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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-14680
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GENZYME CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 06-1047163
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE KENDALL SQUARE 02139
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
</TABLE>
(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 or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the Registrant
as of March 1, 1999: $3,872,522,549
Number of shares of the Registrant's GGD Stock outstanding as of March 1, 1999:
81,953,196
Number of shares of the Registrant's GTR Stock outstanding as of March 1, 1999:
22,292,811
Number of shares of the Registrant's GMO Stock outstanding as of March 1, 1999:
12,668,989
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Genzyme General, Genzyme Tissue Repair and Genzyme
Molecular Oncology Annual Reports are incorporated by reference into Parts I and
II of this Form 10-K. Portions of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held May 26, 1999 are incorporated by
reference into Part III of this Form 10-K.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for Genzyme Corporation ("Genzyme" or the
"Company") contains forward-looking statements concerning, among other things,
the Company's expected future revenues, operations and expenditures, estimates
of the potential markets for the Company's products and services, assessments of
competitors and potential competitors, projected timetables for the preclinical
and clinical development, regulatory approval and market introduction of the
Company's products and services and estimates of the capacity of manufacturing
and other facilities to support such products and services and plans to create a
new division and to transfer the Company's interest in Diacrin/Genzyme LLC from
its General Division to its Tissue Repair Division. 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, (vi) the accuracy of the
Company's information concerning the products and resources of competitors and
potential competitors and (vii) the ability of the Company to obtain requisite
corporate approvals concerning the creation of the new division and the transfer
of the interest in Diacrin/Genzyme LLC. 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, 1998 (the "1998 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, 1998 (the "1998 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,
1998 (the "1998 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 significant unmet medical needs. Genzyme currently has three
divisions, each with its own outstanding series of common stock that is intended
to reflect the value and track the performance the division.
- Genzyme General develops and markets therapeutic and surgical products
and diagnostic services and products. Genzyme General Division Common
Stock ("GGD Stock") is listed on the Nasdaq National Market under the
symbol "GENZ."
- Genzyme Tissue Repair develops and markets biological products and
devices for orthopedic injuries, and severe burns. Genzyme Tissue Repair
Division Common Stock ("GTR Stock") is listed on the Nasdaq National
Market under the symbol "GZTR."
- Genzyme Molecular Oncology is developing cancer products, with a focus on
therapeutic vaccines and angiogenesis inhibitors. Genzyme Molecular
Oncology Division Common Stock ("GMO Stock") is listed on the Nasdaq
National Market under the symbol "GZMO."
For purposes of financial statement presentation, all of Genzyme'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 the outstanding common 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), Polydek(R), InSight(R), MASDA(R) and Carticel(R) are
registered trademarks of Genzyme. Sepracoat(TM), Sepragel(TM), Sepramesh(TM),
Sahara(TM), Cohn Cardiac Stabilizer(TM), Diamond-Line(TM), Diamond-Flex(TM),
Diamond-Touch(TM), N-geneous LDL(TM), N-geneous HDL(TM), Contrast(TM),
Epicel(TM), GlyPro(TM) and SAGE(TM) are trademarks and Renagel(R) is a
registered trademark of GelTex Pharmaceuticals, Inc. NeuroCell(TM)-PD and
NeuroCell(TM)-HD are trademarks of Diacrin, Inc. Provisc(R) is a registered
trademark of Alcon Laboratories, Inc. Pulmozyme(R) is a registered trademark of
Genentech, Inc. AVONEX(R) is a registered trademark of Biogen, Inc.
Recent Developments
In March 1999, Genzyme announced its plans to create a new division for its
existing surgical products business with its own series of common stock. The
surgical products business is currently a unit of Genzyme General. Genzyme also
announced its intention to transfer its ownership interest in Diacrin/Genzyme
LLC from Genzyme Tissue Repair to Genzyme General. Diacrin/Genzyme LLC is a
joint venture formed by Genzyme and Diacrin to develop and commercialize the
NeuroCell(TM) products. The transfer is related to Genzyme Tissue Repair's
effort to redefine its focus on orthopedics and burn care and away from
neurodegenerative diseases. Genzyme General believes that the NeuroCell(TM)
products complement its specialty therapeutics product portfolio. Both of these
transactions are expected to be completed by the third quarter of 1999.
GENZYME GENERAL -- PRODUCTS AND DEVELOPMENT PROGRAMS
Therapeutics
Cerezyme(R) Enzyme/Ceredase(R) Enzyme. 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
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seriously debilitating, sometimes fatal, genetic disorder caused by a deficiency
in an important enzyme in the body called glucocerebrosidase ("GCR"). Gaucher
disease is one of a family of approximately 40 genetic diseases known as
lysosomal storage diseases. 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 that has been remodeled in a similar manner. Genzyme General
produced Ceredase(R) enzyme from an extract of human placental tissue.
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. Nearly
all patients have been converted from Ceredase(R) enzyme to Cerezyme(R) enzyme.
Genzyme General determined that its existing supply of finished goods of
Ceredase(R) enzyme was sufficient to meet patient needs and, therefore, stopped
producing Ceredase(R) enzyme in 1998.
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 estimated 5,000 Gaucher patients Genzyme General believes exist worldwide.
Currently, approximately 50% 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 eight countries as well as the 15 countries forming the European
Union ("EU"). Ceredase(R) enzyme has received marketing approval in 13
countries. Genzyme's results of operations are highly dependent on sales of
these products, which totaled approximately $411.1 million in 1998.
Renagel(R) Capsules. In October 1998, the FDA granted marketing approval
for Renagel(R) Capsules for the reduction of serum phosphorus in patients with
end-stage renal disease. There are an estimated 220,000 end-stage renal failure
patients in the U.S., approximately 95% of whom receive a phosphate control
product, and an estimated 180,000 end-stage renal failure patients in Europe.
Genzyme and GelTex formed a joint venture in 1997 for the commercialization of
Renagel(R) Capsules worldwide, excluding Japan and Pacific Rim countries.
Genzyme General's dedicated 42 person Renagel(R) sales force began marketing the
product on behalf of the joint venture to nephrologists, renal dieticians and
payors in January 1999. Applications for marketing authorization were submitted
in Europe and Canada in 1998. Renagel(R) Capsules have received "Part B" status
from the European Medicines Evaluation Agency. See Note I., "Investments" to the
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. In November 1998, the FDA granted marketing approval
for Thyrogen(R) hormone for use as an adjunctive tool in follow-up screening of
patients who have been treated for thyroid cancer. Thyrogen(R) hormone, which
was developed by Genzyme, 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.
Thyrogen(R) hormone may also be used to enhance the results of thyroglobulin
testing. Thyrogen(R) hormone is being co-marketed in the United States under an
agreement with Knoll Pharmaceutical Company. Knoll's 80 person endocrine and
metabolic sales force began selling Thyrogen(R) hormone in January 1999 in
collaboration with Genzyme's team of clinical specialists. Genzyme General filed
a marketing authorization application for Thyrogen(R) hormone in Europe in
December 1997.
Synthetic Phospholipids. 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. Genzyme General is a
commercial scale contract manufacturer for third parties of synthetic peptides
for many applications, such as use as active drug compounds and in final dosage
form preparations. Amino acid derivatives are the materials used in the
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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.
Alpha-L-Iduronidase. In September 1998, Genzyme formed a joint venture
with BioMarin Pharmaceutical, Inc. to develop and commercialize
alpha-L-iduronidase, a recombinant enzyme designed to treat a family of
lysosomal storage diseases known as Mucopolysaccharidosis I ("MPS I").
Approximately 2,000-3,000 people in the developed world have been diagnosed with
MPS I. In October 1998, the companies announced results of a pivotal clinical
trial that showed that patients with MPS I showed improvement in clinical signs
and symptoms when treated with alpha-L-iduronidase. The companies expect to
apply for FDA marketing approval for alpha-L-iduronidase in mid-1999. See Note
I., "Investments" to the Consolidated Financial Statements for a description of
the joint venture between Genzyme and BioMarin.
Alpha-Galactosidase. Genzyme General is developing a recombinant form of
the human enzyme alpha-galactosidase as a treatment for Fabry disease, a usually
fatal inherited disorder of lipid metabolism. Fabry disease is a lysosomal
storage disease that is estimated to affect 1 in 40,000 males worldwide, with an
estimated 2,000 patients in the United States. Genzyme General expects to
complete a Phase III trial of alpha-galactosidase by the end of 1999.
Alpha-Glucosidase. Through a joint venture formed by Genzyme and Pharming
Group N.V. in October 1998, the companies are developing transgenically produced
alpha-glucosidase for the treatment of Pompe disease. Pompe disease is a
lysosomal storage disease that affects an estimated 5,000-10,000 people in the
Western world. The companies have initiated a Phase II pilot clinical trial in
Europe. This trial will be followed by two larger Phase II/III clinical trials
in Europe and the United States, which are expected to begin in mid-1999. See
Note I., "Investments" to the Consolidated Financial Statements for a
description of the joint venture between Genzyme and Pharming.
AVONEX(R) (Interferon-beta 1a). In September 1998, Genzyme entered into an
agreement with Biogen under which Genzyme General will seek regulatory approval
and commercialize and exclusively distribute AVONEX(R) in Japan. AVONEX(R) is
Biogen's treatment for relapsing forms of multiple sclerosis. Genzyme General
estimates that there are at least 5,000 multiple sclerosis patients in Japan.
Antithrombin III. Antithrombin III is a plasma protein that helps regulate
blood clotting. Genzyme and Genzyme Transgenics Corporation formed a joint
venture in 1998 for the development and commercialization of transgenically
produced recombinant human antithrombin III ("ATIII"). The companies initiated
three Phase III clinical trials of ATIII in May 1998. Two identical trials are
underway to evaluate the safety and efficacy of transgenic ATIII in patients
scheduled for coronary artery bypass graft surgery who fail to adequately
respond to the anti-coagulant heparin. The third trial is designed to compare
transgenic ATIII to plasma-derived ATIII. Subject to the receipt of regulatory
approvals, Genzyme General will market ATIII worldwide, excluding Asia, on
behalf of the joint venture. Genzyme owns approximately 40% of the outstanding
shares of Genzyme Transgenics common stock. See Note I., "Investments" to the
Consolidated Financial Statements for a description of the relationship between
Genzyme and Genzyme Transgenics, including the joint venture.
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Other Development Programs. In addition to the products and programs
described above, Genzyme General has several therapeutic products in various
stages of research and development, including the following:
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PRODUCT/PROGRAM DESCRIPTION
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CFTR Genzyme General is developing gene therapy approaches using
lipid-DNA complexes as vectors and adenovirus vectors to
correct the basic defect in cystic fibrosis 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.
Ex vivo stem cells/ Through its collaborations with the University of
retrovirus vector Pittsburgh and IntroGene B.V., Genzyme General is
developing a hematopoietic stem cell gene therapy for
Gaucher disease.
Prolactin Genzyme General is developing a recombinant form of the
human hormone prolactin for use as an immune and/or
hematopoietic stimulant.
</TABLE>
Surgical Products
Genzyme General's surgical products business primarily consists of three
product lines: cardiovascular surgery, general surgery and plastic surgery.
Genzyme General's sales force markets products directly to cardiac, general,
colon and rectal surgeons and hospital purchasing departments throughout the
U.S. and Europe.
Certain products and product candidates designed to be used in surgical
procedures primarily to limit the incidence and severity of postoperative
adhesions (the "Sepra Products") are being developed by Genzyme General on
behalf of Genzyme Development Partners, L.P. ("GDP"). Under the terms of various
agreements between GDP and Genzyme, Genzyme has the exclusive right to sell the
Sepra Products in the U.S. and Canada on behalf of a joint venture (the "Joint
Venture") between and Genzyme and GDP. Genzyme has the exclusive right to sell
these products outside the U.S. and Canada for its own benefit, 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 in the U.S. and Canada. Genzyme General is focusing
on high-risk colorectal surgeries, where adhesions are a particular concern.
Genzyme has also entered into agreements with Fresenius A.G. for the
distribution and sale of the Sepra Products in Luxembourg, Germany, Austria and
Switzerland and with Kaken Pharmaceutical Co., Ltd. for the distribution and
sale of Seprafilm(R) Bioresorbable Membrane in Japan.
Cardiovascular Surgery. Genzyme General's cardiovascular surgery product
line consists of a comprehensive portfolio of products, including chest drainage
and fluid management systems, sutures, cardiovascular instruments, and
instruments designed for use in minimally invasive cardiovascular surgery.
Genzyme General's line of fluid management systems 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 Pleur-evac(R) chest drainage unit 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.
Sutures, including Tevdek(R) and Polydek(R) sutures, are sold in packs
consisting of suture/needle combinations. Genzyme General emphasizes high
quality specialty sutures for cardiovascular and plastic
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surgery, utilizing special materials, advanced metallurgy and packaging
innovations. Genzyme General also 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 recently introduced two new products for beating heart
surgery: its system for the procedure known as minimally invasive direct
coronary bypass ("MIDCAB"), and its system for the procedure known as off-pump
coronary artery bypass ("OPCAB"). The MIDCAB system for single-vessel coronary
artery bypass and the OPCAB system for multi-vessel coronary artery bypass
surgery combine reusable retractors, clamps and surgical instruments with
disposable devices such as stabilizers, sutures, electrodes and punches. Genzyme
General also launched the Cohn Cardiac Stabilizer(TM) device, developed with Dr.
William Cohn of Beth Israel Deaconess Hospital, Boston, Massachusetts, which
allows stable ateriotomy and anastomosis of the coronary artery on a beating
heart. In addition, Genzyme General has introduced minimally invasive saphenous
vein harvest and valve replacement instruments.
In addition to the products described above, Genzyme General has several
cardiovascular surgery products in various stages of research and development.
<TABLE>
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PROGRAM DESCRIPTION
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Biomaterials Genzyme General expects to initiate a clinical trial of
Seprafilm(R) II Adhesion Barrier in cardiac surgery in the
second quarter of 1999. It is also developing Sepracoat(TM)
Coating Solution to reduce the incidence of postoperative
atrial fibrillation and plans to initiate a pilot clinical
trial in the second quarter of 1999.
Gene Therapies Genzyme General is developing gene therapy approaches to
treating ischemic heart disease, peripheral vascular
disease, congestive heart failure and restenosis.
Cell Therapies Through a collaboration with a research group at the
Toronto Hospital, Genzyme General is developing cell
therapy approaches to treating ischemic heart disease and
congestive heart failure.
</TABLE>
General Surgery. Genzyme Surgical Products has established a growing
presence in the general surgery market through its biomaterials and endoscopic
instruments. Its lead product in this market is Seprafilm(R) Bioresorbable
Membrane. During the third quarter of 1996, the FDA granted approval to market
Seprafilm(R) Bioresorbable Membrane for use for the reduction of the incidence
and extent or adhesions in any open abdominal or pelvic surgery. Genzyme
launched sales of Seprafilm(R) Bioresorbable Membrane in Europe in 1996, in
Canada and Israel in 1997, and in Japan in 1998. Genzyme General is also
marketing Sepracoat(TM) Coating Solution and Seprafilm(R) II Adhesion Barrier, a
second generation Seprafilm(R) product designed to have increased plasticity, as
adhesion prevention products in Europe.
Genzyme General carries an extensive line of high-quality endoscopic
instruments for general surgery. Its Diamond-Line(TM) technology extends to a
full portfolio of retractors, forceps, scissors, needle-holders, graspers and
clamps. The leading products in the portfolio are its Diamond-Flex(TM) and
Diamond-Touch(TM) instruments. Diamond-Flex(TM) retractors and forceps are the
only reusable instruments on the market with articulating heads that allow
gentle repositioning of organs and tissue at varying angles. The
Diamond-Touch(TM) instruments provide ergonomically designed contoured handles
for superior positioning, comfort and control.
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In addition to the products described above, Genzyme General has several
general surgery products in various stages of research and development,
including the following:
<TABLE>
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PRODUCT/PROGRAM DESCRIPTION
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<S> <C>
Seprafilm(R) II Adhesion Genzyme General plans to initiate clinical efficacy trials
Barrier for Seprafilm(R) II Adhesion Barrier for abdominal surgery
in the U.S. in the second quarter of 1999.
Sepracoat(TM) Coating Solution Genzyme General is conducting pilot studies of the product
to determine whether it helps restore bowel function more
quickly after colorectal surgery.
Sepragel(TM) Bioresorbable Gel Genzyme General plans to initiate clinical trials of an
alternative formulation of the Sepragel(TM) product in the
fourth quarter of 1999.
Sepramesh(TM) product Genzyme General is developing a mesh product that is coated
with sodium hyaluronate for use in hernia repairs and other
soft tissue repairs such as bladder neck suspensions.
Genzyme General expects to receive 510(k) approval from the
FDA for this product in late 1999.
Seprafilm(R) Applicator Genzyme General is developing a device to help deliver
Seprafilm(R) II Adhesion Barrier into areas of the body
that are difficult to reach.
</TABLE>
Plastic Surgery. Genzyme General's plastic surgery product line consists
of a distinct product line of hand-held instruments, endoscopic plastic surgery
equipment, sutures and surgical compression garments.
Bulk and Pharmaceutical Grade Hyaluronic Acid ("HA"). 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. 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.
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 cystic fibrosis, 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.
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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 cystic fibrosis test, called the
"CF-70" test.
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 developing a technology called
ligation/ amplification-mismatch protection, or "LAMP," 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 has developed
manufacturing expertise in enzyme fermentation, purification, reagent
formulation and immunoassay test development. In July 1998, Genzyme General sold
the primary assets of its research products business to TECHNE Corporation
("TECHNE"). Genzyme General receives royalties on TECHNE's biotechnology group
sales.
Cardiovascular Products. Genzyme General sells devices and reagents for
the quantification of low-density lipoprotein ("LDL") and high-density
lipoprotein ("HDL") cholesterol levels. Genzyme General's N-geneous LDL(TM) and
N-geneous HDL(TM) 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. 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 and Rapid Tests. 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. Genzyme General also introduced the first
combination rapid test for the two most common causes of parasitic intestinal
disease.
GlyPro(TM) Assay. In 1998, Genzyme General received 510(k) clearance from
the FDA for GlyPro(TM) assay, an improved tool for monitoring diabetes. The
GlyPro(TM) assay measures blood sugar levels over several weeks, which is a
valuable resource for reducing diabetes-related complications. Genzyme General
is developing a family of diabetes-related tests.
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GENZYME TISSUE REPAIR -- PRODUCTS AND DEVELOPMENT PRODUCTS
Genzyme Tissue Repair is a leading developer of biological products and
devices for the treatment of orthopedic injuries and severe burns. Its strategy
is to focus its business on orthopedics and burn care. Genzyme Tissue Repair no
longer intends to develop products for neurodegenerative diseases. It intends to
transfer the NeuroCell(TM) products to Genzyme General if the holders of GTR
Stock approve the transfer, and is exploring partnering alternatives for its
diabetic foot ulcer product, recombinant Transforming Growth Factor Beta(2)
("TGF-Beta(2)").
Carticel(R) Autologous Cultured Chondrocytes ("Carticel(R) AuCC"). Genzyme
Tissue Repair's lead product, Carticel(R) AuCC, is used to treat damaged
articular knee cartilage. Genzyme Tissue Repair employs a proprietary process to
grow a patient's own ("autologous") cartilage cells for use in repairing damaged
knee cartilage. In August 1997, the FDA granted Genzyme Tissue Repair a
biologics license (a "BLA") for the manufacture of Carticel(R) AuCC for use in
repairing clinically significant cartilage defects of the femoral condyle.
Carticel(R) AuCC is not indicated for the treatment of cartilage damage
associated with osteoarthritis. Genzyme Tissue Repair is making a substantial
effort to establish the procedure known as autologous chondrocyte implantation
("ACI") using Carticel(R) AuCC as the new standard of care for repair of
cartilage damage to the femoral condyle.
Genzyme Tissue Repair believes that successful commercialization of
Carticel(R) AuCC is dependent on its being accepted by and incorporated into
routine use by a large number of orthopedic surgeons. Genzyme Tissue Repair
markets Carticel(R) AuCC to orthopedic surgeons in the U.S. and Europe directly
and through distributors. Genzyme Tissue Repair also trains orthopedic surgeons,
collects and analyzes outcomes data, and assists physicians and patients in
obtaining reimbursements from third party payors. Genzyme Tissue Repair also
believes that the commercial success of Carticel(R) AuCC will depend on its
ability to increase the approval rate for reimbursement of the product from
third party payors. For this reason, approximately one-third of its 59-person
U.S. sales and reimbursement staff is involved directly in claims processing and
educating insurers about the appropriate uses of the Carticel(R) AuCC. Genzyme
Tissue Repair expects that its revenues from the sale of Carticel(R) AuCC may be
lower in the summer months as fewer operative procedures are typically performed
during those months.
Genzyme Tissue Repair 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(R) AuCC is superior to the alternatives
studied. The first, a five year, randomized study, will compare outcomes of
patients treated with Carticel(R) AuCC to those of patients treated with
abrasion and microfracture -- two common alternative treatments for articular
cartilage defects. The second study is a smaller scale study in which patients
will undergo the ACI biopsy and implantation procedure, but will randomly be
assigned to receive either Carticel(R) AuCC or a placebo. This study is targeted
to last three to five years, not including a 36-month follow-up.
Epicel(TM) Skin Grafts. Genzyme Tissue Repair's Epicel(TM) skin grafts,
which are cultured autologous skin cells used as permanent skin replacement for
patients with severe burns, were first introduced in 1988. These epidermal
grafts are grown from a patient's own skin cells and, therefore, are not
rejected by the patient's immune system. Starting with a patient biopsy about
the size of a postage stamp, Genzyme Tissue Repair can grow enough skin grafts
in three to four weeks to cover a patient's entire body surface area.
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 Epicel(TM) skin grafts. Therefore, Genzyme Tissue Repair believes that the
primary candidates for Epicel(TM) skin grafts are the approximately 400 patients
each year in the U.S. who survive burn injuries covering more than 60% of their
body surface area. Genzyme Tissue Repair markets Epicel(TM) skin grafts to burn
centers in the U.S. and parts of Europe through its own direct sales force and
in Japan through a distributor.
Photoactive Tissue Welding Technology. In September 1998, Genzyme licensed
proprietary photoactive tissue welding technology from PhotoBioMed Corp. for all
orthopedic purposes. Initially, Genzyme Tissue
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Repair is investigating the use of this technology for applications for meniscal
repair.
NeuroCell(TM)-PD and NeuroCell(TM)-HD. Genzyme Tissue Repair, through a
joint venture with Diacrin, is developing NeuroCell(TM)-PD for the treatment of
advanced cases of Parkinson's disease and NeuroCell(TM)-HD for the treatment of
Huntington's disease. Genzyme Tissue Repair 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. With both of the NeuroCell(TM) products, it is believed that rejection
of the porcine cells can be prevented with cyclosporine, the commonly used
immunosuppressive drug. The companies are also using patented antibody masking
technology licensed from Massachusetts General Hospital in the production of the
NeuroCell(TM) products. The companies believe that the use of this technology
may protect the NeuroCell(TM) products from the patient's immune system without
the need for chronic, lifetime administration of immunosuppressive drugs.
Safety and efficacy data for NeuroCell(TM)-PD is being collected for up to
three years under a Phase I clinical study protocol, and for an additional two
years under an extension protocol. All 11 patients enrolled in the study will be
followed for safety in a life-long registry. Based on the early results of the
Phase I clinical trial, the companies initiated two Phase II clinical trials of
NeuroCell(TM)-PD. One Phase II clinical trial is designed to evaluate the safety
and efficacy of NeuroCell(TM)-PD in patients receiving cyclosporine compared to
a control group in which patients undergo surgery but do not receive
NeuroCell(TM)-PD is ongoing and will last up to 12 months for each patient. The
other Phase II clinical trial was initiated in early 1999 and is designed to
evaluate the safety and efficacy of NeuroCell(TM)-PD using the antibody masking
method to manufacture the product. Both Phase II clinical trials are bilateral
studies (involving implantation of cells in both sides of the brain) and involve
higher dose levels than those used in the Phase I clinical study. If
satisfactory results are obtained from the Phase II clinical trials, a single
product (either NeuroCell(TM)-PD administered with cyclosporine or
NeuroCell(TM)-PD manufactured using the antibody masking method) will be
selected for the pivotal trial.
Enrollment of 12 patients in a Phase I clinical trial of NeuroCell(TM)-HD
has been completed. Safety and efficacy data is being collected for up to three
years under this protocol. The results at 12 months showed no improvement in
symptoms and there was some evidence of worsening in motor scores. All 12 Phase
I patients were implanted with 24 million cells each by March 1997 and are being
followed for three years by clinical ratings and two kinds of PET scans. No
striking benefit has emerged to date. To date there have been no serious adverse
affects related to NeuroCell(TM)-HD. It is likely that a bilateral study
(implantation on both sides of the brain) will be required to test whether a
higher cell dose can affect disease progression. Demonstrating prevention of
progression of the disease may require large, long-term studies.
TGF-Beta(2) Genzyme Tissue Repair completed a 177 patient phase II
clinical study with TGF-Beta(2) in the treatment of diabetic foot ulcers in the
fall of 1998. Genzyme Tissue Repair believes the results of this study warrant
final clinical development of this growth factor-based product. Genzyme Tissue
Repair is in the process of identifying a corporate partner that will
participate in the final development and commercialization of this product
candidate.
Other Development Programs. Genzyme Tissue Repair has a number of ongoing
development programs supporting Carticel(R) AuCC. Genzyme Tissue Repair 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. Genzyme Tissue Repair is also committing resources to meet
requirements specified by the FDA for validation of certain product
manufacturing parameters.
GENZYME MOLECULAR ONCOLOGY -- PRODUCTS AND DEVELOPMENT PROGRAMS
Genzyme Molecular Oncology is developing a new generation of cancer
products with an emphasis on cancer vaccines and angiogenesis inhibitors.
Genzyme Molecular Oncology's products and services include: a
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genomics service business based on its patented Serial Analysis of Gene
Expression, or "SAGE(TM)", technology, and therapeutic product candidates in
various stages of development, including gene immunotherapies, angiogenesis
inhibitors and cancer pathway regulators, which utilize Genzyme's capabilities
in gene discovery, gene therapy, small molecule drug discovery, protein
therapeutic and genetic diagnostic efforts.
SAGE(TM) Technology and Services
SAGE(TM) technology 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). Genzyme Molecular Oncology believes that an understanding
of differential gene expression will accelerate the development of more
effective cancer and other therapeutics and diagnostics. Potential uses of the
SAGE(TM) technology in evaluating therapeutic targets include comparison of
diseased 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) technology 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. Genzyme Molecular Oncology has entered into several commercial
agreements for the provision of SAGE(TM) services and SAGE(TM) sublicenses,
including agreements with Bayer Corporation, Ontogeny, Inc., Parke-Davis, a
division of Warner-Lambert Company, and Reprogen, Inc.
Genzyme Molecular Oncology has a research agreement with Johns Hopkins
University School of Medicine ("JHU") and Dr. Kenneth Kinzler under which
Genzyme Molecular Oncology 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, Genzyme Molecular Oncology will be obligated to make milestone
payments upon the fulfillment of research objectives. Genzyme Molecular Oncology
also has the rights to SAGE(TM) data generated in Dr. Kinzler's laboratory and
an option to license diagnostic and therapeutic rights to discoveries using the
SAGE(TM) technology that are further developed in Dr. Kinzler's laboratory.
Immunotherapy
Cancer Vaccines. Under its collaborative research and development
agreement with the National Cancer Institute, Genzyme Molecular Oncology has
completed two Phase I cancer vaccine trials in melanoma. These studies
demonstrated that treatment with either the Melan-A/MART-1 or the gp100 antigen
was safe and well-tolerated. In March 1999, Genzyme Molecular Oncology initiated
a Phase I/II clinical trial to assess the safety, efficacy, and potency of a
cancer vaccine for melanoma. This trial utilizes dendritic cells and combines
the Melan-A/MART-1 and gp100 antigens.
Genzyme Molecular Oncology has an option from the Dana-Farber Cancer
Institute to exclusively license novel fusion cell technology developed by
researchers at Dana-Farber. Fusion cell therapy relies on dendritic cells, which
are fused with tumor cells, to activate the immune system to attack cells that
contain the same type of antigen found in the tumor cells. Genzyme Molecular
Oncology plans to use this technology in its research efforts to identify tumor
antigens and to initiate two investigator-sponsored Phase I clinical trials
employing dendritic/tumor cell fusions in 1999 -- one in breast cancer and one
in ovarian cancer.
Stress Genes. Genzyme Molecular Oncology, StressGen Biotechnologies
Corporation ("StressGen") and the Canadian Medical Discoveries Fund Inc.
("CMDF") formed a joint venture in 1997 to combine StressGen's proprietary
stress genes with Genzyme's gene delivery technology. Stress genes could be used
as stand-alone therapies or in conjunction with other cancer vaccines to
stimulate an immune response. The companies are initially focusing on the use of
mycobacterial stress genes that have been licensed exclusively to the joint
venture in the field of cancer. See Note I., "Investments" to the Consolidated
Financial Statements for a description of the joint venture between Genzyme,
StressGen and CMDF.
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Antiangiogenesis
Genzyme Molecular Oncology has a multidisciplinary antiangiogenesis
research program that includes proteins, small molecules and genes. In February
1999, it licensed from Children's Hospital Medical Center an angiogenesis
inhibitor that was identified in the laboratory of Judah Folkman, M.D., director
of the Surgical Research Laboratories at Children's Hospital. Over the next
year, Genzyme Molecular Oncology will conduct confirmatory efficacy and other
preclinical studies of the protein and develop a manufacturing process to
produce the protein. If these efforts are successful, Genzyme Molecular Oncology
anticipates beginning Phase I clinical trials in 2000. In exchange for the
exclusive, worldwide license, Genzyme Molecular Oncology paid Children's
Hospital an up-front fee and will make product development milestone payments
and royalty payments on product sales.
Cancer Pathways
Genzyme Molecular Oncology believes that drugs specifically targeting
disease-related cellular level pathways will make attractive product candidates
for cancer therapy. Genzyme Molecular Oncology is developing small molecule
drugs that target three types of cancer pathways -- those involved in cell
death, proliferation and metastasis. This program combines robotically-driven
combinatorial chemistry, high-throughput screens and a diverse library of over
1.5 million compounds. Genzyme Molecular Oncology currently has over 20
cancer-directed assays running or in development. Several of the product
candidates in this program have been optimized and are currently in in vivo
studies. Additional preclinical safety and efficacy studies are planned for
1999, with the goal of identifying clinical candidates.
In addition to its internal research and development efforts, Genzyme
Molecular Oncology is working with leading academic and commercial collaborators
to accelerate the development of cancer pathway therapies.
Schering-Plough Corporation. In September 1998, Genzyme Molecular Oncology
granted a worldwide license under its patent rights to Schering-Plough to
develop and commercialize gene therapy products using the p53 gene.
Schering-Plough is currently conducting Phase II clinical trials with its p53
gene therapy using its adenoviral delivery system. Under terms of the agreement,
Genzyme Molecular Oncology has received a $5 million up-front payment and a $5
million milestone payment, and could receive up to an additional $30 million in
patent, product development and sales milestone fees, in addition to royalties
on product sales. Schering-Plough and Genzyme Molecular Oncology have conducted
research with Genzyme Molecular Oncology's proprietary lipid gene delivery
systems to develop gene therapy products with several of Schering-Plough's
proprietary genes, including the p53 tumor suppressor gene. Schering-Plough and
Genzyme Molecular Oncology have chosen not to pursue further research with this
lipid gene delivery system at this time and Schering-Plough has allowed its
option to license this technology to expire.
Merck & Co., Inc. In January 1998, Genzyme Molecular Oncology
non-exclusively licensed patent rights to Merck relating to methods for
identifying small molecules that interfere with the binding of the MDM2 protein
with the p53 protein. Genzyme Molecular Oncology received an up-front license
fee and could receive additional milestone payments if certain defined
development milestones are achieved by Merck for a product developed by a method
licensed from Genzyme Molecular Oncology or covered by Genzyme Molecular
Oncology patent rights. In addition, Genzyme Molecular Oncology would receive
royalties on worldwide sales of any such product.
Isis Pharmaceuticals Inc. In December 1998, Genzyme Molecular Oncology
granted a non-exclusive license to Isis Pharmaceuticals under patent rights
relating to antisense compounds that interfere with the expression of a
cancer-related gene, methods for treating cancerous cells with these compounds,
and methods for identifying such compounds. Isis Pharmaceuticals licensed these
rights in order to facilitate the development of compounds it will be working on
under its agreement with Zeneca, Inc. Genzyme Molecular Oncology received an
up-front payment from Isis Pharmaceuticals. If Isis Pharmaceuticals and Zeneca
successfully develop therapeutic products through the use of these rights,
Genzyme Molecular Oncology will receive milestone and royalty payments.
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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. 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, gene therapy or therapies based on small molecules.
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.
Renagel(R) Capsules. 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)
Capsules 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.
Cystic Fibrosis. There are a number of organizations, both academic and
commercial, engaged in developing therapies to treat either the symptoms of
cystic fibrosis 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 cystic fibrosis gene therapy. In addition, other organizations are
investigating pharmacological and biological agents that would treat cystic
fibrosis. 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 cystic
fibrosis 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. There are
several companies that produce HA using
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two principal processes: extraction from natural sources and fermentation.
Although several companies are pursuing fermentation as a method of producing
HA. Genzyme General believes that it's proprietary fermentation production
process and its ability to create chemically modified forms of HA give it a
competitive advantage in the marketing of HA-based products for surgery.
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. The
surgical closure category is dominated by Ethicon, a division of Johnson &
Johnson, and Tyco/U.S. Surgical 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 have
allowed Genzyme General to compete effectively across this category. Genzyme
General faces several competitors in the minimally invasive cardiovascular
surgery field. Cardiothoracic Systems Inc. is the leader in the both the MIDCAB
and OPCAB markets. Several major surgical products companies have entered the
minimally invasive cardiovascular surgery market. These companies have the
advantages of name recognition, contracting power and sales force size but may
not be as focused on the minimally invasive cardiovascular surgery market as
Genzyme General.
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. 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.
Carticel(R) AuCC. Genzyme Tissue Repair is aware of one other company,
Verigen, Inc., that is culturing autologous chondrocytes for cartilage repair in
Europe. In addition to Verigen, Genzyme Tissue Repair 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(R)
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. However, current practice suggests
that osteochondral grafting is best used in a subset of patients with lesions
that are smaller than those appropriate for treatment with Carticel(R) AuCC.
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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, Genzyme Tissue Repair 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, deep brain stimulation, the use of growth
factors and neuroprotectant therapy.
Epicel(TM) Skin Grafts. Genzyme Tissue Repair is the only commercial
provider of cultured skin grafts that have been shown to provide permanent skin
replacement for burn patients in the U.S. However, Genzyme Tissue Repair may
face competition from companies using other approaches to culture skin tissue.
Integra is marketing a collagen-based dermal replacement product for severely
burned patients. This product will still require a skin graft from the patient
or the Epicel(TM) skin grafts to close a full-thickness wound, however, and
therefore will not compete directly with Epicel(TM) skin grafts. 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 for treatment of chronic skin
ulcers is an emerging treatment modality. Johnson & Johnson received approval in
1997 for the use of recombinant human platelet-derived growth factor ("PDGF")
for treatment of diabetic foot ulcers based on a 10-15% improvement of frequency
of patients with healed ulcers as compared to placebo and standard of care
control groups in several clinical trials. Allogeneic cell-based therapies for
treatment chronic skin ulcers are also being developed by Advanced Tissue
Sciences and Organogenesis and will likely compete with growth factor strategies
for stimulating cutaneous ulcer repair.
Cancer. Competition in the field of cancer therapeutics and diagnostics is
significant. Genzyme Molecular Oncology 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. Genzyme Molecular Oncology also relies on
its collaborators for support in some of its cancer research and development
programs. Competition may arise from the use of the same or similar technologies
as those currently used or contemplated to be used by Genzyme Molecular
Oncology, as well as from existing therapeutics and diagnostics, any or all of
which may be more effective or less expensive than those developed by Genzyme
Molecular Oncology. 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 Genzyme Molecular Oncology.
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. These license agreements generally require Genzyme to pay royalties upon
commercialization of products covered by the licensed technology. Generally,
patents issued in the United States are effective for a period of 17 years.
However, the GATT legislation changed this period to twenty years from the
filing date for patent 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 1998 Genzyme General Annual Report, (ii) "Management's
Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and
Results of Operations" in the 1998 Genzyme Tissue Repair Annual Report and (iii)
"Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial
Condition and
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Results of Operations" in the 1998 Genzyme Molecular Oncology Annual Report is
incorporated herein by reference.
Genzyme's registered trademarks Cerezyme(R), Ceredase(R), Thyrogen(R),
Seprafilm(R), Pleur-evac(R), Thora-Klex(R), Tevdek(R), Polydek(R), InSight(R),
MASDA(R), and Carticel(R) together with its trademarks Cohn Cardiac
Stablizer(TM), Diamond-Line(TM), Diamond-Flex(TM), Diamond-Touch(TM),
Sepragel(TM), Sepracoat(TM), Sepramesh(TM), N-geneous LDL(TM), N-geneous
HDL(TM), Contrast(TM), GlyPro(TM), Epicel(TM) and SAGE(TM), in the aggregate are
considered to be of material importance to Genzyme.
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) Capsules. ATIII,
alpha-L-iduronidase, alpha-galactosidase, alpha-glucosidase, prolactin and
Genzyme'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
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
17
<PAGE> 18
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(R) 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. Genzyme Tissue Repair 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 Genzyme Tissue Repair a BLA under these regulations for Carticel(R)
AuCC. Genzyme Tissue Repair has initiated discussions with the FDA regarding an
application for Epicel(TM) skin grafts, which has been on the market as an
unregulated medical device. Genzyme Tissue Repair expects that the FDA will
permit Epicel(TM) skin grafts 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 preclinical 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 ("EU 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 European Medicines Evaluation Agency ("EMA") or the
decentralized (mutual recognition) process. The 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, 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 Genzyme 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 an earlier version of the centralized
procedure called the concentration procedure. Genzyme expects alpha-L-
iduronidase, alpha-galactosidase, alpha-glucosidase, prolactin and the gene
therapy products also will be regulated through the centralized procedure.
Seprafilm(R) Bioresorbable Membrane and Sepracoat(TM) Coating Solution have been
granted the CE Mark. Genzyme currently intends to apply for a CE Mark for all of
its other surgical products. EU regulations do not currently permit the sale of
xenotransplanted products in Europe.
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, Genzyme Tissue Repair has not encountered any local
registration
18
<PAGE> 19
requirements for market introduction of Carticel(R) AuCC. During September 1997,
the Spanish national health system approved Carticel(R) AuCC for use by public
hospitals, representing the first broad approval of the product by a
reimbursement authority in Europe. Genzyme Tissue Repair is currently assessing
the regulatory requirements for commercialization of Carticel(R) 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 alpha-glucosidase, alpha-L-iduronidase, gene therapy products
MART-1 and gp100, NeuroCell(TM)-PD and NeuroCell(TM)-HD. Legislation has been
proposed in the European Union that, if enacted, would provide similar
incentives as the Orphan Drug Act.
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. The 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(R) AuCC or Epicel(TM) skin
grafts. Certain states have laws requiring the licensure of tissue and organ
banks and laws governing the sale of human organs and the safety and efficacy of
drugs, devices and biologics, including skin, all of which could be interpreted
to apply to Genzyme Tissue Repair's production and distribution of cultured
tissue products. Provisions in certain states' statutes prohibit the receipt of
valuable consideration in connection with the sale of human tissue by a tissue
bank but permit licensed tissue banks, including companies, to recover their
reasonable costs associated with such sales. The application of these or other
regulations to Genzyme Tissue Repair could result in significant expense to
Genzyme Tissue Repair, limit Genzyme's reimbursement for its services and
otherwise materially adversely affect Genzyme Tissue Repair'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,
19
<PAGE> 20
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 THE REGISTRANT
As of December 31, 1998, Genzyme (including all consolidated subsidiaries
and excluding Genzyme Transgenics) had approximately 3,500 employees. None of
Genzyme's employees are covered by collective bargaining agreements. Genzyme
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 M., "Research and Development Agreements" to the
Consolidated Financial Statements in the 1998 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 1998 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 Q., "Segment Information" to
the Consolidated Financial Statements set forth in Exhibit 13.1 to this Annual
Report on Form 10-K.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Henri A. Termeer............ 53 Chairman of the Board, President and Chief Executive
Officer
Russell J. Campanello....... 43 Senior Vice President, Human Resources
Earl M. Collier, Jr......... 52 Executive Vice President, Health Systems and Surgical
Products
David D. Fleming............ 50 Group Senior Vice President, Diagnostic Products and
Genetics
John V. Heffernan........... 60 Senior Vice President
David J. McLachlan.......... 60 Chief Financial Officer; Executive Vice President,
Finance
Richard A. Moscicki, M.D.... 47 Chief Medical Officer; Senior Vice President, Clinical,
Medical and Regulatory Affairs
Alan E. Smith, Ph.D......... 54 Chief Scientific Officer; Senior Vice President,
Research
G. Jan van Heek............. 49 Executive Vice President, Therapeutics and Tissue
Repair
Peter Wirth................. 48 Chief Legal Officer; Executive Vice President; Clerk
Michael S. Wyzga............ 44 Chief Accounting Officer; Senior Vice President,
Corporate Controller
</TABLE>
Each officer's term of office extends until the meeting of the Board of
Directors following the next annual meeting of stockholders and until a
successor is elected and qualified or until his earlier resignation or removal.
Mr. Termeer has served as President and a Director of the Company since
October 1983, as Chief Executive Officer since December 1985 and as Chairman of
the Board since May 1988. For ten years prior to joining the Company, Mr.
Termeer worked for Baxter Travenol Laboratories, Inc., a manufacturer of human
health care products. Mr. Termeer is a director of ABIOMED, Inc., AutoImmune
Inc., Diacrin, GelTex and
20
<PAGE> 21
Genzyme Transgenics Corporation and a trustee of Hambrecht & Quist Healthcare
Investors and Hambrecht & Quist Life Sciences Investors.
Mr. Campanello joined Genzyme in March 1998 as Senior Vice President, Human
Resources. Prior to joining Genzyme, from March 1996 to March 1998, Mr.
Campanello served as Vice President of Nets Incorporated, an internet-based
marketing company, and from June 1987 to February 1996 he served as Vice
President, Human Resources of Lotus Development Corp. ("Lotus"), a computer
software company. Mr. Campanello is a director of Restrac, Inc., a provider of
human resource staffing software and related services. Nets, Incorporated filed
for Chapter 11 bankruptcy protection in May 1997.
Mr. Collier joined Genzyme in January 1997 as Senior Vice President, Health
Systems and has served as Executive Vice President, Surgical Products and Health
Systems since July 1997. Mr. Collier is responsible for Genzyme's surgical
products business unit. Prior to joining Genzyme, Mr. Collier was President of
Vitas HealthCare Corporation (formerly Hospice Care Incorporated), a provider of
health care services, from October 1991 until August 1995. Prior to that, Mr.
Collier was a partner in the Washington, D.C. law firm of Hogan & Hartson, which
he joined in 1981.
Mr. Fleming joined the Company in April 1984 and has served as Group Senior
Vice President, Diagnostic Products and Genetics since September 1996. Prior to
that date, he served as President of Genzyme's diagnostics business unit since
January 1989 and has been a Senior Vice President of the Company since August
1989. For 11 years prior to joining the Company, he worked for Baxter Travenol
Laboratories, Inc.
Mr. Heffernan joined the Company as Vice President, Human Resources in
October 1989, served as Senior Vice President, Human Resources from May 1992
until March 1998 and currently serves as a Senior Vice President. Prior to
joining the Company, he served for more than five years as Vice President, Human
Resources Corporate Staff of GTE Corporation, a diversified communications and
electronics company.
Mr. McLachlan joined the Company in December 1989 and has served as
Executive Vice President, Finance, since September 1996. He served as Senior
Vice President, Finance, from December 1989 to September 1996 and has served as
Chief Financial Officer since 1989. Prior to joining the Company, he served for
more than five years as Chief Financial Officer for Adams-Russell Electronics
Inc., a defense electronics manufacturer, and Adams-Russell Co., Inc., a cable
television company. Mr. McLachlan is a director of HearX, Ltd., a company
providing products and services to the hearing impaired.
Dr. Moscicki joined the Company in March 1992 as Medical Director, became
Vice President, Medical Affairs in early 1993 and was named Vice President,
Clinical, Medical and Regulatory Affairs in December 1993. In September 1996 he
became Senior Vice President, Clinical, Medical and Regulatory Affairs and Chief
Medical Officer. Since 1979, he has also been a physician staff member at the
Massachusetts General Hospital and a faculty member at the Harvard Medical
School.
Dr. Smith joined the Company in August 1989 as Senior Vice President,
Research and became Chief Scientific Officer in September 1996. Prior to joining
the Company, he served as Vice President-Scientific Director of Integrated
Genetics, Inc., from November 1984 until its acquisition by the Company in
August 1989. From October 1980 to October 1984, Dr. Smith was head of the
Biochemistry Division of the National Institute for Medical Research, Mill Hill,
London, England and from 1972 to October 1980, he was a member of the scientific
staff at the Imperial Cancer Research Fund in London, England. Dr. Smith also
serves as a director of GTC.
Mr. van Heek joined the Company in September 1991 as General Manager of its
wholly-owned subsidiary, Genzyme, B.V., and became a Genzyme Vice President and
President of Genzyme's therapeutics business unit in December 1993. From
September 1996 through July 1997, he served as Group Senior Vice President,
Therapeutics and since July 1997 has served as Executive Vice President,
Therapeutics and Tissue Repair, with responsibility for Genzyme's therapeutics
business unit, Genzyme Tissue Repair and international operations. Prior to
joining the Company, he was, since 1988, Vice President/General Manager of the
Fenwal Division of Baxter Healthcare Corporation. Mr. van Heek also served as
President and Treasurer of Neozyme II Corporation from March 1992 to January
1996.
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<PAGE> 22
Mr. Wirth joined the Company in January 1996 and has served as Executive
Vice President and Chief Legal Officer since September 1996. Mr. Wirth has
responsibility for Genzyme's corporate development and legal activities, and the
molecular oncology and pharmaceuticals business units. From January 1996 to
September 1996, Mr. Wirth served as Senior Vice President and General Counsel of
Genzyme. Mr. Wirth was a partner of Palmer & Dodge LLP, a Boston, Massachusetts
law firm, from 1982 through September 1996. Mr. Wirth remains of counsel to
Palmer & Dodge LLP, and is a director of Transkaryotic Therapies, Inc., a gene
therapy company.
Mr. Wyzga joined Genzyme in February 1998 as Vice President and Corporate
Controller and has served as Senior Vice President, Corporate Controller and
Chief Accounting Officer since January 1999. Prior to joining Genzyme, from
February 1997 to February 1998 Mr. Wyzga served as Chief Financial Officer of
Sovereign Hill Software, Inc., a software company. From November 1995 to
February 1997 he served as Vice President of Finance and Chief Financial Officer
of CACHELINK Corporation, a client/server software company. From October 1994 to
November 1995 Mr. Wyzga served as Vice President of Finance for Lotus, and he
also served from August 1993 to October 1994 as Director of Plans and Controls
and from April 1991 to August 1993 as Manager of Plans and Controls for Lotus.
ITEM 2. PROPERTIES
Genzyme's operations are conducted in manufacturing, warehousing, pilot
plant, clinical laboratories, and research and office facilities principally in
the United States, United Kingdom, Netherlands, Switzerland and Germany. All
properties are leased except for certain properties in Haverhill and West
Malling, England, Coventry, Connecticut, Fall River, Massachusetts, Framingham,
Massachusetts, Allston, Massachusetts and Santa Fe, New Mexico. Genzyme's
principal properties are, for Genzyme General, its manufacturing facilities for
the large scale production of its therapeutic proteins, biomaterials, diagnostic
products and its genetic diagnostic facilities and, for Genzyme Tissue Repair,
its cell processing facilities for Carticel(R) AuCC and Epicel(TM) skin grafts.
Genzyme General
Therapeutics
In October 1996, the Company received FDA approval to manufacture
Cerezyme(R) enzyme at its multi-product manufacturing facility at Allston
Landing in Boston, Massachusetts which contains extensive sterile filling
capacity. The facility, which is owned by the Company, is built on land held
under a 60 year lease.
Genzyme and RenaGel LLC (the joint venture between Genzyme and GelTex) have
entered into a Contract Manufacturing Agreement dated January 1, 1998 under
which Genzyme will manufacture a portion of RenaGel LLC's minimum supply
requirements for Renagel(R) Capsules in Genzyme's facilities in Haverhill,
England, upon receipt of necessary regulatory approvals.
Thyrogen(R) hormone is manufactured under GMP conditions in the Company's
small-scale manufacturing facility in Framingham, Massachusetts.
A multi-use pharmaceutical facility in Liestal, Switzerland is used to
produce peptides.
Surgical Products
Genzyme has manufacturing capacity at two UK facilities to produce
commercial quantities of HA powder for the Sepra Products currently under
development on behalf of GDP. Seprafilm(R) Bioresorbable Membrane is produced at
commercial scale from the HA powder in the Company's manufacturing facility in
Framingham, Massachusetts.
In July 1996, the Company acquired or assumed the leases for certain
office, laboratory and manufacturing facilities in Fall River, Massachusetts,
Coventry, Connecticut, Tucker, Georgia and Germany for use in manufacturing and
warehousing its surgical products.
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<PAGE> 23
Diagnostics
Immunobiological products, diagnostic test kits and reagents are produced
in manufacturing facilities in San Carlos, California, Cambridge, Massachusetts
and Russelsheim, Germany.
Diagnostic enzymes and other fermentation products are produced in a
multi-purpose fermentation facility in Maidstone, England and a protein
purification plant in West Malling, England.
In 1997, the Company completed construction of a new fermentation facility
and warehousing facility in West Malling, England.
The Company's genetic testing business primarily conducts operations in
clinical laboratory and administrative facilities which the Company owns in
Framingham, Massachusetts and Santa Fe, New Mexico.
Genzyme Tissue Repair
Production for Carticel(R) AuCC and Epicel(TM) skin grafts currently occurs
primarily in the Company's cell processing facilities in Cambridge,
Massachusetts. The facility has the capacity to provide Carticel(R) AuCC to
approximately 5,000 patients per year. In 1996, the Company established a
surgeon training center at its facility in the Netherlands in conjunction with
the Carticel(R) AuCC program.
Selling and marketing activities are concentrated at facilities leased by
the Company in Cambridge, Massachusetts and the Netherlands. The Company
conducts its research and development activities primarily at its laboratory
facilities in the United States.
Leases for the Company's facilities contain typical commercial lease
provisions including renewal options, rent escalators and tenant responsibility
for operating expenses. The Company believes that it has or is in the process of
developing adequate manufacturing capacity to support its requirements for the
next several years.
ITEM 3. LEGAL PROCEEDINGS
As of the filing date of this Form 10-K, there are no pending legal
proceedings deemed material by the Company to which Genzyme or any of its
subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has three series of common stock: GGD Stock, GTR Stock and GMO
Stock. The GGD Stock, GTR Stock and GMO Stock are intended to reflect the value
and track the performance of Genzyme General, Genzyme Tissue Repair and Genzyme
Molecular Oncology, respectively. The stocks are traded on the over-the-counter
market and prices are quoted on the Nasdaq National Market under the symbols
GENZ, GZTR and GZMO, respectively. On November 16, 1998, the Company distributed
to the holders of record of GGD Stock on November 2, 1998, .10805 shares of GMO
Stock for each share of GGD Stock held. The GMO Stock commenced trading on
November 16, 1998. As of March 2, 1999, there were 2,468, 5,623 and 2,330
stockholders of record of GGD Stock, GTR Stock and GMO Stock, respectively.
The following table sets forth, for the periods indicated, the high and low
sale prices for the GGD Stock, GTR Stock and GMO Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
GGD Stock
1998:
First Quarter..................................... $34 $25 3/8
Second Quarter.................................... 33 23 1/2
Third Quarter..................................... 36 1/4 23 3/4
Fourth Quarter.................................... 50 29 11/16
1997:
First Quarter..................................... 28 7/8 22 1/8
Second Quarter.................................... 27 7/8 20 3/4
Third Quarter..................................... 33 25
Fourth Quarter.................................... 31 7/8 23 3/8
GTR Stock
1998:
First Quarter..................................... $ 9 1/4 $ 6 1/2
Second Quarter.................................... 9 3/16 5
Third Quarter..................................... 7 1/8 2 3/8
Fourth Quarter.................................... 3 3/4 2 1/32
1997:
First Quarter..................................... 14 7/8 7
Second Quarter.................................... 13 8 1/2
Third Quarter..................................... 12 1/3 9
Fourth Quarter.................................... 10 3/4 6 3/8
GMO Stock
1998:
Fourth Quarter.................................... $15 $ 2
</TABLE>
No cash dividends have been paid to date on any series of common stock and
the Company does not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from (i) the 1998 Genzyme General Annual Report
under the headings "Genzyme General -- Selected Financial Data" and "Genzyme
Corporation -- Selected Financial Data", (ii) the 1998 GTR Annual Report under
the heading "Genzyme Tissue Repair -- Selected Financial Data" and (iii) the
1998 GMO Annual Report under the heading "Genzyme Molecular Oncology -- Selected
Financial Data".
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from (i) the 1998 Genzyme General Annual Report
under the headings "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Genzyme General" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations for Genzyme
Corporation and Subsidiaries", (ii) the 1998 GTR Annual Report under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Genzyme Tissue Repair" and (iii) the 1998 GMO Annual Report under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Genzyme Molecular Oncology."
ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section entitled "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of
Operation -- New Accounting Pronouncements, Euro, Year 2000 and Market Risk" in
the 1998 Genzyme General Annual Report is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
The financial statements filed as part of this Annual Report on Form 10-K
are incorporated by reference from (i) the 1998 Genzyme General Annual Report
under the headings "Genzyme General -- Combined Financial Statements" and notes
thereto and "Genzyme Corporation and Subsidiaries Consolidated Financial
Statements" and notes thereto, (ii) the 1998 GTR Annual Report under the heading
"Genzyme Tissue Repair Combined Financial Statements" and notes thereto and the
1998 GMO Annual Report under the heading "Genzyme Molecular Oncology Combined
Financial Statements" and notes thereto and are listed under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the period from January 1, 1998 to the filing date of this Form
10-K, no independent accountant who was previously engaged as the principal
accountant to audit Genzyme's financial statements has resigned, indicated it
has declined to stand for re-election after completion of the current audit or
was dismissed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I, Item 1A hereof and the remainder is
incorporated herein by reference from the discussion responsive thereto under
the captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement relating to the 1999
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the following captions in the Company's
Proxy Statement relating to the 1999 Annual Meeting of Stockholders: "Election
of Directors -- Director Compensation" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Share Ownership" in the
Company's Proxy Statement relating to the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Transactions" in the
Company's Proxy Statement relating to the 1999 Annual Meeting of Stockholders.
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<PAGE> 26
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
1998 Genzyme General Annual Report:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
GENZYME GENERAL
Combined Statements of Operations -- For the Years
Ended December 31, 1998, 1997 and 1996................ 11
Combined Balance Sheets -- December 31, 1998 and
1997.................................................. 13
Combined Statements of Cash Flows -- For the Years
Ended December 31, 1998, 1997 and 1996................ 14
Notes to Combined Financial Statements................. 16
Report of Independent Accountants...................... 31
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations -- For the Years
Ended December 31, 1998, 1997 and 1996................ 47
Consolidated Balance Sheets -- December 31, 1998 and
1997.................................................. 50
Consolidated Statements of Cash Flows -- For the Years
Ended December 31, 1998, 1997 and 1996................ 52
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.......... 54
Notes to Consolidated Financial Statements............. 57
Report of Independent Accountants...................... 91
</TABLE>
- ---------------
* References are to page numbers in the 1998 Genzyme General Annual Report.
The financial statements (and related notes) are incorporated by
reference from the 1998 Genzyme General Annual Report.
The following financial statements (and related notes) of GTR are
incorporated by reference from the 1998 GTR Annual Report:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
Combined Statements of Operations -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... 103
Combined Balance Sheets -- December 31, 1998 and 1997....... 104
Combined Statements of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... 105
Notes to Combined Financial Statements...................... 106
Report of Independent Accountants........................... 115
</TABLE>
- ---------------
* References are to page numbers in the 1998 GTR Annual Report. The
financial statements (and related notes) are incorporated by reference
from the 1998 GTR Annual Report.
26
<PAGE> 27
The following financial statements (and related notes) of GMO are
incorporated by reference from the 1998 GMO Annual Report:
<TABLE>
<CAPTION>
PAGE*
-----
<S> <C>
Combined Statements of Operations -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... 127
Combined Balance Sheets -- December 31, 1998 and 1997....... 128
Combined Statements of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... 129
Notes to Combined Financial Statements...................... 130
Report of Independent Accountants........................... 140
</TABLE>
- ---------------
* References are to page numbers in the 1998 GMO Annual Report. The
financial statements (and related notes) are incorporated by reference
from the 1998 GMO Annual Report.
2. FINANCIAL STATEMENT SCHEDULES
The schedules listed below for Genzyme General, GTR, GMO and Genzyme
Corporation and Subsidiaries 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....... 32
GTR
Schedule II -- Valuation and Qualifying Accounts....... 116
GMO
Schedule II -- Valuation and Qualifying Accounts....... 141
GENZYME CORPORATION AND SUBSIDIARIES
Schedule II -- Valuation and Qualifying Accounts....... 92
</TABLE>
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, (ii) the GTR Combined Financial Statements or notes
thereto, (iii) the GMO Combined Financial Statements or notes thereto or (iv)
the Genzyme Corporation and Subsidiaries Consolidated Financials or notes
thereto.
27
<PAGE> 28
3. EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this report.
(B) REPORTS ON FORM 8-K
On October 27, 1998, Genzyme Corporation filed a Current Report on Form 8-K
to announce the dividend of shares of GMO Stock to holders of GGD Stock, the
release from escrow of shares of GMO Stock held by the former stockholders of
PharmaGenics, and the listing of the GMO Stock on the Nasdaq National Market.
On March 17, 1999, Genzyme Corporation filed a Current Report on Form 8-K
to announce that the Genzyme Board had authorized the renewal of Genzyme's
shareholder rights plan, which became effective on March 28, which was the date
on which the previous rights plan expired.
(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 -- Renewed Rights Agreement dated as of March 16, 1999 between
Genzyme and American Stock Transfer & Trust Company. Filed
as Exhibit 4 to Genzyme's Current Report on Form 8-K dated
March 17, 1999
*4.4 -- 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)
*4.5 -- 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
*4.6 -- 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
*4.7 -- 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
*4.8 -- 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
*4.9 -- 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
*4.10 -- 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
*4.11 -- Warrant Agreement between Genzyme and Comdisco, Inc. Filed
as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc.
("PharmaGenics") (File No. 0-20138)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*4.12 -- Form of Genzyme Corporation Convertible Note dated February
28, 1997 issued to Credit Suisse First Boston (Hong Kong)
Ltd. ("CSFB"). Filed as Exhibit 4.14 to Genzyme's Form
10-K/A for 1997
*4.13 -- Indenture, dated as of May 22, 1998, between Genzyme and
State Street Bank and Trust Company, as Trustee, including
the form of Note. Filed as Exhibit 4.3 to Genzyme's
Registration Statement on Form S-3 (File No. 333-59513)
*4.14 -- Registration Rights Agreement, dated as of May 19, 1998,
among Genzyme, Credit Suisse First Boston Corporation,
Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit
4.4 to Genzyme's Registration Statement on Form S-3 (File
No. 333-59513)
*4.15 -- Purchase Agreement, dated as of May 19, 1998, among Genzyme,
Credit Suisse First Boston Corporation, Goldman, Sachs & Co.
and Cowen & Company. Filed as Exhibit 4.5 to Genzyme's
Registration Statement on Form S-3 (File No. 333-59513)
*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
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*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 -- Lease dated November 12, 1998 for Metrowest Place, 15
Pleasant Street Connector, Framingham, Massachusetts,
between Consolidated Group Service Company Limited
Partnership and Genzyme. Filed herewith
*10.12 -- 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)
*10.13 -- 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)
*10.14 -- 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)
*10.15 -- 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
*10.16 -- 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)
*10.17 -- 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)
*10.18 -- 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)
*10.19 -- 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)
*10.20 -- 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)
*10.21 -- Technology License and Supply Agreement dated as of
September 8, 1989 between Imedex and Genzyme. Filed as
Exhibit 10.30 to Genzyme's Form 10-K for 1990.**
10.22 -- 1998 Director Stock Option Plan. Filed herewith
*10.23 -- 1990 Equity Incentive Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33249)
*10.24 -- 1990 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No. 333-33291)
*10.25 -- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit
99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33251)
*10.26 -- 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>
30
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*10.27 -- 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 herewith
*10.28 -- 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 herewith
*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 -- Consulting Agreement dated December 14, 1998 between Genzyme
and Charles L. Cooney, Ph.D. Filed herewith
10.31 -- Consulting Agreement dated December 31, 1998 between Genzyme
and Robert J. Carpenter. Filed herewith
10.32 -- Consulting Agreement dated July 1, 1998 between Genzyme and
Henry E. Blair. Filed herewith
*10.33 -- 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)
*10.34 -- 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)
*10.35 -- 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)
*10.36 -- 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)
10.37 -- Second Amended and Restated Convertible Debt Agreement dated
as of December 28, 1998 by and between Genzyme and GTC.
Filed herewith
*10.38 -- 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)**
*10.39 -- 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)**
*10.40 -- 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**
*10.41 -- 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**
*10.42 -- 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)
*10.43 -- 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**
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
*10.44 -- 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
*10.45 -- 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
*10.46 -- 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, Fleet
National Bank, as Administrative Agent, The First National
Bank of Boston, as Documentation Agent, and the lenders
identified in the signature pages thereto. Filed as Exhibit
10.49 to Genzyme's Form 10-K/A for 1997
*10.47 -- Second Amendment to Credit Agreement dated as of April 15,
1998 by and among Genzyme and those of its subsidiaries
party thereto, Fleet National Bank, as Administrative Agent,
The First National Bank of Boston, as Documentation Agent,
and the lenders identified in the signature pages thereto.
Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter
ended June 30, 1998
*10.48 -- Note Purchase Agreement by and between Genzyme and CSFB
dated of February 27, 1997. Filed as Exhibit 10.50 to
Genzyme's Form 10-K/A for 1997
*10.49 -- 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)**
*10.50 -- 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)**
*10.51 -- 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)
*10.52 -- 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
13.1 -- Portions of the 1998 Genzyme General Annual Report
incorporated by reference into Parts I and II of this Form
10-K. Filed herewith
13.2 -- Portions of the 1998 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 1998 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. Filed herewith
</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.
32
<PAGE> 33
** Confidential treatment has been granted for the deleted portions of Exhibits
10.21,
10.38-10.41, 10.43, 10.49 and 10.50.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.22 through 10.32 above are management contracts or compensatory
plans or arrangements in which the executive officers or directors of Genzyme
participate.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENZYME CORPORATION
Dated: March 31, 1999 By: /s/ DAVID J. MCLACHLAN
----------------------------------
DAVID J. MCLACHLAN
Executive Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ HENRI A. TERMEER Director and Principal Executive March 31, 1999
- ------------------------------------ Officer
HENRI A. TERMEER
/s/ DAVID J. MCLACHLAN Principal Financial Officer March 31, 1999
- ------------------------------------
DAVID J. MCLACHLAN
/s/ MICHAEL S. WYZGA Principal Accounting Officer March 31, 1999
- ------------------------------------
MICHAEL S. WYZGA
/s/ CONSTANTINE E. ANAGNOSTOPOULOS Director March 31, 1999
- ------------------------------------
CONSTANTINE E. ANAGNOSTOPOULOS
/s/ DOUGLAS A. BERTHIAUME Director March 31, 1999
- ------------------------------------
DOUGLAS A. BERTHIAUME
/s/ HENRY E. BLAIR Director March 31, 1999
- ------------------------------------
HENRY E. BLAIR
/s/ ROBERT J. CARPENTER Director March 31, 1999
- ------------------------------------
ROBERT J. CARPENTER
/s/ CHARLES L. COONEY Director March 31, 1999
- ------------------------------------
CHARLES L. COONEY
Director March , 1999
- ------------------------------------
HENRY R. LEWIS
</TABLE>
34
<PAGE> 35
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 -- Renewed Rights Agreement dated as of March 16, 1999 between
Genzyme and American Stock Transfer & Trust Company. Filed
as Exhibit 4 to Genzyme's Current Report on Form 8-K dated
March 17, 1999..............................................
*4.4 -- 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).....................................
*4.5 -- 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........................
*4.6 -- 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...............
*4.7 -- 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...............
*4.8 -- 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........................................................
*4.9 -- 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....................................
*4.10 -- 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....................
*4.11 -- Warrant Agreement between Genzyme and Comdisco, Inc. Filed
as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc.
("PharmaGenics") (File No. 0-20138).........................
*4.12 -- Form of Genzyme Corporation Convertible Note dated February
28, 1997 issued to Credit Suisse First Boston (Hong Kong)
Ltd. ("CSFB"). Filed as Exhibit 4.14 to Genzyme's Form
10-K/A for 1997.............................................
*4.13 -- Indenture, dated as of May 22, 1998, between Genzyme and
State Street Bank and Trust Company, as Trustee, including
the form of Note. Filed as Exhibit 4.3 to Genzyme's
Registration Statement on Form S-3 (File No. 333-59513).....
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*4.14 -- Registration Rights Agreement, dated as of May 19, 1998,
among Genzyme, Credit Suisse First Boston Corporation,
Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit
4.4 to Genzyme's Registration Statement on Form S-3 (File
No. 333-59513)..............................................
*4.15 -- Purchase Agreement, dated as of May 19, 1998, among Genzyme,
Credit Suisse First Boston Corporation, Goldman, Sachs & Co.
and Cowen & Company. Filed as Exhibit 4.5 to Genzyme's
Registration Statement on Form S-3 (File No. 333-59513).....
*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...............................................
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*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 -- Lease dated November 12, 1998 for Metrowest Place, 15
Pleasant Street Connector, Framingham, Massachusetts,
between Consolidated Group Service Company Limited
Partnership and Genzyme. Filed herewith.....................
*10.12 -- 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)...................
*10.13 -- 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)...................
*10.14 -- 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)......
*10.15 -- 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........................................................
*10.16 -- 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)...............................................
*10.17 -- 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)...................
*10.18 -- 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).............
*10.19 -- 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)...........................
*10.20 -- 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)....................................................
*10.21 -- Technology License and Supply Agreement dated as of
September 8, 1989 between Imedex and Genzyme. Filed as
Exhibit 10.30 to Genzyme's Form 10-K for 1990.**............
10.22 -- 1998 Director Stock Option Plan. Filed herewith.............
*10.23 -- 1990 Equity Incentive Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33249)..................................................
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*10.24 -- 1990 Employee Stock Purchase Plan. Filed as Exhibit 99.1 to
Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33291)..................................................
*10.25 -- 1996 Directors' Deferred Compensation Plan. Filed as Exhibit
99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33251)..................................................
*10.26 -- 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.............................
*10.27 -- 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 herewith...................
*10.28 -- 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
herewith....................................................
*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 -- Consulting Agreement dated December 14, 1998 between Genzyme
and Charles L. Cooney, Ph.D. Filed herewith.................
10.31 -- Consulting Agreement dated December 31, 1998 between Genzyme
and Robert J. Carpenter. Filed herewith.....................
10.32 -- Consulting Agreement dated July 1, 1998 between Genzyme and
Henry E. Blair. Filed herewith..............................
*10.33 -- 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)..............................
*10.34 -- 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)...................................................
*10.35 -- 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)......................
*10.36 -- 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).....................................
10.37 -- Second Amended and Restated Convertible Debt Agreement dated
as of December 28, 1998 by and between Genzyme and GTC.
Filed herewith..............................................
*10.38 -- 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)**..................................................
*10.39 -- 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)**.....................
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*10.40 -- 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**..........................
*10.41 -- 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**..........................
*10.42 -- 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)......
*10.43 -- 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**..................................................
*10.44 -- 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........................
*10.45 -- 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................................
*10.46 -- 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, Fleet
National Bank, as Administrative Agent, The First National
Bank of Boston, as Documentation Agent, and the lenders
identified in the signature pages thereto. Filed as Exhibit
10.49 to Genzyme's Form 10-K/A for 1997.....................
*10.47 -- Second Amendment to Credit Agreement dated as of April 15,
1998 by and among Genzyme and those of its subsidiaries
party thereto, Fleet National Bank, as Administrative Agent,
The First National Bank of Boston, as Documentation Agent,
and the lenders identified in the signature pages thereto.
Filed as Exhibit 10.1 to Genzyme's Form 10-Q for the quarter
ended June 30, 1998.........................................
*10.48 -- Note Purchase Agreement by and between Genzyme and CSFB
dated of February 27, 1997. Filed as Exhibit 10.50 to
Genzyme's Form 10-K/A for 1997..............................
*10.49 -- 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)**....
*10.50 -- 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)**..................................................
*10.51 -- 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)............................
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C> <C>
*10.52 -- 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....................
13.1 -- Portions of the 1998 Genzyme General Annual Report
incorporated by reference into Parts I and II of this Form
10-K. Filed herewith........................................
13.2 -- Portions of the 1998 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 1998 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. Filed herewith...........
</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 for the deleted portions of Exhibits
10.21, 10.38-10.41, 10.43, 10.49 and 10.50.
<PAGE> 1
EXHIBIT 10.11
METROWEST PLACE
15 PLEASANT STREET CONNECTOR
FRAMINGHAM, MASSACHUSETTS
LEASE
BETWEEN
CONSOLIDATED GROUP SERVICE COMPANY
LIMITED PARTNERSHIP,
AS LANDLORD
AND
GENZYME CORPORATION,
AS TENANT
DATED: NOVEMBER 12, 1998
<PAGE> 2
LEASE
THIS LEASE TOGETHER WITH ALL THE EXHIBITS HERETO, is dated as of this
12th day of November, 1998 (the "Execution Date") between the Landlord and the
Tenant as identified in Article I below, and this Lease relates to certain
Premises in the Building located as indicated in Article I below. The parties
hereby agree as follows:
I. REFERENCE DATA
1.1 BASIC TERMS. All references in this Lease to any Exhibit
attached hereto are deemed to incorporate herein all the data and provisions
stated in such Exhibit, including the attached Rules and Regulations, as they
may be changed from time to time in the manner provided in this Lease.
Each reference in this Lease to any of the following basic terms shall
be deemed to have the meanings for that term as stated below in this Article:
LANDLORD: Consolidated Group Service
Company Limited Partnership, a
Massachusetts limited partnership
LANDLORD'S ADDRESS: c/o Crosspoint Associates, Inc.
217 West Central Street
Natick, Massachusetts 01760
Attn: John W. Hueber and
James F. Carlin, III
TENANT: Genzyme Corporation, a
Massachusetts corporation
TENANT'S ADDRESS: One Kendall Square
Building 1400
Cambridge, Massachusetts 02139
Attn: Evan M. Lebson
Vice President and Treasurer
TERM
COMMENCEMENT DATE: January 1, 1999 or such earlier date as
may be permitted under Section 4.1
hereof.
TERM EXPIRATION DATE: December 31, 2005 with one five (5)
year option to extend the Term.
1
<PAGE> 3
ANNUAL FIXED RENT: As set forth in Section 3.1
ADDITIONAL RENT: Tenant shall also pay such additional
rent (as defined in Section 3.1), including
without limitation, the Electricity
Component as set forth in Section 3.1 as
well as the Tax and Operating Expense
Increases in excess of their respective base
amounts as set forth in Sections 8.1 and
9.2.
