuCC, is used to treat damaged articular knee
cartilage. GTR employs a proprietary process to grow a patient's own
("autologous") cartilage cells for use in repairing damaged knee cartilage. In
addition to cartilage cell processing, GTR trains orthopedic surgeons, collects
and analyzes outcomes data and assists physicians and patients in obtaining
reimbursements from third party payers. GTR's comprehensive surgeon training
program consists of lectures and hands-on bioskills sessions involving practice
of the surgical procedures (including biopsy harvesting, implantation and
surgical follow-up), as well as an orientation on reimbursement and billing
procedures. Since inception, GTR has trained 1,988 surgeons in this program.
In August 1997, the FDA granted GTR a biologics license (a "BLA") for the
manufacture of Carticel(TM) AuCC for use in repairing clinically significant
cartilage defects of the femoral condyle. Carticel(TM) AuCC is not indicated for
the treatment of cartilage damage associated with osteoarthritis. GTR is making
a substantial effort to establish the procedure known as autologous chondrocyte
implantation ("ACI") using Carticel(TM) AuCC as the new standard of care for
repair of cartilage damage to the femoral condyle. As part of these efforts, GTR
shifted its focus in 1996 to increasing the rate of reimbursement approvals by
establishing an educational program for third party payers. As a result of this
program, several payers have established protocols for selecting patients and
determining eligibility. Approximately 101 million people in the U.S. were
covered by health plans with protocols for reviewing Carticel(TM) AuCC
reimbursement requests as of December 31, 1997. In addition, one-third of GTR's
59-person U.S. sales and reimbursement staff is involved directly in claims
processing and educating insurers about the appropriate uses of the Carticel(TM)
AuCC. The commercial success of Carticel(TM) AuCC will depend materially on the
ability of GTR to increase the approval rate for reimbursement of the product
from third party payers. Although GTR has seen a substantial increase in the
development of broad policy coverage for Carticel(TM) AuCC since receipt of the
BLA, there can be no assurance that the recent increase in reimbursement
approvals will continue.
GTR also believes that successful commercialization of Carticel(TM) AuCC is
dependent on its being accepted by and incorporated into routine use by a large
number of orthopedic surgeons. GTR markets Carticel(TM) AuCC to orthopedic
surgeons in the U.S. and Europe directly and through distributors. GTR's sales
force promotes Carticel(TM) AuCC by contacting and educating orthopedic surgeons
about the service and maintaining an ongoing relationship with each surgeon who
receives training from GTR; assisting physicians with administrative, clinical
and reimbursement issues involved in arranging to perform the biopsy and
implantation procedures at hospitals; and assisting physicians in obtaining the
necessary approval from the hospital's Institutional Review Board to collect
outcomes data in accordance with GTR's protocol. GTR expects that its revenues
from the sale of Carticel(TM) AuCC may be lower in the summer months as fewer
operative procedures are typically performed during those months.
GTR is required by the FDA to conduct two confirmatory post-marketing
studies to gain a better understanding of the role of implanted cells in ACI and
to assess longer term clinical results. Each of these studies is required to
demonstrate that Carticel(TM) AuCC is superior to the alternatives studied. The
first, a five year, randomized study, will compare outcomes of patients treated
with Carticel(TM) AuCC to those of patients treated with abrasion and
microfracture -- two common alternative treatments for articular cartilage
defects. The second study will be a smaller scale study in which patients will
undergo the ACI biopsy and implantation procedure, but will randomly be assigned
to receive either Carticel(TM) AuCC or a placebo. This study is targeted to last
three to five years, not including a 36-month follow-up.
Epicel(sm) Service. GTR's Epicel(sm) Service, which provides cultured
autologous skin cells as permanent skin replacement for patients with severe
burns, was first introduced in 1987. These epidermal grafts are grown from a
patient's own skin cells and, therefore, are not rejected by the patient's
immune system. Starting with a patient biopsy about the size of a postage stamp,
GTR can grow enough skin grafts in three to four weeks to cover a patient's
entire body surface area.
Most burn wounds involving less than 60% body surface area are covered with
conventional skin grafts within the three to four weeks it currently takes to
grow skin grafts produced using the Epicel(sm) Service.
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Therefore, GTR believes that the primary candidates for the Epicel(sm) Service
are the approximately 400 patients each year in the U.S. who survive burn
injuries covering more than 60% of their body surface area. GTR markets the
Epicel(sm) Service to burn centers in the U.S. and parts of Europe through its
own direct sales force and in Japan through a distributor.
NeuroCell(TM)-PD and NeuroCell(TM)-HD. GTR, through a joint venture with
Diacrin, is developing NeuroCell(TM)-PD for the treatment of Parkinson's disease
and NeuroCell(TM)-HD for the treatment of Huntington's disease. GTR estimates
that the patient population with advanced Parkinson's disease ranges from
115,000 - 155,000 in the U.S., and that the U.S. patient population with
Huntington's disease is approximately 25,000. Both of the NeuroCell(TM) products
involve the implantation of fetal porcine brain cells into patients to replace
damaged brain tissue. The joint venture has a license to use patented technology
developed at Massachusetts General Hospital ("MGH") to protect the NeuroCell(TM)
products from the host's immune system without the need for chronic, lifetime
administration of immunosuppressive drugs.
In January 1998, the joint venture received FDA approval to initiate
patient recruitment in a Phase II/III trial of NeuroCell(TM)-PD. Enrollment in a
Phase I clinical trial of NeuroCell(TM)-PD involving 12 patients was completed
in October 1996. Patients in this trial are being evaluated at periodic
intervals to assess long term clinical outcomes. The results at six months
post-treatment showed marked improvement in symptoms and restored efficacy of
the drug levodopa, which the brain converts to dopamine, in ten of the 12
patients. An analysis of the ten evaluable patients also demonstrated
statistically significant improvement in mean scores on the Unified Parkinson's
Disease Rating Scale ("UPDRS") six months post-treatment. Without treatment,
scores on UPDRS generally deteriorate over time as the disease progresses. These
results are similar to those obtained by other researchers treating Parkinson's
patients with human fetal cells. Commercialization of treatments using human
fetal cells is not practical, however, because of ethical concerns, supply
constraints and inconsistent quality.
A histological study published in the March 1997 issue of Nature Medicine
showed that NeuroCell(TM)-PD cells transplanted into one of the patients in the
Phase I clinical trial survived for more than seven months and showed signs of
reconnecting nerve tissue damaged by the disease. The study marks the first
documentation of survival of cells transplanted from another species into the
human brain and of the appropriate growth of non-human neurons for a potential
therapeutic response. The patient, a 69-year old man, died of a pulmonary
embolism unrelated to treatment with NeuroCell(TM)-PD. The brain of the patient
showed minimal signs of inflammation or rejection of the foreign tissue.
The results of a Phase I clinical trial of NeuroCell(TM)-HD analyzed at
three months post-treatment showed no observable improvements in patient
outcomes. GTR believes, however, that such improvements may require a longer
period to become evident. See Note H., "Investments" to the Consolidated
Financial Statements for a description of the joint venture between Genzyme and
Diacrin.
Other Development Programs. GTR has a number of ongoing development
programs supporting Carticel(TM) AuCC. GTR is conducting basic research and
development into the biology of cartilage and the cartilage repair process. The
objective of this research is to identify biologic materials that promote more
rapid regeneration of articular cartilage, to develop new methods for the repair
of arthritic joints and large surface area cartilage defects and to enable the
ACI procedure to be performed less invasively. GTR is also committing resources
to meet requirements specified by the FDA for validation of certain product
manufacturing parameters. GTR is also developing recombinant Transforming Growth
Factor Beta(2)("TGF-Beta(2)") for the treatment of chronic skin ulcers and as an
intravenous injectable product for administration to multiple sclerosis ("MS")
patients for the prevention of autoimmune damage to nerve tissue.
GENZYME MOLECULAR ONCOLOGY -- PRODUCTS AND DEVELOPMENT PROGRAMS
GMO is engaged in the development and commercialization of novel cancer
therapeutics using an integrated, gene-based approach. GMO's products and
services include: a genomics service business based on its patented Serial
Analysis of Gene Expression, or "SAGE(TM) ", technology, gene therapy programs
focused on gene immunotherapy and tumor targeting, and a drug discovery program
to identify small molecules that interact with cancer-related targets, which
includes access to Genzyme's library of over one million small
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molecule compounds. GMO was formed in June 1997 by acquiring PharmaGenics and
combining it with several of Genzyme's ongoing programs in the field of
oncology.
SAGE(TM)
SAGE(TM) is a high throughput, high efficiency method of simultaneously
detecting and measuring the expression level of most, and possibly all, genes
expressed in a cell at a given time. Differential gene expression is the
comparison of how, when and in what amounts genes are expressed in a given
tissue or cell line versus another (e.g., cancer tissue versus normal tissue).
GMO has an exclusive, worldwide license to the SAGE(TM) technology from the
Johns Hopkins University School of Medicine ("JHU"). In December 1997, the U.S.
Patent and Trademark Office ("PTO") issued a patent covering the methodology by
which SAGE(TM) identifies and measures gene expression.
GMO believes that an understanding of differential gene expression will
accelerate the development of more effective cancer and other therapeutics and
diagnostics. Potential uses of SAGE(TM) in evaluating therapeutic targets
include comparison of disease tissue with normal tissue, comparison of genes
expressed at different stages of disease, elucidation of disease pathways and
measurement of response to drug candidates. SAGE(TM) may also be used to develop
diagnostics (by identifying tumor or other biological markers), discover novel
genes, map the genetic profiles of model organisms or optimize and monitor
production methods. GMO has entered into several commercial agreements for the
provision of SAGE services and SAGE(TM) sublicenses, including agreements with
Hexagen plc, Ontogeny, Inc., Parke-Davis, a division of Warner-Lambert Company,
and Reprogen, Inc.
Development Programs
GMO is conducting several gene therapy programs for the development of
alternative or complementary approaches to existing cancer therapies, including
the following:
<TABLE>
<CAPTION>
PRODUCT/PROGRAM DESCRIPTION
--------------- -----------
<S> <C>
Immunotherapy:
MART-1 and gp100 GMO is collaborating with researchers at the National Cancer
Institute ("NCI") to develop adenoviral vectors carrying the
MART-1 and gp100 genes for use as tumor "vaccines" for the
treatment of melanoma. Two Phase I clinical trials completed
in 1997 showed the vectors were safe and well tolerated and
that a small subset of patients showed substantial tumor
regression. These product candidates will continue to be
evaluated in Phase I clinical trials in the next year.
HSP65 GMO is collaborating with StressGen Biotechnologies Corp.
("StressGen") to optimize lipid delivery of the HSP65 gene.
See "Collaborations -- StressGen" below.
Tumor Targeting:
Lipid vectors GMO is optimizing its lipid gene delivery vectors for use in
systemic administration for delivery of genes to both
primary tumors and metastasized cancers.
p53 Schering-Plough Corporation ("Schering") is funding a
research program to develop cancer gene therapy products by
combining Schering's proprietary p53 tumor suppressor gene
with GMO's lipid delivery vectors. See "Collaborations --
Schering" below.
</TABLE>
GMO also has a number of cancer screens running both internally and through
efforts with collaborators to identify small molecules that could have
therapeutic benefit in treating cancer. Two areas of priority interest for GMO's
small molecule program are metastasis inhibition and anti-angiogenesis.
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Collaborations
GMO is currently a party to a number of commercial and academic
collaborations and licensing arrangements to provide access to complementary
technologies, enhance its expertise in specific cancer indications and
out-license products it does not choose to pursue internally, including the
arrangements discussed below.
StressGen. GMO, StressGen and the Canadian Medical Discoveries Fund Inc.
("CMDF") formed a joint venture in July 1997 to combine StressGen's proprietary
stress genes with Genzyme's gene delivery technology. The joint venture will
initially focus on the use of mycobacterial stress genes that have been licensed
exclusively to the joint venture in the field of cancer. Subject to the
successful completion of preclinical studies, the companies plan to initiate a
Phase I clinical trial for ovarian cancer during the next 12 months. See Note
H., "Investments" to the Consolidated Financial Statements for a description of
the joint venture between Genzyme, StressGen and CMDF.
Schering. In December 1997, GMO entered into a research and option
agreement with Schering to combine GMO's proprietary lipid delivery systems with
six of Schering's proprietary genes, including the p53 tumor suppressor gene, to
develop gene therapy products. The agreement provides for up-front payments,
research funding and potential milestone payments for research progress on a
lipid-based p53 tumor suppressor gene therapy. At any time during the one-year
research period, Schering may exercise its option to exclusively license GMO's
lipid vector technology for delivery of the p53 gene. If this option is
exercised, Schering will have the option to exclusively license the vector
technology for delivery of five additional genes.
Merck & Co., Inc. ("Merck"). In January 1998, GMO non-exclusively licensed
an assay to Merck relating to methods for identifying small molecules that
interfere with the binding of the MDM2 protein with the p53 protein. GMO
received a license fee for the assay and could receive additional milestone
payments if certain defined development milestones are achieved by Merck for a
product developed by a method licensed from GMO or covered by GMO patent rights.
In addition, GMO would receive royalties on worldwide sales of any such product.
NCI. GMO has a collaborative research and development agreement ("CRADA")
with the NCI relating to the development of treatments for metastatic melanoma.
The CRADA, which is effective until August 1999, covers the use of adenoviral
vectors that incorporate the genes for the proprietary melanoma tumor antigens
MART-1 and gp100. Under the CRADA, GMO provides Dr. Steven Rosenberg at NCI with
clinical grade adenoviral vectors, research funding and support for the conduct
of clinical trials at the NCI relating to these vectors in exchange for an
option to obtain either an exclusive or non-exclusive license to the technology
developed under the CRADA. Dr. Rosenberg is also collaborating with third
parties regarding the use of non-adenoviral vectors for the MART-1 and gp100
tumor antigen genes.
JHU. GMO has a research agreement with JHU and Dr. Kenneth Kinzler under
which GMO provides funding for Dr. Kinzler's SAGE(TM)-related research at JHU
through 2000 in exchange for an option to obtain an exclusive worldwide license
to technology developed as a part of that research. Under this agreement, GMO
will be obligated to make milestone payments upon the fulfillment of research
objectives. Furthermore, GMO has the rights to the SAGE(TM) data generated in
Dr. Kinzler's laboratory and an option to license diagnostic and therapeutic
rights to discoveries using SAGE(TM) that are further developed in Dr. Kinzler's
laboratory.
Under another research agreement with JHU, GMO sponsors certain
cancer-based research (other than SAGE(TM)) in Dr. Kinzler's laboratory through
2000 in exchange for an option to obtain an exclusive, worldwide license to
technology developed in the course of such research. In addition, GMO has
retained Dr. Bert Vogelstein's services on a non-exclusive basis through a
consulting agreement that is effective through April 2000.
In addition, GMO, JHU and Hoffman La-Roche, Inc. ("Roche") are parties to a
broad-based license agreement (the "1992 License Agreement") relating to the
development and commercialization of technology developed by Dr. Vogelstein
under an earlier research agreement. Under the 1992 License Agreement, JHU
granted Roche an exclusive license for diagnostic products and services and GMO
an exclusive license
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for oligonucleotide therapeutics, each with the right to sublicense, and a
co-exclusive license to GMO and Roche for non-oligonucleotide therapeutics and
other products not covered by either GMO's or Roche's exclusive licenses. While
the licenses from JHU are exclusive as to all rights that JHU possesses, some of
the genes licensed from JHU are covered by patent applications that are co-owned
with entities from which GMO and Roche have not obtained a license. GMO will owe
royalties to JHU on net sales by GMO and its sublicensees of therapeutic
products incorporating technology licensed under the 1992 License Agreement. In
April 1997, Roche granted GMO a non-exclusive sublicense of its diagnostics
rights licensed from JHU, along with the exclusive right to sublicense
diagnostic rights to the JHU technology. GMO will owe royalties to Roche on net
sales by GMO and its sublicensees of diagnostic products incorporating
technology licensed under the 1992 License Agreement.
COMPETITION
Genzyme is engaged in a segment of the human health care products industry
that is extremely competitive. Competitors in the U.S. and elsewhere are
numerous and include major pharmaceutical, chemical, surgical device and
biotechnology companies, many of which have substantially greater financial and
human resources, more experience in research, preclinical and clinical
development, and obtaining regulatory approvals and more extensive production
and marketing infrastructure than Genzyme and its divisions. These companies may
succeed in developing products that are more effective than any that have been
or may be developed by Genzyme and may also prove to be more successful than
Genzyme in producing and marketing their products.
Each of Genzyme's products and services faces different competitive
challenges:
Cerezyme(R) Enzyme and Ceredase(R) Enzyme. Although Genzyme General is not
aware of any current effective alternative to its products for the treatment for
Gaucher disease, competition potentially could come from other protein
replacement therapies or gene therapy. Genzyme General believes that its
proprietary production techniques, exclusive raw material source for Ceredase(R)
enzyme and, to a certain extent, the orphan drug status of its products give it
a number of advantages over potential competitors using protein replacement
therapy for the treatment of Gaucher disease. Gene therapy techniques are still
in experimental stages. Genzyme General believes that the principal factors that
will affect competition for Cerezyme(R) enzyme and Ceredase(R) enzyme will be
clinical effectiveness and absence of adverse side effects. One company is
attempting to develop an alternative form of recombinant GCR by producing the
enzyme in insect cells and modifying it by applying a coating of polyethylene
glycol.
RenaGel(R) Phosphate Binder. Phosphate binders are currently the only
available treatment for hyperphosphatemia. There are several phosphate binders
available or under development. A prescription calcium acetate preparation is
currently the only product approved in the U.S. for the control of elevated
phosphorus levels in patients with chronic kidney failure. Other products used
as phosphate binders include over-the-counter calcium- and aluminum-based
antacids and dietary calcium supplements. Calcium acetate and calcium carbonate,
the most commonly used agents, must be taken at sufficient doses to achieve
adequate reductions in phosphate absorption, which can lead to constipation and
patient noncompliance. In addition, calcium therapy requires frequent monitoring
because its use can cause hypercalcemia. Aluminum hydroxide is more effective at
lower doses than calcium acetate or calcium carbonate, but it is infrequently
used because aluminum absorbed from the intestinal tract accumulates in the
tissues of patients with chronic kidney failure, causing aluminum-related
osteomalacia, anemia and dialysis dementia. RenaGel(R) phosphate binder binds
dietary phosphate without the use of either calcium or aluminum and, therefore,
will not cause hypercalcemia or aluminum toxicities. Genzyme believes that
RenaGel(R) phosphate binder will effectively compete with existing phosphate
binders by offering an excellent tolerability profile and a more palatable
formulation than those of currently available phosphate binders.
CF. There are a number of organizations, both academic and commercial,
engaged in developing therapies to treat either the symptoms of CF or the cause
of the disease. Several groups are developing gene therapy approaches to the
disease and also have received approval from the FDA and the Recombinant DNA
Advisory Committee ("RAC") to initiate limited human studies of CF gene therapy.
In addition, other
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organizations are investigating pharmacological and biological agents that would
treat CF. One such product, Pulmozyme(R), which was developed by Genentech,
Inc., is currently on the market. These groups may succeed in developing gene
therapy products before Genzyme General, in obtaining patent protection that may
effectively block Genzyme General from commercializing its gene therapy products
or in developing other drug therapies that relieve the symptoms of CF and, thus,
compete with products under development by Genzyme General.
Sepra Products. Genzyme General believes that its expertise in developing
proprietary fermentation processes and its access to proprietary strains of
micro-organisms used in its HA production process will give it a competitive
advantage in the marketing of the Sepra Products. Its anti-adhesion products may
face significant competition, however, from other HA-based products, from
non-HA-based products and from changes in surgical techniques that would obviate
the use of HA. Genzyme General believes that the principal factor that will
affect competition in this area is acceptance of the product by surgeons, which
depends, in large part, upon product performance, safety and price.
Other Surgical Products. The principal methods by which Genzyme General's
surgical products business unit competes are continued innovative product
development, the performance and breadth of its product lines, brand name
recognition, sales force training and educational services, including
sponsorship of training programs in advanced surgical techniques. Genzyme
General's key product in the cardiovascular fluid management category is the
Pleur-evac(R) chest drainage product. Genzyme General believes that it leads the
chest drainage category and that this position is sustainable due to a broad
product line possessing patented features and brand name recognition.
Substantial competition in the market for fluid management devices resulted in a
decrease in surgical products sales during 1997. Corrective actions taken by
Genzyme General to boost sales in this market began yielding positive results in
the fourth quarter of 1997. Genzyme General continues to compete aggressively in
this market. The surgical closure category is dominated by Ethicon, a subsidiary
of Johnson & Johnson, and Sherwood, a division of American Home Products
Corporation. Genzyme General had focused on the cardiovascular suture market
within this category and believes that favorable demographics such as the aging
population and lengthening life expectancies will provide continued growth in
this market. Competition within the surgical instruments category varies by
segment, such as cardiovascular, endoscopic and plastic surgery instruments,
with no one company dominating the entire category. Unique features and product
innovation within its surgical instruments line, such as the recently launched
EndoCABG(TM) System, have allowed Genzyme General to compete effectively across
this category.
Genetic Diagnostic Services. The U.S. market for prenatal cytogenetic and
biochemical testing is divided among approximately 500 laboratories, many of
which offer both types of testing. Of this total group, less than 20
laboratories market their services nationally. Genzyme General believes that the
industry as a whole is still quite fragmented, with the top 20 laboratories
accounting for approximately 50% of market revenues, and with no individual
company accounting for more than 18% of the total other than Genzyme, which
accounts for approximately 22% of the total. Genzyme General believes, however,
that the industry will experience increasing consolidation, as smaller
laboratories face the challenges of more complex and stringent regulation.
Competitive factors in the genetic diagnostics services business generally
include reputation of the laboratory, range of services offered, pricing,
convenience of sample collection and pick-up, quality of analysis and reporting
and timeliness of delivery of completed reports. Genzyme General believes that
its research and development program, which has enabled it to develop and
introduce testing services based on new technology, and its active sales and
marketing force have played significant roles in the growth of its genetic
diagnostics services business. In addition to Genzyme General, several companies
and academic groups are attempting to develop fetal cell separation techniques.
Genzyme General believes that its combination of separation and analytical
technologies will give it a competitive advantage.
Diagnostic Products. Genzyme General acts as a primary supplier of enzymes
and substrates, and generally does not compete with its customers in the sale of
complete diagnostic kits. This philosophy enables Genzyme General to maintain
unique relationships with major diagnostic kit manufacturers and to engage with
them in development efforts to produce new or improved kits. The market in the
diagnostic products industry is mature and competition is based on price,
reliability of supply and the purity and specific activity of products.
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Carticel(TM) AuCC. GTR is aware of one other company, Verigen, Inc., that
is culturing autologous chondrocytes for cartilage repair in Europe. In addition
to Verigen, GTR knows of three other companies, Advanced Tissue Sciences, Inc.
("ATS"), in conjunction with Smith & Nephew PLC, Integra LifeSciences Corp.
("Integra") and LifeCell Corp., that are engaged in research on cultured
cartilage products. In addition, a surgical technique known as osteochondral
grafting may be competitive to Carticel(TM) AuCC. This procedure, which can be
performed arthroscopically, involves transferring plugs of low weight bearing
cartilage and bone to the area of a defect. Smith & Nephew, Arthrex, Inc. and
Innovasive Devices, Inc. are known to have programs relating to this procedure.
NeuroCell(TM) -PD and NeuroCell(TM) -HD. While there are currently no
effective long-term therapies for advanced Parkinson's disease and no effective
treatments for Huntington's disease, GTR is aware of other companies and
institutions pursuing research and development of alternative treatments for the
diseases. Experimental therapies under development for Parkinson's disease
include surgical destruction of certain portions of the brain (pallidotomy),
gene therapy, the use of growth factors and neuroprotectant therapy.
Epicel(sm) Service. GTR is the only commercial provider of cultured skin
grafts that have been shown to provide permanent skin replacement for burn
patients in the U.S. However, GTR may face competition from companies using
other approaches to culture skin tissue. Integra is marketing a collagen-based
dermal replacement product for severely burned patients. This product will still
require a skin graft from the patient or the Epicel(sm) Service to close a
full-thickness wound, however, and therefore will not compete directly with the
Epicel(sm) Service. ATS also has received approval for a temporary wound
covering for burns. Organogenesis, Inc. has submitted a PMA for a product to be
used for the closure of venous stasis ulcers. LifeCell Corp. currently has
freeze-dried enzymatically processed human cadaver dermis on the market.
TGF-Beta(2). The use of growth factors is emerging as a treatment for
partial-thickness or very small full-thickness wounds. A number of companies are
currently conducting or planning to conduct clinical trials with growth factors.
Potential competitors include Chiron Corp., in collaboration with the Ethicon
division of Johnson & Johnson, Curative Technologies, Inc., and Scios Novo, Inc.
Curative Technologies, Inc., also has one product on the market which does not
require FDA approval. Such growth factors may prove to be complementary to, as
well as competitive with, TGF-Beta(2). GTR does not believe, however, that
growth factors can provide permanent skin replacement to compete with the
Epicel(sm)Service. Additionally, TGF-Beta(2) will compete with interferon-based
immunomodulators produced by Chiron Corp. and Biogen Inc. for the treatment of
MS.
Cancer. Competition in the field of cancer therapeutics and diagnostics is
intense. GMO faces, and will continue to face, significant competition from
organizations such as large pharmaceutical and biotechnology companies,
universities, government agencies and other research institutions in each of
these fields. GMO is aware of clinical trials sponsored by Rhone-Poulenc Rorer
relating to p53 gene therapy for cancer and expects that other large companies
will be initiating gene therapy clinical trials in the near future. GMO also
relies on its collaborators for support in some of its cancer research and
development programs and intends to rely on these partners for preclinical
evaluation and clinical development of its potential products and services.
Competition may arise from the use of the same or similar technologies as those
currently used or contemplated to be used by GMO, as well as from existing
therapeutics and diagnostics, any or all of which may be more effective or less
expensive than those developed by GMO. For instance, other companies provide
genomics services that are competitive with SAGE(TM). Genzyme believes, however,
that SAGE(TM) offers several advantages over competing genomics services,
including that the genetic sequences used in SAGE(TM) for gene identification
can be considerably shorter than those used in competing techniques, thereby
increasing the rate at which genetic information can be analyzed and the
probability of detecting rare genes. In addition, certain of its collaborators
are conducting multiple product development programs in fields similar to those
that are the subject of the partner's alliance with GMO. For instance, the NCI,
with whom GMO is collaborating regarding the use of adenoviral vectors
incorporating the MART-1 and gp100 tumor antigen genes for the treatment of
melanoma, is currently working with others on non-adenoviral vector delivery
systems for these antigens. Any product candidate of GMO, therefore, may be
subject to competition with a potential product under development by a third
party, including GMO's collaborators.
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<PAGE> 17
PATENTS AND PROPRIETARY TECHNOLOGY
In general, Genzyme pursues a policy of obtaining patent protection both in
the U.S. and in selected foreign countries for subject matter considered
patentable and important to its business. In addition, a portion of Genzyme's
proprietary position is based upon patents that Genzyme has licensed from
others, including patents relating to RenaGel(R) phosphate binder, ATIII, the
AFP3 test, NeuroCell(TM)-PD and NeuroCell(TM)-HD, the Epicel(sm) Service,
TGF-Beta(2), SAGE(TM) and various cancer related genes such as p53. These
license agreements generally require Genzyme to pay royalties upon
commercialization of products covered by the licensed technology. Generally,
patents issued in the U.S. are effective for a period of seventeen years from
date of issue, although the GATT legislation changes this to twenty years from
the filing date for applications filed after June 8, 1995. The duration of
foreign patents varies in accordance with applicable local law. Genzyme also
relies on trade secrets, proprietary know-how and continuing technological
innovation to develop and maintain a competitive position in its product areas.
Genzyme's employees, consultants and corporate partners who have access to its
proprietary information have signed confidentiality agreements. Genzyme's patent
position and proprietary technology are subject to certain risks and
uncertainties. The information set forth under the subheading "Factors Affecting
Future Operating Results -- Uncertainty Regarding Patents and Protection of
Proprietary Technology" under (i) "Management's Discussion and Analysis of
Genzyme Corporation and Subsidiaries' Financial Condition and Results of
Operations" in the 1997 Genzyme General Annual Report, (ii) "Management's
Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and
Results of Operations" in the 1997 GTR Annual Report and (iii) "Management's
Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and
Results of Operations" in the 1997 GMO Annual Report is incorporated herein by
reference.
The Company's registered trademarks Cerezyme(R), Ceredase(R), Thyrogen(R),
Seprafilm(R), Pleur-evac(R), Thora-Klex(R), Tevdek(R), InSight(R), MASDA(R) and
Vianain(R), together with its trademarks and service marks Sepragel(TM),
Sepracoat(TM), EndoCABG(TM), Sahara(TM), N-geneous LDL(TM), N-geneous HDL(TM),
Contrast(TM), Carticel(TM), Epicel(sm), Epicel ASAP(sm), and SAGE(TM), in the
aggregate are considered to be of material importance to the Company.
GOVERNMENT REGULATION
Governmental regulation, in the U.S. and other countries, is a significant
factor in the production and marketing of many of Genzyme's products and in its
ongoing research and development activities.
FDA Regulation
In the U.S., products that do not achieve their principal intended purpose
through chemical action within or on the body and which are not dependent upon
being metabolized by the patient's body in order to be effective are classified
by the FDA as "devices" while other products are classified as "drugs" or
"biologics." Cerezyme(R) enzyme and Ceredase(R) enzyme are regulated in the U.S.
as drugs, as are Thyrogen(R) hormone and RenaGel(R) phosphate binder. ATIII,
Alpha-Gal, prolactin and the Company's gene therapy products are regulated as
biologics. The Sepra Products and Genzyme's other surgical products are
regulated as devices. The N-geneous LDL(TM) and N-geneous HDL(TM) cholesterol
tests are classified as in vitro diagnostic devices.
The activities required before drugs or biologics may be marketed in the
U.S. include (i) preclinical laboratory tests, in vitro and in vivo preclinical
studies and formulation and stability studies, (ii) the submission to the FDA
and approval of an application for human clinical testing (an "IND"), (iii)
adequate and well controlled human clinical trials to prove the safety and
effectiveness of the drug or biologic, (iv) the submission of an NDA for a drug
or a Product License Application ("PLA") for a biologic or a BLA for biologics
identified by the FDA as "Specified Biologics" and (v) the approval by the FDA
of the NDA, BLA or PLA.
In addition to product approval, the manufacturer of the product may have
to obtain an establishment license (for a biologic that is not considered well
characterized) or a pre-approval Good Manufacturing Practices ("GMP") inspection
(for a drug or well-characterized biologic) from the FDA. Since any license
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<PAGE> 18
granted by the FDA is both site and process specific, any material change by a
company in the manufacturing process, equipment or location necessitates
additional FDA review and approval.
Products that are classified as devices also require FDA approval prior to
marketing. Devices are classified as Class I, II or III, depending upon the
information available to assure their safety and effectiveness. In general,
Class I and Class II devices are devices whose safety and effectiveness can
reasonably be assured through general or specific controls, respectively. Class
III devices are life sustaining, life supporting or implantable devices or new
devices which have been found not to be substantially equivalent to legally
marketed devices. The steps required for approval of a Class III device include
(i) preclinical laboratory tests and in vitro and in vivo preclinical studies,
(ii) the submission to the FDA and approval of an investigational device
exemption (an "IDE") to allow initiation of clinical testing, (iii) human
clinical studies to prove safety and effectiveness of the device, (iv) the
submission of a PMA and (v) the approval by the FDA of the PMA. Typically,
clinical testing of devices involves initial testing to evaluate safety and
feasibility and expanded trials to collect sufficient data to prove safety and
effectiveness. In addition, the procedures and the facilities used to
manufacture the device are subject to review and approval by the FDA.
A device (other than a Class III device) which is proved to be
substantially equivalent to a device marketed prior to May 28, 1976, when
government regulations for devices were first introduced, can be marketed after
approval of a 510(k) application rather than the filing of an IDE and a PMA. The
510(k) application must contain a description of the device, its methods of
manufacture and quality control procedures and the results of testing to
demonstrate that the device is substantially equivalent to the device already
marketed.
In May 1996, the FDA published a new guidance document that provided for
the regulation of products such as Carticel(]) AuCC that use manipulated
autologous structural cells. Under these regulations, companies that are not
currently marketing autologous cultured chondrocytes would likely be required to
provide a prospective randomized blinded control study comparing the treatment
to alternative treatments. GTR estimates that it could take eight years for any
competitor to complete a study of this nature that would demonstrate the
clinical efficacy of its proposed treatment. In August 1997, the FDA granted GTR
a BLA under these regulations for Carticel(TM) AuCC. GTR has initiated
discussions with the FDA regarding an application for the Epicel(sm) Service,
which has been on the market as an unregulated medical device. GTR expects that
the FDA will permit the service to remain on the market until its regulatory
status is resolved.
The time and expense required to perform the clinical testing necessary to
obtain FDA approval can far exceed the time and expense of the research and
development initially required to create the product. Even after initial FDA
approval has been obtained, further studies may be required to provide
additional data on safety or to gain approval for the use of a product as a
treatment for clinical indications other than those initially targeted. In
addition, use of these products during testing and after marketing approval has
been obtained could reveal side effects which, if serious, could delay, impede
or prevent marketing approval, limit uses, force a recall of the product or
expose Genzyme to product liability claims.
Regulation Outside the U.S.
For marketing outside the U.S., Genzyme is subject to foreign regulatory
requirements governing human clinical testing and marketing approval for its
products. These requirements vary by jurisdiction, differ from those in the U.S.
and may necessitate additional pre-clinical or clinical testing whether or not
FDA approval has been obtained.
Generally, Genzyme's initial focus for obtaining marketing approval outside
the U.S. is Europe. EU Directives ("regulations") generally classify products
either as medicinal products or devices. For medicinal products, like those
produced by Genzyme, marketing approval may be sought using either the
centralized procedure of the Committee for Proprietary Medicine or Products (the
"CPMP") or the decentralized (mutual recognition) process. The CPMP centralized
procedure of the EMEA results in a recommendation in all member states, while
the EU multi-state process involves country by country approval. EU regulations
for products classified as devices have been implemented for some devices.
Devices such as Genzyme's Sepra Products must receive market approval through a
centralized procedure, where the device receives a CE Mark
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<PAGE> 19
allowing distribution to all member states of the EU. For those devices where EU
regulations have not been implemented, marketing approval must be obtained on a
country by country basis. The CE mark certification requires the company to
receive International Standards Organization ("ISO") certification for each
facility involved in the manufacture or distribution of the device. This
certification only comes after the development of an all inclusive quality
system which is reviewed for compliance to International Quality Standards by a
licensed "Notified Body" working within the EU. After certification is received
a product dossier is reviewed which attests to the product's compliance with EU
directive 93/42/EEC for medical devices. Only after this point is a CE Mark
granted. Ceredase(R) enzyme has been registered for sale in the EU through a
CPMP centralized procedure. Genzyme expects Cerezyme(R) enzyme, Thyrogen(R)
hormone, RenaGel(R) phosphate binder, Alpha-Gal, prolactin and the gene therapy
products also will be regulated through centralized CPMP procedure. Seprafilm(R)
and Sepracoat(TM) have been granted the CE Mark. Genzyme will apply for a CE
Mark for all of its other surgical products.
Autologous products are specifically exempt from the European Device
Directive and Pharmaceutical Directive promulgated by the EU. Therefore, each
European country is free to impose its own regulations on the marketing of such
products. To date, GTR has not encountered any local registration requirements
for market introduction of Carticel(TM) AuCC. During September 1997, the Spanish
national health system approved Carticel(TM) AuCC for use by public hospitals,
representing the first broad approval of the product by a reimbursement
authority in Europe. GTR is currently assessing the regulatory requirements for
commercialization of Carticel(TM) AuCC in Japan.
Other Government Regulation
Orphan Drug Act. The Orphan Drug Act provides incentives to manufacturers
to develop and market drugs for rare diseases and conditions affecting fewer
than 200,000 persons in the U.S. at the time of application for orphan drug
designation. The first developer to receive FDA marketing approval for an orphan
drug is entitled to a seven-year exclusive marketing period in the U.S. for that
product. However, a drug that is considered by the FDA to be clinically superior
to or different from another approved orphan drug, even though for the same
indication, is not barred from sale in the U.S. during the seven-year exclusive
marketing period. Genzyme has been accorded orphan drug status for Cerezyme(R)
enzyme, Ceredase(R) enzyme and Thyrogen(R) hormone and has received orphan drug
designation for a number of other products currently under development,
including its gene therapy products MART-1 and gp100, NeuroCell(TM)-PD and
NeuroCell(TM)-HD. Legislation has been periodically introduced in recent years,
however, to amend the Orphan Drug Act. Such legislation has generally been
directed to shortening the period of automatic market exclusivity and granting
certain marketing rights to simultaneous developers of a drug. The effect on
Genzyme of any amendments ultimately adopted cannot be assessed at this time. It
believes that the commercial success of these products, including Cerezyme(R)
enzyme and Ceredase(R) enzyme, will depend more significantly on the associated
safety and efficacy profile and on the price relative to competitive or
alternative treatments and other marketing characteristics of each product than
on the exclusivity afforded by the Orphan Drug Act. Additionally, these products
may be protected by patents, exclusive raw material supply contracts and other
means.
Regulation of Diagnostic Services. The Clinical Laboratories Improvement
Act ("CLIA") provides for the regulation of clinical laboratories by the U.S.
Department of Health and Human Services. Regulations promulgated under CLIA
affect the genetics laboratories of Genzyme.
Regulation of Gene Therapy Products. In addition to FDA requirements, the
National Institutes of Health ("NIH") has established guidelines providing that
transfers of recombinant DNA into human subjects at NIH laboratories or with NIH
funds must be approved by the NIH Director. NIH has established RAC to review
gene therapy protocols. Genzyme expects that all of its gene therapy protocols
will be subject to RAC review. In the U.K., Genzyme's gene therapy protocols
will be subject to review by the Gene Therapy Advisory Committee.
Tissue and Organ Bank Laws. A federal criminal statute that prohibits the
transfer of any human organ for valuable consideration for use in human
transplantation, but which permits recovery of reasonable costs associated with
such activities, has not been applied to Carticel(TM) AuCC or the
Epicel(sm)Service. Certain states
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<PAGE> 20
have laws requiring the licensure of tissue and organ banks and laws governing
the sale of human organs and the safety and efficacy of drugs, devices and
biologics, including skin, all of which could be interpreted to apply to GTR's
production and distribution of cultured tissue products. Provisions in certain
states' statutes prohibit the receipt of valuable consideration in connection
with the sale of human tissue by a tissue bank but permit licensed tissue banks,
including companies, to recover their reasonable costs associated with such
sales. The application of these or other regulations to GTR could result in
significant expense to GTR, limit Genzyme's reimbursement for its services and
otherwise materially adversely affect GTR's results of operations.
Other Laws and Regulations. Genzyme's operations are or may be also
subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices and the purchase, storage, movement, use and disposal of
hazardous or potentially hazardous substances used in connection with Genzyme's
research work and manufacturing operations, including radioactive compounds and
infectious disease agents. Although Genzyme believes that its safety procedures
comply with the standards prescribed by federal, state and local regulations,
the risk of contamination, injury or other accidental harm cannot be completely
eliminated. In the event of such an accident, Genzyme could be held liable for
any damages that result and any liabilities could exceed Genzyme's resources.
EMPLOYEES OF REGISTRANT
As of December 31, 1997, Genzyme (including all consolidated subsidiaries
and excluding GTC) had approximately 3,500 employees. None of the Company's
employees are covered by collective bargaining agreements. The Company considers
its employee relations to be excellent.
RESEARCH AND DEVELOPMENT COSTS
The information required by Item 101(c)(xi) of Regulation S-K is
incorporated by reference from the information set forth in Part II, Item 8
"Consolidated Financial Statements and Supplementary Schedules" and specifically
in the Genzyme Corporation and Subsidiaries Consolidated Statements of
Operations and in Note L., "Research and Development Agreements" to the
Consolidated Financial Statements in the 1997 Genzyme General Annual Report set
forth in Exhibit 13.1 to this Annual Report on Form 10-K.
SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS
The information required by Items 101(c)(1)(i) and (vii) and 101(d) of
Regulation S-K is incorporated by reference from the information set forth in
the 1997 Genzyme General Annual Report under the heading "Management's
Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial
Condition and Results of Operations" and in Note P., "Financial Information by
Geographic Area and Significant Customers and Suppliers" to the Consolidated
Financial Statements set forth in Exhibit 13.1 to this Annual Report on Form
10-K.
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<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements (and related notes) of Genzyme General
and Genzyme Corporation and Subsidiaries are incorporated by reference from the
1997 Genzyme General Annual Report set forth in Exhibit 13.1 to this Annual
Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
GENZYME GENERAL
Combined Balance Sheets -- December 31, 1997 and
1996.................................................. 12
Combined Statements of Operations -- For the Years
Ended December 31, 1997, 1996 and 1995................ 13-14
Combined Statements of Cash Flows -- For the Years
Ended December 31, 1997, 1996 and 1995................ 15-16
Notes to Combined Financial Statements................. 17-29
Report of Independent Accountants...................... 30
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets -- December 31, 1997 and
1996.................................................. 45-46
Consolidated Statements of Operations -- For the Years
Ended December 31, 1997, 1996 and 1995................ 47-48
Consolidated Statements of Cash Flows -- For the Years
Ended December 31, 1997, 1996 and 1995................ 49-50
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.......... 51-52
Notes to Consolidated Financial Statements............. 53-82
Report of Independent Accountants...................... 83
</TABLE>
- ---------------
* References are to page numbers in the 1997 Genzyme General Annual Report
as it appears in Exhibit 13.1 to this Annual Report on Form 10-K.
The following financial statements (and related notes) of GTR are
incorporated by reference from the 1997 GTR Annual Report set forth in Exhibit
13.2 to this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
Combined Balance Sheets -- December 31, 1997 and 1996....... 10
Combined Statements of Operations -- For the Years Ended
December 31, 1997, 1996 and 1995.......................... 11
Combined Statements of Cash Flows -- For the Years Ended
December 31, 1997, 1996 and 1995.......................... 12
Notes to Combined Financial Statements...................... 13 - 20
Report of Independent Accountants........................... 21
</TABLE>
- ---------------
* References are to page numbers in the 1997 GTR Annual Report as it
appears in Exhibit 13.2 to this Annual Report on Form 10-K.
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<PAGE> 22
The following financial statements (and related notes) of GMO are
incorporated by reference from the 1997 GMO Annual Report set forth in Exhibit
13.3 to this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
Combined Balance Sheets -- December 31, 1997 and 1996....... 8
Combined Statements of Operations -- For the Years Ended
December 31, 1997, 1996 and 1995.......................... 9
Combined Statements of Cash Flows -- For the Years Ended
December 31, 1997, 1996 and 1995.......................... 10
Notes to Combined Financial Statements...................... 11 - 21
Report of Independent Accountants........................... 22
</TABLE>
- ---------
* References are to page numbers in the 1997 GMO Annual Report as it
appears in Exhibit 13.3 to this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
The schedules listed below for Genzyme General, Genzyme Corporation and
Subsidiaries, and GTR are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
GENZYME GENERAL
Schedule II -- Valuation and Qualifying Accounts....... 31
GENZYME CORPORATION AND SUBSIDIARIES
Schedule II -- Valuation and Qualifying Accounts....... 84
GTR
Schedule II -- Valuation and Qualifying Accounts....... 22
</TABLE>
- ---------
* References are to page numbers in the 1997 Genzyme General Annual Report
and 1997 GTR Annual Report as they appear in Exhibits 13.1 and 13.2,
respectively, to this Annual Report on Form 10-K.
All other schedules are omitted as the information required is inapplicable
or the information is presented in (i) the Genzyme General Combined Financial
Statements or notes thereto or the Consolidated Financial Statements or notes
thereto in the 1997 Genzyme General Annual Report, (ii) the GTR Combined
Financial Statements or notes thereto in the 1997 GTR Annual Report or (iii) the
GMO Combined Financial Statements or notes thereto in the 1997 GMO Annual
Report.
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<PAGE> 23
3. EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this Annual
Report.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*3.1 -- Restated Articles of Organization of Genzyme, as amended.
Filed as Exhibit 1 to Genzyme's Registration Statement on
Form 8-A dated June 18, 1997.
*3.2 -- By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form
8-K dated December 31, 1991.
*4.1 -- Series Designation for Genzyme Molecular Oncology Division
Common Stock, $.01 par value. Filed as Exhibit 2 to
Genzyme's Registration Statement on Form 8-A dated June 18,
1997.
*4.2 -- Series Designation for Genzyme Series A, Series B and Series
C Junior Participating Preferred Stock, $.01 par value.
Filed as Exhibit 3 to Genzyme's Registration Statement on
Form 8-A dated June 18, 1997.
*4.3 -- Amended and Restated Rights Agreement dated as of June 12,
1997 between Genzyme and American Stock Transfer & Trust
Company. Filed as Exhibit 5 to Genzyme's Registration
Statement on Form 8-A dated June 18, 1997.
*4.4 -- Specimen Callable Warrant to purchase Genzyme Common Stock
issued to shareholders of Neozyme II. Filed as Exhibit 28.6
to Genzyme's Form 10-Q for the quarter ended March 31, 1992.
*4.5 -- Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4
to the Form 8-K of IG Laboratories, Inc. dated October 11,
1990 (File No. 0-18439).
*4.6 -- Genzyme Common Stock Purchase Warrant No. A-1 dated July 31,
1997 issued to Canadian Medical Discoveries Fund, Inc.
("CMDF"). Filed as Exhibit 10.2 to Genzyme's Form 10-Q for
the quarter ended September 30, 1997.
*4.7 -- Genzyme Common Stock Purchase Warrant No. A-2 dated July 31,
1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form
10-Q for the quarter ended September 30, 1997.
*4.8 -- Genzyme Common Stock Purchase Warrant No. A-3 dated July 31,
1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form
10-Q for the quarter ended September 30, 1997.
*4.9 -- Registration Rights Agreement dated as of July 31, 1997 by
and between Genzyme and CMDF. Filed as Exhibit 10.1 to
Genzyme's Form 10-Q for the quarter ended September 30,
1997.
*4.10 -- Genzyme Molecular Oncology Division Convertible Debenture
dated August 29, 1997, including a schedule with respect
thereto filed pursuant to Instruction 2 to Item 601 of
Regulation S-K. Filed as Exhibit 10.6 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997.
*4.11 -- Form of Genzyme General Division Convertible Debenture.
Filed as Exhibit 10.7 to Genzyme's Form 10-Q for the quarter
ended September 30, 1997.
*4.12 -- Registration Rights Agreement dated as of August 29, 1997 by
and among Genzyme and the entities listed on the signature
pages thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997.
*4.13 -- Warrant Agreement between Genzyme and Comdisco, Inc. Filed
as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc.
("PharmaGenics") (File No. 0-20138).
4.14 -- Form of Genzyme Corporation Convertible Note dated February 28,
1997 issued to Credit Suisse First Boston (Hong Kong) Ltd.
("CSFB"). Filed herewith.
4.15 -- Registration Rights Agreement dated February 27, 1997 by and
between Genzyme and CSFB. Filed herewith.
</TABLE>
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<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*10.1 -- Leases by Whatman Reeve Angel Limited to Whatman
Biochemicals Limited dated May 1, 1981. Filed as Exhibit
10.12 to Genzyme's Registration Statement on Form S-1 (File
No. 33-4904).
*10.2 -- Lease dated as of September 15, 1989 for 95-111 Binney
Street, Cambridge, Massachusetts between Genzyme and the
Trustees of the Cambridge East Trust. Filed as Exhibit 10.2
to Genzyme's Form 10-K for 1992. First amendment of lease
dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's
Form 10-K for 1993.
*10.3 -- Lease dated December 20, 1988 for Building 1400, One Kendall
Square, Cambridge, Massachusetts between Genzyme and the
Trustees of Old Binney Realty Trust, as amended by letters
dated December 20, 1988, January 19, 1989 and January 31,
1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K for
1988. Addendum dated September 20, 1991 to Lease for
Building 1400, One Kendall Square, Cambridge, Massachusetts.
Filed as Exhibit 19.1 to Genzyme's Form 10-Q for the quarter
ended September 30, 1991. Addenda dated August 2, 1990 and
April 6, 1993 to Lease for Building 1400, One Kendall
Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to
Genzyme's Form 10-K for 1993.
*10.4 -- Lease dated December 20, 1988 for Building 700, One Kendall
Square, Cambridge, Massachusetts between Genzyme and
Trustees of Old Kendall Realty Trust, as amended by letters
dated December 20, 1988 and January 31, 1989. Filed as
Exhibit 10.19 to Genzyme's Form 10-K for 1988.
*10.5 -- Lease dated September 30, 1985 for 51 New York Avenue,
Framingham, Massachusetts. Filed as Exhibit 10.8 to
Genzyme's Form 10-K for 1990. Amendment No. 1, dated October
11, 1990, and Amendment No. 2, dated May 12, 1993, to lease
for 51 New York Avenue, Framingham, Massachusetts. Filed as
Exhibit 10.5 to Genzyme's Form 10-K for 1993.
*10.6 -- Lease dated April 30, 1990 for 64 Sidney Street, Cambridge,
Massachusetts between BioSurface Technology, Inc.
("BioSurface") and Forest City 64 Sidney Street, Inc. Filed
as Exhibit 10.22 to BioSurface's Registration Statement on
Form S-1 (File No. 33-55874).
*10.7 -- Sublease Lease dated May 22, 1992 for three buildings at
74-84 New York Avenue, Framingham, Massachusetts between
Genzyme and Prime Computer, Inc. Filed as Exhibit 10.7 to
Genzyme's Form 10-K for 1993.
*10.8 -- Lease dated May 22, 1992 for three buildings at 74-84 New
York Avenue, Framingham, Massachusetts between Genzyme and
Mark L. Fins, David J. Winstanley and Bruce A. Gurall,
tenants in common. Filed as Exhibit 10.8 to Genzyme's Form
10-K for 1993.
*10.9 -- Lease dated June 1, 1992 for land at Allston Landing,
Allston, Massachusetts between Allston Landing Limited
Partnership and the Massachusetts Turnpike Authority. Filed
as Exhibit 10.9 to Genzyme's Form 10-K for 1993.
*10.10 -- Underlease for Block 13 building at Kings Hill Business Park
West Malling Kent among Rouse and Associates Block 13
Limited, Genzyme (UK) Limited and Genzyme. Filed as Exhibit
10.11 to Genzyme's Registration Statement on Form 8-B dated
December 31, 1991, filed on March 2, 1992.
*10.11 -- Agreement of Limited Partnership dated as of September 13,
1989 between Genzyme Development Corporation II ("GDC II"),
as General Partner, and each of the Limited Partners named
therein. Filed as Exhibit 10(aa) to Genzyme's Registration
Statement on Form S-4 (File No. 33-32343).
*10.12 -- Cross License Agreement dated as of September 13, 1989
between Genzyme and Genzyme Development Partners, L.P.
("GDP"). Filed as Exhibit 10(bb) to Genzyme's Registration
Statement on Form S-4 (File No. 33-32343).
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*10.13 -- Development Agreement dated as of September 13, 1989 between
Genzyme and GDP. Filed as Exhibit 10(cc) to Genzyme's
Registration Statement on Form S-4 (File No. 33-32343).
*10.14 -- Amendment No. 1 dated January 4, 1994 to Development
Agreement dated as of September 13, 1989 between Genzyme and
GDP. Filed as Exhibit 10.14 to Genzyme's Form 10-K for 1993.
*10.15 -- Partnership Purchase Option Agreement dated as of September
13, 1989 between Genzyme, GDC II, GDP, each Class A Limited
Partner and the Class B Limited Partner. Filed as Exhibit
10(dd) to Genzyme's Registration Statement on Form S-4 (File
No. 33-32343).
*10.16 -- Partnership Purchase Agreement, undated and unexecuted,
between Genzyme, GDC II, GDP, each Class A Limited Partner
and the Class B Limited Partner, as the case may be. Filed
as Exhibit 10(ee) to Genzyme's Registration Statement on
Form S-4 (File No. 33-32343).
*10.17 -- Amended and Restated Joint Venture Agreement between Genzyme
and GDP. Filed as Exhibit 10.1 to GDP's on Form 10-Q for the
quarter ended March 31, 1997 (File No. 0-18554).
*10.18 -- Tax Indemnification Agreement. Filed as Exhibit 10.2 to
GDP's Form 10-Q for the quarter ended March 31, 1997 (File
No. 0-18554).
*10.19 -- Marketing and Distribution Agreement. Filed as Exhibit 10.3
to GDP's Form 10-Q for the quarter ended March 31, 1997
(File No. 0-18554).
*10.20 -- Technology License and Supply Agreement dated as of
September 8, 1989 between Imedex and Genzyme. Filed as
Exhibit 10.30 to Genzyme's Form 10-K for 1990.**
*10.21 -- 1988 Director Stock Option Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33265).
*10.22 -- 1990 Equity Incentive Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33249).
*10.23 -- 1990 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33291).
*10.24 -- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit
99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33251).
*10.25 -- Executive Employment Agreement dated as of January 1, 1990
between Genzyme and Henri A. Termeer. Filed as Exhibit 10.32
to Genzyme's Form 10-K for 1990.
*10.26 -- Form of Severance Agreement between Genzyme and certain
senior executives, together with schedule identifying the
provisions applicable to each executive. Filed as Exhibit
10.33 to Genzyme's Form 10-K for 1990. Current schedule
identifying the executives filed as Exhibit 10.32 to Genzyme's
Form 10-K for 1993.
*10.27 -- Form of Indemnification Agreement between Genzyme and
certain senior executives, together with schedule
identifying the provisions applicable to each executive.
Filed as Exhibit 10.34 to Genzyme's Form 10-K for 1990.
Current schedule identifying the executives filed as Exhibit
10.33 to Genzyme's Form 10-K for 1993.
*10.28 -- Consulting Agreement dated March 1, 1993 between Genzyme and
Henry E. Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for
1992. Consulting Agreement dated February 3, 1994 between
Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to
Genzyme's Form 10-K for 1993.
*10.29 -- Executive Employment Agreement dated as of January 1, 1996
between Genzyme and Peter Wirth. Filed as Exhibit 10.1 to
Genzyme's Form 10-Q for the quarter ended March 31, 1996.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*10.30 -- Technology Transfer Agreement between Genzyme and Genzyme
Transgenics Corporation ("GTC") dated as of May 1, 1993.
Filed as Exhibit 2.1 to the Registration Statement on Form
S-1 of GTC (File No. 33-62872).
*10.31 -- Research and Development Agreement between Genzyme and GTC
dated as of May 1, 1993. Filed as Exhibit 10.1 to the
Registration Statement on Form S-1 of GTC (File No.
33-62872).
*10.32 -- Services Agreement between Genzyme and GTC dated as of May
1, 1993. Filed as Exhibit 10.2 to the Registration Statement
on Form S-1 of GTC (File No. 33-62872).
*10.33 -- Series A Convertible Preferred Stock Purchase Agreement
between Genzyme and GTC dated as of May 1, 1993. Filed as
Exhibit 10.5 to the Registration Statement on Form S-1 of
GTC (File No. 33-62872).
*10.34 -- Convertible Debt and Development Funding Agreement dated as
of March 29, 1996 between Genzyme and GTC. Filed as Exhibit
10.39 to Genzyme's Form 10-K for 1995.
*10.35 -- Amended and Restated Convertible Debt Agreement dated as of
September 4, 1997 by and between Genzyme and GTC. Filed as
Exhibit 10.4 to GTC's Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-21794).
*10.36 -- Amended and Restated Operating Agreement of ATIII LLC dated
as of January 1, 1998 by and among Genzyme and GTC. Filed as
Exhibit 10.52.1 to GTC's Form 10-K for 1997 (File No.
0-21794).**
*10.37 -- Purchase Agreement dated as of January 1, 1998 by and
between Genzyme and GTC. Filed as Exhibit 10.52.2 to GTC's
Form 10-K for 1997 (File No. 0-21794).**
*10.38 -- Collaboration Agreement dated as of January 1, 1997 by and
among Genzyme, GTC and ATIII LLC. Filed as Exhibit 10.52.3
to GTC's Form 10-K for 1997 (File No. 0-21794) and
incorporated herein by reference.**
*10.39 -- Common Stock Purchase Agreement between Argus
Pharmaceuticals, Inc. and Genzyme Corporation dated as of
September 10, 1993. Filed as Exhibit A to Schedule 13D filed
by Genzyme on September 20, 1993.**
*10.40 -- Agreement and Plan of Reorganization dated as of July 25,
1994, as amended, among Genzyme, Phoenix Acquisition
Corporation and BioSurface. Filed as Annex X to Genzyme's
Registration Statement on Form S-4 (File No. 33-83346).
*10.41 -- License and Development Agreement between Celtrix
Pharmaceuticals, Inc. ("Celtrix") and Genzyme dated as of
June 24, 1994. Filed as Exhibit 10.42 to Celtrix's Form 10-K
for 1994.**
*10.42 -- Common Stock Purchase Agreement dated as of June 24, 1994
between Celtrix and Genzyme. Filed as Exhibit A to Schedule
13D filed by Genzyme on July 5, 1994.
*10.43 -- Credit Agreement dated November 14, 1996 among Genzyme and
those of its subsidiaries party thereto, Fleet National
Bank, as Administrative Agent, and The First National Bank
of Boston, as Documentation Agent. Filed as Exhibit 10.39 to
Genzyme's Form 10-K for 1996.
*10.44 -- Collaboration Agreement dated as of June 17, 1997 by and
among Genzyme, GelTex Pharmaceuticals, Inc. ("GelTex") and
RenaGel LLC. Filed as Exhibit 10.18 to GelTex's Form 10-Q
for the quarter ended June 30, 1997 (File No. 0-26872).**
*10.45 -- Purchase Agreement dated as of June 17, 1997 by and between
Genzyme and GelTex. Filed as Exhibit 10.19 to GelTex's Form
10-Q for the quarter ended June 30, 1997 (File No.
0-26872).**
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*10.46 -- Operating Agreement of RenaGel LLC dated as of June 17, 1997
by and among Genzyme, GelTex and RenaGel, Inc. Filed as
Exhibit 10.20 to GelTex's Form 10-Q for the quarter ended
June 30, 1997 (File No. 0-26872).
*10.47 -- Purchase Agreement dated as of August 29, 1997 by and among
Genzyme Corporation and the entities listed on the signature
pages thereto. Filed as Exhibit 10.5 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997.
*10.48 -- Composite copy of Agreement and Plan of Merger dated as of
January 31, 1997, as amended, between Genzyme and
PharmaGenics. Filed as Annex I to Genzyme's Registration
Statement on Form S-4 (File No. 333-26351).
10.49 -- First Amendment to Credit Agreement and Consent to Subordination
Terms dated as of March 3, 1997 by and among Genzyme and those of
its subsidiaries party thereto, The First National Bank of
Boston, as Administrative Agent, The First National Bank of
Boston, as Administrative Agent, and the lenders identified in
the signature pages thereto. Filed herewith.
10.50 -- Note Purchase Agreement by and between Genzyme and CSFB dated as
of February 27, 1997. Filed herewith.
13.1 -- Portions of the 1997 Genzyme General Annual Report
incorporated by reference into Parts I and II of this Form
10-K. Filed herewith.
13.2 -- Portions of the 1997 Genzyme Tissue Repair Annual Report
incorporated by reference into Parts I and II of this Form
10-K. Filed herewith.
13.3 -- Portions of the 1997 Genzyme Molecular Oncology Annual
Report incorporated by reference into Parts I and II of this
Form 10-K. Filed herewith.
21 -- Subsidiaries of the Registrant. Filed herewith.
23.1 -- Consent of Coopers & Lybrand L.L.P. Filed herewith.
23.2 -- Consent of Coopers & Lybrand L.L.P. relating to the Annual
Report of Genzyme Corporation Retirement Savings Plan on
Form 11-K. To be filed by amendment.
27 -- Financial Data Schedule for Genzyme Corporation. Filed herewith.
*99.1 -- Management and Accounting Policies Governing the
Relationship of Genzyme Divisions.
</TABLE>
- ---------------
* Indicates exhibit previously filed with the Securities and Exchange
Commission and incorporated herein by reference. Exhibits filed with Forms
10-K, 10-Q, 8-K, 8-A or 8-B of Genzyme Corporation were filed under
Commission File No. 0-14680.
** Confidential treatment has been granted or requested for the deleted portions
of Exhibits 10.20, 10.36, 10.37, 10.38, 10.39, 10.41, 10.44 and 10.45.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.21 through 10.29 above are management contracts or compensatory
plans or arrangements in which the executive officers or directors of Genzyme
participate.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENZYME CORPORATION
Dated: April 27, 1998 By: /s/ DAVID J. MCLACHLAN
----------------------------------
DAVID J. MCLACHLAN
Executive Vice President, Finance
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*3.1 -- Restated Articles of Organization of Genzyme, as amended.
Filed as Exhibit 1 to Genzyme's Registration Statement on
Form 8-A dated June 18, 1997................................
*3.2 -- By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form
8-K dated December 31, 1991.................................
*4.1 -- Series Designation for Genzyme Molecular Oncology Division
Common Stock, $.01 par value. Filed as Exhibit 2 to
Genzyme's Registration Statement on Form 8-A dated June 18,
1997........................................................
*4.2 -- Series Designation for Genzyme Series A, Series B and Series
C Junior Participating Preferred Stock, $.01 par value.
Filed as Exhibit 3 to Genzyme's Registration Statement on
Form 8-A dated June 18, 1997................................
*4.3 -- Amended and Restated Rights Agreement dated as of June 12,
1997 between Genzyme and American Stock Transfer & Trust
Company. Filed as Exhibit 5 to Genzyme's Registration
Statement on Form 8-A dated June 18, 1997...................
*4.4 -- Specimen Callable Warrant to purchase Genzyme Common Stock
issued to shareholders of Neozyme II. Filed as Exhibit 28.6
to Genzyme's Form 10-Q for the quarter ended March 31,
1992........................................................
*4.5 -- Warrant issued to Richard Warren, Ph.D. Filed as Exhibit 4
to the Form 8-K of IG Laboratories, Inc. dated October 11,
1990 (File No. 0-18439).....................................
*4.6 -- Genzyme Common Stock Purchase Warrant No. A-1 dated July 31,
1997 issued to Canadian Medical Discoveries Fund, Inc.
("CMDF"). Filed as Exhibit 10.2 to Genzyme's Form 10-Q for
the quarter ended September 30, 1997........................
*4.7 -- Genzyme Common Stock Purchase Warrant No. A-2 dated July 31,
1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form
10-Q for the quarter ended September 30, 1997...............
*4.8 -- Genzyme Common Stock Purchase Warrant No. A-3 dated July 31,
1997 issued to CMDF. Filed as Exhibit 10.3 to Genzyme's Form
10-Q for the quarter ended September 30, 1997...............
*4.9 -- Registration Rights Agreement dated as of July 31, 1997 by
and between Genzyme and CMDF. Filed as Exhibit 10.1 to
Genzyme's Form 10-Q for the quarter ended September 30,
1997........................................................
*4.10 -- Genzyme Molecular Oncology Division Convertible Debenture
dated August 29, 1997, including a schedule with respect
thereto filed pursuant to Instruction 2 to Item 601 of
Regulation S-K. Filed as Exhibit 10.6 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997....................
*4.11 -- Form of Genzyme General Division Convertible Debenture.
Filed as Exhibit 10.7 to Genzyme's Form 10-Q for the quarter
ended September 30, 1997....................................
*4.12 -- Registration Rights Agreement dated as of August 29, 1997 by
and among Genzyme and the entities listed on the signature
pages thereto. Filed as Exhibit 10.8 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997....................
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*4.13 -- Warrant Agreement between Genzyme and Comdisco, Inc. Filed
as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc.
("PharmaGenics") (File No. 0-20138).........................
4.14 -- Form of Genzyme Corporation Convertible Note dated
February 28, 1997 issued to Credit Suisse First Boston
(Hong Kong) Ltd. ("CSFB"). Filed herewith...................
4.15 -- Registration Rights Agreement dated February 27, 1997
by and between Genzyme and CSFB. Filed herewith.............
*10.1 -- Leases by Whatman Reeve Angel Limited to Whatman
Biochemicals Limited dated May 1, 1981. Filed as Exhibit
10.12 to Genzyme's Registration Statement on Form S-1 (File
No. 33-4904)................................................
*10.2 -- Lease dated as of September 15, 1989 for 95-111 Binney
Street, Cambridge, Massachusetts between Genzyme and the
Trustees of the Cambridge East Trust. Filed as Exhibit 10.2
to Genzyme's Form 10-K for 1992. First amendment of lease
dated February 28, 1994. Filed as Exhibit 10.2 to Genzyme's
Form 10-K for 1993..........................................
*10.3 -- Lease dated December 20, 1988 for Building 1400, One Kendall
Square, Cambridge, Massachusetts between Genzyme and the
Trustees of Old Binney Realty Trust, as amended by letters
dated December 20, 1988, January 19, 1989 and January 31,
1989. Filed as Exhibit 10.18 to Genzyme's Form 10-K for
1988. Addendum dated September 20, 1991 to Lease for
Building 1400, One Kendall Square, Cambridge, Massachusetts.
Filed as Exhibit 19.1 to Genzyme's Form 10-Q for the quarter
ended September 30, 1991. Addenda dated August 2, 1990 and
April 6, 1993 to Lease for Building 1400, One Kendall
Square, Cambridge, Massachusetts. Filed as Exhibit 10.3 to
Genzyme's Form 10-K for 1993................................
*10.4 -- Lease dated December 20, 1988 for Building 700, One Kendall
Square, Cambridge, Massachusetts between Genzyme and
Trustees of Old Kendall Realty Trust, as amended by letters
dated December 20, 1988 and January 31, 1989. Filed as
Exhibit 10.19 to Genzyme's Form 10-K for 1988...............
*10.5 -- Lease dated September 30, 1985 for 51 New York Avenue,
Framingham, Massachusetts. Filed as Exhibit 10.8 to
Genzyme's Form 10-K for 1990. Amendment No. 1, dated October
11, 1990, and Amendment No. 2, dated May 12, 1993, to lease
for 51 New York Avenue, Framingham, Massachusetts. Filed as
Exhibit 10.5 to Genzyme's Form 10-K for 1993................
*10.6 -- Lease dated April 30, 1990 for 64 Sidney Street, Cambridge,
Massachusetts between BioSurface Technology, Inc.
("BioSurface") and Forest City 64 Sidney Street, Inc. Filed
as Exhibit 10.22 to BioSurface's Registration Statement on
Form S-1 (File No. 33-55874)................................
*10.7 -- Sublease Lease dated May 22, 1992 for three buildings at
74-84 New York Avenue, Framingham, Massachusetts between
Genzyme and Prime Computer, Inc. Filed as Exhibit 10.7 to
Genzyme's Form 10-K for 1993................................
*10.8 -- Lease dated May 22, 1992 for three buildings at 74-84 New
York Avenue, Framingham, Massachusetts between Genzyme and
Mark L. Fins, David J. Winstanley and Bruce A. Gurall,
tenants in common. Filed as Exhibit 10.8 to Genzyme's Form
10-K for 1993...............................................
*10.9 -- Lease dated June 1, 1992 for land at Allston Landing,
Allston, Massachusetts between Allston Landing Limited
Partnership and the Massachusetts Turnpike Authority. Filed
as Exhibit 10.9 to Genzyme's Form 10-K for 1993.............
*10.10 -- Underlease for Block 13 building at Kings Hill Business Park
West Malling Kent among Rouse and Associates Block 13
Limited, Genzyme (UK) Limited and Genzyme. Filed as Exhibit
10.11 to Genzyme's Registration Statement on Form 8-B dated
December 31, 1991, filed on March 2, 1992...................
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*10.11 -- Agreement of Limited Partnership dated as of September 13,
1989 between Genzyme Development Corporation II ("GDC II"),
as General Partner, and each of the Limited Partners named
therein. Filed as Exhibit 10(aa) to Genzyme's Registration
Statement on Form S-4 (File No. 33-32343)...................
*10.12 -- Cross License Agreement dated as of September 13, 1989
between Genzyme and Genzyme Development Partners, L.P.
("GDP"). Filed as Exhibit 10(bb) to Genzyme's Registration
Statement on Form S-4 (File No. 33-32343)...................
*10.13 -- Development Agreement dated as of September 13, 1989 between
Genzyme and GDP. Filed as Exhibit 10(cc) to Genzyme's
Registration Statement on Form S-4 (File No. 33-32343)......
*10.14 -- Amendment No. 1 dated January 4, 1994 to Development
Agreement dated as of September 13, 1989 between Genzyme and
GDP. Filed as Exhibit 10.14 to Genzyme's Form 10-K for
1993........................................................
*10.15 -- Partnership Purchase Option Agreement dated as of September
13, 1989 between Genzyme, GDC II, GDP, each Class A Limited
Partner and the Class B Limited Partner. Filed as Exhibit
10(dd) to Genzyme's Registration Statement on Form S-4 (File
No. 33-32343)...............................................
*10.16 -- Partnership Purchase Agreement, undated and unexecuted,
between Genzyme Corporation, GDC II, GDP, each Class A
Limited Partner and the Class B Limited Partner, as the case
may be. Filed as Exhibit 10(ee) to Genzyme's Registration
Statement on Form S-4 (File No. 33-32343)...................
