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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, 1999
COMMISSION FILE NO. 0-14680
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GENZYME CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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 OFFICE)
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(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 ("GENZ STOCK")
GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK, $0.01 PAR VALUE ("GZMO STOCK")
GENZYME SURGICAL PRODUCTS DIVISION COMMON STOCK, $0.01 PAR VALUE ("GZSP STOCK")
GENZYME TISSUE REPAIR DIVISION COMMON STOCK, $0.01 PAR VALUE ("GZTR STOCK")
GENZ STOCK PURCHASE RIGHTS
GZMO STOCK PURCHASE RIGHTS
GZSP STOCK PURCHASE RIGHTS
GZTR 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 Act of 1934 during
the preceding 12 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 / /.
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 2000:
$5,874,532,711
Number of shares of the Registrant's GENZ Stock outstanding as of March 1, 2000:
84,710,732
Number of shares of the Registrant's GZMO Stock outstanding as of March 1, 2000:
13,514,512
Number of shares of the Registrant's GZSP Stock outstanding as of March 1, 2000:
14,854,067
Number of shares of the Registrant's GZTR Stock outstanding as of March 1, 2000:
28,524,138
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Genzyme General, Genzyme Molecular Oncology, Genzyme
Surgical Products and Genzyme Tissue Repair 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 on May 25,
2000 are incorporated by reference into Part III of this Form 10-K.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements, including statements
regarding our:
- Projected timetables for the preclinical and clinical development of,
regulatory submissions and approvals for, and market introduction of our
products and services;
- Estimates of the potential markets for our products and services;
- Sales and marketing plans;
- Assessments of competitors and potential competitors;
- Estimates of the capacity of manufacturing and other facilities to support
our products and services;
- Planned creation of a new division;
- Planned acquisition of Biomatrix, Inc.;
- Expected future revenues, operations and expenditures; and
- Projected cash needs.
These statements are based upon the current assumptions of our management and
are only expectations of future results. These statements are subject to risks
and uncertainties, and our actual results may differ significantly from those
that are described in this Form 10-K. These risks and uncertainties include:
- Our ability to successfully complete preclinical and clinical development
of our products and services;
- Our ability to manufacture sufficient amounts of our products for
development and commercialization activities;
- Our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services;
- The content and timing of decisions made by the FDA and other regulatory
agencies;
- The accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- Market acceptance of our products and services;
- Our ability to obtain reimbursement for our products and services from
third-party payors;
- Our ability to establish and maintain licenses, strategic collaborations
and distribution arrangements;
- The continued funding of our joint ventures;
- The accuracy of our information regarding the products and resources of
our competitors and potential competitors; and
- The likelihood that the regulatory and other approvals required to create
a new division and to complete the Biomatrix acquisition will be obtained.
We have included more detailed descriptions of these risks and uncertainties
in Exhibit 99.2, "Factors Affecting Future Operating Results," to this
Form 10-K. We encourage you to read those descriptions carefully.
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NOTE REGARDING REFERENCES TO GENZYME DIVISIONS
Throughout this Form 10-K, the words "we," "us," "our" and "Genzyme" refer
to Genzyme Corporation and all of its operating divisions taken as a whole, and
"our board of directors" refers to the board of directors of Genzyme
Corporation. In addition, we refer to our four operating divisions as follows:
- Genzyme General Division = "Genzyme General;"
- Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology;"
- Genzyme Surgical Products Division = "Genzyme Surgical Products;" and
- Genzyme Tissue Repair Division = "Genzyme Tissue Repair."
NOTE REGARDING INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to disclose important
information to you by referring you to other documents we have filed with the
SEC. The information that we refer you to is "incorporated by reference" into
this Form 10-K. Please read that information.
NOTE REGARDING TRADEMARKS
Genzyme-Registered Trademark-, Cerezyme-Registered Trademark-,
Ceredase-Registered Trademark-, Thyrogen-Registered Trademark-,
N-geneous-REGISTERED TRADEMARK- LDL, N-geneous-REGISTERED TRADEMARK- HDL,
Contrast-REGISTERED TRADEMARK-(), InSight-Registered Trademark-,
MASDA-Registered Trademark-, Sepra Film-Registered Trademark-,
Pleur-evac-Registered Trademark-, Thora-Klex-Registered Trademark-,
Tevdek-Registered Trademark-, Polydek-Registered Trademark-,
Deklene-REGISTERED TRADEMARK-(), Cohn Cardiac
Immobilizer-REGISTERED TRADEMARK-(), SaphLITE-REGISTERED TRADEMARK-(),
Sepragel-REGISTERED TRADEMARK-(), Diamond-Line-REGISTERED TRADEMARK-(),
Diamond-Flex-REGISTERED TRADEMARK-(), Diamond-Touch-REGISTERED TRADEMARK-() and
Carticel-REGISTERED TRADEMARK- are registered trademarks of Genzyme.
Fabrazyme-TM-, Afp4-TM-(), GlyPro-TM-, SAGE-TM-, EndoCABG-TM-, Sahara-TM-,
Genzyme OPCAB Elite-TM-, Cohn Cardiac Stabilizer-TM-, Switch-Blade-TM-,
Seprafilm-TM-, Sepracoat-TM-, Sepramesh-TM-, SepraPak-TM-, CV Seprafilm-TM-,
Epicel-TM- and QuickTack-TM- are trademarks of Genzyme.
Genzyme-Registered Trademark- is a service mark of Genzyme.
Renagel-Registered Trademark- is a registered trademark of GelTex
Pharmaceuticals, Inc. NeuroCell-TM--PD and NeuroCell-TM--HD are trademarks of
Diacrin, Inc. FocalSeal-Registered Trademark--L is a registered trademark of
Focal, Inc. Provisc-Registered Trademark- is a registered trademark of Alcon
Laboratories, Inc. Pulmozyme-Registered Trademark- is a registered trademark of
Genentech, Inc. AVONEX-Registered Trademark- is a registered trademark of
Biogen, Inc. Synvisc-REGISTERED TRADEMARK- is a registered trademark of
Biomatrix, Inc. Aldurazyme-TM- is a trademark of BioMarin/Genzyme LLC.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 5
General..................................................... 5
Recent Development.......................................... 5
Genzyme General--Products and Development Programs.......... 6
Genzyme Molecular Oncology--Development Programs and
Services.................................................... 11
Genzyme Surgical Products--Products and Development
Programs.................................................... 15
Genzyme Tissue Repair--Products and Development Programs.... 18
Competition................................................. 19
Patents, License Agreements and Trademarks.................. 23
Government Regulation....................................... 24
Employees................................................... 27
Research and Development Costs.............................. 27
Sales by Geographic Area, Significant Customers and
Products.................................................... 28
ITEM 1A. EXECUTIVE OFFICERS.......................................... 28
ITEM 2. PROPERTIES.................................................. 30
ITEM 3. LEGAL PROCEEDINGS........................................... 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE............................. 31
PART II
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 32
ITEM 5.
ITEM 6. SELECTED FINANCIAL DATA..................................... 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 34
ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 35
ITEM 11. EXECUTIVE COMPENSATION...................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 36
14(a)(1) Financial Statements............................... 36
14(a)(2) Financial Statement Schedules...................... 37
14(a)(3) Exhibits........................................... 38
14(b) Reports on Form 8-K................................... 38
14(c) Exhibits.............................................. 38
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PART I
ITEM 1. BUSINESS
GENERAL
We are a biotechnology company that develops innovative products and
services for major unmet medical needs. We were founded in 1981 and became a
Massachusetts corporation in 1991. We currently have four operating divisions.
Each of our divisions has its own outstanding series of common stock that is
intended to reflect its value and track its financial performance. Our four
divisions are:
- Genzyme General, which develops and markets therapeutic products and
diagnostic products and services, with an emphasis on therapies for
genetic diseases. Genzyme General Division Common Stock is listed on the
Nasdaq National Market-TM- under the symbol "GENZ."
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on cancer vaccines and angiogenesis inhibitors. It is shaping these
new therapies through the integration of its genomics, gene discovery,
cell therapy, gene therapy, small molecule drug discovery, and protein
therapeutic efforts. Genzyme Molecular Oncology Division Common Stock is
listed on Nasdaq under the symbol "GZMO."
- Genzyme Surgical Products, which develops and markets a portfolio of
devices, biomaterials and biotherapeutics for the cardiothoracic and
general surgery markets. Genzyme Surgical Products Division Common Stock
is listed on Nasdaq under the symbol "GZSP."
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns. Genzyme
Tissue Repair Division Common Stock is listed on Nasdaq under the symbol
"GZTR."
We allocate all of our products, services, programs, assets and liabilities
among our divisions for purposes of financial statement presentation; however,
Genzyme, the corporation, continues to own all of the assets and is responsible
for all of the liabilities allocated to each of the divisions.
RECENT DEVELOPMENT
In March 2000, we announced our intention to create a new division called
Genzyme Biosurgery by combining Genzyme Surgical Products and Genzyme Tissue
Repair in tax-free stock exchanges to form one division, and then acquiring
Biomatrix Inc. in an exchange of stock and approximately $245 million in cash.
Biomatrix is a worldwide leader in the development and manufacture of
viscoelastic biomaterials for use in orthopedic and other medical applications.
The new division will have its own newly created series of stock that will be
traded on Nasdaq.
The transaction will unite three leaders in the rapidly emerging market for
sophisticated biomaterials and biotherapeutics products that are used in
surgical and medical procedures. Its focus will be on bio-cardiology,
bio-orthopedics and neurology platforms. The new division will begin with a
portfolio of 22 significant marketed products, including Biomatrix's
Synvisc-Registered Trademark- treatment for osteoarthritis of the knee, and a
strong pipeline of ten products in various stages of development.
We expect the transaction to close by the end of June 2000, pending
regulatory and shareholder approvals. Our board of directors and the Board of
Directors of Biomatrix each have unanimously approved the merger. The merger is
subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act. The
transaction will require the approval of Biomatrix's shareholders and all of our
shareholders, including separate approvals of Genzyme Surgical Products and
Genzyme Tissue Repair shareholders, and is subject to customary closing
conditions.
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GENZYME GENERAL--PRODUCTS AND DEVELOPMENT PROGRAMS
Genzyme General primarily consists of two business units, Therapeutics and
Diagnostics. The Therapeutics business unit focuses on developing and marketing
products for genetic diseases, including a family of diseases known as lysosomal
storage diseases, and specialty therapeutics. The Diagnostics business unit
develops, markets and distributes IN VITRO diagnostic products and genetic
testing services.
THERAPEUTICS
The Therapeutics business unit currently has three therapeutics products on
the market and several other products in varying stages of development. The
following chart contains information about many of these products and product
candidates.
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PRODUCT INDICATION STATUS COLLABORATOR OR LICENSOR
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CEREDASE-REGISTERED TRADEMARK- Type I Gaucher Marketed since 1991 None
(ALGLUCERASE FOR INJECTION) AND disease and 1995,
CEREZYME-REGISTERED TRADEMARK- respectively;
(IMIGLUCERASE FOR INJECTION) available in 55
countries
RENAGEL-REGISTERED TRADEMARK- CAPSULES Reduction of serum Marketed since 1998; GelTex Pharmaceuticals,
(SEVELAMER HYDROCHLORIDE) phosphorus in approved in the U.S. Inc.*
patients with in 1998, Israel in
end-stage renal 1999 and in Europe in
disease 2000
THYROGEN-REGISTERED TRADEMARK- HORMONE Use in follow-up Marketed since 1998; None
screening of patients approved in the U.S.
who have been treated in 1998 and Brazil in
for thyroid cancer 2000
FABRAZYME-TM- (AFGALSIDASE BETA FOR Fabry disease Pivotal trial None
INJECTION) completed; BLA
submission planned
for first half of
2000
TRANSGENIC ANTITHROMBIN III Heparin resistance One Phase III trial Genzyme Transgenics
successfully Corporation*
completed; a
confirmatory Phase
III trial ongoing
ALDURAZYME-TM- (ALRONIDASE FOR Mucopolysaccharidosis-I One Phase III trial BioMarin Pharmaceutical,
INJECTION) successfully Inc.*
completed; a
confirmatory Phase
III trial planned for
2000
RENAGEL-REGISTERED TRADEMARK- TABLETS Dialysis Phase III trial GelTex Pharmaceuticals,
ongoing Inc.*
RENAGEL-REGISTERED TRADEMARK- CAPSULES Hemodialysis (Europe) Phase III trial GelTex Pharmaceuticals,
ongoing Inc.*
AVONEX-REGISTERED TRADEMARK- Relapsing/remitting Pivotal trial planned Biogen, Inc.
(INTERFERON-BETA 1A) forms of multiple for first half of
sclerosis in Japan 2000
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PRODUCT INDICATION STATUS COLLABORATOR OR LICENSOR
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NEUROCELL-TM--PD Parkinson's disease Phase II trial Diacrin, Inc.*
completed
NEUROCELL-TM--HD Huntington's disease Phase I trial Diacrin, Inc.*
completed
TRANSGENIC ALPHA-GLUCOSIDASE Pompe disease Phase II pilot trial Pharming Group N.V.*
in Europe ongoing
GENE THERAPY Gaucher disease Phase I trial ongoing University of Pittsburgh
DHA DERIVATIVE (GENZ 66055) Cystic fibrosis Clinical trial Beth Israel Deaconess
planned for 2000 Medical Center
EPI-KAL2 Hereditary angioedema Clinical trial Dyax Corp.
planned for 2000
ACID SPHINGOMYELINASE Type B Niemann-Pick Clinical trial Mt. Sinai School of
disease planned for 2000 Medicine
PEPTIDE THERAPY Pemphigus vulgaris In development None (added program
through our acquisition
of Peptimmune, Inc. in
July 1999)
GENE THERAPY Cystic Fibrosis In development University of Michigan
and the Hospital for
Sick Children in
Toronto, Ontario
GENE THERAPY Lysosomal storage In development Genovo, Inc.
diseases
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* If you would like information about our strategic collaborations marked with
an asterisk, you should read Note I to our consolidated financial
statements, which we are incorporating into this discussion by reference.
Genzyme General also sells synthetic phospholipids, synthetic peptides and
amino acid derivatives, which are used in research as raw materials for
pharmaceutical manufacturers. It also produces and sells bulk hyaluronic acid
for a number of applications. Under an agreement with Alcon Laboratories, Inc.,
Genzyme General supplies pharmaceutical-grade hyaluronic acid powder to Alcon
for incorporation into Provisc-Registered Trademark-, an ophthalmic surgical aid
product. In addition, hyaluronic acid is sold to a number of customers for
various research and development applications.
We have provided more details on our therapeutic products and our late-stage
development programs below.
CEREZYME-REGISTERED TRADEMARK- (IMIGLUCERASE FOR
INJECTION)/CEREDASE-REGISTERED TRADEMARK- (ALGLUCERASE FOR
INJECTION). Treatment with Cerezyme-Registered Trademark- enzyme or
Ceredase-Registered Trademark- enzyme replacement therapy currently represents
the only safe and effective treatment available for Type I Gaucher disease, a
lysosomal storage disease. We entered the market in 1991 with
Ceredase-Registered Trademark- enzyme. Because production of
Ceredase-Registered Trademark- enzyme was subject to supply constraints, we
developed Cerezyme-Registered Trademark- enzyme, a recombinant form of human
alpha glucocerebrosidase, the enzyme that is deficient in Gaucher patients.
Recombinant technology uses specially engineered cells to produce enzymes, or
other substances, by inserting into cells of one organism the genetic material
of a different species. In the case of Cerezyme-Registered Trademark- enzyme,
Chinese hamster ovary cells are engineered to produce human alpha
glucocerebrosidase. We stopped producing Ceredase-Registered Trademark- enzyme,
except for small quantities, during 1998 after substantially all patients who
previously used Ceredase-Registered Trademark- enzyme were converted to
Cerezyme-Registered Trademark- enzyme.
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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.
Genzyme General received marketing approval for Cerezyme-Registered Trademark-
enzyme in five countries as well as the 15 countries forming the European Union
and for Ceredase-Registered Trademark- enzyme in 13 countries. Our results of
operations are highly dependent on sales of these products. Sales of
Cerezyme-Registered Trademark- and Ceredase-Registered Trademark- enzymes
totaled approximately $479 million in 1999, which represented approximately 70%
of Genzyme's product revenue in that year. Sales of these products totaled
$411 million, or 67% of Genzyme's product revenue, in 1998 and $333 million, or
67% of Genzyme's product revenue, in 1997.
RENAGEL-REGISTERED TRADEMARK- (SEVELAMER
HYDROCHLORIDE). Renagel-Registered Trademark- capsules are used for the
reduction of serum phosphorus in patients with end-stage renal disease. There
are an estimated 280,000 end-stage renal failure patients in the United States,
approximately 95% of whom receive a phosphate control product. There are also an
estimated 170,000 end-stage renal failure patents in Europe. In connection with
our joint venture with GelTex Pharmaceuticals, Genzyme General is marketing
Renagel-Registered Trademark- capsules directly to nephrologists, renal
dieticians and payors through a dedicated sales force. It plans to launch
Renagel-Registered Trademark- capsules on a country-by-country basis in Europe
during 2000 following receipt of pricing and reimbursement approvals. Genzyme
General and GelTex Pharmaceuticals are also developing a new tablet form of the
RenaGel-Registered Trademark- product designed to have a higher potency and to
be smaller and more convenient than the capsule form.
THYROGEN-REGISTERED TRADEMARK- (THYROTROPIN ALFA FOR
INJECTION). Thyrogen-Registered Trademark- hormone was developed by Genzyme
General to allow patients to continue taking their thyroid hormone supplements
while they are being screened for metastases. This allows patients to avoid the
debilitating effects of hypothyroidism. In the United States, physicians order
approximately 135,000 thyroglobulin tests and 25,000 radioiodine imaging whole
body scans each year for thyroid cancer patients. Thyrogen-Registered Trademark-
hormone is being co-marketed in the United States under an agreement with Knoll
Pharmaceutical Company. Brazil has the highest incidence of thyroid cancer in
the developed world, outside of the United States. Physicians order
approximately 28,000 thyroglobulin tests and 12,000 radioiodine imaging whole
body scans each year in Brazil for thyroid cancer patients. Biobras S.A. will
exclusively distribute and market the product in Brazil.
FABRAZYME-TM- (ALGALSIDASE BETA FOR INJECTION). Fabrazyme-TM- enzyme is a
recombinant form of the human enzyme alpha-galactosidase. Genzyme General is
developing Fabrazyme-TM- enzyme as a treatment for Fabry disease. Fabry disease
is a lysosomal storage disease that is estimated to affect 1 in 40,000 males
worldwide, with an estimated 2,000 to 4,000 patients worldwide. Genzyme General
has completed a multi-center pivotal clinical trial of Fabrazyme-TM- enzyme and
intends to file for regulatory approval in the United States in the first half
of 2000.
ANTITHROMBIN III. Antithrombin III, also known as ATIII, is a protein
naturally produced by the body that, when bound to heparin, prevents blood
clotting. Genzyme General and Genzyme Transgenics are developing
transgenically-produced recombinant ATIII. Transgenic proteins are produced by
inserting human DNA into animal cells so that the target protein, or drug, is
secreted into the milk of female offspring during lactation. Genzyme General and
Genzyme Transgenics successfully completed a Phase III clinical trial of
transgenic ATIII to restore heparin sensitivity in heparin-resistant patients
undergoing elective heart surgery requiring cardiopulmonary bypass. An on going
confirmatory Phase III clinical trial is designed to compare transgenic ATIII to
plasma-derived ATIII and is scheduled to conclude in 2000. Genzyme currently
owns approximately 30% of the outstanding shares of Genzyme Transgenics common
stock.
ALDURAZYME-TM- (ALRONIDASE FOR INJECTION). Genzyme General's partner
BioMarin Pharmaceutical successfully completed a Phase III clinical trial of
Aldurazyme-TM- enzyme, a recombinant form of the human enzyme
alpha-L-iduronidase. Aldurazyme-TM- enzyme is designed to treat a lysosomal
storage
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disease known as mucopolysaccharidosis I, or MPS-I. A confirmatory Phase III
clinical trial is scheduled for 2000. Approximately 2,000 to 3,000 people in the
developed world have been diagnosed with MPS-I.
AVONEX-REGISTERED TRADEMARK- (INTERFERON-BETA 1A). In September 1998,
Genzyme entered into an agreement with Biogen Inc. under which Genzyme General
will commercialize and exclusively distribute AVONEX-Registered Trademark- in
Japan, following regulatory approval. AVONEX-Registered Trademark- is Biogen's
treatment for relapsing/remitting forms of multiple sclerosis. Genzyme General
is managing the clinical development program for AVONEX-Registered Trademark- in
Japan and is working to obtain registration and reimbursement approvals for the
product. Genzyme General estimates that there are at least 5,000 multiple
sclerosis patients in Japan.
Genzyme General has several other research and development programs in
process. It is dedicated to capitalizing on its expertise in proteins, gene and
cell therapy, and small molecules to grow its pipeline. It recently formed an
Emerging Technology Group to focus on using this expertise to accelerate
internal development programs, form additional strategic collaborations and
pursue out-licensing opportunities.
DIAGNOSTICS
DIAGNOSTIC PRODUCTS
Genzyme General develops, markets and distributes IN VITRO products, with an
emphasis on point-of-care, clinical chemistry and rapid test products. Genzyme
General sold its bioreagents and ELISA immunochemistry product lines to an
operating unit of Sybron Laboratory Products Corp. in July 1999 and the primary
assets of its research products business to Techne Corporation in July 1998.
These sales reflect the sharpened focus of the diagnostic products business.
Genzyme General sells its diagnostic products through its technical sales
representatives in the United States and Europe and through distributors in
Japan.
CARDIOVASCULAR PRODUCTS. Genzyme General sells devices and reagents for the
measurement of low-density lipoprotein, or LDL, and high-density lipoprotein, or
HDL, cholesterol levels. Genzyme General's N-geneous-REGISTERED TRADEMARK- LDL
and Liquid N-geneous-REGISTERED TRADEMARK- HDL tests accurately measure
cholesterol levels directly without the labor intensive pretreatment steps that
were previously needed and are easily adaptable to automated chemistry
analyzers. Both tests are being distributed in the United States by Genzyme
General under an agreement with the manufacturer of the tests, Daiichi Pure
Chemicals Co., Ltd., of Tokyo. In addition to the United States. Genzyme General
is also the exclusive marketing partner for the N-geneous-REGISTERED TRADEMARK-
LDL and Liquid N-geneous-REGISTERED TRADEMARK- HDL tests in Europe and the rest
of the world, with the exception of Asia, where Genzyme General holds
co-exclusive distribution rights.
GLYPRO-TM- ASSAY. Genzyme General's GlyPro-TM- test is an improved tool for
monitoring diabetes. The GlyPro-TM- test measures blood sugar levels over
several weeks, which is a valuable resource for reducing diabetes-related
complications.
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.
RAPID TESTS. Genzyme General's product portfolio includes its patented
Contrast-TM- rapid tests for pregnancy, Strep A and infectious mononucleosis
determination. It also introduced the first combination rapid test for the two
most common causes of parasitic intestinal disease.
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DEVELOPMENT PROGRAMS. In October 1999, Genzyme General and Skye
PharmaTech Inc. formed a collaboration to develop and market a point-of-care
stroke diagnostic product. Skye is developing the product, and Genzyme General
will exclusively manufacture and market the product worldwide following
approval. Stroke is the third leading cause of death in the United States,
affecting approximately 700,000 people annually, with a similar incidence in
Europe. Approximately 150,000 Americans die as a result of stroke each year.
Genzyme General is conducting research programs for point-of-care products
for diabetes and infectious diseases. Other development programs include
homocysteine and Lpa-cholesterol tests to determine cardiovascular disease risk
and a liquid lipase test for pancreatitis.
GENETIC DIAGNOSTIC SERVICES
Genzyme General applies advanced biotechnology to develop and provide high
quality, sophisticated genetic diagnostic services in the United States and
internationally through a national network of laboratories and a direct sales
force as well as through joint ventures in Germany and Japan. Genzyme General
offers three types of genetic diagnostic services:
- Biochemical testing services, which consist primarily of a widely used
screening test known as AFP3 to determine if further prenatal genetic
testing is appropriate;
- Classical and molecular cytogenetic testing services, which involve the
analysis of fetal cells obtained through amniocentesis or a process known
as chorionic villi sampling to evaluate chromosomal abnormalities; and
- DNA testing, which is performed to determine the likelihood that the
patient has, or is a carrier for, a specific genetic disorder, such as
cystic fibrosis and Gaucher disease.
Genzyme General employs over 90 board certified genetics professionals who
interpret results and provide genetic counseling and support services to medical
practitioners and their patients.
We have described some of Genzyme General's genetic diagnostic tests and
programs below.
AFP4-TM- TEST. Genzyme General added this advanced screening test to its
comprehensive prenatal genetic services program during the fourth quarter of
1999. This test is more accurate than the AFP3 test in detecting mutations
associated with Down syndrome and is expected to replace triple marker screening
over time.
INSIGHT-REGISTERED TRADEMARK- TEST. Genzyme General's
InSight-REGISTERED TRADEMARK- test is a molecular cytogenetic test that permits
identification of the most frequently occurring chromosomal abnormalities within
48 hours, which is significantly faster than the one to three weeks required to
perform classical cytogenetic testing (karyotyping). The
InSight-REGISTERED TRADEMARK- analysis is provided in conjunction with a
complete karyotype.
MASDA-REGISTERED TRADEMARK- TECHNOLOGY. Genzyme General's patented
multiplex allele-specific diagnostic assay, which is known as the
MASDA-REGISTERED TRADEMARK- technology, is used for simultaneous analysis of up
to 500 DNA for over 100 genetic mutations in a single test. The
MASDA-REGISTERED TRADEMARK- technology not only provides high-throughput
analysis of different patient samples for different genetic diseases, but also
identifies multiple mutations in a single patient's DNA sample. Genzyme General
is pursuing a number of commercialization strategies for the
MASDA-REGISTERED TRADEMARK- technology. In addition, the
MASDA-REGISTERED TRADEMARK- technology is being used to provide genetic
profiling services for clinical trials being conducted by pharmaceutical
companies.
HEREDITARY NONPOLYPOSIS COLON CANCER. Genzyme General introduced a test
that screens for mutations associated with the most common form of hereditary
colon cancer, hereditary nonpolyposis colon cancer, which is also known as HNPCC
or Lynch Syndrome. HNPCC accounts for between
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approximately 3 and 6% of all colorectal cancers in the United States, or an
estimated 4,000 to 8,000 cases every year. Genzyme General introduced this test
in July 1999.
ADENOMATOUS POLYPOSIS COLI. Genzyme General's APC I1307K test, also
introduced in 1999, screens for a gene mutation associated with an increased
risk of colorectal cancer in Ashkenazi Jewish families. The specific gene
mutation occurs more frequently in this population and has been found in
approximately 28 percent of Ashkenazi Jewish individuals who have both a
personal history and family history of colon cancer.
CF86 TEST. Introduced in 1999, Genzyme General's CF86 test screens for 86
genetic mutations associated with cystic fibrosis.
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. Genzyme General is also developing a multiple disease carrier test
using the MASDA-Registered Trademark- technology and integrated scanning
sequencing approaches for rapid detection of both previously characterized and
unknown gene mutations.
GENZYME MOLECULAR ONCOLOGY--DEVELOPMENT PROGRAMS AND SERVICES
Genzyme Molecular Oncology is developing a new generation of cancer
therapeutics based upon the growing understanding of the molecular basis of
cancer. Genzyme Molecular Oncology believes that these therapeutics have the
potential to treat multiple types of cancer, minimize toxicity and side effects,
and complement both existing and novel therapies. It uses its functional
genomics tools and draws upon capabilities in gene therapy, cell therapy,
protein therapy and small molecule drugs to select and pursue the most
appropriate of these approaches for each cancer target. Genzyme Molecular
Oncology complements its internal resources through collaborations with some of
the world's preeminent researchers in cancer research.
DEVELOPMENT PROGRAMS
Genzyme Molecular Oncology is developing products in the following three
therapeutic classes:
- vaccines that treat cancer by stimulating the body's immune system to
fight tumor cells;
- angiogenesis inhibitors that treat cancer by preventing the formation and
development of blood vessels that tumors require for growth; and
- pathway regulators that treat cancer by regulating one or more of the
metabolic processes in cancer cells necessary for tumor cells to grow and
survive.
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The following chart describes the development status of Genzyme Molecular
Oncology's development programs:
<TABLE>
<CAPTION>
PRODUCT/PROGRAM TYPES OF CANCER STATUS
- --------------- --------------- ------------------------
<S> <C> <C>
CANCER VACCINES
Dendritic/tumor cell fusion Breast Phase I/II trial ongoing
Melanoma IND filed
Kidney Preclinical
Melan-A/MART-1 and gp100 antigens Melanoma Phase I/II trial ongoing
NY-ESO-1 antigen Multiple Preclinical
ANGIOGENESIS INHIBITORS
aaATIII Multiple Preclinical
Small molecules Multiple Research
Gene therapy Multiple Research
CANCER PATHWAY REGULATORS
Small molecules Multiple Research
</TABLE>
Genzyme Molecular Oncology owns all commercial rights to each of these programs
other than aaATIII, which it is co-developing with ATIII LLC, the joint venture
between Genzyme General and Genzyme Transgenics.
CANCER VACCINES
Genzyme Molecular Oncology believes that the most successful cancer vaccines
will be those that activate a cellular immune response directed at the tumor.
Its program features two types of vaccines for generating a tumor-specific
cellular immune response:
- where the specific tumor antigens are not known, Genzyme Molecular
Oncology uses a technique that fuses the patient's own tumor cells with
dendritic cells, creating a cell therapy product; and
- where specific tumor antigens have been identified as targets of the
cellular immune response, Genzyme Molecular Oncology uses gene-based or
peptide-based tumor vaccines.
Antigens are molecular markers in tumor cells that enable the body's immune
system to recognize and respond to these cells as being foreign. Dendritic cells
are specialized immune system cells that capture antigens and present them to T
cells that selectively recognize them. T cells are the immune system's cellular
response to disease.
Genzyme Molecular Oncology believes that both of the vaccine types described
above will provide clinical benefit and have commercial potential. Development
of antigen-specific vaccines, however, is currently limited by the lack of known
tumor-specific antigens. Therefore, cell fusion may be more broadly applicable
in the near term. Over time, as Genzyme Molecular Oncology identifies more
tumor-specific antigens, it anticipates having the ability to provide
off-the-shelf vaccines that are customized based on the set of specific antigens
present in the patient's tumor.
BREAST CANCER FUSION VACCINE. Working with the Dana-Farber Cancer Institute
and the Beth Israel Deaconess Medical Center in Boston, Genzyme Molecular
Oncology initiated a Phase I/II clinical trial for the treatment of metastatic
breast cancer in September 1999. The vaccine used in this trial is produced
using a chemical fusion process to combine the patient's own cancer cells and
dendritic cells
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derived from the patient. The end points for this trial are safety, immunologic
response and clinical response.
KIDNEY CANCER AND MELANOMA FUSION VACCINES. An academic group in Germany
has recently published clinical data for the treatment of kidney cancer with a
vaccine produced using electrofusion to combine a patient's cancer cells with
dendritic cells derived from another source. The clinical response rate reported
in that study was significantly higher than has been achieved with standard
therapy in that patient population.
Because of the positive results reported in the German study, Genzyme
Molecular Oncology plans to commence four additional Phase I clinical trials for
cell fusion vaccines in 2000. These trials will be in kidney cancer and in
melanoma. For each type of cancer, Genzyme Molecular Oncology intends to conduct
two trials, one using vaccine produced in the manner used in its breast cancer
trial and one using vaccine produced in the manner used in the German study.
These trials should provide Genzyme Molecular Oncology insight into the safety
and efficacy of cell fusion vaccines in a variety of cancer indications, as well
as a comparison of these two processes for producing cell fusion vaccines.
MELAN-A/MART-1 AND GP100 ANTIGEN-SPECIFIC VACCINES. In collaboration with
Dr. Steven Rosenberg at the National Cancer Institute, Genzyme Molecular
Oncology has conducted two Phase I clinical trials. In these trials, adenoviral
gene delivery vectors carrying either the Melan-A/MART-1 or gp100 gene were
evaluated for safety, immunologic reactivity and potential therapeutic effect
when administered IN VIVO alone or in conjunction with recombinant
interleukin-2. The results from these clinical studies indicated that the
adenoviral vectors were safe and well tolerated, and that a small but notable
number of both the 36 patients immunized with Melan-A/MART-1 and the 18 patients
treated with gp100 showed clinically significant tumor regression. These
responses were seen in very late stage (stage IV) metastatic disease patients,
who are a heavily pre-treated patient population not expected to mount a robust
immune response and who, as a group, have a very short life expectancy.
In April 1999, Genzyme Molecular Oncology initiated a Phase I/II trial in
melanoma patients at Massachusetts General Hospital. This trial involves
extracting dendritic cells from the patient and combining these cells with a
vaccine containing Melan-A/MART-1 and gp100 EX VIVO. The treated cells are then
injected into the patient. In this trial, Genzyme Molecular Oncology will assess
safety, immunologic response and clinical response. Throughout the trial Genzyme
Molecular Oncology will be performing a comprehensive analysis of the patient's
immune response to the vaccine to help it to understand better why some patients
respond well to the therapy while others do not.
Genzyme Molecular Oncology is also conducting pre-clinical studies to
support a Phase I/II IN VIVO melanoma trial expected to begin early in the
second half of 2000. For this study, Genzyme Molecular Oncology plans to utilize
both the Melan-A/MART-1 and gp100 tumor antigens. In this trial, Genzyme
Molecular Oncology intends to monitor patient immune responses in order to
further elucidate the immunology of cancer to enhance its antigen-specific
vaccine development efforts.
NY-ESO-1 ANTIGEN-SPECIFIC VACCINES. NY-ESO-1 is an antigen expressed in a
subset of a number of different tumor types, including breast cancer, melanoma
and lung cancer. Genzyme Molecular Oncology is conducting pre-clinical
development to support a Phase I/II clinical trial for NY-ESO-1-positive tumors
to be performed in collaboration with the Ludwig Institute. In this trial,
Genzyme Molecular Oncology plans to enroll patients with tumors that express
NY-ESO-1 regardless of the location of the tumor. In this way, the trial will
offer an opportunity to shift the paradigm for treating cancer from one based on
the anatomical location of the tumor to one based on the antigenic profile of
the tumor.
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ANGIOGENISIS INHIBITORS
Genzyme Molecular Oncology is pursuing proteins, small molecules and gene
therapies for use as angiogenesis inhibitors. Angiogenesis is the growth of new
blood vessels. A modified form of ATIII that is known as aaATIII is Genzyme
Molecular Oncology's lead development candidate in its angiogenesis inhibition
program. While ATIII does not inhibit angiogenesis, preclinical studies have
shown that when it is modified to aaATIII, the modified compound acts as a
potent angiogenesis inhibitor.
CANCER PATHWAY REGULATOR
Cancer pathway regulators treat cancer by regulating one or more metabolic
processes required for growth and survival of cancer cells. Genzyme Molecular
Oncology has early stage programs focusing on small molecule drugs. Genzyme
Molecular Oncology's small molecule drug discovery effort relies upon its access
to extensive libraries of compounds and multiple high-throughput assays. The
number of small molecules in Genzyme's libraries of chemical compounds now
exceeds two million compounds. Genzyme Molecular Oncology also has access to
compound libraries of other companies.
SAGE-TM- TECHNOLOGY PLATFORM
Genzyme Molecular Oncology's SAGE-TM- technology is a patented
high-throughput, high efficiency method of simultaneously detecting and
measuring the expression level of virtually all genes expressed in a cell at a
given time. The SAGE-TM- technology detects and quantifies expression of novel
as well as known genes and, because of its high efficiency and sensitivity,
SAGE-TM- technology can detect genes expressed at low levels. Some of the uses
of SAGE-TM- technology are comparison of disease tissue with healthy tissue,
comparison of genes expressed at different stages of disease, elucidation of
disease pathways and measurement of response to and toxicity of drug candidates.
Genzyme Molecular Oncology continues to enhance the power of its SAGE-TM-
technology through software and bioinformatics development, technology
improvements, database expansion and the integration of the SAGE-TM- technology
with other genomics tools, such as microarrays.
Genzyme Molecular Oncology has used its SAGE-TM- technology to analyze the
most prevalent types of cancer and corresponding normal tissue and also has
access to SAGE-TM- data generated in the laboratories of Drs. Bert Vogelstein
and Kenneth Kinzler at The Johns Hopkins University. Genzyme Molecular Oncology
has accumulated from its proprietary analyses, its collaborators and the Cancer
Genome Anatomy Project at the NCI a database of over 3.5 million SAGE-TM- gene
sequence identification tags, representing over 125,000 unique genes.
Genzyme Molecular Oncology is also using its SAGE-TM- technology extensively
in its drug discovery and development efforts to identify genes that are
functionally relevant. In cancer vaccines, Genzyme Molecular Oncology combines
the SAGE-TM- technology with other proprietary tools to identify tumor-specific
antigens. In angiogenesis inhibition, Genzyme Molecular Oncology is using the
SAGE-TM- technology to dissect the genetic pathways for angiogenesis and to
explore and understand the mechanism of action of drug candidates discovered in
functional assays. In cancer pathway regulation, Genzyme Molecular Oncology is
using the SAGE-TM- technology to identify targets to use in high-throughput
screens.
In addition to using the SAGE-TM- technology in its drug discovery and
development programs, Genzyme Molecular Oncology is using the SAGE-TM-technology
and its proprietary SAGE-TM- database to generate revenues through licenses and
service agreements and database collaborations.
ANTIGEN DISCOVERY PLATFORM
Genzyme Molecular Oncology is seeking to stimulate a cellular immune
response against tumors by using vaccines to present tumor-specific antigens to
the immune system. Genzyme Molecular
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Oncology has built a proprietary, state-of-the-art antigen discovery platform
that combines identification and validation in one step. Genzyme Molecular
Oncology is using this platform to rapidly and efficiently identify and validate
target antigens for incorporation into novel antigen-specific cancer vaccines.
Genzyme Molecular Oncology plans to analyze the cancer cells extracted from the
patients in its on-going cell fusion vaccine clinical trials using its antigen
discovery technologies in order to identify the antigens associated with
anti-tumor and expand the development of its antigen-specific vaccines.
GENZYME SURGICAL PRODUCTS--PRODUCTS AND DEVELOPMENT PROGRAMS
In addition to providing traditional devices and closures for the
cardiothoracic, general and plastic surgery markets, Genzyme Surgical Products
develops and markets products for minimally invasive cardiovascular surgery,
biomaterials and biotherapeutics. Genzyme Surgical Products' sales force markets
products directly to surgeons and hospital administrators throughout the United
States and Europe. It also uses a network of distributors in Europe, Asia and
Latin America.
Genzyme Surgical Products' biomaterials program includes products based on
hyaluronic acid that are intended to reduce the incidence and extent of
adhesions (scar tissue) that form after surgery. Hyaluronic acid is a substance
that is naturally created by the body to lubricate and protect tissue. These
products are known as the Sepra family of products and are being developed on
behalf of Genzyme Development Partners, L.P. Genzyme Surgical Products has the
exclusive right to sell the Sepra family of products in the United States and
Canada on behalf of our joint venture with Genzyme Development Partners and the
exclusive right to sell these products outside the United States and Canada for
its own benefit. Genzyme Surgical Products sells the Sepra family of products in
Luxembourg, Germany, Austria, Switzerland and Japan through distributors. If you
would like more information about our relationship with Genzyme Development
Partners and the joint venture, you should read Note M to our consolidated
financial statements, which we are incorporating into this discussion by
reference.
CARDIOTHORACIC SURGERY
TRADITIONAL INSTRUMENTS AND DEVICES. Genzyme Surgical Products'
cardiothoracic surgery business consists of a comprehensive portfolio of
products, including fluid management and chest drainage systems, sutures and
cardiovascular instruments. Its 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 Surgical Products also sells autotransfusion
devices that allow the collection of blood shed by the patient and its
reinfusion postoperatively, which eliminates the risks associated with blood
transfusions. Genzyme Surgical Products' self-contained, disposable
Pleur-evac-Registered Trademark- chest drainage unit was introduced in 1967 and
is the market leader in chest drainage devices. Genzyme Surgical Products also
sells a line of dry suction-controlled chest drainage and autotransfusion
devices under the Sahara-TM- and Thora-Klex-Registered Trademark- brand names.
It markets sutures, including the Tevdek-Registered Trademark- and
Polydek-Registered Trademark- valve sutures and Deklene-Registered Trademark-
bypass sutures. Genzyme Surgical Products also sells aortic punches, which are
used during coronary artery bypass surgery to make clean, round openings in the
aorta prior to grafting. Finally, its Diamond-Line-Registered Trademark-
portfolio of hand-held, reusable instruments includes needleholders, scissors,
forceps, graspers, dissectors and retractors.
MINIMALLY INVASIVE CARDIOVASCULAR SURGERY SYSTEMS. Genzyme Surgical
Products markets products for minimally invasive cardiovascular surgery, with a
focus on beating-heart surgery. In beating-heart surgery, procedures are
performed on the heart without stopping the heart and without the use of a
heart/lung machine to circulate blood and supply oxygen. This allows surgeons to
avoid the complications often associated with the use of heart/lung machines.
Genzyme Surgical Products' newest product in this line is known as the Genzyme
OPCAB Elite-TM- beating-heart platform. The Genzyme OPCAB Elite-TM- system is
designed to allow surgeons to conduct multi-vessel coronary artery bypass
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surgery while the heart continues to beat. It combines reusable retractors with
disposable devices such as stabilizers, sutures and punches. A central component
of the system is the Cohn Cardiac Stabilizer-TM- device, which allows surgeons
to isolate and stabilize a small section of the heart to have clear access to
the blood vessels.
In addition, Genzyme Surgical Products has introduced minimally invasive
saphenous vein harvest and valve replacement instruments. For example, its
SaphLITE-Registered Trademark- II system is used to remove the saphenous vein
from the leg for use as a graft in coronary artery bypass procedures.
BIOMATERIALS. Genzyme Surgical Products has obtained the exclusive right to
distribute FocalSeal-Registered Trademark--L in North America for pulmonary,
cardiovascular and gastrointestinal procedures following regulatory approval of
the product. FocalSeal-Registered Trademark--L is a biomaterial developed by
Focal, Inc. for the prevention of air and fluid leaks following surgery.
FocalSeal-Registered Trademark--L recently received approval in Canada, and
Genzyme Surgical Products expects it to be approved in the United States in
2000. Approximately 70,000 lung surgeries are performed in the United States
annually, with almost all patients at risk for debilitating air leaks.
Genzyme Surgical Products recently obtained approval in the European Union
for its CV Seprafilm-TM- cardiovascular adhesion barrier, which is designed to
reduce the formation of adhesions following open-heart surgery. In addition, it
has completed the safety phase of a clinical trial for this product in the
United States in infants undergoing multi-stage procedures for the repair of
congenital heart defects.
BIOTHERAPEUTICS. Genzyme Surgical Products also has several biotherapeutic
products in various stages of research and development. It is developing HIF-1
alpha, which is a naturally occurring compound that has been shown to trigger
the expression of many proteins associated with angiogenesis. Genzyme Surgical
Products is conducting a Phase I clinical trial of HIF-1 alpha in patients with
peripheral vascular disease, a condition caused by blocked arteries in the
limbs. Following review of a protocol by the Recombinant DNA Advisory Committee
of the National Institutes of Health, Genzyme Surgical Products also plans to
begin a second Phase I clinical trial of the product in patients with coronary
artery disease undergoing bypass surgery who have an area of the heart that is
not suitable for surgical revascularization.