BUILDING: The building located on the parcel of land
consisting of approximately 5.96 acres and
which is commonly known as and numbered 15
Pleasant Street Connector, Framingham,
Massachusetts (the "Land"). The Land and the
location of the Building thereon are as
shown on the Title Insurance Plan of Land in
Framingham and Southborough, Massachusetts,
dated March 4, 1996, as prepared by Rizzo
Associates, Inc. (the "Site Plan"); however,
Tenant acknowledges that Landlord has
disclosed to Tenant that the parking areas
shown on the Site Plan have been restriped
and expanded and that certain other minor
changes have been made to the site shown on
the Site Plan.
TOTAL RENTABLE FLOOR
AREA OF BUILDING: 92,591 square feet
PREMISES: The Building.
PARKING: 379 parking spaces.
PERMITTED USE: General office use, employee cafeteria use
to the extent provided in Section 13.26, and
any other uses permitted as of right or by
special permit under applicable Framingham
and
2
<PAGE> 4
Southborough zoning laws if Tenant obtains
such special permit at its own expense and
the grant of such special permit is final
and not subject to further review or appeal.
EXPENSE REIMBURSEMENT: No more than $10.00 per rentable square feet
of the Premises for a total of $925,910.00
COMMERCIAL GENERAL LIABILITY
INSURANCE: $10,000,000.00
BROKER: CB Richard Ellis Whittier Partners
PROPERTY: The Building and Land, including without
limitation all improvements on the Land,
parking areas, garages, drives, walks,
landscaped areas and other areas.
BASE REAL ESTATE TAXES: $1.45 per square foot for the Total Rentable
Floor Area of the Premises
BASE OPERATING EXPENSES: $5.76 per square foot for the Total Rentable
Floor Area of the Premises
1.2 EXHIBITS. The following is a list of Exhibits attached to
this Lease.
Exhibit A: Floor Plan of the Premises
Exhibit A-1: Site Plan
Exhibit B: Rules and Regulations
Exhibit C: Schedule of Cleaning Services
Exhibit D: Signage
Exhibit E: Base Year Operating Expenses Budget
Exhibit F: Required Capital Improvements
Exhibit G: Term Commencement Letter
II. PREMISES AND APPURTENANT RIGHTS
2.1 LEASE OF PREMISES. Landlord hereby leases to Tenant and Tenant
hereby accepts from Landlord, the Premises consisting of 92,591 square feet of
rentable area consisting of the entire Building as described in EXHIBIT A, for
the Term of this Lease and upon the terms and conditions hereinafter set forth.
The Term of the Lease shall be for seven (7) years, commencing on the Term
Commencement Date and expiring at the close of business of the Term Expiration
Date.
3
<PAGE> 5
2.2 APPURTENANT RIGHTS.
(a) Tenant shall have, as appurtenant to the Premises,
the exclusive right to use, and permit its invitees to use, parking areas,
public or common lobbies, hallways, stairways and elevators and common walkways
necessary for access to the Building, but such rights shall always be subject to
reasonable Rules and Regulations as set forth in Exhibit B hereto and as issued
pursuant to Section 13.5 hereof.
(b) Tenant agrees that Landlord shall have the right to
place in, over and through the Land, but not the Building or that portion of the
Land located underneath the Building unless the particular item is for the
specific benefit of the Building (but to the extent reasonably possible so as to
reduce to a minimum interference with Tenant's use of the Premises) utility
lines, pipes, equipment and the like. In no event shall Landlord's exercise of
this right reduce the number of parking spaces on the Land to less than 370. Any
such exercise of its rights by Landlord shall be undertaken in such manner and
at such times as to minimize any disruption to Tenant's business and use of the
Premises; shall not diminish the useful life of the parking surface; nor cause
any increase in Operating Expenses unless such exercise was undertaken for the
benefit of the Premises. Following any such exercise, Landlord shall remove all
construction materials and debris and restore the portion of the Land so
affected to substantially the same condition it was in prior to Landlord's
exercise.
III. ANNUAL TOTAL RENT
3.1 PAYMENT. Tenant agrees to pay to Landlord or to its Agent (as
may be identified by Landlord by written notice to Tenant), or as otherwise
directed by Landlord, Annual Fixed Rent for each year of the Term of the Lease
which shall be for the amounts set forth below, without offset, abatement,
deduction or demand except as expressly provided in this Lease, plus an
Electricity Component of eighty cents ($0.80) per square foot per year for the
Total Rentable Floor Area of the Premises:
<TABLE>
<CAPTION>
MONTHS RENT/SQ.FT. ANNUAL RENT MONTHLY RENT
------ ----------- ----------- ------------
<S> <C> <C> <C>
1-12 $19.00 $1,759,229.00 $146,602.42
13-24 $21.00 $1,944,411.00 $162,034.25
25-36 $22.00 $2,037,002.00 $169,750.17
37-48 $23.00 $2,129,593.00 $177,466.08
49-60 $23.50 $2,175,888.50 $181,324.04
61-72 $24.00 $2,222,184.00 $185,182.00
73-84 $24.50 $2,268,479.50 $189,039.96
</TABLE>
Tenant shall pay the Annual Fixed Rent plus the Electricity Component
in equal monthly installments (and at that rate for a partial month), in
advance, on or within five (5) business days after the first day of each and
every calendar month during the Term of
4
<PAGE> 6
this Lease, at Landlord's Address, or at such other place as Landlord shall from
time to time designate by notice, in lawful money of the United States (Annual
Fixed Rent does not include the amount representing Tenant's share of increases
over Base Real Estate Taxes and Base Operating Expenses). Unless herein
otherwise provided, the Rent Commencement Date shall be the Term Commencement
Date; however, on the Execution Date the deposit paid by Tenant to Broker in
connection with the Letter of Intent dated August 7, 1998 between Landlord and
Tenant shall be released to Landlord and shall be applied to and deemed to
constitute payment in full of the first month's rent. If any installment of
Annual Fixed Rent is not paid when due or within any applicable grace periods,
Tenant shall pay, in addition to any charges under Section 13.14, upon demand of
Landlord, an administrative fee equal to five (5%) percent of the overdue
payment. Tenant shall pay all other costs, charges and assessments as may be
owed by it to Landlord under this Lease including, but not limited to, the
Electricity Component and increases over Base Real Estate Taxes and Base
Operating Expenses as additional rent ("Additional Rent"). Tenant's failure to
make any payment of Additional Rent upon the terms and conditions described
herein shall be treated as a default in the payment of Annual Fixed Rent, in
which event Landlord shall have all rights and remedies provided herein for the
non-payment of Annual Fixed Rent and for any other breach hereof.
IV. TERM COMMENCEMENT AND CONDITION
4.1 COMMENCEMENT DATE. The Term Commencement Date hereof shall be
the earlier of (i) January 1, 1999 or (ii) the date Tenant's personnel shall
(but only with the prior consent of Landlord) occupy all or any part of the
Premises for the conduct of any aspect of its business. Tenant's permitted
access to any part of the Premises for the purposes of installing wiring;
constructing Tenant's build-out of the Premises; installing furniture, fixtures,
equipment or personal property shall not in and of itself constitute occupying
all or any part of the Premises for the conduct of its business. In the event
that any of Tenant's personnel take occupancy prior to January 1, 1999, such
occupancy shall be governed by the terms which apply to the first twelve (12)
months of the Lease and shall be deemed to be part of the first twelve (12)
months which shall expire as of December 31, 1999 regardless of when Tenant
takes occupancy of the Premises; however, the Annual Fixed Rent due from Tenant
for such period prior to January 1, 1999 shall be based only on that portion of
the Premises then so occupied by Tenant. In no event shall the Term Expiration
Date be earlier than December 31, 2005.
V. USE OF PREMISES
5.1 PERMITTED USE. Tenant agrees that during the entire Term of
this Lease it shall use and occupy the Premises only for the Permitted Use
specified in Section 1.1 hereof and for no other use. Landlord agrees that it
shall, at Tenant's sole expense, cooperate with and support any efforts by
Tenant to obtain any special permits which Tenant may reasonably seek to obtain
under applicable Framingham and
5
<PAGE> 7
Southborough zoning laws; such cooperation shall be consistent with Landlord's
obligations under Section 15.6 below and shall include, without limitation, the
co-signing of required applications and providing any support required to be
provided by the title holder in connection with hearings before any appropriate
planning board , zoning board of appeals, or other permit granting authority.
Landlord agrees that it shall not, without Tenant's approval, which is not to be
unreasonably withheld, initiate or consent to any proposed changes of zoning
laws that would adversely affect the Premises during the Lease Term. Landlord
agrees, promptly upon Landlord's receipt thereof, to provide Tenant with a copy
of all notices of any proposed zoning law changes and all notices of any
proposed zoning petitions submitted by any abutter seeking any variances,
special permits, site plan approvals or the like.
5.2 INSTALLATIONS AND ALTERATIONS BY TENANT
(a) Landlord and Tenant acknowledge that Tenant intends
to make certain alterations and improvements to the Premises for Tenant's
initial occupancy thereof as generally described in and governed by Section 15.2
below. Tenant shall make no alterations, additions (including, for the purposes
hereof, wall-to-wall carpeting), or other improvements in or to the Premises
without Landlord's prior written consent (which shall not be unreasonably
withheld, conditioned or delayed) in each instance. Any such other alterations,
additions or improvements shall (i) be in accordance with complete plans and
specifications approved by Landlord within ten (10) days after receipt of such
complete set of plans and specifications (ii) be performed in a good and
workmanlike manner in compliance with all applicable laws, regulations, by-laws
or ordinances, (iii) be made only by "Approved Contractors", as hereinafter
defined., (iv) be made at Tenant's sole expense (but with the benefit of any
improvement allowance provided by the Landlord) and (v) become part of the
Premises and property of the Landlord unless Landlord and Tenant agree, at the
time of Landlord's approval of the alterations and additions, that the same
shall remain the property of, and shall be removable by, Tenant, in which event
Tenant shall restore any damage to the finished character of the Premises
created by such removal. If at any time the Tenant seeks Landlord's approval to
build-out any portion of the Building for any use other than office use, the
Tenant shall be obligated prior to the expiration or earlier termination of the
Lease to restore said portion of the Building to a typical open-floor office
layout unless Landlord and Tenant, at the time of Landlord's approval of that
build-out, agree otherwise.
For Purposes of this Lease, an "Approved Contractor" shall
mean a contractor or mechanic identified by Tenant in writing, who has been
approved by Landlord (such approval not to be unreasonably withheld or delayed).
Contractors may be approved in one of two ways. First, Tenant may submit to
Landlord in writing from time to time a list (or a revised list) of contractors
that Tenant anticipates using from time to time to make alterations, repairs and
improvements to the Premises. Unless Landlord makes any reasonable objection to
any of the contractors identified on such list within ten (10) days after
receipt of such list from Tenant, all contractors identified on such list shall
be deemed "Approved Contractors". Second, Tenant may submit to Landlord from
time
6
<PAGE> 8
to time requests for Landlord to approve specific contractors (not already on
the list of Approved Contractors) for work in the Premises. Landlord shall have
the right, upon written notice to Tenant to withdraw its approval of previously
approved contractors at any time for any cause as determined in Landlord's
reasonable judgment. A contractor's failure to provide or maintain adequate
insurance levels shall be a reasonable basis for Landlord to withhold or
withdraw approval unless Tenant notifies Landlord in writing that such
contractor shall be covered by insurance then being maintained by Landlord and
if Tenant provides documentary evidence that said Contractor is covered and of
the amount of coverage.
(b) All articles of personal property and all business
fixtures, machinery and equipment and furniture owned or installed by Tenant
solely at its expense in the Premises ("Tenant's Removable Property") shall
remain the property of Tenant and may be removed by Tenant at any time during,
and shall be removed prior to the expiration of this Lease, provided that
Tenant, at its expense, shall repair any damage to Premises and the Building
caused by any such installation or removal and provided that Tenant is not in
default hereunder beyond any applicable notice, grace or cure period.
(c) In no event shall Landlord be liable for any labor or
materials furnished or to be furnished to Tenant, and no mechanic's or other
lien for any such labor or materials shall attach to or affect the reversion or
other estate or interest of Landlord in or to the Premises. Whenever any
mechanic's lien shall have been filed against the Property based upon any act or
interest of Tenant or of anyone claiming through Tenant, Tenant shall within
fifteen (15) days after Tenant receives notice or has reason to know of such
filing take all such action, such as bonding, deposit or payment, as will result
in the removal of such lien within the said 15 days. If said lien has not been
removed upon the expiration of said fifteen days, Landlord may, but is not
obligated to, remove or satisfy such lien at Tenant's sole cost and expense, and
such cost or expense shall become part of the Additional Rent, payable by Tenant
upon demand of Landlord.
5.3 COMPLIANCE WITH LAWS. In its use and occupancy of the
Premises, Tenant shall comply with the requirements of all governmental laws,
codes, ordinances, rules and regulations, ("Laws") and any and all directions,
rules and regulations of Boards of Fire Underwriters, Rating Boards or the like
(or successor agencies); and Tenant shall obtain and maintain all permits,
licenses and the like, required by all applicable laws in respect of such use
and occupancy. Landlord agrees that it shall, at Tenant's expense, cooperate
with and support Tenant's applications for all such permits, licenses and the
like in the manner set forth in Section 15.6 below. If compliance with any Laws
enacted after the Execution Date requires alterations or improvements to the
Premises, the cost of which would constitute a "Capital Expenditure" as defined
in Section 9.1, such alterations and/or improvements shall start at the latest
date permitted by such Laws and shall be made over the longest period of time
permitted by such Laws unless Tenant elects an earlier and faster implementation
schedule; and the cost of such alterations and/or improvements shall be treated
and paid for as Capital Expenditure under Section 9.1. If, however, Landlord
determines, in its reasonable judgement, that to make any particular alterations
and/or improvements over
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the "longest period of time permitted" would result in making the total cost of
such particular alterations and/or improvements so significantly higher as to be
commercially unreasonable under the circumstances, Landlord may elect to make
such alterations and/or improvements over such earlier and faster implementation
schedule as is consistent with spreading the costs thereof over the longest
period commercially practicable. Promptly after Landlord makes any such
determination, Landlord shall provide Tenant with a reasonably detailed
statement describing such determination. Tenant shall have the right to raise
any reasonable good faith objections to any such determination by giving
Landlord notice of such objection within 15 days after receipt of the aforesaid
detailed statement. Nothing in this paragraph shall prohibit the Landlord from
making any such alterations or improvements when it deems appropriate; rather,
the provisions of this paragraph are simply meant to govern the timing of the
assignment of such costs to Tenant.
VI. ASSIGNMENT AND SUBLETTING
6.1 PROHIBITION.
(a) Notwithstanding anything to the contrary in the Lease
contained, Tenant shall at all times and in all events be and remain primarily
liable for its obligations under this Lease. Tenant covenants and agrees that,
whether voluntarily, involuntarily, by operation of law or otherwise, neither
this Lease nor the Term and estate hereby granted, nor any interest herein or
therein, will be assigned, mortgaged, pledged, encumbered or otherwise
transferred and that neither the Premises nor any part thereof will be
encumbered in any manner by reason of any act or omission on the part of Tenant,
or used or occupied or permitted to be used or occupied for any use other than
the Permitted Use, or by anyone other than Tenant. Tenant further covenants and
agrees not to sublet all or any part of the Premises (which term, without
limitation, shall include granting of concessions, licenses and the like), or
offer or advertise for assignment or subletting all or any part of the Premises
without the prior written consent of the Landlord, which consent shall not be
unreasonably withheld, conditioned or delayed. If any installations or
alterations are necessary in connection with any such sublease or assignment,
all such work shall be governed by the terms of Article V hereof, and if the
fact of such a sublease or assignment triggers compliance of any aspect of the
Property with Laws the cost of such compliance shall be borne by Tenant.
(b) The provisions of paragraph (a) of this Section 6.1
shall not, however, apply to transactions by Tenant if it involves twenty
percent (20%) or less of the Total Rentable Floor Area of the Building and is
with an entity into or with which Tenant is merged or consolidated or to which
substantially all of Tenant's assets, or substantially all of the assets of any
one or more of Tenant's divisions are transferred or to any entity which
controls or is controlled by Tenant or is under common control with Tenant (an
"Affiliate"). In the event of any sublet or assignment of this Lease to any
entity that is not an Affiliate of Tenant or which involves more than twenty
percent (20%) of the Total Rentable Floor Area, then (i) the successor or
assignee/sublessee
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Tenant shall have a net worth reasonably adequate to enable its successor or
assignee to perform its obligations hereunder as reasonably determined by
Landlord (in making such determination Landlord may also consider any material
adverse change in the financial strength of Tenant from its strength as of the
Execution Date); (ii) proof satisfactory to Landlord of such net worth shall
have been delivered to Landlord at least 10 days prior to the effective date of
any such transaction; then, in addition, in connection with any assignment or
sublet of this Lease (either to an Affiliate or a non-Affiliate of Tenant) the
assignee or subtenant shall agree directly with Landlord, by written instrument
in form reasonably satisfactory to Landlord, to assume and be bound by all the
obligations of Tenant hereunder including, without limitation, the covenant
against further assignment and subletting without the Landlord's prior written
consent pursuant to the terms hereof. Tenant shall notify Landlord in writing of
any such sublet or assignment regardless of whether Landlord's consent is
required.
(c) In the event Landlord consents to any assignment or
subletting to a non-Affiliate or to an Affiliate if for more than twenty percent
(20%) of the Total Rentable Floor Area, one half of any rent payable to Tenant
in excess of the Annual Fixed Rent and Additional Rent (i.e., Tax Increases and
Operating Cost Increase payable by Tenant under this Lease) shall be the sole
property of Landlord, payable as Additional Rent upon demand of Landlord;
however, prior to calculating the amount of such excess rent to be shared by
Landlord and Tenant, Tenant shall be entitled to net out (and retain) the
following of its out-of-pocket third-party costs of such transaction: reasonable
attorney's fees, broker's commission, and advertising/marketing costs.
VII. REPAIRS AND CONDITION OF PREMISES; BUILDING SERVICES
7.1 REPAIR AND MAINTENANCE. Landlord and Tenant agree that the
Premises, Building, public areas, roof (including gutters and downspouts),
exterior walls (including exterior glass), structure of the Building (including
all plumbing, mechanical, sewage, elevator and electrical systems) and the
interior of the Premises shall be kept neat and clean and shall be maintained
substantially in the same good order, working condition and repair as they were
in on the Commencement Date (unless they were put into better condition
thereafter, in which case they will be maintained substantially in such better
condition), reasonable wear and tear, and damage by fire, other casualty or a
taking by eminent domain only excepted, . Landlord shall not be responsible to
make any improvements or repairs to the Building other than as expressly
provided in Sections 7.2 (a) and 15.1 or elsewhere in this Lease.
7.2 RESPONSIBILITY FOR REPAIRS AND MAINTENANCE
(a) Landlord shall be responsible for performing, or
causing to be performed, all repairs and maintenance necessary to operate,
maintain and repair the Premises and the Building in the manner provided in
Sections 7.1 above and Section 7.3 below, except to the extent that Tenant
exercises its right under Section 7.6 to contract separately for the delivery of
certain services for the Premises and Building.
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(b) Except for Landlord's obligations under Section 15.1
to perform, at its expense, those capital improvements set forth on Exhibit F,
Tenant shall be responsible for paying all costs of operating, maintaining and
repairing the Building and Premises in the manner provided in Section 7.1 above
and Section 7.3 below, but only to the extent that such costs of so operating,
maintaining and repairing the Building and/or Premises exceed Base Operating
Expenses; Tenant's obligation to pay such costs are more particularly described
in, and governed by, the provisions of Article IX below; however, Tenant shall
also be responsible for the cost of repairs which may be made necessary by
reason of damage to the Building caused by any act or neglect of Tenant or its
agents, employees, contractors or invitees, subject, however, to the waiver of
subrogation provisions of Section 13.16.
(c) If Tenant becomes aware of the need of any repairs
that are required to be made pursuant to the terms hereof, Tenant shall promptly
give Landlord notice of such need. Landlord may elect to make any repairs
immediately and without notice to Tenant if Landlord reasonably believes that
there exists immediate danger to persons or property.
7.3 BUILDING SERVICES. Landlord shall operate and maintain the
Building and the Land in the same condition and quality as other comparable
buildings and parcels of land in first class suburban office parks in the
Framingham/Southborough area. Landlord shall make available to Tenant at all
times heating and cooling as normal seasonal changes may require, provide
reasonable comfortable space temperature and ventilation for occupants of the
Premises under normal business operation at an occupancy of not more than one
person per 250 square feet of rentable area and an electrical load not exceeding
2.5 watts per square foot of rentable area. Tenant shall not introduce into the
Premises personnel or equipment which overloads the capacity of the Building
system or in any other way interferes with the system's ability to perform its
proper functions adequately, PROVIDED, however, if Tenant shall violate the
foregoing, Landlord may, at its option, but without being required to do so,
elect to provide supplementary systems or otherwise take steps to cure such
violation, at Tenant's sole cost and expense. This shall relate, not only to
system installation and removal, but also to continuing costs of operation and
related expenses.
Landlord shall also provide, without additional charge to Tenant:
(i) Passenger elevator service from the passenger
elevator system (if any);
(ii) Hot water for lavatory purposes and cold water
(at temperatures and otherwise as supplied by the
City, Town or other water provider) for drinking,
lavatory and toilet purposes.
(iii) Cleaning and janitorial services to the
Premises on Monday through Friday, excluding national
holidays, provided the same are
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kept in order by Tenant, in accordance with the
cleaning standards set forth from time to time in
EXHIBIT C attached hereto.
(iv) 24-hour access to the Premises subject to such
reasonable security systems, procedures and
restrictions as Tenant may install, but subject to
Landlord's reasonable approval.
7.4 ELECTRICITY. Landlord shall supply electricity, as supplied to
it by the electric utility, to the Premises to meet normal and usual demand
requirements of Tenant for premises lighting; typical office copier, computer
and related equipment and convenience outlets. Tenant agrees, in its use of the
Premises, not to unreasonably burden Building systems nor to exceed any limits
from time to time established under applicable governmental regulations.
7.5 INTERRUPTION OR CURTAILMENT OF BUILDING SERVICES. Landlord
shall have the right to interrupt, curtail, stop or suspend the furnishing of
any services and the operation of any of the Building's systems, in the case of
emergency or accident, or in the event of Force Majeure. In the event of such
emergency, accident or Force Majeure, Landlord shall attempt to notify Tenant of
such interruption, curtailment, stoppage or suspension as soon as reasonably
possible. Tenant shall have no claim of any type or nature whatsoever against
Landlord for any interruption, curtailment, stoppage or suspension of any
electrical or other service being provided hereunder, nor shall any of the same
result in any reduction of Tenant's obligations under this Lease. Landlord shall
not abate or reduce the Annual Fixed Rent or other compensation of whatever form
or nature due from Tenant to Landlord hereunder on account of any such
interruption, curtailment, stoppage or suspension, and Landlord shall use
reasonable diligence, to the extent possible under the circumstances, to
eliminate the cause of such interruption, curtailment, stoppage or suspension.
Notwithstanding the foregoing, if the electrical service to the Premises is
completely discontinued for more than one full work day other than a weekend day
or National Holiday, then the Tenant shall receive a proportional abatement of
the Electricity Component based on the amount of time that electrical service to
the Premises is discontinued. If the delivery of electrical service to the
Premises is discontinued for in excess of five work days, as such work days are
described above, such discontinuation is due to Landlord's gross negligence, and
such discontinuation materially and adversely affects Tenant's ability to
conduct its business in the Premises, then Tenant's Annual Fixed Rent hereunder
shall be abated for each work day beyond such fifth day until such time as the
electrical service is restored.
7.6 TENANT'S CONTRACTS FOR SERVICES. Landlord hereby agrees to
permit Tenant to contract separately for the delivery of certain services to the
Building including, but not limited to, janitorial and cleaning services,
security services and/or snow removal services. However, in no event may Tenant
contract separately for the delivery of property management, maintenance or
repair services relating to the Premises. The Tenant shall deliver to Landlord a
copy of the proposed contract for services, which shall be subject to Landlord's
approval, which shall not be unreasonably withheld, delayed or conditioned.
Landlord agrees to cooperate with, and cause its employees,
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agents and contractors to cooperate with, any provider of such services selected
by Tenant and approved by Landlord. Any such contract must be terminable upon no
more than thirty (30) days prior notice. Landlord shall have the right to
terminate any such contract if Landlord is not reasonably satisfied with the
services delivered and shall do so by giving thirty days prior notice thereof to
both Tenant and the particular contractor. Upon Landlord's approval of any such
contract, Annual Fixed Rent and Base Operating Expenses shall be adjusted
downward by the amount to be paid by Tenant for such services under the
particular contract, which downward adjustment shall in no event be greater than
the amount of the line item for the services provided under such contract set
forth in the attached Exhibit E. If the services provided under such approved
contract are not identified as a separate line item on Exhibit E, but are
services being provided by Landlord under this Lease, then Annual Fixed Rent and
Base Operating Expenses shall be adjusted downward by the fair market value cost
as commonly charged for the delivery of such services in the Framingham-
Southborough area, but such downward adjustment may not exceed the reasonable
amount Landlord states it has budgeted for said service. Such payment by Tenant
for services shall be made in accordance with the payment schedule agreed upon
between Tenant and such service provider, as long as a copy thereof has been
provided to Landlord by Tenant. Landlord's related adjustments shall be made on
the same basis as long as Tenant remains in good payment standing under the
contract between Tenant and such service provider. Upon the request from
Landlord from time to time, Tenant shall provide Landlord with evidence,
reasonably satisfactory to Landlord, that Tenant is in good payment standing
under any such contract. Tenant agrees to pay for any such services at the time
or after they have been delivered but not prior to their delivery. Tenant hereby
agrees to indemnify and hold Landlord harmless from and against any and all
costs, expenses, damages and claims which may be incurred by Landlord in
connection with any such contract for services into which Tenant has entered.
VIII. REAL ESTATE TAXES
It being the intention of the parties hereto that the Annual Fixed Rent
be net of any increases (over Base Real Estate Taxes) in real estate taxes and
all other governmental impositions in the nature thereof or otherwise similarly
related to the Property, Tenant shall pay, as Additional Rent, an escalation
charge, calculated and payable as follows:
8.1 PAYMENT ON ACCOUNT OF REAL ESTATE TAXES.
(a) (i) "Tax Period" or "Tax Year" shall be any fiscal
tax period in respect of which Taxes are due and
payable to the appropriate governmental taxing
authority, any portion of which period occurs
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during the Term of this Lease, the first such period
being the one in which the Term Commencement Date
occurs.
(ii) "Taxes" shall mean the real estate taxes and
other taxes, levies and assessments imposed upon the
Property and upon any personal property of Landlord
used in the operation thereof, or Landlord's interest
in the Property or such personal property; charges,
fees, assessments and payments for transit, housing,
police, fire or other governmental services or
purported benefits to the Property; service or user
payments in lieu of taxes; and any and all other
taxes, levies, assessments and charges arising from
the construction, ownership, leasing, operation, use
or occupancy of the Property or based upon rentals
derived therefrom, which are or shall be imposed by
Municipal or other authorities. Betterment
Assessments and interest thereon shall be apportioned
equally over the longest period permitted by law. As
of the date of execution hereof, "Taxes" shall not
include any franchise, rental, income or profit tax,
capital levy or excise, provided, however, that any
of the same and any other tax, excise, fee, levy,
charge or assessment, however described, that may in
the future be levied or assessed as a substitute for
or an addition to, in whole or in part, any tax, levy
or assessment which would otherwise constitute
"Taxes," foreseen or unforeseen and whether or not
now customary or in the contemplation of the parties
on the date of execution of this Lease, shall
constitute "Taxes," but only to the extent calculated
as if the Building and the Land is the only real
estate owned by Landlord. "Taxes" shall also include
expenses of tax abatement or other proceedings
contesting assessments or levies.
(b) If for any reason, Taxes as allocated on a per square
foot basis for the Total Rentable Floor Area of the Premises shall be greater
for any Tax Year than Base Real Estate Taxes, Tenant shall pay to Landlord, as
Additional Rent, an Escalation Charge in an amount equal to (i) the excess of
Taxes on a square foot basis over Base Real Estate Taxes (the "Tax Increase"),
such amount to be prorated for any fraction of a Tax Year in which the
Commencement Date falls or the Term of this Lease ends.
(c) Tenant shall make reasonably estimated escalation
payments on account of the Tax Increase in monthly installments; such estimated
escalation payments shall be based upon the prior year's assessed Taxes in
comparison with the preliminary or estimated tax bills issued by the
municipality. Landlord shall provide Tenant with a copy of any preliminary
estimated and final tax bill issued by the municipality. Upon receipt by
Landlord of a final tax bill each Tax Year, Landlord shall advise Tenant of the
final amount of Taxes due and the calculation of the Tax Increase and Tenant's
share thereof. If the amount paid by Tenant under subsection (b) above exceeds
the estimated payments for such Tax Year then Landlord shall repay the Tenant
the amount of such overpayment within thirty (30) days after so advising Tenant
(or refund within 30 days such
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overpayment if the Term of this Lease has ended and Tenant has no further
obligation to Landlord). If, however, the amount payable by Tenant under
Subsection (b) above is greater than such estimated payments made by Tenant for
such Tax Year, Tenant shall pay the amount of such shortfall within 30 days
after being so advised by Landlord.
8.2 ABATEMENT. If Landlord shall receive a tax abatement or refund
of Taxes with respect to any Tax Year, which is not due to vacancies in the
Building, then, if Tenant shall have made any payments on account thereof,
Landlord shall pay to Tenant its share of any balance remaining thereof after
deducting Landlord's expenses reasonably incurred in obtaining such refund
provided (i) there does not then exist a Default of Tenant, and (ii) that in no
event shall Tenant either be entitled to receive more than the payments made by
Tenant on account of Tax Increases for such Year pursuant to paragraph (c) of
Section 8.1 or receive any repayment or abatement of Annual Fixed Rent if Taxes
for any year are less than Base Real Estate Taxes. Landlord is not currently
seeking an abatement of Taxes. If Landlord elects not to seek a tax abatement or
refund in a particular fiscal year, Tenant may elect to do so; however, Tenant
shall keep Landlord informed in writing of all aspects of the abatement
proceedings and Landlord shall have a right of approval over any abatement
settlement, which approval shall not be unreasonably withheld, delayed or
conditioned. In no event may Tenant seek an abatement on terms which would
allocate abated taxes or refunds disproportionately to years in which the Tenant
is responsible for the payment of a Tax Increase. Landlord agrees that it shall,
at Tenant's expense, cooperate with and support any application by Tenant for a
tax abatement or refund; such cooperation shall include, without limitation, the
co-signing of all applications, providing Tenant with historic operating cost
and tax data for the Premises, and providing such other support as may be
necessary and uniquely available from Landlord as the owner of the Property.
IX. OPERATING EXPENSES
It being the intention of the parties that the Annual Fixed Rent be net
of any Building Operating Expense increases, Tenant has agreed to pay, as
Additional Rent, an Escalation Charge, calculated and payable as follows:
9.1 DEFINITIONS, ETC. For the purposes of this Lease, the
following terms shall have the following respective meanings:
OPERATING YEAR: Each calendar year in which any part of the
Term of this Lease shall fall.
OPERATING EXPENSES: The aggregate costs and expenses incurred
by Landlord with respect to the cleaning, administration, insuring, repair and
replacements, ownership, management, landscaping and groundskeeping, maintenance
and operation of the Property, and all Building mechanical, electrical and other
systems and facilities including, without limitation, the lighting, plumbing,
heating, ventilation and air conditioning equipment serving the entire Building,
the elevators and all other electrical
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and other energy or utility service equipment serving the entire Building. In
the event of any loss, repair or damage to the Property or Building which is
covered by insurance, the portion of the cost of such loss, repair or damage
that must be paid for by Landlord due to the existence of the deductible (to the
extent that said deductible is for a reasonable amount compared to those
maintained for comparable buildings) shall be included in Operating Expenses.
Any replacements permitted hereunder shall be substantially the same in quality
and/or utility as the item being replaced (unless Tenant consents to any upgrade
in quality or utility) or shall be expected to reduce Operating Expenses or
otherwise provide some other economic benefit to the operation of Premises such
as the conserving of energy or environmental resources. Landlord agrees to
submit its annual projected Operating Expenses budget to Tenant for its review
not less than thirty (30) days prior to the beginning of each Operating Year;
however, as long as Landlord is not shown to have been unreasonable in
calculation of any items in said budget, Tenant shall have no right to object to
any such items. Landlord hereby agrees that the Operating Expense line item for
management fee and Landlord's off-site administrative costs, which are
subsections of the Management Services line item of the attached Exhibit E,
shall in no event exceed three and one half percent (3 1/2%) of the aggregate of
Annual Fixed Rent and Additional Rent.
If, during the Term of this Lease, Landlord shall make a Capital
Expenditure as hereafter defined, there shall be included in the Operating
Expenses for the Operating Year in which it was made and in Operating Expenses
for each succeeding Operating Year, a proportionate charge-off of such Capital
Expenditure. Annual proportionate charge-off percentages shall be reasonably
determined by Landlord by dividing the original Capital Expenditure plus an
interest factor equal to the interest rate yield on U.S. Treasury securities
then having a maturity closest to the useful life of the particular Capital
Expenditure item plus 250 basis points by the number of years of useful life of
the Capital Expenditure. Useful life shall be based on the industry standards
for the anticipated functional life expectancy of the particular item at issue.
If there is no industry standard, then Landlord shall consult with the
manufacturer of the particular item to determine its useful life. Promptly after
determining (as provided below) whether an item is a Capital Expenditure, the
useful life thereof, and the amount of any annual proportionate charge-off
percentage, Landlord shall provide Tenant with a reasonably detailed statement
describing such determination. Tenant shall have the right to raise any
reasonable, good faith objections to such determination by giving Landlord
notice of such objection within 15 days after receipt of the aforesaid detailed
statement.
For purposes of this Lease, whether any particular item (or series of
functionally related items or components which, in the aggregate, represent a
single repair or replacement project) constitutes a Capital Expenditure or an
Operating Expense, shall be determined in accordance with the following
principles:
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(a) Any single item costing less than $10,000, regardless of its
useful life and regardless of whether such item would be considered
capital under industry standards, shall not be treated as a Capital
Expenditure, but rather as an item of Operating Expense, the full cost
of which shall be included in Operating Expenses for the year incurred.
(b) Any single item either (i) costing $10,000 or more, which
industry standards customarily treat as an operating expense chargeable
against income even if its useful life is greater than one year (such
as, by way of example only, the painting of the exterior of the
Building), or (ii) which has a useful life of three years or less,
shall be treated as an item of Operating Expense, the full cost of
which shall be included in Operating Expenses for the year incurred.
(c) Any single item costing $10,000 or more and having a useful
life of more than three years, which industry standards customarily
treats as a capital item shall be treated as a Capital Expenditure, an
annual proportionate charge-off of which shall be included in Operating
Expenses as provided above in this Section 9.1.
(d) For purposes of determining whether the foregoing dollar
thresholds have been met, the cost of any series of functionally
related items or components which represent a single repair or
replacement project shall be aggregated.
Tenant shall not be charged the cost of any Capital Expenditure incurred in
connection with any expansion, or any material increase in the quality of
operation or the aesthetic appearance, of the Building unless Tenant has agreed
thereto in writing. However, any costs associated with any Capital Expenditures
required to be undertaken by the Landlord during the first twelve months of
Tenant's occupancy of the Premises shall not be included in Operating Expenses
and shall not be charged to Tenant, but rather shall be paid for solely by
Landlord. Capital Expenditures to be required in the first twelve months of
Tenant's occupancy shall be those expressly set forth in Exhibit F hereto or
those which are deemed necessary during said twelve month period in order to
remedy a failure in any of the following items as long as no such failure is
caused by Tenant or its agents, contractors or representatives: the Building's
roof (including gutters and downspouts; exterior walls including exterior
glass); structural and weight-bearing walls and members; floor slabs; base
building as to each of the following systems: HVAC, plumbing, sewage, mechanical
or electrical systems; elevators; and the structural integrity of the Building's
public areas, parking areas and walkways. Landlord's obligation to pay for such
Capital Expenditures during said twelve month period shall not include the
obligation to pay any Capital Expenditures necessary to cause the Premises to
comply with any statutory, regulatory or other similar set of guidelines, except
as otherwise expressly set forth in Exhibit F or elsewhere in this Lease.
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9.2 TENANT'S PAYMENTS.
(a) If for any Operating Year the Operating Expenses as
allocated on a per square foot basis for the Total Rentable Floor Area of the
Premises shall exceed the Base Operating Expenses, Tenant shall pay to Landlord,
as Additional Rent, an escalation charge in an amount equal to the excess of
such Operating Expenses as calculated for the entire Premises ("Operating
Expense Increase"), such amount to be apportioned for any Operating Year in
which the Term Commencement Date falls or the Term of this Lease ends.
(b) Tenant shall make reasonably estimated escalation
payments on account of any Operating Expense Increase in monthly installments
based on the budget described in Section 9.1. Within ninety (90) days after the
end of each Operating Year, Landlord shall submit to Tenant a reasonably
detailed statement (including a reasonably detailed statement of the expenses
included in the sub-sections of the Operating Expense line item for Management
Services which are not subject to the 3 1/2% cap) of Operating Expenses for such
Year, and Landlord shall certify to the accuracy thereof. If such estimated
payments exceed Tenant's share of such Operating Expense Increase, Landlord
shall repay to Tenant the amount of such overpayment within thirty (30) days
after so advising Tenant (or refund within thirty (30) days such overpayment if
the Term of this Lease has ended), and Tenant thereupon shall have no further
obligation to Landlord assuming Tenant is not in default hereunder. If, however,
the amount payable by Tenant under Subsection (a) above is greater than such
estimated payments made by Tenant for such Operating Year, Tenant shall pay
Landlord the amount of such shortfall within 30 days after being so advised by
Landlord. Landlord and Tenant agree that, notwithstanding, any exercise or
non-exercise by Tenant of its right to review and examine Landlord's books and
records of Operating Expenses and Taxes, Landlord and Tenant shall remain
obligated to repay the other for any over and underpayment of Operating Expense
Increases as aforesaid.
(c) Upon written request from Tenant to Landlord received
by Landlord within ninety (90) days after Tenant's receipt of the annual
statement of Operating Expenses, Tenant and its representatives or agents shall
be granted access to and the right to review and examine those of Landlord's
books and tapes and records which relate to the determination and computation of
Operating Expenses for the particular year at issue.
X. INDEMNITY AND PUBLIC LIABILITY INSURANCE
10.1 TENANT'S INDEMNITY. Tenant agrees to defend, indemnify and
save harmless Landlord from and against all claims, loss, liability, costs and
damages of whatever nature whenever arising from any default by Tenant under
this Lease and from the following, occurring at any time after the execution
date of this Lease: (i) from any accident, injury or damage whatsoever to any
person, or to the property of any person, in or about the Property, except to
the extent due to Landlord's negligence; or (ii) from any accident, injury or
damage occurring outside of the Property, where such accident, damage or injury
results or is claimed to have resulted from an act or omission on the part of
Tenant or Tenant's agents, employees or invitees. Landlord hereby agrees to
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indemnify Tenant against and hold it harmless from all costs, expenses and
liabilities incurred by Tenant as a direct result of Landlord's gross
negligence. These indemnity and hold harmless agreements shall include an
indemnity against all costs, expenses and liabilities incurred in, or in
connection with, any such claim or proceeding brought thereon and the defense
thereof, including, without limitation, reasonable attorney's fees at both the
trial and appellate levels and shall survive the expiration or sooner
termination of the Term of this Lease.
10.2 COMMERCIAL GENERAL LIABILITY INSURANCE. Tenant agrees to
maintain in full force and effect from the date upon which Tenant first enters
the Property for any reason throughout the Term of this Lease, and thereafter so
long as Tenant is in occupancy of any part of the Premises, a policy of
commercial general liability and property damage insurance (including broad form
contractual liability, independent contractor's hazard and completed operations
coverage secured) from established reputable companies in the face amount of not
less than One Million Dollars ($1,000,000.) per person and Ten Million Dollars
($10,000,000.) per occurrence, for personal injury to any number of persons or
damage to property, or such greater amounts as Landlord shall from time to time
request, under which Landlord (and such other persons as are in privity of
estate with Landlord as may be designated in notice from time to time) are named
as additional insureds. Each such policy shall be noncancellable and
non-amendable with respect to Landlord and Landlord's designees without thirty
(30) days' prior notice to Landlord; and a duplicate original or certificate
thereof shall be delivered to Landlord. All insurance required to be carried by
Tenant pursuant to this Section 10.2 may be provided under one or more "blanket"
insurance policies covering other locations and facilities operated by Tenant or
any Affiliate of Tenant, provided that such blanket policies otherwise comply
with the provisions of this Section. In addition, Tenant may satisfy the
$10,000,000 per occurrence liability insurance coverage with excess liability
(so-called "umbrella") coverage, so long as Tenant maintains primary liability
coverage of not less than $5,000,000.
10.3 TENANT'S RISK. Tenant agrees that its use and occupancy of the
Property, and any and all of Tenant's property and leasehold improvements
located at the Property, (including, without limitation, Tenant's Removable
Property) shall be at Tenant's sole risk and hazard except to the extent caused
by Landlord's gross negligence or willful misconduct. Landlord shall have no
responsibility or liability for any injury to Tenant, its employees, invitees,
contractors or others and for any loss of or damage to any of Tenant's property
or leasehold improvements (including, without limitation, Tenant's Removable
Property), or for any inconvenience, annoyance, interruption or injury to
business, arising from any condition of the Property or any of the facilities or
services provided by Landlord or arising from Landlord's making of any repairs
or changes which Landlord is permitted by this Lease, or required by law, to
make in or to any portion of the Premises or other sections of the Property, or
in or to the fixtures, equipment or appurtenances thereof.
10.4 INJURY CAUSED BY THIRD PARTIES. Tenant agrees that Landlord
shall not be responsible or liable to Tenant, or to those claiming by, through
or under
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Tenant, for any loss or damage that may be occasioned by or through the acts or
omissions of persons other than Landlord, its agents, employees, contractors or
invitees, including, without limitation, other tenants or occupants of the
Property.
XI. FIRE AND EMINENT DOMAIN
11.1 DAMAGE BY FIRE OR CASUALTY. If the Premises or any part
thereof shall be damaged by fire or other casualty, then, subject to the last
paragraph of this Section 11.1, Landlord shall proceed with continuous
diligence, subject to then applicable statutes, building codes, zoning
ordinances and regulations of any governmental authority, and at the expense of
Landlord, to repair or cause to be repaired such damage. Landlord agrees to
insure the Building against fire and other casualty normally covered by a
casualty loss policy in an amount equal to the full replacement cost of the
Building. All such repairs made necessary by any act or omission of Tenant shall
be made at the Tenant's expense to the extent that the cost of such repairs are
not paid for by Landlord's insurer or to the extent the cost of such repairs are
less than the deductible amount in Landlord's insurance policy. Landlord agrees
to maintain a reasonable deductible consistent with standards normally
maintained for a building of the value and type of the Building. In the event
Tenant requests Landlord to obtain a lower deductible than it is otherwise
obtaining, the Tenant shall promptly pay to Landlord the additional premium
charge due as a result of the reduction of the deductible. All repairs to and
replacements of property which Tenant is entitled to remove shall be made by and
at the expense of Tenant unless such property is covered by Landlord's
insurance. If the Premises or any part thereof shall have been rendered unfit
for use and occupation hereunder by reason of such damage, the Annual Fixed Rent
or a just and proportionate part thereof, according to the nature and extent to
which the Premises shall have been so rendered unfit, shall be abated until the
Premises (except as to the property which is to be repaired by or at the expense
of Tenant) shall have been made tenantable and have been restored as nearly as
practicable to the condition in which they were immediately prior to such fire
or other casualty, provided, however, that if Landlord or any mortgagee of the
Premises shall be unable to collect the insurance proceeds (including rent
insurance proceeds) applicable to such damage solely because of some action or
inaction on the part of Tenant, or the employees, licensees or invitees of
Tenant, the cost of repairing such damage shall be paid by Tenant and there
shall be no abatement of rent. If such damage is not of a substantial nature and
does not render the Premises unfit for use and occupation by Tenant, then
Landlord agrees to commence repair work within 15 days after the date of the
casualty and diligently to pursue such repair work until completion.
Between 30 and 60 days after any casualty, Tenant may inquire of
Landlord as to Landlord's estimate of the time period necessary to complete
repair of the Premises. Within 30 days after such inquiry, Landlord shall
provide Tenant with Landlord's architect's good faith estimate of the time to
complete such repairs and if such estimate (which shall be non-binding) shall be
more than one year from the date of the casualty, then Tenant may terminate this
Lease by notice given to Landlord within 30 days after Tenant's receipt of
Landlord's architect's estimate.
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If Landlord fails to commence repairs within sixty (60) days after such
damage, and such failure is not due to causes beyond the control of Landlord, or
if Landlord's mortgagee refuses to release to Landlord sufficient insurance
proceeds to restore the Premises to substantially the condition they were in
prior to the damage, Tenant may elect to terminate this Lease by notice to
Landlord. If Landlord, having commenced such repair, has not completed the
repair of such damage within one year from the occurrence of such damage or by
the date given in any Landlord's architect's repair period estimate under the
prior paragraph, if later than one year (the later of such dates is referred to
below as the "Outside Restoration Date"),Tenant may elect to terminate this
Lease by notice to Landlord within twenty (20) days of the Outside Restoration
Date, the effective termination date pursuant to such notice shall not be less
than thirty (30) days after the date on which such termination notice is
received by Landlord. The Outside Restoration Date shall be extended by up to an
additional 90 days for delays caused by causes beyond the reasonable control of
Landlord as described in the next sentence. Landlord shall not be liable for
delays in the making of any such repairs which are due to government regulation,
casualties and strikes, unavailability of labor and materials, delays in
obtaining insurance proceeds, and other causes beyond the reasonable control of
Landlord, nor shall Landlord be liable for any inconvenience or annoyance to
Tenant or injury to the business of Tenant resulting from delays in repairing
such damage; however if such delays continue more than 90 days beyond the
initial Outside Restoration Date, Tenant may elect to terminate this Lease in
the manner provided above.
If (i) the Building is so damaged by fire or other casualty (whether or
not insured) at any time during the last twelve months of the Term that the cost
to repair such damage is reasonably estimated to exceed one-third of the total
Annual Fixed Rent payable hereunder for the period from the estimated completion
date of repair until the end of the Term, or (ii) at any time during the last
twelve months of the Term the Building (or any substantial portion thereof) is
so damaged by fire or other casualty (whether or not insured) that substantial
alteration or reconstruction or demolition of the Building (or a substantial
portion thereof) shall in Landlord's reasonable judgment be required, then and
in any of such events, this Lease and the term hereof may be terminated at the
election of Landlord by a notice from Landlord to Tenant within sixty (60) days
following such fire or other casualty; the effective termination date pursuant
to such notice shall be not less than thirty (30) days after the day on which
such termination notice is received by Tenant. In the event of any termination,
the Term shall expire as though such effective termination date were the date
originally stipulated in Section 1.1 for the end of the Term and the Annual
Fixed Rent and Additional Rent shall be apportioned as of such date.
11.2 CONDEMNATION - EMINENT DOMAIN. If, during the Term, all or any
substantial part of the Premises are actually taken away from Landlord or its
successors in title by eminent domain, this Lease shall terminate at either
Landlord's or Tenant's election, which may be made (notwithstanding that
Landlord's entire interest may have been divested) by notice given within 90
days after the event giving rise to the election to terminate arises, specifying
the effective date of termination. The effective date of termination specified
shall not be less than 60 days after the date of notice of such
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termination unless an earlier date is required by the terms of the taking.
Unless terminated pursuant to the foregoing provisions, this Lease shall remain
in full force and effect following any such taking, subject, however, to the
following provisions. If in any such case the Premises or any substantial part
thereof are rendered unfit for use and occupation and this Lease is not
terminated, Landlord shall use due diligence (following the expiration of the
period in which Landlord may terminate this Lease pursuant to the foregoing
provisions of this Section, or if Landlord and Tenant waive their right to
terminate, following such waiver) to put the Premises, or what may remain
thereof (excluding any items installed or paid for by Tenant which Tenant may be
required to remove hereunder), into proper condition for use and occupation, and
a just proportion of the Annual Fixed Rent and Additional Rent according to the
nature and extent of the injury shall be abated until the Premises or such
remainder shall have been put by Landlord in such condition, and in case of a
taking which permanently reduces the area of the Premises, a just proportion of
the Annual Fixed Rent and Additional Rent shall be abated for the remainder of
the Term.
11.3 EMINENT DOMAIN AWARD. Except for Tenant's relocation expenses
and any award for Tenant's personal property and fixtures (specifically so
designated by the court or authority having jurisdiction over the matter)
Landlord reserves to itself any and all rights to receive awards made for
damages to the Premises, or the leasehold hereby created, or any one or more of
them, accruing by reason of exercise of eminent domain or by reason of anything
lawfully done in pursuance of public or other authority. Tenant hereby releases
and assigns to Landlord all Tenant's rights to such awards, and covenants to
deliver such further assignments and assurances thereof as Landlord may from
time to time request, hereby irrevocably designating and appointing Landlord as
its attorney-in-fact to execute and deliver in Tenant's name and behalf all such
further assignments thereof.
XII. DEFAULT
12.1 TENANT'S DEFAULT.
(a) If at any time subsequent to the Execution Date of
this Lease any one or more of the following events (herein referred to as a
"Default of Tenant") shall happen:
(i) Tenant shall fail to pay the Annual Fixed Rent or
Additional Rent or other charges hereunder when due
and such failure shall continue for five (5) full
business days after notice thereof from Landlord ;
however, once such a notice has been given by
Landlord, no notice shall be required for any failure
to pay during the twelve (12) months after said
notice and Tenant shall be considered in default if
such failure to pay shall continue for five (5)
business days after such due date; or
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(ii) Tenant shall neglect or fail to perform or
observe any other covenant herein contained on
Tenant's part to be performed or observed or Tenant
shall desert or abandon the Premises or the Premises
shall become, or appear to have become vacant
(regardless of whether the keys shall have been
surrendered or the rent and all other sums due shall
have been paid) and Tenant shall fail to remedy the
same within thirty (30) days after notice to Tenant
specifying such neglect or failure, or if such
failure is of such a nature that Tenant cannot
reasonably remedy the same within such thirty (30)
day period, Tenant shall fail to commence promptly to
remedy the same and to prosecute such remedy to
completion with diligence and continuity; or
(iii) Tenant suffers financial difficulties such as
the issuing, filing or recording of unsatisfied liens
or judgments, bankruptcy, receivership or other
debtor-relief, creditors' rights or reorganization
proceedings (voluntary or involuntary, under State or
Federal law), which are not discharged, satisfied or
dismissed within sixty (60) days; or
(iv) If either a Default of the kind set forth in
clauses (i) or (ii) above occurs or if (whether or
not such Default has been cured, or the Default
waived by Landlord) an event which would constitute a
similar Default if not cured within the applicable
grace period occurs, more than once within the next
365 days.
then in any such case Landlord may invoke any remedy (including the remedy of
specific performance) allowed at law or in equity as if particular remedies were
not herein provided for and, in addition thereto: (1) if such Default of Tenant
shall occur prior to the Term Commencement Date, this Lease shall, at the option
of the Landlord, without further act on the part of Landlord, terminate, and (2)
if such Default of Tenant shall occur on or at any time after the Term
Commencement Date, Landlord may terminate this Lease by notice to Tenant; and
thereupon, this Lease shall come to an end on the date specified therein as
fully and completely as if such date were the date herein originally fixed for
the expiration of the Term of this Lease and Tenant will then quit and surrender
the Premises to Landlord, but Tenant shall remain liable as hereinafter
provided.
(b) If this Lease shall have been terminated as provided
in this Article, or if any execution or attachment shall be issued against
Tenant or any of Tenant's property whereupon the Premises shall be taken or
occupied by someone other than Tenant, then Landlord may, without notice,
re-enter the Premises, either by summary proceedings, ejectment or other legal
means, and remove and dispossess Tenant and all other persons and any and all
property from the same, as if this Lease had not been made, and Tenant hereby
waives the service of notice of intention to re-enter or to institute legal
proceedings to that end. In the event Landlord takes possession of the Premises,
it hereby agrees to exercise reasonable efforts to relet the Premises; however,
its failure to do so
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shall not constitute default hereunder nor shall this duty to exercise
reasonable efforts apply to any mortgagee who takes possession of the Premises.
(c) In the event of any termination, Tenant shall pay the
Annual Fixed Rent, Additional Rent and other sums payable hereunder up to the
time of such termination, and thereafter Tenant, whether or not the Premises
shall have been relet, shall be liable to Landlord for and shall pay to
Landlord, as liquidated current damages, the Annual Fixed Rent, Additional Rent
and other sums which would be payable hereunder if such termination had not
occurred, less the net proceeds, if any, of any reletting of the Premises, after
deducting all commercially reasonable expenses of Landlord in connection with
such reletting, including, without limitation, all repossession costs, brokerage
commissions, legal expenses, attorneys' reasonable fees, advertising, expense of
employees, alteration costs and expenses of preparation for such reletting.
Tenant shall pay such current damages to Landlord monthly on the days on which
the Annual Fixed Rent would have been payable hereunder if this Lease had not
been terminated.
(d) At any time after such termination, whether or not
Landlord shall have collected any such current damages, at Landlord's election,
Tenant shall pay (in addition to such current damages as have accrued but may
not yet then have been collected) to Landlord upon demand, as liquidated final
damages and in lieu of all such further current damages beyond the date of such
demand, (in view of the uncertainty of prompt re-letting and the expense
entailed in re-letting the premises) either (i) an amount equal to the Annual
Fixed Rent, Additional Rent and other sums due hereunder and payable for and in
respect of the twelve (12) month period next preceding the date of termination,
as aforesaid; or (ii) an amount equal to THE EXCESS, IF ANY OF (x) the Annual
Fixed Rent, Additional Rent and other sums as in this Lease provided which would
be payable hereunder from the date of such demand for what would be the then
unexpired Term of this Lease if the same remained in effect, OVER (y) the then
fair rental value of the Premises for the same period, less reletting costs
reasonably projected by Landlord.
(e) In the case of any Default of Tenant, re-entry,
expiration and dispossession by summary proceedings or otherwise, Landlord may
(i) relet the Premises or any parts thereof, either in the name of Landlord or
otherwise, for any term(s), and may grant concessions or free rent to the extent
that Landlord considers it to be advisable in order to relet the same and (ii)
may make such reasonable alterations, repairs and decorations in the Premises as
Landlord in its sole judgment considers advisable or necessary for the purpose
of reletting the Premises. The making of such alterations, repairs and
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Landlord shall in no event be liable in any way
whatsoever for failure to relet the Premises, or , in the event that the
Premises are relet, for failure to collect the rent under such reletting.
(f) Should either Landlord or Tenant employ an attorney
to enforce any of the provisions of this Lease, the non-prevailing party in any
final judgment agrees to pay the other party's reasonable expenses, including
reasonable attorneys' fees and
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expenses in or out of litigation, and, if in litigation, trial, appellate,
bankruptcy or other proceedings, expended or incurred in connection therewith,
as determined by a court of competent jurisdiction.
XIII. MISCELLANEOUS PROVISIONS
13.1 WAIVER.
(a) Failure on the part of Landlord or Tenant to complain
of any action or non-action on the part of the other, no matter how long the
same may continue, shall not be a waiver by Tenant or Landlord, respectively, of
any rights hereunder. Further, no waiver at any time of any of the provisions
hereof by Landlord or Tenant shall be construed as a waiver of any of the other
provisions hereof. The consent or approval of Landlord or Tenant to or of any
action by the other requiring such consent or approval shall not be construed to
waive or render unnecessary Landlord's or Tenant's consent or approval to or of
any subsequent similar act by the other.
(b) Any payment by Tenant, or acceptance by Landlord, of
a lesser amount than shall be due from Tenant to Landlord shall in all events be
considered as a payment on account of the earliest installment of any payment
due from Tenant under the provisions hereof. The acceptance by Landlord of a
check for a lesser amount with an endorsement or statement thereon, or upon any
letter accompanying such check, that such lesser amount is payment in full,
shall be given no effect, and Landlord may accept such check without prejudice
to any other rights or remedies which Landlord may have against Tenant.
13.2 COVENANT OF QUIET ENJOYMENT. Tenant, subject to the terms and
provisions of this Lease, on payment of the Annual Fixed Rent, Additional Rent
and other sums due hereunder and observing, keeping and performing all of the
other terms and provisions of this Lease on Tenant's part to be observed, kept
and performed shall lawfully, peaceably and quietly have, hold, occupy and enjoy
the Premises during the term hereof, without hindrance or ejection by any person
lawfully claiming by, under or through Landlord to have title to the Premises
superior to Tenant; the foregoing covenant of quiet enjoyment is in lieu of any
other such covenant, express or implied.
13.3 LANDLORD'S LIABILITY
(a) Tenant specifically agrees to look solely to
Landlord's then interest in the Property at the time owned, for recovery of any
judgment from Landlord, it being specifically agreed that in no event shall
Landlord, (original or successor), or any of the officers, trustees, directors,
partners, beneficiaries, joint venturers, members, stockholders or other
principals or representatives, and the like, disclosed or undisclosed, ever be
personally liable for any such judgment, or other liability or for the payment
of any monetary obligation to Tenant. In no event shall Landlord's officers,
trustees, directors, partners, beneficiaries, joint venturers, members,
stockholders or other principals or
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representatives, and the like, as aforesaid, ever be individually liable to
Tenant nor shall they or Landlord ever be liable for either (i) any indirect or
consequential damages suffered by Tenant from whatever cause or (ii) any loss or
damage that may accrue to Tenant's stock or business.
(b) With respect to any repair, restoration or other
services or utilities to be furnished by Landlord to Tenant, Landlord shall in
no event be liable for failure to furnish or to perform same when prevented from
doing so by reason of any matter beyond the reasonable control of Landlord, and
any measured time period shall be extended by the period during which Landlord
is so prevented provided that Landlord shall exercise reasonable efforts to
remove the cause of such delay.
(c) As used in this Lease, "Force Majeure" shall mean,
collectively and individually, strike, lockout or other labor trouble, fire or
other casualty, governmental pre-emption of priorities or other controls in
connection with a national or other public emergency or shortages of fuel,
supplies or labor; breakdown, accident; war or other emergency; any other cause
beyond Landlord's reasonable control; PROVIDED however, that no cause due to any
act or neglect of Tenant or Tenant's servants, agents, employees, licensees or
any person claiming by, through or under Tenant shall be considered an act of
Force Majeure unless it hinders or delays Landlord's performance hereunder.
13.4 ASSIGNMENT OF RENTS AND TRANSFER OF TITLE.
(a) If, at any time and from time to time, Landlord
assigns this Lease or the rents payable hereunder to the holder of any mortgage
on the Building, or to any other party for the purpose of securing financing
(the holder of any such mortgage and any other such financing party are referred
to herein as the "Financing Party"), whether such assignment is conditional in
nature or otherwise, the following provisions shall apply:
(i) Such assignment to the Financing Party shall not
be deemed an assumption by the Financing Party of any
obligations of Landlord hereunder unless such
Financing Party shall, by written notice to Tenant,
specifically otherwise elect;
(ii) Except as provided in (i) above and (iii) below,
the Financing Party shall be treated as having
assumed Landlord's obligations hereunder only upon
foreclosure of its mortgage (or voluntary conveyance
by deed in lieu thereof) or the taking of possession
of the Premises and, with respect to obligations
regarding return of the security deposit, only upon
receipt of the funds constituting such security
deposit;
(iii) The Financing Party shall only be responsible
for such breaches under the Lease by Landlord which
occur during the period of ownership by the Financing
Party after such foreclosure (or
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voluntary conveyance by deed in lieu thereof) or
taking of possession, as aforesaid;
(iv) In the event Tenant alleges that Landlord is in
default under any of Landlord's obligations under
this Lease, Tenant agrees to give the holder of any
mortgage, by certified mail, a copy of any notice of
default which is served upon the Landlord, provided
that prior to such notice, Tenant has been notified,
in writing, (whether by way of notice of an
assignment of lease, request to execute an estoppel
letter, or otherwise) of the address of any such
holder. Tenant further agrees that if Landlord shall
have failed to cure such default within the time
provided by law or such additional time as may be
provided in such notice to Landlord, such holder
shall have forty-five (45) days after the last date
on which Landlord could have cured such default
within which such holder will be permitted to cure
such default. If such default cannot be cured within
such sixty day period, then such holder shall have
such additional time as may be necessary to cure such
default but not in excess of six (6) months, if
within such sixty day period such holder has
commenced and is diligently pursuing the remedies
necessary to effect such cure (including, but not
limited to, commencement of foreclosure proceedings,
if necessary, to effect such cure), in which event
Tenant shall have no right with respect to such
default while such remedies are being diligently
pursued by such holder.
In all events, any liability of a Financing Party shall be limited to
the interest of such Financing Party in the Land and Building, and in no event
shall a Financing Party ever be liable for any indirect or consequential
damages.
Tenant hereby agrees to enter into such agreements or instruments as
may, from time to time, be reasonably requested in confirmation of the
foregoing.
(b) In no event shall the acquisition of Landlord's
interest in the Property by a purchaser which, simultaneously therewith, leases
landlord's entire interest in the Property back to seller thereof be treated as
an assumption of Landlord's obligations hereunder, whether by operation of law
or otherwise, but Tenant shall look solely to such seller-lessee, and its
successors in title from time to time for performance of Landlord's obligations
hereunder until such time as such purchaser-lessor has assumed the Landlord's
position. In any such event, this Lease shall be subject and subordinate to the
lease to such purchaser, provided that any such purchaser-lessor agrees to
recognize Tenant's rights hereunder so long as Tenant is not in default beyond
any applicable notice, grace or cure period.
For all purposes, such seller-lessee, and its successors in title,
shall be the Landlord hereunder unless and until Landlord's position shall have
been assumed by such purchaser-lessor.
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(c) Except as provided in paragraph (b) of this Section,
in the event of any transfer of title to the Property by Landlord, Landlord
shall thereafter be entirely freed and relieved from the performance and
observance of all covenants and obligations hereunder arising thereafter and for
all liabilities asserted thereafter provided that if the transferee of title is
a party other than a mortgagee or other creditor of Landlord's, that said
transferee agrees to be bound by the covenants and obligations of Landlord
hereunder from and after the date of such transfer.
13.5 RULES AND REGULATIONS. Tenant shall abide by the Rules and
Regulations presently in effect, (a copy of which has been attached hereto as
Exhibit B) and as they may subsequently from time to time be amended by Landlord
as approved by Tenant, which approval shall not be unreasonably withheld,
delayed or conditioned. Tenant shall have such right of approval only if it is
in occupancy of at least eighty percent (80%) of the Total Rentable Floor Area
and as long as the particular rules and regulations are not for the purpose of
protecting Landlord's interest in the Premises or of addressing the reasonable
concerns of abutters or of responding to any instructions from public
authorities.
13.6 INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision
of this Lease, or the application thereof to any person or circumstance shall,
to any extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
13.7 PROVISIONS BINDING, INC. Except as herein otherwise provided,
the terms hereof shall be binding upon and shall inure to the benefit of the
successors and assigns, respectively, of Landlord and Tenant and, if Tenant
shall be an individual, upon and to his heirs, executors, administrators,
successors, and assigns. Each term and each provision of the Lease to be
performed by Tenant shall be construed to be both a covenant and a condition.
The reference contained to successors and assigns of Tenant is not intended to
constitute a consent to assignment by Tenant, but refers only to an assignment
expressly permitted under the terms of this Lease.
13.8 RECORDING. Tenant agrees not to record this Lease, but each
party hereto agrees, on the request of the other, to execute a memorandum or
notice of lease in recordable form, complying with applicable law and reasonably
satisfactory to Landlord's attorneys. In no other event shall such document set
forth the rent or other charges payable to Tenant under this Lease. Any such
document shall expressly state that it is executed pursuant to the provisions
contained in this Lease and that it is not intended to vary the terms and
conditions of this Lease.
13.9 NOTICES. Any notice, consent, request, bill, demand or
statement hereunder by either party to the other party shall be in writing, and,
if received at Landlord's or Tenant's address, shall be deemed to have been duly
given when either
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delivered or served personally or mailed in a postpaid envelope, deposited in
the United States mails addressed to Landlord at Landlord's Address, or if any
address for notices shall have been duly changed as hereinafter provided, if
mailed as aforesaid to the party at such changed addresses. A copy of notices to
Tenant should also be sent to Genzyme, Inc., One Kendall Square, Building 1400,
Cambridge, Massachusetts, 02139, Attn: General Counsel. Either party may at any
time change the address or specify an additional address for such notices,
consents, requests, bills, demands or statements by delivering or mailing, as
aforesaid, to the other party a notice stating the change and setting forth the
changed or additional address, provided such changed or additional address is
within the continental United States.
13.10 BILLS AND CHARGES. All bills and statements for reimbursement
or other payments or charges due from Tenant to Landlord hereunder shall be due
and payable in full fifteen (15) days after submission thereof by Landlord to
Tenant unless otherwise provided herein. Tenant's failure to make timely payment
of any amounts indicated by such bills and statements, whether for work done by
Landlord at Tenant's request, reimbursement provided for by this Lease or for
any other sums properly owing by Tenant to Landlord, shall be treated as a
default in the payment of Annual Fixed Rent, in which event Landlord shall have
all rights and remedies provided in this Lease for the nonpayment of Annual
Fixed Rent.
13.11 PARAGRAPH HEADINGS. The paragraph headings throughout this
instrument are for convenience and reference only, and the words contained
therein shall in no way be held to explain, modify, amplify or aid in the
interpretation, construction or meaning of the provisions of this Lease.
13.12 SUBORDINATION. This Lease shall be subject and subordinate to
all ground or underlying leases and any mortgages that may now or hereafter be
placed upon the Building and/or the Land and to any and all advances to be made
under such mortgages and to the interest thereon, and all renewals, extensions
and consolidations thereof. Prior to the Commencement Date hereunder Landlord
shall obtain a non-disturbance agreement from the sole mortgagee of the
Premises, such non-disturbance to be in a form and substance which is customary
for mortgagee such as Manufacturer's Life Insurance Company and is reasonably
satisfactory to Tenant. The receipt by Tenant of such a non-disturbance
agreement from any future ground lessor or mortgagee shall be a precondition of
Tenant's obligation to sign a subordination agreement for future ground lessors
or mortgagees. Any mortgagee may elect to give this Lease priority to its
mortgage, except that the Lease shall not have priority to (i) the prior rights
to insurance proceeds and the disposition thereof under the mortgage; (ii) the
prior rights to condemnation awards and the disposition thereof under the
mortgage; and (iii) intervening liens. In the event of such election and upon
notification by such mortgagee, this Lease shall be deemed prior in lien to the
said mortgage. This Section shall be self-operative, but in confirmation
thereof, Tenant shall execute and deliver whatever instruments may be reasonably
required by the lessor or the mortgagee (or mortgagees) to acknowledge such
subordination or priority in recordable form so long as the terms thereof are
consistent with the terms of the Lease, and if Tenant fails to do so within ten
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(10) days after demand, Landlord shall remind Tenant of its obligations to
execute and deliver said instrument; however, if Tenant fails to do so within
ten (10) days of such reminder, Tenant shall be deemed in default of this Lease.
Tenant's obligation to subordinate this Lease to any ground lease or mortgage is
subject to the condition that either the certificate or instrument to be
executed or a separate document executed at the same time provide that the
lessor or mortgagee execute and deliver to the Tenant an agreement not to
disturb the Tenant's possession as long as the Tenant is not in default
(continuing beyond any applicable notice, grace or cure period) with respect to
any of the covenants or conditions of this Lease to be performed and observed by
the Tenant.
13.13 STATUS REPORT. Recognizing that both parties may find it
necessary to establish to third parties, such as accountants, banks, mortgagees,
ground lessors, or the like, the then current status of performance hereunder,
either party, on the request of the other made from time to time, will promptly
furnish to Landlord, or the holder of any mortgage or ground lease encumbering
the Premises, or to Tenant, as the case may be, a statement of the status of any
matter pertaining to this Lease, including, without limitation, acknowledgements
that (or the extent to which) each party is in compliance with its obligations
under the terms of this Lease.
13.14 REMEDYING DEFAULTS. (a) Following a default by Tenant
continuing, other than in the case of emergencies, beyond any applicable notice,
grace or cure periods, Landlord shall have the right, but shall not be required,
to pay such sums or do any act which requires the expenditure of monies which
may be necessary or appropriate by reason of the failure or neglect of Tenant to
perform any of the provisions of this Lease, and in the event of the exercise of
such right by Landlord, following such default, Tenant agrees to pay to Landlord
forthwith upon demand all such sums as Additional Rent, together with interest
thereon at a rate equal to 3% over the base rate in effect from time to time at
the Bank of Boston as an additional charge. Any payment of Additional Rent or
other sums payable hereunder not paid when due or upon the expiration of any
applicable grace period shall, at the option of Landlord, be treated as
Additional Rent and shall bear interest at the rate as aforesaid from the date
thereof and shall be payable forthwith on demand by Landlord, as an additional
charge. If any payment of Annual Fixed Rent is not paid when due, then Tenant
shall pay to Landlord interest on such unpaid amount each month and for each
part thereof during which said delinquency continues at an annual rate three (3)
percentage points over the then Bank of Boston base rate; provided, however, in
no event shall such interest exceed the maximum permitted to be charged by
applicable law;
(b) In the event that Landlord fails to meet its
obligation hereunder to repair and maintain the Premises as expressly set forth
in Article VII hereunder, and if said failure continues for seven (7) days or
more after Tenant has so notified Landlord in writing, the Tenant shall have the
right, but not the obligation, to pay such sums or do any act which requires the
expenditure of monies which may be reasonably necessary or appropriate by reason
of the failure or neglect of Landlord to perform said obligation, and in the
event of the exercise of such right by Tenant, following such default, Tenant
shall have the right to set-off the reasonable amount expended by it in this
connection but only
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to the extent the Tenant's expenditures are equal to or less than the applicable
Base Year operating cost line item. In the event that Landlord fails to meet its
obligations hereunder as set forth in Section 9.1 with respect to the Capital
Expenditures required to be performed by Landlord under Exhibit F or during the
first twelve (12) months of Tenant's occupancy or if Landlord fails to perform
remediation work for which it is expressly responsible under the provisions of
Section 13.19 hereof, and if Landlord fails to commence and diligently pursue
such cure within seven (7) days or more after Tenant has so notified Landlord in
writing, then Tenant shall have the right, but not the obligation, to pay such
sums or do any act which requires the expenditure of monies which may be
reasonably necessary or appropriate by reason of the failure or neglect of
Landlord to perform said obligation, and in the event of the exercise of such
right by Tenant, following such default, Tenant shall have NO right of set-off
but shall be entitled to recover from Landlord the reasonable amounts expended
by it in this connection.
13.15 HOLDING OVER. Any holding over by Tenant after the expiration
of the term of this Lease shall be treated as a daily tenancy at sufferance at a
rate equal to the then (at the time of Lease expiration) fair market rental
value of the Premises but in no event less than 1-1/2 times the sum of (i)
Annual Fixed Rent then in effect plus (ii) Additional Rent, Escalation Charges
and other charges herein provided (prorated on a daily basis). Tenant shall also
pay to Landlord for all damages, direct and/or indirect (including, without
limitation, the loss of a tenant and of rental income) sustained by reason of
any such holding over. Otherwise, such holding over shall be on the terms and
conditions set forth in this Lease as far as applicable.