*10.17 -- Amended and Restated Joint Venture Agreement between Genzyme
and GDP. Filed as Exhibit 10.1 to GDP's on Form 10-Q for the
quarter ended March 31, 1997 (File No. 0-18554).............
*10.18 -- Tax Indemnification Agreement between Genzyme and GDP. Filed
as Exhibit 10.2 to GDP's Form 10-Q for the quarter ended
March 31, 1997 (File No. 0-18554)...........................
*10.19 -- Marketing and Distribution Agreement between Genzyme and
Genzyme Ventures II. Filed as Exhibit 10.3 to GDP's Form
10-Q for the quarter ended March 31, 1997 (File No.
0-18554)....................................................
*10.20 -- Technology License and Supply Agreement dated as of
September 8, 1989 between Imedex and Genzyme. Filed as
Exhibit 10.30 to Genzyme's Form 10-K for 1990.**............
*10.21 -- 1988 Director Stock Option Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33265)..................................................
*10.22 -- 1990 Equity Incentive Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33249)..................................................
*10.23 -- 1990 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33291)..................................................
*10.24 -- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit
99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33251)..................................................
*10.25 -- Executive Employment Agreement dated as of January 1, 1990
between Genzyme and Henri A. Termeer. Filed as Exhibit 10.32
to Genzyme's Form 10-K for 1990.............................
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*10.26 -- Form of Severance Agreement between Genzyme and certain
senior executives, together with schedule identifying the
provisions applicable to each executive. Filed as Exhibit
10.33 to Genzyme's Form 10-K for 1990. Current schedule
identifying the executives filed as Exhibit 10.32 to
Genzyme's Form 10-K for 1993................................
*10.27 -- Form of Indemnification Agreement between Genzyme and
certain senior executives, together with schedule
identifying the provisions applicable to each executive.
Filed as Exhibit 10.34 to Genzyme's Form 10-K for 1990.
Current schedule identifying the executives filed as Exhibit
10.33 to Genzyme's Form 10-K for 1993.......................
*10.28 -- Consulting Agreement dated March 1, 1993 between Genzyme and
Henry E. Blair. Filed as Exhibit 10.29 to Genzyme's 10-K for
1992. Consulting Agreement dated February 3, 1994 between
Genzyme and Henry E. Blair. Filed as Exhibit 10.35 to
Genzyme's Form 10-K for 1993................................
*10.29 -- Executive Employment Agreement dated as of January 1, 1996
between Genzyme and Peter Wirth. Filed as Exhibit 10.1 to
Genzyme's Form 10-Q for the quarter ended March 31, 1996....
*10.30 -- Technology Transfer Agreement between Genzyme and Genzyme
Transgenics Corporation ("GTC") dated as of May 1, 1993.
Filed as Exhibit 2.1 to the Registration Statement on Form
S-1 of GTC (File No. 33-62872)..............................
*10.31 -- Research and Development Agreement between Genzyme and GTC
dated as of May 1, 1993. Filed as Exhibit 10.1 to the
Registration Statement on Form S-1 of GTC (File No.
33-62872)...................................................
*10.32 -- Services Agreement between Genzyme and GTC dated as of May
1, 1993. Filed as Exhibit 10.2 to the Registration Statement
on Form S-1 of GTC (File No. 33-62872)......................
*10.33 -- Series A Convertible Preferred Stock Purchase Agreement
between Genzyme and GTC dated as of May 1, 1993. Filed as
Exhibit 10.5 to the Registration Statement on Form S-1 of
GTC (File No. 33-62872).....................................
*10.34 -- Convertible Debt and Development Funding Agreement dated as
of March 29, 1996 between Genzyme and GTC. Filed as Exhibit
10.39 to Genzyme's Form 10-K for 1995.......................
*10.35 -- Amended and Restated Convertible Debt Agreement dated as of
September 4, 1997 by and between Genzyme and GTC. Filed as
Exhibit 10.4 to GTC's Form 10-Q for the quarter ended
September 30, 1997 (File No. 0-21794).......................
*10.36 -- Amended and Restated Operating Agreement of ATIII LLC dated
as of January 1, 1998 by and among Genzyme and GTC. Filed as
Exhibit 10.52.1 to GTC's Form 10-K for 1997 (File No.
0-21794)**..................................................
*10.37 -- Purchase Agreement dated as of January 1, 1998 by and
between Genzyme and GTC. Filed as Exhibit 10.52.2 to GTC's
Form 10-K for 1997 (File No. 0-21794)**.....................
*10.38 -- Collaboration Agreement dated as of January 1, 1997 by and
among Genzyme, GTC and ATIII LLC. Filed as Exhibit 10.52.3
to GTC's Form 10-K for 1997 (File No. 0-21794) and
incorporated herein by reference**..........................
*10.39 -- Common Stock Purchase Agreement between Argus
Pharmaceuticals, Inc. and Genzyme Corporation dated as of
September 10, 1993. Filed as Exhibit A to Schedule 13D filed
by Genzyme on September 20, 1993**..........................
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*10.40 -- Agreement and Plan of Reorganization dated as of July 25,
1994, as amended, among Genzyme, Phoenix Acquisition
Corporation and BioSurface. Filed as Annex X to Genzyme's
Registration Statement on Form S-4 (File No. 33-83346)......
*10.41 -- License and Development Agreement between Celtrix
Pharmaceuticals, Inc. ("Celtrix") and Genzyme dated as of
June 24, 1994. Filed as Exhibit 10.42 to Celtrix's Form 10-K
for 1994**..................................................
*10.42 -- Common Stock Purchase Agreement dated as of June 24, 1994
between Celtrix and Genzyme. Filed as Exhibit A to Schedule
13D filed by Genzyme on July 5, 1994........................
*10.43 -- Credit Agreement dated November 14, 1996 among Genzyme and
those of its subsidiaries party thereto, Fleet National
Bank, as Administrative Agent, and The First National Bank
of Boston, as Documentation Agent. Filed as Exhibit 10.39 to
Genzyme's Form 10-K for 1996................................
*10.44 -- Collaboration Agreement dated as of June 17, 1997 by and
among Genzyme, GelTex Pharmaceuticals, Inc. ("GelTex") and
RenaGel LLC. Filed as Exhibit 10.18 to GelTex's Form 10-Q
for the quarter ended June 30, 1997 (File No. 0-26872)**....
*10.45 -- Purchase Agreement dated as of June 17, 1997 by and between
Genzyme and GelTex. Filed as Exhibit 10.19 to GelTex's Form
10-Q for the quarter ended June 30, 1997 (File No.
0-26872)**..................................................
*10.46 -- Operating Agreement of RenaGel LLC dated as of June 17, 1997
by and among Genzyme, GelTex and RenaGel, Inc. Filed as
Exhibit 10.20 to GelTex's Form 10-Q for the quarter ended
June 30, 1997 (File No. 0-26872)............................
*10.47 -- Purchase Agreement dated as of August 29, 1997 by and among
Genzyme Corporation and the entities listed on the signature
pages thereto. Filed as Exhibit 10.5 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997....................
*10.48 -- Composite copy of Agreement and Plan of Merger dated as of
January 31, 1997, as amended, between Genzyme and
PharmaGenics. Filed as Annex I to Genzyme's Registration
Statement on Form S-4 (File No. 333-26351)..................
10.49 -- First Amendment to Credit Agreement and Consent to
Subordination Terms dated as of March 3, 1997 by and among
Genzyme and those of its subsidiaries party thereto, The
First National Bank of Boston, as Administrative Agent, The
First National Bank of Boston, as Administrative Agent, and
the lenders identified on the signature pages thereto.
Filed herewith..............................................
10.50 -- Note Purchase Agreement by and between Genzyme and CSFB
dated as of February 27, 1997. Filed herewith...............
13.1 -- Portions of the 1997 Genzyme General Annual Report
incorporated by reference into Parts I and II of this Form
10-K. Filed herewith........................................
13.2 -- Portions of the 1997 Genzyme Tissue Repair Annual Report
incorporated by reference into Parts I and II of this Form
10-K. Filed herewith........................................
13.3 -- Portions of the 1997 Genzyme Molecular Oncology Annual
Report incorporated by reference into Parts I and II of this
Form 10-K. Filed herewith...................................
21 -- Subsidiaries of the Registrant. Filed herewith..............
23.1 -- Consent of Coopers & Lybrand L.L.P. Filed herewith..........
23.2 -- Consent of Coopers & Lybrand L.L.P. relating to the Annual
Report of Genzyme Corporation Retirement Savings Plan on
Form 11-K. To be filed by amendment.........................
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
27 -- Financial Data Schedule for Genzyme Corporation.
Filed herewith..............................................
*99.1 -- Management and Accounting Policies Governing the
Relationship of Genzyme Divisions...........................
</TABLE>
- ---------------
* Indicates exhibit previously filed with the Securities and Exchange
Commission and incorporated herein by reference. Exhibits filed with Forms
10-K, 10-Q, 8-K, 8-A or 8-B of Genzyme Corporation were filed under
Commission File No. 0-14680.
** Confidential treatment has been granted or requested for the deleted portions
of Exhibits 10.20, 10.35, 10.36, 10.37, 10.38, 10.40, 10.43 and 10.44.
<PAGE> 1
EXHIBIT 4.14
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE
WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER,
SALE, TRANSFER OR DISPOSITION. THIS NOTE IS ISSUED SUBJECT TO THE TERMS OF (i)
THE NOTE PURCHASE AGREEMENT, DATED FEBRUARY 27, 1997, BY AND BETWEEN GENZYME
CORPORATION AND THE HOLDER OF THIS NOTE ("NOTE PURCHASE AGREEMENT") AND (ii) THE
REGISTRATION RIGHTS AGREEMENT, DATED FEBRUARY 27, 1997, BY AND BETWEEN GENZYME
CORPORATION AND THE HOLDER OF THIS NOTE ("REGISTRATION RIGHTS AGREEMENT").
GENZYME CORPORATION
CONVERTIBLE NOTE
New York, New York $13,000,000
February 28, 1997
FOR VALUE RECEIVED, Genzyme Corporation, a Massachusetts corporation
(the "COMPANY"), hereby promises to pay to the order of Credit Suisse First
Boston (Hong Kong) Ltd. or its assignees (the "HOLDER") the sum of THIRTEEN
MILLION DOLLARS ($13,000,000) in same day funds, on or before February 27, 2000
(the "MATURITY DATE"), and to pay interest thereon as provided herein.
The following terms shall apply to this Note:
1. INTEREST.
(a) INTEREST RATE; STOCK PAYMENT OPTION. This Note shall bear
interest on the unpaid principal amount hereof at an annual rate of five percent
(5%) from the original date of the issuance hereof (the "ISSUE DATE"), computed
on the basis of a 360-day year of twelve 30-day months for the actual number of
days elapsed. Interest accrued hereunder shall be due and payable on each
Conversion Date (as defined herein), on a Redemption Date (as defined herein)
and on the Maturity Date, but, in the case of interest which is due on a
Conversion Date and payable in cash, such interest may be paid on the following
business day in the event that a Conversion Notice (as defined herein) is
delivered to the Company after 2 p.m., eastern time, on the Conversion Date.
Interest due on a Conversion Date may be paid either in cash or, at the option
of the Company (the "STOCK PAYMENT OPTION"), upon satisfaction of the conditions
set forth in paragraph 1(b) below, in shares of the Company's Tissue Repair
Division Common Stock, $.01 par value, or any shares of capital stock into which
such stock may be changed, reclassified or redeemed (the "GTR STOCK"). The
shares of GTR Stock to be issued and delivered by the Company pursuant to the
Stock Payment Option shall be fully paid and non-assessable, free and clear of
any liens, claims, preemptive rights or encumbrances imposed by or through the
Company, in an amount calculated in accordance with Section 3 below (the
"INTEREST PAYMENT SHARES") and shall be issued and delivered to the Holder on
the third (3rd) business day
<PAGE> 2
following the Conversion Date. Any amount of interest on this Note which is not
paid within three business days of the date when the same becomes due and
payable hereunder (the "PAYABLE DATE") shall bear interest at an annual rate
equal to the lower of (x) the "prime" rate (as published in the Wall Street
Journal) on the Payable Date PLUS three percent (3%) and (y) the highest rate
permitted by applicable law, for the number of days elapsed from such third
business day until such amount is paid in full ("DEFAULT INTEREST"). The Company
may not make payments of Default Interest in shares of GTR Stock.
(b) CONDITIONS TO STOCK PAYMENT OPTION. If the Company wishes to
exercise the Stock Payment Option, it may do so only if each of the following
conditions has been satisfied as of the relevant Conversion Date:
(i) the number of shares of GTR Stock authorized, unissued and
unreserved for all other purposes, or held in the Company's treasury, is
sufficient to pay such interest in shares of GTR Stock;
(ii) the Interest Payment Shares are authorized for quotation
on the Nasdaq National Market or for listing or quotation on any other national
securities exchange or market on which the GTR Stock may be listed;
(iii) the Registration Statement (as defined in the Registration
Rights Agreement) shall be effective and available for the sale of the Interest
Payment Shares by the Holder;
(iv) a Mandatory Redemption Event (as defined herein) shall not
have occurred or be continuing;
(v) the Company shall have delivered to the Holder a
certificate, signed by an executive officer of the Company, setting forth:
- the amount of the interest payment to which the Holder
is entitled and, if not the same, the amount of such
payment to be made in Interest Payment Shares;
- the number of Interest Payment Shares to be delivered
in payment of such interest, and the calculation
therefor; and
- a statement to the effect that all of the conditions
set forth in paragraphs 1(b)(i) - (iv) have been
satisfied;
and
(vi) the Holder shall have consented in writing to the
Company's use of the Stock Payment Option on such Conversion Date.
(c) DELIVERY OF INTEREST PAYMENT SHARES. If the Company elects to
exercise the Stock Payment Option, the Company shall deliver to such Holder, on
or before the third business day following the applicable Conversion Date (the
"INTEREST PAYMENT SHARE DELIVERY DATE"), one or more certificates representing
the aggregate number of whole Interest Payment Shares that is determined by
dividing (x) the amount of interest which would otherwise be payable in cash to
2
<PAGE> 3
such Holder on the applicable Conversion Date by (y) the Conversion Price (as
defined herein) then in effect. No fractional Interest Payment Shares shall be
issued; the Company shall, in lieu thereof, either issue a number of Interest
Payment Shares which reflects a rounding up to the next whole number of shares
or pay such amount in cash.
(d) FAILURE TO DELIVER INTEREST PAYMENT SHARES. If the Company fails
to issue and deliver the appropriate number of Interest Payment Shares to such
Holder on or before the tenth (10th) business day following the Interest Payment
Share Delivery Date, the Company shall not be entitled to utilize the Stock
Payment Option in respect of such interest payment, but instead must immediately
pay such interest payment in cash, together with Default Interest on such unpaid
amount calculated from the applicable Conversion Date until the date on which
such amount is paid.
(e) NOTICE OF EXERCISE. Not later than five (5) business days
immediately prior to the first day of each calendar month during which any
principal of this Note remains unpaid and outstanding, the Company shall notify
the Holder in writing whether the Company intends, assuming satisfaction of the
conditions set forth in subparagraph (b) above, to pay interest in Interest
Payment Shares in lieu of cash on any Conversion Date occurring during that
month or during such longer period as the Company may specify.
2. PRIORITY; SUBORDINATION.
(a) NO PAYMENT IF DEFAULT ON SENIOR INDEBTEDNESS. No payment of
principal of, premium, if any, or interest on this Note or on account of any
purchase or redemption or other acquisition of the Note, whether at maturity or
otherwise, shall be made upon, or accepted with respect to, this Note, and the
Holder shall not initiate any action to accelerate the maturity of the Note or
exercise any remedy to seek collection if at the time of such payment the Holder
has received written notice from the Company or a holder of Senior Debt (as
defined below) that there exists or, after giving effect to such payment, there
would exist any default in respect of any Senior Debt or under any agreement
pursuant to which such Senior Debt was issued (a "Default"); PROVIDED, HOWEVER,
that the foregoing restriction shall cease to apply with respect to a Default
upon the earliest to occur of (i) the commencement by any holder of Senior Debt
of the exercise of its remedies against the Company or its property including,
without limitation, any action, suit or other legal proceeding against the
Company or its property based upon such Default, or (ii) at the expiration of
180 days after the date of such notice if no holder of Senior Debt shall have
commenced the exercise of its remedies against the Company or its property
including, without limitation, any action, suit or other legal proceeding
against the Company or its property based upon such Default. Upon the maturity
of any Senior Debt by lapse of time, acceleration or otherwise, all principal
or, premium, if any, interest and other amounts due or to become due on all such
Senior Debt shall first be paid in full in cash, cash equivalents or in any
other manner acceptable to the holders of Senior Debt (hereinafter, "Payment in
Full" or "Paid in Full"), or such payment shall have been provided for to the
satisfaction of the holders of Senior Debt before any payment on account of
principal of, premium, if any, interest or any other amounts shall be made upon
this Note.
(b) PAYMENT UPON DISSOLUTION, ETC.
(i) In the event of (x) any insolvency or bankruptcy
proceedings, or any receivership, liquidation, reorganization or other similar
proceedings in connection therewith, relative to the Company or to its
creditors, as such, or to its assets or (y) the dissolution or other
3
<PAGE> 4
winding up of the Company whether total or partial, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy proceedings,
or (z) any assignment for the benefit of creditors or any marshaling of the
material assets or material liabilities of the Company, then, and in any such
event, (A) the holders of all Senior Debt shall first be entitled to receive
Payment in Full of all principal, premium, if any, interest and other amounts
due or to become due on the Senior Debt (including, without limitation, any
interest and charges accruing thereon in any such proceeding, notwithstanding
any law to the contrary) before any payment on account of principal, premium, if
any, interest or any other amounts is made on this Note, and (B) in any such
proceedings, any payment that may be payable or deliverable in respect of this
Note shall be paid to the holders of the Senior Debt or their representatives,
unless and until the principal of, premium, if any, interest and other amounts
due or to become due on all such Senior Debt shall have been Paid in Full;
PROVIDED, HOWEVER, that in the event that such payment consists solely of shares
of stock or securities of the Company as reorganized the payment of which is
subordinated, at least to the same extent as the Note, to the payment of all
Senior Debt and such payment is authorized by an order or decree made by a court
of competent jurisdiction in a reorganization proceeding under any applicable
law pursuant to a plan of reorganization and the rights of the holders of Senior
Debt are not impaired or otherwise altered adversely by such reorganization or
adjustment, no such payment shall be required hereby to be made to the holders
of the Senior Debt or their representatives.
(ii) In the event that any such payment shall be received by
the Holder in violation of the subordination provisions hereof before all Senior
Debt is Paid in Full, such payment or distribution shall be received and held in
trust for and shall be paid over to the holders of all Senior Debt remaining
unpaid, or their representatives, until such Senior Debt shall have been Paid in
Full, after giving effect to any concurrent payment or distribution or provision
thereof to the holders of such Senior Debt.
(c) SUBROGATION. Subject to the prior Payment in Full of all Senior
Debt, the Holder shall be subrogated to the rights of the holders of Senior Debt
to receive payments or distributions of assets of the Company applicable to the
Senior Debt to the extent that payments otherwise payable to the Holder under
the Note have been applied to the payment of the Senior Debt; PROVIDED, HOWEVER,
that the subrogation rights of the holder of the Note shall be fully
subordinated to the rights and remedies of the holders of Senior Debt.
(d) AGREEMENTS OF HOLDER.
(i) The Holder agrees that upon the commencement of any
bankruptcy, insolvency or other similar case or proceeding relative to the
Company, or to its creditors, as such, or to its assets, the Holder shall take
such actions as may be necessary or appropriate to effectuate the subordination
provision hereof, including, without limitation, that the Holder shall (i)
timely file a proof of claim in respect of the Note and the indebtedness and
obligations evidenced hereby, provided, however, that if the Holder fails within
thirty (30) days prior to the expiration of any claims bar date to file a proof
of claim, any holder of Senior Debt shall be entitled to file such a proof of
claim in respect thereof in the name of the Holder and the Holder irrevocably
appoints the holders of Senior Debt and their representatives as its
attorney-in-fact solely for such purpose; (ii) not oppose any motion filed or
supported by any holder of Senior Debt for relief from stay or adequate
protection in respect of the Senior Debt; and (iii) not file or accept any
reorganization plan that impairs or otherwise alters adversely the rights of the
holders of Senior Debt.
4
<PAGE> 5
(ii) The Company and the Holder, for themselves and their
successors and assigns, covenant to execute and deliver to the holders of Senior
Debt, such further instruments and to take such further action as the holders of
Senior Debt may at any time or times reasonably request in order to carry out
the provisions hereof.
(iii) No holder of Senior Debt shall be prejudiced in its
right to enforce the subordination of this Note by any act or failure to act on
the part of the Company.
(iv) Without notice to or the consent of the Holder, the
holders of Senior Debt may at any time and from time to time, in their
discretion, without impairing or releasing the subordination herein made, change
the manner, place or terms or payment, or change or extend the time of payment
of or renew or alter the Senior Debt, or amend or supplement in any manner any
instrument evidencing the Senior Debt, any agreement pursuant to which the
Senior Debt was issued or incurred or any instrument securing or relating to the
Senior Debt; release any person liable in any manner for the payment or
collection of the Senior Debt; exercise or refrain from exercising any rights in
respect of the Senior Debt against the Company or any other person; apply any
moneys or other property paid by any person or release in any manner to the
Senior Debt; or accept or release any security for the Senior Debt.
(e) CONTINUING OFFER. This Section shall constitute a continuing
offer to all persons who, in reliance on such provisions, become holders of, or
continue to hold, Senior Debt, and such provisions of this Section are made for
the benefit of such holders and may not be amended, modified, changed or waived
without the prior written consent of the holders of Senior Debt.
(f) RIGHTS OF HOLDERS UNIMPAIRED. The foregoing provisions as to
subordination are solely for the purpose of defining the relative rights of the
holders of the Senior Debt on the one hand and the Holder on the other hand.
None of such provisions shall impair, as between the Company and the Holder, the
obligation of the Company, which is unconditional and absolute, to pay the
Holder of this Note the amounts due on this Note in accordance with the terms
hereof and of the Note Purchase Agreement, nor shall any such provisions prevent
the Holder from exercising all remedies otherwise permitted by law. Moreover,
nothing contained herein shall be deemed to limit in any way the right of the
Holder to convert, at any time and from time to time, the principal balance of
this Note into shares of GTR Stock (as defined below) pursuant to Section 3
hereof or to receive shares of GTR Stock as payment of interest hereon pursuant
to Section 2 hereof.
(g) DEFINITION OF SENIOR DEBT. For purposes hereof, "Senior Debt"
shall mean (a) the principal of, premium, if any, accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company), and any other
monetary obligations on (i) indebtedness of the Company for money borrowed,
whether outstanding on the date of this Note or thereafter created, incurred or
assumed (including but not limited to nonrecourse borrowings secured by
receivables), (ii) guaranties by the Company of indebtedness for money borrowed
by any other person, or reimbursement obligations under letters of credit, in
either case, whether outstanding on the date of this Note or thereafter created,
incurred or assumed, and (iii) indebtedness evidenced by notes (other than the
Note), debentures, bonds or other instruments of indebtedness for the payment of
which the Company is responsible or liable, by guarantees or otherwise, whether
outstanding on the date of this Note or thereafter created, incurred or assumed,
and (b) modification, renewals, extensions, refinancings, refundings and
replacements of any such indebtedness, obligations or guarantees; unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is
5
<PAGE> 6
expressly provided that such indebtedness, obligations or guarantees or such
modification, renewal, extension, refinancing, refunding or replacement thereof
are not superior in right of payment to this Note and the holder of such
indebtedness has consented to same; provided, however, that Senior Debt shall
not be deemed to include any obligations of the Company to any of its
subsidiaries. Without in any way limiting the scope of the foregoing, it is
expressly acknowledged and agreed that Senior Debt shall include all
indebtedness, obligations and guaranties of the Company and its subsidiaries
under that certain Credit Agreement dated November 14, 1996 among the Company,
certain of its subsidiaries, Fleet National Bank, as administrative agent, The
First National Bank of Boston, as documentation agent, and the lender parties
thereto and under all notes, instruments, agreements and documents entered into
pursuant thereto or in connection therewith and all modifications, renewals,
extensions, refinancings, refundings and replacements thereof.
3. CONVERSION.
(a) RIGHT TO CONVERT. Subject to the limitations contained in
paragraph 3(i) below, the Holder shall have the right from the date that is
ninety (90) days following the Issue Date to convert at any time and from time
to time all or any part of the outstanding unpaid principal amount of this Note
in minimum amounts of $100,000 (or such smaller amount of principal as may
remain unpaid at the time of such Conversion), into fully paid and
non-assessable shares of GTR Stock, free and clear of any liens, claims,
preemptive rights or encumbrances imposed by or through the Company (the
"CONVERSION SHARES"), in accordance with the terms hereof (a "CONVERSION").
(b) RESERVATION OF GTR STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of GTR Stock, free from any preemptive rights, solely for the purpose of
effecting Conversions hereunder, such number of its shares of GTR Stock as shall
from time to time be sufficient to effect the Conversion of the entire remaining
unpaid principal balance of this Note. If at any time the number of authorized
but unissued shares of GTR Stock shall not be sufficient to effect a Conversion
in its entirety, the Company shall issue to the Holder all of the shares of GTR
Stock which are then available to effect such Conversion, and shall use its best
efforts to take such corporate action as may be necessary to increase its
authorized but unissued shares of GTR Stock to such number of shares as shall be
sufficient for such purpose. If the Company shall issue any securities or make
any change in its capital structure which would change the number of Conversion
Shares deliverable upon the Conversion of the entire remaining unpaid balance of
this Note, the Company shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of GTR Stock authorized
and reserved, free from any preemptive rights, for such Conversion.
(c) CONVERSION NOTICE. In order to convert the principal amount of
this Note, or any portion thereof, the Holder shall send by facsimile
transmission, at any time prior to 11:59 p.m., eastern time, on the date on
which the Holder wishes to effect such Conversion (the "CONVERSION DATE"), a
notice of conversion to the Company and to its designated transfer agent for the
GTR Stock (the "TRANSFER AGENT") stating the principal amount to be converted,
the amount of interest accrued on the then unpaid principal balance of the Note
as provided herein up to and including the Conversion Date, the applicable
Conversion Price and a calculation of the number of shares of GTR Stock issuable
upon such Conversion (a "CONVERSION NOTICE"). The Holder shall not be required
to physically surrender this Note to the Company in order to effect a
Conversion. The Company shall maintain a record showing, at any given time, the
unpaid principal amount of this
6
<PAGE> 7
Note and the date of each Conversion or other payment of principal herof. The
Holder shall amend Annex I hereto upon any such conversion or payment of
principal to reflect the unpaid principal amount hereof. In the case of a
dispute as to the calculation of the Conversion Price or the number of
Conversion Shares issuable upon a Conversion, the Company shall promptly issue
to the Holder the number of Conversion Shares that are not disputed and shall
submit the disputed calculations to its independent accountants within one (1)
business day of receipt of the Holder's Conversion Notice. The Company shall
cause such accountant to calculate the Conversion Price as provided herein and
to notify the Company and the Holder of the results in writing no later than two
(2) business days following the day on which it received the disputed
calculations. Such accountant's calculation shall be deemed conclusive absent
manifest error. The fees of any such accountant shall be borne by the Company.
(d) NUMBER OF CONVERSION SHARES; CONVERSION PRICE. The number of
Conversion Shares to be delivered by the Company pursuant to a Conversion shall
be determined by dividing the principal amount of this Note to be converted by
the Conversion Price (as defined herein) in effect on the Conversion Date. The
"CONVERSION PRICE" (A) with respect to a Conversion occurring on a Conversion
Date which is on or prior to the last day of the 450-day period following the
Issue Date (the "INITIAL CONVERSION PERIOD"), shall be the price determined by
multiplying (x) the Applicable Percentage (as defined herein) TIMES the average
of the closing bid prices for the GTR Stock as reported by Nasdaq, or by the
principal securities market on which the GTR Stock is then traded, on the
twenty-five (25) Trading Days (as defined herein) occurring immediately prior to
(but not including) the Conversion Date (the "FLOATING CONVERSION PRICE") and
(B) with respect to any Conversion occurring on a Conversion Date which is on or
after the first business day following the end of the Initial Conversion Period,
shall be the lesser of (i) the Floating Conversion Price and (ii) (x) the
average of the closing bid prices for the GTR Stock as reported by Nasdaq, or by
the principal securities market on which the GTR Stock is then traded, on the
twenty-five (25) Trading Days occurring immediately prior to (but not including)
the last day of the Initial Conversion Period TIMES (y) eighty-nine percent
(89%) (the "FIXED CONVERSION PRICE"). "TRADING DAY" shall mean any day on which
the GTR Stock is traded for any period on the Nasdaq National Market or on the
principal securities exchange or market on which the GTR Stock is then traded.
(e) APPLICABLE PERCENTAGE. The "APPLICABLE PERCENTAGE" shall be
determined in accordance with the following schedule, where "X" represents the
Conversion Date:
Number of Days
After Issue Date Applicable Percentage
---------------- ---------------------
90 < X < 180 100%
-
180 < X < 210 98%
-
210 < X < 240 97%
-
240 < X < 270 96%
-
270 < X < 300 95%
-
300 < X < 330 94%
-
330 < X < 360 93%
-
360 < X < 390 92%
-
390 < X < 420 91%
-
420 < X < 450 90%
-
450 < X 89%
-
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<PAGE> 8
(f) DELIVERY OF GTR STOCK UPON CONVERSION. Upon receipt of a
Conversion Notice pursuant to paragraph 3(c) above, the Company shall, no later
than the close of business on the third (3rd) business day following the
Conversion Date set forth in such Conversion Notice (the "DELIVERY DATE"), issue
and deliver or caused to be delivered to the Holder the number of Conversion
Shares as shall be determined as provided herein. If any Conversion would create
a fractional Conversion Share, such fractional Conversion Share shall be
disregarded and the number of Conversion Shares issuable upon such Conversion,
in the aggregate, shall be the next higher number of Conversion Shares.
Conversion Shares delivered to the Holder shall not contain any restrictive
legend as long as the sale of such Conversion Shares is covered by an effective
Registration Statement (as defined in the Registration Rights Agreement) or may
be made pursuant to Rule 144(k) under the Securities Act or any successor rule
or provision.
(g) FAILURE TO DELIVER CONVERSION SHARES. In the event that the
Company fails for any reason to deliver to the Holder the number of Conversion
Shares specified in the applicable Conversion Notice on or before the Delivery
Date therefor (a "CONVERSION DEFAULT"), and such Conversion Default continues
for longer than seven (7) business days, the Company shall pay to the Holder
payments ("CONVERSION DEFAULT PAYMENTS") in the amount of (i) (N/365) MULTIPLIED
BY (ii) the unpaid principal amount of this Note represented by the Conversion
Shares which remain the subject of such Conversion Default MULTIPLIED BY (iii)
the lower of twenty-four percent (24%) and the maximum rate permitted by
applicable law, where "N" equals the number of days elapsed between the original
Delivery Date of such Conversion Shares and the earlier to occur of (A) the date
on which all of such Conversion Shares are issued and delivered to the Holder
and (B) the date on which the principal amount represented thereby is redeemed
pursuant to the terms of this Note. Cash amounts payable hereunder shall be paid
on or before the fifth (5th) business day of the calendar month following the
calendar month in which such amount has accrued. Nothing herein shall limit the
Holder's right to pursue actual damages for the Company's failure to issue and
deliver Conversion Shares on the applicable Delivery Date (including, without
limitation, damages relating to any purchase of shares of GTR Stock by the
Holder to make delivery on a sale effected in anticipation of receiving
Conversion Shares upon Conversion), and the Holder shall have the right to
pursue all remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief).
(h) PAYMENT OF PRINCIPAL AT MATURITY; OPTIONAL CONVERSION. On the
Maturity Date, the Company shall pay to the Holder the amount of the unpaid
principal amount of this Note in same day funds, PROVIDED, HOWEVER, that if (i)
the Holder agrees to receive such payment in shares of GTR Stock (an "OPTIONAL
CONVERSION"), and (ii) the Company has satisfied each of the Optional Conversion
Conditions (as defined herein), such unpaid principal amount may be converted
into the number of shares of GTR Stock equal to the amount of such unpaid
principal amount DIVIDED BY the then applicable Conversion Price, and the
Maturity Date shall be deemed the Conversion Date with respect to such Optional
Conversion. If an Optional Conversion occurs, the Company and the Holder shall
follow the procedures for Conversion set forth in this Section 3; provided,
however, that the Holder shall not be required to send the Conversion Notice
contemplated by paragraph 3(c). The "OPTIONAL CONVERSION CONDITIONS" are as
follows:
(i) the market value of the outstanding shares of GTR Stock on
the Maturity Date (not including any such shares represented by the outstanding
principal balance of this Note) shall be greater than eighty million dollars
($80,000,000);
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<PAGE> 9
(ii) the GTR Stock shall have an average daily trading volume
of at least eight hundred thousand dollars ($800,000) for the period of one
hundred and eighty (180) days ending on the fifteenth (15th) day of the calendar
month immediately prior to the calendar month in which the Maturity Date occurs;
and
(iii) the GTR Stock shall qualify as a "margin stock" under
Regulation T of the Board of Governors of the Federal Reserve System.
(i) LIMITATIONS ON RIGHT TO CONVERT.
(i) The Holder may not convert any principal of this Note
unless a Registration Statement (as defined in the Registration Rights
Agreement) is effective and available for the sale of Conversion Shares by the
Holder or unless sales of the Conversion Shares may be made to the public
pursuant to Rule 144 under the Securities Act.
(ii) The Holder may not convert any principal of this Note to
the extent that the aggregate number of shares of GTR Stock issued upon such
Conversion and all prior Conversions exceeds 19.99% of the number of outstanding
shares on the Issue Date (subject to equitable adjustments from time to time for
the events described in Section 4 below) unless the Company shall have obtained
any approval of its shareholders required by NASD Rule 4460 (or any successor
rule or regulation) for issuance in excess of such amount.
(iii) In no event shall the Holder be permitted to convert
principal of this Note in excess of that amount of principal upon the Conversion
of which (x) the number of shares of GTR Stock beneficially owned by the Holder
and its affiliates (other than shares of GTR Stock which may be deemed
beneficially owned except for being subject to a limitation on conversion or
exercise analogous to the limitation contained in this subparagraph (iii)) PLUS
(y) the number of shares of GTR Stock issuable upon the Conversion of such
principal amount is equal to or exceeds (z) 4.99% of the number of shares of GTR
Stock then issued and outstanding. Nothing contained herein shall be deemed to
restrict the right of the Holder to convert such excess principal amount at such
time as such Conversion will not violate the provisions of this subparagraph
(iii).
(iv) The restrictions contained in subparagraphs (ii) and
(iii), respectively, of this Section 3(i) shall not apply in the event of either
an Optional Conversion or an Optional Redemption (each as defined herein).
4. ADJUSTMENTS TO CONVERSION PRICE.
(a) ADJUSTMENT TO FIXED CONVERSION PRICE DUE TO STOCK SPLIT, STOCK
DIVIDEND, ETC. If, after the Initial Conversion Period and prior to the
Conversion of the entire principal amount of this Note, (A) the number of
outstanding shares of GTR Stock is increased by a stock split, stock dividend,
reclassification, the distribution to holders of GTR Stock of rights or warrants
entitling them to subscribe for or purchase GTR Stock at less than the then
current market price thereof or other similar event, the Fixed Conversion Price
shall be proportionately reduced, or (B) the number of outstanding shares of GTR
Stock is decreased by a reverse stock split, combination or reclassification of
shares or other similar event, the Fixed Conversion Price shall be
proportionately increased. In such event, the Company shall notify the Transfer
Agent of such change on or before the effective date thereof. For purposes
hereof, the market price per
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<PAGE> 10
share of GTR Stock on any date shall be the average of the closing sale prices
for the GTR Stock as reported by Nasdaq, or by the principal securities market
on which the GTR Stock is then traded, on the five (5) consecutive Trading Days
(as defined below) selected by the Company not later than, the earlier of the
date in question and the Trading Day before the "ex" date, if any, with respect
to the issuance or distribution requiring such computation. The term "'ex'
date", when used with respect to any issuance or distribution, means the first
Trading Day on which the GTR Stock trades regular way in the market from which
such average closing price is then to be determined without the right to receive
such issuance or distribution. In the absence of one or more such quotations,
the Company shall determine the current market price on the basis of such
quotations as it considers appropriate.
(b) ADJUSTMENT TO CONVERSION PRICE. If, prior to the Conversion of
the entire principal amount of this Note, the number of outstanding shares of
GTR Stock is increased or decreased by a stock split, stock dividend,
combination, reclassification or other similar event, which event shall have
taken place during the reference period for determination of the Conversion
Price for any conversion of the principal balance of this Note, the Conversion
Price shall be calculated giving appropriate effect to the stock split, stock
dividend, combination, reclassification or other similar event for all Trading
Days immediately preceding the Conversion Date.
(c) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If prior to the
Conversion of the entire principal amount of this Note, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization,
redemption or other similar event, as a result of which shares of GTR Stock
shall be changed into the same or a different number of shares of the same or
another class or classes of stock or securities of the Company or another entity
or there is a sale of all or substantially all the Company's assets or there is
a change of control transaction with respect to which, in any such case, the
Holder does not exercise its right to a Mandatory Redemption (as defined below)
of the outstanding principal hereof, then the Holder shall thereafter have the
right to receive upon Conversion of the principal amount of this Note, upon the
terms and conditions specified herein and in lieu of the shares of GTR Stock
immediately therefore issuable upon conversion, such stock, securities and/or
other assets, if any, which the Holder would have been entitled to receive in
such transaction had such principal amount been converted prior to such
transaction, and in any such case appropriate provisions shall be made with
respect to the rights and interests of the Holder to the end that the provisions
hereof (including, without limitation, provisions for the adjustment of the
Conversion Price and of the number of shares issuable upon a Conversion) shall
thereafter be applicable as nearly as may be practicable in relation to any
securities thereafter deliverable upon the exercise hereof. The Company shall
not effect any transaction described in this subsection 4(c) unless (i) it first
gives to the Holder prior notice of such merger, consolidation, exchange of
shares, recapitalization, reorganization, redemption or other similar event, and
makes a public announcement of such event at the same that it gives such notice
and (ii) the resulting successor or acquiring entity (if not the Company)
assumes by written instrument the obligations of the Company under this Note,
including the terms of this subsection 4(c). Nothing contained herein shall
prevent the Company from issuing additional series or classes of its common
stock as long as any such issuance does not result in dilution (as contemplated
by this paragraph 4(c)) of the shares of GTR Stock then outstanding.
(d) DISTRIBUTION OF ASSETS. If, prior to the Conversion of the entire
principal amount of this Note, the Company shall declare or make any
distribution of its assets (or rights to acquire its assets) to holders of GTR
Stock as a partial liquidating dividend, by way of return of capital
10
<PAGE> 11
or otherwise, including any dividend or distribution in cash or shares of
capital stock of a subsidiary of the Company (collectively, a "DISTRIBUTION"),
then, upon a Conversion by the Holder occurring after the record date for
determining shareholders entitled to such Distribution but prior to the
effective date of such Distribution, the Holder shall be entitled to receive the
amount of such assets which would have been payable to the Holder had the Holder
been the holder of such shares of GTR Stock on the record date for the
determination of shareholders entitled to such Distribution. The Fixed
Conversion Price for amounts of principal of this Note not converted prior to
the effective date of a Distribution shall be reduced to a price determined by
decreasing the Fixed Conversion Price in effect immediately prior to the record
date of the Distribution by an amount equal to the fair market value of the
assets so distributed, as determined by mutual agreement of the Company and the
Holder.
(e) NO FRACTIONAL SHARES. If any adjustment under this Section 4
would create a fractional share of GTR Stock or a right to acquire a fractional
share of GTR Stock, such fractional share shall be disregarded and the number of
shares of GTR Stock issuable upon Conversion shall be the next higher number of
shares.
5. OPTIONAL REDEMPTION BY THE COMPANY.
(a) OPTIONAL REDEMPTION. If at any time commencing twenty-one (21)
months after the Issue Date, the closing bid price of the GTR Stock as reported
by Nasdaq, or by the principal securities exchange or market on which the GTR
Stock is then traded, for twenty-five (25) consecutive Trading Days exceeds 150%
of the Fixed Conversion Price, the Company shall have the right, in its sole
discretion, to redeem (an "OPTIONAL REDEMPTION"), any or all of the principal
amount of this Note then outstanding at the Optional Redemption Price (as
defined herein): provided, however, that in order to effect an Optional
Redemption, the Company shall have provided to the Holder thirty (30) Trading
Days' prior written notice of the effective date of the Optional Redemption (the
"OPTIONAL REDEMPTION DATE"). The Company shall be entitled to four (4) Optional
Redemptions during the term of this Note. Nothing contained herein shall prevent
the Holder from converting any or all of the unpaid principal amount to this
Note at any time or from time to time prior to the Optional Redemption Date.
(b) OPTIONAL REDEMPTION PRICE. The "OPTIONAL REDEMPTION PRICE" shall
mean the principal amount of this Note being redeemed, MULTIPLIED BY the
Optional Redemption Percentage. The Optional Redemption Percentage initially
shall be 130%; beginning on June 1, 1997, and on the first day of each calendar
quarter thereafter, the Optional Redemption Percentage shall be reduced on a
straight line basis so that during the last calendar quarter occurring during
the term of the Note (assuming that this Note has not been redeemed, converted
or paid in full prior thereto) the Optional Redemption Percentage shall be 100%.
(c) PAYMENT OF OPTIONAL REDEMPTION PRICE.
(i) The Company shall pay the Optional Redemption Price to the
Holder within five (5) business days of the Optional Redemption Date. In the
event that the Company redeems the entire remaining unpaid principal amount of
this Note, and pays to the Holder all interest accrued thereon and all other
amounts due in connection therewith, the Holder shall return this Note to the
Company for cancellation.
11
<PAGE> 12
(ii) The Company may, upon fifteen (15) Trading Days' prior
written notice to the Holder, pay the Optional redemption Price in shares of GTR
Stock in lieu of cash. The number of shares of GTR Stock to be delivered to the
Holder in the event that the Company exercises such option shall be determined
by dividing the Optional Redemption Price by the average of the closing bid
prices for the GTR Stock as reported by Nasdaq, or by the principal securities
market on which the GTR Stock is then traded, on the five (5) Trading Days
occurring immediately prior to (but not including) the Optional Redemption Date.
6. MANDATORY REDEMPTION BY THE COMPANY.
(a) MANDATORY REDEMPTION. In the event that a Mandatory Redemption
Event (as defined herein) occurs, the Holder shall have the right, upon written
notice to the Company, to have all or any portion of the unpaid principal amount
of this Note redeemed by the Company (a "MANDATORY REDEMPTION DATE") at the
Mandatory Redemption Price (as defined herein) in same day funds. Such notice
shall specify the effective date of such Mandatory Redemption (the "MANDATORY
REDEMPTION DATE") and the amount of principal to be redeemed. The Optional
Redemption Date and the Mandatory Redemption Date are sometimes each referred to
herein as a "REDEMPTION DATE".
(b) MANDATORY REDEMPTION PRICE. The "MANDATORY REDEMPTION PRICE" shall
be equal to the principal amount of this Note being redeemed MULTIPLIED BY one
hundred and twenty percent (120%); PROVIDED, HOWEVER, that with respect to a
Mandatory Redemption which occurs as a result of a Mandatory Redemption Event
described in subparagraph 6(d)(ii) or 6(d)(vii) below, the Mandatory Redemption
Price shall be equal to the principal amount of this Note being redeemed,
DIVIDED BY the Applicable Percentage in effect on the Mandatory Redemption Date.
(c) PAYMENT OF MANDATORY REDEMPTION PRICE.
(i) The Company shall pay the Mandatory Redemption Price to
the Holder within five (5) business days of the Mandatory Redemption Date. In
the event that the Company redeems the entire remaining unpaid principal amount
of this Note, and pays to the Holder all interest accrued thereon and all other
amounts due in connection therewith, the Holder shall return this Note to the
Company for cancellation.
(ii) If Company fails to pay the Mandatory Redemption Price to
the Holder within five (5) business days of the Mandatory Redemption Date, the
Holder shall be entitled to interest thereon at an annual rare equal to the
lower of (x) the "prime" rate (as published in the Wall Street Journal) on such
fifth business day PLUS three percent (3%) and (y) the highest rate permitted by
applicable law from the Mandatory Redemption Date until the Mandatory Redemption
Price has been paid in full.
(d) MANDATORY REDEMPTION EVENT. Each of the following events shall be
deemed a "MANDATORY REDEMPTION EVENT":
(i) the Company fails for any reason (including without
limitation as a result of not having a sufficient number of shares of GTR Stock
authorized and reserved for issuance or as a result of the prohibition contained
in Section 3(i)(ii)) to issue shares of GTR Stock to the Holder in accordance
with the provisions of this Note upon Conversion of any principal amount hereof,
and such failure continues for ten (10) business days;
12
<PAGE> 13
(ii) the Holder is prohibited from converting principal of this
Note by operation of subparagraph 3(i)(ii) hereof, and such prohibition
continues for a period of sixty (60) days thereafter;
(iii) the Company fails to transfer any certificate for shares
of GTR Stock issued to the Holder upon Conversion of any principal amount hereof
as and when required by this Note or the Registration Rights Agreement and such
failure continues for a period of ten (10) business days;
(iv) the Company breaches, in a material respect, any covenant
or other material term or condition of this Note, the Note Purchase Agreement,
the Registration Rights Agreement or any other agreement, certificate or
instrument delivered by the Company at the Closing (as defined in the Note
Purchase Agreement) (the "Transaction Documents"), and such breach continues for
a period of ten (10) business days after written notice thereof to the Company
from the Holder;
(v) the Registration Statement (as defined in the Registration
Rights Agreement) is not declared effective by August 15, 1997, or if the
Registration Statement has been declared effective by such date, and the
effectiveness of the Registration Statement lapses for any reason (including
without limitation, the issuance of a stop order) or is unavailable to the
Holder for sale of Conversion Shares in accordance with the terms of the
Registration Rights Agreement, and such lapse or unavailability continues for a
period of five (5) business days, PROVIDED that the cause of such lapse or
unavailability is not due to factors solely within the control of the Holder,
and PROVIDED, FURTHER, that the Registration Statement shall not be deemed to be
unavailable to the Holder, for purposes of this paragraph (v) only, during any
Standstill Period (as defined in the Registration Rights Agreement);
(vi) the GTR Stock is no longer quoted on the Nasdaq National
Market or listed on a national securities exchange;
(vii) the sale, conveyance or disposition of all or
substantially all of the assets of the Company or all or substantially all of
the assets comprising the Company's Tissue Repair Division, the effectuation of
a transaction or series of transactions, in which more than fifty percent (50%)
of the voting power of the Company is disposed of, or the consolidation, merger
or other business combination of the Company with or into any other entity,
immediately following which the prior stockholders of the Company fail to own,
directly or indirectly, at least fifty percent (50%) of the surviving entity;
and
(viii) the Company or any subsidiary of the Company shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business; or such a receiver or trustee shall otherwise be
appointed; or bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Company or any
subsidiary of the Company and, in the case of an involuntary action or other
proceeding, remains undismissed and unstayed for a period of sixty (60) days
(each, a "LIQUIDATION EVENT").
13
<PAGE> 14
(e) FAILURE TO PAY REDEMPTION AMOUNTS. If the Company fails to pay
the Mandatory Redemption Price within ten (10) business days of the Payable Date
therefor, then the Holder shall have the right at any time, so long as the
Company remains in default, to require the Company, upon written notice, to
immediately issue, in lieu of the Mandatory Redemption Price, the number of
shares of GTR Stock of the Company equal to the Mandatory Redemption Price
DIVIDED BY the Conversion Price in effect on such Conversion Date as is
specified by the Holder in writing to the Company.
7. MISCELLANEOUS.
(a) FAILURE TO EXERCISE RIGHTS NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude any other or further exercise
thereof. All rights and remedies of the Holder hereunder are cumulative and not
exclusive of any rights or remedies otherwise available.
(b) NOTICES. Any notice, demand or request required or permitted to
be given by the Company or the Holder pursuant to the terms of this Note shall
be in writing and shall be deemed given (i) when delivered personally or by
verifiable facsimile transmission (with a hard copy to follow), (ii) on the next
business day after timely delivery to an overnight courier and (iii) on the
third business day after deposit in the U.S. mail (certified or registered mail,
return receipt requested, postage prepaid), addressed as follows:
If to the Company:
Genzyme Corporation
One Kendall Square
Cambridge, Massachusetts 02139
Attn: Chief Legal Counsel
Fax: 617-252-7553
If to the Holder:
Credit Suisse First Boston (Hong Kong) Ltd.
One Exchange Square
16th Floor
Hong Kong
Attn: Matthew Lawrence
Fax: 011-852-2530-0556
With a copy to:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attn: Raymond J. Dorado, Esq.
Fax: 212-325-8102
14
<PAGE> 15
and:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attn: Allan Weine/John McAvoy
Fax: 212-325-6519
and if to any other Holder, at such address as such Holder shall have furnished
the Company in writing.
(c) AMENDMENTS. No amendment, modification or other change may be
made to this Note unless such amendment, modification or change is set forth in
writing and is signed by the Company and the Holder.
(d) TRANSFER OF NOTE. With the consent of the Company, which shall
not be unreasonably withheld, the Holder may sell, transfer or otherwise dispose
of all, but not less than all, of this Note to any person or entity as long as
such sale, transfer or disposition is the subject of an effective registration
statement under the Securities Act or is exempt from registration thereunder;
PROVIDED, HOWEVER, that such consent shall not be required (but the Company
shall nonetheless be entitled to receive notice thereof) in the event of a sale,
transfer or disposition of this Note to an affiliate of the Holder. From and
after the date of such sale, transfer of disposition, the transferee hereof
shall be deemed to be the Holder. Upon any such sale, transfer or disposition,
the Company shall, promptly following the return of this Note by the transferee
hereof, issue and deliver to such transferee a new note identical in all
respects to this Note, in the name of such transferee, except that the principal
amount of such new note may reflect the unpaid principal amount of this Note at
the time of such sale, transfer or disposition.
(e) LOST OR STOLEN NOTE. Upon receipt by the Company of evidence of
the loss, theft, destruction or mutilation of this Note, and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Company, and upon surrender and cancellation of the Note, if mutilated the
Company shall execute and deliver to the Holder a new note identical in all
respects to this Note. Upon the issuance of any new Note hereunder, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge and any expenses (including reasonable fees and expenses of
counsel) in connection therewith.
(f) GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to the
conflict of law provisions thereof.
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<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name by its duly authorized officer on the date first above written.
GENZYME CORPORATION
By: /s/ David J. McLachlan
----------------------------------------
Name: David J. McLachlan
Title: Executive Vice President, Finance
and Chief Financial Officer
16
<PAGE> 17
ANNEX 1
Schedule of Principal
Payment and Conversions
-----------------------
Principal Amount Paid Date of Payment
Balance or Converted or Conversion
--------- ------------ ---------------
$13,000,000
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
_____________________ _______________________ _____________________
17
<PAGE> 1
EHXIBIT 4.15
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated February 27,
1997, by and between Genzyme Corporation, a Massachusetts corporation (the
"COMPANY"), and Credit Suisse First Boston (Hong Kong) Ltd. (the "PURCHASER").
In connection with the Note Purchase Agreement of even date herewith
(the "NOTE PURCHASE AGREEMENT"), the Company has agreed, subject to the terms
and conditions set forth therein, to issue and sell to the Purchase a note (the
"NOTE") which is convertible into shares of the Company's Tissue Repair Division
Common Stock, $.01 par value (the "GTR STOCK"). In order to induce the Purchaser
to enter into the Note Purchase Agreement, the Company has agreed to provide
certain registration rights under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and under applicable state securities laws. Capitalized terms
used herein and not otherwise defined shall have the respective meanings set
forth in the Note.
In consideration of the Purchaser entering into the Note Purchase
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings specified:
(a) "CLOSING" shall have the meaning specified in the Note Purchase
Agreement;
(b) "DUE DATE" means June 27, 1997;
(c) "HOLDER" means any person owning or having the right to acquire,
through conversion of principal of or interest on the Note, Registrable
Securities, including initially the Purchaser, and any permitted assignee
thereof;
(d) "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement or
statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act ("Rule 415") or any successor rule providing for the offering
of securities on a continuous basis ("Registration Statement"), and the
declaration or ordering of effectiveness of the Registration Statement by the
Securities and Exchange Commission (the "Commission"); and
(e) "REGISTRABLE SECURITIES" means the shares of GTR Stock issued or
issuable either (i) upon conversion of principal of the Note or (ii) as payment
for interest due and payable thereon (the "Conversion Shares") and any shares of
capital stock issued or issuable from time to time (with any adjustments) in
replacement of, in exchange for or otherwise in respect of the Conversion
Shares.
2. MANDATORY REGISTRATION.
(a) On or before April 1, 1997, the Company shall prepare and
file a Registration Statement on Form S-3 (or, if Form S-3 is not available, on
such form of
<PAGE> 2
Registration Statement as is then available to effect a registration of the
Registrable Securities, subject to the consent of the Purchaser, which consent
will not be unreasonably withheld) as a "shelf" registration statement under
Rule 415 covering the resale of all shares of Registrable Securities then
issuable on conversion of the Note or in payment of interest thereon. The
Registration Statement shall state, to the extent permitted by Rule 416 under
the Securities Act, that it also covers such indeterminate number of shares of
GTR Stock as may be required to effect conversion of the Note to prevent
dilution resulting from stock splits, stock dividends or similar events, or by
reason of changes in the Conversion Price in accordance with the terms of the
Note.
(b) The Company shall, subject to Sections 4(h) and 4(i)
hereof, maintain the effectiveness of the Registration Statement from the
effective date thereof until the earlier to occur of (i) the date on which all
of the Registrable Securities have been sold pursuant to the Registration
Statement and (ii) the date on which all of the remaining Registrable Securities
(in the reasonable opinion of counsel to the Purchaser) may be immediately sold
to public without registration and without regard to the amount of Registrable
Securities which may be sold by the Holder thereof at a given time (the
"REGISTRATION PERIOD").
(c) If the Registration Statement is not declared effective by
the Commission on or before the Due Date, or if, after the Registration
Statement has been declared effective by the Commission, sales of Registrable
Securities cannot be made by Holder under the Registration Statement for any
reason (other than during a Standstill Period, as defined below), the Company
shall pay to the Holder an amount equal to the lesser of (x) two percent (2%)
per month and (y) the highest rate permitted by applicable law, TIMES the
aggregate unpaid principal amount of the Note, accruing daily and compounded
monthly, from the Due Date until the date on which the Registration Statement is
declared effective or becomes available for sales of Registrable Securities, as
the case may be. The amounts paid or payable by the Company hereunder shall be
in addition to any other remedies available to the Purchaser at law or in equity
or pursuant to the terms of any other Transaction Document.
3. PIGGYBACK REGISTRATION.
If at any time prior to the expiration of the Registration
Period, (i) the Company proposes to register shares of GTR Stock under the
Securities Act in connection with the public offering of such share for case
(other than a registration relating solely to the sale of securities to
participants in a Company stock plan or a registration on Form S-4 under the
Securities Act or any successor or similar form registering stock issuable upon
a reclassification, a business combination involving an exchange of securities
or an exchange offer for securities of the issuer or another entity (a "Proposed
Registration") and (ii) a registration statement covering the sale of all of the
Registrable Securities is not then effective and available for sales thereof by
the Holder, the Company shall, at such time, promptly give the Holder written
notice of such Proposed Registration. The Holder shall have thirty (30) days
from its receipt of such notice to deliver to the Company a written request
specifying the amount of Registrable Securities that the Holder intends to sell
and the Holder's intended method of distribution. Upon receipt of such request,
the Company shall use its best efforts to cause all Registrable Securities which
the Company has been requested to register to be registered under the Securities
Act to the extent necessary to permit their sale or other disposition in
accordance with the intended methods of distribution specified in the request of
the Holder; PROVIDED, HOWEVER, that the Company shall have the right
2
<PAGE> 3
to postpone or withdraw any registration effected pursuant to this Section 3
without obligation to the Holder.
4. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities
pursuant to a Registration Statement, the Company shall:
(a) prepare and file with the Commission a Registration
Statement with respect to the Registrable Securities and use its best efforts to
cause such Registration Statement to become effective and keep such Registration
Statement effective at all times during the Registration Period;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in connection
with such Registration Statement as may be necessary to comply with the
provisions of the Securities Act or to maintain the effectiveness of the
Registration Statement, or as may be reasonably requested by the Holder in order
to incorporate information concerning the Holder or the Holder's intended method
of distribution;
(c) in the event that the number of shares available under a
Registration Statement filed by the Company hereunder is insufficient to cover
all of the Registrable Securities then outstanding, the Company shall amend such
Registration Statement, or file a new Registration Statement, or both, so as to
cover all shares of Registrable Securities then outstanding. Any Registration
Statement filed pursuant to this Section 4 shall state that, to the extent
permitted by Rule 416 under the Securities Act, such Registration Statement also
covers such indeterminate number of additional shares of GTR Stock as may become
issuable upon conversion of the Note. Unless and until such amendment or new
Registration Statement becomes effective, the Holder shall have the rights
described in Section 2(c) above;
(d) secure the designation and quotation of the Registrable
Securities on the Nasdaq National Market;
(e) furnish to the Holder such number of copies of the
prospectus included in such Registration Statement, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the Holder may reasonably request in order to facilitate the
disposition of the Holder's Registrable Securities;
(f) use its best efforts to register or qualify the Registrable
Securities under the securities or "blue sky" laws of such jurisdictions within
the United States as shall be reasonably requested from time to time by the
Holder, and do any and all other acts or things which may be necessary or
advisable to enable the Holder to consummate the public sale or other
disposition of the Registrable Securities in such jurisdictions; provided that
the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdiction;
(g) in the event of an underwritten public offering of the
Registrable Securities enter into an perform its obligations under an
underwriting agreement, in usual and
3
<PAGE> 4
customary form reasonably acceptable to the Company, with the managing
underwriter of such offering;
(h) notify the Holder immediately upon the occurrence of any
event as a result of which the prospectus included in such Registration
Statement, as then in effect, contains an untrue statement of material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and a promptly as practicable, prepare, file and furnish to the Holder
a reasonable number of copies of a supplement or an amendment to such prospectus
as may be necessary so that such prospectus does not contain an untrue statement
of material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing; PROVIDED, HOWEVER, that the Company may delay
preparing, filing and distributing any such supplement or amendment if the
Company determines in good faith that such supplement or amendment might, in the
reasonable judgment of the Company, (i) interfere with or affect the negotiation
or completion of a transaction that is being contemplated by the Company
(whether or not a final decision has been made to undertake such transaction) or
(ii) involve initial or continuing disclosure obligations that are not in the
best interests of the Company's stockholders at such time; PROVIDED, FURTHER,
that (x) the Company will give notice (a "STANDSTILL NOTICE") of any such delay
no less than five (5) business days prior to such delay, (y) such delay shall
not extend for a period of more than ten (10) business days without the written
consent of the Holder and (z) the Company may utilize such delay no more than
once in each calendar year;
(i) use its best efforts to prevent the issuance of any stop
order or other order suspending the effectiveness of such Registration Statement
and, if such an order is issued, to obtain the withdrawal thereof at the
earliest possible time and to notify the Holder of the issuance of such order
and the resolution thereof;
(j) furnish to the Holder, on the date that such Registration
Statement becomes effective, (i) an opinion, dated such date, of outside counsel
representing the Company (and reasonably acceptable to the Holder) addressed to
the Holder and in form and substance as is customarily given to underwriters in
an underwritten public offering, and (ii) in the case of an underwriting, a
letter, dated such date, from the Company's independent certified public
accountants, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holder;
(k) provide the Holder and its representatives the opportunity
to conduct a reasonable inquiry of the Company's financial and other records
during normal business hours and make available its officers, directors and
employees for questions regarding information which the Holder may reasonably
request in order to fulfill any due diligence obligation on its part; and
(l) permit counsel for the Holder to review such Registration
Statement and all amendments and supplements thereto a reasonable period of time
prior to the filing thereof with the Commission.
4
<PAGE> 5
5. OBLIGATIONS OF HOLDER.
In connection with the registration of the Registrable Securities
pursuant to the Registration Statement, the Holder shall:
(a) furnish to the Company such information regarding itself
and the intended method of disposition of Registrable Securities as the Company
shall reasonably request in order to effect the registration thereof:
(b) upon receipt of any notice from the Company of the
happening of any event of the kind described in paragraph 4(i), immediately
discontinue disposition of Registrable Securities pursuant to the Registration
Statement until withdrawal of the stop order referred to in paragraph 4(i); and
(c) if so requested by the Company, provided a Registration
Statement covering the sale of all of the Registrable Securities is then
effective, the Holder shall not sell or otherwise transfer pursuant to the
Registration Statement or pursuant to Rule 144 any Registrable Securities (i)
during the period from the second (2nd) business day prior to the effective date
of a registration statement filed by the Company under the Securities Act in
connection with a public offering of GTR Stock until the thirtieth (30th)
calendar day following such effective date, and (ii) during the period from the
date specified in the Standstill Notice given by the Company pursuant to
paragraph 4(h) above that the Company has determined that it will delay the
preparation and filing of an amendment or supplement to the prospectus included
in the Registration Statement until the expiration date specified in such notice
(the periods described in clauses (i) and (ii) hereof are each referred to
herein as a "Standstill Period"). The Company agrees that upon a Conversion with
a Conversion Date occurring after the expiration date of a Standstill Period
until (and including) the tenth (10th) business day following the date of such
expiration, the Conversion Price shall be the lesser of (A) the lowest
Conversion Price in effect during the Standstill Period and (B) the Conversion
Price on the Conversion Date.
6. INDEMNIFICATION.
In the event that any Registrable Securities are included in a
Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company shall indemnify
and hold harmless the Holder, the officers, directors, employees, agents and
representatives of the Holder, and each person, if any, who controls the Holder
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (the "1934 ACT"), against any losses, claims, damages, liabilities or
reasonable out-of-pocket expenses (whether joint or several) (collectively,
including legal or other expenses reasonably incurred in connection with
investigating or defending same, "LOSSES"), insofar as any such Losses arise out
of or are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in such Registration Statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (collectively, "VIOLATIONS"). The Company will reimburse the
Holder, and each such officer, director, employee, agent, representative or
controlling person for any legal or other expenses as reasonably incurred by any
5
<PAGE> 6
such entity or person in connection with investigating or defending any Loss;
provided, however, that the foregoing indemnity shall not apply to amounts paid
in settlement of any Loss if such settlement is effected without the consent of
the Company (which consent shall not be unreasonably withheld), nor shall the
Company be obligated to indemnify any person for any Loss to the extent that
such Loss arises out of or is based upon and in conformity with written
information furnished by such person expressly for use in such Registration
Statement; and provided, further, that the Company shall not be required to
indemnify any person to the extent that any Loss results from such person
selling Registrable Securities (i) to a person to whom there was not sent or
give, at or prior to the written confirmation of the sale of such shares, a copy
of the prospectus, as most recently amended or supplemented, if the Company has
previously furnished or made available copies thereof or (ii) during any period
following written notice by the Company to the Holder of an event described in
Section 4(h) or 4(i).
(b) To the extent permitted by law, the Holder shall indemnify
and hold harmless the Company, the officers, directors, employees, agents and
representatives of the Company, and each person, if any, who controls the
Company within the meaning of the Securities Act or the 1934 Act, against any
Losses to the extent (and only to the extent) that any such Losses arise out of
or are based upon and in conformity with written information furnished by the
Holder expressly for use in such Registration Statement; and the Holder will
reimburse any legal or other expenses as reasonably incurred by the Company and
any such officer, director, employee, agent, representative, or controlling
person, in connection with investigating or defending any such Loss; provided,
however, that the foregoing indemnity shall not apply to amounts paid in
settlement of any such Loss if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; provided, that,
in no event shall any indemnity under this subsection 6(b) exceed the net
purchase price of securities sold by the Holder under the Registration
Statement.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in and to assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the reasonably incurred fees and expenses of one such counsel to
be paid by the indemnifying party, if representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate under
applicable standards of professional conduct due to actual or potential
conflicting interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, to the extent prejudicial to its ability to defend such action,
shall relieve such indemnifying party of any liability to the indemnified party
under this Section 6 with respect to such action, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 6 or
with respect to any other action.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 6 is unavailable or insufficient to hold harmless an
indemnified party for any reason, the Company and the Holder agree to contribute
to the aggregate Losses to which the Company or the Holder may be subject in
such proportion as is appropriate to reflect the relative fault of the
6
<PAGE> 7
Company and the Holder in connection with the statements or omissions which
resulted in such Losses; provided, however, that in no case shall the holder be
responsible for any amount in excess of the net purchase price of securities
sold by it under the Registration Statement. Relative fault shall be determined
by reference to whether any alleged untrue statement or omission relates to
information provided by the Company or by the Holder. The Company and the Holder
agree that it would not be just and equitable if contribution were determined by
pro rata allocation or any other method of allocation which does not take
account of the equitable considerations referred to above. Notwithstanding the
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 6, each person who
controls the Holder within the meaning of either the Securities Act or the
Exchange Act and each officer, director, employee, agent or representative of
the Holder shall have the same rights to contribution as the Holder, and each
person who controls the Company within the meaning of either the Securities Act
or the Exchange Act and each officer, director, employee, agent or
representative of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (d).
(e) The obligations of the Company and the Holder under this
Section 6 shall survive the conversion or redemption, if any, of the Note, the
completion of any offering of Registrable Securities pursuant to a Registration
Statement under this Agreement, or otherwise.
7. REPORTS.
With a view to making available to the Holder the benefits of
Rule 144 under the Securities Act ("Rule 144") and any other rule or regulation
of the Commission that may at any time permit the Holder to sell securities of
the Company to the public without registration, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the 1934
Act; and
(c) furnish to the Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company, if true, that it has complied with the reporting requirements of Rule
144, the Securities Act and the 1934 Act, (ii) a copy of the most recent annual
or quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably requested
in availing the Holder of any rule or regulation of the Commission which permits
the selling of any such securities without registration.
8. MISCELLANEOUS.
(a) EXPENSES OF REGISTRATION. All expenses, other than
underwriting discounts and commissions and fees and expenses of counsel to the
Holder, incurred in connection with the registrations, filings or qualifications
described herein, including (without limitation) all registration, filing and
qualification fees, printers' and accounting fees, the fees and
7
<PAGE> 8
disbursements of counsel for the Company, and the fees and disbursements
incurred in connection with the opinion and letter described in paragraph 4(j)
hereof shall be borne by the Company.
(b) AMENDMENT; WAIVER. Any provisions of this Agreement may be
amended only pursuant to a written instrument executed by the Company and the
Holder. Any waiver of the provision of this Agreement may be made only pursuant
to a written instrument executed in accordance with this paragraph shall be
binding upon the Holder, each future Holder, and the Company.
(c) NOTICES. Any notice, demand or request required or
permitted to be given by the Company or the Holder pursuant to the terms of this
Agreement shall be in writing and shall be deemed given (i) when delivered
personally or when sent by verifiable facsimile transmission (with a hard copy
to follow), (ii) on the next business day after timely delivery to an overnight
courier and (iii) on the third business day after deposit in the U.S. mail
(certified or registered mail, return receipt requested, postage prepaid),
addressed to the parties as follows:
If to the Company:
Genzyme Corporation
One Kendall Square
Cambridge, Massachusetts 02139
Attn: Chief Legal Counsel
Fax: 617-252-7553
If to the Purchaser:
Credit Suisse First Boston (Hong Kong) Ltd.
One Exchange Square, 16th Floor
Hong Kong
Attn: Matthew Lawrence
Fax: 852-2845-2456
With a copy to:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attn: Raymond J. Dorado, Esq.
Fax: 212-325-8102
With a copy to:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attn: Allen Weine/John McAvoy
Fax: 212-325-6519
8
<PAGE> 9
and if to any other Holder, at such Holder's address as such Holder shall have
furnished the Company in writing.
(d) TERMINATION. This Agreement shall terminate on the earlier
to occur of (a) the end of the Registration Period and (b) the date on which all
of the Registrable Securities have been publicly distributed; but any such
termination shall be without prejudice to (i) the parties' rights and
obligations arising from breaches of this Agreement occurring prior to such
termination and (ii) the indemnification obligations under this Agreement.
(e) ASSIGNMENT. The rights of the Holder hereunder shall be
assigned automatically to any transferee of the Note or Registrable Securities
as long as: (i) the Company is, within a reasonable period of time following
such transfer, furnished with written notice of the name and address of such
transferee, (ii) immediately following such transfer, the further disposition of
Registrable Securities is restricted under the Securities Act or under state
securities laws, (iii) the transferee agrees in writing with the Company to be
bound by all of the provisions hereof and (iv) such transfer is made in
accordance with the applicable requirements of the Note Purchase Agreement. No
rights under this Agreement shall be assigned to any person or entity to whom
less than the Note and all of the Registrable Securities held by the Holder are
transferred.
(f) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflict of laws provisions thereof.
9
<PAGE> 10
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first-above written.