Genzyme Surgical Products is conducting research on other gene therapy
approaches to congestive heart failure and restenosis. In addition, through a
collaboration with a research group at the Toronto Hospital in Canada, Genzyme
Surgical Products is also conducting research on cell therapy approaches to
congestive heart failure.
GENERAL SURGERY
Genzyme Surgical Products has established a growing presence in the general
surgery market through its biomaterials and endoscopic instruments.
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BIOMATERIALS. Genzyme Surgical Products has an extensive line of
biomaterial products on the market and in development for the general surgery
market, including many products included in the Sepra family of products.
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS
- ------- ----------------------------- -----------------------------
<S> <C> <C>
SEPRA FILM-REGISTERED TRADEMARK- Abdominal/pelvic surgery Marketed in the U.S. since
BIORESORBABLE MEMBRANE 1996; approved in the U.S.
and Europe in 1996, in Canada
and Israel in 1997, in Japan
in 1998 and in several other
countries
SEPRA FILM(-REGISTERED TRADEMARK-) Small bowel obstructions Phase IV clinical trial
BIORESORBABLE MEMBRANE ongoing
SEPRA FILM(-REGISTERED TRADEMARK-) II Abdominal/pelvic surgery Marketed in Europe since 1999
ADHESION BARRIER
SEPRACOAT-TM- COATING SOLUTION Open surgery Marketed in Europe since 1996
SEPRAMESH-TM- PRODUCT Hernia repair Received 510(k) clearance in
2000
SEPRAPAK-TM- PRODUCT Sinus packing Listed with the FDA
SEPRAGEL(-REGISTERED TRADEMARK-) Open and laproscopic surgery In development
BIORESORBABLE GEL
</TABLE>
Genzyme Surgical Products' lead product in the general surgery market is
Sepra Film-Registered Trademark- bioresorbable membrane. It is currently
conducting a Phase IV clinical trial to test the ability of the Sepra
Film-Registered Trademark- product to reduce the incidence of bowel
obstructions. Genzyme Surgical Products is also marketing Sepra
Film-Registered Trademark- II adhesion barrier, a second generation Sepra
Film-Registered Trademark- product designed to have increased plasticity, as an
adhesion prevention product for open and laparoscopic surgery in Europe. In
addition, Genzyme Surgical Products has developed the Sepramesh-TM- product, a
prosthetic surgical mesh product for use in hernia repairs.
Other Sepra products are in earlier stages of development. Genzyme Surgical
Products is developing Sepragel-Registered Trademark- bioresorbable gel for use
during laparoscopic surgery as well as in open surgery as a complement to the
Sepra Film-Registered Trademark- product. Genzyme Surgical Products is also
currently developing anti-adhesion products for other surgical applications.
ENDOSCOPIC INSTRUMENTS. Genzyme Surgical Products carries an extensive line
of high-quality endoscopic instruments for general and gynecological surgery.
Its Diamond-Line-Registered Trademark- 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-Registered Trademark- and
Diamond-Touch-Registered Trademark- instruments.
Diamond-Flex-Registered Trademark- 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-Registered Trademark- instruments provide ergonomically designed
contoured handles for superior positioning, comfort and control. Genzyme
Surgical Products' Switch-Blade-TM- tips are the second major component of its
endoscopic surgery portfolio. Switch-Blade-TM- tips are disposable scissor tips
that are attached to reusable shafts.
OTHER PRODUCTS
Genzyme Surgical Products also manufactures products for the plastic surgery
market. This distinct product line consists of hand-held instruments, endoscopic
plastic surgery equipment, sutures and surgical compression garments.
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GENZYME TISSUE REPAIR--PRODUCTS AND DEVELOPMENT PRODUCTS
Genzyme Tissue Repair is a leading developer of biological products for the
fields of orthopedics and burn care. Over the course of the last year, Genzyme
Tissue Repair has taken several steps to streamline its operations and focus its
business strategy, including transferring the NeuroCell-TM- program to Genzyme
General. Genzyme Tissue Repair is dedicated to expanding and improving its
Carticel-Registered Trademark- product and accelerating its bio-orthopedic
development programs.
CARTICEL-REGISTERED TRADEMARK- AUTOLOGOUS CULTURED CHONDROCYTES. Genzyme
Tissue Repair's lead product, Carticel-REGISTERED TRADEMARK- chondrocytes, is
used to treat damaged articular knee cartilage. Genzyme Tissue Repair employs a
proprietary process to grow autologous--a patient's own--cartilage cells for use
in repairing damaged knee cartilage.
The FDA has required Genzyme Tissue Repair to conduct two confirmatory
post-marketing studies of Carticel-REGISTERED TRADEMARK- chondrocytes. The FDA
approved new clinical designs for these trials in February 2000. The first study
measures outcomes of patients in Genzyme Tissue Repair's registry who did not
respond to other treatment before being implanted with
Carticel-Registered Trademark- chondrocytes. It will compare outcomes before and
after implantation. Genzyme Tissue Repair expects to complete this study in
2000. The second study is designed to compare the long-term clinical effect of
treatment with Carticel-REGISTERED TRADEMARK- chondrocytes to other treatments.
Genzyme Tissue Repair believes that for Carticel-REGISTERED TRADEMARK-
chondrocytes to be commercially successful, it must be routinely used by a large
number of orthopedic surgeons. It markets Carticel-REGISTERED TRADEMARK-
chondrocytes to orthopedic surgeons in the United States and Europe directly and
through distributors. Genzyme Tissue Repair also trains orthopedic surgeons,
collects and analyzes outcomes data through a registry, and assists physicians
and patients in obtaining reimbursements from third-party payers. The commercial
success of Carticel-REGISTERED TRADEMARK- chondrocytes will also depend on its
ability to increase the approval rate for reimbursement of the product from
third-party payers. 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-REGISTERED TRADEMARK- chondrocytes. Genzyme Tissue Repair expects that
Carticel-REGISTERED TRADEMARK- sales may be lower in the summer months as fewer
operative procedures are typically performed during those months.
EPICEL-TM- SKIN GRAFTS. Genzyme Tissue Repair's Epicel-TM- skin grafts are
cultured autologous skin cells used for permanent skin replacement for patients
with severe burns. Epicel-TM- skin grafts were first introduced in 1987. These
epidermal grafts are grown from a patient's own skin cells and, therefore, are
not rejected by the patient's immune system. Most burn wounds involving less
than 60% body surface area are covered with conventional skin grafts within the
three to four weeks it currently takes to grow skin grafts produced using the
Epicel-TM- service. Therefore, Genzyme Tissue Repair believes that the primary
candidates for Epicel-TM- skin grafts are the approximately 800 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. Sales of Epicel-TM- skin grafts fluctuate from
quarter to quarter depending on the number of unpredictable factors, including
the number and survival rate of severe burn patients who are treated with
Epicel-TM- skin grafts.
CARTICEL-REGISTERED TRADEMARK- II. Carticel-REGISTERED TRADEMARK- II is a
next-generation product based on the development of a pre-formed autologous
cartilage tissue implant. The implant is intended to allow the procedure to be
performed arthroscopically. If it is successfully developed,
Carticel-REGISTERED TRADEMARK- II could significantly decrease rehabilitation
time for patients and allow surgeons to treat larger cartilage defects. Genzyme
Tissue Repair plans to complete preclinical studies of
Carticel-REGISTERED TRADEMARK-() II in 2000.
QUICKTACK-TM- PERIOSTEAL FIXATION SYSTEM. QuickTack-TM- is a small device
designed to be used instead of sutures during the Carticel-REGISTERED TRADEMARK-
implant procedure. It is expected to simplify the procedure and
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significantly decrease the time needed for surgery. Genzyme Tissue Repair plans
to submit a 510(k) application for the Quick Tack-TM- periosteal fixation system
to the FDA in the first half of 2000.
OSTEOARTHRITIS. Genzyme Tissue Repair has is conducting pre-clinical
studies of an innovative small molecule therapy for the treatment of
osteoarthritis.
PHOTOACTIVE TISSUE WELDING TECHNOLOGY. Genzyme Tissue Repair is conducting
proof of concept studies of a photoactive tissue welding technology it licensed
from PhotoBioMed Corp. It intends to seek a partner to develop and commercialize
this technology.
OTHER DEVELOPMENT PROGRAMS. Genzyme Tissue Repair has a number of ongoing
development programs supporting Carticel-REGISTERED TRADEMARK- chondrocytes.
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 implantation
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.
COMPETITION
We are engaged in a segment of the human health care products industry that
is extremely competitive. Our competitors in the United States and elsewhere are
numerous and include major pharmaceutical, surgical device and biotechnology
companies. Some of these competitors may have more extensive research and
development, regulatory, manufacturing and production capabilities. Some
competitors may have greater financial resources. These companies may succeed in
developing products that are more effective than any that we have or may develop
and may also prove to be more successful than we are in producing and marketing
products and services. In addition, technological advances or different
approaches developed by one or more of our competitors may render our products
obsolete, less effective or uneconomical.
Each of our products and services faces different competitive challenges:
CEREZYME-REGISTERED TRADEMARK- ENZYME AND CEREDASE-REGISTERED TRADEMARK-
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, small molecules
or gene therapy. Genzyme General is aware of other companies attempting to
develop alternative treatments for Gaucher disease. However, Genzyme General
believes that its proprietary production techniques and, to a certain extent,
the orphan drug status of its products, which provides market exclusivity in the
United States until May 2001, 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-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
will be clinical effectiveness and absence of adverse side effects.
RENAGEL-REGISTERED TRADEMARK- 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 other product approved in the United States
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
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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.
ANTITHROMBIN III. Individuals who have a deficiency of ATIII are treated
currently with plasma-derived ATIII. Genzyme General and Genzyme Transgenics
believe transgenic ATIII may represent a more attractive therapeutic than the
current plasma-derived product in light of:
- the risks of viral transmission from pooled plasma products in general;
- the limited volume of ATIII available from plasma; and
- the impracticality of producing sufficient quantities of ATIII in cell
culture systems.
NEUROCELL-TM- -PD AND NEUROCELL-TM- -HD. While there currently are no
effective long-term therapies for advanced Parkinson's disease and no effective
treatments for Huntington's disease, Genzyme General 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, cell therapy, the use of growth factors and neuroprotectant
therapy.
CYSTIC FIBROSIS. There are a number of academic and commercial
organizations 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 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-Registered Trademark-, 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 blocking Genzyme General from commercializing its cystic fibrosis
products or in developing other drug therapies that relieve the symptoms of
cystic fibrosis.
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.
GENETIC DIAGNOSTIC SERVICES. The U.S. market for human genetic testing is
divided among approximately 500 laboratories. 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.
CANCER. Competition in the field of cancer therapeutics is intense. 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.
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Competition can 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 therapies. Any or all of these may be more effective or
less expensive than those developed by Genzyme Molecular Oncology. For instance,
other companies provide genomics services that are competitive with the SAGE-TM-
technology.
Genzyme Molecular Oncology relies on its collaborators for support in some
of its cancer research and development programs and intends to rely on these
partners for preclinical evaluation and clinical development of its potential
products and services. In addition, certain of its partners are conducting
multiple product development programs in the same fields as those in which they
are collaborating with Genzyme Molecular Oncology. Genzyme Molecular Oncology's
product candidates, therefore, may be subject to competition with potential
products under development by one or more of its partners.
CHEST DRAINAGE AND FLUID MANAGEMENT SYSTEMS, INSTRUMENTS AND SUTURES. The
principal methods by which Genzyme Surgical Products competes in the
cardiothoracic and general surgery markets 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.
Its chief competitors in the chest drainage and fluid management market are
Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco
International, Ltd. Genzyme Surgical Products primarily competes with Karl Storz
Endoscopy America, Inc., Scanlan International, Inc., Pilling Weck Surgical
Instruments and the Codman division of Johnson & Johnson Ltd. in the reusable
instruments market. U.S. Surgical Corporation, a division of Tyco, and the
Ethicon division of Johnson & Johnson are Genzyme Surgical Products' primary
competitors in the cardiovascular sutures market.
MINIMALLY INVASIVE CARDIOVASCULAR SURGERY. Genzyme Surgical Products faces
competitors in the minimally invasive cardiovascular surgery field.
CardioThoracic Systems, Inc., which was recently acquired by Guidant
Corporation, was founded solely to pursue minimally invasive cardiovascular
surgery and was among the first companies to draw national attention to the
technology. CardioThoracic Systems is also the leader in both the minimally
invasive direct coronary artery bypass and off-pump coronary artery bypass
markets. Several major surgical products companies have also entered the
minimally invasive cardiovascular surgery market, including Medtronic, Inc.,
U.S. Surgical and Ethicon.
THERAPIES FOR ISCHEMIC HEART DISEASE. There is considerable competition in
the development of protein and gene therapies to induce angiogenesis for the
treatment of ischemic heart disease. Several companies have initiated clinical
trials of gene and protein therapies for ischemic heart disease, and other
companies have products that are still in preclinical development.
Genzyme Surgical Products is aware of ongoing research on cell-based
approaches to restoring cardiac function to infarcted tissue. Academic
institutions and private companies are also conducting research to develop
mechanical devices to reduce ventricular size or to minimize ventricular
dilation.
THERAPIES FOR PERIPHERAL VASCULAR DISEASE. There is considerable
competition in the development of protein and gene therapies to induce
angiogenesis for the treatment of peripheral vascular disease.
ADHESION BARRIERS. Genzyme Surgical Products believes that its expertise in
developing proprietary fermentation processes and its access to proprietary
strains of micro-organisms used in its hyaluronic
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acid production process will give it a competitive advantage in the marketing of
the Sepra family of products. Its anti-adhesion products may face significant
competition, however, from other products based on hyaluronic acid as well as
from other products and changes in surgical techniques that may obviate the use
of hyaluronic acid. Genzyme Surgical Products 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.
Sepra Film-Registered Trademark- bioresorbable membrane does not have
significant direct competition in the colorectal surgery market. Ethicon markets
Interceed-Registered Trademark-, an anti-adhesion barrier that may have
properties similar to the Sepra Film-Registered Trademark- product, but is
indicated only for selected gynecological indications.
Interceed-Registered Trademark- has been shown to lose its anti-adhesion
properties in the presence of blood. Lifecore Biomedical, Inc. and Ethicon's
Intergel-TM- product, a gel-based anti-adhesion product, is marketed in Europe.
Gliatech, Inc. currently markets Adcon-L for the prevention of adhesions
following lumbar surgery. In addition, it has initiated clinical trials of
Adcon-A and Adcon-P, which are designed to limit adhesions after abdominal and
pelvic surgery. Life Medical Sciences, Inc. is developing REPEL for
gynecological surgery and REPEL-CV for cardiovascular surgery. These adhesion
barrier membranes are in early clinical trials.
PLASTIC SURGERY AND ENDOSCOPIC SURGERY INSTRUMENTS. Genzyme Surgical
Products' main competitors for the market in plastic surgery instruments are
Karl Storz, Padgett Instruments, Inc., the V. Mueller division of Allegiance
Corporation and Walter Lorenz Surgical, Inc. In the endoscopic plastic surgery
market, its competitors include Circon Corporation, OLYMPUS Winter & Ibe GmbH,
Stryker Corporation, and Karl Storz.
CARTICEL-REGISTERED TRADEMARK- CHONDROCYTES. Genzyme Tissue Repair is aware
of two other companies, Verigen, Inc. and Codon, which are both culturing
autologous chondrocytes for cartilage repair in Europe. In addition, Genzyme
Tissue Repair knows of three other companies, Advanced Tissue Sciences, Inc. in
conjunction with Smith & Nephew PLC, Integra LifeSciences Corp. and LifeCell
Corp., which are engaged in research on cultured cartilage products. In
addition, a surgical technique known as osteochondral grafting may be
competitive to Carticel-REGISTERED TRADEMARK- chondrocytes. 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.
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 Epicel-TM- skin grafts to close a full-thickness wound, however, and
therefore will not compete directly with Epicel-TM- skin grafts. Advanced Tissue
Sciences, Inc. has received approval for a temporary wound covering for burns.
Organogenesis, Inc. has submitted a Pre-Market Approval application 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.
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PATENTS, LICENSE AGREEMENTS AND TRADEMARKS
In general, we pursue a policy of obtaining patent protection both in the
United States and in selected foreign countries for subject matter we consider
patentable and important to our business. In addition, a portion of our
proprietary position is based upon patents that we have licensed from others
either through collaboration or traditional license agreements, including
patents relating to:
- Renagel-Registered Trademark- capsules;
- Transgenic ATIII;
- Aldurazyme-TM- enzyme;
- AVONEX-Registered Trademark- (Interferon-beta 1a);
- NeuroCell-TM--PD and NeuroCell-TM--HD;
- Alpha-glucosidase;
- DHA derivative;
- Acid sphingomyelinase;
- EPI-KAL2;
- the HNPCC and APC I1307K tests;
- TGF-(2);
- SAGE-TM- technology;
- cell fusion technology;
- viral and non-viral gene therapy technology;
- drug delivery technology;
- various cancer related genes such as p53;
- HIF-1 alpha;
- Cohn Cardiac Stabilizer-TM- device;
- Epicel-TM- skin grafts; and
- photoactive tissue welding technology.
These collaboration and license agreements generally require us to share
profits with our collaborative partners or pay royalties to our licensors upon
commercialization of products covered by the licensed technology. Generally,
patents issued in the United States are effective for the longer of 17 years
from date of issue or 20 years from the effective filing date of the
corresponding patent application if filed prior to June 8, 1995; and 20 years
from the filing date for applications filed after June 8, 1995. In some cases,
the patent term can be extended to recapture a portion of the term lost during
FDA regulatory review. The duration of foreign patents varies in accordance with
applicable local law.
We also rely on trade secrets, proprietary know-how and continuing
technological innovation to develop and maintain a competitive position in our
product areas. We require our employees, consultants and corporate partners who
have access to our proprietary information to sign confidentiality agreements.
Our patent position and proprietary technology are subject to certain risks
and uncertainties. We have included information about these risks and
uncertainties in Exhibit 99.2, "Factors Affecting
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Future Operating Results," to this Form 10-K. We encourage you to read those
descriptions, which we are incorporating into this discussion by reference.
Our products and services are sold around the world under brand-name
trademarks and service marks. Trademark protection continues in some countries
as long as the mark is used; in other countries, as long as its registered.
Registrations generally are for fixed, but renewable, terms. We consider our
registered trademarks Genzyme-Registered Trademark-,
Cerezyme-Registered Trademark-, Ceredase-Registered Trademark-,
Thyrogen-Registered Trademark-, N-geneous-REGISTERED TRADEMARK- LDL,
N-geneous-REGISTERED TRADEMARK- HDL, Contrast-REGISTERED TRADEMARK-(),
InSight-Registered Trademark-, MASDA-Registered Trademark-, Sepra
Film-Registered Trademark-, Pleur-evac-Registered Trademark-,
Thora-Klex-Registered Trademark-, Tevdek-Registered Trademark-,
Polydek-Registered Trademark-, Deklene-REGISTERED TRADEMARK-(), Cohn Cardiac
Immobilizer-REGISTERED TRADEMARK-(), SaphLITE-REGISTERED TRADEMARK-(),
Sepragel-REGISTERED TRADEMARK-(), Diamond-Line-REGISTERED TRADEMARK-(),
Diamond-Flex-REGISTERED TRADEMARK-(), Diamond-Touch-REGISTERED TRADEMARK-(), and
Carticel-REGISTERED TRADEMARK-(), together with our trademarks Fabrazyme-TM-,
Afp4-TM-(), GlyPro-TM-, SAGE-TM-, EndoCABG-TM-, Sahara-TM-, Genzyme OPCAB
Elite-TM-, Cohn Cardiac Stabilizer-TM-, Switch-Blade-TM-, Seprafilm-TM-,
Sepracoat-TM-, Sepramesh-TM-, SepraPak-TM-, CV Seprafilm-TM-, Epicel-TM- and
QuickTack-TM-, in the aggregate, to be of material importance to our business.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the development, manufacture and
commercialization of our products and services.
FDA REGULATION
We expect that all of our products and services will require approval of the
FDA and corresponding agencies in other countries before they can be marketed.
In the United States, the FDA classifies products as either "devices," "drugs"
or "biologics." 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."
The activities required before drugs or biologics may be marketed in the
United States include:
- pre-clinical laboratory tests, IN VITRO and IN VIVO pre-clinical studies
and formulation and stability studies;
- the submission to the FDA and approval of an application for human
clinical testing, which is known as an Investigational New Drug
application;
- adequate and well controlled human clinical trials to prove the safety and
effectiveness of the drug or biologic;
- the submission of a New Drug Application for a drug or a Product License
Application for a biologic or a Biologic License Application for biologics
identified by the FDA as "Specified Biologics;" and
- the approval by the FDA of the New Drug Application, Product License
Application or Biologic License Application.
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 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
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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:
- pre-clinical laboratory tests and IN VITRO and IN VIVO pre-clinical
studies;
- the submission to the FDA and approval of an Investigational Device
Exemption application to allow initiation of clinical testing;
- human clinical studies to prove safety and effectiveness of the device;
- the submission of a Pre-Marketing Application; and
- the approval by the FDA of the Pre-Marketing Application.
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 proven 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 Investigational Device
Exemption application and a Pre-Marketing Application. The 510(k) application
must contain a description of the device, its methods of manufacture and quality
control procedures and the results of testing to demonstrate that the device is
substantially equivalent to the device already marketed.
In May 1996, the FDA published a new guidance document that provided for the
regulation of products such as Carticel-Registered Trademark- chondrocytes that
use manipulated autologous structural cells. Under these regulations, companies
that currently are not 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 Biologic License
Application under these regulations for Carticel-Registered Trademark-
chondrocytes. 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, we could be required to conduct further studies to
provide additional data on safety or to gain approval for the use of a product
as a treatment for additional clinical indications. 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 us to product
liability claims.
REGULATION OUTSIDE OF THE UNITED STATES
For marketing outside the United States, we are subject to foreign
regulatory requirements governing human clinical testing and marketing approval
for our products. These requirements vary by jurisdiction, differ from those in
the United States and may require us to perform additional pre-clinical or
clinical testing whether or not FDA approval has been obtained. The amount of
time required to obtain necessary approvals may be longer or shorter than that
required for FDA approval. In many foreign countries, pricing and reimbursement
approvals are also required.
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Our initial focus for obtaining marketing approval outside the United States
is typically Europe. European Union Regulations and Directives generally
classify healthcare products either as medicinal products or devices. For
medicinal products, marketing approval may be sought using either the
centralized procedure of the Committee for Proprietary Medicinal Products or the
decentralized, mutual recognition process. The centralized procedure results in
a recommendation in all member states, while the European Union multi-state
process involves country by country approval. European Union regulations for
products classified as devices have been implemented for some devices. Devices
such as the Sepra family of products must receive market approval through a
centralized procedure, where the device receives a CE Mark allowing distribution
to all member states of the European Union. For those devices where European
Union regulations have not been implemented, marketing approval must be obtained
on a country by country basis. The CE Mark certification requires us to receive
International Standards Organization certification for each facility involved in
the manufacture or distribution of the device. This certification comes only
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 European Union. After certification is received a product
dossier is reviewed which attests to the product's compliance with European
Union directive 93/42/EEC for medical devices. Only after this point is a CE
Mark granted.
Autologous products are specifically exempt from the European Device
Directive and Pharmaceutical Directive promulgated by the European Union.
Therefore, each European country is free to impose its own regulations on the
marketing of these products. To date, Genzyme Tissue Repair has not encountered
any local registration requirement for market introduction of
Carticel-REGISTERED TRADEMARK- chondrocytes. During September 1997, the Spanish
national health system approved Carticel-REGISTERED TRADEMARK- chondrocytes for
use by public hospitals, representing the first broad approval of the product by
a reimbursement authority in Europe. Genzyme Tissue Repair is assessing the
regulatory requirements for commercialization of Carticel-REGISTERED TRADEMARK-
chondrocytes in Japan.
OTHER GOVERNMENT REGULATION
GOOD MANUFACTURING PRACTICES. All facilities and manufacturing techniques
used for the manufacture of products for clinical use or for sale must comply
with applicable "Good Manufacturing Practices," the FDA regulations governing
the production of pharmaceutical products.
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 United States 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 United
States for that product. However, a drug that the FDA considers 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 United States during the
seven-year exclusive marketing period. Similar legislation was adopted in the
European Union in the beginning of 2000, but the market exclusivity granted in
Europe is for ten years.
Legislation periodically has been introduced in recent years to change the
U.S. Orphan Drug Act to shorten the period of automatic market exclusivity and
to allow marketing rights to simultaneous developers of a drug. We cannot be
sure of whether the Orphan Drug act will be amended or, if amended, what effect
the changes would have on us.
REGULATION OF DIAGNOSTIC SERVICES. The Clinical Laboratories Improvement
Act provides for the regulation of clinical laboratories by the U.S. Department
of Health and Human Services. Regulations promulgated under the act affect our
genetics laboratories.
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REGULATION OF GENE THERAPY PRODUCTS. In addition to FDA requirements, the
National Institutes of Health 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 the
Recombinant DNA Advisory Committee to review gene therapy protocols. We expect
that all of our gene therapy protocols will be subject to review by the
Recombinant DNA Advisory Committee. In the U.K., our gene therapy protocols will
be subject to review by the Gene Therapy Advisory Committee.
The recent death of a patient undergoing gene therapy using an adenoviral
vector to deliver the therapeutic gene has been widely publicized. As a result
of the death, the U.S. Senate has commenced hearings to determine whether
additional legislation is required to protect volunteers and patients who
participate in gene therapy clinical trials. Additionally, the Recombinant DNA
Advisory Committee has discussed extensively the use of adenoviral vectors in
gene therapy clinical trials and intends to issue a report in March 2000 on the
adverse events reported by investigators using adenoviral vectors. Increased
scrutiny could delay or increase the costs of our gene therapy product
development efforts or clinical trials.
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
transplant activities. This statute has not been applied to
Carticel-REGISTERED TRADEMARK- chondrocytes 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. These state laws 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 human tissue sales. The application of these or other
regulations to Genzyme Tissue Repair could result in significant expense to
Genzyme Tissue Repair, limit reimbursement for Genzyme Tissue Repair's services
and otherwise materially adversely affect Genzyme Tissue Repair's results of
operations.
OTHER LAWS AND REGULATIONS. Our operations are or may be 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 our research work and manufacturing
operations, including radioactive compounds and infectious disease agents.
Although we believe that our safety procedures comply with the standards
prescribed by federal, state and local regulations, the risk of contamination,
injury or other accidental harm cannot be eliminated completely. In the event of
an accident, we could be held liable for any damages that result and any
liabilities could exceed our resources.
EMPLOYEES
As of December 31, 1999, we had approximately 3,800 employees, including all
of our consolidated subsidiaries and excluding Genzyme Transgenics. None of our
employees are covered by collective bargaining agreements. We consider our
employee relations to be excellent.
RESEARCH AND DEVELOPMENT COSTS
We have provided the information required by Item 101(c)(1)(xi) of
Regulation S-K 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.,
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"Research and Development Agreements" to our consolidated financial statements
set forth in Exhibit 13.5 to this Form 10-K. We are incorporating that
information into this section by reference.
SALES BY GEOGRAPHIC AREA, SIGNIFICANT CUSTOMERS AND PRODUCTS
We have provided the information required by Items 101(c)(1)(i) and
(vii) and 101(d) of Regulation S-K in the 1999 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 our consolidated financial statements set forth in
Exhibit 13.5 to this Form 10-K. We are incorporating that information into this
section by reference.
ITEM 1A. EXECUTIVE OFFICERS
Our current executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- -----
<S> <C> <C>
Henri A. Termeer........................................ 54 Chairman of the Board,
President and Chief
Executive Officer
Russell J. Campanello................................... 44 Senior Vice President, Human
Resources
Earl M. Collier, Jr..................................... 52 Executive Vice President;
President, Genzyme Surgical
Products
David D. Fleming........................................ 51 Group Senior Vice President,
Diagnostic Products
Richard A. Moscicki, M.D................................ 48 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......................................... 50 Executive Vice President,
Therapeutics and Genetics
Peter Wirth............................................. 49 Chief Legal Officer;
Executive Vice President;
Clerk
Michael S. Wyzga........................................ 45 Chief Financial and
Accounting Officer; Senior
Vice President, Finance
</TABLE>
MR. TERMEER has served as our President and a Director 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 us, 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, Inc., GelTex
Pharmaceuticals, Inc. and Genzyme Transgenics Corporation, and a trustee of
Hambrecht & Quist Healthcare Investors and Hambrecht & Quist Life Sciences
Investors.
MR. CAMPANELLO joined us in February 1998 as Senior Vice President, Human
Resources. Prior to joining us, from March 1996 to February 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., a computer software company. Mr.
Campanello is a director of Webhire, Inc., an application services provider in
the internet recruiting marketplace. Nets, Incorporated filed for Chapter 11
bankruptcy protection in May 1997.
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MR. COLLIER joined us in January 1997 as Senior Vice President, Health
Systems, served as Executive Vice President, Surgical Products and Health
Systems from July 1997 until June 1999, and was named President of Genzyme
Surgical Products when it was formed in June 1999. Mr. Collier is also
responsible for Genzyme Tissue Repair. Prior to joining us, 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 us in April 1984 and has served as Group Senior Vice
President, Diagnostic Products since September 1996. From September 1996 until
January 2000 he also served as Group Senior Vice President, Diagnostic Products
and Genetics. Prior to that date, he served as President of our diagnostics
business unit since January 1989 and has been a Senior Vice President since
August 1989. For 11 years prior to joining us, he worked for Baxter Travenol
Laboratories, Inc.
DR. MOSCICKI joined us 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 us in August 1989 as Senior Vice President, Research and
became Chief Scientific Officer in September 1996. Prior to joining us, he
served as Vice President-Scientific Director of Integrated Genetics, Inc. from
November 1984 until its acquisition by us 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 Genzyme
Transgenics Corporation.
MR. VAN HEEK joined us in September 1991 as General Manager of our
wholly-owned subsidiary, Genzyme, B.V., and became a corporate Vice President
and President of our therapeutics business unit in December 1993. From September
1996 through July 1997, he served as Group Senior Vice President. Therapeutics
and from July 1997 through December 1999 served as Executive Vice President,
Therapeutics and Tissue Repair. Since January 2000 he has served as Executive
Vice President, Therapeutics and Genetics, with responsibility for our
therapeutics and genetics business units and international operations. Prior to
joining us, Mr. van Heek was Vice President/General Manager of the Fenwal
Division of Baxter Healthcare Corporation.
MR. WIRTH joined us 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, Genzyme
Molecular Oncology and our emerging technologies business unit. From January
1996 to September 1996, Mr. Wirth served as Senior Vice President and General
Counsel. 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.
MR. WYZGA joined us in February 1998 as Vice President and Corporate
Controller, served as Senior Vice President, Corporate Controller and Chief
Accounting Officer since January 1999, and as Senior Vice President, Finance and
Chief Financial Officer since July 1999. Prior to joining us, 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 Development
Corporation 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.
29
<PAGE>
ITEM 2. PROPERTIES
Our operations are conducted in manufacturing, warehousing, pilot plant,
clinical laboratories, and research and office facilities that are located
principally in:
- the United States;
- the United Kingdom;
- the Netherlands;
- Switzerland; and
- Germany.
We lease all of our properties except for certain properties in:
- Haverhill, England;
- West Malling, England;
- Coventry, Connecticut;
- Fall River, Massachusetts;
- Framingham, Massachusetts;
- Allston, Massachusetts; and
- Santa Fe, New Mexico.
Our principal properties are:
- for Genzyme General, our manufacturing facilities for the large scale
production of our therapeutic proteins, diagnostic products and its
genetic diagnostic facilities;
- for Genzyme Surgical Products, our manufacturing facilities for the large
scale production of surgical instruments and biomaterials; and
- for Genzyme Tissue Repair, our cell processing facilities for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
Our selling and marketing activities are concentrated at facilities we have
leased in Cambridge, Massachusetts and the Netherlands. We conduct our research
and development activities primarily at our laboratory facilities in the United
States.
Leases for our facilities contain typical commercial lease provisions
including renewal options, rent escalators and tenant responsibility for
operating expenses. We believe that we have or are in the process of developing
adequate manufacturing capacity to support our requirements for the next several
years.
GENZYME GENERAL
THERAPEUTICS
In October 1996, we received FDA approval to manufacture
Cerezyme-Registered Trademark- enzyme at our multi-product manufacturing
facility at Allston Landing in Boston, Massachusetts. The facility, which we own
and which contains extensive sterile filling capacity, is built on land that we
hold under a 60-year lease.
We have entered into a contract manufacturing agreement with RenaGel LLC,
the entity formed in connection with our joint venture with GelTex
Pharmaceuticals under which, upon receipt of
30
<PAGE>
necessary regulatory approvals, we will manufacture a portion of the joint
venture's minimum supply requirements for Renagel-Registered Trademark- Capsules
in our facilities in Haverhill, England.
We manufacture Thyrogen-Registered Trademark- hormone under Good
Manufacturing Practices conditions in our small-scale manufacturing facility in
Framingham, Massachusetts.
We use a multi-use pharmaceutical facility in Liestal, Switzerland to
produce peptides.
DIAGNOSTICS
Genzyme General's diagnostic test kits and reagents are produced in
manufacturing facilities in San Carlos, California, Cambridge, Massachusetts and
Russelsheim, Germany.
We produce diagnostic enzymes and other fermentation products in a
multi-purpose fermentation facility in Maidstone, England and a protein
purification plant in West Malling, England. In 1997, we completed construction
of a new fermentation facility and warehousing facility in West Malling,
England.
Our genetic testing business primarily conducts operations in clinical
laboratory and administrative the facilities we own in Framingham, Massachusetts
and Santa Fe, New Mexico.
GENZYME MOLECULAR ONCOLOGY
Genzyme Molecular Oncology provides SAGE-TM- services from facilities we own
in Framingham, Massachusetts.
GENZYME SURGICAL PRODUCTS
We have manufacturing capacity at two facilities in the United Kingdom to
produce commercial quantities of hyaluronic acid powder for the Sepra family of
products. Sepra Film-Registered Trademark- bioresorbable membrane is produced at
commercial scale from the hyaluronic acid powder in our manufacturing facility
in Framingham, Massachusetts.
In July 1996, we acquired or assumed the leases for certain office,
laboratory and manufacturing facilities in Fall River, Massachusetts, Coventry,
Connecticut, Tucker, Georgia and Russelsheim, Germany for use in manufacturing
and warehousing our surgical products.
GENZYME TISSUE REPAIR
Production for Carticel-Registered Trademark- chondrocytes and Epicel-TM-
skin grafts occurs primarily in our cell processing facilities in Cambridge,
Massachusetts. The facility has the capacity to provide
Carticel-Registered Trademark- chondrocytes to approximately 5,000 patients per
year. In 1996, Genzyme Tissue Repair established a surgeon training center at
our facility in the Netherlands in conjunction with the
Carticel-Registered Trademark- program.
ITEM 3. LEGAL PROCEEDINGS
As of the filing date of this Form 10-K, there are no pending legal
proceedings deemed material by us to which we are, or any of our subsidiaries
is, a party, or to which any of the property of our company or of our
subsidiaries is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
31
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We have four series of common stock:
- Genzyme General Division Common Stock;
- Genzyme Molecular Oncology Division Common Stock;
- Genzyme Surgical Products Division Common Stock; and
- Genzyme Tissue Repair Division Common Stock.
These securities are intended to reflect the value and track the performance
of Genzyme General, Genzyme Molecular Oncology, Genzyme Surgical Products and
Genzyme Tissue Repair. All four series of stock are traded on the
over-the-counter market and prices are quoted on The Nasdaq National Market-TM-
system under the symbols GENZ, GZMO, GZSP and GZTR.
On November 16, 1998, we distributed to the holders of record of GENZ Stock
on November 2, 1998, 0.10805 shares of GZMO Stock for each share of GENZ Stock
held. GZMO Stock began trading on Nasdaq November 16, 1998. On June 28, 1999, we
distributed to the holders of record of GENZ Stock on June 14, 1999, 0.17901
shares of GZSP Stock for each share of GENZ Stock held. The GZSP Stock began
trading on Nasdaq June 28, 1999.
As of March 21, 2000, there were 2,307 stockholders of record of GENZ Stock,
2,198 stockholders of record of GZMO Stock, 2,086 stockholders of record of GZSP
Stock and 5,423 stockholders of record of GZTR Stock.
32
<PAGE>
The following table sets forth, for the periods indicated, the high and low
sale prior for each series of our stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
GENZ STOCK
1999:
First Quarter........................................ $55 3/4 $41 5/8
Second Quarter....................................... 53 5/8 36 3/8
Third Quarter........................................ 63 1/8 44 3/4
Fourth Quarter....................................... 48 3/8 30 3/4
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
GZMO STOCK
1999:
First Quarter........................................ $ 5 1/2 $ 2 5/16
Second Quarter....................................... 3 31/32 2 5/8
Third Quarter........................................ 10 5/8 2 5/8
Fourth Quarter....................................... 7 3/8 4 3/16
1998:
Fourth Quarter....................................... $15 $ 2
GZSP STOCK
1999:
Second Quarter....................................... $ 8 $ 4
Third Quarter........................................ 7 5/8 3 5/16
Fourth Quarter....................................... 6 7/16 4 5/8
GZTR STOCK
1999:
First Quarter........................................ $ 4 1/8 $ 2 7/32
Second Quarter....................................... 2 5/8 1 15/16
Third Quarter........................................ 2 1/4 1 9/16
Fourth Quarter....................................... 3 9/16 1 5/16
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
</TABLE>
We have never paid any cash dividends on any series of our common stock and
we do not anticipate paying cash dividends in the foreseeable future.
In August 1999, the Canadian Medical Discoveries Fund exercised its option
to require us and StressGen to repurchase the fund's interest in
StressGen/Genzyme LLC. We repurchased one-half of the fund's interest in the
joint venture on October 12, 1999 for $3,934,651 by issuing to the fund 617,200
shares of GZMO Stock.
The Canadian Medical Discoveries Fund is a venture capital fund based in
Ontario, Canada. We issued the 617,200 shares of GZMO Stock to the fund in
reliance on Section 4(2) and Regulation S under the Securities Act of 1933, as
amended.
33
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
We incorporate our Selected Financial Data into this section by reference
from:
- the 1999 Genzyme General Annual Report under the headings "Genzyme
General--Selected Financial Data" and "Genzyme Corporation--Selected
Financial Data;"
- the 1999 Genzyme Molecular Oncology Annual Report under the heading
"Genzyme Molecular Oncology--Selected Financial Data;"
- the 1999 Genzyme Surgical Products Annual Report under the heading
"Genzyme Surgical Products--Selected Financial Data;" and
- the 1999 Genzyme Tissue Repair Annual Report under the heading "Genzyme
Tissue Repair--Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We incorporate our Management's Discussion and Analysis of Financial
Condition and Results of Operations into this section by reference from:
- the 1999 Genzyme General Annual Report under the headings "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;"
- the 1999 Genzyme Molecular Oncology Annual Report under the heading
"Management's Discussion and Analysis of Genzyme Molecular Oncology's
Financial Condition and Results of Operations;"
- the 1999 Genzyme Surgical Products Annual Report under the heading
"Management's Discussion and Analysis of Genzyme Surgical Products'
Financial Condition and Results of Operations;" and
- the 1999 Genzyme Tissue Repair Annual Report under the heading
"Management's Discussion and Analysis of Genzyme Tissue Repair's Financial
Condition and Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We incorporate our Quantitative and Qualitative Disclosures About Market
Risk by reference into this section from 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 1999 Genzyme General Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We incorporate the financial statements filed as part of this Annual Report
on Form 10-K into this section by reference from:
- the 1999 Genzyme General Annual Report under the headings "Genzyme General
Combined Financial Statements" and the notes thereto and "Genzyme
Corporation and Subsidiaries Consolidated Financial Statements" and the
notes thereto;
- the 1999 Genzyme Molecular Oncology Annual Report under the heading
"Genzyme Molecular Oncology Combined Financial Statements" and the notes
thereto;
34
<PAGE>
- the 1999 Genzyme Surgical Products Annual Report under the heading
"Genzyme Surgical Products Combined Financial Statements" and the notes
thereto; and
- the 1999 Genzyme Tissue Repair Annual Report under the heading "Genzyme
Tissue Repair Selected Financial Data" and the notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the period from January 1, 1999 to the filing date of this
Form 10-K, no independent accountant who was previously engaged as the principal
accountant to audit our financial statements has resigned, indicated that it has
declined to stand for re-election after the completion of the current audit or
was dismissed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We incorporate information regarding our directors and executive officers
into this section by reference from the section entitled "Executive Officers of
the Registrant" in Part I, Item 1A of this Form 10-K and the sections entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the proxy statement for our 2000 annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate information regarding the compensation of our directors and
executive officers into this section by reference from the sections entitled
"Election of Directors--Director Compensation" and "Executive Compensation" in
the proxy statement for our 2000 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate information regarding the ownership of our securities by our
directors, executive officers and 5% stockholders into this section by reference
from the section entitled "Share Ownership" in the proxy statement for our 2000
annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate information regarding transactions with related parties into
this section by reference from the section entitled "Certain Transactions" in
the proxy statement for our 2000 annual meeting of stockholders.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1). FINANCIAL STATEMENTS
We are incorporating the following financial statements (and related notes)
of Genzyme General and Genzyme Corporation and Subsidiaries into this section by
reference from the 1999 Genzyme General annual report:
<TABLE>
<CAPTION>
PAGE*
--------
<S> <C>
GENZYME GENERAL
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.................... GG-16
Combined Balance Sheets--December 31, 1999 and 1998..... GG-17
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.................... GG-18
Notes to Combined Financial Statements.................. GG-20
Report of Independent Accountants....................... GG-40
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations--For the Years
Ended
December 31, 1999, 1998 and 1997.................... GCS-24
Consolidated Balance Sheets--December 31, 1999 and
1998................................................. GCS-26
Consolidated Statements of Cash Flows--For the Years
Ended
December 31, 1999, 1998 and 1997.................... GCS-28
Consolidated Statements of Stockholders' Equity for the
Years
Ended December 31, 1999, 1998 and 1997.............. GCS-30
Notes to Consolidated Financial Statements.............. GCS-33
Report of Independent Accountants....................... GCS-74
</TABLE>
- ------------------------
* References are to page numbers in the 1999 Genzyme General annual report.
The financial statements (and related notes) are incorporated by reference
from the 1999 Genzyme General annual report.
We are incorporating the following financial statements (and related notes)
of Genzyme Molecular Oncology into this section by reference from the 1999
Genzyme Molecular Oncology annual report:
<TABLE>
<CAPTION>
PAGE*
--------
<S> <C>
GENZYME MOLECULAR ONCOLOGY
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.................... GMO-13
Combined Balance Sheets--December 31, 1999 and 1998..... GMO-14
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.................... GMO-15
Notes to Combined Financial Statements.................. GMO-16
Report of Independent Accountants....................... GMO-28
</TABLE>
- ------------------------
* References are to page numbers in the 1999 Genzyme Molecular Oncology annual
report. The financial statements (and related notes) are incorporated by
reference from the 1999 Genzyme Molecular Oncology annual report.