13.16 WAIVER OF SUBROGATION. Landlord and Tenant mutually agree that
(insofar as and to the extent that such agreement may be effective without
invalidating or making it impossible to secure insurance coverage obtainable
from responsible insurance companies doing business in Massachusetts at
commercially reasonable rates), with respect to any loss which is covered by
insurance then being carried by Landlord or Tenant, respectively, the party
carrying such insurance and suffering such loss releases the other of and from
all claims with respect to such loss (but not for any claims for any deductible
costs paid for by the party suffering such loss); and they further mutually
agree that their respective insurance companies shall have no right of
subrogation against the other on account thereof, even though extra premiums may
result therefrom.
Notwithstanding any provisions of this Lease to the contrary, Landlord
and Tenant each hereby waives any and all right of recovery which it may have
against the other party and its agents, employees, licensees and contractors for
any loss or damage to the Building or Premises and for any injury to or death of
persons occurring in, on or about the Building with respect to any hazard which
(a) would be covered under a standard "all-risk" property insurance policy
without regard to the amount of coverage other than a reasonable deductible with
malicious mischief and vandalism coverage, whether or not such policy is then
being carried by the Landlord or Tenant or (b) is covered by insurance then
being carried by the Landlord or Tenant, notwithstanding that such loss or
damage may result from the negligence or other fault of Landlord, Tenant or
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their respective, agents, employees, subtenants, licensees, invitees or
assignees. In the event that an extra premium is payable by either party as a
result of this provision, the other party shall reimburse the party paying such
premium the amount of such extra premium. If, at the request of one party, this
release and non-subrogation provision is waived, then the obligation of
reimbursement shall cease for a period of time as such waiver shall be
effective. If the release of either party provided above shall contravene any
law with respect to exculpatory agreements, the liability of the party for whose
benefit such release was intended shall remain but shall be secondary to that of
the other party's insurer.
13.17 SURRENDER OF PREMISES. Upon the expiration or earlier
termination of the Term of this Lease, Tenant shall peaceably quit and surrender
to Landlord the Premises in substantially the same good order, condition and
repair the Premises were in as of the Commencement Date, together with all
alterations, additions and improvements which may have been made or installed
in, on or to the Premises prior to or during the Term of this Lease, excepting
only ordinary wear and use and damage by fire, other casualty and taking by
eminent domain, for which, under other provisions of this Lease, Tenant has no
responsibility of repair or restoration. In the event Tenant changes any of the
space in the Building to a non-office character Tenant shall, at its own
expense, restore said space to an open-floor office lay-out as of the date of
expiration or earlier termination of the Lease. Tenant shall return all keys to
the Premises, remove all of the Tenant's Removable Property and, to the extent
specified by Landlord at the time Landlord approves the plans for the same, all
alterations and additions made by Tenant and all partitions wholly within the
Premises(however, in no event shall Tenant be required to remove any alterations
installed as part of its initial build-out); and shall repair any damages to the
Premises or the Building caused by such installation or removal. Any of the
Tenant's Removable Property which shall remain in the Building or on the
Premises after the expiration or termination of the Term of this Lease and
continues to remain there for five (5) days after notice thereof from Landlord
shall conclusively be deemed to have been abandoned, and either may be retained
by Landlord as its property or may be disposed of in such manner as Landlord may
see fit, at Tenant's sole cost and expense.
13.18 BROKERAGE. Tenant warrants that it has had no dealings with
any broker or agent in connection with this Lease except for any broker
designated in Section 1.1. Tenant covenants to pay, hold harmless and indemnify
Landlord from and against any and all costs, expense or liability for any
compensation, commission and charges claimed by any broker or agent other than
any such broker designated in Section 1.1 with respect to this Lease or the
negotiations thereof arising from a breach of the foregoing warranty. Landlord
shall be responsible for payment of any brokerage commission to any broker
designated in Section 1.1.
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13.19 HAZARDOUS SUBSTANCES.
13.19.1 Tenants Covenants Regarding Hazardous
Substances:
13.19.1.1 LANDLORD'S CONSENT REQUIRED. Tenant
shall not cause or permit any Hazardous Substances, as defined in Section
13.19.1.5 below, to be brought upon or kept or used in or about the Premises,
the Building, or the Property by Tenant, its agents, employees, contractors, or
invitees, unless (a) such Hazardous Substances are necessary for Tenant's
business (and such business is a permitted use under Section 5.1 above) and (b)
Tenant obtains the prior written consent of Landlord, which consent shall not be
unreasonably withheld provided that the net worth/environmental insurance
standards of the last sentence of Section 13.19.4 below are met.
13.19.1.2 COMPLIANCE WITH ENVIRONMENTAL LAWS.
Tenant shall at all times and in all respects comply with all local, state, and
federal laws, ordinances, regulations, and orders (collectively "Hazardous
Substances Laws" relating to industrial hygiene, environmental protection, or
the use, analysis, generation, manufacture, storage, disposal, or transportation
of any Hazardous Substances.
13.19.1.3 HAZARDOUS SUBSTANCES HANDLING.
Tenant shall at its own expense procure, maintain in effect, and comply with all
conditions of any and all permits, licenses, and other governmental and
regulatory approvals required for Tenant's use of the Premises, including,
without limitation, discharge of (appropriately treated) materials or wastes
into or through any sanitary sewer serving the Premises, the Building, or the
Property. Except as discharged into a sanitary sewer in strict compliance and
conformity with all applicable Hazardous Substances Laws, Tenant shall cause any
and all Hazardous Substances to be removed from the Premises or from the
Property and to be transported solely by duly licensed haulers to duly licensed
facilities for final disposal of such wastes. Tenant shall in all respects
handle, treat, deal with, and manage any and all Hazardous Substances in, on,
under, or about the Premises, the Building, or the Property in total conformity
with all applicable Hazardous Substance Laws and prudent industry practices
regarding management of such Hazardous Substances. Upon expiration or earlier
termination of the Term of the Lease, Tenant shall cause all Hazardous
Substances to be removed from the Premises (except such Hazardous Substances, if
any, as were located in the premises prior to the commencement of Tenant's
occupancy thereof) and the Property (if Tenant caused such Hazardous Substance
to located on the Property) and to be transported for use, storage, or disposal
in accordance and compliance with all applicable Hazardous Substances Laws;
PROVIDED HOWEVER, that Tenant shall not take any remedial action in response to
the presence of any Hazardous Substance in or about the Premises, the Building,
or the Property, nor enter into any settlement agreement, consent decree, or
other compromise in respect to any claims relating to any Hazardous Substances
in any way connected with the Premises, the Building, or the Property, without
first notifying Landlord of Tenant's intention to do so
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and affording Landlord adequate opportunity to appear, intervene, or otherwise
appropriately assert and protect Landlord's interest with respect thereto.
13.19.1.4 NOTICES. If at any time Tenant
shall become aware, or have reasonable cause to believe, that any Hazardous
Substance has come to be located on or beneath the Property, Tenant shall,
immediately upon discovering such presence or suspected presence of the
Hazardous Substance, give written notice of that condition to the Landlord. In
addition, Tenant shall immediately notify Landlord in writing of (i) any
enforcement, cleanup, removal, or other governmental or regulatory action
instituted, completed, or threatened pursuant to any Hazardous Substances Laws,
(ii) any claim made or threatened by any person against Tenant, the Premises,
the Building, or the Property relating to damage, contribution, cost recovery,
compensation, loss, or injury resulting from or claimed to result from any
Hazardous Substances, and (iii) any reports made to any local, state, or federal
environmental agency arising out of or in connection with any Hazardous
Substances in or removed from the Premises, the Building, or the Property,
including any complaints, notices, warnings, or asserted violations in
connection therewith. Tenant shall also supply to Landlord as promptly as
possible, and in any event within five (5) business days after Tenant first
receives or sends the same, copies of all claims, reports, complaints, notices
warnings or asserted violations related in any way to the Premises the Building,
the Property, or the Tenant's use thereof. Tenant shall promptly deliver to
Landlord copies of hazardous waste manifests reflecting the legal and proper
disposal of all Hazardous Substances removed from the Premises or the Property.
13.19.1.5 DEFINITION OF HAZARDOUS SUBSTANCES.
As used in this Agreement, the term "Hazardous Substance or Substances" means
any hazardous or toxic substances, materials or wastes, including, but not
limited to, those substances, materials, and wastes listed in the United States
Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by
the Environmental Protection Agency as hazardous substances (40 CFR Part 302)
and amendments thereto, or such substances, materials, wastes which are or
become regulated under any applicable local, state, or federal law excluding,
however, small quantities of materials such as cleaning solvents,
computer/photocopier toner and similar substances typically used in the ordinary
course of a business office.
13.19.2 INDEMNIFICATION OF LANDLORD. Tenant shall
indemnify, defend (by counsel reasonably acceptable to Landlord), protect, and
hold harmless Landlord, and each of Landlord's partners, directors, officers,
employees, agents, attorney, successors, and assigns, from and against any and
all claims, liabilities, penalties, fines, judgements forfeitures, losses
(including without limitation, diminution in the value of the Premises, the
Building, or the Property, damages for the loss or restriction on use of
rentable or useable space or of any amenity of the Premises, the Building, or
the Property), costs or expenses (including attorney fees, consultant fees, and
expert fees) for the death of or injury to any person or damages to any property
whatsoever, arising from or caused in whole or in part, directly or indirectly,
by (A) the release or discharge by Tenant or any of its Affiliates in, on,
under, or about the Premises,
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the Building, or the Property, of any Hazardous Substances or Tenant's use,
analysis, storage, transportation, disposal, release, threatened release,
discharge, or generation of Hazardous Substances to, in, on, under, about, or
from the Premises, the Building, or the Property, or (B) Tenant's failure to
comply with any Hazardous Substances Law. Tenant's obligations under this
Section 13.19.2 shall include, without limitation, and whether foreseeable or
unforeseeable, any and all costs incurred in connection with any investigation
of site conditions, and any and all costs of any required or necessary repair,
cleanup, detoxification, or decontamination of the Premises, the Buildings or
the Property (including without limitation. the soil and ground water on or
under the Property), and the preparation and implementation of any closure,
remedial action, or other require plans in connection therewith. Tenant's
obligations under this Section 13.19.2 shall survive the expiration or earlier
termination of the term of the Lease. For purposes of the release and indemnity
provisions hereof, any acts or omissions of Tenant, or by employees, agents,
assignees, contractors, or subcontractors of Tenant or others acting for or on
behalf of Tenant (whether or not they are negligent, intentional, willful, or
unlawful), shall be strictly attributable to Tenant.
13.19.3 INDEMNIFICATION OF TENANT. Landlord shall
indemnify, defend (by counsel reasonably acceptable to Tenant), protect, and
hold harmless Tenant, and each of Tenant's partners, directors, officers,
employees, agents, attorney, successors, and assigns, from and against any and
all claims, liabilities, penalties, fines, judgements forfeitures, losses, costs
or expenses (including attorney fees, consultant fees, and expert fees) for the
death of or injury to any person or damages to any property whatsoever, arising
from or caused in whole or in part, directly or indirectly, by the presence
prior to Tenant's taking of possession of the Premises or the release or
discharge by Landlord in, on, under, or about the Premises, the Building, or the
Property, of any Hazardous Substances or Landlord's use, analysis, storage,
transportation, disposal, release, threatened release, discharge, or generation
of Hazardous Substances to, in, on, under, about, or from the Premises, the
Building, or the Property, or Landlord's failure to comply with any Hazardous
Substances Law. For purposes of the release and indemnity provisions hereof, any
acts or omissions of Landlord, or by employees, agents, assignees, contractors,
or subcontractors of Landlord or others acting for or on behalf of Landlord
(whether or not they are negligent, intentional, willful, or unlawful), shall be
strictly attributable to Landlord.
Tenant acknowledges having received certain environmental reports from Landlord
with respect to the Building, the Premises and the Land as prepared by GZA, Inc.
and Environmental Solutions; to the best of Landlord's knowledge, except as
disclosed in such environmental reports, there exist no Hazardous Substances in,
on or under the Premises or the Land. To the best of Landlord's knowledge there
are no material inaccuracies in such reports, but Landlord assumes no
responsibility for the accuracy, reliability or completeness of such reports and
Tenant assumes all risk in connection with the review and use thereof. Landlord
represents to Tenant that the reports as delivered to Tenant are complete and
true copies of the documents as received by Landlord. Landlord hereby agrees
that if any pre-existing asbestos not already disclosed to Tenant is discovered
anywhere in the Building, the Premises or the Land, and if the condition of
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such asbestos requires remediation of some kind under the applicable law, then
Landlord shall arrange for such remediation and shall pay the full cost of such
remediation. However, Landlord's remediation and payment obligations under this
paragraph shall be waived if remediation would not have been required but for
the performance of building improvements by Tenant on the Building or the area
at issue, or if due to actions taken by Tenant or its employees, agents,
contractors, invitees or representatives on the Premises.
13.19.4 WITHHOLDING CONSENT TO PROPOSED TRANSFEREES.
Tenant acknowledges and agrees that it shall not be unreasonable for Landlord to
withhold its consent to any proposed assignment, subletting, or transfer of
Tenant's interest in this Lease if the anticipated use of the Premises by the
proposed assignee, subtenant, or transferee (collectively, a "Transferee")
involves the generation, storage, use, treatment, or disposal of Hazardous
Substances; and (i) the proposed Transferee has been required to take remedial
action in connection with Hazardous Substances contaminating a property, if the
contamination resulted from such Transferee's actions or use of the property in
question; or (ii) the proposed Transferee is subject to an enforcement order
issued by any governmental authority in connection with the use, disposal, or
storage of a Hazardous Substance. Any Affiliate of Tenant shall be permitted to
make such use of the Premises if it does not fall under clauses (i) or (ii)
above and as long as such anticipated use is limited to no more than twenty
percent (20%) of the Total Rentable Floor Area of the Premises, and such use is
undertaken in full compliance with all applicable licenses, laws, regulations
and other governing rules, and both Tenant and the Affiliate fully and
unconditionally indemnify Landlord and hold Landlord harmless from and against
any and all cost, expenses, liabilities and damages which result directly or
indirectly from such use, as well as any consequential damages which may result
therefrom. Additionally, if Tenant or an Affiliate undertakes such a use of any
part of the Premises and if at any time while such use is ongoing Tenant's net
worth drops below $100,000,000.00, then at Landlord's request Tenant shall
purchase at its expense insurance in an amount of no less than $2,000,000.00
insuring Landlord against any loss caused by the presence of Hazardous
Substances on the Premises.
13.19.5 ADDITIONAL INSURANCE OR FINANCIAL CAPACITY.
If Tenant or its Affiliate is permitted to conduct the use described in Section
13.19.4 (i) and at any time it reasonably appears to Landlord that Tenant is not
maintaining sufficient insurance or other means of financial capacity to enable
Tenant to fulfill its obligations to Landlord under this Section 13.19.5,
whether or not then accrued, liquidated, conditional, or in contingent, Tenant
shall procure and thereafter maintain in full force and effect such insurance or
other form of financial assurance, with companies or persons and in forms
reasonably acceptable to Landlord, as Landlord may from time to time reasonably
request
13.20 GOVERNING LAW. This Lease shall be governed by and construed
in accordance with the laws of the Commonwealth of Massachusetts.
13.21 ACCESS TO PREMISES. The Landlord or the Landlord's agents
shall have the right to enter the Premises at all reasonable times throughout
the term hereof, to examine the same, and to show them to prospective purchasers
or lenders of the Building
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and to make such repairs as the Landlord may deem necessary or desirable,
provided that Landlord shall give Tenant reasonable notice other than in
emergency circumstances and, provided, further that such entry shall not
unreasonably interfere with normal business operations of Tenant. Landlord shall
have the same right of access as is set forth above during the last twelve
months of the Term hereof or of any extension of said Term for the purpose of
showing the Premises to possible future tenants or to real estate brokers.
13.22 SAFETY APPLIANCES. Tenant shall keep the Premises equipped
with all safety appliances and permits which, as a result of Tenant's particular
activities, are required by law or ordinance or by an order or regulation of any
public authority or are reasonably require by Landlord, shall keep the Premises
equipped at all times with adequate fire extinguishers, and, shall make all
repairs, alterations, replacements, or additions so required as a result of
Tenant's particular activities.
13.23 NO AGREEMENT UNTIL SIGNED. The submission of this Lease or a
summary of some or all of its provisions for examination does not constitute a
reservation of or option for the Premises or an offer to lease, and no legal
obligations shall arise with respect to the Premises or other matters herein
until this Lease is executed and delivered by Landlord and Tenant.
13.24 SIGNAGE. Any signage which Tenant may be permitted to place on
the interior and exterior of the Building or elsewhere on the Property shall be
governed by the terms of Exhibit D hereto.
13.25 AUTHORITY OF PARTIES. Landlord and Tenant each warrant to the
other that the person or persons executing this Lease on behalf of the Landlord
or Tenant, as the case may be, has authority to do so fully obligate Landlord or
Tenant, as the case may be, to all terms and provisions of this Lease. If
Landlord or Tenant is a corporation, each warrants that it has legal authority
to operate and is authorized to do business in the Commonwealth of
Massachusetts.
13.26 CAFETERIA. Landlord hereby consents to Tenant's operating a
cafeteria for the benefit of its employees, patrons and business visitors in the
space in the Building currently laid out for such use, and Landlord further
consents to Tenant's use of all equipment currently located in the cafeteria
area. Landlord makes no representations hereunder as to the fitness of such
cafeteria equipment for use nor as to the right to operate a cafeteria in the
Building. Tenant will be solely responsible for the establishment, licensing,
contracting and ongoing operations of said cafeteria and for all related costs
and expenses. To the extent that the cafeteria's kitchen and counter areas
(i.e., the area with stoves, sinks, and the like) are included within the
rentable square footage of the Premises, and if despite its good faith efforts
Tenant is unable to obtain all necessary permits for the operation of this area
as a cafeteria within the current space limitations and the Tenant does not
otherwise use said area, then such cafeteria kitchen and counter areas should be
excluded from the Premises and the appropriate rent adjustment should be made.
However, Landlord shall have the discretion, but not the obligation, to remove
any or all of such counters, stoves, sinks and other equipment so
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that the space at issue can be readily adapted for office use, whereupon there
will be no rental adjustment for the space so cleared.
13.27 OLD LEASE. Tenant acknowledges that it is aware that the
Premises are subject to a current lease with Healthplan Services, Inc. and that
Healthplan Services, Inc. has agreed to yield up its lease, at or prior to the
Tenant's entry permitted under Section 4.1 above, so that this Lease between
Landlord and Tenant would govern the use of the Premises.
XIV. EXTENSION OPTION
14.1 FIVE YEAR EXTENSION. The Tenant shall have the right to extend
the term hereof by one additional five (5) year term ("the Renewal Term") by so
notifying Landlord in writing by no later than twelve (12) months prior to the
Term Expiration Date; however, Tenant's option to extend will be void at
Landlord's option if Tenant is in default beyond any applicable notice, grace or
cure period orif Tenant and/or Tenant's Affiliates are not in possession of at
least eighty percent (80%) of the Total Rentable Floor Area of the Premises
either at the time the Tenant elects to extend the Term or at the time the
original Term would expire. Such Renewal Term shall apply to the entire Premises
and shall be subject to all the terms and conditions of this Lease as in effect
during the original seven year term hereof, except that during the Renewal Term
(Lease Years 8 through 13), the Annual Fixed Rent shall be set at ninety-five
percent (95%) of the prevailing fair market rents as of the date which is twelve
months prior to the Term Expiration Date, which 95% shall in no event be less
than the Annual Fixed Rent due in year 7 of the Lease. In determining fair
market rent, the parties and their arbitrators shall take the then condition of
the Building into account, but shall not consider any specialty laboratory or
similar special non-office space built out by Tenant at its expense, but rather
shall treat such areas as if Tenant restored them to open-floor office space.
Landlord shall notify Tenant of its estimate of the prevailing fair market rent
within thirty (30) business days after the Tenant exercises the Renewal Term
option. Tenant shall have the option, within twenty (20) business days of the
Landlord's notice, to accept the Landlord's estimate, to reject Landlord's
estimate and request arbitration or to withdraw its exercise of the extension
option. Failure by the Tenant to respond to the Landlord's notice within the
twenty (20) business day period shall be deemed an acceptance of the Landlord's
estimate. In the event Tenant rejects Landlord's estimate, then the prevailing
fair market rent shall be arbitrated in accordance with the following procedure.
The parties within ten (10) days after Tenant's rejection of Landlord's estimate
shall each identify an impartial third party to serve as an arbitrator and these
two arbitrators shall seek to identify one mutually acceptable impartial third
party to serve as the third arbitrator. If either party has not designated its
arbitrator to the other in a timely fashion, then the determination of the other
party's arbitrator shall be final. All such arbitrators shall be commercial real
estate brokers, having current and at least fifteen (15) years' prior experience
in appraising first class office space in the "Metro-West" area. If the two
arbitrators are unable to agree upon a third arbitrator within ten (10) days,
the third
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arbitrator shall be selected by J.A.M.S/ENDISPUTE, or any successor entity. If
neither J.A.M.S/ENDISPUTE nor any successor entity exists at the time of the
dispute, the third arbitrator shall be selected by the American Arbitration
Association ("AAA") or any successor entity. If neither AAA nor any successor
exists at the time of the dispute, the third arbitrator shall be selected by the
largest private provider of dispute resolution services then doing business in
the Greater Boston area. Within thirty (30) days after the parties are notified
as to the identity of the third arbitrator, each of the three arbitrators shall
submit its final determination of the prevailing market rate (the "Final Rent
Determination") to the other arbitrators. The two Final Rent Determinations
which are closest to each other shall be averaged and this average shall be
designated as the prevailing market rate. If the highest and lowest Final Rent
Determinations are equally close to the middle Final Rent Determination then the
middle one shall be designated as the prevailing market rate. If one of the
arbitrators has not submitted its Final Rent Determination to the other
arbitrators within the time limits set forth herein, the other arbitrators will
designate the average of their Final Rent Determinations as the prevailing
market rent. The arbitrators shall notify the parties of their decision in
writing within such thirty (30) day period. All costs incurred for the services
of the arbitrator shall be borne equally by the parties. The prevailing market
rate as designated by the arbitrator shall be final and binding and the parties
shall have no further recourse to such determination.
Promptly after rent is determined for the Renewal Term, Landlord and Tenant
shall enter into an amendment of this Lease confirming the extension of the Term
and the new rate for rent.
XV. CONDITION OF PREMISES AND
CONSTRUCTION OF LEASEHOLD IMPROVEMENTS
15.1 AS IS CONDITION. Tenant accepts the Premises and the Building
in their present "as is" condition, without representation or warranty, express
or implied, in fact or in law, by Landlord except as expressly provided herein
and without recourse to Landlord as to the nature, condition or usability
thereof, and Tenant agrees that Landlord has no work to perform in or on the
Premises to prepare the Premises for Tenant's occupancy, and that any and all
work, other than those capital improvements described in Exhibit F or required
to be performed by Landlord as Capital Expenditures in the first twelve months
as described in Section 9.1 hereof, to be done in or on the Premises will be
performed by Tenant at Tenant's sole cost and expense in accordance with the
terms of this Lease. Notwithstanding the foregoing, Landlord agrees to deliver
the Premises to Tenant vacant and in broom clean condition with all building
systems, roof, structure, exterior parking areas and walkways in good working
order and all exterior windows and walls in waterproof weather-tight condition.
15.2 TENANT IMPROVEMENTS. Tenant shall be responsible, at its sole
cost and expense, for the performance of all work, if any, necessary to prepare
the Premises for Tenant's occupancy, which work is currently anticipated to
consist solely of ordinary
38
<PAGE> 40
office tenant fit-out work (the "Tenant Improvements"). If Tenant's preparation
of the space for its usage necessitates a higher electrical capacity than is
customary for office use, the provision of such additional capacity shall be
undertaken by Tenant at Tenant's sole cost. Tenant agrees that the construction
of Tenant Improvements and the Tenant's use of the Premises may not overburden
the capacity of the Building's existing plumbing, mechanical, electrical,
elevator or sewage systems unless Tenant agrees to be responsible for the cost
of such expenditures. Tenant shall complete the Tenant Improvements
substantially in accordance with plans and specifications prepared by it,
submitted to Landlord and Landlord's current tenant, Health Plan Services, Inc.,
and is approved by Landlord and the aforesaid current tenant (such approval not
to be unreasonably withheld or delayed). Tenant shall complete the Tenant
Improvements in accordance with all applicable laws and with all applicable
requirements of this Lease relating to alterations; and such work shall only be
performed by contractors and subcontractors who have been approved in writing by
Landlord, such approval not to be unreasonably withheld. It shall be solely the
responsibility of Tenant to cause the Premises to comply with the Americans with
Disabilities Act ("ADA") and any other state or local laws, ordinances or
regulations relating thereto, except as otherwise expressly provided in Exhibit
F or elsewhere in this Lease. Any such alterations or modifications to the
Premises shall be performed by Tenant at its sole cost and expense, except as
set forth in Section 15.4 hereof.
15.3 DELIVERY DATE. During the period from and after the date on
which Landlord delivers the Premises to Tenant ("Delivery Date"), until the Term
Commencement Date, the Tenant shall have the right to enter and make use of the
Premises solely for the purpose of constructing the Tenant Improvements and
fitting out the Premises with its personal property and equipment, and not for
the conduct of business or operations, provided that during the period after the
Delivery Date, Tenant shall pay, perform and observe all its covenants and
obligations under this Lease (including, in particular, having liability and
other insurance policies in effect as herein required), except only that no
rental payments shall be due the Landlord for such period prior to the Lease
Commencement Date. Landlord shall notify Tenant when Premises are or expected to
be available for the purposes of this paragraph and the Delivery Date shall be
no less than five (5) days after Tenant's receipt of such notice.
15.4 REIMBURSEMENT. Landlord will reimburse Tenant for the cost of
Tenant Improvements in an amount up to, but not to exceed, the Expense
Reimbursement Amount specified in Section 1.1 above within thirty (30) days
after Landlord receives copies of invoices and receipts of payment from Tenant,
but in no event before January 1, 1999, and the Tenant's execution and delivery
to Landlord of the Commencement Letter attached hereto as Exhibit G. The Expense
Reimbursement shall be applied towards the cost of the following matters related
to the performance of the Tenant Improvements; material used and labor costs
incurred in construction, architectural and engineering planning, space planning
and construction services
15.5 LANDLORD'S REPRESENTATIONS. To the best of Landlord's
knowledge, the operating systems of the Building will not be subject to
interruption nor
39
<PAGE> 41
will they fail to operate properly due to the inability of any computer guided
system to recognize the year 2000 as a regular operating year of the Building.
To the best of Landlord's knowledge there are no new material matters on record
since March 28, 1996, which would adversely and substantially interfere with
Tenant's anticipated use of the Premises under this Lease. Landlord represents
that under applicable zoning laws, it is lawful to use the Building for general
business office use.
Landlord represents that, to the best of its knowledge, it has
delivered to Tenant true, correct and complete copies of the following plans,
reports, studies and records of the Building in Landlord's possession:
1. Environmental Reports referred to in Section 13.19.3;
2. Site Plan;
3. Internal air quality reports;
4. Lists of chemicals, fertilizers, pesticides, etc. used in lawn
maintenance programs;
5. Letter regarding floor load calculations; and
6. Floor plans of the Building and certain other architectural and
engineering documents.
To the best of Landlord's knowledge, except as disclosed in this Lease, the
aforesaid reports, plans, studies and records and/or in the several due
diligence inspection reports of the Building prepared for Tenant by Genzyme's
Health, Safety and Environmental Group, by CID Associates, Inc. and BR&A, there
exist no conditions that materially adversely affect the utility of this
Building, Premises or the Land for occupancy by Tenant under this Lease.
Landlord assumes no responsibility for the accuracy, completeness or reliability
of any of the aforesaid plans, reports, studies and records, and Tenant assumes
all risk in connection with the review and use thereof.
15.6 COOPERATION. Landlord agrees that it shall, at Tenant's
expense, cooperate with, support, consult with, and provide information in its
possession to Tenant in seeking, applying for and obtaining any and all
consents, permits, licenses, certificates, waivers, special permits, approvals
and the like required, or deemed necessary or appropriate by Tenant, in
connection with (a) Tenant's use and occupancy of the Premises for the Permitted
Use and/or (b) Tenant's exercise of its rights and/or performance of its
obligations under this Lease. Landlord agrees that such cooperation shall
include, without limitation, the co-signing of applications; the providing of
support and information that can reasonably be made available by the record
owner of the Premises but not by other parties; providing letters of support or
other supporting information or evidence for submission to hearings or
proceedings before any zoning,
40
<PAGE> 42
planning, land use, or regulatory board or authority, or any license or
permit-granting or permitting office board or authority
XVI. PARKING
16.1 PARKING. On and after Term Commencement Date Landlord agrees
to provide (without additional rent or charge to Tenant) automobile parking in
parking areas serving the Building for the benefit and use of customers and
employees of Tenant. Whenever the words "automobile parking areas" are used in
this Lease, it is intended that the same shall include, whether in a surface
parking area or parking structure, the automobile stalls, driveways, entrances,
exits, sidewalks, landscaped areas, pedestrian passageways in conjunction
therewith and other areas designated for parking as approximately shown on the
Site Plan and subsequently restriped and expanded as described in the definition
of Building set forth in Section 1.1.. Landlord shall keep the automobile
parking area neat, clean and in good repair, properly lighted and landscaped,
ordinary wear and tear excepted. Nothing contained herein shall be deemed to
create liability upon Landlord for any damage to motor vehicles of customers and
employees or from loss of property from within such motor vehicles, unless
caused by the gross negligence or reckless or willful misconduct of Landlord,
its agents, servants, and employees. Landlord shall have the right to establish
and enforce against all users of the automobile parking area, such reasonable
rules and regulations as may be deemed necessary and advisable for the proper
and efficient operation and maintenance of the automobile parking area; however,
to the extent that particular rules and regulations are not for the purpose of
protecting Landlord's interest in the Premises or of addressing the reasonable
concerns of abutters or of responding to any instructions from public
authorities, the Tenant shall have a right of approval of the parking area rules
and regulations, which approval may not unreasonably be withheld, delayed or
conditioned.
Landlord shall at all times during the term hereof have the sole and
exclusive control of the automobile parking areas, and may at any time during
the term hereof exclude and restrain any person from use thereof, excepting,
however, Tenant and its employees, bonafide customers, patrons and service
suppliers of Tenant.
41
<PAGE> 43
IN WITNESS THEREOF, Landlord and Tenant have caused this Lease to be
duly executed, under seal, by persons hereunto duly authorized, in multiple
copies, each of which is to be considered as an original, as of the Execution
Date stated herein.
Dated this 12th day of November, 1998. ("Execution Date").
LANDLORD TENANT
Consolidated Group Service Genzyme Corporation
Company Limited Partnership
By: /s/ Woolsey Conover By: /s/ Evan M. Lebson
------------------------------ --------------------------------
Woolsey Conover Evan M. Lebson
President Vice President and Treasurer
Hereunto Duly Authorized Hereunto Duly Authorized
November 13, 1998 November 12, 1998
- ---------------------------------- ------------------------------------
Date Signed Date Signed
42
<PAGE> 44
EXHIBIT A
---------
FLOOR PLAN OF THE PREMISES
ATTACHED
A-1
<PAGE> 45
EXHIBIT B
---------
RULES AND REGULATIONS
The following Rules and Regulations constitute a part of the Lease and of
Tenant's obligations thereunder in respect of Tenant's use and occupancy of
the Premises in the Building.
I. BUILDING HOURS
1.1 Tenant's access to the Building shall be as provided in
Section 7.3 of the Lease.
1.2 Building security shall be installed and administered by
Tenant; however, Tenant's proposed security system shall be subject to Landlord
approval prior to installation, and said approval shall not be unreasonably
withheld by Landlord. Pass cards and other devices necessary for access to all
parts of the Premises shall be made available to Landlord by Tenant.
1.3 You are advised, for the protection and safety of your
personnel, to lock front doors at the end of each working day. Front doors
should also be locked whenever your receptionist leaves the area.
II. ELEVATORS, DELIVERIES AND PARKING
2.1 If you expect delivery of any bulky material, notify the
Building Management Office reasonably in advance so that elevators may be
scheduled and elevator pads may be installed. This protects both your shipment
and the elevators.
2.2 All larger deliveries must be made from the designated
Building loading dock area. The receiving area can accommodate only certain
types and sizes of vehicles. All hand trucks used for interior deliveries must
be equipped with rubber bumpers and tires.
2.3 The loading dock may be used only for deliveries. No vehicles
are allowed to stand or park in this area after unloading nor are vehicles
allowed to park at the loading dock for service calls. You should advise your
vendors and suppliers of this rule. Any vehicle abusing the truck dock
privileges are subject to being towed at the vehicle owner's expense.
B-1
<PAGE> 46
III. GENERAL USE OF BUILDING AND PREMISES
3.1 Property may not be placed or stored on the sidewalks,
passageway, parking areas or courtyards adjacent to the Building or in the
elevators, vestibules, stairways, or corridors (except as may be necessary for
brief periods during deliveries).
3.2 No animals may be brought into or kept in or about the
Building premises except if kept in cages.
3.3 Rubbish, rags, sweepings, acid and any and all harmful or
damaging substances may not be deposited in the lavatories or in the janitor
closets.
IV. FLOOR LOAD - HEAVY MACHINERY
4.1 You may not place a load upon any floor in the Premises or
Building exceeding the floor load which that section of floor was designed to
carry and which is allowed by law. Landlord reserves the right to prescribe the
weight and position of all business machines and mechanical equipment, including
safes, all of which shall be so placed as to distribute the weight. You shall
place and maintain your business machines and mechanical equipment in setting
sufficient to absorb and prevent vibration, noise and annoyance. You may not
move any safe, heavy machinery, heavy equipment, freight, bulky matter or
fixtures into or out of the Building without notice to Landlord. Notwithstanding
the foregoing, proper placement of all such business machines, etc., in the
Premises shall be your responsibility as Tenant.
4.2 If any such safe, machinery, equipment, freight, bulky matter
or fixtures requires special handling, you must employ only persons holding a
Master Rigger's license to do such work; and all work in connection therewith
must comply with applicable laws and regulations. Any such moving shall be at
your sole risk and hazard and you, as Tenant, will defend, exonerate, indemnify
and save Landlord harmless against and from any liability, loss, injury claim or
suit resulting directly or indirectly from such moving.
V. ELECTRICAL SYSTEM: ENERGY CONSERVATION: WATER
5.1 Notwithstanding anything to the contrary contained in the
Lease, Landlord reserves the right to implement policies and procedures it
deems, in its reasonable judgment, to be necessary or required in order to
comply with applicable government laws, rules, regulations, codes, orders and
standards.
VI. SIGNS AND ADVERTISING
6.1 Except as provided in Section 13.24 of the Lease, you may not
place on the exterior surfaces of the Premises without Landlord's express
consent, not to be unreasonably withheld, including both interior
B-2
<PAGE> 47
and exterior surfaces or doors and interior surfaces of windows, or on any part
of the Building outside the Premises, any signs, symbol, advertisement or the
like visible to public view outside of the Premises.
VII. EXTRA HAZARDOUS AND PROHIBITED USES
7.1 PROHIBITED USES. Notwithstanding any other provision of the
Lease, you may not use, or permit the use or occupancy of, the Premises or the
Building, or permit any act or practice to be done or anything to be brought
into or kept in or about the Premises or the Building or any part thereof: (i)
which would violate any of the covenants, agreements, terms, provisions and
conditions or the Lease or such other covenants, agreements, terms, provisions
and conditions otherwise applicable to or binding upon the Premises; (ii) for
any unlawful purposes or in any unlawful manner; (iii) which, in the reasonable
judgment of Landlord shall in any way (a) adversely affect the appearance of the
Building as a first-class office building, (b) adversely affect, directly or
indirectly any building services, or (c) cause any offensive odors or loud
noises or constitute a nuisance or a menace to any others outside the Building.
Without intending to limit the general applicability of the foregoing and other
than as permitted under Section 13.26 hereof, you may not use or permit the use
of any part of the Premises for the preparation or dispensing of food. You may,
nevertheless, install hot-cold water fountains, coffee makers and
refrigerator-sink-stove combinations for the preparation of beverages and foods,
provided that no cooking, frying, etc., are carried on that require special
exhaust venting. The Building contains no facilities to provide special venting.
VIII. LIFE SAFETY AND EMERGENCY PROCEDURES
8.1 In case of emergency situations such as power failure, water
leaks or serious injury, call the Building Management Office immediately. In
case of fire or smoke, pull the nearest alarm (located on your floor) and then
call the Building Management Office.
B-3
<PAGE> 48
EXHIBIT C
---------
SCHEDULE OF CLEANING SERVICE
Lessor shall provide at the Lessor's expense all labor, supervision, materials
and equipment for the satisfactory performance of the following services:
I. Daily Services
1. Empty waste receptacles.
2. Damp mop, or sweep with a chemically treated dust mop, all
uncarpeted areas. Vacuum all carpeted areas.
3. Spot clean carpets, wall surfaces, and other partition glass
as necessary.
4. Wash and polish all entrance glass doors.
5. Spray buff (buffing over a light spray of a mixture of
detergent and floor finish) uncarpeted floors in reception
area, lunchroom and corridors.
6. Damp clean all bright work.
7. Remove and dispose of all trash (wet and dry).
II. Weekly Services
1. Dust window ledges.
2. Dust tops of office furniture, furnishings, files, cabinets,
radiators, convectors, and baseboards.
III. Monthly Services
1. Machine buff all uncarpeted floors.
2. Deep vacuum (pile lifting) all carpeted areas.
IV. Every Three-Month Services
1. Wash baseboards, window sills and remove smudges and marks
from radiators and convectors whenever possible.
2. Wash all interior windows and glass in private offices and
enclosures inside and out.
3. Vacuum drapes.
4. Vacuum ceiling diffusers.
5. Strip and refinish all uncarpeted (resilient tile) floors.
V. Toilet Rooms
1. Daily Services:
a. Empty all waste receptacles.
b. Sweep and wet mop floors.
c. Clean and disinfect all fixtures.
d. Polish mirrors.
e. Clean shelves, tops of tile edges and dispensers.
f. Refill paper towel, toilet paper and soap dispensers.
C-1
<PAGE> 49
2. Weekly Services:
a. Wash toilet partitions
b. Wash and disinfect all ceramic tile, fixtures and
waste receptacles.
VI. Shampooing of Carpets
1. Twice a year shampoo all high traffic areas such as
hallways.
2. All other carpets are to be shampooed once a year.
VII Cleaning of perimeter induction unit drain pans throughout the Building
and the exterior air intake areaways shall be performed in accordance
with a periodic schedule reasonably acceptable to Landlord and Tenant.
C-2
<PAGE> 50
EXHIBIT D
SIGNAGE CRITERIA AND RESTRICTIONS
Tenant will not erect any signs except in conformity with both (i) applicable
sign by-laws and codes and (ii) sign plans specifically approved in writing by
Landlord, such approval not to be unreasonably withheld. In event of a conflict
between the requirements of the by-laws or codes and the approved signage, the
more restrictive requirements shall control.
(a) Wording on large-scale signs shall be limited to business name
only. All signs shall be drawn up by Tenant and submitted to Landlord for
approval prior to fabrication.
(b) Signs with exposed neon tubing or exposed lamps and signs of
the flashing, blinking, rotating, moving or animated types are not permitted.
(c) Public safety decals or artwork on glass in minimum sizes to
comply with applicable Code, subject to the approval of Landlord, may be used,
as required by building codes or other governmental regulations.
Tenant will be permitted, subject to Landlord's approval which is not to be
unreasonably withheld, to install exterior signage on the Building in accordance
with applicable sign by-laws, and Landlord agrees to cooperate with Tenant, if
so requested, to apply for such signage. Such agreement to cooperate shall in no
event require the expenditure of money by Landlord.
D-1
<PAGE> 51
EXHIBIT E
---------
BASE YEAR OPERATING EXPENSES BUDGET
ATTACHED
E-1
<PAGE> 52
EXHIBIT F
---------
REQUIRED CAPITAL IMPROVEMENTS
ATTACHED
F-1
<PAGE> 53
Management Services shall include the following:
Management Fee
Salary, benefits and other direct and indirect costs of on-site
building management.
Direct and indirect costs of all labor providing services for the
operation, maintenance and management of the Premises.
All direct and indirect administrative costs of Landlord in operating,
maintaining and managing the Premises.
F-2
<PAGE> 1
Exhibit 10.22
Approved by directors on March 6, 1998
Approved by stockholders on May 28, 1998
GENZYME CORPORATION
1998 DIRECTOR STOCK OPTION PLAN
1. GENERAL; PURPOSE.
This 1998 Director Stock Option Plan dated March 6, 1998 (the "Plan")
governs options to purchase common stock, $0.01 par value ("Common Stock"), of
Genzyme Corporation (the "Company") granted on or after the date hereof by the
Company to members of the Board of Directors of the Company (the "Board") who
are not also officers or employees of the Company. The Plan constitutes an
amendment and restatement of the Company's 1988 Director Stock Option Plan (the
"Prior Plan") and supersedes the Prior Plan, the separate existence of which
shall terminate on the effective date of this Plan. The rights and privileges of
holders of options outstanding under the Prior Plan shall not be adversely
affected by the foregoing action.
The purpose of the Plan is to attract and retain qualified persons to
serve as Directors of the Company and to encourage ownership of stock of the
Company by such Directors so as to provide additional incentives to promote the
success of the Company.
2. ADMINISTRATION OF THE PLAN; GOVERNING LAW.
Grants of stock options under the Plan shall be automatic as provided
in Section 7. However, all questions of interpretation with respect to the Plan
and options granted under it shall be determined by a committee consisting of
all Directors of the Company who are not eligible to participate in the Plan,
and such determination shall be final and binding upon all persons having an
interest in the Plan. This Plan shall be governed by and interpreted in
accordance with the laws of The Commonwealth of Massachusetts.
3. PERSONS ELIGIBLE TO PARTICIPATE IN THE PLAN.
Members of the Board who are not also officers or employees of the
Company shall be eligible to participate in the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK"), GENZYME TISSUE
REPAIR DIVISION Common Stock ("GTR Stock") and Genzyme Molecular Oncology
Division Common Stock ("GMO Stock") are series of the Company's Common Stock
that may be granted under this Plan. The aggregate number of shares of each
series of Common Stock that may be issued upon exercise of options granted under
this Plan is:
<TABLE>
<CAPTION>
GGD STOCK GTR STOCK GMO STOCK
--------- --------- ---------
<S> <C> <C> <C>
New shares to be authorized under the Plan 130,400 100,000 70,000
Authorized and available for grant from Prior Plan 24,000 24,818 53,800
Outstanding options from Prior Plan 185,600 75,182 16,200
------- ------- -------
Total reserve 340,000 200,000 140,000
</TABLE>
In the event of a stock dividend, split-up, combination or reclassification of
shares, recapitalization or other similar capital change relating to the Common
Stock, the maximum aggregate number and kind of shares or securities of the
Company as to which options may be granted under this Plan and as to which
options then outstanding shall be exercisable, and the option price of such
options, shall be appropriately adjusted by the
- 1 -
<PAGE> 2
Board (whose determination shall be conclusive) so as to preserve the value of
the option.
- 2 -
<PAGE> 3
(b) In the event of a consolidation or merger of the Company with
another corporation where the Company's stockholders do not own a majority in
interest of the surviving or resulting corporation, or the sale or exchange of
all or substantially all of the assets of the Company, or a reorganization or
liquidation of the Company, any deferred exercise period shall be automatically
accelerated and each holder of an outstanding option shall be entitled to
receive upon exercise and payment in accordance with the terms of the option the
same shares, securities or property as he or she would have been entitled to
receive upon the occurrence of such event if he or she had been, immediately
prior to such event, the holder of the number of shares of Common Stock
purchasable under his or her option or, if another corporation shall be the
survivor, such corporation shall substitute therefor substantially equivalent
shares, securities or property of such other corporation; provided, however,
that in lieu of the foregoing the Board may make such other provision as it may
consider equitable to holders and in the best interests of the Company.
(c) Whenever options under this Plan (including options outstanding
under the Prior Plan as of the effective date of this Plan) lapse or terminate
or otherwise become unexercisable, the shares of Common Stock which were subject
to such options may again be subjected to options under this Plan. The Company
shall at all times while this Plan is in force reserve such number of shares of
Common Stock as will be sufficient to satisfy the requirements of this Plan.
5. NONSTATUTORY STOCK OPTIONS.
All options granted under this Plan shall be nonstatutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
6. FORM OF OPTIONS.
Options granted hereunder shall be in such form as the Board may from
time to time determine.
7. GRANT OF OPTIONS AND OPTION TERMS.
(a) AUTOMATIC GRANT OF OPTIONS. At each annual meeting of the
stockholders of the Company, those Directors to be elected or re-elected at that
meeting who are eligible to receive options under this Plan shall automatically
be granted, for each year of the term of office to which they are elected,
options to purchase (i) 4,000 shares of GGD Stock, (ii) a number of shares of
GTR Stock equal to 1,000 times a fraction, the numerator of which is the Fair
Market Value of the GGD Stock and the denominator of which is the Fair Market
Value of the GTR Stock (a market value equal to one-quarter of the market value
of the stock subject to the GGD Stock option), and (iii) a number of shares of
GMO Stock equal to 1,000 times a fraction, the numerator of which is the Fair
Market Value of the GGD Stock and the denominator of which is the Fair Market
Value of the GMO Stock (a market value equal to one-quarter of the market value
of the stock subject to the GGD Stock option). In addition, upon the election of
an eligible Director under this Plan other than at an annual meeting of
stockholders (whether by the Board or the stockholders and whether to fill a
vacancy or otherwise), such Director shall automatically be granted options to
purchase the number of shares of GGD Stock, GTR Stock and GMO Stock described in
the preceding sentence for each year or portion thereof of the term of office to
which he or she is elected. The "Date of Grant" for options granted under this
Plan shall be the date of election or re-election as a Director, as the case may
be. No options shall be granted hereunder after ten years from the date on which
this Plan was initially approved and adopted by the Board. As used herein, "Fair
Market Value" for each series of the Common Stock shall mean the closing sale
price of such series as reported by the Nasdaq National Market or the principal
securities exchange or over-the-counter market on which such series is listed or
quoted on the Date of Grant of such options or, if such series is not then
listed on the Nasdaq National Market or any securities exchange or quoted in the
over-the-counter market, the fair market value of such series as determined in
good faith by the Board.
- 3 -
<PAGE> 4
(b) OPTION PRICE. The option price per share for each option granted
under this Plan shall be equal to the Fair Market Value of the series of Common
Stock with respect to which the option is exercisable.
(c) TERM OF OPTION. The term of each option granted under this Plan
shall be ten years from the Date of Grant.
(d) PERIOD OF EXERCISE. Options granted under this Plan shall become
exercisable on the date of each annual meeting of stockholders following their
Date of Grant, if and only if the option holder is a member of the Board at the
opening of business on that date. Directors holding exercisable options under
this Plan who cease to serve as members of the Board may, during their lifetime,
exercise the rights they had under such options at the time they ceased being a
Director for the full unexpired term of such option. Upon the death of a
Director, those entitled to do so under the Director's will or the laws of
descent and distribution shall have the right, at any time within twelve months
after the date of death, to exercise in whole or in part any rights which were
available to the Director at the time of his or her death. Options granted under
this Plan shall terminate, and no rights thereunder may be exercised, after the
expiration of the applicable exercise period. Notwithstanding the foregoing
provisions of this section, no rights under any options may be exercised after
the expiration of ten years from their Date of Grant.
(e) METHOD OF EXERCISE AND PAYMENT. Options may be exercised only by
written notice to the Company at its head office accompanied by payment of the
full option price for the shares of Common Stock as to which they are exercised.
The option price shall be paid in cash or by check. Upon receipt of such notice
and payment, the Company shall promptly issue and deliver to the optionee (or
other person entitled to exercise the option) a certificate or certificates for
the number of shares as to which the exercise is made.
(f) NON-TRANSFERABILITY. Options granted under this Plan shall not be
transferable by the holder thereof otherwise than by will or the laws of descent
and distribution, and shall be exercisable, during the holder's lifetime, only
by him or her.
(g) AMENDMENT. In addition to the rights set forth in Section 4(b) of
this Plan, the Board may amend or modify any outstanding option in any respect,
provided that the optionee's consent to such action shall be required unless the
Board determines that the action, taking into account any related action, would
not materially and adversely affect the optionee.
8. LIMITATION OF RIGHTS.
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither this Plan, nor the
granting of an option or any other action taken pursuant to this Plan, shall
constitute an agreement or understanding, express or implied, that the Company
will retain an optionee as a Director for any period of time or at any
particular rate of compensation.
(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. Directors shall have no rights
as a stockholder with respect to the shares covered by their options until the
date they exercise such options and pay the option price to the Company, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such option is exercised and paid for.
9. EFFECTIVE DATE; AMENDMENT OR TERMINATION.
Subject to the approval of the stockholders of the Company, this Plan
shall be effective as of March 6, 1998. Prior to such approval, options may be
granted under this Plan expressly subject to such approval. The Board may amend
or terminate this Plan at any time, subject to any stockholder approval that the
Board determines to be necessary or advisable.
- 4 -
<PAGE> 5
10. STOCKHOLDER APPROVAL.
This Plan is subject to approval by the stockholders of the Company by
the affirmative vote of the holders of a majority of the votes properly cast by
holders of the shares of Common Stock of the Company present, or represented and
entitled to vote, at a meeting duly held in accordance with the laws of The
Commonwealth of Massachusetts. In the event such approval is not obtained, all
options granted under this Plan shall be void and without effect.
- 5 -
<PAGE> 1
EXHIBIT 10.27
SCHEDULE TO EXECUTIVE SEVERANCE AGREEMENT
The following are the senior executive of Genzyme Corporation who are party
to an Executive Severance Agreement, the form of which was filed as Exhibit
10.33 to Genzyme's Form 10-K for 1990:
<TABLE>
<S> <C>
David D. Fleming Russell J. Campanello
John V. Heffernan Earl M. Collier, Jr.
Elliot D. Hillback, Jr. Richard H. Douglas
David J. McLachlan Frank Ollington
John M. McPherson Lisa J. Raines
Alan E. Smith Thomas J. DesRosier
G. Jan van Heek Michael S. Wyzga
Richard A. Moscicki
</TABLE>
The Company is a party to Executive Severance Agreements with the executive
officers named above, under which payments will be made under certain
circumstances following a Change of Control of the Company (as defined in the
Executive Severance Agreements). The Executive Severance Agreements proved that
in the event the officer's employment is terminated by the Company without Cause
(as defined) or by the officer for Good Reason (as defined) following a Change
of Control, the Company will make a lump sum severance payment to the officer of
up to two times (in the case of David J. McLachlan, three times) annual salary
and bonus. Upon such termination, the Executive Severance Agreements also
provide for (i) a cash payment equal to the additional retirement benefit which
would have been earned under the Company's retirement plans if employment had
continued for two years (in the case of David J. McLachlan, three years)
following the date of termination, (ii) participation in the life, accident and
health insurance plans of the Company for such period except to the extent such
benefits are provided by a subsequent employer and (iii) in certain
circumstances, legal costs and expenses associated with such termination.
<PAGE> 1
EXHIBIT 10.28
SCHEDULE TO INDEMNIFICATION AGREEMENT
The following are the directors and senior executive of Genzyme Corporation
who are party to an Indemnification Agreement, the form of which was filed as
Exhibit 10.34 to Genzyme's Form 10-K for 1990:
Constantine E. Anagnostopoulos
Douglas A. Berthiaume
Henry E. Blair
Russell J. Campanello
Robert J. Carpenter
Earl M. Collier, Jr.
Charles L. Cooney
Thomas J. DesRosier
Richard H. Douglas
David D. Fleming
John V. Heffernan
Elliott D. Hillback, Jr.
Evan M. Lebson
Henry R. Lewis
David J. McLachlan
John M. McPherson
Richard A. Moscicki
Frank Ollington
Lisa J. Raines
Alan E. Smith
G. Jan van Heek
Michael S. Wyzga
<PAGE> 1
CONSULTING SERVICES AGREEMENT
EXHIBIT 10.30
This AGREEMENT (this "Agreement") dated December 14, 1998, but
effective as of January 1, 1999 (the "Effective Date") between CHARLES L.
COONEY, Ph.D., with an address at 35 Chestnut Place, Brookline, Massachusetts,
02146 (Consultant"), and GENZYME CORPORATION, a Massachusetts corporation having
an office and principal place of business at One Kendall Square, Cambridge,
Massachusetts 02139 ("Genzyme").
WITNESSETH:
WHEREAS, Consultant has knowledge, expertise and experience in chemical
and biochemical engineering, manufacturing processes and operations management;
WHEREAS, Genzyme manufactures a variety of therapeutic, surgical,
diagnostic and pharmaceutical products;
WHEREAS, Consultant is willing to provide counseling, planning, recommendations
and assistance to Genzyme with respect to Genzyme's business operations and
manufacturing processes, including technical reviews of current and prospective
development projects, evaluations and benchmarking studies of systems and
procedures, advice concerning Genzyme planning and staffing, and other forms of
assistance relating to Genzyme's manufacturing and operations; and
WHEREAS, Genzyme desires to engage Consultant as an independent contractor to
consult to Genzyme regarding the matters described above.
NOW, THEREFORE, in consideration of the premises and the covenants and
undertakings set forth below, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Consulting Services.
(a) Genzyme hereby engages Consultant as an independent contractor to
provide Consulting Services (as hereafter defined) for Genzyme with respect to
the Transactions. As used herein, the term "Consulting Services" shall include
the provision of technical and business advice regarding Genzyme's business
operations, technology development and manufacturing processes, including in
particular but without limitation, the projects set forth on Exhibit A attached
hereto.
(b) Consultant agrees to make himself available and, if requested,
to provide not less than fifteen (15) business days (each business day
to consist of 8 hours devoted to the conduct of the Consulting Services)
of Consulting Services each year during the term of this Agreement as
requested by Genzyme. Each Genzyme request (which may be provided orally or
in writing) shall include a description of the requested Consulting Services,
the number of consulting hours anticipated to complete the requested
Consulting Services, the proposed dates and times of the Consulting Services
and the location for delivery of the Consulting Services. Consultant shall
use his best efforts to provide the Consulting Services in accordance with
Genzyme's request; nonetheless, if the date and location of the requested
Consulting Services conflict with activities previously scheduled by
Consultant or are otherwise not reasonably convenient for the Consultant,
the Consultant may reasonably decline to provide the Consulting Services on the
proposed dates and may suggest alternative scheduling which is subject
to Genzyme's approval.
2. Compensation for Consulting Services.
<PAGE> 2
(a) Genzyme shall pay Consultant an annual fee equal to $30,000,
payable quarterly in four equal installments of $7,500 within 20 business days
after the end of each calendar quarter. If Consultant works in excess of 15
business days during the year, Genzyme shall pay Consultant a fee at a rate of
$2,000 per day, and for partial days at a rate of $250.00 per hour.
(b) Genzyme shall reimburse Consultant for all reasonable out-of-pocket
expenses reported by Consultant, provided, that such expenses are confirmed by
appropriate supporting documentation as Genzyme may from time to time require
and approved by Genzyme. Expenses subject to reimbursement shall include, but
shall not be limited to, costs incurred by Consultant for travel, lodging,
meals, office supplies and other costs directly related to the provision the
Consulting Services. Reasonable efforts should be made by Consultant to arrange
and book travel in advance to obtain the most cost effective travel pricing
available. In addition to other reasonable travel policies that may be
established by Genzyme from time to time, for air travel flights of less than
six (6) hours Genzyme reimbursement shall be limited to coach class fares, and
for air travel flights greater than six (6) hours Genzyme reimbursement shall be
limited to business class fares.
3. Independent Contractor Status.
It is understood and agreed between the parties that during the period
Consultant renders Consulting Services hereunder, all of his activities shall be
undertaken and performed as an independent contractor. Consultant shall have no
rights to receive any employee benefits, such as health and accident insurance,
sick leave or vacation, which are afforded by Genzyme to regular employees.
Consultant shall not in any way represent himself or herself to be an employee,
partner, joint venturer, agent or officer of or with Genzyme. Genzyme shall not
be responsible for the Consultant's acts while the Consultant is performing the
Consulting Services, whether on Genzyme's premises or elsewhere, and the
Consultant will not have authority to speak for, represent or obligate Genzyme
in any way without additional prior written authority.
4. Assignments and Subcontracts.
Neither party may assign this Agreement to another person or entity
without the express written permission of the other party; provided, however,
that Genzyme may assign this Agreement to an affiliated company in connection
with a merger, consolidation or sale of all or substantially all of the assets.
If assignment is permitted, all of the conditions of this Agreement shall remain
in effect for the future assignee for the entire term of this Agreement.
Permission to assign shall not be unreasonably withheld or delayed.
5. Confidential Proprietary Information.
Both parties acknowledge that each owns or is entrusted with and use
confidential and proprietary information which may include, without limitation,
computer programs, inventions, discoveries, tools, machines, articles of
manufacture, mechanisms, jigs, fixtures, methods, processes, compositions,
mixtures, formulas, designs, techniques of production, manufacture or assembly,
know-how, show-how, trade secrets, patent applications, technical data or
specifications, testing methods, information which concerns their financial
affairs, marketing practices, internal policies and procedures, research and
development activities, products, contracts, suppliers or customers
("Confidential Information"). The parties acknowledge that during the
performance of this Agreement, each may become privy to the Confidential
Information of the other or its affiliates. Notwithstanding the foregoing, both
parties agree that neither obtains any title to or interest or license in such
Confidential Information of the other, and that all such Confidential
Information is owned exclusively by its respective owner.
(a) Restrictions on Use and Disclosure. Each of the parties shall use
the Confidential Information of the other solely for the purposes set forth
in this Agreement. Each party shall maintain in strict confidence
<PAGE> 3
the Confidential Information of the other, except that Genzyme may disclose or
permit disclosure of Consultant's Confidential Information to its directors,
officers, employees and advisors who are obligated to maintain the confidential
nature of such Confidential Information and who need to know such Confidential
Information for the purposes set forth in this Agreement. During the term of
this Agreement, and for a period of five (5) years thereafter, irrespective of
the manner of or reason for termination of this Agreement, neither party shall
disclose, divulge, publish to others or use in any manner any such Confidential
Information of the other without the prior written consent of the other. Upon
the expiration or termination of this Agreement, each party shall return to the
other party all originals, copies and summaries of documents, materials and
other tangible manifestations of Confidential Information in the possession or
control of such party, except that each party may retain one copy of such
Confidential Information in the possession of its legal counsel for purposes of
monitoring its obligations under this Agreement. Both parties further
acknowledge that any unauthorized disclosure or use of Confidential Information
of the other would substantially and irreparably damage and impair the business
of the other; therefore, the other party shall have, in addition to any remedies
available at law, the right to obtain equitable relief to enforce the provisions
of this Section 6.
(b) Subject Matter Excluded From Restrictions. The foregoing
proscription against use, disclosure and copying by one party (the "Receiving
Party") does not apply to information or data of the other party (the
"Disclosing Party") which (i) can be shown by written documents to have been
known by the Receiving Party prior to disclosure hereunder other than as a
result of some breach of the Disclosing Party's rights in and to such
confidential proprietary information; (ii) is available in published print or is
otherwise known to the public, unless published or made known as a result of
some act of omission of the Receiving Party; (iii) can be shown by written
documents to have been obtained by the Receiving Party in writing from a third
party who did not wrongfully acquire such information or data from the
Disclosing Party and who has no obligation of confidentiality to the Disclosing
Party with respect to such information; (iv) can be shown by written documents
to have been independently developed by the Receiving Party or its affiliates
without breach of any of the provisions of this Agreement; or (v) is disclosed
by the Receiving Party pursuant to a subpoena lawfully issued by a Genzyme or
governmental agency, provided that such party notifies the Disclosing Party
immediately upon receipt of any such subpoena.
(c) Additional Obligations of Consultant. The Consultant agrees not to
disclose to representatives of Genzyme any information which is secret or
confidential information belonging to a third party or with respect to which the
Consultant is under an obligation to a third party not to disclose. Similarly,
if during the term of this Agreement, the Consultant discloses any ideas to
Genzyme which were conceived prior to the term of this Agreement or are outside
the scope of the consultancy under this Agreement, Genzyme shall have no
liability to the Consultant because of his use of such ideas, except that this
shall not be construed as a license under any valid patent now or hereafter
issued thereon. The Consultant has not brought and will not bring to Genzyme or
use in the performance of this Agreement any materials or documents of any
current or former employer which are not generally available to the public,
unless the Consultant shall have obtained written authorization from such
employer for the possession and use of such materials or documents.
6. Non-Competition and Conflicting Obligations
(a) Non-Competition. During the term of this Agreement the Consultant shall not
enter into a consulting arrangement with any other person or entity which is
engaged in any business or activity similar to or competitive with the business
or products of Genzyme unless such arrangement has been approved by Genzyme in
writing and signed by an appropriate representative of Genzyme. It shall not be
considered a competitive activity within the meaning of this Section 7 for the
Consultant to be a member of the faculty or staff of a university, college or
other educational or non-profit research institution.
(b) Conflicting Obligations. The Consultant represents that the Consultant is
presently under no obligation to any third party (including without limitation
any governmental body and others with whom the
<PAGE> 4
Consultant consults) which would prevent the Consultant from carrying out his
duties and obligations under this Agreement or which is inconsistent with the
provisions contained herein. The Consultant agrees not to enter into any
agreement (either oral or written) in conflict with this Agreement.
7. Compliance with Policies and Regulations.
In performing the Consulting Services, the Consultant shall comply with all
business conduct, regulatory and health and safety guidelines or regulations
established by Genzyme or any governmental authority that may be applicable to
the Consulting Services.
8. Requisite Authority.
Each party warrants and represents to the other that he, she or it has
the right to enter into and fully perform this Agreement, and that, to the best
of that party's knowledge, the performance of their respective obligations under
this Agreement will not violate any applicable law, rule or regulation, or any
contract with a third party. Each party warrants to the other that he or it has
the requisite power and authority to execute and deliver this Agreement and to
perform his or its obligations hereunder. Each party warrants that this
Agreement has been duly and validly executed and constitutes a valid and binding
obligation, enforceable in accordance with the terms of this Agreement.
9. Term and Termination.
(a) Term and Renewal. Unless earlier terminated, the initial term of
this Agreement shall be for a period of one (1) year from the Effective Date
hereof. The term of this Agreement may be extended at the end of its initial
term and any subsequent renewal term for an additional one (1) year period by
written agreement of Consultant and Genzyme executed and delivered by both
parties prior to the end of the initial term or any renewal term, as the case
may be.
(b) Termination by Mutual Consent. The parties may terminate
this Agreement without cause upon the mutual written consent of the parties.
(c) Termination for Breach. In the event that either party commits
a material breach of any of the terms herein, the non-breaching party must then
give ten (10) days written notice to the breaching party, specifically setting
forth the nature of the complained of breach. If the breach is not
satisfactorily cured within the ten (10) day period, then the Agreement will be
deemed terminated; provided, however, that all monies due hereunder as of the
date of the termination will remain due and owing, under a complete and full
post-termination accounting and payment, within forty-five (45) days of said
termination date.
(d) Grounds For Immediate Termination. If either party becomes bankrupt
or insolvent, or if either party's business is placed in the hands of a
receiver, assignee or trustee, whether by that party's voluntary act or
otherwise, this Agreement shall immediately and automatically terminate.
(e) Effect of Termination. Upon termination of this Agreement, neither
party shall have any further obligations under this Agreement, except (i) the
liabilities accrued through the date of termination, and (b) the obligations
which by their terms survive termination. The provisions of Section 9 and this
Section 10(e) shall survive the expiration or termination of this Agreement.
10. Succession.
This Agreement shall inure to the benefit of and be binding upon the
heirs, lawful assigns, successors, and legal representatives, as the case may
be, of the undersigned parties. The operation of this Section 17 is subject to
Section 6 of this Agreement.
11. Ownership of Work Product. Any products, methods, approaches or ideas made
or conceived by Consultant in connection with or during the performance of the
consulting services under this Agreement,
<PAGE> 5
whether developed alone or in conjunction with Genzyme, shall be the property of
Genzyme, free of any restrictions of any kind maintained or asserted by you or
any third party.
12. Notices.
All notices contemplated herein shall be deemed sufficient when given
or made in writing and personally delivered or sent by registered or certified
mail (return receipt requested, postage prepaid) or by the so-called next
business day service of an overnight carrier of national reputation (with
evidence of delivery) to the receiving party and his, her or its representative
at the addresses set forth below, or at such further addresses as may be
hereafter specified in writing:
To Consultant:
Charles L. Cooney, Ph.D.
35 Chestnut Place
Brookline, MA 02192
To Genzyme:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Attn: Frank Ollington, Ph.D.
13. Waiver.
A waiver by either party of any term or condition of this Agreement in any one
instance shall not be deemed or construed to be a waiver of such term or
condition for any similar instance in the future or of any subsequent breach
hereof. All rights, remedies, undertakings, obligations and agreements contained
in this Agreement shall be cumulative and none of them shall be a limitation of
any other remedy, right, undertaking, obligations or agreement to either party.
14. Captions.
Titles or captions of sections contained in this Agreement are inserted only as
a matter of convenience and for reference, and in no way define, limit, extend
or describe the scope of this Agreement or the intent of any provision hereof.
15. Governing Law.
This Agreement 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 or choice
of law provisions thereof.
16. Severability.
Any provisions of this Agreement that in any way contravenes any
provision of applicable law shall, to the extent that the law is contravened, be
considered severable and not applicable and shall not alter or affect any other
provision or provisions of this Agreement.
17. Entire Agreement/Amendments.
This Agreement, together with the exhibits hereto, constitutes the
entire Agreement between the parties, and supersedes in all respects any and all
agreements between the parties, whether active or inactive, verbal or written,
and there are no representations or understandings between the parties not set
<PAGE> 6
forth herein. This Agreement may be amended, modified or otherwise changed only
by an instrument in writing, executed by the parties, and no waiver, alteration
or modification of any of the provisions hereof shall be binding upon a party
unless in writing and signed by such party or his, her or its duly authorized
representative.
<PAGE> 7
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first written above.
CHARLES L. COONEY, Ph.D. GENZYME CORPORATION
/s/ Charles L. Cooney By: /s/ Frank Ollington
(signature) Frank Ollington, Ph.D.
Senior Vice President, Operations
rwhesslein
Kendall\consult\cooney
<PAGE> 8
Exhibit A
CONSULTING SERVICES PROJECTS
Participate in technical reviews of Genzyme's hyaluronic acid development
projects (cost reduction, new formulations, manufacturing improvements, etc.)
and support hyaluronic acid manufacturing strategic planning.
Work with Genzyme's Operations Management group to identify suitable metrics of
performance for operations; to compare performance to appropriate biotechnology
and pharmaceutical companies for benchmarking purposes.
Participate in one or both of Genzyme's semi-annual Technology Development
reviews.
Review and evaluate Genzyme's process for the manufacture of Sevelamer in the
United Kingdom.
Give presentation(s) to Genzyme technical and business staff on improving
Genzyme's competitive advantage in those industries where Genzyme now produces
products.
Participate in discussions on reducing Genzyme's product development cycle time
(i.e., time to market).
Assist in identifying an appropriate cell culture product for manufacturing in
Genzyme's Allston facility.
Participate in the interviewing and selection of key candidates, and participate
in the hiring process.
Provide expert advice on technical issues as these are identified and
communicated to you by Genzyme staff (Frank Ollington to resolve
appropriateness, urgency, prioritization with the Consultant as necessary).
While undertaking the above, Consultant will endeavor to build into his schedule
site visits to Genzyme's United Kingdom facilities (both Kent and Haverhill) and
to Genzyme eastern Massachusetts facilities so as to visit as many of these
sites as possible at least once per calendar year.
<PAGE> 1
CONSULTING SERVICES AGREEMENT
EXHIBIT 10.31
This AGREEMENT (this "Agreement") dated December 31, 1998, but
effective as of January 1, 1998 (the "Effective Date") between ROBERT J.
CARPENTER, 9 Lowell Road, Wellesley Hills, Massachusetts , 02181 (Consultant"),
and GENZYME CORPORATION, a Massachusetts corporation having an office and
principal place of business at One Kendall Square, Cambridge, Massachusetts
02139 ("Genzyme").
In consideration of the premises and covenants and undertakings set
forth below, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Consulting Services. Genzyme hereby engages Consultant as an independent
contractor to provide consulting services for Genzyme in connection with (i) its
general business, and (ii) various strategic alternatives available to Genzyme
to further develop its business, including mergers, acquisitions, joint ventures
and other types of business collaborations.
2. Compensation for Consulting Services.
(a) Genzyme shall pay Consultant a fee of $2,000 per day, and for
partial days at a rate of $250 per hour, for consulting services rendered by
Consultant and reported on his Activity Report (as hereafter defined).
(b) Genzyme shall reimburse Consultant for all reasonable out-of-pocket
expenses reported by Consultant on his Activity Report; provided, that such
expenses are confirmed by appropriate supporting documentation as Genzyme may
from time to time require and are approved by Genzyme. Expenses subject to
reimbursement shall include, but shall not be limited to, costs incurred by
Consultant for travel, lodging, meals, office supplies and other costs directly
related to the provision the consulting services. In addition to other
reasonable travel policies that may be established by Genzyme from time to time,
for air travel flights of less than six (6) hours, reimbursement shall be
limited to coach class fares, and for air travel flights greater than six (6)
hours, reimbursement shall be limited to business class fares.
3. Activity Report.
(a) Consultant shall submit to Genzyme from time to time a report (the "Activity
Report") substantially in the form attached hereto as Exhibit A. The Activity
Report shall include a description of the consulting services performed, the
number of days of consulting services provided by Consultant, and an itemization
of out-of-pocket expenses incurred in performing such consulting services. The
Activity Report shall be the basis for confirming the compensation payable to
Consultant under Section 2 of this Agreement.
4. Independent Contractor Status.
It is understood and agreed between the parties that during the period
Consultant renders consulting services hereunder, all of his activities shall be
undertaken and performed as an independent contractor. Consultant shall have no
rights to receive any employee benefits, such as health and accident insurance,
sick leave or vacation, which are afforded by Genzyme to regular employees.
Consultant shall not in any way represent himself or herself to be an employee,
partner, joint venturer, agent or officer of or with Genzyme.
5. Assignment and Subcontracting.
<PAGE> 2
Consultant may not assign this Agreement or subcontract the performance
of any consulting services to another person or entity without the express
written permission of Genzyme.
6. Confidential Proprietary Information.
Both parties acknowledge that each owns or are entrusted with and use
confidential and proprietary information which may include, without limitation,
computer programs, inventions, discoveries, tools, machines, articles of
manufacture, mechanisms, jigs, fixtures, methods, processes, compositions,
mixtures, formulas, designs, techniques of production, manufacture or assembly,
know-how, show-how, trade secrets, patent applications, technical data or
specifications, testing methods, information which concerns their financial
affairs, marketing practices, internal policies and procedures, research and
development activities, products, contracts, suppliers or customers
("Confidential Information"). The parties acknowledge that during the
performance of this Agreement, each may become privy to the Confidential
Information of the other or its affiliates. Notwithstanding the foregoing, both
parties agree that neither obtains any title to or interest or license in such
Confidential Information of the other, and that all such Confidential
Information is owned exclusively by its respective owner.