GENZYME CORPORATION
By: /s/ David J. McLachlan
----------------------------------------
Name: David J. McLachlan
Title: Executive Vice President, Finance
and Chief Financial Officer
CREDIT SUISSE FIRST BOSTON (HONG KONG) LTD.
By: /s/ Matthew T. Lawrence
----------------------------------------
Name: Matthew T. Lawrence
Title: Director
10
<PAGE> 1
EXHIBIT 10.49
FIRST AMENDMENT TO CREDIT AGREEMENT
AND CONSENT TO SUBORDINATION TERMS
FIRST AMENDMENT to Credit Agreement and CONSENT to Subordination Terms
("First Amendment") dated as of March 3, 1997 among and between Genzyme
Corporation (the "Company"); each of the Subsidiaries of the Company identified
under the caption "Subsidiary Guarantors" on the signature pages hereto; each of
the Lenders identified under the caption "Lenders" on the signature pages hereto
(each a "Lender" and collectively, the "Lenders"); Fleet National Bank ("Fleet")
as administrative agent for the Lenders (the "Administrative Agent"); and The
First National Bank of Boston ("BankBoston") as documentation agent for the
Lenders (the "Documentation Agent").
Reference is made to the Credit Agreement dated as of November 14,
1996, among and between the Company, the Subsidiary Guarantors, the Lenders, the
Administrative Agent and the Documentation Agent, pursuant to which the Lenders
furnished to the Company a $225,000,000 revolving line of credit. Capitalized
terms used in this First Amendment have the meanings given such terms in the
Credit Agreement, as amended hereby, except as provided otherwise herein.
The Company has requested that Section 9.5(d)(ii) of the Credit
Agreement be amended as provided by this First Amendment. Under section 12.5 of
the Agreement, to be effective, the amendment to Section 9.5(d)(ii) set forth in
this First Amendment must be signed by the Company, the Administrative Agent and
the Lenders constituting the Required Lenders. In addition, the Company has
requested that the Lenders constituting the Required Lenders confirm that the
subordination terms of a certain Genzyme Corporation Convertible Note dated
February 28, 1997 in the original principal amount of $13,000,000 that are
attached hereto as EXHIBIT A (the "Subordination Terms") are satisfactory.
1. AMENDMENT TO SECTION 9.5 - (PROHIBITION OF FUNDAMENTAL CHANGES -
EXCEPTIONS). Subsection 9.5(d)(ii) of the Credit Agreement is deleted, in its
entirety, and the following is substituted in its place thereof:
"the Company and its Subsidiaries may acquire any assets used or
useful in the lines of business permitted under Section 9.10 or the
stock or other equity interest of any Person that is engaged in a line
of business permitted to the Company under Section 9.10 or merge any
Person that is in a line or lines of business permitted under Section
9.10 with the Company or a Subsidiary or the Company or a Subsidiary
with any such Person (provided that the conditions in the provisos in
Section 9.5(d)(i) are satisfied with respect to such merger) provided
that at the time of the consummation of any such transaction and after
giving effect thereto, the Company shall be in compliance with the
covenants in Section 9.9 as of the end of the most recent fiscal
quarter or annual period of the Company and the transaction will not be
reasonably likely to result in the noncompliance with such financial
covenants;"
<PAGE> 2
2. CONFIRMATION THAT SUBORDINATION TERMS ARE SATISFACTORY. The undersigned
Lenders confirm that the Subordination Terms are satisfactory, as provided in
the definition of "Subordinated Debt" under Section 1.1 of the Credit Agreement.
3. REPRESENTATIONS AND WARRANTIES. In order to induce the Agents and
Lenders to enter into this First Amendment, the Company makes the following
representations and warranties, all of which shall survive the execution and
delivery of this First Amendment:
(a) Each of the Company and the Subsidiary Guarantors has all
requisite corporate, partnership or other power and authority to execute,
deliver and perform its obligations under the First Amendment and under the
Credit Agreement, as amended hereby. This First Amendment has been duly
authorized, executed and delivered by the Company and each Subsidiary Guarantor,
and does not conflict with, violate or result in a breach of or require any
consent under any applicable law, rule or regulation or any of the terms of the
charter or by-laws (or equivalent constitutional documents) of any Obligor, any
agreement or instrument to which the Company or any Subsidiary is a party or to
which any of them or their Property is bound or to which any of them is subject.
This First Amendment and the Credit Agreement, as amended hereby, constitute the
legal, valid and binding obligation of each Obligor enforceable against each
Obligor in accordance with its terms.
(b) On the date hereof each of the representations and warranties in
the Credit Agreement are true, accurate and complete in all material respects.
(c) Upon the execution and delivery of this First Amendment, and the
satisfaction of each of the conditions precedent set forth in Section 4 of this
First Amendment, no Default or Event of Default shall exist and be continuing.
4. CONDITIONS PRECEDENT. The agreements contained herein and the
amendments contemplated hereby shall become effective on the date (the
"Effective Date") when Company, the Required Lenders, and the Administrative
Agent shall have executed this First Amendment and when each of the following
conditions shall have been fulfilled:
(a) EXECUTION OF DOCUMENTS, ETC. This First Amendment and any other
agreements, documents and instruments to be executed and/or delivered in
connection herewith (collectively the "First Amendment Documents") shall have
been duly and properly authorized and executed by: the Company, the
Administrative Agent, and the Required Lenders and shall be in full force and
effect on and as of the Effective Date of this First Amendment.
(b) PROCEEDINGS; RECEIPT OF DOCUMENTS. All requisite corporate action
and proceedings of the Company and the Subsidiary Guarantors in connection with
the execution and delivery of this First Amendment and the other First Amendment
Documents shall be satisfactory in form and substance to the Administrative
Agent and its counsel, and the Administrative Agent and its counsel shall have
received all information and copies of all documents, including without
limitation, records of requisite corporate action and proceedings which the
Administrative Agent or its counsel may have requested in connection therewith,
such
<PAGE> 3
documents where requested by the Administrative Agent or its counsel to be
certified by appropriate persons or governmental authorities.
(c) MATERIAL LITIGATION. There shall be no pending or, to the best
knowledge of the Company, threatened litigation with respect to the Company or
any Subsidiary Guarantor before any court, arbitrator or governmental or
administrative body or agency which challenges or relates to (i) the
transactions contemplated hereby or (ii) the Loan Documents.
5. REAFFIRMATION AND RATIFICATION OF EXISTING AGREEMENT, ETC. The Company:
(i) reaffirms and ratifies all the Obligations to the Agents and the Lenders, in
respect to the Credit Agreement, as hereby amended, and the other Loan
Documents, (ii) certifies that there are no defenses, offsets or counterclaims
to such Obligations as of the date hereof, (iii) expressly acknowledges its
continuing liability pursuant thereto, and (iv) agrees that each of the Credit
Agreement, as amended hereby, and the other Loan Documents shall remain in full
force and effect, enforceable against the Company and Subsidiary Guarantors in
accordance with its terms.
6. MISCELLANEOUS.
(a) This First Amendment may be executed on separate counterparts by
the parties hereto, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same agreement.
(b) This First Amendment and the rights and obligations of the
parties hereunder shall be construed in accordance with and be governed by the
laws of the Commonwealth of Massachusetts (without giving effect to the conflict
of laws principles thereof).
(c) The headings of the several sections of this First Amendment are
inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this First Amendment.
(d) This First Amendment, together with the other First Amendment
Documents, embodies the entire agreement and understanding among the parties
relating to the subject matter hereof and supersedes all prior proposals,
negotiation, agreements and understandings relating to such subject matter.
(e) This First Amendment, together with the other First Amendment
Documents, shall be deemed to be Loan Documents under the Credit Agreement.
(f) EACH OF THE OBLIGORS, THE AGENTS AND THE LENDERS HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS FIRST AMENDMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY.
(g) The Company shall pay on demand the reasonable costs and
expenses, including, without limitation, reasonable attorney's fees and expenses
incurred, or which may be incurred
<PAGE> 4
by the agents or the Lenders in connection with the negotiation, documentation,
administration and enforcement of this First Amendment.
IN WITNESS WHEREOF, this First Amendment has been duly executed and
delivered as a sealed instrument at Boston, Massachusetts as of the 3rd day of
March, 1997.
THE COMPANY:
GENZYME CORPORATION
By: /s/ David J. Mclachlan
-----------------------------------
Title: Executive Vice President
SUBSIDIARY GUARANTORS:
DEKNATEL SNOWDEN PENCER, INC.
By: /s/ David J. Mclachlan
-----------------------------------
Title: Treasurer
DSP WORLDWIDE, INC.
By: /s/ John R. Connolly
-----------------------------------
Title: Executive Vice President
ALLSTON LANDING LIMITED PARTNERSHIP
By: Allston Landing Corporation,
its General Partner
By: /s/ David J. Mclachlan
-----------------------------------
Title: Vice President and Treasurer
ADMINISTRATIVE AGENT:
FLEET NATIONAL BANK
By: /s/ [signature illegible]
-----------------------------------
Title: Senior Vice President
DOCUMENTATION AGENT:
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Elizabeth C. Everett
-----------------------------------
Title: Director
<PAGE> 5
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: FLEET NATIONAL BANK
$35,000,000.00 By: /s/ [signature illegible]
----------------------------
Title: Senior Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 6
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE FIRST NATIONAL BANK OF BOSTON
$22,000,000.00 By: /s/ Elizabeth C. Everett
----------------------------
Title: Director
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 7
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: BANK OF TOKYO-MITSUBISHI TRUST COMPANY
$13,000,000.00 By: /s/ Michael J. Cronin
----------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 8
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: CREDIT LYONNAIS NEW YORK BRANCH
$13,000,000.00 By: /s/ Robert Ivosevich
----------------------------
Title: Senior Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 9
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE FUJI BANK LIMITED, NEW YORK BRANCH
$13,000,000.00 By: /s/ Masanobo Kobayashi
----------------------------------
Title: Vice President and Manager
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 10
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: MELLON BANK, N.A.
$13,000,000.00 By: /s/ Rita C. Long
---------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 11
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: NATIONSBANK, N.A.
$13,000,000.00 By: /s/ Michael A. Crabb, III
-------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 12
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: REPUBLIC NATIONAL BANK OF NEW YORK
$13,000,000.00 By: /s/ Patrick Hildreth
-------------------------------
Title: First Vice President
By: /s/ Jean-Pierre F. Diels
-------------------------------
Title: Executive Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 13
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: ABN AMRO BANK N.V.
$7,500,000.00 By: /s/ Carol A. Levine
-------------------------------
Title: Senior Vice President
By: /s/ Brian M. Horgan
-------------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 14
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: BANK LEUMI TRUST COMPANY OF NEW YORK
$7,500,000.00 By: /s/ John Koenigsberg
--------------------------------
Title: Vice President
By: /s/ [signature illegible]
--------------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 15
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE BANK OF NOVA SCOTIA
$7,500,000.00 By: /s/ T. M. Pitcher
--------------------------------
Title: Authorized Signatory
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 16
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: CITIZENS BANK OF MASSACHUSETTS
$7,500,000.00 By: /s/ Anne Forbes Van Nest
--------------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 17
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: CORESTATES BANK, N.A.
$7,500,000.00 By: /s/ [signature illegible]
--------------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 18
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: CREDIT SUISSE FIRST BOSTON
$7,500,000.00 By: /s/ [signature illegible]
--------------------------------
Title: Vice President
By: /s/ [signature illegible]
--------------------------------
Title: Associate
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 19
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: KREDIETBANK, N.V.
$7,500,000.00 By: /s/ Robert Snauffer
--------------------------------
Title: Vice President
By: /s/ Garling Lee
--------------------------------
Title: Assistant Treasurer
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 20
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: LTCB TRUST CO.
$7,500,000.00 By: /s/ [signature illegible]
--------------------------------
Title: Executive Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 21
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE NORTHERN TRUST COMPANY
$7,500,000.00 By: /s/ [signature illegible]
--------------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 22
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE SAKURA BANK, LIMITED
$7,500,000.00 By: /s/ Yasumasa Kikuchi
--------------------------------
Title: Senior Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 23
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE SANWA BANK, LIMITED
$7,500,000.00 By: /s/ Yutaka Higashino
--------------------------------
Title: Senior Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 24
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing First Amendment to Credit Agreement and
Consent to Subordination Terms dated March 3, 1997.
Revolving Credit Commitment: THE SUMITO BANK, LIMITED,
NEW YORK BRANCH
$7,500,000.00 By: /s/ Leslie L Rogers
--------------------------------
Title: Vice President
[Signature Page to First Amendment to Credit Agreement and Consent to
Subordination Terms dated March 3, 1997]
<PAGE> 25
EXHIBIT A TO FIRST AMENDMENT TO CREDIT
AGREEMENT AND CONSENT TO
SUBORDINATION TERMS DATED AS
OF MARCH 3, 1997
2. PRIORITY; SUBORDINATION.
(a) NO PAYMENT IF DEFAULT ON SENIOR INDEBTEDNESS. No payment of
principal of, premium, if any, or interest on this Note or on account of any
purchase or redemption or other acquisition of the Note, whether at maturity or
otherwise, shall be made upon, or accepted with respect to, this Note, and the
Holder shall not initiate any action to accelerate the maturity of the Note or
exercise any remedy to seek collection if at the time of such payment the Holder
has received written notice from the Company or a holder of Senior Debt (as
defined below) that there exists or, after giving effect to such payment, there
would exist any default in respect of any Senior Debt or under any agreement
pursuant to which such Senior Debt was issued (a "Default"); PROVIDED, HOWEVER,
that the foregoing restriction shall cease to apply with respect to a Default
upon the earliest to occur of (i) the commencement by any holder of Senior Debt
of the exercise of its remedies against the Company or its property including,
without limitation, any action, suit or other legal proceeding against the
Company or its property based upon such Default, or (ii) at the expiration of
180 days after the date of such notice if no holder of Senior Debt shall have
commenced the exercise of its remedies against the Company or its property
including, without limitation, any action, suit or other legal proceeding
against the Company or its property based upon such Default. Upon the maturity
of any Senior Debt by lapse of time, acceleration or otherwise, all principal
or, premium, if any, interest and other amounts due or to become due on all such
Senior Debt shall first be paid in full in cash, cash equivalents or in any
other manner acceptable to the holders of Senior Debt (hereinafter, "Payment in
Full" or "Paid in Full"), or such payment shall have been provided for to the
satisfaction of the holders of Senior Debt before any payment on account of
principal of, premium, if any, interest or any other amounts shall be made upon
this Note.
<PAGE> 26
(b) PAYMENT UPON DISSOLUTION, ETC.
(i) In the event of (x) any insolvency or bankruptcy
proceedings, or any receivership, liquidation, reorganization or other similar
proceedings in connection therewith, relative to the Company or to its
creditors, as such, or to its assets or (y) the dissolution or other winding up
of the Company whether total or partial, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy proceedings, or (z) any
assignment for the benefit of creditors or any marshaling of the material assets
or material liabilities of the Company, then, and in any such event, (A) the
holders of all Senior Debt shall first be entitled to receive Payment in Full of
all principal, premium, if any, interest and other amounts due or to become due
on the Senior Debt (including, without limitation, any interest and charges
accruing thereon in any such proceeding, notwithstanding any law to the
contrary) before any payment on account of principal, premium, if any, interest
or any other amounts is made on this Note, and (B) in any such proceedings, any
payment that may be payable or deliverable in respect of this Note shall be paid
to the holders of the Senior Debt or their representatives, unless and until the
principal of, premium, if any, interest and other amounts due or to become due
on all such Senior Debt shall have been Paid in Full; PROVIDED, HOWEVER, that in
the event that such payment consists solely of shares of stock or securities of
the Company as reorganized the payment of which is subordinated, at least to the
same extent as the Note, to the payment of all Senior Debt and such payment is
authorized by an order or decree made by a court of competent jurisdiction in a
reorganization proceeding under any applicable law pursuant to a plan of
reorganization and the rights of the holders of Senior Debt are not impaired or
otherwise altered adversely by such reorganization or adjustment, no such
payment shall be required hereby to be made to the holders of the Senior Debt or
their representatives.
(ii) In the event that any such payment shall be received by
the Holder in violation of the subordination provisions hereof before all Senior
Debt is Paid in Full, such payment or distribution shall be received and held in
trust for and shall be paid over to the holders of all Senior Debt remaining
unpaid, or their representatives, until such Senior Debt shall have been Paid in
Full, after giving effect to any concurrent payment or distribution or provision
thereof to the holders of such Senior Debt.
(c) SUBROGATION. Subject to the prior Payment in Full of all Senior
Debt, the Holder shall be subrogated to the rights of the holders of Senior Debt
to receive payments or distributions of assets of the Company applicable to the
Senior Debt to the extent that payments otherwise payable to the Holder under
the Note have been applied to the payment of the Senior Debt; PROVIDED, HOWEVER,
that the subrogation rights of the holder of the Note shall be fully
subordinated to the rights and remedies of the holders of Senior Debt.
(d) AGREEMENTS OF HOLDER.
(i) The Holder agrees that upon the commencement of any
bankruptcy, insolvency or other similar case or proceeding relative to the
Company, or to its creditors, as such, or to its assets, the Holder shall take
such actions as may be necessary or appropriate to effectuate the subordination
provision hereof, including, without limitation, that the Holder shall (i)
timely file a proof of claim in respect of the Note and the indebtedness and
obligations evidenced hereby, provided, however, that if the Holder fails within
thirty (30) days prior to the expiration of any claims bar date to file a proof
of claim, any holder of Senior Debt shall be
<PAGE> 27
entitled to file such a proof of claim in respect thereof in the name of the
Holder and the Holder irrevocably appoints the holders of Senior Debt and their
representatives as its attorney-in-fact solely for such purpose; (ii) not oppose
any motion filed or supported by any holder of Senior Debt for relief from stay
or adequate protection in respect of the Senior Debt; and (iii) not file or
accept any reorganization plan that impairs or otherwise alters adversely the
rights of the holders of Senior Debt.
(ii) The Company and the Holder, for themselves and their
successors and assigns, covenant to execute and deliver to the holders of Senior
Debt, such further instruments and to take such further action as the holders of
Senior Debt may at any time or times reasonably request in order to carry out
the provisions hereof.
(iii) No holder of Senior Debt shall be prejudiced in its
right to enforce the subordination of this Note by any act or failure to act on
the part of the Company.
(iv) Without notice to or the consent of the Holder, the
holders of Senior Debt may at any time and from time to time, in their
discretion, without impairing or releasing the subordination herein made, change
the manner, place or terms or payment, or change or extend the time of payment
of or renew or alter the Senior Debt, or amend or supplement in any manner any
instrument evidencing the Senior Debt, any agreement pursuant to which the
Senior Debt was issued or incurred or any instrument securing or relating to the
Senior Debt; release any person liable in any manner for the payment or
collection of the Senior Debt; exercise or refrain from exercising any rights in
respect of the Senior Debt against the Company or any other person; apply any
moneys or other property paid by any person or release in any manner to the
Senior Debt; or accept or release any security for the Senior Debt.
(e) CONTINUING OFFER. This Section shall constitute a continuing
offer to all persons who, in reliance on such provisions, become holders of, or
continue to hold, Senior Debt, and such provisions of this Section are made for
the benefit of such holders and may not be amended, modified, changed or waived
without the prior written consent of the holders of Senior Debt.
(f) RIGHTS OF HOLDERS UNIMPAIRED. The foregoing provisions as to
subordination are solely for the purpose of defining the relative rights of the
holders of the Senior Debt on the one hand and the Holder on the other hand.
None of such provisions shall impair, as between the Company and the Holder, the
obligation of the Company, which is unconditional and absolute, to pay the
Holder of this Note the amounts due on this Note in accordance with the terms
hereof and of the Note Purchase Agreement, nor shall any such provisions prevent
the Holder from exercising all remedies otherwise permitted by law. Moreover,
nothing contained herein shall be deemed to limit in any way the right of the
Holder to convert, at any time and from time to time, the principal balance of
this Note into shares of GTR Stock (as defined below) pursuant to Section 3
hereof or to receive shares of GTR Stock as payment of interest hereon pursuant
to Section 2 hereof.
(g) DEFINITION OF SENIOR DEBT. For purposes hereof, "Senior Debt"
shall mean (a) the principal of, premium, if any, accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company), and any other
monetary obligations on (i) indebtedness of the Company for money borrowed,
whether
<PAGE> 28
outstanding on the date of this Note or thereafter created, incurred or assumed
(including but not limited to nonrecourse borrowings secured by receivables),
(ii) guaranties by the Company of indebtedness for money borrowed by any other
person, or reimbursement obligations under letters of credit, in either case,
whether outstanding on the date of this Note or thereafter created, incurred or
assumed, and (iii) indebtedness evidenced by notes (other than the Note),
debentures, bonds or other instruments of indebtedness for the payment of which
the Company is responsible or liable, by guarantees or otherwise, whether
outstanding on the date of this Note or thereafter created, incurred or assumed,
and (b) modification, renewals, extensions, refinancings, refundings and
replacements of any such indebtedness, obligations or guarantees; unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is expressly provided that such indebtedness, obligations or
guarantees or such modification, renewal, extension, refinancing, refunding or
replacement thereof are not superior in right of payment to this Note and the
holder of such indebtedness has consented to same; provided, however, that
Senior Debt shall not be deemed to include any obligations of the Company to any
of its subsidiaries. Without in any way limiting the scope of the foregoing, it
is expressly acknowledged and agreed that Senior Debt shall include all
indebtedness, obligations and guaranties of the Company and its subsidiaries
under that certain Credit Agreement dated November 14, 1996 among the Company,
certain of its subsidiaries, Fleet National Bank, as administrative agent, The
First National Bank of Boston, as documentation agent, and the lender parties
thereto and under all notes, instruments, agreements and documents entered into
pursuant thereto or in connection therewith and all modifications, renewals,
extensions, refinancings, refundings and replacements thereof.
<PAGE> 1
EXHIBIT 10.50
NOTE PURCHASE AGREEMENT
NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of February 27,
1997, by and between Genzyme Corporation, a Massachusetts corporation (the
"COMPANY"), and Credit Suisse First Boston (Hong Kong) Ltd.
(the "PURCHASER").
The Company wishes to sell and the Purchaser wishes to buy, subject to
the terms and conditions set forth in this Agreement, a convertible note of the
Company in the principal amount of $13,000,000, having the terms and conditions
and in the form attached hereto as EXHIBIT A (the "NOTE"), in reliance on the
exemption from securities registration afforded by the provisions of Regulation
D under the Securities Act of 1993, as amended (the "SECURITIES ACT"). The Note
will be convertible, in accordance with its terms, into shares (the "CONVERSION
SHARES") of the Company's Tissue Repair Division Common Stock, $.01 par value
(the "GTR STOCK").
The parties hereto agree as follows:
1. PURCHASE AND SALE OF NOTE.
1.1 AGREEMENT TO PURCHASE AND SELL. Upon the terms and subject to the
conditions set forth herein, the Company agrees to sell at the Closing (as
defined below), and the Purchaser agrees to purchase, the Note at the purchase
price in the amount of thirteen million dollars ($13,000,000) (the "PURCHASE
PRICE").
1.2 CLOSING. Subject to the satisfaction of the conditions set forth
herein, the closing of the purchase and sale of the Note (the "CLOSING") will be
deemed to occur when this Agreement, and the other Transaction Documents (as
defined below), have been executed and delivered by both the Company and the
Purchaser, and full payment of the Purchase Price has been made by the Purchaser
by wire transfer of same day funds to an account designated by the Company
against delivery by the Company of the duly executed Note.
1.3 FINANCING FEE. The Company will pay to Credit Suisse First Boston
Corporation a financing fee in the amount of four percent (4%) of the Purchase
Price in the same day funds wired to an account designated by Credit Suisse
First Boston Corporation to the Company.
1.4 CERTAIN DEFINITIONS. When used herein (A) "business day" shall
mean any day on which the New York Stock Exchange and commercial banks in the
cities of Boston and New York are open for business and (B) an "affiliate" of a
party shall mean any person or entity controlling, controlled by or under common
control with that party.
<PAGE> 2
2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser hereby makes the following representations and warranties
to the Company (which shall be true as of the Closing and as of any such later
date as contemplated hereunder) and agrees with the Company that:
2.1 AUTHORIZATION; ENFORCEABILITY. The Purchaser is duly and validly
organized, validly existing and in good standing as a corporation under the laws
of the state of its incorporation with full power and authority to purchase the
Note and to execute and deliver this Agreement. This Agreement constitutes the
Purchaser's valid and legally binding obligation, enforceable in accordance with
its terms, except as such enforcement may be limited by (i) applicable
bankruptcy, insolvency, reorganization or other laws of general application
relating to or affecting the enforcement of creditors' rights generally and (ii)
general principles of equity.
2.2 ACCREDITED INVESTOR; INVESTMENT INTENT. The Purchaser is an
accredited investor, as defined in Rule 501 of Regulation D under the Securities
Act. The Purchaser is acquiring the Note solely for the Purchaser's own account
for investment purposes as a principal and not with a view to the public resale
or distribution of all or any part thereof; provided, however, that in making
such representation, the Purchaser does not agree to hold the Note for any
minimum or specific term and reserves the right to sell, transfer or otherwise
dispose of the Note at any time in accordance with the provisions of this
Agreement and with Federal and state securities laws applicable to such sale,
transfer or disposition.
2.3 INFORMATION. The Company has provided the Purchaser with certain
information regarding the Company and has granted to the Purchaser the
opportunity to ask questions of and receive answers from representatives of the
Company, its officers, directors, employees and agents concerning the terms and
conditions of the purchase of sale of the Note hereunder, and the Company and
its business and prospects.
2.4 LIMITATIONS ON DISPOSITION. The Purchaser acknowledges that the
Note is a "restricted security" under the Securities Act and that under the
Securities Act and applicable rules and regulations neither the Note nor any
interest therein may be transferred or resold without registration under the
Securities Act or unless pursuant to an exemption therefrom. The Purchaser
agrees not to sell, transfer or otherwise dispose of the Note or any interest
therein unless and until:
(a) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(b) (i) the Purchaser shall have notified the Company in advance of
the proposed disposition, and (ii) if reasonably requested by the
Company, Purchaser shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such disposition
will not require registration of Note under the Securities Act. It is
agreed that no opinion of counsel will be required for the transfer
2
<PAGE> 3
of the Note or any interest therein to an affiliate of the Purchaser or
with respect to the sale thereof made pursuant to Rule 144 under the
Securities Act ("Rule 144"); PROVIDED, HOWEVER, that prior to any sale
made pursuant to Rule 144, the Purchaser will furnish to the Company,
upon its request, a certificate setting forth such representations as
are customarily given by selling shareholder to the issuer in a Rule
144 transaction.
2.5 LEGEND. The Purchaser understands that the Note shall bear at
issuance the following legend.
"This Note has not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and may not be sold or
transferred in the absence of an effective registration statement
under the Securities Act or an exemption from the registration
requirements thereunder."
The legend set forth above shall be removed and the Company shall
issue a new Note without such legend to the holder of the Note if (i) the sale
of the Note is registered under the Securities Act, or (ii) the Note can be
sold publicly pursuant Rule 144(k) (or any successor provision).
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby makes the following representations and warranties
to the Purchaser (which shall be true as of the Closing and as of any such later
date as contemplated hereunder) and agrees with the Purchaser that:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the
Company and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has all requisite corporate power and authority to carry on its business as now
conducted. Each of the Company and its subsidiaries is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on the consolidated
business or financial condition of the Company and its subsidiaries take as a
whole. Each of the Company and its subsidiaries is not the subject of any
pending or, to its knowledge, threatened investigation or administrative or
legal proceeding by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, the Securities and Exchange Commission (the
"Commission") or any state securities commission or other governmental entity
which could reasonably be expected to have a material adverse effect on the
consolidated business or financial condition of the Company. The term
"subsidiaries" means corporations in which the Company has an equity interest of
greater than 50%.
3.2 AUTHORIZATION; CONSENTS. All corporate action on the part of the
Company by its officers, directors and shareholders necessary for (A) the
authorization, execution and delivery of, and the performance by the Company of
its obligation under, (i) this Agreement, (ii) the Note, (iii) the Registration
Rights Agreement (as defined below) and (iv) all other agreements, documents,
certificates or other instruments delivered by the Company at the
3
<PAGE> 4
Closing (the instruments described in (i), (ii), (iii) and (iv) being
collectively referred herein as the "TRANSACTIONS DOCUMENTS"), and (B) except to
the extent that the approval described in Section 3(i)(ii) of the Note may be
required by the NASD or other association or exchange on which the GTR Stock is
quoted or listed, the authorization, reservation for issuance, and issuance and
delivery of the Conversion Shares upon conversion of the Note has been taken.
The Transaction Documents constitute valid and legally binding obligations of
the Company, enforceable in accordance with their respective terms, except as
other such enforcement may be limited by (i) applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or affecting the
enforcement of creditors' rights generally and (ii) general principles of
equity. Except as otherwise provided in the Transaction Documents, the Company
has obtained all governmental or regulatory consents and approvals required for
it to execute, deliver and perform its obligations under the Transaction
Documents.
3.3 DISCLOSURE DOCUMENTS; MATERIAL AGREEMENTS; OTHER INFORMATION. The
Company has filed with the Commission: (i) the Company's Annual Report on Form
10-K for the year ended December 31, 1995, (ii) Quarterly Reports on form 10-Q
for the quarters ended March 31, June 30 and September 30, 1996, (iii) all
Current Reports on Form 8-K required to be filed with the Commission since
December 31, 1995 and (iv) the Company's definitive Proxy Statement for its 1996
Annual Meeting of Shareholders (collectively, the "DISCLOSURE DOCUMENTS"). The
Company is not aware of any event that would require the filing of a Form 8-K
after the Closing, except with regard to matters disclosed in the press release,
dated February 3, 1997 (the "Press Release"), attached hereto as Exhibit 3.3.
Each Disclosure Document, as of the date of the filing thereof with the
Commission, conformed in all material respects to the requirements of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules
and regulations thereunder, and, as of the date of such filing, such Disclosure
Document did not contain an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. All material agreements required to be filed as exhibits to the
Disclosure Documents have been filed as required; neither the Company nor any of
its subsidiaries is in breach of any such agreement where such breach is
reasonably likely to have a material adverse effect on the business or financial
condition of the Company. The information provided to the Purchaser as described
in paragraph 2.3 above does not contain an untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
3.4 CAPITALIZATION. The capitalization of the Company as of December
31, 1996 is as set forth on EXHIBIT 3.4 hereto.
3.5 VALID ISSUANCE. The Note, when issued, sold and delivered in
accordance with the terms hereof, and the Conversion Shares and the Interest
Payment Shares (as defined in the Note), when issued in accordance with the
terms of the Note, will be duly and validly issued, fully paid and
nonassessable, free and clear of any liens, claims, preemptive rights or
encumbrances imposed by or through the Company and, based in part upon the
representations of the Purchaser in this Agreement, will be issued in compliance
with all applicable Federal and state securities laws.
4
<PAGE> 5
3.6 NO CONFLICT WITH OTHER INSTRUMENTS. Neither the Company nor any
of its subsidiaries is in violation or default of any provisions of its
Certificate of Incorporation or Bylaws as amended and in effect on and as of the
date hereof or of any material provision of any material instrument or contract
to which it is a party or by which it is bound, or of any provision of any
Federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company, which would have a material adverse affect
on the Company's consolidated business or financial condition. The execution,
delivery and performance of the Note, this Agreement and the other Transaction
Documents, and the consummation of the transactions contemplated hereby and
thereby, will not result in any such violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument or contract or an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company or of any of its subsidiaries.
3.7 FINANCIAL CONDITION; TAXES; LITIGATION.
3.7.1 The Company's financial condition is, in all material
respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business and normal year-end adjustments that are not, in the
aggregate, materially adverse to the Company. Except as otherwise described in
the Disclosure Documents as of the date hereof or in the Press Release, there
have been no material adverse changes to the Company's consolidated business or
financial condition since September 30, 1996.
3.7.2 The financial statements contained in the Disclosure
Documents have been prepared with generally accepted accounting principles
consistently applied and fairly present the consolidated financial condition of
the Company as of the dates of the balance sheets included therein and the
consolidated results of its operations and cash flows for the period then ended
(except as may be indicated therein). Without limitation the foregoing, there
are no material liabilities, contingent or actual, that are required to be
disclosed in the Disclosure Documents that are not so disclosed.
3.7.3 The Company has filed all tax returns required to be
filed by it and paid all taxes which are due, except for taxes which it
reasonably disputes or which could not reasonably be expected to have a material
adverse effect on the consolidated business or financial condition of the
Company.
3.7.4 Except as set forth in Schedule 3.7.4, there is no
material claim, litigation or administrative proceeding pending, or to the best
of the Company's knowledge, threatened, against the Company or any of its
subsidiaries, or against any officer, director or employee of the Company or any
such subsidiary in connection with such person's employment therewith. Neither
the Company nor any of its subsidiaries is a party to or subject to the
provisions of, any order, writ, injunction, judgment or decree of any court or
government agency or instrumentally which could reasonably be expected to have a
material adverse effect on the consolidated business or financial condition of
the Company.
5
<PAGE> 6
3.8 REPORTING COMPANY; FORM S-3. The Company is subject to the
reporting requirements of the Exchange Act, has a class of securities registered
under Section 12 of the Exchange Act, and has filed all reports required
thereby. The Company is eligible to register for resale shares of its GTR Stock
on a registration statement on Form S-3 under the Securities Act.
3.9 INTELLECTUAL PROPERTY. The Company and its subsidiaries own,
possess or can acquire on reasonable terms adequate trademarks, trade names and
other rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property rights necessary to conduct business
now operated by them, or presently employed by them, and have not received any
notice of infringement of or conflict with asserted rights of others with
respect to any such rights that, if determined adversely of the Company or any
of its subsidiaries, would individually or in the aggregate have a material
adverse effect on the consolidated business or financial condition of the
Company.
3.10 REGISTRATION RIGHTS; RIGHTS OF PARTICIPATION. Except as
described on Schedule 3.10 hereto, (A) the Company has not granted or agreed to
grant to any person or entity any rights (including "piggy back" registration
rights) to have any securities of the Company registered with the Commission or
any other governmental authority and (B) no person or entity, including, but no
limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by this Agreement or any other Transaction
Document which has not been waived.
3.11 TRADING ON NASDAQ. The GTR Stock in authorized for quotation on
the Nasdaq National Market, and trading in the GTR Stock on Nasdaq has not been
suspended. Shareholder approval for the issuance of the Note is not required
under NASD Rule 4460.
3.12 SOLICITATION. Neither the Company nor any of its subsidiaries or
affiliates, nor any person acting on its or their behalf, (i) has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the Note or (ii) has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under any circumstances
that would require registration of the Note under the Securities Act.
3.13 OTHER FEES. The Company is not obligated to pay any compensation
or other fee, cost or related expenditure to any underwriter, broker, agent or
other representative other than the Placement Agent in connection with the
transactions contemplated hereby.
4. COVENANTS OF THE COMPANY.
4.1 CORPORATE EXISTENCE. The Company shall, during the term of the
Registration Rights Agreement (as defined in the Note), so long as the Purchaser
or any affiliate of the Purchaser beneficially owns the Note (or any interest
therein), any Conversion Shares or Interest Payment Shares (but in no event
longer than three (3) years from the date of Closing), maintain its corporate
existence in good standing and shall pay all its taxes when due except
6
<PAGE> 7
for taxes which the Company reasonably disputes or which could not reasonably be
expected to have a materially adverse change on the consolidated business or
financial condition for the Company.
4.2 PROVISION OF INFORMATION. The Company shall provide the Purchaser
with copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy statements, in each such case promptly
after filing thereof with the Commission, until the conversion or redemption of
the Note in its entirety.
4.3 BLUE-SKY QUALIFICATION. The Company shall, on or before the
Closing, take such action as is necessary to qualify the Note for sale under
applicable state or "blue sky" laws or obtain an exemption therefrom, and shall
provide evidence of any such action to the Purchaser.
4.4 REPORTING STATUS. As long as the Purchaser or any affiliate of
the Purchaser beneficially owns the Note, or any interest therein, or any
Conversion Shares or Interest Payment Shares, and until the date on which any of
the foregoing may be sold to the public pursuant to Rule 144(k) (or any
successor rule or regulation), (i) the Company shall timely file with the
Commission all reports required to be so filed pursuant to the Exchange Act and
(ii) the Company shall not terminate its status as an issuer required by the
Exchange Act to file reports thereunder even if the Exchange Act or the rules
and regulations thereunder would permit such termination.
4.5 USE OF PROCEEDS. The Company shall use the proceeds from the sale
of the Note for general corporate purposes and shall not use such proceeds to
make a loan to or an investment in any other corporation, partnership or other
entity.
4.6 LISTING. The Company shall promptly secure the designation and
quotation of the Conversion Shares on the Nasdaq National Market and shall use
its best efforts to maintain the listing of the shares of GTR Stock on the
Nasdaq National Market or another national securities exchange or quotation
system.
4.7 USE OF PURCHASER NAME. The Company shall not use, directly or
indirectly, the Purchaser's name in any advertisement, announcement, press
release or other similar communication unless it has received the prior written
consent of the Purchaser for the specific use contemplated.
4.8 COMPANY'S INSTRUCTIONS TO TRANSFER AGENT. The Company shall
instruct its transfer agent (the "Transfer Agent") (i) to convert the Note into
GTR Stock in accordance with the terms of the Note upon receipt of a valid
Conversion Notice (as defined in the Note) from the Purchaser, (ii) to issue
certificates representing the number of shares of GTR Stock specified in such
Conversion Notice, free to any restrictive legend, in the name of the Purchaser
or its nominee and (iii) to deliver such certificates to the Purchaser no later
than the close of business on the third (3rd) business day following the
Conversion Date (as defined in the Note). The Company represents to and agrees
with the Purchaser that it will not give any instruction to the Transfer Agent
that will conflict with the foregoing instruction or otherwise
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<PAGE> 8
restrict the Purchaser's right to convert the Note or receive Conversion Shares
in accordance with the terms of the Note, the Registration Rights Agreement and
this Agreement, respectively. In the event the Company's relationship with the
Transfer Agent should be terminated for any reason, the Transfer Agent shall
continue acting as transfer agent pursuant to the terms hereof until such time
that successor transfer agent is appointed by the Company and executes and
agrees to be bound by the terms hereof.
5. CONDITIONS TO CLOSING.
5.1 CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING. The Purchaser's
obligations at the Closing, including without limitation its obligation to
purchase the Note, are conditioned upon the fulfillment of each of the following
events:
(a) the representations and warranties of the Company set forth
in this Agreement shall be true and correct in all material
respects as of the date of the Closing as if made on such
date;
(b) the Company shall have complied with or performed all of
the agreements, obligations and conditions set forth in
this Agreement that are required to be complied with or
performed by the Company on or before the Closing;
(c) the Company shall have delivered to the Purchaser a
certificate, signed by an officer of the Company,
certifying that the conditions specified in paragraphs (a)
and (b) above have been fulfilled;
(d) the Company shall have delivered to the Purchaser an
opinion of counsel for the Company, dated as of the date of
Closing, in the form attached as EXHIBIT 5.1;
(e) the Company shall have executed and delivered the
Registration Rights Agreement;
(f) the GTR Stock shall be listed and traded on the Nasdaq
National Market;
(g) there shall have been no material adverse changes in the
Company's consolidated business or financial condition
since September 30, 1996 which have not been disclosed in
the Disclosure Documents or the Press Release; and
(h) the Company shall have authorized and reserved for issuance
upon conversion of the Note a reasonably sufficient number
of shares of GTR Stock to effect conversion of the entire
principal balance of the Note.
8
<PAGE> 9
5.2 CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The Company's
obligations at the Closing are conditioned upon the fulfillment of each of the
following events;
(a) the representatives and warranties of the Purchaser shall
be true and correct in all material respects of the date of
the Closing as if made on such date;
(b) the Purchaser shall have complied with or performed all of
the agreements, obligations and conditions set forth in
this Agreement that are required to be complied with or
performed by the Purchaser on or before the Closing; and
(c) the Purchaser shall have delivered to the Company a letter,
dated as of the date of the Closing and addressed to
Coopers & Lybrand, L.L.P., describing the factors on which
a determination by a holder of the Note to accept cash or
securities under the Note would be based.
6. INDEMNIFICATION.
The Company agrees to indemnify and hold harmless the Purchaser and its
officers, directors, employees and agents, and each person who controls the
Purchaser within the meaning of the Securities Act or the Exchange Act (each, a
"Purchaser Indemnified Party") against any losses, claims, damages, liabilities
or reasonable out-of-pocket expenses (including the reasonable fees and
disbursements of counsel) as incurred, joint or several, to which it, they or
any of them, may become subject and not otherwise reimbursed, arising out of or
in connection with the breach by the Company of any of its representations,
warranties or covenants made herein.
The Purchaser agrees to indemnify and hold harmless the Company and its
officers, directors and agents, and each person who controls the Company within
the meaning of the Securities Act or the Exchange Act (each, a "Company
Indemnified Party") (a Purchaser Indemnified Party and a Company Indemnified
Party are each hereinafter referred to as an "Indemnified Party') against any
losses, claims, damages, liabilities or expenses (including the fees and
disbursements of counsel) as incurred, joint or several, to which it, they or
any of them, may become subject and not otherwise reimbursed, arising out of or
in connection with the breach by the Purchaser of any of its representatives,
warranties or covenants made herein.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought
hereunder, such Indemnified Party will, if a claim in respect thereof is to be
made against the other party (the "Indemnifying Party"), deliver to the
Indemnifying Party a written notice of the commencement thereof and the
Indemnifying Party shall have the right to participate in and to assume the
defense thereof with counsel reasonably selected by the Indemnifying Party,
provided, however, that an Indemnified Party shall have the right to retain its
own counsel, with the reasonably incurred fees and expenses of such counsel to
be paid by the Company, if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate
9
<PAGE> 10
due to actual or potential conflicts of interest under applicable standards of
professional conduct between such Indemnified Party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the Indemnifying Party within a reasonable time of the commencement of
any such action will not relieve the Indemnifying Party of any of its
obligations hereunder with respect to such action except to the extent such
failure is prejudicial to the Indemnifying Party's ability to defend any such
action.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of pending or threatened action in
respect of which an Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on any claims that are the subject matter of such action. An
Indemnifying Party will not be liable for any settlement of any action or claim
effected without its written consent.
7. MISCELLANEOUS.
7.1 SURVIVAL; SEVERABILITY. The representation, warranties, covenants
and indemnities made by the parties herein shall survive the Closing
notwithstanding any due diligence investigation made by or on behalf of the
party seeking to rely thereon. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to either party.
7.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. The Purchaser may assign its rights hereunder, in connection
with any private sale or transfer of the Note, as long as, as a condition
precedent to such transfer, the transferee executes an acknowledgment agreeing
to be bound by the applicable provisions of this Agreement, in which case the
term "Purchaser" shall be deemed to refer to such transferee as though such
transferee were an original signatory hereto.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of New York without regard to the conflict of laws
provisions hereof.
7.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
7.5 HEADINGS. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
10
<PAGE> 11
7.6 NOTICES. Any notice, demand or request required or permitted to
be given by the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given (i) when delivered personally or
by verifiable facsimile transmission (with a hard copy to follow) on or before
5:00 p.m., eastern time, on a business day or, if such day is not a business
day, on the next succeeding business day, (ii) on the next business day after
timely delivery to an overnight courier and (iii) on the third business day
after deposit in the U.S. mail (certified or registered mail, return receipt
requested, postage prepaid), addressed to the parties as follows:
If to the Company:
Genzyme Corporation
One Kendall Square
Cambridge, Massachusetts 02139
Attention: Chief Legal Counsel
Fax: 617-252-7553
If to the Purchaser:
Credit Suisse First Boston (Hong Kong) Ltd.
One Exchange Square, 16th Floor
Hong Kong
Attention: Matthew Lawrence
Fax: 852-2845-2456
With a copy to:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attention: Raymond J. Dorado, Esq.
Fax: 212-325-8102
With a copy to:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, New York 10010
Attention: Allan Weine/John McAvoy
Fax: 212-325-6519
7.7 EXPENSES. Each of the Company and the Purchaser shall pay all
costs and expenses that it incurs in connection with the negotiation, execution,
delivery and performance of this Agreement.
11
<PAGE> 12
7.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Note and the
other Transaction Documents constitute the entire agreement between the parties
with regard to the subject matter hereof and thereof, superseding all prior
agreements or understandings, whether written or oral, between the parties.
Except as expressly provided herein, neither this Agreement nor any term hereof
may be amended except pursuant to a written instrument executed by the Company
and the Purchaser, and no provision hereof may be waived other than by a written
instrument executed by the Company and the Purchaser, and no provision hereof
may be waived other than by a written instrument signed by the party against
whom enforcement of any such waiver is sought.
7.9 ARBITRATION. Any controversy or claim arising out of or related
to this Agreement or the breach thereof, shall be settled by binding arbitration
in New York City in accordance with the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"). A proceeding shall be commenced upon
written demand by one party to the other. The arbitrator(s) shall enter a
judgment by default against any third party which fails or refuses to appear in
any properly noticed arbitration proceeding. The proceeding shall be conducted
by one (1) arbitrator, unless the amount alleged to be in dispute exceeds two
hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators
shall preside. The arbitrator(s) will be chosen by the parties from a list
provided by the AAA, and if they are unable to agree within ten (10) days, the
AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe it is appropriate in light of the merits of parties'
respective positions in the issues in dispute. Each party submits irrevocably to
the jurisdiction of any state court sitting in New York County, New York or to
the United States District Court for the Southern District of New York for
purposes of enforcement of any discovery, order, judgment or award in connection
with such arbitration. The award of the arbitrator(s) shall be final and binding
upon the parties and may be enforced in any court having jurisdiction.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first-above written.
GENZYME CORPORATION
By: /s/ David J. McLachlan
----------------------------------------
Name: David J. McLachlan
Title: Executive Vice President, Finance
and Chief Financial Officer
CREDIT SUISSE FIRST BOSTON (HONG KONG) LTD.
By: /s/ Matthew T. Lawrence
----------------------------------------
Name: Matthew T. Lawrence
Title: Director
<PAGE> 1
FINANCIAL STATEMENTS EXHIBIT 13.1
<TABLE>
<CAPTION> PAGE NO.
<S> <C> <C>
I. GENZYME GENERAL
Combined Selected Financial Data.................................................................. 2
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 5
Combined Balance Sheets - December 31, 1997 and 1996.............................................. 12
Combined Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995.......... 13
Combined Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995.......... 15
Notes to Combined Financial Statements............................................................ 17
Report of Independent Accountants................................................................. 30
II. GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Selected Financial Data.............................................................. 31
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 34
Consolidated Balance Sheets - December 31, 1997 and 1996.......................................... 45
Consolidated Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995...... 47
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995...... 49
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996
and 1995........................................................................................ 51
Notes to Consolidated Financial Statements........................................................ 53
Report of Independent Accountants................................................................. 83
</TABLE>
1
<PAGE> 2
GENZYME GENERAL
COMBINED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales ................................. $ 529,927 $ 424,483 $ 304,373 $ 238,645 $ 183,366
Net service sales ................................. 55,835 61,638 47,230 49,686 50,511
Revenues from research and development contracts:
Related parties ................................. 8,041 23,011 26,758 20,883 29,478
Other ........................................... 3,400 2,310 202 1,513 2,332
--------- --------- --------- --------- ---------
Total revenues .................................. 597,203 511,442 378,563 310,727 265,687
Operating costs and expenses:
Cost of products sold (1) ......................... 206,028 155,930 113,964 92,226 64,704
Cost of services sold ............................. 35,451 42,889 31,137 32,116 34,558
Selling, general and administrative (1) ........... 173,020 135,153 97,520 80,026 72,051
Research and development (including research and
development related to contracts)................. 74,192 69,969 57,907 51,696 45,526
Amortization of intangibles ....................... 12,534 8,849 4,647 4,741 5,964
Purchase of in-process research and
development (2)................................... -- 130,639 14,216 -- 24,000
Other (3).......................................... -- 1,465 -- -- 26,517
--------- --------- --------- --------- ---------
Total operating costs and expenses .............. 501,225 544,894 319,391 260,805 273,320
--------- --------- --------- --------- ---------
Operating income (loss) ............................. 95,978 (33,452) 59,172 49,922 (7,633)
Other income (expenses):
Equity in loss of unconsolidated affiliates ....... (5,281) (2,633) (1,810) (1,353) --
Other (1) ......................................... (2,000) 1,711 1,608 (9,752) 9,192
Investment income ................................. 10,038 13,909 7,428 9,072 12,209
Interest expense .................................. (8,108) (6,842) (1,069) (1,354) (2,500)
--------- --------- --------- --------- ---------
Total other income (expenses) ................... (5,351) 6,145 6,157 (3,387) 18,901
--------- --------- --------- --------- ---------
Income (loss) before income taxes.................... 90,627 (27,307) 65,329 46,535 11,268
Provision for income taxes .......................... (33,601) (20,206) (30,506) (16,341) (2,812)
--------- --------- --------- --------- ---------
Net income (loss) ................................... 57,026 (47,513) 34,823 30,194 8,456
Tax benefit allocated from Genzyme Tissue Repair .... 17,666 17,011 8,857 1,860 9,564
Tax benefit allocated from Genzyme Molecular
Oncology .......................................... 2,755 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) attributable to Genzyme General
Division Common Stock ("GGD Stock") (4,6,11) .... $ 77,447 $ (30,502) $ 43,680 $ 32,054 $ 18,020
========= ========= ========= ========= =========
</TABLE>
2
<PAGE> 3
GENZYME GENERAL
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS DATA (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
GENZYME GENERAL COMMON SHARE DATA:
Net income (loss) attributable to GGD Stock (4) $77,447 $(30,502) $ 43,680 $ 32,054 $18,020
======= ======== ======== ======== =======
Per Genzyme General common share-basic (4,5,6):
Net income (loss) ............................. $ 1.01 $ (0.45) $ 0.79 $ 0.67 $ 0.37
======= ======== ======== ======== =======
Weighted average shares outstanding (5)........ 76,531 68,289 55,531 48,141 48,075
======= ======== ======== ======== =======
Per Genzyme General common and common
equivalent share-diluted (4,5,6):
Net income (loss) ............................. $ 0.98 $ (0.45) $ 0.68 $ 0.58 $ 0.36
======= ======== ======== ======== =======
Adjusted weighted average shares outstanding (5) 78,925 68,289 63,967 55,321 56,282
======= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET DATA (2): DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and investments (7) ................... $ 193,197 $ 171,725 $278,663 $128,652 $168,953
Working capital ............................ 307,988 381,373 308,036 83,314 99,503
Total assets ............................... 1,203,056 1,229,519 854,586 630,144 532,357
Long-term debt and capital lease obligations
excluding current portion (8,9) ........... 117,978 223,998 124,473 126,555 144,674
Division equity (10) ....................... 980,876 884,225 659,281 395,651 324,391
</TABLE>
There were no cash dividends paid.
NOTES TO SELECTED FINANCIAL DATA:
(1) In the fourth quarter of 1997, Genzyme General recorded $29.2 million of
charges mainly associated with its Pharmaceutical business and Surgical
Products businesses and the sale of Genetic Design, Inc.("GDI"), which was
sold in 1996. This resulted in (i) an $18.1 million charge to cost of
products sold primarily related to the melatonin, bulk pharmaceuticals and
fine chemical product lines which are being discontinued by Genzyme
General; (ii) charges of $5.5 million to cost of products sold and $3.5
million to selling, general and administrative("SG&A") expense primarily
related to the manufacturing and selling of the Sepracoat(TM) product line,
which was also discontinued after an advisory panel of the U.S. Food and
Drug Administration (the "FDA") recommended against granting market
approval of this product in 1997; and (iii) a $2.0 million charge to other
expense related to the uncertainty of collection on certain notes
receivable.
(2) Genzyme General acquired: in 1996 the assets of Deknatel Snowden Pencer,
Inc. ("DSP") and all of the Callable Common Stock of Neozyme II Corporation
("Neozyme II"); in 1995 the publicly-held, minority interest in IG
Laboratories, Inc. ("IG"); and, in 1993, all of the rights to one of the
two remaining development programs of Neozyme I Corporation ("Neozyme I").
In connection with these transactions, all of which were accounted for as
purchases, Genzyme General charged to operations the following amounts
which represented the purchase of in-process research and development:
1996, $130.6 million; 1995, $14.2 million; and 1993, $24.0 million.
(3) In 1996, Genzyme General incurred restructuring charges of $1.5 million
related to the consolidation of laboratory operations in its diagnostic
services business and to the consolidation of foreign operations in its
surgical products business in connection with certain acquisitions. In
1993, Genzyme General incurred restructuring charges of $2.8 million
related to the consolidation of laboratory operations in its diagnostic
services business and wrote off $23.7 million for the value of impaired
goodwill associated primarily with IG's acquisition of GDI in 1992.
(4) Net income (loss) attributable to Genzyme General and net income (loss) per
common and common equivalent share of GGD Stock for the year ended December
31, 1993 gives effect to the provisions of the Management and Accounting
Policies adopted by the Genzyme Board of Directors (the "Genzyme Board") in
connection with the creation of the Genzyme Tissue Repair Division
("Genzyme Tissue Repair" or "GTR") and, accordingly, are pro forma
presentations.
3
<PAGE> 4
(5) Reflects a July 25, 1996 2-for-1 stock split of GGD Stock effected by means
of a 100% stock dividend paid to stockholders of record on July 11, 1996.
All share and per share amounts have been restated to reflect this split.
(6) In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128") which established a different method of computing net income
per share ("EPS") than is required under the provisions of Accounting
Principles Board Opinion No. 15 ("APB 15"). The Company adopted SFAS 128 in
the fiscal quarter ending December 31, 1997. All historical EPS data
presented herein has been restated to conform to the provisions of SFAS 128
(See Note A., "Summary of Significant Accounting Policies-Net Income (Loss)
Per Share" to Genzyme General's Combined Financial Statements).
(7) Cash and investments includes cash, cash equivalents, and short- and
long-term investments and excludes investment in equity securities.
(8) In March 1996, holders of the 6 3/4% Convertible Subordinated Notes due
2001 (the "Notes") issued by Genzyme in October 1991 for net proceeds of
$97.3 million, converted such notes into 3,782,496 shares of GGD Stock and
255,000 shares of Genzyme Tissue Repair Division Common Stock ("GTR
Stock").
(9) In June 1996, the Company's $15.0 million credit line with a commercial
bank was increased to $215.0 million in connection with the acquisition of
DSP in July 1996. In November 1996, this credit line was refinanced with a
syndicated group of banks and the line of credit was increased to $225.0
million (the "Revolving Credit Facility"). As of December 1996, Genzyme had
$218.0 million outstanding under the Revolving Credit Facility, of which
$200.0 million was allocated to Genzyme General. As of December 31, 1997,
Genzyme had $118.0 million outstanding under the Revolving Credit Facility,
of which $95.0 million was allocated to Genzyme General. (See Note J.,
"Long-Term Debt and Leases" to Genzyme's Consolidated Financial Statements
which is incorporated herein by reference).
(10) In October 1995, Genzyme General completed the sale of 5,750,000 shares of
GGD Stock for net proceeds of $141.3 million.
(11) Genzyme formed Genzyme Molecular Oncology Division ("Genzyme Molecular
Oncology" or "GMO") in June 1997 by acquiring Pharmagenics, Inc.
("PharmaGenics") and combining it with several existing programs in the
field of oncology. The costs related to these programs were included in
Genzyme General from December 1, 1994 to June 18, 1997. Therefore, from
June 18, 1997, the costs and expenses related to GMO are no longer included
in Genzyme General's results of operations.
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of
Genzyme General Division ("Genzyme General") and Genzyme Corporation ("Genzyme"
or the "Company") as of the filing date of this Annual Report. The actual
results for both Genzyme General and Genzyme could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme General and Genzyme, respectively. Stockholders and potential investors
should consider carefully each of these risks and uncertainties in evaluating
the financial condition and results of operations of Genzyme General and
Genzyme.
Genzyme provides separate financial statements for the Company and its
subsidiaries on a consolidated basis and for each of Genzyme General, Genzyme
Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and Genzyme Molecular
Oncology Division ("Genzyme Molecular Oncology" or "GMO"). The financial
statements of each division include the financial position, results of
operations and cash flows of programs and products allocated to the division
under the Company's Restated Articles of Organization, as amended (the "Genzyme
Charter"), and the management and accounting policies adopted by the Genzyme
Board of Directors (the "Genzyme Board") to govern the relationship of the
divisions. The financial information of Genzyme General, Genzyme Tissue Repair
and Genzyme Molecular Oncology, taken together, include all accounts which
comprise the consolidated financial information presented for Genzyme and its
subsidiaries.
For purposes of financial statement presentation, all of the Company's
programs and products are allocated to Genzyme General, Genzyme Tissue Repair or
Genzyme Molecular Oncology. Notwithstanding this allocation, Genzyme continues
to hold title to all of the assets and is responsible for all of the liabilities
allocated to each of the divisions. Holders of Genzyme General Division Common
Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock")
and Genzyme Molecular Oncology Division Common Stock ("GMO Stock") have no
specific claim against the assets attributed to the division whose performance
is associated with the series of stock they hold. Liabilities or contingencies
of one division that affect Genzyme's resources or financial condition could
affect the financial condition or results of operations of the other divisions.
Stockholders and potential investors should, therefore, read this
discussion and analysis of Genzyme General's financial position and results of
operations in conjunction with the financial statements and related notes of
Genzyme General and the discussion and analysis of Genzyme's financial position
and results of operations and financial statements and related notes of
Genzyme, all of which are included with this Annual Report.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management
considers necessary in reviewing Genzyme General's combined results of
operations. Detailed discussion and analysis of the consolidated results of
operations of Genzyme Corporation and its subsidiaries, which include the
combined results of Genzyme General, Genzyme Tissue Repair and Genzyme Molecular
Oncology, are provided separately in this Annual Report under "Management's
Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial
Condition and Results of Operations".
In the fourth quarter of 1997, Genzyme General recorded $29.2 million
of charges mainly associated with its Pharmaceutical and Surgical Products
businesses and the sale of Genetic Design, Inc.("GDI"), which was sold in 1996.
The Pharmaceutical business will now focus on products that are more consistent
with Genzyme General's long-term business strategy of moving towards
higher-value products and away from fine chemical and bulk pharmaceuticals. This
change in strategy resulted in a $18.1 million charge to cost of products sold
primarily related to the melatonin, bulk pharmaceuticals and fine chemical
product lines which are being discontinued. In addition, Genzyme General
recorded charges of $5.5 million to cost of products sold and $3.5 million to
selling, general and administrative("SG&A") expense primarily related to the
manufacturing and selling of the Sepracoat(TM) product line, which was also
discontinued after an advisory panel of the U.S. Food and Drug Administration
("FDA") recommended against granting marketing approval of this product in 1997.
Genzyme General also recorded a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
Because of the strategic changes in Genzyme General's business, the
financial condition and results of operations will now be discussed differently
than in previous years. Genzyme General is now focusing its efforts within three
business areas -- therapeutics, surgical products and diagnostics.
5
<PAGE> 6
GENZYME GENERAL (CONT.)
1997 AS COMPARED TO 1996
REVENUES. Total revenues for 1997 were $597.2 million compared to
$511.4 million in 1996, an increase of 17%. Product and service revenues were
$585.8 million, compared to $486.1 million in 1996, an increase of 21%. Revenues
from research and development contracts for 1997 were $11.4 million compared to
$25.3 million in 1996, a decrease of 55%.
Product revenues in 1997 increased 25% to $529.9 million from $424.5
million in 1996, due primarily to increased sales of Cerezyme(R) enzyme and a
full year of sales by DSP, which was acquired by the Company in July 1996.
Sales of Therapeutic products in 1997 consisted primarily of sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) increased 26% to $332.7 million from $264.6 million in 1996, due to
continued growth in new patient accruals in existing markets. Genzyme General's
results of operations are highly dependent on sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme, which together represented 63% of consolidated product sales
in 1997 compared to 62% in 1996. In October 1996, Genzyme General received FDA
approval to manufacture Cerezyme(R) enzyme in the Company's large-scale
manufacturing plant located in Boston, Massachusetts. Having achieved the
ability to produce uninterrupted supply of Cerezyme(R) enzyme at the plant,
Genzyme General commenced the process of converting patients receiving
Ceredase(R) enzyme to Cerezyme(R) enzyme. The conversion of patients from
Ceredase(R) enzyme to Cerezyme(R) enzyme is substantially complete in the United
States. Genzyme General may be required to record a charge to earnings for the
equipment used exclusively for and any inventory of Ceredase(R) enzyme remaining
upon completion of the patient conversion process and, if the conversions
proceed more rapidly than anticipated, the remaining inventory of Ceredase(R)
enzyme and the corresponding charge to earnings could be material.
Pharmaceuticals 1997 product sales decreased 31% from 1996 due primarily to a
significant decline in sales of Melatonin in 1997. Melatonin sales declined
materially during the second half of 1996 due to declining market demand and
Genzyme General discontinued this product line in the fourth quarter of 1997.
The Surgical Products business unit was formed in July 1996 following
the acquisition of DSP and combines the business of DSP with Genzyme General's
hyaluronic acid-based products designed to limit post operative adhesions (the
"Sepra Products"). Sepra Products primarily consist of sales of Seprafilm(R).
Product sales by the Surgical Products business unit for 1997 were $100.8
million as compared to $50.7 million for the period from July 1, 1996, the date
of the acquisition of DSP, through December 31, 1996. Surgical Products sales
consisted primarily of sales of cardiovascular fluid management products,
surgical closures and surgical instruments. These product sales (excluding sales
of Sepra Products) declined 12% in the second half of 1997 in comparison to the
same period of 1996 due to a loss of volume and severe price competition in the
fluid management business. DSP's product sales for the first half of 1996, which
are not included in the results of Genzyme General, were $53.2 million.
Seprafilm(R) is being marketed in the United States and Canada by
Genzyme General on behalf of Genzyme Ventures II ("GVII"), the joint venture
between Genzyme and Genzyme Development Partners, L.P. ("GDP"). In March 1997,
Genzyme and GDP reached agreement concerning the operation of and allocations of
profits and losses from GVII. Under the terms of this agreement, Genzyme
purchases product from GVII for resale by Genzyme. Genzyme funds the activities
of GVII and is reimbursed at cost for SG&A expenses. The first $200,000 of
losses generated by GVII are allocated to GDP and thereafter losses are
allocated 40% to GDP and 60% to Genzyme, provided, however, that to the extent a
loss allocated to GDP would, pursuant to the partnership agreement, be allocated
to the general partner of GDP rather than the limited partners, such loss is
allocated 100% to Genzyme. GDP will receive the first $5.6 million in profits
generated by GVII, Genzyme General will receive the next $8.4 million in profits
and, thereafter, Genzyme General and GDP will receive 60% and 40% share,
respectively, in the profits of GVII. In 1997, Genzyme General contributed an
additional $1.5 million to GVII through GDP.
The Diagnostics Business unit consists of product sales and genetic
testing services. Product sales of diagnostic products in 1997 were level with
1996. Service revenues for genetic testing in 1997 decreased 9% primarily due to
the loss of revenue from GDI, which was sold in November 1996. This decrease was
offset in part by higher unit volumes that were primarily attributable to the
acquisition of Genetrix, Inc. ("Genetrix"), which was included in Genzyme
General's results of operations from May 1, 1996.
International sales as a percentage of total sales in 1997 increased to
37% from 35% in 1996, due primarily to a 32% increase in combined international
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, offset in part by additional
domestic sales by DSP.
Revenues from research and development contracts for 1997 decreased 55%
to $11.4 million from $25.3 million in 1996, due primarily to the absence of
revenue from Neozyme II, which was acquired by
6
<PAGE> 7
GENZYME GENERAL (CONT.)
Genzyme in the fourth quarter of 1996. This decrease was offset in part by
increases in revenues from research and development contracts with third
parties. Revenues from Neozyme II were $19.8 million in 1996.
MARGINS AND OPERATING EXPENSES. Gross margins for 1997 were 59%, level with
1996. Excluding the effects of special charges, gross margins were 63% in 1997
compared to 59% in 1996. Genzyme General provides a broad range of health care
products and services, resulting in a range of gross margins depending on the
particular market conditions of each product or service. Product margins for
1997 decreased to 61% from 63% in 1996. Excluding the effects of special
charges, product margins in 1997 were 66%. The increase in product margins
before special charges in 1997 is primarily due to increased sales volume of
Cerezyme[R] enzyme offset in part by a full year of sales of lower margin DSP
products. Service margins for 1997 increased to 37% from 30% in 1996 due to the
consolidation of Genetrix, the sale of GDI in 1996 and the resulting elimination
of redundant facilities and staffing.
SG&A expenses and amortization of intangibles for 1997 were $185.6
million compared to $144.0 million in 1996, an increase of 29%. Excluding
special charges, SG&A expenses increased by 25% over 1996. The increase was due
primarily to the acquisition of DSP and increased staffing in support of the
growth in several product lines, most notably in support of the North American
introduction of Seprafilm(R). DSP added $16.7 million in SG&A expenses and
amortization of intangibles in the first half of 1997 for which comparable
amounts were not included in the results of Genzyme General in 1996. The
acquisition of Genetrix did not materially affect SG&A expenses in 1996 and 1997
due to consolidation of operations.
Research and development expenses for 1997 were $74.2 million compared
to $70.0 million in 1996, an increase of 6%, due to Genzyme General's commitment
to fund development costs of the transgenic recombinant human antithrombin III
("ATIII") program being conducted by Genzyme Transgenics Corporation ("GTC") and
increased spending on internal programs, most notably Thyrogen[R].
OTHER INCOME AND EXPENSES. Other income and expenses were a net expense
of $5.4 million (which includes a $2.0 million special charge) compared to other
income of $6.1 million in 1996. The change was due primarily to a decrease in
investment income and an increase in interest expense as well as increased
equity in net losses of unconsolidated affiliates. Investment income for 1997
was $10.0 million, compared with $13.9 million for 1996. The decrease resulted
from lower average cash and investment balances. Investment income for 1997 did
not include any material gain or loss from sales of securities. Interest expense
for 1997 was $8.1 million, compared to $6.8 million in 1996. The increase
resulted from interest on funds borrowed to finance portions of the acquisitions
of DSP and Neozyme II. Equity in net loss of unconsolidated affiliates increased
from $2.6 million in 1996 to $5.3 million in 1997. The change is primarily due
to increased losses from Genzyme General's 43% owned affiliate, GTC, and
increased losses resulting from the joint venture between Genzyme General and
GelTex Pharmaceuticals, Inc. ("GelTex") for the development and
commercialization of RenaGel[R] phosphate binder.
The net tax provision for 1997 varies from the U.S. statutory tax rate
because of the provision for state income taxes, the foreign sales corporation,
nondeductible amortization of intangibles, tax credits and Genzyme General's
share of the losses of unconsolidated affiliates. In 1997, the effective tax
rate was 37%, compared to 41% in 1996 before acquisitions. The decrease in the
rate was due to additional tax credits in 1997 as well as a change in
Massachusetts state law. The allocated tax benefit generated by GTR and GMO of
$17.7 million and $2.8 million, respectively, in 1997 and $17.0 million and
zero, respectively, in 1996 reduced Genzyme General's tax rate to 15% and 12%
in 1997 and 1996, respectively.
1996 AS COMPARED TO 1995
REVENUES. Total revenues for 1996 were $511.4 million compared to
$378.6 million in 1995, an increase of 35%. Product and service revenues were
$486.1 million in 1996 compared to $351.6 million in 1995, an increase of 38%.
Revenues from research and development contracts for 1996 were $25.3 million
compared to $27.0 million in 1995, a decrease of 6%.
Product revenues in 1996 increased 39% to $424.5 million from $304.4
million in 1995, due primarily to the addition of sales by DSP and to increased
sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Increases in sales by each
of the Diagnostic Products and Pharmaceuticals business units accounted for the
remainder of the increase in product revenues in 1996.
7
<PAGE> 8
GENZYME GENERAL (CONT.)
Sales of Therapeutic products in 1996 consisted entirely of sales of
Ceredase(R) enzyme and Cerezyme(R) enzyme. Through the third quarter of 1995,
Therapeutic product sales included sales of Cosmetic Grade HA Powder, which were
reclassified as Pharmaceuticals product sales beginning in the fourth quarter of
1995. Sales of Ceredase(R) enzyme and Cerezyme(R) enzyme in 1996 increased 23%
to $264.6 million due to increased shipments resulting from the introduction of
these products in Japan and continued growth in new patient accruals in existing
markets. Genzyme General's results of operations are highly dependent on sales
of Ceredase(R) enzyme and Cerezyme(R) enzyme, which together represented 62% of
consolidated product sales in 1996 compared to 71% in 1995.
Product sales by the Surgical Products business unit for the period
beginning with the DSP acquisition on July 1, 1996 and ending December 31, 1996
were $50.7 million and were generated primarily from sales by DSP. DSP's product
sales for the first half of 1996 and for the years ending December 31, 1995 and
1994, which are not included in the results of Genzyme General, were $53.2
million, $95.2 million and $90.5 million, respectively.
Product sales by the Diagnostic Products and Pharmaceuticals business
units increased 15% and 45%, respectively, over 1995. The increase in Diagnostic
Products sales resulted from growth in each of its product lines, most notably
in sales of the Direct LDL[TM] test and diagnostic intermediates. The increase
in Pharmaceuticals sales was generated primarily from sales of Melatonin during
the first half of 1996 and from sales of Cosmetic Grade HA Powder. Melatonin
sales declined materially during the second half of 1996 due to declining market
demand.