36
<PAGE>
We are incorporating the following financial statements (and related notes)
of Genzyme Surgical Products into this section by reference from the 1999
Genzyme Surgical Products annual report:
<TABLE>
<CAPTION>
PAGE*
--------
<S> <C>
GENZYME SURGICAL PRODUCTS
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.................... GSP-14
Combined Balance Sheets--December 31, 1999 and 1998..... GSP-15
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.................... GSP-16
Notes to Combined Financial Statements.................. GSP-17
Report of Independent Accountants....................... GSP-30
</TABLE>
- ------------------------
* References are to page numbers in the 1999 Genzyme Surgical Products annual
report. The financial statements (and related notes) are incorporated by
reference from the 1999 Genzyme Surgical Products annual report.
We are incorporating the following financial statements (and related notes)
of Genzyme Tissue Repair into this section by reference from the 1999 Genzyme
Tissue Repair annual report:
<TABLE>
<CAPTION>
PAGE*
--------
<S> <C>
GENZYME TISSUE REPAIR
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.................... GTR-11
Combined Balance Sheets--December 31, 1999 and 1998..... GTR-12
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.................... GTR-13
Notes to Combined Financial Statements.................. GTR-14
Report of Independent Accountants....................... GTR-25
</TABLE>
- ------------------------
* References are to page numbers in the 1999 Genzyme Tissue Repair annual
report. The financial statements (and related notes) are incorporated by
reference from the 1999 Genzyme Tissue Repair annual report.
(A)(2). FINANCIAL STATEMENT SCHEDULES
The schedules listed below for Genzyme General, Genzyme Surgical Products,
Genzyme Tissue Repair and Genzyme Corporation and Subsidiaries are filed as part
of this Form 10-K:
<TABLE>
<CAPTION>
PAGE*
--------
<S> <C>
GENZYME GENERAL
Schedule II--Valuation and Qualifying Accounts.......... GG-41
GENZYME SURGICAL PRODUCTS
Schedule II--Valuation and Qualifying Accounts.......... GSP-31
GENZYME TISSUE REPAIR
Schedule II--Valuation and Qualifying Accounts.......... GTR-26
GENZYME CORPORATION AND SUBSIDIARIES
Schedule II--Valuation and Qualifying Accounts.......... GCS-75
</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 Genzyme Surgical Products Combined
Financial Statements or notes thereto or (iii) the Genzyme
37
<PAGE>
Tissue Repair Combined Financial Statements or notes thereto or (iv) the Genzyme
Corporation and Subsidiaries Consolidated Financials or notes thereto.
(A)(3). EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this Form 10-K.
(B). REPORTS ON FORM 8-K
On October 21, 1999, we filed a Current Report on Form 8-K to announce that
we entered into an Agreement and Plan of Merger which provided for the merger of
Cell Genesys, Inc. with and into a subsidiary of Genzyme.
(C). EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*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 as amended. Filed as Exhibit 3.2 to
Genzyme's Form 10-Q for the quarter ended September 30,
1999.
*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, Series C
and Series D Junior Participating Preferred Stock, $.01 par
value. Filed as Exhibit 2 to Amendment No. 1 to Genzyme's
Registration Statement on Form 8-A dated June 11, 1999.
*4.3-- Amended and Restated Renewed Rights Agreement dated as of
June 10, 1999 between Genzyme and American Stock Transfer &
Trust Company. Filed as Exhibit 4 to Amendment No. 1 to our
Registration Statement on Form 8-A dated June 11, 1999.
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-- Series Designation for Genzyme Surgical Products Division
common stock, $.01 par value. Filed as Exhibit 2 to
Genzyme's Registration Statement on Form 8-A dated June 11,
1999.
*4.6-- 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.
*4.7-- 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.
*4.8-- Warrant Agreement between Genzyme and Comdisco, Inc. Filed
as Exhibit 10.22 to a Form 10 of PharmaGenics, Inc. (File
No. 0-20138).
*4.9-- 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>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*4.10-- 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).
*4.11-- 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. 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>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*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.
*10.12-- Agreement of Limited Partnership dated as of September 13,
1989 between Genzyme Development Corporation II, as General
Partner, and each of the Limited Partners named therein.
Filed as Exhibit 10(aa) to Genzyme's Registration Statement
on Form S-4 (File No. 33-32343).
*10.13-- Cross License Agreement dated as of September 13, 1989
between Genzyme and Genzyme Development Partners, L.P. Filed
as Exhibit 10(bb) to Genzyme's Registration Statement on
Form S-4 (File No. 33-32343).
*10.14-- Development Agreement dated as of September 13, 1989 between
Genzyme and Genzyme Development Partners. 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
Genzyme Development Partners. 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, Genzyme Development Corporation
II, Genzyme Development Partners, 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, Genzyme Development Corporation
II, Genzyme Development Partners, 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 Genzyme Development Partners. Filed as Exhibit 10.1 to
Genzyme Development Partners' Form 10-Q for the quarter
ended March 31, 1997 (File No. 0-18554).
*10.19-- Tax Indemnification Agreement between Genzyme and General
Development Partners. Filed as Exhibit 10.2 to Genzyme
Development Partners' 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 Genzyme
Development Partners' 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, as amended. Filed as
Exhibit 10.22 to Genzyme's Form 10-K for 1998.
*10.23-- 1990 Equity Incentive Plan, as amended. Filed as Exhibit
99.1 to Genzyme's Form S-8 dated August 8, 1997 (File No.
333-33249).
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.24-- 1999 Employee Stock Purchase Plan. Filed herewith.
*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 as Exhibit 10.27 to
Genzyme's Form 10-K for 1998.
*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 as
Exhibit 10.28 to Genzyme's Form 10-K for 1998.
*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.
*10.31-- Consulting Agreement dated December 31, 1998 between Genzyme
and Robert J. Carpenter.
*10.32-- Consulting Agreement dated July 1, 1998 between Genzyme and
Henry E. Blair.
*10.33-- Technology Transfer Agreement between Genzyme and Genzyme
Transgenics Corporation 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
Genzyme Transgenics dated as of May 1, 1993. Filed as
Exhibit 10.1 to the Registration Statement on Form S-1 of
Genzyme Transgenics (File No. 33-62872).
*10.35-- Services Agreement between Genzyme and Genzyme Transgenics
dated as of May 1, 1993. Filed as Exhibit 10.2 to the
Registration Statement on Form S-1 of Genzyme Transgenics
(File No. 33-62872).
*10.36-- Series A Convertible Preferred Stock Purchase Agreement
between Genzyme and Genzyme Transgenics dated as of May 1,
1993. Filed as Exhibit 10.5 to the Registration Statement on
Form S-1 of Genzyme Transgenics (File No. 33-62872).
*10.37-- Second Amended and Restated Convertible Debt Agreement dated
as of December 28, 1998 by and between Genzyme and Genzyme
Transgenics.
*10.38-- Amended and Restated Operating Agreement of ATIII LLC dated
as of January 1, 1998 by and among Genzyme and Genzyme
Transgenics. Filed as Exhibit 10.52.1 to Genzyme
Transgenics' Form 10-K for 1997 (File No. 0-21794).**
*10.39-- Purchase Agreement dated as of January 1, 1998 by and
between Genzyme and Genzyme Transgenics. Filed as Exhibit
10.52.2 to Genzyme Transgenics' Form 10-K for 1997 (File No.
0-21794).**
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
*10.40-- Collaboration Agreement dated as of January 1, 1997 by and
among Genzyme, Genzyme Transgenics and ATIII LLC. Filed as
Exhibit 10.52.3 to Genzyme Transgenics' Form 10-K for 1997
(File No. 0-21794) and incorporated herein by reference.**
10.41-- Credit Agreement dated November 12, 1999 among Genzyme and
those of its subsidiaries party thereto, Fleet National
Bank, as Administrative Agent, and ABN AMRO Bank N.V. as
Syndication Agent and Mellon Bank, N.A. as Documentation
Agent. Filed herewith.
*10.42-- Collaboration Agreement dated as of June 17, 1997 by and
among Genzyme, GelTex Pharmaceuticals, Inc. 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).**
*10.43-- Purchase Agreement dated as of June 17, 1997 by and between
Genzyme and GelTex Pharmaceuticals. Filed as Exhibit 10.19
to GelTex Pharmaceuticals' Form 10-Q for the quarter ended
June 30, 1997 (File No. 0-26872).**
*10.44-- Operating Agreement of RenaGel LLC dated as of June 17, 1997
by and among Genzyme, GelTex Pharmaceuticals and RenaGel,
Inc. Filed as Exhibit 10.20 to GelTex Pharmaceuticals' Form
10-Q for the quarter ended June 30, 1997 (File No. 0-26872).
*10.45-- Purchase Agreement dated as of August 29, 1997 by and among
Genzyme Corporation and the entities listed on the signature
pages thereto. Filed as Exhibit 10.5 to Genzyme's Form 10-Q
for the quarter ended September 30, 1997.
*10.46-- Collaboration Agreement dated September 4, 1998 among
Genzyme, BioMarin Pharmaceutical, Inc. and BioMarin/Genzyme
LLC. Previously filed as Exhibit 10.24 to BioMarin
Pharmaceuticals' Registration Statement on Form S-1 (File
No. 333-77701) and incorporated herein by reference.**
*10.47-- Purchase Agreement dated September 4, 1998 between Genzyme
and BioMarin Pharmaceuticals. Previously filed as Exhibit
10.25 to BioMarin Pharmaceutical's Registration Statement on
Form S-1 (File No. 333-77701) and incorporated herein by
reference.
*10.48-- Operating Agreement of BioMarin/Genzyme LLC. Previously
filed as Exhibit 10.30 to BioMarin Pharmaceuticals'
Registration Statement on Form S-1 (File No. 333-77701) and
incorporated herein by reference.
13.1-- Portions of the 1999 Genzyme General Annual Report
incorporated by reference into Parts I and II of this Form
10-K.
13.2-- Portions of the 1999 Genzyme Molecular Oncology Annual
Report incorporated by reference into Parts I and II of this
Form 10-K.
13.3-- Portions of the 1999 Genzyme Surgical Products Annual Report
incorporated by reference into Parts I and II of this Form
10-K.
13.4-- Portions of the 1999 Genzyme Tissue Repair Annual Report
incorporated by reference into Parts I and II of this Form
10-K.
13.5-- Portions of the 1999 Genzyme General Annual Report related
to Genzyme Corporation and Subsidiaries incorporated by
reference into Parts I and II of this Form 10-K.
21-- Subsidiaries of the Registrant. Filed herewith.
23.1-- Consent of PricewaterhouseCoopers LLP. Filed herewith.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
23.2-- Consent of PricewatehouseCoopers LLP 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 as Exhibit 99.1 to
Genzyme's Registration Statement on Form S-3 dated March 3,
2000 (File No. 333-31548).
99.2-- Factors Affecting Future Operating Results. 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, 8-B or Schedule 14A of Genzyme Corporation were filed
under Commission File No. 0-14680.
** Confidential treatment has been granted for the deleted portions of Exhibits
10.21, 10.38-10.40, 10.42 and 10.43 and 10.46
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.
43
<PAGE>
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.
<TABLE>
<S> <C> <C>
GENZYME CORPORATION
Dated: March 30, 2000 By: /s/ MICHAEL S. WYZGA
-----------------------------------------
Michael S. Wyzga
Senior Vice President and
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities 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>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ HENRI A. TERMEER
------------------------------------------- Director and Principal March 30, 2000
Henri A. Termeer Executive Officer
/s/ MICHAEL S. WYZGA
------------------------------------------- Principal Financial and March 30, 2000
Michael S. Wyzga Accounting Officer
/s/ CONSTANTINE E. ANAGNOSTOPOULOS
------------------------------------------- Director March 30, 2000
Constantine E. Anagnostopoulos
/s/ DOUGLAS A. BERTHIAUME
------------------------------------------- Director March 30, 2000
Douglas A. Berthiaume
/s/ HENRY E. BLAIR
------------------------------------------- Director March 30, 2000
Henry E. Blair
/s/ ROBERT J. CARPENTER
------------------------------------------- Director March 30, 2000
Robert J. Carpenter
/s/ CHARLES L. COONEY
------------------------------------------- Director March 30, 2000
Charles L. Cooney
/s/ HENRY R. LEWIS
------------------------------------------- Director March 30, 2000
Henry R. Lewis
</TABLE>
44
<PAGE>
Exhibit 10.24
GENZYME CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
The purpose of this 1999 Employee Stock Purchase Plan (the "Plan") is
to provide employees of Genzyme Corporation (the "Company") and its subsidiaries
who wish to become shareholders of the Company an opportunity to purchase shares
of common stock, $0.01 par value, of the Company (the "Shares"). The Plan is
intended to qualify as an "employee stock purchase plan" within the meaning of
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
The Plan constitutes an amendment and restatement of the Company's 1990
Employee Stock Purchase Plan (the "1990 Plan"), which is hereby merged with and
into the Plan, and the separate existence of the 1990 Plan shall terminate on
the effective date of the Plan. The rights and privileges of the holders of
outstanding rights under the 1990 Plan shall not be adversely affected by the
foregoing action.
2. ELIGIBLE EMPLOYEES.
Subject to the provisions of Sections 7, 8 and 9 below, any individual
who is in the full-time employment (as defined below) of the Company, or any of
its subsidiaries (as defined in Section 425(f) of the Code), the employees of
which are designated by the Board of Directors as eligible to participate in the
Plan, is eligible to participate in any Offering of Shares (as defined in
Section 3 below) made by the Company hereunder. Full-time employment shall
include all employees whose customary employment is:
(a) 20 hours or more per week; and
(b) more than five months
in the calendar year during which said Offering Date (as defined in Section 3
below) occurs or in the calendar year immediately preceding such year.
3. OFFERING DATES.
From time to time, the Company, by action of the Board of Directors,
will grant rights to purchase shares of the Genzyme General Division Common
Stock ("GENZ stock"), the Genzyme Tissue Repair Division Common Stock ("GZTR
stock"), the Genzyme Molecular Oncology Division Common Stock ("GZMO stock"),
and/or the Genzyme Surgical Products Division Common Stock ("GSP stock") to
employees eligible to participate in the Plan pursuant to one or more offerings
(each of which is an "Offering") on a date or series of dates (each of which is
an "Offering Date") designated for this purpose by the Board of Directors. The
Board or any Administrator designated pursuant to Section 17 shall determine the
proportion of each class of Common Stock that may be purchased in any Offering
by participating employees. A reference to a class of Shares also means each
separate series of a single class.
4. PRICES.
The price per share for each grant of rights hereunder shall be the
lesser of:
(a) eighty-five percent (85%) of the fair market value on the Offering
Date on which such right was granted of a share of the series of Common Stock to
which the right relates; or
1
<PAGE>
(b) eighty-five percent (85%) of the fair market value on the date such
right is exercised of a share of the series of Common Stock to which the right
relates. At its discretion, the Board of Directors may determine a higher price
for a grant of rights.
5. EXERCISE OF RIGHTS AND METHOD OF PAYMENT.
(a) Rights granted under the Plan will be exercisable periodically on
specified dates as determined by the Board of Directors.
(b) The method of payment for Shares purchased upon exercise of rights
granted shall be through regular payroll deductions or by lump sum cash payment
or both, as determined by the Board of Directors. No interest shall be paid upon
payroll deductions unless specifically provided for by the Board of Directors.
(c) Any payments received by the Company from a participating employee
and not utilized for the purchase of Shares upon exercise of a right granted
hereunder shall be promptly returned to such employee by the Company after
termination of the right to which the payment relates.
6. TERM OF RIGHTS.
The total period from an Offering Date to the last date on which rights
granted on that Offering Date are exercisable (the "Offering Period") shall in
no event be longer than twenty-seven (27) months. The Board of Directors when it
authorizes an Offering may designate one or more exercise periods during the
Offering Period. Rights granted on an Offering Date shall be exercisable in full
on the Offering Date or in such proportion on the last day of each exercise
period as the Board of Directors determines.
7. SHARES SUBJECT TO THE PLAN.
GENZ stock, GZTR stock, GZMO stock and GSP 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>
GENZ GZTR GZMO GSP
stock stock stock stock
------- ------- ------- -------
<S> <C> <C> <C> <C>
New shares to be authorized under the plan 500,000 500,000 -- 500,000
Authorized and available from the 1990 plan 89,299 1 500,000 --
------- ------- ------- -------
Total reserve 589,299 500,001 500,000 500,000
</TABLE>
Appropriate adjustments in the above amounts, in the number of Shares covered by
outstanding rights granted hereunder, in the exercise price of the rights and in
the maximum number of Shares which an employee may purchase (pursuant to Section
8 below) shall be made to give effect to any mergers, consolidations,
reorganizations, recapitalizations, stock splits, stock dividends or other
relevant changes in the capitalization of the Company occurring after the
effective date of the Plan, provided that no fractional Shares shall be subject
to a right and each right shall be adjusted downward to the nearest full Share.
Any agreement of merger or consolidation shall include provisions for protection
of the then existing rights of participating employees under the Plan. Either
authorized and unissued Shares or issued Shares heretofore or hereafter
reacquired by the Company may be subject to rights under the Plan. If for any
reason any right under the Plan terminates in whole or in part, Shares subject
to such terminated right may be subject to a right under the Plan.
8. LIMITATIONS ON GRANTS.
(a) No employee shall be granted a right hereunder if such employee,
immediately after the right is granted would own stock or rights to purchase
stock possessing five percent (5%) or more of the
2
<PAGE>
total combined voting power or value of all series of common stock of the
Company, or of any subsidiary, computed in accordance with Section 423(b)(3) of
the Code.
(b) No employee shall be granted a right which permits the employee's
rights to purchase shares under all employee stock purchase plans of the Company
and its subsidiaries to accrue at a rate which exceeds twenty-five thousand
dollars ($25,000) (or such other maximum as may be prescribed from time to time
by the Code) of the fair market value of such Shares (determined at the time
such right is granted) for each calendar year in which such right is outstanding
at any time in accordance with the provisions of Section 423(b)(8) of the Code.
(c) No right granted to any participating employee under an Offering,
when aggregated with rights granted under any other Offering still exercisable
by the participating employee, shall cover more shares than may be purchased at
an exercise price not to exceed fifteen percent (15%) of the employee's annual
rate of compensation on the date the employee elects to participate in the
Offering or such lesser percentage as the Board of Directors may determine.
9. LIMIT ON PARTICIPATION.
Participation in an Offering shall be limited to eligible employees who
elect to participate in such Offering in the manner, and within the time
limitations, established by the Board of Directors when it authorizes the
Offering.
10. CANCELLATION OF ELECTION TO PARTICIPATE.
An employee who has elected to participate in an Offering may cancel
such election as to all (but not part) of the unexercised rights granted under
such Offering by giving written notice of such cancellation to the Company
before the expiration of any exercise period. Any amounts paid by the employee
for the Shares or withheld for the purchase of Shares from the employee's
compensation through payroll deductions shall be paid to the employee, without
interest unless otherwise determined by the Board of Directors, upon such
cancellation.
11. TERMINATION OF EMPLOYMENT.
Upon the termination of employment for any reason, including the death
of the employee, before the date on which any rights granted under the Plan are
exercisable, all such rights shall immediately terminate and amounts paid by the
employee for the Shares or withheld for the purchase of Shares from the
employee's compensation through payroll deductions shall be paid to the employee
or to the employee's estate, without interest unless otherwise determined by the
Board of Directors.
12. EMPLOYEE'S RIGHTS AS SHAREHOLDER.
No participating employee shall have any rights as a shareholder in the
Shares covered by a right granted hereunder until such right has been exercised,
full payment has been made for the corresponding Share and the Share certificate
is actually issued.
13. RIGHTS NOT TRANSFERABLE.
Rights under the Plan are not assignable or transferable by a
participating employee and are exercisable only by the employee.
14. AMENDMENTS TO OR DISCONTINUATION OF THE PLAN.
The Board of Directors of the Company shall have the right to amend,
modify or terminate the Plan at any time without notice; provided, however, that
the then existing rights of all participating
3
<PAGE>
employees shall not be adversely affected thereby, and provided further that,
subject to the provisions of Section 7 above, no such amendment to the Plan
shall, without the approval of the shareholders of the Company, increase the
total number of shares of GENZ stock, GZTR stock or GZMO stock which may be
offered under the Plan.
15. EFFECTIVE DATE AND APPROVALS.
Subject to the approval of the shareholders of the Company, this Plan
shall be effective on March 24, 1999, the date it was adopted by the Board of
Directors.
The Company's obligation to offer, sell and deliver its Shares under
the Plan is subject to (i) the approval of any governmental authority required
in connection with the authorization, issuance or sale of such Shares, (ii)
satisfaction of the listing requirements of any national securities exchange on
which the Shares are then listed and (iii) compliance, in the opinion of the
Company's counsel, with all applicable federal and state securities and other
laws.
16. TERM OF PLAN.
No rights shall be granted under the Plan after March 24, 2009.
17. ADMINISTRATION OF THE PLAN.
The Board of Directors or any committee or person(s) to whom it
delegates its authority (the "Administrator") shall administer, interpret and
apply all provisions of the Plan as it deems necessary. Nothing contained in
this Section shall be deemed to authorize the Administrator to alter or
administer the provisions of the Plan in a manner inconsistent with the
provisions of Section 423 of the Code.
------------
Approved by directors on March 24, 1999
Approved by stockholders on May 26, 1999
4
<PAGE>
Exhibit 10.41
CREDIT AGREEMENT
AMONG
GENZYME CORPORATION,
THE SUBSIDIARY GUARANTORS PARTY HERETO,
THE LENDERS PARTY HERETO,
AND
FLEET NATIONAL BANK,
AS ADMINISTRATIVE AGENT,
ABN AMRO BANK N.V.,
AS SYNDICATION AGENT
AND MELLON BANK, N.A.,
AS DOCUMENTATION AGENT
DATED: NOVEMBER 12, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS AND ACCOUNTING MATTERS--------------------------------------------------------------1
1.1 Certain Defined Terms-------------------------------------------------------------------------------2
1.2 Accounting Terms and Determinations----------------------------------------------------------------18
1.3 Types of Loans/Facilities--------------------------------------------------------------------------19
SECTION 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS------------------------------------------------------19
2.1 Revolving Credit Loans-----------------------------------------------------------------------------19
2.2 Borrowings of Revolving Credit Loans---------------------------------------------------------------20
2.3 Changes of Commitments-----------------------------------------------------------------------------20
2.4 Commitment Fee-------------------------------------------------------------------------------------20
2.5 Lending Offices------------------------------------------------------------------------------------21
2.6 Several Obligations; Remedies Independent----------------------------------------------------------21
2.7 Notes----------------------------------------------------------------------------------------------21
2.8 Optional Prepayments and Conversions or Continuations of Loans-------------------------------------22
SECTION 3. PAYMENTS OF PRINCIPAL AND INTEREST-------------------------------------------------------------22
3.1 Repayment of Loans---------------------------------------------------------------------------------22
3.2 Interest-------------------------------------------------------------------------------------------22
SECTION 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.-----------------------------------------------23
4.1 Payments-------------------------------------------------------------------------------------------23
4.2 Pro Rata Treatment---------------------------------------------------------------------------------24
4.3 Computations---------------------------------------------------------------------------------------25
4.4 Minimum Amounts------------------------------------------------------------------------------------25
4.5 Certain Notices------------------------------------------------------------------------------------25
4.6 Non-Receipt of Funds by the Administrative Agent; Delinquent Lenders-------------------------------26
4.7 Sharing of Payments, Etc.--------------------------------------------------------------------------28
SECTION 5. YIELD PROTECTION, ETC.-------------------------------------------------------------------------29
5.1 Additional Costs-----------------------------------------------------------------------------------29
5.2 Limitation on Types of Loans-----------------------------------------------------------------------31
5.3 Illegality-----------------------------------------------------------------------------------------31
5.4 Treatment of Affected Loans------------------------------------------------------------------------31
5.5 Compensation---------------------------------------------------------------------------------------32
5.6 Rate Selection-------------------------------------------------------------------------------------33
SECTION 6. GUARANTEE--------------------------------------------------------------------------------------33
6.1 Guarantee------------------------------------------------------------------------------------------33
6.2 Obligations Unconditional--------------------------------------------------------------------------34
6.3 Reinstatement--------------------------------------------------------------------------------------35
6.4 Subrogation----------------------------------------------------------------------------------------35
6.5 Remedies-------------------------------------------------------------------------------------------35
6.6 Continuing Guarantee-------------------------------------------------------------------------------35
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
6.7 Rights of Contribution-----------------------------------------------------------------------------36
6.8 Limitation on Guarantee Obligations----------------------------------------------------------------36
SECTION 7. CONDITIONS PRECEDENT---------------------------------------------------------------------------36
7.1 Initial Loan---------------------------------------------------------------------------------------36
7.2 Initial and Subsequent Extensions of Credit--------------------------------------------------------38
SECTION 8. REPRESENTATIONS AND WARRANTIES-----------------------------------------------------------------39
8.1 Existence------------------------------------------------------------------------------------------39
8.2 Financial Condition--------------------------------------------------------------------------------39
8.3 Litigation-----------------------------------------------------------------------------------------40
8.4 No Breach------------------------------------------------------------------------------------------40
8.5 Action---------------------------------------------------------------------------------------------40
8.6 Approvals------------------------------------------------------------------------------------------40
8.7 Use of Credit--------------------------------------------------------------------------------------41
8.8 ERISA----------------------------------------------------------------------------------------------41
8.9 Taxes----------------------------------------------------------------------------------------------41
8.10 Investment Company Act-----------------------------------------------------------------------------41
8.11 Public Utility Holding Company Act-----------------------------------------------------------------41
8.12 Borrowing Agreements and Liens---------------------------------------------------------------------41
8.13 Compliance with Laws Including Environmental and Safety Matters------------------------------------42
8.14 Subsidiaries, Etc.---------------------------------------------------------------------------------42
8.15 Title to Assets; Etc.------------------------------------------------------------------------------42
8.16 Intellectual Property Rights-----------------------------------------------------------------------43
8.17 Year 2000 Compliance-------------------------------------------------------------------------------43
8.18 True and Complete Disclosure-----------------------------------------------------------------------43
SECTION 9. COVENANTS OF THE COMPANY-----------------------------------------------------------------------44
9.1 Financial Statements Etc.--------------------------------------------------------------------------44
9.2 Litigation-----------------------------------------------------------------------------------------45
9.3 Existence, Etc.------------------------------------------------------------------------------------45
9.4 Insurance------------------------------------------------------------------------------------------46
9.5 Prohibition of Fundamental Changes-----------------------------------------------------------------47
9.6 Limitation on Liens--------------------------------------------------------------------------------48
9.7 Indebtedness---------------------------------------------------------------------------------------50
9.8 Investments----------------------------------------------------------------------------------------51
9.9 Financial Covenants--------------------------------------------------------------------------------51
9.10 Lines of Business----------------------------------------------------------------------------------51
9.11 Use of Proceeds------------------------------------------------------------------------------------51
9.12 Certain Obligations Respecting Subsidiaries--------------------------------------------------------51
9.13 Additional Subsidiary Guarantors-------------------------------------------------------------------52
9.14 Subordinated Debt----------------------------------------------------------------------------------53
SECTION 10. EVENTS OF DEFAULT------------------------------------------------------------------------------53
SECTION 11. THE AGENTS-------------------------------------------------------------------------------------55
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
11.1 Appointment, Powers and Immunities.----------------------------------------------------------------55
11.2 Reliance by Agents---------------------------------------------------------------------------------56
11.3 Defaults-------------------------------------------------------------------------------------------57
11.4 Rights as a Lender---------------------------------------------------------------------------------57
11.5 Indemnification------------------------------------------------------------------------------------57
11.6 Non-Reliance on Agents and Other Lenders-----------------------------------------------------------58
11.7 Failure to Act-------------------------------------------------------------------------------------58
11.8 Resignation or Removal of Agents-------------------------------------------------------------------58
11.9 Consents under Other Loan Documents----------------------------------------------------------------59
SECTION 12. MISCELLANEOUS----------------------------------------------------------------------------------59
12.1 Waiver---------------------------------------------------------------------------------------------59
12.2 Notices--------------------------------------------------------------------------------------------59
12.3 Expenses, Etc.-------------------------------------------------------------------------------------60
12.4 Indemnification------------------------------------------------------------------------------------60
12.5 Amendments, Etc.-----------------------------------------------------------------------------------61
12.6 Successors and Assigns-----------------------------------------------------------------------------61
12.7 Assignments and Participations---------------------------------------------------------------------61
12.8 Survival-------------------------------------------------------------------------------------------63
12.9 Captions-------------------------------------------------------------------------------------------64
12.10 Counterparts---------------------------------------------------------------------------------------64
12.11 Governing Law; Submission to Jurisdiction----------------------------------------------------------64
12.12 Waiver of Jury Trial-------------------------------------------------------------------------------64
12.13 Confidentiality------------------------------------------------------------------------------------64
12.14 Compliance with Usury Laws-------------------------------------------------------------------------65
12.15 Replacement Note-----------------------------------------------------------------------------------66
</TABLE>
Schedules:
Schedule 7.1 Indebtedness to be paid at closing
Schedule 8.3 Litigation
Schedule 8.12A Credit Agreements, Indentures, Guarantees,
Letters of Credit, Etc.
Schedule 8.12B Liens Securing Indebtedness
Schedule 8.14 Subsidiaries
Exhibits:
Exhibit A Form of Three-Year Facility Revolving Credit Note
Exhibit B Form of 364-Day Facility Revolving Credit Note
Exhibit C Form of Legal Opinion
Exhibit D Form of Compliance Certificate
Exhibit E Form of Joinder Agreement
<PAGE>
Exhibit F Form of Notice of Assignment
Exhibit G Form of Pledge Agreement
Exhibit H Form of Notice of Borrowing
Exhibit I Form of Notice of Conversion/Continuation
Exhibit J Form of Notice of Prepayment
<PAGE>
CREDIT AGREEMENT
CREDIT AGREEMENT ("Agreement" or "Credit Agreement") dated as of
November 12, 1999 among and between:
GENZYME CORPORATION, a corporation duly organized and validly existing
under the laws of The Commonwealth of Massachusetts (together with its permitted
successors and assigns, the "Company");
Each of the Subsidiaries of the Company identified under the caption
"SUBSIDIARY GUARANTORS" on the signature pages hereto or that may hereafter
become a "Subsidiary Guarantor" pursuant to Section 9.13 hereof (together with
its permitted successors and assigns, individually, a "SUBSIDIARY GUARANTOR"
and, collectively, the "SUBSIDIARY GUARANTORS" and, together with the Company,
the "OBLIGORS");
Each of the lenders identified under the caption "LENDERS" on the
signature pages hereto or that may hereafter become a "Lender" pursuant to
Section 12.7(b) hereof (together with its successors and permitted assigns,
individually, a "LENDER" and, collectively, the "Lenders"); and
FLEET NATIONAL BANK ("FLEET") as administrative agent for the Lenders
(in such capacity, together with the successors in such capacity, the
"ADMINISTRATIVE AGENT");
ABN AMRO BANK N.V. ("ABN AMRO") as syndication agent for the Lenders
(in such capacity, together with the successors in such capacity, the
"Syndication Agent");
MELLON BANK, N.A. ("MELLON") as documentation agent for the Lenders (in
such capacity, together with the successors in such capacity, the "Documentation
Agent" and together with the Administrative Agent and the Syndication Agent, the
"AGENT" or "AGENTS").The Company has requested that the Lenders extend credit to
the Company in an aggregate principal or stated amount not exceeding
$150,000,000; and
To induce the Lenders to extend such credit, the Obligors, the Lenders
and the Agents propose to enter into this Agreement pursuant to which, INTER
ALIA, (1) the Lenders will make loans to the Company and (2) each Subsidiary
Guarantor will guarantee the credit so extended to the Company. Each of the
Obligors expects to derive benefit, directly or indirectly, from the credit so
extended to the Company, both in its separate capacity and as a member of the
integrated group, since the successful operation of each of the Obligors is
dependent on the continued successful performance of the functions of the
integrated group as a whole.
Accordingly, the parties hereto agree as follows:
Section 1. DEFINITIONS AND ACCOUNTING MATTERS.
-1-
<PAGE>
1.1. CERTAIN DEFINED TERMS. As used herein, the following terms shall
have the following meanings (all terms defined in this Section 1.1 or in other
provisions of this Agreement in the singular to have the same meanings when used
in the plural and VICE VERSA).
"ACCOUNTS RECEIVABLE" shall mean, on any date, the net amount of
accounts receivable of Company and its Consolidated Subsidiaries, excluding any
such accounts which are more than 120 days old, after deducting all returns,
discounts and allowances thereon and reserves relating thereto, determined in
accordance with GAAP.
"ADJUSTED LIBO RATE" shall mean, for any LIBOR Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Administrative Agent to be equal to the rate of interest specified in the
definition of "LIBO RATE" in this Section 1.1 for the Interest Period for such
Loan divided by 1 minus the Reserve Requirement (if any) for such Loan for such
Interest Period.
"ADMINISTRATIVE AGENT" shall have the meaning given such term in the
preamble hereto, as it may be amended, modified, or changed from time to time.
"AFFILIATE" shall mean any Person that directly or indirectly controls,
or is under common control with, or is controlled by, the Company and, if such
Person is an individual, any member of the immediate family (including parents,
spouse, children and siblings) of such individual and any trust whose principal
beneficiary is such individual or one or more members of such immediate family
and any Person who is controlled by any such member or trust. As used in this
definition, "CONTROL" (including, with its correlative meanings, "CONTROLLED BY"
and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly,
of power to direct or cause the direction of management or policies (whether
through ownership of securities or partnership or other ownership interests, by
contract or otherwise), or that, in any event, any Person that owns directly or
indirectly securities having 33% or more of the voting power for the election of
directors or other governing body of a corporation or 33% or more of the
partnership or other ownership interests of any other Person will be deemed to
control such corporation, partnership or other Person. Notwithstanding the
foregoing, (a) the Company and its Subsidiaries shall not be Affiliates of each
other and (b) neither any Agent nor any Lender shall be an Affiliate of the
Company or any of its Subsidiaries.
"AGENTS" shall have the meaning given in the preamble hereto, as it may
be amended, modified or changed from time to time.
"APPLICABLE COMMITMENT FEE RATE" shall mean, for any period set forth
below for each Facility, the percentage set forth below opposite such period
under the caption "APPLICABLE COMMITMENT FEE RATE" and under the caption for the
respective Facility, and "APPLICABLE MARGIN" shall mean, for any period set
forth below for either Type of Loan set forth below, the percentage set forth
below opposite such period under the caption "APPLICABLE MARGIN" and under the
caption for such Type of Loan:
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<TABLE>
<CAPTION>
Applicable Margin Applicable Commitment Fee Rate
Period Prime Rate LIBOR Loans Three-Year 364-Day Facility
Loans Facility
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Level I 0.000% 0.875% 0.250% 0.175%
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Level II 0.000% 0.750% 0.225% 0.150%
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Level III 0.000% 0.625% 0.200% 0.125%
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Level IV 0.000% 0.500% 0.175% 0.100%
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
</TABLE>
PROVIDED, HOWEVER, that:
(a) subject to paragraph (b) below, at all times after November
15, 1999 that outstanding Loans exceed 33% of the aggregate
amount of the Commitments and as to which Levels I, II or III
apply, the Applicable Margin for LIBOR Loans shall equal the
sum of the percentage set forth above opposite such period
under the caption "LIBOR Loans," PLUS 0.125%;
(b) notwithstanding paragraph (a) above, at all times after
November 15, 1999 that outstanding Loans exceed 67% of the
aggregate amount of the Commitments AND as to which Levels I,
II or III apply, the Applicable Margin for LIBOR Loans shall
equal the sum of the percentage set forth above opposite such
period under the caption "LIBOR Loans," PLUS 0.250%; and
(c) at all times after November 15, 1999 that outstanding Loans
exceed 67% of the aggregate amount of the Commitments AND as
to which Level IV applies, the Applicable Margin for LIBOR
Loans shall equal 0.625%.
"APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each
Type of Loan, the "Lending Office" of such Lender (or of an affiliate of such
Lender) designated for such Type of Loan on the signature pages hereof or such
other office of such Lender (or of an affiliate of such Lender) as such Lender
may from time to time specify to the Administrative Agent and the Company as the
office by which its Loans of such Type are to be made and maintained.
"BANKRUPTCY CODE" shall mean the Federal Bankruptcy Code of 1978, as
amended from time to time.
"BASLE ACCORD" shall mean the proposals for risk-based capital
framework described by the Basle Committee on Banking Regulations and
Supervisory Practices in its paper entitled "International Convergence of
Capital Measurement and Capital Standards" dated July 1988, as amended, modified
and supplemented and in effect from time to time or any replacement thereof.
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"BUSINESS DAY" shall mean (a) any day on which commercial banks are not
authorized or required to close in Boston, Massachusetts and (b) if such day
relates to the giving of notices or quotes in connection with a borrowing of, a
payment or prepayment of principal of or interest on, a Conversion of or into,
or an Interest Period for, a LIBOR Loan or a notice by the Company with respect
to any such borrowing, payment, prepayment, Conversion or Interest Period, then
any day referred to in clause (a) that is also a day on which dealings in Dollar
deposits are carried out in the London interbank market.
"CAPITAL EXPENDITURES" shall mean, for any period, expenditures
(including, without limitation, the aggregate amount of Capital Lease
Obligations incurred during such period) made by the Company or any of its
Subsidiaries to acquire or construct fixed assets, plant and equipment
(including renewals, improvements and replacements, but excluding repairs)
during such period computed in accordance with GAAP.
"CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, all obligations
of such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) property to the extent such obligations are required
to be classified and accounted for as a capital lease on a balance sheet of such
Person under GAAP, and, for purposes of this Agreement, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP.
"CAPITAL STOCK" shall mean capital stock of the Company that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, to shares of capital stock of any other class of the Company.
"CASH EQUIVALENTS" shall mean any interest bearing investment of
Company and its Wholly Owned Subsidiaries which meets the definition of a "cash
equivalent" under GAAP (i.e., purchased with a remaining maturity of 90 days or
less). Such investments shall be at least investment grade (A1/P1 for commercial
paper, BBB or better for bonds and similar investments).
"CLOSING DATE" the date upon which the initial Loans hereunder are
made, provided, however, that such date shall be no earlier than the Prior
Credit Agreement Termination Date.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMMITMENTS" shall mean the Revolving Credit Commitments.
"COMPANY" shall have the meaning given in the preamble, and its
successors and permitted assigns hereunder.
"COMPLIANCE CERTIFICATE" shall mean the compliance certificate provided
for under Section 9.1(c)(ii) in substantially the form of EXHIBIT D.
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<PAGE>
"CONSOLIDATED" shall mean, when used with reference to any term, that
term (or the term "combined" in the case of partnerships, joint ventures and
Affiliates that are not Subsidiaries) as applied to the accounts of Company (or
any other specified Person) and all of its Subsidiaries (or other specified
Persons) or such of its Subsidiaries as may be specified, consolidated (or
combined) in accordance with GAAP and with appropriate deductions for minority
interests in Subsidiaries, if required by GAAP.
"CONSOLIDATED EBITDA" shall mean, for any period, the sum, for the
Company, of the following: (a) Consolidated Operating Income for such period
PLUS (b) depreciation and amortization, but only to the extent deducted in
determining Consolidated Operating Income for such period.
"CONSOLIDATED DEBT COVERAGE RATIO" shall mean, at any date, the ratio,
for the Company and its Consolidated Subsidiaries, of (a) the sum of (i)
Unrestricted Cash on such date plus (ii) Marketable Investments on such date to
(b) Consolidated Funded Debt on such date.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" shall mean, for any period,
the ratio of (a) the sum of (i) Consolidated EBITDA for such period LESS (ii)
the aggregate amount of Capital Expenditures made during such period LESS (iii)
the amount of the taxes paid during such period LESS (iv) the aggregate amount
of all Dividend Payments made during such period to (b) all Interest expense for
such period, PROVIDED, HOWEVER, that the Company may designate with respect to
one project for improvements to new leased headquarters and with respect to any
consecutive fiscal quarters that clause (ii) above shall consist instead of the
aggregate amount of Capital Expenditures made during such period in excess of
the lesser of (x) $12,000,000; or (y) the aggregate amount incurred by the
Company during those consecutive fiscal quarters for expenditures for such
project for improvements to new leased headquarters for the Company.
"CONSOLIDATED FUNDED DEBT" shall mean, at any time, the outstanding
balance of all Indebtedness in respect of borrowed money, Capital Lease
Obligations, letters of credit and trade acceptances for the Company and its
Consolidated Subsidiaries.
"CONSOLIDATED NET INCOME" shall mean, for any period, net income (or
loss) for the Company and its Consolidated Subsidiaries (determined in
accordance with GAAP), PROVIDED, HOWEVER, that Consolidated Net Income shall not
include amounts included in computing net income (or loss) in respect of (a) the
write-up of assets (other than Marketable Investments) after December 31, 1995
and (b) extraordinary and non-recurring gains or losses.
"CONSOLIDATED NET WORTH" shall mean, as at any date, the shareholder's
equity of the Company and its Consolidated Subsidiaries.
"CONSOLIDATED OPERATING INCOME" shall mean, for any period, the
Consolidated Net Income of the Company for such period, PROVIDED, HOWEVER, that,
to the extent the following items have been included in determining Consolidated
Net Income, they shall NOT be considered in computing Consolidated Operating
Income: provision for income taxes, interest expense, equity in the operating
results of unconsolidated subsidiaries (including partnerships, joint ventures
and Affiliates but only to the extent that such results represent noncash,
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<PAGE>
nonoperating items) and other 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.
"CONSOLIDATED QUICK RATIO" shall mean, at any date, the ratio, for the
Company and its Consolidated Subsidiaries, of (a) the sum of (i) Unrestricted
Cash on such date PLUS (ii) Marketable Investments on such date PLUS (iii)
Accounts Receivable on such date to (b) Current Liabilities on such date.
"CONSOLIDATED TOTAL LIABILITIES" shall mean, as at any date, the sum,
for the Company and its Consolidated Subsidiaries, of all Indebtedness and other
liabilities, in each case, that should be classified as liabilities on a balance
sheet, including, without limitation, all reserves and all deferred taxes and
other deferred items.
"CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the
continuation pursuant to Section 2.8 hereof of a LIBOR Loan from one Interest
Period to the next Interest Period.
"CONVERT", "CONVERSION" and "CONVERTED" shall refer to a conversion
pursuant to Section 2.8 hereof of one Type of Loans into another Type of Loans,
which may be accompanied by the transfer by a Lender (at its sole discretion,
but subject to Section 5.1(d) hereof) of a Loan from one Applicable Lending
Office to another.
"CURRENT LIABILITIES" shall mean any liability that in accordance with
GAAP would be classified as such.
"DEFAULT" shall mean an Event of Default or an event that with notice
or lapse of time or both would become an Event of Default.