(a) Restrictions on Use and Disclosure. Each of the parties shall use the
Confidential Information of the other solely for the purposes set forth in this
Agreement. Each party shall maintain in strict confidence the Confidential
Information of the other, except that Genzyme may disclose or permit disclosure
of Consultant's Confidential Information to its directors, officers, employees
and advisors who are obligated to maintain the confidential nature of such
Confidential Information and who need to know such Confidential Information for
the purposes set forth in this Agreement. During the term of this Agreement, and
for a period of five (5) years thereafter, irrespective of the manner of or
reason for termination of this Agreement, neither party shall disclose, divulge,
publish to others or use in any manner any such Confidential Information of the
other without the prior written consent of the other. Upon the expiration or
termination of this Agreement, each party shall return to the other party all
originals, copies and summaries of documents, materials and other tangible
manifestations of Confidential Information in the possession or control of such
party, except that each party may retain one copy of such Confidential
Information in the possession of its legal counsel for purposes of monitoring
its obligations under this Agreement. Both parties further acknowledge that any
unauthorized disclosure or use of Confidential Information of the other would
substantially and irreparably damage and impair the business of the other;
therefore, the other party shall have, in addition to any remedies available at
law, the right to obtain equitable relief to enforce the provisions of this
Section 6.
(b) Subject Matter Excluded From Restrictions. The foregoing proscription
against use, disclosure and copying by one party (the "Receiving Party") does
not apply to information or data of the other party (the "Disclosing Party")
which (i) can be shown by written documents to have been known by the Receiving
Party prior to disclosure hereunder other than as a result of some breach of the
Disclosing Party's rights in and to such confidential proprietary information;
(ii) is available in published print or is otherwise known to the public, unless
published or made known as a result of some act or omission of the Receiving
Party; (iii) can be shown by written documents to have been obtained by the
Receiving Party in writing from a third party who did not wrongfully acquire
such information or data from the Disclosing Party and who has no obligation of
confidentiality to the Disclosing Party with respect to such information; (iv)
can be shown by written documents to have been independently developed by the
Receiving Party or its affiliates without breach of any of the provisions of
this Agreement; or (v) is disclosed by the Receiving Party pursuant to a
subpoena lawfully issued by a court or governmental agency, provided that such
party notifies the Disclosing Party immediately upon receipt of any such
subpoena.
(c) Additional Obligations of Consultant. The Consultant agrees not to
disclose to representatives of Genzyme any information which is secret or
confidential information belonging to a third party or with respect to which the
Consultant is under an obligation to a third party not to disclose. Similarly,
if during the term of this Agreement, the Consultant discloses any ideas to
Genzyme which were conceived prior to the term of this Agreement or are outside
the scope of the consultancy under this
<PAGE> 3
Agreement, Genzyme shall have no liability to the Consultant because of his use
of such ideas, except that this shall not be construed as a license under any
valid patent now or hereafter issued thereon. The Consultant has not brought and
will not bring to Genzyme or use in the performance of this Agreement any
materials or documents of any current or former employer which are not generally
available to the public, unless the Consultant shall have obtained written
authorization from such employer for the possession and use of such materials or
documents.
7. Term and Termination.
(a) Term and Renewal. The initial term of this Agreement shall be for a
period of one (1) year from the Effective Date hereof. The term of this
Agreement shall be extended automatically at the end of its initial term and any
subsequent renewal term for an additional one (1) year period without notice and
without amendment, unless a party provides written notice to the other party of
its election not to extend this Agreement. The terms and conditions in effect at
the end of the initial period and any subsequent renewal term shall continue to
apply during the renewal period following each automatic extension.
(b) Termination. Either party may terminate this Agreement without cause upon
written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement, neither
party shall have any further obligations under this Agreement, except (i) the
liabilities accrued through the date of termination, and (b) the obligations
which by their terms survive termination. The provisions of Section 6 and this
Section 7(c) shall survive the expiration or termination of this Agreement.
8. Ownership of Work Product. Any products, methods, approaches or ideas made or
conceived by Consultant in connection with or during the performance of the
consulting services under this Agreement, whether developed alone or in
conjunction with Genzyme, shall be the property of Genzyme, free of any
restrictions of any kind maintained or asserted by you or any third party.
9. Notices.
All notices contemplated herein shall be deemed sufficient when given
or made in writing and personally delivered or sent by registered or certified
mail (return receipt requested, postage prepaid) or by the so-called next
business day service of an overnight carrier of national reputation (with
evidence of delivery) to the receiving party and his, her or its representative
at the addresses set forth below, or at such further addresses as may be
hereafter specified in writing:
To Consultant:
Robert J. Carpenter
9 Lowell Road
Wellesley Hills, MA 02181
To Genzyme:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Attn: Henri A. Termeer
10. Governing Law.
<PAGE> 4
This Agreement 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 or choice
of law provisions thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first written above.
ROBERT J. CARPENTER GENZYME CORPORATION
/s/ Robert J. Carpenter By: /s/ Peter Wirth
Peter Wirth
Executive Vice President
rwhesslein
Kendall\consult\carepent2
<PAGE> 5
EXHIBIT A
ACTIVITY REPORT
Name: ________________________________________________
Address: _____________________________________________
Report Period: _______________________________________
Report Date: _________________________________________
Project/Activity Date(s) Consulting Services Rendered~Description of Consulting
Services~Location(s) Consulting Services Rendered~Consulting Hours~Expenses
Subject to Reimbursement* TOTALS__________ Total Consulting Hours Year-to-Date:
______________________
* Expenses listed in this Activity Report must be confirmed by appropriate
supporting documentation, including receipts, invoices, credit card statements
and other similar documents. All requests for expense reimbursement will
be considered under Genzyme's general reimbursement polices and practices
for consultants and the specific understandings contained in written
agreements between Genzyme and Consultant. In all cases, reimbursement
for expenses is subject to Genzyme's reasonable approval.
<PAGE> 1
CONSULTING SERVICES AGREEMENT
EXHIBIT 10.32
This AGREEMENT (this "Agreement") dated July 1, 1998, but effective
as of July 1, 1998 (the "Effective Date") between HENRY E. BLAIR, P.O. Box
648, 275 Mill Way, Barnstable, Massachusetts 02630 (Consultant"), and GENZYME
CORPORATION, a Massachusetts corporation having an office and principal place of
business at One Kendall Square, Cambridge, Massachusetts 02139 ("Genzyme").
In consideration of the premises and covenants and undertakings set
forth below, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Consulting Services. Genzyme hereby engages Consultant as an independent
contractor to provide consulting services for Genzyme in connection with (i) its
general business, and (ii) various strategic alternatives available to Genzyme
to further develop its business, including mergers, acquisitions, joint ventures
and other types of business collaborations. Consultant agrees to use his best
efforts to make himself available, and if requested, to provide not less than
twenty-five (25) business days (each business day to consist of eight (8) hours
devoted to the conduct of consulting services) of consulting services during
each calendar year of the term of this Agreement as requested by Genzyme.
2. Compensation for Consulting Services.
(a) Genzyme shall pay Consultant a fee of $50,000 per calendar year
payable in equal semi-annual installments on June 1 and December 1, for
consulting services rendered by Consultant and reported on his Activity Report
(as hereafter defined).
(b) Genzyme shall reimburse Consultant for all reasonable out-of-pocket
expenses reported by Consultant on his Activity Report; provided, that such
expenses are confirmed by appropriate supporting documentation as Genzyme may
from time to time require and are approved by Genzyme. Expenses subject to
reimbursement shall include, but shall not be limited to, costs incurred by
Consultant for travel, lodging, meals, office supplies and other costs directly
related to the provision the consulting services. In addition to other
reasonable travel policies that may be established by Genzyme from time to time,
for air travel flights of less than six (6) hours, reimbursement shall be
limited to coach class fares, and for air travel flights greater than six (6)
hours, reimbursement shall be limited to business class fares.
3. Activity Report.
(a) Consultant shall submit to Genzyme from time to time a report (the
"Activity Report") substantially in the form attached hereto as Exhibit A. The
Activity Report shall include a description of the consulting services
performed, the number of days of consulting services provided by Consultant, and
an itemization of out-of-pocket expenses incurred in performing such consulting
services. The Activity Report shall be the basis for confirming the compensation
payable to Consultant under Section 2 of this Agreement.
4. Independent Contractor Status.
It is understood and agreed between the parties that during the period
Consultant renders consulting services hereunder, all of his activities shall be
undertaken and performed as an independent contractor. Consultant shall have no
rights to receive any employee benefits, such as health and accident insurance,
sick leave or vacation, which are afforded by Genzyme to regular employees.
Consultant shall
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not in any way represent himself or herself to be an employee, partner, joint
venturer, agent or officer of or with Genzyme.
5. Assignment and Subcontracting.
Consultant may not assign this Agreement or subcontract the performance
of any consulting services to another person or entity without the express
written permission of Genzyme.
6. Confidential Proprietary Information.
Both parties acknowledge that each owns or are entrusted with and use
confidential and proprietary information which may include, without limitation,
computer programs, inventions, discoveries, tools, machines, articles of
manufacture, mechanisms, jigs, fixtures, methods, processes, compositions,
mixtures, formulas, designs, techniques of production, manufacture or assembly,
know-how, show-how, trade secrets, patent applications, technical data or
specifications, testing methods, information which concerns their financial
affairs, marketing practices, internal policies and procedures, research and
development activities, products, contracts, suppliers or customers
("Confidential Information"). The parties acknowledge that during the
performance of this Agreement, each may become privy to the Confidential
Information of the other or its affiliates. Notwithstanding the foregoing, both
parties agree that neither obtains any title to or interest or license in such
Confidential Information of the other, and that all such Confidential
Information is owned exclusively by its respective owner.
(a) Restrictions on Use and Disclosure. Each of the parties shall use the
Confidential Information of the other solely for the purposes set forth in this
Agreement. Each party shall maintain in strict confidence the Confidential
Information of the other, except that Genzyme may disclose or permit disclosure
of Consultant's Confidential Information to its directors, officers, employees
and advisors who are obligated to maintain the confidential nature of such
Confidential Information and who need to know such Confidential Information for
the purposes set forth in this Agreement. During the term of this Agreement, and
for a period of five (5) years thereafter, irrespective of the manner of or
reason for termination of this Agreement, neither party shall disclose, divulge,
publish to others or use in any manner any such Confidential Information of the
other without the prior written consent of the other. Upon the expiration or
termination of this Agreement, each party shall return to the other party all
originals, copies and summaries of documents, materials and other tangible
manifestations of Confidential Information in the possession or control of such
party, except that each party may retain one copy of such Confidential
Information in the possession of its legal counsel for purposes of monitoring
its obligations under this Agreement. Both parties further acknowledge that any
unauthorized disclosure or use of Confidential Information of the other would
substantially and irreparably damage and impair the business of the other;
therefore, the other party shall have, in addition to any remedies available at
law, the right to obtain equitable relief to enforce the provisions of this
Section 6.
(b) Subject Matter Excluded From Restrictions. The foregoing proscription
against use, disclosure and copying by one party (the "Receiving Party") does
not apply to information or data of the other party (the "Disclosing Party")
which (i) can be shown by written documents to have been known by the Receiving
Party prior to disclosure hereunder other than as a result of some breach of the
Disclosing Party's rights in and to such confidential proprietary information;
(ii) is available in published print or is otherwise known to the public, unless
published or made known as a result of some act or omission of the Receiving
Party; (iii) can be shown by written documents to have been obtained by the
Receiving Party in writing from a third party who did not wrongfully acquire
such information or data from the Disclosing Party and who has no obligation of
confidentiality to the Disclosing Party with respect to such information; (iv)
can be shown by written documents to have been independently developed by the
Receiving Party or its affiliates without breach of any of the provisions of
this Agreement; or (v) is disclosed by the Receiving Party pursuant to a
subpoena lawfully issued by a court or governmental agency, provided that such
party notifies the Disclosing Party immediately upon receipt of any such
subpoena.
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Additional Obligations of Consultant. The Consultant agrees not to disclose to
representatives of Genzyme any information which is secret or confidential
information belonging to a third party or with respect to which the Consultant
is under an obligation to a third party not to disclose. Similarly, if during
the term of this Agreement, the Consultant discloses any ideas to Genzyme which
were conceived prior to the term of this Agreement or are outside the scope of
the consultancy under this Agreement, Genzyme shall have no liability to the
Consultant because of his use of such ideas, except that this shall not be
construed as a license under any valid patent now or hereafter issued thereon.
The Consultant has not brought and will not bring to Genzyme or use in the
performance of this Agreement any materials or documents of any current or
former employer which are not generally available to the public, unless the
Consultant shall have obtained written authorization from such employer for the
possession and use of such materials or documents.
7. Term and Termination.
(a) Term and Renewal. The initial term of this Agreement shall commence
on the Effective Date and shall end on December 31, 1999. The term of this
Agreement may be extended at the end of its initial term and any subsequent
renewal term for an additional one (1) year period by written agreement of
Consultant and Genzyme executed and delivered by both parties prior to the end
of the initial term or any renewal term, as the case may be.
(b) Termination. Either party may terminate this Agreement without
cause upon written notice to the other party.
(c) Effect of Termination. Upon termination of this Agreement, neither
party shall have any further obligations under this Agreement, except (i) the
liabilities accrued through the date of termination, and (b) the obligations
which by their terms survive termination. The provisions of Section 6 and this
Section 7(c) shall survive the expiration or termination of this Agreement.
8. Ownership of Work Product. Any products, methods, approaches or ideas made or
conceived by Consultant in connection with or during the performance of the
consulting services under this Agreement, whether developed alone or in
conjunction with Genzyme, shall be the property of Genzyme, free of any
restrictions of any kind maintained or asserted by you or any third party.
9. Notices.
All notices contemplated herein shall be deemed sufficient when given
or made in writing and personally delivered or sent by registered or certified
mail (return receipt requested, postage prepaid) or by the so-called next
business day service of an overnight carrier of national reputation (with
evidence of delivery) to the receiving party and his, her or its representative
at the addresses set forth below, or at such further addresses as may be
hereafter specified in writing:
To Consultant:
Henry F. Blair
P.O. Box 648
275 Mill Way
Barnstable, MA 02630
To Genzyme:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Attn: Henri A. Termeer
10. Governing Law.
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This Agreement 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 or choice
of law provisions thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first written above.
HENRY E. BLAIR GENZYME CORPORATION
/s/ Henry E. Blair By: /s/ Henri A. Termeer
Henri A. Termeer
Chief Executive Officer
<PAGE> 5
EXHIBIT A
ACTIVITY REPORT
Name: _____________________________________________________
Address: __________________________________________________
Report Period: ____________________________________________
Report Date: ______________________________________________
Project/Activity Date(s) Consulting Services Rendered Description of Consulting
Services~Location(s) Consulting Services Rendered Consulting Hours Expenses
Subject to Reimbursement* TOTALS_____________ Total Consulting Hours
Year-to-Date: ______________________
* Expenses listed in this Activity Report must be confirmed by appropriate
supporting documentation, including receipts, invoices, credit card statements
and other similar documents. All requests for expense reimbursement will
be considered under Genzyme's general reimbursement polices and practices
for consultants and the specific understandings contained in written
agreements between Genzyme and Consultant. In all cases, reimbursement
for expenses is subject to Genzyme's reasonable approval.
<PAGE> 1
EXHIBIT 10.37
SECOND AMENDED AND RESTATED CONVERTIBLE
DEBT AGREEMENT
THIS SECOND AMENDED AND RESTATED CONVERTIBLE DEBT AGREEMENT dated as of
December 28, 1998 (this "AGREEMENT") is between Genzyme Transgenics Corporation,
a Massachusetts corporation ("GTC"), and Genzyme Corporation, a Massachusetts
corporation ("GENZYME").
RECITALS:
A. Genzyme and GTC entered into an Amended and Restated
Convertible Debt Agreement dated as of September 4, 1997 (as amended, the "PRIOR
AGREEMENT") whereby Genzyme provided (i) a revolving line of credit to GTC in
exchange for securities of GTC.
B. Genzyme and GTC desire to amend certain terms and conditions
relating to the revolving credit facility provided by Genzyme to GTC in
connection with the establishment of a new credit facility for GTC with Fleet
National Bank (the "BANK").
C. The Prior Agreement shall be superseded and replaced in its
entirety by the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, GTC and Genzyme agree as follows:
ARTICLE 1. REVOLVING CREDIT
1.1. LINE OF CREDIT. Subject to the terms and conditions set forth
herein, Genzyme shall make loans to GTC (the "REVOLVING CREDIT LOANS") from time
to time during the Revolving Credit Availability Period (but not more often than
twice in any month) in U.S. Dollars in immediately available funds in the
aggregate principal amount not exceeding the Revolving Credit Commitment. Within
the foregoing limits and subject to the terms and conditions set forth herein,
GTC may borrow, prepay and reborrow the Revolving Credit Loans.
1.2. THE NOTE.
(a) The Revolving Credit Loans shall be evidenced by an amended
and restated promissory note (the "REVOLVING CREDIT NOTE") made by GTC and
payable to the order of Genzyme, substantially in the form of EXHIBIT A annexed
hereto, in the principal amount equal to the initial Revolving Credit Commitment
with a final maturity of the Revolving Credit Maturity Date. The Revolving
Credit Note shall be dated on or before the date of the first Revolving Credit
Loan and shall have the blanks therein appropriately completed.
(b) Genzyme shall maintain records in which it shall record (i)
the amount of each Loan made hereunder, (ii) the amount of any principal or
interest due and payable or to become
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due and payable from GTC hereunder and (iii) the amount of any sum received by
Genzyme hereunder.
(c) The entries made in the records maintained pursuant to
paragraph (b) of this Section 1.2 shall be prima facie evidence of the existence
and amounts of the obligations recorded therein; provided that the failure of
Genzyme to maintain such account or any error therein shall not in any manner
affect the obligation of GTC to repay the Loans in accordance with the terms of
this Agreement.
1.3. USE OF PROCEEDS. GTC shall use all proceeds of the Revolving
Credit Loans to fund its current operations.
1.4. REQUESTS FOR REVOLVING CREDIT LOANS.
(a) To request a Revolving Credit Loan, GTC shall notify Genzyme
of such request by a written loan request signed by GTC and received by Genzyme
not later than 11:00 a.m., Boston, Massachusetts time, two (2) Business Days
before the date of the proposed Borrowing.
(b) Each such written loan request shall specify the following
information:
(i) the aggregate amount requested, which shall not be
less than $100,000;
(ii) the requested date of such Revolving Credit Loan,
which shall be a Business Day; and
(iii) the location and number of GTC's account to which
funds are to be disbursed.
Each loan request shall constitute a certification that the representations and
warranties contained herein were true and correct when made and are true and
correct as of the date of such Revolving Credit Loan and that no Default or
Event of Default has occurred and is continuing.
1.5. TERMINATION AND REDUCTION OF COMMITMENT.
(a) Unless previously terminated, the Revolving Credit Commitment
shall terminate at the close of business on the Revolving Credit Maturity Date.
(b) GTC may, at its option, at any time terminate, or from time to
time reduce, the Revolving Credit Commitment.
(c) Any conversion of the outstanding principal amount of any
Revolving Credit Loans pursuant to Section 1.7 shall reduce the Revolving Credit
Commitment to the extent of such converted principal amount.
(d) GTC shall notify Genzyme of any election to terminate or
reduce the Revolving Credit Commitment under paragraph (b) of this Section 1.5
at least three (3) Business Days prior to the effective date of such termination
or reduction, specifying such election and the effective date thereof. Each
notice delivered by GTC pursuant to this Section 1.5 shall be irrevocable;
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provided that a notice of termination of Revolving Credit Commitment delivered
by GTC may state that such notice is conditioned upon the effectiveness of other
credit facilities, in which case such notice may be revoked by GTC (by notice to
Genzyme on or prior to the specified effective date) if such condition is not
satisfied. Any termination or reduction of Revolving Credit Commitment shall be
permanent.
1.6. REPAYMENT OF LOANS.
(a) GTC hereby unconditionally promises to pay to Genzyme the then
unpaid principal amount of the Revolving Credit Loans on the Revolving Credit
Maturity Date. In addition, if following any reduction in the Revolving Credit
Commitment the aggregate principal amount of the Revolving Credit Loans shall
exceed the aggregate Revolving Credit Commitment, GTC shall immediately pay the
Revolving Credit Loans in an aggregate amount equal to such excess; provided
that any prepayments on account of reductions in the Revolving Credit Commitment
pursuant to Section 1.11 shall be made in accordance with Section 1.11(b)(iv).
(b) Conversions pursuant to Section 1.7 of outstanding principal
amounts shall be deemed to be repayments as of the date of such conversion.
1.7. CONVERSION TO GTC COMMON STOCK.
(a) GENZYME'S OPTION. All or part of any outstanding Loans and
accrued interest thereon, or any portion thereof, may, at Genzyme's option, be
converted at any time into shares of GTC's common stock, par value $.01 per
share (the "GTC COMMON STOCK"), at a conversion price equal to the average
closing price of GTC Common Stock over the 20 Trading Day period ending two (2)
Trading Days prior to the date of conversion (the "CONVERSION PRICE").
(b) GTC'S OPTION. Outstanding Loans and accrued interest thereon,
or any portion thereof, may, at the option of GTC, be converted at the
Conversion Price once each fiscal quarter into GTC Common Stock; provided,
however, such GTC conversion right may be exercised only to the extent
necessary, in the reasonable judgment of GTC, to maintain GTC's tangible net
worth as determined at the end of such fiscal quarter at the minimum amount
required for continued listing on the NASDAQ National Market.
(c) REGISTRATION RIGHTS. The shares of GTC Common Stock issuable
upon conversion shall be entitled to same registration rights as are applicable
to the other shares of Common Stock held by Genzyme, which rights are set forth
in Section 8 of the Series A Convertible Preferred Stock Purchase Agreement
dated May 1, 1993 between GTC and Genzyme.
1.8. TERM LOAN.
(a) MAKING THE TERM LOAN. Subject to Section 1.8(c), Genzyme
agrees that, subject to the terms and conditions of this Agreement, and in
reliance upon the representations, warranties and covenants contained herein and
provided no Default or Event of Default has occurred, at GTC's option, Genzyme
shall make a term loan (the "TERM LOAN" and with the Revolving Credit Loans,
collectively the "LOANS") to GTC for the purpose of repaying all outstanding
principal of the Revolving Credit Loans, on the Revolving Credit Maturity Date
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which Term Loan shall be in a principal amount equal to the outstanding balance
of the Revolving Credit Loans on the Revolving Credit Maturity Date, or in such
lesser amount as is specified in writing by GTC to Genzyme at least two (2)
Business Days prior to the Revolving Credit Maturity Date. Any portion of the
Revolving Credit Loans not repaid by the making of the Term Loan shall be due
and payable in full, along with all accrued interest thereon, on the Revolving
Credit Maturity Date. Genzyme shall make the Term Loan hereunder on the
Revolving Credit Maturity Date by crediting the amount thereof to the payment of
the Revolving Credit Note.
(b) TERM NOTE: REPAYMENT TERMS. The Term Loan shall be evidenced
by a note (the "TERM NOTE"), substantially in the form of EXHIBIT B annexed
hereto, payable to the order of Genzyme, duly executed on behalf of GTC, dated
the Revolving Credit Maturity Date. The Term Loan shall be payable in 12
installments consisting of 11 equal consecutive installments of principal, each
installment in an amount sufficient to fully amortize the original principal
amount of the Term Loan assuming quarterly principal payments over a seven-year
period, payable on each Payment Date together with interest payable in
accordance with Section 1.9(c) PLUS one final installment on the Term Loan
Maturity Date which shall include all unpaid principal, accrued interest and any
and all other amounts due and payable under the Term Note or hereunder.
(c) CONDITIONS INCLUDE ADDITIONAL COVENANTS. The commitment of
Genzyme to provide the Term Loan is subject to the agreement of GTC to certain
additional covenants in form and substance satisfactory to both Genzyme and GTC,
regarding the financial performance of GTC which covenants shall include
covenants establishing the minimum liquidity of GTC and its Subsidiaries.
1.9. INTEREST RATE.
(a) Unless and until converted to GTC Common Stock pursuant to
Section 1.7, each Loan shall bear interest at a rate per annum equal to the
Interest Rate.
(b) Notwithstanding the foregoing, (i) in the event that an Event
of Default shall have occurred under Section 4.1(a), all amounts which are not
paid when due shall bear interest beginning on the date such amounts were
originally due until paid in full at the Post-Default Rate and (ii) during the
period when any other Event of Default shall have occurred the principal of all
Loans hereunder shall bear interest, after as well as before judgment, at the
Post-Default Rate beginning on the date such Event of Default occurred until
such Event of Default is cured, in each case to the extent permitted by law.
(c) Accrued interest on each Loan shall be payable in arrears on
each Payment Date; provided that (i) interest accrued at the Post-Default Rate
shall be payable on demand, (ii) in the event of any repayment or prepayment in
full of any Term Loan, accrued interest on the principal amount repaid or
prepaid shall be payable on the date of such repayment or prepayment and (iii)
all accrued interest on Revolving Credit Loans shall be payable upon the
Revolving Credit Maturity Date or the earlier termination of the Revolving
Credit Commitment.
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(d) All interest hereunder shall be computed on the basis of a year of
360 days, and in each case shall be payable for the actual number of days
elapsed (including the first day but excluding the last day).
1.10. PAYMENTS GENERALLY.
(a) GTC shall make each payment required to be made by it
hereunder (whether of principal, interest or fees, or otherwise) prior to 12:00
noon, Boston, Massachusetts time, on the date when due, in immediately available
funds, without set-off or counterclaim. Any amounts received after such time on
any date may, in Genzyme's discretion be deemed to have been received on the
next succeeding Business Day for purposes of calculating interest thereon. All
such payments shall be made to Genzyme at its principal offices or at such of
its other offices in Cambridge, Massachusetts as shall be notified to the
relevant parties from time to time. If any payment hereunder shall be due on a
day that is not a Business Day, the date for payment shall be extended to the
next succeeding Business Day, and, in the case of any payment accruing interest,
interest thereon shall be payable for the period of such extension. All payments
hereunder shall be made in U.S. dollars.
(b) If at any time insufficient funds are received by and
available to Genzyme to pay fully all amounts of principal, interest and fees
then due hereunder, such funds shall be applied (i) first, to pay interest and
fees then due hereunder and (ii) second, to pay principal and then due
hereunder.
1.11. PREPAYMENT OF LOANS.
(a) OPTIONAL PREPAYMENTS. GTC shall have the right at any time and
from time to time to prepay the Loans in whole or in part. Each prepayment of
the Term Loan shall be applied in inverse order of maturity.
(b) MANDATORY PREPAYMENTS. GTC shall make prepayments of the Loans
hereunder (and reduce the Revolving Credit Commitment hereunder) as follows:
(i) EQUITY ISSUANCE. GTC agrees, on or prior to the
closing of any Equity Issuance by GTC or any of its Subsidiaries, to
deliver to Genzyme a statement certified by the chief financial officer
of GTC, in form and detail reasonably satisfactory to Genzyme, of the
estimated amount of the Net Cash Payments of such sale of securities
that will (on the date of such sale of securities) be received by GTC
or any of its Subsidiaries in cash.
(ii) SALE OF ASSETS. GTC agrees, on or prior to the
occurrence of any Disposition by GTC or any of its Subsidiaries, to
deliver to Genzyme a statement certified by the chief financial officer
of GTC, in form and detail reasonably satisfactory to Genzyme, of the
estimated amount of the Net Cash Payments of such Disposition that will
be received by GTC or any of its Subsidiaries in cash on the date of
such Disposition plus the amount, if any expected to be received
thereafter.
(iii) PAYMENT AND REDUCTION. The Revolving Credit
Commitment hereunder shall be reduced on the date of such receipt of
Net Cash Payments from any Equity
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Issuance or Disposition, or the Term Loan shall be prepaid, in an
aggregate amount equal to:
(1) until the aggregate Net Cash Payments of all
Dispositions and Equity Issuances from and after the date
hereof equal or exceed $20,000,000, no reduction of the
Revolving Credit Commitment or prepayment of the Term Loan is
required from the proceeds of Dispositions and Equity
Issuances;
(2) when the aggregate Net Cash Payments of all
Dispositions and Equity Issuances from and after the date
hereof are cumulatively equal to or greater than $20,000,000
but less than $40,000,000, the Revolving Credit Commitment
shall be reduced by, or the Term Loan shall be prepaid in an
amount equal to, $4,000,000; and
(3) when the aggregate Net Cash Payments of all
Dispositions and Equity Issuances from and after the date
hereof are cumulatively greater than $40,000,000, all Loans
shall be repaid in full and the Revolving Credit Commitment
shall terminate, and
GTC shall make prepayments of Revolving Credit Loans to the extent
required by Section 1.6(a). Prepayments of Loans and reductions of the
Revolving Credit Commitment shall be effected in each case in the
manner and to the extent specified in paragraph (iv) of this Section
1.11(b).
(iv) APPLICATION. Upon the occurrence of any of the events
described in paragraphs (i) or (ii) of this Section 1.11(b), (1) the
Revolving Credit Commitment shall be reduced as provided in paragraph
(iii) above and (2) GTC shall prepay (A) the Revolving Credit Loans to
the extent that the aggregate principal amount of such Revolving Credit
Loans exceeds the Revolving Credit Commitment as adjusted or in full if
required paragraph (ii)(3) above or (B) the Term Loan as provided in
such paragraphs and, in each case, the amount of the required
prepayment shall be applied to the prepayment of the Loans on the
ninetieth day after the date on which such Net Cash Proceeds are
received by GTC satisfying such conditions. Each prepayment of any Term
Loan shall be applied to the installments thereof in the inverse order
of maturity.
(iv) PREPAYMENTS ACCOMPANIED BY INTEREST. Prepayments
shall be accompanied by accrued interest to the extent required by
Section 1.9.
1.12. FEES.
(a) GTC agrees to pay to Genzyme a commitment fee, which shall
accrue at a rate equal to 0.125% on the daily average unused amount of the
respective Revolving Credit Commitment during the period from and including the
date hereof to but excluding the date on which such Revolving Credit Commitment
terminates. Accrued commitment fees shall be payable in arrears on each Payment
Date and, in respect of any Revolving Credit Commitment, on the date such
Revolving Credit Commitment terminate, commencing on the first such date to
occur after the date hereof. All commitment fees shall be computed on the basis
of a year of 360
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days and shall be payable for the actual number of days elapsed (including the
first day but excluding the last day).
(b) The fee payable under Section 1.12(a) may be paid by GTC in
cash or by issuance to Genzyme of warrants with a term of five (5) years for the
purchase of GTC Common Stock. The exercise price of each such warrant shall be
equal to the closing price of GTC Common Stock on the Trading Day immediately
preceding the date on which such warrant is issued as reported by the NASDAQ
National Market or such other principal securities exchange or market on which
GTC Common Stock is then traded. The number of shares of GTC Common Stock
subject to each such warrant shall be determined using the Black-Scholes
valuation method and using the per share exercise price of the warrant as the
value per share of GTC Common Stock for purposes of such calculation, and
Coopers & Lybrand L.L.P. (or such other independent accounting firm mutually
agreeable to Genzyme and GTC) shall perform such calculation.
1.13. SUBORDINATION. Genzyme has executed a Guaranty dated as of the
date (the "GUARANTY") hereof in favor of the Bank. Pursuant to Section 7 of the
Guaranty the obligations of GTC to repay amounts accrued hereunder to Genzyme
are subordinated to GTC's obligations to the Bank.
1.14. SECURITY. The obligations of GTC hereunder are secured by that
certain Amended and Restated Security Agreement dated as of the date hereof (the
"Security Agreement') between Genzyme, GTC and certain subsidiaries of GTC, a
Mortgage and Security Agreement dated as of June 30, 1995 as amended by the
First Amendment to Mortgage and Security Agreement dated as of December 15,
1995, and the Second Amendment to Mortgage and Security Agreement dated as of
the date hereof between Genzyme, as mortgagee, and GTC as mortgagor
(collectively with the Security Agreement, the "COLLATERAL DOCUMENTS"). GTC's
obligations hereunder are guaranteed by certain of its subsidiaries pursuant to
that certain Amended and Restated Reimbursement Agreement dated as of the date
hereof among Genzyme, GTC and certain of GTC's subsidiaries named therein.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES
2.1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GTC. GTC
represents, warrants and covenants to Genzyme as follows:
(a) GTC is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Massachusetts with corporate
powers adequate for executing, delivering and performing its obligations under
this Agreement and the Notes.
(b) The execution, delivery and performance of this Agreement, the
Notes and any other documents delivered or to be delivered to Genzyme have been
duly authorized by all necessary corporate action on the part of GTC and this
Agreement, the Notes and all other necessary documents have been duly executed
and delivered and, as executed, constitute the valid and binding obligations of
GTC, enforceable against GTC in accordance with their respective terms.
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(c) The execution, delivery and performance of this Agreement, the
Notes and any other documents delivered or to be delivered to Genzyme do not and
will not conflict with or contravene any provision of the charter documents or
by-laws of GTC or any agreement, document, instrument, indenture or other
obligation of GTC, nor does it or will it result in a violation of or default
under any law, rule, regulation, order, writ, judgment, injunction, decree,
determination, award, indenture, agreement, lease or instrument now in effect
having applicability to GTC, or to any of its properties, nor does it or will it
result in any encumbrance on GTC or any of its properties, nor does it or will
it require any governmental or third party consents. As of the date hereof, GTC
is not in default under any provision under the Prior Agreement.
(d) The financial statements of GTC as at December 31, 1997 and
for the period then ended included in its filings under the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT"), fairly present the financial
condition of GTC as of the dates thereof and its results of operations for the
periods then ended and have been prepared in accordance with generally accepted
accounting principles consistently applied.
(e) There is no litigation or proceeding pending before any court
or governmental or administrative agency or, to the knowledge of GTC,
threatened, or any basis therefor, that is required to be disclosed in GTC's
periodic filings under the Exchange Act and that has not been so disclosed.
(f) Since December 31, 1997, there has been no material adverse
change in the business, prospects, financial condition or operations of the GTC.
(g) The issuance and delivery to Genzyme of the shares of GTC
Common Stock issuable upon conversion of any amounts payable to Genzyme
hereunder in accordance with this Agreement have been duly authorized by all
necessary corporate action on the part of GTC. Said shares when so issued and
delivered in accordance with the provisions of this Agreement will be duly and
validly issued, fully paid and non-assessable.
2.2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GENZYME.
Genzyme represents, warrants and covenants to GTC as follows:
(a) Genzyme is a corporation duly organized, validly existing and
in good standing under the laws of the Commonwealth of Massachusetts with
corporate powers adequate for executing, delivering and performing its
obligations under this Agreement.
(b) This Agreement has been executed in the name and on behalf of
Genzyme by a duly elected officer of Genzyme, and the execution, delivery and
performance of this Agreement by Genzyme are subject to the ratification and
confirmation of this Agreement by Genzyme's Board of Directors. Genzyme shall
use its reasonable best efforts to obtain the aforementioned ratification and
confirmation as soon as practicable after the date hereof.
(c) The execution, delivery and performance of this Agreement do
not and will not conflict with or contravene any provision of the charter
documents or by-laws of Genzyme or any agreement, document, instrument or other
obligation of Genzyme.
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(d) Genzyme is acquiring the Notes and the GTC Common Stock
issuable upon conversion thereof (the "CONVERSION SHARES") for its own account
for investment and not with a view to, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
the same; and Genzyme has no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment providing for the
disposition thereof.
(e) As the holder of approximately 41% of the outstanding GTC
Common Stock, Genzyme is familiar with GTC, its business and its personnel. The
officers of GTC have made available to Genzyme any and all information which it
has requested and have answered to Genzyme's satisfaction all inquiries made by
Genzyme. Genzyme has such knowledge and experience as is necessary to properly
evaluate the risks and merits of an investment in GTC.
(f) Genzyme acknowledges that the Notes and the Conversion Shares
shall not be sold or transferred unless either (i) they first shall have been
registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
or (ii) GTC first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to GTC, to the effect that such sale or transfer is
exempt from the registration requirements of the Securities Act, and that the
Revolving Credit Note and the certificates representing the Conversion Shares
shall bear an appropriate legend to that effect.
ARTICLE 3. COVENANTS
3.1. COVENANTS OF GTC. On and after the date hereof and so long as
the Revolving Credit Commitment is outstanding and until all of the Loans and
all other amounts due hereunder from GTC to Genzyme shall have been paid in
full, GTC shall comply with the covenants set forth in Section 3.2 hereof as
well as the affirmative and negative covenants set forth in Articles 5 and 6 of
the Credit Agreement dated as of the date hereof between GTC and the Bank, as
amended (the "CREDIT AGREEMENT"), which covenants are hereby incorporated by
reference as if set forth herein in full, as such covenants may from time to
time be amended by the parties to the Credit Agreement or waived by the Bank;
provided that for purposes of this Section 3.1 and the covenants so
incorporated, "Borrower" shall mean GTC, "Lender" shall mean Genzyme and
"Agreement" shall mean this Agreement; provided further that the "Compliance
Certificate" (as defined in the Credit Agreement) required to be delivered to
Genzyme by GTC pursuant to this Section 3.1 as required by Section 5.1(c) of the
Credit Agreement shall include a computation demonstrating the amount of
Unfunded R&D and compliance with the covenants set forth in Section 3.2. All
other terms incorporated and not otherwise defined in this Section 3.1 shall
have the meanings set forth in the Credit Agreement. Such covenants shall be
deemed to survive with respect to the parties hereto notwithstanding the earlier
termination of the Credit Agreement.
3.2. ADDITIONAL FINANCIAL COVENANTS OF GTC. GTC agrees that, so
long as the Revolving Credit Commitment and until all of the Loans and all other
amounts due hereunder from GTC to Genzyme shall have been paid in full:
(a) for each of (i) the fiscal quarter ending on March 31, 1999,
(ii) the two fiscal quarters ending on June 30, 1999, and (iii) the three fiscal
quarters ending on September 30,
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1999, GTC will not permit its Consolidated EBITDA for any such period as at the
last day of such period to exceed a loss of $5,000,000;
(b) for the four fiscal quarters ending on December 31, 1999, GTC
will not permit its Consolidated EBITDA as at the last day of such period to
exceed a loss of $2,000,000; and
(c) commencing with the fiscal quarter ending on March 31, 2000,
GTC will not, as at the last day of each fiscal quarter, permit its Consolidated
EBITDA for the period of four (4) consecutive fiscal quarters ending or most
recently ended prior to such date to be less than zero.
ARTICLE 4. EVENTS OF DEFAULT
4.1. EVENTS OF DEFAULT. Each of the events set forth below shall
constitute an "EVENT OF DEFAULT":
(a) A payment of principal and/or interest on any Loan is not
made within five (5) days after the date due;
(b) A representation or warranty of GTC in this Agreement shall
prove to have been incorrect when made or deemed made in any material respect;
(c) GTC shall be in default under any provision of this Agreement
and shall fail to remedy such default within 20 days of receiving written notice
thereof from Genzyme;
(d) Any bankruptcy, receivership, insolvency or reorganization
proceedings shall be instituted by GTC or any such proceedings shall be
instituted against GTC and not dismissed within 60 days or GTC shall make an
assignment for the benefit of creditors or consent to the appointment of a
receiver; or
(e) GTC shall fail to make any payment in excess of $10,000 in
respect of Indebtedness for money borrowed by GTC when such payment is due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) or shall fail to perform or observe any provision of any agreement or
instrument relating to such Indebtedness, which failure has resulted in the
acceleration of such Indebtedness by the holder thereof.
4.2. REMEDIES. Following the occurrence and during the continuance
of any Event of Default, Genzyme may (i) decline to make any or all further
Loans (including conversion to the Term Loan in accordance with Section 1.8) and
(ii) by written notice to GTC, declare the entire unpaid principal of the Loans,
accrued interest and other amounts payable hereunder to be due and payable
without further demand, presentment, protest or further notice of any kind, all
of which are hereby waived by GTC; provided, however, that upon the occurrence
of an Event of Default described in Section 4.1(d), the Revolving Credit
Commitment and Genzyme's commitment to make the Term Loan shall immediately
terminate and all Loans, accrued interest and other amounts payable hereunder
shall be immediately due and payable, all without any demand or notices of any
kind. Thereafter, Genzyme may proceed to protect and enforce its rights by suit
in equity, action at law and/or other appropriate proceeding; and Genzyme may
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offset and apply toward the payment of such amounts or part thereof any
Indebtedness of it to GTC.
ARTICLE 5. DEFINITIONS
5.1. CERTAIN DEFINED TERMS. As used herein, the following terms shall
have the following meanings (all terms defined in this Section 5.1 or in other
provisions of this Agreement in the singular to have the same meanings when used
in the plural and visa versa.
"AGREEMENT" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"BANK" has the meaning assigned to such term in Section 1.13.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or other
day on which commercial banks in Boston, Massachusetts are authorized or
required by law to remain closed.
"COLLATERAL DOCUMENTS" has the meaning assigned to such term in Section
1.14.
"CONSOLIDATED EBITDA" shall mean, for any period, the sum, for GTC, of
the following: (a) Consolidated Operating Income for such period (excluding any
amounts deducted for Unfunded R&D and reported by GTC to Genzyme on the
certificate required to be delivered by Section 3.1) PLUS (b) depreciation and
amortization, but only to the extent deducted in determining Consolidated
Operating Income for such period.
"CONSOLIDATED NET INCOME" shall mean, for any period, net income (or
loss) for GTC and its Subsidiaries (determined in accordance with GAAP);
provided, however, that Consolidated Net Income shall not include amounts
included in computing net income (or loss) in respect of (a) the write-up of
assets (other than marketable investments) after December 31, 1996 and (b)
extraordinary and non-recurring gains or losses.
"CONSOLIDATED OPERATING INCOME" shall mean, for any period, the
Consolidated Net Income of GTC for such period; provided, however, that, to the
extent the following items have been included in determining Consolidated Net
Income, they shall NOT be considered in computing Consolidated Operating Income:
provision for income taxes, interest expense, equity in the operating results of
unconsolidated Subsidiaries and other affiliates and non-operating, non-cash
items including, but not limited to, write-off of acquired technology or
acquired, in-process research and development which, in accordance with GAAP,
must be charged to income.
"CONVERSION PRICE" has the meaning assigned to such term in Section
1.7(a).
"CONVERSION SHARES" has the meaning assigned to such term in Section
2.2(d).
"CREDIT AGREEMENT" has the meaning assigned to such term in Section
3.1.
"DEFAULT" means an event or act which with the giving of notice or the
passage of time, or both, would become an Event of Default.
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"DISPOSITION" means any sale, assignment, transfer or other disposition
of any property (whether now owned or hereafter acquired) by GTC or any of its
Subsidiaries to any other Person excluding (a) the granting of Liens to Genzyme,
(b) any sale, assignment, transfer or other disposition of (i) any property sold
or disposed of in the ordinary course of business and on ordinary business
terms, (ii) any property no longer used or useful in the business of GTC and
(iii) any collateral under and as defined in the Collateral Documents pursuant
to an exercise of remedies of the Guarantor thereunder and (c) any licensing of
intellectual property of the Borrower in the ordinary course of business.
"DISPOSITION INVESTMENT" means, with respect to any Disposition, any
promissory notes or other evidences of indebtedness or investments received by
GTC or any of its Subsidiaries in connection with such Disposition.
"EQUITY ISSUANCE" means any issuance or sale of equity securities by a
Credit Party to any Person other than (i) an Affiliate of such Credit Party or
(ii) the Guarantor; EXCLUDING the issuance or sale of equity securities under an
employee benefit plan approved by the stockholders of such Credit Party.
"EXCHANGE ACT" has the meaning assigned to such term in Section 2.1(e).
"EVENT OF DEFAULT" has the meaning assigned to such term in Section
4.1.
"FORCE MAJEURE" has the meaning assigned to such term in Section 6.11.
"GAAP" means generally accepted accounting principles applied on a
basis consistent with those that, in accordance with the last sentence of
Section 5.2(a), are to be used in making the calculations for purposes of
determining compliance with this Agreement.
"GENZYME" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"GTC" has the meaning assigned to such term in the introductory
paragraph of this Agreement.
"GTC COMMON STOCK" has the meaning assigned to such term in Section
1.7(a).
"INDEBTEDNESS" means, in respect of any Person, all obligations,
contingent and otherwise, that in accordance with GAAP should be classified as
liabilities, including without limitation (i) all debt obligations, (ii) all
liabilities secured by Liens, (iii) all guarantees and (iv) all liabilities in
respect of bankers' acceptances or letters of credit.
"INTEREST RATE" means, for all Loans outstanding, the lesser (where
applicable) of respective interest rates indicated below for the periods set
forth below:
PERIOD INTEREST RATES
------ --------------
From the date hereof to
and including April 1, 1999 8.0% or Prime Rate
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From April 2, 1999 to
and including April 1, 2000 8.5% or Prime Rate PLUS 0.5%
From April 2, 2000 to
and including April 1, 2001 9.0% or Prime Rate PLUS 1.0%
From April 2, 2001 to
and including April 1, 2002 9.5% or Prime Rate PLUS 1.5%
From April 2, 2002 to and
including the Term Loan Maturity Date 10.0% or Prime Rate PLUS 2.0%,
but, in any event, not in excess of the maximum amount permitted by law.
"LIENS" means any encumbrance, mortgage, pledge, hypothecation, charge
restriction or other security interest of any kind securing any obligation of
any Person.
"LOANS" has the meaning assigned to such term in Section 1.8.
"NET CASH PAYMENTS" means,
(a) with respect to Equity Issuance, the aggregate amount
of all cash proceeds received by GTC or any of its Subsidiaries
therefrom less all legal, accounting, underwriting and similar fees and
expenses incurred in connection therewith.
(b) with respect to any Disposition, the aggregate amount
of all cash payments received by GTC or any of its Subsidiaries
directly or indirectly in connection with such Disposition, whether at
the time of such Disposition or after such Disposition under deferred
payment arrangements or investments entered into or received in
connection with such Disposition (including, without limitation,
Disposition Investments); provided that
(i) Net Cash Payments shall be net of (I) the
amount of any legal, accounting, title, transfer and recording
tax expenses, commissions and other fees and expenses payable
by GTC or any of its Subsidiaries in connection with such
Disposition and (II) any Federal, state and local income or
other taxes estimated to be payable by GTC or any of its
Subsidiaries as a result of such Disposition net of any
available tax credits and carryforwards, but only to the
extent that such estimated taxes are in fact paid to the
relevant Federal, state or local governmental authority within
12 months of the date of receipt of cash payments relating to
such Disposition; and
(ii) Net Cash Payments shall be net of any
repayments by GTC or any its of Subsidiaries of Indebtedness
to the extent that (I) the holder of such Indebtedness
requires repayment of such Indebtedness or (II) the transferee
of (or holder of a Lien on) such property requires that such
Indebtedness be repaid as a condition to the purchase of such
property.
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"NOTES" means the Revolving Credit Note and the Term Note.
"PAYMENT DATE" means the last Business Day of March, June, September
and December in each year, the first of which shall be the first such day after
the date of this Agreement.
"PERSON" means any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, governmental
authority or other entity.
"POST-DEFAULT RATE" means, a rate per annum equal to the applicable
Interest Rate PLUS 4%
"PRIME RATE" means for any day the rate from time to time equal to the
highest rate of interest reported in The Wall Street Journal as the prime rate
or in the event that such publication is not available such other or similar
rate selected by Genzyme representing the prime rate charged by major banking
institutions.
"PRIOR AGREEMENT" has the meaning assigned to such term in Recital A of
this Agreement.
"REVOLVING CREDIT AVAILABILITY PERIOD" means the period from and
including the date hereof to the Revolving Credit Maturity Date.
"REVOLVING CREDIT COMMITMENT" means $6,300,000 as such commitment may
be reduced from time to time pursuant to Sections 1.5 and 1.11.
"REVOLVING CREDIT LOANS" has the meaning assigned to such term in
Section 1.1.
"REVOLVING CREDIT MATURITY DATE" means the last Business Day in March
2000.
"REVOLVING CREDIT NOTE" has the meaning assigned to such term in
Section 1.2.
"SUBSIDIARY" means, with respect to any Person (the "PARENT") at any
date, any corporation, limited liability company, partnership, association or
other entity the accounts of which would be consolidated with those of the
parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as any
other corporation, limited liability company, partnership, association or other
entity (a) of which securities or other ownership interests representing more
than 50% of the ordinary voting power or, in the case of a partnership, more
than 50% of the general partnership interests are, as of such date, owned,
controlled or held, or (b) that is, as of such date, otherwise Controlled, by
the parent or one or more subsidiaries of the parent or by the parent and one or
more subsidiaries of the parent. References herein to "SUBSIDIARIES" shall,
unless the context requires otherwise, be deemed to be references to
Subsidiaries of the Borrower.
"SECURITIES ACT" has the meaning assigned to such term in Section
2.2(f).
"TRADING DAY" means any day on which GTC Common Stock is traded for any
period on the NASDAQ National Market or on the principal securities exchange or
market on which the GTC Common Stock is then traded.
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"TERM LOAN" has the meaning assigned to such term in Section 1.8(a).
"TERM LOAN MATURITY DATE" means the last Business Day in March 2003.
"TERM NOTE" has the meaning assigned to such term in Section 1.8(b).
"UNFUNDED R&D" means, for any period, (a) the amount of expenses for
research and development costs for such period MINUS (b) revenues earned for
such period attributable to contracts for the performance of research and
development.
5.2. ACCOUNTING TERMS AND DETERMINATIONS.
(a) Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to
Genzyme hereunder shall (unless otherwise disclosed to Genzyme in writing at the
time of delivery thereof in the manner described in subsection (b) below) be
prepared, in accordance with GAAP applied on a basis consistent with those used
in the preparation of the latest annual or quarterly financial statements
furnished to the Lender hereunder (which, prior to the delivery of the first
annual or quarterly financial statements under Section 3.1 hereof, shall mean
the audited financial statements as at December 31, 1996).
(b) To enable the ready and consistent determination of compliance
with the covenants set forth in Article 5, GTC will not change its fiscal year.
5.3. SECTION REFERENCES. References to particular sections are
references to sections of this Agreement unless otherwise indicated.
ARTICLE 6. MISCELLANEOUS
6.1. REPLACEMENT OF PRIOR AGREEMENT. Upon the execution and
delivery of this Agreement, Article 1 (except Sections 1.10 and 1.11) of the
Prior Agreement shall be superseded and replaced by the terms of this Agreement
and the remainder of the Prior Agreement shall remain in full force and effect.
6.2. EXPENSES. GTC shall pay all costs and expenses incurred by
Genzyme in connection with the preparation, execution, administration and
enforcement of this Agreement and the Notes, including reasonable attorneys'
fees.
6.3. NOTICES. All notices, requests and other communications to GTC
or Genzyme hereunder shall be in writing (including telecopy or similar
electronic transmissions), shall refer specifically to this Agreement and shall
be personally delivered or sent by telecopy or other electronic facsimile
transmission (with conformation of receipt and a hard copy sent by mail), by the
next business day service of a nationally recognized overnight courier or by
registered mail or certified mail, return receipt requested, postage prepaid, in
each case to the respective address specified below (or to such address as may
be specified in writing to the other party hereto in accordance with this
Section 6.3):
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To GTC:
Genzyme Transgenics Corporation
One Mountain Road
Framingham, MA 01701
Attention: President
Facsimile (508) 370-3797
To Genzyme:
Genzyme Corporation
One Kendall Square
Cambridge, MA 02139
Attention: Chief Legal Officer
Facsimile (617) 252-7553
Any notice or communication given in conformity with this Section 6.3
shall be deemed to be effective when received by the addressee, if delivered by
hand or facsimile, the next Business Day after mailing, if mailed via an
overnight courier, and seven (7) days after mailing, if sent by registered or
certified mail.
6.4. ENTIRE AGREEMENT. This Agreement, together with any agreements
referenced herein, constitutes, on and as of the date hereof, the entire
agreement of GTC and Genzyme with respect to the subject matter hereof, and all
prior or contemporaneous understandings or agreements, whether written or oral,
between GTC and Genzyme with respect to such subject matter are hereby
superseded in their entirety.
6.5. NO IMPLIED WAIVERS; RIGHTS CUMULATIVE. No failure on the part
of GTC or Genzyme to exercise and no delay in exercising any right, power,
remedy or privilege under this Agreement, or provided by statute or at law or in
equity or otherwise, including, without limitation, the right or power to
terminate this Agreement, shall impair, prejudice or constitute a waiver of any
such right, power, remedy or privilege or be construed as a waiver of any breach
of this Agreement or as an acquiescence therein, nor shall any single or partial
exercise of any such right, power, remedy or privilege preclude any other or
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
6.6. AMENDMENTS. No amendment, modification, waiver, termination or
discharge of any provision of this Agreement, nor consent to any departure by
GTC or Genzyme therefrom, shall in any event be effective unless the same shall
be in writing specifically identifying this Agreement and the provision intended
to be amended, modified, waived, terminated or discharged and signed by the
party against whom enforcement of such amendment is sought, and each such
amendment, modification, waiver, termination or discharge shall be effective
only in the specific instance and for the specific purpose for which given. No
provision of this Agreement shall be varied, contradicted or explained by any
oral agreement, course of dealing or performance or any other matter not set
forth in an agreement in writing and signed by the party against whom
enforcement of such variation, contradiction or explanation is sought.
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6.7. SUCCESSORS AND ASSIGNS. The terms and provisions of this
Agreement shall inure to the benefit of, and be binding upon, GTC, Genzyme and
their respective successors and assigns. Neither GTC nor Genzyme may assign or
transfer any of the respective rights or interests, nor delegate any of their
respective obligations, hereunder, without prior written consent from the other
party, except that either party may fully assign its rights and interests and
delegate its obligations hereunder (a) to an affiliate if such affiliate assumes
all of the obligations of such party hereunder in writing and this Agreement
remains binding upon the assigning party or (b) to any entity which acquires all
or substantially all of the assets of the assigning party or which is the
surviving entity in a merger or consolidation with such party, if such entity
assumes all of the obligations of such party hereunder in writing.
6.8. SURVIVAL. All covenants, agreements, representations and
warranties made by GTC herein, and in any certificates or other instruments
delivered in connection with or pursuant to this Agreement, shall be considered
to have been relied upon by Genzyme and shall survive the execution and delivery
of this Agreement and the making of any Loans, regardless of any investigation
made by any such other party or on its behalf and notwithstanding that Genzyme
may have had notice or knowledge of any Default or incorrect representation or
warranty at the time any credit is extended hereunder, and shall continue in
full force and effect so long as the principal of or any accrued interest on any
Loan or any fee or any other amount payable under this Agreement is outstanding
and so long as the Revolving Credit Commitment has not expired or terminated.
6.9. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.
6.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.10.
6.11. FORCE MAJEURE. GTC and Genzyme shall each be excused for any
failure or delay in performing any of its respective obligations under this
Agreement, if such failure or delay is caused by Force Majeure. For purposes of
this Agreement, "FORCE MAJEURE" shall mean any act of God, accident, explosion,
fire, storm, earthquake, flood, drought, peril of the sea, riot, embargo, war or
foreign, federal, state or municipal order of general application, seizure,
requisition or allocation, any failure or delay of transportation, shortage of
or inability to obtain supplies, equipment, fuel or labor or any other
circumstances or events beyond the reasonable control of the party relying upon
such circumstances or events.
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6.12. FURTHER ASSURANCES. Each of GTC and Genzyme agrees to duly
execute and deliver, or cause to be duly executed and delivered, such further
instruments and do and cause to be done such further acts and things, including,
without limitation, the execution of such additional assignments, agreements,
documents and instruments, that may be necessary or as the other party hereto
may at any time and from time to time reasonably request in connection with this
Agreement or to carry out more effectually the provisions and purposes of, or to
better assure and confirm unto such other party its rights and remedies under,
this Agreement.
6.13. SEVERABILITY. If any provision hereof should be held invalid,
illegal or unenforceable in any respect in any jurisdiction, then, to the
fullest extent permitted by law, (a) all other provisions hereof shall remain in
full force and effect in such jurisdiction and shall be liberally construed in
order to carry out the intentions of the parties hereto as nearly as may be
possible and (b) such invalidity, illegality or unenforceability shall not
affect the validity, legality or enforceability of such provision in any other
jurisdiction. To the extent permitted by applicable law, GTC and Genzyme hereby
waive any provision of law that would render any provision hereof prohibited or
unenforceable in any respect.
6.14. HEADINGS. Headings used herein are for convenience only and
shall not in any way affect the construction of, or be taken into consideration
in interpreting, this Agreement.
6.15. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
any number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original, and all of which counterparts,
taken together, shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as an instrument under seal in their respective corporate names by
their respective authorized representatives as of the date first set forth
above.
GENZYME TRANSGENICS CORPORATION
By: /s/ John B. Green
John B. Green
Vice President and Chief Financial Officer
GENZYME CORPORATION
By: /s/ Evan Lebson
Evan Lebson
Treasurer
<PAGE> 20
EXHIBIT A
---------
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT
AND SUCH LAWS OR (1) REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED AND (2) AN OPINION OF COUNSEL SATISFACTORY TO THE BORROWER IS FURNISHED
TO THE BORROWER TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
AMENDED AND RESTATED CONVERTIBLE REVOLVING CREDIT NOTE
$6,300,000 December 28, 1998
Cambridge, Massachusetts
FOR VALUE RECEIVED, Genzyme Transgenics Corporation, a Massachusetts
corporation (the "BORROWER"), hereby unconditionally promises to pay to the
order of Genzyme Corporation (the "LENDER"), at the place and times provided in
that certain Second Amended and Restated Convertible Debt Agreement dated of
even date herewith (as amended from time to time, the "AGREEMENT") between the
Borrower and the Lender, the principal sum of
SIX MILLION THREE HUNDRED THOUSAND DOLLARS
($6,300,000)
or such lesser amount as may be then outstanding hereunder, in lawful money of
the United States of America, as provided in the Agreement, and in immediately
available funds, and to pay interest on the unpaid principal balance hereof from
time to time outstanding, in like money, for the period commencing on the date
hereof until paid in full, at the Interest Rate on the dates provided in the
Agreement. Each change in the Interest Rate based upon the Prime Rate shall take
effect simultaneously with the corresponding change in such Prime Rate. All
amounts outstanding which are not paid when due and during the period when any
Event of Default shall have occurred and be continuing for a period of 30 or
more days, the principal of all Loans hereunder shall bear interest, after as
well as before judgment, at the Post-Default Rate.
This Amended and Restated Convertible Revolving Credit Note is
subordinated to certain indebtedness of the Borrower to Fleet National Bank (the
"BANK") as set forth in a Guaranty dated as of the date hereof made by the
Lender in favor of the Bank.
This Amended and Restated Convertible Revolving Credit Note is the
"Revolving Credit Note" referred to in the Agreement, and is entitled to the
benefits of and its subject to the provisions of the Agreement but neither this
reference to the Agreement nor any provision thereof shall affect or impair the
absolute and unconditional obligation of the undersigned maker of this Amended
and Restated Convertible Revolving Credit Note to pay the principal of and
interest on this Amended and Restated Convertible Revolving Credit Note as
herein provided. All capitalized terms used herein and not specifically defined
shall have the meanings given to them in the Agreement.
<PAGE> 21
Each Loan made by the Lender pursuant to the Agreement and all payments
made on account of principal and interest shall be recorded by the Lender in its
records and prior to any transfer hereof, endorsed on the grid schedule attached
hereto. The Borrower acknowledges that, notwithstanding the state of the grid
schedule hereto, the Lender's records with respect to Loans and payments made
hereunder shall constitute, in the absence of manifest error, presumptive
evidence of the Borrower's indebtedness from time to time under the Agreement
and hereunder.
Subject to the terms of the Agreement, the outstanding principal and
interest payable hereunder shall be convertible into shares of Common Stock,
$.01 par value per share, of the Borrower at the Conversion Price set forth in
Section 1.7 thereof.
This Amended and Restated Convertible Revolving Credit Note may be
prepaid at any time without penalty or fee as provided in the Agreement.
Upon the occurrence of an Event of Default specified in Section 4.1 of
the Agreement, the holder hereof may declare the entire outstanding indebtedness
evidenced by this Amended and Restated Convertible Revolving Credit Note, with
interest accrued thereon, to be immediately due and payable as provided in the
Agreement.
PRESENTMENT, DEMAND, PROTEST AND NOTICE OF DISHONOR AND NON-PAYMENT ARE
HEREBY WAIVED BY THE UNDERSIGNED.
This Amended and Restated Convertible Revolving Credit Note shall be
governed by the laws of the Commonwealth of Massachusetts and shall have the
effect of an instrument under seal.
GENZYME TRANSGENICS CORPORATION
By
---------------------------------------
John B. Green
Vice President and
Chief Financial Officer
<PAGE> 22
GRID SCHEDULE
TO AMENDED AND RESTATED
CONVERTIBLE REVOLVING CREDIT NOTE
Dated: December __, 1998
Date of Amount Amount of Amount of Outstanding Notation
Advance/Payment of Advance Principal Paid Interest Paid Credit Made By
<PAGE> 23
EXHIBIT B
---------
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE ACT
AND SUCH LAWS OR (1) REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED AND (2) AN OPINION OF COUNSEL SATISFACTORY TO THE BORROWER IS FURNISHED
TO THE BORROWER TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
CONVERTIBLE TERM NOTE
$[__________] March 31, 2000
Cambridge, Massachusetts
FOR VALUE RECEIVED, Genzyme Transgenics Corporation, a Massachusetts
corporation (the "BORROWER"), hereby unconditionally promises to pay to the
order of Genzyme Corporation (the "LENDER") at the place and times provided in
that certain Second Amended and Restated Convertible Debt Agreement dated as of
December __, 1998 (as amended from time to time, the "AGREEMENT"), between the
Borrower and the Lender, the principal sum of
[________________________________________________] DOLLARS ($__________)
or, if less, the aggregate unpaid principal amount of the Term Loan made by the
Lender to the Borrower pursuant to the Agreement, in lawful money of the United
States of America, as provided in the Agreement, and in immediately available
funds, and to pay interest on the unpaid principal balance hereof from time to
time outstanding, in like money, for the period commencing on the date hereof
until paid in full, at the Interest Rate on the dates provided in the Agreement.
Each change in the Interest Rate based upon the Prime Rate shall take effect
simultaneously with the corresponding change in such Prime Rate. Principal on
this Convertible Term Note shall be payable quarterly in arrears in 12
consecutive quarterly installments consisting of 11 equal consecutive quarterly
installments of principal in an amount sufficient to fully amortize the original
principal amount of the Term Loan in quarterly payments over a seven-year
period, beginning on June 30, 2000, and payable on each Payment Date thereafter,
PLUS one final installment on March 31, 2003 which shall include all unpaid
principal, unpaid and accrued interest and any and all other amounts due and
payable hereunder and under the Agreement, and together with interest thereon
from the date hereof payable at the Interest Rate in arrears on each Payment
Date. All amounts outstanding which are not paid when due and during the period
when any Event of Default shall have occurred and be continuing for a period of
30 or more days, the principal of all Loans hereunder shall bear interest, after
as well as before judgment, at the Post-Default Rate.
This Convertible Term Note is subordinated to certain indebtedness of
the Borrower to Fleet National Bank (the "BANK") as set forth in a Guaranty
dated as of December __, 1998 made by the Lender in favor of the Bank.
<PAGE> 24
This Convertible Term Note is the "Term Note" referred to in the
Agreement, and is entitled to the benefits of and its subject to the provisions
of the Agreement but neither this reference to the Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of the
undersigned maker of this Convertible Term Note to pay the principal of and
interest on this Convertible Term Note as herein provided. All capitalized terms
used herein and not specifically defined shall have the meanings given to them
in the Agreement.
All payments made on account of principal and interest shall be
recorded by the Lender in its records. The Borrower acknowledges that the
Lender's records with respect to payments made hereunder shall constitute, in
the absence of manifest error, presumptive evidence of the Borrower's
indebtedness from time to time under the Agreement and hereunder.
Subject to the terms of the Agreement, the outstanding principal and
interest payable hereunder shall be convertible into shares of Common Stock,
$.01 par value per share, of the Borrower at the Conversion Price set forth in
Section 1.7 thereof.
This Convertible Term Note may be prepaid at any time without penalty
or fee as provided in the Agreement.
Upon the occurrence of an Event of Default specified in Section 4.1 of
the Agreement, the holder hereof may declare the entire outstanding indebtedness
evidenced by this Convertible Term Note, with interest accrued thereon, to be
immediately due and payable as provided in the Agreement.
PRESENTMENT, DEMAND, PROTEST AND NOTICE OF DISHONOR AND NON-PAYMENT ARE
HEREBY WAIVED BY THE UNDERSIGNED.
This Convertible Term Note shall be governed by the laws of the
Commonwealth of Massachusetts and shall have the effect of an instrument under
seal.
GENZYME TRANSGENICS CORPORATION
By
------------------------------------------
John B. Green
Vice President and Chief Financial Officer
<PAGE> 1
EXHIBIT 13.1
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
I. GENZYME GENERAL
Combined Selected Financial Data............................................................................. 2
Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations...... 4
Combined Statements of Operations--For the Years Ended December 31, 1998, 1997 and 1996...................... 11
Combined Balance Sheets--December 31, 1998 and 1997.......................................................... 13
Combined Statements of Cash Flows--For the Years Ended December 31, 1998, 1997 and 1996...................... 14
Notes to Combined Financial Statements....................................................................... 16
Report of Independent Accountants............................................................................ 31
II. GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Selected Financial Data......................................................................... 33
Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and
Results of Operations...................................................................................... 34
Consolidated Statements of Operations--For the Years Ended December 31, 1998, 1997 and 1996.................. 47
Consolidated Balance Sheets--December 31, 1998 and 1997...................................................... 50
Consolidated Statements of Cash Flows--For the Years Ended December 31, 1998, 1997 and 1996.................. 52
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 ........ 54
Notes to Consolidated Financial Statements................................................................... 57
Report of Independent Accountants............................................................................ 91
</TABLE>
<PAGE> 2
GENZYME GENERAL
COMBINED SELECTED FINANCIAL DATA
The following Selected Financial Data reflects the results of operations and
financial position of Genzyme General Division ("Genzyme General") and should
be read in conjunction with the financial statements of Genzyme General and
accompanying footnotes.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales .................................. $ 613,685 $ 529,927 $ 424,483 $ 304,373 $ 238,645
Net service sales .................................. 55,445 55,835 61,638 47,230 49,686
Revenues from research and development contracts:
Related parties ................................... 3,568 8,041 23,011 26,758 20,883
Other ............................................. 579 3,400 2,310 202 1,513
------- --------- --------- --------- ---------
Total revenues ................................... 673,277 597,203 511,442 378,563 310,727
Operating costs and expenses:
Cost of products sold .............................. 211,076 206,028 155,930 113,964 92,226
Cost of services sold .............................. 34,240 35,451 42,889 31,137 32,116
Selling, general and administrative ............... 183,469 173,020 135,153 97,520 80,026
Research and development (including research and
development related to contracts) ................. 91,757 74,192 69,969 57,907 51,696
Amortization of intangibles ........................ 13,358 12,534 8,849 4,647 4,741
Purchase of in-process research and development .... -- -- 130,639 14,216 --
Other .............................................. -- -- 1,465 -- --
--------- --------- --------- --------- ---------
Total operating costs and expenses ............... 533,900 501,225 544,894 319,391 260,805
--------- --------- --------- --------- ---------
Operating income (loss) ............................... 139,377 95,978 (33,452) 59,172 49,922
Other income (expenses):
Equity in net loss of unconsolidated affiliates .... (19,685) (5,281) (3,646) (1,810) (1,353)
Gain on affiliate sale of stock .................... 2,369 -- 1,013 -- --
Minority interest .................................. 4,285 -- -- 1,608 1,659
Gain on sale of product line ....................... 31,202 -- -- -- --
Gain on sale of investments ........................ 3,391 -- 1,711 -- --
Charge for impaired investments .................... (3,397) -- -- -- (9,431)
Other .............................................. -- (2,000) -- -- (1,980)
Investment income .................................. 23,097 10,038 13,909 7,428 9,072
Interest expense ................................... (17,069) (8,108) (6,842) (1,069) (1,354)
--------- --------- --------- --------- ---------
Total other income (expenses) .................... 24,193 (5,351) 6,145 6,157 (3,387)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..................... 163,570 90,627 (27,307) 65,329 46,535
Provision for income taxes ............................ (62,438) (33,601) (20,206) (30,506) (16,341)
--------- --------- --------- --------- ---------
Net income (loss) ..................................... 101,132 57,026 (47,513) 34,823 30,194
Tax benefit allocated from Genzyme Tissue Repair ...... 16,394 17,666 17,011 8,857 1,860
Tax benefit allocated from Genzyme Molecular
Oncology ............................................ 3,527 2,755 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) attributable to Genzyme General
Division Common Stock ("GGD Stock") ................... $ 121,053 $ 77,447 $ (30,502) $ 43,680 $ 32,054
========= ========= ========= ========= =========
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS DATA CONTINUED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GENZYME GENERAL COMMON SHARE DATA:
Net income (loss) attributable to GGD Stock ........... $ 121,053 $ 77,447 $ (30,502) $ 43,680 $ 32,054
========= ========= ========= ========= =========
Per Genzyme General common share:
Net income (loss) per Genzyme General common
share - basic ...................................... $ 1.53 $ 1.01 $ (0.45) $ 0.79 $ 0.67
========= ========= ========= ========= =========
Weighted average shares outstanding ................... 79,063 76,531 68,289 55,531 48,141
========= ========= ========= ========= =========
Net income per Genzyme General common and
common equivalent share-diluted .................... $ 1.48 $ 0.98 $ (0.45) $ 0.68 $ 0.58
========= ========= ========= ========= =========
Adjusted weighted average shares outstanding .......... 81,734 78,925 68,289 63,967 55,321
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET DATA: DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and investments .................................. $ 556,097 $ 193,197 $ 171,725 $278,663 $128,652
Working capital........................................ 412,711 307,988 381,373 308,036 83,314
Total assets........................................... 1,646,307 1,203,056 1,229,519 854,586 630,144
Long-term debt and convertible debt ................... 274,651 117,978 223,998 124,473 126,555
Division equity ....................................... 1,167,067 980,876 884,225 659,281 395,651
</TABLE>
There were no cash dividends paid.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of the management of 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 included elsewhere in
this Annual Report. 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
"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 either 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 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, the discussion and analysis of Genzyme's financial position and
results of operations, and the consolidated 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 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."
1998 AS COMPARED TO 1997
REVENUES. Total revenues for 1998 were $673.3 million compared to $597.2
million in 1997, an increase of 13%. Product and service revenues were
$669.1 million, compared to $585.8 million in 1997, an increase of 14%. Revenues
from research and development contracts for 1998 were $4.1 million compared to
$11.4 million in 1997, a decrease of 64%.
Product revenues in 1998 increased 16% to $613.7 million from $529.9
million in 1997, due primarily to increased sales of Cerezyme(R) enzyme.
In 1998, sales of products by Genzyme General's Therapeutics business unit
consisted primarily of sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales
of Cerezyme(R) enzyme and Ceredase(R) enzyme increased 24% to $411.1 million
from $332.7 million in 1997, due to continued growth in new patient accruals in
existing markets and strong international sales. Genzyme General's results of
operations are highly dependent on sales of Cerezyme(R) enzyme and Ceredase(R)
enzyme, which together represented 67% of Genzyme General's product sales in
1998 compared to 63% in 1997.
4
<PAGE> 5
The Surgical Products business unit was formed in July 1996 following the
acquisition of Deknatel Snowden Pencer, Inc. ("DSP"), which combined the
business of DSP with Genzyme General's hyaluronic acid-based products designed
to limit the incidence and occurrence of post-operative adhesions (the "Sepra
Products"). Revenues from Sepra Products primarily consist of sales of
Seprafilm(R) Bioresorbable Membrane. Product sales by the Surgical Products
business unit for 1998 were $104.0 million as compared to $100.8 million for
1997. 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) were up slightly in 1998 as
compared to 1997. Sales of Sepra Products increased 88% in 1998 as compared to
1997.