Revenues for the Diagnostic Services business unit in 1996 increased
31% to $61.6 million, due to higher unit volumes that were primarily
attributable to the acquisition of Genetrix, which was included in Genzyme
General's results of operations from May 1, 1996 forward, and to changes in
service pricing. On November 1, 1996, the assets of GDI were sold. GDI
contributed $11.6 million in diagnostic service revenues through October 31,
1996.
International sales as a percentage of total sales in 1996 decreased to
35% from 36% in 1995, as the addition of domestic sales by DSP offset a 35%
increase in combined international sales of Ceredase(R) enzyme and Cerezyme(R)
enzyme.
Revenues from research and development contracts for 1996 decreased 6%
to $25.3 million from $27.0 million in 1995, as a decrease in revenues from
Neozyme II was partially offset by an increase in revenues from research and
development contracts with third parties. Revenues from Neozyme II decreased 18%
to $19.8 million in 1996 compared to $24.2 million in 1995, due to the
acquisition of Neozyme II in the fourth quarter.
MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 59%, level
with 1995. Genzyme General provides a broad range of health care products and
services, resulting in a range of gross margins depending on the particular
market conditions of each product or service. Product margins for 1996 were 63%,
level with 1995, as sales of higher margin products and cost reductions by both
the Pharmaceuticals and Diagnostic Products business units and higher margins on
Ceredase(R) enzyme resulting from manufacturing process improvements were offset
by lower margin products acquired with DSP. Service margins for 1996 decreased
to 30% from 34% in 1995 due to the consolidation of Genetrix, which required the
operation of redundant facilities while staffing was expanded and employees
trained at the facilities that remained open following the consolidation.
SG&A expenses and amortization of intangibles for 1996 were $144.0
million compared to $102.2 million in 1995, an increase of 41%. The increase was
due primarily to the acquisition of DSP and increased staffing in support of
the growth in several product lines, most notably in support of the North
American introduction of the Sepra Products. DSP added $12.1 million in SG&A
expenses in 1996. For the first half of 1996 and for 1995, DSP incurred
SG&A expenses of $15.7 million and $25.3 million, respectively, which are not
included in the results of Genzyme General. Genetrix did not contribute
materially to SG&A expenses in 1996 due to consolidation of its operations with
Genzyme Genetics.
Research and development expenses for 1996 were $70.0 million compared
to $57.9 million in 1995, an increase of 21%, due to Genzyme General's funding
of development costs of the ATIII program being conducted by GTC and increased
spending on internal programs, most notably Thyrogen(R).
8
<PAGE> 9
GENZYME GENERAL (CONT.)
Genzyme recorded charges related to the following acquisitions
completed in 1996:
Genetrix. On May 1, 1996, Genzyme acquired all of the outstanding
shares of Genetrix capital stock in exchange for approximately 1,380,000 shares
of GGD Stock valued at approximately $36.5 million. Genzyme General recorded a
charge in 1996 of $1.5 million for amortization of goodwill and a restructuring
charge of $1.0 million in connection with the Genetrix acquisition.
DSP. On July 1, 1996, Genzyme acquired DSP for a total purchase price
of $252.0 million. Genzyme General recorded charges of $24.2 million for the
purchase of in-process research and development and $0.5 million for
restructuring in connection with the acquisition of DSP.
Neozyme II. On October 28, 1996, Genzyme, through a wholly-owned
subsidiary ("Acquisition Corp.") completed a tender offer for outstanding Units
of Neozyme II for $45.00 per Unit in cash. A total of 2,385,686 Units, or 98.8%,
were tendered and accepted for payment. Each Neozyme II Unit consisted of one
share of Callable Common Stock and one Callable Warrant to purchase two shares
of GGD Stock and .0675 share of GTR Stock (after 1996 GGD Stock split). On
December 6, 1996, Neozyme II was merged with and into Acquisition Corp. and the
remaining outstanding shares of Callable Common Stock (other than shares held by
Genzyme and its subsidiaries) were thereby cancelled and converted into the
right to receive $29.00 per share in cash. The Callable Warrants included in the
untendered Units separated from the shares of Callable Common Stock converted in
the merger and became exercisable on December 6, 1996. Genzyme General recorded
a charge of $106.5 million for the purchase of in-process research and
development in connection with the acquisition of Neozyme II.
OTHER INCOME AND EXPENSES. Other income and expenses decreased by less
than 1% in 1996 to $6.1 million compared to $6.2 million in 1995, as increases
in interest expenses offset an 87% increase in investment income. Investment
income for 1996 was $13.9 million, compared with $7.4 million for 1995. The
increase resulted from higher average cash and investment balances. Investment
income for 1996 did not include any material gain or loss on sales of
securities. Interest expense for 1996 was $6.8 million, compared to $1.1 million
in 1995. The increase resulted from interest on funds borrowed to finance
portions of the acquisitions of DSP and Neozyme II.
The tax provision for 1996 varies from the U.S. statutory tax rate
because of the provision for state income taxes, tax credits, taxes on foreign
earnings, losses of unconsolidated affiliates and nondeductible charges in
connection with tax-free acquisitions. In 1996, the effective tax rate before
these acquisitions was 41%, compared to 38% in 1995. The increase in the rate
was due to nondeductible goodwill charges in 1996 and to the absence in 1996 of
certain operating loss carryforwards available in 1995. The tax provision in
1996 resulted from taxes on foreign earnings and taxes on earnings before
acquisition-related charges comprising charges for goodwill and incomplete
technologies accruing from the acquisitions of DSP of Genetrix. The allocated
tax benefit generated by GTR of $17.0 million in 1996 and $8.9 million in 1995
reduced Genzyme General's tax rate to 12% and 33% in 1996 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Genzyme General had cash, cash equivalents and
investments (excluding equity securities) of $193.2 million compared to $171.7
million at December 31, 1996 an increase of $21.5 million. In 1997, operating
and financing activities provided $79.5 million and $2.8 million of cash,
respectively, while investing activities used $91.0 million of cash and
fluctuations in exchange rates caused a reduction in cash of $2.3 million.
At December 31, 1997, inventories had increased 12% to $137.7 million
from $123.4 million at December 31, 1996, due primarily to support of increased
business operations, most notably in the Therapeutics inventories as a result of
increased production of the Cerezyme(R) enzyme and in the Surgical Products
business unit in support of the introduction of Seprafilm(R) in the North
American marketplace. Genzyme General used $28.5 million for capital
acquisitions. Genzyme General used $50.3 million for net purchases of
investments. Genzyme General received $123.8 million of cash from issuances of
common stock and used $101.1 million of cash for payments of debt and capital
leases.
Genzyme General believes that its available cash, investments and cash
flow from operations will be sufficient to finance its planned operations and
capital requirements for the foreseeable future. Although Genzyme General
currently has substantial cash resources, it has committed to utilize a portion
of its resources for certain purposes, such as completing the market
introduction of the Sepra Products in the United States and Europe and making
certain payments to third parties in connection with strategic collaborations.
Genzyme General's cash resources will also be diminished upon repayment of
amounts borrowed, plus accrued interest, under the Revolving Credit Facility and
if its option to acquire the partnership interests in GDP is exercised using
cash to pay some or all of the exercise price. In addition, the liabilities or
contingencies of GTR and GMO affect Genzyme's resources or financial condition
and could affect the financial condition or results of operations of Genzyme
General. As a result, Genzyme may have to obtain additional financing. There can
be no assurance that such financing will be available on terms reasonably
acceptable to Genzyme. Genzyme General's capital requirements could differ
materially from those currently anticipated by management due to the factors
described under the "Factors Affecting Future Operating Results-Future Capital
Needs" in "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations".
For a discussion of the demands, commitments and events that may affect
the liquidity and capital resources of Genzyme Corporation including Genzyme
General, see "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations - Liquidity and
Capital Resources" included in this Annual Report.
9
<PAGE> 10
GENZYME GENERAL (CONT.)
NEW ACCOUNTING PRONOUNCEMENTS, YEAR 2000 AND FINANCIAL REPORTING RELEASE 48
("FRR 48")
See Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations -- Liquidity and
Financial Resources included in this Annual Report.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme General could differ materially
from the results described above due to the risks and uncertainties described
below and under the heading "Management's Discussions and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of Operations -
Factors Affecting Future Operating Results" included in this Annual Report.
DEPENDENCE ON CEREZYME(R) ENZYME AND CEREDASE(R) ENZYME SALES. Genzyme
General's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme in 1997 were $332.7 million, representing 63% of Genzyme's
consolidated product sales in 1997.
To address supply constraints, Genzyme General developed Cerezyme(R)
enzyme. Patients receiving Ceredase(R) enzyme are being converted to Cerezyme(R)
enzyme; however, Genzyme General will continue to manufacture Ceredase(R) enzyme
until the process of patient conversion is completed. Any disruption in the
supply or manufacturing process of Cerezyme(R) enzyme may have a material
adverse effect on revenue. In addition, Genzyme General may be required to
record a charge to earnings for the equipment used for and the inventory of
Ceredase(R) enzyme remaining upon completion of the patient conversion process,
and, if the conversions proceed more rapidly than anticipated, the remaining
inventory of Ceredase(R) enzyme and the corresponding charge to earnings could
be material.
NO ASSURANCE OF COMMERCIAL SUCCESS OF THE SEPRA PRODUCTS. In August
1996, Genzyme received marketing approval from the FDA for Seprafilm(R) and
commenced commercial sales of Seprafilm(R) in the U.S. on behalf of GVII. The
successful commercialization of Seprafilm(R) and other Sepra Products will
depend on many factors, including: (i) the content and timing of decisions made
by the FDA and other regulatory authorities, (ii) market acceptance of the Sepra
Products by surgeons and hospital administrators, (iii) Genzyme General's
ability to deploy its sales force to market the Sepra Products, (iv) Genzyme
General's ability to supply sufficient product to meet market demand, (v) the
number and relative efficacy of competitive products that may subsequently enter
the market and (vi) the degree to which third party reimbursement is available
for the Sepra Products. There can be no assurance that Genzyme General will be
successful in its efforts to commercialize the Sepra Products.
TECHNOLOGY TRANSFERRED TO GENZYME DEVELOPMENT PARTNERS, L.P. Genzyme
organized GDP, a special purpose research and development entity, and
transferred technology and commercial rights to certain products that Genzyme
previously had under development. Genzyme has an option to purchase the limited
partnership interests in GDP under certain circumstances. It is uncertain at
this time whether Genzyme will exercise this option. If Genzyme does not
10
<PAGE> 11
GENZYME GENERAL (CONT.)
exercise this option, it will have limited rights in revenues generated from the
sale of GDP's products. If Genzyme does exercise this option, it will be
required to make substantial cash payments or to issue shares of GGD Stock, or
both. Cash payments will diminish Genzyme's capital resources. Payments in GGD
Stock could result in dilution to holders of GGD Stock and could negatively
affect the market price of such stock.
POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS. The market
prices for securities of biotechnology companies have been volatile. Factors
such as announcements of technological innovations or new commercial products by
Genzyme or its competitors, governmental regulation, patent or proprietary
rights developments, public concern as to the safety or other implications of
biotechnology products and market conditions in general may have a significant
impact on the market price of GGD Stock. No cash dividends have been paid to
date on GGD Stock, nor does Genzyme General anticipate paying cash dividends on
such stock in the foreseeable future.
11
<PAGE> 12
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) December 31,
- -----------------------------------------------------------------------------------------------------------------
1997 1996
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 66,276 $ 77,220
Short-term investments ......................................................... 35,294 56,290
Accounts receivable, net ....................................................... 116,056 115,156
Inventories .................................................................... 137,708 123,442
Prepaid expenses and other current assets ...................................... 15,941 99,953
Due from Genzyme Molecular Oncology ............................................ 5,434 --
Due from Genzyme Tissue Repair ................................................. 1,213 1,604
Deferred tax assets - current .................................................. 27,601 17,493
---------- ----------
Total current assets ......................................................... 405,523 491,158
Property, plant and equipment, net ................................................ 365,337 371,610
Long-term investments ............................................................. 91,627 38,215
Notes receivable - related parties ................................................ 4,601 --
Intangibles, net .................................................................. 243,071 247,745
Deferred tax assets - noncurrent .................................................. 35,988 42,221
Investments in equity securities................................................... 30,047 10,813
Other noncurrent assets ........................................................... 26,862 27,757
---------- ----------
Total assets ................................................................. $1,203,056 $1,229,519
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ............................................................... $ 18,409 $ 20,522
Accrued expenses ............................................................... 66,865 67,645
Income taxes payable ........................................................... 11,157 17,926
Deferred revenue - related parties and unaffiliated entities ................... 217 2,693
Current portion of long-term debt and capital lease obligations ................ 887 999
---------- ----------
Total current liabilities .................................................... 97,535 109,785
Noncurrent liabilities:
Long-term debt and capital lease obligations ................................... 117,978 223,998
Other noncurrent liabilities ................................................... 6,667 11,511
---------- ----------
Total liabilities ............................................................ 222,180 345,294
Commitments and contingencies (See Notes) .........................................
Division equity (Note L) .......................................................... 980,876 884,225
---------- ----------
Total liabilities and division equity......................................... $1,203,056 $1,229,519
========== ==========
</TABLE>
The accompanying notes are an integral
part of these combined financial statements
12
<PAGE> 13
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Net product sales ............................... $ 529,927 $ 424,483 $ 304,373
Net service sales ............................... 55,835 61,638 47,230
Revenues from research and development contracts:
Related parties ................................ 8,041 23,011 26,758
Other .......................................... 3,400 2,310 202
--------- --------- ---------
Total revenues................................. 597,203 511,442 378,563
Operating costs and expenses:
Cost of products sold ........................... 206,028 155,930 113,964
Cost of services sold ........................... 35,451 42,889 31,137
Selling, general and administrative ............. 173,020 135,153 97,520
Research and development (including research and
development related to contracts) .............. 74,192 69,969 57,907
Amortization of intangibles ..................... 12,534 8,849 4,647
Purchase of in-process research and development . -- 130,639 14,216
Other ........................................... -- 1,465 --
--------- --------- ---------
Total operating costs and expenses ............ 501,225 544,894 319,391
--------- --------- ---------
Operating income (loss) ............................. 95,978 (33,452) 59,172
Other income (expenses):
Equity in net loss of unconsolidated affiliates . (5,281) (2,633) (1,810)
Other ........................................... (2,000) 1,711 1,608
Investment income ............................... 10,038 13,909 7,428
Interest expense ................................ (8,108) (6,842) (1,069)
--------- --------- ---------
Total other income (expenses) ................. (5,351) 6,145 6,157
--------- --------- ---------
Income (loss) before income taxes ................... 90,627 (27,307) 65,329
Provision for income taxes .......................... (33,601) (20,206) (30,506)
--------- --------- ---------
Net income (loss) ................................... 57,026 (47,513) 34,823
Tax benefit allocated from Genzyme Tissue Repair..... 17,666 17,011 8,857
Tax benefit allocated from Genzyme Molecular Oncology 2,755 -- --
--------- --------- ---------
Net income (loss) attributable to GGD Stock ......... $ 77,447 $ (30,502) $ 43,680
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements
13
<PAGE> 14
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Net income (loss) attributable to GGD Stock ....................... $77,447 $(30,502) $43,680
======= ======== =======
Income (loss) per Genzyme General common share - basic:
Net income (loss) ............................................ $ 1.01 $ (0.45) $ 0.79
======= ======== =======
Weighted average shares outstanding .......................... 76,531 68,289 55,531
======= ======== =======
Income (loss) per Genzyme General common and common equivalent
share - diluted:
Net income (loss) ............................................ $ 0.98 $ (0.45) $ 0.68
======= ======== =======
Adjusted weighted average shares outstanding ................. 78,925 68,289 63,967
======= ======== =======
</TABLE>
The accompanying notes are an integral part of
these combined financial statements
14
<PAGE> 15
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) ........................................... $ 57,026 $ (47,513) $ 34,823
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ............................ 43,653 29,257 22,010
Loss on disposal of fixed assets ......................... 1,234 42 743
Non-cash compensation expense ............................ 2,881 148 131
Accrued interest/amortization on bonds ................... (571) 1,110 (279)
Provisions for bad debts and inventory ................... 14,100 9,521 8,105
Purchase of in-process research and development .......... -- 130,639 14,216
Deferred income taxes .................................... (3,969) (28,558) 4,428
Minority interest in net loss of subsidiaries ............ -- -- (1,608)
Equity in net loss of unconsolidated affiliates .......... 5,281 3,646 1,810
Gain on investment in unconsolidated affiliate ........... -- (1,013) --
Other .................................................... 528 (1,558) 1,568
Increase (decrease) in cash from working capital changes:
Accounts receivable ................................... (10,052) (18,318) (14,486)
Inventories ........................................... (29,149) (40,547) (18,142)
Prepaid expenses and other assets ..................... (8,774) (379) (1,778)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue ........................ 8,945 43,342 14,423
Due from Genzyme Tissue Repair ........................ 391 430 (1,863)
Due from Genzyme Molecular Oncology ................... (2,011) -- --
--------- --------- ---------
Net cash provided by operating activities ............. 79,513 80,249 64,101
INVESTING ACTIVITIES:
Purchases of investments .................................... (131,197) (117,089) (130,253)
Sales and maturities of investments ......................... 80,867 195,952 39,064
Acquisition of property, plant and equipment ................ (28,456) (42,540) (48,694)
Acquisitions, net of acquired cash and assumed liabilities .. -- (299,078) (322)
Additional investment in unconsolidated affiliates .......... (6,449) (3,600) (4,428)
Loans to affiliates ......................................... (4,601) (1,676)
Other ....................................................... (1,173) (7,621) (1,172)
--------- --------- ---------
Net cash used by investing activities ................. (91,009) (275,652) (145,805)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 123,837 39,119 179,623
Proceeds from issuance of common stock by a subsidiary ...... -- -- 1,107
Issuance of debt ............................................ -- 480,000 --
Payments of debt and capital lease obligations .............. (101,118) (340,333) (41,163)
Net cash allocated to Genzyme Tissue Repair ................. (14,892) (11,714) --
Net cash allocated to Genzyme Molecular Oncology ............ (5,000) -- --
--------- --------- ---------
Net cash provided by financing activities ............. 2,827 167,072 139,567
Effect of exchange rate changes on cash ......................... (2,275) 1,920 (781)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................ (10,944) (26,411) 57,082
Cash and cash equivalents at beginning of period ................ 77,220 103,631 46,549
--------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 66,276 $ 77,220 $ 103,631
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
15
<PAGE> 16
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................................... $ 8,684 $ 6,169 $ 9,944
Income taxes ............................................... 18,887 14,133 19,581
Supplemental disclosures of non-cash transactions:
Acquisition liability - Note D
Allocation of tax benefit - Note B
Strategic Financial Provisions - Note C
Warrant exercise - Note L
Debt conversion - Note L
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
16
<PAGE> 17
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A . SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General, a division of Genzyme, is a global diversified human health
care business with product development, manufacturing and marketing
capabilities. Genzyme is focusing its efforts on three broad business areas --
therapeutic products, surgical products and diagnostics.
BASIS OF PRESENTATION
The combined financial statements of Genzyme General include the balance sheets,
results of operations and cash flows of Genzyme's therapeutic products, surgical
products, diagnostics and corporate operations during the periods presented.
Genzyme General's financial statements are prepared using the amounts included
in Genzyme's consolidated financial statements. Corporate allocations reflected
in these financial statements are determined based upon methods which management
believes to be reasonable.
PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme General include the accounts of all
of the majority and wholly-owned subsidiaries and joint ventures of Genzyme,
except for the accounts of Genzyme Tissue Repair and, beginning on June 18,
1997, the accounts of Genzyme Molecular Oncology. The equity method is used to
account for investments in companies and joint ventures in which Genzyme General
has a substantial ownership interest (20% to 50%), or in which Genzyme General
participates in policy decisions. Investments of less than 20% are reported at
fair value. (See Note H., "Investments" to Genzyme's Consolidated Financial
Statements (the "Consolidated Financial Statements") which is incorporated
herein by reference.) All significant intercompany items and transactions have
been eliminated in combination. Certain items in the combined financial
statements for the years ended December 31, 1995 and 1996 have been reclassified
to conform with the December 31, 1997 presentation.
FINANCIAL INFORMATION
Genzyme provides to holders of GGD Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for Genzyme General. Notwithstanding the attribution of
assets and liabilities, including contingent liabilities, between Genzyme
General, GTR and GMO for the purposes of preparing their respective financial
statements, this attribution will not affect legal title to such assets or
responsibility for such liabilities of Genzyme or any of its subsidiaries.
Holders of GGD Stock are common stockholders of Genzyme and continue to be
subject to all the risks associated with an investment in Genzyme. Liabilities
or contingencies of Genzyme General, GTR or GMO could affect the financial
condition or results of operations of the other divisions. Accordingly, the
Genzyme General combined financial statements should be read in connection with
Genzyme's consolidated financial statements included in this Annual Report.
Accounting policies and financial information specific to Genzyme General are
presented in these Genzyme General combined financial statements. Accounting
policies and financial information relevant to Genzyme, Genzyme General, GTR and
GMO collectively are presented in the consolidated financial statements of
Genzyme Corporation and subsidiaries. The Company prepares the financial
statements of the division in accordance with generally accepted accounting
principles, the management and accounting policies of Genzyme and the divisional
accounting policies approved by the Genzyme Board. (See Note A., "Summary of
Significant Accounting Policies" to the Consolidated Financial Statements, which
is incorporated herein by reference). Except as otherwise provided in such
policies, the management and accounting policies applicable to the presentation
of the financial statements of Genzyme General may be modified or rescinded at
the sole discretion of the Genzyme Board without approval of the stockholders,
subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders.
DIVIDEND POLICY
Under the terms of the Genzyme Charter, dividends to be paid to the holders of
GGD Stock will be limited to the lesser of funds of Genzyme legally available
for the payment of dividends and the Available GGD Dividend Amount, as defined
in the Genzyme Charter. Although there is no requirement to do so, the Genzyme
Board would declare and pay cash dividends on GGD Stock, if any, based primarily
on earnings, financial condition, cash flow and business requirements of Genzyme
General. Genzyme General has never paid any cash dividends on shares of its
capital stock. Genzyme General currently intends to retain its earnings to
finance future growth and, therefore, does not anticipate paying any cash
dividends on GGD Stock in the forseeable future.
17
<PAGE> 18
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GTR and GMO give
effect to the management and accounting policies adopted by the Genzyme Board in
connection with the re-designation of Genzyme common stock as GGD Stock and the
creation of GTR Stock and GMO Stock and are reported in lieu of consolidated per
share data. The Company computes net income (loss) per share for each division
by dividing the earnings attributable to each series of stock by the weighted
average number of shares of that stock outstanding during the period, for basic
earnings per share, and by the weighted average shares of that stock, plus other
potentially dilutive securities outstanding during the applicable period for
diluted earnings per share. Earnings (loss) attributable to GGD Stock, GTR Stock
and GMO Stock equals the respective division's net income or loss for the
relevant period determined in accordance with generally accepted accounting
principles in effect at such time, adjusted by the amount of tax benefits
allocated to or from the other divisions pursuant to the management and
accounting policies adopted by the Genzyme Board.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted net income per share is similar to the
previously reported fully diluted earnings per share except that the new
treasury stock method used in determining the dilutive effect of options uses
the average market price for the period rather than the higher of the average
market price or the ending market price. All net income (loss) per common share
amounts have been restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) attributable to GGD
Stock-basic and diluted (1) ............... $ 77,447 $(30,502) $ 43,680
======== ======== ========
Shares used in net income per common
share-basic ............................... 76,531 68,289 55,531
Effect of dilutive securities:
Employee and director stock options ..... 2,387 - 2,757
Warrants ................................ 7 - 1,897
6 3/4% convertible subordinated
notes (1) .............................. - - 3,782
-------- -------- --------
Dilutive potential common shares (2) ..... 2,394 - 8,436
-------- -------- --------
Shares used in net income per common
share-diluted (1,2) ...................... 78,925 68,289 63,967
======== ======== ========
Net income (loss) per common share
- basic (1) .............................. $ 1.01 $ (0.45) $ 0.79
======== ======== ========
Net income (loss) per common share -
diluted (1,2) ............................ $ 0.98 $ (0.45) $ 0.68
======== ======== ========
</TABLE>
- ------------
(1) In March 1996, $100.0 million of 6 3/4% convertible subordinated notes
issued by Genzyme in October 1991 were converted into approximately
3,782,000 shares of GGD Stock and 255,000 shares of GTR Stock. For the
diluted EPS calculation in 1995, no adjustment to Genzyme General's net
income is required in assuming the conversion of the notes as of
January 1, 1995 because substantially all of the interest costs
incurred on the notes were capitalized.
(2) In computing diluted EPS for 1996, exercise of approximately 6,506,000
options and 35,000 warrants are not assumed as the result would be
antidilutive due to Genzyme General's net loss.
Options to purchase approximately 5,921,000 shares of GGD Stock in 1997,
3,824,000 shares in 1996, and 2,837,000 shares of stock in 1995 were outstanding
during the years then ended but were not included in the year-to-date
calculation of diluted income per share because the options' exercise price was
greater than the average market price of the common shares during those periods.
Warrants to purchase 40,000 shares of GGD stock exercisable as of July 31, 1997
were not included in the year-to-date calculation of diluted income per share
because the exercise price of the warrants was greater than the average market
price of the common shares during those periods.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Genzyme General has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation". Genzyme General has disclosed
herein pro forma net income and pro forma earnings per share in the footnotes
using the fair value based method for 1997, 1996 and 1995.
TRANSLATION OF FOREIGN CURRENCIES
Exchange gains and losses on intercompany balances of a long-term investment
nature are charged to division equity. Transaction gains and losses are included
in the results of operations. Net transaction losses were $0.1 million in 1997,
$1.0 million in 1996 and $0.8 million in 1995. Division equity includes
cumulative foreign currency translation adjustments of $(12.4) million and
$(0.7) million at December 31, 1997 and 1996, respectively.
NOTE B. RELATED PARTY TRANSACTION POLICIES
Genzyme allocates certain corporate costs for general and administrative,
research and development and cash management services to the divisions. Genzyme
files a consolidated tax return and allocates income taxes to the divisions in
accordance with the policies described below. Effective upon the merger of GMO
and PharmaGenics, the Genzyme Board amended certain of the policies which govern
the management of the divisions and added certain new policies governing
interdivision transactions. The policies summarized below, with the exception of
Interdivision Asset Transfers, may be further modified or rescinded by action of
the Genzyme Board, or the Genzyme Board may adopt additional policies, without
approval of the stockholders of Genzyme, subject only to the Genzyme Board's
fiduciary duty to the Genzyme stockholders. In addition, generally accepted
accounting principles require that any change in policy be preferable (in
accordance with such principles) to the previous policy.
18
<PAGE> 19
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
FINANCIAL MATTERS
The Company manages the financial activities of Genzyme General, GTR and GMO.
These financial activities include the investment of cash; the issuance,
repayment and repurchase of short-term and long-term debt; and the issuance and
repurchase of equity instruments.
Loans may be made from time to time between divisions. Any such loan of $1.0
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1.0 million will require approval of
the Genzyme Board, which approval shall include a determination by the Genzyme
Board that the material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating division and to
holders of the common stock representing such division. As of December 31,
1997, a $2.5 million inter-divisional note receivable due from Genzyme
Molecular Oncology (related to GMO's acquisition of PharmaGenics in June 1997)
remained outstanding at an interest rate of 6.15% per annum.
SHARED SERVICES
Genzyme General operates as a division of Genzyme with its own personnel and
financial resources, however, Genzyme General has access to Genzyme's corporate
general and administrative functions, the costs of which are allocated to each
division in a reasonable and consistent manner based on utilization by the
division of the services to which such costs relate. Management believes that
such allocation is a reasonable estimate of such expenses.
Genzyme's corporate general and administrative and research and development
functions and certain selling and marketing efforts are performed primarily by
Genzyme General. General and administrative and selling and marketing expenses
have been allocated to GTR and GMO based upon utilization of such services as if
each division operated independently. Genzyme's allocations to GTR for SG&A
expenses were $7.7 million in 1997, $9.1 million in 1996 and $4.4 million in
1995. Genzyme allocated $2.1 million, $0.2 million and $0.1 million of SG&A
expenses to Genzyme Molecular Oncology in 1997, 1996 and 1995, respectively.
Genzyme's allocations to GTR and GMO for research and development expenses were
(i) in the case of GTR, $7.7 million in 1997, $6.9 million in 1996 and $4.7
million in 1995 and (ii) in the case of GMO, $5.3 million in 1997, $0.8 million
in 1996 and $0.4 million in 1995. Amounts due from GTR for operating activities
were $1.2 million and $1.6 million at December 31, 1997 and 1996 and in the case
of GMO, $5.4 million at December 31, 1997.
INTERDIVISION INCOME TAX ALLOCATIONS
Genzyme General is included in the consolidated U.S. federal income tax return
filed by Genzyme. Genzyme allocates current and deferred taxes to the divisions
by determining the tax provision of each division, in accordance with generally
accepted accounting principles, as if it were a separate taxpayer. Accordingly,
the realizability of deferred tax assets is assessed at the division level. The
sum of division tax provisions may not equal the consolidated tax provision
under this approach.
Pursuant to the management and accounting policies adopted by the Genzyme Board,
as of the end of any fiscal quarter of Genzyme, any projected tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to any
other division which can utilize the benefit without any compensating payment or
allocation. The treatment of such allocation for purposes of earnings per share
computation is discussed in Note A., "Net Income (Loss) Per Share" to the
Consolidated Financial Statements which is incorporated herein by reference.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme General has free access to all technology and know-how of Genzyme that
may prove useful in Genzyme General's business, subject to any obligations or
limitations applicable to Genzyme.
INTERDIVISION ASSET TRANSFERS
The policy described below regarding the transfer of assets between divisions
may not be changed by the Genzyme Board without the approval of the holders of
GTR Stock and GMO Stock, each voting as a separate class; provided, however,
that if a policy change affects GTR or GMO alone, only holders of shares
representing the affected division will be entitled to a class vote on such
matter.
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program, the
likelihood and timing of any such realization and other matters that the Genzyme
Board and its financial advisors, if any, deem relevant. The consideration for
such
19
<PAGE> 20
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
reallocation may be paid by one division to another in cash or other
consideration, in lieu of cash, with a value equal to the fair market value of
the assets being reallocated or, in the case of a reallocation of assets from
Genzyme General to GTR or GMO, the Genzyme Board may elect to account for such
reallocation of assets as an increase in Designated Shares representing the
division to which such assets are reallocated. Notwithstanding the foregoing, no
Key GMO Program, as defined in the management and accounting policies, may be
transferred out of GMO without a class vote of the holders of GMO Stock and no
Key GTR Program, as defined in the management and accounting policies, may be
transferred out of GTR without a class vote of the holders of GTR Stock.
OTHER INTERDIVISION TRANSACTIONS
From time to time, a division may engage in transactions with one or more other
divisions or jointly with one or more other divisions and one or more third
parties. Such transactions may include agreements by one division to provide
products and services for use by another division, and joint ventures or other
collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Research and development
performed by one division for the benefit of another division will be charged to
the division for which work is performed on a cost basis. The division
performing the research will not recognize revenue as a result of performing
such research. Other interdivisional transactions shall be on terms and
conditions that would be obtainable in transactions negotiated with unaffiliated
third parties. Any interdivisional transaction to be performed on terms and
conditions other than those previously set forth and that is material to one or
more of the participating divisions will require the approval of the Genzyme
Board, which approval shall include a determination by the Genzyme Board that
the transaction is fair and reasonable to each participating division and to
holders of the common stock representing each division.
If a division (the "purchasing division") requires any product or service from
which another division (the "selling division") derives revenue from
sales to third parties (a "commercial product or service"), the purchasing
division may solicit from the selling division a bid to provide such commercial
product or service in addition to any bids solicited by the purchasing division
from third parties. Subject to determination by the Genzyme Board that the bid
of selling division is fair and reasonable to each division and to their
respective stockholders and that the purchasing division is willing to accept
the selling division's bid, the purchasing division may accept any bid deemed to
offer the most favorable terms and conditions for providing the commercial
product or service sought by the purchasing division.
NOTE C. STRATEGIC FINANCIAL PROVISIONS
In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges
mainly associated with its Pharmaceutical and Surgical Products businesses and
the sale of GDI, which was sold in 1996. The Pharmaceutical business will now
focus on products that are more consistent with Genzyme General's long-term
business strategy of moving towards higher-value products and away from fine
chemical and bulk pharmaceuticals. This change in strategy resulted in a $18.1
million charge to cost of products sold primarily related to the melatonin, bulk
pharmaceuticals and fine chemical product lines which are being discontinued. In
addition, Genzyme General recorded charges of $5.5 million to cost of products
sold and $3.5 million to SG&A expense primarily related to the manufacturing and
selling of the Sepracoat(TM) product line, which was also discontinued after an
advisory panel of the FDA recommended against granting market approval of this
product in 1997. Genzyme General also recorded a $2.0 million charge to other
expense related to the uncertainty of collection on certain notes receivable.
20
<PAGE> 21
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE D. ACQUISITIONS
Incorporated by reference herein are the disclosures related to the acquisitions
of IG, Genetrix, DSP and Neozyme II included in Note C., "Acquisitions" to the
Consolidated Financial Statements.
PRO FORMA FINANCIAL INFORMATION
The following pro forma information presents the results of operations of
Genzyme General, for the year ended December 31, 1996, with pro forma
adjustments as if the acquisitions of Genetrix, DSP and Neozyme II had been
consummated as of January 1, 1996. This pro forma information does not purport
to be indicative of what would have occurred had the acquisitions been made as
of that date or of results which may occur in the future. The pro forma
financial information does not include charges for in-process technology of
$24.2 million and $106.5 million, related to the DSP and Neozyme II
acquisitions, respectively, which were recognized as expense upon consummation
of each acquisition in 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996
----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
- -------------------------------------------------------------------------------
<S> <C>
Pro forma revenues ................................... $ 556,274
Pro forma net income ................................. $ 65,146
Pro forma net income per Genzyme General
common share - basic ............................... $ 0.95
Pro forma net income per Genzyme General
common and common equivalent share - diluted ....... $ 0.88
</TABLE>
NOTE E. MAJORITY-OWNED SUBSIDIARY
IG LABORATORIES, INC.
IG was an approximately seventy-percent-owned subsidiary for the period from
January 1, 1995 through October 1, 1995. (See Note C., "Acquisitions" to the
Consolidated Financial Statements which is incorporated herein by reference).
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme General's trade receivables primarily represent amounts due from
healthcare service providers and companies and institutions engaged
in research, development, or production of pharmaceutical and biopharmaceutical
products. Genzyme General performs ongoing credit evaluations of its customers
and generally does not require collateral. Accounts receivable are stated at
fair value after reflecting the allowance for doubtful accounts of $11.3 million
and $16.1 million at December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, accumulated amortization of intangible assets
was $38.6 million and $26.2 million, respectively.
NOTE G. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
------------------------------------------------
<S> <C> <C>
Raw materials ........ $ 48,149 $ 30,243
Work-in-process ...... 30,264 36,516
Finished products .... 59,295 56,683
-------- --------
$137,708 $123,442
======== ========
</TABLE>
21
<PAGE> 22
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE H. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
---------------------------------------------------------------
<S> <C> <C>
Plant and equipment .............. $ 232,405 $ 163,413
Land and buildings ............... 138,696 173,296
Leasehold improvements ........... 63,244 55,828
Furniture and fixtures ........... 13,522 12,996
Construction in-progress ......... 24,853 53,298
--------- ---------
472,720 458,831
Less accumulated depreciation .. (107,383) (87,221)
--------- ---------
Property, plant and equipment, net $ 365,337 $ 371,610
========= =========
</TABLE>
Depreciation expense was $31.1 million, $22.1 million, and $17.3 million in
1997, 1996 and 1995, respectively.
Genzyme General has a production facility at Allston Landing in Boston,
Massachusetts to produce Cerezyme(R) enzyme and other products. The Company had
capitalized approximately $154.1 million of gross expenditures related to this
building and approximately $64.3 million of gross process validation and
optimization costs related to this and other manufacturing facilities. In 1997,
1996 and 1995, the Company capitalized approximately $0.5 million, $2.2 million
and $9.0 million of interest costs, respectively, relating to this and other
facility construction. The Company began depreciating this facility in July 1996
upon receipt of FDA approval for the facility, using the units of production
method of depreciation. Depreciation expense for 1997 and 1996 related to this
facility was $6.1 million and $1.7 million, respectively.
NOTE I. INVESTMENTS
INVESTMENTS
Investments in marketable securities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit ................ $ - $ - $ 1,564 $ 1,564
Corporate notes ........................ 35,298 35,294 54,732 54,726
------- ------- ------- -------
$35,298 $35,294 $56,296 $56,290
======= ======= ======= =======
Long Term:
Corporate notes ........................ $69,932 $69,872 $16,481 $16,485
U.S. Treasury notes .................... 21,667 21,755 22,010 21,730
------- ------- ------- -------
$91,599 $91,627 $38,491 $38,215
======= ======= ======= =======
Equity securities....................... $29,609 $30,047 $10,905 $10,813
======= ======= ======= =======
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND
INVESTMENTS:
Investment income for 1997, 1996 and 1995 includes net realized losses of
$0, $47,000 and $110,000, respectively. Net realized gains included in
investment income for 1995 were $1.4 million. The realized gain on the sale of
the investment in Nabi was reported as a separate line item in the Company's
statement of operations for 1996.
Gross unrealized holding losses of $2.9 million and gross unrealized holding
gains of $3.4 million were recorded at December 31, 1997 in division equity as
compared to unrealized gross holding losses of $2.7 million and unrealized
holding gains of $2.3 million recorded at December 31, 1996.
Information regarding the range of contractual maturities of investments in debt
securities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 1 year ............................ $ 35,298 $ 35,294 $56,296 $56,290
After 1 year through 2 years ............. 62,856 62,806 11,399 11,415
After 2 years through 10 years ........... 28,743 28,821 27,092 26,800
-------- -------- ------- -------
$126,897 $126,921 $94,787 $94,505
======== ======== ======= =======
</TABLE>
Investments in marketable securities are attributed to either Genzyme General,
GTR or GMO. The Company holds certain strategic investments in unconsolidated
entities which may be attributed to either Genzyme General, GTR or GMO.
22
<PAGE> 23
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
The disclosures related to Genzyme General's investments in GTC, ABIOMED,
Inc., Aronex Pharmaceuticals, Inc., Celtrix Pharmaceuticals, Inc., Geltex
Pharmaceuticals, Inc., and Nabi (formerly North American Biologicals, Inc.) are
included in Note H., "Investments" to the Consolidated Financial Statements
which is incorporated herein by reference.
NOTE J. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
--------------------------------------------------
<S> <C> <C>
Professional fees .... $ 7,057 $ 3,757
Compensation ......... 19,865 21,252
Royalties ............ 8,151 8,210
Rebates .............. 4,575 7,604
Interest ............. 381 1,677
Other ................ 26,836 25,145
------- -------
$66,865 $67,645
======= =======
</TABLE>
NOTE K. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Long-term debt at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility .................. $ 95,000 $ 200,000
Mortgage note payable, matures June 13, 1999 19,833 20,375
Other mortgage notes payable ............... 3,856 3,983
--------- ---------
118,689 224,358
Less current portion ....................... (711) (999)
--------- ---------
$ 117,978 $ 223,359
========= =========
</TABLE>
In January 1997, Genzyme General repaid $100.0 million of its debt outstanding
plus accrued interest of $0.5 million.
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1998-$711,000, 1999-$114,394,000,
2000-$153,000, 2001-$160,000 and 2002-$170,000 and thereafter $3,101,000.
Although the Company retains responsibility for the repayment of all long-term
debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated
Financial Statements which is incorporated herein by reference), such debt is
allocated to either Genzyme General, GTR or GMO for reporting purposes based on
the intended use of the funds borrowed under each instrument.
CREDIT FACILITIES, INTEREST RATE HEDGE AGREEMENTS, MORTGAGE NOTES AND CONVERSION
OF $100.0 million, 6-3/4% CONVERTIBLE SUBORDINATED NOTES:
The disclosures related to Genzyme's Credit Facilities, and Interest Rate Hedge
Agreements, Mortgage Notes and conversion of $100.0 million Convertible
Subordinated Notes (the "Notes") (which were converted in March 1996 into shares
of GGD Stock and GTR Stock) and the GTR and GMO Private Placements are included
in Note J., "Long-Term Debt and Leases" to the Consolidated Financial Statements
which is incorporated herein by reference.
OPERATING LEASES
Total rent expense under operating leases was $14.4 million, $10.7 million, and
$8.6 million in 1997, 1996 and 1995, respectively. Genzyme General leases
facilities and personal property under certain operating leases in excess of one
year.
23
<PAGE> 24
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
FUTURE MINIMUM PAYMENTS DUE UNDER CAPITAL AND OPERATING LEASES:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(DOLLARS IN THOUSANDS) LEASES LEASES
-----------------------------------------------------------------------------------
<S> <C> <C>
1998 ............................................... $182 $ 13,256
1999 ............................................... 10 12,674
2000 ............................................... -- 11,532
2001 ............................................... -- 8,481
2002 ............................................... -- 8,155
Thereafter ......................................... -- 77,824
---- --------
Total minimum payments ............................. 192 $131,922
========
Less: interest ..................................... (10)
----
$182
====
</TABLE>
NOTE L. DIVISION EQUITY
The following presents the division equity of Genzyme General for the periods
presented:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period ............................. $ 884,225 $ 659,281 $395,649
Net income (loss) .......................................... 57,026 (47,513) 34,823
Allocation of tax benefits generated by GTR ................ 17,666 17,011 8,857
Allocation of tax benefits generated by GMO ................ 2,755 -- --
Issuance of common stock under stock plans ................. 35,963 18,581 32,083
Exercise of warrants ....................................... 855 106,164 6,264
Allocation to GTR for designated shares ..................... (14,892) (11,714) --
Shares issued in connection with acquisitions .............. -- 36,991 23,821
Allocation of acquired deferred tax asset in connection with
the acquisition of PharmaGenics, Inc. .................... 2,900 -- --
Tax benefit of disqualified dispositions ................... 4,127 3,500 5,500
Issuance of common stock in connection with the conversion
of $100.0M 6 3/4% Convertible Subordinated Notes .......... -- 101,400 --
Shares issued in public offering ........................... -- -- 141,276
Equity adjustments ......................................... (9,749) 524 11,008
--------- --------- --------
$ 980,876 $ 884,225 $659,281
========= ========= ========
</TABLE>
At December 31, 1997 and 1996, Genzyme General had 200,000,000 shares of GGD
Stock authorized and approximately 77,693,000 and 75,537,000 shares,
respectively, issued.
Included in division equity are the cumulative foreign currency translation
adjustments of $(12.4) million and $(0.7) million at December 31, 1997 and
1996, respectively.
In March 1996, holders of the Notes converted such Notes into GGD Stock and GTR
Stock. Holders of such Notes received 37.826 shares of GGD Stock and 2.553
shares of GTR Stock in conversion of each $1,000 Note.
In June 1996, the Genzyme Board declared a 2-for-1 stock split of shares of GGD
Stock to be effected by means of a 100% stock dividend payable on July 25, 1996
to stockholders of record on July 11, 1996. On July 25, 1996, a total of
34,669,435 shares of GGD Stock were distributed to stockholders in connection
with the dividend. All share and per share amounts have been restated to
reflect this split.
24
<PAGE> 25
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLAN, STOCK RIGHTS, STOCK
OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, CREATION OF GGD STOCK AND GTR STOCK,
WARRANTS, GTR DESIGNATED SHARES AND GMO DESIGNATED SHARES The disclosures
relating to Genzyme's preferred stock, Directors' Deferred Compensation Plan,
stock rights, stock options, Employee Stock Purchase Plan, creation of GGD Stock
and GTR Stock, and warrants are included in Note K., "Stockholders' Equity" to
the Consolidated Financial Statements which is incorporated herein by reference.
At December 31, 1997, approximately 18,135,000 shares of GGD Stock were reserved
for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997
Equity Incentive Plan, 1988 Director Stock Option Plan, as amended, and 1990
Employee Stock Purchase Plan, as amended, and upon the exercise of outstanding
warrants. At December 31, 1997, approximately 13,347,000 options to purchase
shares of GGD Stock were outstanding.
Pursuant to the Genzyme Charter, GTR and GMO Designated Shares are authorized
shares of GTR Stock and GMO Stock which are not issued and outstanding, but
which the Genzyme Board may from time to time issue, sell or otherwise
distribute without allocating the proceeds or other benefits of such issuance,
sale or distribution to GTR or GMO. GTR and GMO Designated Shares are created in
certain circumstances when cash or other assets are transferred from Genzyme
General to GTR or GMO.
In October 1996, the Genzyme Board approved the allocation of up to $20.0
million in cash from Genzyme General to GTR to provide initial funding for GTR's
joint venture with Diacrin, of which $7.0 million has been allocated to GTR in
exchange for 721,455 GTR Designated Shares.
In 1997, the Genzyme Board approved the allocation of up to $25.0 million in
cash from Genzyme General to GMO (the "GMO Equity Line"). The amount available
was reduced to $5.0 million as a result of the issuance of the GMO Debentures in
August 1997. No draws have been made under the GMO Equity Line to date.
As of December 31, 1997, there were approximately 885,000 GTR Designated Shares
reserved for issuance. During 1997, the Company distributed approximately
2,292,000 GTR Designated Shares as a dividend to Genzyme General shareholders.
As of December 31, 1997, there were 6,000,000 GMO Designated Shares reserved
for issuance. There have been no issuances of GMO Designated Shares to date.
Further disclosures relating to Genzyme's stock options and GTR and GMO
Designated Shares are included in Note K., "Stockholders' Equity" to the
Consolidated Financial Statements which is incorporated herein by reference.
STOCK COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its four stock-based compensation plans, the
1990 Equity Incentive Plan, and the 1997 Equity Incentive Plan (both of which
are stock option plans), the 1988 Director Stock Option Plan (a stock option
plan) and the 1990 Employee Stock Purchase Plan (a stock purchase plan) and,
accordingly, no compensation expense has been recognized for shares purchased or
for options granted to employees with an exercise price equal to fair market
value. Had compensation expense for the stock-based compensation plans been
determined based on the fair value at the grant dates for options granted and
shares purchased under the plans consistent with the provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation"
("SFAS 123"), Genzyme General's net (loss) income and (loss) earnings per share
would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
(Amounts in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GENZYME GENERAL:
Net income (loss):
As reported ............................... $77,447 $(30,502) $43,680
Pro forma ................................. $65,440 $(40,558) $40,429
Basic earnings per share:
As reported ............................... $ 1.01 $ (0.45) $ 0.79
Pro forma ................................. $ 0.86 $ (0.59) $ 0.73
Diluted earnings per share:
As reported ............................... $ 0.98 $ (0.45) $ 0.68
Pro forma ................................. $ 0.83 $ (0.59) $ 0.63
</TABLE>
For the assumptions used in the SFAS 123 calculations for Genzyme General for
the three years ended December 31, 1997, 1996 and 1995 -- see Note K.,
"Stockholders Equity" to the Consolidated Financial Statements which is
incorporated herein by reference.
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995 and additional awards are
anticipated in future years.
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties include
the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees for research and development activities:
Neozyme II .................................. $ -- $19,799 $24,198
Research contracts .......................... 8,041 3,212 2,560
------- ------- -------
$ 8,041 $23,011 $26,758
======= ======= =======
</TABLE>
The disclosures related to Neozyme II and Genzyme General participation in
research contracts are included in Note H., "Investments in GTC and RenaGel
LLC," and Note L., "Research and Development Agreements -- Genzyme Development
Partners, L.P." to the Consolidated Financial Statements which are incorporated
herein by reference.
NOTE N. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme General has been subject to legal proceedings and
claims arising in connection with its business. At December 31, 1997, there were
no asserted claims against Genzyme General which, in the opinion of management,
if adversely decided would have a material adverse effect on Genzyme General's
financial position and results of operations.
25
<PAGE> 26
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE O. INCOME TAXES
Income (loss) before income taxes and the related income tax expense (benefit)
are as follows for the year ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (1) ......... $81,805 $(37,615) $62,633
Foreign .............. 8,822 10,308 2,696
------- -------- -------
Total .......... $90,627 $(27,307) $65,329
======= ======== =======
Currently payable:
Federal ........... $ 31,102 $ 37,985 $ 18,780
State ............. 3,498 6,889 5,949
Foreign ........... 2,971 3,616 1,349
-------- -------- --------
Total current .. 37,571 48,490 26,078
Deferred:
Federal ........... (3,723) (28,448) 4,507
State ............. (247) 164 (79)
-------- -------- --------
Total deferred . (3,970) (28,284) 4,428
-------- -------- --------
Provision for income
taxes ............. $ 33,601 $ 20,206 $ 30,506
======== ======== ========
</TABLE>
(1) Includes $130.6 million and $14.2 million in charges for purchased
research and development and acquisition expenses in 1996 and 1995,
respectively.
Provisions for income taxes were at rates other than the U.S. federal statutory
tax rate for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------------------------
<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 .................... 1.1 0.8 0.8
State taxes, net ............................................. 3.0 5.2 5.2
Foreign sales corporation .................................... (2.4) (2.1) (1.4)
Nondeductible amortization ................................... 3.1 2.1 1.4
Benefit of tax credits ....................................... (1.8) -- --
Other, net ................................................... (0.9) 2.2 0.7
Utilization of operating loss carryforwards .................. -- (2.6) (3.8)
------- ------- ------
Effective tax rate before certain charges .................. 37.1 40.6 37.9
Gross charge for purchased research and development net of
related tax benefits ......................................... -- 33.4 8.8
------- ------- ------
37.1 74.0 46.7
Allocated tax benefits generated by Genzyme Tissue Repair .... (19.5) (62.3) (13.6)
Allocated tax benefits generated by Genzyme Molecular Oncology (3.1) -- --
------- ------- ------
Effective tax rate attributable to Genzyme General Stock ..... 14.5% 11.7% 33.1%
========================================================================================================
</TABLE>
26
<PAGE> 27
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
At December 31 the components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .......................... $ 4,909 $10,427
Tax credits ............................................... 5,091 --
Deferred gain ............................................. 2,237 --
Intangible amortization ................................... 28,730 29,901
Investments in unconsolidated subsidiaries ................ 1,323 --
Realized and unrealized capital losses .................... 16,987 17,603
Reserves and other ........................................ 23,716 17,687
Allocation of tax benefit from Genzyme Tissue Repair ...... 15,515 13,266
Allocation of tax benefit from Genzyme Molecular Oncology.. 3,252 --
- -------------------------------------------------------------------------------------------------
Gross deferred tax asset .................................. 101,760 88,884
Valuation allowance ....................................... (14,914) (15,299)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset .................................... 86,846 73,585
Deferred tax liabilities:
Depreciable assets ........................................ (23,257) (13,871)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset .................................... $ 63,589 $59,714
=================================================================================================
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses related to the purchase of
in-process research and development, the Company placed a valuation allowance of
$14.9 million and $15.3 million for December 31, 1997 and December 31, 1996,
respectively, against otherwise recognizable deferred tax assets.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
At December 31, 1997 Genzyme General had U.S. net operating loss and tax credit
carryforwards of $14.0 million and $5.1 million, respectively, for income tax
purposes. These carryforwards expire from 2002 to 2012. Utilization of tax net
operating loss carryforwards may be limited under Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). Tax credits of $2.5 million
expire in 2012. The remaining $2.6 million of tax credits carry forward
indefinitely.
NOTE P. BENEFIT PLANS
The disclosures relating to Genzyme's domestic employee savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") and
defined-benefit pension plans are included in Note O., "Benefit Plans" to the
Consolidated Financial Statements which is incorporated herein by reference.
Genzyme General contributed $1.3 million, $1.1 million, and $0.7 million to the
401(k) Plan in 1997, 1996 and 1995, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and its foreign subsidiaries. Pension expense for Genzyme
General related to these plans for 1997, 1996 and 1995 was approximately
$1,110,000, $601,000 and $498,000, respectively. Pension costs are funded as
accrued. Actuarial and other disclosures regarding the plans are not presented
because the plans are not material.
27
<PAGE> 28
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE Q. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
Genzyme General operates in the healthcare industry and manufactures and markets
its products in two major geographic areas, the United States and Europe.
Genzyme General's principal manufacturing facilities are located in the United
States, United Kingdom, Switzerland and Germany. Genzyme General purchases
products from its British and Swiss subsidiaries for sale to customers in the
United States. Transfer prices from the foreign subsidiaries are intended to
allow Genzyme to produce profit margins commensurate with its sales and
marketing effort. Genzyme's Netherlands subsidiary is the primary European
distributor of Genzyme General's therapeutic products.
Certain information by geographic area follows (dollars in thousands):
<TABLE>
<CAPTION>
UNITED
STATES NETHERLANDS UK OTHER ELIMINATION COMBINATION
----------- ----------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997
Net sales -
unaffiliated customers ..................... $ 423,912 $ 40,436 $32,852 $88,562 $ -- $ 585,762
Transfers between geographic areas .......... 119,391 63,100 28,205 2,634 (213,330) --
----------- -------- ------- ------- --------- -----------
Total product and service sales .............. 543,303 103,536 61,057 91,196 (213,330) 585,762
Pre-tax income .............................. 78,942 1,539 3,304 2,699 4,143 90,627
Net income .................................. 70,008 948 2,172 1,235 3,084 77,447
Assets ...................................... 1,144,583 30,638 69,125 39,304 (80,594) 1,203,056
Liabilities ................................. 180,117 28,329 2,058 22,114 (10,438) 222,180
1996
Net sales -
unaffiliated customers ..................... $ 354,323 $ 56,865 $21,217 $53,716 $ -- $ 486,121
Transfers between geographic areas .......... 101,786 33,659 30,435 3,615 (169,495) --
----------- -------- ------- ------- --------- -----------
Total product and service sales .............. 456,109 90,524 51,652 57,331 (169,495) 486,121
Pre-tax income .............................. (30,124) 920 8,349 1,807 (8,259) (27,307)
Net income .................................. (31,956) 520 8,349 844 (8,259) (30,502)
Assets ...................................... 1,170,826 33,500 69,379 41,511 (85,697) 1,229,519
Liabilities ................................. 283,756 31,930 2,241 27,410 (43) 345,294
1995
Net sales -
unaffiliated customers ..................... $ 247,138 $ 70,532 $13,669 $20,264 $ -- $ 351,603
Transfers between geographic areas .......... 74,697 -- 19,543 4,115 (98,355) --
----------- -------- ------- ------- --------- -----------
Total product and service sales .............. 321,835 70,532 33,212 24,379 (98,355) 351,603
Pre-tax income .............................. 65,941 836 93 1,759 (3,300) 65,329
Net income .................................. 45,856 540 93 491 (3,300) 43,680
Assets ...................................... 873,252 27,703 54,595 25,692 (126,656) 854,586
Liabilities ................................. 156,650 26,652 1,962 10,041 -- 195,305
</TABLE>
Substantially all revenue from research and development contracts is earned in
the United States. Entities comprising Other include Genzyme General's
operations in Germany, France, Switzerland, Japan, Italy, Belgium, Sweden,
Canada, Israel, Spain, Argentina and Brazil. Export sales from the United States
were $36.2 million, $27.4 million and $20.5 million in 1997, 1996 and 1995,
respectively. Export sales by Genzyme's Netherlands subsidiary amounted to $40.4
million, $56.9 million and $66.2 million in 1997, 1996 and 1995, respectively.
Genzyme General's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. In 1997, 1996 and 1995 Cerezyme(R)
enzyme and Ceredase(R) enzyme represented 63%, 62% and 71% of total product
sales, respectively. In 1997, 1996 and 1995, Genzyme General marketed its
Cerezyme(R) enzyme and Ceredase(R) enzyme products directly to physicians,
hospitals and treatment centers, and sold products representing approximately
18%, 12% and 14%, respectively, of net revenue to an unaffiliated distributor.
Otherwise, the credit risk associated with trade receivables is mitigated due to
the large number of customers and their broad dispersion over different
industries and geographic areas.
28
<PAGE> 29
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE R. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1997 and 1996 are displayed in the
following table.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- ---------
<S> <C> <C> <C> <C>
1997
Net sales .......................................... $144,606 $147,614 $ 148,841 $ 156,142
Gross profit ....................................... 87,084 91,454 94,387 71,358
Net income (1) ..................................... 21,238 23,283 24,357 8,569
Income per share (2,3):
Basic ............................................ 0.28 0.31 0.32 0.11
Diluted .......................................... 0.27 0.30 0.31 0.11
1996
Net sales .......................................... $111,783 $113,988 $ 141,022 $ 144,649
Gross profit ....................................... 64,171 67,260 73,867 82,004
Net income (loss) (4) ............................. 19,034 20,284 (5,908) (63,912)
Income (loss) per share (2,3):
Basic ............................................ 0.30 0.30 (0.09) (0.91)
Diluted .......................................... 0.26 0.27 (0.09) (0.91)
</TABLE>
- ---------
(1) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million
resulting from certain strategic financial provisions recorded in
December 1997 (see Note C., "Strategic Financial Provisions" to the
Combined Financial Statements above).
(2) Income (loss) per share data for the first, second and third quarters
of 1997 and for all quarters of 1996 has been restated to reflect the
adoption in December 1997 of SFAS 128, "Earnings Per Share" and is pro
forma. (See Note A., "Summary of Significant Accounting Policies" to
the Combined Financial Statements above.)
(3) Cumulative quarterly income per share data does not equal the annual
amounts due to changes in the average common and common equivalent
shares outstanding.
(4) Includes pre-tax charges in the third and fourth quarters of 1996 of
$24.2 million and $106.5 million, respectively, for acquired incomplete
technology (See Note C., "Acquisitions" to the Consolidated Financial
Statements which is incorporated herein by reference).
NOTE S. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The disclosures relating to off-balance sheet financial instruments are included
in Note D., "Off-Balance-Sheet Financial Instruments" to the Consolidated
Financial Statements which is incorporated herein by reference.
29
<PAGE> 30
GENZYME GENERAL
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying combined balance sheets of Genzyme General (as
described in Note A) as of December 31, 1997 and 1996, and the related combined
statements of operations and cash flows, and the combined financial statement
schedule for each of the three years in the period ended December 31, 1997. The
combined financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility is to
express an opinion on these combined financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme General present
fairly, in all material respects, the financial position of Genzyme General as
of December 31, 1997 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the combined financial statement schedule taken as a whole presents
fairly, in all material respects, the information required to be included
therein.
As more fully described in Note A to these financial statements, Genzyme General
is a business group of Genzyme Corporation; accordingly, the combined financial
statements of Genzyme General should be read in conjunction with the audited
consolidated financial statements of Genzyme Corporation and Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
30
<PAGE> 31
GENZYME GENERAL DIVISION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<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, 1997:
Allowance for doubtful accounts $16,100,400 $ 2,355,000 - $7,156,400 $11,299,000
Inventory Reserve $ 3,247,200 $15,585,000(1) - $3,840,000 $14,992,200
Year ended December 31, 1996:
Allowance for doubtful accounts $ 7,833,800 $ 8,093,600 $2,534,000(3) $2,361,000(2) $16,100,400
Inventory Reserve $ 3,082,200 $ 1,426,600 - $1,261,600 $ 3,247,200
Year ended December 31, 1995:
Allowance for doubtful accounts $ 5,992,300 $ 5,180,000 - $3,338,500(2) $ 7,833,800
Inventory Reserve $ 1,131,000 $ 2,920,700 - $ 969,500 $ 3,082,200
</TABLE>
- -----------
(1) Includes $13.4 million of strategic financial provisions (See Note C,
"Strategic Financial Provisions" to Genzyme General's Combined
Financial Statements).
(2) Uncollectible accounts written off, net of recoveries.
(3) Reserve acquired in acquisition.
<PAGE> 32
GENZYME CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales ........................... $ 529,927 $ 424,483 $ 304,373 $ 238,645 $ 183,366
Net service sales ........................... 67,158 68,950 52,450 50,010 50,511
Revenues from research and development
contracts:
Related parties ........................... 8,356 23,011 26,758 20,883 34,162
Other ..................................... 3,400 2,310 202 1,513 2,332
--------- --------- --------- --------- ---------
Total revenues........................... 608,841 518,754 383,783 311,051 270,371
Operating costs and expenses:
Cost of products sold (1) ................... 206,028 155,930 113,964 92,226 64,704
Cost of services sold ....................... 47,289 54,082 35,868 32,403 34,558
Selling, general and administrative (1) ..... 200,476 162,264 110,447 80,990 72,752
Research and development (including research
and development related to contracts) ...... 89,558 80,849 68,845 55,334 48,331
Amortization of intangibles ................. 17,245 8,849 4,647 4,741 5,964
Purchase of in-process research and
development (2) ........................... 7,000 130,639 14,216 11,215 49,000
Other (3) ................................... -- 1,465 -- -- 26,517
--------- --------- --------- --------- ---------
Total operating costs and expenses....... 567,596 594,078 347,987 276,909 301,826
--------- --------- --------- --------- ---------
Operating income (loss) ........................ 41,245 (75,324) 35,796 34,142 (31,455)
Other income (expenses):
Equity in net loss of unconsolidated
subsidiaries ............................... (12,258) (4,360) (1,810) (1,353) --
Other (1) ................................... (2,000) 1,711 1,608 (9,752) 9,192
Investment income ........................... 11,409 15,341 8,814 9,101 12,209
Interest expense ............................ (12,667) (6,990) (1,109) (1,354) (2,500)
--------- --------- --------- --------- ---------
Total other income (expenses)............. (15,516) 5,702 7,503 (3,358) 18,901
--------- --------- --------- --------- ---------
Income (loss) before income taxes .............. 25,729 (69,622) 43,299 30,784 (12,554)
Benefit (provision) for income taxes ........... (12,100) (3,195) (21,649) (14,481) 6,459
--------- --------- --------- --------- ---------
Net income (loss)(4,6) ......................... $ 13,629 $ (72,817) $ 21,650 $ 16,303 $ (6,095)
========= ========= ========= ========= =========
</TABLE>
31
<PAGE> 33
GENZYME CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA: 1997 1996 1995 1994 1993
----------- ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL:
Net income (loss) attributable to Genzyme
General Division Common Stock ("GGD Stock")
(1,2,3,4,6) ..................................... $ 77,447 $ (30,502) $ 43,680 $ 32,054 $ 18,020
=========== ========== ========= ======== =========
Per Genzyme General common share-basic (1,2,4,5,6):
Net income (loss) .............................. $ 1.01 $ (0.45) $ 0.79 $ 0.67 $ 0.37
=========== ========== ========= ======== =========
Weighted average shares outstanding ............. 76,531 68,289 55,531 48,141 48,075
=========== ========== ========= ======== =========
Per Genzyme General common and common
equivalent share-diluted (4,5,6):
Net income (loss) ............................... $ 0.98 $ (0.45) $ 0.68 $ 0.58 $ 0.36
=========== ========== ========= ======== =========
Adjusted weighted average shares outstanding .... 78,925 68,289 63,967 55,321 56,282
=========== ========== ========= ======== =========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss attributable to Genzyme Tissue
Repair Division Common Stock
("GTR Stock") (4,6) ............................ $ (45,984) $ (42,315) $ (22,030) $(15,751) $ (24,115)
=========== ========== ========= ======== =========
Per GTR basic and diluted common share (6) ....... $ (3.07) $ (3.38) $ (2.28) $ (4.40) $ (7.43)
=========== ========== ========= ======== =========
Weighted average basic and diluted shares
outstanding .................................... 14,976 12,525 9,659 3,578 3,245
=========== ========== ========= ======== =========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss attributable to Genzyme Molecular
Oncology Division Common Stock ("GMO Stock")(6).. $ (19,578) $ (1,003) $ (464) $ (37) --
=========== ========== ========= ========
Pro forma per GMO basic and diluted common
share (6,7) ..................................... $ (4.98) $ (0.26) $ (0.12) $ (0.01) --
=========== ========== ========= ========
Pro forma basic and diluted shares
outstanding (7) ................................. 3,929 3,929 3,929 3,929 --
=========== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA: DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Cash and investments (8) ................... $ 246,341 $ 187,955 $326,236 $153,460 $168,953
Working capital ............................ 350,822 395,605 352,410 103,871 99,605
Total assets ............................... 1,295,453 1,270,508 905,201 658,408 542,052
Long-term debt, convertible debentures and
capital lease obligations excluding
current portion (9,10) .................... 170,276 241,998 124,473 126,729 144,674
Stockholders' equity (9,11) ................ 1,012,050 902,309 705,207 418,964 334,072
</TABLE>
There were no cash dividends paid.
NOTES TO SELECTED FINANCIAL DATA:
(1) In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges
mainly associated with its Pharmaceutical and Surgical Products businesses
and the sale of Genetic Design, Inc. ("GDI"), which was sold in 1996. This
resulted in (i) an $18.1 million charge to cost of products sold primarily
related to the melatonin, bulk pharmaceuticals and fine chemical product
lines which are being discontinued by Genzyme General; (ii) charges of $5.5
million to cost of products sold and $3.5 million to selling, general and
administrative ("SG&A") expense primarily related to the manufacturing and
selling of the Sepracoat(TM) product line, which was also discontinued
after an advisory panel of the U.S. Food and Drug Administration
recommended against granting market approval of this product
32
<PAGE> 34
in 1997; and (iii) a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
(2) Genzyme acquired: in 1997, the assets of PharmaGenics, Inc.
("PharmaGenics"); in 1996, Deknatel Snowden Pencer, Inc. ("DSP") and
all of the Callable Common Stock of Neozyme II Corporation ("Neozyme
II"); in 1995, the publicly-held, minority interest in IG Laboratories,
Inc. ("IG"); in 1994, all of the outstanding stock of BioSurface
Technology, Inc. ("BioSurface"); and, in 1993, all of the rights to the
two remaining development programs of Neozyme I Corporation ("Neozyme
I"). In connection with these transactions, all of which were accounted
for as purchases, Genzyme charged to operations the following amounts
which represented the purchase of in-process research and development:
1997, $7.0 million; 1996, $130.6 million; 1995, $14.2 million; 1994,
$11.2 million; and 1993, $49.0 million.
(3) In 1996, Genzyme incurred restructuring charges of $1.5 million related
to the consolidation of laboratory operations in its diagnostic
services business and to the consolidation of foreign operations in its
surgical products business in connection with certain acquisitions. In
1993, Genzyme incurred restructuring charges of $2.8 million related to
the consolidation of laboratory operations in its diagnostic services
business and wrote off $23.7 million for the value of impaired goodwill
associated primarily with IG's acquisition of GDI in 1992.
(4) Net income (loss) attributable to Genzyme General Division ("Genzyme
General") and Genzyme Tissue Repair Division ("Genzyme Tissue Repair"
or "GTR") and net income (loss) per common and common equivalent share
of GGD Stock and GTR Stock for the year ended December 31, 1993 give
effect to the provisions of the Management and Accounting Policies
adopted by the Genzyme Board of Directors (the "Genzyme Board") in
connection with the creation of GTR and accordingly, are pro forma
presentations.
(5) Reflects the July 25, 1996 2-for-1 stock split of GGD Stock effected by
means of a 100% stock dividend paid to stockholders of record on July
11, 1996. All share and per share amounts have been restated to
reflect this split.
(6) In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128") which established a different method of
computing net income per share ("EPS") than is required under the
provisions of Accounting Principles Board Opinion No. 15 ("APB 15").
The Company adopted SFAS 128 in the fiscal quarter ending December 31,
1997. All historical EPS data presented herein has been restated to
conform to the provisions of SFAS 128. (See Note A., "Summary of
Significant Accounting Policies" to the Consolidated Financial
Statements).
(7) Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or
"GMO") is a division of Genzyme Corporation. GMO was part of Genzyme
General from December 1, 1994 (Date of Inception) to June 18, 1997.
Therefore, pro forma net loss per share data is presented for GMO Stock
for all periods presented as there were no shares of GMO Stock
outstanding prior to June 18, 1997. In each year, approximately
3,929,000 shares of GMO Stock, which represents the shares of GMO Stock
issued to effect the merger of PharmaGenics with and into Genzyme on
June 18, 1997, have been used for the pro forma loss per basic and
diluted share calculation.
(8) Cash and investments includes cash, cash equivalents, and short and
long-term investments and excludes investments in equity securities.
(9) In October 1991, the Company issued $100.0 million of 6 3/4%
convertible subordinated notes due October 2001 and received net
proceeds of $97.3 million. The notes were converted into shares of GGD
Stock in March 1996. In March 1996, the convertible subordinated notes
were converted into approximately 3,782,000 shares of GGD Stock and
255,000 shares of GTR Stock. See Note J., "Long-Term Debt and Leases"
to the Consolidated Financial Statements for disclosures relating to
the GTR and GMO private placements.
(10) In June 1996, the Company's $15.0 million credit line with a commercial
bank was increased to $215.0 million in connection with the acquisition
of DSP in July 1996. In November 1996, this credit line was refinanced
with a syndicated group of banks and the line of credit was increased
to $225.0 million (the "Revolving Credit Facility"). As of December
1996, Genzyme had $218.0 million outstanding under the Revolving Credit
Facility. As of December 31, 1997, Genzyme had $118.0 million
outstanding under the Revolving Credit Facility. (See Note J.,
"Long-Term Debt and Leases" to the Consolidated Financial Statements).