"DIVIDEND PAYMENT" shall mean dividends (in cash, Property or
obligations) on, or other payments or distributions on account of, or the
setting apart of money for a sinking or other analogous fund for, or the
purchase, redemption, retirement or other acquisition of, any shares of any
class of stock of, or any partnership or other equity interest issued by, the
Company or of any warrants, options or other rights to acquire the same (or to
make any payments to any Person, such as "phantom stock" payments, where the
amount thereof is calculated with reference to the fair market or equity value
of the Company or any of its Subsidiaries), but excluding dividends payable
solely in shares of common stock of the Company.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, any
written or oral notice, claim, demand or other communication (collectively, a
"claim") by any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, governmental response costs, damages to
natural resources or other Property, personal injuries, fines or penalties
arising out of, based on or resulting from (a) the presence, or Release into the
environment, of any Hazardous Material at any location, whether or not owned by
such Person, or (b) circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law. The term
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<PAGE>
"Environmental Claim" shall include, without limitation, any claim by any
governmental authority for enforcement, cleanup, removal, response, remedial or
other actions or damages pursuant to any applicable Environmental Law, and any
claim by any third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from the presence of
Hazardous Materials or arising from alleged injury or threat of injury to the
environment.
"ENVIRONMENTAL LAWS" shall mean any and all present and future Federal,
state, local and foreign laws, rules or regulations, and any orders or decrees,
in each case as now or hereafter in effect, relating to the regulation or
protection of the environment or to emissions, discharges, releases or
threatened releases of pollutants, contaminants or toxic or hazardous substances
or wastes into the indoor or outdoor environment, including, without limitation,
ambient air, soil, surface water, ground water, wetlands, land or subsurface
strata, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants
or toxic or hazardous substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA AFFILIATE" shall mean any corporation or trade or business that
is a member of any group of organizations (a) described in Section 414(b) or (c)
of the Code of which the Company is a member and (b) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the Company
is a member.
"EVENT OF DEFAULT" shall have the meaning assigned to such term in
Section 10 hereof.
"FACILITY" shall have the meaning given in Section 1.3 hereof.
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, PROVIDED that (a) if the day for which such rate is to
be determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day and (b) if such rate is not so
published for any Business Day, the Federal Funds Rate for such Business Day
shall be the average rate charged to the Administrative Agent on such Business
Day on such transactions as determined by the Administrative Agent.
"FUNDAMENTAL CHANGE" shall mean any of the following:
(i) a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), becoming the "beneficial owner" (as defined in Rule 13d-3
under the exchange Act) of Voting Shares of the
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<PAGE>
Company entitled to exercise more than 50% of the total voting power of all
outstanding Voting Shares of the Company (including any right to acquire Voting
Shares that are not then outstanding of which such person or group is deemed the
beneficial owner); or
(ii) a change in the Board of Directors in which the
individuals who constituted the Board of Directors at the beginning of the
two-year period immediately preceding such change (together with any other
director whose election by the Board of Directors or whose nomination for
election by the shareholders of the Company was approved by a vote of at least
two-thirds of the directors then in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
directors then in office; or
(iii) any consolidation of the Company with, or merger of
the Company into, any other Person, any merger of another Person into the
Company, or any sale or transfer of all or substantially all of the assets of
the Company to another Person (other than (w) a merger which does not result in
any reclassification, conversion, exchange or cancellation of outstanding shares
of Capital Stock, (x) a merger which is effected solely to change the
jurisdiction of incorporation of the Company, (y) any consolidation with or
merger of the Company into a Wholly Owned Subsidiary of the Company, or any sale
or transfer by the Company of all or substantially all of its assets to one or
more of its Wholly Owned Subsidiaries, in any one transaction or a series of
transactions, provided, in any such case, that the resulting corporation or each
such Wholly Owned Subsidiary assumes the Obligations under the Loan Documents;
or (z) a merger or consolidation in which the holders of the Company's Voting
Shares immediately prior to such event continue to hold more than 50% of the
Voting Shares outstanding immediately after such event).
"GAAP" shall mean generally accepted accounting principles applied on a
basis consistent with those that, in accordance with the last sentence of
Section 1.2(a) hereof, are to be used in making the calculations for purposes of
determining compliance with this Agreement.
"GUARANTEE" shall mean a guarantee, an endorsement, a contingent
agreement to purchase or to furnish funds for the payment or maintenance of, or
otherwise to be or become contingently liable under or with respect to, the
Indebtedness, other obligations, net worth, working capital or earnings of any
Person, or a guarantee of the payment of dividends or other distributions upon
the stock or equity interests of any Person, or an agreement to purchase, sell
or lease (as lessee or lessor) Property, products, materials, supplies or
services primarily for the purpose of enabling a debtor to make payment of such
debtor's obligations or an agreement to assure a creditor against loss, and
including, without limitation, causing a bank or other financial institution to
issue a letter of credit or other similar instrument for the benefit of another
Person, but excluding endorsements for collection or deposit in the ordinary
course of business. The terms "Guarantee" and "Guaranteed" used as a verb shall
have a correlative meaning.
"GUARANTEED OBLIGATIONS" shall have the meaning assigned to such term
in Section 6.1 hereof.
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<PAGE>
"HAZARDOUS MATERIAL" shall mean, collectively, (a) any petroleum or
petroleum products, explosives, radioactive materials, asbestos, urea
formaldehyde foam insulation, and transformers or other equipment that contain
polychlorinated biphenyls ("PCB's") in concentrations that are regulated under
the Toxic Substances Control Act, as amended, or any other Environmental Law,
(b) any chemicals or other materials or substances that are now or hereafter
become defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances", "toxic pollutants",
"contaminants", "pollutants" or words of similar import under any Environmental
Law and (c) any other chemical or other material or substance, exposure to which
is now or hereafter prohibited, limited or regulated under any Environmental
Law.
"INDEBTEDNESS" shall mean, for the Company and its Consolidated
Subsidiaries: (a) obligations created, issued or incurred by such Person for
borrowed money (whether by loan, the issuance and sale of debt securities or the
sale of Property to another Person subject to an understanding or agreement,
contingent or otherwise, to repurchase such Property from such Person); (b)
obligations of such Person to pay the deferred purchase or acquisition price of
Property or services, other than trade accounts payable (other than for borrowed
money) arising, and accrued expenses incurred, in the ordinary course of
business so long as such trade accounts payable are payable within 120 days of
the date the respective goods or services are delivered or rendered; (c)
Indebtedness of others secured by a Lien on the Property of such Person, whether
or not the respective indebtedness so secured has been assumed by such Person;
(d) obligations of such Person, contingent or otherwise, in respect of letters
of credit, bankers' acceptances or similar instruments issued or accepted by
banks and other financial institutions for account of such person; (e) Capital
Lease Obligations of such Person; and (f) Guarantees by such Person of
Indebtedness of others.
"INTELLECTUAL PROPERTY" shall mean "Intellectual Property," as defined
in Section 101(60) of the Bankruptcy Code, now or hereafter owned by Company or
any of its Subsidiaries, together with all of the following property now or
hereafter owned by Company or any of its Subsidiaries: all domestic and foreign
patents and patent applications; inventions, discoveries and improvements,
whether or not patentable; trademarks, trademark applications and registrations;
service marks, service mark applications and registrations; copyrights,
copyright applications and registrations; all licenses therefor; trade secrets
and all other proprietary information.
"INTEREST" shall mean, for any period, the sum, for the Company and its
Consolidated Subsidiaries, of the following: (a) all interest in respect of
Indebtedness (including, without limitation, the interest component of any
payments in respect of Capital Lease Obligations) accrued or capitalized during
such period (whether or not actually paid during such period); and (b) all other
amounts that would be accrued or capitalized during such period as "interest
expense" in accordance with GAAP.
"INTEREST PERIOD" shall mean: with respect to any LIBOR Loan, each
period commencing on the date such LIBOR Loan is made or Converted from a Loan
of another Type or the day after the last day of the next preceding Interest
Period for such Loan and ending on the numerically corresponding day in the
first, second, third or sixth calendar month thereafter, as the Company
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may select as provided in Section 4.5 hereof, except that each Interest Period
that commences on the last Business Day of a calendar month (or on any day for
which there is no numerically corresponding day in the appropriate subsequent
calendar month) shall end on the last Business Day of the appropriate subsequent
calendar month; PROVIDED, that, notwithstanding the foregoing:
(i) (a) if any Interest Period for any 364-Day Facility
Revolving Credit Loan would otherwise end after the 364-Day Facility
Revolving Credit Commitment Termination Date, such Interest Period
shall not be available hereunder; and (b) if any Interest Period for
any Three-Year Facility Revolving Credit Loan would otherwise end after
the Three-Year Facility Revolving Credit Commitment Termination Date,
such Interest Period shall not be available hereunder;
(ii) each Interest Period that would otherwise end on a day
that is not a Business Day shall end on the next succeeding Business
Day (or, if such next succeeding Business Day falls in the next
succeeding calendar month, on the next preceding Business Day); and
(iii) notwithstanding clauses (i) and (ii) above, no Interest
Period for any LIBOR Loan shall have a duration of less than one month
and, if the Interest Period for any LIBOR Loan would otherwise be a
shorter period, such Loan shall not be available as a LIBOR Loan
hereunder for such period.
"INVESTMENT" shall mean, for any Person: (a) the acquisition (whether
for cash, Property, services or securities or otherwise) of capital stock,
bonds, notes, debentures, partnership or other ownership interests or other
securities of any other Person or any agreement to make any such acquisition
(including, without limitation, any "short sale" or any sale of any securities
at a time when such securities are not owned by the Person entering into such
sale); (b) the making of any deposit with, or advance, loan or other extension
of credit to, any other Person (including the purchase of Property from another
Person subject to an understanding or agreement, contingent or otherwise, to
resell such Property to such Person), but excluding any such advance, loan or
extension of credit arising in connection with the sale of inventory or supplies
by such Person in the ordinary course of business so long as such advance, loan
or extension of credit is made on terms (including as to maturity) consistent
with those terms offered by the Company on the date hereof; and (c) the entering
into of any Guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of any other Person and (without duplication)
any amount committed to be advanced, lent or extended to such Person.
"LEVEL I PERIOD" shall mean any period, other than a Level II Period,
Level III Period, or Level IV Period.
"LEVEL II PERIOD" shall mean any period (a) from and including the
Business Day immediately following the Business Day on which a senior financial
officer of the Company shall have delivered to the Administrative Agent a
Compliance Certificate, together with the related financial statements referred
to in Section 9.1 hereof, demonstrating in reasonable detail that the
Consolidated Debt Coverage Ratio, as of the last day of the fiscal quarter of
the
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Company most recently ended, is greater than or equal to 1.0 to 1.0, but less
than 1.5 to 1.0, to but excluding the next succeeding Reporting Date and (b)
during which no Event of Default shall have occurred and be continuing.
"LEVEL III PERIOD" shall mean any period, other than a Level IV Period,
(a) from and including the Business Day immediately following the Business Day
on which a senior financial officer of the Company shall have delivered to the
Administrative Agent a Compliance Certificate, together with the related
financial statements referred to in Section 9.1 hereof, demonstrating in
reasonable detail that the Consolidated Debt Coverage Ratio, as of the last day
of the fiscal quarter of the Company most recently ended, is greater than or
equal to 1.5 to 1.0, to but excluding the next succeeding Reporting Date and (b)
during which no Event of Default shall have occurred and be continuing.
"LEVEL IV PERIOD" shall mean any period (a) from and including the
Business Day immediately following the Business Day on which a senior financial
officer of the Company shall have delivered to the Administrative Agent a
Compliance Certificate, together with the related financial statements referred
to in Section 9.1 hereof, demonstrating in reasonable detail that the
Consolidated Debt Coverage Ratio, as of the last day of the fiscal quarter of
the Company most recently ended, is greater than or equal to 1.5 to 1.0, AND for
which the Administrative Agent has received written confirmation from the
respective debt rating company that the Senior Unsecured Debt Rating of the
Company, as of the last day of the fiscal quarter of the Company most recently
ended, is at least A- with regard to Standard & Poor's, A3 with regard to
Moody's Investors Service, or A- with regard to Duff & Phelps Credit Rating Co.,
to but excluding the next succeeding Reporting Date and (b) during which no
Event of Default shall have occurred and be continuing.
"LIBO RATE" shall mean, with respect to any LIBOR Loan for any Interest
Period therefor, the simple average (rounded upwards, if necessary, to the
nearest 1/32 of 1%), as determined by the Administrative Agent, of the rates per
annum which appear on the Telerate page 3750 as of 11:00 a.m. London time on the
day that is two Business Days prior to the first day of such Interest Period
(provided, that if the rate described above does not appear on the Telerate
System on any applicable interest determination date, then at the rates per
annum quoted to the Administrative Agent at approximately 11:00 a.m. London time
(or as soon thereafter as practicable) on the date two Business Days prior to
the first day of such Interest Period for the offering by leading banks in the
London interbank market) of Dollar deposits having a term comparable to such
Interest Period and in an amount comparable to the principal amount of the LIBOR
Loan to be made by the Lenders for such Interest Period.
"LIBOR LOANS" shall mean loans bearing interest at the rate determined
under Section 3.2(b).
"LIEN" shall mean, with respect to any Property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
property. For purposes of this Agreement and the other Loan Documents, a Person
shall be deemed to own subject to a Lien any Property that it has acquired or
holds subject to the interest of a vendor or lessor under any
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conditional sale agreement, capital lease or other title retention agreement
(other than an operating lease) relating to such Property.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Pledge
Agreement and all other agreements, instruments and documents entered into
pursuant hereto or thereto as such may be amended, modified or changed from time
to time.
"LOANS" shall mean Prime Rate Loans and LIBOR Loans.
"MARGIN STOCK" shall mean "margin stock" within the meaning of
Regulations U and X.
"MARKETABLE INVESTMENTS" shall mean any interest-bearing debt
obligations owned by Company and its Wholly-Owned Subsidiaries (excluding
directors' qualifying shares and items included as Cash Equivalents) which meet
the definition of marketable securities under GAAP. Such amounts shall exclude
common or preferred stock. Such securities shall include obligations issued by
the U.S. Treasury and other agencies of the U.S. government, corporate bonds,
bank notes, mortgage and asset backed securities, finance company securities and
auction rate preferred stocks. Such securities shall be rated investment grade
(BBB or better for bonds or similar securities, A1/P1 for commercial paper and
notes) and shall otherwise be reasonably liquid investments.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a)
the business, operations or financial condition or material Property of the
Company and its Subsidiaries, taken as a whole, (b) the validity or
enforceability of any of the Loan Documents or the rights and remedies of the
Lenders and the Agents thereunder or (c) the ability of the Obligors to perform
their obligations hereunder including the timely payment of the principal of or
interest on the Loans or other amounts in connection therewith.
"MATERIAL SUBSIDIARY" shall mean any Subsidiary of the Company, the
value of the assets of which exceeds five percent (5%) of the consolidated
assets of the Company and its Subsidiaries, taken as a whole, and, for the
purposes of Sections 6 and 9.13 hereof means such a Subsidiary of the Company
that is organized under the laws of the United States, provided that Genzyme
Securities Corporation shall not be deemed to be a Material Subsidiary for
purposes of Sections 6 and 9.13 hereof.
"MULTIEMPLOYER PLAN" shall mean a multiemployer plan defined as such in
Section 3(37) of ERISA to which contributions have been made by the Company or
any ERISA Affiliate and that is covered by Title IV of ERISA.
"NOTES" shall mean the Revolving Credit Notes.
"OBLIGATIONS" shall mean any and all of the Revolving Credit Loans,
including any principal, interest, charges, fees, costs and expenses (including
interest arising after the filing of any bankruptcy petition and notwithstanding
any law to the contrary) and all other obligations liabilities and indebtedness
of the Company or any Obligor of any kind, nature or description arising under
this Agreement, the Notes or any other Loan Documents.
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"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof) and
shall include any syndicate or group which would be deemed to be a "person"
under Section 13(d)(3) of the Exchange Act.
"PLAN" shall mean an employee benefit or other plan established or
maintained by the Company or any ERISA Affiliate and that is covered by Title IV
of ERISA, other than a Multiemployer Plan.
"PLEDGE AGREEMENT" shall mean the Pledge Agreement provided under
Section 7.1(f) as the same such shall be modified, amended and supplemented from
time to time.
"POST-DEFAULT RATE" shall mean a rate per annum equal to 4% PLUS the
interest rate for a Loan as provided in one of the lettered paragraphs of
Section 3.2 for a Level I Period.
"PRIME RATE" shall mean for any day the rate equal to the higher from
time to time of (A) the rate of interest announced by the Administrative Agent
at the Principal Office from time to time as its prime rate; and (B) a rate
equal to 1/2 of 1% per annum above the weighted average of the rates on
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as determined on any day by the
Administrative Agent.
"PRIME RATE LOANS" shall mean loans bearing interest at the rate
determined under Section 3.2(a).
"PRINCIPAL OFFICE" shall mean the principal office of Fleet, located on
the date hereof at One Federal Street, Boston, Massachusetts 02110, or such
other principal office of the Administrative Agent, after written notice by the
Administrative Agent.
"PRIOR CREDIT AGREEMENT TERMINATION DATE" shall mean the date specified
in the notice given by the Company to the Administrative Agent under that
certain Credit Agreement dated as of November 14, 1996 among the Company, the
Subsidiary Guarantors thereto, the Lenders thereto, Fleet, as Administrative
Agent, and BankBoston, N.A., as Documentation Agent (the "Prior Credit
Agreement") for the termination of the Revolving Credit Commitments (as defined
under the Prior Credit Agreement) under Sections 2.3 and 4.5 of the Prior Credit
Agreement, PROVIDED, HOWEVER, that the Prior Credit Agreement Termination Date
shall not be earlier than three (3) Business Days (as defined under the Prior
Credit Agreement) after the date of such notice.
"PROPERTY" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"PURCHASE MONEY INDEBTEDNESS" shall mean Indebtedness incurred by a
Person to purchase machinery, equipment and other fixed assets, but only (i) if
the amount of such
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Indebtedness is not greater than 100% of the invoice amount of such purchased
machinery, equipment and other fixed assets, and (ii) such Indebtedness, if
secured, is secured by a security interest in only the purchased machinery,
equipment and other fixed assets and such Person has not granted a lien or
security interest to secure such Indebtedness on any other property of such
Person other than such purchased fixed assets; and (iii) such purchased fixed
assets do not constitute all or substantially all of the fixed assets of any
Person or any division of any Person.
"QUARTERLY DATES" shall mean the last Business Day of March, June,
September and December of each year, the first of which shall be the first such
day after the date hereof.
"REGULATIONS A, D, U AND X" shall mean, respectively, Regulations A, D,
U and X of the Board of Governors of the Federal Reserve System (or any
successor), as the same may be modified and supplemented and in effect from time
to time.
"REGULATORY CHANGE" shall mean, with respect to any Lender, any change
after the date hereof in Federal, state or foreign law or regulations
(including, without limitation, Regulation D) or the adoption or making after
such date of any interpretation, directive or request applying to a class of
banks including such Lender of or under any Federal, state or foreign law or
regulations (whether or not having the force of law and whether or not failure
to comply therewith would be unlawful) by any court or governmental or monetary
authority charged with the interpretation or administration thereof.
"RELEASE" shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor environment, including, without limitation, the movement
of Hazardous Materials through ambient air, soil, surface water, ground water,
wetlands, land or subsurface strata.
"REPORTING DATE" shall mean the first to occur of (i) the Business Day
following the Business Day that the Administrative Agent receives a Compliance
Certificate of the Company providing the information required to determine
whether a period is a Level I Period, Level II Period, Level III Period or Level
IV Period and (ii) the first Business Day after the date on which the quarterly
or annual financial statement and Compliance Certificate is required to be
delivered to the Lenders pursuant to Section 9.1(a) or (b) and (c).
"REQUIRED LENDERS" shall mean Lenders having at least 51% of the
aggregate amount of the Commitments or, if the Commitments shall have
terminated, Lenders holding at least 51% of the aggregate unpaid principal
amount of the Loans.
"RESERVE REQUIREMENT" shall mean, for any Interest Period for a LIBOR
Loan, the average maximum rate at which reserves (including, without limitation,
any marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding one billion Dollars
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any Regulatory Change with respect to (i) any category of liabilities
that includes deposits by
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reference to which the LIBOR Loan is to be determined or (ii) any category of
extensions of credit or other assets that includes LIBOR Loans.
"REVOLVING CREDIT COMMITMENT" shall mean, for each Revolving Credit
Lender, the sum of such Lender's Three-Year Facility Revolving Credit Commitment
and 364-Day Facility Revolving Credit Commitment.
"REVOLVING CREDIT COMMITMENT PERCENTAGE" shall mean, with respect to
any Revolving Credit Lender, the ratio of (a) the amount of the Revolving Credit
Commitment of such Lender to (b) the aggregate amount of the Revolving Credit
Commitments of all of the Lenders.
"REVOLVING CREDIT LENDERS" shall mean the Lenders from time to time
holding Revolving Credit Loans and/or Revolving Credit Commitments.
"REVOLVING CREDIT LOANS" shall mean the loans provided for in Section
2.1 hereof, which may be Prime Rate Loans and/or LIBOR Loans, and which may be
Three-Year Facility Revolving Credit Loans or 364-Day Facility Revolving Credit
Loans.
"REVOLVING CREDIT NOTES" shall mean the promissory notes provided for
by Section 2.7(a) hereof and all promissory notes delivered in substitution or
exchange for any thereof, in each case as the same shall be modified and
supplemented and in effect from time to time.
"SENIOR UNSECURED DEBT RATING" shall mean, for any date, the senior
unsecured debt rating, as rated by Standard & Poor's, Moody's Investor Service,
or Duff & Phelps Credit Rating Co. as of such date.
"SUBORDINATED DEBT" means (1) the Company's Convertible Note, issued
February 28, 1997, in the original aggregate principal amount of $13 million,
(2) the Company's Convertible Debentures, issued August 29, 1997, in the
original aggregate principal amount of $20 million, (3) the Company's
Convertible Notes, issued May 19, 1998, in the original aggregate principal
amount of $250 million, (4) unsecured Indebtedness of the Company or a
Subsidiary of the Company which, by its terms, is explicitly subordinated to the
prior payment in full of the Obligations to at least the following extent: (a)
no payments of principal of (or premium, if any) or interest on (or otherwise
due in respect of) such Indebtedness may be permitted for so long as any Default
or Event of Default in the payment of principal (or premium, if any) or interest
on the Loans exists; (b) in the event that any other Default or Event of Default
exists, upon notice by the Required Lenders, the Administrative Agent shall have
the right to give notice to the Company and the holders of such Indebtedness (or
agents therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on (or otherwise due in respect of) such
Indebtedness may be made for a period of 179 days from the date of such notice
unless, prior to such time, such Default or Event of Default is cured or waived;
PROVIDED, HOWEVER, that only one such notice of a payment blockage shall be
effective during any 365 consecutive day period and PROVIDED, FURTHER, that no
such other Default or Event of Default that existed upon first delivery of such
a notice shall be the basis for a subsequent notice of payment blockage unless
such Default or Event of Default shall have been cured or waived for a period of
180 consecutive days; (c) such Indebtedness may not (i) provide for payments of
principal of
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such Indebtedness at the stated maturity thereof or by way of a sinking fund
applicable thereto or by way of any mandatory redemption, defeasance, retirement
or repurchase thereof by the Company or any Subsidiary (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances but not including any exchange, conversion or payment with equity
or other Subordinated Debt), in each case prior to the Three-Year Facility
Revolving Credit Commitment Termination Date or (ii) permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company or
any Subsidiary) of such other Indebtedness at the option of the holder thereof
prior to the Three-Year Facility Revolving Credit Commitment Termination Date
other than by conversion to Capital Stock or other equity of the Company or
other Subordinated Debt; PROVIDED, HOWEVER, in the case of either (i) or (ii),
such Indebtedness may provide for payment prior to the stated maturity of such
Indebtedness if any event which causes, or (with the giving of any notice or the
lapse of time or both) permits the holder or holders of such Indebtedness (or a
trustee or agent on behalf of such holder or holders) to cause such Indebtedness
to become due, or to be prepaid (whether by redemption, purchase, offer to
purchase or otherwise), prior to its stated maturity would also cause a Default
or an Event of Default (subject, however, to the limitations of clauses (a),
(b), (d) and (e) hereof); (d) the terms of such Indebtedness shall provide, to
the extent not prohibited in the Trust Indenture Act of 1939, as amended, that
no action to enforce the payment thereof or to exercise any remedy with respect
thereto shall occur unless the holders of such Indebtedness (or agents therefor)
give the Administrative Agent notice of such default and thereafter no such
enforcement action or exercise of remedies shall occur until 180 days shall have
elapsed from the date of such notice without the cure or waiver of such default,
provided that such standstill period shall continue for as long as a Default or
an Event of Default under clause (a) above exists; provided, further, however,
that the restrictions described in this clause (d) shall not apply if the event
which gives rise to the right to enforce such payment or exercise such remedy
triggers a Default or an Event of Default (subject, however, to the limitations
of clauses (a), (b), (c), and (e); and (e) such Indebtedness shall further
provide that, upon any bankruptcy, insolvency, liquidation or similar case or
proceeding relative to the Company or any of its Subsidiaries, or upon the
realization of any amounts by the holders of the Indebtedness (or the agents
therefor) resulting from an action under clause (d) above, the Obligations shall
first be paid in full to the Administrative Agent or such payment shall have
been provided for to the satisfaction of the Required Lenders before any payment
or distribution is made to or retained by the holders of the Indebtedness (or
the agents therefor), (5) any other Indebtedness of the Company or its
Subsidiaries, incurred after the date hereof, containing subordination terms,
which are specifically consented to in writing by the Required Lenders and (6)
any refinancing of Subordinated Debt incurred pursuant to subsections (1), (2),
(3), (4) or (5), in which (x) the principal amount of Subordinated Debt
resulting from such refinancing does not exceed the sum of (i) the principal
amount of the Subordinated Debt so refinanced plus (ii) customary fees and
expenses incurred in connection with such refinancing and (y) the Indebtedness
resulting from such refinancing satisfies the criteria for Subordinated Debt
hereunder.
"SUBSIDIARY" shall mean, with respect to any Person, any corporation,
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions of such corporation, partnership or other entity (irrespective of
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whether or not at the time securities or other ownership interests of any other
class or classes of such corporation, partnership or other entity shall have or
might have voting power by reason of the happening of any contingency), or of
which at least a majority of the limited partnership interests or other similar
ownership interests issued by any limited partnership or other similar entity,
is at the time directly or indirectly owned or controlled by such Person or one
or more Subsidiaries of such Person or by such Person and one or more
Subsidiaries of such Person.
"TAXES" shall mean any present or future tax (including, without
limitation, any income, documentary, sales, stamp, registration, property or
excise tax), assessment or other charge, levy, impost, fee, compulsory loan,
charge or withholding.
"364-DAY FACILITY REVOLVING CREDIT COMMITMENT" shall mean, for each
Revolving Credit Lender, the obligation of such Lender to make 364-Day Facility
Revolving Credit Loans in an aggregate principal amount at any one time
outstanding up to but not exceeding (a) in the case of any such Lender
originally party hereto, the sum of (i) the amount set opposite the name of such
Lender on the signature pages hereto under the caption "364-Day Facility
Revolving Credit Commitment" plus (ii) the aggregate amount of 364-Day Facility
Revolving Credit Commitments acquired by such Lender from other Lenders pursuant
to Section 12.7(b) hereof minus (iii) the aggregate amount of 364-Day Facility
Revolving Credit Commitments transferred by such Lender to one or more other
Lenders pursuant to Section 12.7(b) hereof and (b) in the case of any such
Lender that was not originally party hereto, (i) the aggregate amount of 364-Day
Facility Revolving Credit Commitments acquired by such Lender from other Lenders
pursuant to Section 12.7(b) hereof minus (ii) the aggregate amount of 364 Day
Facility Revolving Credit Commitments transferred by such Lender to one or more
other Lenders pursuant to Section 12.7(b) hereof, in each case, as such
obligation may be reduced from time to time pursuant to Section 2.3 hereof.
"364-DAY FACILITY REVOLVING CREDIT COMMITMENT TERMINATION DATE" shall
be November 10, 2000.
"364-DAY FACILITY REVOLVING CREDIT LOANS" shall have the meaning given
in Section 2.1(b) hereof.
"THREE-YEAR FACILITY REVOLVING CREDIT COMMITMENT" shall mean, for
each Revolving Credit Lender, the obligation of such Lender to make
Three-Year Facility Revolving Credit Loans in an aggregate principal amount
at any one time outstanding up to but not exceeding (a) in the case of any
such Lender originally party hereto, the sum of (i) the amount set opposite
the name of such Lender on the signature pages hereto under the caption
"Three-Year Facility Revolving Credit Commitment" plus (ii) the aggregate
amount of Three-Year Facility Revolving Credit Commitments acquired by such
Lender from other Lenders pursuant to Section 12.7(b) hereof minus (iii) the
aggregate amount of Three-Year Facility Revolving Credit Commitments
transferred by such Lender to one or more other Lenders pursuant to Section
12.7(b) hereof and (b) in the case of any such Lender that was not originally
party hereto, (i) the aggregate amount of Three-Year Facility Revolving
Credit Commitments acquired by such Lender from other Lenders pursuant to
Section 12.7(b) hereof minus (ii) the aggregate amount of Three-Year
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Facility Revolving Credit Commitments transferred by such Lender to one or
more other Lenders pursuant to Section 12.7(b) hereof, in each case, as such
obligation may be reduced from time to time pursuant to Section 2.3 hereof.
"THREE-YEAR FACILITY REVOLVING CREDIT COMMITMENT TERMINATION DATE"
shall be November 12, 2002.
"THREE-YEAR FACILITY REVOLVING CREDIT LOANS" shall have the meaning
given in Section 2.1(a) hereof.
"TYPE" shall have the meaning given such term in Section 1.3 hereof.
"UNRESTRICTED CASH" shall mean cash and Cash Equivalents of the Company
and its Wholly Owned Subsidiaries that are readily available to Company and not
subject to any limitation or restriction on their use by the Company.
"U.S. PERSON" shall mean a citizen or resident of the United States of
America, a corporation, partnership or other entity created or organized in or
under any laws of the United States of America or any State thereof, or any
estate or trust that is subject to Federal income taxation regardless of the
source of its income.
"VOTING SHARES" shall mean all outstanding shares of any class or
series (however designated) of Capital Stock entitled to vote generally in the
election of members of the Board of Directors of the Company.
"WHOLLY OWNED SUBSIDIARY" shall mean, with respect to any Person, any
corporation, partnership or other entity to which all of the equity securities
or other ownership interests (other than, in the case of a corporation,
directors' qualifying shares or, in the case of a limited partnership, not more
than 1% of the aggregate partnership interests issued by such limited
partnership) are directly or indirectly owned or controlled by such Person or
one or more Wholly Owned Subsidiaries of such Person or by such Person and one
or more Wholly Owned Subsidiaries of such Person.
1.2. 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 the Lenders hereunder shall (unless
otherwise disclosed to the Lenders in writing at the time of delivery
thereof in the manner described in subsection (b) below) be prepared,
in accordance with GAAP applied on a basis consistent with those used
in the preparation of the latest annual or quarterly financial
statements furnished to the Lenders hereunder (which, prior to the
delivery of the first annual or quarterly financial statements under
Section 9.1 hereof, shall mean the audited financial statements as at
December 31, 1998 referred to in Section 8.2 hereof).
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(b) To enable the ready and consistent determination of
compliance with the covenants set forth in Section 9 hereof, the
Company will not change its fiscal year.
1.3. TYPES OF LOANS/FACILITIES. Loans hereunder are distinguished
by "Type" and "Facility". The "Type" of a Loan refers to whether such Loan is a
Prime Rate Loan or a LIBOR Loan. The "Facility" refers to whether such Loan is
made under the Three-Year Facility or the 364-Day Facility.
Section 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS.
2.1. REVOLVING CREDIT LOANS.
(a) THREE-YEAR FACILITY. Each Lender severally agrees, on the
terms and conditions of this Agreement, to make loans to the Company in
Dollars during the period from and including the Closing Date to but
not including the Three-Year Facility Revolving Credit Commitment
Termination Date in an aggregate principal amount at any one time
outstanding up to but not exceeding the amount of the Three-Year
Facility Revolving Credit Commitment of such Lender as in effect from
time to time (such Loans being herein called "THREE-YEAR FACILITY
REVOLVING CREDIT LOANS"); PROVIDED THAT in no event shall the
Three-Year Facility Revolving Credit Loans at any time outstanding
exceed the aggregate amount of the Three-Year Facility Revolving Credit
Commitments as in effect from time to time. Subject to the terms and
conditions of this Agreement, during such period the Company may
borrow, repay and reborrow the amount of the Three-Year Facility
Revolving Credit Commitments by means of Prime Rate Loans and LIBOR
Loans and may Convert Three-Year Facility Revolving Credit Loans of one
Type into Three-Year Facility Revolving Credit Loans of another Type
(as provided in Section 2.8 hereof) or Continue Three-Year Facility
Revolving Credit Loans of one Type as Three-Year Facility Revolving
Credit Loans of the same Type (as provided in Section 2.8 hereof).
(b) 364-DAY FACILITY. Each Lender severally agrees, on the terms
and conditions of this Agreement, to make loans to the Company in
Dollars during the period from and including the Closing Date to but
not including the 364-Day Facility Revolving Credit Commitment
Termination Date in an aggregate principal amount at any one time
outstanding up to but not exceeding the amount of the 364-Day Facility
Revolving Credit Commitment of such Lender as in effect from time to
time (such Loans being herein called "364-DAY FACILITY REVOLVING CREDIT
LOANS"); PROVIDED THAT in no event shall the 364-Day Facility Revolving
Credit Loans at any time outstanding exceed the aggregate amount of the
364-Day Facility Revolving Credit Commitments as in effect from time to
time. Subject to the terms and conditions of this Agreement, during
such period the Company may borrow, repay and reborrow the amount of
the 364-Day Facility Revolving Credit Commitments by means of Prime
Rate Loans and LIBOR Loans and may Convert 364-Day Facility Revolving
Credit Loans of one Type into 364-Day Facility Revolving Credit Loans
of another Type (as provided in Section 2.8 hereof).
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(c) INTEREST PERIODS. No more than five separate Interest Periods
in respect of LIBOR Loans may be outstanding at any one time.
(d) REVOLVING CREDIT COMMITMENTS. In no event shall the Revolving
Credit Loans at any time outstanding exceed the aggregate amount of the
Revolving Credit Commitments as in effect from time to time.
2.2. BORROWINGS OF REVOLVING CREDIT LOANS. The Company shall give
the Administrative Agent notice of each borrowing hereunder as provided in
Section 4.5 hereof. Not later than 1:00 p.m. Boston, Massachusetts time on the
date specified for each borrowing of Revolving Credit Loans hereunder, each
Lender shall make available the amount of the Loan or Loans to be made by it on
such date to the Administrative Agent, at account number 1510351 maintained by
the Administrative Agent with Fleet at the Principal Office, or, after written
notice by the Administrative Agent to the Lenders, at such other account
maintained by the Administrative Agent, in immediately available funds, for the
account of the Company. The amount so received by the Administrative Agent
shall, subject to the terms and conditions of this Agreement, be made available
to the Company by depositing the same, in immediately available funds, in an
account of the Company maintained with Fleet at the Principal Office designated
for the Company, or at such other account designated in writing by the
Administrative Agent.
2.3. CHANGES OF COMMITMENTS.
(a) (i) The aggregate amount of the 364-Day Facility Revolving
Credit Commitments shall be automatically reduced to zero on the
364-Day Facility Revolving Credit Commitment Termination Date; and (ii)
the aggregate amount of the Three-Year Facility Revolving Credit
Commitments shall be automatically reduced to zero on the Three-Year
Facility Revolving Credit Commitment Termination Date.
(b) The Company shall have the right at any time or from time to
time to reduce the aggregate unused amount of the Three-Year Facility
Revolving Credit Commitments and the 364-Day Facility Revolving Credit
Commitments (for which purpose the Revolving Credit Commitments shall
be deemed to be utilized by the amount of the Revolving Credit Loans);
PROVIDED that (x) the Company shall give notice of each such
termination or reduction as provided in Section 4.5 hereof, which
notice shall specify the amount of the total reduction, and the amount
of the reduction for each Facility, and (y) each partial reduction to
the aggregate Revolving Credit Commitments shall be in an aggregate
amount at least equal to $5,000,000 (or any integral multiple of
$1,000,000 in excess thereof).
(c) The Commitments once terminated or reduced may not be
reinstated.
2.4. COMMITMENT FEE. The Company shall pay to the Administrative
Agent for the account of each Lender a commitment fee on the daily average
unused amount of such Lender's Commitment, for the period from and including the
date hereof to but not including the date such Commitment is terminated or
expires, at a rate per annum equal to the Applicable Commitment Fee Rate.
Accrued commitment fees shall be payable in arrears on each Quarterly
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Date and on the date the respective Revolving Credit Commitments are terminated
or expire. Notwithstanding the foregoing, on any day during the period prior to
the Reporting Date occurring with respect to the quarter ended September 30,
1999, the Applicable Commitment Fee Rate shall be the percentage set forth in
the definition of Applicable Commitment Fee Rate opposite the designation "Level
III Period".
2.5. LENDING OFFICES. The Loans of each Type made by each Lender
shall be made and maintained at such Lender's Applicable Lending Office for
Loans of such Type.
2.6. SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT. The failure of any
Lender to make any Loan to be made by it on the date specified therefor shall
not relieve any other Lender of its obligation to make its Loan on such date,
but neither any Lender nor any Agent shall be responsible for the failure of any
other Lender to make a Loan to be made by such other Lender, and (except as
otherwise provided in Section 4.6 hereof) no Lender shall have any obligation to
any Agent or any other Lender for the failure by such Lender to make any Loan
required to be made by such Lender. The amounts payable by the Company at any
time hereunder and under the Note to each Lender shall be a separate and
independent debt and each Lender shall be entitled to protect and enforce its
rights arising out of this Agreement and the Notes, and it shall not be
necessary for any other Lender or any Agent to consent to, or be joined as an
additional party in, any proceedings for such purposes.
2.7. NOTES.
(a) (i) The Three-Year Facility Revolving Credit Loans made by
each Lender shall be evidenced by a single promissory note of the
Company substantially in the form of EXHIBIT A hereto, dated the date
hereof, payable to such Lender in a principal amount equal to the
amount of its Three-Year Facility Revolving Credit Commitment as
originally in effect and otherwise duly completed; and (ii) the 364-Day
Facility Revolving Credit Loans made by each Lender shall be evidenced
by a single promissory note of the Company substantially in the form of
EXHIBIT B hereto, dated the date hereof, payable to such Lender in a
principal amount equal to the amount of its 364-Day Facility Revolving
Credit Commitment as originally in effect and otherwise duly completed.
(b) The date, amount, Type, interest rate and duration of
Interest Period (if applicable) of each Loan made by each Lender to the
Company, and each payment made on account of the principal thereof,
shall be recorded by such Lender on its books and, prior to any
transfer of any Note evidencing the Loans held by it, endorsed by such
Lender on the schedule attached to such Note or any continuation
thereof; PROVIDED that the failure of such Lender to make any such
recordation or endorsement shall not affect the obligations of the
Company to make a payment when due of any amount owing hereunder or
under such Note in respect of such Loans.
(c) No Lender shall be entitled to have its Notes substituted or
exchanged for any reason, or subdivided for promissory notes of lesser
denominations, except in connection with a permitted assignment of all
or any portion of such Lender's relevant
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Commitment, Loans and Note pursuant to Section 12.7 hereof (and, if
requested by any Lender, the Company agrees to so exchange any Note).
2.8. OPTIONAL PREPAYMENTS AND CONVERSIONS OR CONTINUATIONS OF
LOANS. Subject to Section 4.4 hereof, the Company shall have the right to prepay
Loans or to Convert Loans of one Type into Loans of another Type (within the
same Facility) or Continue Loans of one Type as Loans of the same Type (within
the same Facility), at any time or from time to time, PROVIDED that:
(a) the Company shall give the Administrative Agent notice of
each such prepayment, Conversion or Continuation as provided in Section
4.5 hereof (and, upon the date specified in any such notice of
prepayment, the amount to be prepaid shall become due and payable
hereunder); and
(b) any prepayment or Conversion of LIBOR Loans on any day other
than the last day of an Interest Period for such Loans shall be subject
to the payment of any compensation payable pursuant to Section 5.5
hereof.
Notwithstanding the foregoing, and without limiting the rights and remedies of
the Lenders under Section 10 hereof, in the event that any Event of Default
shall have occurred and be continuing, the Administrative Agent may (and at the
request of the Required Lenders shall) suspend the right of the Company to
Convert any Loan into a LIBOR Loan, or to make or Continue any Loan as a LIBOR
Loan, in which event all Loans shall be Converted (on the last day(s) of the
respective Interest Periods therefor) or made or Continued, as the case may be,
as Prime Rate Loans.
Section 3. PAYMENTS OF PRINCIPAL AND INTEREST.
3.1. REPAYMENT OF LOANS. The Company hereby promises to pay to the
Administrative Agent for account of each Lender (a) the entire outstanding
principal amount of such Lender's 364-Day Facility Revolving Credit Loans, and
each 364-Day Facility Revolving Credit Loan shall mature, on the 364-Day
Facility Revolving Credit Commitment Termination Date; and (b) the entire
outstanding principal amount of such Lender's Three-Year Facility Revolving
Credit Loans, and each Three-Year Facility Revolving Credit Loan shall mature,
on the Three-Year Facility Revolving Credit Commitment Termination Date.
3.2. INTEREST. The Company hereby promises to pay to the
Administrative Agent for account of each Lender interest on the unpaid principal
amount of each Revolving Credit Loan made by such Lender for the period from and
including the date of such Loan to but excluding the date such Revolving Credit
Loan shall be paid in full, at the following rates per annum:
(a) if such Loan is outstanding as a Prime Rate Loan, the Prime
Rate (as in effect from time to time) PLUS the Applicable Margin; and
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(b) if such Loan is outstanding as a LIBOR Loan, for each
Interest Period relating thereto, the Adjusted LIBO Rate for such Loan
for such Interest Period PLUS the Applicable Margin.
Notwithstanding the foregoing, on any day during the period prior to
the Reporting Date with respect to the quarter ended on September 30, 1999, the
Applicable Margin shall mean the respective percentages set forth in the
definition of "Applicable Margin" opposite the designation "Level III Period".
During any period when an Event of Default shall have occurred and be
continuing and upon notice from the Administrative Agent of an election to
charge interest at the applicable Post-Default Rate, the Company hereby promises
to pay to the Administrative Agent for account of each Lender interest at the
applicable Post-Default Rate on (i) each Loan and (ii) any amount owing
hereunder (other than overdue principal of a Loan) that is not paid when due
(whether at stated maturity, by acceleration, by mandatory or voluntary
prepayment or otherwise).
Accrued interest on each Loan shall be payable in arrears (i) in the
case of a Prime Rate Loan, quarterly on the Quarterly Dates, (ii) in the case of
a LIBOR Loan, on the last day of each Interest Period therefor and, if such
Interest Period is longer than three months, at three-month intervals following
the first day of such Interest Period, and (iii) in the case of any Loan, upon
the payment or prepayment thereof or the Conversion of such Loan to a Loan of
another Type (but only on the principal amount so paid, prepaid or Converted),
except that interest payable at the Post-Default Rate shall be payable from time
to time on demand. Promptly after the determination of any interest rate
provided for herein or any change therein, the Administrative Agent shall give
notice thereof to the Lenders to which such interest is payable and to the
Company.