Seprafilm(R) Bioresorbable Membrane is being marketed in the United States
and Canada by Genzyme General on behalf of Genzyme Ventures II ("GVII"), a 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 selling, general and
administrative ("SG&A") expenses. The first $200,000 of losses generated by GVII
were allocated to GDP and thereafter losses are allocated 40% to GDP and 60% to
Genzyme, except that if losses would be allocated to the general partner of GDP
rather than the limited partners, all of such losses are allocated 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%, respectively, of the profits of GVII.
In 1997, Genzyme General contributed an additional $1.5 million to GVII through
GDP. There were no capital contributions in 1998.
Revenues from the Diagnostics business unit consist of product sales and
genetic testing service revenues. On July 1, 1998, Genzyme completed the sale of
substantially all of the assets of its research products business to TECHNE
Corp. and its wholly owned subsidiary, Research and Diagnostic Systems, Inc.
(the "TECHNE Sale"). The research products business contributed $9.1 million and
$15.8 million of revenue in 1998 and 1997, respectively. Despite the sale of
these assets, product sales of diagnostic products in 1998 were level with 1997.
Service revenues in 1998 were level with 1997.
International sales as a percentage of total sales in 1998 increased to 41%
from 37% in 1997, due primarily to a 32% increase in combined international
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme.
Revenues from research and development contracts for 1998 decreased 64% to
$4.1 million from $11.4 million in 1997, due primarily to a decrease in services
performed for Genzyme Transgenics Corporation ("GTC").
MARGINS AND OPERATING EXPENSES. Total gross margins for 1998 were 63%
compared to 59% in 1997. Excluding other charges, gross margins for 1998 were
67% compared to 63% in 1997. 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
1998 were 66%, including certain other charges, compared to 61% in 1997,
including certain other charges. The increase in product margins in 1998 is
primarily due to increased sales of Cerezyme(R) enzyme.
In the third quarter of 1998, Genzyme General recorded charges of $25.2
million associated with the write-down of inventories in the Therapeutics and
Surgical Products business units. The conversion of patients with Gaucher
disease from Ceredase(R) enzyme to Cerezyme(R) enzyme is substantially complete.
Based on its successful progress in converting patients from Ceredase(R) enzyme
to Cerezyme(R) enzyme, Genzyme General determined that its existing supply of
finished goods of Ceredase(R) enzyme was sufficient to meet patient needs. As a
result, in the third quarter of 1998, Genzyme General recorded a $14.8 million
charge to cost of products sold primarily for the excess inventory used to make
Ceredase(R) enzyme. In addition, during the third quarter of 1998, Genzyme
General reviewed its requirements to support the Sepra Products. As a result, in
the third quarter of 1998, Genzyme General recorded a $10.4 million charge to
cost of products sold to write-down Sepra Products inventory amounts to net
realizable value.
Without these other charges, product margins in 1998 would have been 70%
compared to 66% in 1997. Product margins, without other charges increased in
1998 due to increased sales of Cerezyme(R) enzyme. Service margins for 1998 were
38% compared to 37% in 1997.
SG&A expenses and amortization of intangibles for 1998 were $196.8 million
compared to $185.6 million in 1997, an increase of 6%. Excluding other charges
in 1997, SG&A expenses increased by 8% over 1997. The increase was due primarily
to increased sales and marketing expenses related to the product launch of
Thyrogen[R] hormone and increased expenditures in support of Cerezyme[R] enzyme.
Research and development expenses for 1998 were $91.8 million compared to
$74.2 million in 1997, an increase of 24%. The increase was primarily due to
$12.0 million of additional research and development expenses resulting from the
consolidation of the results of ATIII LLC, for which there were no comparable
amounts in 1997. ATIII LLC is the joint venture between Genzyme and GTC for the
development and commercialization of transgenic recombinant human antithrombin
III ("ATIII"). In addition, during the third quarter of 1998, Genzyme General
5
<PAGE> 6
wrote-off $1.7 million of certain costs related to equipment used to manufacture
Sepra Products.
OTHER INCOME AND EXPENSES. Other income and expenses was a net other income
of $24.2 million in 1998 compared to net other expense of $5.4 million in 1997.
The 1997 amount includes $2.0 million of other charges.
Other income and expenses includes $19.7 million in equity in net loss of
unconsolidated affiliates in 1998 compared to $5.3 million in equity in net loss
of unconsolidated affiliates in 1997. The increase in equity in net loss of
unconsolidated affiliates was primarily due to (i) increased losses from GTC;
(ii) increased losses resulting from RenaGel LLC, Genzyme's joint venture with
GelTex Pharmaceuticals, Inc. ("GelTex") for the development and
commercialization of Renagel(R) Capsules (sevelamer hydrochloride), which was
established on June 17, 1997; (iii) Genzyme's portion of the losses resulting
from Pharming/Genzyme LLC, Genzyme's joint venture with Pharming Group NV
("Pharming") for the development and commercialization of human alpha
glucosidase ("hAG") as a treatment for Pompe's disease, which became effective
on October 9, 1998; and (iv) Genzyme's portion of the losses resulting from
BioMarin/Genzyme LLC, Genzyme's joint venture with BioMarin Pharmaceutical Inc.
("BioMarin") for the development and commercialization of alpha-L-iduronidase
for the treatment of mucopolysaccharidosis ("MPS I"), which was established on
September 14, 1998.
Other income and expense includes a gain of $2.4 million on Genzyme's
investment in GTC due to the issuance by GTC of shares of its common stock,
which was recorded in June 1998.
For the year ended December 31, 1998, Genzyme General recorded minority
interest in the results of ATIII LLC of $4.3 million, representing GTC's portion
of the losses of the joint venture for 1998. There was no comparable amount in
the corresponding period of 1997.
In July 1998, Genzyme General recorded a gain of $31.2 million in
connection with the TECHNE Sale. In addition, a gain on sale of investment of
$3.4 million was recorded in December 1998 upon the sale of a portion of the
shares of TECHNE common stock acquired in that transaction. There were no
comparable amounts in the corresponding period of last year.
Genzyme General recorded a charge for an impaired investment of $3.4
million related to a strategic investment in a company whose common stock price
decline was considered "other than temporary."
Investment income for 1998 was $23.1 million, compared with $10.0 million
for 1997. The increase was due to higher average cash balances resulting
primarily from the proceeds from the issuance in May 1998 of $250.0 million in
principal amount of 5 1/4% Convertible Subordinated Notes due June 1, 2005 (the
"GGD Notes"). Interest expense for 1998 was $17.1 million, compared to $8.1
million in 1997. The increase was due to additional interest expense related to
the issuance of the GGD Notes and interest related to the $21.2 million in
principal amount of 5% convertible debentures due 2003 (the "GGD Debentures").
The net tax provision for 1998 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 1998, the effective tax
rate was 38%, compared to 37% in 1997. The allocated tax benefit generated by
GTR and GMO of $16.4 million and $3.5 million, respectively, in 1998 and $17.7
million and $2.8 million, respectively, in 1997 reduced Genzyme General's tax
rate to 26% and 15% in 1998 and 1997, respectively. The increase in Genzyme
General's net tax rate in 1998 was due to the fact that the tax benefits
allocated from GTR and GMO decreased the tax rate only 12% in 1998. The same
benefits decreased the tax rate 22.6% in 1997. The difference is attributable to
the fact that the same dollar benefits gave a lower percentage of benefit over
an increased profit before tax.
1997 AS COMPARED TO 1996
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 Pharmaceuticals business now focuses 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 an $18.1 million charge to cost of products sold,
primarily related to the melatonin, bulk pharmaceuticals and fine chemical
product lines that were 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 Sepracoat(TM)
Coating Solution, which was discontinued for the U.S. market after an advisory
panel of the U.S. Food and Drug Administration ("FDA") recommended against
granting marketing approval of this product in 1997. The product is sold outside
of the United States. Genzyme General also recorded a $2.0 million charge to
other expense related to the uncertainty of collection on certain notes
receivable.
6
<PAGE> 7
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. Sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme together represented 63% of
consolidated product sales in 1997 compared to 62% in 1996.
Pharmaceuticals 1997 product sales decreased 31% from 1996 due primarily to
a significant decline in sales of melatonin. Melatonin sales began to decline
materially during the second half of 1996 due to reduced demand and Genzyme
General discontinued this product line in the fourth quarter of 1997.
Revenues from Sepra Products primarily consist of sales of Seprafilm(R)
Bioresorbable Membrane. 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 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.
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., 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 Corporation, which was acquired by 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. Total 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
7
<PAGE> 8
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 in 1997 by 25% over 1996. The increase was due
primarily to the acquisition of DSP and increases in 1997 staffing in support of
the growth in several product lines, most notably in support of the North
American introduction of Seprafilm(R) Bioresorbable Membrane. 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 the 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 ATIII development program being conducted by GTC
and increased spending on internal programs, most notably the Thyrogen(R)
hormone program.
OTHER INCOME AND EXPENSES. Other income and expenses was a net other
expense of $5.4 million (which includes a $2.0 million special charge) compared
to net 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 Corporation. 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 GTC and RenaGel LLC.
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.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, Genzyme General had cash, cash equivalents and
investments (excluding equity securities) of $556.1 million compared to $193.2
million at December 31, 1997, an increase of $362.9 million. In 1998, operating
and financing activities provided $153.7 million and $288.2 million of cash,
respectively, while investing activities used $408.5 million of cash and
fluctuations in exchange rates caused an increase in cash of $0.3 million.
At December 31, 1998, accounts receivable increased 32% to $153.3 million
from $116.1 million primarily due to increased revenue in 1998. At December 31,
1998, inventories decreased 22% to $107.2 million from $137.7 million at
December 31, 1997, due primarily to the $25.2 million charge to write-down
inventory in the Therapeutics and Surgical Products business units. Genzyme
General used $55.3 million for capital acquisitions. Genzyme General used $320.6
million for net purchases of investments. Genzyme General received $74.6 million
of cash from issuances of common stock, $250.0 million in cash from the issuance
of debt and used $33.4 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: (i) paying strategic collaborators and
funding joint venture obligations, including a $10 million milestone payment to
GelTex in October 1999; (ii) product development and marketing; (iii) expanding
facilities; and (iv) marketing the Sepra Products. Genzyme General's cash
resources will be further reduced to pay principal and interest on the following
debt: (i) $82.0 million allocated to Genzyme General under Genzyme's revolving
credit facility with a syndicate of commercial banks, which is payable in
November 1999; (ii) $21.2 million in principal amount under the GGD Debentures,
which mature on August 29, 2003; and (iii) $250.0 million in principal amount
under the GGD Notes, which are convertible into GGD Stock and mature on June 1,
2005. To the extent cash is used to repay or redeem these debt instruments,
including the interest payable thereon, Genzyme General's cash reserves will
also be diminished. Genzyme General's capital requirements could differ
materially from those currently anticipated by management due to the factors
described under the section entitled "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"
included in this Annual Report.
For a discussion of the demands, commitments and events that may affect the
liquidity and capital resources of Genzyme Corporation, including Genzyme
General, 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, EURO, YEAR 2000 AND MARKET RISK
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.
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 Discussion 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, both of which treat Gaucher disease.
Sales of Cerezyme(R) enzyme and Ceredase(R) enzyme in 1998 were $411.1 million,
representing 67% of Genzyme General's product sales in 1998. In 1994, Genzyme
General developed Cerezyme(R) enzyme, a recombinant form of the enzyme, to
replace Ceredase(R) enzyme, production of which is subject to supply
constraints. Genzyme ceased producing Ceredase(R) enzyme in 1998, after
substantially all of the patients previously using Ceredase(R) enzyme had
converted to Cerezyme(R) enzyme.
Certain companies have initiated, and other companies in the future may
initiate, efforts to develop competitive products to treat Gaucher disease.
Although management believes its regulatory position, manufacturing capability
and patient and physician relationships provide Cerezyme(R) enzyme with a strong
competitive position, there can be no assurance that any competitive products
9
<PAGE> 10
which are developed will not gain market acceptance. A reduction in revenue from
sales of Cerezyme(R) enzyme would adversely affect Genzyme General's results of
operations.
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 the Sepra Products. 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 exercise this option, it will have limited rights in
revenues generated from the sale of the Sepra Products. If Genzyme does exercise
this option, it will be required to make substantial cash payments or to issue
shares of Genzyme common stock, or both. Cash payments will diminish Genzyme's
capital resources. Payments in GDP stock could result in dilution to holders of
Genzyme common stock and could negatively affect the market price of such stock.
DEPENDENCE ON STRATEGIC ALLIANCES.
Several of Genzyme General's strategic initiatives involve alliances with
other biotechnology companies, including: (i) a joint venture with GelTex for
the commercialization of Renagel(R) Capsules; (ii) an agreement with Knoll
Pharmaceutical Company for the marketing of Thyrogen(R) hormone in the U.S.;
(iii) an agreement with Biogen, Inc. for the marketing of AVONEX(R)
(interferon-beta-1a) for the treatment of relapsing forms of multiple sclerosis
in Japan following regulatory approval; (iv) a joint venture with BioMarin for
the development of alpha-L-iduronidase for the treatment of MPS-I; (v) a joint
venture with GTC for the development and commercialization of ATIII; and (vi) a
joint venture with Pharming for the development and commercialization of hAG for
the treatment of Pompe disease. Genzyme General plans to enter into additional
alliances in the future. The success of these alliances is largely dependent on
the efforts and skill of Genzyme's partners. There can be no assurance that any
of these alliances will result in the successful development and/or
commercialization of a product.
SUBSEQUENT EVENTS
In March 1999, Genzyme announced that it intends to create a separate
division, with its own series of common stock, for the existing surgical
products business that is currently part of Genzyme General, subject to approval
of the Genzyme Board.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's
interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General.
Diacrin/Genzyme LLC is Genzyme's joint venture with Diacrin for the development
and commercialization of products based on fetal porcine cells for the treatment
of Parkinson's and Huntington's diseases. The transfer of interest in
Diacrin/Genzyme LLC is subject to the approval of GTR's shareholders.
10
<PAGE> 11
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net product sales................................................... $ 613,685 $ 529,927 $ 424,483
Net service sales ................................................... 55,445 55,835 61,638
Revenues from research and development contracts:
Related parties ................................................... 3,568 8,041 23,011
Other ............................................................. 579 3,400 2,310
--------- --------- ---------
Total revenues .................................................... 673,277 597,203 511,442
Operating costs and expenses:
Cost of products sold ............................................... 211,076 206,028 155,930
Cost of services sold ............................................... 34,240 35,451 42,889
Selling, general and administrative ................................. 183,469 173,020 135,153
Research and development (including research and development
related to contracts) .............................................. 91,757 74,192 69,969
Amortization of intangibles ......................................... 13,358 12,534 8,849
Purchase of in-process research and development ..................... -- -- 130,639
Other ............................................................... -- -- 1,465
--------- --------- ---------
Total operating costs and expenses ................................ 533,900 501,225 544,894
--------- --------- ---------
Operating income (loss) ................................................ 139,377 95,978 (33,452)
Other income (expenses):
Equity in net loss of unconsolidated affiliates ..................... (19,685) (5,281) (3,646)
Gain of affiliate sale of stock ..................................... 2,369 -- 1,013
Minority interest ................................................... 4,285 -- --
Gain on sale of product line ........................................ 31,202 -- --
Gain on sale of investments ......................................... 3,391 -- 1,711
Charge for impaired investments ..................................... (3,397) -- --
Other ............................................................... -- (2,000) --
Investment income ................................................... 23,097 10,038 13,909
Interest expense .................................................... (17,069) (8,108) (6,842)
--------- --------- ---------
Total other income (expenses) ..................................... 24,193 (5,351) 6,145
--------- --------- ---------
Income (loss) before income taxes ...................................... 163,570 90,627 (27,307)
Provision for income taxes ............................................. (62,438) (33,601) (20,206)
--------- --------- ---------
Net income (loss) ...................................................... 101,132 57,026 (47,513)
Tax benefit allocated from Genzyme Tissue Repair ....................... 16,394 17,666 17,011
Tax benefit allocated from Genzyme Molecular Oncology .................. 3,527 2,755 --
--------- --------- ---------
Net income (loss) attributable to GGD Stock ............................ $ 121,053 $ 77,447 $ (30,502)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
11
<PAGE> 12
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) attributable to GGD Stock .................. $ 121,053 $ 77,447 $ (30,502)
========= ========= =========
Per Genzyme General common share:
Net income (loss) per Genzyme General common share-- basic: $ 1.53 $ 1.01 $ (0.45)
========= ========= =========
Weighted average shares outstanding .......................... 79,063 76,531 68,289
========= ========= =========
Net income (loss) per Genzyme General common and common
equivalent share-- diluted: .............................. $ 1.48 $ 0.98 $ (0.45)
========= ========= =========
Adjusted weighted average shares outstanding ................. 81,734 78,925 68,289
========= ========= =========
Net income (loss)............................................. $101,132 $ 57,026 $ (47,513)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................... 7,681 (11,704) 2,845
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period..... (6,059) 833 (2,446)
Reclassification adjustment for gains (losses)
included in net income (loss)........................ 2,100 - (1,077)
-------- --------- ---------
Unrealized gains (losses) on securities, net......... (3,959) 833 (3,523)
-------- --------- ---------
Other comprehensive income (loss)....................... 3,722 (10,871) (678)
-------- --------- ---------
Comprehensive income (loss)................................ $104,854 $ 46,155 $ (48,191)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
12
<PAGE> 13
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------------------
1998 1997
-----------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 100,012 $ 66,276
Short-term investments ........................................ 174,421 35,294
Accounts receivable, net ...................................... 153,278 116,056
Inventories ................................................... 107,188 137,708
Prepaid expenses and other current assets ..................... 29,659 15,941
Due from Genzyme Tissue Repair ................................ 548 1,213
Due from Genzyme Molecular Oncology ........................... 4,773 5,434
Deferred tax assets-- current ................................. 39,725 27,601
---------- ----------
Total current assets ........................................ 609,604 405,523
Property, plant and equipment, net ............................... 378,992 365,337
Long-term investments ............................................ 281,664 91,627
Notes receivable-- related parties ............................... -- 4,601
Intangibles, net ................................................. 263,748 243,071
Deferred tax assets-- noncurrent ................................. 28,138 35,988
Investments in equity securities ................................. 51,977 30,047
Other noncurrent assets .......................................... 32,184 26,862
---------- ----------
Total assets ................................................ $1,646,307 $1,203,056
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable .............................................. $ 26,249 $ 18,409
Accrued expenses .............................................. 70,313 66,865
Income taxes payable .......................................... 16,532 11,157
Deferred revenue............................................ .. 1,231 217
Current portion of long-term debt and capital lease obligations 82,568 887
---------- ----------
Total current liabilities ................................... 196,893 97,535
Noncurrent liabilities:
Long-term debt ................................................... 3,087 117,978
Convertible subordinated notes and debentures .................... 271,559 --
Other noncurrent liabilities ..................................... 7,701 6,667
---------- ----------
Total liabilities ........................................... 479,240 222,180
Commitments and contingencies (See Notes)
Division equity (Note M) ......................................... 1,167,067 980,876
---------- ----------
Total liabilities and division equity ....................... $1,646,307 $1,203,056
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
13
<PAGE> 14
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................................ $ 101,132 $ 57,026 $ (47,513)
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization ....................................... 45,765 43,653 29,257
Loss on disposal of fixed assets ....................... ........... 108 1,234 42
Non-cash compensation expense ........................ ............. 8,519 2,881 148
Accrued interest/amortization on bonds ............. ............... (7,242) (571) 1,110
Provisions for bad debts and inventory ........... ................. 9,005 14,100 9,521
Accretion of debt conversion feature ................................ 705 -- --
Equity in net loss of unconsolidated affiliates ..................... 19,685 5,281 3,646
Gain on affiliate sale of stock ..................................... (2,369) -- (1,013)
Minority interest in net loss of subsidiaries ....................... (4,285) -- --
Gain on sale of product line ........................................ (31,202) -- --
Purchase of in-process research and development ..................... -- -- 130,639
Gain on sale of investments ......................................... (3,391) -- (1,711)
Charge for impaired investment ...................................... 3,397 --
Deferred income tax benefit.......................................... (3,022) (3,969) (28,558)
Other ............................................................... 26 528 153
Increase (decrease) in cash from working capital changes:
Accounts receivable ............................................ (38,531) (10,052) (18,318)
Inventories .................................................... 31,307 (29,149) (40,547)
Prepaid expenses and other assets .............................. (12,254) (8,774) (379)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue ................................. 36,225 8,945 43,342
Due from Genzyme Tissue Repair ................................. 665 391 430
Due from Genzyme Molecular Oncology ............................ (553) (2,011) --
--------- --------- ---------
Net cash provided by operating activities ...................... 153,690 79,513 80,249
INVESTING ACTIVITIES:
Purchases of investments ............................................... (439,431) (131,197) (117,089)
Sales and maturities of investments .................................... 118,871 80,867 195,952
Proceeds from sale of equity investment ................................ 9,564 -- --
Acquisition of property, plant and equipment ........................... (55,271) (28,456) (42,540)
Sales of property, plant and equipment ................................. 1,795 -- --
Proceeds from sale of product line ..................................... 24,760 -- --
Acquisitions, net of acquired cash and assumed liabilities ............. (9,949) -- (299,078)
Purchase of technology rights .......................................... (15,100)
Investment in unconsolidated affiliates ................................ (25,783) (6,449) (3,600)
Investment in joint ventures ........................................... (14,811) -- --
Loans to affiliates .................................................... (1,000) (4,601) (1,676)
Repayment of loans by affiliates ....................................... 3,019 -- --
Other .................................................................. (5,119) (1,173) (7,621)
--------- --------- ---------
Net cash used in investing activities .......................... (408,455) (91,009) (275,652)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................. 74,649 123,837 39,119
Proceeds from issuance of debt ......................................... 250,000 -- 480,000
Payments of debt ....................................................... (33,388) (101,118) (340,333)
Net cash allocated to Genzyme Tissue Repair ............................ (155) (14,892) (11,714)
Net cash allocated to Genzyme Molecular Oncology ....................... (5,000) (5,000) --
Other .................................................................. 2,061 -- --
-------- --------- ---------
Net cash provided by financing activities ...................... 288,167 2,827 167,072
Effect of exchange rate changes on cash .................................. 334 (2,275) 1,920
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ......................... 33,736 (10,944) (26,411)
Cash and cash equivalents at beginning of period ......................... 66,276 77,220 103,631
--------- --------- ---------
Cash and cash equivalents at end of period ............................... $ 100,012 $ 66,276 $ 77,220
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
14
<PAGE> 15
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental cash flow information: Cash paid during the year for:
Interest .................................................... $ 15,047 $ 8,684 $ 6,169
Income taxes ................................................ 24,463 18,887 14,133
</TABLE>
Supplemental disclosure of non-cash transactions:
Allocation of tax benefit -- Note B
Other charges -- Note C
Sale of research products business assets -- Note D
Acquisitions liability -- Note E
Investment in unconsolidated affiliate -- Note J
GGD Debentures -- Note L
Warrant exercise -- Note M
Debt conversion -- Note L
GTR and GMO Designated Shares dividend -- Note M
The accompanying notes are an integral part of these combined
financial statements.
15
<PAGE> 16
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General develops and markets therapeutic and surgical products and
diagnostic products and services. It is a division of Genzyme Corporation and
has a separate series of common stock intended to reflect its value and track
its economic performance.
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 the consolidated financial statements of Genzyme and its subsidiaries
("Genzyme's Consolidated Financial Statements") included in this Annual Report.
Corporate allocations reflected in these financial statements are determined
based upon methods which management believes to be reasonable.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements of Genzyme General reflect the
combined accounts of all of Genzyme General's businesses. 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 I., "Investments" to Genzyme's Consolidated
Financial Statements, which is incorporated herein by reference.) All
significant interdivisional items and transactions have been eliminated in
combination. Certain items in Genzyme General's combined financial statements
for the years ended December 31, 1997 and 1996 have been reclassified to conform
with the December 31, 1998 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 allocation of
assets and liabilities, including contingent liabilities, between Genzyme
General, GTR and GMO for the purposes of preparing their respective financial
statements, Genzyme Corporation 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 are common stockholders of Genzyme and have no specific
claim against the assets attributed to Genzyme General. 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.
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 Genzyme's Consolidated Financial Statements.
The Company prepares the financial statements of Genzyme General 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
Genzyme's 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 Charter, dividends that may 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 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.
16
<PAGE> 17
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDEND POLICY (CONTINUED)
Genzyme 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 GGD Stock in the
foreseeable future.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GTR and GMO gives
effect to the management and accounting policies adopted by the Genzyme Board
and is reported in lieu of consolidated per share data. Genzyme 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.
The following table sets forth the computation of basic and diluted earnings per
share for Genzyme General (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Net income (loss) attributable to GGD
Stock-basic and diluted ............................... $121,053 $ 77,447 $(30,502)
======== ======== ========
Shares used in net income per common share-basic ....... 79,063 76,531 68,289
Effect of dilutive securities:
Employee and director stock options ................... 2,661 2,387 --
Warrants .............................................. 10 7 --
-------- -------- --------
Dilutive potential common shares (1,2,3) ............... 2,671 2,394 --
-------- -------- --------
Shares used in net income per common
share-diluted (1,2,3)................................. 81,734 78,925 68,289
======== ======== ========
Net income (loss) per common share - basic ............. $ 1.53 $ 1.01 $ (0.45)
======== ======== ========
Net income (loss) per common share - diluted (1,2,3) ... $ 1.48 $ 0.98 $ (0.45)
======== ======== ========
</TABLE>
- ----------
(1) Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the years ended December 31,
1998, 1997 and 1996 because each such security had an exercise price
greater than the average market price of GGD Stock during each
respective period. Such securities include:
<TABLE>
<CAPTION>
December 31,
----------------------
(Amounts in thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of GGD Stock issuable for options(a) ............................. 2,827 5,921 3,824
Shares of GGD Stock issuable for warrants ............................... 40 40 --
----- ----- -----
Total shares with exercise prices greater than the average market
price of GGD Stock during the year ........................... 2,867 5,961 3,824
===== ===== =====
</TABLE>
(a) Options not included in diluted earnings per share had exercise
price ranges of $28.67-$47.88 in 1998, $23.59-$38.00 in 1997 and
$3.79-$38.00 in 1996.
(2) In computing diluted earnings per share for Genzyme General for 1998,
the following securities were not included in the calculation because
inclusion of such shares would have an anti-dilutive effect on Genzyme
General's net income per share: (i) approximately 6,313,000 shares of
GGD Stock reserved in May 1998 for issuance upon conversion of the GGD
Notes and (ii) approximately 630,000 shares of GGD Stock reserved in
August 1998 for issuance upon conversion of the GGD Debentures.
(3) In computing diluted earnings per share for 1996, exercise of
approximately 6,506,000 options and 35,000 warrants were not included
because the result would be anti-dilutive due to Genzyme General's net
loss in 1996.
17
<PAGE> 18
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1998, 1997 and 1996.
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. Genzyme General incurred net transaction gains of
$0.3 million in 1998 and net transaction losses of $0.1 million in 1997 and $1.0
million in 1996. Division equity includes cumulative foreign currency
translation charges of $4.8 million and $12.4 million at December 31,
1998 and 1997, respectively.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS
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. With the exception of the policy
regarding Interdivision Asset Transfers, policies may be further modified or
rescinded by action of the Genzyme Board, or the Genzyme Board may adopt
additional policies, without approval of the stockholders of Genzyme, subject
only to the Genzyme Board's fiduciary duty to the Genzyme stockholders. 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.
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.
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 it 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 General allocated $6.5 million, $7.7 million and $9.1 million of SG&A
expenses to GTR in 1998, 1997 and 1996, respectively. Genzyme General allocated
$5.7 million, $2.1 million and $0.2 million of SG&A expenses to GMO in 1998,
1997 and 1996, respectively. Genzyme General's allocations to GTR and GMO for
research and development expenses were (i) in the case of GTR, $7.7 million,
$7.7 million and $6.9 million in 1998, 1997 and 1996, respectively, and (ii) in
the case of GMO, $12.1 million in 1998, $5.3 million in 1997, and $0.8 million
in 1996. Amounts due from GTR for operating activities were $0.5 million and
$1.2 million at December 31, 1998 and 1997, respectively, and in the case of
GMO, $4.8 million and $5.4 million at December 31, 1998 and 1997, respectively.
In 1998, Genzyme General adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of Genzyme General's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information (see Note R., "Segment Reporting" below).
18
<PAGE> 19
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS (CONTINUED)
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.
Income taxes are allocated to each division based upon the financial statement
income, taxable income, credits and other amounts properly allocable to such
division under generally accepted accounting principles as if each division were
a separate taxpayer; provided, however, that as of the end of any fiscal quarter
of Genzyme, any projected annual tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be allocated to the other divisions in proportion to
their taxable income 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 Account Policies -- Net Income
(Loss) Per Share," to Genzyme's 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 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. SG&A and 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.
19
<PAGE> 20
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS (CONTINUED)
OTHER INTERDIVISION TRANSACTIONS (CONTINUED)
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. OTHER CHARGES
In the third quarter of 1998, Genzyme General recorded $26.9 million of charges
associated with its Therapeutics and Surgical Products businesses.
The conversion of patients with Gaucher disease from Ceredase(R) enzyme to
Cerezyme(R) enzyme is substantially complete. Based on its successful progress
in converting patients from Ceredase(R) enzyme to Cerezyme(R) enzyme, Genzyme
General determined that its existing supply of finished goods of Ceredase(R)
enzyme was sufficient to meet patient needs. As a result, in the third quarter
of 1998, Genzyme General recorded a $14.8 million charge to cost of products
sold for the excess inventory used to make Ceredase(R) enzyme.
During the third quarter of 1998, Genzyme General reviewed its requirements to
support the Sepra Products. As a result, in the third quarter of 1998, Genzyme
General recorded a $10.4 million charge to cost of products sold to write-down
Sepra Products inventory amounts to net realizable value. In addition, during
the third quarter of 1998, Genzyme General wrote-off certain costs related to
equipment used to manufacture the Sepra Products totaling $1.7 million.
In the fourth quarter of 1997, Genzyme General recorded $29.2 million of charges
mainly associated with its Pharmaceuticals and Surgical Products businesses and
the sale of GDI, which was sold in 1996. The Pharmaceuticals business now
focuses 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 that were 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 Sepracoat(TM) Coating Solution, which was discontinued for the U.S.
market after an advisory panel of the FDA recommended against granting market
approval of this product in 1997. The product is sold outside the United States.
Genzyme General also recorded a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
NOTE D. SALE OF RESEARCH PRODUCTS BUSINESS ASSETS
On July 1, 1998, Genzyme General completed the sale of the primary assets of its
research products business to TECHNE. The purchase price consisted of $24.8
million in cash, approximately 987,000 shares of TECHNE common stock, and
royalties on TECHNE's biotechnology group sales for the next five years. Royalty
income will be recorded as earned. In the third quarter of 1998, Genzyme General
recorded a gain of $31.2 million related to the sale of the research products
business assets.
20
<PAGE> 21
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE E. ACQUISITIONS
Disclosure related to the acquisitions of Neozyme II, DSP and Genetrix, Inc. are
included in Note D., "Acquisitions," to Genzyme's Consolidated Financial
Statements, and are incorporated herein by reference.
NOTE F. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The disclosures relating to off-balance sheet financial instruments are included
in Note E., "Off-Balance-Sheet Financial Instruments," to Genzyme's Consolidated
Financial Statements, which is incorporated herein by reference.
NOTE G. 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 $12.9 million and
$11.3 million at December 31, 1998 and 1997, respectively.
Net intangible assets for Genzyme General as of December 31, 1998 and 1997
includes $170.9 million and $177.3 million, respectively, of goodwill primarily
due to acquisitions.
As of December 31, 1998 and 1997, accumulated amortization of intangible assets
was $53.5 million and $39.0 million, respectively.
NOTE H. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
---------------------------------------------------------------------
<S> <C> <C>
Raw materials............................ $ 41,064 $ 48,149
Work-in-process.......................... 25,093 30,264
Finished products........................ 41,031 59,295
--------- ---------
Total....................... $ 107,188 $ 137,708
========= =========
</TABLE>
21
<PAGE> 22
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE I. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Plant and equipment....................... $ 252,750 $ 232,405
Land and buildings........................ 156,067 138,696
Leasehold improvements.................... 68,848 63,244
Furniture and fixtures.................... 17,460 13,522
Construction-in-progress.................. 30,805 24,853
--------- ---------
525,930 472,720
Less accumulated depreciation............. (146,938) (107,383)
-------- --------
Property, plant and equipment, net........ $ 378,992 $ 365,337
========= =========
</TABLE>
Depreciation expense was $37.4 million, $31.1 million and $22.1 million in
1998, 1997 and 1996, respectively.
Genzyme General has capitalized approximately $34.6 million of gross process
validation and optimization costs related to its manufacturing facilities.
Genzyme General capitalized approximately $0.7 million, $0.5 million and $2.2
million of interest costs in 1998, 1997 and 1996, respectively, related to
facility construction.
NOTE J. INVESTMENTS
Investments in marketable securities at December 31 consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-----------------------------------------------------------------------
MARKET MARKET
COST VALUE COST VALUE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Equivalents:
Corporate notes ......... $ 8,131 $ 8,129 $ 10,829 $ 10,829
Money Market Fund ....... 70,805 70,805 39,833 39,833
-------- -------- -------- --------
$ 78,936 $ 78,934 $ 50,662 $ 50,662
======== ======== ======== ========
Short Term:
Corporate notes ......... $173,970 $174,421 $ 35,298 $ 35,294
======== ======== ======== ========
Long Term:
Corporate notes ......... $226,002 $226,259 69,932 $ 69,872
Federal agencies ........ 33,412 33,581 -- --
U.S. Treasury notes...... 21,323 21,824 21,667 21,755
-------- -------- -------- --------
$280,737 $281,664 $ 91,599 $ 91,627
======== ======== ======== ========
Investment in Equity
securities ............. $ 62,244 $ 51,977 $ 29,609 $ 30,047
======== ======== ======== ========
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND
INVESTMENTS:
In 1998, Genzyme recorded a gain of $3.4 million upon the sale of a portion of
its TECHNE common stock received from the sale of Genzyme's research products
assets to TECHNE. Genzyme recorded a charge of $3.4 million related to a
write-down of a strategic equity investment whose decline in value was
considered "other than temporary". Investment income for 1996 includes net
realized losses of $47,000.
22
<PAGE> 23
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE J. INVESTMENTS (CONTINUED)
Gross unrealized holding losses of $12.5 million and gross unrealized holding
gains of $3.6 million were recorded at December 31, 1998 in division equity as
compared to unrealized gross holding losses of $2.9 million and unrealized
holding gains of $3.4 million recorded at December 31, 1997.
Information regarding the range of contractual maturities of investments in debt
securities at December 31 is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
------------------------------------------------------------------------------
MARKET MARKET
COST VALUE COST VALUE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 1 year ..................... $252,907 $253,355 $ 85,960 $ 85,956
After 1 year through 2 years ...... 259,363 259,788 62,856 62,806
After 2 years through 10 years..... 21,373 21,876 28,743 28,821
-------- -------- -------- --------
$533,643 $535,019 $177,559 $177,583
======== ======== ======== ========
</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.
The disclosures related to Genzyme General's investments in the following
entities are included in Note I., "Investments," to Genzyme's Consolidated
Financial Statements, which is incorporated herein by reference:
INVESTMENTS IN THE EQUITY SECURITIES OF:
ABIOMED, Inc.
Aronex Pharmaceuticals, Inc.
BioMarin Pharmaceutical, Inc.
Celtrix Pharmaceuticals, Inc.
Dyax Corporation
GelTex Pharmaceuticals, Inc.
Pharming Group, N.V.
TECHNE Corporation
Other
INVESTMENTS IN UNCONSOLIDATED AFFILIATES AND JOINT VENTURES:
GTC
ATIII LLC
RenaGel LLC
BioMarin/Genzyme LLC
Pharming/Genzyme LLC
NOTE K. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Compensation......................... $21,989 $19,865
Technology access fee................ 10,000 -
Professional fees.................... 5,144 7,057
Royalties............................ 6,369 8,151
Rebates.............................. 5,663 4,575
Other................................ 21,148 27,217
------- -------
$70,313 $66,865
======= =======
</TABLE>
23
<PAGE> 24
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE L. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Long-term debt at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
5.25% Convertible Subordinated Notes ........... $ 250,000 $ --
Revolving Credit Facility ...................... 82,000 95,000
5% GGD Notes ................................... 21,559 --
Mortgage note payable, matures June 13, 1999.... -- 19,833
Other mortgage notes payable ................... 3,167 3,856
--------- ---------
356,726 118,689
Less current portion ........................... (82,080) (711)
--------- ---------
$ 274,646 $ 117,978
========= =========
</TABLE>
In February 1998, Genzyme repaid the remaining $0.7 million principal balance
due on a mortgage note due January 2008.
In November 1998, Genzyme repaid the remaining $19.4 million principal balance
due on a mortgage note due June 1999 plus accrued interest of $0.2 million.
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1999-$82,080,000, 2000-$89,000,
2001-$98,000, 2002-$109,000 and 2003-$25,920,000 and thereafter $252,590,000.
Although the Company retains responsibility for the repayment of all long-term
debt obligations (see Note K., "Long-term Debt and Leases," to Genzyme's
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, GGD NOTES, MORTGAGE NOTES AND GGD DEBENTURES: The disclosures
related to Genzyme's revolving credit facility, the GGD Notes, mortgage notes
and the GGD Debentures, are included in Note K, "Long-Term Debt and Leases," to
Genzyme's Consolidated Financial Statements, which is incorporated herein by
reference.
OPERATING LEASES
Total rent expense under operating leases was $16.5 million, $14.4 million, and
$10.7 million in 1998, 1997 and 1996, respectively. Genzyme General leases
facilities and personal property under certain operating leases in excess of one
year.
FUTURE MINIMUM PAYMENTS DUE UNDER OPERATING LEASES:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) OPERATING
LEASES
----------------------------------------------------
<S> <C>
1999................................... $ 19,880
2000................................... 18,790
2001................................... 15,827
2002................................... 13,867
2003................................... 13,163
Thereafter............................. 129,191
--------
Total minimum payments................. $210,718
========
</TABLE>
A sixty-five year lease commenced on June 1, 1992 between a wholly owned
subsidiary of Genzyme and a third party lessor. Genzyme General recorded total
rent expense under this lease of $1,517,000, $1,290,000 and $886,000 in 1998,
1997 and 1996, respectively. The lease provides for escalations every five
years based on the Consumer Price Index Escalation with a minimum escalation of
3% per year. Therefore, rent expense on a straight-lined basis is $1,517,000
per year.
GTR leases from Genzyme General a portion of a research and development
facility. GTR is obligated to pay Genzyme General $0.6 million per year for 3
years commencing on July 1, 1998. Total rental income for 1998 was $0.3 million.
24
<PAGE> 25
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE M. DIVISION EQUITY
The following presents the division equity of Genzyme General for the periods
presented:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 980,876 $ 884,225 $ 659,281
Net income (loss) .......................................... 101,132 57,026 (47,513)
Allocation of tax benefits generated by GTR ................ 16,394 17,666 17,011
Allocation of tax benefits generated by GMO ................ 3,527 2,755 --
Issuance of common stock under stock plans ................. 74,360 35,963 18,581
Exercise of warrants ....................................... 289 855 106,164
Allocation to GTR for GTR Designated Shares ................ -- (14,892) (11,714)
Tax benefit from disqualified dispositions ................. 18,561 4,127 3,500
Allocation of cash to GMO for GMO Designated Shares......... (5,000)
Conversion of GMO Debentures to GGD Debentures for GMO
Designated Shares......................................... (19,802) -- --
Conversion of note receivable due from GMO into
GMO Designated Shares..................................... (2,696) -- --
Loss on purchase of facility from GTR ...................... (711) -- --
Payment to GTR for research program ........................ (250) -- --
Shares issued in connection with acquisitions .............. -- -- 36,991
Allocation of acquired deferred tax asset in connection
with the acquisition of PharmaGenics ..................... -- 2,900 --
Issuance of common stock in connection with the conversion
of 6 3/4% Convertible Subordinated Notes ................. -- -- 101,400
Equity adjustments ......................................... 387 (9,749) 524
----------- ----------- -----------
$ 1,167,067 $ 980,876 $ 884,225
=========== =========== ===========
</TABLE>
At December 31, 1998 and 1997, 200,000,000 shares of GGD Stock were authorized
for issuance and approximately 81,394,000 and 77,693,000 shares, respectively,
were issued and outstanding.
Included in division equity are the cumulative foreign currency translation
charges of $4.8 million and $12.4 million at December 31, 1998 and 1997,
respectively.
All share and per share amounts herein have been restated to reflect the
2-for-1 split of shares of GGD Stock on July 25, 1996.
At December 31, 1998, approximately 14,888,000 shares of GGD Stock were reserved
for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997
Equity Incentive Plan, 1998 Director Stock Option Plan, and 1990 Employee Stock
Purchase Plan, as amended, and upon the exercise of outstanding warrants. At
December 31, 1998, approximately 11,593,000 options to purchase shares of GGD
Stock were outstanding.
Pursuant to the Charter, GTR and GMO Designated Shares are authorized shares of
GTR Stock and GMO Stock, respectively, 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, respectively. GTR and GMO Designated Shares
are not eligible to receive dividends and cannot be voted by Genzyme. 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 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. 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.
In May 1998, the Genzyme Board increased the amount available under the GTR
Equity Line from $13.0 million to $50.0 million. Under the GTR Equity Line,
Genzyme Tissue Repair may draw down funds as needed each fiscal quarter in
exchange for GTR Designated Shares. The rate of exchange will be determined by
dividing the amount drawn under the line of credit by the average market value
of one share of GTR Stock during the 20 trading days prior to the date the
amount is drawn under the line of credit. As of December 31, 1998, GTR had not
yet drawn any funds from the equity line.
25
<PAGE> 26
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE M. DIVISION EQUITY (CONTINUED)
In 1997, the Genzyme Board approved the allocation of up to $25.0 million in
cash from Genzyme General to GMO. The amount available was reduced to $5.0
million as a result of the issuance in August 1998 of $20.0 million in
debentures convertible into GMO Stock, which were subsequently surrendered in
exchange for the GGD Debentures in 1998. GMO drew down the remaining $5.0
million available under this equity line in 1998 in exchange for approximately
714,000 GMO Designated Shares.
In August 1998, the Genzyme Board approved the allocation of up to an additional
$30.0 million in cash to GMO in exchange for an increase in the number of GMO
Designated Shares.
As of December 31, 1998, there were approximately 716,000 GTR Designated Shares
reserved for issuance.
As of December 31, 1998, there were approximately 696,000 GMO Designated Shares
reserved for issuance. During 1998, Genzyme distributed 8,717,000 GMO Designated
Shares as a dividend to Genzyme General shareholders.
PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLAN, STOCK RIGHTS, STOCK
OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, WARRANTS, GTR DESIGNATED SHARES AND GMO
DESIGNATED SHARES
Further disclosures relating to Genzyme's preferred stock, Directors' Deferred
Compensation Plan, stock rights, stock options, Employee Stock Purchase Plan,
warrants, GTR Designated Shares and GMO Designated Shares are included in Note
L., "Stockholders' Equity," to Genzyme's 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
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 1998 Director Stock Option Plan (a stock option 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 SFAS 123,
Genzyme General's net income (loss) and earnings (loss) per share would have
been as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
GENZYME GENERAL:
Net income (loss):
As reported................................... $121,053 $77,447 $(30,502)
Pro forma..................................... $107,478 $65,440 $(40,558)
Basic earnings per share:
As reported................................... $1.53 $1.01 $(0.45)
Pro forma..................................... $1.36 $0.86 $(0.59)
Diluted earnings per share:
As reported................................... $1.48 $0.98 $(0.45)
Pro forma..................................... $1.31 $0.83 $(0.59)
</TABLE>
For the assumptions used in the SFAS 123 calculations for Genzyme General for
the years ended December 31, 1998, 1997 and 1996 (see Note L., "Stockholders
Equity," to Genzyme's 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.
26
<PAGE> 27
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties
include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees for research and development activities:
GTC ........................................ $ 3,568 $ 8,041 $ 3,212
Neozyme II ................................. -- -- 19,799
------- ------- -------
$ 3,568 $ 8,041 $23,011
======= ======= =======
</TABLE>
The disclosures related to Neozyme II and Genzyme General's participation in
research contracts are included in Note I., "Investments - GTC, RenaGel LLC,
BioMarin/Genzyme LLC, and Pharming/Genzyme LLC," and Note M., "Research and
Development Agreements -- Genzyme Development Partners, L.P.," to Genzyme's
Consolidated Financial Statements, which are incorporated herein by reference.
NOTE O. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme has been subject to legal proceedings and claims
arising in connection with its business. At December 31, 1998, there were no
asserted claims against Genzyme 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.
NOTE P. INCOME TAXES
Income (loss) before income taxes and the related income tax expense (benefit)
are as follows for the years ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (1)........................ $ 154,056 $ 81,805 $(37,615)
Foreign............................. 9,514 8,822 10,308
--------- -------- --------
Total........................... $ 163,570 $ 90,627 $(27,307)
========= ======== ========
Currently payable:
Federal............................ $ 53,509 $ 31,102 $ 37,985
State.............................. 7,935 3,497 6,889
Foreign............................ 4,016 2,971 3,616
--------- -------- --------
Total current................... 65,460 37,570 48,490
Deferred:
Federal............................ (2,180) (3,723) (28,448)
State.............................. (842) (246) 164
--------- -------- --------
Total deferred.................. (3,022) (3,969) (28,284)
--------- -------- --------
Provision for income taxes.......... $ 62,438 $ 33,601 $ 20,206
========= ======== ========
</TABLE>
(1) Includes $130.6 million in charges for purchased research and development
and acquisition expenses in 1996.
27
<PAGE> 28
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE P. INCOME TAXES (CONTINUED)
Provisions for income taxes were at rates other than the U.S. federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate................................... 35.0% 35.0% 35.0%
Losses in less than 80%-owned subsidiaries with
no current tax benefit................................... 1.1 1.1 0.8
State taxes, net............................................. 3.2 3.0 5.2
Foreign sales corporation.................................... (2.0) (2.4) (2.1)
Nondeductible amortization................................... 1.8 3.1 2.1
Benefit of tax credits....................................... (1.3) (1.8) --
Other, net................................................... 0.4 (0.9) 2.2
Utilization of operating loss carryforwards.................. -- -- (2.6)
---- ---- ----
Effective tax rate before certain charges............... 38.2 37.1 40.6
Gross charge for purchased research and development
net of related tax benefits............................... -- -- 33.4
---- ---- ----
38.2 37.1 74.0
Allocated tax benefits generated by Genzyme Tissue Repair.... (10.0) (19.5) (62.3)
Allocated tax benefits generated by Genzyme Molecular
Oncology.................................................. (2.2) (3.1) --
---- ---- ----
Effective tax rate attributable to GGD Stock................. 26.0% 14.5% 11.7%
==== ==== ====
</TABLE>
At December 31 the components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 4,254 $ 4,909
Tax credits.................................................. 3,714 5,091
Deferred gain................................................ 2,002 2,237
Intangible amortization...................................... 32,259 28,730
Investments in unconsolidated subsidiaries................... 3,108 1,323
Realized and unrealized capital losses....................... 10,139 16,987
Reserves and other........................................... 39,553 23,716
Allocation of tax benefit from Genzyme Tissue Repair......... 15,621 15,515
Allocation of tax benefit from Genzyme Molecular Oncology.... 2,648 3,252
--------- ---------
Gross deferred tax asset........................................ 113,298 101,760
Valuation allowance............................................. (16,700) (14,914)
--------- ---------
Net deferred tax asset.......................................... 96,598 86,846
Deferred tax liabilities:
Depreciable assets........................................... (28,735) (23,257)
--------- ---------
Net deferred tax asset.......................................... $ 67,863 $ 63,589
========= =========
</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
$16.7 million and $14.9 million for December 31, 1998 and December 31, 1997,
respectively, against otherwise recognizable deferred tax assets.
28
<PAGE> 29
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE P. INCOME TAXES (CONTINUED)
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, 1998 Genzyme General had U.S. net operating loss and tax credit
carryforwards of $12.1 million and $3.7 million, respectively, for income tax
purposes. These carryforwards expire from 2003 to 2013. 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 $3.7 million carry
forward indefinitely.
NOTE Q. BENEFIT PLANS
The disclosures relating to Genzyme's domestic employee savings plan under
Section 401(k) of the Code (the "401(k) Plan") and defined-benefit pension plans
are included in Note P., "Benefit Plans," to Genzyme's Consolidated Financial
Statements, which is incorporated herein by reference. Genzyme General
contributed $3.7 million, $2.1 million and $1.1 million to the 401(k) Plan in
1998, 1997 and 1996, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and certain of Genzyme's foreign subsidiaries. Pension expense
for Genzyme General related to these plans was approximately $1.1 million, $1.1
million and $0.6 million in 1998, 1997 and 1996, respectively. Pension costs are
funded as accrued. Actuarial and other disclosures regarding the plans are not
presented because the plans are not material.
NOTE R. SEGMENT REPORTING
Genzyme General's reportable segments are strategic business units that offer
different products and services. Genzyme General has three reportable segments:
- - The Therapeutics business unit, which develops, manufactures and distributes
human therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from Cerezyme(R) enzyme and
Ceredase(R) enzyme sales.
- - The Surgical Products business unit, which commenced operations in July 1996
upon the acquisition of DSP, develops manufactures and markets surgical
products for three principal business lines: (i) cardiovascular surgery; (ii)
general surgery; and (iii) plastic surgery.
- - The Diagnostic Products business unit, which provides diagnostic products to
niche markets focusing on in vitro diagnostics.
Information concerning the operations in these reportable segments is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
REVENUES:
Therapeutics $ 413,645 $332,712 $264,588
Surgical Products 103,958 100,835 50,715
Diagnostic Products 65,683 66,288 65,789
Other 85,846 86,927 107,162
Eliminations/Adjustments 4,145 10,441 23,188
-----------------------------------------
Total $ 673,277 $597,203 $511,442
=========================================
DEPRECIATION AND AMORTIZATION EXPENSE:
Therapeutics $ 10,862 $ 10,054 $ 1,700
Surgical Products 8,449 8,220 4,520
Diagnostic Products 4,715 4,540 7,487
Other 11,470 7,410 7,161
Eliminations/Adjustments 10,269 13,429 8,389
-----------------------------------------
Total $ 45,765 $ 43,653 $ 29,257
=========================================
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES:
Therapeutics $ (12,480) $ (2,310) $ --
Surgical Products -- -- --
Diagnostic Products -- -- --
Other (107) (71) (174)
Eliminations/Adjustments (7,098) (2,900) (3,472)
-----------------------------------------
Total $ (19,685) $(5,281) $ (3,646)
=========================================
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
INCOME TAX (EXPENSE) BENEFIT:
Therapeutics $ (76,606) $ (61,389) $ (57,145)
Surgical Products 19,653 10,210 18,514
Diagnostic Products (13,755) (1,409) (2,430)
Other 2,134 8,658 621
Eliminations/Adjustments 6,136 10,329 20,234
-----------------------------------------
Total $ (62,438) $ (33,601) $ (20,206)
=========================================
NET INCOME:
Therapeutics $ 120,832 $ 104,527 $ 82,232
Surgical Products (31,000) (17,384) (26,642)
Diagnostic Products(1) 21,694 2,400 3,499
Other (3,367) (14,741) (895)
Eliminations/Adjustments (7,027) (17,776) (105,707)
-----------------------------------------
Total $ 101,132 $ 57,026 $ (47,513)
=========================================
SEGMENT ASSETS:
Therapeutics $ 326,305 $ 315,775
Surgical Products 277,578 282,379
Diagnostic Products 49,430 54,132
Other 94,930 92,605
Eliminations/Adjustments 898,064 458,165
--------------------------
Total $1,646,307 $1,203,056
==========================
</TABLE>
(1) Includes a gain on sale of product line in 1998 totaling $31.2 million.
The amounts in the category Other consist primarily of amounts derived in
Genzyme General's genetic testing and Pharmaceuticals business units. There are
no transactions between reportable segments. The difference between the
reportable segment's Net Income and Segment Assets and the Combined Net Income
and the Combined Total Assets for Genzyme General is included in the category
Eliminations/Adjustments. The amounts in Eliminations/Adjustments for the
category Net Income primarily consists of Genzyme General's interest income and
interest expense and certain other income and expense amounts not allocated to
the segments. Eliminations/Adjustments in the category Net Income for 1996
included a $106.5 million charge for in-process technology. Segment Assets for
reportable segments include the following: Accounts Receivable, Inventory,
certain Fixed Assets and certain Intangible Assets. Therefore, the amounts in
Elimination/Adjustments for Segment Assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash, cash equivalents, short and long term investments $556,097 $193,197
Intangibles, net 41,556 26,488
Property, plant and equipment, net 133,995 110,305
Investment in equity securities 51,977 30,047
Other 114,439 98,128
-------- --------
Total Eliminations/Adjustments $898,064 $458,165
======== ========
</TABLE>
Genzyme General operates in the healthcare industry and primarily 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>
Long-Lived
Revenues Assets
-------- ----------
<S> <C> <C>
1998
United States $445,659 $ 951,318
Netherlands 31,931 730
Other 195,687 56,517
-------- ----------
Total $673,277 $1,008,565
======== ==========
1997
United States $435,353 $ 707,196
Netherlands 40,436 652
Other 121,414 53,697
-------- ----------
Total $597,203 $ 761,545
======== ==========
1996
United States $379,644
Netherlands 56,685
Other 75,113
--------
Total $511,442
========
</TABLE>
Genzyme General's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. For the years ended December 31,
1998, 1997 and 1996, sales of Cerezyme(R) enzyme and Ceredase(R) enzyme
represented 67%, 63% and 62% of total product sales. In 1998, 1997 and 1996,
Genzyme marketed Cerezyme(R) enzyme and Ceredase(R) enzyme directly to
physicians, hospitals and treatment centers, and sold products representing
approximately 12%, 18% and 12%, 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.
29
<PAGE> 30
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE S. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per
share amounts) for the years ended December 31, 1998 and 1997 are displayed in
the following table.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1998
- ----
<S> <C> <C> <C> <C>
Net sales....................................... $ 154,123 $ 168,980 $ 167,129 $ 183,045
Gross profit.................................. 98,593 110,802 85,627 128,792
Net income (1,2).............................. 24,938 31,200 32,233 32,682
Income per share:
Basic....................................... 0.32 0.40 0.41 0.40
Diluted..................................... 0.31 0.39 0.40 0.39
1997
- ----
Net sales ...................................... $ 144,606 $ 147,614 $ 148,841 $ 156,142
Gross profit.................................. 87,084 91,454 94,387 71,358
Net income (1,2).............................. 21,238 23,283 24,357 8,569
Income per share:
Basic....................................... 0.28 0.31 0.32 0.11
Diluted..................................... 0.27 0.30 0.31 0.11
</TABLE>
- ----------
(1) Includes pre-tax charges in the third quarter of 1998 of $26.9 million
resulting from certain other charges (see Note C., "Other Charges" above)
and a pre-tax gain on the sale of the research products business assets of
$31.2 million, also recorded in the third quarter of 1998 (see Note D.,
"Sale of Research Products Business Assets" above).
(2) Includes pre-tax charges in the fourth quarter of 1997 of $29.2 million
related to certain other charges recorded in December 1997 (see Note C.,
"Other Charges" above).
NOTE T. SUBSEQUENT EVENTS
In March 1999, Genzyme announced that it intends to create a separate division,
with its own series of common stock, for the existing surgical products business
that is currently part of Genzyme General, subject to approval of the Genzyme
Board.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest
in Diacrin/Genzyme LLC from GTR to Genzyme General. The transfer of interest in
Diacrin/Genzyme LLC is subject to the approval of GTR's shareholders.
30
<PAGE> 31
GENZYME GENERAL
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Genzyme General (as described in
Note A) at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related combined financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As more fully described in Note A to these financial statements, Genzyme General
is a division 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/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 1999
31
<PAGE> 32
GENZYME GENERAL DIVISION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1998:
Allowance for doubtful accounts........ $11,299,000 $ 5,225,000 $ -- $ 3,665,000 $12,859,000
Inventory Reserve ..................... $14,992,000 $ 3,780,000 $ -- $17,393,000 $ 1,379,000
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
</TABLE>
- ----------
(1) Includes $13.4 million of strategic financial provisions (See Note C,
"Other Changes" to Genzyme General's Combined Financial Statements).
(2) Uncollectable accounts written off, net of recoveries.
(3) Reserve acquired in acquisition.
32
<PAGE> 33
GENZYME CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
The following Selected Financial Data reflects the results of operations and
financial position of Genzyme Corporation ("Genzyme" or the "Company") and
should be read in conjunction with the financial statements of Genzyme
Corporation and Subsidiaries and accompanying footnotes.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales .................................. $ 613,685 $ 529,927 $ 424,483 $ 304,373 $ 238,645
Net service sales .................................. 74,791 67,158 68,950 52,450 50,010
Revenues from research and development contracts:
Related parties ................................... 5,745 8,356 23,011 26,758 20,883
Other ............................................. 15,114 3,400 2,310 202 1,513
--------- --------- --------- --------- ---------
Total revenues ................................... 709,335 608,841 518,754 383,783 311,051
Operating costs and expenses:
Cost of products sold .............................. 211,076 206,028 155,930 113,964 92,226
Cost of services sold .............................. 48,586 47,289 54,082 35,868 32,403
Selling, general and administrative ................ 215,203 200,476 162,264 110,447 80,990
Research and development (including research
and development related to contracts) ............. 119,005 89,558 80,849 68,845 55,334
Amortization of intangibles ........................ 24,334 17,245 8,849 4,647 4,741
Purchase of in-process research and development .... -- 7,000 130,639 14,216 11,215
Other .............................................. -- -- 1,465 -- --
--------- --------- --------- --------- ---------
Total operating costs and expenses ............... 618,204 567,596 594,078 347,987 276,909
--------- --------- --------- --------- ---------
Operating income (loss) ............................... 91,131 41,245 (75,324) 35,796 34,142
Other income (expenses):
Equity in net loss of unconsolidated subsidiaries .. (29,006) (12,258) (5,373) (1,810) (1,353)
Gain on affiliate sale of stock .................... 2,369 -- 1,013 -- --
Minority interest .................................. 4,285 -- -- 1,608 1,659
Gain on sale of product line ....................... 31,202 -- -- -- --
Gain on sale of investment ......................... 3,391 -- 1,711 -- --
Charge for impaired investments .................... (3,397) -- -- -- (9,431)
Other .............................................. -- (2,000) -- -- (1,980)
Investment income .................................. 25,055 11,409 15,341 8,814 9,101
Interest expense ................................... (22,593) (12,667) (6,990) (1,109) (1,354)
--------- --------- --------- --------- ---------
Total other income (expenses) .................... 11,306 (15,516) 5,702 7,503 (3,358)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..................... 102,437 25,729 (69,622) 43,299 30,784
Provision for income taxes ............................ (39,870) (12,100) (3,195) (21,649) (14,481)
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ 62,567 $ 13,629 $ (72,817) $ 21,650 $ 16,303
========= ========= ========= ========= =========
</TABLE>
<PAGE> 34
GENZYME CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMON SHARE DATA:
ATTRIBUTABLE TO GENZYME GENERAL:
Net income (loss) ............................ $ 121,053 $ 77,447 $(30,502) $ 43,680 $ 32,054
========== ======== ======== ======== ========
Per Genzyme General common share -
basic:
Net income (loss) .......................... $ 1.53 $ 1.01 $ (0.45) $ 0.79 $ 0.67
========== ======== ======== ======== ========
Weighted average shares outstanding .......... 79,063 76,531 68,289 55,531 48,141
========== ======== ======== ======== ========
Per Genzyme General common and common
equivalent share-diluted:
Net income (loss) .......................... $ 1.48 $ 0.98 $ (0.45) $ 0.68 $ 0.58
========== ======== ======== ======== ========
Adjusted weighted average shares outstanding . 81,734 78,925 68,289 63,967 55,321
========== ======== ======== ======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss ........................................ $ (40,386) $(45,984) $(42,315) $(22,030) $(15,751)
========== ======== ======== ======== ========
Per Genzyme Tissue Repair basic and
diluted common share:
Net loss ...................................... $ (1.99) $ (3.07) $ (3.38) $ (2.28) $ (4.40)
========== ======== ======== ======== ========
Weighted average shares outstanding ............. 20,227 14,976 12,525 9,659 3,578
========== ======== ======== ======== ========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss ........................................ $ (19,107) $(19,578) $ (1,003) $ (464) $ (37)
========== ======== ======== ======== ========
Per Genzyme Molecular Oncology basic and diluted
common share:
Net loss ...................................... $ (3.81)
==========
Weighted average shares outstanding ............. 5,019
==========
Pro forma per Genzyme Molecular Oncology basic
and diluted common share:
Pro forma net loss ........................... $ (4.98) $ (0.26) $ (0.12) $ (0.01)
======== ======== ======== ========
Pro forma weighted average shares outstanding ... 3,929 3,929 3,929 3,929
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA: DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, short- and long-term
investments ............................. $ 575,729 $ 246,341 $ 187,955 $326,236 $153,460
Working capital ............................ 415,428 350,822 395,605 352,410 103,871
Total assets ............................... 1,690,554 1,295,453 1,270,508 905,201 658,408
Long-term debt and convertible debt ........ 287,225 170,276 241,998 124,473 126,729
Stockholders' equity ....................... 1,172,547 1,012,050 902,309 705,207 418,964
</TABLE>
There were no cash dividends paid.
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. These forward-looking
statements represent the expectations of the management of Genzyme 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" included elsewhere in this Annual Report. 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 to address significant unmet medical needs. Genzyme has three
divisions: Genzyme General Division ("Genzyme General"), which develops and
markets therapeutic and surgical products and diagnostic products and services;
Genzyme Tissue Repair Division ("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 and develops gene-based
approaches to cancer therapy through genomics, gene therapy and a small molecule
drug discovery program. Genzyme owns approximately 40% 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 "Charter"), and the management and accounting policies adopted
by Genzyme's 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 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 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 any other division.
Stockholders and potential investors should, therefore, read this discussion
and analysis of Genzyme's financial position and results of operations in
conjunction with the 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's consolidated results of operations. Detailed
discussion and analysis of each division's results of operations are provided in
the Management's Discussion and Analysis of Results of Operations and Financial
Condition for each division.
1998 AS COMPARED TO 1997
REVENUES. Total revenues for 1998 were $709.3 million compared to $608.8
million in 1997, an increase of 17%. Product and service revenues were $688.5
million in 1998, compared to $597.1 million in 1997, an increase of 15%.
Revenues from research and development contracts for 1998 were $20.9 million
compared to $11.8 million in 1997, an increase of 77%.
Product revenues consist of sales by Genzyme General. Product revenues in
1998 increased 16% to $613.7 million from $529.9 million in 1997, due primarily
to increased sales of Cerezyme(R) enzyme.
In 1998, sales of products by Genzyme General's Therapeutics business unit
consisted primarily of sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales
of Cerezyme(R) enzyme and Ceredase(R) enzyme increased 24% to $411.1 million
from $332.7 million in 1997, due to continued growth in new patient accruals in
existing markets and strong international sales. Genzyme's results of operations
are highly dependent on sales of Cerezyme(R) enzyme and Ceredase(R) enzyme,
which together represented 67% of Genzyme General's product sales in 1998
compared to 63% in 1997.
The Surgical Products business unit was formed in July 1996 following the
acquisition of Deknatel Snowden Pencer, Inc. ("DSP") and combined the business
of DSP with Genzyme General's hyaluronic acid-based products designed to limit
the incidence and occurrence of post-operative adhesions (the "Sepra Products").
Revenues from Sepra Products primarily consist of sales of Seprafilm(R)
Bioresorbable Membrane. Product sales by the Surgical Products business unit
for 1998 were $104.0 million as compared to $100.8 million for 1997. 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) were up slightly in 1998 as compared to
1997. Sales of Sepra Products increased 88% in 1998 as compared to 1997.
34
<PAGE> 36
Seprafilm(R) Bioresorbable Membrane is being marketed in the United States
and Canada by Genzyme General on behalf of Genzyme Ventures II ("GVII"), a 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 selling, general and
administrative ("SG&A") expenses. The first $200,000 of losses generated by GVII
were allocated to GDP and thereafter losses are allocated 40% to GDP and 60% to
Genzyme, except that if losses would be allocated to the general partner of GDP
rather than the limited partners, all of such losses are allocated 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%, respectively, in the profits of GVII.
In 1997, Genzyme General contributed an additional $1.5 million to GVII through
GDP. There were no capital contributions in 1998.
Revenues from the Diagnostics business unit consist of product sales and
genetic testing service revenues. On July 1, 1998, Genzyme completed the sale of
substantially all of the assets of its research products business to TECHNE
Corp. and its wholly-owned subsidiary, Research and Diagnostic Systems, Inc.
(the "TECHNE Sale"). The research products business contributed $9.1 million and
$15.8 million of revenue in 1998 and 1997, respectively. Despite the sale of
these assets, product sales of diagnostic products in 1998 were level with 1997.
Service revenues in 1998 were level with 1997.
Service revenues primarily consist of genetic testing services by Genzyme
General and sales of GTR's autologous cultured chondrocytes ("Carticel(R) AuCC")
and Epicel(TM) skin grafts services. Service revenues for genetic testing in
1998 were level with 1997. Service revenues related to Carticel(R) AuCC and
Epicel(TM) skin grafts increased to $17.1 million in 1998 from $10.9 million in
1997 or 57%. The growth in sales of Carticel(R) AuCC is primarily attributable
to increased acceptance by orthopedic surgeons and insurance companies, most
notably following the issuance by the FDA of a biologics license to GTR in
August 1997 for Carticel(R) AuCC, and a continued increase in the number of
orthopedic surgeons trained in the implantation procedure. The increase in sales
of Epicel(TM) skin grafts was due to penetration of Epicel(TM) skin grafts into
the catastrophic burn market. The increased market share resulted from increased
surgeon awareness and from product improvements designed to ease the surgical
procedure.
International sales as a percentage of total sales in 1998 increased to 41%
from 36% in 1997, due primarily to a 32% increase in combined international
sales of Cerezyme(R) enzyme and Ceredase(R) enzyme.
Revenues from research and development contracts are attributable to
Genzyme General and GMO. Revenues from research and development contracts for
1998 increased 77% to $20.9 million from $11.8 million in 1997, due primarily to
increased research and development revenue from GMO primarily due to $13.0
million in revenue recorded by GMO in connection with two research agreements
with a large pharmaceutical company.
MARGINS AND OPERATING EXPENSES. Total gross margins for 1998 were 62%, as
compared to 58% in 1997. Excluding other charges, gross margins for 1998 were
66% in 1998 compared to 62% in 1997. 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
1998 were 66%, including certain other charges, compared to 61% in 1997,
including certain other charges. The increase in product margins in 1998 is
primarily due to increased sales of Cerezyme(R) enzyme.
In the third quarter of 1998, Genzyme General recorded charges of $25.2
million associated with the write-down of inventories in the Therapeutics and
Surgical Products business units. The conversion of U.S. patients with Gaucher
disease from Ceredase(R) enzyme to Cerezyme(R) enzyme is substantially complete.
Based on its successful progress in converting patients from Ceredase(R) enzyme
to Cerezyme(R) enzyme, Genzyme determined that its existing supply of finished
goods of Ceredase(R) enzyme was sufficient to meet patient needs. As a result,
in the third quarter of 1998, Genzyme recorded a $14.8 million charge to cost of
products sold primarily for the excess inventory used to make Ceredase(R)
enzyme. In addition, during the third quarter of 1998, Genzyme reviewed its
requirements to support the Sepra Products. As a result, in the third quarter of
1998, Genzyme recorded a $10.4 million charge to cost of products sold to write
down Sepra Products inventory amounts to net realizable value.
Without these other charges, product margins in 1998 would have been 70%
compared to 66% in 1997. Product margins, without other charges, increased in
1998 due to increased sales of Cerezyme(R) enzyme. Service margins for 1998 were
35% compared to 30% in 1997. The improvement in service margins is primarily
attributable to increased margins on the sales Carticel(R) AuCC by GTR.
SG&A expenses and amortization of intangibles for 1998 were $239.5 million
compared to $217.7 million in 1997, an increase of 10%. The increase was due
primarily to increased sales and marketing expenses in Genzyme General related
to the product launch of Thyrogen(R) hormone and increased expenditures in
support of Cerezyme(R) enzyme.
Research and development expenses for 1998 were $119.0 million compared to
$89.6 million in 1997, an increase of 33%. The increase was primarily due to
increased research and development expenditures in 1998 at GMO and $12.0 million
additional research and development expenses resulting from the consolidation of
the results of ATIII LLC, for which there were no comparable amounts in 1997.
ATIII LLC is the joint venture between Genzyme and GTC for the development and
commercialization of transgenic recombinant human antithrombin III ("ATIII").
35
<PAGE> 37
OTHER INCOME AND EXPENSES. Other income and expenses for 1998 was a net
income of $11.3 million compared to a net other expense of $15.5 million in
1997. The 1997 amount includes $2.0 million of other charges.
Other income and expenses includes $29.0 million in equity in net loss of
unconsolidated affiliates in 1998 compared to $12.3 million in equity in net
loss of unconsolidated affiliates in 1997. The increase in equity in net loss of
unconsolidated affiliates was primarily due to (i) increased losses from GTC;
(ii) increased losses resulting from RenaGel LLC, Genzyme's joint venture with
GelTex Pharmaceuticals, Inc. ("GelTex") for the development and
commercialization of Renagel(R) Capsules (sevelamer hydrochloride), which was
established on June 17, 1997; (iii) increased losses resulting from
Diacrin/Genzyme LLC, Genzyme's joint venture with Diacrin, Inc. for the
development and commercialization of products and processes using porcine fetal
cells for the treatment of Parkinson's and Huntington's diseases in humans which
was established on October 1, 1996; and (iv) Genzyme's portion of the losses
resulting from Pharming/Genzyme LLC, Genzyme's joint venture with Pharming Group
N.V. ("Pharming") for the development and commercialization of human alpha
glucosidase ("hAG") as a treatment for Pompe's disease, which became effective
on October 9, 1998; and (v) Genzyme's portion of the losses resulting from
BioMarin/Genzyme LLC, Genzyme's joint venture with BioMarin Pharmaceuticals Inc.
("BioMarin") for the development and commercialization of alpha-L-iduronidase
for the treatment of mucopolysaccharidosis ("MPS I"), which was established on
September 14, 1998.
Other income and expense includes a gain of $2.4 million on Genzyme's
investment in GTC due to the issuance by GTC of shares of its common stock,
which was recorded in June 1998.
For the year ended December 31, 1998, Genzyme General recorded minority
interest in the results of ATIII LLC of $4.3 million, representing GTC's portion
of the losses of the joint venture for 1998. There was no comparable amount in
the corresponding period of 1997.
In July 1998, Genzyme General recorded a gain of $31.2 million on the
TECHNE Sale. In addition, a gain on sale of investment of $3.4 million was
recorded in December 1998 upon the sale of a portion of the shares of TECHNE
common stock acquired in that transaction. There was no comparable amount in the
corresponding period of last year.
Genzyme General recorded a charge for an impaired investment of $3.4
million related to a strategic investment in a company whose common stock price
decline was considered "other than temporary".