(11) In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public
for $7.75 per share. Net proceeds from the offering after underwriting
discounts, commissions and offering costs were $29.0 million. In
October 1995, Genzyme General completed the sale of 5,750,000 shares
of GGD Stock for net proceeds of $141.3 million. In September 1995,
GTR completed the sale of 3,000,000 shares of GTR Stock for net
proceeds of $42.3 million.
33
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of
Genzyme Corporation ("Genzyme" or the "Company") as of the filing date of this
Annual Report. The actual results for Genzyme could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results".
Stockholders and potential investors should consider carefully each of these
risks and uncertainties in evaluating the financial condition and results of
operations of Genzyme.
Genzyme is a biotechnology company that develops innovative products
and services for major unmet medical needs. Genzyme has three divisions: Genzyme
General, which develops and markets therapeutic and surgical products and
diagnostic services and products; Genzyme Tissue Repair, which develops and
markets biological products for the treatment of cartilage damage, severe burns,
chronic skin ulcers and neurodegenerative diseases; and Genzyme Molecular
Oncology, which was formed in June 1997 in connection with the acquisition of
PharmaGenics and develops gene-based approaches to cancer therapy through
genomics, gene therapy and a small molecule drug discovery program. Genzyme owns
approximately 43% of the outstanding shares of the common stock of Genzyme
Transgenics Corporation ("GTC"). GTC applies transgenic technology to enable the
development and production of recombinant proteins and monocolonal antibodies
for medical uses. Primedica Corporation, GTC's contract research organization,
provides preclinical development and testing services to pharmaceutical,
biotechnology, medical device and other companies. GTC is also developing
idiotypic vaccines in collaboration with the National Cancer Institute.
Genzyme Corporation provides separate financial statements for the
Company and its subsidiaries on a consolidated basis and for each of Genzyme
General, GTR and GMO. The financial statements of each division include the
financial position, results of operations and cash flows of programs and
products allocated to the division under the Company's Restated Articles of
Organization, as amended (the "Genzyme Charter"), and the management and
accounting policies adopted by the Genzyme Board to govern the relationship of
the divisions. The financial information of Genzyme General, GTR and GMO, taken
together, include all accounts which comprise the consolidated financial
information presented for Genzyme and its subsidiaries.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management
considers necessary in reviewing Genzyme's consolidated results of operations.
Detailed discussion and analysis of each division's results of operations are
provided in the respective Management's Discussion and Analysis of Results of
Operations and Financial Condition for each division.
In the fourth quarter of 1997, Genzyme General recorded $29.2 million
of charges mainly associated with its Pharmaceutical and Surgical Products
businesses and the sale of GDI which was sold in 1996. The Pharmaceutical
business will now focus on products that are more consistent with Genzyme
General's long-term business strategy of moving towards higher-value products
and away from fine chemical and bulk pharmaceuticals. This change in strategy
resulted in a $18.1 million charge to cost of products sold primarily related to
the melatonin, bulk pharmaceuticals and fine chemical product lines which are
being discontinued. In addition, Genzyme General recorded charges of $5.5
million to cost of products sold and $3.5 million to SG&A expense primarily
related to the manufacturing and selling of the Sepracoat(TM) product line,
which was also discontinued after an advisory panel of the U.S. Food and Drug
Administration ("FDA") recommended against granting marketing approval of this
product in 1997. Genzyme General also recorded a $2.0 million charge to other
expense related to the uncertainty of collection on certain notes receivable.
Because of the strategic changes in Genzyme General's business the
financial condition and results of operations will now be discussed differently
than in previous years. Genzyme General is now focusing its efforts within three
business areas - therapeutics, surgical products and diagnostics.
34
<PAGE> 36
GENZYME CORPORATION (CONT.)
1997 AS COMPARED TO 1996
REVENUES. Total revenues for 1997 were $608.8 million compared to
$518.8 million in 1996, an increase of 17%. Product and service revenues were
$597.1 million in 1997, compared to $493.4 million in 1996, an increase of 21%.
Revenues from research and development contracts for 1997 were $11.8 million
compared to $25.3 million in 1996, a decrease of 53%.
Product revenues consist of sales by Genzyme General. Product revenues
in 1997 increased 25% to $529.9 million from $424.5 million in 1996, due
primarily to increased sales of Cerezyme(R) enzyme and a full year of sales by
DSP, which was acquired by the Company in July 1996.
Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme by Genzyme General
increased 26% to $332.7 million in 1997 from $264.6 million in 1996, due to
continued growth in new patient accruals in existing markets. Genzyme's results
of operations are highly dependent on sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme, which together represented 63% of consolidated product sales
in 1997 compared to 62% in 1996. In October 1996, Genzyme General received FDA
approval to manufacture Cerezyme(R) enzyme in its large-scale manufacturing
plant located in Boston, Massachusetts. Having achieved the ability to produce
uninterrupted supply of Cerezyme(R) enzyme at the plant, Genzyme General
commenced the process of converting patients receiving Ceredase(R) enzyme to
Cerezyme(R) enzyme. The conversion of patients from Ceredase(R) enzyme to
Cerezyme(R) enzyme is substantially complete in the United States. Genzyme
General may be required to record a charge to earnings for the equipment used
exclusively for and any inventory of Ceredase(R) enzyme remaining upon
completion of the patient conversion process and, if the conversions proceed
more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme and
the corresponding charge to earnings could be material.
Genzyme General's Surgical Products business unit was formed in July
1996 by Genzyme General following the acquisition of DSP and combines the
business of DSP with Genzyme General's hyaluronic acid-based products designed
to limit postoperative adhesions (the "Sepra Products"). Sepra Products
primarily consist of sales of Seprafilm(R). Product sales by the Surgical
Products business unit for 1997 were $100.8 million as compared to $50.7 million
for the period from July 1, 1996, the date of the acquisition of DSP, through
December 31, 1996. Surgical Products sales consisted primarily of sales of
cardiovascular fluid management products, surgical closures and surgical
instruments. These product sales (excluding sales of Sepra Products) declined
12% in the second half of 1997 in comparison to the same period of 1996 due to a
loss of volume and severe price competition in the fluid management business.
DSP's product sales for the first half of 1996, which are not included in the
results of Genzyme General, were $53.2 million.
Service revenues primarily consist of genetic testing services by
Genzyme General and sales of GTR's autologous cultured chondrocytes
("Carticel(TM) AuCC") and Epicel [SM] services. Service revenues for genetic
testing in 1997 decreased 9% primarily due to the loss of revenue from GDI,
which was sold in November 1996, offset in part by higher unit volumes that
were primarily attributable to the acquisition of Genetrix, Inc. ("Genetrix")
which was included in Genzyme General's results of operations from May 1, 1996
forward.
International sales as a percentage of total sales in 1997 increased to
36% from 35% in 1996, due primarily to a 32% increase in combined international
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme, offset in part by additional
domestic sales by DSP.
Revenues from research and development contracts are primarily
attributable to Genzyme General. Revenues from research and development
contracts for 1997 decreased 53% to $11.8 million from $25.3 million in 1996,
due primarily to the absence of revenue from Neozyme II which was acquired by
35
<PAGE> 37
GENZYME CORPORATION (CONT.)
Genzyme in the fourth quarter of 1996. This decrease was offset in part by
increases in revenues from research and development contracts with third
parties. Revenues from Neozyme II were $19.8 million in 1996.
MARGINS AND OPERATING EXPENSES. Gross margins for 1997 were 58%, as
compared to 57% in 1996. Excluding the effects of special charges, gross
margins were 62% in 1997 compared to 57% in 1996. Genzyme provides a broad
range of health care products and services, resulting in a range of gross
margins depending on the particular market conditions of each product or
service. Product margins for 1997 decreased to 61% from 63% in 1996. Excluding
the effects of special charges, product margins in 1997 were 66%. The increase
in product margins before special charges in 1997 is primarily due to increased
sales volume of Cerezyme[R] enzyme offset in part by a full year of sales of
lower margin DSP products. Service margins for 1997 were 30%, compared to 22% in
1996 due to the consolidation of Genetrix, the sale of GDI in 1996 and the
resulting elimination of redundant facilities and staffing.
SG&A expenses and amortization of intangibles for 1997 were $217.7
million compared to $171.1 million in 1996, an increase of 27%. Excluding
special charges, SG&A expenses increased by 21% over 1996. The increase was due
primarily to the acquisition of DSP and increased staffing in support of the
growth in several product lines, most notably in support of the North American
introduction of Seprafilm[R] and increased surgeon training costs related to
Carticel(TM) AuCC. DSP added $16.7 million in SG&A expenses and amortization of
intangibles in the first half of 1997 for which comparable amounts were not
included in the results of Genzyme General in 1996. The acquisition of Genetrix
did not materially affect SG&A expenses in 1996 and 1997 due to consolidation of
operations. GMO incurred $5.1 million in amortization of intangibles in 1997 as
a result of the acquisition of PharmaGenics, and there was no similar amount in
1996.
In 1997, GMO recorded a $7.0 million charge for the purchase of
in-process technology which has no alternative future use, as part of the
acquisition of PharmaGenics.
Research and development expenses for 1997 were $89.6 million compared
to $80.8 million in 1996, an increase of 11%, due to Genzyme General's
commitment to fund development costs of the transgenic recombinant human
antithrombin III ("ATIII") program being conducted by GTC and increased spending
on internal programs, most notably Thyrogen[R].
OTHER INCOME AND EXPENSES. Other income and expenses were a net expense
of $15.5 million (which includes a $2.0 million special charge) compared to
other income of $5.7 million in 1996. The change was due primarily to a decrease
in investment income and an increase in interest expense as well as increased
equity in net losses of unconsolidated affiliates. Investment income for 1997
was $11.4 million, compared with $15.3 million for 1996. The decrease resulted
from lower average cash and investment balances. Investment income for 1997 did
not include any material gain or loss from sales of securities. Interest expense
for 1997 was $12.7 million, compared to $7.0 million in 1996. The increase
resulted from interest on funds borrowed to finance portions of the acquisitions
of DSP and Neozyme II and interest related to convertible notes of GTR and GMO
issued in 1997. Equity in net loss of unconsolidated affiliates increased from
$4.3 million in 1996 to $12.3 million in 1997. The change is primarily due to
increased losses from the joint venture established between Genzyme Tissue
Repair and Diacrin Inc., ("Diacrin") to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans, increased losses from GTC and losses resulting
from the joint venture between Genzyme General and GelTex Pharmaceuticals, Inc.
("GelTex") for the development and commercialization of RenaGel[R] phosphate
binder.
The tax provision for 1997 varies from the U.S. statutory tax rate
because of the provision for state income taxes, nondeductible interest, the
foreign sales corporation, nondeductible amortization of intangibles, tax
credits and Genzyme's share of the losses of unconsolidated affiliates. In 1997,
the effective tax rate was 37%, compared to 41% in 1996. The decrease in the
rate was due to additional tax credits in 1997 as well as a change in
Massachusetts state law.
1996 COMPARED TO 1995
REVENUES. Total revenues for 1996 were $518.8 million compared to
$383.8 million in 1995, an increase of 35%. Product revenues consisted of
product sales by Genzyme General which increased 39% to $424.5 million in 1996
from $304.4 million in 1995. The increase resulted primarily from the addition
of sales from DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R)
enzyme. Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme by Genzyme General
increased 23% to $264.6 million in 1996 from $215.4 million in 1995.
Service revenues consisted of sales of genetic diagnostic testing
services by Genzyme General's Diagnostic Services business unit and sales of
Genzyme Tissue Repair's Carticel(TM) AuCC and Epicel(SM) Service. Service
revenues in
36
<PAGE> 38
GENZYME CORPORATION (CONT.)
1996 increased 31% to $69.0 million from $52.5 million in 1995, due primarily to
higher unit volumes in the Diagnostic Services business unit due primarily to
the acquisition of Genetrix.
Revenues from research and development contracts for 1996 were
attributable entirely to Genzyme General. Revenues from research and development
contracts decreased 6% to $25.3 million in 1996 from $27.0 million in 1995. The
decrease was due to the acquisition of Neozyme II in the fourth quarter of 1996.
MARGINS AND OPERATING EXPENSES. Gross margins for 1996 were 57%,
compared to 58% for 1995. Product margins for 1996 were 63%, level with 1995, as
increased sales of higher margin products from the Company's existing portfolio
were offset by lower margin products acquired with DSP. Service margins for 1996
decreased to 22% from 32% in 1995 due primarily to increased costs associated
with sales of Carticel(TM) AuCC and increased costs during the consolidation
period associated with Genzyme General's acquisition of Genetrix.
SG&A expenses for 1996 were $162.3 million compared to $110.4 million
in 1995, an increase of 47%. The increase resulted primarily from the
acquisitions of DSP and Genetrix and increased staffing in support of the growth
in several product lines and the growth in sales of Carticel(TM) AuCC.
Research and development expenses for 1996 were $80.8 million compared
to $68.8 million in 1995, an increase of 17%. The increase was primarily due to
Genzyme General's commitment to fund development costs of the ATIII program
being conducted by GTC and increased spending on internal programs.
Genzyme recorded the following acquisition-related charges in 1996:
$24.2 million and $106.5 million for the purchase of in-process research and
development in connection with the acquisitions of DSP and Neozyme II,
respectively; $8.8 million for the amortization of intangible assets including
goodwill recorded in connection with the acquisitions of Genetrix, DSP and, in
1995, the publicly-held, minority interest in IG; and $1.5 million for
restructuring charges incurred in connection with the acquisitions of DSP and
Genetrix.
OTHER INCOME AND EXPENSES. Other income and expenses were $5.7 million
in 1996, compared to $7.5 million in 1995, a 24% decrease. The decrease was
primarily the result of increases in interest expenses and Genzyme's equity in
the net loss of GTC which offset a 74% increase in investment income. Interest
expense for 1996 was $7.0 million, compared to $1.1 million in 1995. The
increase resulted from interest on funds borrowed to finance portions of the
acquisitions of DSP and Neozyme II.
The tax provision for 1996 varies from the U.S. statutory tax rate
because of the provision for state income taxes, tax credits and taxes on
foreign earnings, losses of unconsolidated affiliates and nondeductible charges
in connection with tax-free acquisitions. In 1996, the effective tax rate before
these acquisitions was 41%, compared to 37% in 1995. The increase in the rate
was due to nondeductible goodwill charges in 1996 and to the absence in 1996 of
certain operating loss carryforwards available in 1995. The tax provision in
1996 resulted from taxes on foreign earnings and taxes on earnings before
acquisition-related charges comprising charges for goodwill and incomplete
technologies accruing from the acquisitions of DSP and Genetrix.
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of December 31, 1997, Genzyme had cash, cash equivalents and
investments (excluding equity securities) of $246.3 million, an increase of
$58.3 million from December 31, 1996. In 1997 operating and financing activities
provided $39.7 million and $87.0 million of cash, respectively, investing
activities used $115.2 million and fluctuations in exchange rates caused a
reduction in cash of $2.3 million. In 1997, financing activities provided $156.0
million of cash proceeds from the exercise of stock options and warrants and the
issuance of stock under the employee stock purchase plan, and $32.1 million from
the issuance of debt, and used $101.1 million for the repayment of debt and
capital lease obligations. At December 31, 1997, $118.0 million was outstanding
under the $225.0 million Revolving Credit Facility, of which $95.0 million was
allocated to Genzyme General, $18.0 million was allocated to GTR and $5.0
million was allocated to GMO. In 1997, investing activities used $66.7 million
of cash for
37
<PAGE> 39
GENZYME CORPORATION (CONT.)
net purchases of investments and $29.3 million was used to finance capital
expenditures.
Genzyme had inventories of $139.7 million, an increase of $14.4 million
over December 31, 1996. The increase was due primarily to support of increased
business operations, most notably in Genzyme General's Therapeutics business
unit as a result of increased production of Cerezyme(R) enzyme and in the
Surgical Products business unit in support of the introduction of Seprafilm(R)
in the North American marketplace.
On February 28, 1997, GTR raised $13.0 million through the private
placement of a 5% convertible note (the "GTR Note") to an affiliate of Credit
Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning
May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount
to the average of the closing bid prices of the GTR Stock on the Nasdaq National
Market for the 25 trading days immediately preceding the conversion date (the
"Average GTR Stock Price"). The discount will start at 2% beginning six months
from the date the GTR Note was issued and will increase to 11% at 15 months
after the date of issue. Thereafter, the conversion price will be the lesser of
89% of the Average GTR Stock Price preceding the conversion date or the date 15
months after the date of issue. In the first quarter of 1997, GTR recorded $11.5
million of proceeds attributed to the value of the debt and $1.5 million
attributed to the value of the conversion feature (recorded as an increase to
division equity). The debt will be accreted to its face value by a charge to
interest expense of $1.5 million over the term of the initial 15 month
conversion period. As of December 31, 1997, GTR had accreted $1.0 million of the
value of the conversion feature.
On June 30, 1997, the Genzyme Board declared a dividend of
approximately 2,686,000 GTR Designated Shares which were distributed on July 22,
1997 to Genzyme General stockholders of record as of July 11, 1997, in a
tax-free distribution of approximately .03 share of GTR Stock for each share of
GGD Stock owned. A total of approximately 2,292,000 shares of GTR Stock were
issued to Genzyme General stockholders in the distribution and approximately
394,000 shares of GTR Stock have been reserved for issuance upon the exercise of
Genzyme General stock options and warrants outstanding on the record date.
In June 1997, Genzyme General formed RenaGel LLC for the final
development and commercialization of RenaGel(R) non-absorbed phosphate binder.
Funding for the joint venture is provided equally by Genzyme and GelTex. The
agreement calls for Genzyme General to pay GelTex $27.5 million, consisting of a
$2.5 million equity investment in GelTex made in June 1997, a $15.0 million
payment on receipt of FDA marketing approval for RenaGel(R) and a $10.0 million
payment one year following receipt of FDA marketing approval for RenaGel(R).
In September 1997, Genzyme and GTC entered into an Amended and Restated
Convertible Debt Agreement (the "1997 Debt Agreement"), which superseded and
replaced the provisions of the 1996 Agreement other than the provisions relating
to the development and commercialization of ATIII. Under the 1997 Debt
Agreement, the line of credit was reduced from $10.0 million to $8,327,000 and
the expiration date of the revolving credit line was extended to March 31, 2000,
with an option, at that date, for GTC to convert the outstanding balance to a
three-year term loan. The interest rate remains at 7% through April 1, 1998.
Thereafter, the interest rate increases annually, starting at a rate equal to
the lower of 8% or the prime lending rate in the first year and ending at a rate
equal to the lower of 10% or the prime lending rate plus 2% from April 2, 2002
through the final year of the term loan. Financial covenants require positive
quarterly earnings before interest, taxes, depreciation, amortization and
unfunded research and development expense starting April 1, 1998. Any amounts
outstanding under the credit line may be converted into shares of GTC common
stock at Genzyme's option at any time for up to the full amount outstanding or
at GTC's option on a quarterly basis limited to an amount sufficient to maintain
the minimum tangible net worth required for continued listing on the Nasdaq
National Market.
Under the terms of the BioSurface acquisition agreement,
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GENZYME CORPORATION (CONT.)
the Genzyme Board voted in June 1997 to allocate $10.0 million under the
agreement in exchange for an increase in the GTR Designated Shares of 1,000,000
shares.
In July 1997, StressGen/Genzyme LLC was established as a joint venture
among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian
Medical Discoveries Fund Inc. ("CMDF") to develop stress gene therapies for the
treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in
connection with the joint venture through the combination of a capital
contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian),
the purchase of warrants from Genzyme in the amount of $1.0 million (Canadian),
the purchase of warrants and preferred stock from StressGen in the amount of
$1.4 million (Canadian) and a limited recourse loan bearing interest at 0.125%
per annum to StressGen in the amount of $6.6 million (Canadian). Each of Genzyme
and StressGen (through a U.S. subsidiary) also made a capital contribution to
StressGen/Genzyme LLC in the amount of $1.0 million (Canadian) and a limited
recourse loan was made by the U.S. subsidiary of StressGen to StressGen/Genzyme
LLC in the amount of $7.0 million (Canadian). In addition, Genzyme and StressGen
have agreed to provide in equal shares any additional capital required by the
joint venture in excess of the initial $10.0 million (Canadian) funding.
Genzyme and StressGen have an option (the "Purchase Option"), payable
in equal shares, to purchase CMDF's membership interest in StressGen/Genzyme LLC
at any time during the three-year period beginning July 31, 1999 and ending July
31, 2002. The exercise price of the Purchase Option initially will be $15.6
million (Canadian) in July 1999 and will increase monthly thereafter to a final
exercise price of $30.5 million (Canadian) in July 2002. The limited recourse
loan made by CMDF will be retired in connection with the exercise of the
Purchase Option. If the Purchase Option is not exercised on or before July 31,
2002, CMDF may require Genzyme and StressGen to repay $2.0 million (Canadian)
each of the limited recourse loan. In addition, at any time during the 30-day
period commencing on the date when not less than 75% of the initial funding
provided by CMDF has been spent by the joint venture, but in no event later that
July 31, 1999, CMDF shall have the right (the "Mandatory Purchase Right") to
require Genzyme and StressGen to purchase its membership interest at an
aggregate purchase price of $10.0 million (Canadian) plus interest thereon at a
rate per annum equal to the Canadian prime rate plus 1%. The Mandatory Purchase
Right will terminate if not exercised by CMDF during such 30-day period.
Genzyme's share of any amounts payable to CMDF upon exercise of the Purchase
Option, the Mandatory Purchase Right or repayment of the limited recourse loan
may be paid in cash, Genzyme common stock or any combination thereof at the
discretion of Genzyme.
In August 1997, GMO completed a private placement of Convertible
Debentures (the "GMO Debentures") due August 29, 2002. The GMO Debentures bear
interest at 6% per annum and are convertible into shares of GMO Stock beginning
no earlier than the 91st day after the
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GENZYME CORPORATION (CONT.)
effective date of a registration statement covering the initial public offering
of GMO stock (the "GMO IPO"). Beginning on February 26, 1998, the GMO Debentures
are convertible at a discount to the average of the closing bid prices of GMO
Stock as reported by the Nasdaq National Market for the 20 trading days
immediately preceding the applicable conversion date (the "Market Price"), which
discount begins at 7% and will increase by an additional one percent every 30
days thereafter until October 24, 1998. Beginning November 23, 1998, the
conversion price will be the lower of (i) 85% of the Market Price calculated as
of the actual conversion date and (ii) 85% of the Market Price calculated as of
November 21, 1998. In no event, however, will the conversion price be less than
$7.70 per share (subject to adjustment in the event of any stock split, stock
dividend, reclassification, combination or similar event). In the third quarter
of 1997, GMO recorded $16.5 million of proceeds attributed to the value of the
debt and $3.5 million attributed to the value of the conversion feature
(recorded as an increase to division equity). The debt will be accreted to its
$20.0 million face value by a charge to interest expense of $3.5 million over
the term of the initial 15 month conversion period. As of December 31, 1997, GMO
had accreted $407,000 of the value of the conversion feature.
If GMO has not completed the GMO IPO by August 29, 1998, at the
holder's option, the GMO Debentures may be exchanged for 5% debentures
convertible into shares of GGD Stock ("GGD Debentures") due August 29, 2003. If
the GMO IPO is completed before August 29, 1998 but the aggregate proceeds from
the offering are less than $15.0 million or GMO's market capitalization is below
$90.0 million, at the holder's option, 50% of the GMO Debentures can be
exchanged for GGD Debentures. The exchange option must be exercised within 30
business days after August 29, 1998 or the date on which the GMO IPO is
consummated. The GGD Debentures, if issued, will be convertible at the option of
the holder at any time prior to maturity into shares of GGD Stock at a 13%
premium to the average closing bid price of GGD Stock as reported by the Nasdaq
National Market for the five trading days immediately preceding the issue date.
In addition, beginning on the 181st day after the completion of the GMO
IPO, the holders of GMO Debentures have the option (the "Put Option") to require
Genzyme to pay the entire principal amount of the GMO Debentures in cash,
together with interest at the rate of 15% per annum (less any interest
previously paid) if the conversion price (as calculated above) is less than
$7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put
Option is exercisable only with respect to the first Put Option Review Period
that occurs while the GMO Debentures are outstanding and if the Put Option is
not exercised within 15 days after any Put Option Review Period, a period of 90
days from the last day of the previous Put Option Review Period must elapse
before another Put Option Review Period commences.
The GMO Debentures are callable with cash or stock beginning 18 months
after the GMO IPO if the stock has closed at 150% of the Fixed Conversion Price
for 20 consecutive trading days.
The Genzyme Board approved the allocation of up to $25.0 million in
cash from Genzyme General to GMO (the "GMO Equity Line"), subject to a
dollar-for-dollar reduction by the proceeds of outside financing received by
GMO. As a result of the issuance of the GMO debentures in August 1997, the
amount available under the GMO Equity Line was reduced to $5.0 million. No draws
have been made under the Equity Line to date.
In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public
for $7.75 per share. Net proceeds from the offering after underwriting discounts
and commissions were $29.0 million.
In order to provide initial funding for the joint venture with Diacrin,
the Genzyme Board has approved the allocation of up to $20.0 million in cash
from Genzyme General to GTR (the "GTR Equity Line") in exchange for an increase
in the number of GTR Designated Shares at a rate determined by dividing the
amount of cash so allocated by the average of the daily closing prices of one
share of GTR Stock for the 20 consecutive trading days commencing on the 30th
trading day prior to the date of allocation. The Company intends to make monthly
allocations of cash under the GTR Equity Line in an amount corresponding to the
funding commitment of GTR under the joint venture agreement for such month. As
of December 31, 1997 the Company had allocated $7.0 million from Genzyme General
to GTR under the GTR Equity Line.
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GENZYME CORPORATION (CONT.)
Genzyme holds an option to acquire all of the partnership interests in
Genzyme Development Partners, L.P. ("GDP") for approximately $26.0 million plus
a continuing royalty payment for a period of ten years on certain sales of Sepra
Products. Genzyme's decision regarding the exercise of this option will be
based, in part, on the progress in the development and Genzyme's evaluation of
the potential commercial success of the Sepra Products. The exercise price for
the purchase option is payable in cash, shares of GGD Stock or a combination of
the two, as determined by Genzyme at the time the option is exercised.
Genzyme believes that its available cash, investments and cash flow
from operations will be sufficient to finance its planned operations and capital
requirements for the foreseeable future. Although Genzyme had approximately
$246.3 million in cash, cash equivalents and short and long-term investments at
December 31, 1997, it has committed to utilize a portion of such funds for
certain purposes, such as (i) completing the market introduction in the U.S. and
Europe of Seprafilm(R) and clinical development of other Sepra Products, (ii)
completing the market introduction of GTR's Carticel(TM) AuCC and developing,
producing and marketing other products through GTR and GMO and (iii) making
certain payments to third parties in connection with strategic collaborations.
In addition to these commitments, Genzyme historically has pursued strategic
acquisitions and collaborations with complementary businesses as opportunities
became available and will seek additional acquisitions and collaborations in the
future. Genzyme may require additional capital to finance any such activities.
There can be no assurance, however, that such capital will be available on terms
reasonably acceptable to Genzyme.
In addition, as of December 31, 1997, approximately $118.0 million was
outstanding under the Revolving Credit Facility, $95.0 million of which was
allocated to Genzyme General, $18.0 million of which was allocated to GTR and
$5.0 million of which was allocated to GMO. Amounts borrowed under this facility
are payable on November 15, 1999. Genzyme's cash resources will be diminished
upon repayment of amounts borrowed, plus accrued interest, under this credit
facility. In addition, pursuant to the terms of both the GTR Note and the GMO
Debentures, the holders will, in some circumstances, receive cash from Genzyme.
To the extent Genzyme uses cash to pay the principal and accrued interest on the
GTR Note or GMO Debentures, its cash reserves will also be diminished. As a
result, Genzyme may have to obtain additional financing. There can be no
assurance that such financing will be available on terms reasonably acceptable
to Genzyme.
NEW ACCOUNTING PRONOUNCEMENTS, YEAR 2000 AND FINANCIAL REPORTING RELEASE 48
("FRR 48")
In June 1997, the FASB issued Statement of Financial Accounting
Standards Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS 130"), and
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), respectively (collectively, the "Statements"). The Statements are
effective for fiscal years beginning December 15, 1997. SFAS 130 establishes
standards for reporting of comprehensive income and its components in annual
financial statements. SFAS 131 establishes standards for reporting financial and
descriptive information about an enterprises's operating segments in its annual
financial statements and selected segment information in interim financial
reports. Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS 130
and SFAS 131, respectively. Application of the Statement's disclosure
requirements will have no impact on Genzyme's combined financial position,
results of operations or earnings per share data as currently reported.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 is
effective for fiscal years beginning after December 15, 1997. Genzyme has not
assessed the impact of SFAS 132 on its financial statement disclosures.
Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing the internal readiness of its computer systems for handling the year
2000. The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on future results of operations.
In January 1997, the Securities and Exchange Commission issued
Financial Reporting Release 48 which expands disclosure requirements for certain
derivative and other financial instruments. The Company adopted the sensitivity
analysis approach effective in the fourth quarter of 1997. The sensitivity
approach presents the hypothetical changes in fair value resulting from
hypothetical changes in market rates.
As a result of the Company's worldwide operations, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material adverse effect on the Company's financial results in the future.
Historically, the Company's primary exposures have been related to local
currency operating expenses in Europe and Asia, where the Company sells
primarily in U.S. dollars. The Company generally does not hedge anticipated
foreign currency cash flows.
The carrying amounts reflected in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to the short maturities of these instruments. The
fair values represent estimates of possible value that may not be realized in
the future.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Corporation and its
Subsidiaries could differ materially from the results described above due to the
following risks and uncertainties.
DEPENDENCE ON CEREZYME(R) ENZYME AND CEREDASE(R) ENZYME SALES
Genzyme's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme in 1997 were $332.7 million, representing 63% of Genzyme's
consolidated product sales in 1997.
To address supply constraints, Genzyme developed Cerezyme(R) enzyme.
Patients receiving Ceredase(R) enzyme are being converted to Cerezyme(R) enzyme;
however, Genzyme will continue to manufacture Ceredase(R) enzyme until the
process of patient conversion is completed. Any disruption in the supply or
manufacturing process of Cerezyme(R) enzyme may have a material adverse effect
on revenue. In addition, Genzyme may be required to record a charge to earnings
for the equipment used for and inventory of Ceredase(R) enzyme remaining upon
completion of the patient conversion process, and, if the conversions proceed
more rapidly than anticipated, the remaining inventory of Ceredase(R) enzyme
and the corresponding charge to earnings could be material.
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GENZYME CORPORATION (CONT.)
RISKS INHERENT IN INTERNATIONAL OPERATIONS. Foreign operations of
Genzyme accounted for 36% of consolidated net sales in 1997 as compared to 35%
in each of 1996 and 1995. In addition, Genzyme has direct investments in a
number of subsidiaries in foreign countries (primarily in Europe and Japan).
Financial results of Genzyme could be adversely affected by fluctuations in
foreign exchange rates. Fluctuations in the value of foreign currencies affect
the dollar value of Genzyme's net investment in foreign subsidiaries, with these
fluctuations being included in a separate component of stockholders' equity.
Operating results of foreign subsidiaries are translated into U.S. dollars at
average monthly exchange rates. As of December 31, 1997, Genzyme had a
cumulative charge of $12.4 million to stockholders' equity as a result of
foreign currency adjustments and there can be no assurance that the Company will
not incur additional charges relating to such adjustments in future periods. In
addition, the U.S. dollar value of transactions based in foreign currency
(collections on foreign sales or payments for foreign purchases) also fluctuates
with exchange rates. The largest foreign currency exposure results from activity
in Dutch guilders, British pounds, French francs, German marks and Japanese yen.
Genzyme has not hedged net foreign investments in the past, although it
may engage in hedging transactions in the future to manage and reduce its
foreign exchange risk, subject to certain restrictions imposed by the Genzyme
Board. There can be no assurance that Genzyme's attempts to manage its foreign
currency exchange risk will be successful.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of Genzyme's
products are currently in or will require clinical trials to test safety and
efficacy in humans for various conditions. There can be no assurance that
Genzyme will not encounter problems in clinical trials that will cause it to
delay or suspend these clinical trials. In addition, there can be no assurance
that such clinical testing, if completed, will ultimately show these products to
be safe and efficacious.
RAPID TECHNOLOGICAL CHANGE. The field of biotechnology is expected to
continue to undergo significant and rapid technological change. Although Genzyme
will seek to expand its technological capabilities in order to remain
competitive, there can be no assurance that research and discoveries by others
will not render Genzyme's products or services obsolete.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES.
A majority of Genzyme's revenues are attributable directly or indirectly to
payments received from third party payers, including government health
administration authorities and private health insurers. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third party payers are increasingly challenging the prices charged for
health care products and services. Third party payers are also increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic products and by refusing in some cases to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted marketing approval. There can be no assurance that third
party insurance coverage will be available for any products or services under
development by Genzyme. If adequate coverage and reimbursement are not provided
by government and other third party payers for Genzyme's products and services,
its results of operations may be materially adversely affected.
In addition, Congress has from time to time discussed the possible
implementation of broad-based health care cost containment measures. While these
discussions have not led to the enactment of any specific health care cost
containment legislation, it is possible that health care measures will again be
proposed in Congress. The effects on Genzyme of any such measures that are
ultimately adopted cannot be predicted at this time.
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GENZYME CORPORATION (CONT.)
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY.
Genzyme's success depends, to a large extent, on its ability to maintain a
competitive technological position in its product areas. Proprietary rights
relating to Genzyme's products and services are protected from unauthorized use
by third parties only to the extent that they are covered by patents or are
maintained in confidence as trade secrets. Genzyme has filed for patents and has
rights to numerous patents and patent applications worldwide. While certain of
Genzyme's patents have been allowed or issued, there can be no assurance that
these allowed and issued patents or additional patents allowed or issued to
Genzyme will effectively protect the proprietary technology of Genzyme. In
addition, patent litigation is widespread in the biotechnology industry and it
is not possible to predict how any such litigation will affect Genzyme.
No consistent policy has emerged from the U.S. Patent and Trademark
Office regarding the breadth of claims allowed in biotechnology patents and,
therefore, the degree of future protection for Genzyme's proprietary rights is
uncertain. The allowance of broader claims may increase the incidence and cost
of patent interference proceedings in the U.S. and the risk of infringement
litigation in the U.S. and abroad. Conversely, the allowance or narrower claims,
while reducing the risk of infringement, may limit the value of Genzyme's
proprietary rights under its patents, licenses and pending patent applications.
Genzyme attempts to monitor the patent filings of its competitors in an
effort to guide the design and development of its products to avoid
infringement. Notwithstanding these efforts, there can by no assurance that the
patents issued or licensed to Genzyme will remain free of challenge by third
parties. In addition, patent rights filed by third parties may, if issued, cover
Genzyme's products and services as ultimately developed, which could have an
adverse impact on Genzyme's results of operations in amounts that cannot
presently be determined. Genzyme may, depending on the final formulation of such
products and services, need to acquire license to, or contest the validity of,
such patents. For example, Genzyme may need to acquire patent rights from third
parties that cover particular diagnostic and/or therapeutic gene sequences or
that cover aspects of adjuvant therapies such as compositions of matter or
methods of use related to the administration of cytokines as immunostimulants in
combination with a cancer therapy. In gene therapy, Genzyme may need to license
a number of patents covering different elements of the technique, such as those
relating to particular viral or non-viral vector or methods for its delivery.
The extent to which Genzyme may need to license rights or contest the validity
of patents depends on the scope and validity of such patents and ultimately on
the final design or formulation of its products and services under development.
The cost and ability to license any such rights and the likelihood of
successfully contesting the validity of such patents are uncertain.
Genzyme has also relied upon trade secrets, proprietary know-how and
continuing technological innovation to develop and maintain its competitive
position. There can be no assurance that others will not independently develop
such know-how or otherwise obtain access to Genzyme's technology. While
Genzyme's employees, consultants and corporate partners with access to
proprietary information are generally required to enter into confidentiality
agreements, there can be no assurance that these agreements will be honored.
Certain of Genzyme's consultants have developed portions of Genzyme's
proprietary technology at their respective universities or governmental
laboratories. There can be no assurance that such universities or governmental
authorities will not assert rights to intellectual property arising out of
university or government based research conducted by such consultants.
GOVERNMENT REGULATIONS; NO ASSURANCE OF REGULATORY APPROVALS. The production and
sale of health care products and provision of health care services are highly
regulated. In particular, human therapeutic and diagnostic products are subject
to pre-marketing approval by the FDA and comparable agencies in foreign
countries. The process of obtaining these approvals varies according to the
nature and use of the product and can involve lengthy and detailed
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GENZYME CORPORATION (CONT.)
laboratory and clinical testing, sampling activities and other costly and
time-consuming procedures. Regulation of Genzyme's products and services could
also limit Genzyme's reimbursement for its products and services and otherwise
materially affect the results of operations of Genzyme. Additional regulatory
regimes, in the U.S. and internationally, affect the Company's work in gene
therapy and the provision of cancer diagnostic services. There can be no
assurance that any of the required regulatory approvals will be granted on a
timely basis, if at all.
Certain of Genzyme's products, including Cerezyme(R) enzyme and
Ceredase(R) enzyme, have been designated as orphan drugs under the Orphan Drug
Act, which provides incentives to manufacturers to develop and market drugs for
rare diseases. The Orphan Drug Act generally entitles the first developer to
receive FDA marketing approval for an orphan drug to a seven-year exclusive
marketing period in the United States for that product. Legislation has been
periodically introduced in recent years, however, to amend the Orphan Drug Act.
Such legislation has generally been directed to shortening the period of
automatic market exclusivity and granting certain market rights to simultaneous
developers of a drug. The effect on Genzyme of any amendments ultimately adopted
cannot be assessed at this time.
PRODUCT LIABILITY AND LIMITATIONS OF INSURANCE. Genzyme may be subject
to product liability claims in connection with the use or misuse of its products
during testing or after commercialization. While Genzyme has taken, and
continues to take, what it believes are appropriate precautions, there can be no
assurance that Genzyme will avoid significant liability exposure. Genzyme has
only limited amounts of product liability insurance and there can be no
assurance that such insurance will provide sufficient coverage against any or
all potential product liability claims. If Genzyme attempts to obtain additional
insurance in the future, there can be no assurance that it will be able to do so
on acceptable terms, if at all, or that such insurance will provide adequate
coverage against claims asserted.
RISKS RELATED TO GENZYME TRACKING STOCK
Prior to June 18, 1997, Genzyme had two outstanding classes of common
stock, GGD Stock and GTR Stock. Effective June 18, 1997, the GGD Stock and GTR
Stock were redesignated as separate series of a single class of common stock and
a new series of the same class of common stock, GMO Stock, was issued. As a
result, Genzyme currently has three series of common stock outstanding: GGD
Stock, GTR Stock and GMO Stock, which are intended to reflect the value and
track the performance of Genzyme's three divisions: Genzyme General, GTR and
GMO. Prospective investors in GGD Stock, GTR Stock or GMO Stock should carefully
consider the following risks relating to an investment in Genzyme "tracking
stock."
STOCKHOLDERS OF ONE COMPANY; FINANCIAL IMPACTS ON ONE DIVISION COULD
AFFECT THE OTHERS. Notwithstanding the allocation of Genzyme's products and
programs between divisions for purposes of financial statement presentation and
allocation of equity interests, Genzyme continues to hold title to all of the
assets and is responsible for all of the liabilities allocated to each of its
divisions. Holders of each series of Genzyme common stock have no specific claim
against the assets attributed for financial statement presentation purposes to
the division whose performance is associated with the series of stock they hold.
Liabilities or contingencies of any division that affect Genzyme's resources or
financial condition could affect the financial condition or results of
operations of the other divisions.
NO RIGHTS OR ADDITIONAL DUTIES WITH RESPECT TO THE DIVISIONS; POTENTIAL
CONFLICTS. Holders of each series of Genzyme common stock have only the rights
of stockholders of Genzyme, and, except in limited circumstances, do not have
any rights specifically related to the division to which such series of common
stock relates. The existence of separate series of common stock may give rise to
occasions when the interests of holders of each series of Genzyme common stock
may diverge or appear to diverge. Although Genzyme is aware of no precedent
concerning the manner in which Massachusetts law would be applied to the duties
of a board of directors in the context of three series of common stock with
divergent interests, Genzyme believes, based on the advice of counsel, that a
Massachusetts court would hold that a board of directors owes an equal duty to
all stockholders regardless of class or series and does not have separate or
additional duties to any group of stockholders. That duty is the fiduciary duty
to act in good faith and in a manner it reasonably believes to be in the best
interests of the corporation. Genzyme has been advised that, under Massachusetts
law, a good faith determination by a disinterested and adequately informed board
of directors that an action is in the best interests of the corporation, taking
into account the interests of the holders of each series of common stock and the
alternatives reasonably available, should represent an appropriate defense to
any challenge by or on behalf of the holders of any series of common stock that
such action could have a disparate effect on different series of common stock.
However, a Massachusetts court hearing a case involving such a challenge may
decide to apply principles of Massachusetts law other than those described
above, or may develop new principles of Massachusetts law to decide such a case.
Disproportionate ownership interests of members of the Genzyme Board in
any series of common stock or disparities in the value of such stock could
create or appear to create potential conflicts of interest when directors are
faced with decisions that could have different implications for each series of
common stock. Nevertheless, Genzyme believes that a director would be able to
discharge his or her fiduciary responsibilities even if his or her interest in
shares of such series were disproportionate or had disparate values. The Genzyme
Board may also from time to time establish one or more committees to review
matters presented to it that raise conflict issues, which committee(s) would
report to the full Genzyme Board on such matters.
NO ADDITIONAL SEPARATE VOTING RIGHTS. Holders of each series of
Genzyme common stock vote together as a single class on all matters as to which
common stockholders generally are entitled to vote (including the election of
directors). Except in certain limited circumstances provided under Massachusetts
law, in the Genzyme Charter and in the management and accounting policies
adopted by the Genzyme Board, holders of each series of common stock have no
rights to vote on matters separately. Accordingly, except in limited
circumstances, holders of shares of one series of common stock could not bring a
proposal to a vote of the holders of that series of common stock only, but would
be required to bring any proposal to a vote of all common stockholders.
On all matters as to which common stockholders generally are entitled
to vote, each share of GGD Stock has one vote, each share of GTR Stock has,
through December 31, 1998, .33 vote and each share of GMO stock will have,
through December 31, 1998, .25 vote. On January 1, 1999 and on January 1 every
two years thereafter, the number of votes to which each share of GTR Stock is
entitled will be adjusted to equal the ratio of the Fair Market Value (as
defined herein) of one share of GTR Stock to the Fair Market Value of one share
of GGD Stock as of such date. The number of votes to which each share of GMO
Stock is entitled will also be adjusted on such dates to equal the ratio of the
Fair Market Value of one share of GMO Stock to the Fair Market Value of one
share of GGD Stock. "Fair Market Value" as of any date means the average of the
daily closing prices as reported by the Nasdaq National Market (or the
appropriate exchange on which such shares are traded) for the 20 consecutive
trading days commencing on the 30th trading day prior to such date. In the event
such closing prices are unavailable, Fair Market Value will be determined by the
Genzyme Board.
Certain matters as to which the holders of common stock are entitled to
vote may involve a divergence or the appearance of a divergence in the interests
of holders of each series of Genzyme common stock. If, when a stockholder vote
is taken on any matter as to which a separate vote by each series is not
required and the holders of any series of common stock would have more than the
number of votes required to approve any such matter, the holders of that series
would control the outcome of the vote on such matter, Holders of GGD Stock, GTR
Stock and GMO Stock currently have approximately 91.1%, 7.7% and 1.2%,
respectively, of the total voting power of Genzyme. As a result, on matters
which are submitted to a vote of the common stockholders, the preferences of the
holders of GGD Stock are likely to dominate and determine the outcome of such
vote unless and until the relative number of shares outstanding and/or the
market value of each series of Genzyme common stock materially changes.
EXCHANGE OF GTR STOCK AND GMO STOCK. The Genzyme Board can, in its
sole discretion, determine to exchange shares of GTR Stock and GMO Stock for
cash or shares of GGD Stock (or any combination thereof) at a 30% premium over
Fair Market Value of the GTR Stock or GMO Stock at any time. In addition,
following a disposition of all or substantially all of the assets of GTR or GMO,
the shares of GTR Stock or GMO Stock, as the case may be, are subject to
mandatory exchange by Genzyme for cash and/or shares of GGD Stock at a 30%
premium over Fair Market Value of such series of common stock as determined by
the trading prices during a specified period prior to public announcement of the
disposition. Consequently, holders of GTR Stock and GMO Stock may receive a
greater or lesser premium for their shares than any premium paid by a third
party buyer of all or substantially all of the assets of GTR or GMO. In
addition, the right of the Genzyme Board to exchange shares of GTR Stock or GMO
Stock at a 30% premium over the Fair Market Value of such shares does not
preclude the Genzyme Board from making an offer to exchange such shares on terms
other than those provided in the Genzyme Charter. Although any alternative offer
would be subject to acceptance by the holders of the shares to be exchanged,
such offer could be made on terms less favorable than those provided in the
Genzyme Charter. Any exchange of shares for GGD Stock could be made at a time
when the GGD Stock may be considered to be undervalued and, if such exchange is
perceived as dilutive, the market price of GGD Stock may be adversely affected.
See "Management and Accounting Policies Governing the Relationship of Genzyme
Divisions -- Open Market Purchases of Shares of Common Stock" set forth in
Exhibit 99.1 to Genzyme's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "1997 Form 10-K").
NO ADJUSTMENT TO LIQUIDATING DISTRIBUTIONS. In the event of a
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of Genzyme (other than pursuant to a merger, business combination or sale of
substantially all assets), holders of outstanding shares of each series of
Genzyme common stock would receive the assets, if any, remaining for
distribution to common stockholders on a per share basis in proportion to the
respective per share liquidation units of such series. Currently, each share of
GGD Stock has 100 liquidation units, each share of GTR Stock has 58 liquidation
units and each share of GMO Stock has 25 liquidation units. Because the
liquidation units will not be adjusted to reflect changes in the relative market
value or performance of each of the divisions of Genzyme, the per share
liquidating distribution to a holder of GGD Stock, GTR Stock or GMO Stock is not
likely to correspond to the value of the assets of Genzyme General, GTR or GMO,
respectively, at the time of a dissolution, liquidation or winding up of
Genzyme.
MANAGEMENT AND ACCOUNTING POLICIES TO CHANGE. The Genzyme Board has
adopted certain management and accounting policies applicable to the preparation
of the financial statements of the divisions of Genzyme, the allocation of
corporate expenses, assets and liabilities, the reallocation of assets between
divisions and other matters. These policies may, except as stated therein, be
modified or rescinded at the sole discretion of the Genzyme Board without the
approval of Genzyme's stockholders, subject to the Genzyme Board's fiduciary
duty to all holders of Genzyme's capital stock. See "Management and Accounting
Policies Governing the Relationship of Genzyme Divisions" set forth in Exhibit
99.1 to the 1997 Form 10-K.
NON-COMPETE POLICY. The Genzyme Board has adopted a policy providing
that the Company will not develop products and services outside of GTR or GMO
that compete with products and services being developed or sold by GTR or GMO,
other than through joint ventures in which GTR or GMO participate (the
"Non-Compete Policy"). The scope of the Non-Compete Policy does not extend to
the entire fields of tissue repair and oncology. Accordingly, the Company is
currently developing oncology products outside of GMO that do not compete with
products and services being developed or sold by GMO and, in the future, may
develop additional oncology and tissue repair products and services outside of
GMO and GTR, provided that such products and services do not compete with
then-existing GMO or GTR products and services. See "Management and Accounting
Policies Governing the Relationship of Genzyme Divisions" set forth in Exhibit
99.1 to the 1997 Form 10-K.
USE OF TAX BENEFITS BY OTHER GENZYME DIVISIONS. Genzyme's management
and accounting policies provide that, to the extent any division of Genzyme is
unable to utilize its operating losses or other projected tax benefits to reduce
its current or deferred income tax expense, such losses or benefits may be
reallocated to another division on a quarterly basis for financial reporting
purposes. Accordingly, although the actual payment of taxes is a corporate
liability of Genzyme as a whole, separate financial statements will be prepared
for each division and any losses that cannot be utilized by a division will be
allocated among the profitable divisions rather than carried forward to reduce
the future tax liability of the division generating such losses. This could
result in a division (such as GTR and GMO currently) being charged a greater
portion of the total corporate tax liability and reporting lower earnings after
taxes in the future than would have been the case if such division had retained
its losses or other benefits in the form of a net operating loss carryforward.
44
<PAGE> 46
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) DECEMBER 31,
- ---------------------- ------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 102,406 $ 93,132
Short-term investments ................................................ 51,259 56,608
Accounts receivable, net .............................................. 118,277 116,833
Inventories ........................................................... 139,681 125,265
Prepaid expenses and other current assets ............................. 17,361 100,287
Deferred tax assets - current ......................................... 27,601 17,493
---------- ----------
Total current assets ................................................ 456,585 509,618
Property, plant and equipment, net ....................................... 385,348 393,839
Long-term investments .................................................... 92,676 38,215
Note receivable - related party .......................................... 2,019 --
Intangibles, net ......................................................... 271,275 247,745
Deferred tax assets - noncurrent ......................................... 29,479 42,221
Investment in equity securities........................................... 30,047 10,813
Other noncurrent assets................................................... 28,024 28,057
---------- ----------
Total assets......................................................... $1,295,453 $1,270,508
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE> 47
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in thousands) DECEMBER 31,
- ---------------------- ------------
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................ $ 19,787 $ 22,271
Accrued expenses ............................................................ 72,103 70,124
Income taxes payable ........................................................ 11,168 17,926
Deferred revenue ............................................................ 1,800 2,693
Current portion of long-term debt and capital lease obligations ............. 905 999
----------- -----------
Total current liabilities ............................................... 105,763 114,013
Noncurrent liabilities:
Long-term debt and capital lease obligations ................................ 140,978 241,998
Convertible debentures, net ................................................. 29,298 --
Other noncurrent liabilities ................................................ 7,364 12,188
----------- -----------
Total liabilities ....................................................... 283,403 368,199
Commitments and contingencies (See Notes) ......................................
Stockholders' equity:
Preferred Stock, $0.01 par value, authorized 10,000,000 shares; no shares
issued and outstanding
Preferred Stock, Series A Junior Participating, $0.01 par value,
2,000,000 shares authorized; no shares issued and outstanding
Preferred Stock, Series B Junior Participating, $0.01 par value,
400,000 shares authorized; no shares issued and outstanding
Preferred Stock, Series C Junior Participating, $0.01 par value,
400,000 shares authorized; no shares issued and outstanding
Common Stocks $0.01 par value, 390,000,000 shares authorized;
179,254,865 issued and outstanding:
Genzyme General Division Common Stock, $0.01 par value, 200,000,000
shares authorized; 77,692,550 and 75,537,300 issued and outstanding
at December 31, 1997 and 1996, respectively .............................. 777 755
Genzyme Tissue Repair Division Common Stock, $0.01 par value, 40,000,000
shares authorized; 19,941,193 and 13,161,500 issued and outstanding
at December 31, 1997 and 1996, respectively .............................. 199 132
Genzyme Molecular Oncology Division Common Stock, $0.01 par value,
40,000,000 shares authorized; 3,928,572 and 0 issued and outstanding
at December 31, 1997 and 1996, respectively .............................. 39 --
Treasury common stock, at cost:
Genzyme General Common Stock,106,358 and 105,941 shares at
December 31, 1997 and 1996, respectively ................................. (901) (890)
Additional paid-in capital - Genzyme General ................................ 895,340 871,020
Additional paid-in capital - Genzyme Tissue Repair .......................... 170,430 122,385
Additional paid-in capital - Genzyme Molecular Oncology ..................... 34,517
Accumulated deficit ......................................................... (76,346) (89,975)
Foreign currency translation adjustments .................................... (12,449) (745)
Unrealized gains (losses) on investments .................................... 444 (373)
----------- -----------
Total stockholders' equity............................................. 1,012,050 902,309
----------- -----------
Total liabilities and stockholders' equity............................. $ 1,295,453 $ 1,270,508
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE> 48
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues
Net product sales ................................. $ 529,927 $ 424,483 $ 304,373
Net service sales ................................. 67,158 68,950 52,450
Revenues from research and development contracts:
Related parties .................................. 8,356 23,011 26,758
Other ............................................ 3,400 2,310 202
--------- --------- ---------
Total revenues................................ 608,841 518,754 383,783
Operating costs and expenses:
Cost of products sold ............................. 206,028 155,930 113,964
Cost of services sold ............................. 47,289 54,082 35,868
Selling, general and administrative ............... 200,476 162,264 110,447
Research and development (including research and
development related to contracts) ................ 89,558 80,849 68,845
Amortization of intangibles ....................... 17,245 8,849 4,647
Purchase of in-process research and development 7,000 130,639 14,216
Restructuring charges ............................. -- 1,465 --
--------- --------- ---------
Total operating costs and expenses............ 567,596 594,078 347,987
--------- --------- ---------
Operating income (loss) ............................... 41,245 (75,324) 35,796
Other income (expenses):
Equity in net loss of unconsolidated affiliates .... (12,258) (4,360) (1,810)
Other .............................................. (2,000) 1,711 1,608
Investment income .................................. 11,409 15,341 8,814
Interest expense ................................... (12,667) (6,990) (1,109)
--------- --------- ---------
Total other income (expenses)................. (15,516) 5,702 7,503
--------- --------- ---------
Income (loss) before income taxes ..................... 25,729 (69,622) 43,299
Provision for income taxes ............................ (12,100) (3,195) (21,649)
--------- --------- ---------
Net income (loss) ..................................... $ 13,629 $ (72,817) $ 21,650
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE> 49
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL:
Net income (loss) ............................................... $ 57,026 $(47,513) $ 34,823
Tax benefit allocated from Genzyme Tissue Repair ................ 17,666 17,011 8,857
Tax benefit allocated from Genzyme Molecular Oncology............ 2,755 -- --
-------- -------- --------
Net income (loss) attributable to GGD Stock .................. $ 77,447 $(30,502) $ 43,680
======== ======== ========
Per Genzyme General common share-basic:
Net income (loss) ............................................ $ 1.01 $ (0.45) $ 0.79
======== ======== ========
Weighted average shares outstanding .......................... 76,531 68,289 55,531
======== ======== ========
Per Genzyme General common and common equivalent share - diluted:
Net income (loss) ............................................ $ 0.98 $ (0.45) $ 0.68
======== ======== ========
Adjusted weighted average shares outstanding ................. 78,925 68,289 63,967
======== ======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss attributable to GTR Stock .............................. $(45,984) $(42,315) $(22,030)
======== ======== ========
Per GTR basic and diluted common share:
Net loss ..................................................... $ (3.07) $ (3.38) $ (2.28)
======== ======== ========
Weighted average shares outstanding .......................... 14,976 12,525 9,659
======== ======== ========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss attributable to GMO Stock .............................. $(19,578) $ (1,003) $ (464)
======== ======== ========
Pro forma per GMO basic and diluted
common share:
Pro forma net loss .......................................... $ (4.98) $ (0.26) $ (0.12)
======== ======== ========
Pro forma shares outstanding ................................. 3,929 3,929 3,929
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE> 50
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------- --------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 13,629 $ (72,817) $ 21,650
Reconciliation of net income (loss) to net cash provided by operating
activities:
Depreciation and amortization .................................... 50,964 30,192 22,638
Loss on disposal of fixed assets ................................. 1,258 101 903
Non-cash compensation expense .................................... 3,160 460 1,013
Accrued interest/amortization on bonds ........................... (900) 1,195 (355)
Provisions for bad debts and inventory ........................... 14,580 9,759 8,336
Purchase of in-process research and development .................. 7,000 130,639 14,216
Deferred income taxes ............................................ (5,061) (28,558) 4,428
Accretion of debt conversion feature.............................. 2,028 -- --
Minority interest in net loss of subsidiaries .................... -- -- (1,608)
Equity in net loss of unconsolidated subsidiaries ................ 12,258 4,360 1,810
Other ............................................................ 528 (1,558) 1,568
Increase (decrease) in cash from changes in working capital net
of acquired assets:
Accounts receivable ............................................ (11,076) (18,395) (15,069)
Inventories .................................................... (29,299) (41,609) (18,827)
Prepaid expenses and other current assets ...................... (10,062) (527) (1,680)
Accounts payable, accrued expenses and deferred revenue ........ (9,333) 26,775 5,679
--------- --------- ---------
Net cash provided by operating activities ...................... 39,674 40,017 44,702
INVESTING ACTIVITIES:
Purchases of investments ............................................ (147,897) (122,093) (146,940)
Maturities of investments ........................................... 81,185 207,399 57,055
Purchases of property, plant and equipment .......................... (29,309) (63,802) (49,988)
Sale of property, plant and equipment ............................... 852 -- --
Acquisitions, net of cash acquired and liabilities assumed .......... 9 (299,078) (322)
Additional investment in unconsolidated affiliates .................. (13,993) (5,511) (4,428)
Loans to affiliates ................................................. (4,601) (1,676) --
Other ............................................................... (1,419) (7,470) (1,265)
--------- --------- ---------
Net cash used by investing activities .......................... (115,173) (292,231) (145,888)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock .............................. 156,036 41,556 223,139
Proceeds from issuance of common stock by subsidiary ................ -- -- 1,107
Proceeds from issuance of debt ...................................... 32,127 536,000 --
Payments of long-term debt and capital lease obligations ............ (101,115) (378,502) (41,449)
--------- --------- ---------
Net cash provided by financing activities ...................... 87,048 199,054 182,797
Effect of exchange rate changes on cash ................................ (2,275) 1,920 (781)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ....................... 9,274 (51,240) 80,830
Cash and cash equivalents at beginning of period ....................... 93,132 144,372 63,542
--------- --------- ---------
Cash and cash equivalents at end of period ............................. $ 102,406 $ 93,132 $ 144,372
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE> 51
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------- --------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest ......................................................... $ 9,811 $ 6,285 $ 9,944
Income taxes ..................................................... 18,887 14,149 19,581
</TABLE>
Supplemental Disclosures of Non-Cash Transactions:
Acquisition liability -- Note C
Investment in unconsolidated affiliate -- Note H
Exercise of warrants - Note K
Debt conversion - Note J
Strategic financial provision -- Note B
GTR designated share dividend -- Note K
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE> 52
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------- --------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS:
GENZYME GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ................. 75,537 62,372 52,894 $ 755 $ 624 $ 529
Exercise of stock options .................... 1,750 1,371 1,916 18 13 19
Issuance from employee stock purchase plan ... 367 291 286 4 3 3
Exercise of warrants ......................... 39 6,341 686 -- 63 7
Shares issued in public offering ............. -- -- 5,750 -- -- 58
Issuance of GGD Stock in connection with
conversion of convertible notes ............ -- 3,782 -- -- 38 --
Issuance of GGD Stock in connection with
acquisitions ............................... -- 1,380 840 -- 14 8
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 77,693 75,537 62,372 $ 777 $ 755 $ 624
====== ====== ====== ===== ===== =====
GENZYME TISSUE REPAIR DIVISION COMMON STOCK:
Balance at beginning of year ................. 13,162 12,113 8,675 $ 132 $ 121 $ 87
Exercise of stock options .................... 206 124 122 2 1 1
Issuance from employee stock purchase plan ... 281 325 270 2 3 3
Exercise of warrants ......................... -- 345 46 -- 4 --
Issuance of GTR Stock in connection with
declared dividend of GTR Designated Shares . 2,292 -- -- 23 -- --
Shares issued in public offering ............. 4,000 -- 3,000 40 -- 30
Issuance of GTR Stock in connection with
conversion of convertible notes ............. -- 255 -- -- 3 --
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 19,941 13,162 12,113 $ 199 $ 132 $ 121
====== ====== ====== ===== ===== =====
GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK:
Balance at June 18, 1997 ..................... -- -- -- $ -- $-- $--
Issuance of GMO Stock in connection with
the acquisition of PharmaGenics ........... 3,929 -- -- 39 -- --
------ ------ ------ ----- ----- -----
Balance at end of year ....................... 3,929 -- -- $ 39 $-- $--
====== ====== ====== ===== ===== =====
TREASURY COMMON STOCK (AT COST):
GENZYME GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ................. (106) (106) (100) $(890) $(882) $(755)
Purchases .................................... -- -- (6) (11) (8) (127)
------ ------ ------ ----- ----- -----
Balance at end of year ....................... (106) (106) (106) $(901) $(890) $(882)
====== ====== ====== ===== ===== =====
</TABLE>
The accompanying notes are an intergral
part of these consolidated financial statements.
51
<PAGE> 53
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ADDITIONAL PAID IN CAPITAL - GENZYME GENERAL:
Balance at beginning of year ........................................... $ 871,020 $ 616,096 $ 406,991
Exercise of stock options .............................................. 28,518 13,870 27,903
Issuance from employee stock purchase plan ............................. 7,370 4,695 4,158
Exercise of warrants ................................................... 855 106,101 6,257
GGD Stock issued in public offering .................................... -- -- 141,218
Issuance of GGD Stock in connection with conversion of convertible
notes ................................................................ -- 101,362 --
Issuance of GGD Stock in connection with acquisitions .................. -- 36,508 23,813
Callable Warrants issued in connection with acquisition of Neozyme II .. -- 469 --
Allocation to Genzyme Tissue Repair for Designated Shares............... (14,892) (11,714) --
Allocation to Genzyme Molecular Oncology for Designated Shares.......... (2,886) -- --
Tax benefit from disqualified dispositions ............................. 4,127 3,500 5,500
Stock compensation expense ............................................. 1,218 123 131
Purchase of Treasury Stock ............................................. 10 10 125
--------- --------- ---------
Balance at end of year ................................................. $ 895,340 $ 871,020 $ 616,096
========= ========= =========
ADDITIONAL PAID IN CAPITAL- GENZYME TISSUE REPAIR:
Balance at beginning of year ........................................... $ 122,385 $ 107,934 $ 63,573
Exercise of stock options .............................................. 705 539 240
Issuance from employee stock purchase plan ............................. 1,729 1,893 980
Exercise of warrants ................................................... -- (4) (3)
Issuance of GTR Stock in public offering ............................... 28,997 -- 42,262
Issuance of GTR Stock in connection with conversion of Genzyme's 6 3/4%
convertible subordinated notes ......................................... -- (3) --
Issuance of GTR Stock in connection with declared dividend of GTR
Designated Shares ................................................... (23) -- --
Value of debt conversion feature ....................................... 1,524 -- --
Allocation from Genzyme General for Designated Shares................... 14,892 11,714 --
Stock compensation expense ............................................. 221 312 882
--------- --------- ---------
Balance at end of year ................................................. $ 170,430 $ 122,385 $ 107,934
========= ========= =========
ADDITIONAL PAID IN CAPITAL- GENZYME MOLECULAR ONCOLOGY:
Balance at June 18, 1997 ............................................... $ --
Issuance of GMO Stock in connection with the acquisition of PharmaGenics 27,330
Sale of warrants ....................................................... 724
Value of debt conversion feature ....................................... 3,530
Allocation from Genzyme General for Designated Shares................... 2,886
Stock compensation expense ............................................. 47
---------
Balance at end of year ................................................. $ 34,517
=========
ACCUMULATED DEFICIT
Balance at beginning of year ........................................... $ (89,975) $ (17,158) $ (38,808)
Net income (loss) ...................................................... 13,629 (72,817) 21,650
--------- --------- ---------
Balance at end of year ................................................. $ (76,346) $ (89,975) $ (17,158)
========= ========= =========
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS:
Balance at beginning of year ........................................... $ (745) $ (3,590) $ (4,915)
Translation adjustments ................................................ (11,704) 2,845 1,325
--------- --------- ---------
Balance at end of year ................................................. $ (12,449) $ (745) $ (3,590)
========= ========= =========
UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Balance at beginning of year ........................................... $ (373) $ 2,062 $ (7,735)
Adjustments ............................................................ 817 (2,435) 9,797
--------- --------- ---------
Balance at end of year ................................................. $ 444 $ (373) $ 2,062
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
52
<PAGE> 54
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Corporation is a global diversified human healthcare business with
product development, manufacturing and marketing capabilities in therapeutic
products, surgical products, diagnostics, tissue repair and molecular oncology.
BASIS OF PRESENTATION
The consolidated financial statements of Genzyme include the balance sheets,
results of operations and cash flows of Genzyme's therapeutic products, surgical
products, diagnostics, tissue repair, molecular oncology and corporate
operations during the periods presented.
The approval effective December 16, 1994 (the "Effective Date") by the
stockholders of Genzyme of the Genzyme Stock Proposal as described in Genzyme's
Prospectus/Proxy Statement dated November 10, 1994 resulted in the redesignation
of Genzyme's common stock. The outstanding shares of Genzyme common stock were
redesignated as GGD Stock and a second class of common stock, designated as GTR
Stock was distributed on the basis of .0675 of one share of GTR Stock (after
1996 GGD Stock split) for each share of Genzyme's common stock. The merger of
PharmaGenics with and into Genzyme was consummated on June 18, 1997. In
connection with the merger, Genzyme established Genzyme Molecular Oncology, a
new division of Genzyme, which consists of all of PharmaGenics's business,
several programs previously allocated to Genzyme General in the area of
molecular oncology and Genzyme's rights under agreements with third parties
relating to gene therapies for the treatment of cancer. (See Note C.,
"Acquisitions" below). Contemporaneous with the Merger, the Genzyme stockholders
also approved the amendment and restatement of the Genzyme Charter redesignating
the GGD Stock and GTR Stock as a separate series of a single class of common
stock with substantially the same features as the existing GGD Stock and GTR
Stock and authorizing the designation of the GMO Stock. GGD Stock, GTR Stock and
GMO Stock provide stockholders with separate securities which are intended to
reflect the performance of Genzyme General, GTR, and GMO, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority and wholly-owned subsidiaries. Investments in companies and joint
ventures in which the Company has a substantial ownership interest (20% to 50%),
or in which the Company participates in policy decisions are accounted for using
the equity method. Accordingly, the Company's share of the earnings of these
entities is included in consolidated net income. Investments of less than 20%
are reported at fair value (see Note H., "Investments" below). All significant
intercompany items and transactions have been eliminated in consolidation.
Certain items in the consolidated financial statements for the years ended
December 31, 1995 and 1996 have been reclassified to conform with the December
31, 1997 presentation.
FINANCIAL INFORMATION
The Company prepares separate financial statements for Genzyme General, GTR and
GMO in addition to consolidated financial statements of the Company. Although
the financial statements of Genzyme General, GTR and GMO separately report the
assets, liabilities and stockholders' equity of Genzyme attributable to each
such division, such attribution of assets and liabilities (including contingent
liabilities) and stockholders' equity among Genzyme General, GTR and GMO does
not affect legal title to such assets or responsibility for such liabilities.
Holders of GGD Stock, GTR Stock and GMO Stock are holders of common stock of
Genzyme and continue to be subject to all the risks associated with an
investment in Genzyme and all of its businesses and liabilities. Liabilities or
contingencies of Genzyme General, GTR or GMO could affect the results of
operations and financial condition of the other divisions.
DIVIDEND POLICY
The Company has never paid any cash dividends on shares of its capital stock.
Genzyme currently intends to retain its earnings to finance future growth and
therefore does not anticipate paying any cash dividends on Genzyme Common Stock
in the foreseeable future.
53
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
current and non-current investments and accounts receivable. The Company
generally invests its cash investments in investment-grade securities to
mitigate risk.
UNCERTAINTIES
The Company is subject to risks common to companies in the biotechnology
industry, including the Company's ability to successfully complete preclinical
and clinical development and obtain timely regulatory approval and patent and
other proprietary rights protection of its products and services, (ii)
decisions, and the timing of decisions, made by the FDA and other agencies
regarding the indications for which the Company's products may be approved,
(iii) the accuracy of the Company's estimates of the size and characteristics of
markets to be addressed by the Company's products and services, (iv) market
acceptance of the Company's products and services, (v) the Company's ability to
obtain reimbursement for its products from third-party payers, where
appropriate, and (vi) the accuracy of the Company's information concerning the
products and resources of competitors and potential competitors.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting principally of money market funds and
municipal notes purchased with initial maturities of three months or less, are
valued at cost plus accrued interest, which approximates market.
INVESTMENTS
Short-term investments include all investments with remaining maturities of
twelve months or less. Long-term investments include all investments with
remaining maturities greater than twelve months. The Company classifies its
equity investments as available-for-sale and its investments in debt securities
as either held-to-maturity or available-for-sale based on facts and
circumstances present at the time the investments are purchased. As of December
31, 1997 and 1996, the Company classified all investments in debt and equity
securities as available-for-sale.