Section 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
4.1. PAYMENTS.
(a) Except to the extent otherwise provided in this Agreement,
all payments of principal, interest, and other amounts to be made by
the Company under this Agreement and the Notes, and, except to the
extent otherwise provided therein, all payments to be made by the
Obligors under any other Loan Document, shall be made in Dollars, in
immediately available funds, without deduction, set-off or
counterclaim, to the Administrative Agent at account number 58386988
maintained by the Company with the Administrative Agent, or at any
other account designated in writing by the Administrative Agent, at the
Principal Office, not later than 1:00 p.m. Boston, Massachusetts time
on the date on which such payment shall become due (each such payment
made after such time on such due date to be deemed to have been made on
the next succeeding Business Day). The Obligors authorize the
Administrative Agent to debit such account for all such payments.
(b) If any such payment owing to any Lender is not made when due
(beyond any applicable grace period), such Lender may (but shall not be
obligated to)
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debit the amount of any such payment to any ordinary deposit account of
the Company with such Lender (with notice to the Company and the
Administrative Agent).
(c) The Company shall, at the time of making each payment under
this Agreement or any Note for account of any Lender, subject to
Section 4.2 specify to the Administrative Agent (which shall so notify
the intended recipient(s) thereof) the amount payable on the Loans, the
Facility to which such payment applies, or other amounts payable by the
Company hereunder to which such payment is to be applied (and in the
event that the Company fails to so specify, or if an Event of Default
has occurred and is continuing, the Administrative Agent may distribute
such payment to the Lenders for application in such manner as it,
subject to Section 4.2 hereof, may determine to be appropriate).
(d) Each payment received by the Administrative Agent under this
Agreement or any Note for account of any Lender shall be paid by the
Administrative Agent promptly to such Lender, in immediately available
funds, for account of such Lender's Applicable Lending Office for the
Loan or other obligation in respect of which such payment is made.
(e) If the due date of any payment under this Agreement or any
Note would otherwise fall on a day that is not a Business Day, such
date shall be extended to the next succeeding Business Day, and
interest shall be payable for any principal so extended for the period
of such extension.
(f) Any payment of principal or interest on the Loans not paid
within ten (10) days after the date such payment is due shall be
subject to a late charge equal to five percent (5%) of the amount
overdue.
4.2. PRO RATA TREATMENT. Except to the extent otherwise provided
herein:
(a) each borrowing of Loans from the Lenders under Section 2.1
hereof shall be made from the Lenders, each payment of commitment fee
under Section 2.4 hereof in respect of Commitments shall be made for
account of the Lenders, and each termination or reduction of the amount
of the Commitments under Section 2.3 hereof shall be applied to the
respective Commitments of the Lenders, pro rata according to the
amounts of their respective Commitments under the respective Facility;
(b) except as otherwise provided in Section 5.4 hereof, LIBOR
Loans having the same Interest Period shall be allocated pro rata among
the Lenders according to the amounts of their respective Revolving
Credit Commitments under the respective Facility (in the case of the
making of Loans) or their respective Revolving Credit Loans under the
respective Facility (in the case of Conversions and Continuations of
Loans);
(c) each payment or prepayment of principal of Revolving Credit
Loans by the Company shall be made for account of the Lenders pro rata
in accordance with the
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respective unpaid principal amounts of the Loans under the respective
Facility held by them; and
(d) each payment of interest on Revolving Credit Loans by the
Company shall be made for account of the Lenders pro rata in accordance
with the amounts of interest on such Loans under the respective
Facility then due and payable to the respective Lenders.
4.3. COMPUTATIONS. Interest on Loans and commitment fees shall be
computed on the basis of a year of 360 days and actual days elapsed, including
the first day but excluding the last day occurring in the period for which
payable.
4.4. MINIMUM AMOUNTS. Except for Conversions or prepayments made
pursuant to Section 5.4 hereof, each borrowing, Conversion and partial
prepayment of principal of Loans shall be in an aggregate amount equal to
$5,000,000 or an integral multiple of $1,000,000 in excess thereof (borrowings,
Conversions or prepayments of or into Loans of different Types or, in the case
of LIBOR Loans, having different Interest Periods at the same time hereunder to
be deemed separate borrowings, Conversions and prepayments for purposes of the
foregoing, one for each Type or Interest Period).
4.5. CERTAIN NOTICES. Notices by the Company to the Administrative
Agent of terminations or reductions of the Commitments, of borrowings,
Conversions, Continuations and optional prepayments of Loans, of the respective
Facility, and of Types of Loans and of the duration of Interest Periods shall be
irrevocable and shall be effective only if received by the Administrative Agent
not later than 10:00 a.m. Boston, Massachusetts time on the number of Business
Days prior to the date of the relevant termination, reduction, borrowing,
Conversion, Continuation or prepayment or the first day of such Interest Period
specified below:
<TABLE>
<CAPTION>
Number of
Business
Notice Days Prior
------ ----------
<S> <C>
Termination or reduction
of Commitments 3
Borrowing or prepayment of,
or Conversion into,
Prime Rate Loans next Business Day
Borrowing or prepayment of, Conversions into,
Continuations
as, or duration of Interest
Period for, LIBOR Loans 3
</TABLE>
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<PAGE>
Each such notice of termination or reduction shall specify the respective
Facility and the amount of the Commitments to be terminated or reduced. Each
such notice of borrowing, Conversion, Continuation or optional prepayment shall
specify the amount to be borrowed, Converted, Continued or prepaid (subject to
Section 4.4 hereof) and Type and the respective Facility of each Loan to be
borrowed, Converted, Continued or prepaid and the date of borrowing, Conversion,
Continuation or optional prepayment (which shall be a Business Day), and shall
be in the form, as applicable, of either EXHIBIT H hereto (for each notice of
borrowing), EXHIBIT I hereto (for each notice of Conversion or Continuation), or
EXHIBIT J hereto (for each notice of prepayment). Each such notice of the
duration of an Interest Period shall specify the Loans to which such Interest
Period is to relate. The Administrative Agent shall promptly notify the Lenders
of the contents of each such notice. In the event that the Company fails to
select a Facility or Type of Loan, or the duration of any Interest Period for
any LIBOR Loan, within the time period and otherwise as provided in this Section
4.5, such Loan: (i) if then outstanding as a LIBOR Loan, will be automatically
Converted into a Prime Rate Loan under the same Facility as such LIBOR Loan on
the last day of the then current Interest Period for such Loan, unless such
Facility was the 364-Day Facility and the 364-Day Facility Revolving Credit
Commitment Termination Date shall have occurred, in which case it will be made
as a Prime Rate Loan under the Three-Year Facility; or (ii) if not then
outstanding, will be made as, a Prime Rate Loan under the Three-Year Facility.
4.6. NON-RECEIPT OF FUNDS BY THE ADMINISTRATIVE AGENT; DELINQUENT
LENDERS.
(a) Unless the Administrative Agent shall have been notified by a
Lender or the Company (the "PAYOR") prior to the date on which the
Payor is to make payment to the Administrative Agent of (in the case of
a Lender) the proceeds of a Loan to be made by such Lender hereunder or
(in the case of the Company) a payment to the Administrative Agent for
account of one or more of the Lenders hereunder (such payment being
herein called the "REQUIRED PAYMENT"), which notice shall be effective
upon receipt, that the Payor does not intend to make the Required
Payment to the Administrative Agent, the Administrative Agent may
assume that the Required Payment has been made and may, in reliance
upon such assumption (but shall not be required to), make the amount
thereof available to the intended recipient(s) on such date; and, if
the Payor has not in fact made the Required Payment to the
Administrative Agent and the Administrative Agent has made the payment
to the recipient(s), the recipient(s) of such payment shall, on demand,
repay to the Administrative Agent the amount so made available together
with interest thereon in respect of each day during the period
commencing on the date (the "ADVANCE DATE") such amount was so made
available by the Administrative Agent until the date the Administrative
Agent recovers such amount at a rate per annum equal to the Federal
Funds Rate for such day and, if such recipient(s) shall fail promptly
to make such payment, the Administrative Agent shall be entitled to
recover such amount, on demand, from the Payor, together with interest
as aforesaid, PROVIDED that if neither the recipient(s) nor the Payor
shall return the Required Payment to the Administrative Agent within
three Business Days of the date of the notice from the Administrative
Agent, then the Payor and the recipient(s) shall each be obligated to
pay interest on the Required Payment as follows:
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(i) if the Required Payment shall represent a payment
to be made by the Company to the Lenders, the Company and the
recipient(s) shall each be obligated retroactively to the
Advance Date to pay interest in respect of the Required
Payment at the Post-Default Rate (without duplication of the
obligation of the Company under Section 3.2 hereof to pay
interest on the Required Payment at the Post-Default Rate), it
being understood that the return by the recipient(s) of the
Required Payment to the Administrative Agent shall not limit
such obligation of the Company under said Section 3.2 to pay
interest at the Post-Default Rate in respect of the Required
Payment; and
(ii) if the Required Payment shall represent proceeds
of a Loan to be made by the Lenders to the Company, the Payor
and the Company shall each be obligated retroactively to the
Advance Date to pay interest in respect of the Required
Payment pursuant to Section 3.2 hereof (without duplication of
the obligation of the Company under Section 3.2 hereof to pay
interest on the Required Payment), it being understood that
the return by the Company of the Required Payment to the
Administrative Agent shall not limit any claim the Company may
have against the Payor in respect of such Required Payment.
(b) If for any reason any Lender shall fail or refuse to abide
by its obligations under this Loan Agreement, including, without
limitation, its obligation to make available to Administrative Agent
its share of any Revolving Credit Loans, expenses, or setoff (a
"Delinquent Lender"), any non-delinquent Lender shall have the right,
but not the obligation, in its respective, sole and absolute
discretion, to acquire (x) for no cash consideration (PRO RATA, based
on the respective Commitments of those Lenders electing to exercise
such right) the Delinquent Lender's Commitment to fund future Revolving
Credit Loans; and (y) for consideration equal to the amount of the
outstanding Revolving Credit Loans from such Lender (PRO RATA, based on
the respective Commitments of those Lenders electing to exercise such
right) the Delinquent Lender's rights with respect to outstanding
Revolving Credit Loans (the rights purchased under clauses (x) and (y),
the "Purchased Rights"), but only if, in the aggregate, all of the
Delinquent Lender's rights with respect to outstanding Revolving Credit
Loans and Commitments are acquired hereunder by one or more
non-delinquent Lender(s). Upon any such purchase of the PRO RATA share
of any Delinquent Lender's Purchased Rights, the Delinquent Lender's
rights with respect to outstanding Revolving Credit Loans, Commitment,
share in future Revolving Credit Loans, and rights under the Loan
Documents with respect thereto shall terminate on the day of purchase
(other than indemnification rights that survive termination of the
Commitments under Section 12.8 hereof and rights to receive accrued but
unpaid interest and fees through the date of purchase), and the
Delinquent Lender shall promptly execute all documents reasonably
requested to surrender and transfer such interests (other than
indemnification rights that survive termination of the Commitments
under Section 12.8 hereof and rights to receive accrued but unpaid
interest and fees through the date of purchase), including, if so
requested, a Notice of Assignment (provided that the assignment fee in
connection with such Notice of Assignment shall not be charged).
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<PAGE>
4.7. SHARING OF PAYMENTS, ETC.
(a) Each Obligor agrees that, in addition to (and without
limitation of) any right of set-off, banker's lien or counterclaim a
Lender may otherwise have, each Lender shall be entitled, at its option
(to the fullest extent permitted by law), to set off and apply any
deposit (general or special, time or demand, provisional or final), or
other indebtedness, held by it for the credit or account of such
Obligor at any of its offices, in Dollars or in any other currency,
against any principal of or interest on any of such Lender's Loans, or
any other amount payable to such Lender hereunder, that is not paid
when due (regardless of whether such deposit or other indebtedness are
then due to such Obligor and of the existence or adequacy of any
security therefor), in which case it shall promptly notify such Obligor
and the Administrative Agent thereof, PROVIDED that such Lender's
failure to give such notice shall not affect the validity thereof.
(b) If any Lender shall obtain from any Obligor payment of any
principal of or interest on any Loan owing to it or payment of any
other amount under this Agreement or any other Loan Document through
the exercise any right of set-off, banker's lien or counterclaim or
similar right or otherwise (other than from the Administrative Agent as
provided herein), and, as a result of such payment, such Lender shall
have received a greater percentage of the principal of or interest on
the Loans or such other amounts then due hereunder or thereunder by
such Obligor to such Lender than the percentage received by any other
Lender, it shall promptly purchase from such other Lenders
participations in (or, if and to the extent specified by such Lender,
direct interests in) the Loans or such other amounts, respectively,
owing to such other Lenders (or in interest due thereon, as the case
may be) in such amounts, and make such other adjustments from time to
time as shall be equitable, to the end that all the Lenders shall share
the benefit of such excess payment (net of any expenses that may be
incurred by such Lender in obtaining or preserving such excess payment)
pro rata in accordance with the unpaid principal of and/or interest on
the Loans or such other amounts, respectively, owing to each of the
Lenders. To such end all the Lenders shall make appropriate adjustments
among themselves (by the resale of participations sold or otherwise) if
such payment is rescinded or must otherwise be restored.
(c) The Company agrees that any Lender so purchasing such a
participation (or direct interest) may exercise all rights of set-off,
banker's lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans
or other amounts (as the case may be) owing to such Lender in the
amount of such participation.
(d) Nothing contained herein shall require any Lender to exercise
any such right or shall affect the right of any Lender to exercise, and
retain the benefits of exercising, any such right with respect to any
other indebtedness or obligation of any Obligor. If, under any
applicable bankruptcy, insolvency or other similar law, any Lender
receives a secured claim in lieu of a set-off to which this Section 4.7
applies, such
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<PAGE>
Lender shall, to the extent practicable, exercise its rights in respect
of such secured claim in a manner consistent with the rights of the
Lenders entitled under this Section 4.7 to share in the benefits of any
recovery on such secured claim.
Section 5. YIELD PROTECTION, ETC.
5.1. ADDITIONAL COSTS.
(a) The Company shall pay directly to each Lender from time to
time such amounts as such Lender may determine to be necessary to
compensate such Lender for any costs that such Lender determines are
attributable to its making or maintaining of any LIBOR Loans or its
obligation to make any LIBOR Loans hereunder, or any reduction in any
amount receivable by such Lender hereunder in respect of any of such
Loans or such obligation (such increases in costs and reductions in
amounts receivable being herein called "ADDITIONAL COSTS"), resulting
from any Regulatory Change that:
(i) shall subject any Lender (or its Applicable
Lending Office for any of such Loans) to any tax, duty or
other charge in respect of such Loans or its Note or changes
the basis of taxation of any amounts payable to such Lender
under this Agreement or its Note in respect of any of such
Loans (excluding any Taxes based on net income or in lieu of
net income imposed on such Lender by the jurisdiction in which
such Lender has its principal office or its Applicable Lending
Office); or
(ii) imposes or modifies any reserve, special deposit
or similar requirements (other than any thereof, including,
without limitation, the Reserve Requirement, utilized in the
determination of the Adjusted LIBO Rate or LIBO Rate for such
Loan) relating to any extensions of credit or other assets of,
or any deposits with or other liabilities of, such Lender
(including, without limitation, any of such Loans or any
deposits referred to in the definition of "LIBO Rate" in
Section 1.1 hereof), or any commitment of such Lender
(including, without limitation, the Commitments of such Lender
hereunder); or
(iii) imposes any other condition affecting this
Agreement or its Note (or any of such extensions of credit or
liabilities) or its Commitment.
If any Lender requests compensation from the Company under this Section 5.1(a),
the Company may, by notice to such Lender (with a copy to the Administrative
Agent), suspend the obligation of such Lender thereafter to make or Continue
LIBOR Loans, or to Convert Prime Rate Loans into LIBOR Loans, until the
Regulatory Change giving rise to such request ceases to be in effect (in which
case the provisions of Section 5.4 hereof shall be applicable), PROVIDED that
such suspension shall not affect the right of such Lender to receive the
compensation so requested.
(b) Without limiting the effect of the provisions of paragraph
(a) of this Section 5.1, in the event that, by reason of any Regulatory
Change, any Lender either (i) incurs Additional Costs based on or
measured by the excess above a specified level of
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the amount of a category of deposits or other liabilities of such
Lender that includes deposits by reference to which the interest rate
on LIBOR Loans is determined as provided in this Agreement or a
category of extensions of credit or other assets of such Lender that
includes LIBOR Loans or (ii) becomes subject to restrictions on the
amount of such a category of liabilities or assets that it may hold,
then, if such Lender so elects by notice to the Company (with a copy to
the Administrative Agent), the obligation of such Lender to make or
Continue, or to Convert Prime Rate Loans into, LIBOR Loans hereunder
shall be suspended until such Regulatory Change ceases to be in effect
(in which case the provisions of Section 5.4 hereof shall be
applicable).
(c) Without limiting the effect of the foregoing provisions of
this Section 5.1 (but without duplication), the Company shall pay
directly to each Lender from time to time on request such amounts as
such Lender may determine to be necessary to compensate such Lender
(or, without duplication, the bank holding company of which such Lender
is a subsidiary) for any costs that it determines are attributable to
the maintenance by such Lender (or any Applicable Lending Office or
such bank holding company), pursuant to any law or regulation or any
interpretation, directive or request (whether or not having the force
of law and whether or not failure to comply therewith would be
unlawful) of any court or governmental or monetary authority (i)
following any Regulatory Change or (ii) implementing any risk-based
capital guideline or other requirement (whether or not having the force
of law and whether or not the failure to comply therewith would be
unlawful) hereafter issued by any government or governmental or
supervisory authority implementing at the national level the Basle
Accord, of capital in respect of its Commitments or Loans (such
compensation to include, without limitation, an amount equal to any
reduction of the rate of return on assets or equity of such Lender (or
any Applicable Lending Office or such bank holding company) to a level
below that which such Lender (or any Applicable Lending Office or such
bank holding company) could have achieved but for such law, regulation,
interpretation, directive or request).
(d) Each Lender shall notify the Company of any event occurring
after the date hereof entitling such Lender to compensation under
paragraph (a) or (c) of this Section 5.1 as promptly as practicable,
but in any event within 45 days, after such Lender obtains actual
knowledge thereof; PROVIDED that if (i) any Lender fails to give such
notice within 45 days after it obtains actual knowledge of such an
event, such Lender shall, with respect to compensation payable pursuant
to this Section 5.1 in respect of any costs resulting from such event,
only be entitled to payment under this Section 5.1 for costs incurred
from and after the date 45 days prior to the date that such Lender does
give such notice and (ii) each Lender will designate a different
Applicable Lending Office for the Loans of such Lender affected by such
event if such designation will avoid the need for, or reduce the amount
of, such compensation and will not, in the reasonable opinion of such
Lender, be disadvantageous to such Lender (including, without
limitation, by reason of any economic, legal or regulatory cost or
disadvantage that such Lender may bear or suffer by reason of such
designation). Each Lender will furnish to the Company a certificate
setting forth in reasonable detail the basis and amount of each request
by such
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Lender for compensation under paragraph (a) or (c) of this Section 5.1.
Determinations and allocations by any Lender for purposes of this
Section 5.1 of the effect of any Regulatory Change pursuant to
paragraph (a) or (b) of this Section 5.1, or of the effect of capital
maintained pursuant to paragraph (c) of this Section 5.1, on its costs
or rate of return of maintaining Loans or its obligation to make Loans,
or on amounts receivable by it in respect of Loans, and of the amounts
required to compensate such Lender under this Section 5.1, shall be
conclusive, PROVIDED that such determinations and allocations are made
on a reasonable basis.
5.2. LIMITATION ON TYPES OF LOANS. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any LIBO Rate for any
Interest Period:
(a) the Administrative Agent determines, which determination
shall be conclusive, that quotations of interest rates for the relevant
deposits referred to in the definition of "LIBO Rate" in Section 1.1
hereof are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining rates of interest for
LIBOR Loans as provided herein; or
(b) the Required Lenders determine which determination shall be
conclusive, and notify (or notifies, as the case may be) the
Administrative Agent that the relevant rates of interest referred to in
the definition of "LIBO Rate" in Section 1.1 hereof upon the basis of
which the rate of interest for LIBOR Loans for such Interest Period is
to be determined do not adequately and fairly reflect the cost to such
Lenders of making or maintaining LIBOR Loans for such Interest Period;
then the Administrative Agent shall give the Company and each Lender prompt
notice thereof and, so long as such condition remains in effect, the Lenders
shall be under no obligation to make additional LIBOR Loans, to Continue LIBOR
Loans or to Convert Prime Rate Loans into LIBOR Loans, and the Company shall, on
the last day(s) of the then current Interest Period(s) for the outstanding LIBOR
Loans, either prepay such Loans or Convert such Loans into Prime Rate Loans in
accordance with Section 2.8 hereof.
5.3. ILLEGALITY. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain LIBOR
Loans hereunder (and, in the sole opinion of such Lender, the designation of a
different Applicable Lending Office would either not avoid such unlawfulness or
would be disadvantageous to such Lender), then such Lender shall promptly notify
the Company thereof (with a copy to the Administrative Agent) and such Lender's
obligation to make or Continue, or to Convert Loans of any other Type into,
LIBOR Loans shall be suspended until such time as such Lender may again make and
maintain LIBOR Loans (in which case the provisions of Section 5.4 hereof shall
be applicable).
5.4. TREATMENT OF AFFECTED LOANS. If the obligation of any Lender
to make LIBOR Loans or to Continue, or to Convert Prime Rate Loans into, LIBOR
Loans shall be suspended pursuant to Section 5.1 or 5.3 hereof, such Lender's
LIBOR Loans shall be automatically Converted into Prime Rate Loans on the last
day(s) of the then current Interest Period(s) for
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LIBOR Loans (or, in the case of a Conversion required by Section 5.1(b) or 5.3
hereof, on such earlier date as is required pursuant to applicable law or
regulation and as such Lender may specify to the Company with a copy to the
Administrative Agent) and, unless and until such Lender gives notice as provided
below that the circumstances specified in Section 5.1 or 5.3 hereof that gave
rise to such Conversion no longer exist:
(a) to the extent that such Lender's LIBOR Loans have been so
Converted, all payments and prepayments of principal that would
otherwise be applied to such Lender's LIBOR Loans shall be applied
instead to its Prime Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such
Lender as LIBOR Loans shall be made or Continued instead as Prime Rate
Loans, and all Prime Rate Loans of such Lender that would otherwise be
Converted into LIBOR Loans shall remain as Prime Rate Loans.
If such Lender gives notice to the Company with a copy to the Administrative
Agent that the circumstances specified in Section 5.1 or 5.3 hereof that gave
rise to the Conversion of such Lender's LIBOR Loans pursuant to this Section 5.4
no longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when LIBOR Loans made by other Lenders are
outstanding, such Lender's Prime Rate Loans shall be automatically Converted, on
the first day(s) of the next succeeding Interest Period(s) for such outstanding
LIBOR Loans, to the extent necessary so that, after giving effect thereto, all
Loans held by the Lenders holding LIBOR Loans and by such Lender are held pro
rata (as to principal amounts, Types and Interest Periods) in accordance with
their respective Commitments.
5.5. COMPENSATION. The Company shall pay to the Administrative
agent for account of each Lender, upon the request of such Lender through the
Administrative Agent, such amount or amounts as shall be sufficient (in the
reasonable opinion of such Lender) to compensate it for any loss, cost or
expense that such Lender determines is attributable to:
(a) any payment, mandatory or optional prepayment or Conversion
of a LIBOR Loan made by such Lender for any reason (including, without
limitation, the acceleration of the Loans pursuant to Section 10
hereof) on a date other than the last day of the Interest Period for
such Loan; or
(b) any failure by the Company for any reason (including, without
limitation, the failure of any of the conditions precedent specified in
Section 7 hereof to be satisfied) to borrow, Continue or Convert a
LIBOR Loan from such Lender on the date for such borrowing,
Continuation or Conversion specified in the relevant notice given
pursuant to Sections 2.2 and 4.5 hereof.
Without limiting the effect of the preceding sentence, such compensation shall,
if so requested, include an amount equal to the product of: (a) the amount so
paid, prepaid, Converted or not borrowed times (b) the excess of (i) the rate of
interest that otherwise would have accrued on the principal amount so paid,
prepaid, Converted or not borrowed for the period from the date of such payment,
prepayment, Conversion or failure to borrow to the last day of the then current
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Interest Period for such Loan (or, in the case of a failure to borrow, the
Interest Period for such Loan that would have commenced on the date specified
for such borrowing) at the applicable rate of interest for such Loan provided
for herein (excluding, however, any Applicable Margin included therein) less
(ii) the rate of interest that otherwise would have accrued on such principal
amount at a rate per annum equal to the interest component of the amount such
Lender would have bid in the London interbank market (for Dollar deposits of
leading banks in amounts comparable to such principal amount and with maturities
comparable to such period (as reasonably determined by such Lender), which
product shall be multiplied by a fraction the numerator of which is the number
of days from the date of such occurrence to the last day of the applicable
Interest Period and the denominator of which is 360 days.
5.6. RATE SELECTION. If the Company has provided a notice of
borrowing under Section 4.5 hereof and any Lender determines (which
determination shall be conclusive and binding on the Company) that:
(a) deposits of the necessary amount for the selected Interest
Period are not available to such Lender in either the London interbank
market or the market for Federal funds transactions or, by reason of
circumstances affecting such markets, adequate and reasonable means do
not exist for ascertaining the LIBO Rate or the Federal Funds Rate for
such Interest Period; or
(b) the LIBO Rate or the Federal Funds Rate, as applicable, will
not adequately and fairly reflect the cost to such Lender of making or
funding a Loan for such Interest Period; or
(c) the making or funding of Loans has become impracticable as a
result of any event occurring after the date of this Agreement which,
in the opinion of such Lender, materially and adversely affects such
Loans or the London interbank market or the market for Federal funds
transactions;
then such Lender shall notify the Company of this condition and of the rate that
the Lender has selected to apply to such Loan pursuant to the following
sentence, provided, however, that the Company shall have the opportunity to
withdraw such notice of borrowing prior to the making of the Loan on the date
specified in the notice. If, after such notice from the Lender, the Company does
not withdraw such notice of borrowing prior to the making of the Loan, then any
notice of borrowing shall be deemed to be a notice to request a borrowing of
such Loan at such higher rate per annum, if any, which in such Lender's opinion
will adequately fairly compensate such Lender for the cost to such Lender of
making or funding such Loan plus the Applicable Margin under this Agreement; or
if such Lender determines that no such rate exists, then such Lender shall
promptly notify the Agent and shall not be obligated to fund the Loan.
Section 6. GUARANTEE.
6.1. GUARANTEE. The Subsidiary Guarantors hereby jointly and
severally guarantee to each Lender and each Agent and their respective
successors and assigns the prompt payment
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in full when due (whether at stated maturity, by acceleration or otherwise) of
the principal of and interest on the Loans made by the Lenders to, and the Notes
held by each Lender of, the Company and all other amounts from time to time
owing to the Lenders or any Agent by the Company under this Agreement and under
the Notes and by any Obligor under any of the other Loan Documents, in each case
strictly in accordance with the terms thereof (such obligations being herein
collectively called the "GUARANTEED OBLIGATIONS"). The Subsidiary Guarantors
hereby further jointly and severally agree that if the Company shall fail to pay
in full when due (whether at stated maturity, by acceleration or otherwise) any
of the Guaranteed Obligations, the Subsidiary Guarantors will promptly pay the
same, without any demand or notice whatsoever, and that in the case of any
extension of time of payment or renewal of any of the Guaranteed Obligations,
the same will be promptly paid in full when due (whether at extended maturity,
by acceleration or otherwise) in accordance with the terms of such extension or
renewal.
6.2. OBLIGATIONS UNCONDITIONAL. The obligations of each Subsidiary
Guarantor under Section 6.1 hereof are absolute and unconditional, joint and
several, irrespective of the value, genuineness, validity, regularity or
enforceability of the obligations of the Company or any Obligor (other than such
Subsidiary Guarantor) under this Agreement, the Notes, the other Loan Documents
or any other agreement or instrument referred to herein or therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever that might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 6.2 that the obligations of the
Subsidiary Guarantors hereunder shall be absolute and unconditional, joint and
several, under any and all circumstances. Without limiting the generality of the
foregoing, it is agreed that the occurrence of any one or more of the following
shall not alter or impair the liability of the Subsidiary Guarantors hereunder
which shall remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice
to the Subsidiary Guarantors, the time for any performance of or
compliance with any of the Guaranteed Obligations shall be
extended, or such performance or compliance shall be waived;
(ii) any of the acts mentioned in any of the
provisions of this Agreement or the Notes or any other agreement
or instrument referred to herein or therein shall be done or
omitted;
(iii) the maturity of any of the Guaranteed
Obligations shall be accelerated, or any of the Guaranteed
Obligations shall be modified, supplemented or amended in any
respect, or any right under this Agreement or the Notes or any
other agreement or instrument referred to herein or therein shall
be waived or any other guarantee of any of the Guaranteed
Obligations or any security therefor shall be released or
exchanged in whole or in part or otherwise dealt with; or
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(iv) any lien or security interest granted to, or in
favor of, any Agent or Agents or any Lender or Lenders as
security for any of the Guaranteed Obligations shall fail to be
perfected.
The Subsidiary Guarantors hereby expressly waive diligence, presentment, demand
of payment, protest and all notices whatsoever, and any requirement that any
Agent or any Lender exhaust any right, power or remedy or proceed against the
Company under this Agreement or the Notes or the other Loan Documents or any
other agreement or instrument referred to herein or therein, or against any
other Person under any other guarantee of, or security for, any of the
Guaranteed Obligations.
6.3. REINSTATEMENT. The obligations of the Subsidiary Guarantors
under this Section 6 shall be automatically reinstated if and to the extent that
for any reason any payment by or on behalf of the Company in respect of the
Guaranteed Obligations is rescinded or must be otherwise restored by any holder
of any of the Guaranteed Obligations, whether as a result of any proceedings in
bankruptcy or reorganization or otherwise and the Subsidiary Guarantors jointly
and severally agree that they will indemnify each Agent and each Lender on
demand for all reasonable costs and expenses (including, without limitation,
fees of counsel) incurred by such Agent or such Lender in connection with such
rescission or restoration, including any such costs and expenses incurred in
defending against any claim alleging that such payment constituted a preference,
fraudulent transfer or similar payment under any bankruptcy, insolvency or
similar law.
6.4. SUBROGATION. Each Subsidiary Guarantor hereby agrees that,
until the payment and satisfaction in full of all Guaranteed Obligations and the
expiration and termination of the Commitments of the Lenders under this
Agreement, such Subsidiary Guarantor shall not exercise any right or remedy
arising by reason of any performance by such Subsidiary Guarantor of its
guarantee in Section 6.1 hereof, whether by subrogation or otherwise, against
the Company or any other Obligor or any other guarantor of any of the Guaranteed
Obligations or any security for any of the Guaranteed Obligations.
6.5. REMEDIES. The Subsidiary Guarantors jointly and severally
agree that, as between the Subsidiary Guarantors and the Lenders, the
obligations of the Company under this Agreement and the Notes may be declared to
be forthwith due and payable as provided in Section 10 hereof (and shall be
deemed to have become automatically due and payable in the circumstances
provided in said Section 10(g) or (h)) for purposes of Section 6.1 hereof
notwithstanding any stay, injunction or other prohibition preventing such
declaration (or such obligations from becoming automatically due and payable) as
against the Company and that, in the event of such declaration (or such
obligations being deemed to have become automatically due and payable), such
obligations (whether or not due and payable by the Company) shall forthwith
become due and payable by the Subsidiary Guarantors for purposes of said Section
6.1.
6.6. CONTINUING GUARANTEE. The guarantee in this Section 6 is a
continuing guarantee, and shall apply to all Guaranteed Obligations whenever
arising.
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6.7. RIGHTS OF CONTRIBUTION. The Subsidiary Guarantors hereby
agree, as between themselves, that if any Subsidiary Guarantor (an "EXCESS
FUNDING GUARANTOR") shall pay Guaranteed Obligations in excess of such Excess
Funding Guarantor's Pro Rata Share (as defined below) of such Guaranteed
Obligations (such excess payment, an "EXCESS PAYMENT"), each other Subsidiary
Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the
next sentence hereof), pay to such Excess Funding Guarantor an amount equal to
such other Subsidiary Guarantor's Pro Rata Share (such Pro Rata Share, for the
purpose of determining the amount due to the Excess Funding Guarantor under this
Section 6.7, to be determined without reference to the Excess Funding Guarantor)
of such Excess Payment. The payment obligation of each other Subsidiary
Guarantor to an Excess Funding Guarantor under this Section 6.7 shall be
subordinate and subject in right of payment to the prior payment in full of the
Obligations, and such Excess Funding Guarantor shall not exercise any right or
remedy with respect to such Excess Payment until payment and satisfaction in
full of the Obligations. For the purposes hereof, "PRO RATA SHARE" shall mean,
with respect to each Subsidiary Guarantor, the ratio (expressed as a percentage)
of (a) the net worth of such Subsidiary Guarantor (determined on an
unconsolidated basis in accordance with GAAP as of the last day of the fiscal
quarter of such Subsidiary Guarantor most recently ended prior to the date such
Person became a Subsidiary Guarantor) to (b) the sum of the amounts determined
pursuant to clause (a) for all of the Subsidiary Guarantors.
6.8. LIMITATION ON GUARANTEE OBLIGATIONS. In any action or
proceeding involving any state corporate or partnership law, or any state or
Federal bankruptcy, insolvency, reorganization or other law affecting the rights
of creditors generally, if the obligations of any Subsidiary Guarantor under
Section 6.1 hereof would otherwise, taking into account the provisions of
Section 6.7 hereof, be held or determined to be void, invalid or unenforceable,
or subordinated to the claims of any other creditors, on account of the amount
of its liability under said Section 6.1, then, notwithstanding any other
provision hereof to the contrary, the amount of such liability shall, without
any further action by such Subsidiary Guarantor, any Lender, any Agent or any
other Person, be automatically limited and reduced to the highest amount that is
valid and enforceable and not subordinated to the claims of other creditors as
determined in such action or proceeding.
Section 7. CONDITIONS PRECEDENT.
7.1 INITIAL LOAN. The obligation of any Lender to make its initial
Loan hereunder is subject to the satisfaction of each of the following
conditions (with each document being satisfactory to each Agent and each Lender
in form and substance):
(a) CORPORATE DOCUMENTS. The receipt by the Administrative Agent
of (i) certified copies of the charter and by-laws (or equivalent
constitutional documents) of each Obligor and GSC, (ii) a long-form
good standing certificate issued by the Secretary of State of the
jurisdiction of incorporation or organization of each Obligor and GSC
and (iii) certified copies of all corporate or partnership authority
for each Obligor (including, without limitation, board of director
resolutions and evidence of the incumbency,
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including specimen signatures, of officers) with respect to the
execution, delivery and performance of such of the Loan Documents to
which such Obligor is intended to be a party and each other document to
be delivered by such Obligor from time to time in connection herewith
and the extensions of credit hereunder (and each Agent and each Lender
may conclusively rely on such certificate until it receives notice in
writing from such Obligor to the contrary).
(b) OFFICER'S CERTIFICATE. The receipt by the Administrative
Agent of a certificate of a senior officer of the Company, dated the
Closing Date, to the effect set forth in the first sentence of Section
7.2 hereof.
(c) BORROWING NOTICE AND PRIOR CREDIT AGREEMENT TERMINATION DATE.
The receipt by the Administrative Agent of (i) the notice of the Prior
Credit Agreement Termination Date; and (ii) the notice of borrowing
required by Sections 2.2 and 4.5 hereof in the form of EXHIBIT H, which
notice of borrowing shall specify a borrowing date that is not earlier
than the Prior Credit Agreement Termination Date.
(d) OPINIONS OF COUNSEL TO THE OBLIGORS. The receipt by the
Administrative Agent of an opinion, dated the Closing Date, of Palmer &
Dodge LLP, special counsel to the Obligors, substantially in the form
of EXHIBIT C hereto and covering such other matters as any Agent or any
Lender may reasonably request.
(e) NOTES. The receipt by the Administrative Agent of Notes, duly
completed and executed for each Lender.
(f) PLEDGE AGREEMENT. The receipt by the Administrative Agent of
the Pledge Agreement in the form of EXHIBIT G, together with the
certificates for all shares of capital stock of Genzyme Securities
Corporation pledged thereunder and undated executed stock powers.
(g) SEARCH RESULTS. The receipt by the Administrative Agent of
results satisfactory to the Administrative Agent of UCC, Federal and
state tax lien and judgment searches conducted by a search firm
acceptable to the Administrative Agent with respect to each Obligor in
each jurisdiction specified by the Administrative Agent.
(h) INSURANCE. The receipt by the Administrative Agent of (i)
certificates of insurance evidencing the existence of all insurance
required to be maintained pursuant to Section 9.4 hereof and (ii) a
certificate of a senior financial officer of the Company stating that
the insurance obtained by it in accordance with the requirements of
said Section 9.4 is in full force and effect and that all premiums then
due and payable thereon have been paid.
(i) REPAYMENT OF EXISTING INDEBTEDNESS. Evidence that the
principal of and interest on, and all other amounts owing in respect
of, the Indebtedness (including, without limitation, any contingent or
other amounts payable in respect of letters of credit) indicated on
SCHEDULE 7.1 hereto that is to be repaid on the Closing Date shall have
been
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(or shall be simultaneously) paid in full, that any commitments to
extend credit under the agreements or instruments relating to such
Indebtedness shall have been canceled or terminated and that all
Guarantees in respect of, and all Liens securing, any such Indebtedness
shall have been released (or arrangements for such release satisfactory
to the Required Lenders shall have been made); in addition, the
Administrative Agent shall have received from any Person holding any
Lien securing any such Indebtedness, such Uniform Commercial Code
termination statements, mortgage releases and other instruments, in
each case in proper form for recording, as the Administrative Agent
shall have requested to release and terminate of record the Liens
securing such Indebtedness (or arrangements for such release and
termination satisfactory to the Required Lenders shall have been made).
(j) NO ADVERSE LITIGATION OR PROCEEDING. The receipt by the
Administrative Agent of a certificate of a senior officer of the
Company to the effect that, on and as of the Closing Date and except as
disclosed in SCHEDULE 8.3 hereto, no litigation or proceeding shall
exist or (to the Company's knowledge) be threatened against the Company
or any of its Subsidiaries, and, to the Company's knowledge, no law or
regulation shall have been proposed (unless withdrawn) that could
reasonably be expected to (i) have a Material Adverse Effect, (ii)
materially and adversely affect the ability of the Obligors to perform
their respective obligations under this Agreement or the other Loan
Documents, (iii) materially and adversely affect the rights and
remedies of the Agents and the Lenders under this Agreement or the Loan
Documents or (iv) purport to adversely affect the Revolving Credit
Loans or Commitments.
(k) CONSENTS, ETC. The receipt by the Administrative Agent of a
certificate of a senior officer of the Company to the effect that, on
and as of the Closing Date, all necessary governmental and third party
consents and approvals in connection with the transactions contemplated
by this Agreement have been obtained and remain in effect and that all
applicable waiting periods have expired.
(l) PAYMENT OF FEES. The payment by the Company of such fees as
the Company shall have agreed to pay or deliver to any Lender or any
Agent in connection herewith, including, without limitation, any and
all arrangement and administrative, syndication, or documentation fees
due to any Agent, up-front fees due to the Lenders, and the reasonable
fees and expenses of Brown, Rudnick, Freed & Gesmer, special counsel to
Fleet in connection with the negotiation, preparation, execution and
delivery of this Agreement and the Notes and the other Loan Documents
and the making of the extensions of credit hereunder (to the extent
that statements for such fees and expenses have been delivered to the
Company).
(m) OTHER DOCUMENTS. Such other documents as any Agent or any
Lender or special counsel to Fleet may reasonably request.
7.2. INITIAL AND SUBSEQUENT EXTENSIONS OF CREDIT. The obligation of
any Lender to make any Loan or otherwise extend any credit to the Company upon
the occasion of each
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borrowing or other extension of credit hereunder is subject to the further
conditions precedent that, both immediately prior to such borrowing or other
extension of credit and also after giving effect thereto and to the intended use
thereof:
(a) no Default shall have occurred and be continuing; and
(b) the representations and warranties made by the Company in
Section 8 hereof, and by each Obligor in each of the other Loan
Documents to which it is a party, shall be true and complete in all
material respects on and as of the date of the making of such Loan or
other extension of credit with the same force and effect as if made on
and as of such date (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such
specific date).
Each notice of borrowing by the Company hereunder shall constitute a
certification by the Company to the effect set forth in the preceding sentence
(both as of the date of such notice or request and, unless the Company otherwise
notifies the Administrative Agent prior to the date of such borrowing or
issuance, as of the date of such borrowing or issuance).
Section 8. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to the Agents and the Lenders that:
8.1. EXISTENCE. Each of the Company and the Material Subsidiaries:
(a) is a corporation, partnership, limited liability company or other entity
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; (b) has all requisite corporate, partnership
or other power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being or as proposed to be conducted, except to the extent that the failure
to have any such license, authorization, consent or approval would not
reasonably be expected (either individually or in the aggregate) to have a
Material Adverse Effect; and (c) is qualified to do business and is in good
standing in all jurisdictions in which the nature of the business conducted by
it makes such qualification necessary and where failure so to qualify would not
reasonably be expected (either individually or in the aggregate) to have a
Material Adverse Effect.
8.2. FINANCIAL CONDITION. The Company has heretofore furnished to
each of the Lenders the audited Consolidated balance sheet of the Company as at
December 31, 1998 and the related Consolidated statements of earnings,
shareholders' equity and cash flows of the Company for the fiscal year ended on
said date, with the report thereon of PriceWaterhouseCoopers, and the unaudited
Consolidated balance sheet of the Company as at June 30, 1999, and the related
unaudited Consolidated statements of income and cash flows for the period ended
on said date. All such financial statements fairly present in all material
respects the Consolidated financial position of the Company as at said dates and
the Consolidated results of its operations for the fiscal year and period ended
on said dates (subject, in the case of such financial statements as at June 30,
1999, to normal year-end audit adjustments), all in accordance with generally
accepted accounting principles and practices applied on a consistent basis. The
Company does not on the date hereof have any material contingent liabilities,
liabilities for taxes, unusual forward or long-
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term commitments or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in said balance
sheets or the notes thereto as at said dates. Since June 30, 1999, there has
been no material adverse change in the business, operations or financial
condition of the Company from that set forth in said financial statements as at
said date.
8.3. LITIGATION. Except as disclosed in SCHEDULE 8.3 hereto, there
are no legal or arbitral proceedings, or any proceedings by or before any
governmental or regulatory authority or agency, now pending or (to the knowledge
of the Company) threatened against the Company, or any of its Subsidiaries that,
if adversely determined could (either individually or in the aggregate) be
reasonably expected to have a Material Adverse Effect.
8.4. NO BREACH. The execution and delivery of this Agreement and
the Notes and the other Loan Documents, the consummation of the transactions
herein and therein contemplated and the compliance with the terms and provisions
hereof and thereof do not and will not: (a) conflict with, violate or result in
a breach of, or require any consent under the charter or by-laws (or equivalent
constitutional documents) of any Obligor; (b) violate or result in a breach of
any applicable law or regulation; (c) conflict with, violate or result in a
breach of, or require any consent under any order, writ, injunction or decree of
any court or governmental authority or agency, or any agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which any of them
or any of their Property is bound or to which any of them is subject; (d)
constitute a default, or result in the termination of any commitment to extend
credit, under any such agreement or instrument; or (e) result in the creation or
imposition of any Lien upon any Property of the Company or any of its
Subsidiaries pursuant to the terms of any such agreement or instrument (except
for any Lien created by the Pledge Agreement); except to the extent, with
respect to the foregoing clauses (c) and (d), any such conflict, violation,
breach or default, or the failure to have any such consent, (i) could not
reasonably be expected (either individually or in the aggregate) to have a
Material Adverse Effect and (ii) does not and will not result in any liability
of the Administrative Agent or any Lender or in the acceleration or required
prepayment of any Indebtedness or the termination of any commitments to extend
credit.