Investment income for 1998 was $25.1 million, compared with $11.4 million
for 1997. The increase was due to higher average cash balances resulting
primarily from the proceeds from the issuance of $250.0 million in principal
amount of 5 1/4% Convertible Subordinated Notes due June 1, 2005 (the "GGD
Notes") in May 1998. Interest expense for 1998 was $22.6 million, compared to
$12.7 million in 1997. The increase was due to additional interest expense
related to the issuance of the GGD Notes and a full year of interest related to
the $21.2 million in principal amount of 5% convertible debentures due 2003 (the
"GGD Debentures").
The tax provision for 1998 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 1998, the
effective tax rate was 39%, compared to 37% in 1997. The increase in the rate
was due to an increase in non-deductible amortization of intangibles and an
increase in 1998 foreign tax rates.
36
<PAGE> 38
1997 AS COMPARED TO 1996
In the fourth quarter of 1997, Genzyme General recorded $29.2 million of
charges mainly associated with its Pharmaceuticals and Surgical Products
businesses and the sale of Genetic Design, Inc ("GDI") which was sold in 1996.
The Pharmaceuticals business now focuses 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 that were 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 Sepracoat(TM)
Coating Solution, which was discontinued for the U.S. market after an advisory
panel of the U.S. Food and Drug Administration ("FDA") recommended against
granting marketing approval of this product in 1997. The product is sold outside
of the United States. Genzyme General also recorded a $2.0 million charge to
other expense related to the uncertainty of collection on certain notes
receivable.
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. Sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme together represented 63% of
consolidated product sales in 1997 compared to 62% in 1996.
Pharmaceuticals 1997 product sales decreased 31% from 1996 due primarily to
a significant decline in sales of melatonin. Melatonin sales began to decline
materially during the second half of 1996 due to reduced demand and Genzyme
discontinued this product line in the fourth quarter of 1997.
Revenues from Sepra Products primarily consist of sales of Seprafilm(R)
Bioresorbable Membrane. 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 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 Carticel(R) AuCC and Epicel (TM) skin grafts.
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. 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 the Surgical Products business unit.
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 Corporation, which was acquired by
37
<PAGE> 39
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. Total 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 in 1997 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) Bioresorbable Membrane and increased surgeon
training costs related to Carticel(R) 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 the 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 represents the value assigned to the PharmaGenics's programs
which are still in the development stage and for which there is no future use.
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 ATIII development program being conducted by
GTC and increased spending on internal programs, most notably the Thyrogen(R)
hormone program.
OTHER INCOME AND EXPENSES. Other income and expenses was a net other
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 Diacrin/Genzyme LLC and RenaGel LLC.
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.
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of December 31, 1998, Genzyme had cash, cash equivalents and investments
(excluding equity securities) of $575.7 million compared to $246.3 million as of
December 31, 1997, an increase of 134%. In 1998 operating and financing
activities provided $111.1 million and $289.9 million of cash, respectively,
investing activities used $385.1 million and fluctuations in exchange rates
caused an increase in cash of $0.3 million. In 1998, financing activities
provided $76.9 million of cash proceeds from the exercise of stock options and
warrants and the issuance of stock under the employee stock purchase plan, and
$250.0 million from the issuance of debt, and used $38.8 million for the
repayment of debt and capital lease obligations. In 1998, investing activities
used $304.9 million of cash for net purchases of investments and $39.5 million
was used to finance capital expenditures.
38
<PAGE> 40
At December 31, 1998, accounts receivable increased 38% to $163.0 million
from $118.3 million primarily due to increased revenue in 1998. At December 31,
1998, inventories had decreased 21% to $109.8 million from $139.7 million at
December 31, 1997, primarily due to $25.2 million charge to write-down
inventory in Genzyme General's Therapeutics and Surgical Products business
units.
In May 1998, Genzyme raised approximately $243.0 million, net of the
initial purchasers' discount and offering costs, from the issuance of the GGD
Notes. The GGD Notes bear interest at 5.25% per annum and interest is payable
semi-annually on June 1 and December 1 of each year, commencing on December 1,
1998. The GGD Notes are convertible, at any time at or before maturity (unless
previously redeemed) into shares of GGD Stock at a conversion price of $39.60
per share, subject to adjustment in certain events. Holders of the GGD Notes
will also be entitled to receive 0.10805 share of GMO Stock for each share of
GGD Stock issued upon conversion. The GGD Notes may not be redeemed prior to
June 10, 2001 and are redeemable, subject to certain subordination provisions,
on such date and thereafter at the option of Genzyme, as a whole or from time to
time in part, at the following prices (expressed as percentages of the principal
amount) plus accrued interest to, but not including, the redemption date:
102.63% if redeemed on or before May 31, 2002; 101.75% if redeemed between June
1, 2002 and May 31, 2003; 100.88% if redeemed between June 1, 2003 and May 31,
2004; and 100% if redeemed on or after June 1, 2004.
On November 16, 1998 Genzyme distributed approximately 8,717,000 shares of
GMO Stock to holders of GGD Stock and released from escrow approximately
3,929,000 shares of GMO Stock held by former PharmaGenics shareholders (the
"GMO Dividend").
39
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On November 2, 1998, Genzyme General and GelTex announced that the FDA
granted marketing approval for Renagel(R) Capsules for the reduction of serum
phosphorus in patients with end-stage renal disease. Genzyme made a $15.0
million payment to GelTex in connection with the receipt of FDA approval of
Renagel(R) Capsules, and is required to make an additional $10.0 million
milestone payment to GelTex in October 1999.
In February 1997, Genzyme issued a $13.0 million note convertible into
shares of GTR Stock (the "GTR Note"). The GTR Note bears interest at the rate of
5% per year. On November 2, 1998, the holder of the GTR Note converted $600,000
of the principal amount of the GTR Note in exchange for 223,405 shares of GTR
Stock. GTR paid $1.1 million of accrued interest in cash to the holder in
connection with this conversion.
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 Genzyme common 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 currently has
substantial cash resources, it has committed to utilize a portion of its
resources for certain purposes, such as (i) paying strategic collaborators and
funding joint venture obligations, including a $10.0 million milestone payment
to GelTex in October 1999; (ii) product development and marketing; (iii)
expanding facilities; and (iv) marketing Carticel(R) AuCC and the Sepra
Products. Genzyme's cash resources will be further reduced to pay principal and
interest on the following debt: (i) $100.0 million payable in November 1999
under Genzyme's revolving credit facility with a syndicate of commercial banks,
$82.0 million of which is allocated to Genzyme General and $18.0 million of
which is allocated to GTR; (ii) $21.2 million in principal amount under the GGD
Debentures, which mature on August 29, 2003; (iii) $9.4 million in principal
amount under the GTR Note, which matures on February 27, 2000; and (iv) $250.0
million in principal amount under the GGD Notes, which mature on June 1, 2005.
To the extent cash is used to repay or redeem these debt instruments, including
the interest payable thereon, Genzyme's cash reserves will also be diminished.
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.
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NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-5. SOP 98-5 requires all
costs of start-up activities (as defined by SOP 98-5) to be expensed as
incurred. The impact of SOP 98-5 on Genzyme's consolidated financial statements
was not material.
In June 1998, the Financial Accounting Standards Board issued SFAS 133.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS 133 requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Genzyme will
adopt SFAS 133 by January 1, 2000. Genzyme is evaluating SFAS 133 to determine
its impact on its consolidated financial statements.
EURO-THE NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the Euro and adopted the Euro as their common legal currency. The
Euro trades on currency exchanges and is available for non-cash transactions.
These participating countries now issue sovereign debt exclusively in Euros, and
have redenominated their outstanding sovereign debt. These countries no longer
control their own monetary policies by directing independent interest rates for
their legacy currencies. Instead, the authority to direct monetary policy,
including money supply and official interest rates for the Euro, is exercised by
the new European Central Bank.
The legacy currencies of these 11 countries are scheduled to remain legal
tender in those countries as denominations of the Euro until January 1, 2002.
Until that date, public and private parties may pay for goods and services using
either the Euro or the participating country's legacy currency on a "no
compulsion, no prohibition" basis.
Genzyme has formed committees to address the business implications of the
Euro conversion, communicate information about the conversion throughout the
organization, create global coordination among functional areas and address
specific accounting, treasury and tax issues relating to the Euro.
Management believes that the Euro conversion will not affect
any of Genzyme's outstanding derivatives and forward contracts, or any other
material commercial contracts. Similarly, management does not foresee any
increased currency exchange rate risk as a result of the Euro conversion.
Genzyme is assessing whether there are any long term competitive
implications of the Euro conversion. While no material risks have been
identified to date, individual European governments may pressure Genzyme to have
consistent European pricing, and individual customers and distributors in Europe
may choose to begin purchasing products in the country where the Euro price is
lowest.
Because the Internal Revenue Service has not yet issued final regulations
regarding the Euro, no assessment can be made as to the tax consequences of the
conversion at this time. If the temporary regulations currently in place are
adopted in their entirety, management believes that there will be no material
tax consequences of the conversion.
Because Genzyme's existing accounting and finance software is currently able
to use Euro-based accounts, management believes that the cost of upgrading
software and other information systems for the conversion will be immaterial.
YEAR 2000
Many computer systems and other equipment with embedded chips or processors
experience problems handling dates beyond the year 1999. As a result, older
programs may experience operating difficulties that cause date-sensitive
transaction errors or failures unless they are modified or upgraded to
adequately address the problem. The potential impact of the Year 2000 problem
cannot be fully appreciated at this time.
The Company has implemented a Year 2000 compliance program intended to
identify and minimize exposure to Year 2000 problems. This program involves four
phases: (a) conducting an inventory of the Company's Year 2000 issues; (b)
prioritizing identified systems, programs and equipment based on materiality to
the Company's operations; (c) assessing Year 2000 compliance; and (d) resolving
Year 2000 issues through upgrades, replacements or repairs. The Company places
each identified system or piece of equipment in one of seven categories; (i)
mission critical, (ii) mission important, (iii) process critical, (iv) process
important, (v) process convenient, (vi) reporting and (vii) other. The
compliance program is a coordinated effort being conducted by each division,
business unit and department within the Company.
The Company is in the fourth phase of the compliance program for its own
systems, programs and equipment. Its Year 2000 exposures are primarily in the
areas of information systems, financial and administrative applications,
manufacturing applications and equipment, and research and development support
systems, programs and equipment. The Company is also currently assessing
compliance of identified systems, programs and equipment. The first three phases
were substantially completed in the first quarter of 1999 for all systems,
programs and equipment deemed critical or important under the Company's
operations categories (i)-(iii), and the Company plans to resolve the Year 2000
issues for such systems, programs and equipment by mid-1999. The Company is also
developing contingency plans with respect to categories (i) and (ii). The
Company plans to resolve Year 2000 issues for systems, programs and equipment in
categories (iv) and (v) by the end of the fourth quarter of 1999, and for
systems, programs and requirements in categories (vi) and (vii) as time permits.
Concurrently with the conduct of the Company's internal compliance program,
the Company is also in the process of surveying certain third parties with whom
the Company conducts business about their Year 2000 readiness. These third
parties include significant customers, suppliers, research or collaborative
partners, service providers and distributors considered to be critical to the
Company's business. To date, the Company has received responses from
approximately half of the third parties surveyed and expects to complete the
survey by the end of the third quarter of 1999. The Company will attempt to
mitigate its risks with respect to such third parties' Year 2000 compliance.
This may involve efforts such as identifying and securing alternative resources,
stock-piling raw materials, and developing joint contingency plans with critical
suppliers and distributors.
The Company may incur significant costs in assessing, resolving and
mitigating Year 2000 compliance issues. Each department, business unit and
division of the Company incurs its own costs in connection with readiness
efforts. The Company does not separately track the internal costs of its Year
2000 compliance efforts and, therefore, these costs are unknown. The Company
estimates that to date it has spent approximately $0.5 million in replacing,
upgrading or repairing systems, programs or equipment. Although the aggregate
additional costs of the Company's Year 2000 program cannot be known at this
time, it is currently expected to be less than $1.5 million. The actual costs
will depend on numerous factors, including without limitation, the costs of
replacing, upgrading or repairing systems, software and equipment, internal
staff costs, and consulting fees and expenses. All costs are expected to be
funded through operations.
There can be no assurance that the Company's Year 2000 issues will be
resolved by the end of 1999. Failure to identify and resolve all significant
Year 2000 issues in a timely manner could result in interruptions in, or
failures of, certain normal business activities or operations that may have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company's compliance program is an ongoing process, and
the estimated costs and timetables discussed above are subject to change. The
failure of third parties that are significant to the Company's business to be
Year 2000 compliant could also have a material adverse effect on the Company's
business, results of operations and financial condition.
MARKET RISK
Genzyme is exposed to potential loss from financial market risks which may
occur due to changes in interest rates, equity prices and foreign exchange
rates. At December 31, 1998, Genzyme held one derivative security, an interest
rate swap. Genzyme also held investments in various financial instruments,
principally marketable debt and equity securities, and had balances outstanding
under several debt securities.
The Company generally invests in investment-grade securities to mitigate
risk. The Company's investments are described in greater detail in Note E,
"Off-Balance Sheet Financial Instruments" and Note I, "Investments," below.
Genzyme's financing strategy is to minimize its cost of capital while mitigating
risk through the use of a variety of debt instruments including convertible debt
securities.
INTEREST RATE RISK
Genzyme's exposure to interest rate risk is primarily related to potential
fluctuations in domestic interest rates as they pertain to the Company's
outstanding debt and its investments in fixed income securities. The Company has
an interest rate swap which it uses to fix the interest exposure on $100.0
million of variable rate debt issued under a credit facility. Genzyme has issued
fixed rate convertible debt with repayment and conversion terms summarized in
Note K, "Long-term Debt and Leases," below. The expected repayment of all debt
securities varies between one and six years. Investments in marketable
securities with interest rate risk include short term deposits and investments
and long term investments. The average duration of all fixed income investments
varies from time to time and is never greater than three years.
The Company performed a sensitivity analysis to estimate the potential loss
in fair value on investments and the credit facility borrowings due to changes
in interest rates. A 100 basis point increase in interest rates across the yield
curve at year-end was used to estimate the potential loss in fair value. On this
basis, the potential net loss in fair value on both assets and liabilities from
changes in interest rates is estimated at $5.0 million, essentially all of which
is attributable to Genzyme General. The following assumptions were used in
preparing the sensitivity analysis: (i) all of the convertible debt instruments
are "in-the-money" at year-end and are therefore considered equity securities
and excluded; (ii) the interest rate swap is a fully effective hedge of an
underlying borrowing under a credit facility and the combination is treated as a
fixed rate borrowing with an underlying maturity equal to that of the swap; and
(iii) financial instruments contain no call or leverage features material to the
analysis. Based on a 100 basis point decline in interest rates, applied as
above, the net potential net gain in fair value on both assets and liabilities
is estimated at $5.0 million.
Changes in fair value of the investment portfolio and the interest rate
swap are monitored monthly. The estimated net potential loss in fair value was
never exceeded during the fiscal year.
EQUITY PRICE RISK
The Company holds investments in a limited number of domestic and European
equity securities which are allocated to Genzyme General. The investments are
described in Note I, "Investments," below. The potential loss in fair value
due to a 10% decrease in equity prices of each security held at year-end is
estimated at $5.0 million, all of which is attributable to Genzyme General. This
estimate assumes no change in foreign exchange rates from year end spot rates.
The changes in fair value of the equity portfolio measured on a monthly
basis over the fiscal year exceeded this amount one time.
FOREIGN EXCHANGE RISK
As a result of the company's worldwide operations, the Company faces
exposure to adverse movements in foreign currency exchange rates, primarily to
component currencies of the Euro, British pounds and Japanese yen. These
exposures are reflected in market risk sensitive instruments including foreign
currency receivables and payables and investments in marketable securities.
Genzyme has no foreign currency derivatives outstanding at year end. The
Company's risk management strategy related to foreign exchange exposure,
periodically includes the use of forward contracts. 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.
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, both of which treat Gaucher disease. Sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme in 1998 were $411.1 million,
representing 67% of Genzyme's consolidated product sales in 1998. In 1994,
Genzyme General developed Cerezyme(R) enzyme, a recombinant form of the enzyme,
to replace Ceredase(R) enzyme, production of which is subject to supply
constraints. Genzyme ceased producing Ceredase(R) enzyme in 1998, after
substantially all of the patients previously using Ceredase(R) enzyme had
converted to Cerezyme(R) enzyme.
Certain companies have initiated, and other companies in the future may
initiate, efforts to develop competitive products to treat Gaucher disease.
Although management believes its regulatory position, manufacturing capability
and patient and physician relationships provide Cerezyme(R) enzyme with a strong
competitive position, there can be no assurance that any competitive products
which are developed will not gain market acceptance. A reduction in revenue from
sales of Cerezyme(R) enzyme would adversely affect Genzyme's results of
operations.
RISKS INHERENT IN INTERNATIONAL OPERATIONS. Genzyme has direct investments
in a number of subsidiaries in foreign countries (primarily in Europe and
Japan). Fluctuations in the value of foreign currencies affect the dollar value
of Genzyme's net investment in these foreign subsidiaries. As of December 31,
1998, Genzyme has reduced Genzyme General's stockholders' equity by $4.8 million
to reflect foreign currency translation adjustments. Reduction in the dollar
value of Genzyme's foreign holdings reduces the dollar returns Genzyme can
expect to realize upon any sales of foreign investments. Genzyme does not
currently hedge net foreign investments. If the Genzyme Board approves hedging
of net foreign investments in the future, there can be no assurance that such
hedging will be successful.
Genzyme's foreign operations accounted for 41% of consolidated sales in
1998. These operations accounted for 36% of consolidated sales in 1997. For
financial statement purposes, Genzyme translates operating results of
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foreign subsidiaries into dollars at average monthly exchange rates. Reported
revenues, therefore, may be depressed or inflated by exchange rate trends.
Exchange rates also determine the dollar value of transactions denominated
in foreign currencies and the number of dollars Genzyme receives upon
repatriation of amounts earned in foreign currencies.
Currently, Genzyme's largest foreign currency exposures are in Euros,
British pounds and Japanese yen.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of Genzyme's
products, including those to address lysosomal storage disorders, are currently
in or will require clinical trials to test their safety and efficacy in humans.
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.
INTENSE COMPETITION. The human health care products and services industry
is extremely competitive. Major pharmaceutical companies and other biotechnology
companies compete with Genzyme. Some of these competitors have superior research
and development, marketing and production capabilities. Some competitors also
have greater financial resources than Genzyme. Genzyme incurs significant costs
developing and marketing new products without any guarantee that they will be
commercially successful. Genzyme's future success will depend on its ability to
effectively develop and market its products against those of its competitors.
FUTURE CAPITAL NEEDS. As of December 31, 1998, Genzyme had approximately
$575.7 million in cash, cash equivalents, and short and long-term investments
(excluding investments in equity securities). Although Genzyme has substantial
cash resources, it has committed to utilize a portion of these funds for certain
purposes, such as (i) paying strategic collaborators and funding joint venture
obligations, including a $10.0 million milestone payment to GelTex in October
1999; (ii) product development and marketing; (iii) expanding facilities;
and (iv) marketing Carticel(R) AuCC and the Sepra Products.
Genzyme's cash reserves will be further reduced to pay principal and
interest on the following debt: (i) $100.0 million outstanding under a $225
million revolving credit facility with a syndicate of commercial banks, $82.0
million of which is allocated to Genzyme General and $18.0 million of which is
allocated to Genzyme Tissue Repair, which must be repaid by November 15, 1999;
(ii) $9.4 million in principal amount under the GTR Note, which matures on
February 27, 2000; (iii) $21.2 million in principal amount under the GGD
Debentures, which mature on August 29, 2003; and (iv) $250.0 million in
principal amount under the GGD Notes, which mature on June 1, 2005. To the
extent cash is used to repay or redeem these debt instruments, including the
interest payable thereon, Genzyme's cash reserves will also be diminished.
As a result of these and other commitments, Genzyme may have to obtain
additional financing. There can be no assurance that any such financing will be
available on favorable terms, if at all.
THIRD PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES. A
majority of Genzyme's revenues is 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 for approved products that are
considered experimental or investigational by such payers, 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.
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
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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. 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 also relies 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 REGULATION; 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 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, 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. The exclusive marketing period for Cerezyme(R) enzyme expires
in 2001. Legislation has been periodically introduced in recent years to amend
the Orphan Drug Act by 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.
POSSIBLE ADVERSE EFFECT OF THE EURO CONVERSION. On January 1, 1999, 11 of
the 15 member countries of the European Union established fixed conversion rates
between their existing currencies and a new common currency called the "euro."
This represents an initial step in a process expected to culminate in the
replacement of the existing currencies with the euro. The conversion to the euro
will have operational and legal implications for certain of Genzyme's
international business activities. Genzyme has begun evaluating these
implications, but has yet to estimate the potential impact on Genzyme's
financial condition or operating results. Management believes, however, that the
nature of Genzyme's business and customers makes a material impact unlikely.
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UNCERTAINTY REGARDING YEAR 2000 COMPLIANCE. Many currently installed
computer systems, software products and equipment with embedded chips or
processors are programmed to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, Genzyme's
software and computer systems may need to be upgraded or replaced in order to
comply with "Year 2000" requirements. Genzyme has implemented a Year 2000
compliance program to identify and minimize exposure to Year 2000 problems,
which includes an assessment of internal readiness as well as the readiness of
third parties that are critical to our with whom Genzyme does business. Genzyme
may incur significant costs in identifying, resolving and mitigating Year 2000
compliance issues. In addition, there can be no assurance that Genzyme's Year
2000 issues will be fully identified and resolved by the end of 1999. The
failure to identify and resolve these issues could result in interruptions in,
or failures of, certain normal business activities or operations that may have
an adverse effect on Genzyme's business, results of operations and financial
condition. The failure of third parties that are significant to Genzyme's
business to be Year 2000 compliant could also have an adverse effect on
Genzyme's business, results of operations and financial condition.
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 Genzyme common stock. No cash dividends have been
paid to date on any series of Genzyme common stock, nor does Genzyme anticipate
paying cash dividends on its common stock in the foreseeable future.
RISKS RELATED TO GENZYME TRACKING STOCK
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, Genzyme Tissue Repair
and Genzyme Molecular Oncology. Stockholders should carefully consider the
following risks relating to their 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
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<PAGE> 46
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, 2000, .06 vote and each share of GMO Stock has, through
December 31, 2000, .08 vote. On January 1, 2001 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, As of January 1, 1999, holders
of GGD Stock, GTR Stock and GMO Stock had approximately 97.3%, 1.5% 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 Genzyme Tissue Repair
or Genzyme Molecular Oncology, 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 Genzyme
Tissue Repair or Genzyme Molecular Oncology. 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, 1998
(the "1998 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, Genzyme Tissue Repair or Genzyme
Molecular Oncology, respectively, at the time of a dissolution, liquidation or
winding up of Genzyme.
45
<PAGE> 47
RECENT CLINTON ADMINISTRATION PROPOSAL COULD RESULT IN TAXATION OF ISSUANCES OF
GTR STOCK AND GMO STOCK
A recent tax proposal by the Clinton administration would impose a
corporate level tax on the issuance of certain tracking stocks, including GTR
Stock and GMO Stock. If the administration's proposal is enacted as legislation
or made effective through the issuance of Treasury Regulations, Genzyme would be
taxed on an amount up to the gain realized in connection with future financings
in which Genzyme sells shares of GTR Stock or GMO Stock. In addition, the
distribution of GTR Designated Shares and GMO Designated Shares by Genzyme to
its shareholders and the use of shares of GTR Stock and GMO Stock as
consideration for acquisitions by Genzyme would be taxable events to Genzyme.
The adoption of such legislation or regulations would have a significant
negative impact on Genzyme's ability to raise capital in the future through GTR
Stock and GMO Stock, to complete tax efficient acquisitions of other companies
using GTR Stock and GMO Stock and thereby to maintain its current capital
structure and corporate governance. Genzyme can not predict, however, whether
the proposal will be enacted by Congress, or whether legislation or regulations,
if enacted or issued, will be the same as, or substantially similar to, the
proposal of the Clinton administration.
If Genzyme issues any new tracking stock before the enactment of any
legislation or regulations, Genzyme intends to include provisions in the terms
of such tracking stock allowing Genzyme in the event of adverse tax developments
to convert the new tracking stock into GGD Stock. Such conversion rights are not
contained in the terms of the GTR Stock and GMO Stock. In the event
of adverse tax developments, the Genzyme Board may consider and recommend to its
shareholders appropriate amendments to Genzyme's charter and changes to its
capital structure to avoid the potential material adverse consequences of any
such legislation or regulations.
MANAGEMENT AND ACCOUNTING POLICIES SUBJECT 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 1998 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 Genzyme Tissue
Repair or Genzyme Molecular Oncology that compete with products and services
being developed or sold by Genzyme Tissue Repair or Genzyme Molecular Oncology,
other than through joint ventures in which Genzyme Tissue Repair or Genzyme
Molecular Oncology participate. The scope of this policy does not extend to the
entire fields of tissue repair and oncology. Accordingly, the Company is
currently developing oncology products outside of Genzyme Molecular Oncology
that do not compete with products and services being developed or sold by
Genzyme Molecular Oncology and, in the future, may develop additional oncology
and tissue repair products and services outside of Genzyme Molecular Oncology
and Genzyme Tissue Repair, provided that such products and services do not
compete with then-existing Genzyme Molecular Oncology or Genzyme Tissue Repair
products and services. See "Management and Accounting Policies Governing the
Relationship of Genzyme Divisions" set forth in Exhibit 99.1 to the 1998 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 annual operating losses or other annual 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 Genzyme Tissue Repair and
Genzyme Molecular Oncology 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.
SUBSEQUENT EVENTS
In January 1999, the holder of the GTR Note converted $3,000,000 principal
amount of the GTR Note in exchange for 1,352,290 shares of GTR Stock. GTR paid
$133,000 of accrued interest to the holder in connection with this conversion.
In February 1999, GTR made a $5.0 million draw under the GTR Equity Line in
exchange for 1,633,399 GTR Designated Shares.
In March 1999, Genzyme announced that it intends to create a separate division,
with its own series of common stock, for the existing surgical products business
that is currently part of Genzyme General, subject to approval of the Genzyme
Board.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest
in Diacrin/Genzyme LLC from GTR to Genzyme General. The transfer of interest in
Diacrin/Genzyme LLC is subject to the approval of GTR's shareholders.
In March 1999, the Genzyme Board renewed Genzyme's shareholder rights plan,
which expired on March 28, 1999. Under the renewed plan, the exercise price for
the GGD Stock Rights, GTR Stock Rights and GMO Stock Rights are $300.00, $26.00
and $26.00, respectively.
46
<PAGE> 48
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net product sales ............................... $ 613,685 $ 529,927 $ 424,483
Net service sales ............................... 74,791 67,158 68,950
Revenues from research and development contracts:
Related parties ............................... 5,745 8,356 23,011
Other ......................................... 15,114 3,400 2,310
--------- --------- ---------
Total revenues ................................ 709,335 608,841 518,754
Operating costs and expenses:
Cost of products sold ........................... 211,076 206,028 155,930
Cost of services sold ........................... 48,586 47,289 54,082
Selling, general and administrative ............. 215,203 200,476 162,264
Research and development (including research and
development related to contracts) .............. 119,005 89,558 80,849
Amortization of intangibles ..................... 24,334 17,245 8,849
Purchase of in-process research and development . -- 7,000 130,639
Restructuring charges ........................... -- -- 1,465
--------- --------- ---------
Total operating costs and expenses ............ 618,204 567,596 594,078
--------- --------- ---------
Operating income (loss) ............................ 91,131 41,245 (75,324)
Other income (expenses):
Equity in net loss of unconsolidated affiliates.. (29,006) (12,258) (5,373)
Gain on affiliate sale of stock.................. 2,369 -- 1,013
Minority interest ............................... 4,285 -- --
Gain on sale of product line .................... 31,202 -- --
Gain on sale of investment ...................... 3,391 -- 1,711
Charge for impaired investments ................. (3,397) -- --
Other ........................................... -- (2,000) --
Investment income ............................... 25,055 11,409 15,341
Interest expense ................................ (22,593) (12,667) (6,990)
--------- --------- ---------
Total other income (expenses) ................. 11,306 (15,516) 5,702
--------- --------- ---------
Income (loss) before income taxes .................. 102,437 25,729 (69,622)
Provision for income taxes ......................... (39,870) (12,100) (3,195)
--------- --------- ---------
Net income (loss) .................................. $ 62,567 $ 13,629 $ (72,817)
========= ========= =========
</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,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------
<S> <C> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL:
Net income (loss) .......................................... 101,132 57,026 (47,513)
Tax benefit allocated from Genzyme Tissue Repair ........... 16,394 17,666 17,011
Tax benefit allocated from Genzyme Molecular Oncology ...... 3,527 2,755 --
-------- -------- --------
Net income (loss) attributable to GGD Stock ................ $121,053 $ 77,447 $(30,502)
======== ======== ========
Per Genzyme General common share:
Net income (loss) per Genzyme General common share -- basic: $ 1.53 $ 1.01 $ (0.45)
======== ======== ========
Weighted average shares outstanding ........................... 79,063 76,531 68,289
======== ======== ========
Net income (loss) per Genzyme General common and common
equivalent share -- diluted: .............................. $ 1.48 $ 0.98 $ (0.45)
======== ======== ========
Adjusted weighted average shares outstanding .................. 81,734 78,925 68,289
======== ======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss ................................................... $(40,386) $(45,984) $(42,315)
======== ======== ========
Per Genzyme Tissue Repair basic and diluted common share:
Net loss ................................................. $ (1.99) $ (3.07) $ (3.38)
======== ======== ========
Weighted average shares outstanding ........................ 20,277 14,976 12,525
======== ======== ========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss ................................................... $(19,107) $(19,578) $ (1,003)
======== ======== ========
Per Genzyme Molecular Oncology basic and
diluted common share:
Net loss ................................................. $ (3.81)
========
Weighted average shares outstanding ........................ 5,019
========
Pro forma per GMO basic and diluted common share:
Pro forma net loss ....................................... $ (4.98) $ (0.26)
======== ========
Pro forma weighted average shares outstanding .............. 3,929 3,929
======== ========
COMPREHENSIVE INCOME:
Net income (loss)........................................... $ 62,567 $ 13,629 $(72,817)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................... 7,681 (11,704) 2,845
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period ..... (6,043) 817 (2,435)
Reclassification adjustment for gains (losses)
included in net income (loss)........................... 2,100 - (1,077)
-------- -------- --------
Unrealized gains (losses) on securities, net.......... (3,943) 817 (3,512)
-------- -------- --------
Other comprehensive income (loss)........................... 3,738 (10,887) (667)
-------- -------- --------
Comprehensive income (loss)................................. $ 66,305 $ 2,742 $(73,484)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
48
<PAGE> 50
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 118,612 $ 102,406
Short-term investments ..................... 175,453 51,259
Accounts receivable, net ................... 163,042 118,277
Inventories ................................ 109,833 139,681
Prepaid expenses and other current assets .. 31,467 17,361
Deferred tax assets - current .............. 39,725 27,601
---------- ----------
Total current assets ..................... 638,132 456,585
Property, plant and equipment, net ............ 382,619 385,348
Long-term investments ......................... 281,664 92,676
Note receivable - related party ............... -- 2,019
Intangibles, net .............................. 279,516 271,275
Deferred tax assets - noncurrent .............. 24,277 29,479
Investment in equity securities ............... 51,977 30,047
Other ......................................... 32,369 28,024
---------- ----------
Total assets ............................. $1,690,554 $1,295,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
50
<PAGE> 51
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 27,604 $ 19,787
Accrued expenses ........................................................... 74,077 72,103
Income taxes payable ....................................................... 16,543 11,168
Deferred revenue ........................................................... 2,731 1,800
Current portion of long-term debt and capital lease obligations ............ 100,568 905
Payable to joint venture.................................................... 1,181 --
----------- -----------
Total current liabilities ................................................ 222,704 105,763
Long-term debt ................................................................ 3,087 140,978
Convertible debentures, net ................................................... 284,138 29,298
Other ......................................................................... 8,078 7,364
----------- -----------
Total liabilities ........................................................ 518,007 283,403
Commitments and contingencies (See Notes)
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares authorized; 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 Stock $0.01 par value, 390,000,000 shares authorized; 115,116,547
issued and outstanding:
Genzyme General Division Common Stock, $0.01 par value, 200,000,000
shares authorized; 81,394,000 and 77,692,550 issued
and outstanding at December 31, 1998 and 1997, respectively ............ 814 777
Genzyme Tissue Repair Division Common Stock, $0.01 par value,
40,000,000 shares authorized; 20,920,806 and 19,941,193 issued
and outstanding at December 31, 1998 and 1997, respectively ............ 209 199
Genzyme Molecular Oncology Division Common Stock, $0.01 par value,
40,000,000 shares authorized; 12,648,295 and 3,928,572 issued and
outstanding at December 31, 1998 and 1997, respectively ............... 126 39
Treasury common stock, at cost:
Genzyme General Division Common Stock, 106,358 shares at
December 31, 1998 and 1997, respectively .............................. (901) (901)
Additional paid-in capital -- Genzyme General .............................. 958,820 895,340
Additional paid-in capital -- Genzyme Tissue Repair ........................ 174,198 170,430
Additional paid-in capital -- Genzyme Molecular Oncology ................... 63,427 34,517
Accumulated deficit ........................................................ (13,779) (76,346)
Accumulated other comprehensive income ..................................... (10,367) (12,005)
----------- -----------
Total stockholders' equity ............................................... 1,172,547 1,012,050
----------- -----------
Total liabilities and stockholders' equity ............................... $ 1,690,554 $ 1,295,453
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
51
<PAGE> 52
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 62,567 $ 13,629 $ (72,817)
Reconciliation of net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ................................. 58,869 50,964 30,192
Loss on disposal of fixed assets .............................. 108 1,258 101
Non-cash compensation expense ................................. 8,740 3,160 460
Accrued interest/amortization on bonds ........................ (6,923) (900) 1,195
Provisions for bad debts and inventory ........................ 11,990 14,580 9,759
Accretion of debt conversion feature .......................... 3,025 2,028 --
Deferred income tax benefit ................................... (5,669) (5,061) (28,558)
Equity in net loss of unconsolidated subsidiaries ............. 29,006 12,258 4,360
Gain on affiliate sale of stock ............................... (2,369) -- --
Minority interest in net loss of subsidiaries ................. (4,285) -- --
Gain on sale of product line .................................. (31,202) -- --
Gain on sale of investments ................................... (3,391) -- (1,711)
Charge for impaired investment ................................ 3,397 --
Purchase of in-process research and development ............... -- 7,000 130,639
Other ......................................................... 26 528 153
Increase (decrease) in cash from changes in working capital net
of acquired assets:
Accounts receivable ......................................... (46,215) (11,076) (18,395)
Inventories ................................................. 27,907 (29,299) (41,609)
Prepaid expenses and other current assets ................... (11,987) (10,062) (527)
Accounts payable, accrued expenses, income taxes payable
and deferred revenue ....................................... 17,509 (9,333) 26,775
--------- --------- ---------
Net cash provided by operating activities ................. 111,103 39,674 40,017
INVESTING ACTIVITIES:
Purchases of investments ........................................ (441,487) (147,897) (122,093)
Sales and maturities of investments ............................. 136,605 81,185 207,399
Proceeds from sale of equity investment ......................... 9,564 -- --
Acquisitions of property, plant and equipment ................... (39,467) (29,309) (63,802)
Sale of property, plant and equipment ........................... 1,262 852 --
Proceeds from sale of product line .............................. 24,760 -- --
Acquisitions, net of cash acquired and assumed liabilities ...... (9,949) 9 (299,078)
Purchase of technology rights ................................... (15,100) -- --
Investment in unconsolidated affiliates ......................... (25,783) (13,993) (5,511)
Investment in joint ventures .................................... (21,974) -- --
Loans to affiliates ............................................. (1,000) (4,601) (1,676)
Repayment of loans by affiliates ................................ 3,019 -- --
Other ........................................................... (5,592) (1,419) (7,470)
--------- --------- ---------
Net cash used by investing activities ..................... (385,142) (115,173) (292,231)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock .......................... 76,860 156,036 41,556
Proceeds from issuance of debt .................................. 250,000 32,127 536,000
Payments of debt ....................................... ........ (38,833) (101,115) (378,502)
Other ........................................................... 1,884 -- --
--------- --------- ---------
Net cash provided by financing activities ................. 289,911 87,048 199,054
Effect of exchange rate changes on cash ............................ 334 (2,275) 1,920
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................... 16,206 9,274 (51,240)
Cash and cash equivalents at beginning of period ................... 102,406 93,132 144,372
--------- --------- ---------
Cash and cash equivalents at end of period ......................... $ 118,612 $ 102,406 $ 93,132
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
52
<PAGE> 53
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flows: Cash paid during the year for:
Interest ........................................................... $ 17,385 $ 9,811 $ 6,285
Income taxes ....................................................... 24,463 18,887 14,149
</TABLE>
Supplemental Disclosures of Non-Cash Transactions:
Other charges -- Note B
Sale of research product business assets - Note C
Acquisitions liability -- Note D
Investment in unconsolidated affiliate -- Note I
Debt conversion -- Note K
GGD Debentures -- Note K
Warrant exercise -- Note L
GTR and GMO Designated Share dividend - Note L
The accompanying notes are an integral part of these consolidated
financial statements.
53
<PAGE> 54
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS:
GENZYME GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ..................... 77,693 75,537 62,372 $ 777 $ 755 $ 624
Issuance of GGD Stock under stock plans .......... 3,695 2,117 1,662 37 22 16
Exercise of warrants ............................. 7 39 6,341 -- -- 63
Issuance of GGD Stock in connection
with conversion of convertible notes ............ -- -- 3,782 -- -- 38
Issuance of GGD Stock in connection
with acquisitions ............................... -- -- 1,380 -- -- 14
-------- -------- -------- -------- -------- --------
Balance at end of year ........................... 81,395 77,693 75,537 $ 814 $ 777 $ 755
======== ======== ======== ======== ======== ========
GENZYME TISSUE REPAIR DIVISION COMMON STOCK:
Balance at beginning of year ..................... 19,941 13,162 12,113 $ 199 $ 132 $ 121
Issuance of GTR Stock under stock plans .......... 756 487 449 8 4 4
Exercise of warrants ............................. -- -- 345 -- -- 4
Issuance of GTR Stock in connection with
declared dividend of GTR Designated Shares ...... -- 2,292 -- -- 23 --
Shares issued in public offering ................. -- 4,000 -- -- 40 --
Issuance of GTR Stock in connection with partial
conversion of convertible note ................. 224 -- 255 2 -- 3
-------- -------- -------- -------- -------- --------
Balance at end of year ........................... 20,921 19,941 13,162 $ 209 $ 199 $ 132
======== ======== ======== ======== ======== ========
GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK:
Balance at beginning of year ..................... 3,929 -- -- $ 39 $
Balance at June 18, 1997 ......................... -- -- -- -- --
Issuance of GMO Stock under stock plans .......... 1 -- -- -- --
Exercise of warrants ............................. 1 -- -- -- --
Issuance of GMO Stock in connection with declared
dividend of GMO Designated Shares ............... 8,717 -- -- 87 --
Issuance of GMO Stock in connection with the
acquisition of PharmaGenics ..................... -- 3,929 -- -- 39
-------- -------- -------- -------- --------
Balance at end of year ........................... 12,648 3,929 -- $ 126 $ 39
======== ======== ======== ======== ========
TREASURY COMMON STOCK (AT COST):
GENZYME GENERAL DIVISION COMMON STOCK:
Balance at beginning of year ..................... (106) (106) (106) $ (901) $ (890) $ (882)
Purchases ........................................ -- -- -- -- (11) (8)
-------- -------- -------- -------- -------- --------
Balance at end of year ........................... (106) (106) (106) $ (901) $ (901) $ (890)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
54
<PAGE> 55
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
ADDITIONAL PAID IN CAPITAL:
GENZYME GENERAL:
Balance at beginning of year ........................................... $ 895,340 $ 871,020 $ 616,096
Issuance of GGD Stock under stock plans ................................ 74,323 35,888 18,565
Exercise of warrants ................................................... 289 855 106,101
Allocation to Genzyme Tissue Repair for GTR Designated Shares .......... -- (14,892) (11,714)
Tax benefit from disqualified dispositions ............................. 18,561 4,127 3,500
Allocation of cash to GMO for GMO Designated Shares..................... (5,000) (2,886) --
Conversion of cash of GMO Debentures to GGD Debentures for GMO
Designated Shares ............................................... (19,802) -- --
Conversion of note receivable due from GMO into GMO Designated Shares... (2,696) -- --
Loss on purchase of facility from GTR .................................. (711) -- --
Payment to GTR for research program..................................... (250) -- --
Stock compensation expense ............................................. 48 1,218 123
Purchase of Treasury Stock ............................................. -- 10 10
Other .................................................................. (1,282) -- --
Issuance of GGD Stock in connection with conversion of Genzyme's 6 3/4%
convertible notes ................................................ -- -- 101,362
Issuance of GGD Stock in connection with acquisitions .................. -- -- 36,508
Callable Warrants issued in connection with acquisition of Neozyme II .. -- -- 469
--------- --------- ---------
Balance at end of year ................................................. $ 958,820 $ 895,340 $ 871,020
========= ========= =========
GENZYME TISSUE REPAIR:
Balance at beginning of year ........................................... $ 170,430 $ 122,385 $ 107,934
Issuance of GTR Stock under stock plans ................................ 2,101 2,434 2,432
Exercise of warrants ................................................... -- -- (4)
Issuance of GTR Stock in connection with declared dividend of GTR
Designated Shares .................................................. -- (23) --
Issuance of GTR Stock in public offering ............................... 28,997 --
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 partial conversion of
convertible notes.................................................. 598
Value of debt conversion feature ....................................... -- 1,524 --
Gain on transfer of facility ........................................... 711 -- --
Payment from Genzyme General for research program ...................... 250 -- --
Allocation from Genzyme General for GTR Designated Shares .............. -- 14,892 11,714
Stock compensation expense ............................................. 108 221 312
--------- --------- ---------
Balance at end of year ................................................. $ 174,198 $ 170,430 $ 122,385
========= ========= =========
GENZYME MOLECULAR ONCOLOGY:
Balance at beginning of year ........................................... $ 34,517 $ -- $ --
Balance at June 18, 1997 ............................................... -- -- --
Issuance of GMO Stock under stock plans................................. 7 -- --
Issuance of GMO Stock in connection with declared dividend of GMO
Designated Shares .................................................. (87) -- --
Conversion of note payable to Genzyme General into GMO Designated
Shares.............................................................. 2,696 -- --
Issuance of GMO Stock in connection with the requisition of PharmaGenics -- 27,330 --
Sale of warrants ....................................................... -- 724 --
Value of debt conversion feature ....................................... -- 3,529 --
Conversion of GMO Debentures to GGD Debentures for GMO Designated Shares 19,802 -- --
Allocation from Genzyme General for GMO Designated Shares .............. 5,000 2,886 --
Stock compensation expense (unearned compensation), net................. 113 (116) --
Other................................................................... 1,379 164 --
--------- --------- ---------
Balance at end of year ................................................. $ 63,427 $ 34,517 $ --
========= ========= =========
ACCUMULATED DEFICIT:
Balance at beginning of year ........................................... $ (76,346) $ (89,975) $ (17,158)
Net income (loss) ...................................................... 62,567 13,629 (72,817)
--------- --------- ---------
Balance at end of year ................................................. $ (13,779) $ (76,346) $ (89,975)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
55
<PAGE> 56
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Accumulated other comprehensive income:
Balance at beginning of year .......... $(12,005) $ (1,118) $ (1,528)
Foreign currency translation
adjustments.......................... 7,681 (11,704) 2,845
Unrealized gains (losses)
on investments....................... (6,043) 817 (2,435)
-------- -------- --------
Accumulated other comprehensive
income............................... $(10,367) $(12,005) $(1,118)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
56
<PAGE> 57
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, diagnostic products and services, tissue repair and
oncology.
BASIS OF PRESENTATION
The consolidated financial statements of Genzyme include the balance sheets,
results of operations and cash flows of Genzyme's therapeutics, surgical
products, diagnostics, tissue repair and oncology businesses and corporate
operations during the periods presented.
Genzyme currently has three series of common stock outstanding. These three
series are intended to reflect the value and track the economic performance of
Genzyme's three primary operating divisions (Genzyme General, GTR and GMO).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Genzyme reflect the
consolidated accounts of all of Genzyme's businesses. 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 I., "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, 1997 and 1996 have been reclassified to conform with
the December 31, 1998 presentation.
FINANCIAL INFORMATION
The Company prepares separate financial statements for Genzyme General, GTR and
GMO in addition to consolidated financial statements for Genzyme.
Notwithstanding the allocation of assets and liabilities, including contingent
liabilities, between Genzyme General, GTR 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 GGD Stock, GTR Stock and GMO Stock are common
stockholders of Genzyme and have no specific claim against the assets to which
each series of common stock relates. 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 its common stock in
the foreseeable future.
57
<PAGE> 58
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 (i) the Company's ability to successfully complete
preclinical and clinical development and obtain timely regulatory approval and
adequate patent and other proprietary rights protection of its products and
services, (ii) the content and timing of decisions made by the FDA and other
agencies regarding the indications for which the Company's products may be
approved, (iii) the ability of the Company to manufacture adequate supplies of
its products for development and commercialization activities, (iv) the accuracy
of the Company's estimates of the size and characteristics of markets to be
addressed by the Company's products and services, (v) market acceptance of the
Company's products and services, (vi) the Company's ability to obtain
reimbursement for its products from third-party payers, where appropriate, and
(vii) 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, 1998 and 1997, the Company classified all of its 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.
Investments in equity securities not listed or traded are valued on a security
by security basis, considering the types of securities, their marketability,
subsequent purchase of the same or similar securities by third parties and the
financial condition, operating results and progress of development programs of
the securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments is obtained from market quotations and is
disclosed in Note I., "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 -- Foreign Currency Hedging).
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
58
<PAGE> 59
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are depreciated over their
remaining useful lives 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
generally depreciated using the units of production method.
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 40 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.
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 of the Company's 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 gains of
$0.3 million in 1998 and net losses of $0.3 million and $0.9 million for the
years ended December 31, 1997 and 1996, respectively.
FOREIGN CURRENCY HEDGING
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. Related gains and losses were not material
to the financial statements. There were no foreign currency forward contracts
outstanding at December 31, 1998 and 1997.
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.
59
<PAGE> 60
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 OR AN AFFILIATE
Gains on the issuance of stock by a subsidiary or an affiliate are included in
net income unless the subsidiary or affiliate 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 or affiliate equity resulting
from the additional equity raised by the subsidiary or affiliate as an equity
transaction.
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,
1998, such undistributed foreign earnings were approximately $4.5 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 gives
effect to the management and accounting policies adopted by the Genzyme Board
and is 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.
60
<PAGE> 61
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE (CONTINUED)
The following tables set forth the computation of basic and diluted earnings per
share for Genzyme General, Genzyme Tissue Repair and Genzyme Molecular Oncology:
GENZYME GENERAL:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Net income (loss) attributable to GGD
Stock-basic and diluted .............................. $121,053 $ 77,447 $(30,502)
======== ======== ========
Shares used in net income per common share-basic ....... 79,063 76,531 68,289
Effect of dilutive securities:
Employee and director stock options ................... 2,661 2,387 --
Warrants .............................................. 10 7 --
-------- -------- --------
Dilutive potential common shares (1,2,3) ............... 2,671 2,394 --
-------- -------- --------
Shares used in net income per common
share-diluted (1,2,3)................................. 81,734 78,925 68,289
======== ======== ========
Net income (loss) per common share - basic ............. $ 1.53 $ 1.01 $ (0.45)
======== ======== ========
Net income (loss) per common share - diluted (1,2,3) ... $ 1.48 $ 0.98 $ (0.45)
======== ======== ========
</TABLE>
- ----------
(1) Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the years ended December 31,
1998, 1997 and 1996 because each such security had an exercise price
greater than the average market price of GGD Stock during each
respective period. Such securities include:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of GGD Stock issuable for options(a)......................... 2,827 5,921 3,824
Shares of GGD Stock issuable for warrants .......................... 40 40 --
----- ----- -----
Total shares with exercise prices greater than the average market
price of GGD Stock during the year ...................... 2,867 5,961 3,824
===== ===== =====
(a) Options not included in diluted earnings per share had exercise
price ranges of $28.67-$47.88 in 1998, $23.59-$38.00 in 1997,
and $3.79-$38.00 in 1996.
</TABLE>
(2) In computing diluted earnings per share for Genzyme General for 1998,
the following securities were not included in the calculation because
inclusion of such shares would have an anti-dilutive effect on Genzyme
General's net income per share: (i) approximately 6,313,000 shares of
GGD Stock reserved in May 1998 for issuance upon conversion of the GGD
Notes and (ii) approximately 630,000 shares of GGD Stock reserved in
August 1998 for issuance upon conversion of the GGD Debentures.
(3) In computing diluted earnings per share for 1996, exercise of
approximately 6,506,000 options and 35,000 warrants were not included
because the result would be anti-dilutive due to Genzyme General's net
loss in 1996.
GENZYME TISSUE REPAIR:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Net loss ......................................................... $(40,386) $(45,984) $(42,315)
Basic and diluted weighted average shares outstanding............. 20,277 14,976 12,525
Net loss per common share -- basic and diluted.................... $(1.99) $(3.07) $(3.38)
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, certain
securities 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 those years. Such securities include:
61
<PAGE> 62
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE (CONTINUED)
GENZYME TISSUE REPAIR (CONTINUED):
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands) 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of GTR Stock issuable for options.......................... 3,398 2,777 2,574
GTR Designated Shares............................................. 716 885 1,794
Shares of GTR Stock issuable upon conversion of the GTR Note...... 7,810 1,772 --
------ ----- -----
Total shares excluded from the GTR diluted earnings per
share calculation............................................. 11,924 5,434 4,368
====== ===== =====
</TABLE>
GENZYME MOLECULAR ONCOLOGY:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Net loss for basic and diluted weighted average shares............ $(19,107) $(19,578) $(1,003)
Basic and diluted weighted average shares outstanding............. 5,019
Net loss per common share - basic and diluted..................... $ (3.81)
Pro forma basic and diluted weighted average shares outstanding... 3,929 3,929
Pro forma net loss per common share - basic and diluted........... $(4.98) $(0.26)
</TABLE>
During the years ended December 31, 1998 and 1997, certain securities 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. Such
securities include:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands) 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares of GMO Stock issuable for options.......................... 1,158 826
Warrants to purchase GMO Stock.................................... 10 10
GMO Designated Shares............................................. 1,410 6,000
----- -----
Total shares excluded from the GMO diluted earnings per
share calculation............................................... 2,578 6,836
===== =====
</TABLE>
During the years ended December 31, 1996, there were no securities
outstanding to be considered in this calculation.
COMPREHENSIVE INCOME
Effective January 1, 1998, Genzyme adopted SFAS 130, "Reporting Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components in a set of financial statements. Components of
comprehensive income are net income and all other non-owner changes in equity
such as the change in the cumulative translation adjustment. Genzyme presents
such information in its statement of operations.
SEGMENT INFORMATION
In 1998, Genzyme adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," and replaces the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position, but did affect the disclosure of segment information (see
Note Q., "Segment Information" below).
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation". The Company has disclosed herein
pro forma net income and pro forma earnings per share in the footnotes using the
fair value based method for fiscal 1998, 1997 and 1996.
62
<PAGE> 63
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Accounting for the Costs of Start-Up Activities". SOP 98-5 requires all costs
of start-up activities (as defined by SOP 98-5) to be expensed as incurred. The
adoption of SOP 98-5 did not have a material impact on Genzyme's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Genzyme will adopt SFAS 133 by
January 1, 2000. Genzyme is evaluating SFAS 133 to determine its impact on its
consolidated financial statements.
NOTE B. OTHER CHARGES
In the third quarter of 1998, Genzyme recorded $26.9 million of charges
associated with its Therapeutics and Surgical Products businesses.
The conversion of patients with Gaucher disease from Ceredase(R) enzyme to
Cerezyme(R) enzyme is substantially complete. Based on its successful progress
in converting patients from Ceredase(R) enzyme to Cerezyme(R) enzyme, Genzyme
determined that its existing supply of finished goods of Ceredase(R) enzyme was
sufficient to meet patient needs. As a result, in the third quarter of 1998,
Genzyme recorded a $14.8 million charge to cost of products sold for the
excess inventory used to make Ceredase(R) enzyme.
During the third quarter of 1998, Genzyme reviewed its requirements to support
the Sepra Products. As a result, in the third quarter of 1998, Genzyme recorded
a $10.4 million charge to cost of products sold to write down Sepra Products
inventory amounts to net realizable value. In addition, during the third
quarter, the Company wrote-off certain costs related to equipment used to
manufacture the Sepra Products totaling $1.7 million.
In the fourth quarter of 1997, Genzyme recorded $29.2 million of charges mainly
associated with its Pharmaceuticals and Surgical Products businesses and the
sale of GDI, which was sold in 1996. The Pharmaceuticals business unit now
focuses 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 that were 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 Sepracoat(TM) Coating Solution, which was discontinued for the U.S. market
after an advisory panel of the FDA recommended against granting marketing
approval of this product in 1997. The product is sold outside of the United
States. Genzyme also recorded a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable.
NOTE C. SALE OF RESEARCH PRODUCTS BUSINESS ASSETS
On July 1, 1998, Genzyme completed the sale of the primary assets of its
research products business to TECHNE. The purchase price consisted of $24.8
million in cash, approximately 987,000 shares of TECHNE common stock, and
royalties on TECHNE's biotechnology group sales for the next five years. Royalty
income will be recorded as earned. In the third quarter of 1998, Genzyme
recorded a gain of $31.2 million related to the sale of the research products
business assets.
63
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. 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
In the fourth quarter of 1996, Genzyme acquired Neozyme II Corporation.
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. 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 acquired DSP. 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.
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 had 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 had 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 were 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.
GENETRIX, INC.
On May 1, 1996, the Company acquired Genetrix, Inc., a privately held
genetic testing laboratory, for an aggregate purchase price of $36.5
million. Approximately $39.0 million was allocated to goodwill and is
being amortized over 15 years. The Company incurred restructuring charges
of $1.0 million related to closings of laboratories made redundant by the
acquisition.
64
<PAGE> 65
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. ACQUISITIONS (CONTINUED)
ALLOCATED TO GENZYME MOLECULAR ONCOLOGY:
PHARMAGENICS, INC.
Genzyme acquired PharmaGenics on June 18, 1997. The transaction was
accounted for as a purchase. The aggregate purchase price of $27.5 million
(net of $0.5 million, which represents fees payable by PharmaGenics in
connection with the merger), plus acquisition costs of $2.5 million and
assumed liabilities of $4.9 million, has been allocated to the acquired
tangible and intangible assets based on their respective fair values
(amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Equipment................................................................. $ 208
Other assets.............................................................. 50
Completed technology rights (to be amortized over 3 years)................ 20,000
Goodwill (to be amortized over 3 years)................................... 15,193
Deferred tax liability (to be amortized over 3 years)..................... (7,600)
In-process technology..................................................... 7,000
-------
Total........................................................... $34,851
=======
</TABLE>
In 1998, there were certain adjustments to the assumed liabilities
totaling $0.5 million.
The $7.0 million allocated to in-process technology represents the value
assigned to PharmaGenics's programs which were still in the development
stage and for which there was no alternative use. The value assigned to
these programs (both complete and in-process) was determined by selecting
the maximum anticipated value of these programs 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.
65
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GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents the results of
operations of Genzyme for the year ended December 31, 1997 as if the
acquisition of PharmaGenics had been consummated on January 1, 1997. The
pro forma information does not purport to be indicative of what would have
occurred had the acquisition been made on that date or of results that may
occur in the future. The pro forma financial information does not include
$7.0 million in charges for in-process technology:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997
---------------------------------------------------------------------------------------------------
<S> <C>
Pro forma revenues........................................................ $608,916
Pro forma net income...................................................... $7,832
Pro forma net loss attributable to GMO Stock.............................. $(25,926)
Pro forma net loss per GMO common share -basic and diluted................ $(6.60)
======
Pro forma weighted average shares outstanding............................. 3,929
=====
</TABLE>
NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments create 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 interest rate risk related to its variable rate notes
payable. 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 notional amount of interest rate
contracts is the amount upon which interest and other payments under the
contract are based. 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.
In December 1996, Genzyme entered into a $100.0 million interest rate swap
contract to effectively convert the variable interest rate on borrowings under
its $225 million revolving credit facility to a fixed interest rate. Net
payments made or received under the interest rate swap contract are recorded as
interest expense. At December 31, 1998, the interest rate swap contract had a
termination value of approximately $1.2 million with a notional value of
approximately $100.0 million. The agreement matures in 1999.
NOTE F. 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 $13.9 million and $12.1
million at December 31, 1998 and 1997, respectively.
Net intangible assets for Genzyme as of December 31, 1998 and 1997 includes
$178.0 million and $191.7 million, respectively, of goodwill primarily due to
acquisitions.
As of December 31, 1998 and 1997 accumulated amortization of intangible assets
was $70.7 million and $43.3 million, respectively.
66
<PAGE> 67
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials................................... $ 41,328 $ 48,392
Work-in-process................................. 27,474 31,994
Finished products............................... 41,031 59,295
-------- --------
$109,833 $139,681
======== ========
</TABLE>
NOTE H. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
------------------------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment............................. $ 257,706 $ 249,718
Land and buildings.............................. 156,067 141,020
Leasehold improvements.......................... 71,425 65,672
Furniture and fixtures.......................... 17,619 15,364
Construction-in-progress........................ 30,805 24,953
--------- ---------
533,622 496,727
Less accumulated depreciation................... (151,003) (111,379)
--------- ---------
Property, plant and equipment, net.............. $ 382,619 $ 385,348
========= =========
</TABLE>
Depreciation and amortization expense was $39.2 million, $33.5 million and $23.1
million in 1998, 1997 and 1996, respectively.
The Company attributes its fixed assets to Genzyme General, GTR or GMO based on
use.
The Company has capitalized approximately $34.6 million of gross process
validation and optimization costs related to its manufacturing facilities. The
Company capitalized approximately $0.7 million, $0.5 million and $2.2 million of
interest costs in 1998, 1997 and 1996, respectively, related to facility
construction.
67
<PAGE> 68
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. INVESTMENTS
MARKETABLE SECURITIES
Consolidated investments in marketable securities at December 31 consisted of
the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Equivalents:
Corporate notes .... $ 8,131 $ 8,129 $ 17,036 $ 17,034
Money market fund... 70,805 70,805 67,649 67,650
-------- -------- -------- --------
$ 78,936 $ 78,934 $ 84,685 $ 84,684
======== ======== ======== ========
Short Term:
Corporate notes .... $175,002 $175,453 $ 51,280 $ 51,259
======== ======== ======== ========
Long Term:
Corporate notes .... $226,002 $226,259 $ 70,981 $ 70,921
Federal ........... 33,412 33,581 -- --
U.S. Treasury notes 21,323 21,824 21,667 21,755
-------- -------- -------- --------
$280,737 $281,664 $ 92,648 $ 92,676
======== ======== ======== ========
Equity securities .... $ 62,244 $ 51,977 $ 29,609 $ 30,047
======== ======== ======== ========
</TABLE>
Investments in marketable securities are attributed to either Genzyme
General, GTR or GMO.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
In 1998, Genzyme recorded a gain of $3.4 million upon the sale of a portion
of its TECHNE common stock received from the sale of Genzyme's research
products assets to TECHNE. In 1998, Genzyme also recorded a charge of $3.4
million related to a write-down of a strategic equity investment whose
decline in value was considered "other than temporary". Investment income for
1997 and 1996 includes gross realized losses of $2,000 and $47,000,
respectively.
Gross unrealized holding losses of $12.5 million and unrealized holding gains
of $3.6 million were recorded at December 31, 1998 in stockholders' equity as
compared to unrealized holding losses of $3.0 million and unrealized holding
gains of $3.4 million at December 31, 1997.
Information regarding the range of contractual maturities of investments in
debt securities at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 1 year ................ $253,939 $254,387 $135,965 $135,943
After 1 year through 2 years . 259,363 259,788 63,905 63,855
After 2 years through 10 years 21,373 21,876 28,743 28,821
-------- -------- -------- --------
$534,675 $536,051 $228,613 $228,619
======== ======== ======== ========
</TABLE>
68
<PAGE> 69
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. INVESTMENTS (CONTINUED)
MARKETABLE SECURITIES (CONTINUED)
The Company holds certain strategic investments in equity securities of
unconsolidated entities which may be attributed to either Genzyme General,
GTR or GMO.
INVESTMENTS ALLOCATED TO GENZYME GENERAL (amounts in thousands), except
shares owned):
<TABLE>
<CAPTION>
Adjusted Market Unrealized
Entity Cost Value Gain (Loss)
- ------ -------- ------- -----------
<S> <C> <C> <C>
ABIOMED, Inc. ........................................... $15,804 $11,323 $ (4,481)
Aronex Pharmaceuticals, Inc. ............................ 1,693 846 (847)
BioMarin Pharmaceutical, Inc............................. 8,000 8,000 --
Celtrix Pharmaceuticals, Inc.(3)......................... 4,898 4,898 --
Dyax Corporation ........................................ 3,000 3,000 --
GelTex Pharmaceuticals, Inc. ............................ 2,500 2,263 (237)
Pharming Group, N.V(1) .................................. 13,983
Revaluation of investment in Pharming ............... 1,122
-------
Adjusted investment in Pharming ....................... 15,105 8,497 (6,608)
-------
TECHNE Corporation(2) ................................... 9,126 11,196 2,070
Other.................................................... 2,118 1,954 (164)
------- ------- --------
Total investment in equity securities
as of December 31, 1998 ............................... $62,244 $51,977 $(10,267)
======= ======= ========
</TABLE>
SUMMARY:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
(AMOUNTS IN THOUSANDS) 1998 1997
------------------------------------------ ---- ----
<S> <C> <C>
Adjusted historical cost of investments
in equity securities.................. $ 62,244 $29,609
Net unrealized gains (losses)............. (10,267) 438
-------- -------
Investment in equity securities at market value: $ 51,977 $30,047
======== =======
</TABLE>
(1) The investment in Pharming is denominated in guilders and the
revaluation entry represents the translation of the historical guilder
amount of the investment into US dollars at the December 1998 month-end
rate.
(2) In December 1998, Genzyme sold a portion of TECHNE common stock for net
proceeds of $9.6 million and recorded a gain of approximately $3.4
million related to the sale.
(3) In December 1998, Genzyme determined that a portion of the impairment
in its investment in Celtrix was "other than temporary." Accordingly, a
loss of approximately $3.4 million was charged to operations in 1998.
69
<PAGE> 70
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. INVESTMENTS (CONTINUED)
EQUITY INVESTMENTS ALLOCATED TO GENZYME GENERAL
DYAX CORPORATION
In October 1998, Genzyme entered into a collaboration agreement with Dyax
Corporation to develop and commercialize one of Dyax's proprietary
compounds for the treatment of chronic inflammatory diseases. Dyax will
fund the first $6.0 million in development costs, and the parties will
split all subsequent development costs equally. In connection with that
agreement, Genzyme made an investment of $3.0 million in the convertible
preferred stock of Dyax and made a $3.0 million line of credit available to
help Dyax fund its operations. As of December 31, 1998, Dyax had not
borrowed any money under the line of credit. Genzyme is required to make
milestone payments to Dyax upon FDA approval of products that arise out of
the collaboration, and will share equally with Dyax all profits from the
sale of these products. Genzyme's Chairman and Chief Executive Officer is a
director of Dyax and Dyax's Chief Executive Officer is a director of
Genzyme.
GENZYME TRANSGENICS CORPORATION
Genzyme currently holds approximately 40.4% 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 (which is currently
under renegotiation) 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 1998,
Genzyme received approximately $4.8 million from GTC pursuant to the
three agreements between the companies and GTC received approximately $3.6
million from Genzyme pursuant to the research and development agreement. At
December 31, 1998, Genzyme had a receivable of $1.5 million from GTC.
The fair market value of the GTC shares owned by Genzyme, based on quoted
market prices, was $41.8 million and $71.5 million at December 31, 1998
and 1997, respectively. The Company reported equity in GTC's net losses of
$7.4 million, $2.9 million and $3.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
Following are condensed statements of operations and balance sheet data of
GTC:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues........................................ $ 62,412 $62,938 $46,834
Operating loss.................................. (19,365) (8,352) (7,253)
Net loss........................................ (19,950) (9,343) (7,746)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS) 1998 1997
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets.................................. $32,417 $24,400
Noncurrent assets............................... 50,920 46,580
Current liabilities............................. 37,297 32,823
Noncurrent liabilities.......................... 9,836 10,779
</TABLE>
GTC CREDIT FACILITIES
Genzyme has guaranteed GTC's obligations under a $17.5 million credit
facility and a $7.1 million term loan with a commercial bank. In exchange
for this guarantee, GTC issued Genzyme a warrant to purchase up to
288,000 shares of GTC common stock at an exercise price of $4.875 per
share. Of these shares, 96,000 are currently exercisable. GTC also issued
Genzyme a warrant to purchase 145,000 shares of GTC common stock at an
exercise price of $2.84375 per share in connection with the guarantee by
Genzyme of GTC's obligations under a prior credit facility. All of the
shares subject to this warrant are exercisable.
CONVERTIBLE DEBT AGREEMENT
In December 1998, Genzyme and GTC further amended and restated their
Convertible Debt Agreement (the "Convertible Debt Agreement"). Under the
Convertible Debt Agreement, the available line of credit from Genzyme to
GTC is $8,327,000 and the expiration date is March 31, 2000. GTC has an
option to convert any outstanding balance to a three year term loan. The
interest rate of the Convertible Debt Agreement was 7% through April 1,
1998 increasing annually through the end of the Convertible Debt
Agreement; starting at the lower of 8% or prime in the first year
increasing to the lower of 10% or prime lending rate plus 2% in the first
year of the Convertible Debt Agreement. As a result of GTC's preferred
stock offering in March 1998 the Convertible Debt Agreement was reduced
to approximately $6.3 million. There are certain financial covenants
under the Convertible Debt Agreement. Any amounts outstanding under the
Convertible Debt Agreement may be converted into shares of GTC common
stock at Genzyme's option at any time or at GTC's option on a quarterly
basis. 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, 1998 was $3.0 million. As of
December 31, 1998, no balances remained outstanding under this credit
line.
70
<PAGE> 71
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. INVESTMENTS (CONTINUED)
ATIII LLC
Effective January 1998, Genzyme and GTC established ATIII LLC, a joint
venture for the development and commercialization of ATIII. Genzyme and
GTC will provide 70% and 30%, respectively, of the first $33.0 million in
development costs under the program. Development costs in excess of $33.0
million will be shared equally by the partners and all profits from the
sale of ATIII 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 contributed ATIII and
certain of the product's underlying patents and technology to the joint
venture. Genzyme also contributed patents and technology underlying the
product to the joint venture. Pursuant to the terms of the joint venture
agreements, Genzyme will pay GTC certain amounts upon the achievement of
certain milestones. 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 an earlier agreement between the parties
pursuant to which Genzyme had funded the ATIII program.
The minority interest of $4.3 million for the year ended December 31,
1998 relates to the portion of the results of operations of ATIII LLC
that is allocable to GTC. There were no corresponding amounts for the
years ended December 31, 1997 or 1996. Genzyme's Chairman and Chief
Executive Officer is a director of GTC.
INVESTMENTS IN JOINT VENTURES ALLOCATED TO GENZYME GENERAL:
RENAGEL LLC
In June 1997, Genzyme and GelTex established RenaGel LLC, a
joint venture for the final development and commercialization of
Renagel(R) Capsules. The joint venture has rights to commercialize
Renagel(R) Capsules worldwide, except in Japan and Pacific Rim countries.
Genzyme will market and sell products for the joint venture in the
territory. 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) Capsules and the product's underlying patents and
technologies to the joint venture.
Pursuant to the terms of the agreement, Genzyme committed to pay GelTex a
total of $27.5 million. When the joint venture agreements were signed,
Genzyme made a $2.5 million equity investment of GelTex common stock at
$25.00 per share, which represents less than 1% ownership in GelTex.
Genzyme also paid GelTex $15.0 million in November 1998 when Renagel(R)
Capsules received FDA marketing approval. Genzyme will make an additional
$10.0 million milestone payment in October 1999. The $25.0 million in
milestone payments has been capitalized.
As of December 31, 1998, Genzyme General has provided a total of $14.4
million of funding to the joint venture and realized net losses from the
joint venture of $7.5 million in 1998 and $2.3 million in 1997. Summary
financial information is not presented as the impact of RenaGel LLC's
activities on the Company's statement of operations for the years ended
December 31, 1998 and 1997 is not considered to be material. At December
31, 1998, Genzyme had a receivable from RenaGel LLC of $1.1 million. The
Company's Chairman and Chief Executive Officer is a director of GelTex
and another director of the Company is Chairman of GelTex.
71
<PAGE> 72
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. INVESTMENTS (CONTINUED)
INVESTMENTS IN JOINT VENTURES ALLOCATED TO GENZYME GENERAL (CONTINUED):
BIOMARIN/GENZYME LLC
In September 1998, Genzyme formed BioMarin/Genzyme LLC, a joint venture with
BioMarin for the development and commercialization of alpha-L-iduronidase, a
recombinant enzyme to treat MPS I. Funding for and profits of the joint venture
will be shared equally by Genzyme and BioMarin. Pursuant to the terms of joint
venture agreement, Genzyme will pay BioMarin a $12.1 million milestone payment
upon receipt of FDA approval of a Biologics License Application for
alpha-L-iduronidase to treat MPS I. As of December 31, 1998, Genzyme General has
provided a total of $1.4 million of funding to the joint venture and realized
net losses from the joint venture of $0.9 million in 1998. Summary financial
information is not presented as the impact of BioMarin/Genzyme LLC's activities
on the Company's statement of operations for the year ended December 31, 1998 is
not considered to be material.
PHARMING/GENZYME LLC
On October 14, 1998 Genzyme General and Pharming formed Pharming/Genzyme LLC,
joint venture to develop and commercialize worldwide the human enzyme
alpha-glucosidase as a treatment for Pompe disease. Under the terms of the
agreement, Genzyme General will fund the first $14.0 million of development
costs. Thereafter, funding for and profits of the joint venture will be shared
equally by Genzyme and Pharming. As of December 31, 1998, Genzyme General has
provided a total of $3.2 million of funding to the joint venture and realized
net losses from the joint venture of $4.0 million in 1998. Summary financial
information is not presented as the impact of Pharming/Genzyme LLC's activities
on the Company's statement of operations for the year ended December 31, 1998
is not considered to be material.
INVESTMENT IN JOINT VENTURE 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
using porcine fetal cells for the treatment of Parkinson's and Huntington's
disease in humans. Under the terms of the joint venture agreement, GTR provided
100% of the initial $10.0 million of the funding requirements and will provide
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 by
the two parties. As of December 31, 1998, GTR has provided a total of $15.7
million of funding to the joint venture, $5.1 million of which was provided by
Genzyme General in exchange for 489,810 GTR Designated Shares. GTR realized net
losses from the joint venture of $7.7 million in 1998, $6.7 million in 1997 and
$1.7 million in 1996. During February 1998, GTR's funding obligation of the
expenses incurred by Diacrin/Genzyme LLC decreased from 100% to 75%, because the
initial $10.0 million of the funding requirements had been provided by that
date. 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, 1998, 1997 and 1996 is not considered to be material. The
Company's Chairman and Chief Executive Officer is a director of Diacrin.