Available-for-sale investments are reported at fair value as of the balance
sheet date with unrealized holding gains and losses (the adjustment to fair
value) included in Stockholders' equity. If the adjustment to fair value
reflects a decline in the value of the investment, management considers all
available evidence to evaluate the extent to which the decline is "other than
temporary" and marks the investment to market through a charge to the income
statement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments is obtained from market quotations and is
disclosed in Note H., "Investments" below. The fair value of foreign currency
forward contracts is based on forward rates in effect at the balance sheet date
and is disclosed below (see -- Hedging). There were no foreign currency forward
contracts outstanding at December 31, 1997.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. On disposal, the related cost
and accumulated depreciation or amortization are removed from the accounts and
any resulting gain or loss is included in the results of operations. Provision
for depreciation is generally computed using the straight-line method over the
estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and 20 to 40 years
for buildings). Certain specialized manufacturing equipment and facilities
allocated to Genzyme General (with a net book value of $169.9 million at
December 31, 1997) is depreciated over its remaining useful life using the
units-of-production method. The remaining life and recoverability of such
equipment is evaluated periodically based on the appropriate facts and
circumstances. Leasehold improvements are amortized over the lesser of the
useful life or the term of the respective lease. For products expected to be
commercialized, the Company capitalizes, to construction in-progress, the costs
of manufacturing process validation and optimization incurred beginning when the
product is deemed to have demonstrated technological feasibility and ending when
the asset is substantially complete and ready for its intended use. Qualified
costs include incremental labor and direct material, and incremental fixed
overhead and interest. These costs are depreciated using the units of production
method.
54
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLES
Intangible assets consist of goodwill, covenants not to compete, customer lists,
patents, trademarks, trade-names and technology rights and are being amortized
using the straight-line method over useful lives of three to forty years.
Management's policy regarding intangible assets is to evaluate the
recoverability of its intangible assets when the facts and circumstances suggest
that these assets may be impaired. Evaluations consider factors including
operating results, business plans, economic projections, strategic plans and
market emphasis. Evaluations also compare expected cumulative, undiscounted
operating incomes or cash flows with net book values of related intangible
assets. Unrealizable intangible asset values are charged to operations if these
evaluations indicate an impairment in value. Accumulated amortization of
intangibles were $43.3 million and $26.2 million as of December 31, 1997 and
1996.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company's foreign subsidiaries are translated
from local currency into U.S. dollars using the current exchange rate at the
balance sheet date for assets and liabilities and the average exchange rate
prevailing during the period for revenues and expenses. The local currency for
all Company foreign subsidiaries is considered to be the functional currency for
each entity and accordingly, translation adjustments for these subsidiaries are
included in Stockholders' equity. Exchange gains and losses on intercompany
balances of a long-term investment nature are also recorded as a charge or
credit to Stockholder's equity.
Transaction gains and losses are recorded in income and totaled net losses of
$0.3, $0.9 million and $0.8 million for the years ended December 31, 1997, 1996
and 1995, respectively.
HEDGING
FORWARD CONTRACTS
From time to time, the Company enters into forward contracts to reduce
foreign currency exchange risk. Such contracts are revalued using current
exchange rates at the balance sheet date. All gains and losses on revaluation
of forward contracts are included in net income. At December 31, 1997 the
Company had no currency contracts outstanding and at December 31, 1996, had
currency contracts valued at approximately $0.9 million. Related gains and
losses were not material to the financial statements.
INTEREST RATE HEDGE AGREEMENTS
Interest rate hedge agreements are used to reduce interest rate risks and
costs inherent in the Company's debt portfolio. The Company enters into these
agreements to change the fixed/variable interest rate mix of the portfolio to
reduce the Company's aggregate risk to movements in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. The differentials to be received or paid under contracts designated
as hedges are recognized in income over the life of the contracts as
adjustments to interest expense. The fair values of interest rate contracts
are estimated based on the estimated amount necessary to terminate the
agreements.
REVENUE RECOGNITION
Revenues from product sales are recognized when goods are shipped and are net of
third party contractual allowances and rebates, as applicable. Revenues from
service sales are recognized when the service procedures have been completed or
applicable milestones have been achieved. Revenues from research and development
contracts are recognized over applicable contractual periods as specified by
each contract and as costs related to the contracts are incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred. Costs of
purchased technology which management believes has not demonstrated
technological feasibility and for which there is no alternative future use are
charged to expense in the period of purchase.
ISSUANCE OF STOCK BY A SUBSIDIARY
Gains on the issuance of stock by a subsidiary are included in net income
unless the subsidiary is a research and development, start-up or development
stage company or an entity whose viability as a going concern is under
consideration. In those situations the Company accounts for the change in its
proportionate share of subsidiary equity resulting from the additional equity
raised by the subsidiary as an equity transaction.
55
<PAGE> 57
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company uses the asset and liability method of accounting for deferred
income taxes. The provision for income taxes includes income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities. The Company has not
provided for possible U.S. taxes on the undistributed earnings of foreign
subsidiaries that are considered to be reinvested indefinitely. At December 31,
1997, such undistributed foreign earnings were approximately $4.0 million.
Based on the Company's policy of indefinite reinvestment in non-US operations,
it is not currently practicable to determine the tax liability associated with
the repatriation of those earnings.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GTR and GMO give
effect to the management and accounting policies adopted by the Genzyme Board in
connection with the redesignation of Genzyme common stock as GGD Stock and the
creation of GTR Stock and GMO Stock and are reported in lieu of consolidated per
share data. The Company computes net income (loss) per share for each division
by dividing the earnings attributable to each series of stock by the weighted
average number of shares of that stock outstanding during the period for basic
earnings per share and by the weighted average shares of that stock plus other
potentially dilutive securities outstanding during the applicable period for
diluted earnings per share. Earnings (loss) attributable to GGD Stock, GTR Stock
and GMO Stock equal the respective division's net income or loss for the
relevant period determined in accordance with generally accepted accounting
principles in effect at such time, adjusted by the amount of tax benefits
allocated to or from the division pursuant to the management and accounting
policies adopted by the Genzyme Board.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted net income per share is very
similar to the previously reported fully diluted earnings per share except that
the new treasury stock method used in determining the dilutive effect of options
uses the average market price for the period rather than the higher of the
average market price or the ending market price. All net income (loss) per
common share amounts have been restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
GENZYME GENERAL
<S> <C> <C> <C>
Net income (loss) attributable to GGD Stock
-basic and diluted (1) .................... $ 77,447 $(30,502) $ 43,680
======== ======== ========
Shares used in net income per common
share-basic ................................ 76,531 68,289 55,531
Effect of dilutive securities:
Employee and director stock options ........ 2,387 - 2,757
Warrants ................................... 7 - 1,897
6 3/4% convertible subordinated notes (1) .. - - 3,782
-------- -------- --------
Dilutive potential common shares (2) ......... 2,394 - 8,436
-------- -------- --------
Shares used in net income per common
share-diluted (1,2) ........................ $ 78,925 $ 68,289 $ 63,967
======== ======== ========
Net income (loss) per common share
- basic (1) ................................ $ 1.01 $ (0.45) $ 0.79
======== ======== ========
Net income (loss) per common share
- diluted (1,2) ............................ $ 0.98 $ (0.45) $ 0.68
======== ======== ========
</TABLE>
- -------------------------
(1) In March 1996, $100.0 million of 6 3/4% convertible subordinated notes
issued by Genzyme in October 1991 were converted into approximately
3,782,000 shares of GGD Stock and 255,000 shares of GTR Stock. For the
diluted EPS calculation in 1995, no adjustment to Genzyme General's net
income is required in assuming the conversion of the notes as of
January 1, 1995 because substantially all of interest costs incurred on
the notes were capitalized.
(2) In computing diluted EPS for 1996, exercise of approximately 6,506,000
options and 35,000 warrants are not assumed as the result would be
antidilutive due to Genzyme General's net loss.
Options to purchase approximately 5,921,000 shares of GGD Stock in
1997, 3,824,000 shares in 1996, and 2,837,000 shares of stock in 1995 were
outstanding during the years then ended but were not included in the
year-to-date calculation of diluted income per share because the options'
exercise price was greater than the average market price of the common shares
during those periods. Warrants to purchase 40,000 shares of GGD stock
exercisable as of July 31, 1997 were not included in the year-to-date
calculation of diluted income per share because the exercise price of the
warrants was greater than the average market price of the common shares during
the year.
GENZYME TISSUE REPAIR
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts) December 31,
- -----------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss for basic and diluted weighted
average shares outstanding.................... $(45,984) $(42,315) $(22,030)
Basic and diluted weighted average shares
outstanding................................... 14,976 12,525 9,659
Net loss per common share -
basic and diluted ............................ $ (3.07) $ (3.38) $ (2.28)
</TABLE>
During the years ended December 31, 1997, 1996, and 1995, certain
securities which were not included in the computation of diluted earnings per
share because they would have an anti-dilutive effect due to the net loss for
the years, were as follows: (i) options to purchase approximately 2,777,000,
2,574,000 and 1,985,000 shares of GTR Stock with a price range of $4.84-$12.88
per share; (ii) 885,000, 1,794,000 and 1,287,000 GTR Designated shares issuable
for the benefit of Genzyme General; (iii) debentures convertible into 1,772,000
shares of GTR Stock computed as of December 31, 1997.
GENZYME MOLECULAR ONCOLOGY
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts) December 31,
- -----------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss for basic and diluted weighted
average shares ............................... $(19,578) $ (1,003) $ (464)
Basic and diluted weighted average shares
outstanding................................... 3,929 3,929 3,929
Pro forma net loss per common share -
basic and diluted............................. $ (4.98) $ (0.26) $ (0.12)
</TABLE>
During the year ended December 31, 1997, certain securities which
were not included in the computation of diluted earnings per share because they
would have an anti-dilutive effect due to the net loss for the year were as
follows: (i) options to purchase approximately 826,000 shares of GMO Stock at
$7.00 per share; (ii) warrants to purchase 10,000 shares of GMO Stock at $8.04
per share; (iii) debentures convertible into 3,476,000 shares of GMO Stock; and
(iv) 6,000,000 GMO Designated Shares issuable for the benefit of Genzyme
General. During the years ended December 31, 1996 and 1995, there were no
securities outstanding to be considered in this calculation.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has
disclosed herein pro forma net income and pro forma earnings per share in the
footnotes using the fair value based method for fiscal 1997, 1996 and 1995.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of comprehensive
income and its
56
<PAGE> 58
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
components in annual financial statements. SFAS 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment information in
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS 130 and SFAS 131, respectively. Application of SFAS 130
will have no impact on Genzyme's consolidated financial position, results of
operations or earnings per share data as currently reported or the combined
financial position, results of operations or earnings per share data as
currently reported for Genzyme General, GTR or GMO. The impact of adoption of
SFAS 131 on the Company's disclosures is being evaluated.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits ("SFAS 132"). SFAS 132 effective for
fiscal years beginning after December 15, 1997. Genzyme has not assessed the
impact of the Statement on its financial statement disclosures.
NOTE B. STRATEGIC FINANCIAL PROVISIONS
In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges mainly
associated with its Pharmaceutical and Surgical Products businesses and the sale
of GDI, which was sold in 1996. The Pharmaceutical business will now focus on
products that are more consistent with Genzyme's long-term business strategy of
moving towards higher-value products and away from fine chemical and bulk
pharmaceuticals. This change in strategy resulted in a $18.1 million charge to
cost of products sold primarily related to the melatonin, bulk pharmaceuticals
and fine chemical product lines which are being discontinued. In addition,
Genzyme recorded charges of $5.5 million to cost of products sold and $3.5
million to SG&A expense primarily related to the manufacturing and selling of
the Sepracoat product line, which an advisory panel of the FDA recommended
against granting market approval of this product in 1997. Genzyme also recorded
a $2.0 million charge to other expense related to the uncertainty of collection
on certain notes receivable.
NOTE C. ACQUISITIONS
ACQUISITIONS
The Company allocates all acquisitions to either Genzyme General, GTR or GMO
depending on the nature of the acquired business.
ALLOCATED TO GENZYME GENERAL:
NEOZYME II CORPORATION On October 28, 1996, Genzyme completed its tender
offer for the outstanding units (the "Units") of Neozyme II, each Unit
consisting of (i) one share of Neozyme II Callable Common Stock ("Callable
Common Stock"), and (ii) one callable warrant (the "Neozyme II Callable
Warrants") to purchase two shares of GGD Stock and 0.135 share of GTR
Stock, for $45.00 per Unit in cash. A total of 2,385,686 Units, or 98.8%,
were tendered and accepted for payment resulting in payment of $107.4
million.
On December 6, 1996, Neozyme II was merged with and into a wholly-owned
subsidiary of Genzyme and, as a result of the merger, all outstanding
shares of Callable Common Stock (other than shares held by Genzyme and its
subsidiaries) were cancelled and converted into the right to receive
$29.00 in cash per share, for an aggregate merger consideration of $0.9
million. The Neozyme II Callable Warrants included in the untendered Units
separated from the shares of Callable Common Stock converted in the
merger, and accordingly, 29,314 of such warrants became exercisable on
December 6, 1996. The Neozyme II Callable Warrants have an exercise price
of $44.202 per share and will expire on December 31, 1998. The aggregate
purchase price of Neozyme II was $111.3 million and consisted of $108.2
million of cash, warrants valued at $0.5 million and acquisition costs of
$2.6 million.
57
<PAGE> 59
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for as a purchase. The excess purchase
price was allocated to Neozyme II's only remaining assets which were
technologies still in the development stage. These technologies consisted
of specific programs for the treatment of cystic fibrosis and have no
alternative future use. Accordingly, the statement of operations for the
year ended December 31, 1996 reflects a $106.5 million charge for
in-process technology and a related deferred tax benefit of $21.7 million
which were recorded upon consummation of the acquisition.
DEKNATEL SNOWDEN PENCER, INC.
On July 1, 1996, Genzyme completed the acquisition of DSP, a privately held
surgical products company. The purchase price of $252.2 million consisted
of cash of approximately $192.0 million, acquisition costs of approximately
$4.6 million and debt obligations of DSP of approximately $55.6 million.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair market value of the net assets acquired,
approximately $130.8 million, was allocated to goodwill to be amortized
over 40 years. Funds for the acquisition, the repayment of the debt and the
payment of the acquisition costs were provided by borrowings of $200.0
million under a revolving credit facility from Fleet National Bank.
The purchase price was allocated to the assets and liabilities of DSP based
on their estimated respective fair values on the date of acquisition.
Completed technology that has reached technological feasibility was valued
using a risk adjusted cash flow model under which future cash flows were
discounted, taking into account risks related to existing and future
markets and assessments of the life expectancy of the completed technology.
In-process technology that has not reached technological feasibility and
that has no alternative future use was valued using the same method.
Expected future cash flows associated with in-process technology are
discounted considering risks and uncertainties related to viability of and
to the potential changes in future target markets and to the completion of
the products expected to be ultimately marketed by Genzyme. The amount
allocated to in-process technology of $24.2 million was charged to
operations in July 1996 upon completion of the acquisition. The Company
incurred restructuring charges of $0.5 million related to this acquisition.
GENETRIX, INC.
On May 1, 1996, the Company acquired Genetrix, a privately held genetic
testing laboratory based in Phoenix, Arizona, in a tax-free exchange of
GGD Stock. In the aggregate, approximately 1,380,000 shares of GGD Stock
valued at approximately $36.5 million were issued for all the
outstanding shares of Genetrix preferred stock and Genetrix common stock.
The acquisition was accounted for as a purchase. The purchase price was
allocated to the assets and liabilities of Genetrix based on their
respective estimated fair values at the date of acquisition. The excess of
the purchase price over the fair market value of the net assets acquired,
approximately $39.0 million, was allocated to goodwill to be amortized
over 15 years. The Company incurred restructuring charges of $1.0 million
related to closings of laboratories made redundant by the acquisition.
IG LABORATORIES, INC.
IG was an approximately 70%-owned subsidiary for the period from January
1, 1995 through October 1, 1995. In October 1995, Genzyme acquired the
publicly-held minority interest in IG by issuing approximately 770,510
shares of GGD Stock, valued at approximately $22.5 million. The
acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market value of the net assets acquired, approximately
$18.6 million, was allocated $14.2 million to in-process research and
development and charged to operations, and $4.4 million to goodwill to be
amortized over 11 years. Pro forma information is not presented since the
impact of the acquisition on financial statement periods prior to the
acquisition is not material.
ALLOCATED TO GENZYME MOLECULAR ONCOLOGY:
PHARMAGENICS, INC.
The merger of PharmaGenics with and into Genzyme (the "Merger") was
consummated on June 18, 1997.
58
<PAGE> 60
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As compensation to Genzyme General for its contribution to GMO, 6,000,000
shares of GMO Stock have been reserved for issuance at the discretion of
the Genzyme Board for the benefit of Genzyme General or its stockholders
("GMO Designated Shares"). (See Note K., "Stockholder's Equity - GMO
Designated Shares" below).
The aggregate purchase price of $27.5 million (net of $0.5 million which
represents the fees payable by PharmaGenics in connection with the merger),
plus acquisition costs of $2.5 million and assumed liabilities of $5.4
million has been allocated to the acquired tangible and intangible assets
based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Property, plant & equipment .............................. $ 208
Other assets ............................................. 50
Completed technology rights (to be amortized over 3 years) 20,000
Goodwill (to be amortized over 3 years) .................. 15,729
Deferred tax liability (to be amortized over 3 years) .... (7,600)
In-process technology .................................... 7,000
--------
Total................................................. $ 35,387
========
</TABLE>
Accumulated amortization of the completed technology rights and goodwill
was $5,127,000 as of December 31, 1997.
The $7.0 million allocated to in-process technology represents the value
assigned to PharmaGenics's programs which are still in the development
stage and for which there is no alternative use. The value assigned to
these programs (both complete and in-process) has been determined by
selecting the maximum anticipated value of these programs, as provided by
an independent valuation of the PharmaGenics business, based on comparable
technologies. The amount allocated to in-process technology was charged to
operations in June 1997, the period in which the merger was consummated.
The deferred tax liability of $7.6 million results from the temporary
difference between the book and tax basis of the completed technology
computed at a 38.0% incremental tax rate.
As of the date of the Merger, PharmaGenics had borrowed $2.5 million from
Genzyme under a credit facility (the "PharmaGenics Note") which Genzyme had
made available to PharmaGenics to fund PharmaGenics's documented operating
costs. Upon consummation of the Merger, the PharmaGenics Note became a
liability allocated to GMO and the $2.5 million of outstanding principal is
considered an intracompany loan by Genzyme General to GMO bearing interest
at 6.15% per annum and maturing on February 10, 2002 and convertible at any
time prior thereto, at the Genzyme Board's option, into GMO Designated
Shares. See Note K., "Stockholder's Equity - GMO Designated Shares" below.
59
<PAGE> 61
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents the results of
operations of Genzyme for the years ended December 31, 1997 and 1996 as if
the acquisitions of Genetrix, DSP, Neozyme II and PharmaGenics had been
consummated as of the beginning of the periods presented. This pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions been made as of those dates or of results that may occur in
the future. The pro forma financial information does not include charges for
in-process technology of (i) $24.2 million and $106.5 million related to the
DSP and Neozyme II acquisitions, respectively in 1996 and (ii) $7.0 million
related to the acquisition of PharmaGenics in 1997, all of which were
recognized as expense upon consummation of each acquisition.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
------------------------------------------------ ----------- ----------
<S> <C> <C>
Pro forma revenues .......................................... $608,916 $565,004
Pro forma net income ........................................ 7,667 9,668
Pro forma net income attributable to GGD Stock .............. $77,447 $65,146
Pro forma net income per Genzyme
General common share - basic ............................ $1.01 $0.95
====== ======
Weighted average shares outstanding ....................... 76,531 68,289
====== ======
Pro forma net income per Genzyme
General common and common equivalent share - diluted .... $0.98 $0.88
====== ======
Adjusted weighted average shares outstanding .............. 78,925 73,704
====== ======
Pro forma net loss attributable to GMO Stock ................ $(26,091) $(15,113)
Pro forma net loss per GMO common share -
basic and diluted ....................................... $(6.64) $(3.85)
====== ======
Weighted average shares outstanding ....................... 3,929 3,929
====== ======
</TABLE>
NOTE D. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments represent various degrees and types of
risk to Genzyme, including credit, interest rate and liquidity risk.
In the normal course of business, Genzyme enters into interest rate swap
contracts to hedge its interest rate risk related to its variable rate notes
payable. The notional amount of interest rate contracts is the amount upon which
interest and other payments under the contract are based.
Interest rate swaps generally involve the exchange of fixed and variable
interest payments between two parties based on a common notional principal
amount and maturity date. The primary risks associated with interest rate swaps
are the exposure to movements in interest rates and the ability of
counterparties to meet the terms of the contract.
At December 31, 1997, Genzyme had one swap agreement with a notional value of
approximately $100.0 million. The agreement matures in 1998.
NOTE E. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme's trade receivables primarily represent amounts due from healthcare
service providers and companies and institutions engaged in research,
development or production of pharmaceutical and biopharmaceutical products.
Genzyme performs ongoing credit evaluations of its customers and generally does
not require collateral. Accounts receivable are stated at fair value after
reflecting the allowance for doubtful accounts of $12.1 million and $16.5
million at December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996 accumulated amortization of intangible assets
was $43.3 million and $26.2 million, respectively.
NOTE F. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
<S> <C> <C>
Raw materials ............ $ 48,392 $ 30,379
Work-in-process .......... 31,994 38,203
Finished products ........ 59,295 56,683
-------- --------
$139,681 $125,265
========= =========
</TABLE>
NOTE G. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 include the following
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
<S> <C> <C>
Plant and equipment ....................$ 249,718 $ 217,594
Land and buildings ..................... 141,020 122,843
Leasehold improvements ................. 65,672 58,215
Furniture and fixtures ................. 15,364 14,714
Construction in-progress ............... 24,953 69,286
--------- ---------
496,727 482,652
Less accumulated depreciation .......... (111,379) (88,813)
--------- ---------
Property, plant and equipment, net.. $ 385,348 $ 393,839
========== ==========
</TABLE>
60
<PAGE> 62
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense was $33.5 million, $23.1 million and
$18.0 million in 1997, 1996 and 1995, respectively.
The Company attributes its fixed assets to Genzyme General, GTR or GMO based on
use.
The Company has completed construction of the Company's mammalian cell
production facility at Allston Landing in Boston, Massachusetts to produce a
recombinant form of Ceredase(R) enzyme and other products. The Company has
capitalized approximately $154.1 million of expenditures related to this
building and approximately $64.3 million of gross process validation and
optimization costs related to this and other manufacturing facilities. In 1997,
1996 and 1995, the Company capitalized approximately $0.5 million, $2.2 million
and $9.0 million of interest costs, respectively, relating to this and other
facility construction. The Company began depreciating this facility in July 1996
using the units of production method of depreciation. Depreciation expense for
1997 and 1996 related to this facility was $6.1 million and $1.7 million,
respectively.
NOTE H. INVESTMENTS
Consolidated investments in marketable securities at December 31 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
-------------------- ----------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Short Term:
Certificates of deposit $ -- $ -- $ 1,882 $ 1,882
Corporate notes ....... 51,280 51,259 54,732 54,726
------- ------- ------- -------
$51,280 $51,259 $56,614 $56,608
======= ======= ======= =======
Long Term:
Corporate notes ....... $70,981 $70,921 $16,481 $16,485
U.S. Treasury notes ... 21,667 21,755 22,010 21,730
------- ------- ------- -------
$92,648 $92,676 $38,491 $38,215
======= ======= ======= =======
Equity securities ........ $29,609 $30,047 $10,905 $10,813
======= ======= ======= =======
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
Investment income for 1997, 1996 and 1995 includes gross realized
losses of $2,000, $47,000 and $110,000 respectively. Gross realized gains
included in investment income for 1995 were $1.4 million. The realized gain on
the investment in Nabi was reported as a separate line item in the Company's
statement of operations for 1996.
Gross unrealized holding losses of $3.0 million and unrealized holding gains of
$3.4 million were recorded at December 31, 1997 in Stockholders' equity as
compared to unrealized holding losses of $2.7 million and unrealized holding
gains of $2.3 million at December 31, 1996.
Information regarding the range of contractual maturities of investments in debt
securities at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- ----------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Within 1 year ................ $ 51,280 $ 51,259 $56,614 $56,608
After 1 year through 2 years . 63,905 63,855 11,399 11,415
After 2 years through 10 years 28,743 28,821 27,092 26,800
-------- -------- ------- -------
$143,928 $143,935 $95,105 $94,823
======== ======== ======= =======
</TABLE>
Investments in marketable securities are attributed to either Genzyme General,
GTR or GMO.
61
<PAGE> 63
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company holds certain strategic investments in unconsolidated entities
which may be attributed to either Genzyme General, GTR or GMO.
INVESTMENTS ALLOCATED TO GENZYME GENERAL:
ABIOMED, INC. ("ABIOMED")
In July 1997, Genzyme General purchased 1,153,846 shares of ABIOMED common
stock for $13.00 per share for an aggregate investment of $14,999,998. As a
result of the investment, Genzyme owns approximately 13% of ABIOMED. As of
December 31, 1997, the fair market value of the Company's investment in
ABIOMED was approximately $18.9 million. The Company's Chairman and Chief
Executive Officer is a director of ABIOMED.
CELTRIX Pharmaceuticals, INC. ("CELTRIX") and Aronex Pharmaceuticals, Inc.
("ARONEX") Genzyme owns 3,023,217 shares of common stock of CELTRIX and
423,306 shares of common stock of ARONEX. At December 31, 1997, the fair
market value of the Company's investments in Celtrix and Aronex were
approximately $5.5 million and $1.8 million, respectively.
Nabi (formerly NORTH AMERICAN BIOLOGICALS, INC.)
In April 1996, the Company disposed of its entire investment in Nabi and
recorded a realized gain of approximately $1.7 million on the sale.
GENZYME TRANSGENICS CORPORATION ("GTC")
Genzyme currently holds approximately 43% of the outstanding common stock of
GTC, and accounts for its investment in GTC under the equity method. Genzyme
and GTC are parties to a services agreement under which GTC pays Genzyme for
certain basic services provided by Genzyme, such as treasury, data processing
and laboratory support services, a sublease agreement pursuant to which
Genzyme subleases a portion of one of its facilities in Framingham,
Massachusetts to GTC and a research and development agreement pursuant to
which Genzyme and GTC each perform certain research services for each other.
During 1997, Genzyme received approximately $7.4 million from GTC pursuant to
the three agreements between the companies and GTC received approximately
$5.9 million from Genzyme pursuant to the research and development agreement.
In December 1995, GTC refinanced its line of credit and term loan agreement
with a commercial bank, subject to Genzyme's continuing guaranty of a total
of $9.8 million of credit facilities provided to GTC by the commercial bank.
The largest amount outstanding under these facilities during the fiscal year
ended December 31, 1997 was $6.0 million. In exchange for its guaranty,
Genzyme received a warrant to purchase 145,000 shares of GTC common stock
with an exercise price of $2.84375 per share.
In March 1996, GTC entered into a Convertible Debt and Development Funding
Agreement with Genzyme under which Genzyme agreed to provide a revolving line
of credit in the amount of $10.0 million and agreed to fund development costs
of the transgenic antithrombin ("ATIII") program through March 31, 1997 (the
"1996 Agreement"). Under the agreement, GTC granted to the Company
co-marketing rights to ATIII in all territories other than Asia subject to
negotiation and execution of a development and supply agreement between the
parties prior to March 31, 1997. Pursuant to the terms of this agreement, GTC
borrowed $4.3 million in 1996 from Genzyme General, of which $1.7 million of
this debt was converted into 219,565 shares of GTC Stock, $1.2 million was
offset against amounts owed by Genzyme General to GTC for services provided
in relation to the ATIII program and $1.4 million was repaid by GTC with
accrued interest.
62
<PAGE> 64
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 1997, Genzyme and GTC entered into an Amended and Restated
Convertible Debt Agreement (the "1997 Debt Agreement"), which superseded and
replaced the provisions of the 1996 Agreement other than the provisions relating
to the development and commercialization of ATIII. Under the 1997 Debt
Agreement, the line of credit was reduced to $8,327,000 and the expiration date
of the revolving credit line was extended to March 31, 2000, with an option, at
that date, for GTC to convert the outstanding balance to a three-year term loan.
The interest rate remains at 7% through April 1, 1998. Thereafter, the interest
rate increases annually starting at a rate equal to the lower of 8% or the prime
lending rate in the first year and ending at a rate equal to the lower of 10% or
the prime lending rate plus 2% from April 2, 2002 through the final year of the
term loan. Financial covenants require positive quarterly earnings before
interest, taxes, depreciation, amortization and unfunded research and
development expense starting April 1, 1998. Any amounts outstanding under the
credit line may be converted into shares of GTC common stock at Genzyme's option
at any time for up to the full amount outstanding or at GTC's option on a
quarterly basis limited to an amount sufficient to maintain a minimum tangible
net worth required for continued listing on the Nasdaq National Market. All such
conversions are to be based on the average closing stock price over 20 trading
days ending two trading days prior to the date of conversion. The largest amount
outstanding under this line of credit during the fiscal year ended December 31,
1997 was $6.0 million. As of December 31, 1997, $2.0 million remained
outstanding under this credit line.
In December 1997, Genzyme and GTC established ATIII LLC, a joint venture for the
development and commercialization of ATIII effective as of January 1, 1998.
Initially, Genzyme will fund 70% of the development costs up to a maximum of
$33.0 million and GTC will fund the remaining 30% of the development costs. Both
companies will fund equally any costs in excess of that level, and profits will
be split equally. To the extent that either party fails to fund its share of
costs and expenses, the profit sharing interests and the future funding
obligations of the parties may be proportionately adjusted. The joint venture
has the right to commercialize ATIII worldwide, excluding Asia. GTC has
contributed ATIII and the product's underlying patents and technology to
the joint venture. Pursuant to the terms of the joint venture agreements,
Genzyme will pay GTC certain amounts upon the achievement of milestones events.
GTC will manufacture ATIII in bulk form and Genzyme will perform the finished
processing work. Genzyme, as the exclusive distributor for ATIII LLC, will
market and sell products for the joint venture in the territory. The joint
venture agreements supersede and replace the provisions of the 1996 Agreement
that related to the ATIII program, pursuant to which Genzyme had previously
funded the ATIII program.
The fair market value of the GTC shares, based on quoted market prices, was
$71.5 million and $45.5 million at December 31, 1997 and 1996, respectively.
The Company reported equity in GTC's net losses of $2.9 million, $2.4 million
and $1.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Following are condensed statements of operations and balance
sheet data of GTC which are recorded as other noncurrent assets in Genzyme's
financial statements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues ............. $ 62,938 $ 46,834 $32,421
Operating loss ....... (8,352) (7,253) (7,855)
Net loss ............. (9,343) (7,746) (4,133)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
(DOLLARS IN THOUSANDS) 1997 1996
- ---------------------- ---- ----
<S> <C> <C>
Current assets ....... $ 24,400 $24,642
Noncurrent assets .... 46,580 42,062
Current liabilities .. 32,823 24,758
Noncurrent liabilities 10,779 6,742
</TABLE>
63
<PAGE> 65
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GELTEX PHARMACEUTICALS, INC. AND RENAGEL LLC
In June 1997, Genzyme and GelTex established RenaGel LLC, a joint venture for
the final development and commercialization of RenaGel(R) non-absorbed
phosphate binder. Each of Genzyme and GelTex currently hold a 50% ownership
interest in RenaGel LLC. Genzyme and GelTex are each required to fund 50% of
the joint venture's costs and expenses, and will share equally in the
profits. To the extent that either party fails to fund its share of costs and
expenses, the profit sharing interests and the future funding obligations of
the parties may be proportionately adjusted. GelTex contributed RenaGel(R)
and the product's underlying patents and technologies to the joint venture.
Pursuant to the terms of the joint venture agreements, Genzyme will pay
GelTex a total of $27.5 million, consisting of a $2.5 million equity
investment for 100,000 shares of GelTex common stock at $25.00 per share,
which represents less than 1% ownership in GelTex, which was made in June
1997, a $15.0 million payment on receipt of FDA marketing approval for
RenaGel and a $10.0 million payment one year following FDA marketing approval
for RenaGel(R). The joint venture has rights to commercialize RenaGel(R)
worldwide, except in Japan and Pacific Rim countries. Genzyme, as exclusive
distributor for RenaGel LLC, will market and sell products for the joint
venture pursuant to the terms of the joint venture agreement in the
territory. The Company's Chairman and Chief Executive Officer is a director
of Geltex.
INVESTMENT ALLOCATED TO GENZYME TISSUE REPAIR:
DIACRIN/GENZYME LLC
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin to develop and commercialize products and processes
for use in the treatment of Parkinson's disease and Huntington's disease in
humans using porcine fetal cells. Under the terms of the joint venture
agreement, GTR is required to provide 100% of the initial $10.0 million of
the funding requirements and 75% of the next $40.0 million of funding
requirements. After that, all costs will be shared equally between GTR and
Diacrin. Profits from the joint venture will be shared by the two parties.
Genzyme General has agreed to provide funding to GTR in support of GTR's
joint venture efforts in exchange for GTR Designated Shares. Pursuant to this
agreement, Genzyme General allocated $5.1 million and $1.9 million of cash to
GTR in 1997 and 1996, respectively, and 489,810 and 231,645 GTR Designated
Shares, respectively, were reserved for issuance by the Genzyme Board's for
the benefit of Genzyme General or its stockholders. As of December 31, 1997,
GTR has provided a total of $8.7 million of funding to the joint venture and
realized net losses from the joint venture of $6.7 million in 1997 and $1.7
million in 1996. Summary financial information is not presented as the
impact of the Joint Venture's activities on the Company's statement of
operations for the years ended December 31, 1997 is not considered to be
material. The Company's Chairman and Chief Executive Officer is a director of
Diacrin.
INVESTMENT ALLOCATED TO GENZYME MOLECULAR ONCOLOGY:
STRESSGEN/GENZYME LLC
In July 1997, StressGen/Genzyme LLC was established as a joint venture among
Genzyme, StressGen and CMDF to develop stress gene therapies for the
treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in
connection with the joint venture through the combination of a capital
contribution to StressGen/Genzyme LLC in the amount of $1.0 million
(Canadian), the purchase of warrants from Genzyme in the amount of $1.0
million (Canadian), the purchase of warrants and preferred stock from
StressGen in the amount of $1.4 million (Canadian) and a limited recourse
loan bearing interest at 0.125% per annum to StressGen in the amount of $6.6
million (Canadian). Each of Genzyme and StressGen (through a U.S. subsidiary)
also made a capital contribution to StressGen/Genzyme LLC in the amount of
$1.0 million (Canadian) and a limited recourse loan was made by the U.S.
subsidiary of StressGen to StressGen/Genzyme LLC in the amount of $7.0
million (Canadian). In addition, Genzyme and StressGen have agreed to provide
in equal shares any additional capital required by the joint venture in
excess of the initial $10.0 million (Canadian) in funding.
64
<PAGE> 66
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Genzyme and StressGen have an option, payable in equal shares, to purchase
CMDF's membership interest in StressGen/Genzyme LLC at any time during the
three-year period beginning July 31, 1999 and ending July 31, 2002. The
exercise price of the Purchase Option initially will be $15.6 million
(Canadian) in July 1999 and will increase monthly thereafter to a final
exercise price of $30.5 million (Canadian) in July 2002. The limited
recourse loan made by CMDF will be retired in connection with the exercise
of the Purchase Option. If the Purchase Option is not exercised on or before
July 31, 2002, CMDF may require Genzyme and StressGen to repay $2.0 million
(Canadian) each of the limited recourse loan. In addition, at any time
during the 30-day period commencing on the date when not less than 75% of
the initial funding provided by CMDF has been spent by the joint venture,
but in no event later than July 31, 1999, CMDF shall have the right to
require Genzyme and StressGen to purchase its membership interest at an
aggregate purchase price of $10.0 million (Canadian) plus interest thereon
at a rate per annum equal to the Canadian prime rate plus 1%. The Mandatory
Purchase Right will terminate if not exercised by CMDF during such 30-day
period. Genzyme's share of any amounts payable to CMDF upon exercise of the
Purchase Option, the Mandatory Purchase Right or repayment of the limited
recourse loan may be paid in cash, Genzyme common stock or any combination
thereof at the discretion of Genzyme.
Prior to the repurchase of CMDF's membership interest in StressGen/Genzyme
LLC, profits from the joint venture will be shared in proportion to the
capital contributions of the three parties. Following the repurchase of
CMDF's membership interest, profits will be shared equally by StressGen and
Genzyme. However, GMO currently records 50% of the net operating losses of
the joint venture due to the existence of the Mandatory Purchase Right.
Accordingly, for the year ended December 31, 1997, GMO recorded $258,000 of
equity in loss of joint venture.
GMO recorded $315,000 and $287,000 of research and development revenue and
cost of research and development revenue, respectively, related to services
billed to StressGen/Genzyme LLC for the year ended December 31, 1997. GMO
has a receivable of $427,000 from StressGen/Genzyme LLC at December 31,
1997, which is included in other current assets.
NOTE I. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
---------------------- ---- ----
<S> <C> <C>
Professional fees .... $ 7,949 $ 4,402
Compensation ......... 21,917 22,626
Royalties ............ 8,421 8,323
Rebates .............. 4,575 7,604
Interest ............. 799 1,681
Other ................ 28,442 25,488
------- -------
$72,103 $70,124
======= =======
</TABLE>
65
<PAGE> 67
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Although the Company retains responsibility for the repayment of all long-term
debt obligations, such debt and leases are allocated to Genzyme General, GTR or
GMO for reporting purposes based on the intended use of the funds borrowed under
each instrument or facility or equipment leased.
Long-term debt at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
----------------------------------------------------- ---- ----
<S> <C> <C>
Revolving Credit Facility ........................... $ 118,000 $ 218,000
6% convertible subordinated debentures .............. 16,617 --
5% convertible subordinated debentures .............. 12,681 --
Mortgage note payable, matures June 13, 1999 ........ 19,833 20,375
Other mortgage notes payable ........................ 3,856 3,983
--------- ---------
170,987 242,358
Less current portion ................................ (711) (999)
--------- ---------
$ 170,276 $ 241,359
========= =========
</TABLE>
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1998 - $711,000, 1999 -
$137,397,000, 2000 - $12,831,000, 2001 - $160,000, 2002 - $16,787,000 and
thereafter $3,101,000.
CREDIT FACILITIES
In November 1996, Genzyme refinanced its existing $215.0 million line of credit
(the "Credit Line") with a Revolving Credit Facility made available through a
syndicate of commercial banks administered by Fleet National Bank in the amount
of $225.0 million. Amounts drawn under this facility may be allocated to Genzyme
General, GTR or GMO. As of December 31, 1996, Genzyme had $218.0 million of debt
outstanding under the Revolving Credit Facility, of which $200.0 million was
allocated to Genzyme General and $18.0 million to GTR. In June 1997, $5.0
million of borrowings originally allocated to Genzyme General were reallocated
to GMO. As of December 31, 1997, Genzyme had $118.0 million of debt outstanding
under the Revolving Credit Facility, which had been allocated $95.0 million to
Genzyme General, $18.0 million to GTR and $5.0 million to GMO.
REVOLVING CREDIT FACILITY
Genzyme may request loans up to a maximum aggregate principal amount outstanding
at any time of $225.0 million under the terms of the Revolving Credit Facility.
Loans bear interest at LIBOR plus an applicable margin pursuant to the terms and
conditions defined in the credit agreement. The notes have certain covenants
which require Genzyme to, among other things, maintain certain levels of
earnings and liquidity ratios. If Genzyme defaults on the covenants the
Revolving Credit Facility is payable on demand. The stock of Genzyme Securities
Corporation, a Massachusetts Securities Corporation, is pledged as collateral
for this facility. As of December 31, 1997, the interest rate on amounts
outstanding under the Revolving Credit Facility was approximately 6.28%. Genzyme
pays a commitment fee ranging from .15% to .375% on the unused portion of the
Revolving Credit Facility.
INTEREST RATE HEDGE AGREEMENT
In December 1996, Genzyme entered into a $100.0 million interest rate swap
contract (the "Interest Rate Swap Contract") to effectively convert the variable
interest rate on borrowings under the Revolving Credit Facility to fixed
interest rates. Net payments made or received under the Interest Rate Swap
Contract are recorded as interest expense. At December 31, 1997, the Interest
Rate Swap Contract had a termination value of approximately ($618,000).
66
<PAGE> 68
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTR PRIVATE PLACEMENT:
On February 28, 1997, GTR raised $13.0 million through the private placement of
the GTR Note to an affiliate of Credit Suisse First Boston due February 27,
2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR
Stock and, beginning August 1997, at a discount to the average of the closing
bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading
days immediately preceding the conversion date (the "Average GTR Stock Price").
The discount will start at 2% beginning six months from the date the GTR Note
was issued and will increase to 11% at 15 months after the date of issue.
Thereafter, the conversion price will be the lesser of 89% of the Average GTR
Stock Price preceding the conversion date or the date 15 months after the date
of issue. In the first quarter of 1997, GTR recorded $11.5 million of proceeds
attributed to the value of the debt and $1.5 million attributed to the value of
the conversion feature (recorded as an increase to division equity). The debt
will be accreted to its $13.0 million face value by a charge to interest expense
of $1.5 million over the term of the initial 15 month conversion period.
GMO PRIVATE PLACEMENT
On August 29, 1997, GMO raised $20.0 million through the private placement of
the GMO Debentures, due August 29, 2002. The GMO Debentures are convertible into
shares of GMO Stock, at the option of the holders, beginning on the 91st day
after the effective date of a registration statement covering the GMO IPO at the
average of the closing bid prices of GMO Stock as reported by the Nasdaq
National Market for the 20 trading days immediately preceding the applicable
conversion date (the "GMO Market Price"). Beginning February 26, 1998, the GMO
Debentures are convertible at a discount to the GMO Market Price. This discount
will begin at 7% on February 26, 1998 and will increase by an additional one
percent every 30 days thereafter to 15% on October 24, 1998. Beginning November
23, 1998, the conversion price will be the lower of (i) 85% of the GMO Market
Price calculated as of the actual conversion date and (ii) 85% of the GMO Market
Price calculated as of November 21, 1998. In no event, however, will the
conversion price be less than $7.70 per share (subject to adjustment in the
event of any stock split, stock dividend, reclassification, combination or
singular event). In the third quarter of 1997, GMO recorded $16.5 million of
proceeds attributed to the value of the debt and $3.5 million attributed to the
value of the conversion feature (recorded as an increase to division equity).
The debt will be accreted to its $20.0 million face value by a charge to
interest expense of $3.5 million over the term of the initial 15 month
conversion period.
The Genzyme Board approved the allocation of up to $25.0 million in cash from
Genzyme General to GMO (the "GMO Equity Line"), subject to a dollar-for-dollar
reduction by the proceeds of outside financing received by GMO. As a result
of the issuance of the GMO debentures in August 1997, the amount available
under the GMO Equity Line was reduced to $5.0 million. No draws have been made
under the Equity Line to date. Upon successful completion of a GMO IPO the
Equity Line will terminate.
If the effective date of the GMO IPO does not occur before August 29, 1998, at
the holder's option, the GMO Debentures may be exchanged for a 5% convertible
debenture issued by Genzyme General (the "GGD Debenture") due August 29, 2003.
If the GMO IPO is completed before August 29, 1998 but the aggregate proceeds
from the offering are less than $15.0 million or GMO's market capitalization is
below $90.0 million, at the holder's option, 50% of the GMO Debentures can be
exchanged for the Genzyme General Debentures. The exchange option must be
exercised within 30 business days of the event triggering the right of exchange.
Beginning on the 181st day following the effective date of the GMO IPO, the
holders of the GMO Debentures have the option (the "Put Option") to require
Genzyme to pay the entire principal amount of the GMO Debentures in cash,
together with interest at the rate of 15% per annum (less any interest
previously paid) if the conversion price (as calculated above) is less than
$7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put
Option is exercisable only with respect to the first three Put Option Review
Periods that occur while the GMO Debentures are outstanding and, if the Put
Option is not exercised within 15 days after any Put Option Review Period, a
period of 90 days from the last day of the previous Put Option Review Period
must elapse before another Put Option Review Period commences.
The GMO Debentures are callable with cash or stock beginning 18 months after the
effective date of the GMO IPO if the stock has closed at 150% of the fixed
conversion price for 20 consecutive trading days.
MORTGAGE NOTES
The Company's three mortgage notes have been attributed to Genzyme General.
The mortgage note due June 1999 is collateralized by land and buildings with a
net book value of $27.6 million at December 31, 1997, bears interest at 7.73%
annually, and is payable monthly based on a 20 year direct reduction
amortization schedule, with the remaining principal due June 13, 1999.
67
<PAGE> 69
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The mortgage note maturing November 2014 is collateralized by land and buildings
with a net book value of $6.1 million at December 31, 1997 and bears interest at
10.5%. The mortgage note maturing January 2008 provides the bank with a "call or
review" feature at the end of the first 60 month period, allowing the bank to
adjust the note under specific circumstances. This note bears interest at a
variable rate of prime plus 1% and is collateralized by land and fixtures.
Principal and interest are payable monthly on both of these notes.
CONVERSION OF $100.0 Million 6 3/4% CONVERTIBLE SUBORDINATED NOTES
In March 1996, holders of Genzyme's 6 3/4% Convertible Subordinated Notes due
October 1, 2001 in the aggregate principal amount of $100.0 million (the
"Notes"), converted such Notes into shares of GGD Stock and GTR Stock pursuant
to the amended terms of the Notes and received 37.826 shares of GGD Stock and
2.553 shares of GTR Stock in conversion of each $1,000 Note. Prior to
conversion, the Notes had been allocated to Genzyme General.
OPERATING LEASES
Total rent expense under operating leases was $16.3 million, $12.8 million and
$10.0 million in 1997, 1996 and 1995, respectively. The Company leases
facilities and personal property under certain operating leases in excess of one
year.
FUTURE MINIMUM PAYMENTS DUE UNDER CAPITAL AND OPERATING LEASES:
Future minimum payments due under the Company's long-term obligations and
capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
(DOLLARS IN THOUSANDS) LEASES LEASES
---------------------- ------ ------
<S> <C> <C>
1998 .................................. $203 $ 14,903
1999 .................................. 20 14,296
2000 .................................. 0 13,153
2001 .................................. 0 10,014
2002 .................................. 0 9,611
Thereafter ............................ 0 80,009
---- --------
Total minimum payments ............. 223 $141,986
========
Less: interest ........................ (12)
----
$211
====
</TABLE>
NOTE K. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more series.
The Genzyme Board may determine, in whole or in part, the preferences, voting
powers, qualifications, and special or relative rights or privileges of any such
series before the issuance of any such shares of that series. The Genzyme Board
shall determine the number of shares constituting each series of preferred stock
and each series shall have a distinguishing designation.
CREATION OF GGD STOCK AND GTR STOCK
Immediately prior to the Effective Date, as defined in Note A., "Summary of
Significant Accounting Policies" above, approximately 31,582,000 shares of
Genzyme common stock were reserved for issuance under the Company's 1990 Equity
Incentive Plan, 1988 Director Stock Option Plan, 1990 Employee Stock Purchase
Plan, outstanding warrants (the "Warrants"), and the conversion of the Notes.
Pursuant to antidilution provisions in the agreements covering the options,
Genzyme has adjusted each option outstanding on the Effective Date to provide
for separation of the option into an option exercisable for GGD Stock and an
option exercisable for the number of shares of GTR Stock that the holder would
have received if the holder had exercised the option immediately prior to the
Effective Date. The Warrants provide that the holder of the Warrant is entitled
to receive the number of shares of GGD Stock and GTR Stock upon exercise of the
Warrant that the holder would have received had the holder exercised the Warrant
immediately prior to the Effective Date. Pursuant to the indenture under which
the Notes were issued, the conversion privilege of the Notes
68
<PAGE> 70
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was adjusted so that the holder of a Note converted after the Effective Date
would receive, in addition to the shares of GGD Stock into which the Note is
convertible, the same number of shares of GTR Stock as the holder would have
received had the holder converted the Note immediately prior to the Effective
Date.
CREATION OF GMO STOCK
In June 1997, Genzyme issued 3,928,572 shares of GMO Stock to effect the
acquisition of PharmaGenics (See Note C., "Acquisitions" above).
STOCK OFFERINGS
In November 1997, Genzyme sold 4,000,000 shares of GTR Stock to the public at a
price of $7.75 per share for net proceeds of $29.0 million after offering costs
and underwriting discounts and commissions. In October 1995, Genzyme sold
5,750,000 shares of GGD Stock to the public at a price of $25.63 per share for
net proceeds of $141.3 million after underwriting discounts and commissions. In
September 1995, Genzyme sold 3,000,000 shares of GTR Stock to the public at a
price of $15.00 per share for net proceeds of $42.3 million after underwriting
discounts and commissions.
STOCK SPLIT
In June 1996, the Board of Directors declared a 2-for-1 stock split of shares of
GGD Stock to be effected by means of a 100% stock dividend payable on July 25,
1996 to stockholders of record on July 11, 1996, subject to stockholder approval
of an amendment to the Genzyme Charter to increase the number of authorized
shares of GGD Stock from 100,000,000 to 200,000,000 shares (the "Amendment").
The Amendment was approved by holders of a majority in interest of the
outstanding GGD Stock and GTR Stock, voting together as a single class, at a
special meeting of the stockholders held on July 24, 1996. On July 25, 1996, a
total of 34,669,435 shares of GGD Stock were distributed to stockholders in
connection with the dividend. All share and per share amounts have been
re-stated to reflect this split.
DIRECTOR'S DEFERRED COMPENSATION PLAN
Genzyme's Directors' Deferred Compensation Plan (the "Deferred Compensation
Plan") allows each member of the Genzyme Board who is not also an officer,
employee or consultant of Genzyme to defer receipt of all or a portion of the
cash compensation payable to him or her as a director of Genzyme. Compensation
may be deferred until the termination of services as a director or, subject to
certain restrictions, such other date as may be specified by the director. All
of the current directors of Genzyme, other than those directors who are also
officers, employees or consultants of Genzyme, are eligible to participate in
the plan and as of December 31, 1997, one of the directors has elected to
participate in the plan. Genzyme has reserved 50,000 shares of GGD Stock,
100,000 shares of GTR Stock and 50,000 shares of GMO Stock to cover
distributions of shares credited to stock accounts under the Deferred
Compensation Plan (subject in each case to adjustments for stock splits, stock
dividends, and certain transactions affecting Genzyme's capital stock). As of
December 31, 1997, no shares of GGD Stock, GTR Stock, or GMO Stock credited to
stock accounts under the Deferred Compensation Plan have been distributed to
participants in such plan.
SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS' STOCK OPTION
PLAN AND EMPLOYEE STOCK PURCHASE PLAN
At December 31, 1997, approximately 18,135,000 shares of GGD Stock, 5,392,000
shares of GTR Stock and 4,070,000 shares of GMO Stock were reserved for issuance
under the Company's 1990 Equity Incentive Plan, as amended, 1997 Equity Plan,
1988 Director Stock Option Plan, as amended, 1990 Employee Stock Purchase Plan,
as amended, and upon the exercise of outstanding warrants.
STOCK OPTIONS
Pursuant to the 1990 Equity Incentive Plan, as amended, and the 1997 Equity Plan
options may be granted to purchase an aggregate of 23,800,000 shares of GGD
Stock 5,300,000 shares of GTR Stock and 3,500,000 shares of GMO Stock. The
plans allow the granting of stock options at not less than fair market value at
date of grant, and stock appreciation rights, performance shares, restricted
stock and stock units to employees and consultants of the Company, each with a
maximum term of ten
69
<PAGE> 71
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years. In addition, Genzyme has a 1988 Director Stock Option Plan, as amended,
pursuant to which nonstatutory stock options up to a maximum of 233,600 shares
or GGD Stock, 100,000 shares of GTR Stock and 70,000 shares of GMO Stock,
respectively, are automatically granted at fair market value to members of the
Genzyme Board upon their election or reelection as directors. For each year of
a director's term of office, he or she receives an option to purchase 4,000
shares of GGD Stock and a number of GTR Stock and GMO Stock options with a
market value equal to one-quarter of the market value of the stock subject to
GGD Stock options. All options expire ten years after the initial grant date
and generally vest over four years.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
GGD STOCK:
Outstanding at December 31, 1994 .... 10,481,700 $15.13 4,683,967
Granted ........................... 4,141,502 23.25
Exercised ......................... (2,007,654) 13.97
Forfeited and cancelled ........... (442,882) 14.96
----------
Outstanding at December 31, 1995 .... 12,172,666 17.79 5,138,502
Granted ........................... 3,442,484 29.16
Exercised ......................... (906,041) 15.70
Forfeited and cancelled ........... (643,626) 22.81
----------
Outstanding at December 31, 1996 .... 14,065,483 20.48 6,505,835
Granted ........................... 2,083,936 29.86
Exercised ......................... (1,760,934) 16.25
Forfeited and cancelled ........... (1,041,218) 23.77
----------
Outstanding at December 31, 1997 .... 13,347,267 22.22 6,982,224
==========
GTR STOCK:
Outstanding at December 31, 1994 .... 940,976 4.84 207,583
Granted ........................... 1,160,928 12.86
Exercised ......................... (48,232) 5.15
Forfeited and cancelled ........... (68,435) 4.96
----------
Outstanding at December 31, 1995 .... 1,985,237 8.66 449,257
Granted ........................... 819,142 12.88
Exercised ......................... (81,117) 5.23
Forfeited and cancelled ........... (149,043) 9.50
----------
Outstanding at December 31, 1996 .... 2,574,219 10.73 739,421
Granted ........................... 636,605 9.84
Exercised ......................... (100,407) 5.21
Forfeited and cancelled ........... (333,655) 12.75
----------
Outstanding at December 31, 1997 .... 2,776,762 10.50 1,084,532
==========
GMO STOCK:
Outstanding June 18, 1997 --
Granted ............................. 826,334 7.00
----------
Outstanding at December 31, 1997 .... 826,334 7.00 180,063
==========
</TABLE>
70
<PAGE> 72
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total exercise proceeds for all options outstanding at December 31, 1997 is
approximately $296,601,000, $29,152,000 and $5,784,338 for GGD Stock, GTR Stock
and GMO Stock, respectively. Information regarding the range of option prices as
of December 31, 1997 is as follows:
GGD STOCK:
<TABLE>
<CAPTION>
EXERCISABLE
------------------------------
RANGE OF NUMBER WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE
AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
CONTRACTUAL
LIFE
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.85 - $14.72 2,678,907 4.44 $11.32 1,953,504 $10.16
$14.75 - $19.44 3,238,377 6.10 $17.61 2,131,983 $17.72
$19.50 - $28.00 3,390,201 7.19 $25.32 1,569,813 $24.04
$28.06 - $30.63 3,830,507 8.95 $30.36 1,233,521 $30.27
$30.65 - $38.00 209,275 7.90 $33.63 93,403 $33.13
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.85 - $38.00 13,347,267 6.89 $22.22 6,982,224 $19.45
</TABLE>
GTR STOCK:
<TABLE>
<CAPTION>
EXERCISABLE
------------------------------
RANGE OF NUMBER WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICES OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE
AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
CONTRACTUAL
LIFE
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.19 - $ 6.00 906,686 7.07 $ 5.09 655,865 $ 5.03
$ 6.63 - $11.75 752,948 9.50 $ 9.90 133,227 $ 9.97
$11.88 - $17.50 1,052,530 8.09 $14.93 274,797 $13.49
$17.63 - $25.75 64,598 8.08 $21.24 20,643 $20.50
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.19 - $25.75 2,776,762 8.14 $10.50 1,084,532 $ 8.07
</TABLE>
GMO STOCK:
<TABLE>
<CAPTION>
EXERCISABLE
------------------------------
NUMBER WEIGHTED WEIGHTED WEIGHTED
EXERCISE PRICE OUTSTANDING AVERAGE AVERAGE NUMBER AVERAGE
AS OF 12/31/97 REMAINING EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
CONTRACTUAL
LIFE
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$7.00 826,334 9.77 $7.00 180,063 $ 7.00
- ---------------------------- --------------- --------------- --------------- --------------- ---------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Genzyme's 1990 Employee Stock Purchase Plan allows full-time employees, as
defined in the plan, to purchase the Company's stock at 85% of fair market
value. Under this plan, (i) 2,000,000 shares of GGD Stock are authorized, of
which 366,922, 291,053 and 285,868 shares were issued in 1997, 1996 and 1995,
respectively, (ii) 1,100,000 shares of GTR Stock are authorized, of which
280,819, 325,300 and 269,920 shares of GTR Stock were issued in 1997, 1996 and
1995, respectively, and (iii) 500,000 shares of GMO Stock are authorized, of
which no shares were issued in or prior to 1997.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related Interpretations in accounting for
its four stock-based compensation plans, the 1990 Equity Incentive Plan and
the 1997 Equity Incentive Plan (both of which are stock option plans), the
1990 Employee Stock Purchase Plan (a stock
71
<PAGE> 73
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase plan) and the 1988 Director Stock Option Plan and accordingly, no
compensation expense has been recognized for options granted and shares
purchased under the provisions of these plans for options granted to employees
with an exercise price equal to fair market value. Had compensation expense for
the stock-based compensation plans been determined based on the fair value at
the grant dates for options granted and shares purchased under the plans
consistent with the method of SFAS 123, net income (loss) and income (loss) per
share would have been as follows (In the case of GMO, disclosure is presented
exclusively for the year ended December 31, 1997, as there were no stock options
issued under the above mentioned plans prior to 1997):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
(Amounts in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSOLIDATED:
Net income (loss):
as reported .................. $ 13,629 $ (72,817) $ 21,650
pro forma .................... $ (2,150) $ (86,293) $ 17,261
GENZYME GENERAL:
Net income (loss):
As reported .................. $ 77,447 $ (30,502) $ 43,680
Pro forma .................... $ 65,440 $ (40,558) $ 40,429
Basic income (loss) per share:
As reported .................. $ 1.01 $ (0.45) $ 0.79
Pro forma .................... $ 0.86 $ (0.59) $ 0.73
Diluted income (loss) per share:
As reported .................. $ 0.98 $ (0.45) $ 0.68
Pro forma .................... $ 0.83 $ (0.59) $ 0.63
GENZYME TISSUE REPAIR:
Net loss:
As reported .................. $ (45,984) $ (42,315) $ (22,030)
Pro forma .................... $ (49,547) $ (45,735) $ (23,168)
Basic and diluted loss per share:
As reported .................. $ (3.07) $ (3.38) $ (2.28)
Pro forma .................... $ (3.31) $ (3.65) $ (2.40)
GENZYME MOLECULAR ONCOLOGY:
Net loss:
As reported .................. $ (19,578) -- --
Pro forma .................... $ (19,787) -- --
Basic and diluted loss per share:
As reported .................. $ (4.98) -- --
Pro forma .................... $ (5.04) -- --
</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, Genzyme General has assumed a risk-free interest rate equal to
approximately 5.96%, 6.37% and 6.33%, expected volatility of 42% in 1997 and
45% in each of 1996 and 1995, zero dividend yields and expected lives of four
years for 1997,
72
<PAGE> 74
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1996 and 1995, respectively. The average fair value of the Genzyme General
options granted during 1997, 1996 and 1995 is estimated as $12.21, $11.98 and
$11.53, respectively, on the date of grant. In computing these pro forma
amounts, GTR has assumed a risk-free interest rate equal to approximately 5.96%,
6.37% and 6.33%, expected volatility of 70% in 1997 and 80% in each of 1996 and
1995, zero dividend yields and expected lives of four years for 1997, 1996, and
1995, respectively. The average fair value of GTR Stock granted during 1997,
1996 and 1995 is estimated as $5.66, $9.23 and $10.06, respectively, on the date
of grant. In computing these pro forma amounts, GMO has assumed a risk-free
interest rate equal to approximately 5.96%, expected volatility of 45%, zero
dividend yields and expected lives of four years for 1997. The average fair
value of the options exercisable for shares of GMO Stock granted during 1997 is
estimated as $2.97 on the date of grant.
STOCK RIGHTS
Pursuant to the Company's Restated Rights Agreement, each outstanding share of
GGD Stock, GTR Stock and GMO Stock also represents one preferred stock purchase
right (a "GGD Stock Right", a "GTR Stock Right" and a "GMO Stock Right",
respectively). Each GGD Stock Right, GTR Stock Right and GMO Stock Right, when
it becomes exercisable, will entitle the registered holder to purchase from
Genzyme (i) in the case of a GGD Stock Right, one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a purchase price of $26.00,
subject to adjustment, (ii) in the case of a GTR Stock Right, one one-hundredth
of a share of Series B Junior Participating Preferred Stock at a purchase price
of $25.00, subject to adjustment, and (iii) in the case of a GMO Stock Right,
one one-hundredth of a share of Series C Junior Participating Preferred Stock
at a purchase price of $21.00, subject to adjustment.
WARRANTS
Genzyme sold three warrants (the "Front-End Warrant", the "NDA Warrant", and the
"Callable Warrant", to purchase Genzyme common stock to CMDF for an aggregate
purchase price of $1.0 million (Canadian). Each warrant is initially exercisable
for up to 40,000 shares of GGD Stock and will be converted automatically upon
the closing date of the GMO IPO into warrants to purchase shares of GMO Stock as
follows:
The Front-End Warrant is exercisable immediately and will terminate upon the
earlier of the exercise of the Mandatory Purchase Right by CMDF or July 31,
2002. The exercise price of the Front-End Warrant is $30.18 per share of GGD
Stock (120% of $25.15) and, upon conversion following the GMO IPO, will be equal
to 120% of a defined conversion price per share of GMO Stock.
73
<PAGE> 75
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The NDA Warrant will be exercisable during the one-year period following the
filing of the first new drug application with the FDA for a product developed
through the collaboration and will terminate upon the earliest of the exercise
of the Mandatory Purchase Right by CMDF, the expiration of the Purchase Option
or July 31, 2007. The exercise price of the NDA Warrants is $30.18 per share of
GGD Stock and, upon conversion following the GMO IPO, will be equal to 120% of a
defined conversion price per share of GMO Stock.
The Callable Warrant will terminate upon the earliest of the exercise of the
Mandatory Purchase Right by CMDF, the exercise of the Purchase Option or July
31, 2005 and will be exercisable during the three-year period following the
expiration of the Purchase Option. The exercise price of the Callable Warrant
per share of GGD Stock will be equal to the average of the closing sale prices
of GGD Stock on the Nasdaq National Market for the 20 trading days ending on
the expiration date of the Purchase Option and, upon conversion following the
GMO IPO, will be equal to the average of closing sale prices of GMO Stock on
the Nasdaq National Market for the 20 trading days ending on the expiration date
of the Purchase Option.
In 1992 and 1995, Genzyme issued certain warrants which, when exercised, grant
the holders two shares of GGD Stock and .0675 share of GTR Stock (after 1996 GGD
Stock split) for each warrant exercised. These warrants were granted in exchange
for the receipt of options to purchase the callable common stock of Neozyme II
and in connection with Genzyme's purchase of the publicly-held shares of IG in
exchange for IG warrants.
Warrant activity related to GGD Stock is summarized below:
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
-------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 ... 5,934,381 $16.01 - $38.25
Granted ........................ 6,005 42.67
Exercised ...................... (343,145) 16.01 - 38.25
----------
Outstanding at December 31, 1995 ... 5,597,241 16.01 - 42.67
----------
Exercised ...................... (3,170,551) 16.01 - 38.25
Tendered ....................... (2,385,686)
Expired ........................ (5,685) 16.01 - 38.25
----------
Outstanding at December 31, 1996 ... 35,319 16.01 - 44.20
Granted ........................ 120,000 30.18
Exercised ...................... (19,340) 44.20
----------
Outstanding at December 31, 1997 135,979 16.01 - 44.20
==========
</TABLE>
GTR DESIGNATED SHARES
Pursuant to Genzyme's charter, as amended, GTR Designated Shares are authorized
shares of GTR Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or distribution
to GTR. GTR Designated Shares are created in certain circumstances when cash or
other assets are transferred from Genzyme General to GTR. The number of GTR
Designated Shares will be decreased by: the number of shares of GTR Stock issued
by Genzyme, the proceeds of which are allocated to Genzyme General; the number
of shares of GTR Stock issued as a dividend to holders of GGD Stock; and the
number of shares of GTR Stock issued upon the conversion of convertible
securities, including the 5% convertible note, the proceeds of which are
attributed to Genzyme General. In addition, the number of GTR Designated Shares
can be increased as a result of certain interdivision transactions.
At the Effective Date, 5,000,000 GTR Designated Shares were established. As a
result of the distribution of approximately 3,300,000 shares of GTR Stock to
holders of GGD Stock on the Effective Date, the number of GTR Designated Shares
were reduced by a corresponding amount. The remaining 1,700,000 GTR Designated
Shares were reserved for issuance upon the exercise of Genzyme stock options and
warrants and the conversion of Genzyme's convertible notes which were
outstanding on the Effective Date.
74
<PAGE> 76
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Genzyme also has the option to allocate to GTR, at $10.00 per GTR Designated
Share, up to $30.0 million from Genzyme General (the "GTR Purchase Option") in
exchange for a maximum of 3,000,000 GTR Designated Shares to be issued in
connection with the exercise of the GTR Purchase Option. In each of June 1996
and 1997, pursuant to the terms of the GTR Purchase Option, the Genzyme Board
elected to allocate $10.0 million in cash from Genzyme General to GTR in
exchange for 1,000,000 GTR Designated Shares, respectively, which were reserved
for issuance at the sole discretion of the Genzyme Board for the benefit of the
Genzyme General stockholders.
In October 1996, the Genzyme Board approved the allocation of up to a maximum of
$20.0 million of cash from Genzyme General to GTR (the "GTR Equity Line") to
provide initial funding for GTR's joint venture with Diacrin. The GTR Equity
Line was provided in exchange for an increase in the number of GTR Designated
Shares at a rate determined by dividing the cash so allocated by the average of
the daily closing prices of one share of GTR Stock for the 20 consecutive
trading days commencing on the 30th trading day prior to the date of allocation.
As of December 31, 1997, Genzyme had allocated a total of $7.0 million of cash
from Genzyme General to GTR under the GTR Equity line and 721,455 GTR Designated
Shares had been reserved for issuance at the discretion of the Genzyme Board for
the benefit of the Genzyme General stockholders.
If, as of May 31 of each year starting May 31, 1997, the number of GTR
Designated Shares on such date (not including those reserved for issuance with
respect to Genzyme General convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds 10% of the number of shares of GTR Stock then issued and outstanding,
then substantially all GTR Designated Shares will be distributed to holders of
record of GGD Stock, subject to reservation of a number of such shares equal to
the sum of (a) the number of GTR Designated Shares reserved for issuance upon
the exercise or conversion of Genzyme General convertible securities and (b) the
number of GTR Designated Shares reserved by the Genzyme Board as of such date
for sale not later than six months after such date, the proceeds of which sale
will be allocated to Genzyme General.
On June 30, 1997, the Genzyme Board declared a dividend of approximately
2,686,000 GTR Designated Shares for distribution to Genzyme General stockholders
of record as of July 11, 1997, in a tax-free distribution of approximately .03
shares of GTR Stock for each share of GGD Stock owned. In total, 2,292,000
shares of GTR Stock were issued to GGD Stockholders on July 22, 1997 in the
distribution with a fair market value of $22.9 million and 394,000 shares of GTR
Stock have been reserved for issuance upon the exercise of GGD Stock options and
warrants outstanding on the record date.
GTR Designated Share activity is summarized below:
<TABLE>
<CAPTION>
GTR DESIGNATED
SHARES
--------------
<S> <C>
Balance at December 31, 1994 1,409,707
Stock options exercised ........... (72,942)
Stock warrants exercised .......... (46,244)
ESPP shares issued ................ (3,613)
----------
Balance at December 31, 1995 1,286,908
Stock options exercised ........... (42,728)
Stock warrants exercised .......... (426,984)
Convertible notes conversion ...... (255,249)
Exercise of GTR Purchase Option ... 1,000,000
Increase from equity line ......... 231,645
----------
Balance at December 31, 1996 1,793,592
Stock options exercised ........... (103,729)
Stock warrants exercised .......... (2,617)
Exercise of GTR Purchase Option ... 1,000,000
Increase from equity line ......... 489,810
Dividend distribution ............. (2,292,003)
----------
Balance at December 31, 1997 885,053
==========
</TABLE>
75
<PAGE> 77
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GMO DESIGNATED SHARES:
Pursuant to Genzyme's charter, as amended, GMO Designated Shares are authorized
shares of GMO Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or distribution
to GMO. GMO Designated Shares are created in certain circumstances when cash or
other assets are transferred from Genzyme General to GMO. The Genzyme Board may
issue the GMO Designated Shares as a stock dividend to the holders of GGD Stock
or it may sell such shares in a public or private sale and allocate all of the
proceeds to Genzyme General. Genzyme's management and accounting policies
require Genzyme to distribute GMO Designated Shares to holders of GGD Stock on
the later of November 30, 1998 or 360 days following completion of an initial
public offering of shares of GMO Stock, although the Genzyme Board may elect to
distribute these shares at any time but not later than November 29, 1999.
As compensation to Genzyme General for its contribution to GMO, 6,000,000 GMO
Designated Shares have been reserved for issuance at the discretion of the
Genzyme Board for the benefit of Genzyme General or its stockholders.