8.5. ACTION. Each Obligor has all necessary corporate or
partnership power, authority and legal right to execute, deliver and perform its
obligations under each of the Loan Documents to which it is a party; the
execution, delivery and performance by each Obligor of each of the Loan
Documents to which it is a party have been duly authorized by all necessary
corporate or partnership action on its part (including, without limitation, any
required shareholder approvals); and this Agreement has been duly and validly
executed and delivered by each Obligor and constitutes, and each of the Notes
and the other Loan Documents to which it is a party when executed and delivered
by such Obligor (in the case of the Notes, for value) will constitute, its
legal, valid and binding obligation, enforceable against each Obligor in
accordance with its terms.
8.6. APPROVALS. No authorizations, approvals or consents of, and no
filings or registrations with, any governmental or regulatory authority or
agency, or any securities
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exchange, are necessary for the execution, delivery or performance by any
Obligor of the Loan Documents to which it is a party or for the legality,
validity or enforceability hereof or thereof, except for approvals,
authorizations, consents, filings and registrations that have already been
obtained or made.
8.7. USE OF CREDIT. None of the Obligors is engaged principally,
or as one of its important activities, in the business of extending credit for
the purpose, whether immediate, incidental or ultimate, of buying or carrying
Margin Stock, and no part of the proceeds of the Loans or other extensions of
credit hereunder will be used to buy or carry any Margin Stock.
8.8. ERISA. Each Plan, and, to the knowledge of the Company, each
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law, and no event
or condition has occurred and is continuing as to which the Company would be
under an obligation to furnish a report to the Lenders under Section 9.1(e)
hereof.
8.9. TAXES. The Company and its Subsidiaries have filed all income
tax returns and all other material tax returns in all jurisdictions in which
such returns are required to have been filed by any of them and have paid all
taxes shown to be due and payable on such returns and all other taxes and
assessments in any material amount payable by any of them pursuant to any
assessment received by the Company or any of its Subsidiaries, except for any
such taxes and assessments (x) the amount, applicability or validity of which is
currently being contested in good faith by appropriate proceedings and (y) with
respect to which the Company or one of its Subsidiaries (as the case may be) has
set aside on its books adequate reserves in accordance with generally accepted
accounting principles. The charges, accruals and reserves on the books of the
Company and its Subsidiaries in respect of taxes and other governmental charges
are, in the opinion of the Company, adequate. The Company has not given or been
requested to give a waiver of the statute of limitations relating to the payment
of any Federal, state, local and foreign taxes or other impositions in respect
of the Company or any of its Subsidiaries.
8.10. INVESTMENT COMPANY ACT. None of the Obligors is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
8.11. PUBLIC UTILITY HOLDING COMPANY ACT. None of the Obligors is a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended, or an "electric company," within the
meaning of Massachusetts General Laws, Chapter 164, as amended.
8.12. BORROWING AGREEMENTS AND LIENS.
(a) Part A of SCHEDULE 8.12 hereto includes a complete and
correct list, as of the date hereof, of each credit agreement, loan
agreement, indenture, purchase agreement, guarantee, letter of credit
or other arrangement providing for or otherwise
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relating to any Indebtedness or any extension of credit (or commitment
for any extension of credit) to, or guarantee by, the Company or any of
its Subsidiaries the aggregate principal or stated amount of which
equals or exceeds (or may equal or exceed) $1,000,000, and the
aggregate principal or stated amount outstanding or that may become
outstanding under each such arrangement is, as of the date hereof,
correctly described in Part A of said SCHEDULE 8.12.
(b) Part B of SCHEDULE 8.12 hereto is a complete and correct
list, as of the date hereof, of each Lien securing Indebtedness of any
Person the aggregate principal or stated amount of which equals or
exceeds (or may equal or exceed) $1,000,000 and covering any property
of the Company or any of its Subsidiaries, and the aggregate
Indebtedness secured (or that may be secured) by each such Lien and the
property covered by each such Lien is, as of the date hereof, correctly
described in said SCHEDULE 8.12.
8.13. COMPLIANCE WITH LAWS INCLUDING ENVIRONMENTAL AND SAFETY
MATTERS. Each of the Company and its Subsidiaries is in compliance in all
material respects with all applicable federal, state, county and local statutes,
laws, rules, regulations, codes and ordinances and orders and directives
including, without limitation, all Environmental Laws, health and safety
statutes and regulations and specifically the Federal Food, Drug and Cosmetic
Act, and the regulations promulgated thereunder, the effect of the
non-compliance with which would have a Material Adverse Effect. To the knowledge
of the Company, the Company and its Subsidiaries are not subject to any material
judicial or administrative proceedings alleging the violation of any applicable
law or regulation and neither the Company or its Subsidiaries is the subject of
any federal, state or local investigation regarding, among other matters, the
Release of any Hazardous Material into the environment, the results of which
would reasonably be likely to materially and adversely affect the Company and
its Subsidiaries' financial condition, operations, business or prospects, taken
as a whole. Neither the Company or its Subsidiaries has any contingent
liabilities in connection with any Release of any Hazardous Material into the
environment which would reasonably be likely to materially and adversely affect
the Company and its Subsidiaries' financial condition, operations, businesses or
prospects, taken as a whole.
8.14. SUBSIDIARIES, ETC. Set forth on SCHEDULE 8.14 hereto is a list
of all of the Subsidiaries of the Company as of the date hereof complete and
correct in all material respects, together with, for each such Subsidiary, (i)
the jurisdiction of organization of such Subsidiary, (ii) each Person holding
ownership interests in such Subsidiary and (iii) the nature of the ownership
interests held by each such Person and the percentage of ownership of such
Subsidiary represented by such ownership interests except as disclosed in
SCHEDULE 8.14 hereto, (x) each of the Company and its Subsidiaries owns, free
and clear of Liens, and has the unencumbered right to vote, all outstanding
ownership interests in each Person shown to be held by it in SCHEDULE 8.14
hereto, and (y) all of the issued and outstanding capital stock of each such
Person organized as a corporation is validly issued, fully paid and
nonassessable.
8.15. TITLE TO ASSETS; ETC. The Company and its Subsidiaries own and
have on the date hereof good and marketable or merchantable title (subject only
to Liens permitted by
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Section 9.6 hereof) to the material Properties shown to be owned in the audited
financial statements referred to in Section 8.2 hereof (other than properties
disposed of in the ordinary course of business or otherwise permitted to be
disposed of pursuant to Section 9.5 hereof). The Company and its Subsidiaries
own and have on the date hereof good and marketable or merchantable title to, or
lease, and enjoy on the date hereof peaceful and undisturbed possession of, all
material Properties (subject only to Liens permitted by Section 9.6 hereof) that
are necessary for the operation and conduct of its businesses.
8.16. INTELLECTUAL PROPERTY RIGHTS. Except with respect to events or
matters which are not reasonably expected to have a Material Adverse Effect, (a)
the Company and its Subsidiaries own or license all material Intellectual
Property necessary for the conduct of its business as presently conducted; (b)
all material agreements pursuant to which the Company and its Subsidiaries
license the manufacture, marketing or sale of products employing its
Intellectual Property are in full force and effect; (c) no claims, demands,
suits, or proceedings are pending or, to the knowledge of the Company and its
Subsidiaries, threatened which impair their rights in any material Intellectual
Property used in the conduct of their business or any material agreement
relating thereto; and (d) the Company and its Subsidiaries have not infringed
(without any license therefor) any Intellectual Property of any other Person,
and the present conduct of the Company and its Subsidiaries' business does not
infringe any such rights in any way which would have a Material Adverse Effect.
8.17. YEAR 2000 COMPLIANCE. The Company has taken all reasonably
necessary action to access and evaluate all of the hardware, software, embedded
microchips and other processing capabilities it uses and which is used in the
products it sells, directly or indirectly, and has made inquiry of the Company's
and its Subsidiaries' material suppliers and vendors, to be able to ensure that
the Company and its Subsidiaries and each product they sell will be able to
function accurately and without interruption using date information before,
during and after January 1, 2000 sufficiently so as not to cause a Material
Adverse Effect. The Company and its Subsidiaries have corrected, on or before
September 30, 1999, all such problems that are reasonably likely to have a
Material Adverse Effect, and the cost of any reprogramming and testing has not
and is not reasonably likely to have a Material Adverse Effect.
8.18. TRUE AND COMPLETE DISCLOSURE. The reports, financial
statements, exhibits, schedules and other documents furnished by or on behalf of
the Obligors to the Administrative Agent or any Lender in connection with the
negotiation, preparation or delivery of this Agreement and the other Loan
Documents or included herein or therein or delivered pursuant hereto or thereto,
when taken as a whole do not contain any untrue statement of material fact or
omit to state any material fact necessary to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading. All written information furnished after the date hereof by the
Company and its Subsidiaries to the Administrative Agent and the Lenders in
connection with this Agreement and the other Loan Documents and the transactions
contemplated hereby and thereby will be true, complete and accurate in every
material respect, or (in the case of projections) based on reasonable estimates,
on the date as of which such information is stated or certified. There is no
fact known to the Company that could reasonably be expected to have a Material
Adverse Effect that has not been disclosed herein, in the other
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Loan Documents or in a report, financial statement, exhibit, schedule,
disclosure letter or other writing furnished to the Lenders for use in
connection with the transactions contemplated hereby or thereby.
Section 9. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Lenders and the Agents that, so long as any Commitment, or Loan is outstanding
and until payment in full of all amounts payable by the Company hereunder:
9.1. FINANCIAL STATEMENTS ETC.: The Company shall deliver to each
of the Lenders:
(a) as soon as available and in any event within 45 days after
the end of the first three quarterly fiscal periods of each fiscal year
of the Company, Consolidated statements of earnings, shareholders'
equity and cash flows of the Company and its Subsidiaries for such
period and for the period from the beginning of the respective fiscal
year to the end of such period, and the related Consolidated balance
sheets of the Company and its Subsidiaries as at the end of such
period, setting forth in each case in comparative form, to the extent
such figures appear therein, the corresponding Consolidated figures for
the corresponding periods in the preceding fiscal year accompanied by a
certificate of a senior financial officer of the Company, which
certificate shall state that said Consolidated financial statements
present fairly in all material respects the Consolidated financial
position and results of operations of the Company and its Subsidiaries,
in accordance with GAAP, consistently applied, as at the end of, and
for, such period (subject to normal year-end audit adjustments);
(b) as soon as available and in any event within 90 days after
the end of each fiscal year of the Company, Consolidated statements of
earnings, shareholders' equity and cash flows of the Company and its
Subsidiaries for such fiscal year and the related Consolidated balance
sheets of the Company and its Subsidiaries as at the end of such fiscal
year, setting forth in each case in comparative form, to the extent
such figures appear therein, the corresponding Consolidated figures for
the preceding fiscal year, and accompanied by a report thereon of
independent certified public accountants of recognized national
standing, which report shall state that said Consolidated financial
statements present fairly in all material respects the Consolidated
financial position and results of operations of the Company and its
Subsidiaries as at the end of, and for, such fiscal year in accordance
with GAAP, consistently applied;
(c) simultaneously with the delivery of the financial statements
required under Section 9.1(a) and (b) above, (i) a copy of the
Company's Form 10-Q or 10-K filing made for the periods covered by such
financial statements or, if such filings are not available, a brief
narrative description of material businesses and financial trends and
developments and significant transactions that have occurred in the
period or periods covered thereby, together with (ii) a Compliance
Certificate as of the date of such financial statements, in the form
attached as EXHIBIT D hereto;
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(d) promptly upon their becoming available, copies of all (i)
regular, periodic and special reports that the Company shall have filed
with the Securities and Exchange Commission (or any governmental agency
substituted therefor) pursuant to the Securities Exchange Act of 1934,
as amended (ii) financial statements, reports, notices or proxy or
other statements sent to shareholders of the Company, and (iii) press
releases and other statements generally made available by the Company
to the public concerning material developments in the business of the
Company;
(e) as soon as possible and in any event within five (5) days
after any officer of Company obtains knowledge thereof: (i) Company's
failure to make any required payment to any Plan in sufficient amount
to comply with ERISA and the Code on or before the due date for such
payment; (ii) the occurrence or expected occurrence of any "reportable
event" under ERISA, "prohibited transaction" or "accumulated funding
deficiency" with respect to any Plan; (iii) receipt by Company of any
notice (A) from a Multiemployer Plan regarding the imposition of
withdrawal liability; or (B) of the institution, or expectancy of the
institution, of any proceeding or any other action which may result in
the termination of any Plan, or Company's withdrawal or partial
withdrawal from any Plan;
(f) promptly after the Company knows that any Default has
occurred, a notice of such Default describing the same in reasonable
detail and, together with such notice or as soon thereafter as
possible, a description of the action that the Company has taken or
proposes to take with respect thereto (a "Notice of Default");
(g) within thirty (30) days of obtaining knowledge thereof, the
Company shall provide Lender with a written notice and reasonable
description of any events or conditions which, if they existed and were
known to the Company on the date of this Agreement, would have violated
the warranty and representation made in Section 8.16 (dealing with
Intellectual Property Rights); and
(h) from time to time such other information regarding the
Property, operations, business, financial condition or prospects of the
Company or any of its Subsidiaries as any Lender or any Agent may
reasonably request.
9.2. LITIGATION. Promptly after the Company obtains knowledge
thereof, the Company will give notice to each Lender of all legal or arbitral
proceedings, and of all proceedings by or before any governmental or regulatory
authority or agency, and any material development in respect of such legal or
other proceedings, affecting the Company or any of its Subsidiaries, except
proceedings that, if adversely determined, would not (either individually or in
the aggregate) reasonably be expected to have a Material Adverse Effect.
9.3. EXISTENCE, ETC.. The Company:
(a) (i) will preserve and maintain its legal existence; (ii) will
preserve and maintain and all of its material rights, privileges,
licenses and franchises; and (iii) will cause each of its Material
Subsidiaries to, preserve and maintain its legal existence and all
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of its material rights, privileges, licenses and franchises (PROVIDED
that nothing in this Section 9.3 shall prohibit any transaction
expressly permitted under Section 9.5 hereof);
(b) will, and will cause each of its Subsidiaries to, comply with
the requirements of all applicable laws, rules, regulations and orders
of governmental or regulatory authorities if failure to comply with
such requirements could reasonably be expected (either individually or
in the aggregate) to have a Material Adverse Effect;
(c) will, and will cause each of its Subsidiaries to, pay and
discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property
prior to the date on which penalties attach thereto, except for any
such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which
adequate reserves are being maintained in accordance with generally
accepted accounting principles consistently applied, and except for any
such tax, assessment, charge or levy the failure to pay which would not
have a Material Adverse Effect;
(d) will, and will cause each Obligor to, maintain all of its
Properties used or useful in its business in good working order and
condition, ordinary wear and tear excepted;
(e) will, and will cause each of its Subsidiaries to, keep
adequate records and books of account, in which complete entries will
be made in accordance with generally accepted accounting principles
consistently applied; and
(f) will, and will cause each of its Material Subsidiaries to,
permit representatives of any Lender or any Agent, upon reasonable
advance notice to the Company or such Material Subsidiary and during
normal business hours, to examine, copy and make extracts from its
books and records, to inspect any of its Properties, and to discuss its
business and affairs with its officers, all to the extent reasonably
requested by such Lender or the Administrative Agent (as the case may
be); PROVIDED THAT (i) the Agents and the Lenders will endeavor to
cooperate with the Company or such Material Subsidiary in order to
minimize any interference with its normal business operations that may
result from any such inspection and (ii) except as otherwise provided
in Section 12.3 hereof, all expenses of the Agents and the Lenders in
connection with the exercise of their rights under this Section 9.3(f)
shall be for their own account.
9.4. INSURANCE. The Company will, and will cause each of its
Subsidiaries to, maintain insurance with financially sound and reputable
insurance companies, and with respect to Property and risks of a character
usually maintained by corporations engaged in the same or similar business
similarly situated, against loss, damage and liability of the kinds and in the
amounts customarily maintained by such corporations.
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9.5. PROHIBITION OF FUNDAMENTAL CHANGES.
(a) MERGER, CONSOLIDATION, ETC. The Company will not, nor will it
permit any of its Subsidiaries to, enter into any transaction of merger
or consolidation or amalgamation, or liquidate, wind up or dissolve
itself (or suffer any liquidation or dissolution).
(b) ACQUISITIONS. The Company will not, nor will it permit any of
its Subsidiaries to, acquire any business or Property from, or capital
stock of, or be a party to any acquisition of, any Person.
(c) SALE OF ASSETS. The Company will not, nor will it permit any
of its Subsidiaries to, convey, sell, lease, transfer or otherwise
dispose of, in one transaction or a series of transactions, any part of
its business or Property, whether now owned or hereafter acquired
(including, without limitation, receivables and leasehold interests)
other than the sale of inventory in the course of business.
(d) EXCEPTIONS. Notwithstanding the foregoing provisions of this
Section 9.5:
(i) any Subsidiary of the Company may be merged or
consolidated with or into, or have its assets liquidated and
distributed to, the Company or any other Subsidiary of the
Company; PROVIDED that (x) if any such merger or consolidation
shall be with the Company, the Company shall be the Person
surviving such merger or consolidation, (y) if any such merger or
consolidation shall be between any Subsidiary of the Company and
a Wholly Owned Subsidiary of the Company, such Wholly Owned
Subsidiary shall be the Person surviving such merger or
consolidation and (z) if any such merger or consolidation shall
be between a Subsidiary Guarantor and a Subsidiary of the Company
that is not a Subsidiary Guarantor, and such Subsidiary Guarantor
is not the continuing or surviving Person, then the continuing or
surviving Person shall have assumed all of the obligations of
such Subsidiary Guarantor hereunder and under the other Loan
Documents;
(ii) the Company and its Subsidiaries may acquire any
assets used or useful in the lines of business permitted under
Section 9.10 or the stock or other equity interests or rights as
a holder of indebtedness of any Person that is engaged in a line
of business permitted to the Company under Section 9.10 or merge
any Person that is in a line or lines of business permitted under
Section 9.10 with the Company or a Subsidiary or the Company or a
Subsidiary with any such Person (provided that the conditions in
the provisos in Section 9.5(d)(i) are satisfied with respect to
such merger) provided that at the time of the consummation of any
such transaction and after giving effect thereto, the Company
shall be in compliance with the covenants in Section 9.9 as of
the end of the most recent fiscal quarter or annual period of the
Company and the
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transaction will not be reasonably likely to result in the
noncompliance with such financial covenants;
(iii) the Company or any of its Subsidiaries may
purchase inventory and other Property to be sold or used in the
ordinary course of business, make Investments permitted by
Section 9.8 hereof and make Capital Expenditures in the ordinary
course of its business;
(iv) the Company or any Subsidiary of the Company may
convey, sell, lease, transfer or otherwise dispose of any or all
of its Property to the Company or any other Subsidiary of the
Company (and the Company or such other Subsidiary may acquire
such Property); PROVIDED that if any such conveyance, sale,
lease, transfer or other disposition is to a Subsidiary that is
not a Subsidiary Guarantor and relates to all or any material
part of the Property of the Company or a Subsidiary Guarantor,
then the transferee Subsidiary shall have assumed all of the
obligations of the Company or such Subsidiary Guarantor hereunder
and under the other Loan Documents; and PROVIDED, further, that
the Company or such Subsidiary Guarantor shall remain fully
obligated as an Obligor hereunder;
(v) the Company or any Subsidiary may convey, sell,
lease, transfer or otherwise dispose of any non-material Property
(of the Company and its Subsidiaries, taken as a whole) including
equity interests in any Person and the licensing of patents and
product rights; and
(vi) the Company or any Subsidiary may lease or
sublease any of its real Property.
9.6. LIMITATION ON LIENS. The Company will not, nor will it permit
any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien
upon any of its Property, whether now owned or hereafter acquired, except:
(a) Liens in existence on the date hereof, including, without
limitation, Liens required to be listed on SCHEDULE 8.12 (parts A and
B) hereto (excluding, however, Liens securing Indebtedness to be repaid
with the proceeds of Loans hereunder, as indicated on said SCHEDULE
8.12 (parts A and B), from and after the date of such repayment);
(b) Liens imposed by any governmental authority for taxes,
assessments or charges not in excess of $1,000,000 or not yet due or
that are being contested in good faith and by appropriate proceedings
if adequate reserves with respect thereto are maintained on the books
of the Company or the affected Subsidiaries, as the case may be, in
accordance with GAAP;
(c) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business that are not overdue or that are being contested in good faith
and by appropriate proceedings if adequate reserves with
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respect thereto are maintained or the books of the Company or the
affected Subsidiaries, as the case may be, in accordance with GAAP;
(d) pledges or deposits under worker's compensation, unemployment
insurance and other social security legislation;
(e) (i) deposits to secure the performance of bids, trade
contracts (other than for Indebtedness), leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a
like nature incurred in the ordinary course of business and (ii) Liens
arising from a seller's title retention provisions with respect to
goods or services acquired in the ordinary course of business;
(f) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and
encumbrances consisting of zoning restrictions, easements, licenses,
restrictions on the use of Property or imperfections in title thereto
that, in the aggregate, are not material in amount, and that do not in
any case materially detract from the value of the Property subject
thereto or interfere with the ordinary conduct of the business of the
Company or any of its Subsidiaries;
(g) Liens on Property of any Person that becomes a Subsidiary of
the Company after the date hereof, PROVIDED that such Liens are in
existence at the time such Person becomes a Subsidiary of the Company
and were not created in anticipation thereof;
(h) Liens upon fixed or capital assets to secure purchase money
Indebtedness or Capital Lease Obligations of the Company or a
Subsidiary; PROVIDED, THAT, (i) such Lien does not extend to or cover
any other Property of the Company or such Subsidiary and (ii) such Lien
does not secure any Indebtedness other than the Indebtedness so
incurred;
(i) Liens on the Genzyme Tissue Repair manufacturing facility and
equipment securing the repayment of Indebtedness permitted under
Section 9.7(i);
(j) Liens on the Genzyme (UK) Limited manufacturing facility and
equipment securing the repayment of the Indebtedness permitted under
Section 9.7(i);
(k) Liens arising from or upon any judgment or award, provided
that such judgment or award is being contested in good faith by proper
appeal proceedings, such judgment or award is not secured by any Lien
which is not discharged within thirty (30) days, and only so long as
execution thereon shall be stayed;
(l) Liens securing Indebtedness otherwise permitted under Section
9.7 that does not exceed, in the aggregate, $1,000,000 at any one time
outstanding; and
(m) Liens now or hereafter granted to the Agents or Lenders under
the Loan Documents.
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9.7. INDEBTEDNESS. The Company will not, nor will it permit any of
its Subsidiaries to, create, incur, assume, or suffer to exist any Indebtedness
except:
(a) Indebtedness to the Lenders hereunder and under the other
Loan Documents;
(b) Indebtedness outstanding on the date hereof including
Indebtedness in excess of $1,000,000 that is required to be listed on
SCHEDULE 8.12 hereto (excluding however, the Indebtedness to be repaid
with the proceeds of Loans hereunder, as indicated on said SCHEDULE
8.12, from and after the date of such repayment);
(c) Indebtedness of (i) Subsidiaries of the Company to the
Company, (ii) the Company to any of its Subsidiaries or (iii) of
Subsidiaries to Subsidiaries, PROVIDED, HOWEVER, that any Indebtedness
of the Company to any of its Subsidiaries (other than the Subsidiary
Guarantors and Genzyme Securities Corporation), and any Indebtedness of
any Subsidiary Guarantor or Genzyme Securities Corporation to any of
the Company's other Subsidiaries (other than the Subsidiary Guarantors
and Genzyme Securities Corporation), shall be subject to a
subordination agreement unconditionally providing that: (x) such
Indebtedness is subordinate and subject in right of payment to the
prior payment in full of the Obligations; (y) that no payments shall be
made on such Indebtedness, nor shall the holder of such Indebtedness
exercise any right or remedy with respect to such Indebtedness, until
payment and satisfaction in full of the Obligations; and (z)
notwithstanding clauses (x) and (y), payments may be made on account of
such Indebtedness UNLESS there has occurred an Event of Default that is
continuing or such payment(s) would result in an Event of Default;
(d) Indebtedness constituting Purchase Money Indebtedness or
Capital Lease Obligations incurred in the ordinary course of Company's
or such Subsidiaries' business;
(e) Indebtedness under or in respect of currency exchange
contracts or interest rate protection obligations incurred in the
ordinary course of business;
(f) Indebtedness in connection with performance bonds or letters
of credit obtained and issued in the ordinary course of business,
including letters of credit related to insurance associated with claims
for work-related injuries;
(g) Subordinated Debt;
(h) Indebtedness incurred to renew, extend, refinance or refund
any Indebtedness expressly permitted by any of the clauses of this
Section 9.7; and
(i) additional Indebtedness of the Company and its Subsidiaries,
including Indebtedness incurred to finance the construction of
manufacturing facilities and the acquisition of the equipment for the
Genzyme Tissue Repair Division and for Genzyme (UK) Limited, up to but
not exceeding $50,000,000 at any one time outstanding.
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9.8. INVESTMENTS. The Company will not, nor will it permit any of
its Subsidiaries to, make or permit to remain outstanding any Investments except
Investments made in the ordinary course of business of the Company or its
Subsidiaries or that would be permitted under the terms of Section 9.5.
9.9. FINANCIAL COVENANTS.
(a) CONSOLIDATED QUICK RATIO. The Company will not permit the
Consolidated Quick Ratio on the last day of any fiscal quarter of the
Company to be less than 1.50 to 1.00 (commencing with the fiscal
quarter of the Company ending in September, 1999).
(b) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. The Company will
not permit the Consolidated Fixed Charge Coverage Ratio for any period
of four consecutive fiscal quarters of the Company (commencing with the
period of four consecutive fiscal quarters of the Company ending in
September, 1999) to be less than 3.00 to 1.00.
(c) CONSOLIDATED LEVERAGE RATIO. The Company will not permit, as
of the last day of any fiscal quarter (commencing with the fiscal
quarter of the Company ending in September, 1999), the ratio of (a)
Consolidated Funded Debt less all Unrestricted Cash and Marketable
Investments of the Company and its Consolidated Subsidiaries in excess
of $125,000,000; to (b) Consolidated EBITDA of the Company for the
period of four consecutive fiscal quarters then ended to exceed 2.00 to
1.00.
9.10. LINES OF BUSINESS. The Company will not, and will not permit
any of its Subsidiaries to, engage to any significant extent in any line or
lines of business activity other than the biotechnology, pharmaceutical, medical
devices, therapeutic products, medical products, and medical services and
diagnostic services businesses.
9.11. USE OF PROCEEDS. The Company will use the proceeds of the
Loans hereunder to finance transactions permitted under Section 9.5 and to
finance the ongoing working capital and other general corporate needs of the
Company and its Subsidiaries (in each case, in compliance with all applicable
legal and regulatory requirements, including, without limitation, Regulations U
and X and the Securities Act of 1933 and the Securities Exchange Act of 1934);
PROVIDED that neither any Agent nor any Lender shall have any responsibility as
to the use of any of such proceeds.
9.12. CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES.
(a) Except as permitted under Section 9.5 hereof, the Company
will, and will cause each of its Subsidiaries to, take such action from
time to time as shall be necessary to ensure that the Company and each
of its Subsidiaries at all times collectively own (subject to no Lien
other than the Lien granted under the Pledge Agreement) at least the
same percentage of the issued and outstanding shares of each class of
stock or other equity ownership interests of each of its Subsidiaries
as is collectively owned by the Company and its Subsidiaries on the
Closing Date.
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(b) The Company will not, and will not permit any of its Material
Subsidiaries to, enter into, after the Closing Date, any indenture,
agreement, instrument or other arrangement (other than entering into
one or more of the Loan Documents) that, directly or indirectly,
prohibits or restrains, or has the effect of prohibiting or
restraining, or imposes materially adverse conditions upon, the
incurrence or payment of Indebtedness, the granting of Liens, the
declaration or payment of dividends, the making of loans, advances or
other Investments or the sale, assignment, transfer or other
disposition of Property, other than (i) any indenture, agreement,
instrument or other arrangement relating to Indebtedness of a
Subsidiary of the Company acquired by the Company after the date hereof
which was entered into by such Subsidiary prior to the date on which
the Company acquired such Subsidiary (and which was not entered into in
contemplation of such acquisition), provided that the terms and
conditions thereof only relate to such Subsidiary and not the Company
or its other Subsidiaries and are no more restrictive than the terms
and conditions hereof, (ii) any indenture, agreement, instrument or
other arrangement effecting the refinancing of any Indebtedness
referred to in clause (i) above so long as the prohibitions and
restrictions contained in the documents relating to such refinancing
are as a whole no less favorable to the Lenders or the obligor in
respect of such Indebtedness than the prohibitions and restrictions
contained in the documents relating to the Indebtedness being
refinanced, (iii) customary non-assignment provisions in leases
governing leasehold interests to the extent such provisions restrict
transfer of rights under the related lease, (iv) restrictions on the
transfer of or the granting of Liens on Property of the Company or any
of its Subsidiaries subject to a Lien expressly permitted by Section
9.6 hereof securing Indebtedness expressly permitted by Section 9.7
hereof to the extent such restrictions are contained in documents
evidencing or relating to such Indebtedness and (v) restrictions on the
transfer of Property of the Company or any of its Subsidiaries that is
the subject of a disposition expressly permitted by Section 9.5 hereof
to the extent such restrictions are contained in the documents relating
to such disposition.
9.13. ADDITIONAL SUBSIDIARY GUARANTORS. In the event that the
Company shall, after the date of this Agreement, hold or acquire any Material
Subsidiary that is not already a Subsidiary Guarantor, the Company will, and
will cause each of its other Subsidiaries to, cause such Material Subsidiary (a)
to execute and deliver to each Agent and each Lender a joinder agreement in the
form of EXHIBIT E hereto, (b) to execute and deliver to the Administrative Agent
and each Lender a written instrument in form and substance satisfactory to the
Required Lenders and the Administrative Agent pursuant to which such Material
Subsidiary shall become an "Obligor" hereunder and (c) to deliver such proof of
corporate action, incumbency of officers, opinions of counsel (it being agreed
that any such opinion may be an opinion of internal counsel qualified to
practice law in the jurisdiction(s) relevant to such opinion) and other
documents as are consistent with those delivered by the Company pursuant to
Section 7.1 hereof or as the Administrative Agent shall have reasonably
requested. Upon execution and delivery by such Material Subsidiary of any
agreement referred to in the foregoing clauses, each of the representations and
warranties in Section 8 hereof with respect to such Material Subsidiary and each
Loan Document to which it shall have become a party shall be deemed made by the
Company.
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9.14. SUBORDINATED DEBT. The Company shall not, and shall cause its
Subsidiaries to not, make any prepayments of principal, any non-mandatory
payments of principal, or any other payments of principal other than regularly
scheduled payments of principal on account of Subordinated Debt, other than by
conversion to Capital Stock or other equity of the Company or other Subordinated
Debt.
Section 10. EVENTS OF DEFAULT. If one or more of the following events (herein
called "EVENTS OF DEFAULT") shall occur and be continuing:
(a) The Company shall default in the payment when due (whether at
stated maturity or upon mandatory or optional prepayment) of any
principal of or interest on any Loan, provided, however, that as to the
non-payment of interest, there shall be a one (1) Business Day grace
period without any requirement of notice, but the Company shall not be
entitled to such grace period more than once in any consecutive
twelve-month period; or
(b) The Company shall default in the payment of any fee or any
other amount (other than principal of or interest on any Loan) payable
by it hereunder or under any other Loan Document and such default shall
continue unremedied for a period of five (5) days after notice to the
Company from the Administrative Agent; or
(c) The Company or any of its Subsidiaries shall default in the
payment when due of any principal of or interest on any of its other
Indebtedness aggregating to at least $5,000,000 (after the expiration
of any grace period originally provided for); or any event specified in
any note, agreement, indenture or other document evidencing or relating
to any such Indebtedness shall occur if the effect of such event is to
cause, or (with the giving of any notice or the lapse of time or both)
to permit the holder or holders of such Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause, such Indebtedness
to become due, or to be prepaid in full (whether by redemption,
purchase, offer to purchase or otherwise), prior to its stated
maturity; or
(d) Any representation, warranty or certification made or deemed
made herein or in any other Loan Document (or in any modification or
supplement hereto or thereto) by any Obligor, or any certificate
furnished to any Lender or any Agent pursuant to the provisions hereof
or thereof, shall prove to have been false or misleading as of the time
made or furnished in any material respect; or
(e) (i) The Company shall default in the performance of any of
its obligations under any of Sections 9.1(c), 9.1 (e), 9.1(f), 9.1(g),
9.3(a)(i), 9.3(f), 9.5, 9.6, 9.7, 9.9, 9.10, 9.11, 9.12, 9.13, and 9.14
hereof; or
(ii) Any Obligor shall default in the performance of any of
its other obligations in this Agreement or any other Loan Document and
such default (if remediable) shall continue unremedied for a period of
30 or more days after notice
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thereof to the Company by the Administrative Agent or any Lender
(through the Administrative Agent); or
(f) The Company or any of its Material Subsidiaries shall admit
in writing its inability to, or be generally unable to, pay its debts
as such debts become due; or
(g) The Company or any of its Material Subsidiaries shall (i)
apply for or consent to the appointment of, or the taking of possession
by, a receiver, custodian, trustee, examiner or liquidator of itself or
of all or a substantial part of its Property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary
case under the Bankruptcy Code, (iv) file a petition seeking to take
advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
composition or readjustment of debts, (v) fail to convert in a timely
and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code, (vi) cause
or be subject to any event with respect to it which, under the
applicable laws of any foreign jurisdiction, has an analogous effect to
any of the events specified in the foregoing clauses (i) to (v) or
(vii) take any corporate action for the purpose of effecting any of the
foregoing; or
(h) A proceeding or case shall be commenced, without the
application or consent of the Company or any of its Material
Subsidiaries, in any court of competent jurisdiction, seeking (i) its
reorganization, liquidation, dissolution, arrangement or winding-up, or
the composition or readjustment of its debts, (ii) the appointment of a
receiver, custodian, trustee, examiner, liquidator or the like of the
Company or such Material Subsidiary or of all or any substantial part
of its Property, (iii) similar relief in respect of the Company or such
Material Subsidiary under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and
such proceeding or case shall continue undismissed, or an order,
judgment or decree approving or ordering any of the foregoing shall be
entered and continue unstayed and in effect, for a period of 60 or more
days or (iv) relief with respect to it which, under the applicable laws
of any foreign jurisdiction, has an analogous effect to any of the
actions specified in foregoing clauses (i) to (iii); or an order for
relief against the Company or such Material Subsidiary shall be entered
in an involuntary case under the Bankruptcy Code; or
(i) A final judgment or judgments for the payment of money in
excess of $1,000,000 in the aggregate (exclusive of judgment amounts
fully covered by insurance where the insurer has a claims paying
ability rated AA- or better from S&P or a financial strength rating of
AA or better from Moody's) shall be rendered by one or more courts,
administrative tribunals or other bodies having jurisdiction against
the Company or any of its Subsidiaries and the same shall not be
discharged (or provision shall not be made for such discharge) or
vacated, or a stay of execution thereof shall not be procured, within
30 days from the date of entry thereof and the Company or the relevant
Subsidiary shall not, within said period of 30 days, or such longer
period during which execution of the
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same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal; or
(j) An event or condition specified in Section 9.1(e) hereof
shall occur or exist with respect to any Plan or Multiemployer Plan
and, as a result of such event or condition, together with all other
such events or conditions, the Company or any ERISA Affiliate shall
incur or in the opinion of the Required Lenders shall be reasonably
likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC
(or any combination of the foregoing) that, in the determination of the
Required Lenders, would (either individually or in the aggregate) have
a Material Adverse Effect; or
(k) There shall have been asserted against the Company or any of
its Subsidiaries an Environmental Claim that, in the judgment of the
Required Lenders is reasonably likely to be determined adversely to the
Company or any of its Subsidiaries, and the amount thereof (either
individually or in the aggregate) is reasonably likely to have a
Material Adverse Effect (insofar as such amount is payable by the
Company or any of its Subsidiaries but after deducting any portion
thereof that is reasonably expected to be paid by other creditworthy
Persons jointly and severally liable therefor); or
(l) Any Fundamental Change shall occur;
THEREUPON: (1) in the case of an Event of Default other than one referred to in
clause (g) or (h) of this Section 10 with respect to any Obligor, upon request
of the Required Lenders, (A) the Administrative Agent shall, by notice to the
Company, terminate the Commitments and they shall thereupon terminate, and (B)
the Administrative Agent shall, by notice to the Company declare the principal
amount then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Obligors hereunder and under the Notes (including,
without limitation, any amounts payable under Section 5.5 hereof) to be
forthwith due and payable, whereupon such amounts shall be immediately due and
payable without presentment, demand, protest or other formalities of any kind,
all of which are hereby expressly waived by each Obligor; and (2) in the case of
the occurrence of an Event of Default referred to in clause (g) or (h) of this
Section 10 with respect to any Obligor, the Commitments shall automatically be
terminated and the principal amount then outstanding of, and the accrued
interest on, the Loans and all other amounts payable by the Obligors hereunder
and under the Notes (including, without limitation, any amounts payable under
Section 5.5 hereof) shall automatically become immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are hereby expressly waived by each Obligor.
Section 11. THE AGENTS
11.1. APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby
appoints and authorizes the Administrative Agent to act as its agent hereunder
and under the other Loan Documents with such powers as are specifically
delegated to the Administrative Agent by the terms of this Agreement and of the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. Each Agent (which term as used in this sentence and in
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Section 11.5 and the first sentence of Section 11.6 hereof shall include
reference to their respective affiliates and their own and their affiliates'
officers, directors, employees and agents):
(a) shall have no duties or responsibilities except those
expressly set forth in this Agreement and in the other Loan Documents,
and shall not by reason of this Agreement or any other Loan Document be
a trustee for any Lender;
(b) shall not be responsible to the Lenders for any recitals,
statements, presentations or warranties contained in this Agreement or
in any other Loan Document, or in any certificate or other document
referred to or provided for in, or received by any of them under, this
Agreement or any other Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this
Agreement, any Note or any other Loan Document or any other document
referred to or provided for herein or therein or for any failure by the
Company or any other Person to perform any of its obligations hereunder
or thereunder;
(c) shall not, except to the extent expressly instructed by the
Required Lenders, be required to initiate or conduct any litigation or
collection proceedings hereunder or under any other Loan Document; and
(d) shall not be responsible for any action taken or omitted to
be taken by it hereunder or under any other Loan Document or under any
other document or instrument referred to or provided for herein or
therein or in connection herewith or therewith, except for its own
gross negligence, bad faith or willful misconduct.
Each Agent may employ agents and attorneys-in-fact and shall not be responsible
for the negligence or misconduct of any such agents or attorneys-in-fact
selected by it in good faith. Each Agent may deem and treat the payee of a Note
as the holder thereof for all purposes hereof unless and until a notice of the
assignment or transfer thereof shall have been filed with the Administrative
Agent, together with the consent of the Company to such assignment or transfer
(to the extent provided in Section 12.7(b) hereof). The identification of ABN
AMRO as Syndication Agent and the identification of Mellon Bank as Documentation
Agent hereunder shall not create any rights in favor of such parties in such
capacities, nor subject them to any duties or obligations, in such capacity.
11.2. RELIANCE BY AGENTS. Each Agent shall be entitled to rely upon
any certification, notice or other communication (including, without limitation,
any thereof by telephone, telecopy, telegram or cable) believed by it to be
genuine and correct and to have been signed or sent by or on behalf of the
proper Person or Persons, and upon advice and statements of legal counsel,
independent accountants and other experts selected by such Agent. As to any
matters not expressly provided for by this Agreement or any other Loan Document,
each Agent shall in all cases be fully protected in acting, or in refraining
from acting, hereunder or thereunder in accordance with instructions given by
the Required Lenders or, if provided herein, in accordance with the instructions
given by all of the Lenders as is required in such circumstance, and such
instructions of such Lenders and any action taken or failure to act pursuant
thereto shall be binding on all of the Lenders.
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11.3. DEFAULTS. Except with respect to Events of Default consisting
of the failure to make regularly scheduled interest payments hereunder, the
failure to repay all 364-Day Facility Revolving Credit Loans on the 364-Day
Facility Revolving Credit Commitment Termination Date, or the failure to pay all
Three-Year Facility Revolving Credit Loans on the Three-Year Facility Revolving
Credit Commitment Termination Date, no Agent shall be deemed to have knowledge
or notice of the occurrence of a Default unless the Administrative Agent has
received notice from a Lender or the Company specifying such Default and stating
that such notice is a "Notice of Default". In the event that the Administrative
Agent receives such a notice of the occurrence of a Default, the Administrative
Agent shall give prompt notice thereof to the other Agents and the Lenders. The
Administrative Agent shall (subject to Sections 11.1 and 11.7 hereof) take such
action with respect to such Default as shall be directed by the Required
Lenders, PROVIDED that, unless and until the Administrative Agent shall have
received such directions, the Administrative Agent may but shall not be
obligated to take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interest of the other
Agents and the Lenders except to the extent that this Agreement expressly
requires that such action be taken, or not be taken, only with the consent or
upon the authorization of the Required Lenders or all of the Lenders.
11.4. RIGHTS AS A LENDER. With respect to its Commitments and the
Loans made by it, Fleet (and any successor acting as Administrative Agent) and
ABN AMRO (and any successor acting as Syndication Agent) and Mellon (and any
successor acting as Documentation Agent) in their capacity as a Lender hereunder
shall have the same rights and powers hereunder as any other Lender and may
exercise the same as though it were not acting as an Agent, and the term
"Lender" or "Lenders" shall, unless the context otherwise indicates, include any
such Agent in its individual capacity. Fleet (and any successor acting as
Administrative Agent) and ABN AMRO (and any successor acting as Syndication
Agent) and Mellon (and any successor acting as Documentation Agent) and their
respective affiliates may (without having to account therefor to any Lender)
accept deposits from, lend money to, make investments in and generally engage in
any kind of banking, trust or other business with the Obligors (and any of their
Subsidiaries or Affiliates) as if they were not acting as an Agent, and Fleet
(and any such successor) and ABN AMRO (and any such successor) and Mellon (and
any such successor) and their respective affiliates may accept fees and other
consideration from the Obligors for services in connection with this Agreement
or otherwise without having to account for the same to the Lenders.
11.5. INDEMNIFICATION. The Lenders agree to indemnify each of the
Agents (to the extent not reimbursed under Section 12.3 hereof, but without
limiting the obligations of the Company under said Section 12.3) ratably in
accordance with their respective Commitments, for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever that may be imposed
on, incurred by or asserted against any Agent (including by any Lender) arising
out of or by reason of any investigation in or in any way relating to or arising
out of this Agreement or any other Loan Document or any other documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses that the Company is obligated to pay under Section 12.3 hereof, but
excluding, unless a Default has occurred and is continuing, normal
administrative costs and expenses incident to the
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performance of its agency duties hereunder) or the enforcement of any of the
terms hereof or thereof or of any such other documents, PROVIDED that no Lender
shall be liable for any of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the person to be indemnified.