Genzyme has announced its intent to reallocate this joint venture from GTR to
Genzyme General. See Note S., "Subsequent Events," below.
In 1996, Genzyme agreed to make available an unsecured, subordinated line of
credit of up to $10.0 million to Diacrin that may be used by Diacrin under
certain circumstances only to fund capital contributions to Diacrin/Genzyme LLC.
There have been no draws on the line of credit to date.
INVESTMENT IN JOINT VENTURE ALLOCATED TO GENZYME MOLECULAR ONCOLOGY:
STRESSGEN/GENZYME LLC
In July 1997, StressGen/Genzyme LLC was established as a joint venture among
Genzyme, StressGen Biotechnologies Corporation ("StressGen") and the Canadian
Medical Discoveries Fund ("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. 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 a 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.
72
<PAGE> 73
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I. INVESTMENTS (CONTINUED)
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. 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%. This purchase right will
terminate if not exercised by CMDF during such 30-day period.
Prior to any 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 any 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 CMDF's put right. Accordingly, for the years
ended December 31, 1998 and 1997, GMO recorded $1.6 million and $0.3 million,
respectively, of equity in loss of joint venture.
For the years ended December 31, 1998 and 1997, GMO recorded $2.2 million and
$0.3 million, respectively, of research and development revenue and $2.0 million
and $0.3 million, respectively, for cost of research and development revenue
related to services billed to StressGen/Genzyme LLC. GMO had a receivable of
$0.1 million due from StressGen/Genzyme LLC at December 31, 1998, which is
included in other current assets.
As of December 31, 1998, GMO's portion of the cumulative losses of
StressGen/Genzyme LLC exceeded its initial capital contribution of $0.7 million
and GMO has recorded $1.2 million of a noncurrent liability due to the existence
of CMDF's put right.
Summary financial information for StressGen/Genzyme LLC is not presented as the
impact of StressGen/Genzyme LLC activities on Genzyme's statement of operations
for the years ended December 31, 1998 and 1997 is not considered to be material.
NOTE J. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
Compensation ............................. $23,310 $21,917
Technology access fee .................... 10,000 --
Professional fees ........................ 6,146 7,949
Royalties ................................ 6,895 8,421
Rebates .................................. 5,663 4,575
Other .................................... 22,063 29,241
------- -------
$74,077 $72,103
======= =======
</TABLE>
73
<PAGE> 74
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K. 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) 1998 1997
--------- ---------
<S> <C> <C>
5.25% convertible subordinated notes due June 2005 ....... $ 250,000 $ --
Revolving credit facility due November 1999 .............. 100,000 118,000
5% GGD Notes due August 2003 ............................. 21,559 --
6% convertible subordinated debentures ................... -- 16,617
5% convertible subordinated note due February 2000........ 12,579 12,681
Mortgage note payable, matures June 1999 ................. -- 19,833
Other mortgage notes payable ............................. 3,167 3,856
--------- ---------
387,305 170,987
Less current portion ..................................... (100,080) (711)
--------- ---------
$ 287,225 $ 170,276
========= =========
</TABLE>
In February 1998, Genzyme repaid the remaining $0.7 million principal balance
due on a mortgage note due January 2008.
In November 1998, Genzyme repaid the remaining $19.4 million principal balance
due on a mortgage note due June 1999, plus accrued interest of $0.2 million.
The minimum annual principal repayment of obligations for long-term debt,
excluding capital leases, in each of the next five years are as follows: 1999 -
$100,080,000, 2000 - $12,668,000, 2001 - $98,000, 2002 - $109,000, 2003 -
$21,680,000 and thereafter $252,670,000.
REVOLVING CREDIT FACILITY
Genzyme has a $225 million revolving credit facility with a syndicate of
commercial banks. Amounts drawn under this facility may be allocated to Genzyme
General, GTR or GMO. As of December 31, 1998, Genzyme had $100.0 million of debt
outstanding under the revolving credit facility, $82.0 million of which was
allocated to Genzyme General and $18.0 million of which was allocated to GTR.
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, 1998, the interest rate on amounts
outstanding under the revolving credit facility was approximately 5.75%. Genzyme
pays a commitment fee ranging from .15% to .375% on the unused portion of the
revolving credit facility.
74
<PAGE> 75
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
5.25% CONVERTIBLE SUBORDINATED NOTES
In May 1998, Genzyme raised approximately $243.0 million, net of the initial
purchasers' discount and offering costs, from the issuance of the GGD Notes. The
GGD Notes bear interest at 5.25% per annum and interest is payable semi-annually
on June 1 and December 1 of each year, commencing on December 1, 1998. The GGD
Notes are convertible, at any time at or before maturity (unless previously
redeemed), into shares of GGD Stock at a conversion price of $39.60 per share,
subject to adjustment for certain events. As a result of the GMO Dividend,
holders of the GGD Notes will also be entitled to receive 0.10805 share of GMO
Stock for each share of GGD Stock issued upon conversion. The GGD Notes may not
be redeemed prior to June 10, 2001 and are redeemable, subject to certain
subordination provisions, on such date and thereafter at the option of Genzyme,
as a whole or from time to time in part, at the following prices (expressed as
percentages of the principal amount) plus accrued interest to, but not
including, the redemption date: 102.63% if redeemed on or before May 31, 2002,
101.75% if redeemed between June 1, 2002 and May 31, 2003; 100.88% if redeemed
between June 1, 2003 and May 31, 2004; and 100% if redeemed on or after June 1,
2004. The fair value of the GGD Notes at December 31, 1998, based upon quoted
market prices, totaled $322.0 million.
GTR'S 5% CONVERTIBLE NOTE
On February 28, 1997, GTR raised $13.0 million through the private placement of
the GTR Note. The GTR Note became 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 (the "Average GTR Stock Price") immediately preceding the
conversion date. The discount started at 2% beginning in August 1997 and
increased to 11% in November 1998. Thereafter, the conversion price is the
lesser of 89% of the Average GTR Stock Price preceding the conversion date or
May 28, 1998, 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 has been accreted to its face value by a
charge to interest expense of $1.6 million over the term of the initial 15 month
conversion period. GTR recorded interest expense related to the accretion of
this debt of $0.5 million and $1.1 million in the years ended December 31, 1998
and 1997, respectively.
In November 1998, the holder of the GTR Note converted $600,000 of the principal
amount of the GTR Note in exchange for 223,405 shares of GTR Stock. Due to the
conversion, GTR paid $1.1 million of accrued interest in cash to the holder of
the GTR Note, which represented all of the accrued interest on the GTR Note.
GGD DEBENTURES
In August 1997, GMO raised $20.0 million through the private placement of the
GMO Debentures. In the third quarter of 1997, GMO recorded $16.5 million of
proceeds attributable to the value of the debt and $3.5 million attributed to
the value of the conversion feature (recorded as an increase to stockholders'
equity). The debt was 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 GMO Debentures provided that if the effective date of the
initial public offering of GMO Stock did not occur before August 29, 1998, at
the holder's option, the GMO Debentures could be exchanged for the GGD
Debentures. Effective August 1998, all of the holders of the GMO Debentures
exercised their option to exchange their GMO Debentures, plus accrued interest
of $1.2 million, for the GGD Debentures. Approximately 3,029,000 GMO Designated
Shares were reserved in connection with this exchange, subject to adjustment
based on the fair market value of GMO Stock on October 16, 1999. GMO recorded
$1.9 million and $1.0 million of interest expense related to the accretion of
this debt in 1998 and 1997, respectively. Genzyme General recorded $0.7 million
of interest expense related to the accretion of this debt in 1998.
MORTGAGE NOTES
The Company's remaining mortgage note matures December 2003 and is
collateralized by land and buildings with a net book value of $3.5 million at
December 31, 1998. This mortgage, which bears interest at 10.5%, is attributed
to Genzyme General
75
<PAGE> 76
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
OPERATING LEASES
Total rent expense under operating leases was $18.4 million, $16.3 million and
$12.8 million in 1998, 1997 and 1996, respectively. The Company leases
facilities and personal property under certain operating leases in excess of one
year.
FUTURE MINIMUM PAYMENTS DUE UNDER OPERATING LEASES:
Future minimum payments due under the Company's operating leases are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) OPERATING
LEASES
-------
<S> <C>
1999 ..................................... $ 21,535
2000 ..................................... 20,443
2001 ..................................... 17,309
2002 ..................................... 13,867
2003 ..................................... 13,163
Thereafter ............................... 129,191
--------
Total minimum payments ................... $215,508
========
</TABLE>
A sixty-five year lease commenced on June 1, 1992 between a wholly owned
subsidiary of Genzyme and a third party lessor. Genzyme recorded total rent
expense under this lease of $1,517,000, $1,290,000 and $886,000 in 1998, 1997
and 1996, respectively. The lease provides for escalations every five years
based on the Consumer Price Index Escalation with a minimum escalation of 3% per
year. Therefore, rent expense on a straight-lined basis is $1,517,000 per year.
GTR leases from Genzyme General a portion of a research and development
facility. GTR is obligated to pay Genzyme General $0.6 million per year for 3
years commencing on July 1, 1998. Total rent expense for 1998 was $0.3 million.
Diacrin/Genzyme LLC has subleased a portion of this facility and is obligated to
pay GTR rent of $0.4 million per year pursuant to the terms of the sublease
agreement. Total rent expense under the sublease for 1998 was $0.2 million.
NOTE L. 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.
STOCK OFFERINGS
In 1997, Genzyme sold 4,000,000 shares of GTR Stock for net proceeds of $29.0
million.
STOCK SPLIT
All share and per share amounts herein have been restated to reflect the
2-for-1 split of shares of GGD Stock on July 25, 1996.
DIRECTORS' DEFERRED COMPENSATION PLAN
Genzyme's Directors' 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 and receive either cash or stock in the future.
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, 1998, 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 Directors' 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, 1998, no shares of GGD Stock, GTR Stock, or GMO Stock credited to
stock accounts under the Directors' Deferred Compensation Plan have been
distributed to participants.
76
<PAGE> 77
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS' STOCK OPTION
PLAN AND EMPLOYEE STOCK PURCHASE PLAN
At December 31, 1998, approximately 14,888,000 shares of GGD Stock, 5,253,000
shares of GTR Stock and 4,139,000 shares of GMO Stock were reserved for issuance
under the Company's 1990 Equity Incentive Plan, as amended, 1997 Equity Plan,
1998 Director Stock Option Plan, 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 years. In addition, Genzyme has a 1998 Director Stock Option
Plan pursuant to which nonstatutory stock options up to a maximum of 354,000
shares of GGD Stock, 200,000 shares of GTR Stock and 140,000 shares of GMO Stock
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, 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
Granted ........................... 2,482,222 29.61
Exercised ......................... (3,319,203) 20.11
Forfeited and cancelled ........... (917,556) 27.21
-----------
Outstanding at December 31, 1998 .... 11,592,730 24.00 5,579,267
===========
</TABLE>
77
<PAGE> 78
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
GTR STOCK:
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
Granted ............................. 996,019 5.44
Exercised ........................... (71,491) 4.83
Forfeited and cancelled ............. (303,344) 10.47
----------
Outstanding at December 31, 1998 ...... 3,397,946 9.13 1,464,732
==========
</TABLE>
<TABLE>
WEIGHTED
SHARES AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
GMO STOCK:
Outstanding June 18, 1997 .............. --
Granted ............................ 826,334 7.00
----------
Outstanding at December 31, 1997 ....... 826,334 7.00 180,063
Granted .............................. 386,867 6.83
Exercised ............................ (886) 7.00
Forfeited and cancelled .............. (54,530) 7.00
----------
Outstanding at December 31, 1998 ....... 1,157,785 6.96 391,044
==========
</TABLE>
The total exercise proceeds for all options outstanding at December 31, 1998 is
approximately $278,271,000, $31,065,000 and $8,061,000 for GGD Stock, GTR Stock
and GMO Stock, respectively. Information regarding the range of option prices as
of December 31, 1998 is as follows:
GGD STOCK:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISABLE
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/98 LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- --------------- -------------- ---- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.82 - $15.14 2,526,171 4.10 $12.79 1,630,092 $11.72
15.19 - 24.88 2,452,083 5.12 20.48 1,978,770 20.24
25.00 - 28.00 3,146,767 8.27 27.44 590,030 26.76
28.06 - 30.63 2,875,941 8.04 30.37 1,300,498 30.35
30.65 - 47.88 591,768 9.15 37.19 79,877 33.81
- -----------------------------------------------------------------------------------------------------------
$ 4.82 - $47.88 11,592,730 6.68 $24.00 5,579,267 $20.99
</TABLE>
78
<PAGE> 79
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
GTR STOCK:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISABLE
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/98 LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- --------------- -------------- ---- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.31 - $ 4.75 868,267 7.42 $4.05 525,446 $4.73
4.81 - 6.50 722,966 8.29 6.31 283,109 6.13
6.63 - 10.75 710,681 8.74 9.27 235,408 9.67
10.88 - 17.50 1,042,951 7.14 14.62 391,748 13.28
17.63 - 25.75 53,081 7.09 21.75 29,021 21.41
- ---------------------------------------------------------------------------------------------------------------
$ 2.31 - $25.75 3,397,946 7.79 $9.13 1,464,732 $8.41
</TABLE>
GMO STOCK:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISABLE
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/98 LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- --------------- -------------- ---- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.31 - $3.75 11,467 9.94 $3.22 67 $3.75
7.00 - 7.00 1,146,318 8.98 7.00 390,977 7.00
- -------------------------------------------------------------------------------------------------------
$2.31 - $7.00 1,157,785 8.99 $6.96 391,044 $7.00
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Genzyme's 1990 Employee Stock Purchase Plan, as amended, 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) 2,250,000 shares of GGD Stock are
authorized for issuance, of which 388,048, 366,922 and 291,053 shares were
issued in 1998, 1997 and 1996, respectively, (ii) 1,450,000 shares of GTR Stock
are authorized for issuance, of which 515,936, 280,819 and 325,300 shares were
issued in 1998, 1997 and 1996, respectively, and (iii) 500,000 shares of GMO
Stock are authorized for issuance, none of which have been issued.
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, as amended, (a stock purchase plan), and the 1998
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 for the years ended December 31,
1998 and 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) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CONSOLIDATED:
Net income (loss):
As reported.............................. $ 62,567 $ 13,629 $(72,817)
Pro forma ............................... $ 43,986 $ (2,150) $(86,293)
</TABLE>
79
<PAGE> 80
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK COMPENSATION PLANS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
GENZYME GENERAL:
Net income (loss):
As reported ................... $ 121,053 $ 77,447 $ (30,502)
Pro forma ..................... $ 107,478 $ 65,440 $ (40,558)
Basic income (loss) per share:
As reported ................... $ 1.53 $ 1.01 $ (0.45)
Pro forma ..................... $ 1.36 $ 0.86 $ (0.59)
Diluted income (loss) per share:
As reported ................... $ 1.48 $ 0.98 $ (0.45)
Pro forma ..................... $ 1.31 $ 0.83 $ (0.59)
GENZYME TISSUE REPAIR:
Net loss:
As reported ................... $ (40,386) $ (45,984) $ (42,315)
Pro forma ..................... $ (44,481) $ (49,547) $ (45,735)
Basic and diluted loss per share:
As reported ................... $ (1.99) $ (3.07) $ (3.38)
Pro forma ..................... $ (2.19) $ (3.31) $ (3.65)
GENZYME MOLECULAR ONCOLOGY:
Net loss:
As reported ................... $ (19,107) $ (19,578) --
Pro forma ..................... $ (20,018) $ (19,787) --
Basic and diluted loss per share:
As reported ................... $ (3.81) $ (4.98) --
Pro forma ..................... $ (3.99) $ (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
5.59%, 5.96% and 6.37%, expected volatility of 44%, 42% and 45%, zero dividend
yields and expected lives of four years for 1998, 1997 and 1996, respectively.
The average fair value of the Genzyme General options granted during 1998, 1997
and 1996 is estimated as $12.87, $12.21 and $11.98, respectively, on the date of
grant. In computing these pro forma amounts, GTR has assumed a risk-free
interest rate equal to approximately 5.59%, 5.96% and 6.37%, expected volatility
of 73%, 70% and 80% in 1996, zero dividend yields and expected lives of four
years for 1998, 1997, and 1996, respectively. The average fair value of GTR
stock options granted during 1998, 1997 and 1996 is estimated as $3.27, $5.66
and $9.23, respectively, on the date of grant. In computing these pro forma
amounts, GMO has assumed a risk-free interest rate equal to approximately 5.59%
and 5.96%, expected volatility of 70% and 45%, zero dividend yields and expected
lives of four years for 1998 and 1997, respectively. The average fair value of
the options exercisable for shares of GMO Stock granted during 1998 and 1997 is
estimated as $3.92 and $2.97 on the date of grant.
80
<PAGE> 81
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK RIGHTS
Pursuant to the Company's shareholder rights plan, 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. The shareholder rights plan
was renewed by the Genzyme Board in March 1999. See Note S., "Subsequent
Events," below.
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 first underwritten public offering of GMO Stock (the
"Qualified Public Offering") 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 Qualified Public
Offering, will be equal to 120% of a defined conversion price per share of GMO
Stock.
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 Qualified Public Offering, 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
Qualified Public Offering, 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 between
December 16, 1994 and July 10, 1997, grant the holders two shares of GGD Stock
and .0675 share of GTR Stock (after giving effect to the 2-for-1 split of shares
of GGD Stock in July 1996) for each warrant exercised. When exercised after July
10, 1997, holders received two shares of GGD Stock and .0975 shares of GTR
Stock. 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.
81
<PAGE> 82
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS (CONTINUED)
Warrant activity related to GGD Stock is summarized below:
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
-------------- -------------
<S> <C> <C>
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
--------------
Exercised ................................................. (13,019) 42.67 -- 44.20
Expired ................................................... (2,960) 44.20
--------------
Outstanding at December 31, 1998 ............................ 120,000 30.18
==============
</TABLE>
GTR DESIGNATED SHARES
Pursuant to the Charter, 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 not eligible to receive dividends and cannot be voted by Genzyme. 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, 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.
Genzyme had 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, which were reserved for issuance
at the sole discretion of the Genzyme Board for the benefit of the Genzyme
General stockholders. There was no such allocation in 1998. The GTR Purchase
Option has expired.
GTR EQUITY LINE
In October 1996, the Genzyme Board approved the GTR Equity Line with an initial
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 of
cash was allocated to GTR in 1997 in exchange for 721,455 GTR Designated Shares.
In May 1998, the Genzyme Board increased the amount available under the GTR
Equity Line from $13.0 million to $50.0 million. Under the GTR Equity Line,
Genzyme Tissue Repair may draw down funds as needed each fiscal quarter in
exchange for GTR Designated Shares. The rate of exchange will be determined by
dividing the amount drawn under the line of credit by the average market value
of one share of GTR Stock during the 20 trading days prior to the date the
amount is drawn under the line of credit. As of December 31, 1998, GTR had not
yet drawn any funds from the GTR Equity Line.
82
<PAGE> 83
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
GTR DESIGNATED SHARES (CONTINUED)
DISTRIBUTION OF GTR DESIGNATED SHARES
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. Of these shares, 2,292,000 shares of GTR Stock,
with a fair market value of $22.9 million, were issued to holders of GGD Stock
and 394,000 shares of GTR Stock were reserved for issuance upon the exercise of
GGD Stock options and warrants outstanding on June 11, 1997.
There was no distribution of GTR Designated Shares in 1998.
GTR Designated Share activity is summarized below:
<TABLE>
<CAPTION>
GTR DESIGNATED
SHARES
----------
<S> <C>
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
Stock options exercised ................................. (167,064)
Stock warrants exercised ................................ (1,721)
----------
Balance at December 31, 1998 .......................... 716,268
==========
</TABLE>
83
<PAGE> 84
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
GMO DESIGNATED SHARES
Pursuant to the Charter, 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 not eligible to receive dividends and cannot be voted by Genzyme. 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. The number of GMO Designated Shares will be decreased by: the
number of shares of GMO Stock issued by Genzyme, the proceeds of which are
allocated to Genzyme General; the number of shares of GMO Stock issued as a
dividend to holders of GGD Stock; and the number of shares of GMO Stock issued
upon the conversion of convertible securities, the proceeds of which are
attributed to Genzyme General. In addition, the number of GMO Designated Shares
can be increased as a result of certain interdivision transactions.
When Genzyme acquired PharmaGenics, 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 "PGI Credit Facility"). In September 1998, the Genzyme Board approved the
exchange of the PGI Credit Facility to Genzyme General in the principal amount
of $2,450,000, plus accrued interest of $246,080, for approximately 386,000 GMO
Designated Shares. The number of GMO Designated Shares created as a result of
the exchange was based on the fair value of the GMO Stock ($7.00) as determined
by the Genzyme Board. The amount of the note and the accrued interest was
reclassified to division equity upon the exchange.
GMO EQUITY LINE OF CREDIT
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"), 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. In
September 1998, GMO made a draw of the remaining $5.0 million available under
the GMO Equity Line, thus reducing the amount available under the GMO Equity
Line to zero. Approximately 714,000 GMO Designated Shares were reserved for
issuance in connection with this draw.
In August 1998, the Genzyme Board approved the allocation of up to an additional
$30.0 million in cash to GMO in exchange for an increase in the number of GMO
Designated Shares. As of December 31, 1998, GMO had not yet drawn any funds
under this arrangement.
If, as of November 30, of each year starting November 30, 1999 the number of GMO
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 GMO Stock then issued and outstanding,
then substantially all GMO 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 GMO Designated Shares reserved for issuance upon
the exercise or conversion of Genzyme General convertible securities and (b) the
number of GMO 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.
In November 1998, Genzyme distributed approximately 8,717,000
shares of GMO Stock to holders of GGD Stock and released from escrow
approximately 3,929,000 shares of GMO Stock held by the former PharmaGenics
shareholders.
84
<PAGE> 85
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
GMO DESIGNATED SHARES (CONTINUED)
GMO Designated Shares activity is summarized below:
<TABLE>
<CAPTION>
GMO DESIGNATED
SHARES
----------
<S> <C>
Established at merger with PharmaGenics ................... 6,000,000
----------
Balance at December 31, 1997 ............................ 6,000,000
GMO Debenture exchange .................................... 3,028,571
PharmaGenics credit facility exchange ..................... 385,972
Increase from equity line ................................. 714,286
Dividend distribution ............... ..................... (8,717,485)
Warrants exercised ........................................ (1,352)
----------
Outstanding at December 31, 1998 ......................... 1,409,992
==========
</TABLE>
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Revenues from research and development agreements with related parties include
the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Fees for research and development activities:
GTC ........................................ $3,568 $8,041 $ 3,212
StressGen/Genzyme LLC ...................... 2,177 315 --
Neozyme II ................................. -- -- 19,799
------ ------ -------
$5,745 $8,356 $23,011
====== ====== =======
</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.
GENZYME GENERAL:
GENZYME DEVELOPMENT PARTNERS, L.P.
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 the Sepra
Products.
The Company has an option (the "GDP Purchase Option") to purchase all of the
outstanding partnership interests in GDP for a payment of approximately $26.0
million in cash, Genzyme common stock or a combination thereof determined at
Genzyme's sole discretion, plus future royalty payments. The GDP Purchase Option
is exercisable during the 90-day period commencing on August 31, 2000, but such
commencement date will be accelerated to the last day of the first month in
which GDP has received distributions from GVII (described below) in an aggregate
amount of at least $5.5 million. Genzyme elected without obligation to fund the
research and development activities of GDP using Genzyme General cash and spent
approximately $6.7 million, $7.3 million and $6.0 million on GDP's programs in
1998, 1997 and 1996, respectively. The Company has agreed to fund GDP's research
and development programs and general and administrative expenses through 1999
but, as general partner, believes that additional funds will be required to
complete the development, clinical testing and commercialization of GDP's
products.
85
<PAGE> 86
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
GENZYME GENERAL (CONTINUED):
GDP (CONTINUED)
The Company and GDP formed GVII, 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 GVII to Genzyme General. GDP has
contributed its technology and $1.7 million to GVII 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 GVII. GVII
began to engage in active business after receipt of FDA marketing approval for
Seprafilm(R) in August 1996. For the years ended December 31, 1998, 1997 and
1996, GVII incurred net losses of $4.8 million, $2.3 million and $2.5 million,
respectively, primarily attributable to costs associated with the introduction
of the Sepra Products to the healthcare marketplace. The results of operations
and financial position of GVII are consolidated into Genzyme's financial
statements.
GTC
The disclosures related to the research and development agreement between
Genzyme and GTC are included in Note I., "Investments" above.
RENAGEL LLC, BIOMARIN/GENZYME LLC, PHARMING/GENZYME LLC AND ATIII LLC:
The disclosures related to Genzyme General's participation in RenaGel LLC,
BioMarin/Genzyme LLC, Pharming/Genzyme LLC and ATIII LLC, joint ventures with
GelTex, BioMarin, Pharming and GTC, respectively, are included in Note I.,
"Investments" above.
GENZYME TISSUE REPAIR:
The disclosures related to GTR's participation in Diacrin/Genzyme LLC, a joint
venture, are included in Note I., "Investments" above.
GENZYME MOLECULAR ONCOLOGY:
The disclosures related to GMO's participation in StressGen/Genzyme LLC, a joint
venture, are included in Note I., "Investments" above.
NOTE N. 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, 1998, 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.
86
<PAGE> 87
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic (1) ............... $ 92,923 $ 16,907 $(79,930)
Foreign .................... 9,514 8,822 10,308
-------- -------- --------
Total ............ $102,437 $ 25,729 $(69,622)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Currently payable:
Federal .................. $ 32,501 $ 11,344 $ 23,174
State .................... 6,375 1,754 4,689
Foreign .................. 4,016 2,971 3,616
-------- -------- --------
Total current .... 42,892 16,069 31,479
Deferred:
Federal .................. (2,180) (3,723) (28,448)
State .................... (842) (246) 164
-------- -------- --------
Total deferred ... (3,022) (3,969) (28,284)
-------- -------- --------
Provision for income taxes . $ 39,870 $ 12,100 $ 3,195
======== ======== ========
</TABLE>
- ----------
(1) Includes $7.0 million in charges for purchased research and development
and acquisition expenses in 1997, and $130.6 million in charges for
purchased research and development in 1996.
Provisions for income taxes were at rates other than the U.S. Federal statutory
tax rate for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate ......................... 35.0 % 35.0% 35.0%
Losses in less than 80%-owned
subsidiaries with no current tax benefit ........... 1.7 3.1 1.4
State taxes, net ................................... 3.5 3.0 5.2
Foreign sales corporation .......................... (3.2) (6.7) (3.6)
Nondeductible amortization ......................... 4.2 10.6 3.6
Benefit of tax credits ............................. (3.9) (7.7) --
Other, net ......................................... 0.5 (2.6) 3.7
Nondeductible interest ............................. 1.1 2.2 --
Utilization of operating loss carryforwards ........ -- -- (4.5)
---- ---- ----
Effective tax rate before certain charges - expense 38.9 36.9 40.8
---- ---- ----
Gross charge for purchased research and development
net of related tax benefits ........................ 0.0 10.1 (36.3)
---- ---- ----
Effective tax rate -- expense ...................... 38.9% 47.0% 4.5%
==== ==== ====
</TABLE>
87
<PAGE> 88
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O. INCOME TAXES
At December 31 the components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............. $ 6,853 $ 7,702
Tax credits .................................. 3,714 6,514
Deferred gain ................................ 2,002 2,237
Intangible amortization ...................... 42,717 46,391
Investments in unconsolidated subsidiary ..... 3,108 1,323
Realized and unrealized capital losses ....... 10,139 10,182
Reserves,accruals and other .................. 44,509 27,328
--------- ---------
Gross deferred tax asset ..................... 113,042 101,677
Valuation allowance .......................... (16,700) (14,914)
--------- ---------
Net deferred tax asset ..................... 96,342 86,763
Deferred tax liabilities:
Depreciable assets ........................... (28,479) (23,174)
Intangible amortization ...................... (3,861) (6,509)
--------- ---------
Net deferred tax asset ..................... $ 64,002 $ 57,080
========= =========
</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
$16.7 million and $14.9 million for December 31, 1998 and 1997, 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, 1998 the Company had U.S. net operating loss and tax credit
carryforwards of $19.6 million and $3.7 million, respectively, for income tax
purposes. These loss carryforwards expire from 2003 to 2011. Utilization of net
operating loss carryforwards may be limited under Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). Tax credits of $3.7 million
carryforward indefinitely.
NOTE P. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the 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 $3.8 million, $2.3 million and $1.1 million to the 401(k) Plan in
1998, 1997 and 1996, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of DSP and certain of Genzyme's foreign subsidiaries. Pension expense
for 1998, 1997 and 1996 was approximately $1.1 million, $1.1 million and $0.6
million, respectively. Pension costs are funded as accrued. Actuarial and other
disclosures regarding the plans are not presented because they are not material.
88
<PAGE> 89
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q. SEGMENT INFORMATION
Genzyme reportable segments are strategic business units or divisions that offer
different products and services. Genzyme has five reportable segments:
- The Therapeutics business unit, which develops, manufactures and
distributes human therapeutic products for significant unmet medical needs.
The business derives substantially all of its revenue from Cerezyme(R)
enzyme and Ceredase(R) enzyme sales.
- The Surgical Products business unit, which commenced operations in
July 1996 upon the acquisition of DSP, develops, manufactures and
markets surgical products for three principal business lines: (i)
cardiovascular surgery; (ii) general surgery; and (iii) plastic surgery.
- The Diagnostic Products business unit, which provides diagnostic
products to niche markets focusing on in vitro diagnostics.
- GTR develops and markets biological products for orthopedic injuries,
such as cartilege repair, and severe burns.
- GMO is developing cancer products, with a focus on therapeutic
vaccines and angiogenesis inhibitors.
Information concerning the operations in these reportable segments is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
REVENUES:
Therapeutics $ 413,645 $ 332,712 $ 264,588
Surgical Products 103,958 100,835 50,715
Diagnostic Products 65,683 66,288 65,789
GTR 17,117 10,856 7,312
GMO 19,407 782 --
Other 85,846 86,927 107,162
Eliminations/Adjustments 3,679 10,441 23,188
-----------------------------------------
Total $ 709,335 $ 608,841 $ 518,754
=========================================
DEPRECIATION AND AMORTIZATION EXPENSE:
Therapeutics $ 10,862 $ 10,054 $ 1,700
Surgical Products 8,449 8,220 4,520
Diagnostic Products 4,715 4,540 7,487
GTR 1,757 2,482 935
GMO 12,354 5,245 --
Other 11,470 7,410 7,161
Eliminations/Adjustments 9,262 13,013 8,389
-----------------------------------------
Total $ 58,869 $ 50,964 $ 30,192
=========================================
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES:
Therapeutics $ (12,480) $ (2,310) $ --
Surgical Products -- -- --
Diagnostic Products -- -- --
GTR (7,674) (6,719) (1,727)
GMO (1,647) (258) --
Other (107) (71) (174)
Eliminations/Adjustments (7,098) (2,900) (3,472)
-----------------------------------------
Total $ (29,006) $ (12,258) $ (5,373)
=========================================
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
INCOME TAX (EXPENSE) BENEFIT:
Therapeutics $ (76,606) $ (61,389) $ (57,145)
Surgical Products 19,653 10,210 18,514
Diagnostic Products (13,755) (1,409) (2,430)
GTR -- -- --
GMO 2,647 1,092 --
Other 2,134 8,658 621
Eliminations/Adjustments 26,057 30,738 37,245
-----------------------------------------
Total $ (39,870) $ (12,100) $ (3,195)
=========================================
NET INCOME:
Therapeutics $ 120,832 $ 104,527 $ 82,232
Surgical Products (31,000) (17,384) (26,642)
Diagnostic Products(1) 21,694 2,400 3,499
GTR (40,386) (45,984) (42,315)
GMO (19,107) (19,578) --
Other (3,367) (14,741) (895)
Eliminations/Adjustments 13,901 4,389 (88,696)
-----------------------------------------
Total $ 62,567 $ 13,629 $ (72,817)
=========================================
SEGMENT ASSETS:
Therapeutics $ 326,305 $ 315,775
Surgical Products 277,578 282,379
Diagnostic Products 49,430 54,132
GTR 18,954 57,226
GMO 35,952 53,801
Other 94,930 92,605
Eliminations/Adjustments 887,405 439,535
--------------------------
Total $1,690,554 $1,295,453
==========================
</TABLE>
(1) Includes a gain on sale of product line in 1998 totaling $31.2 million.
The amounts in the category Other consist of amounts derived from Genzyme's
genetic testing and Pharmaceuticals business units. The difference between the
reportable segment's Net Income and Segment Assets and the Consolidated Net
Income and the Consolidated Total Assets for Genzyme is included in
Eliminations/Adjustments. The amounts in Eliminations/Adjustments for the
category Net Income primarily consists of interest income and interest expense
and certain other income and expense amounts not allocated to the segments.
Eliminations/Adjustments in the category Net Income for 1996 included a 106.5
million charge for in-process technology.
Segment assets for reportable segments includes the following: Accounts
Receivable, Inventory, certain Fixed Assets and certain Intangible Assets.
Therefore, the amounts in Eliminations/Adjustments for Segment Assets consist of
the following:
1998 1997
---- ----
Cash, cash equivalents, short and
long term investments $575,729 $246,341
Intangibles, net 40,079 15,973
Property, plant and equipment, net 133,995 96,650
Investment in equity securities 51,977 30,047
Other 85,625 50,524
------- -------
Total Eliminations/Adjustments $887,405 $439,535
======== ========
Genzyme operates in the healthcare industry and primarily manufactures and
markets its products in two major geographic areas - the United States and
Europe. Genzyme's principal manufacturing facilities are located in the United
States, United Kingdom, Switzerland and Germany. Genzyme 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's therapeutic products.
Certain information by geographic area follows (dollars in thousands):
<TABLE>
<CAPTION>
Long-Lived
Revenues Assets
<S> <C> <C>
1998
United States $485,864 $ 970,898
Other 223,471 57,247
-------- ----------
Total $709,335 $1,028,145
======== ==========
1997
United States $446,991 $ 755,040
Other 161,850 54,349
-------- ----------
Total $608,841 $ 809,389
======== ==========
1996
United States $386,956
Other 131,798
--------
Total $518,754
========
</TABLE>
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,
1998, 1997 and 1996, sales of Cerezyme(R) enzyme and Ceredase(R) enzyme
represented 67%, 63% and 62% of total product sales. In 1998, 1997 and 1996,
Genzyme marketed Cerezyme(R) enzyme and Ceredase(R) enzyme directly to
physicians, hospitals and treatment centers, and sold products representing
approximately 12%, 18% and 12%, 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.
89
<PAGE> 90
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
NOTE R. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per share
amounts) for the years ended December 31, 1998 and 1997 are displayed in the
following table.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998
Net revenue .............................. $ 160,551 $ 174,874 $ 173,394 $ 200,516
Gross profit ............................. 99,434 111,436 87,142 130,802
Net income (loss) (1) .................... 7,784 13,096 14,967 26,720
Income (loss) per share:
Attributable to GGD Stock:
Basic ............................... 0.32 0.40 0.41 0.40
Diluted ............................. 0.31 0.39 0.40 0.39
Attributable to GTR Stock:
Basic and diluted ................... (0.57) (0.52) (0.47) (0.44)
Attributable to GMO Stock:
Basic ............................... (1.66) (1.90) (2.06) 0.36
Diluted .............................. (1.66) (1.90) (2.06) 0.22
1997
Net revenue .............................. $ 146,593 $ 150,268 $ 152,094 $ 159,886
Gross profit ............................. 86,215 90,973 94,466 72,114
Net income (loss) (2) .................. 9,367 4,269 9,557 (9,564)
Income (loss) per share:
Attributable to GGD Stock:
Basic ............................... 0.28 0.31 0.32 0.11
Diluted ............................. 0.27 0.30 0.31 0.11
Attributable to GTR Stock:
Basic and diluted ................... (0.90) (0.86) (0.72) (0.64)
Attributable to GMO Stock:
Basic and diluted ................... (1.00) (1.69)
Pro forma attributable to GMO Stock (3):
Basic and diluted ................... (0.16) (2.14)
</TABLE>
- ----------
(1) Includes pre-tax charges in the third quarter of 1998 of $26.9 million
resulting from certain other charges (see Note B., "Other Charges" above)
and a pre-tax gain on the sale of the research products business assets of
$31.2 million, also recorded in the third quarter of 1998 (see Note C.,
"Sale of Research Products Business Assets" above).
(2) Includes pre-tax charges in the second quarter of 1997 of $7.0 million
respectively for acquired incomplete technology (see Note D.,
"Acquisitions" above). Also includes pre-tax charges in the fourth quarter
of 1997 of $29.2 million related to certain other charges recorded in
December 1997 (see Note B., "Other Charges" above).
(3) Pro forma net loss per share data is presented for GMO Stock for the first
and second quarters of 1997 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.
NOTE S. SUBSEQUENT EVENTS
In March 1999, Genzyme announced that it intends to create a separate division,
with its own series of common stock, for the existing surgical products business
that is currently part of Genzyme General, subject to approval of the Genzyme
Board.
In March 1999, Genzyme announced it plans to reallocate Genzyme's interest in
Diacrin/Genzyme LLC from GTR to Genzyme General. The transfer of the interest in
Diacrin/Genzyme LLC is subject to the approval of GTR's shareholders.
In March 1999, the Genzyme Board renewed Genzyme's shareholder rights plan,
which expired on March 28, 1999. Under the renewed plan, the exercise prices for
the GGD Stock Rights, GTR Stock Rights and GMO Stock Rights are $300.00, $26.00
and $26.00, respectively.
90
<PAGE> 91
GENZYME CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Genzyme
Corporation and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
----------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 1999
91
<PAGE> 92
GENZYME CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1998:
Allowance for doubtful accounts $12,138,000 $ 5,482,000 $ -- $ 3,740,000 $13,880,000
Inventory Reserve .............. $23,339,200 $ 6,508,000 $ -- $17,816,000 $12,031,200
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
</TABLE>
- ----------
(1) Includes $13.4 million of strategic financial provisions (See Note B.,
"Other Charges" to the Consolidated Financial Statements).
(2) Reserve acquired in acquisition.
(3) Uncollectable accounts written off, net of recoveries.
92
<PAGE> 1
EXHIBIT 13.2
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
I. GENZYME TISSUE REPAIR
Combined Selected Financial Data............................................................................... 94
Management's Discussion And Analysis Of Genzyme Tissue Repair's Financial Condition And Results
Of Operations.................................................................................................. 96
Combined Statements of Operations -- For the Years Ended December 31, 1998, 1997 and 1996...................... 103
Combined Balance Sheets -- December 31, 1998 and 1997.......................................................... 104
Combined Statements of Cash Flows -- For the Years Ended December 31, 1998, 1997 and 1996...................... 105
Notes to Combined Financial Statements......................................................................... 106
Report of Independent Accountants.............................................................................. 115
</TABLE>
93
<PAGE> 2
GENZYME TISSUE REPAIR
COMBINED SELECTED FINANCIAL DATA
The following Selected Financial Data reflects the results of operations and
financial position of Genzyme Tissue Repair Division ("Genzyme Tissue Repair"
or "GTR") and should be read in conjunction with the financial statements of
GTR and accompanying footnotes.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net service sales..................................... $ 17,117 $ 10,856 $ 7,312 $ 5,220 $ 324
Operating costs and expenses:
Cost of services sold................................. 13,438 11,788 11,193 4,731 287
Selling, general and administrative................... 24,579 25,571 27,111 12,927 964
Research and development.............................. 10,432 10,845 10,880 10,938 3,638
Purchase of in-process research and development ...... - - - - 11,215
-------- -------- ------- -------- --------
Total operating costs and expenses................. 48,449 48,204 49,184 28,596 16,104
-------- ------ ------ -------- --------
Operating loss............................................ (31,332) (37,348) (41,872) (23,376) (15,780)
Other income (expenses):
Equity in net loss of joint venture................... (7,674) (6,719) (1,727) - -
Interest income....................................... 1,176 979 1,432 1,386 29
Interest expense...................................... (2,556) (2,896) (148) (40) -
-------- -------- -------- -------- -------
Total other income (expenses)...................... (9,054) (8,636) (443) 1,346 29
-------- -------- -------- -------- --------
Net loss attributable to Genzyme Tissue Repair Stock...... $(40,386) $(45,984) $(42,315) $(22,030) $(15,751)
======== ======== ======== ======== ========
Net loss per Genzyme Tissue Repair basic and diluted
common share:
Net loss.............................................. $(1.99) $(3.07) $(3.38) $(2.28) $(4.40)
====== ====== ====== ====== ======
Weighted average shares outstanding....................... 20,277 14,976 12,525 9,659 3,578
======= ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEET DATA: DECEMBER 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and investments ................................ $ 7,732 $31,915 $16,230 $47,573 $24,808
Working capital (deficit)............................ (6,461) 31,623 14,232 44,374 20,557
Total assets ........................................ 18,954 57,226 42,593 52,649 28,435
Long-term debt ...................................... 12,579 31,089 18,000 - 174
Division equity (deficit)............................ (16,396) 20,203 18,084 45,926 23,313
</TABLE>
There were no cash dividends paid.
94
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME TISSUE REPAIR'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of the management of Genzyme Tissue Repair
and Genzyme Corporation ("Genzyme" of the "Company") 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 included elsewhere in this Annual Report.
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 Division
("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 "Charter"), and the management and accounting
policies adopted by Genzyme's 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 either 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 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 GTR's financial position and results of operations in
conjunction with the financial statements and related notes of GTR, the
discussion and analysis of Genzyme's financial position and results of
operations, and the consolidated 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 GTR's combined results of operations. Detailed discussion
and analysis of the consolidated results of operations of Genzyme 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".
1998 COMPARED TO 1997
REVENUES
Revenues in 1998 increased 58% to $17.1 million from $10.9 million in 1997.
Sales of Carticel(R) autologous cultured chondrocytes ("Carticel(R) AuCC")
were $11.0 million, compared to $6.6 million in 1997, an increase of 66%. The
growth in sales of Carticel(R) 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(R) AuCC, and a continued
increase in the number of orthopedic surgeons trained in the implantation
procedure. Sales of Epicel(TM) skin grafts were $6.0 million in 1998, compared
to $4.3 million in 1997, an increase of 42%. The increase was due to increased
penetration of Epicel(TM) skin grafts into the catastrophic burn market. This
increased market share resulted from increased surgeon awareness and from
product improvements designed to ease the surgical procedure.
MARGINS AND OPERATING EXPENSES
GTR's costs of services sold were $13.4 million in 1998 as compared to
$11.8 million in 1997. Revenues exceeded costs of services sold by 21% in 1998
and costs of services sold exceeded revenues by 9% in 1997. 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 1998 were $24.6
million, a decrease of 4% from SG&A expenses of $25.6 million in 1997. The
decrease is due primarily to a decrease in general and administrative expenses
resulting from GTR's ongoing efforts to streamline operations. 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
1998, $6.5 million of SG&A services were provided by Genzyme General, compared
to $7.7 million in 1997, due to the decrease in corporate, legal, reimbursement
and other organizational support required following FDA approval of Carticel(R)
AuCC.
96
<PAGE> 4
Research and development expenses were $10.4 million in 1998 compared to
$10.8 million in 1997, a decrease of 4%. In 1998 and 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.
OTHER INCOME AND EXPENSES
Interest income was $1.2 million in 1998 as compared to $1.0 million in
1997, due primarily to higher average cash balances during the year.
Interest expense in 1998 was $2.6 million as compared to $2.9 million in
1997. Interest expense includes interest related to the addition of $11.4
million of debt from the issuance of $13 million in principal under a 5% note
convertible into shares of GTR Stock (the "GTR Note") in February 1997 (see
"Liquidity and Capital Resources" below), interest charges to complete the
accretion of this debt to its face value and interest from borrowing under
Genzyme's $225 million revolving credit facility with a syndicate of commercial
banks.
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 provided 100% of the initial $10.0 million of the funding requirements and
will provide 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 by the two parties. Profits from the joint venture will be shared
equally by the two parties. For the year ended December 31, 1998, GTR had
provided a total of $7.2 million of funding to the joint venture, and GTR
realized net losses from the joint venture of $7.7 million in 1998 compared to
$6.8 million in funding and net losses of $6.7 million from the joint venture in
1997. The Company's Chairman and Chief Executive Officer is a director of
Diacrin.
1997 COMPARED TO 1996
REVENUES
Revenues in 1997 increased 49% to $10.9 million from $7.3 million in 1996.
Sales of Carticel(R) AuCC were $6.6 million, compared to $3.1 million in 1996.
The growth in sales of Carticel(R) AuCC is primarily attributable to increased
acceptance by orthopedic surgeons and insurance companies, most notably
following issuance by the FDA of a biologics license to GTR in August 1997 for
Carticel(R) AuCC, and a continued increase in the number of orthopedic surgeons
trained in the procedure utilizing the service. Sales of Epicel(TM) skin grafts
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 treatment.
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.
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(R) AuCC in
1996. 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(R) AuCC in 1997.
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.
97
<PAGE> 5
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 $11.4 million of debt from the GTR Note in February
1997, $1.1 million of interest charges to accrete this debt to its face value
and additional interest from increases in borrowing under Genzyme's revolving
credit facility in June 1996 and December 1996 of $8.0 million and $3.0 million,
respectively (see "Liquidity and Capital Resources" below).
GTR realized net losses from Diacrin/Genzyme LLC of $6.7 million in 1997,
and $1.7 million in 1996. For the year ended December 31, 1997, GTR provided
$6.8 million of funding to the joint venture, compared to $1.9 million in
funding to the joint venture in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, GTR had cash, cash equivalents and short-term
investments of $7.7 million, a decrease of $24.2 million from December 31, 1997.
In 1998, GTR used $34.4 million of cash for operations. Investing activities
provided $19.3 million of cash which consisted of $16.5 million from the
transfer of property to Genzyme General and $10.6 million from the sale and
maturity of investments, offset by $7.2 million used to fund GTR's investment in
Diacrin/Genzyme LLC. Financing activities provided $1.8 million of cash, of
which $2.2 million consisted of proceeds from the exercise of stock options and
stock issued under the employee stock purchase plan.
As of December 31, 1998, $18.0 million of funds allocated to GTR in
December 1996 under Genzyme's revolving credit facility remained outstanding.
In 1996, Genzyme agreed to make available an unsecured, subordinated line
of credit of up to $10.0 million to Diacrin that may be used by Diacrin under
certain circumstances to fund capital contributions to Diacrin/Genzyme LLC.
There have been no draws on this line of credit to date.
In 1996, the Genzyme Board approved the allocation of $20.0 million in cash
from Genzyme General to GTR to provide initial funding for Diacrin/Genzyme LLC,
of which $7.0 million had been allocated to GTR in exchange for 721,455 GTR
Designated Shares as of December 31, 1997. GTR Designated Shares are shares of
GTR Stock that are not issued and outstanding, but which the Genzyme Board may
from time to time issue, sell or otherwise distribute without allocating the
proceeds to GTR. During 1998, the Genzyme Board increased the amount available
under the GTR Equity Line from $13.0 million to $50.0 million. Under the GTR
Equity Line, GTR may draw down funds as needed each fiscal quarter in exchange
for GTR Designated Shares. There were no amounts outstanding under the GTR
Equity Line at December 31, 1998.
In February 1997, GTR raised $13.0 million through the private placement of
the GTR Note. In November 1998, the holder of the GTR Note converted $600,000 in
principal amount in exchange for 233,405 shares of GTR Stock. GTR paid $1.1
million of accrued interest in cash in connection with this conversion.
GTR believes its available cash and investments, and amounts available
under the GTR Equity Line will be sufficient to finance planned operations and
capital requirements through the end of 1999. GTR must raise significant
additional capital in order to continue operations at current levels beyond
1999. 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(R) 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 GTR
would otherwise undertake itself.
For a discussion of the demands, commitments and events that may affect the
liquidity and capital resources of Genzyme Corporation including 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, EURO, YEAR 2000 AND MARKET RISK
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.
98
<PAGE> 6
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Tissue Repair 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.
UNCERTAINTY OF COMMERCIAL SUCCESS OF CARTICEL(R) AUCC
Carticel(R) AuCC is used to treat knee cartilage damage. Carticel(R) AuCC
involves a proprietary process for growing autologous (a patient's own)
cartilage cells to replace those that are damaged or lost. Revenue from this
service accounted for approximately 64% of Genzyme Tissue Repair's revenue
during 1998 and 61% of its revenue during 1997. The commercial success of
Carticel(R) AuCC will depend on many factors including:
POSITIVE RESULTS FROM POST-MARKETING STUDIES
As a condition to the FDA's approval of Carticel(R) AuCC, Genzyme
Tissue Repair agreed to conduct two post-marketing studies to confirm its
effectiveness. The first study will compare the long-term clinical effects
of treatment with Carticel(R) AuCC to certain other available treatments.
The second study will compare treatment with Carticel(R) AuCC against a
placebo implant. If these studies demonstrate that treatment with
Carticel(R) AuCC is not superior to the alternatives studied, the FDA may
suspend or withdraw its approval of Carticel(R) AuCC. If Genzyme Tissue
Repair cannot market Carticel(R) AuCC in the U.S., its results of
operations will be adversely affected.
FDA APPROVAL OF SURGICAL INSTRUMENTATION
Genzyme Tissue Repair has developed surgical instruments to improve
the Carticel(R) AuCC treatment procedure and plans to file for marketing
approval with the FDA. It is anticipated that Genzyme Tissue Repair will
begin marketing the instruments in early 2000. There can be no assurance,
however, that the FDA will approve these instruments or that the
instruments will improve the Carticel(R) AuCC treatment procedure or gain
commercial acceptance.
AVAILABILITY OF THIRD PARTY REIMBURSEMENT
Since the FDA approved Carticel(R) AuCC, there has been a substantial
increase in the number of third party payers who cover the treatment. A
large number of third party payers, however, do not cover it. There can be
no assurance that any third party payers will continue to cover
Carticel(R) AuCC or that additional third party payers will begin to
provide reimbursement.
Although FDA approval is a crucial factor in insurance plans deciding
to cover new treatments, a number of major insurance plans also base such
decisions on their own or third party evaluations of such treatments. One
independent association that conducts such evaluations is the Blue Cross
Blue Shield Association. The Blue Cross Blue Shield Association has
determined that its Technology Assessment Committee does not believe that
Carticel(R) AuCC meets all of its published criteria for new treatments.
Genzyme Tissue Repair believes that Carticel(R) AuCC does in fact meet all
of such criteria and is discussing the evaluation with the Blue Cross Blue
Shield Association. While individual Blue Cross Blue Shield plans
representing more than 50% of Blue Cross Blue Shield policyholders have
provided policy coverage for Carticel(R) AuCC without a favorable
evaluation by the Blue Cross Blue Shield Association, many Blue Cross Blue
Shield plans have delayed approving Carticel(R) AuCC for coverage under
their policies as a direct result of this unfavorable ruling. Since these
remaining plans represent a significant percentage of insured lives in the
United States, this ruling has delayed Genzyme Tissue Repair's access to a
substantial portion of the market for Carticel(R) AuCC.
SUCCESS OF COMPETITIVE PRODUCTS
The process Genzyme Tissue Repair uses to grow a patient's cartilage
cells is not patentable, and Genzyme does not yet have significant patent
protection covering the other processes used in providing Carticel(R)
AuCC. Genzyme Tissue Repair consequently cannot prevent a competitor from
developing the ability to grow cartilage cells and from offering a product
or service that is similar or superior to Carticel(R) AuCC. If a
competitor were to develop such ability and obtain FDA approval for a
competitive product or service, Genzyme Tissue Repair's results of
operations could be adversely affected. Genzyme Tissue Repair is aware of
at least two other companies that are growing autologous cartilage cells
for cartilage repair in the European market. Additionally, several
pharmaceutical and biotechnology companies are
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<PAGE> 7
developing alternative treatments for knee cartilage damage. One or more of
these companies may develop products or services superior to Carticel(R)
AuCC.
MARKET ACCEPTANCE BY ORTHOPEDIC SURGEONS
Genzyme Tissue Repair is marketing Carticel(R) AuCC to orthopedic
surgeons. There can be no assurance that enough trained surgeons will
incorporate Carticel(R) AuCC into their practice to make it commercially
successful.
SIGNIFICANT TISSUE REPAIR DIVISION OPERATING LOSSES AND CASH REQUIREMENTS MAY
REDUCE FLEXIBILITY IN OPERATIONS
Genzyme Tissue Repair is expected to have significant operating losses at
least through early 2001 as it continues to introduce Carticel(R) AuCC and
conduct research and development and clinical programs. There can be no
assurance that Genzyme Tissue Repair's operations will ever be profitable. It is
anticipated that Genzyme Tissue Repair's current cash resources, together with
amounts available under the GTR Equity Line and cash generated from sales of
Carticel(R) AuCC and Epicel(TM) skin grafts, a skin replacement product for
patients with severe burns, will be sufficient to fund its operations until the
end of 1999. However, Genzyme Tissue Repair may need more cash than currently
planned because of numerous factors, including: (i) fluctuations in its
revenues; (ii) the availability of third party reimbursement; (iii) the results
of research and development and clinical testing; (iv) the development of
competitive products and services; (v) effectiveness of cost-containment
measures; (vi) regulation by the FDA and other government authorities; (vii)
commitments to fund joint ventures or strategic collaborations; and (viii)
acquisition activity.
Genzyme Tissue Repair may also require significant additional financing to
continue operations at anticipated levels. There can be no assurance that
Genzyme Tissue Repair will be able to obtain any additional financing or find it
on favorable terms. If Genzyme Tissue Repair has insufficient funds or is unable
to raise additional funds, it may have to delay, reduce or eliminate certain of
its programs. Genzyme Tissue Repair also may have to give rights to third
parties to commercialize technologies or products that it would otherwise
commercialize itself.
FLUCTUATION IN QUARTERLY RESULTS MAY AFFECT OPERATIONS
It is expected that revenue from the sale of Carticel(R) AuCC will
fluctuate based on Genzyme Tissue Repair's success penetrating the market, the
availability of competitive procedures and the availability of third party
reimbursement. The timing or magnitude of such fluctuations cannot be predicted.
Furthermore, it is expected that revenue from Carticel(R) AuCC will be lower in
the summer months because fewer operations are typically performed during those
months. It is also expected that revenues from the sale of Epicel(TM) skin
grafts will continue to fluctuate from quarter to quarter. This fluctuation is a
result of several unpredictable factors, including the number and survival rate
of burn patients who are treated with the Epicel(TM) skin grafts. Since Genzyme
Tissue Repair must maintain extensive tissue culture facilities and a trained
staff for both Carticel(R) AuCC and Epicel(TM) skin grafts, a significant
portion of its costs are fixed and, therefore, fluctuations in demand can have
an adverse effect on its results of operations.
UNCERTAINTY REGARDING SUCCESS OF THE NEUROCELL(TM) PRODUCTS
Genzyme has a joint venture with Diacrin, Inc. to develop and commercialize
NeuroCell(TM)-PD for Parkinson's disease and NeuroCell(TM)-HD for Huntington's
disease and have allocated these programs to Genzyme Tissue Repair. Genzyme
intends, however, to reallocate this program to Genzyme General if the holders
of GTR Stock approve. Both Parkinson's disease and Huntington's disease result
from damage to brain cells. NeuroCell(TM)-PD and NeuroCell(TM)-HD rely upon
transplantation of cells from fetal pig brains to regenerate damaged brain
tissue. The ultimate success of the NeuroCell(TM) products is subject to several
risks, including:
RISKS RELATED TO DISEASE TRANSMISSION
Human therapeutic products based on the transplantation of cells
obtained from animals -- "xenotransplantation" -- represent a novel
therapeutic approach. There have not been extensive clinical tests of
products based on xenotransplantation, and there is a risk that viruses or
other animal pathogens will be unintentionally transmitted to human
patients who are treated with these products. The FDA has issued draft
regulatory guidelines to reduce the risk that infectious agents will
contaminate xenotransplanted products. Although Genzyme Tissue Repair
believes that the processes the joint venture uses to produce the
NeuroCell(TM) products would comply with the guidelines as presently
drafted, the FDA may substantially revise these guidelines before issuing
them in final form. There can be no assurance that the FDA will in fact
issue final guidelines or that the processes the joint venture uses to
produce the NeuroCell(TM) products will comply with any guidelines that the
FDA does issue.
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<PAGE> 8
No therapeutic product based on xenotransplantation has been approved
for marketing by the FDA, and there can be no assurance that the FDA or
regulatory authorities in other countries will approve any products
developed by the joint venture. The current regulatory scheme in Europe
does not allow products based on porcine cells to be marketed in Europe.
There can also be no assurance that the medical community or third party
payers will accept products based on xenotransplantation, including those
developed by the joint venture.
SAFETY AND EFFECTIVENESS NOT YET ESTABLISHED
Based on the early results of the Phase I clinical trial for
NeuroCell(TM)-PD, the companies initiated two Phase II clinical trials of
NeuroCell(TM)-PD. These two trials are designed to show safety and efficacy
of NeuroCell (TM)-PD using two forms of immunosuppression. Upon successful
completion of these trials, GTR plans to initiate pivotal trials of
NeuroCell(TM)-PD. There can be no assurance that these trials will produce
positive results. Negative results from any of these clinical trials may
jeopardize the joint venture's ability to get FDA approval for
NeuroCell(TM)-PD. If the joint venture cannot market NeuroCell(TM)-PD in
the U.S., the value of Genzyme Tissue Repair's interest in the joint
venture will be significantly reduced.
In Phase I clinical trials involving NeuroCell(TM)-HD, patients did
not show statistically significant clinical improvement 12 months following
surgery. There can be no assurance that future clinical trials will
demonstrate that NeuroCell(TM)-HD is effective in treating Huntington's
disease.
The joint venture's success also depends upon the successful
development of xenotransplantation 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
xenotransplantation technology does not result in the development of
therapeutic products, the joint venture may have to dramatically change the
scope and direction of its product development activities.
RELIANCE ON AGREEMENTS WITH KEY COLLABORATORS
Carticel(R) AuCC was developed based on the work of a group of Swedish
physicians. Genzyme Tissue Repair had consulting agreements with the two leaders
of that group. These agreements expired at the end of 1998 and Genzyme Tissue
Repair is currently negotiating renewals of these agreements. Pending these
negotiations, these physicians are continuing to advise Genzyme Tissue Repair on
the commercialization and further development of Carticel(R) AuCC. There can be
no assurance, however, that renewals of these agreements will be signed.
Under the terms of these consulting agreements, each physician: (i) cannot
conduct any business activity that is competitive with products or services of
Genzyme Tissue Repair through 1999; and (ii) cannot disclose proprietary and
confidential information of Genzyme Tissue Repair. There can be no assurance
that the two physicians will honor their obligations under the consulting
agreements or that the agreements will be renewed. In addition, individuals who
are familiar with the know-how underlying Carticel(R) AuCC through their
association with these physicians may disclose such information to our
competitors. Either event could have an adverse effect on Genzyme Tissue
Repair's results of operations.
Genzyme has entered into a sponsored research agreement with the University
of Gothenburg in Sweden and certain physicians, including the two physicians
discussed above. The purpose of the agreement is to conduct additional research
on Carticel(R) AuCC. The agreement prohibits each member of the research team
from disclosing any information relating to Genzyme Tissue Repair or its
business that they acquire in connection with their work under the agreement.
The agreement also states that all inventions that the members conceive or
reduce to practice during the course of the research program will be the
property of Genzyme Tissue Repair, with royalties payable to the inventing
member. There can be no assurance that these members will honor their
obligations under the sponsored research agreement.
POTENTIAL DILUTION OF GTR STOCKHOLDERS
The issuance or distribution of additional shares of GTR Stock could
adversely affect the market price of such stock and/or result in substantial
dilution to holders of such stock. The Genzyme Board has reserved 8,033,707
shares of GTR Stock for issuance upon conversion of amounts payable under the
GTR Note. On March 15, 1999, $9.4 million of principal on this note was
outstanding. The actual number of shares of GTR Stock issued upon conversion of
this note will depend on the market price prior to conversion.
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<PAGE> 9
In addition, in May 1998, the Genzyme Board established a long-term
financing plan for the continuing development of the product portfolio and
research and development programs of Genzyme Tissue Repair. As part of this
plan, the Genzyme Board increased the amount available under the GTR Equity Line
from $13 million to $50 million. Under the terms of the GTR Equity Line, Genzyme
Tissue Repair may draw down funds as needed each fiscal quarter in exchange for
designated shares of GTR Stock. The rate of exchange will be determined by
dividing the amount drawn under the line of credit by the average market value
of one share of GTR Stock during the 20 trading days prior to the date the
amount is drawn under the line of credit.
Designated shares represent authorized shares that are not issued or
outstanding but that the Genzyme Board can sell for the sole benefit of Genzyme
General or distribute as a stock dividend to the holders of GGD Stock. Under the
terms of Genzyme's management and accounting policies, substantially all of the
designated shares of GTR Stock will be distributed or sold if, as of May 31 of
each year, the number of such designated shares is greater than 10% of the
number of outstanding shares of GTR Stock. The effect that these sales or
distributions may have on the market price of GTR Stock cannot be predicted.
SUBSEQUENT EVENTS
In January 1999, the holder of the GTR Note converted $3,000,000 in
principal amount of the GTR Note in exchange for 1,352,290 shares of GTR Stock.
GTR paid $133,000 of accrued interest to the holder in connection with this
conversion.
In February 1999, GTR made a $5.0 million draw under the GTR Equity Line in
exchange for 1,633,399 GTR Designated Shares.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's
interest in Diacrin/Genzyme LLC from GTR to Genzyme General. The transfer of the
interest in Diacrin/Genzyme LLC is subject to the approval of GTR's
shareholders.
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<PAGE> 10
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net service sales.................................................... $ 17,117 $ 10,856 $ 7,312
Operating costs and expenses:
Cost of services sold................................................ 13,438 11,788 11,193
Selling, general and administrative.................................. 24,579 25,571 27,111
Research and development............................................. 10,432 10,845 10,880
-------- -------- ---------
Total operating costs and expenses........................... 48,449 48,204 49,184
-------- -------- ---------
Operating loss......................................................... (31,332) (37,348) (41,872)
Other income (expenses):
Equity in net loss of joint venture.................................. (7,674) (6,719) (1,727)
Interest income...................................................... 1,176 979 1,432
Interest expense..................................................... (2,556) (2,896) (148)
-------- --------- --------
Total other income (expenses)................................ (9,054) (8,636) (443)
-------- --------- --------
Net loss attributable to Genzyme Tissue Repair Stock................... $(40,386) $ (45,984) $(42,315)
======== ========= ========
Per Genzyme Tissue Repair basic and diluted common share:
Net loss............................................................. $(1.99) $(3.07) $(3.38)
====== ====== ======
Weighted average shares outstanding.................................... 20,277 14,976 12,525
====== ====== ======
Net loss attributable to Genzyme Tissue Repair Stock................... $(40,386) $(45,984) $(42,315)
Other comprehensive loss
Unrealized gains (losses) on securities arising during the period... 9 (9) 11
-------- -------- --------
Other comprehensive income.......................................... 9 (9) 11
-------- -------- --------
Comprehensive loss..................................................... $(40,377) $(45,993) $(42,304)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
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<PAGE> 11
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 7,732 $21,120
Short-term investments....................................................... - 10,795
Accounts receivable, net..................................................... 3,833 2,221
Inventories.................................................................. 2,645 1,973
Other current assets......................................................... 1,723 921
-------- -------
Total current assets....................................................... 15,933 37,030
Property, plant and equipment, net.............................................. 2,836 19,524
Other noncurrent assets......................................................... 185 672
-------- -------
Total assets............................................................... $ 18,954 $57,226
======== =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable............................................................. $ 1,355 $ 1,378
Accrued expenses............................................................. 2,491 2,816
Due to Genzyme General....................................................... 548 1,213
Current portion of long-term debt............................................ 18,000 -
-------- -------
Total current liabilities.................................................. 22,394 5,407
Long-term debt.................................................................. - 18,000
Convertible debenture, net...................................................... 12,579 13,089
Other noncurrent liabilities.................................................... 377 527
-------- -------
Total liabilities.......................................................... 35,350 37,023
Commitments and contingencies (See Notes)
Division equity (Note J)........................................................ (16,396) 20,203
-------- -------
Total liabilities and division equity...................................... $ 18,954 $57,226
======== =======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
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<PAGE> 12
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................................. $(40,386) $(45,984) $(42,315)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization....................................... 1,757 2,482 935
Loss on disposal of property, plant and equipment................... - 24 59
Non-cash compensation expense....................................... 108 221 312
Accrued interest/amortization on bonds.............................. 188 (188) 85
Provision for bad debts and inventory............................... 2,985 4,400 4,665
Accretion of debt discount.......................................... 453 1,071 -
Equity in net loss of joint venture................................. 7,674 6,719 1,727
Increase (decrease) in cash from working capital:
Accounts receivable............................................... (1,869) (1,024) (77)
Inventories....................................................... (3,400) (4,070) (5,489)
Other current assets.............................................. (719) (587) (148)
Accounts payable, accrued expenses and deferred revenue........... (574) (39) 444
Due to Genzyme General............................................ (665) (391) (430)
-------- -------- --------
Net cash used by operating activities............................. (34,448) (37,366) (40,232)
INVESTING ACTIVITIES:
Purchases of investments.............................................. - (10,614) (5,004)
Sales and maturities of investments................................... 10,614 318 11,447
Investment in joint venture........................................... (7,163) (6,820) (1,911)
Purchases of property, plant and equipment............................ (670) (496) (26,573)
Sale of property, plant and equipment................................. 16,500 852 5,311
Other................................................................. 15 (428) 151
-------- -------- -------
Net cash (used) provided by investing activities.................. 19,296 (17,188) (16,579)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net........................... 2,204 31,475 2,437
Proceeds from issuance of debt, net................................... - 13,542 56,000
Payments of debt and capital lease obligations........................ (445) 3 (38,169)
Cash allocated from Genzyme General................................... 155 14,892 11,714
Other................................................................. (150) (150) -
-------- -------- ------
Net cash provided by financing activities......................... 1,764 59,762 31,982
Increase (decrease) in cash and cash equivalents......................... (13,388) 5,208 (24,829)
Cash and cash equivalents at beginning of period......................... 21,120 15,912 40,741
-------- -------- -------
Cash and cash equivalents at end of period............................... $ 7,732 $ 21,120 $ 15,912
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest............................................................ $ 2,265 $ 1,127 $ 334
</TABLE>
Supplemental Disclosures of Non-Cash Transactions:
GTR Designated Shares -- Note J
Transfer of Property, Plant and Equipment -- Note E
Conversion of GTR Note--Note H
The accompanying notes are an integral part of these combined
financial statements.
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<PAGE> 13
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Tissue Repair develops and sells biological products primarily for the
treatment of orthopedic injuries, such as cartilage damage, and severe burns. It
is a division of Genzyme Corporation and has a separate series of common stock
intended to reflect its value and track its economic performance.
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 the consolidated financial
statements of Genzyme and its subsidiaries ("Genzyme's Consolidated Financial
Statements") included in this Annual Report. Corporate allocations reflected in
these financial statements are determined based upon methods which management
believes to be reasonable.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements of GTR reflect the combined
accounts of all of GTR's businesses. 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. (See Note I., "Investments" to
Genzyme's Consolidated Financial Statements which is incorporated herein by
reference). All significant intradivisional items and transactions have been
eliminated in combination. Certain items in GTR's combined financial statements
for the years ended December 31, 1997 and 1996 have been reclassified to conform
with the December 31, 1998 presentation.
FINANCIAL INFORMATION
Genzyme provides to holders of GTR Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for GTR. Notwithstanding the allocation of assets and
liabilities, including contingent liabilities, between Genzyme General, GTR and
GMO for the purposes of preparing their respective financial statements, Genzyme
Corporation 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
are common stockholders of Genzyme and have no specific claim against the assets
attributed to GTR. Liabilities or contingencies of Genzyme General, GTR 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.
Accounting policies and financial information specific to GTR are presented in
these GTR combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are
presented in Genzyme's Consolidated Financial Statements. The Company prepares
the financial statements of GTR 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 Genzyme's 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 Charter, dividends that may be paid to the holders of GTR
Stock will be limited to the lesser of funds of Genzyme legally available for
the payment of dividends and the Available GTR Dividend Amount, as defined in
the Charter. Although there is no requirement to do so, the Genzyme Board would
declare and pay cash dividends on
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<PAGE> 14
GTR Stock, if any, based primarily on earnings, financial condition, cash flow
and business requirements of Genzyme. Genzyme has never paid any cash dividends
on shares of its capital stock. Genzyme currently intends to retain its
earnings to finance future growth and therefore does not anticipate paying any
cash dividends on GTR stock in the foreseeable future.
REVENUE RECOGNITION
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(TM) 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.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GTR and GMO gives
effect to the management and accounting policies adopted by the Genzyme Board
and is reported in lieu of consolidated per share data. Genzyme 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 GTR Stock equals GTR's net income or loss for
the relevant period determined in accordance with generally accepted accounting
principles in effect at such time, adjusted by the amount of tax benefits
allocated to or from the other divisions pursuant to the management and
accounting policies adopted by the Genzyme Board.
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,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss ......................................................... $(40,386) $(45,984) $(42,315)
Basic and diluted weighted average shares outstanding............. 20,277 14,976 12,525
Net loss per common share-- basic and diluted..................... $(1.99) $(3.07) $(3.38)
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, certain securities
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 those years. Such
securities include:
<TABLE>
<CAPTION>
December 31,
Amounts in thousands 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares of GTR Stock issuable for options .............................. 3,398 2,777 2,574
GTR Designated Shares ................................................. 716 885 1,794
Shares of GTR Stock issuable upon conversion of the GTR Note .......... 7,810 1,772 --
------ ----- -----
Total shares excluded from the GTR diluted earnings per
share calculation ............................................... 11,924 5,434 4,368
====== ===== =====
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION
GTR has elected the disclosure-only alternative permitted under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". GTR has disclosed pro forma net income (loss) and pro forma
earnings per share information in Note J. below, using the fair value based
method for 1998, 1997 and 1996.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS
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. With the exception of the policy
regarding Interdivision Asset Transfers, policies may be 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.
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<PAGE> 15
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 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, but 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. Genzyme's corporate general and administrative functions, selling and
marketing, and research and development expenses have been allocated to GTR 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. Management believes that such allocation is a reasonable
estimate of such expenses. Genzyme General's allocation to GTR for research and
development was $7.7 million in both 1998 and 1997 and $6.9 million in 1996. The
charges for SG&A services were $6.5 million, $7.7 million and $9.1 million in
1998, 1997 and 1996, respectively. As of December 31, 1998 and 1997, GTR owed
Genzyme General $0.5 million and $1.2 million, respectively, in connection with
the above services.
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.
Income taxes are allocated to each division based upon the financial statement
income, taxable income, credits and other amounts properly allocable to such
division under generally accepted accounting principles as if each division were
a separate taxpayer; provided, however, that as of the end of any fiscal quarter
of Genzyme, any projected annual tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be allocated to the other divisions in proportion to
their taxable income 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 Genzyme's 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.
108
<PAGE> 16
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. SG&A or 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 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.
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 $1.0 million and $840,000
at December 31, 1998 and 1997, respectively.