Upon consummation of the PharmaGenics Merger, the $2.5 million of debt
outstanding under a credit facility which Genzyme had made available to
PharmaGenics to fund PharmaGenics's documented operating costs became a
liability allocated to GMO (the "GMO Note"), and is considered as an
intracompany loan by Genzyme General to GMO, due on February 10, 2002, and
convertible at any time prior thereto, at the Genzyme Board's option, into GMO
Designated Shares. The number of GMO Designated Shares resulting from any
conversion of the GMO Note will be determined by dividing the principal and
interest being converted by the conversion price (the "GMO Conversion Price") in
effect on the date of conversion. The initial GMO Conversion Price will be
determined upon the closing of a GMO initial public offering in which the
aggregate gross proceeds to GMO equal or exceed $10.0 million (an "Offering"),
and will be equal to (i) the per share price of the GMO Stock sold in the
Offering or, if GMO Stock is not sold in the Offering, (ii) the initial
conversion price of the security convertible into GMO Stock that is sold in the
Offering, provided that if any portion of the PharmaGenics Note is converted
prior to any Offering, the initial GMO Conversion Price is $7.00. The GMO
Conversion Price is subject to adjustment upon declaration of any stock dividend
or on completion of any subdivision or combination of the GMO Stock.
NOTE L. RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties include
the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ------- ------- -------
<S> <C> <C> <C>
Fees for research and development activities:
Neozyme II ............................. $ -- 19,799 24,198
Research contracts ..................... 8,041 3,212 2,560
------ ------- -------
$8,041 $23,011 $26,758
====== ======= =======
</TABLE>
The Company allocates all research and development agreements with
unconsolidated affiliates to Genzyme General, GTR or GMO based on the business
to which the research relates.
76
<PAGE> 78
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENZYME GENERAL:
GENZYME DEVELOPMENT PARTNERS, L.P. ("GDP")
Genzyme Development Corporation II, a wholly-owned subsidiary of Genzyme, is
the General Partner of GDP, a Delaware limited partnership which was formed
in September 1989 to develop, produce and derive income from the sale of
products (the "Sepra Products") based on hyaluronic acid. Such Sepra Products
are intended to be used to limit the incidence and severity of postoperative
adhesions.
The Company has an option (the "GDP Purchase Option") to purchase all of the
outstanding partnership interests for a payment of approximately $26.0
million in cash, GGD Stock or a combination thereof determined at Genzyme's
sole discretion, plus future royalty payments. The GDP Purchase Option does
not become exercisable until at least twenty-four months after the first
commercial sale of a product of GDP and certain returns have been earned by
GDP. Genzyme elected without obligation to fund the research and development
activities of GDP using Genzyme General cash and spent approximately $7.3
million, $6.0 million and $6.4 million on the GDP's programs in 1997, 1996
and 1995, respectively. The Company has agreed to fund the GDP's research and
development programs and general and administrative expenses through 1998
but, as General Partner, believes that additional funds will be required to
complete the development, clinical testing and commercialization of GDP's
products. In 1997, Genzyme made an additional capital contribution of $1.5
million to the Partnership.
The Company and GDP formed Genzyme Ventures II (the "Joint Venture"), in
September 1989 for the purpose of manufacturing and marketing the Sepra
Products in the United States and Canada for use in human clinical trials or
human surgical procedures. In December 1994, the Company allocated its
interests in the Joint Venture to Genzyme General. GDP has contributed its
technology and $1.7 million to the Joint Venture and Genzyme General has
contributed its agreement to manufacture and market the Sepra Products, to
make non-interest bearing loans to the Joint Venture in the amount of any
working capital deficiency, and to make capital contributions to the extent
deemed necessary by the two venturers in connection with the business of the
Joint Venture. The Joint Venture began to engage in active business after
receipt of FDA marketing approval for Seprafilm[R] in August 1996. For the
years ended December 31, 1997 and 1996, the Joint Venture incurred net losses
of $2.3 million and $2.5 million, respectively, primarily attributable to
costs associated with the introduction of the Sepra Products to the
healthcare marketplace. Summary financial information is not presented as the
impact of the Joint Venture's activities on the Company's statement of
operations for the year ended December 31, 1997 is not considered to be
material.
NEOZYME II
In 1992, the Company entered into a development agreement with Neozyme II
Corporation ("Neozyme II") whereby the Company was engaged to perform all
research, development and clinical testing activities related to products and
77
<PAGE> 79
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
programs for which Neozyme II was licensed. Pursuant to the terms of the
development agreement, Neozyme II was required to reimburse the Company for
research and development expenses incurred by Genzyme in connection with the
Neozyme II development programs and fulfilled this obligation through October
1996, at which time Genzyme acquired 98.8% outstanding Neozyme II Units
through a tender offer (See Note C., "Acquisitions" above).
GTC:
The disclosures related to the research and development agreement between
Genzyme and GTC are included in Note H., "Investments" above.
RENAGEL LLC AND ATIII LLC:
The disclosures related to Genzyme General's participation in RenaGel LLC and
ATIII LLC, joint ventures with Geltex and GTC, respectively, are included in
Note H., "Investments" above.
GENZYME TISSUE REPAIR:
The disclosures related to GTR's participation Diacrin/Genzyme LLC, a joint
venture are included in Note H., "Investments" above.
GENZYME MOLECULAR ONCOLOGY:
The disclosures related to GMO's participation StressGen/Genzyme LLC, a joint
venture are included in Note H., "Investments" above.
NOTE M. COMMITMENTS AND CONTINGENCIES
From time to time the Company has been subject to legal proceedings and claims
arising in connection with its business. At December 31, 1997, there were no
asserted claims against the Company which, in the opinion of management, if
adversely decided would have a material adverse effect on the Company's
financial position and results of operations.
NOTE N. INCOME TAXES
Income (loss) before income taxes and the related income tax expense (benefit)
are as follows for the year ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Domestic(1) ............................................................. $16,907 $(79,930) $40,551
Foreign ................................................................. 8,822 10,308 2,748
------- -------- -------
Total ............................................................. $25,729 $(69,622) $43,299
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Currently payable:
Federal ......................... $11,344 $ 23,174 $11,051
State ........................... 1,754 4,689 4,803
Foreign ......................... 2,971 3,616 1,367
------- -------- -------
Total current ................ 16,069 31,479 17,221
Deferred:
Federal ......................... (3,723) (28,448) 4,507
State ........................... (246) 164 (79)
------- -------- -------
Total deferred ............... (3,969) (28,284) 4,428
------- -------- -------
Provision (benefit) for income taxes $12,100 $ 3,195 $21,649
======= ======== =======
</TABLE>
- -------------------
(1) Includes $7.0 million in charges for purchased research and development in
1997, $130.7 million in charges for purchased research and development and
acquisition expenses in 1996, and $14.2 million in charges for purchased
research and development in 1995.
78
<PAGE> 80
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provisions for income taxes were at rates other than the U.S. Federal statutory
tax rate for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
<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 .............. 3.1 1.4 1.0
State taxes, net ....................................... 3.0 5.2 5.2
Foreign sales corporation .............................. (6.7) (3.6) (2.0)
Nondeductible amortization ............................. 10.6 3.6 1.9
Benefit of tax credits ................................. (7.7) -- --
Other, net ............................................. (2.6) 3.7 1.1
Nondeductible interest ................................. 2.2 -- --
Utilization of operating loss carryforwards ............ -- (4.5) (5.2)
Effective tax rate before certain charges - expense .... 36.9 40.8 37.0
---- ---- ----
Gross charge for purchased research and development
net of related tax benefits ........................... 10.1 (36.3) 13.0
---- ----- ----
Effective tax rate - expense ........................... 47.0% 4.5% 50.0%
==== ===== ====
</TABLE>
At December 31 the components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1997 1996
- --------------------------------------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............ $ 7,702 $ 10,427
Tax credits ................................. 6,514 --
Deferred gain ............................... 2,237 --
Intangible amortization ..................... 46,391 41,183
Investments in unconsolidated subsidiary .... 1,323 1,323
Realized and unrealized capital losses ...... 10,182 17,603
Reserves and other .......................... 27,328 19,670
-------- --------
Gross deferred tax asset .................... 101,677 90,206
Valuation allowance ......................... (14,914) (16,622)
-------- --------
Net deferred tax asset ...................... 86,763 73,584
Deferred tax liabilities:
Depreciable assets .......................... (23,174) (13,870)
Intangible amortization ..................... (6,509) --
-------- --------
Net deferred tax asset ...................... $ 57,080 $ 59,714
======== ========
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses related to the purchase of
in-process research and development, the Company placed a valuation allowance of
$14.9 million and $16.6 million for December 31, 1997 and December 31, 1996,
respectively, against otherwise recognizable deferred tax assets.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to the expiration of loss carryforwards. Although
realization is not assured, management believes that it is more likely than not
that all of the net deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
79
<PAGE> 81
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 the Company had U.S. net operating loss and tax credit
carryforwards of $22.0 million and $6.5 million, respectively, for income tax
purposes. These loss carryforwards expire from 2002 to 2012. Utilization of tax
net operating loss carryforwards may be limited under Section 382 of the
Internal Revenue Code of 1986. Tax credits of $3.9 million expire in 2012. The
remaining $2.6 million of tax credits carry forward indefinitely.
NOTE O. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all employees of the Company with
the exception of employees of DSP who have a separate retirement savings plan.
The plan allows employees to make contributions up to a specified percentage of
their compensation, a portion of which are matched by the Company. The Company
contributed $1.5 million, $1.1 million, and $0.7 million to the 401(k) Plan in
1997, 1996 and 1995, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and its foreign subsidiaries. Pension expense for 1997, 1996
and 1995 was approximately $1,100,000, $601,000 and $498,000, respectively.
Pension costs are funded as accrued. Actuarial and other disclosures regarding
the plans are not presented because they are not material.
NOTE P. FINANCIAL INFORMATION BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS AND
SUPPLIERS
The Company operates in the human healthcare industry and manufactures and
markets its products in two major geographic areas, the United States and
Europe. The Company's principal manufacturing facilities are located in the
United States, United Kingdom, Switzerland and Germany. The Company purchases
products from its British, Swiss and German subsidiaries for sale to customers
in the United States. Transfer prices from the foreign subsidiaries are intended
to allow the United States parent to produce profit margins commensurate with
its sales and marketing effort. Genzyme's Netherlands subsidiary is the primary
European distributor of the Company's therapeutic products.
Certain information by geographic area follows (dollars in thousands):
<TABLE>
<CAPTION>
UNITED
STATES NETHERLANDS UK OTHER ELIMINATION CONSOLIDATION
---------- ----------- ------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Net sales -
unaffiliated customers .......... $ 435,235 $ 40,436 $32,852 $88,562 $ -- $ 597,085
Transfers between geographic areas 119,391 63,100 28,205 2,634 (213,330) --
---------- -------- ------- ------- --------- ----------
Total product and service sales... 554,626 103,536 61,057 91,196 (213,330) 597,085
Pre-tax income ................... 14,075 1,539 3,304 2,699 4,112 25,729
Net income ....................... 6,233 948 2,172 1,235 3,041 13,629
Assets ........................... 1,236,980 30,638 69,125 39,304 (80,594) 1,295,453
Liabilities ...................... 241,330 28,329 2,058 22,114 (10,428) 283,403
1996
- ----
Net sales -
unaffiliated customers .......... $ 361,635 $ 56,865 $21,217 $53,716 $ -- $ 493,433
Transfers between geographic areas 101,786 33,659 30,435 3,615 (169,495) --
---------- -------- ------- ------- --------- ----------
Total product and service sales... 463,421 90,524 51,652 57,331 (169,495) 493,433
Pre-tax income (loss) ............ (72,439) 920 8,349 1,807 (8,259) (69,622)
Net income ....................... (74,271) 520 8,349 844 (8,259) (72,817)
Assets ........................... 1,211,816 33,500 69,378 41,511 (85,697) 1,270,508
Liabilities ...................... 306,662 31,930 2,240 27,410 (43) 368,199
</TABLE>
80
<PAGE> 82
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales -
unaffiliated customers .......... $252,358 $70,532 $13,669 $20,264 $ -- $356,823
Transfers between geographic areas 74,697 -- 19,543 4,115 (98,355) --
-------- ------- ------- ------- --------- --------
Total product and service sales... 327,055 70,532 33,212 24,379 (98,355) 356,823
Pre-tax income ................... 43,911 836 93 1,759 (3,300) 43,299
Net income ....................... 23,826 540 93 491 (3,300) 21,650
Assets ........................... 923,867 27,703 54,594 25,692 (126,655) 905,201
Liabilities ...................... 161,339 26,652 1,962 10,041 -- 199,994
</TABLE>
Substantially all revenue from research and development contracts is earned in
the United States. Entities comprising "Other" include Genzyme's operations in
Germany, France, Switzerland, Japan, Italy, Belgium, Sweden, Israel, Canada,
Spain, Argentina and Brazil. Export sales from the United States were $36.2
million, $27.4 million and $20.5 million in 1997, 1996 and 1995, respectively.
Export sales by the Netherlands subsidiary amounted to $40.4 million, $56.9
million and $66.2 million in 1997, 1996 and 1995, respectively. Genzyme's
results of operations are highly dependent upon the sales of Cerezyme(R) enzyme
and Ceredase(R) enzyme. For the years ended December 31, 1997, 1996 and 1995,
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme represented 63%, 62% and 71%
of total product sales. In 1997, 1996 and 1995, Genzyme marketed its Cerezyme(R)
enzyme and Ceredase(R) enzyme products directly to physicians, hospitals and
treatment centers, and sold products representing approximately 18%, 12% and
14%, respectively, of net revenue to an unaffiliated distributor. The credit
risk associated with trade receivables is mitigated due to the large number of
customers and their broad dispersion over different industries and geographic
areas.
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1997 and 1996 are displayed in the
following table.
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
1997
- ----
Net revenue ............................ $146,593 $150,268 $152,094 $159,886
Gross profit ........................... 86,215 90,973 94,466 72,114
Net income (loss) (1,2) ................ 9,367 4,269 9,557 (9,564)
Income (loss) per share (3,4):
Attributable to GGD Stock:
Basic ............................. 0.28 0.27 0.32 (0.11)
Diluted ........................... 0.27 0.26 0.31 (0.11)
Attributable to GTR Stock:
Basic and diluted ................. (0.90) (0.83) (0.78) (1.02)
Pro forma attributable to GMO
Stock (5):
Basic and diluted ................. (0.16) (2.14) (1.00) (1.69)
1996
- ----
Net revenue ............................ $113,497 $115,635 $142,883 $146,739
Gross profit ........................... 63,459 65,451 73,212 81,299
Net income (loss) (2) .................. 10,292 9,784 (15,840) (77,053)
Income (loss) per share (3,4):
Attributable to GGD Stock:
Basic ............................. 0.30 0.30 (0.09) (0.91)
Diluted ........................... 0.26 0.27 (0.09) (0.91)
81
<PAGE> 83
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
Attributable to GTR Stock:
Basic and diluted .................... (0.71) (0.83) (0.78) (1.02)
Pro forma attributable to GMO Stock (5):
Basic and diluted .................... (0.06) (0.06) (0.06) (0.08)
</TABLE>
- --------------
(1) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million
related to resulting from certain strategic financial provisions recorded
in December 1997 (see Note B., "Strategic Financial Provisions" above).
(2) Includes pre-tax charges in the second quarter of 1997 and third and fourth
quarters of 1996 of $7.0 million, $24.2 million and $106.5 million,
respectively for acquired incomplete technology (see Note C.,
"Acquisitions" above).
(3) Income (loss) per share data for the first three quarters of 1997 and for
all quarters of 1996 have been restated to reflect the adoption in
December 1997 of SFAS 128, "Earnings Per Share". (See Note A. "Summary of
Significant Accounting Policies" above.)
(4) Cumulative quarterly income per share data does not equal the annual
amounts due to changes in the average common and common equivalent shares
outstanding.
(5) Pro forma net loss per share data is presented for GMO Stock for the first
and second quarters of 1997 and all four quarters of 1996 as there were no
shares of GMO Stock outstanding prior to June 18, 1997. In each such
quarter, approximately 3,929,000 shares of GMO Stock, which represents the
shares of GMO Stock issued to effect the merger with PharmaGenics, were
used for the pro forma loss per share calculation.
82
<PAGE> 84
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENZYME CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying consolidated balance sheets of Genzyme
Corporation and Subsidiaries as of December 31, 1997 and 1996, the related
consolidated statements of operations, cash flows and stockholders' equity, and
the consolidated financial statement schedule for each of the three years in the
period ended December 31, 1997. The consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Genzyme
Corporation and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the consolidated
financial statement schedule taken as a whole presents fairly, in all material
respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
83
<PAGE> 85
GENZYME CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
===============================================================================
<TABLE>
<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, 1997:
Allowance for doubtful accounts $16,508,400 $ 2,835,000 $7,205,400 $12,138,000
Inventory Reserve $ 7,674,200 $19,505,000(1) -- $3,840,000 $23,339,200
Year ended December 31, 1996:
Allowance for doubtful accounts $ 8,158,800 $ 8,331,600 $2,534,000(2) $2,516,000(3) $16,508,400
Inventory Reserve $ 3,082,200 $ 5,853,600 $1,261,600 $ 7,674,200
Year ended December 31, 1995:
Allowance for doubtful accounts $ 6,169,100 $ 5,390,000 $3,400,100(3) $ 8,159,000
Inventory Reserve $ 1,131,000 $ 2,920,700 $ 969,500 $ 3,082,200
</TABLE>
(1) Includes $13.4 million of strategic financial provisions (See Note B.,
"Strategic Financial Provisions" to the Consolidated Financial Statements).
(2) Reserve acquired in acquisition.
(3) Uncollectible accounts written off, net of recoveries.
<PAGE> 1
EXHIBIT 13.2
FINANCIAL STATEMENTS
PAGE NO.
I. GENZYME TISSUE REPAIR
Combined Selected Financial Data................................... 2
Management's Discussion And Analysis Of Financial Condition And
Results Of Operations............................................. 4
Combined Balance Sheets - December 31, 1997 and 1996............... 10
Combined Statements of Operations - For the Years Ended
December 31, 1997, 1996 and 1995.................................. 11
Combined Statements of Cash Flows - For the Years Ended
December 31, 1997, 1996 and 1995.................................. 12
Notes to Combined Financial Statements............................. 13
Report of Independent Accountants.................................. 21
<PAGE> 2
GENZYME TISSUE REPAIR
COMBINED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Net service sales .......................... $10,856 $ 7,312 $ 5,220 $ 324 $ -
Related party revenues:
Technology license fee (1) ................ - - - - 2,000
Revenues from research and development
contracts ................................ - - - - 2,684
------- ------- ------- ------- -------
Total revenues .......................... 10,856 7,312 5,220 324 4,684
Operating costs and expenses:
Cost of services sold ...................... 11,788 11,193 4,731 287 -
Selling, general and administrative ........ 25,571 27,111 12,927 964 701
Research and development (including research
and development related to contracts) ..... 10,845 10,880 10,938 3,638 2,805
Purchase of in-process research and
development (2) ........................... - - - 11,215 25,000
------- ------- ------- ------- -------
Total operating costs and expenses ...... 48,204 49,184 28,596 16,104 28,506
------- ------- ------- ------- -------
Operating loss ................................ (37,348) (41,872) (23,376) (15,780) (23,822)
Other income (expenses):
Interest income ............................ 979 1,432 1,386 29 -
Interest expense ........................... (2,896) (148) (40) - -
Equity in net loss of joint venture (3) .... (6,719) (1,727) - - -
------- ------- ------- ------- -------
Total other income (expenses) .......... (8,636) (443) 1,346 29 -
------- ------- ------- ------- -------
Loss before income taxes ...................... (45,984) (42,315) (22,030) (15,751) (23,822)
------- ------- ------- ------- -------
Provision for income taxes .................... - - - - (38)
Tax benefit allocated to Genzyme General ...... - - - - (255)
Net loss attributable to Genzyme Tissue Repair
stock (4) ................................... (45,984) (42,315) (22,030) (15,751) (24,115)
======= ======= ======= ======= =======
Per Genzyme Tissue Repair common share
(basic and diluted):
Net loss (4) ................................ $ (3.07) $ (3.38) $ (2.28) $ (4.40) $ (7.43)
======= ======= ======= ======= =======
Weighted average shares outstanding (4) ..... 14,976 12,525 9,659 3,578 3,245
======= ======= ======= ======= =======
</TABLE>
2
<PAGE> 3
GENZYME TISSUE REPAIR
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED BALANCE SHEET DATA(7): DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Cash and investments (5) ...... $31,915 $16,230 $47,573 $24,808 $ -
Working capital ............... 31,434 14,232 44,374 20,557 -
Total assets .................. 56,818 42,593 52,649 28,435 -
Long-term debt (6) ............ 30,681 18,000 - 174 -
Division equity (6,7,8) ....... 20,203 18,084 45,926 23,313 -
There were no cash dividends paid.
- -----------------------
NOTES TO SELECTED FINANCIAL DATA:
(1) Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") received a
$2.0 million technology license fee from the Neozyme Corporation ("Neozyme I")
in July 1993 related to the expansion of the Vianain(R) debriding product.
(2) GTR acquired (a) the rights to the Neozyme I Vianain(R) development program
in 1993, and (b) all of the outstanding stock of BioSurface Technology, Inc.
("BioSurface") in 1994. These acquisitions were accounted for as purchases.
In-process research and development acquired in connection with the acquisitions
was charged to operations.
(3) In 1996, in connection with the formation of a joint venture with Diacrin,
Inc., the Genzyme Board of Directors (the "Genzyme Board") authorized the
allocation of up to $20.0 million in cash from Genzyme General Division
("Genzyme General" or "GGD") to GTR. In 1997 and 1996, GTR received $5.1 million
and $1.9 million, respectively, in cash from Genzyme General to fund the joint
venture in exchange for the rights to 489,810 and 231,645 GTR Designated
Shares, respectively. (See Note F., "Investments and Other Noncurrent
Assets" below).
(4) Net loss attributable to GTR and net loss per share for the year ended
December 31, 1993 gives effect to the management and accounting policies adopted
by the Genzyme Board in connection with the creation of GTR and, accordingly, is
a pro forma presentation.
(5) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(6) In December 1996, GTR borrowed $18.0 million under Genzyme Corporation's
("Genzyme" or the "Company") $225.0 million revolving credit facility to fund
operations. At December 31, 1997 this $18.0 million is still outstanding.
On February 28, 1997, GTR raised $13.0 million through the private placement of
a 5% convertible note due February 27, 2000 (the "GTR Note") to an affiliate of
Credit Suisse First Boston Corporation. In the first quarter of 1997, GTR
recorded $11.5 million of proceeds attributed to the value of the debt and $1.5
million attributed to the value of the conversion feature (recorded as an
increase to division equity). (See Note H., "Long-term Obligations and
Leases" below).
(7) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as Genzyme General Division Common Stock ("GGD Stock") on a
share-for-share basis and a second class of common stock designated as Genzyme
Tissue Repair Division Common Stock ("GTR Stock") was distributed on the basis
of .0675 of one share of GTR Stock (after 1996 GGD Stock split) for each share
of Genzyme's previous common stock held by stockholders of record on December
16, 1994. In December 1994, Genzyme issued 5,000,000 shares of GTR Stock valued
at $25.3 million in connection with the acquisition of BioSurface.
(8) In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for
$7.75 per share. Net proceeds from the offering after underwriting discounts and
commissions were $29.0 million. In September 1995, GTR completed the sale of
3,000,000 shares of GTR Stock for net proceeds of $42.3 million. In June 1996
and June 1997, GTR received $10.0 million from Genzyme General for 1,000,000 GTR
Designated Shares issued pursuant to the terms of the purchase option agreement
between Genzyme General and GTR.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME TISSUE REPAIR'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of GTR
and Genzyme as of the filing date of this Annual Report. The actual results for
both GTR and Genzyme could differ materially from those anticipated by the
forward-looking statements due to the risks and uncertainties described under
the caption "Factors Affecting Future Operating Results" for GTR and Genzyme,
respectively. Stockholders and potential investors should consider carefully
each of these risks and uncertainties in evaluating the financial condition and
results of operations of GTR and Genzyme.
Genzyme provides separate financial statements for the Company and its
subsidiaries on a consolidated basis and for each of Genzyme General, GTR and
Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"). The
financial statements of each division include the financial position, results of
operations and cash flows of programs and products allocated to the division
under the Company's Restated Articles of Organization, as amended (the "Genzyme
Charter"), and the management and accounting policies adopted by the Genzyme
Board to govern the relationship of the divisions. The financial information of
Genzyme General, GTR and GMO, taken together, include all accounts which
comprise the consolidated financial information presented for Genzyme and its
subsidiaries.
For purposes of financial statement presentation, all of Genzyme's programs and
products are allocated to Genzyme General, GTR or GMO. Notwithstanding this
allocation, Genzyme continues to hold title to all of the assets and is
responsible for all of the liabilities allocated to each of the divisions.
Holders of Genzyme General Stock, GTR Stock and Genzyme Molecular Oncology
Division Common Stock ("GMO Stock") have no specific claim against the assets
attributed to the division whose performance is associated with the series of
stock they hold. Liabilities or contingencies of one division that affect
Genzyme's resources or financial condition could affect the financial condition
or results of operations of any other division.
Stockholders and potential investors should, therefore, read this discussion and
analysis of GTR's financial position and results of operations in conjunction
with the financial statements and related notes of GTR and the discussion and
analysis of Genzyme's financial position and results of operations and financial
statements and related notes of Genzyme, all of which are included with this
Annual Report.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
REVENUES.
Revenues in 1997 increased 49% to $10.9 million from $7.3 million in 1996. Sales
of the Carticel(TM) autologous cultured chondrocytes ("Carticel(TM) AuCC") were
$6.6 million, compared to $3.1 million in 1996. The growth in sales of
Carticel(TM) AuCC is primarily attributable to increased acceptance by
orthopedic surgeons and insurance companies, most notably following issuance by
the U.S. Food and Drug Administration ("FDA") of a biologics license to GTR in
August 1997 for Carticel(TM) AuCC, and a continued increase in the number of
orthopedic surgeons trained in the procedure utilizing the service. Sales of the
Epicel[SM] Service were $4.3 million in 1997, compared to $4.2 million in 1996,
due to a slight increase in the number of burn incidents requiring the service.
MARGINS AND OPERATING EXPENSES.
GTR's costs of services sold were $11.8 million in 1997 as compared to $11.2
million in 1996. Costs of services sold exceeded revenues by 9% in 1997 and 53%
in 1996. The improvement in service margins is primarily attributable to the
higher sales volume and efficiencies gained in the manufacturing process.
Selling, general and administrative ("SG&A") expenses in 1997 were $25.6
million, a decrease of 6% from SG&A expenses of $27.1 million in 1996. The
decrease is due primarily to a decrease in expenses incurred in connection with
the marketing of Carticel(TM) AuCC in 1996. GTR incurs direct SG&A expenses as
well as a SG&A charge, based on actual amounts incurred, from Genzyme General
for SG&A work performed by Genzyme General on behalf of GTR. In 1997, $7.7
million of SG&A services were provided by Genzyme General, compared to $9.1
million in 1996 due to a decrease in expenses incurred in connection with the
marketing of Carticel (TM) AuCC in 1996.
4
<PAGE> 5
GENZYME TISSUE REPAIR (CONT.)
Research and development expenses were $10.8 million in 1997 and $10.9 million
in 1996. In 1997, $7.7 million of the total research and development expenses
incurred by GTR resulted from charges for research and development services
provided by Genzyme General to GTR, compared to $6.9 million in 1996.
OTHER INCOME AND EXPENSES.
Interest income was $1.0 million in 1997 as compared to $1.4 million in 1996,
due primarily to lower average cash balances during the year.
Interest expense in 1997 was $2.9 million as compared to $0.1 million in 1996.
Interest expense increased in 1997 as a result of $0.5 million of interest
related to the addition of $11.5 million of debt from the GTR Note in February
1997 (see "Liquidity and Capital Resources"), $1.1 million of interest charges
to accrete this debt to its face value and additional interest from increases in
borrowing under a revolving credit facility in June 1996 and December 1996 of
$8.0 million and $3.0 million, respectively.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans. Under the terms of the joint venture agreement,
GTR is required to provide 100% of the initial $10.0 million of the funding
requirements and 75% of the next $40.0 million of funding requirements for
products to be developed by the joint venture. Thereafter, all costs will be
shared equally between GTR and Diacrin. Profits from the joint venture will be
shared equally by the two parties. For the year ended December 31, 1997, GTR had
provided $6.8 million of funding to the joint venture and realized a net loss of
$6.7 million from the joint venture, compared to $1.9 million of funding to the
joint venture and a net loss of $1.7 million from the joint venture as of
December 31, 1996. GTR's funding commitment to the joint venture is expected to
be approximately $10.0 million for 1998.
1996 COMPARED TO 1995
REVENUES.
Revenues in 1996 increased 40% to $7.3 million from $5.2 million in 1995. Sales
of Carticel(TM) AuCC were $3.1 million, compared to $0.6 million in 1995, the
year in which Carticel(TM) AuCC was launched. The increase in Carticel(TM) AuCC
sales resulted primarily from the increase in the number of surgeons trained in
the procedure utilizing Carticel(TM) AuCC. Sales of the Epicel[SM] Service in
1996 decreased 9% to $4.2 million, due to a decrease in the number of burn
incidents requiring the service.
MARGINS AND OPERATING EXPENSES.
GTR's costs of services sold exceeded revenues by 53% in 1996, compared to a
gross profit of 9% in 1995, due to increased spending for the expansion of
manufacturing capacity.
SG&A expenses in 1996 were $27.1 million, an increase of 110% over 1995. The
increase resulted from the expenses and staffing to support revenue growth and
increased surgeon training costs related to Carticel(TM) AuCC. GTR incurs direct
SG&A expenses as well as a SG&A charge, based on actual amounts incurred, from
Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In
1996, $9.1 million of SG&A services were provided by Genzyme General, compared
to $4.4 million in 1995, due to an increase in the level of operations related
to Carticel(TM) AuCC.
Research and development expenses were $10.9 million in each of 1996 and 1995.
Increases in expenses associated with the TGF[Beta](2) program were offset by
decreases in the Vianain(R) program. In 1996, $6.9 million of the total research
and development expense incurred by GTR resulted from charges for services
provided by Genzyme General to GTR, compared to $4.7 million in 1995.
OTHER INCOME AND EXPENSES.
Interest income was $1.4 million in each of 1996 and 1995, due primarily to
level average cash balances during the year. Interest expense in 1996 was
$0.1 million, net of capitalized interest on construction in-progress of
$0.2 million, compared to $0.05 million in 1995. Interest expense increased in
1996 due to interest on borrowings. See "Liquidity and Capital Resources " for a
description of the borrowings.
5
<PAGE> 6
GENZYME TISSUE REPAIR (CONT)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, GTR had cash, cash equivalents and short-term
investments of $31.9 million, an increase of $15.7 million from December 31,
1996. In 1997, GTR used $37.2 million of cash for operations and $16.8 million
for investing activities. In the year ended December 31, 1997, investing
activities provided $0.9 million from the sale of equipment and used $6.8
million of cash to fund GTR's investment in Diacrin/Genzyme LLC, and $0.5
million to purchase equipment. Financing activities provided $59.2 million of
cash, of which $14.9 million was allocated to GTR from Genzyme General, $13.0
million consisted of proceeds from the issuance of debt, $29.0 million consisted
of proceeds from the sale of GTR Stock to the public and $2.4 million consisted
of proceeds from the exercise of stock options and stock issued under the
employee stock purchase plan. Of the $13.0 million in proceeds from the GTR
Note, GTR recorded $11.5 million of proceeds attributable to the value of the
convertible debt and $1.5 million attributable to the value of the conversion
feature (recorded as an increase to division equity). The $11.5 million will be
accreted to the face value of the debt by a charge to interest expense of $1.5
million over the term of the initial 15 month conversion period. As of December
31, 1997, $18.0 million of funds allocated to GTR in December 1996 under the
Revolving Credit Facility remained outstanding.
In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for $7.75
per share. Net proceeds from the offering after underwriting discounts and
commissions were $29.0 million.
GTR believes its available cash and investments, including the proceeds from the
November 1997 stock offering, will be sufficient to finance planned operations
and capital requirements through the end of 1998. GTR must raise significant
additional capital in order to continue operations at current levels beyond
1998. GTR's plans to raise additional capital include the consideration of the
sale of additional equity securities, strategic alliances with third parties to
fund further developments and marketing of Carticel(TM) AuCC and other business
transactions that would generate capital resources to assure continuation of
GTR's operations and research programs. If these initiatives are not successful,
GTR may be required to delay, scale back or eliminate certain of its programs,
or to license third parties to commercialize technologies or products that the
division would otherwise undertake itself.
For a discussion of the demands, commitments and events that may affect the
liquidity and capital reserves of Genzyme Corporation and GTR, see also
Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations - Liquidity and Capital Resources
included in this Annual Report.
NEW ACCOUNTING PRONOUNCEMENTS AND YEAR 2000
For a discussion of new accounting pronouncements and Year 2000 impact, see
Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations - New Accounting Pronouncements,
Year 2000 and Financial Reporting Release No. 48 ("FRR 48") included in this
Annual Report.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of GTR could differ materially from the results
described above due to the risks and uncertainties described below and under the
heading "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results" included in this Annual Report.
NO ASSURANCE OF COMMERCIAL SUCCESS OF CARTICEL(TM) AuCC. In August 1997, the FDA
approved GTR's BLA for Carticel(TM) AuCC. As a condition to such approval, GTR
has agreed to conduct two confirmatory post-marketing studies, one of which will
compare the long-term clinical effects of treatment with Carticel(TM) AuCC to
certain other available treatments and the other of which will compare treatment
with Carticel(TM) AuCC against a placebo implant. Should these post-marketing
studies demonstrate that treatment with Carticel(TM) AuCC is not superior to the
alternatives studied, the FDA may suspend or terminate GTR's license to market
the product. If GTR were prohibited from marketing Carticel(TM) AuCC in the
U.S., its results of operations would be materially adversely affected.
The commercial success of Carticel(TM) AuCC will also depend materially on the
ability of GTR to increase the approval rate for reimbursement of the product
from third party payers. Although GTR has seen a substantial increase in the
development of broad policy coverage for Carticel(TM) AuCC since the August 1997
FDA approval of the product, there can be no assurance that the recent increase
in reimbursement approvals will continue.
Although FDA approval is a critical requirement for most plans to adopt
favorable policy coverage for new treatments, a number of major insurance plans
also base their decisions on technology assessments conducted by individual
plans or by independent associations such as the Blue Cross Blue Shield
Association ("BCBSA"). The BCBSA Technology Assessment Committee (the "BCBSA
Committee") met in late September 1997 to review the Carticel(TM) AuCC
treatment.
6
<PAGE> 7
GENZYME TISSUE REPAIR (CONT.)
The BCBSA has indicated that it does not believe Carticel(TM) AuCC meets all of
the published criteria used by BCBSA to evaluate new treatments. GTR is in
discussions with BCBSA regarding this assessment. While a favorable review by
the BCBSA Committee is not required for individual Blue Cross/Blue Shield plans
to approve policy coverage for a new treatment, it is a factor in the decision
process for many plans. Because of the BCBSA Committee report, implementation of
policy coverage for Carticel(TM) AuCC by many Blue Cross/Blue Shield plans could
be delayed. Since these plans represent approximately 60 million, or 25% of
insured lives in the U.S., GTR's ability to access a substantial portion of the
market for Carticel(TM) AuCC could also be delayed. Other indemnity plans have
given GTR coverage for approximately 115 million insured lives in the U.S.
GTR is marketing Carticel(TM) AuCC to orthopedic surgeons. The commercial
success of the product depends on the extent to which sufficient numbers of
surgeons who are trained by GTR incorporate the product into their existing
practices. There can be no assurance that GTR will be successful in marketing
Carticel(TM) AuCC to such surgeons or that such surgeons will use Carticel(TM)
AuCC to the extent anticipated by GTR.
GTR OPERATING LOSSES AND CASH REQUIREMENTS. GTR is expected to experience
significant operating losses at least through 1998 as the market introduction of
Carticel(TM) AuCC continues and its research and development and clinical
programs progress. There can be no assurance that GTR will ever achieve a
profitable level of operations or that profitability, if achieved, can be
sustained on an ongoing basis. GTR anticipates that its existing cash, together
with existing cash balances allocated to GTR or approved for reallocation from
Genzyme General and cash generated from the sale of Carticel(TM) AuCC and the
Epicel[SM] Service, will be sufficient to fund GTR's operations through the end
of 1998. Significant additional funds may be required to continue operations at
anticipated levels beyond 1998, however, and GTR may be required to delay, scale
back or eliminate certain of its programs or to license third parties to
commercialize technologies or products that it would otherwise undertake itself
if it does not have sufficient capital or is not successful in raising
additional capital.
GTR's cash requirements may vary from those now planned as a result of numerous
factors, including revenue fluctuations, reimbursement denials for GTR's
products, results of research and development and clinical testing by GTR and
its collaborators, competing technological and market developments and the cost
and timing of clinical trials and regulatory approvals. In addition, if GTR
commits to fund additional joint ventures or strategic collaborations or uses
cash to effect acquisitions, its cash requirements may increase significantly.
FLUCTUATIONS IN GTR'S QUARTERLY RESULTS. Revenues generated from the sale of
Carticel(TM) AuCC are expected to fluctuate as GTR enrolls and trains additional
orthopedic surgeons and the product gains market and third party payer
acceptance. GTR's management is unable to predict the timing or magnitude of
such fluctuations, although GTR expects that its revenues from the sale of
Carticel(TM) AuCC may be lower in the summer months as fewer operative
procedures are typically performed during those months. Sales of the Epicel[SM]
Service for the treatment of severe burns also comprise a material percentage of
GTR's revenues. Revenues realized from the Epicel[SM] Service fluctuate from
quarter to quarter due to the dependency of such revenues on many unpredictable
factors, including the number and survival rate of patients for which the
Epicel[SM] Service is the indicated treatment. Since GTR is required to maintain
extensive tissue culture facilities and a staff of trained personnel for both
Carticel(TM) AuCC and the Epicel[SM] Service, a significant portion of GTR's
costs are fixed and, therefore, fluctuations in demand can have a material
adverse effect on GTR's results of operations.
COLLABORATION WITH DIACRIN, INC. - NO CURRENTLY APPROVED XENOTRANSPLANTATION-
BASED PRODUCTS; RELIANCE ON CELL TRANSPLANTATION TECHNOLOGY. GTR has formed a
joint venture with Diacrin to develop and commercialize products based on
transplantable fetal porcine brain cells for the treatment of Parkinson's
disease and Huntington's disease. Human therapeutic products based on the
transplantation of cells obtained from animals ("xenotransplantation") represent
a novel therapeutic approach that has not been subject to extensive clinical
testing. Xenotransplantation also poses a risk that viruses or other animal
pathogens will be unintentionally transmitted to a human patient. The joint
venture has been required by the FDA to perform certain assays to
7
<PAGE> 8
GENZYME TISSUE REPAIR (CONT.)
determine whether porcine retrovirus is present in patients that have received
porcine cells. These assays have been performed on samples taken from all
patients who have received NeuroCell(TM)-PD and no porcine retrovirus was
detected in those samples. The joint venture has also been required by the FDA
to perform additional assays on its porcine cellular products to determine if
active porcine retroviruses are present and no retrovirus was detected. The
joint venture has been required by the FDA to develop an additional test for the
detection of porcine retrovirus and has been instructed to routinely monitor
patient blood samples for the presence of porcine retrovirus. If porcine
retrovirus is detected in this test or samples, additional tests may be required
to assess the risk to patients of porcine retrovirus infection. If such
additional tests are required, trials of the joint venture's porcine cell
products may be delayed. While porcine retrovirus has not been shown to cause
any disease in pigs, it is not known what effect, if any, porcine retrovirus may
have on human beings. The joint venture's porcine cell product development
programs would be negatively impacted by the detection of infectious porcine
retrovirus in porcine cells or clinical trial subjects. An inability to proceed
with further trials or a substantial delay in the clinical trials would have a
material adverse effect on the Company.
The FDA has issued draft regulatory guidelines to reduce the risk of
contamination of xenotransplanted cellular products with infectious agents.
Although GTR's management believes the processes used to produce the porcine
cell products under development by the joint venture would comply with the
guidelines as drafted, such guidelines may undergo substantial revision before
definitive guidelines are issued by the FDA. There can be no assurance that
definitive guidelines will be issued by the FDA or that processes used by the
joint venture will comply with any guidelines that may be issued.
No xenotransplantation-based therapeutic product has been approved by the FDA
and there can be no assurance that any products developed by the joint venture
will be approved by the FDA or regulatory authorities in other countries. There
can also be no assurance that xenotransplantation-based products, including the
joint venture's product candidates, will be accepted by the medical community or
third party payers or that the degree of such acceptance will not limit the size
of the market for such products.
The success of the joint venture is also dependent upon the successful
development of cell transplantation technology. This technology currently has
limited clinical applications and there can be no assurance that it will result
in the development of any therapeutic products. If the cell transplantation
technology does not result in the development of such products, the joint
venture may be required to change dramatically the scope and direction of its
product development activities.
RELIANCE ON AGREEMENTS WITH KEY COLLABORATORS. Carticel(TM) AuCC has been
developed based on the work of a group of Swedish physicians, the two leaders of
which are performing consulting services for GTR relating to the
commercialization and further development of the product. These two physicians
are parties to research and development consulting agreements with GTR (the
"Consulting Agreements") which prohibit them, without GTR's consent, from
performing consulting services for others in the field of cartilage and bone
repair. In addition, pursuant to the Consulting Agreements, each physician (i)
is prohibited from engaging in any business activity that is in competition with
the products or services being developed, manufactured or sold by GTR during the
term of the Consulting Agreements (currently through 1998) and for a period of
one year after termination thereof, (ii) is subject to non-disclosure
obligations and (iii) has assigned to GTR all rights to inventions resulting
from work performed by each physician as a consultant to GTR, subject to
royalties payable to the inventing physician. There can be no assurance that the
two physicians will honor their obligations under the Consulting Agreements or
that such agreements will be renewed beyond 1998. In addition, there can be no
assurance that individuals who are familiar with the know-how underlying
Carticel(TM) AuCC through their association with these physicians will not
disclose such information to GTR's competitors. The occurrence of either of
these events could have a material adverse effect on GTR's results of
operations.
GTR is conducting additional research relating to Carticel(TM) AuCC pursuant to
a sponsored research agreement with the University of Gotenburg in Sweden and
certain physicians, including the two referred to above. The sponsored research
agreement requires that all members of the investigative team maintain the
confidentiality of all information pertaining to GTR and its business that may
become known to them in connection to their work under the agreement. The
agreement also states that all inventions conceived or reduced to practice
during the course of the research program will be the property of GTR, subject
to royalties payable to the inventing physician. There can be no assurance that
the sponsored research agreement will be honored by the individuals performing
services thereunder.
COMPETITION. GTR is engaged in a segment of the human health care products
industry that is extremely competitive. Competitors in the U.S. and elsewhere
are numerous and include major pharmaceutical, chemical and biotechnology
companies, many of which have substantially greater capital resources marketing
experience, research and development staffs and facilities than GTR. These
companies may succeed in developing products that are more effective than any
that have been or may be developed
8
<PAGE> 9
GENZYME TISSUE REPAIR (CONT.)
by GTR and may also be more successful than GTR in producing and marketing these
products. GTR is aware of at least one company that is culturing autologous
chondrocytes for cartilage repair in Europe and numerous additional companies
developing competing products for cartilage repair and the treatment of
Parkinson's disease, Huntington's disease, burns, chronic wounds and multiple
sclerosis.
The process used by GTR to grow autologous chondrocytes is not patentable, and
GTR does not yet have significant patent protection covering the other
methodologies used in providing Carticel(TM) AuCC. Consequently, GTR is unable
to prevent a competitor from developing the ability to grow cartilage cells and
from offering a product that is similar or superior to Carticel(TM) AuCC. GTR's
results of operations could be materially adversely affected if a competitor
were to develop such know-how and obtain FDA approval for an autologous
chondrocyte product.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY. GTR does not yet have
significant patent protection covering the methodologies used in providing
Carticel[TM] AuCC. Consequently, GTR is unable to prevent a competitor from
developing the ability to grow cartilage cell cultures and from offering a
service that is similar or superior to Carticel[TM] AuCC. GTR's results of
operations could be materially and adversely affected if a competitor were to
develop such know-how.
DILUTION.
Pursuant to an agreement made at the time of formation of GTR, the Genzyme Board
may allocate up to $10.0 million from Genzyme General to GTR on or before June
14, 1998 in exchange for 1,000,000 GTR Designated Shares. In addition, the
Genzyme Board has authorized the allocation of up to $20.0 million in cash from
Genzyme General to GTR (the "GTR Equity Line"). Any amounts allocated to GTR
under the GTR Equity line will result in an increase in such number of GTR
Designated Shares determined by dividing (i) the amount of cash allocated by
(ii) the average of the daily closing prices of GTR Stock for the 20 consecutive
trading days commencing on the 30th trading day prior to the date of such
allocation. Of the $20.0 million authorized for allocation to GTR, approximately
$7.0 million had been allocated as of December 31, 1997.
The GTR Designated Shares are not issued or outstanding, but may be issued from
time to time by the Genzyme Board without allocating any proceeds to GTR or
distributed as a stock dividend to the holders of GGD Stock. As of December 31,
1997, there were approximately 885,000 GTR Designated Shares reserved for
issuance. Pursuant to the management and accounting policies adopted by the
Genzyme Board, Genzyme is required to distribute or sell the GTR Designated
Shares annually to the extent that the number of such shares (excluding those
reserved for GGD option holders and the holders of instruments convertible into
GGD Stock) exceeds 10% of the shares of GTR Stock outstanding. Genzyme is unable
to predict the effect that the sales or distributions described in this
paragraph may have on the then prevailing market price of GTR Stock.
In addition, Genzyme currently has reserved approximately 2,577,000 shares of
GTR Stock for issuance upon conversion of amounts payable under the GTR Note.
The actual number of shares issued upon conversion of the GTR Note may be more
or less than the number currently reserved. The GTR Note is convertible into
shares of GTR Stock at a discount to the average of the closing bid prices of
GTR Stock as reported by the Nasdaq National Market for the 25 trading days
immediately preceding the applicable conversion date (the "Conversion Price").
This discount began at 2% on August 27, 1997 and increases by an additional one
percent per month thereafter until May 27, 1998. After May 27, 1998, the
Conversion Price will be equal to the lesser of : (i) 89% of the Conversion
Price calculated as of the actual conversion date and (ii) 89% of the Conversion
Price calculated as of May 27, 1998.
POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS.
The market prices for securities of biotechnology companies have been volatile.
Factors such as announcements of technological innovations or new commercial
products by Genzyme or its competitors, governmental regulation, patent or
proprietary rights developments, public concern as to the safety or other
implications of biotechnology products and market conditions in general may
have a significant impact on the market price of GTR Stock. No cash dividends
have been paid to date on Genzyme common stock, nor does Genzyme anticipate
paying cash dividends on such stock in the foreseeable future.
9
<PAGE> 10
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $21,120 $15,912
Short-term investments ................................... 10,795 318
Accounts receivable, net.................................. 2,221 1,677
Inventories .............................................. 1,973 1,823
Prepaid expenses and other current assets ................ 732 334
------- -------
Total current assets .................................... 36,841 20,064
Property, plant and equipment, net ......................... 19,524 22,229
Other noncurrent assets .................................... 453 300
------- -------
Total assets ............................................ $56,818 $42,593
======= =======
</TABLE>
LIABILITIES AND DIVISION EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable ................................... $ 1,378 $ 1,749
Accrued expenses ................................... 2,816 2,479
Due to Genzyme General ............................. 1,213 1,604
------- -------
Total current liabilities ........................ 5,407 5,832
Long-term debt ....................................... 18,000 18,000
Convertible debenture, net ........................... 12,681 -
Other noncurrent liabilities ......................... 527 677
------- -------
Total liabilities ................................. 36,615 24,509
Commitments and Contingencies (See Notes) ............
Division equity (Note J) ............................. 20,203 18,084
------- -------
Total liabilities and division equity ............. $56,818 $42,593
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
10
<PAGE> 11
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net service sales ..................... $ 10,856 $ 7,312 $ 5,220
Operating costs and expenses:
Cost of services sold ................. 11,788 11,193 4,731
Selling, general and administrative ... 25,571 27,111 12,927
Research and development .............. 10,845 10,880 10,938
-------- -------- --------
Total operating costs and expenses .... 48,204 49,184 28,596
-------- -------- --------
Operating loss .......................... (37,348) (41,872) (23,376)
Other income (expenses):
Equity in loss of joint venture ....... (6,719) (1,727) -
Interest income ....................... 979 1,432 1,386
Interest expense ...................... (2,896) (148) (40)
-------- -------- --------
Total other income (expenses) ......... (8,636) (443) 1,346
-------- -------- --------
Net loss ................................ $(45,984) $(42,315) $(22,030)
======== ======== ========
Per Genzyme Tissue Repair basic and diluted
common share:
Net loss .............................. $ (3.07) $ (3.38) $ (2.28)
======== ======== ========
Weighted average shares outstanding ... 14,976 12,525 9,659
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
11
<PAGE> 12
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss .......................................... $(45,984) (42,315) (22,030)
Reconciliation of net loss to net cash used
by operating activities:
Depreciation and amortization ................... 2,482 935 628
Loss on disposal of property, plant and equipment 24 59 160
Non-cash compensation expense ................... 221 312 882
Accrued interest/amortization on bonds .......... (188) 85 (76)
Provision for bad debts ......................... 480 238 210
Accretion of debt discount ...................... 1,071 - -
Equity in net loss of joint venture ............. 6,719 1,727 -
Increase (decrease) in cash from working capital:
Accounts receivable ........................... (1,024) (77) (562)
Inventories ................................... (150) (1,062) (685)
Prepaid expenses and other .................... (398) (148) 98
Accounts payable, accrued expenses and
deferred revenue ............................. (39) 444 33
Due to Genzyme General ........................ (391) (430) 1,863
-------- -------- --------
Net cash used by operating activities ....... (37,177) (40,232) (19,479)
INVESTING ACTIVITIES:
Purchases of investments .......................... (10,614) (5,004) (16,687)
Sales and maturities of investments ............... 318 11,447 17,991
Investment in joint venture ....................... (6,820) (1,911) -
Purchases of property, plant and equipment ........ (496) (26,573) (1,294)
Sale of property, plant and equipment ............. 852 5,311 -
Other ............................................. (52) 151 (13)
-------- -------- --------
Net cash used by investing activities ....... (16,812) (16,579) (3)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ....... 31,475 2,437 43,516
Proceeds from issuance of convertible
debentures, net .................................. 12,977 56,000 -
Payments of debt and capital lease obligations .... 3 (38,169) (286)
Cash allocated from Genzyme General ............... 14,892 11,714 -
Other ............................................. (150) - -
-------- -------- --------
Net cash provided by financing activities ..... 59,197 31,982 43,230
Increase (decrease) in cash and cash equivalents ..... 5,208 (24,829) 23,748
Cash and cash equivalents at beginning of period ..... 15,912 40,741 16,993
-------- -------- --------
Cash and cash equivalents at end of period ........... $ 21,120 $ 15,912 $ 40,741
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest ......................................... $ 1,127 $ 334 $ 40
Supplemental Disclosures of Non-Cash Transactions:
GTR Designated Shares - Note J.
Transfer of Property, Plant and Equipment - Note E.
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
12
<PAGE> 13
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Tissue Repair ("GTR"), a division of Genzyme Corporation (the "Company"
or "Genzyme") is a leading developer of biological products for the treatment of
cartilage damage, severe burns, chronic skin ulcers and neurodegenerative
diseases. GTR uses cell, enzyme, growth factor and matrix technologies to
develop products that will augment or positively modify naturally-occurring
biological processes involved in tissue repair.
BASIS OF PRESENTATION
The combined financial statements of GTR include the balance sheets, results of
operations and cash flows during the periods presented. GTR's financial
statements are prepared using the amounts included in Genzyme's consolidated
financial statements. Corporate allocations reflected in these financial
statements are determined based upon methods which management believes to be
reasonable. The approval effective December 16, 1994 (the "Effective Date") by
the stockholders of Genzyme of the Genzyme Stock Proposal as described in
Genzyme's Prospectus/Proxy Statement dated November 10, 1994 resulted in the
redesignation of Genzyme's common stock. The outstanding shares of Genzyme
common stock were redesignated as GGD Stock and a second class of common stock,
designated as GTR Stock was distributed on the basis of .0675 of one share of
GTR Stock (after 1996 GGD Stock split) for each share of Genzyme's common stock.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements reflect the combined accounts of
all of GTR's businesses. All material intradivisional items and transactions
have been eliminated in combination. The equity method is used to account for
investments in companies and joint ventures in which GTR has a substantial
ownership interest (20% to 50%), or in which GTR participates in policy
decisions. Accordingly, GTR's share of the earnings or losses of such entities
is included in computation of GTR's net loss.
FINANCIAL INFORMATION
Genzyme will provide to holders of GTR Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for GTR. Notwithstanding the attribution of assets and
liabilities, including contingent liabilities, between GTR, Genzyme General and
GMO for the purposes of preparing their respective financial statements, Genzyme
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each of the divisions. Holders of GTR Stock, GGD Stock
and GMO Stock have no specific claim against the assets attributed to the
division whose performance is associated with the series of common stock they
hold. Liabilities or contingencies of GTR, Genzyme General or GMO could affect
the financial condition or results of operations of the other divisions.
Accordingly, the GTR combined financial statements should be read in connection
with Genzyme's consolidated financial statements included in this Annual Report.
Accounting policies and financial information specific to GTR are presented in
GTR's combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, GTR and GMO are presented in
the consolidated financial statements of Genzyme Corporation and Subsidiaries.
The Company prepares the financial statements of GTR in accordance with
generally accepted accounting principles, the management accounting policies of
Genzyme and the divisional accounting policies approved by the Company's Board
of Directors (the "Genzyme Board"). (see Note A., "Summary of Significant
Accounting Policies" to Genzyme's Consolidated Financial Statements (the
"Consolidated Financial Statements") which is incorporated herein by reference).
Except as otherwise provided in such policies, the management and accounting
policies applicable to the presentation of the financial statements of GTR may
be modified or rescinded at the sole discretion of the Genzyme Board without
approval of the stockholders, subject only to the Genzyme Board's fiduciary duty
to Genzyme's stockholders.
DIVIDEND POLICY
Under the terms of the Genzyme Charter, dividends may be paid to the holders of
GTR Stock only out of the lesser of funds of Genzyme legally available for the
payment of dividends and the Available GTR Dividend Amount, as defined in the
Genzyme Charter. Although there is no requirement to do so, the Genzyme Board
would declare and pay cash dividends on GTR Stock, if any, based primarily on
earnings, financial condition, cash flow and business requirements of GTR. There
is currently no intention of paying any cash dividends.
REVENUE RECOGNITION
GTR's two commercial tissue repair services are autologous epidermal skin grafts
produced using the Epicel(SM) Service and the culturing of autologous cartilage
cells using Carticel(TM) AuCC. GTR recognizes service revenue at the time skin
grafts or cartilage cells are shipped. Cancellation charges may be assessed upon
the cancellation of an Epicel(SM) order. These charges are dependent upon order
size and stage of skin graft growth and are recognized upon order cancellation
and when collection is determined to be probable.
13
<PAGE> 14
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
NET INCOME(LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted net income per
share is very similar to the previously reported fully diluted earnings per
share except that the new treasury stock method used in determining the dilutive
effect of options uses the average market price for the period rather than the
higher of the average market price or the ending market price. All net income
(loss) per common share amounts have been restated to conform to SFAS 128
requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
(Amounts in thousands, except per share amounts) December 31,
- -------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Net loss ...................................... $(45,984) $(42,315) $(22,030)
Basic and diluted weighted average shares
outstanding.................................. 14,976 12,525 9,659
Net loss per common share - basic.............. $ (3.07) $ (3.38) $ (2.28)
Net loss per common share - diluted............ $ (3.07) $ (3.38) $ (2.28)
During the years ended December 31, 1997, 1996 and 1995, certain securities
which were not included in the computation of diluted earnings per share because
they would have an anti-dilutive effect due to the net loss for the years, were
as follows: (i) options to purchase approximately 2,777,000, 2,574,000 and
1,985,000 shares of GTR Stock with a price range of $4.84-$12.88 per share,
respectively, (ii) 885,000, 1,794,000 and 1,287,000 GTR Designated shares
issuable for the benefit of Genzyme General; (iii) debentures convertible into
1,772,000 shares of GTR Stock computed as of December 31, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
GTR has elected the disclosure-only alternative permitted under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). GTR has disclosed pro
forma net income (loss) and pro forma earnings per share information in the
footnotes to the combined financial statements using the fair value based method
for 1997, 1996 and 1995.
NOTE B. RELATED PARTY TRANSACTION POLICIES
Genzyme allocates certain corporate costs for general and administrative
expenses, research and development expenses and cash management services in
accordance with the policies summarized below. Genzyme files a consolidated tax
return and allocates income taxes to the divisions in accordance with the
policies described below. Effective upon the merger of GMO and Pharmagenics
Inc., the Genzyme Board amended certain of the policies which govern the
management of GTR and Genzyme General to include the management of GMO and to
add certain new policies governing interdivision transactions. The policies
summarized below, with the exception of Interdivision Asset Transfers, may be
further modified or rescinded by action of the Genzyme Board, or the Genzyme
Board may adopt additional policies, without approval of the stockholders of
Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme
stockholders. In addition, generally accepted accounting principles require that
any change in policy be preferable (in accordance with such principles) to the
previous policy.
FINANCIAL MATTERS
The Company manages the financial activities of Genzyme General, GTR and GMO on
a centralized basis. These financial activities include the investment of
surplus cash, the issuance, repayment and repurchase of short-term and long-term
debt and the issuance of equity instruments.
Loans may be made from time to time between divisions. Any such loan of $1.0
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1.0 million will require approval of
the Genzyme Board, which approval shall include a determination by the Genzyme
Board that the material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating division and to
holders of the common stock representing such division.
SHARED SERVICES
GTR operates as a division of Genzyme with its own personnel and financial
resources. However, GTR has access to Genzyme's extensive research and
development capabilities, manufacturing facilities, worldwide clinical
development and regulatory affairs staffs, marketing, infrastructure, and
experience in raising capital and Genzyme's corporate and general administrative
functions, the costs of which are allocated to each division in a reasonable and
consistent manner based on utilization by the division of the services to which
such costs relate. Genzyme's corporate general and administrative and research
and development functions are performed primarily by Genzyme General.
Administrative expenses and research and development expenses have been
allocated to GTR as if GTR operated on a stand-alone basis. Management believes
that such allocation is a reasonable estimate of such expenses. These
allocations for research and development were $7.7 million in 1997 compared
14
<PAGE> 15
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
to $6.9 million in 1996. The charges for sales, general and administrative
services were $7.7 million in 1997 compared with $9.1 million in 1996.
INTERDIVISION INCOME TAX ALLOCATIONS
GTR is included in the consolidated U.S. federal income tax return filed by
Genzyme. Genzyme allocates current and deferred taxes to the divisions using the
asset and liability method of accounting for income taxes as if the divisions
were separate taxpayers. Accordingly, the realizability of deferred tax assets
is assessed at the division level. The sum of the amounts calculated for
individual divisions of Genzyme may not equal the consolidated amount under this
approach.
Pursuant to the management and accounting policies adopted by the Genzyme Board,
as of the end of any fiscal quarter of Genzyme, any projected tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to any
other division without any compensating payment or allocation. The treatment of
such allocation for purposes of earnings per share computation is discussed in
Note A., "Summary of Significant Accounting Policies -- Net Income (Loss) Per
Share" in the Consolidated Financial Statements which is incorporated herein by
reference.
ACCESS TO TECHNOLOGY AND KNOW-HOW
GTR has free access to all technology and know-how of Genzyme that may prove
useful in GTR's business, subject to any obligations or limitations applicable
to Genzyme.
INTERDIVISION ASSET TRANSFERS
The following policy regarding the transfer of assets between divisions may not
be changed by the Genzyme Board without the approval of the holders of GTR Stock
and GMO Stock, each voting as a separate class; provided, however, that if a
policy change affects GTR or GMO alone, only holders of shares representing the
affected division will be entitled to a class vote on such matter.
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program, the
likelihood and timing of any such realization and other matters that the Genzyme
Board and its financial advisors, if any, deem relevant. The consideration for
such reallocation may be paid by one division to another in cash or other
consideration, with a value equal to the fair market value of the assets being
reallocated or, in the case of a reallocation of assets from Genzyme General to
GTR or GMO, the Genzyme Board may elect to account for such reallocation of
assets as an increase in Designated Shares representing the division to which
such assets are reallocated. Notwithstanding the foregoing, no Key GTR Program,
as defined in the management and accounting policies, may be transferred out of
GTR without a class vote of the holders of GTR Stock and no Key GMO Program, as
defined in the management and accounting policies, may be transferred out of GMO
without a class vote of the holders of GMO Stock.
OTHER INTERDIVISION TRANSACTIONS
From time to time, a division may engage in transactions with one or more other
divisions or jointly with one or more other divisions and one or more third
parties. Such transactions may include agreements by one division to provide
products and services for use by another division and joint ventures or other
collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Research and development
performed by one division for the benefit of another division will be charged to
the division for which work is performed on a cost basis. The division
performing the research will not recognize revenue as a result of performing
such research. Other interdivisional transactions shall be on terms and
conditions that would be obtainable in transactions negotiated with unaffiliated
third parties. Any interdivisional transaction to be performed on terms and
conditions other than those previously set forth and that is material to one or
more of the participating divisions will require the approval of the Genzyme
Board, which approval shall include a determination by the Genzyme Board that
the transaction is fair and reasonable to each participating division and to
holders of the common stock representing each such division.
If a division (the "purchasing division") requires any product or service from
which another division (the "selling division") derives revenues from sales to
third parties (a "commercial product or service"), the purchasing division may
solicit from the selling division a bid to provide such commercial product or
service in addition to any bids solicited by the purchasing division from third
parties. Subject to determination by the Genzyme Board that the bid of the
selling division is fair and reasonable to each division and to their respective
stockholders and that the purchasing division is willing to accept the selling
division's bid, the purchasing division may accept any bid deemed to offer the
most favorable terms and conditions for providing the commercial product or
service sought by the purchasing division.
15
<PAGE> 16
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE C. ACCOUNTS RECEIVABLE
GTR performs ongoing credit evaluations of its customers and generally does not
require collateral. Accounts receivable are stated at fair value after
reflecting the allowance for doubtful accounts of $840,000 at December 31, 1997
and $408,000 at December 31, 1996.
NOTE D. INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996
-------------------------------------------------------
Raw materials.................... $ 243 $ 136
Work-in-process.................. 1,730 1,687
------- -------
$1,973 $1,823
======= =======
NOTE E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1997 1996
-----------------------------------------------------------
Plant and equipment.............. $ 16,847 $ 1,404
Land and buildings............... 2,324 2,324
Leasehold improvements........... 2,428 2,387
Furniture and fixtures........... 1,842 1,718
Construction in progress......... - 15,988
-------- --------
23,441 23,821
Less accumulated depreciation.. (3,917) (1,592)
-------- --------
Property, plant and equipment,
net............................. $ 19,524 $ 22,229
======== ========
Depreciation expense was $2,326,000 in 1997, $935,000 in 1996, and $628,000 in
1995.
In August 1996, GTR effected an interdivisional transfer of certain land and a
building in Framingham, Massachusetts, acquired in January 1996, to Genzyme
General for $5.2 million, which represented the cost and approximate fair market
value of the property at the date of the sale. There was no gain or loss
recorded as a result of this transaction.
NOTE F. INVESTMENTS AND OTHER NONCURRENT ASSETS
Investments in marketable securities at December 31, consisted of the following:
1997 1996
-----------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- -----------------------------------------------------------------------------
Short Term:
Certificates of deposit . $ - $ - $ 318 $ 318
Corporate notes ......... 10,804 10,795 - -
------- ------- ------- -------
$10,804 $10,795 $ 318 $ 318
======= ======= ======= =======
Gross unrealized holding losses of $9,000 were recorded at December 31, 1997 in
division equity as compared to no unrealized gross holding losses at December
31, 1996.
16
<PAGE> 17
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
DIACRIN/GENZYME LLC
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes for use in the treatment of Parkinson's disease and Huntington's
disease in humans using porcine fetal cells. Under the terms of the joint
venture agreement, GTR will provide 100% of the initial $10.0 million of the
funding requirements and 75% of the next $40.0 million of funding requirements
for products to be developed by the joint venture. After that, all costs will be
shared equally between GTR and Diacrin. Profits from the joint venture will be
shared equally by the two parties. For the years ended December 31, 1997 and
1996, $5.1 million and $1.9 million, respectively, of Genzyme General cash had
been allocated to GTR under the GTR Equity Line and 489,810 and 231,645, GTR
Designated Shares respectively, have been reserved for issuance at the sole
discretion of the Genzyme Board. As of December 31, 1997 and 1996, GTR realized
a net loss of $6.7 million and $1.7 million, respectively, from the joint
venture. For the year ended December 31, 1997, GTR had provided $6.8 million of
funding to the joint venture. The Company's Chairman and Chief Executive Officer
is a Director of Diacrin.
NOTE G. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1997 1996
------------------------------------------------------
Professional fees................ $ 797 $ 743
Compensation..................... 1,837 1,375
Royalties........................ 58 113
Other............................ 124 248
------- -------
$ 2,816 $ 2,479
======= =======
NOTE H. LONG-TERM OBLIGATIONS AND LEASES
Long-term obligations at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1997 1996
------------------------------------------------------
Revolving Credit Facility........ $18,000 $18,000
Convertible Debenture............ 12,681 -
------- -------
$30,681 $18,000
======= =======
Although the Company retains responsibility for the repayment of all long-term
debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated
Financial Statements which is incorporated herein by reference), such debt is
allocated to either Genzyme General, GTR or GMO for reporting purposes based on
the intended use of the funds borrowed under each instrument.
GTR PRIVATE PLACEMENT
On February 28, 1997, GTR raised $13.0 million through the private placement of
a 5% convertible note (the "GTR Note"), to an affiliate of Credit Suisse First
Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997
into shares of GTR Stock and, beginning August 1997, at a discount to the
average of the closing bid prices of the GTR Stock on the Nasdaq National Market
for the 25 trading days immediately preceding the conversion date (the "Average
GTR Stock Price"). The discount will start at 2% beginning six months from the
date the GTR Note was issued and will increase to 11% at 15 months after the
date of issue. Thereafter, the conversion price will be the lesser of 89% of the
Average GTR Stock Price preceding the conversion date or the date 15 months
after the date of issue. In the first quarter of 1997, GTR recorded $11.5
million of proceeds attributed to the value of the debt and $1.5 million
attributed to the value of the conversion feature (recorded as an increase to
division equity). The debt will be accreted to its $13.0 million face value by a
charge to interest expense of $1.5 million over the term of the initial 15 month
conversion period. As of December 31, 1997, GTR had accreted $1.1 million of the
value of the conversion feature.
Future minimum payments due under GTR's long-term obligations are as follows:
LONG-TERM
(DOLLARS IN THOUSANDS) DEBT
-----------------------------------------------------
[S] [C]
1998...................................... $ -
1999...................................... 20,160
2000...................................... 14,583
-------
Total minimum payments............... 34,743
Less interest........................ (4,062)
-------
$30,681
=======
17
<PAGE> 18
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
OPERATING LEASES
GTR rents facilities and equipment under noncancellable operating leases
expiring through 2001. For a GTR Facility there is an option to renew the lease
expiring in 2001 for an additional five years. Rent expense under all operating
leases was $1.8 million in 1997, $2.1 million in 1996 and $1.4 million in 1995.
Future minimum payments due under Genzyme Tissue Repair non-cancellable
operating leases are as follows:
OPERATING
(DOLLARS IN THOUSANDS) LEASES
------------------------------------------------------
1998........................................ $1,680
1999........................................ 1,655
2000........................................ 1,653
2001........................................ 1,531
------
Total minimum payments................. $6,519
======
NOTE I. COMMITMENTS AND CONTINGENCIES
From time to time GTR has been subject to legal proceedings and claims arising
in connection with its business. At December 31, 1997, there were no asserted
claims against GTR which, in the opinion of management, if adversely decided,
would have a material adverse effect on GTR's financial position and results of
operations.
NOTE J. DIVISION EQUITY
The following presents the equity of GTR for the periods presented:
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996 1995
---- ---- -----
Balance at beginning of period ........... $ 18,084 $ 45,926 $ 23,313
Net loss ................................. (45,984) (42,315) (22,030)
Exercise of stock options ................ 706 540 241
Shares issued in connection with
the Employee Stock Purchase Plan ....... 1,732 1,896 983
Shares issued in public offering ......... 29,037 - 42,292
Allocation from Genzyme General for
designated shares....................... 14,892 11,714 -
Stock compensation........................ 221 312 882
Value of debt conversion feature.......... 1,524 - -
Equity adjustments ....................... (9) 11 245
-------- ------- --------
Balance at end of period ................. $ 20,203 $ 18,084 $ 45,926
======== ======== ========
At December 31, 1997 and 1996, GTR had 40,000,000 of $.01 par value GTR stock
authorized and approximately 19,941,000 and 13,161,000 issued and outstanding.
PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLANS, STOCK RIGHTS, STOCK
OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, STOCK COMPENSATION PLANS AND GTR
DESIGNATED SHARES
The disclosures relating to Genzyme's Preferred Stock, Directors' Deferred
Compensation Plan, Stock Rights, Employee Stock Purchase Plan, Stock
Compensation Plans and GTR Designated Shares are included in Note K.,
"Stockholders' Equity" to the Consolidated Financial Statements which is
incorporated herein by reference.