11.6. NON-RELIANCE ON AGENTS AND OTHER LENDERS. Each Lender agrees
that it has, independently and without reliance on the Agents or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Company and its Subsidiaries
and decision to enter into this Agreement and that it will, independently and
without reliance upon the Agents or any other Lender, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own analysis and decisions in taking or not taking action under this
Agreement or under any other Loan Document. No Agent shall be required to keep
itself informed, as to the performance or observance by any Obligor of this
Agreement or any of the other Loan Documents or any other document referred to
or provided for herein or therein or to inspect the Properties or books of the
Company or any of its Subsidiaries. Except for notices, reports and other
documents and information expressly required to be furnished to the Lenders by
the Agents hereunder, the Agents shall not have any duty or responsibility to
provide any Lender with any credit or other information concerning the affairs,
financial condition or business of the Company or any of its Subsidiaries (or
any of their affiliates) that may come into the possession of any Agent or any
of their respective affiliates.
11.7. FAILURE TO ACT. Except for action expressly required of any
Agent hereunder and under the other Loan Documents, each Agent shall in all
cases be fully justified in failing or refusing to act hereunder and thereunder
unless it shall receive further assurances to its satisfaction from the Lenders
of their indemnification obligations under Section 11.5 hereof against any and
all liability and expense that may be incurred by it by reason of taking or
continuing to take any such action.
11.8. RESIGNATION OR REMOVAL OF AGENTS. Subject to the appointment
and acceptance of a successor Agent as provided below, an Agent may resign at
any time by giving notice thereof to the Lenders and the Company. Any Agent may
be removed as Agent hereunder upon the written consent of all Lenders exclusive
of such Agent upon the following: (i) willful misconduct in the performance of
such Agent's duties or responsibilities under this Agreement as finally
determined by a court of competent jurisdiction; or (ii) if a receiver, trustee
or conservator is appointed for such Agent or any state or federal regulatory
authority assumes management or control of such Agent or if, under applicable
law, the administrative or discretionary duties of such Agent hereunder become
controlled by or subject to the approval of any state or federal regulatory
authority. Upon any such resignation or removal, the Required Lenders shall have
the right to appoint a successor Agent to such capacity (and in that connection,
so long as no Event of Default shall have occurred and be continuing, subject to
the consent of the Company, not to be unreasonably withheld or delayed). If no
successor Agent shall have been so appointed by the Required Lenders and shall
have accepted such appointment within 30 days after such removal or the retiring
Agent's giving of notice of resignation then the retiring Agent may, on behalf
of the Lenders, appoint a successor Agent to such capacity, that shall be a bank
with a combined
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capital and surplus of at least $250,000,000 (and in that connection, so long as
no Event of Default shall have occurred and be continuing, subject to the
consent of the Company, not to be unreasonably withheld or delayed)). Upon the
acceptance of any appointment as an Agent hereunder by a successor Agent, (a)
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent and (b) the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as an Agent, the provisions of
this Section 11 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent.
11.9. CONSENTS UNDER OTHER LOAN DOCUMENTS. Except as otherwise
provided in Section 12.5 hereof with respect to this Agreement, the
Administrative Agent may, with the prior consent of the Required Lenders (but
not otherwise), consent to any modification, supplement or waiver under any of
the other Loan Documents, PROVIDED that, without the prior consent of each
Lender, the Administrative Agent shall not (except as provided herein) release
any collateral or any Obligor or otherwise terminate any Lien under any Loan
Document providing for collateral security, or agree to additional obligations
being secured by such collateral security.
Section 12. MISCELLANEOUS
12.1 WAIVER. No failure on the part of any Agent or any Lender to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under this Agreement or any Note shall operate as
a waiver thereof, nor shall any single or partial exercise of any right, power
or privilege under this Agreement or any Note preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Each Obligor irrevocably waives, to the fullest extent permitted by
applicable law, any claim that any action or proceeding commenced by any Agent
or any Lender relating in any way to this Agreement should be dismissed or
stayed by reason, or pending the resolution, of any action or proceeding
commenced by any Obligor relating in any way to this Agreement whether or not
commenced earlier. To the fullest extent permitted by applicable law, the
Obligors shall take all measures necessary for any such action or proceeding
commenced by any Agent or any Lender to proceed to judgment prior to the entry
of judgment in any such action or proceeding commenced by any Obligor.
12.2. NOTICES. All notices, requests and other communications provided
for herein and under the Security Documents (including, without limitation, any
modifications of, or waivers, requests or consents under, this Agreement) shall
be given or made in writing (including, without limitation, by telecopy), or,
with respect to notices given pursuant to Section 2.3 hereof or Section 4.5
hereof, by telephone, confirmed in writing by telecopier by the close of
business on the day the notice is given, delivered (or telephoned, as the case
may be) to the intended recipient at the "Address for Notices" specified below
its name on the signature pages hereof (below the name of the Company, in the
case of any Subsidiary Guarantor); or, as to any party, at such other address as
shall be designated by such party in a notice to each other party.
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Except as otherwise provided in this Agreement, all such communications shall be
deemed to have been duly given when transmitted by telecopier or personally
delivered or, in the case of a mailed notice, upon receipt, in each case given
or addressed as aforesaid.
12.3. EXPENSES, ETC. The Company agrees to pay or reimburse each of
the Lenders and each of the Agents for: (a) all reasonable out-of-pocket costs
and expenses of the Agents (including, without limitation, the reasonable fees
and expenses of Brown, Rudnick, Freed & Gesmer, special counsel to Fleet) in
connection with (i) the negotiation, preparation, execution and delivery of this
Agreement and the other Loan Documents and the extensions of credit hereunder,
(ii) the syndication of the Commitments and the Loans and (iii) the negotiation
or preparation of any modification, supplement or waiver of any of the terms of
this Agreement or any of the other Loan Documents (whether or not consummated);
(b) all reasonable out-of-pocket costs and expenses of each of the Lenders and
each of the Agents (including, without limitation, the reasonable fees and
expenses of legal counsel) in connection with (i) any Default and any
enforcement or collection proceedings resulting therefrom, including, without
limitation, all manner of participation in or other involvement with (w) the
exercise of the Agents' and Lenders' rights under Section 9.3(f) hereof, (x)
bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation
proceedings, (y) judicial or regulatory proceedings and (z) workout,
restructuring or other negotiations or proceedings (whether or not the workout,
restructuring or transaction contemplated thereby is consummated) and (ii) the
enforcement of this Section 12.3; and (c) all transfer, stamp, documentary or
other similar taxes, assessments or charges levied by any governmental or
revenue authority in respect of this Agreement or any of the other Loan
Documents or any other document referred to herein or therein and all reasonable
costs, expenses, taxes, assessments and other charges incurred in connection
with any filing, registration, recording or perfection of any security interest
contemplated by any Loan Document or any other document referred to therein.
12.4. INDEMNIFICATION. The Company hereby agrees to indemnify each
Agent, each Lender, their affiliates and their respective directors, officers,
employees, attorneys and agents from, and hold each of them harmless against,
any and all losses, liabilities, claims, damages or expenses incurred by any of
them (including, without limitation, any and all losses, liabilities, claims,
damages or expenses incurred by any Agent to any Lender, whether or not any
Agent or any Lender is a party thereto) arising out of or by reason of any
investigation or litigation or other proceedings (including any threatened
investigation or litigation or other proceedings) relating to the extensions of
credit hereunder or any actual or proposed use by the Company or any of its
Subsidiaries of the proceeds of any of the extensions of credit hereunder,
including, without limitation, the reasonable fees and disbursements of counsel
incurred in connection with any such investigation or litigation or other
proceedings (but excluding any such losses, liabilities, claims, damages or
expenses incurred by reason of the gross negligence or willful misconduct of the
Person to be indemnified). Without limiting the generality of the foregoing, the
Company will indemnify each Agent and each Lender from, and hold each Agent and
each Lender harmless against, any losses, liabilities, claims, damages or
expenses described in the preceding sentence (but excluding, as provided in the
preceding sentence, any loss, liability, claim, damage or expense incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified) arising under any Environmental Law as a result of
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(i) the past, present or future operations of the Company or any of its
Subsidiaries (or any predecessor in interest to the Company or any of its
Subsidiaries), (ii) the past, present or future condition of any site or
facility owned, operated or leased at any time by the Company or any of its
Subsidiaries (or any such predecessor in interest) or (iii) any Release or
threatened Release of any Hazardous Materials at or from any such site or
facility, including any such Release or threatened Release that shall occur
during any period when any Agent or any Lender shall be in possession of any
such site or facility following the exercise by the Administrative Agent or any
Lender of any of its rights and remedies hereunder.
12.5. AMENDMENTS, ETC.. Except as otherwise expressly provided in
this Agreement, any provision of this Agreement may be modified or supplemented
only by an instrument in writing signed by the Company, the Administrative Agent
and the Required Lenders, or by the Company and the Administrative Agent acting
with the consent of the Required Lenders, and any provision of this Agreement
may be waived by the Required Lenders or by the Administrative Agent acting with
the consent of the Required Lenders; PROVIDED that: (a) no modification,
supplement or waiver shall, unless by an instrument signed by all of the Lenders
or by the Administrative Agent acting with the consent of all of the Lenders:
(i) increase, or extend the term of any of the Commitments, or extend the time
or waive any requirement for the reduction or termination of any of the
Commitments, (ii) extend the date fixed for the payment of principal of or
interest on any Loan, or any fee hereunder, (iii) reduce the amount of any such
payment of principal, (iv) reduce the rate at which interest is payable thereon
or any fee is payable hereunder, (v) alter the rights or obligations of the
Company to prepay Loans, (vi) alter the terms of Section 4.2, 4.7 or 11.9 hereof
or this Section 12.5, (vii) modify the definition of the term "Required
Lenders", or modify in any other manner the number or percentage of the Lenders
required to make any determinations or waive any rights hereunder or to modify
any provision hereof, (viii) release any Obligor hereunder, or (ix) waive any of
the conditions precedent set forth in Section 7.1 hereof; (b) any modification
or supplement of Section 11 hereof shall require the consent of the
Administrative Agent; and (c) any modification or supplement of Section 6 hereof
shall require the consent of each Subsidiary Guarantor (PROVIDED that any
Subsidiary of the Company may become a party to this Agreement as a "Subsidiary
Guarantor" hereunder as provided in Section 9.13 hereof).
12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
12.7. ASSIGNMENTS AND PARTICIPATIONS.
(a) No Obligor may assign any of its rights or obligations
hereunder or under the Notes without the prior consent of all of the
Lenders and the Agent.
(b) Each Lender may assign any of its Loans, its Note and its
Commitment but only with the consent of the Company and the
Administrative Agent; PROVIDED THAT
(i) no such consent by the Company or the
Administrative Agent shall be required in the case of any
assignment to another Lender or to an Affiliate of any Lender,
and no such consent by the Company shall be required in
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the case of any assignment effected while an Event of Default has
occurred and is continuing;
(ii) except to the extent the Company and the
Administrative Agent shall otherwise consent, any such partial
assignment (other than to another Lender) shall be in an amount
at least equal to $5,000,000;
(iii) upon each such assignment, the assignor and
assignee shall deliver to the Company and the Administrative
Agent a Notice of Assignment in the form of EXHIBIT F hereto; and
(iv) no consent required of the Company or the
Administrative Agent under this Section 12.7(b) shall be
unreasonably withheld or delayed.
Upon execution and delivery by the assignor and the assignee to
the Company and the Administrative Agent of such Notice of Assignment
and upon the consent thereto by the Company and the Administrative
Agent, the assignee shall have, to the extent of such assignment
(unless otherwise consented to by the Company and the Administrative
Agent), the obligations, rights and benefits of a Lender hereunder
holding the Commitment(s) and Loans (or portions thereof) assigned to
it and specified in such Notice of Assignment (in addition to the
Commitment(s) and Loans, if any, theretofore held by such assignee) and
the assigning Lender shall, to the extent of such assignment, be
released from the Commitment(s) (or portion(s) thereof) so assigned.
Upon each such assignment the assigning Lender shall pay the
Administrative Agent an assignment fee of $4,500.
(c) A Lender may sell or agree to sell to one or more other
Persons a participation in all or any part of any Loans held by it, or
in its Commitments, in which event each purchaser of a participation (a
"Participant"), except with respect to a Lender as otherwise provided
in Section 4.7(c) hereof, shall not have any rights or benefits under
this Agreement or any Note or any other Loan Document (the
Participant's rights against such Lender in respect of such
participation to be those set forth in the agreements executed by such
Lender in favor of the Participant). All amounts payable by the Company
to any Lender under Section 5 hereof in respect of Loans held by it,
and its Commitments, shall be determined as if such Lender had not sold
or agreed to sell any participations in such Loans and Commitments, and
as if such Lender were funding each of such Loan and Commitments in the
same way that it is funding the portion of such Loan and Commitments in
which no participations have been sold. In no event shall a Lender that
sells a participation agree with the Participant to take or refrain
from taking any action hereunder or under any other Loan Document
except that such Lender may agree with the Participant that it will
not, without the consent of the Participant, agree to (i) increase or
extend the term, or extend the time or waive any requirement for the
reduction or termination, of such Lender's related Commitment, (ii)
extend the date fixed for the payment of principal of or interest on
the related Loan or Loans, or any portion of
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<PAGE>
any fee hereunder payable to the Participant, (iii) reduce the amount
of any such payment of principal, (iv) reduce the rate at which
interest is payable thereon, or any fee hereunder payable to the
Participant, to a level below the rate at which the Participant is
entitled to receive such interest or fee, (v) alter the rights or
obligations of the Company to prepay the related Loans or (vi) consent
to any modification, supplement or waiver hereof or of any of the other
Loan Documents to the extent that the same, under Section 11.9 or 12.4
hereof, requires the consent of each Lender.
(d) In addition to the assignments and participations permitted
under the foregoing provisions of this Section 12.7, any Lender may
(without notice to the Company, the Administrative Agent or any other
Agent or Lender and without payment of any fee) (i) assign and pledge
all or any portion of its Loans, and Notes to any Federal Reserve Bank
as collateral security pursuant to Regulation A and any Operating
Circular issued by such Federal Reserve Bank and (ii) assign all or any
portion of its rights under this Agreement and its Loans, and Note to
an Affiliate provided that the Company shall not be required to pay any
increase in the cost of borrowing as a result of such assignment and
LIBOR Loans must continue to be made available by such Assignee.
(e) A Lender may furnish any information concerning the Company
or any of its Subsidiaries in the possession of such Lender from time
to time to assignees and participants (including prospective assignees
and participants), subject, however, to the provisions of Section 12.13
hereof.
(f) Anything in this Section 12.7 to the contrary
notwithstanding, no Lender may assign or participate any interest in
any Commitment or Loan held by it hereunder to the Company or any of
its Affiliates or Subsidiaries, and the Company shall not, and shall
not permit any of its Subsidiaries to, acquire any such interest in any
Commitment or Loan, without the prior consent of each Lender.
12.8. SURVIVAL. The obligations of the Company under Sections 5.1,
5.5, and 12.3 hereof, the obligations of each Subsidiary Guarantor under Section
6.3 hereof, and the obligations of the Lenders under Section 11.5 hereof, shall
survive the repayment of the Loans and the termination of the Commitments and,
in the case of any Lender that may assign any interest in its Commitments or
Loans hereunder, shall survive the making of such assignment, notwithstanding
that such assigning Lender may cease to be a "Lender" hereunder. In addition,
each representation and warranty made, or deemed to be made by a notice of
borrowing herein or pursuant hereto shall survive the making of such
representation and warranty, and no Lender shall be deemed to have waived, by
reason of making any extension of credit, any Default that may arise by reason
of such representation or warranty proving to have been false or misleading,
notwithstanding that such Lender or any Agent may have had notice or knowledge
or reason to believe that such representation or warranty was false or
misleading at the time such extension of credit was made.
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<PAGE>
12.9. CAPTIONS. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
12.10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
12.11. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and
the Notes shall be governed by, and construed in accordance with, the law of The
Commonwealth of Massachusetts. Each Obligor hereby submits to the nonexclusive
jurisdiction of the United States District Court for the District of
Massachusetts and of the Superior Court of the Commonwealth of Massachusetts
sitting in Suffolk County, and any appellate court in the Commonwealth of
Massachusetts, for the purposes of all legal proceedings arising out of or
relating to this Agreement or the transactions contemplated hereby. Each Obligor
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any objection that it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum.
12.12. WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENTS AND THE
LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
12.13. CONFIDENTIALITY.
(a) The Company acknowledges that from time to time financial
advisory, investment banking and other services may be offered or
provided to the Company or one or more of its Subsidiaries (in
connection with this Agreement or otherwise) by any Lender or by one or
more subsidiaries or affiliates of such Lender and the Company hereby
authorizes each Lender to share any information delivered to such
Lender by the Company and its Subsidiaries pursuant to this Agreement
and the other Loan Documents, or in connection with the decision of
such Lender to enter into this Agreement, to any such subsidiary or
affiliate, it being understood that any such subsidiary or affiliate
receiving such information shall be bound by the provisions of
paragraph (b) below as if it were a Lender hereunder. Such
authorization shall survive the repayment of the Loans and the
termination of the Commitments.
(b) Each Lender and each Agent agrees (on behalf of itself and
each of its affiliates, directors, officers, employees and
representatives) to keep confidential, in accordance with their
customary procedures for handling confidential information of the same
nature and in accordance with safe and sound banking practices, any
non-public information supplied to it by the Company pursuant to this
Agreement and the other Documents, provided that nothing herein shall
limit the disclosure of any such
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<PAGE>
information (i) to the extent required by statute, rule, regulation or
judicial process, (ii) to counsel for any of the Lenders or the Agents,
(iii) to bank examiners, auditors or accountants, (iv) to any other
Agent or any other Lender, (v) in connection with any litigation to
which any one or more of the Lenders or one or more of the Agents is a
party in which such Lender or the Agents has been required or, in the
opinion of its legal counsel, deems it necessary to produce such
information, (vi) to a subsidiary or affiliate of such Lender as
provided in paragraph (a) above or (vii) to any assignee or participant
(or prospective assignee or participant) assignee or participant (or
prospective assignee or participant); provided, further, that (x)
unless specifically prohibited by applicable law or court order, each
Lender and each Agent shall, prior to disclosure thereof, notify the
Company of any request for disclosure of any such non-public
information, except when the request is (A) made by any governmental
agency or representative thereof or (B) pursuant to legal process and
(y) that in no event shall any Lender or any Agent be obligated to
return any materials furnished by the Company. The obligations of each
Lender under this Section 12.13 shall supersede and replace the
obligations of such Lender under the confidentiality letter in respect
of this financing signed and delivered by such Lender to the Company
prior to the date hereof.
12.14. COMPLIANCE WITH USURY LAWS.
All agreements between any Obligor, the Agents, and any Lender are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason of acceleration of maturity of the indebtedness evidenced hereby or
otherwise, shall the amount paid or agreed to be paid to any Agent or any Lender
for the use or the forbearance of the indebtedness evidenced hereby exceed the
maximum permissible under applicable law. As used herein, the term "applicable
law" shall mean the law in effect as of the date hereof, PROVIDED, HOWEVER, that
in the event there is a change in the law which results in a higher permissible
rate of interest, then this Agreement shall be governed by such new law as of
its effective date. In this regard, it is expressly agreed that it is the intent
of the Obligors, the Agents and the Lenders in the execution, delivery and
acceptance of this Agreement to contract in strict compliance with the laws of
the Commonwealth of Massachusetts from time to time in effect. If, under or from
any circumstances whatsoever, fulfillment of any provision hereof or of any of
the Loan Documents at the time performance of such provision shall be due, shall
involve transcending the limit of validity prescribed by applicable law, then
the obligation to be fulfilled shall automatically be reduced to the limit of
such validity, and if under or from any circumstances whatsoever any Agent or
any Lender should ever receive as interest an amount which would exceed the
highest lawful rate, such amount which would be excessive interest shall be
applied to the reduction of the principal balance evidenced hereby and not to
the payment of interest. This provision shall control every other provision of
all agreements between the Obligors, the Agents, and the Lenders.
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<PAGE>
12.15. REPLACEMENT NOTE.
Upon receipt of an affidavit of an officer of any Agent or any Lender
as to the loss, theft, destruction or mutilation of any Revolving Credit Note or
any other Loan Documents which is not of public record, and, in the case of any
such loss, theft, destruction or mutilation, upon receipt of an affidavit of
surrender and cancellation of such Revolving Credit Note or other Loan Document,
the Company will issue, in lieu thereof, a replacement Revolving Credit Note or
other Loan Document in the same principal amount thereof and otherwise of like
tenor.
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<PAGE>
EXHIBIT A
[Form of Three-Year Facility Revolving Credit Note]
PROMISSORY NOTE
(Three-Year Facility)
$______________ November 12 1999_
Boston, Massachusetts
FOR VALUE RECEIVED, GENZYME CORPORATION, a Massachusetts corporation
(the "COMPANY"), hereby promises to pay to _______________ (the "LENDER"), for
account of its respective Applicable Lending Offices provided for by the Credit
Agreement referred to below, at the principal office of Fleet National Bank, One
Federal Street, Boston, Massachusetts 02110, the principal sum of
________________ Dollars (or such lesser amount as shall equal the aggregate
unpaid principal amount of the Three-Year Facility Revolving Credit Loans made
by the Lender to the Company under the Credit Agreement), in lawful money of the
United States of America and in immediately available funds, on the dates and in
the principal amounts provided in the Credit Agreement, and to pay interest on
the unpaid principal amount of each such Three-Year Facility Revolving Credit
Loan, at such office, in like money and funds, for the period commencing on the
date of such Three-Year Facility Revolving Credit Loan until such Three-Year
Facility Revolving Credit Loan shall be paid in full, at the rates per annum and
on the dates provided in the Credit Agreement.
The date, amount, Type, interest rate and duration of Interest Period
(if applicable) of each Three-Year Facility Revolving Credit Loan made by the
Lender to the Company, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of this Note, endorsed by the Lender on the schedule attached hereto or any
continuation thereof, PROVIDED that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Company to
make a payment when due of any amount owing under the Credit Agreement or
hereunder in respect of the Three-Year Facility Revolving Credit Loans made by
the Lender.
This Note is one of the Three-Year Facility Revolving Credit Notes
referred to in the Credit Agreement dated as of November 12, 1999 (as modified
and supplemented and in effect from time to time, the "CREDIT AGREEMENT")
between the Company, the Subsidiary Guarantors party thereto, the Lenders party
thereto and Fleet National Bank, as Administrative Agent, ABN AMRO Bank N.V., as
Syndication Agent, and Mellon Bank, N.A., as Documentation Agent, and evidences
Three-Year Facility Revolving Credit Loans made by the Lender thereunder. Terms
used but not defined in this Note have the respective meanings assigned to them
in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
1
<PAGE>
Except as permitted by Section 12.7 of the Credit Agreement, this Note
may not be assigned by the Lender to any other Person.
This Note shall be deemed to be an instrument under seal governed by,
and construed in accordance with, the law of The Commonwealth of Massachusetts.
ATTEST: GENZYME CORPORATION
_________________________ By:_____________________________________
Title:
2
<PAGE>
SCHEDULE OF THREE-YEAR FACILITY REVOLVING CREDIT LOANS
This Note evidences Three-Year Facility Revolving Credit Loans made,
Continued or Converted under the within-described Credit Agreement to the
Company, on the dates, in the principal amounts, of the Types, bearing interest
at the rates and having Interest Periods (if applicable) of the durations set
forth below, subject to the payments, Continuations, Conversions and prepayments
of principal set forth below:
<TABLE>
<CAPTION>
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
Amount
Date Paid,
Made, Prepaid,
Continued Principal Duration Continued Unpaid
or Amount Type of Interest of Interest or Principal Notation
Converted of Loan Loan Rate Period Converted Amount Made By
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
<S> <C>
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
1
<PAGE>
EXHIBIT B
[Form of 364-Day Facility Revolving Credit Note]
PROMISSORY NOTE
(364-Day Facility)
$______________ November 12, 1999_
Boston, Massachusetts
FOR VALUE RECEIVED, GENZYME CORPORATION, a Massachusetts corporation
(the "COMPANY"), hereby promises to pay to _______________ (the "LENDER"), for
account of its respective Applicable Lending Offices provided for by the Credit
Agreement referred to below, at the principal office of Fleet National Bank, One
Federal Street, Boston, Massachusetts 02110, the principal sum of
________________ Dollars (or such lesser amount as shall equal the aggregate
unpaid principal amount of the 364-Day Facility Revolving Credit Loans made by
the Lender to the Company under the Credit Agreement), in lawful money of the
United States of America and in immediately available funds, on the dates and in
the principal amounts provided in the Credit Agreement, and to pay interest on
the unpaid principal amount of each such 364-Day Facility Revolving Credit Loan,
at such office, in like money and funds, for the period commencing on the date
of such 364-Day Facility Revolving Credit Loan until such 364-Day Facility
Revolving Credit Loan shall be paid in full, at the rates per annum and on the
dates provided in the Credit Agreement.
The date, amount, Type, interest rate and duration of Interest Period
(if applicable) of each 364-Day Facility Revolving Credit Loan made by the
Lender to the Company, and each payment made on account of the principal
thereof, shall be recorded by the Lender on its books and, prior to any transfer
of this Note, endorsed by the Lender on the schedule attached hereto or any
continuation thereof, PROVIDED that the failure of the Lender to make any such
recordation or endorsement shall not affect the obligations of the Company to
make a payment when due of any amount owing under the Credit Agreement or
hereunder in respect of the 364-Day Facility Revolving Credit Loans made by the
Lender.
This Note is one of the 364-Day Facility Revolving Credit Notes
referred to in the Credit Agreement dated as of November 12, 1999 (as modified
and supplemented and in effect from time to time, the "CREDIT AGREEMENT")
between the Company, the Subsidiary Guarantors party thereto, the Lenders party
thereto and Fleet National Bank, as Administrative Agent, ABN AMRO Bank N.V., as
Syndication Agent, and Mellon Bank, N.A., as Documentation Agent, and evidences
364-Day Facility Revolving Credit Loans made by the Lender thereunder. Terms
used but not defined in this Note have the respective meanings assigned to them
in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
1
<PAGE>
Except as permitted by Section 12.7 of the Credit Agreement, this Note
may not be assigned by the Lender to any other Person.
This Note shall be deemed to be an instrument under seal governed by,
and construed in accordance with, the law of The Commonwealth of Massachusetts.
ATTEST: GENZYME CORPORATION
_____________________________ By:______________________________
Title:
2
<PAGE>
SCHEDULE OF 364-DAY FACILITY REVOLVING CREDIT LOANS
This Note evidences 364-Day Facility Revolving Credit Loans made,
Continued or Converted under the within-described Credit Agreement to the
Company, on the dates, in the principal amounts, of the Types, bearing interest
at the rates and having Interest Periods (if applicable) of the durations set
forth below, subject to the payments, Continuations, Conversions and prepayments
of principal set forth below:
<TABLE>
<CAPTION>
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
Amount
Date Paid,
Made, Prepaid,
Continued Principal Duration Continued Unpaid
or Amount Type of Interest of Interest or Principal Notation
Converted of Loan Loan Rate Period Converted Amount Made By
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
<S> <C>
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
- ----------------- -------------- ------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
1
<PAGE>
EXHIBIT D TO CREDIT AGREEMENT
FORM OF COMPLIANCE CERTIFICATE
COMPLIANCE CERTIFICATE
This Compliance Certificate is
provided pursuant to Section 9.1(c) of that certain Credit Agreement (the
"Agreement") dated as of November
12, 1999, between Genzyme Corporation ("Company"), the Subsidiary Guarantors
party thereto, the Lenders party thereto and Fleet National Bank
("Administrative Agent"), ABN AMRO Bank, N.V. ("Syndication Agent") and Mellon
Bank, N.A. ("Documentation Agent"). The capitalized terms used herein shall have
the meanings ascribed to such terms in the Agreement. The undersigned hereby
certifies as follows as of this date:
1. The representations and warranties made by the Company in the
Agreement and by the Company and each Obligor in each certificate, document or
financial or other statement furnished under or in connection therewith are true
and accurate in all material respects.
2. The financial information and calculations shown on the attached
Schedule A are true and accurate as of the date hereof and the Company is in
compliance with the financial covenants set forth in Section 9.9 of the
Agreement.
3. No Default or Event of Default under the Agreement has occurred.
IN WITNESS WHEREOF, this Certificate has been duly executed and
delivered as a sealed instrument at Boston, Massachusetts on this ____ day of
________, ____.
GENZYME CORPORATION
By: ___________________________________
Name:______________________________
Title:_____________________________
1
<PAGE>
SCHEDULE A
TO EXHIBIT D
SECTION 9.9(A) CONSOLIDATED QUICK RATIO
cash -- $__________
Cash Equivalents -- $___________
Marketable Investments -- $____________
Accounts Receivable -- $___________
Current Liabilities -- $____________
Actual Ratio -- ____________
Minimum Ratio -- 1.50 to 1.00
SECTION 9.9(B) CONSOLIDATED FIXED CHARGE COVERAGE RATIO
Consolidated EBITDA -- $___________
Capital Expenditures:
Actual Capital Expenditures -- $_______
LESS Capital Expenditures with respect to designated project
for improvements to new leased headquarters (the
aggregate of such exclusions for this quarter and
PRIOR QUARTERS DOES NOT EXCEED $12,000,000) -- $_______
Capital Expenditures for purposes of Section 9.9(b) -- $_______
Taxes -- $___________
Dividend Payments -- $___________
Interest Expense -- $___________
Actual Ratio -- ___________
Minimum Ratio -- 3.00 to 1.00
1
<PAGE>
SECTION 9.9(C) CONSOLIDATED LEVERAGE RATIO
Consolidated Funded Debt -- $_________
Unrestricted Cash and Marketable Investments in excess of $125,000,000 -- $_____
Consolidated EBITDA -- $___________
Actual Ratio -- ___________
Maximum Ratio -- 2.00 to 1.00
LEVEL CALCULATION
CONSOLIDATED DEBT COVERAGE RATIO
cash -- $__________
Cash Equivalents -- $__________
Marketable Investments -- $__________
Consolidated Funded Debt -- $__________
Ratio -- __________
SENIOR UNSECURED DEBT RATING -- _________(written confirmation is attached)
Level Period (I, II, III or IV) for Applicable Margin and Applicable Commitment
Fee determination: ___________________
2
<PAGE>
EXHIBIT E
[Form of Joinder Agreement]
This Joinder Agreement is delivered pursuant to Section 9.13 of the
Credit Agreement dated as of November 12, 1999 (the "CREDIT AGREEMENT") between
Genzyme Corporation (the "COMPANY"), the Subsidiary Guarantors party thereto,
the Lenders party thereto, and Fleet National Bank, as Administrative Agent, ABN
AMRO Bank N.V., as Syndication Agent, and Mellon Bank, N.A., as Documentation
Agent.
The undersigned hereby agrees to become a "Subsidiary Guarantor" as
such term is used in the Credit Agreement and, by virtue of its execution and
delivery of this Joinder Agreement, agrees to assume all of the obligations and
liabilities of a Subsidiary Guarantor under the Credit Agreement and the other
Loan Documents.
IN WITNESS WHEREOF, the undersigned has caused this Joinder Agreement
to be duly executed on this _____ day of _____________, _____.
[NAME OF SUBSIDIARY]
By: ______________________________
Title:
Address for Notices:
[Address]
1
<PAGE>
EXHIBIT F
[Form of Notice of Assignment]
NOTICE OF ASSIGNMENT
[Date]
Genzyme Corporation
One Mountain Road
Framingham, Massachusetts 01701
Attention: Mr. Evan M. Lebson, Treasurer
Fleet National Bank,
as Administrative Agent
One Federal Street
Boston, Massachusetts 02110
Attention: High Tech Group
Re: Credit Agreement dated as of November 12, 1999 (the "CREDIT
AGREEMENT"), between Genzyme Corporation (the "COMPANY"), the
Subsidiary Guarantors party thereto, the Lenders party thereto
and Fleet National Bank, as Administrative Agent, ABN AMRO
Bank N.V., as Syndication Agent and Mellon Bank, N.A., as
Documentation Agent
Ladies and Gentlemen:
We hereby give notice that, effective as of the date hereof, [Name of
Assignor] (the "ASSIGNOR") has assigned its rights and obligations with respect
to _____% of its outstanding Revolving Credit Commitment (representing
$__________ of the Assignor's outstanding Revolving Credit Commitment and
Revolving Credit Loans, of which $____________ consists of the Assignor's
outstanding 364-Day Revolving Credit Commitment and $___________ consists of the
Assignor's outstanding Three-Year Revolving Credit Commitment (such interest in
such rights and obligations being hereinafter referred to as the "ASSIGNED
INTEREST") under the Credit Agreement to [Name of Assignee] (the "ASSIGNEE").
The Assignee hereby agrees (a) to become a "Lender" pursuant to Section 12.7(b)
of the Credit Agreement (if not already a Lender under the Credit Agreement) and
(b) to assume all the obligations of the Assignor thereunder with respect to the
Assigned Interest.
The address for notices, Applicable Lender Office(s) and payment
instructions for the Assignee are as follows:
1
<PAGE>
Address for Notices:
------------------------
------------------------
Attention:
Telephone:
Telecopier:
Lending Office for Prime Rate
Loans and LIBOR Loans:
-------------------------
Payment Instructions:
-------------------------
-------------------------
Please sign and return the enclosed copy of this letter to the
undersigned to indicate your receipt hereof, and your consent to or notice of
(as applicable) the above-mentioned assignment and assumption, and your
agreement to the release of the Assignor from its obligations under the Credit
Agreement with respect to the Assigned Interest. As a condition to the
effectiveness of the above-mentioned assignment and assumption, the Assignee
hereby agrees to pay to the Administrative Agent on the date hereof an
assignment fee of $4,500.
Very truly yours,
[NAME OF ASSIGNOR]
By: ________________________________
Title
[NAME OF ASSIGNEE]
By: ________________________________
Title
2
<PAGE>
ACKNOWLEDGED OR CONSENTED TO
(AS APPLICABLE):
GENZYME CORPORATION
By: _____________________________
Title:
FLEET NATIONAL BANK,
as Administrative Agent
By: _____________________________
Title:
3
<PAGE>
EXHIBIT 13.1
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
GENZYME GENERAL
Combined Selected Financial Data.......................... GG-2
Management's Discussion and Analysis of Genzyme General's
Financial Condition and Results of Operations........... GG-4
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997........................ GG-16
Combined Balance Sheets--December 31, 1999 and 1998....... GG-17
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997........................ GG-18
Notes to Combined Financial Statements.................... GG-20
Report of Independent Accountants......................... GG-41
</TABLE>
GG-1
<PAGE>
GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
Genzyme General is our operating division that develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics, and
- diagnostic products, with a focus on IN VITRO diagnostics,
- other products and services, such as genetic testing services and lipids
and peptides for drug delivery.
Genzyme General Division Common Stock, which we refer to as "GENZ Stock," is
intended to reflect the value and track the performance of Genzyme General.
The following combined selected financial data reflect the results of
operations and financial position of Genzyme General and should be read in
conjunction with the financial statements of Genzyme General and accompanying
notes.
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
These combined selected financial data reflect the results and financial
position of Genzyme General as if Genzyme Surgical Products had existed as a
separate division of Genzyme for all periods presented.
GG-2
<PAGE>
GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales........................... $571,531 $509,727 $429,092 $373,769 $304,365
Net service sales........................... 57,223 55,445 55,835 61,638 47,230
Revenues from research and development
contracts:
Related parties........................... 1,516 3,568 8,041 23,011 26,758
Other..................................... 5,096 579 3,400 2,310 202
-------- -------- -------- -------- --------
Total revenues.......................... 635,366 569,319 496,368 460,728 378,555
Operating costs and expenses:
Cost of products sold....................... 115,125 138,802 146,226 123,276 113,231
Cost of services sold....................... 35,637 34,240 35,451 42,889 31,137
Selling, general and administrative......... 149,427 126,172 118,616 107,219 94,944
Research and development (including research
and development related to contracts)..... 97,746 73,139 62,905 62,276 51,936
Amortization of intangibles................. 8,106 7,610 6,887 5,865 4,647
Purchase of in-process research and
development............................... 5,436 -- -- 106,469 14,216
Other....................................... -- -- -- 1,000 --
-------- -------- -------- -------- --------
Total operating costs and expenses........ 411,477 379,963 370,085 448,994 310,111
-------- -------- -------- -------- --------
Operating income.............................. 223,889 189,356 126,283 11,734 68,444
Other income (expenses):
Equity in net loss of unconsolidated
affiliates................................ (37,423) (19,739) (5,782) (3,656) (1,809)
Gain on affiliate sale of stock............. 6,683 2,369 -- 1,013 --
Gain on sale of investment in equity
securities................................ 1,963 3,391 -- 1,711 --
Minority interest........................... 3,674 4,285 -- -- 1,608
Gain on sale of product line................ 8,018 31,202 -- -- --
Charge for impaired investments............. (5,712) (3,397) -- -- --
Other....................................... 14,389 -- (2,000) -- --
Investment income........................... 30,881 22,953 9,940 13,825 7,428
Interest expense............................ (19,885) (16,994) (8,074) (6,784) (1,069)
-------- -------- -------- -------- --------
Total other income (expenses)............. 2,588 24,070 (5,916) 6,109 6,158
-------- -------- -------- -------- --------
Income before income taxes.................. 226,477 213,426 120,367 17,843 74,602
Provision for income taxes.................. (84,400) (80,374) (43,725) (28,530) (34,234)
-------- -------- -------- -------- --------
Net income (loss)........................... 142,077 133,052 76,642 (10,687) 40,368
Tax benefit allocated from Genzyme Molecular
Oncology.................................. 7,812 3,527 2,755 -- --
Tax benefit allocated from Genzyme Surgical
Products.................................. 16,128 17,936 10,112 7,487 3,728
Tax benefit allocated from Genzyme Tissue
Repair.................................... 10,866 16,394 17,666 17,011 8,857
-------- -------- -------- -------- --------
Net income attributable to GENZ Stock....... $176,883 $170,909 $107,175 $ 13,811 $ 52,953
======== ======== ======== ======== ========
</TABLE>
GG-3
<PAGE>
GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net income attributable to GENZ Stock....... $176,883 $170,909 $107,175 $13,811 $52,953
======== ======== ======== ======= =======
Per GENZ common share:
Net income per GENZ common share--basic... $ 2.13 $ 2.16 $ 1.40 $ 0.20 $ 0.95
======== ======== ======== ======= =======
Weighted average shares outstanding......... 83,092 79,063 76,531 68,289 55,531
======== ======== ======== ======= =======
Net income per GENZ common and common
equivalent share-diluted................ $ 2.00 $ 2.06 $ 1.36 $ 0.19 $ 0.83
======== ======== ======== ======= =======
Adjusted weighted average shares
outstanding............................... 93,228 85,822 78,925 73,038 63,967
======== ======== ======== ======= =======
</TABLE>
COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and investments................... $ 513,905 $ 556,097 $192,222 $169,543 $278,663
Working capital........................ 487,561 381,685 273,697 340,817 307,918
Total assets........................... 1,399,583 1,410,391 960,490 975,910 854,411
Long-term debt and convertible debt.... 272,622 274,646 117,978 223,846 124,473
Division equity........................ 1,007,614 939,967 745,895 645,185 659,106
</TABLE>
There were no cash dividends paid.
GG-4
<PAGE>
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 our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme General and Genzyme Corporation included in this annual report. You
should consider carefully each of these risks and uncertainties in evaluating
the financial condition and results of operations of Genzyme General and
Genzyme.
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General. The
discussion that follows reflects the results of operations of Genzyme General as
if Genzyme Surgical Products had existed as a separate division of Genzyme for
all periods presented.
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme General and prepare separate
financial statements for Genzyme General. Notwithstanding the allocation of
assets and liabilities to Genzyme General, Genzyme Corporation continues to hold
title to all of the assets and is responsible for all of the liabilities
allocated to Genzyme General. Holders of GENZ Stock are common stockholders of
Genzyme Corporation and have no specific rights to the assets to which GENZ
Stock relates.
We present financial information and accounting policies specific to Genzyme
General in the accompanying combined financial statements. We present financial
information and accounting policies relevant to the corporation and its
operating divisions taken as a whole in our consolidated financial statements.
You 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 in this annual report.
GG-5
<PAGE>
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of Genzyme General's financial statements.
The components of Genzyme General's combined statements of operations are
described in the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues............................ $635,366 $569,319 $496,368 12% 15%
Cost of products and services sold........ 150,762 173,042 181,677 (13)% (5)%
Selling, general and administrative....... 149,427 126,172 118,616 18% 6%
Research and development (including
research and development related to
contracts).............................. 97,746 73,139 62,905 34% 16%
Amortization of intangibles............... 8,106 7,610 6,887 7% 10%
Purchase of in-process research and
development............................. 5,436 -- -- 100% N/A
-------- -------- --------
Total operating costs and expenses.... 411,477 379,963 370,085 8% 3%
-------- -------- --------
Operating income.......................... 223,889 189,356 126,283 18% 50%
Other income (expenses), net.............. 2,588 24,070 (5,916) (89)% 507%
-------- -------- --------
Income before income taxes................ 226,477 213,426 120,367 6% 77%
Provision for income taxes................ (84,400) (80,374) (43,725) 5% 84%
-------- -------- --------
Net income................................ 142,077 133,052 76,642 7% 74%
Allocated tax benefits.................... 34,806 37,857 30,533 (8)% 24%
-------- -------- --------
Net income attributable to GENZ Stock..... $176,883 $170,909 $107,175 3% 59%
======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Product revenue........................... $571,531 $509,727 $429,092 12% 19%
Service revenue........................... 57,223 55,445 55,835 3% (1)%
-------- -------- --------
Total product and service revenue..... 628,754 565,172 484,927 11% 17%
Research and development revenue.......... 6,612 4,147 11,441 59% (64)%
-------- -------- --------
Total revenues........................ $635,366 $569,319 $496,368 12% 15%
======== ======== ========
</TABLE>
GG-6
<PAGE>
The following table sets forth Genzyme General's product and service revenue
on a segment basis:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Therapeutics.............................. $488,705 $413,645 $332,712 18% 24%
Diagnostic Products....................... 57,971 65,683 66,288 (12)% (1)%
Other:
Product revenue......................... 24,855 30,399 30,092 (18)% 1%
Service revenue......................... 57,223 55,445 55,835 3% (1)%
-------- -------- --------
Total product and service revenue......... $628,754 $565,172 $484,927 11% 17%
======== ======== ========
</TABLE>
THERAPEUTICS
Genzyme General's increase in product revenue during both periods is largely
due to increased sales of Cerezyme-Registered Trademark- enzyme, which was
attributed to the identification of new Gaucher disease patients throughout the
world and strong international sales. We have provided information regarding the
growth in sales of Genzyme General's Gaucher disease therapies during both
periods in the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Sales of Cerezyme-Registered Trademark-
enzyme and
Ceredase-Registered Trademark- enzyme... $478,538 $411,060 $332,712 16% 24%
% of total product revenue................ 84% 81% 78%
</TABLE>
Genzyme General's results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of
this product would adversely affect its results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. Genzyme General is aware of
companies that have initiated efforts to develop competitive products and other
companies may do so in the future.