NOTE D. INVENTORIES
Inventories at December 31 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
---------------------------------------------------------------------------
<S> <C> <C>
Raw materials................................. $ 264 $ 243
Work--in-process.............................. 2,381 1,730
------ ------
$2,645 $1,973
====== ======
</TABLE>
NOTE E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
----------------------------------------------------------------------------
<S> <C> <C>
Plant and equipment.......................... $ 3,845 $18,562
Land and buildings........................... - 2,324
Leasehold improvements....................... 2,577 2,428
Furniture and fixtures....................... 146 127
------- -------
6,568 23,441
Less accumulated depreciation.............. (3,732) (3,917)
------- -------
Property, plant and equipment, net........... $ 2,836 $19,524
======= =======
</TABLE>
109
<PAGE> 17
Depreciation expense was $1.6 million, $2.3 million and $0.9 million in 1998,
1997 and 1996, respectively.
In June 1998, the Genzyme Board approved the transfer of one of GTR's
manufacturing facilities at fair market value, including land, building and
equipment, to Genzyme General in exchange for approximately $16.5 million in
cash. GTR recognized a gain of approximately $0.7 million from this transfer,
which was recorded in division equity in June 1998.
NOTE F. INVESTMENTS
Investments in cash equivalents and marketable securities at December 31, 1998
consist primarily of money market funds. At December 31, 1997, cash equivalents
and marketable securities consisted primarily of money market funds and
short-and long-term corporate notes.
Gross unrealized holding losses of $9,000 were recorded at December 31, 1997 in
division equity.
All of the cash equivalents and marketable securities held by GTR as of December
31, 1997 matured in 1998.
DIACRIN/GENZYME LLC
In October 1996, Diacrin/Genzyme LLC was established as a joint venture between
GTR and Diacrin to develop and commercialize products and processes using
porcine fetal cells for the treatment of Parkinson's disease and Huntington's
disease in humans. Under the terms of the joint venture agreement, GTR provided
100% of the initial $10.0 million of the funding requirements and will provide
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 by
the two parties. Profits from the joint venture will be shared equally by the
two parties. As of December 31, 1998 GTR has provided a total of $15.7 million
of funding to the joint venture, $5.1 million of which was provided by Genzyme
General in exchange for 489,810 GTR Designated Shares. GTR realized net losses
from the joint venture of $7.7 million in 1998, $6.7 million in 1997 and $1.7
million in 1996. Summary financial information is not presented as the impact of
the joint ventures activities on GTR's statement of operations for the years
ended December 31, 1998, 1997 and 1996 is not material. GTR performs research
and development services on behalf of Diacrin/Genzyme LLC. In connection with
these services, GTR received payments of $5.0 million, $2.3 million and $0.2
million in 1998, 1997 and 1996, respectively. As of December 31, 1998 GTR had a
payable of $0.2 million to Diacrin/Genzyme LLC. The Company's Chairman and Chief
Executive Officer is a Director of Diacrin.
In 1996 Genzyme agreed to make available an unsecured, subordinated line of
credit of up to $10.0 million to Diacrin that may be used by Diacrin to fund
capital contributions to Diacrin/Genzyme LLC. There have been no draws on this
line of credit to date.
NOTE G. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Compensation.................................... $1,271 $1,837
Professional fees............................... 505 797
Royalties....................................... 88 58
Other........................................... 627 124
------- -------
$2,491 $2,816
====== ======
</TABLE>
NOTE H. LONG-TERM OBLIGATIONS AND LEASES
Long-term obligations at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility....................... $ 18,000 $18,000
Convertible Debenture........................... 12,579 13,089
-------- -------
30,579 31,089
Less current portion............................ (18,000) --
-------- -------
$ 12,579 $31,089
======== =======
</TABLE>
The $18.0 million allocated to GTR under Genzyme's revolving credit facility at
December 31, 1997 is due to be repaid in 1999 and is no longer considered a
long-term debt obligation.
During 1998, the Genzyme Board increased the amount available under the GTR
Equity Line from $13.0 million to $50.0 million (the "GTR Equity Line"). There
were no amounts outstanding under the GTR Equity Line at December 31, 1998.
Although the Company retains responsibility for the repayment of all long-term
debt obligations (See Note K., "Long-term Debt and Leases" to the Consolidated
Financial Statements, which is incorporated herein by reference), such debt is
allocated
110
<PAGE> 18
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
In February 1997, GTR raised $13.0 million through the private placement of the
GTR Note. The GTR Note is convertible, 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 started at 2% beginning in August 1997 and increased to
11% in November 1998. The conversion price is currently the lesser of 89% of the
Average GTR Stock Price preceding the conversion date or May 28, 1998, 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 has been accreted to its $13.0 million face value by
a charge to interest expense of $1.6 million over the term of the initial 15
month conversion period. GTR recorded interest expense related to the accretion
of this debt of $0.5 million and $1.1 million in the years ended December 31,
1998 and 1997, respectively.
In November 1998, the holder of the GTR Note converted $600,000 of the principal
amount of the GTR Note in exchange for 223,405 shares of GTR stock. Due to the
conversion, GTR paid $1.1 million of accrued interest to the holder of the GTR
Note in cash, which represented total accrued interest on the GTR Note to date.
Future minimum payments due under GTR's long-term obligations are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) LONG-TERM DEBT
---------------------------------------------------------------------------
<S> <C>
1999...................................... $ 18,000
2000...................................... 12,579
--------
Total minimum payments.................... 30,579
Less current portion................ (18,000)
--------
Total............... $ 12,579
========
</TABLE>
OPERATING LEASES
GTR rents facilities and equipment under noncancellable operating leases
expiring through 2001. For one of GTR's facilities there is an option to renew
the lease expiring in 2001 for an additional five years. Rent expense under all
operating leases was $2.2 million in 1998, $1.8 million in 1997 and $2.1 million
in 1996.
Future minimum payments due under Genzyme Tissue Repair's non-cancellable
operating leases are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) OPERATING
LEASES
-------------------------------------------------------------------------
<S> <C>
1999................................................ $2,238
2000................................................ 2,236
2001................................................ 1,773
------
Total minimum payments........................ $6,247
======
</TABLE>
GTR leases from Genzyme General a portion of a research and development
facility. GTR is obligated to pay Genzyme General $0.6 million per year for
three years commencing on July 1, 1998. Total rent expense for this facility for
1998 was $0.3 million. Diacrin/Genzyme LLC has subleased a portion of this
facility from GTR for the term of the lease and is obligated to pay GTR rent of
$0.4 million per year pursuant to the terms of the sublease agreement. Total
rent due to GTR under the sublease for 1998 was $0.2 million.
NOTE I. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme has been subject to legal proceedings and claims
arising in connection with its business. At December 31, 1998, there were no
asserted claims against Genzyme which, in the opinion of management, if
adversely decided, would have a material adverse effect on GTR's financial
position and results of operations.
111
<PAGE> 19
NOTE J. DIVISION EQUITY
The following presents the equity of GTR for the periods presented:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) DECEMBER 31,
1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period............................. $ 20,203 $ 18,084 $ 45,926
Net loss................................................... (40,386) (45,984) (42,315)
Issuance of common stock under stock plans................. 2,109 2,438 2,436
Shares issued in public offering........................... - 29,037 -
Allocation from Genzyme General for designated shares...... - 14,892 11,714
Payment from Genzyme General for research program.......... 250 - -
Stock compensation expense................................. 108 221 312
Value of debt conversion feature........................... - 1,524 -
Shares issued upon partial conversion of convertible debt.. 600 - -
Gain on transfer of facility............................... 711 - -
Equity adjustments......................................... 9 (9) 11
-------- -------- -------
Balance at end of period................................... $(16,396) $ 20,203 $18,084
======== ======== =======
</TABLE>
At December 31, 1998 and 1997, 40,000,000 shares of GTR Stock were authorized
for issuance and approximately 20,921,000 and 19,941,000 shares, respectively,
were issued and outstanding.
In October 1996, the Genzyme Board approved the GTR Equity Line with an initial
allocation of up to $20.0 million in cash to GTR from Genzyme General to provide
initial funding for GTR's joint venture with Diacrin, of which $7.0 million had
been allocated to GTR in exchange for 721,455 GTR Designated Shares as of
December 31, 1997.
In May 1998, the Genzyme Board increased the amount available under GTR Equity
Line from $13 million to $50 million. Under the GTR Equity Line, GTR may draw
down funds as needed each fiscal quarter in exchange for GTR Designated Shares.
The rate of exchange will be determined by dividing the amount drawn under the
line of credit by the average market value of one share of GTR Stock during the
20 trading days prior to the date the amount is drawn under the line of credit.
As of December 31, 1998, GTR had not yet drawn any funds from the GTR Equity
Line.
As of December 31, 1998, there were approximately 716,000 GTR Designated Shares
reserved for issuance.
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, stock options, Employee Stock Purchase Plan,
Stock Compensation Plans and GTR Designated Shares are included in Note L.,
"Stockholders' Equity" to Genzyme's Consolidated Financial Statements, which is
incorporated herein by reference.
At December 31, 1998, approximately 5,253,000 shares of GTR Stock were reserved
for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997
Equity Incentive Plan, 1998 Director Stock Option Plan, and 1990 Employee Stock
Purchase Plan, as amended. At December 31, 1998, approximately 3,398,000 options
to purchase shares of GTR Stock were outstanding.
STOCK OFFERING
In 1997, Genzyme sold 4,000,000 shares of GTR Stock for net proceeds of $29.0
million.
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 1998 Director Stock Option Plan (a stock option 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.
112
<PAGE> 20
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, GTR's net
loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------------
Net income (loss):
<S> <C> <C> <C>
As reported................................... $(40,386) $(45,984) $(42,315)
Pro forma..................................... $(44,481) $(49,547) $(45,735)
Basic and diluted loss per share:
As reported................................... $(1.99) $(3.07) $(3.38)
Pro forma..................................... $(2.19) $(3.31) $(3.65)
</TABLE>
For assumptions used in the SFAS 123 calculations for GTR for the three years
ended December 31, 1998, 1997 and 1996 - see Note L., "Stockholders Equity", to
Genzyme's 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 K. INCOME TAXES
The differences between the effective tax rates and the U.S. Federal statutory
tax rates were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
U.S. Federal income tax statutory rate................... (35.0)% (35.0)% (35.0)%
State taxes, net......................................... (2.8) (3.0) (5.2)
Tax credits.............................................. (3.4) (1.4) --
Other.................................................... 0.6 1.0 --
Deductions subject to deferred tax valuation allowance... 40.6 38.4 40.2
----- ----- -----
Effective tax rate....................................... --% --% --%
===== ===== =====
</TABLE>
At December 31, 1998 and 1997, the components of deferred tax assets were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............ $ 55,582 $ 40,554
Tax credits................................. 2,331 964
Intangible amortization..................... 10,586 10,856
Reserves and other.......................... 5,035 3,695
--------- ---------
Gross deferred tax assets................... 73,534 56,069
Valuation allowance......................... (73,534) (56,069)
--------- ---------
Net deferred tax assets..................... -- --
========= =========
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes, GTR placed a valuation allowance of $73.5 million and $56.1 million
for December 31, 1998 and 1997, 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 GTR. However,
the benefit of these deferred tax
113
<PAGE> 21
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.
NOTE L. BENEFIT PLANS
The disclosures relating to Genzyme's domestic employee savings plan under
Section 401(k) of the Internal Revenue Code of 1986, as amended (the "401(k)
Plan") are included in Note P., "Benefit Plans" to Genzyme's Consolidated
Financial Statements, which is incorporated herein by reference. Substantially
all employees of GTR are covered under the 401(k) Plan.
The 401(k) plan allows employees to make contributions up to a specified
percentage of their compensation, a portion of which are matched by GTR. GTR
made $135,000, $183,000, and $165,000 in contributions to the plan in 1998, 1997
and 1996, respectively.
NOTE M. SUBSEQUENT EVENTS
In January 1999, the holder of the GTR Note converted $3,000,000 principal
amount of the GTR Note in exchange for 1,352,290 shares of GTR Stock. GTR paid
$133,000 of accrued interest to the holder in connection with this conversion.
In February 1999, GTR made a $5.0 million draw under the GTR Equity Line in
exchange for 1,633,399 GTR Designated Shares.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest
in Diacrin/Genzyme LLC from GTR to Genzyme General. The transfer of the interest
in Diacrin/Genzyme LLC is subject to the approval of GTR's shareholders.
114
<PAGE> 22
GENZYME TISSUE REPAIR
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Genzyme Tissue Repair (as described
in Note A) at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related combined financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As more fully described in Note A to these financial statements, Genzyme Tissue
Repair is a division 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/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 1999
115
<PAGE> 23
GENZYME TISSUE REPAIR DIVISION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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, 1998:
Allowance for doubtful accounts $ 839,000 $ 257,000 - $ 75,000(1) $ 1,021,000
Inventory Reserve $8,347,000 $2,728,000 - $423,000 $10,652,000
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
- ----------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
116
<PAGE> 1
EXHIBIT 13.3
FINANCIAL STATEMENTS
PAGE NO.
--------
I. GENZYME MOLECULAR ONCOLOGY
Combined Selected Financial Data............................... 118
Management's Discussion And Analysis Of Genzyme Molecular
Oncology's Financial Condition And Results Of Operations....... 121
Combined Statements of Operations -- For the Years Ended
December 31, 1998, 1997 and 1996............................... 127
Combined Balance Sheets -- December 31, 1998 and 1997.......... 128
Combined Statements of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996............................... 129
Notes to Combined Financial Statements......................... 130
Report of Independent Accountants.............................. 140
117
<PAGE> 2
GENZYME MOLECULAR ONCOLOGY
COMBINED SELECTED FINANCIAL DATA
The following Selected Financial Data reflects the results of operations and
financial position of Genzyme Molecular Oncology Division ("Genzyme Molecular
Oncology" or "GMO") and should be read in conjunction with the financial
statements of GMO and accompanying footnotes.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
DECEMBER 1, 1994
COMBINED STATEMENTS OF OPERATIONS DATA (DATE OF INCEPTION)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31, TO DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenue ..................................... 2,229 467 - - -
Service revenue - related party ..................... 466 - - - -
Research and development revenue - related party .... 2,177 315 - - -
Research and development revenue .................... 14,535 - - - -
-------- -------- ------- ------ ------
Total revenue .................................. 19,407 782 - - -
Operating costs and expenses:
Cost of service revenue .......................... 1,374 50 - - -
Cost of research and development revenue ......... 4,073 287 - - -
Selling, general and administrative............... 7,155 2,118 185 87 8
Research and development ......................... 12,743 5,341 818 377 29
Amortization of intangibles....................... 11,983 5,127 - - -
Charge for in-process technology ................. - 7,000 - - -
-------- -------- ------- ------ ------
Total operating costs and expenses.............. 37,328 19,923 1,003 464 37
-------- -------- ------- ------ ------
Operating loss....................................... (17,921) (19,141) (1,003) (464) (37)
Other income (expenses):
Equity in net loss of joint venture .............. (1,647) (258) - - -
Interest income................................... 782 392 - - -
Interest expense.................................. (2,968) (1,663) - - -
-------- -------- ------- ------ ------
Total other income (expenses)................... (3,833) (1,529) - - -
-------- -------- ------- ------ ------
Loss before income taxes............................. $(21,754) $(20,670) $(1,003) $ (464) $ (37)
Tax benefit.......................................... 2,647 1,092 - - -
-------- -------- ------- ------ ------
Net loss attributable to GMO Stock................... $(19,107) $(19,578) $(1,003) $ (464) $ (37)
======== ======== ======= ====== ======
Per Genzyme Molecular Oncology basic and diluted
common share:
Net loss.......................................... $ (3.81)
========
Weighted average shares outstanding.................. 5,019
========
Pro forma per Genzyme Molecular Oncology
basic and diluted common share:
Pro forma net loss................................ $(4.98) $(0.26) $(0.12) $(0.01)
======== ======= ====== ======
Pro forma weighted average shares outstanding........ 3,929 3,929 3,929 3,929
======== ======= ====== ======
</TABLE>
118
<PAGE> 3
GENZYME MOLECULAR ONCOLOGY
COMBINED SELECTED FINANCIAL DATA (CONTINUED)
COMBINED BALANCE SHEET DATA
- --------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and investments ............................. $11,900 $21,229 $ -- $-- $--
Working capital................................... 9,189 11,953 -- -- --
Total assets...................................... 35,952 53,801 -- -- --
Long-term debt, convertible debenture and
note payable ................................... -- 24,606 -- -- --
Parent company investment ........................ -- -- 1,504 501 37
Division equity .................................. 23,364 13,466 -- -- --
</TABLE>
There were no cash dividends paid.
119
<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. These forward-looking
statements represent the expectations of the management of Genzyme Molecular
Oncology and Genzyme Corporation ("Genzyme" or the "Company") 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 included in this Annual Report.
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 Division
("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 "Charter"), and the management and accounting policies adopted
by Genzyme's 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 either 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 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 GMO's 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 the consolidated financial statements and related notes of
Genzyme, all of which are included with this Annual Report.
GMO was part of Genzyme General from December 1, 1994 (Date of Inception) to
June 18, 1997. Genzyme acquired PharmaGenics, Inc. on June 18, 1997 and the
combined financial statements of GMO beginning June 18, 1997 include the results
of PharmaGenics.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management considers
necessary in reviewing GMO'S combined results of operations. Detailed
discussion and analysis of the consolidated results of operations of Genzyme
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".
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.
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<PAGE> 5
1998 COMPARED TO 1997
REVENUES
GMO recorded $19.4 million of total revenue in 1998 as compared to $0.8
million of total revenue in 1997. The increase in GMO's revenue in 1998 is
primarily attributable to an increase of $16.4 million in research and
development revenue. The increase in research and development revenue is
primarily due to $13.0 million in revenue recorded in connection with a research
and license agreement with a large pharmaceutical company. GMO's revenue
includes work performed for the joint venture with StressGen Biotechnologies
Corporation ("StressGen/Genzyme LLC").
MARGINS AND OPERATING EXPENSES
GMO's cost of revenues in 1998 was $5.4 million as compared to $0.3 million
in 1997. The increase is primarily attributable to costs related to the delivery
of services using GMO's SAGE(TM) differential gene expression technology,
royalties and costs incurred in connection with research and development
performed on behalf of StressGen/Genzyme LLC and the large pharmaceutical
company.
In 1998, GMO incurred $7.2 million of selling, general and administrative
("SG&A") expenses, compared to $2.1 million in 1997. The increase is due to
increased administrative support corresponding to the growth of GMO's business,
as well as amounts written off in connection with the withdrawal of Genzyme's
registration statement on Form S-3 that it had filed with the Securities and
Exchange Commission covering the initial public offering of GMO Stock.
Research and development costs in 1998 increased to $12.7 million from $5.3
million in 1997. The increase in research and development costs relate to
increases in research personnel and related expenses pertaining to GMO's SAGE,
gene therapy and small molecule programs.
Amortization expenses in 1998 and 1997 were $12.0 million and $5.1 million,
respectively, and were attributable to the PharmaGenics acquisition, which was
completed on June 18, 1997.
GMO recorded a $7.0 million charge in 1997 as part of the acquisition of
PharmaGenics for the purchase of in-process technology that has no alternative
future use. There were no similar amounts in 1998.
OTHER INCOME AND EXPENSES
Interest income increased in 1998 to $0.8 million from $0.4 million in 1997,
mainly as the result of higher average cash balances during 1998. Interest
expense increased to $3.0 million in 1998 compared to $1.7 million in 1997. The
increase in interest expense is the result of interest and related amortization
of the discount on the 6% convertible debentures issued in August 1997 (the "GMO
Debentures") that were exchanged in August 1998 for 5% convertible debentures
convertible into shares of GGD Stock (the "GGD Debentures").
On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture
among Genzyme, StressGen Biotechnologies Corporation and the Canadian Medical
Discoveries Fund to develop stress gene therapies for the treatment of cancer.
GMO recorded an equity in net loss of the joint venture of $1.6 million and
$0.3 million in 1998 and 1997, respectively.
GMO recorded a tax benefit of $2.6 million in 1998 as compared to $1.1
million during 1997. The tax benefit results from the amortization of the
deferred tax liability established upon the acquisition of PharmaGenics.
1997 COMPARED TO 1996
REVENUES
GMO recorded $0.8 million total revenue in 1997 as compared to no revenue
in 1996. GMO recorded revenue of $0.5 million which consists of the sale of
services using GMO's SAGE(TM) differential gene expression technology. GMO also
recorded research and development revenue of $0.3 million, which consists of
work performed for 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.
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<PAGE> 6
In 1997, GMO incurred $2.1 million of 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.
In 1997, GMO recorded a $7.0 million charge as part of the acquisition of
PharmaGenics for the purchase of in-process technology which represents the
value assigned to PharmaGenics' programs which were still in the development
stage for which there was 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 the GMO
Debentures. The interest expense is interest and related amortization of the
discount on the GMO Debentures.
GMO recorded an equity in net loss of StressGen/Genzyme LLC of $0.3 million
in 1997. Because StressGen/Genzyme LLC was formed in July 1997, there were no
comparable amounts in 1996.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, GMO had cash, cash equivalents and short- and
long-term investments of $11.9 million, a decrease of $9.3 million from December
31, 1997. In 1998, GMO used $8.1 million of cash for operations. Investing
activities provided $4.0 million of cash which consisted of $7.1 million in
proceeds from the maturities of investments, offset by $2.1 million used to
purchase investments and $0.6 million used to acquire equipment.
In 1997, the Genzyme Board approved the allocation of up to $25.0 million
in cash to GMO from Genzyme General (the "GMO Equity Line"). The amount
available was reduced to $5.0 million as a result of the issuance of the GMO
Debentures in 1997.
In August 1998, the holders of the GMO Debentures exercised their option to
exchange the GMO Debentures, plus accrued interest of $1.2 million, for the GGD
Debentures.
In September 1998, Genzyme withdrew its registration statement on Form S-3
that it had filed with the Securities and Exchange Commission in April 1998,
covering the initial public offering of 3,450,000 shares (including 450,000
shares issuable upon exercise of the underwriter's over-allotment option) of GMO
Stock. In 1998, GMO recorded a $0.6 million charge for previously capitalized
costs in connection with this offering.
In September 1998, the Genzyme Board approved the exchange of a
subordinated convertible promissory note due from GMO to Genzyme General in the
amount of $2,450,000, plus accrued interest of $246,080, for approximately
386,000 GMO Designated Shares. GMO Designated Shares are shares of GMO Stock
that are not issued and outstanding, but which the Genzyme Board may from time
to time issue, sell or otherwise distribute without allocating the proceeds to
GMO.
In September 1998, GMO made a draw of the remaining $5.0 million available
under the GMO Equity Line. Approximately 714,000 GMO Designated Shares were
reserved for issuance in connection with this draw. In August 1998, the Genzyme
Board approved the allocation by Genzyme General of up to $30.0 million in cash
to GMO in exchange for an increase in the number of GMO Designated Shares (the
"New Equity Line"). This is in addition to the GMO Equity Line. GMO has not yet
drawn any funds under this arrangement.
In October 1998, GMO licensed its p53 gene therapy patent rights to
Schering-Plough Corporation. Under terms of the licensing agreement, GMO
received a $5.0 million up-front payment. There could be additional patent,
product development and sales milestone fees, in addition to royalties on
product sales, associated with Schering-Plough's development and
commercialization of p53 gene therapy product.
On November 16, 1998 Genzyme distributed 8,717,000 shares of GMO Stock to
holders of GGD Stock (the "GMO Dividend") and released from escrow 3,929,000
shares of GMO Stock held by former PharmaGenics shareholders.
Management of GMO currently believes that the existing cash balances,
revenues generated from SAGE agreements, committed research funding from
collaborators and cash available under the New Equity Line will enable GMO to
maintain its current and planned operations through 2000. Substantial additional
funds will be required to complete development and commercialization of GMO's
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<PAGE> 7
products and services (other than SAGE 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, the development of
competitor products and services and the cost and timing of 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.
GMO is expected to experience significant operating losses at least through
fiscal year 2002 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.
NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK
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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Molecular Oncology 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.
LACK OF SIGNIFICANT REVENUES; EARLY STAGE OF PRODUCT DEVELOPMENT
Genzyme Molecular Oncology's products and services will not generate
significant revenue for several years. Genzyme Molecular Oncology's service
business around its SAGE(TM) differential gene expression technology is its
only program that is not at an early stage of development. To date, these
services have generated only modest revenue, and there are several other
companies that provide genomics services that compete with SAGE(TM). Prior to
commercializing any other products and services, Genzyme Molecular Oncology
will have to conduct substantial research and development, undertake
preclinical and clinical testing and pursue regulatory approvals. There can be
no assurance that these efforts will be successful. Clinical trials, for
example, may not support the safety or effectiveness of a particular product or
service. Currently, Genzyme Molecular Oncology's gene therapy products for
melanoma are its only therapeutic products in clinical development. There can
be no assurance that Genzyme Molecular Oncology will not encounter problems in
clinical trials that will cause it to delay or suspend the trials. 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.
SIGNIFICANT OPERATING LOSSES
It is expected that Genzyme Molecular Oncology will have significant
operating losses for the next several years. Genzyme Molecular Oncology plans
to spend substantial amounts of money on, among other things: (i)
commercialization of the SAGE(TM) technology; (ii) research and development;
(iii) preclinical and clinical testing; and (iv) pursuing regulatory approvals.
There can be no assurance that the efforts underlying these expenditures will
be successful or that Genzyme Molecular Oncology's operations will ever be
profitable. It may be years before Genzyme Molecular Oncology generates any
revenue from sales of products or services other than from the SAGE(TM)
technology.
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<PAGE> 8
It is anticipated that Genzyme Molecular Oncology's current cash resources,
together with amounts available under a line of credit from Genzyme General and
revenues generated from SAGE(TM), license agreements and committed research
funding from collaborators, will be sufficient to fund its operations through
2000. However, Genzyme Molecular Oncology's cash needs may differ from those
planned because of many factors, including: (i) the results of research and
development and clinical testing; (ii) the achievement of milestones under
existing strategic alliances; (iii) the ability to establish and maintain
additional strategic alliances and licensing arrangements; (iv) the enforcement
of patent and other intellectual property rights; (v) the development of
competitive products and services; and (vi) the ability to satisfy regulatory
requirements of the FDA and other government authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations at anticipated levels. There can be no assurance that
Genzyme Molecular Oncology will be able to obtain any additional financing or
find it on favorable terms. If Genzyme Molecular Oncology has insufficient funds
or is unable to raise additional funds, it may delay, reduce or eliminate
certain of its programs. Genzyme Molecular Oncology may also have to give rights
to third parties to attempt to commercialize technologies or products that it
would otherwise commercialize itself.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY
Genzyme Molecular Oncology's long-term success largely depends on its ability to
market technologically competitive products. Genzyme Molecular Oncology can
prevent unauthorized third parties from using proprietary rights relating to its
products and services only if these rights are covered by patents or are kept
confidential as trade secrets.
Third party patent rights and pending patent applications filed by third
parties, if issued, may cover some of the therapeutic products Genzyme Molecular
Oncology Division is developing or testing. As a result, it may be required to
obtain licenses from the holders of these patents in order to test, use or
market certain products and services. There can be no assurance that these
licenses will be available on acceptable terms, if at all.
Several patents have recently been issued that may affect Genzyme Molecular
Oncology's business. The first is a U.S. patent issued to an academic
institution that claims to cover the use of any recombinant viral vector in gene
therapy, including adenoviral vectors. Based on public statements by the
academic institution, Genzyme Molecular Oncology understands that the
institution intends to make non-exclusive licenses under this patent widely
available. The second is a group of U.S. and European patents that recently
issued to a third party that relate to the collection and analysis of gene
expression data from chemically exposed mammalian, plant and yeast cells. The
third party has invited Genzyme to negotiate for a license for these patents.
The third is a U.S. patent recently issued to a third party relating to methods
for introducing DNA sequences encoding gene products into mammals systemically
using lipid carriers. Genzyme Molecular Oncology 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.
Genzyme Molecular Oncology Division has a right of first negotiation to
exclusively license the rights to inventions made by the National Cancer
Institute relating to its use of adenoviral vectors for the tumor antigens
MART-1 and gp100. In addition, Genzyme Molecular Oncology may negotiate for
pre-existing rights to MART-1 and gp100 held by National Cancer Institute.
Genzyme Molecular Oncology is aware of a U.S. patent issued to a third party
which appears to cover the MART-1 gene. Genzyme Molecular Oncology is continuing
to evaluate this patent and is in discussions with the patent holder regarding a
non-exclusive license to the MART-1 gene. Genzyme Molecular Oncology is also
aware of two published Patent Cooperation Treaty applications by two different
third party applicants which appear to cover the gp100 gene. Accordingly, there
can be no assurance that the National Cancer Institute will ultimately obtain
the patent rights to gp100. Genzyme Molecular Oncology may need to obtain
licenses from both the National Cancer Institute and others in order to
commercialize immunotherapy products based on MART-1 and gp100.
There can be no assurance that the patents issued or licensed to Genzyme
will remain free from challenge by third parties. If Genzyme Molecular Oncology
becomes involved in litigation to defend itself in patent suits brought by third
parties or if it initiates such suits, it could consume a substantial portion of
Genzyme Molecular Oncology's resources. Any legal action against Genzyme
Molecular Oncology or its strategic partners claiming damages or seeking to stop
commercial activities relating to the affected products and processes could
subject Genzyme Molecular Oncology to potential liability for damages.
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<PAGE> 9
These actions may also require Genzyme Molecular Oncology or its strategic
partner to obtain a license in order to continue to manufacture or market the
affected products and services. There can be no assurance that Genzyme Molecular
Oncology or its strategic partner would prevail in any legal action. If Genzyme
Molecular Oncology is required to obtain a license, there can be no assurance
that one would be made on acceptable terms, if at all.
Genzyme Molecular Oncology also relies upon trade secrets, proprietary
know-how and continuing technological innovation to remain competitive. There
can be no assurance that other parties will not independently develop such
know-how or otherwise obtain access to Genzyme Molecular Oncology's technology.
While Genzyme Molecular Oncology'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. In addition, some of Genzyme Molecular Oncology's consultants have
developed portions of its proprietary technology at universities or in
governmental laboratories. These universities or governmental authorities may
claim rights to the intellectual property arising out of the research performed
at the university or governmental laboratory.
RELIANCE ON COLLABORATORS
Genzyme Molecular Oncology'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. Genzyme
Molecular Oncology will be dependent on the subsequent success of these parties
in performing research, preclinical and clinical testing and marketing. These
arrangements may require Genzyme Molecular Oncology to transfer certain material
rights to such corporate partners and licensees. While Genzyme Molecular
Oncology 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 Genzyme Molecular Oncology, 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
Genzyme Molecular Oncology's current strategic alliances will be continued or
not terminated early or that Genzyme Molecular Oncology will be able to enter
into future collaborations.
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<PAGE> 10
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Service Revenue.......................................................... $ 2,229 $ 467 $ --
Service revenue-related party............................................ 466 -- --
Research and development-related party................................... 2,177 315 --
Research and development................................................. 14,535 -- --
-------- -------- -------
Total revenues.................................................... 19,407 782 --
Operating costs and expenses:
Cost of service revenue................................................. 1,374 50 --
Cost of research and development revenue................................ 4,073 287 --
Selling, general and administrative..................................... 7,155 2,118 185
Research and development................................................ 12,743 5,341 818
Amortization of intangibles............................................. 11,983 5,127 --
Charge for in-process technology........................................ -- 7,000 --
-------- -------- -------
Total operating costs and expenses................................. 37,328 19,923 1,003
-------- -------- -------
Operating loss............................................................ (17,921) (19,141) (1,003)
Other income (expenses):
Equity in net loss of joint venture..................................... (1,647) (258) --
Interest income......................................................... 782 392 --
Interest expense........................................................ (2,968) (1,663) --
-------- -------- -------
Total other income (expenses)...................................... (3,833) (1,529) --
-------- -------- -------
Loss before income taxes.................................................. (21,754) (20,670) (1,003)
Tax benefit............................................................... 2,647 1,092 --
-------- -------- -------
Net loss attributable to Genzyme Molecular Oncology Stock................. $(19,107) $(19,578) $(1,003)
======== ======== =======
Net loss per Genzyme Molecular Oncology basic and diluted common share:
Net loss.............................................................. $ (3.81)
========
Weighted average shares outstanding....................................... 5,019
========
Pro forma net loss per Genzyme Molecular Oncology basic and diluted common
share:
Pro forma net loss.................................................... $ (4.98) $ (0.26)
======== =======
Pro forma weighted average shares outstanding............................. 3,929 3,929
======== =======
Net loss attributable to Genzyme Molecular Oncology Stock.............. $(19,107) $(19,578) $(1,003)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities arising during the period.... 7 (7) --
-------- -------- -------
Other comprehensive income............................................. 7 (7) --
-------- -------- -------
Comprehensive loss..................................................... $(19,100) $(19,585) $(1,003)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
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<PAGE> 11
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(AMOUNTS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $10,868 $15,010
Short-term investments............................................... 1,032 5,170
Accounts receivable.................................................. 5,931 117
Other................................................................ 85 706
------- -------
Total current assets............................................ 17,916 21,003
Equipment, net....................................................... 791 487
Long-term investments................................................ - 1,049
Intangibles, net..................................................... 17,245 30,688
Investment in joint venture.......................................... - 574
------- -------
Total assets.................................................... $35,952 $53,801
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses..................................................... $ 1,273 $ 2,015
Due to Genzyme General............................................... 4,773 5,434
Payable to joint venture............................................... 1,181 -
Deferred revenue..................................................... 1,500 1,583
Other current liabilities............................................ - 18
------- -------
Total current liabilities....................................... 8,727 9,050
Long-term debt......................................................... - 5,000
Convertible debentures, net............................................ - 17,024
Note payable to Genzyme General........................................ - 2,582
Deferred tax liability................................................. 3,861 6,509
Other.................................................................. - 170
------- -------
Total liabilities............................................... 12,588 40,335
Commitments and contingencies (See Notes)
Division equity (Note L)............................................... 23,364 13,466
------- -------
Total liabilities and division equity........................... $35,952 $53,801
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
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<PAGE> 12
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................. $(19,107) $(19,578) $(1,003)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization......................... 12,353 5,245 --
Charge for in-process technology...................... -- 7,000 --
Deferred tax benefit.................................. (2,647) (1,092) --
Accretion of debt conversion feature.................. 1,867 957 --
Equity in loss of joint venture....................... 1,647 258 --
Accrued interest/amortization of marketable securities 131 (141) --
Non-cash compensation expense......................... 114 58 --
Increase (decrease) in cash from working capital:
Accounts receivable................................. (5,815) (117) --
Other current assets................................ 986 (773) --
Accrued expenses, deferred revenue and other........ 1,779 2,139 --
Due to Genzyme General.............................. 553 2,011 --
-------- -------- -------
Net cash used by operating activities............. (8,139) (4,033) (1,003)
INVESTING ACTIVITIES:
Acquisition of PharmaGenics, Inc., net of acquired cash.. -- 9 --
Investment in unconsolidated affiliate................... -- (724) --
Purchases of investments................................. (2,056) (6,086) --
Maturities of investment................................. 7,120 -- --
Acquisitions of equipment................................ (559) (357) --
Other.................................................... (488) -- --
-------- -------- -------
Net cash provided (used) by investing activities . 4,017 (7,158) --
FINANCING ACTIVITIES:
Allocation of debt from Genzyme General.................. -- 5,000 --
Cash allocated from Genzyme General...................... 5,000 -- --
Proceeds from issuance of common stock................... 7 -- --
Proceeds from issuance of warrants....................... -- 724 --
Proceeds from issuance of convertible debentures, net.... -- 19,150 --
Repayments of debt....................................... (5,000) -- --
Parent company investment, Genzyme General............... -- 1,371 1,003
Other.................................................... (27) (44) --
-------- -------- -------
Net cash provided (used) by financing activities.. (20) 26,201 1,003
Increase (decrease) in cash and cash equivalents......... (4,142) 15,010 --
Cash and cash equivalents at beginning of period......... 15,010 -- --
-------- -------- -------
Cash and cash equivalents at end of period............... $ 10,868 $ 15,010 $ --
======== ======== =======
Supplemental disclosure of non-cash transaction:
Acquisition of PharmaGenics, Inc. -- See Note B
Conversion of debt to equity -- See Notes C and G
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
129
<PAGE> 13
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Molecular Oncology is engaged in development and commercialization of
novel cancer products focusing on cancer vaccines and angiogenesis inhibitors
through the integration of its gene discovery, gene therapy, small molecule drug
discovery, protein therapeutic and genetic diagnostic efforts. GMO is a division
of Genzyme Corporation and has a separate series of common stock intended to
reflect its value and track its economic performance. Genzyme formed GMO in June
1997 by acquiring PharmaGenics and combining it with several of Genzyme's
existing programs in the field of oncology. Operations under the existing
Genzyme programs that formed GMO commenced December 1, 1994 (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 General through June 18, 1997. GMO's financial statements are
prepared using amounts included in the consolidated financial statements of
Genzyme and its subsidiaries ("Genzyme's Consolidated Financial Statements").
Corporate allocations reflected in these financial statements are determined
based upon methods which management believes to be reasonable.
On June 18, 1997, Genzyme acquired PharmaGenics. Therefore, from June 18, 1997,
the results of PharmaGenics are included in GMO's financial statements. The
stockholders of PharmaGenics received approximately 3,929,000 shares of GMO
Stock in the merger. As compensation to Genzyme General for its contribution to
GMO, 6,000,000 GMO Designated Shares were reserved for issuance. GMO Designated
Shares are shares of GMO Stock that are not outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds to GMO. (See Note L., "Division Equity" below).
PRINCIPLES OF COMBINATION
The accompanying combined financial statements of GMO reflect the combined
accounts of all of GMO's businesses. The equity method is used to account for
investments in companies and joint ventures in which GMO has a substantial
ownership interest (20% to 50%), or in which GMO participates in policy
decisions. Accordingly, GMO's share of the earnings or losses of these entities
is included in the computation of GMO's net loss. (See Note I. "Investments", to
Genzyme's Consolidated Financial Statements, which is incorporated herein by
reference) All significant intercompany items and transactions have been
eliminated in combination. Certain items in GMO's combined financial statements
for the years ended December 31, 1997 and 1996 have been reclassified to conform
with the December 31, 1998 presentation.
FINANCIAL INFORMATION
Genzyme provides to holders of GMO Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for GMO. Notwithstanding the allocation of assets and
liabilities, including contingent liabilities, between Genzyme General, GTR and
GMO for the purposes of preparing their respective financial statements, Genzyme
Corporation 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 GMO Stock
are common stockholders of Genzyme and have no specific claim against the assets
attributed to GMO. 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.
130
<PAGE> 14
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 Genzyme's Consolidated Financial Statements. The Company prepares
the financial statements of GMO 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 Genzyme's 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 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 Charter, dividends that may be paid to the holders of GMO
Stock will be limited to the lesser of funds of Genzyme legally available for
the payment of dividends and the Available GMO Dividend Amount, as defined in
the 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 Genzyme.
Genzyme has never paid any cash dividends on shares of its capital stock.
Genzyme currently intends to retain its earnings to finance future growth and
therefore does not anticipate paying any cash dividends on GTR Stock in the
foreseeable future.
REVENUE RECOGNITION
GMO recognizes service revenue when the service procedures have been completed
or applicable milestones have been achieved. Revenues from research and
development contracts are recognized over applicable contractural periods as
specified by each contract and as costs related to the contracts are incurred.
NET LOSS PER SHARE
Historical loss per share information is presented for the year ending December
31, 1998, but is omitted for the years ended December 31, 1997 and 1996 as there
were no shares of GMO Stock outstanding prior to June 18, 1997. Pro forma net
loss per share is disclosed for the years ending December 31, 1997 and 1996. The
pro forma shares outstanding represent the shares of GMO Stock issued to effect
the acquisition of PharmaGenics. Following issuance of the GMO Stock, the method
of calculating earnings per share for GMO reflects the terms of the Charter,
which provides 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.
Net income (loss) per share attributable to Genzyme General, GTR and GMO gives
effect to the management and accounting policies adopted by the Genzyme Board
and is reported in lieu of consolidated per share data. Genzyme 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 GMO Stock equals GMO'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.
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,
-------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss......................................................... $(19,107) $(19,578) $(1,003)
Basic and diluted weighted average shares outstanding............ 5,019
Net loss per common share - basic and diluted.................... $ (3.81)
Pro forma basic and diluted weighted average shares outstanding.. 3,929 3,929
Pro forma net loss per common share -- basic and diluted......... $ (4.98) $ (0.26)
</TABLE>
During the years ended December 31, 1998, and 1997, certain securities 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. Such
securities include:
<TABLE>
<CAPTION>
December 31,
Amount in thousands 1998 1997
<S> <C> <C>
Shares of GMO Stock issuable for options.......................................... 1,158 826
Warrants to purchase GMO Stock.................................................... 10 10
GMO Designated Shares............................................................. 1,410 6,000
----- -----
Total shares excluded from the GMO diluted earnings per
share calculation....................................................... 2,578 6,836
----- -----
</TABLE>
During the year ended December 31, 1996, there were no securities outstanding to
be considered in this calculation.
131
<PAGE> 15
ACCOUNTING FOR STOCK-BASED COMPENSATION
GMO has elected the disclosure-only alternative permitted under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". GMO has disclosed net income (loss) and earnings per
share for 1998 and pro forma net loss and pro forma loss per share information
using the fair value based method for 1997, as there were no GMO Stock Options
issued under the above mentioned plan prior to 1997 (See Note L., "Division
Equity" below).
NOTE B. PHARMAGENICS MERGER
Genzyme acquired PharmaGenics on June 18, 1997. 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 and are included in accrued expenses), plus acquisition costs of $2.5
million and assumed liabilities of $4.9 million, has been allocated to the
acquired tangible and intangible assets based on their estimated respective fair
values (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
Equipment....................................................... $ 208
Other assets.................................................... 50
Completed technology rights (to be amortized over 3 years)...... 20,000
Goodwill (to be amortized over 3 years)......................... 15,193
Deferred tax liability (to be amortized over 3 years)........... (7,600)
In-process technology........................................... 7,000
-------
$34,851
=======
</TABLE>
In 1998 there were certain adjustments to the assumed liabilities totaling $0.5
million.
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, 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.
If the acquisition had taken place at the beginning of 1997, 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
------------------------------------------------------------------------------
(Unaudited)
<S> <C>
Pro forma revenues................................... $ 857
Pro forma net loss................................... $(25,926)
Pro forma basic and diluted net loss per share....... $ (6.60)
Pro forma weighted average shares outstanding........ 3,929
</TABLE>
132
<PAGE> 16
In connection with the PharmaGenics merger, a warrant to purchase certain shares
of PharmaGenics Series A Preferred Stock was converted to a warrant to purchase
approximately 10,000 shares of GMO Stock at $8.04 per share.
NOTE C. CREDIT FACILITY
Genzyme had made a credit facility (the "PGI Credit Facility") available to
PharmaGenics to fund PharmaGenics' documented operating costs prior to
completion of the merger. As of June 18, 1997, PharmaGenics had drawn $2,450,000
under the PGI Credit Facility. Following the merger, amounts advanced under the
PGI Credit Facility were evidenced by a Subordinated Convertible Promissory Note
which bore interest subsequent to June 18, 1997 at the best borrowing rate
available to Genzyme (6.15% per annum as of December 31, 1997) and was due to
mature on February 10, 2002 (the "Maturity Date"). Amounts drawn under the PGI
Credit Facility were a liability allocated to GMO and the outstanding principal
amount was 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. In
September 1998, the Genzyme Board approved the exchange of amounts drawn under
the PGI Credit Facility in the amount of $2,450,000, plus accrued interest of
$246,080, for approximately 386,000 GMO Designated Shares. The number of GMO
Designated Shares created as a result of the exchange was based on the fair
value of the GMO Stock ($7.00) as determined by the Genzyme Board. The amount of
the note and accrued interest was reclassified to division equity upon the
exchange.
NOTE D. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS
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. With the exception of the policy
regarding Interdivision Asset Transfers, policies may be 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.
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 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
GMO operates as a division of Genzyme with its own personnel and financial
resources, but GMO 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. Genzyme's corporate general and administrative, selling and marketing,
and research and development expenses have been allocated to GMO in a reasonable
and consistent manner based on the utilization by GMO 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. Management
believes that such allocation is a reasonable estimate of such expenses. Genzyme
General's allocations to GMO for general and administrative and selling and
marketing expenses were $5.7 million, $2.1 million, and $0.2 million in 1998,
1997 and 1996, respectively. Genzyme General allocations to GMO for research and
development expenses were $12.1 million, $5.3 million, and $0.8 million in 1998,
1997 and 1996 respectively.
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 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.
133
<PAGE> 17
Income taxes are allocated to each division based upon the financial statement
income, taxable income, credits and other amounts properly allocable to such
division under generally accepted accounting principles as if each division were
a separate taxpayer; provided, however, that as of the end of any fiscal quarter
of Genzyme, any projected annual tax benefit attributable to any division that
cannot be utilized by such division to offset or reduce its current or deferred
income tax expense may be allocated to the other divisions in proportion to
their taxable income 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 Genzyme's 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.
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 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. SG&A or 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 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. As of December 31, 1998 GMO recorded
$0.5 million of service revenue for services performed for Genzyme General.
134
<PAGE> 18
s
NOTE E. EQUIPMENT
Equipment at December 31 includes the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Equipment.................................... $1,111 $552
Furniture and fixtures....................... 13 13
------ ----
1,124 565
Less accumulated depreciation.............. (333) (78)
------ ----
Equipment, net............................... $ 791 $487
====== ====
</TABLE>
Depreciation expense was $255,000 in 1998 and $74,000 in 1997.
NOTE F. REVOLVING CREDIT FACILITY
Genzyme has a $225 million revolving credit facility with a syndicate of
commercial banks. As of December 31, 1998, GMO had repaid the $5.0 million of
debt it had outstanding under the revolving credit facility and currently has no
amounts outstanding under this credit facility. GMO incurred $73,000 and
$160,000 of interest expense in 1998 and 1997, respectively, related to this
credit facility. (See Note K., "Long-Term Debt And Leases," to Genzyme's
Consolidated Financial Statements, which is incorporated herein by reference).
NOTE G. GMO DEBENTURES
Effective August 1998, all of the holders of the GMO Debentures exercised their
option to exchange their GMO Debentures, plus accrued interest of $1.2 million,
into the GGD Debentures. Approximately 3,029,000 GMO Designated Shares were
reserved for issuance in connection with the exchange. The GMO Designated Shares
are subject to adjustment based on the fair market value of GMO Stock on October
16, 1999. The number of GMO Designated Shares created as a result of the
exchange was based on the fair value of the GMO Stock ($7.00) as determined by
the Genzyme Board. The amount of the note and accrued interest was reclassified
to division equity upon the exchange. (See Note L. "Division Equity" below and
Note K., "Long-Term Debt and Leases," to Genzyme's Consolidated Financial
Statements, which is incorporated herein by reference).
NOTE H. GMO EQUITY LINE
In 1997, the Genzyme Board approved the allocation of up to $25.0 million in
cash to GMO from Genzyme General (the "GMO Equity Line"). The amount available
was reduced to $5.0 million as a result of the issuance of the GMO Debentures in
1997.
In September 1998, GMO made a draw of the remaining $5.0 million available under
the GMO Equity Line. In August 1998, the Genzyme Board approved the allocation
by Genzyme General of up to an additional $30.0 million in cash to GMO in
exchange for an increase in the number of GMO Designated Shares. This is in
addition to the GMO Equity Line. GMO has not yet drawn any funds under this
arrangement.
NOTE I. REGISTRATION STATEMENT
In April 1998, Genzyme filed with the Securities and Exchange Commission an
amended registration statement on Form S-3 covering the initial public offering
of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon
exercise of the underwriters' over-allotment option). In September 1998, GMO
withdrew the registration statement because it no longer intended to conduct the
offering of shares of GMO Stock contemplated in the registration statement. In
1998, GMO recorded a $0.6 million charge for previously capitalized costs in
connection with this offering.
NOTE J. STRESSGEN/GENZYME LLC
The disclosures relating to StressGen/Genzyme LLC are included in Note I.,
"Investments," to Genzyme's Consolidated Financial Statements, which is
incorporated herein by reference.
For the years ended December 31, 1998 and 1997, GMO recorded $2.2 million and
$0.3 million, respectively, of research and development revenue and $2.0 million
and $0.3 million, respectively, in costs of research and development revenue,
respectively, related to services billed to StressGen/Genzyme LLC. GMO had a
receivable of $0.1 million from StressGen/Genzyme LLC at December 31, 1998,
which is included in other current assets. Because CMDF has the right to require
Genzyme and StressGen to purchase CMDF's membership interest, Genzyme records
50% of the losses incurred by the joint venture. For the years ended December
31, 1998 and December 31, 1997, GMO recorded $1.6 million and $0.3 million,
respectively, 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 GMO's statement of operations for the
years ended December 31, 1998 and 1997 is not considered to be material.
135
<PAGE> 19
NOTE K. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme has been subject to legal proceedings and claims
arising in connection with its business. At December 31, 1998, there were no
asserted claims against Genzyme which, in the opinion of management, if
adversely decided, would have a material adverse effect on GMO's financial
position and results of operations.
NOTE L. 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,
---------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period ............................. $13,466 $ -- $ --
Net loss ................................................... (19,107) (19,578) (1,003)
Allocation from Genzyme General for GMO Designated Shares... 5,000 1,381 1,003
Conversion of note payable to Genzyme
General into GMO Designated Shares ....................... 2,696 -- --
Exercise of stock options .................................. 7 -- --
Shares issued in connection with acquisition of PharmaGenics -- 27,369 --
Sale of warrants ........................................... -- 724 --
Unearned compensation ...................................... 114 (116) --
Value of debt conversion feature ........................... -- 3,529 --
Conversion of GMO debentures to GGD debentures
for GMO Designated Shares................................. 19,802 -- --
Unrealized gain (loss) on investments ...................... 7 (7) --
Other ...................................................... 1,379 164 --
------- ------- ------
Balance at end of period .............................. $23,364 $13,466 $ --
======= ======= ======
</TABLE>
At December 31, 1998 and 1997, 40,000,000 shares of GMO Stock were authorized
for issuance and 12,648,295 and 3,929,572 shares, respectively, were issued and
outstanding.
On November 16, 1998, Genzyme distributed 8,717,000 shares of GMO Stock to
holders of GGD Stock and released from escrow 3,929,000 shares of GMO Stock held
by former PharmaGenics shareholders.
As of December 31, 1998 approximately 1,410,000 GMO Designated Shares were
reserved for issuance.
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, stock options, Employee Stock Purchase Plan,
Stock Compensation Plans and GMO Designated Shares are included in Note L.,
"Stockholder's Equity" to Genzyme's Consolidated Financial Statements which is
incorporated herein by reference.
At December 31, 1998, approximately 4,139,000 shares of GMO Stock were reserved
for issuance under the Company's 1990 Equity Incentive Plan, as amended, 1997
Equity Incentive Plan, 1998 Director Stock Option Plan, as amended, and 1990
Employee Stock Purchase Plan, as amended. At December 31, 1998, approximately
1,158,000 options to purchase shares of GMO Stock were outstanding.
136
<PAGE> 20
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 1998 Director Stock Option Plan (a stock
option 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
method of SFAS 123, GMO's net loss and loss per share would have been as follows
(disclosure is presented only for the years ended December 31, 1998 and 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)
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported..................... $(19,107) $(19,578)
Pro forma....................... $(20,018) $(19,787)
Basic and diluted loss per share:
As reported..................... $ (3.81) $ (4.98)
Pro forma....................... $ (3.99) $ (5.04)
</TABLE>
For assumptions used in the SFAS 123 calculations for GMO for the two years
ended December 31, 1998 and 1997 (see Note L., "Stockholders Equity," to
Genzyme's 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.
NOTE M. INCOME TAXES
There was no provision for income taxes due to GMO's continuing operating
losses. As part of the acquisition of PharmaGenics, 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 is being amortized over three years consistent with the life of the
completed technology. GMO recorded $2,647,000 and $1,092,000 of deferred tax
benefit for the years ended December 31, 1998 and 1997, respectively.
137
<PAGE> 21
The following summarizes GMO's provision for (benefit from) income taxes for the
years ended December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-------------------------------------------------------------
<S> <C> <C>
Federal income taxes:
Current......................... $ -- $ --
Deferred........................ (2,438) (1,006)
State income taxes:
Current......................... -- --
Deferred........................ (209) (86)
------- -------
Total income tax benefit..... $(2,647) $(1,092)
======= =======
</TABLE>
The differences between the effective tax rates and the U.S. federal statutory
tax rates for the years ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
U.S. Federal income tax statutory rate.................. (35.0)% (35.0)%
State income taxes, net of federal benefit.............. (2.0) (3.0)
Tax credits............................................. (2.5) (2.4)
Nondeductible amortization.............................. 8.1 6.4
Nondeductible interest.................................. 3.0 2.7
Deductions subject to deferred tax valuation allowance . 16.2 22.4
---- ----
Effective tax rate...................................... (12.2)% (8.9)%
==== ====
</TABLE>
At December 31, 1998 and 1997, the components of deferred tax assets and
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,166 $ 5,250
Tax credits..................... 1,003 459
------- -------
Gross deferred tax asset.......... 9,169 5,709
Valuation allowance............. (9,169) (5,709)
------- -------
Net deferred tax asset............ -- --
Deferred tax liabilities:
Intangible amortization......... (3,861) (6,509)
------- -------
Net deferred tax liabilities..... $(3,861) $(6,509)
======= =======
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes, GMO placed a valuation allowance of $9.2 million and $5.7 million
for December 31, 1998 and December 31, 1997, respectively, 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.
138
<PAGE> 22
NOTE N. BENEFIT PLANS
For discussion on the Company's benefit plans, see Note P., "Benefit Plans" to
Genzyme's Consolidated Financial Statements which is incorporated herein by
reference.
NOTE O. SIGNIFICANT CUSTOMERS
GMO has two significant customers that combined accounted for 78% of the total
revenue earned during 1998. A large pharmaceutical company accounted for $13.0
million, or 67% of GMO's 1998 total revenue and StressGen/Genzyme LLC accounted
for $2.2 million, or 11%, of GMO's 1998 total revenues.
139
<PAGE> 23
GENZYME MOLECULAR ONCOLOGY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Genzyme Molecular Oncology (as
described in Note A) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As more fully described in Note A to these financial statements, Genzyme
Molecular Oncology is a division 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/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 1999
140
<PAGE> 1
Exhibit 21
DESCRIPTION: SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME DIRECT PARENT OWNERSHIP INCORPORATION
- ---- ------------- --------- -------------
<S> <C> <C> <C>
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation II
Deknatel Snowden Genzyme Corporation 100% Delaware
Pencer, Inc.
Genzyme B.V. Genzyme Corporation 100% Netherlands
Genzyme GmbH Genzyme B.V. 100% Germany
Genzyme France 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 40% Massachusetts
Corporation
Genzyme Virotech GmbH Genzyme Corporation 100% Germany
RenaGel LLC Genzyme Corporation 50% Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329,
33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437,
333-10003, 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, 333-42371, 333-64103) and on Form S-3 (File Nos. 33-61853,
333-59513, 333-68629, 33-64901) of our reports, dated February __, 1999 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, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, 1997 and 1996, which reports are included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS PRESENTED
IN THE 1998 ANNUAL REPORT ON FORM 10-K FOR GENZYME CORPORATION.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 118,612
<SECURITIES> 175,453
<RECEIVABLES> 176,922
<ALLOWANCES> 13,880
<INVENTORY> 109,833
<CURRENT-ASSETS> 638,132
<PP&E> 533,622
<DEPRECIATION> 151,003
<TOTAL-ASSETS> 1,690,554
<CURRENT-LIABILITIES> 222,704
<BONDS> 287,225
0
0
<COMMON> 1,149
<OTHER-SE> 1,171,398
<TOTAL-LIABILITY-AND-EQUITY> 1,690,554
<SALES> 613,685
<TOTAL-REVENUES> 709,335
<CGS> 211,076
<TOTAL-COSTS> 259,662
<OTHER-EXPENSES> 353,060
<LOSS-PROVISION> 5,482
<INTEREST-EXPENSE> 22,593
<INCOME-PRETAX> 102,437
<INCOME-TAX> 39,870
<INCOME-CONTINUING> 62,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,567
<EPS-PRIMARY> 1.53<F1>
<EPS-DILUTED> 1.48<F1>
<FN>
<F1>GENZYME CORPORATION REPORTS EARNINGS PER SHARE BASED ON ITS THREE TRACKING
STOCKS-GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK"), GENZYME TISSUE
REPAIR DIVISION COMMON STOCK ("GTR STOCK") AND GENZYME MOLECULAR ONCOLOGY
DIVISION COMMON STOCK ("GMO STOCK"). THE EARNINGS PER SHARE DATA PRESENTED ON
THIS SCHEDULE REFLECTS THE EARNINGS PER SHARE DATA FOR NET INCOME ATTRIBUTABLE
TO GGD STOCK. FOR THE YEAR ENDED DECEMBER 31, 1998, NET INCOME ATTRIBUTABLE FOR
GENZYME GENERAL DIVISION WAS $121,053 AND NET INCOME PER SHARE OF GGD STOCK ON
A BASIC AND DILUTED BASIS WAS $1.53 AND $1.48, RESPECTIVELY. NET LOSS FOR
GENZYME TISSUE REPAIR DIVISION FOR THE YEAR ENDED DECEMBER 31, 1998 WAS
$(40,386) OR $(1.99) PER BASIC AND DILUTED SHARE OF GTR STOCK. NET LOSSES FOR
GENZYME MOLECULAR ONCOLOGY DIVISION FOR THE YEAR ENDED DECEMBER 31, 1998 WERE
$(19,107) OR $(3.81) PER BASIC AND DILUTED SHARE OF GMO STOCK.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MANAGEMENT AND ACCOUNTING POLICIES GOVERNING THE RELATIONSHIP OF GENZYME
DIVISIONS
The Genzyme Board of Directors (the "Genzyme Board") has adopted the
following policies to govern the management of the General Division, the Tissue
Repair Division and the Molecular Oncology Division and the relationships
between such Divisions. Except as otherwise provided in the policies, the
Genzyme Board may modify or rescind the policies in its sole discretion without
approval of the stockholders, subject only to the Genzyme Board's fiduciary duty
to Genzyme's stockholders.
1. PURPOSE OF THE TISSUE REPAIR AND MOLECULAR ONCOLOGY DIVISIONS. The purpose
of the Tissue Repair Division is to create a business with a comprehensive
approach to the field of tissue repair by developing and commercializing a
portfolio of novel products for the treatment and prevention of serious tissue
injury (excluding products developed on behalf of Genzyme Development
Partners, L.P.). The purpose of the Molecular Oncology Division is to create a
focused, integrated oncology business that will develop and commercialize novel
therapeutic and diagnostic products and services based upon molecular tools and
genomic information. In addition to the programs initially assigned to each of
the Tissue Repair Division and the Molecular Oncology Division, it is expected
that the product and service portfolio of each Division will expand through the
addition of complementary programs, products and services developed either
internally or externally to the Division, including acquiring or in-licensing
programs, products and services from outside of Genzyme. Each of the Tissue
Repair Division and the Molecular Oncology Division will be operated and managed
similarly to the General Division.
2. REVENUE ALLOCATION. Other than revenues received in connection with
transactions subject to Paragraph 8, revenues from the sale of a Division's
products and services shall be credited to that Division.
3. EXPENSE ALLOCATION. Other than expenses incurred in connection with
transactions subject to Paragraph 8, all direct expenses shall be charged to the
Division for the benefit of which they are incurred. Corporate and general and
administrative expenses or other indirect costs will be allocated to each
Division in a reasonable and consistent manner based on utilization by the
Division of the services to which such costs relate.
4. TAX ALLOCATIONS. Income taxes shall be allocated to each Division based
upon the financial statement income, taxable income, credits and other amounts
properly allocable to such Division under generally accepted accounting
principles as if each Division were a separate taxpayer; provided, however, that
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 the
other Divisions in proportion to their taxable income without any compensating
payment or allocation.
5. ACQUISITIONS OF PROGRAMS, PRODUCTS OR ASSETS. Upon the acquisition by
Genzyme from a third party of any programs, products or assets (whether by
acquisition of assets or stock, merger, consolidation or otherwise), the
aggregate cost of the acquisition and the programs, products or assets acquired
shall be allocated among the Divisions of Genzyme. In the case of material
acquisitions, such allocation shall be made in a manner determined by the
Genzyme Board to be fair and reasonable to each Division and to holders of the
common stock representing each Division, taking into account such matters as the
Genzyme Board and its financial advisors, if any, deem relevant. Any such
determination by the Genzyme Board will be final and binding on all holders of
common stock.
6. DISPOSITION OF PROGRAMS, PRODUCTS OR ASSETS. Upon any sale, transfer,
assignment or other disposition by Genzyme of any product, program or asset not
consisting of all or substantially all of the assets of a Division, all proceeds
from such disposition shall be allocated to the Division to which the program,
product or asset had been allocated. If the program, product or asset was
allocated to more than one Division, the proceeds of the disposition shall be
allocated among such Divisions based on their respective interests in such
program, product or asset. Such allocation shall be made in a manner determined
by the Genzyme Board to be fair and reasonable to such Divisions and to holders
of the common stock representing such Divisions, taking into account such
matters as the Genzyme Board and its financial advisors, if any, deem relevant.
Any such determination by the Genzyme Board will be final and binding on all
holders of common stock.
<PAGE> 2
7. INTERDIVISION ASSET TRANSFERS. The Genzyme Board may at any time and from
time to time reallocate any program, product or other asset from one Division to
any other Division. All such reallocations shall 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 such program, the phase of
clinical development of such program, the expenses associated with realizing any
income from such 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 the General Division to the Tissue Repair Division or to the
Molecular Oncology Division, the Genzyme Board may elect to account for such
reallocation as an increase in the Designated Shares representing the Division
to which such assets are reallocated in accordance with the provisions of
Genzyme's Articles of Organization.
Notwithstanding the foregoing, no Key GTR Program or Key GMO Program, as
defined below, may be transferred out of the Tissue Repair Division or the
Molecular Oncology Division, respectively, without a class vote of the holders
of the common stock representing the Division from which such Key GTR Program or
Key GMO Program is to be removed unless the Genzyme Board determines that (i) in
the case of a Key GTR Program, such Key GTR Program has application outside of
the field of tissue repair (in which case it may be transferred out only for the
non-tissue repair applications) and (ii) in the case of a Key GMO Program, such
Key GMO Program has application outside of the field of oncology (in which case
it may be transferred out only for the non-oncology applications; provided,
however that the SAGE Service (as herein defined) may not be transferred out of
the Molecular Oncology Division for any application without the approval of the
holders of the GMO Stock voting as a separate class).
A "Key GTR Program" is any of the following: (i) Vianain7 for debridement
of necrotic or damaged tissue; (ii) TGF-(beta)2 for all indications licensed
from Celtrix Pharmaceuticals, Inc. as of December 16, 1994; (iii) Epicel(SM)
cultured epithelial cell autografts for tissue replacement or repair; (iv)
Acticel(SM) cultured epithelial cell allografts for tissue replacement or
repair; (v) CARTICEL(TM) Autologous Chondrocyte Service; and (vi) any additional
tissue repair program or product being developed from time to time in the Tissue
Repair Division which (a) constituted 20% or more of the research and
development budget of the Tissue Repair Division in any one of the three most
recently completed fiscal years or (b) has had a cumulative investment of $8
million or more in research and development expenses by the Tissue Repair
Division.
A "Key GMO Program" is any of the following: (i) use of the Serial
Analysis of Gene Expression ("SAGE") technology licensed from The Johns Hopkins
University School of Medicine for third parties ("SAGE Service"); (ii) the
clinical program developing adenovirus vectors containing the tumor antigens
Ad-MART 1 or Ad-gp100 for the treatment of melanoma; (iii) the "suicide" gene
therapy research program developing adenovirus and lipid vectors containing
genes to enhance chemotherapy for oncology indications; (iv) the research
program developing adenovirus and lipid vectors containing tumor suppressor
genes for oncology indications; (v) the research program developing adenovirus
and lipid vectors containing genes to regulate the immune system for oncology
indications, including heat shock proteins; (vi) the research program developing
antibody-based gene therapy for the treatment of tumors; and (vii) any
additional program, product or service being developed from time to time in the
Molecular Oncology Division which (a) constituted 20% or more of the research
and development budget of the Molecular Oncology Division in any one of the
three most recently completed fiscal years or (b) has had a cumulative
investment of $8 million or more in research and development expenses by the
Molecular Oncology Division.
The foregoing policies regarding transfers of assets between Divisions
will not be changed by the Genzyme Board without the approval of the holders of
the GTR Stock and the GMO Stock, each voting as a separate class; provided,
however, that if a policy change affects the Tissue Repair Division or the
Molecular Oncology Division alone, only holders of shares representing the
affected Division will be entitled to vote on such matter.
8. OTHER INTERDIVISION TRANSACTIONS. This policy shall cover interdivision
transactions other than asset transfers, which shall be subject to Paragraph 7.
From time to time, a Division may engage in transactions directly 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
<PAGE> 3
ventures or other collaborative arrangements involving more than one Division to
develop new products and services jointly and with third parties. Such
transactions shall be subject to the following conditions:
(a) Research performed by one Division for the benefit of another Division
will be charged to the Division for which the work is performed on a cost basis,
such costs will be allocated in the manner described in Paragraph 3, and the
Division performing the research will not recognize revenue as a result of
performing such research.
(b) Corporate and general and administrative services will be provided by
each Division to any other Division requesting such services on a cost basis and
such costs shall be allocated in the manner described in Paragraph 3.
(c) Other than research, corporate and general and administrative
services, interdivision transactions will be on terms and conditions that would
be obtainable in transactions negotiated at arm's length with unaffiliated third
parties.
(d) Any interdivision transaction (i) to be performed on terms and
conditions that deviate from the policies set forth in subparagraphs (a), (b) or
(c) of this Paragraph 8 and (ii) that is material to one or more of the
participating Divisions will require approval by 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.
(e) 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 the determination by Genzyme Board that the bid
of the Selling Division is fair and reasonable to each Division and to holders
of the common stock representing each Division and that the Purchasing Division
will 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.
(f) Loans may be made from time to time between Divisions. Any such loan
of $1 million or less will mature within 18 months and interest will accrue at
the best borrowing rate available to Genzyme for a loan of like type and
duration. Amounts borrowed in excess of $1 million will require approval of the
Genzyme Board, which approval shall include a determination by the Genzyme Board
that the material terms of such loan, including the interest rate and maturity
date, are fair and reasonable to each participating Division and to holders of
the common stock representing each such Division.
9. ACCESS TO TECHNOLOGY AND KNOW-HOW. Each of the General Division, the
Tissue Repair Division and the Molecular Oncology Division will have free access
to all technology and know-how of Genzyme that may be useful in such Division's
business, subject to any obligations or limitations applicable to Genzyme.
10. DISPOSITION OF GTR AND GMO DESIGNATED SHARES.
(a) The GTR Designated Shares and the GMO Designated Shares may be (i)
issued upon the exercise or conversion of outstanding stock options, warrants or
convertible securities allocated to the General Division, (ii) subject to the
restrictions set forth in Paragraph 11, sold for any valid business purpose, or
(iii) distributed as a dividend to the holders of shares of GGD Stock, all as
determined from time to time by the Genzyme Board in its sole discretion.
(b) If, as of May 31 of each year starting May 31, 1997, the number of GTR
Designated Shares on such date exceeds the sum of (i) ten percent (10%) of the
number of shares of GTR Stock then issued and outstanding and (ii) the number of
shares of GTR Stock issuable on such date with respect to stock options, stock
purchase rights, warrants or other securities convertible into or exercisable
for shares of GTR Stock outstanding on such date, substantially all GTR
Designated Shares will be distributed to holders of record of GGD Stock (a
<PAGE> 4
"Distribution"), subject to reservation of a number of such shares equal to the
sum of (x) the number of GTR Designated Shares reserved for issuance with
respect to stock options, stock purchase rights, warrants or other securities
convertible into or exercisable for shares of GGD Stock outstanding on such date
(AGGD Convertible Securities@) as a result of anti-dilution adjustments required
by the terms of such instruments or approved by the Genzyme Board and (y) the
number of GTR Designated Shares reserved by the Genzyme Board as of such date
for sale not later than six months after such date, the proceeds of which sale
will be allocated to the General Division.
(c) If, as of November 30 of each year starting November 30, 1998, the
number of GMO Designated Shares on such date exceeds the sum of (i) ten percent
(10%) of the number of shares of GMO Stock then issued and outstanding and (ii)
the number of shares of GMO Stock issuable on such date with respect to stock
options, stock purchase rights, warrants or other securities convertible into or
exercisable for shares of GMO Stock outstanding on such date, substantially all
GMO 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 (x) the
number of GMO Designated Shares reserved for issuance upon the exercise or
conversion of GGD Convertible Securities as a result of anti-dilution
adjustments required by the terms of such instruments or approved by the Genzyme
Board and (y) the number of GMO Designated Shares reserved by the Genzyme Board
as of such date for sale not later than six months after such date, the proceeds
of which sale will be allocated to the General Division; provided, however, that
if, prior to November 30, 1998, Genzyme has completed the initial public
offering of GMO Stock, Genzyme may defer the distribution of GMO Designated
Shares provided in this policy until the later of November 30, 1998 or 360 days
after the date such offering was completed.
11. ISSUANCE AND SALE OF ADDITIONAL SHARES OF COMMON STOCK. When additional
shares of common stock are issued and sold by Genzyme, Genzyme will identify (i)
the number of such shares issued and sold for the account of the Division to
which they relate, the proceeds of which will be allocated to and reflected in
the financial statements of such Division and (ii) the number of such shares
issued and sold that shall reduce the number of Designated Shares of such
Division. Notwithstanding the foregoing, Genzyme will not sell any GTR
Designated Shares or GMO Designated Shares (except upon exercise or conversion
of options, warrants or convertible securities issued by the General Division
that were adjusted as a result of a dividend of GTR or GMO Stock paid to holders
of GGD Stock) unless (i) the Genzyme Board determines that the Tissue Repair
Division or the Molecular Oncology Division, as the case may be, has cash
sufficient to fund its operations for at least the next 12 months or (ii) shares
of GTR Stock or GMO Stock, as the case may be, are concurrently being sold for
the account of the Tissue Repair Division or the Molecular Oncology Division,
respectively, in an amount that will produce proceeds sufficient to fund such
Division's cash needs for the next 12 months.
12. OPEN MARKET PURCHASES OF SHARES OF COMMON STOCK. Genzyme may make open
market purchases of its common stock in accordance with applicable securities
law requirements; provided, however, that in no event shall any such purchases
be made if as an immediate result thereof the number of Designated Shares
representing a Division will exceed 60% of the number of shares of such Division
outstanding plus such number of Designated Shares. Notwithstanding the
foregoing, within 90 days of any open market purchase of the common stock
representing any Division, Genzyme may not exercise the right provided under its
Articles of Organization to exchange shares representing such Division for cash
and/or shares of GGD Stock.
13. CLASS VOTING. In addition to any stockholder approval required by
Massachusetts law, whenever the approval of the holders of the common stock
representing a Division is required to take any action pursuant to these
policies or Genzyme's Articles of Organization, such requirement shall be
satisfied if a meeting of the holders of the common stock representing such
Division is held at which a quorum is present and the votes cast in favor of the
proposed action exceed the votes cast against.
14. NON-COMPETE. Genzyme will not develop products or services outside of the
Tissue Repair Division or the Molecular Oncology Division which compete or would
compete with products or services being developed or sold by the Tissue Repair
Division or the Molecular Oncology Division, respectively, other than through
joint ventures or other collaborative arrangements involving more than one
Division to develop new products and services jointly and with third parties,
which transactions shall be subject to the conditions set forth in Paragraph 8.