Pursuant to Genzyme's charter, as amended, GTR Designated Shares are authorized
shares of GTR Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or
distribution to GTR. GTR Designated Shares are created in certain circumstances
when cash or other assets are transferred from Genzyme General to GTR.
As of December 31, 1997, there were approximately 885,000 GTR Designated Shares
reserved for issuance. During 1997, GTR distributed approximately 2,292,000
Designated Shares as a dividend to Genzyme General shareholders.
Further disclosures relating to Genzyme's stock options and GTR Designated
Shares are included in Note K., "Stockholders' Equity" to the Consolidated
Financial Statements which are incorporated herein by reference.
STOCK OFFERING
In November 1997, Genzyme sold 4,000,000 shares of GTR stock to the public at a
price of $7.75 per share for net proceeds of $29.0 million after underwriting
discounts and commissions.
STOCK COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its four stock-based compensation plans, the
1997 Equity Incentive Plan and the 1990 Equity Incentive Plan (both of which are
stock option plans), the 1990 Employee Stock Purchase Plan (a stock purchase
plan) and the 1988 Director Stock Option Plan and accordingly, no compensation
expense has been recognized for options granted and shares purchased by
employees under the provisions of these plans for options granted to employees
with an exercise price equal to fair market value.
18
<PAGE> 19
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
Had compensation expense for the stock-based compensation plans been determined
based on the fair value at the grant dates for options granted and shares
purchased under the plans consistent with the method of SFAS No. 123 "Accounting
for Stock-Based Compensation" ("SFAS 123"), GTR's net loss and loss per share
would have been as follows:
DECEMBER 31,
--------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ------------------------------------------------------------------------------
Net income (loss):
As reported..................... $(45,984) $(42,315) $(22,030)
Pro forma....................... $(49,547) $(45,735) $(23,168)
Basic and diluted loss per share:
As reported..................... $(3.07) $(3.38) $(2.28)
Pro forma....................... $(3.31) $(3.65) $(2.40)
For assumptions used in the SFAS 123 calculations for GTR for the three years
ended December 31, 1997, 1996 and 1995 -- see Note K., "Stockholders Equity" to
the Consolidated Financial Statements which is incorporated herein by
reference.
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995. Additional awards are
anticipated in future years.
NOTE K. INCOME TAXES
The differences between the effective tax rates and the U.S. federal statutory
tax rates were as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
U.S. Federal income tax statutory rate ........ (35.0)% (35.0)% (35.0)%
State taxes, net .............................. (3.0) (5.2) (5.2)%
Tax credits ................................... (1.4) - -
Other ......................................... 1.0 - -
Deductions subject to deferred tax
valuation allowance .......................... 38.4 40.2 40.2
----- ----- -----
Effective tax rate ............................ -% -% -%
===== ===== =====
At December 31, 1997 and 1996, the components of deferred tax assets were as
follows (in thousands):
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforwards.............. $ 40,554 $ 24,802
Tax credits................................... 964 -
Intangible amortization....................... 10,856 11,282
Reserves and other............................ 3,695 1,983
-------- --------
Gross deferred tax assets..................... 56,069 38,067
Valuation allowance........................... (56,069) (38,067)
-------- --------
Net deferred tax assets....................... $ - $ -
======== ========
Due to uncertainty surrounding the realization of favorable tax attributes GTR
placed a valuation allowance of $56.1 million and $38.1 million for December 31,
1997 and December 31, 1996, respectively, against otherwise recognizable
deferred tax assets. At the time GTR recognizes these tax assets in accordance
with generally accepted accounting principles, the resulting deferred tax
benefits will be reflected in the tax provision for Genzyme General. However,
the benefit of these deferred tax assets has been previously allocated to
Genzyme General in accordance with the management and accounting policies, and
will be reflected as a reduction of GTR net income to determine net income
attributable to GTR Stock.
19
<PAGE> 20
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE L. BENEFIT PLANS
The disclosures relating to Genzyme's domestic employee savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") are included in
Note O., "Benefit Plans" to the Consolidated Financial Statements which is
incorporated herein by reference. Substantially all employees of GTR are covered
under the 401(k) Plan.
The plan allows employees to make contributions up to a specified percentage of
their compensation, a portion of which are matched by GTR. GTR made $183,000,
$165,000, and $36,000 in contributions to the plan in 1997, 1996 and 1995,
respectively.
20
<PAGE> 21
GENZYME TISSUE REPAIR
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying combined balance sheets of Genzyme Tissue
Repair (as described in Note A) as of December 31, 1997, and 1996, the related
combined statements of operations and cash flows, and the combined financial
statement schedule for each of the three years in the period ended December 31,
1997. The combined financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility is to
express an opinion on these combined financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme Tissue Repair
present fairly, in all material respects, the financial position of Genzyme
Tissue Repair as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. In addition,
in our opinion, the combined financial statement schedule taken as a whole
presents fairly, in all material respects, the information required to be
included therein.
As more fully described in Note A to these financial statements, Genzyme Tissue
Repair is a business group of Genzyme Corporation; accordingly, the combined
financial statements of Genzyme Tissue Repair should be read in conjunction with
the audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
21
<PAGE> 22
GENZYME TISSUE REPAIR DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<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, 1997:
Allowance for doubtful accounts $ 408,000 $ 480,000 -- $ 49,000(1) $ 839,000
Inventory Reserve $4,427,000 $3,920,000 -- -- $8,347,000
Year ended December 31, 1996:
Allowance for doubtful accounts $ 325,000 $ 238,000 -- $155,000(1) $ 408,000
Inventory Reserve -- $4,427,000 -- -- $4,427,000
Year ended December 31, 1995:
Allowance for doubtful accounts $ 176,800 $ 210,000 -- $ 61,600(1) $ 325,200
- --------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve acquired in acquisition.
</TABLE>
22
<PAGE> 1
EXHIBIT 13.3
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
I. GENZYME MOLECULAR ONCOLOGY
Combined Selected Financial Data............................................................. 2
Management's Discussion And Analysis Of Financial Condition And Results Of Operations........ 4
Combined Balance Sheets - December 31, 1997 and 1996......................................... 8
Combined Statements of Operations - For the Years Ended December 31, 1997, 1996 and 1995..... 9
Combined Statements of Cash Flows - For the Years Ended December 31, 1997, 1996 and 1995..... 10
Notes to Combined Financial Statements....................................................... 11
Report of Independent Accountants............................................................ 22
</TABLE>
<PAGE> 2
GENZYME MOLECULAR ONCOLOGY
COMBINED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 1,1994
COMBINED STATEMENTS OF OPERATIONS DATA (1) (DATE OF INCEPTION)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, TO DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1995
---- ----- -----
Revenues:
Service revenue.................................. $ 467 $ - $ - $ -
Research and development revenue-related party... 315 - - -
-------- ------- ------ ------
782 - - -
Operating costs and expenses:
Cost of revenues................................. 337 - - -
Selling, general and administrative.............. 2,118 185 87 8
Research and development (1)..................... 5,341 818 377 29
Amortization of intangibles...................... 5,127 - - -
Charge for in-process technology (1)............. 7,000 - - -
-------- ------- ------ ------
Total operating costs and expenses............ 19,923 1,003 464 37
-------- ------- ------ ------
Operating loss....................................... (19,141) (1,003) (464) (37)
Other income (expenses):
Equity in net loss of joint venture (2).......... (258) - - --
Interest income.................................. 392 - - -
Interest expense................................. (1,663) - - -
-------- ------- ------ ------
Total other income (expenses)................. (1,529) - - -
-------- ------- ------ ------
Loss before income taxes............................. $(20,670) $(1,003) $ (464) $ (37)
Tax benefit.......................................... 1,092 - - -
-------- ------- ------ ------
Net loss............................................. $(19,578) $(1,003) $ (464) $ (37)
======== ======= ====== ======
Pro forma per Genzyme Molecular Oncology common share
(basic and diluted)(1):
Pro forma net loss............................... $(4.98) $ (.26) $ (.12) $(.01)
Pro forma shares outstanding..................... 3,929 $3,929 $3,929 $3,929
</TABLE>
2
<PAGE> 3
GENZYME MOLECULAR ONCOLOGY
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET DATA (1): DECEMBER 31,
- -----------------------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash and investments(3)............. $21,229 $ - $ - $ -
Working capital..................... 11,411 - - -
Total assets........................ 53,801 - - -
Long-term debt and convertible
debenture(4,5)...................... 24,199 - - -
Parent company investment(1)........ 2,875 1,504 501 37
Division equity(5).................. 13,466 - - -
</TABLE>
There were no cash dividends paid.
NOTES TO SELECTED FINANCIAL DATA:
(1) Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO")
is a division of Genzyme Corporation ("Genzyme" or the "Company"). GMO was
part of Genzyme General Division ("Genzyme General" or "GGD") from December
1, 1994 (Date of Inception) to June 18, 1997. Genzyme acquired
PharmaGenics, Inc. ("PharmaGenics") on June 18, 1997 (date of acquisition),
and the combined financial statements of GMO beginning June 18, 1997
include the results of PharmaGenics. As a result of the PharmaGenics
acquisition, GMO recorded a $7.0 million charge to operations for
in-process technology that has no alternative future use. GMO's financial
statements are prepared using amounts included in Genzyme's consolidated
financial statements. Pro forma net loss per share data is presented for
Genzyme Molecular Oncology Division Common Stock ("GMO Stock") for all
periods presented as there were no shares of GMO Stock outstanding prior to
June 18, 1997. Historical loss per share information is omitted from the
statement of operations as GMO Stock was not part of the capital structure
of Genzyme for periods presented prior to June 18, 1997.
(2) In July 1997, StressGen/Genzyme LLC was established as a joint venture
among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the
Canadian Medical Discoveries Fund Inc. ("CMDF") to develop stress gene
therapies for the treatment of cancer. For the year ended December 31,
1997, GMO recorded $258,000 of equity in net loss in joint venture.
(3) Cash and investments includes cash equivalents, and short- and long-term
investments.
(4) In June 1997, $5.0 million of borrowings under Genzyme's $225.0 million
revolving credit facility were allocated to GMO to fund operations. At
December 31, 1997 this $5.0 million is still outstanding.
(5) In August 1997, GMO raised $20.0 million (before offering discounts and
expenses), through the private placement of 6% convertible debentures (the
"GMO Debentures"), due August 29, 2002. The GMO Debentures are convertible
into shares of GMO Stock, at the option of the holders, beginning on the
91st day after the effective date of a registration statement covering the
initial public offering of GMO Stock (the "GMO IPO") at the average of the
closing bid prices of GMO Stock as reported by the Nasdaq National Market
for the 20 trading days immediately preceding the applicable conversion
date (the "GMO Market Price"). Beginning February 26, 1998, the GMO
Debentures are convertible at a discount to the GMO Market Price. This
discount will begin at 7% on February 26, 1998 and will increase by an
additional one percent every 30 days thereafter to 15% on October 24, 1998.
Beginning November 23, 1998, the conversion price will be the lower of (i)
85% of the GMO Market Price calculated as of the actual conversion date and
(ii) 85% of the GMO Market Price calculated as of November 21, 1998. In no
event, however, will the conversion price be less than $7.70 per share
(subject to adjustment in the event of any stock split, stock dividend,
reclassification, combination or singular event).
If the effective date of the GMO IPO does not occur before August 29, 1998,
at the holder's option, the GMO Debentures may be exchanged for a 5%
convertible debenture issued by Genzyme General (the "GGD Debentures") due
August 29, 2003. If the GMO IPO is completed before August 29, 1998 but the
market capitalization is below $90.0 million, at the holder's option, 50%
of the GMO Debentures can be exchanged for the GGD Debentures. The exchange
option must be exercised within 30 business days of the event triggering
the right of exchange.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME MOLECULAR ONCOLOGY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of GMO
and Genzyme as of the filing date of this Annual Report. The actual results for
both GMO and Genzyme could differ materially from those anticipated by the
forward-looking statements due to the risks and uncertainties described under
the caption "Factors Affecting Future Operating Results" for GMO and Genzyme,
respectively. Stockholders and potential investors should consider carefully
each of these risks and uncertainties in evaluating the financial condition and
results of operations of GMO and Genzyme.
Genzyme provides separate financial statements for the Company and its
subsidiaries on a consolidated basis and for each of Genzyme General, Genzyme
Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") and GMO. The financial
statements of each division include the financial position, results of
operations and cash flows of programs and products allocated to the division
under the Company's Restated Articles of Organization, as amended (the "Genzyme
Charter"), and the management and accounting policies adopted by the Genzyme
Board of Directors (the "Genzyme Board") to govern the relationship of the
divisions. The financial information of Genzyme General, GTR and GMO, taken
together, include all accounts which comprise the consolidated financial
information presented for Genzyme and its subsidiaries.
For purposes of financial statement presentation, all of the Company's programs
and products are allocated to Genzyme General, GTR or GMO. Notwithstanding this
allocation, Genzyme continues to hold title to all of the assets and is
responsible for all of the liabilities allocated to each of the divisions.
Holders of Genzyme General Division Common Stock ("GGD Stock"), Genzyme Tissue
Repair Division Common Stock ("GTR Stock") and GMO Stock have no specific claim
against the assets attributed to the division whose performance is associated
with the series of stock they hold. Liabilities or contingencies of one division
that affect Genzyme's resources or financial condition could affect the
financial condition or results of operations of any other division.
Stockholders and potential investors should, therefore, read this discussion and
analysis of financial position and results of operations in conjunction with the
financial statements and related notes of GMO and the discussion and analysis of
Genzyme's financial position and results of operations and financial statements
and related notes of Genzyme, all of which are included with this Annual Report.
Genzyme formed GMO on June 18, 1997 by acquiring PharmaGenics and combining it
with several of its existing programs in the field of oncology. The aggregate
purchase price of the PharmaGenics acquisition was $27.5 million plus
acquisition costs of $2.5 million, assumed liabilities of $5.4 million and the
recording of a deferred tax liability of $7.6 million resulting from the
temporary difference between the book and tax basis of the completed technology.
The portion of the purchase price allocated to the completed technology was
$20.0 million which will be amortized over three years. GMO recorded $15.7
million of goodwill, which represents the remaining portion of the purchase
price, which will be amortized over the same period as the completed technology.
GMO allocated $7.0 million to in-process technology which represents the value
assigned to PharmaGenics' programs which are still in the development stage and
for which there is no alternative use. The value assigned to these programs has
been determined by selecting the maximum anticipated value of these programs, as
provided by an independent valuation of the PharmaGenics business, based on
comparable technologies. GMO charged the amount allocated to in-process
technology to operations in June 1997, the period in which the acquisition was
completed.
4
<PAGE> 5
GENZYME MOLECULAR ONCOLOGY (CONT.)
RESULTS OF OPERATIONS
From the Date of Inception, research and development functions with respect
to development programs which have been attributed to GMO have been provided
solely by Genzyme General. In accordance with Genzyme's management and
accounting policies, expenses for research and development performed by Genzyme
General for GMO are charged to GMO on a cost basis. Genzyme's corporate and
general and administrative expenses or other indirect costs are allocated to GMO
in a reasonable and consistent manner based on utilization by GMO of the
services to which such costs relate. Management believes that such allocation is
a reasonable estimate of such expenses.
1997 COMPARED TO 1996
REVENUES.
GMO recorded $0.8 million total revenue in 1997 as compared to no revenue in
1996. GMO recorded service revenue of $0.5 million which consists of the sale of
SAGE(TM) differential gene expression technology ("SAGE(TM)") services. GMO also
recorded research and development revenue of $0.3 million, which consists of
work performed for the joint venture with StressGen Biotechnologies Corporation
("StressGen/Genzyme LLC").
MARGINS AND OPERATING EXPENSES.
GMO's cost of revenues in 1997 was $0.3 million, and consisted of work
performed on behalf of StressGen/Genzyme LLC.
In 1997, GMO incurred $2.1 million of selling, general and administrative
("SG&A") expenses, compared to $0.2 million in 1996. The increase is due to
increased administrative support corresponding to the growth of GMO's business
following the acquisition of PharmaGenics.
Research and development costs in 1997 increased to $5.3 million from $0.8
million in 1996. The increase in research and development costs relate to
increases in research personnel and related expenses pertaining to GMO's
SAGE(TM) and gene therapy programs.
Amortization expenses of $5.1 million in 1997 were attributable to the
PharmaGenics acquisition which was effective on June 18, 1997. There were no
similar amounts in 1996.
GMO recorded a $7.0 million charge as part of the acquisition of PharmaGenics
for the purchase of in-process technology that has no alternative future use.
OTHER INCOME AND EXPENSES.
Interest income and interest expense were $0.4 million and $1.7 million,
respectively in 1997. There were no similar amounts in 1996. The interest income
results from higher average cash balances due to the issuance of convertible
debentures in August 1997 (the "GMO Debentures"). The interest expense is
interest and related amortization of discount on the GMO Debentures.
On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture among
Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian Medical
Discoveries Fund ("CMDF") to develop stress gene therapies for the treatment of
cancer. GMO recorded an equity in net loss of the joint venture of $0.3 million
in 1997.
GMO recorded a tax benefit of $1.1 million during 1997. There was no similar
amount in 1996. The tax benefit results from amortization of the deferred tax
liability established upon the acquisition of PharmaGenics as described in the
introduction to this section.
1996 AS COMPARED TO 1995
No revenues were earned by GMO from the date of inception through
December 31, 1996. Research and development expenses for 1996 increased to $0.8
million from $0.4 million or 117% in comparison to 1995 due primarily to
increased cancer research efforts. These efforts related to GMO's drug discovery
programs, GMO's internal gene therapy programs and activities related to GMO's
collaboration with the Imperial Cancer Research Technology Limited to develop
cancer gene therapies, which commenced in January 1996, and GMO's Collaborative
Research and Development Agreement with the National Cancer Institute to develop
treatments for metastatic melanoma.
SG&A expenses increased $98,000 to $185,000 or 113% primarily due to increased
administrative support corresponding to the growth in GMO's programs.
5
<PAGE> 6
GENZYME MOLECULAR ONCOLOGY (CONT.)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, GMO had cash, cash equivalents and short-term
investments of $20.2 million. In 1997, GMO used $4.0 million for operations and
$7.2 million for investing activities. In the year ended December 31, 1997,
investing activities used $6.1 million for the purchases of short-term
marketable securities and long-term investments. Financing activities for the
year ended December 31, 1997 provided $26.2 million of cash, of which $19.2
million was the net proceeds from the issuance of the GMO Debentures, $5.0
million was allocated to GMO from Genzyme General under the revolving credit
facility, and $1.4 million was Genzyme General's investment in GMO. Of the $19.2
million in proceeds from the GMO Debentures, GMO recorded $16.5 million of
proceeds attributed to the value of the debt, $3.5 million attributed to the
value of the conversion feature (recorded as an increase to division equity),
net of $0.9 million of underwriter's fees associated with the issuance of the
debt. The debt will be accreted to its $20.0 million face value by a charge to
interest expense of $3.5 million over the term of the initial 15 month
conversion period.
GMO has recorded $2.4 million of accrued expenses as of December 31, 1997, which
consist primarily of costs related to the PharmaGenics merger. Deferred revenue
of $1.6 million represents contract execution payments received from
collaborators which are to be recognized as revenues in future periods.
Management of GMO currently believes that the existing cash balances and
revenues generated from SAGE[TM] agreements and committed research funding from
collaborators will enable GMO to maintain its current and planned operations
through the end of 1999. Substantial additional funds will be required to
complete development and commercialization of GMO's products and services (other
than SAGE[TM] services). In addition, GMO's cash requirements may vary
materially from those now planned as a result of numerous factors, including
progress of GMO's research and development programs, achievement of milestones
under strategic alliance arrangements, the ability of GMO to establish and
maintain additional strategic alliances and licensing arrangements, the progress
of development efforts of GMO's strategic partners, competing technological and
market developments, the costs involved in enforcing patent claims and other
intellectual property rights and the cost of timing and regulatory approvals.
Insufficient funds may require GMO to delay, scale back or eliminate certain of
its programs or to license third parties to commercialize technologies or
products that GMO would otherwise undertake itself. Such actions may adversely
affect the potential market value of GMO Stock.
GMO is expected to experience significant operating losses at least through
fiscal year 2001 as its research and development and clinical trial programs
expand. There can be no assurance that GMO will ever achieve a profitable level
of operations or that profitability, if achieved, can be sustained on an ongoing
basis. In addition, Genzyme's management and accounting policies provide that to
the extent GMO is unable to utilize its operating losses or other projected tax
benefits to reduce its current or deferred income tax expense, such losses or
benefits may be reallocated to another division on a quarterly basis.
Accordingly, although the actual payment of taxes is a corporate liability of
Genzyme as a whole, separate financial statements will be prepared for each
division and any losses that cannot be utilized by GMO will not be carried
forward to reduce the taxes allocable to GMO's earnings in the future. This
could result in GMO being charged a greater portion of the total corporate tax
liability and reporting lower earnings available to GMO stockholders in the
future than would have been the case if GMO had retained its losses or other
benefits in the form of a net operating loss carryforward.
For a discussion of the demands, commitments and events that may affect the
liquidity and capital resources of Genzyme Corporation, including GMO, see
Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations - Liquidity and Capital Resources,
included in this Annual Report.
For a discussion of the new accounting pronouncements and Year 2000 impact, see
Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations - New Accounting Pronouncements,
Year 2000 and Financial Reporting Release No. 48 ("FRR 48") included in this
Annual Report.
6
<PAGE> 7
GENZYME MOLECULAR ONCOLOGY (CONT.)
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of GMO could differ materially from the results
described above due to the risks and uncertainties described below and under the
heading "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations - Factors Affecting
Future Operating Results" included in this Annual Report.
EARLY STAGE OF PRODUCT DEVELOPMENT. GMO's products and services, other than
SAGE(TM) services, are at an early stage of development and will require, at
substantial expense, additional research, development, preclinical and clinical
testing and regulatory approval prior to commercialization. Revenues to date
from SAGE(TM) services have been nominal. GMO does not expect to generate
significant revenue from any additional commercial products or services for
several years.
GMO's gene therapy products for melanoma are its only therapeutic products that
are currently in clinical trials. Although preliminary results from these trials
are encouraging, such results are not necessarily indicative of results that
will be obtained in subsequent or more extensive clinical testing. There can be
no assurance that GMO will not encounter problems in clinical trials that will
cause it to delay or suspend clinical trials or that such clinical testing, if
completed, will ultimately show any of GMO's products to be safe and
efficacious. In addition, gene therapy is a theoretically promising therapeutic
approach that has many technical obstacles to be overcome. No gene therapy
products have been approved to date for sale in the U.S. or internationally.
GMO OPERATING LOSSES; LACK OF REVENUES. GMO's revenues from SAGE[TM] services
have been nominal to date and all of its other revenues have resulted from
payments by strategic partners. GMO does not expect that its revenues will be
sufficient to support its operations and ongoing product and service development
programs. In addition, because all of GMO's potential therapeutic products will
require significant additional research, development, and preclinical and
clinical testing prior to commercialization, it may be several years, if ever,
before GMO recognizes revenue from sales or royalties on these products or
services. Accordingly, GMO is expected to experience significant operating
losses for at least the next several years and there can be no assurance that
GMO will ever achieve a profitable level of operations or that profitability, if
achieved, can be sustained on an ongoing basis.
COMPETITION. Competition in the field of cancer therapeutics and diagnostics is
intense. Competitors in the U.S. and elsewhere are numerous and include major
pharmaceutical, chemical and biotechnology companies, many of which have
substantially greater capital resources, marketing experience, research and
development staffs and facilities than GMO. These companies may succeed in
developing products and services that are more effective than any that have been
or may be developed by GMO and may also be more successful than GMO in producing
and marketing these products and services. In addition, other companies provide
genomics services that are competitive with SAGE[TM].
RELIANCE ON COLLABORATORS. GMO's strategy to develop and commercialize certain
of its products and services entails entering into various arrangements with
both academic collaborators and corporate partners and licensees. GMO will be
dependent on the subsequent success of these parties in performing research,
preclinical and clinical testing and marketing. These arrangements may require
GMO to transfer certain material rights to such corporate partners and
licensees. While GMO believes its collaborators and licensees will have an
economic motivation to succeed in performing their contractual responsibilities,
in some cases the amount and timing of resources to be devoted to their
collaboration with GMO, and the ability to terminate the collaboration, will be
controlled by the collaborators. Consequently, there can be no assurance that
any revenues or profits will be derived from such arrangements, that any of
GMO's current strategic alliances will be continued or not terminated early or
that GMO will be able to enter into future collaborations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. Several
patents have recently issued that may affect GMO's business. The first is a U.S.
patent issued to an academic institution that purports to cover the use of any
recombinant viral vector in gene therapy, including adenoviral vectors. Based on
public statements by the academic institution, GMO understands that the
institution intends to make non-exclusive licenses under this patent widely
available. In addition, the U.S. and European patent offices have recently
issued patents to a third party relating to the use of cationic liposomes to
deliver a gene to a target organ. The method claimed under these patents
involves the selection of a site of administration proximal to the target organ.
Since GMO seeks to optimize the systemic delivery advantages of cationic lipid
delivery of genes at sites distant from the site of administration, it is not
clear whether this technology will be necessary in GMO's gene therapy products.
In addition, a third party has invited Genzyme to enter negotiations to license
an issued European patent and claims in a U.S. patent application that relate to
the collection and analysis of gene expression data from chemically exposed
mammalian, plant and yeast cells. GMO is in the process of evaluating the scope
and validity of each of these patents to determine whether obtaining licenses to
these patents is necessary.
Among the genes licensed by GMO from The Johns Hopkins University School of
Medicine ("JHU") is p53, which is the subject of a pending patent application.
GMO is aware of third party patent applications and issued patents directed to
p53 gene therapy, as well as to general methods for delivering genes
therapeutically, including for the treatment of cancer (the "Additional Gene
Therapy Patents"). In the U.S., GMO believes that the U.S. Patent and Trademark
Office (the "PTO") will declare a patent interference between certain of the
Additional Gene Therapy Patents and the p53 patent application licensed to it
from JHU and sublicensed to Genetic Therapy, Inc. ("GTI"). There can be no
assurance, however, that the PTO will institute the interference or that JHU
would prevail in such a proceeding. Claims to p53 gene therapy have been granted
to a third party in Europe as well. GMO is participating in an opposition to
these claims. Notwithstanding the issuance of the third party patent, the
European patent office has indicated to JHU that its claims to p53 gene therapy
are patentable. Revisions to the claims are being made to place the European
patent application in form for grant. There can be no assurance that JHU will
ultimately obtain the patent rights to p53 gene therapy in either the U.S. or
Europe.
GMO has a right of first negotiation to exclusively license the rights to
inventions made by the National Cancer Institute ("NCI") regarding the tumor
antigens MART-1 and gp100 under its collaborative research and development
agreement. In addition, GMO may negotiate for pre-existing rights to MART-1 and
gp100 held by the NCI. GMO also has a right of first negotiation to exclusively
license the rights held by the Dana Farber Cancer Institute regarding certain
dendritic cell fusion technology. With respect to the MART-1 gene, GMO is aware
of a U.S. patent issued to a third party, which appears to cover the MART-1
gene. GMO is continuing to evaluate this patent and is in discussions with the
patent holder regarding a license to the MART-1 gene. With respect to the gp100
gene, GMO is aware of two published PCT applications by two different third
party applicants that appear to cover the gp100 gene. There can be no
assurance, therefore, that the NCI will ultimately obtain the patent rights to
gp100. GMO may need to obtain licenses from both the NCI and others in order to
commercialize immunotherapy products based on MART-1 and gp100.
Genzyme has also licensed the adenomatous polyposis coli ("APC") gene, for
which a patent was issued in 1994, from JHU. A patent has been issued to a
third party that purports to cover a probe residing in a specified chromosomal
area linked to the APC gene. A license to such patent may be required if GMO
decides to pursue APC diagnostic testing.
If GMO determines that obtaining licenses to any patents, including those
discussed above, is necessary, there can be no assurance that such licenses
would be available on commercially reasonable terms, if at all.
GMO and Hoffman La-Roche, Inc. ("Roche") have also licensed a number of patents
and pending patent applications from JHU covering various cancer-related genes.
While the licenses from JHU are exclusive as to all rights that JHU possesses,
some of the genes licensed from JHU are covered by patent applications that are
co-owned with entities from which GMO has not obtained a license. Because many
foreign jurisdictions do not accept license grants as valid unless all owners
of the licensed technology consent to the grant, such jurisdictions may not
recognize the validity of JHU's license to GMO. No assurance can be given that
such consents will be obtained. Unless and until such consents are obtained,
GMO's rights to practice the pertinent inventions in foreign countries remain
unclear and could adversely affect GMO's activities in those countries.
Genzyme has been assigned the patent rights to the SPHERE screening technology
from the inventor. A third party has notified Genzyme, however, that it
believes that the inventor did not have the authority to assign the SPHERE
technology to Genzyme. Genzyme is currently investigating this matter.
NO PUBLIC MARKET FOR GMO STOCK. Currently there is no public market for GMO
Stock, and there can be no assurance that a regular trading market for GMO Stock
will develop.
7
<PAGE> 8
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $15,010 $ -
Short-term investments.................................. 5,170 -
Other................................................... 688 -
------- -------
Total current assets............................... 20,868 -
Equipment, net........................................... 487 -
Long-term investments.................................... 1,049 -
Intangibles, net......................................... 30,688 -
Investment in joint venture.............................. 574 -
Other.................................................... 135 -
------- -------
Total assets....................................... $53,801 $ -
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses........................................ $ 2,422 $ -
Due to Genzyme General.................................. 5,434 -
Deferred revenue........................................ 1,583 -
Other current liabilities............................... 18 -
------- -------
Total current liabilities........................... 9,457 -
Noncurrent liabilities:
Long-term debt.......................................... 5,000 -
Convertible debentures, net............................. 16,617 -
Note payable to Genzyme General......................... 2,582 -
Deferred tax liability.................................. 6,509
Other noncurrent liabilities............................ 170 -
------- -------
Total liabilities.................................. 40,335 -
Commitments and contingencies (See Notes)................
Division equity:
Division equity (Note H)................................ 13,466 -
Parent company investment-Genzyme General............... - 1,504
Accumulated deficit..................................... - (1,504)
------- -------
Total division equity.............................. 13,466 -
------- -------
Total liabilities and division equity.............. $53,801 $ -
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
8
<PAGE> 9
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Service revenue.................................. $ 467 - -
Research and development revenue - related party. 315 - -
---------- -------- -------
782 - -
Operating costs and expenses:
Cost of service revenue.......................... 50 - -
Cost of research and development revenue......... 287 - -
Selling, general and administrative.............. 2,118 $ 185 $ 87
Research and development......................... 5,341 818 377
Amortization of intangibles...................... 5,127 - -
Purchase of in-process technology................ 7,000 - -
---------- -------- -------
Total operating costs and expenses............ 19,923 1,003 464
---------- -------- -------
Operating loss....................................... (19,141) (1,003) (464)
Other income (expenses):
Equity in net loss of joint venture.............. (258) - -
Interest income.................................. 392 - -
Interest expense................................. (1,663) - -
---------- -------- -------
Total other income (expenses)................. (1,529) - -
---------- -------- -------
- -
Loss before income taxes............................. (20,670) (1,003) (464)
Tax benefit.......................................... 1,092 - -
---------- -------- -------
Net loss............................................. (19,578) (1,003) (464)
========== ======== =======
Pro forma per Genzyme Molecular Oncology common share:
Pro forma basic and diluted net loss............. $ (4.98) $ (0.26) $(0.12)
========== ======== ======
Pro forma shares outstanding..................... 3,929 3,929 3,929
========== ======== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
9
<PAGE> 10
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------
1997 1996 1995
-------- ------- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................. $(19,578) $(1,003) $(464)
Reconciliation of net loss to net cash used
by operating activities:
Depreciation and amortization..................... 5,245 - -
Amortization of deferred taxes.................... (1,092) - -
Purchase of in-process technology................. 7,000 - -
Accretion of debt conversion feature.............. 957 - -
Equity in net loss of joint venture............... 258 - -
Accrued interest/amortization of
marketable securities.......................... (141) - -
Non-cash compensation expense..................... 58 - -
Increase (decrease) in cash from working capital,
net of effects of acquired business:
Other current assets and liabilities........... (890) - -
Accrued expenses............................... 556 - -
Deferred revenue............................... 1,583 - -
Due to Genzyme General......................... 2,011 - -
-------- ------- -----
Net cash used by operating activities.......... (4,033) (1,003) (464)
INVESTING ACTIVITIES:
Acquisition of PharmaGenics, Inc., net of acquired cash 9 - -
Investment in joint venture.......................... (724) - -
Purchases of investments............................. (6,086) - -
Purchases of equipment............................... (357) - -
-------- ------- -----
Net cash used by investing activities.......... (7,158) - -
FINANCING ACTIVITIES:
Proceeds from issuance of warrants................... 724 - -
Proceeds from issuance of convertible debentures, net 19,150 - -
Allocation of debt from Genzyme General.............. 5,000 - -
Parent company investment, Genzyme General........... 1,371 1,003 464
Other................................................ (44) - -
-------- ------- -----
Net cash provided by financing activities...... 26,201 1,003 464
Increase in cash and cash equivalents.................... 15,010 - -
Cash and cash equivalents at beginning of period......... - - -
-------- ------- -----
Cash and cash equivalents at end of period............... $ 15,010 $ - $ -
======== ======= =====
Supplemental disclosure of non-cash transaction:
Acquisition of PharmaGenics, Inc. - See Note B.
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
10
<PAGE> 11
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"), a
division of Genzyme Corporation (the "Company" or "Genzyme"), is engaged in the
development and commercialization of novel cancer therapeutics and diagnostics
based on molecular tools and genomics information. GMO's products and services
include a genomics service business based on its SAGE(TM) differential gene
expression technology ("SAGE"), two gene immunotherapy programs currently in
Phase I clinical trials for melanoma, additional gene therapy programs based on
immunotherapy and tumor targeting, a drug discovery program to identify small
molecules that interact with cancer-related targets and diagnostic assay
capabilities. Genzyme formed GMO in June 1997 by acquiring PharmaGenics, Inc.
("PharmaGenics") and combining it with several of its existing programs in the
field of oncology. Operations under the existing Genzyme programs combined to
form GMO commenced December 1, 1994 (the "Date of Inception").
BASIS OF PRESENTATION
The combined financial statements of GMO include the balance sheets, results of
operations and cash flows of Genzyme's molecular oncology operations, which were
part of Genzyme's General Division ("Genzyme General") through June 18, 1997.
GMO's financial statements are prepared using amounts included in Genzyme's
consolidated financial statements. Corporate allocations reflected in these
financial statements are determined based upon methods which management believes
to be reasonable (see Note D., "Related Party Transactions" below). GMO
generated revenue from operations during the third quarter of 1997 and therefore
is no longer considered to be a development stage enterprise for reporting
purposes.
On June 18, 1997, pursuant to an agreement between Genzyme and PharmaGenics,
PharmaGenics merged with and into Genzyme (the "Merger"). Therefore, from June
18, 1997, the results of PharmaGenics are included in GMO's financial
statements. As consideration for the Merger, the stockholders of PharmaGenics
received approximately 3,929,000 shares of Genzyme Molecular Oncology Common
Stock ("GMO Stock"). The GMO Stock is intended to reflect the value and track
the performance of GMO. As compensation to Genzyme General for its contribution
to GMO, 6,000,000 shares of GMO Stock have been reserved for issuance for the
benefit of Genzyme General or its stockholders (these 6,000,000 shares are
referred to as the "GMO Designated Shares") (See Note H., "Division Equity"
below). The Genzyme Board of Directors (the "Genzyme Board") may issue the GMO
Designated Shares as a stock dividend to the holders of Genzyme General Division
Common Stock ("GGD Stock") or it may sell such shares in a public or private
sale and allocate all of the proceeds to Genzyme General. Genzyme's management
and accounting policies require Genzyme to distribute GMO Designated Shares to
holders of GGD Stock on the later of November 30, 1998 or 360 days following
completion of an initial public offering of GMO Stock (the "GMO IPO"), although
the Genzyme Board may elect to distribute these shares at any time but not later
than November 29, 1999.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements reflect the combined accounts of
all of GMO's businesses. All material intradivisional items and transactions
have been eliminated in combination. Investments in joint ventures in which GMO
has a substantial ownership interest of approximately twenty-percent to
fifty-percent, or in which GMO participates in policy decisions are accounted
for using the equity method. Accordingly, GMO's share of the earnings or losses
of these entities is included in combined net income (loss).
11
<PAGE> 12
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INFORMATION
Genzyme will provide to holders of GMO Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for GMO. Notwithstanding the attribution of assets and
liabilities, including contingent liabilities, between Genzyme General, Genzyme
Tissue Repair Division ("GTR") and GMO for the purposes of preparing their
respective financial statements, this attribution will not affect legal title to
such assets or responsibility for such liabilities of Genzyme or any of its
subsidiaries. Holders of GMO Stock, GGD Stock, and Genzyme Tissue Repair
Division Common Stock ("GTR Stock") are common stockholders of Genzyme and
continue to be subject to all risks associated with an investment in Genzyme.
Liabilities or contingencies of Genzyme General, GTR or GMO could affect the
financial condition or results of operations of the other divisions.
Accordingly, the GMO combined financial statements should be read in connection
with Genzyme's consolidated financial statements included in this Annual Report.
Accounting policies and financial information specific to GMO are presented in
these GMO combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, GTR and GMO collectively
are presented in the consolidated financial statements of Genzyme Corporation
and subsidiaries. The Company prepares the financial statements of the division
in accordance with generally accepted accounting principles, the accounting
policies of Genzyme (see Note A., "Summary of Significant Accounting Policies"
to Genzyme's Consolidated Financial Statements (the "Consolidated Financial
Statements") which is incorporated herein by reference), and the divisional
accounting policies approved by the Genzyme Board. Except as otherwise provided
in such policies, the management and accounting policies applicable to the
presentation of the financial statements of GMO may be modified or rescinded at
the sole discretion of the Genzyme Board without approval of the stockholders,
subject only to the Genzyme Board's fiduciary duty to Genzyme's stockholders.
DIVIDEND POLICY
Under the terms of the Genzyme Articles of Organization, as amended, (the
"Genzyme Charter"), dividends may be paid to the holders of GMO Stock only out
of the lesser of funds of Genzyme legally available for the payment of dividends
and the Available GMO Dividend Amount, as defined in the Genzyme Charter.
Although there is no requirement to do so, the Genzyme Board would declare and
pay cash dividends on GMO Stock, if any, based primarily on earnings, financial
condition, cash flow and business requirements of GMO. There is currently no
intention of paying cash dividends.
NET LOSS PER SHARE
Historical loss per share information is omitted as there were no shares of GMO
Stock outstanding prior to June 18, 1997 and pro forma net loss per share is
disclosed for all periods presented. The pro forma shares outstanding represent
the shares of GMO Stock issued to effect the Merger. Following issuance of the
GMO Stock, the method of calculating earnings per share for GMO would reflect
the terms of the Genzyme Charter, which provide that dividends may be declared
and paid out of the lesser of funds of Genzyme legally available for the payment
of dividends and the Available GMO Dividend Amount, as defined.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted net income per share is very
similar to the previously reported fully diluted earnings per share except that
the new treasury stock method used in determining the dilutive effect of options
uses the average market price for the period rather than the higher of the
average market price or the ending market price. All net income (loss) per
common share amounts have been restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
December 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- -------------------------------------------------- ------- ------- -----
Net Loss.......................................... $(19,578) $(1,003) $(464)
Basic and diluted weighted average shares
outstanding.................................... 3,929 3,929 3,929
Pro forma net loss per common share -
basic and diluted............................... $(4.98) $(0.26) $(0.12)
During the year ended December 31, 1997, certain securities which were not
included in the computation of diluted earnings per share because they would
have an anti-dilutive effect due to the net loss for the year were as follows:
(i) options to purchase approximately 826,000 shares of GMO Stock at $7.00 per
share; (ii) warrants to purchase 10,000 shares of GMO Stock at $8.04 per share;
(iii) debentures convertible into 3,476,000 shares of GMO Stock; (iv) 6,000,000
GMO Designated Shares issuable for the benefit of Genzyme General. During the
years ended December 31, 1996 and 1995, there were no securities outstanding to
be considered in this calculation.
12
<PAGE> 13
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Genzyme stockholders have approved amendments to the existing Genzyme 1990
and 1997 Equity Incentive Plans (the "Equity Plans") and the 1988 Director Stock
Option Plan (the "Director Stock Option Plan") that would allow for the issuance
of shares of GMO Stock under such plans, in addition to the GGD Stock and GTR
Stock already included in such plans. The Equity Plans will permit the granting
of options to purchase GMO Stock to employees. GMO has elected the disclosure-
only alternative for accounting for stock-based employee compensation as
required by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). GMO has disclosed pro forma net income (loss) and pro forma earnings per
share information in the footnotes to the combined financial statements using
the fair value based method for 1997, as there were no GMO Stock Options issued
under the above mentioned plan prior to 1997.
13
<PAGE> 14
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE B. PHARMAGENICS MERGER
In June 1997, pursuant to an agreement between Genzyme and PharmaGenics,
PharmaGenics merged with and into Genzyme. This transaction was accounted for as
a purchase. The aggregate purchase price of $27.5 million (net of $0.5 million
which represents the fees payable by PharmaGenics in connection with the Merger,
which are included in accrued expenses), plus acquisition costs of $2.5 million
and assumed liabilities of $5.4 million has been allocated to the acquired
tangible and intangible assets based on their estimated respective fair values
(amounts in thousands):
Equipment..................................................... $ 208
Other assets.................................................. 50
Completed technology rights (to be amortized over 3 years).... 20,000
Goodwill (to be amortized over 3 years)....................... 15,729
Deferred tax liability (to be amortized over 3 years)......... (7,600)
In-process technology......................................... 7,000
-------
$35,387
=======
Accumulated amortization of the completed technology rights and goodwill was
$5,127,000 as of December 31, 1997.
The amount allocated to in-process technology of $7.0 million represents the
value assigned to PharmaGenics's programs which are still in the development
stage and for which there is no alternative use. The value assigned to these
programs (both complete and in-process) has been determined by selecting the
maximum anticipated value of these programs, as provided by an independent
valuation of the PharmaGenics business, based on comparable technologies. The
amount allocated to in-process technology was charged to operations in June
1997, the period in which the Merger was consummated.
The deferred tax liability of $7.6 million results from the temporary difference
between the book and tax basis of the completed technology computed at a 38.0%
incremental tax rate.
As of the date of the Merger, PharmaGenics had borrowed $2.5 million from
Genzyme under a credit facility which Genzyme had made available to PharmaGenics
to fund PharmaGenics' documented operating costs. Upon consummation of the
Merger, the PharmaGenics Note (See Note C., "Credit Facility" below) became a
liability allocated to GMO, and the $2.5 million of outstanding principal is
considered as an intracompany loan by Genzyme General to GMO, bearing interest
at 6.15% per annum and maturing on February 10, 2002 and convertible at any time
prior thereto, at the Genzyme Board's option, into GMO Designated Shares. The
number of GMO Designated Shares resulting from any conversion of the
PharmaGenics Note will be determined by dividing the principal and interest
being converted by the conversion price (the "GMO Conversion Price") in effect
on the date of conversion. The initial GMO Conversion Price will be determined
upon the closing of a GMO IPO in which the aggregate gross proceeds to GMO equal
or exceed $10.0 million (an "Offering"), and will be equal to (i) the per share
price of the GMO Stock sold in the Offering or, if GMO Stock is not sold in the
Offering, (ii) the initial conversion price of the security convertible into GMO
Stock that is sold in the Offering, provided that if any portion of the
PharmaGenics Note is converted prior to an Offering, the initial GMO Conversion
Price is $7.00. The GMO Conversion Price is subject to adjustment upon
declaration of any stock dividend or upon completion of any subdivision or
combination of the GMO Stock.
14
<PAGE> 15
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE B. PHARMAGENICS MERGER (CONTINUED)
If the acquisition had taken place at the beginning of 1996, after giving effect
for adjustments for increased amortization, increased interest expense, the tax
benefit from the amortization of the deferred tax liability and the one time
charge for in-process technology, the pro forma revenues, net loss and net loss
per share for GMO would have been as follows. This pro forma information does
not purport to be indicative of what would have occurred had the acquisition
been made as of those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts) Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Pro forma revenues................................. $ 857 $ 1,418
Pro forma net loss................................. $(26,091) $(15,113)
Pro forma basic and diluted net loss per share..... $ (6.64) $ (3.85)
Pro forma weighted average shares outstanding...... 3,929 3,929
</TABLE>
In connection with the PharmaGenics merger, a warrant to purchase certain shares
of PharmaGenics Series A Stock was converted to a warrant to purchase
approximately 10,000 shares of GMO Stock (the "Comdisco Warrant") at $8.04 per
share.
NOTE C. CREDIT FACILITY
Genzyme had made a credit facility (the "Credit Facility") available to
PharmaGenics to fund PharmaGenics documented operating costs through June 18,
1997 (date of acquisition). Monthly draws against the Credit Facility could be
made, up to a maximum amount during December 1996, January 1997, February 1997,
March 1997, April 1997 and May 1997 of $250,000, $750,000, $650,000, $450,000,
$550,000 and $550,000, respectively. Amounts not drawn by PharmaGenics in a
designated month were available to cover documented expenses in any later month
(subject to limitations described below). The maximum amount of monthly draws
was subject to downward adjustment based on the amount of the gross revenues
received by PharmaGenics in the prior month. An additional draw of $250,000
could be made under the Credit Facility if the SAGE patent licensed by
PharmaGenics to Johns Hopkins University ("JHU") was issued while the Credit
Facility was in effect, provided, however, that such draw was used by
PharmaGenics to fulfill its obligation to JHU. As of June 18, 1997, PharmaGenics
had drawn $2,450,000. The amount outstanding under this credit facility,
including accrued interest, at December 31, 1997 is $2,582,000.
Amounts advanced under the Credit Facility are evidenced by a Subordinate
Convertible Promissory Note which bears interest subsequent to June 18, 1997 at
the best borrowing rate available to Genzyme, 6.15% per annum as of December 31,
1997, and matures on February 10, 2002 (the "Maturity Date"). The Note is a
liability allocated to GMO, the outstanding principal amount has been treated as
an intracompany loan by Genzyme General to GMO, due on the Maturity Date and
convertible at any time prior thereto, at the Genzyme Board's option, into GMO
Designated Shares pursuant to an established formula.
NOTE D. RELATED PARTY TRANSACTIONS
Genzyme allocates certain corporate general and administrative, research and
development, and cash management services to the divisions. Genzyme files a
consolidated tax return and allocates income taxes to the divisions in
accordance with the policies described below. Effective upon completion of the
Merger, the Genzyme Board amended certain of the policies which govern the
management of Genzyme General and GTR to include the management of GMO and added
certain new policies governing interdivision transactions. The policies
summarized below, with the exception of Interdivision Asset Transfers, may be
further modified or rescinded by action of the Genzyme Board, or the Genzyme
Board may adopt additional policies, without approval of the stockholders of
Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme
stockholders. In addition, generally accepted accounting principles require that
any change in policy be preferable (in accordance with such principles) to the
previous policy.
15
<PAGE> 16
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE D. RELATED PARTY TRANSACTIONS (CONTINUED)
FINANCIAL MATTERS
The Company manages the financial activities of Genzyme General, GTR and GMO.
These financial activities include the investment of surplus cash, the issuance,
repayment and repurchase of short-term and long-term debt, and the issuance and
repurchase of common stock.
Loans may be made from time to time between divisions. Any such loan of $1.0
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1.0 million will require approval of
the Genzyme Board, which approval shall include a determination by the Genzyme
Board that the material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating division and to
holders of the common stock representing such division. To date, GMO has
borrowed $2,582,000 from Genzyme General (See Note C., "Credit Facility" above).
SHARED SERVICES
GMO operates as a division of Genzyme with its own personnel and financial
resources, however, GMO has access to Genzyme's extensive research and
development capabilities, manufacturing facilities, and worldwide clinical
development and regulatory affairs staff, marketing, infrastructure and
experience in raising capital. Genzyme's corporate general and
administrative, selling and marketing, and research and development expenses
have been allocated to GMO as if GMO operated on a stand-alone basis. Management
believes that such allocation is a reasonable estimate of such expenses. Genzyme
General allocations to GMO for general and administrative and selling and
marketing expenses were $2.1 million in 1997, $0.2 million in 1996, and $0.1
million in 1995. Genzyme General allocations to GMO for research and development
expenses were $5.3 million in 1997, $0.8 million in 1996, and $0.4 million in
1995.
INTERDIVISIONAL INCOME TAX ALLOCATIONS
GMO is included in the consolidated U.S. federal income tax return filed by
Genzyme. Genzyme allocates current and deferred taxes to the divisions using the
asset and liability method of accounting for income taxes and as if the
divisions were separate taxpayers. Accordingly, the realizability of deferred
tax assets is assessed at the division level. The sum of the amounts calculated
for individual divisions of Genzyme may not equal the consolidated amount under
this approach.
The accounting policies provide that, as of the end of any fiscal quarter of
Genzyme, any projected annual tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be attributed to any other division without any
compensating payment or allocation. The treatment of such allocation for
purposes of earnings per share computation is discussed in Note A., "Summary of
Significant Accounting Policies -- Net Income (Loss) Per Share" to the
Consolidated Financial Statements which is incorporated herein by reference.
ACCESS TO TECHNOLOGY AND KNOW-HOW
GMO has free access to all technology and know-how of Genzyme that may prove
useful in GMO's business, subject to any obligations or limitations applicable
to Genzyme.
16
<PAGE> 17
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE D. RELATED PARTY TRANSACTIONS (CONTINUED)
INTERDIVISION ASSET TRANSFERS
The following policy regarding the transfer of assets between divisions may not
be changed by the Genzyme Board without the approval of the holders of GTR Stock
and GMO Stock, each voting as a separate class; provided, however, that if a
policy change affects GTR or GMO alone, only holders of shares representing the
affected division will be entitled to a class vote on such matter.
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program, the
likelihood and timing of any such realization and other matters that the Genzyme
Board and its financial advisors, if any, deem relevant. The consideration for
such reallocation may be paid by one division to another in cash or other
consideration with a value equal to the fair market value of the assets being
reallocated or, in the case of a reallocation of assets from GGD to GMO, the
Genzyme Board may elect to account for such reallocation of assets as an
increase in GMO Designated Shares. Notwithstanding the foregoing, no Key GMO
Program, as defined in the management and accounting policies, may be
transferred out of GMO without a class vote of the holders of GMO Stock.
OTHER INTERDIVISION TRANSACTIONS
From time to time, a division may engage in transactions with one or more other
divisions or jointly with one or more other divisions and with one or more third
parties. Such transactions may include agreements by one division to provide
products and services for use by another division and joint ventures or other
collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Research and development
performed by one division for the benefit of another division will be charged to
the division for which work is performed on a cost basis. The division
performing the research will not recognize revenue as a result of performing
such research. Corporate and general and administrative services will be
provided by each division to any other division requesting such services on a
cost basis. Other interdivisional transactions shall be on terms and conditions
that would be obtainable in transactions negotiated at arm's length with
unaffiliated third parties. Any interdivisional transaction to be performed on
terms and conditions other than those previously set forth and that is material
to one or more of the participating divisions will require the approval of the
Genzyme Board, which approval shall include a determination by the Genzyme Board
that the transaction is fair and reasonable to each participating division and
to holders of the common stock representing each such division.
If a division (the "purchasing division") requires any product or service from
which another division (the "selling division") derives revenue from sales to
third parties (a "commercial product or service"), the purchasing division may
solicit from the selling division a bid to provide such commercial product or
service in addition to any bids solicited by the purchasing division from third
parties. Subject to determination by the Genzyme Board that the bid of the
selling division is fair and reasonable to each division and to their respective
stockholders and that the purchasing division is willing to accept the selling
division's bid, the purchasing division may accept any bid deemed to offer the
most favorable terms and conditions for providing the commercial product or
service sought by the purchasing division.
17
<PAGE> 18
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE E. REVOLVING CREDIT FACILITY
Genzyme has a revolving credit facility (the "Revolving Credit Facility") with a
syndicate of commercial banks administered by Fleet National Bank in the amount
of $225.0 million. Amounts drawn under the facility may be allocated among
Genzyme General, GTR or GMO and are due in November 1999. As of December 31,
1997, GMO had $5.0 million of debt outstanding under the Revolving Credit
Facility. GMO incurred $160,000 of interest expense related to this credit
facility. (See Note J., "Long-term Debt And Leases" to the Consolidated
Financial Statements which is incorporated herein by reference).
NOTE F. GMO PRIVATE PLACEMENT
In August 1997, GMO raised $20.0 million through the private placement of 6%
convertible debentures (the "GMO Debentures"), due August 29, 2002. The GMO
Debentures are convertible into shares of GMO Stock, at the option of the
holders, beginning on the 91st day after the effective date of a registration
statement covering a GMO IPO at the average of the closing bid prices of GMO
Stock as reported by the Nasdaq National Market for the 20 trading days
immediately preceding the applicable conversion date (the "GMO Market Price").
Beginning February 26, 1998, the GMO Debentures are convertible at a discount to
the GMO Market Price. This discount will begin at 7% on February 26, 1998 and
will increase by an additional one percent every 30 days thereafter to 15% on
October 24, 1998. Beginning November 23, 1998, the conversion price will be the
lower of (i) 85% of the GMO Market Price calculated as of the actual conversion
date and (ii) 85% of the GMO Market Price calculated as of November 21, 1998. In
no event, however, will the conversion price be less than $7.70 per share
(subject to adjustment in the event of any stock split, stock dividend,
reclassification, combination or singular event.) In the third quarter of 1997,
GMO recorded $16.5 million of proceeds attributed to the value of the debt and
$3.5 million attributed to the value of the conversion feature (recorded as an
increase to division equity). The debt will be accreted to its $20.0 million
face value by a charge to interest expense of $3.5 million over the term of the
initial 15 month conversion period. During the year ended December 31, 1997, GMO
incurred $407,000 of interest expense related to the GMO Debentures.
EXCHANGE OPTION
If the effective date of the GMO IPO does not occur before August 29, 1998, at
the holder's option, the GMO Debentures may be exchanged for a 5% convertible
debenture issued by Genzyme General (the "GGD Debentures") due August 29, 2003.
If the GMO IPO is completed before August 29, 1998 but the aggregate proceeds
from the offering are less than $15.0 million or GMO's market capitalization is
below $90.0 million, at the holder's option, 50% of the GMO Debentures can be
exchanged for the GGD Debentures. The exchange option must be exercised within
30 business days of the event triggering the right of exchange.
PUT OPTION
Beginning on the 181st day following the effective date of the GMO IPO, the
holders of the GMO Debentures have the option (the "Put Option") to require
Genzyme to pay the entire principal amount of the GMO Debentures in cash,
together with interest at the rate of 15% per annum (less any interest
previously paid) if the conversion price (as calculated above) is less than
$7.70 per share for 90 consecutive days (a "Put Option Review Period"). The Put
Option is exercisable only with respect to the first three Put Option Review
Periods that occur while the GMO Debentures are outstanding and, if the Put
Option is not exceeded within 15 days after any Put Option Review Period, a
period of 90 days from the last day of the previous Put Option Review Period
must elapse before another Put Option Review Period commences.
GMO CALL OPTION
The GMO Debentures are callable with cash or stock beginning 18 months after the
effective date of the GMO IPO if the stock has closed at 150% of the fixed
conversion price for 20 consecutive trading days.
18
<PAGE> 19
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE G. STRESSGEN/GENZYME LLC
The disclosures relating to Stressgen/Genzyme LLC are included in Note H.,
"Investments" to the Consolidated Financial Statements which is incorporated
herein by reference.
GMO recorded $315,000 and $287,000 of research and development revenue and cost
of research and development revenue, respectively, related to services billed to
StressGen/Genzyme LLC for the year ended December 31, 1997. GMO has a receivable
of $427,000 from StressGen/Genzyme LLC at December 31, 1997, which is included
in other current assets. For the year ended December 31, 1997, GMO recorded
$258,000 of equity in net loss of joint venture. Summary financial information
for StressGen/Genzyme LLC is not presented as the impact of StressGen/Genzyme
LLC's activities on the Company's statement of operations for the year ended
December 31, 1997 is not considered to be material.
NOTE H. DIVISION EQUITY
The following presents the equity of GMO for the periods presented. The
presentation of Division Equity reflects the amounts expended by Genzyme on
programs being attributed to GMO and, accordingly, such amounts are reflected as
a parent company investment.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Balance at beginning of period................. $ - $ - $ -
Net loss....................................... (19,578) (1,003) (464)
Allocation from Genzyme General................ 1,371 1,003 464
Shares issued in connection with acquisition
of PharmaGenics............................... 27,369 - -
Issuance of warrants and options............... 899 - -
Unearned compensation.......................... (117) - -
Value of debt conversion feature............... 3,529 - -
Unrealized gain (loss) on investments.......... (7) - -
-------- ------- ------
Balance at end of period..................... $ 13,466 $ - $ -
======== ======= ======
</TABLE>
There are 40,000,000 shares of GMO Stock authorized. Of the authorized shares,
3,928,572 million were issued to effect the Merger (see Note B., "PharmaGenics
Merger" above). In addition, 6,000,000 GMO Designated Shares were created as a
result of the Merger.
PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLAN, STOCK RIGHTS, STOCK
OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, STOCK COMPENSATION PLAN AND GMO
DESIGNATED SHARES. The disclosures relating to Genzyme's Preferred Stock,
Directors' Deferred Compensation Plan, Stock Rights, Employee Stock Purchase
Plan, and Stock Compensation Plan, are included in Note K., "Stockholder's
Equity" to the Consolidated Financial Statements which is incorporated herein by
reference.
Pursuant to Genzyme's charter, as amended, GMO Designated Shares are authorized
shares of GMO Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or
distribution to GMO. GMO Designated Shares are created in certain circumstances
when cash or other assets are transferred from Genzyme General to GMO.
As of December 31, 1997 GMO had 6,000,000 Designated Shares reserved for
issuance. There have been no issuances of GMO Designated Shares to date.
Further disclosures relating to Genzyme Stock Options and GMO Designated Shares
are included in Note K., "Stockholders' Equity" to the Consolidated Financial
Statements which is incorporated herein by reference.
19
<PAGE> 20
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE H. DIVISION EQUITY (CONTINUED)
STOCK COMPENSATION PLAN
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its four stock-based compensation plans, the
1997 Equity Incentive Plan and the 1990 Equity Incentive Plan (both of which are
stock option plans), the 1990 Employee Stock Purchase Plan (a stock purchase
plan), and the 1988 Director Stock Option Plan and accordingly, no compensation
expense has been recognized for options granted and shares purchased under the
provisions of these plans for options granted with an exercise price equal to
fair market value. Had compensation expense for the stock-based compensation
plans been determined based on the fair value at the grant dates for options
granted and shares purchased under the plans consistent with the method of SFAS
123, GMO's net loss and loss per share would have been as follows (disclosure is
presented exclusively for the year ended December 31, 1997, as there were no GMO
Stock options issued under the above mentioned plans prior to 1997):
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
- -----------------------------------------------------------------------------
1997
-------------
<S> <C>
Net loss:
As reported........................................... $(19,578)
Pro forma............................................. (19,787)
Basic loss per share:
As reported........................................... (4.98)
Pro forma............................................. (5.04)
Diluted loss per share:
As reported........................................... (4.98)
Pro forma............................................. (5.04)
</TABLE>
For assumptions used in the SFAS 123 calculations for GMO for the three years
ended December 31, 1997, 1996 and 1995 -- see Note K., "Stockholders Equity" to
the Consolidated Financial Statements which is incorporated herein by
reference.
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects of reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995 and additional awards are
anticipated in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
GMO has assumed a risk-free interest rate equal to approximately 5.96%, expected
volatility of 45%, zero dividend yields and expected lives of four years. The
average fair value of the options granted during 1997 is estimated at $7.00 on
the date of the grant.
20
<PAGE> 21
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE I. INCOME TAXES
There was no provision for income taxes due to GMO's operating losses. As part
of the Merger, GMO recorded a deferred tax liability of $7.6 million resulting
from the difference between the book and tax basis of the completed technology
computed at a 38% incremental tax rate. This amount will be amortized over three
years consistent with the life of the completed technology. GMO recorded
$1,092,000 of deferred tax benefit for the year ended December 31, 1997.
The following summarizes GMO's provision for (benefit from) income taxes for
the year ended December 31, 1997:
(DOLLARS IN THOUSANDS)
- -------------------------------------
Federal income taxes:
Current............................ $ -
Deferred........................... (1,006)
State income taxes:
Current............................ -
Deferred........................... (86)
-------
Total income tax benefit............. $(1,092)
=======
The differences between the effective tax rates and the U.S. federal statutory
tax rates for the year ended December 31, 1997 were as follows:
U.S. Federal income tax statutory rate................. (35.0)%
State income taxes, net of federal benefit............. (3.0)
Tax credits............................................ (2.4)
Nondeductible amortization............................. 6.4
Nondeductible interest ................................ 2.7
Deductions subject to deferred tax valuation allowance. 22.4
-----
Effective tax rate..................................... (8.9)%
=====
At December 31, 1997 and 1996, the components of deferred tax assets and
liabilities were as follows (in thousands):
1997 1996
------- -----
Deferred tax assets:
Net operating loss carryforwards......... $ 5,250 $ 572
Tax credits.............................. 459 -
------- -----
Gross deferred tax asset................. 5,709 572
Valuation allowance...................... (5,709) (572)
------- -----
Net deferred tax asset................... $ - $ -
Deferred tax liabilities:
Intangible amortization.................. (6,509) -
------- -----
Net deferred tax liabilities............. $(6,509) $ -
======= =====
Due to uncertainty surrounding the realization of certain favorable tax
attributes, GMO placed a valuation allowance of $5.7 million for December 31,
1997 against otherwise recognizable deferred tax assets. At the time GMO
recognizes these tax assets in accordance with generally accepted accounting
principles, the resulting deferred tax benefits will be reflected in the tax
provision for GMO. However, the benefit of these deferred tax assets has been
previously allocated to Genzyme General in accordance with the management and
accounting policies, and will be reflected as a reduction of GMO net income to
determine net income attributable to GMO Stock.
NOTE J. BENEFIT PLANS
For discussion on the Company's benefit plans, see Note O., "Benefit Plans" to
the Consolidated Financial Statements which is incorporated herein by
reference.
21
<PAGE> 22
GENZYME MOLECULAR ONCOLOGY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying combined balance sheets of Genzyme Molecular
Oncology (as described in Note A) as of December 31, 1997 and 1996, the related
combined statements of operations and cash flows for each of the three years in
the period ended December 31, 1997. The combined financial statements are the
responsibility of Genzyme Corporation's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme Molecular Oncology
present fairly, in all material respects, the financial position of Genzyme
Molecular Oncology as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As more fully described in Note A to these financial statements, Genzyme
Molecular Oncology is a business group of Genzyme Corporation; accordingly, the
combined financial statements of Genzyme Molecular Oncology should be read in
conjunction with the audited consolidated financial statements of Genzyme
Corporation and Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
22
<PAGE> 1
Exhibit 21
JURISDICTION OF
NAME DIRECT PARENT OWNERSHIP INCORPORATION
- ---- ------------- --------- -------------
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation II
Deknatel Snowden Genzyme Corporation 100% Delaware
Pencer, Inc.
Genzyme B.V. Genzyme Corporation 100% Netherlands
Genzyme GmbH Genzyme B.V. 100% Germany
Genzyme Finance S.A. Genzyme B.V. 100% France
Genzyme Limited Genzyme Corporation 100% U.K.
Genzyme Securities Genzyme Corporation 100% Massachusetts
Corporation
Genzyme Transgenics Genzyme Corporation 43% Massachusetts
Corporation
Genzyme Virotech GmbH Genzyme Corporation 100% Germany
<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, 333-33249, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005,
333-33251, 33-22464, 33-29440, 33-51416, 33-68186, 33-58353, 33-58355, 33-60435,
333-33291, 33-21241) and on Form S-3 (File Nos. 33-61853, 333-15597, 333-24361)
of our reports, dated February 27, 1998 on our audits of the consolidated
financial statements and financial statement schedule of Genzyme Corporation,
the combined financial statements and financial statement schedule of Genzyme
General Division, the combined financial statements and financial statement
schedule of Genzyme Tissue Repair Division and the combined financial statements
of Genzyme Molecular Oncology Division as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, which reports are
included in this Annual Report on Form 10-K/A.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
This schedule contains financial information extracted from the Consolidated
Financial Statements of Genzyme Corporation and Subsidiaries and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 102,406
<SECURITIES> 51,259
<RECEIVABLES> 130,377
<ALLOWANCES> 12,100
<INVENTORY> 139,681
<CURRENT-ASSETS> 456,585
<PP&E> 496,727
<DEPRECIATION> 111,379
<TOTAL-ASSETS> 1,295,453
<CURRENT-LIABILITIES> 105,763
<BONDS> 170,276
0
0
<COMMON> 1,015
<OTHER-SE> 1,011,035
<TOTAL-LIABILITY-AND-EQUITY> 1,295,453
<SALES> 529,927
<TOTAL-REVENUES> 608,841
<CGS> 206,028
<TOTAL-COSTS> 253,317
<OTHER-EXPENSES> 314,444
<LOSS-PROVISION> 2,835
<INTEREST-EXPENSE> 12,667
<INCOME-PRETAX> 25,729
<INCOME-TAX> 12,100
<INCOME-CONTINUING> 13,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,629
<EPS-PRIMARY> 1.01<F1>
<EPS-DILUTED> 0.98<F1>
<FN>
<F1>The earnings per share figures prepared on this schedule represent EPS data
for net income attributable to Genzyme General Division Common Stock. Genzyme
Corporation reports earnings based on its three tracking stocks ("GGD Stock"),
therefore consolidate earnings per share data is not applicable . For the year
ended December 31, 1997, Genzyme General has net income of $77,447 and net loss
per share of GGD Stock - basic and diluted of $0.01 and $0.98, respectively. Net
loss for Genzyme Tissue Repair for the year ended December 31, 1997 was $245,984
or $3.07 per share of GTR Stock - basic and diluted. Net loss for Genzyme
Molecular Oncology for the year ended December 31, 1997 was $19,578, or $4.98
per share of GMO Stock - basic and diluted.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.2
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS PRESENTED
IN THE 1996 ANNUAL REPORT ON FORM-10K FOR GENZYME CORPORATION.
</LEGEND>
<RESTATED>
<CURRENCY> U.S. DOLLARS
<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><F2>
<EPS-DILUTED> (0.45)<F1><F2>
<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
GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK") OR GENZYME TISSUE REPAIR
DIVISION COMMON STOCK ("GTR STOCK"). CONSOLIDATED EPS IS NOT APPLICABLE FOR THE
YEAR ENDED DECEMBER 31, 1996. THE GENERAL DIVISION REPORTED A NET LOSS OF $0.45
PER SHARE OF GGD STOCK AND GTR REPORTED A NET LOSS OF $3.38 PER SHARE OF GTR
STOCK.
<F2>NET LOSS PER SHARE OF GGD STOCK AND GTR STOCK, FOR THE YEAR ENDED DECEMBER
31, 1996 COMPUTED TO CONFORM TO SFAS 128 IS THE SAME ON NET LOSS PER SHARE OF
GGD STOCK AND GTR STOCK AS COMPUTED UNDER APB 15 AS THE INCLUSION OF CERTAIN
POTENTIALLY DILUTIVE SHARES IN THE DILUTIVE LOSS PER SHARE CALCULATION FOR STOCK
WOULD HAVE BEEN ANTIDILUTIVE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.3
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMBINED FINANCIAL STATEMENTS OF GENZYME CORPORATION'S GENERAL DIVISION FOR THE
YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 103,631
<SECURITIES> 105,471
<RECEIVABLES> 94,954
<ALLOWANCES> 7,833
<INVENTORY> 52,281
<CURRENT-ASSETS> 370,612
<PP&E> 391,287
<DEPRECIATION> 63,826
<TOTAL-ASSETS> 854,586
<CURRENT-LIABILITIES> 62,576
<BONDS> 126,749
0
0
<COMMON> 312
<OTHER-SE> 658,969
<TOTAL-LIABILITY-AND-EQUITY> 854,586
<SALES> 351,603
<TOTAL-REVENUES> 378,563
<CGS> 145,101
<TOTAL-COSTS> 317,539
<OTHER-EXPENSES> 112
<LOSS-PROVISION> 1,842
<INTEREST-EXPENSE> 1,609
<INCOME-PRETAX> 65,329
<INCOME-TAX> 21,649
<INCOME-CONTINUING> 43,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,680
<EPS-PRIMARY> 0.79<F1>
<EPS-DILUTED> 0.68<F1>
<FN>
<F1>NET INCOME PER SHARE ATTRIBUTABLE TO GENZYME GENERAL DIVISION COMMON STOCK
("GGD STOCK") FOR THE YEAR ENDED DECEMBER 31, 1995 HAS BEEN RESTATED TO CONFORM
TO SFAS 128. PRIMARY AND FULLY DILUTED NET INCOME PER SHARE ATTRIBUTABLE TO GGD
STOCK COMPUTED UNDER THE PROVISIONS OF APB 15 WAS HISTORICALLY REPORTED AS
$0.73 AND $0.66 PER SHARE, RESPECTIVELY.
</FN>
</TABLE>