Therapeutics revenue for each period also includes sales of
Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool
for well differentiated thyroid cancer.
DIAGNOSTIC PRODUCTS
The decrease in diagnostic products revenue for 1999 as compared to 1998
reflects the sale of the research products business to Techne Corporation in
July 1998 and immunochemistry product line to an operating unit of Sybron
Laboratory Products Corp. in July 1999. Diagnostic products revenue includes
royalties on product sales by Techne's biotechnology group.
OTHER
Other revenue for each period include sales of:
- lipids and peptides for drug delivery; and
- genetic testing services.
GG-7
<PAGE>
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of Genzyme General's revenue was generated outside of
the United States, as described in the following table. Most of these revenues
were attributable to sales of Cerezyme-Registered Trademark- enzyme.
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
International product and service
revenue................................. $273,851 $248,365 $217,777 10% 14%
% of total product and service revenue.... 44% 44% 45%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Product margin............................ $456,406 $370,925 $282,866 23% 31%
% of product revenue.................. 80% 73% 66%
Service margin............................ 21,586 21,205 20,384 2% 4%
% of service revenue.................. 38% 38% 37%
Total gross margin........................ 477,992 392,130 303,250 22% 29%
% of total product and service
revenue............................. 76% 69% 63%
</TABLE>
Genzyme General provides a broad range of healthcare products and services.
As a result, Genzyme General's gross margin varies significantly based on the
category of product or service. Sales of therapeutic products, including
Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic
products.
During 1998, Genzyme General recorded a $14.8 million charge to cost of
products sold to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. Without the effect of this charge,
Genzyme General's product margin for 1998 would have been 76% and its total
gross margin during that period would have been 72%.
Excluding the charge described above, the increases in product margin and
total gross margin during each period are a result of increased efficiency and
process improvements in manufacturing as well as increased sales of
Cerezyme-Registered Trademark- enzyme.
Our service margin also increased during each period as a result of
increases in sales of DNA and cancer testing services.
OPERATING EXPENSES
1999 AS COMPARED TO 1998
The increase in selling, general and administrative expenses in 1999 as
compared to 1998 is related to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- an increased reserve for doubtful accounts in Genzyme General's genetic
testing business;
- costs associated with the market introduction of
Thyrogen-Registered Trademark- hormone in January 1999; and
GG-8
<PAGE>
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme.
The increase in research and development expense in 1999 as compared to 1998
is a result of:
- increased costs in connection with the results of ATIII LLC, the joint
venture with Genzyme Transgenics Corporation for the development and
commercialization of transgenic recombinant human antithrombin III; and
- increased spending on Genzyme General's program to develop Fabrazyme-TM-
enzyme for the treatment of Fabry disease and other internal programs.
In the fourth quarter of 1998, Genzyme General began amortizing a milestone
payment that it made to GelTex Pharmaceuticals, Inc. upon FDA approval of
RenaGel-Registered Trademark- capsules. As a result, amortization of intangibles
increased slightly during 1999 as compared to 1998.
In 1999, we acquired Peptimmune, Inc., a privately-held company whose lead
development program focuses on a treatment for pemphigus vulgaris. We allocated
$5.4 million to in-process technology representing Peptimmune's programs that
were still in the development stage and for which there was no alternative
future use. In 1999, we recorded a one-time charge to operations for the amount
of the purchase price allocated to in-process technology.
1998 AS COMPARED TO 1997
The increase in selling, general and administrative expenses in 1998 as
compared to 1997 was related to:
- increased sales and marketing costs related to the product launch of
Thyrogen-Registered Trademark- hormone; and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme.
The increase in research and development expense in 1998 as compared to 1997
was primarily attributable to $12.0 million in costs resulting from the
consolidation of the results of ATIII LLC, for which there were no comparable
amounts in 1997.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Equity in net loss of unconsolidated
affiliates................................ $(37,423) $(19,739) $(5,782) 90% 241%
Gain on affiliate sale of stock............. 6,683 2,369 -- 182% N/A
Gain on sale of investments in equity
securities................................ 1,963 3,391 -- (42)% N/A
Minority interest........................... 3,674 4,285 -- (14)% N/A
Gain on sale of product line................ 8,018 31,202 -- (74)% N/A
Charge for impaired investments............. (5,712) (3,397) -- 68% N/A
Other....................................... 14,389 -- (2,000) N/A N/A
Investment income........................... 30,881 22,953 9,940 35% 131%
Interest expense............................ (19,885) (16,994) (8,074) 17% 110%
-------- -------- -------
Total other income (expense), net....... $ 2,588 $ 24,070 $(5,916) (89)% 507%
======== ======== =======
</TABLE>
GG-9
<PAGE>
1999 AS COMPARED TO 1998
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
Genzyme General records in equity in net loss of unconsolidated affiliates
its portion of the results of its joint ventures with GelTex, BioMarin
Pharmaceutical Inc., Pharming Group, N.V. and Diacrin, Inc. Genzyme General also
records a portion of the results of Genzyme Transgenics in equity in net loss of
unconsolidated affiliates.
Genzyme General's equity in net loss of unconsolidated affiliates increased
in 1999 as compared to 1998 as a result of:
- increased losses from RenaGel LLC, our joint venture with GelTex to
develop and commercialize Renagel-Registered Trademark- capsules;
- increased losses from our joint venture with BioMarin to develop and
commercialize Aldurazyme(TM) enzyme for the treatment of
mucopolysaccharidosis-I, which was formed in September 1998;
- increased losses from our joint venture with Pharming to develop a therapy
for Pompe disease, which was formed in October 1998; and
- the reallocation of our joint venture with Diacrin from Genzyme Tissue
Repair to Genzyme General in May 1999.
These increases were offset in part by decreased losses from Genzyme
Transgenics for both periods.
GAIN ON AFFILIATE SALE OF STOCK
In 1999 and 1998, Genzyme General recorded gains on its investment in
Genzyme Transgenics as a result of its issuance of additional shares of common
stock.
MINORITY INTEREST
Genzyme General consolidates the results of ATIII LLC and records Genzyme
Transgenics' portion of the losses of that joint venture as minority interest.
Minority interest decreased in both periods, notwithstanding increases in ATIII
LLC's losses, because Genzyme Transgenics' portion of those losses decreased.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
Genzyme General recorded gains of $2.0 million in January 1999 and
$3.4 million in December 1998 upon the sales of shares of Techne common stock
that it received when it sold its research products business to Techne.
GAIN ON SALE OF PRODUCT LINE
In July 1999, Genzyme General recorded a gain of $0.5 million in connection
with the sale of its immunochemistry product lines to an operating unit of
Sybron Laboratory Products.
In June 1999, Genzyme General recorded a gain of $7.5 million representing
the payment of a note receivable that it received as partial consideration for
the sale of Genetic Design, Inc. in 1996. Genzyme General had previously fully
reserved the amount of this note because it considered the repayment of the note
to be uncertain.
In July 1998, Genzyme General recorded a gain of $31.2 million in connection
with the sale of its research products business to Techne.
GG-10
<PAGE>
CHARGE FOR IMPAIRED INVESTMENTS
In 1999, Genzyme General recorded $5.7 million in charges to write down
certain strategic investments in collaborators' common stock because it
considered the decline in the value of these investments to be other than
temporary.
In 1998, Genzyme General recorded a $3.4 million charge to write down a
strategic investment in a company because we considered the decline in the value
of the company's common stock to be other than temporary.
OTHER
In December 1999, Genzyme General recorded a net gain of $14.4 million upon
receipt of a payment associated with the termination of an agreement to acquire
Cell Genesys, Inc.
INVESTMENT INCOME
Investment income increased in both periods because our cash balances were
higher. The increase in cash balances was attributable to the issuance in May
1998 of $250.0 million in principal amount of 5 1/4% convertible subordinated
notes and increased cash generated from operations.
INTEREST EXPENSE
Genzyme General's interest expense increased in both periods, primarily as a
result of the issuance of the 5 1/4% convertible subordinated notes.
TAX PROVISION AND ALLOCATED TAX BENEFITS
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Provision for income taxes................. $(84,400) $(80,374) $(43,725) 5% 84%
Effective tax rate......................... 37% 38% 36%
Tax benefits allocated from:
Genzyme Molecular Oncology............. 7,812 3,527 2,755 121% 28%
Genzyme Surgical Products.............. 16,128 17,936 10,112 (10)% 77%
Genzyme Tissue Repair.................. 10,866 16,394 17,666 (34)% (7)%
-------- -------- --------
Net allocated tax benefits........... 34,806 37,857 30,533 (8)% (24)%
-------- -------- --------
Net tax provision.......................... $(49,594) $(42,517) $(13,192) 17% 222%
======== ======== ========
Genzyme General net tax rate............... 22% 20% 11%
======== ======== ========
</TABLE>
Genzyme General's tax rates for all periods vary from the U.S. statutory tax
rate as a result of its:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
GG-11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, Genzyme General had cash, cash-equivalents, and short-
and long-term investments of $513.9 million, a decrease of $42.2 million from
December 31, 1998.
Genzyme General generated $284.8 million in cash from its operations in
1999.
Genzyme General's investing activities utilized $192.7 million in cash in
1999. Investing activities generated:
- $5.0 million from the sale of Genzyme General's immunochemistry product
line;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with the sale
of Genetic Design.
Investing activities used:
- $93.4 million for Genzyme General's net purchases of investments;
- $52.9 million to fund capital expenditures;
- $36.4 million to fund Genzyme General's investments in joint ventures;
- $6.5 million to fund its acquisition of Peptimmune;
- $10.0 million to GelTex to make a milestone payment upon the first
anniversary of FDA approval of Renagel-Registered Trademark- capsules;
- $6.6 million to Genzyme Transgenics for the purchase of preferred stock;
- $10.0 million to Biomarin for the purchase of shares of common stock; and
- $3.4 million to Genovo, Inc. for the purchase of shares of preferred
stock.
In 1999, Genzyme General received $59.2 million in cash from employee stock
plans. Genzyme General's financing activities used the following cash during
1999:
- $85.0 million to repay short-term debt and capital lease obligations; and
- $49.4 million paid to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme.
- $30.0 million paid to Genzyme Tissue Repair for the transfer of the
interest in Diacrin/Genzyme LLC and a draw under Genzyme Tissue Repair's
equity line of credit.
In 1998, our board of directors made $30.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology under an equity line of credit. Under
the terms of this equity line, Genzyme Molecular Oncology may draw down funds as
needed each quarter in exchange for GZMO designated shares. GZMO designated
shares are shares of GZMO Stock that are not issued and outstanding, but which
our board of directors may issue, sell or distribute without allocating the
proceeds to Genzyme Molecular Oncology. Genzyme Molecular Oncology has not yet
drawn any funds under this equity line.
GG-12
<PAGE>
In 1998, our board of directors also made $50.0 million of Genzyme General's
cash available to Genzyme Tissue Repair under an equity line of credit. Under
the terms of this equity line, Genzyme Tissue Repair may draw down funds as
needed each quarter in exchange for GZTR designated shares. GZTR designated
shares are shares of GZTR Stock that are not issued and outstanding, but which
our board of directors may issue, sell or distribute without allocating the
proceeds to Genzyme Tissue Repair. In February 1999, Genzyme Tissue Repair made
a $5.0 million draw under this equity line in exchange for 1,633,399 GZTR
designated shares. In May 1999, the amount available under this equity line was
reduced by $25.0 million in connection with the reallocation of our ownership
interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General.
In June 1999, Genzyme General transferred $150.0 million in cash, cash
equivalents and investments to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. In
exchange for this transfer, approximately 14.8 million shares of GZSP Stock were
issued and distributed as a dividend to holders of GENZ Stock.
Genzyme General, together with our other operating divisions, has access to
Genzyme's revolving credit facilities. At December 31, 1999, $50.0 million was
available under a facility that matures in November 2000 and $77.0 million was
available under a facility that matures in November 2002.
We believe that Genzyme General's available cash, investments and cash flow
from operations will be sufficient to fund its planned operations and capital
requirements for the foreseeable future. Although Genzyme General currently has
substantial cash resources and positive cash flow, it intends to use substantial
portions of its available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Genzyme General's cash reserves will be further reduced to pay principal and
interest on the following debt:
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock.
If Genzyme General uses cash to pay or redeem this debt, including the
interest due on it, its cash reserves will be diminished. In addition, Genzyme
General's cash resources will be reduced to the extent that the liabilities of
Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair
affect our consolidated results of operations.
To satisfy these and other commitments, Genzyme General may have to obtain
additional financing. We cannot guarantee that Genzyme General will be able to
obtain any additional financing, extend any existing financing arrangement, or
obtain either on favorable terms.
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" included in this
annual report.
GG-13
<PAGE>
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.
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON GENZYME GENERAL'S BUSINESS.
Genzyme General generates a majority of its product revenues from sales of
Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme,
which are products for patients with Gaucher disease. Sales of
Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme
totaled $478.5 million for the year ended December 31, 1999, representing
approximately 84% of Genzyme General's product revenues for that year.
Because Genzyme General's business is highly dependent on
Cerezyme-Registered Trademark- enzyme, a reduction in revenue from sales of this
product would have an adverse effect on its operations and may cause the value
of GENZ Stock to decline substantially. Revenues from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors develop alternative treatments for Gaucher disease and these
alternative products gained commercial acceptance. Some companies have initiated
efforts to develop competitive products, and other companies may do so in the
future. Cerezyme-Registered Trademark- enzyme has orphan drug status, providing
it with market exclusivity in the U.S. until May 2001. We also have patents
protecting its manufacturing method until 2010 and its composition until 2013.
We cannot predict the effect that the expiration of orphan drug status and
market exclusivity will have on sales of Cerezyme-Registered Trademark- enzyme
after May 2001.
GENZYME GENERAL MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE
THYROGEN-REGISTERED TRADEMARK- HORMONE AND RENAGEL-REGISTERED TRADEMARK-
CAPSULES.
In January 1999, Genzyme General, together with Knoll Pharmaceutical
Company, launched U.S. sales of Thyrogen-Registered Trademark- recombinant
thyroid stimulating hormone for use in the treatment of thyroid cancer. At about
the same time, Genzyme General, in collaboration with GelTex
Pharmaceuticals, Inc., launched Renagel-Registered Trademark- capsules, a
non-absorbed phosphate binder used in the treatment of end-stage renal disease.
The commercial success of Thyrogen-Registered Trademark- hormone and
Renagel-Registered Trademark- capsules will depend on a number of factors,
including:
- regulation by the FDA;
- the ability to obtain regulatory approvals in foreign countries;
- the development and commercial success of competitive products; and
- the availability of third party reimbursement.
Genzyme General cannot be sure that market penetration of
Thyrogen-Registered Trademark- hormone and Renagel-Registered Trademark-
capsules will increase.
IF THE STRATEGIC COLLABORATIONS GENZYME GENERAL HAS ENTERED INTO TO DEVELOP AND
COMMERCIALIZE ITS PRODUCTS ARE NOT SUCCESSFUL, GENZYME GENERAL'S RESULTS OF
OPERATIONS WILL BE ADVERSELY IMPACTED.
Several of Genzyme General's strategic initiatives involve collaborations
with other biotechnology companies and arrangements with academic medical
centers. These include:
- a joint venture with GelTex for the commercialization of
Renagel-Registered Trademark- capsules;
GG-14
<PAGE>
- an agreement with Knoll Pharmaceutical Company for the marketing of
Thyrogen-Registered Trademark- hormone in the U.S.;
- an agreement with Biogen, Inc. for the marketing of
AVONEX-Registered Trademark- (Interferon-beta 1a), Biogen's treatment for
relapsing forms of multiple sclerosis, in Japan following regulatory
approval;
- a joint venture with BioMarin for the development and commercialization of
Aldurazyme(TM) enzyme for the treatment of the lysosomal storage known as
mucopolysaccharidosis I;
- a joint venture with Genzyme Transgenics for the development and
commercialization of transgenic antithrombin III, a human protein that
Genzyme Transgenics produces in the milk of genetically modified animals;
- a joint venture with Pharming for the development and commercialization of
human alpha-glucosidase for the treatment of Pompe disease;
- an agreement with Genovo for the development of gene therapy products for
the treatment of lysosomal storage disorders;
- a relationship with Mount Sinai Medical Center for the development of a
therapy for the treatment of Niemann-Pick disease;
- a joint venture with Diacrin to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's
disease and Huntington's disease; and
- an agreement with Dyax Corp. to develop and commercialize the protein
EPI-KAL2 for the treatment of chronic inflammatory diseases.
Genzyme General plans to enter into additional collaborations in the future.
The success of these arrangements are largely dependent on the efforts and
skills of Genzyme General's collaborators. Genzyme General cannot guarantee
that:
- these agreements will not be terminated;
- its strategic collaborators will devote significant resources to the
collaborations; or
- any of these collaborations will result in the successful development or
commercialization of any products.
OUR OPTION TO PURCHASE LIMITED PARTNERSHIP INTERESTS COULD DILUTE THE RIGHTS OF
HOLDERS OF GENZ STOCK.
We organized Genzyme Development Partners, L.P., a special purpose research
and development entity, in 1989 and transferred to it technology and commercial
rights to our hyaluronic acid-based products designed to prevent the occurrence
and severity of post-operative adhesions. These products, which we refer to as
the Sepra products, are now allocated to Genzyme Surgical Products. We have an
option to purchase the limited partnership interests in the partnership. If this
option is exercised, we may have to issue shares of GENZ Stock or make
substantial cash payments or both. If we make payments in GENZ Stock, the rights
of holders of GENZ Stock could be diluted and the market price of that stock may
fall. If we make cash payments, our cash resources would diminish.
SUBSEQUENT EVENT
In February 2000, we converted our shares of the Series B Convertible
Preferred Stock of Genzyme Transgenics into 1,048,021 shares of Genzyme
Transgenics common stock. Also in February 2000, Genzyme Transgenics completed a
public offering of its common stock. Genzyme General will recognize a gain on
affiliate sale of stock of approximately $20 million in the first quarter of
2000.
GG-15
<PAGE>
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Net product sales......................................... $571,531 $509,727 $429,092
Net service sales......................................... 57,223 55,445 55,835
Revenue from research and development contracts:
Related parties......................................... 1,516 3,568 8,041
Other................................................... 5,096 579 3,400
-------- -------- --------
Total revenues........................................ 635,366 569,319 496,368
Operating costs and expenses:
Cost of products sold..................................... 115,125 138,802 146,226
Cost of services sold..................................... 35,637 34,240 35,451
Selling, general and administrative....................... 149,427 126,172 118,616
Research and development (including research and
development relating to contracts)...................... 97,746 73,139 62,905
Amortization of intangibles............................... 8,106 7,610 6,887
Purchase of in-process research and development........... 5,436 -- --
-------- -------- --------
Total operating costs and expenses...................... 411,477 379,963 370,085
-------- -------- --------
Operating income............................................ 223,889 189,356 126,283
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (37,423) (19,739) (5,782)
Gain on affiliate sale of stock........................... 6,683 2,369 --
Gain on sale of investments in equity securities.......... 1,963 3,391 --
Minority interest......................................... 3,674 4,285 --
Gain on sale of product line.............................. 8,018 31,202 --
Charge for impaired investments........................... (5,712) (3,397) --
Other..................................................... 14,389 -- (2,000)
Investment income......................................... 30,881 22,953 9,940
Interest expense.......................................... (19,885) (16,994) (8,074)
-------- -------- --------
Total other income (expenses)......................... 2,588 24,070 (5,916)
-------- -------- --------
Income before income taxes.................................. 226,477 213,426 120,367
Provision for income taxes.................................. (84,400) (80,374) (43,725)
-------- -------- --------
Net income.................................................. 142,077 133,052 76,642
Tax benefit allocated from Genzyme Molecular Oncology....... 7,812 3,527 2,755
Tax benefit allocated from Genzyme Surgical Products........ 16,128 17,936 10,112
Tax benefit allocated from Genzyme Tissue Repair............ 10,866 16,394 17,666
-------- -------- --------
Net income attributable to GENZ Stock....................... $176,883 $170,909 $107,175
======== ======== ========
Per GENZ common share:
Net income per GENZ common share--basic..................... $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Weighted average shares outstanding......................... 83,092 79,063 76,531
======== ======== ========
Net income per GENZ common and common equivalent
share--diluted............................................ $ 2.00 $ 2.06 $ 1.36
======== ======== ========
Adjusted weighted average shares outstanding................ 93,228 85,822 78,925
======== ======== ========
Net income.................................................. $142,077 $133,052 $ 76,642
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments.................. (14,883) 7,681 (11,704)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period..... 26,785 (6,059) 833
Reclassification adjustment for losses included in net
income.................................................. 2,092 2,100 --
-------- -------- --------
Unrealized gains (losses) on securities, net............ 28,877 (3,959) 833
-------- -------- --------
Other comprehensive income................................ 13,994 3,722 (10,871)
-------- -------- --------
Comprehensive income........................................ $156,071 $136,774 $ 65,771
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GG-16
<PAGE>
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 94,523 $ 100,012
Short-term investments.................................... 214,240 174,421
Accounts receivable, net.................................. 141,949 137,615
Inventories............................................... 84,384 85,162
Prepaid expenses and other current assets................. 17,632 27,727
Due from Genzyme Molecular Oncology....................... 3,793 4,773
Due from Genzyme Surgical Products........................ 6,406 --
Due from Genzyme Tissue Repair............................ 683 548
Deferred tax assets--current.............................. 41,195 39,725
---------- ----------
Total current assets.................................... 604,805 569,983
Property, plant and equipment, net........................ 362,548 362,743
Long-term investments..................................... 205,142 281,664
Intangibles, net.......................................... 75,370 85,851
Deferred tax assets--noncurrent........................... 19,844 28,138
Investments in equity securities.......................... 94,719 51,977
Other noncurrent assets................................... 37,155 30,035
---------- ----------
Total assets............................................ $1,399,583 $1,410,391
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 23,229 $ 22,324
Accrued expenses.......................................... 62,514 65,643
Income taxes payable...................................... 27,946 16,532
Deferred revenue.......................................... 3,475 1,231
Current portion of long-term debt and capital lease
obligations............................................. 80 82,568
---------- ----------
Total current liabilities............................... 117,244 188,298
Noncurrent liabilities:
Long-term debt.............................................. -- 3,087
Convertible notes and debentures............................ 272,622 271,559
Other noncurrent liabilities................................ 2,103 7,480
---------- ----------
Total liabilities....................................... 391,969 470,424
Commitments and contingencies (See Notes)
Division equity (Note M).................................... 1,007,614 939,967
---------- ----------
Total liabilities and division equity................... $1,399,583 $1,410,391
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GG-17
<PAGE>
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 142,077 $ 133,052 $ 76,642
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization............................. 50,234 37,758 34,822
Loss on disposal of fixed assets.......................... 971 108 1,234
Non-cash compensation expense............................. 58 8,519 2,881
Equity in loss of unconsolidated affiliates............... 37,423 19,739 5,440
Accrued interest/amortization of marketable securities.... (1,647) (7,242) (571)
Provision for bad debts and inventory..................... 14,194 8,113 13,440
Accretion of debt conversion feature...................... -- 705 --
Gain on affiliate sale of stock........................... (6,683) (2,369) --
Minority interest in net loss of subsidiary............... (3,674) (4,285) --
Gain on sale of product line.............................. (8,018) (31,202) --
Gain on sale of investments in equity securities.......... (1,963) (3,391) --
Charge for impaired investments........................... 5,712 3,397 --
Deferred income tax benefit............................... (3,414) (3,022) (3,969)
Charge for in-process research and development............ 5,436 -- --
Other..................................................... 556 26 528
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (18,459) (36,437) (13,669)
Inventories............................................. (3,435) 27,928 (31,676)
Prepaid expenses and other assets....................... 9,925 (10,785) (9,033)
Due from Genzyme Molecular Oncology..................... 980 (553) (2,011)
Due from Genzyme Surgical Products...................... (6,406) -- --
Due from Genzyme Tissue Repair.......................... (135) 665 391
Accounts payable, accrued expenses, income taxes
Payable and deferred revenue.......................... 71,026 52,275 21,192
--------- --------- ---------
Net cash provided by operating activities........... 284,758 192,999 95,641
INVESTING ACTIVITIES:
Purchases of investments.................................... (494,016) (439,431) (131,197)
Sales and maturities of investments......................... 400,630 118,871 80,867
Proceeds from sale of investments in equity securities...... 11,090 9,564 --
Acquisitions of property, plant and equipment............... (52,910) (53,312) (25,344)
Sales of property, plant and equipment...................... -- 1,795 --
Proceeds from sale of product line.......................... 5,000 24,760 --
Acquisitions, net of acquired cash and assumed
liabilities............................................... (6,500) (9,949) --
Purchase of technology rights............................... (10,000) (15,100) --
Purchase of equity investments.............................. (13,700) (25,783) (6,449)
Investments in unconsolidated affiliates.................... (43,027) (14,811) --
Loans to affiliates......................................... -- (1,000) (4,601)
Proceeds from notes receivable.............................. 8,360 -- --
Repayment of loans by affiliates............................ -- 3,019 --
Other....................................................... 2,388 (4,431) (134)
--------- --------- ---------
Net cash used in investing activities............... (192,685) (405,808) (86,858)
</TABLE>
GG-18
<PAGE>
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 59,216 74,649 123,837
Proceeds from issuance of debt............................ -- 250,000 --
Payments of debt.......................................... (84,985) (33,236) (100,945)
Net cash allocated to Genzyme Molecular Oncology.......... -- (5,000) (5,000)
Net cash allocated to Genzyme Surgical Products........... (49,414) (41,484) (19,003)
Net cash allocated to Genzyme Tissue Repair............... (30,037) (155) (14,892)
Bank overdraft............................................ 7,220 -- --
Other..................................................... 2,510 2,412 (242)
--------- --------- ---------
Net cash provided by (used in) financing
activities........................................ (95,490) 247,186 (16,245)
Effect of exchange rate changes on cash................... (2,072) 334 (2,275)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... (5,489) 34,711 (9,737)
Cash and cash equivalents at beginning of period.......... 100,012 65,301 75,038
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 94,523 $ 100,012 $ 65,301
========= ========= =========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest................................................ $ 18,508 $ 15,047 $ 8,684
Income taxes............................................ $ 30,992 $ 24,463 $ 18,887
Supplemental disclosures of non-cash transactions:
Transfer of investments to Genzyme Surgical Products--
Note A.
Other gains and charges--Note C.
Dispositions of assets--Note D.
Peptimmune acquisition--Note E.
Investment in unconsolidated affiliate--Note J.
Conversion of 5% convertible subordinated notes--Note L.
Conversion of 6% convertible subordinated debentures into
5% convertible subordinated debentures--Note L.
Warrant exercise--Note M.
Distributions of GZMO, GZSP and GZTR designated
shares--Note M.
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GG-19
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General is our operating division that develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing and lipids and
peptides for drug delivery.
Genzyme General Division Common Stock, which we refer to as "GENZ Stock," is
intended to reflect the value and track the performance of Genzyme General.
BASIS OF PRESENTATION; PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme General for each period include
the balance sheets, results of operations and cash flows of the businesses we
allocate to Genzyme General. We also allocate a portion of our corporate
operations to Genzyme General using methods we believe are reasonable. These
combined financial statements are prepared using amounts included in our
consolidated financial statements included in this annual report. We have
reclassified certain 1998 and 1997 data to conform with the 1999 presentation.
In June 1999, we created Genzyme Surgical Products. Genzyme General
transferred $150.0 million in cash, cash equivalents and investments, and
certain other assets, to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. The
business of Genzyme Surgical Products previously operated as a business unit of
Genzyme General. These financial statements reflect the financial position,
results of operations and cash flows of Genzyme General as if Genzyme Surgical
Products had existed as a separate division of the corporation for all periods
presented.
We use the equity method to account for investments in entities in which
Genzyme General has a substantial ownership interest (20% to 50%), or in which
it participates in policy decisions. Genzyme General's consolidated net income
includes its share of the earnings of these entities. We report at fair value
investments in entities in which Genzyme General's ownership interest is less
than 20%.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme General and prepare separate
financial statements for Genzyme General. Notwithstanding the allocation of
assets and liabilities to Genzyme General, Genzyme Corporation continues to hold
title to all of the assets and is responsible for all of the liabilities
allocated to Genzyme General. Holders of GENZ Stock are common stockholders of
Genzyme Corporation and have no specific rights to the assets to which GENZ
Stock relates.
We prepare the financial statements of Genzyme General in accordance with
generally accepted accounting principles, our management and accounting policies
and the divisional accounting policies approved by our board. We present
financial information and accounting policies specific to Genzyme General in the
accompanying combined financial statements. We present financial information and
GG-20
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting policies relevant to the corporation and its operating divisions
taken as a whole in our consolidated financial statements. You should read these
consolidated financial statements.
Note A., "Summary of Significant Accounting Policies," to our consolidated
financial statements contains our accounting policies. We incorporate that
information into this note by reference.
DIVIDEND POLICY
We have never paid a cash dividend on shares of GENZ Stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on GENZ Stock in the foreseeable future.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme General from local currency into U.S. dollars and include translation
adjustments for these subsidiaries in division equity. Genzyme General's
division equity includes cumulative foreign currency translation charges of
$19.7 million at December 31, 1999 and $4.8 million at December 31, 1998.
We include exchange gains and losses on intercompany balances which are
long-term in nature in our division equity. Our gains and losses on all other
transactions are included in our results of operations. Genzyme General recorded
a net gain of $0.6 million in 1999, a net gain of $0.3 million in 1998 and a net
loss of $0.1 million in 1997.
REVENUE RECOGNITION
Genzyme General recognizes revenue from product sales when it ships the
product and title has passed, net of any applicable third party contractual
allowances and rebates. Genzyme General recognizes revenue from service sales
when it has finished providing the service or when it has achieved an applicable
milestone. Genzyme General recognizes revenue from research and development
contracts over the term of the applicable contract and as it incurs costs
related to that contract. Up front license fees, milestone fees and royalty
revenue are recognized as revenue only if there are no remaining performance
obligations and the fees are non-refundable.
NET INCOME (LOSS) PER SHARE
To calculate basic earnings per share for Genzyme General, we divide the
earnings attributable to Genzyme General by the weighted average number of
outstanding shares of GENZ Stock during the applicable period. When we calculate
diluted earnings per share, we also include in the denominator all potentially
dilutive securities outstanding during the applicable period. To determine what
earnings are attributable to Genzyme General, we take its net income or loss for
the applicable period (determined in accordance with generally accepted
accounting principles) and adjust it for the tax benefits allocated to Genzyme
General in accordance with our management and accounting policies.
GG-21
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth our computation of basic and diluted earnings
per share of GENZ Stock:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income--basic..................................... $176,883 $170,909 $107,175
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes(1):
Interest expense.................................. 8,375 4,911 --
Amortization of purchasers' discount and offering
costs(2)........................................ 597 348 --
5% convertible subordinated debentures(3):
Interest expense.................................. 676 258 --
Amortization of debt offering costs(4)............ 113 434 --
-------- -------- --------
Net income--diluted................................... $186,644 $176,860 $107,175
======== ======== ========
Shares used in net income per common share--basic..... 83,092 79,063 76,531
Effect of dilutive securities:
Employee and director stock options............... 3,173 2,661 2,387
Warrants.......................................... 20 10 7
5 1/4% convertible subordinated notes(1).......... 6,313 3,874 --
5% convertible subordinated debentures(3)......... 630 214 --
-------- -------- --------
Dilutive potential common shares(5)................. 10,136 6,759 2,394
-------- -------- --------
Shares used in net income per common
share--diluted(5)................................... 93,228 85,822 78,925
======== ======== ========
Net income per common share--basic.................... $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Net income per common share--diluted(5)............... $ 2.00 $ 2.06 $ 1.36
======== ======== ========
</TABLE>
- ------------------------
(1) We issued these notes in May 1998.
(2) We are amortizing the purchasers' discount and offering costs of
approximately $7.0 million over the term of these notes, which mature in
June 2005.
(3) We issued these debentures in August 1998.
(4) We are amortizing the offering costs of approximately $0.9 million over the
term of these debentures, which mature in August 2003.
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for each period
because these securities had an exercise price greater than the average
market price of GENZ Stock:
GG-22
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GENZ Stock issuable for options*.................. 2,094 2,827 5,921
Shares of GENZ Stock issuable for warrants.................. 26 40 40
----- ----- -----
Total shares with exercise prices greater than the average
market price of GENZ Stock during the period.............. 2,120 2,867 5,961
===== ===== =====
</TABLE>
- ------------------------
*These options had exercise price ranges of $48.06--$62.33 in 1999,
$28.67--$47.88 in 1998, and $23.59--$38.00 in 1997.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
Because each of our operating divisions is a part of a single company, our
board of directors has adopted policies to address issues that may arise among
divisions and to govern the management of and the relationships between each
division. With some exceptions that are mentioned specifically in this note, our
board may modify or rescind these policies, or adopt additional policies, in its
sole discretion without stockholder approval, subject only to our board's
fiduciary duty to stockholders. Generally accepted accounting principles require
that any change in policy be preferable (in accordance with these principles) to
the previous policy.
INTERDIVISION ASSET TRANSFERS
Our board may at any time reallocate any program, product or other asset
from one division to any other division. We make reallocations at fair market
value, as determined by our board. In determining the fair market value of a
program under development, our board takes into account the following criteria:
- the commercial potential of the program;
- the phase of clinical development of the program;
- the expenses associated with realizing any income from the program and the
likelihood and time of the realization; and
- other matters that our board and its financial advisors, if any, deem
relevant.
One division may pay another division the consideration for a reallocation
in cash or other consideration with a value equal to the fair market value of
the reallocated assets. In the case of a reallocation of assets from Genzyme
General to another division, our board may elect instead to account for the
reallocation as an increase in the designated shares representing the division
to which the assets are reallocated in accordance with the provisions of our
charter.
Our policy regarding transfers of assets between divisions may not be
changed by our board without the approval of the holders of GENZ Stock voting as
a separate class unless the policy change does not affect Genzyme General.
GG-23
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
OTHER INTERDIVISION TRANSACTIONS
Our divisions 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. These transactions may include agreements by one division to provide
products and services for use by another division, license agreements and joint
ventures or other collaborative arrangements involving more than one division to
develop new products and services jointly and with third parties. These
transactions are subject to the following conditions:
- We charge research and development (including clinical and regulatory
support), distribution, sales, marketing, and general and administrative
services (including allocated space) performed by one division for another
division to the division for which the services are performed on a cost
basis. We charge direct costs to the division for which we incur them. We
allocate direct labor and indirect costs in reasonable and consistent
manners based on the use by a division of relevant services. Divisions
performing services for other divisions do not recognize revenue for the
services they perform.
- We charge the manufacturing of goods and performance of services by one
division exclusively for another division to the division for which it is
performed on a cost basis. We include in manufacturing costs an interest
charge (based on our short-term borrowing rate at the beginning of the
fiscal year) on the gross fixed assets used in the manufacturing process.
We determine gross fixed assets for the facility used at the beginning of
each fiscal year. We allocate direct labor and indirect costs in
reasonable and consistent manners based on the benefit received by a
division of related goods and services. Divisions performing services for
other divisions do not recognize revenue for the services they perform.
- Other than transactions involving research and development, manufacturing,
distribution, sales, marketing, general and administrative services, which
are addressed above, all interdivisional transactions are performed on
terms and conditions obtainable in arm's length transactions with third
parties. Divisions performing services for other divisions do not
recognize revenue for the services they perform.
- Our board must approve interdivisional transactions that are performed on
terms and conditions other than as described above and are material to one
or more of the participating divisions. In giving its approval, our board
must determine that the transaction is fair and reasonable to each
participating division and to holders of the common stock representing
each participating division.
- Divisions may make loans to other divisions. Any loan of $1 million or
less matures within 18 months and accrues interest at the best borrowing
rate available to the corporation for a loan of like type and duration.
Our board must approve any loan in excess of $1 million. In giving its
approval, our board must determine that the material terms of the 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.
- All material interdivisional transactions are set forth in a written
agreement that is signed by an authorized member of the management team of
each division involved in the transaction.
GG-24
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
TAX ALLOCATIONS
We file a consolidated return and allocate income taxes to each division
based upon the financial statement income, taxable income, credits and other
amounts properly allocable to each division under generally accepted accounting
principles as if it were a separate taxpayer. We assess the realizability of our
deferred tax assets at the division level. As a result, our consolidated tax
provision may not equal the sum of the divisions' tax provision. As of the end
of any fiscal quarter, however, if a division cannot use any projected annual
tax benefit attributable to it to offset or reduce its current or deferred
income tax expense, we may allocate the tax benefit to the other divisions in
proportion to their taxable income without any compensating payment or
allocation.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme General has unrestricted access to all technology and know-how owned
or controlled by Genzyme Corporation that may be useful in its business, subject
to any obligations or limitations that apply to the corporation generally.
NOTE C. OTHER GAINS AND CHARGES
In December 1999, Genzyme General recorded a net gain of $14.4 million upon
receipt of a payment associated with the termination of an agreement to acquire
Cell Genesys, Inc. Genzyme General recorded this gain as other income.
During the third quarter of 1998, Genzyme General recorded a $14.8 million
charge to cost of products sold to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. Genzyme General took this charge
following a determination that, based on the status of efforts to convert
Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, the existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated patient
needs.
Genzyme General also recorded $20.1 million in other charges in the fourth
quarter of 1997. The components of these charges are:
- a $18.1 million charge to cost of products sold to write down excess
inventory in Genzyme General's melatonin, bulk pharmaceuticals and fine
chemical product lines. Genzyme General took this charge after it
discontinued these product lines; and
- a $2.0 million charge to other expense relating to uncertainty in
collecting a note receivable that was issued upon the sale of Genetic
Design, Inc.
NOTE D. DISPOSITIONS OF ASSETS
In July 1998, we sold the assets of our research products business to Techne
Corporation in exchange for:
- $24.8 million in cash;
- approximately 987,000 shares of Techne common stock; and
- royalties on product sales by Techne's biotechnology group through
June 2003.
GG-25
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. DISPOSITIONS OF ASSETS (CONTINUED)
We will record royalty income as it is earned. In 1998, we recorded a
$31.2 million gain in connection with the sale of this business and an
additional $3.4 million gain upon the sale of a portion of our investment in
Techne common stock. In 1999, we recorded a gain of $2.0 million upon the sale
of our remaining shares of Techne common stock. The $3.4 million and
$2.0 million gains were recorded as gains on sale of investments in equity
securities. The research products business had been allocated to Genzyme
General.
Note C., "Dispositions of Assets," to our consolidated financial statements
contains information regarding:
- the sale of Genzyme General's immunochemistry product lines to an
operating unit of Sybron Laboratory Products Corp.; and
- the sale of Genetic Design to Laboratory Corporation of America.
We incorporate that information into this note by reference.
NOTE E. PEPTIMMUNE ACQUISITION
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General and accounted for it as a
purchase. We allocated the aggregate purchase price of $6.5 million and assumed
liabilities of $0.3 million to the tangible and intangible assets we acquired
from Peptimmune based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total................................................... $6,793
======
</TABLE>
The $5.4 million allocated to in-process technology represents the value we
assigned to Peptimmune's programs that were still in the development stage and
for which there was no alternative future use. Genzyme General recorded this
amount as a charge to operations.
NOTE F. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Note E., "Off-Balance Sheet Financial Instruments," to our consolidated
financial statements contains information regarding interest rate swap contracts
that are allocated to Genzyme General. We incorporate that information into this
note by reference.
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme General's trade receivables primarily represent amounts due from
distributors, healthcare service providers and companies and institutions
engaged in research, development or production of pharmaceutical and
biopharmaceutical products. Genzyme General performs credit evaluations of its
customers on an ongoing basis and generally does not require collateral. Genzyme
General states accounts receivable at fair value after reflecting an allowance
for doubtful accounts. This allowance was $17.6 million at December 31, 1999 and
$9.9 million at December 31, 1998.
GG-26
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS (CONTINUED)
Genzyme General's net intangible assets include $41.5 million in goodwill as
of December 31, 1999 and $48.5 million in goodwill as of December 31, 1998. This
goodwill is primarily a result of acquisitions.
Genzyme General's accumulated amortization of intangible assets was
$38.5 million as of December 31, 1999 and $39.6 million as of December 31, 1998.
NOTE H. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................... $24,057 $29,497
Work-in-process........................................ 40,592 23,359
Finished products...................................... 19,735 32,306
------- -------
Total.............................................. $84,384 $85,162
======= =======
</TABLE>
NOTE I. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Plant and equipment..................................... $230,151 $243,816
Land and buildings...................................... 180,624 147,806
Leasehold improvements.................................. 90,128 68,414
Furniture and fixtures.................................. 13,169 13,516
Construction-in-progress................................ 26,964 30,191
-------- --------
$541,036 $503,743
Less accumulated depreciation........................... (178,488) (141,000)
-------- --------
Property, plant and equipment, net...................... $362,548 $362,743
======== ========
</TABLE>
Genzyme General's depreciation expense was $36.9 million in 1999,
$34.9 million in 1998, and $28.4 million in 1997.
Genzyme General has capitalized approximately $34.6 million, which
represents the costs it has incurred in validating and optimizing the
manufacturing process for products which have reached technological feasibility.
Genzyme General has capitalized the following amounts of interest costs incurred
in financing the construction of manufacturing facilities:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
$0.9 million $0.7 million $0.5 million
</TABLE>
GG-27
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS
MARKETABLE SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents(1):
Corporate notes........................... $ 34,108 $ 34,108 $ 8,131 $ 8,129
Money market fund......................... 22,210 22,210 70,805 70,805
-------- -------- -------- --------
$ 56,318 $ 56,318 $ 78,936 $ 78,934
======== ======== ======== ========
Short-term:
Corporate notes........................... $210,954 $210,173 $173,970 $174,421
Federal agencies.......................... 4,085 4,067 -- --
-------- -------- -------- --------
$215,039 $214,240 $173,970 $174,421
======== ======== ======== ========
Long-term:
Corporate notes........................... $137,482 $135,509 $226,002 $226,259
Federal................................... -- -- 33,412 33,581
U.S. Treasury notes....................... 69,925 69,633 21,323 21,824
-------- -------- -------- --------
$207,407 $205,142 $280,737 $281,664
======== ======== ======== ========
Investments in equity securities.......... $ 59,983 $ 94,719 $ 62,244 $ 51,977
======== ======== ======== ========
</TABLE>
- ------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheets.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND
INVESTMENTS IN EQUITY SECURITIES
Genzyme General recorded gains of $2.0 million in 1999 and $3.4 million in
1998 upon the sale of its investment in shares of Techne common stock. Genzyme
General also recorded charges of $5.7 million in 1999 and $3.4 million in 1998
because it considered the decline in the value of certain strategic investments
in collaborators' common stock to be other than temporary.
Genzyme General records gross unrealized holding gains and losses in
division equity. The following table sets forth the amounts recorded:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Unrealized holding gains........................ $37.1 million $3.6 million
Unrealized holding losses....................... $5.0 million $12.5 million
</TABLE>
GG-28
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS (CONTINUED)
The following table contains information regarding the range of contractual
maturities of Genzyme General's investments in debt securities:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 years.............................. $271,357 $270,558 $252,907 $253,355
1-2 years................................... 106,046 104,306 259,363 259,788
2-10 years.................................. 101,361 100,836 21,373 21,876
-------- -------- -------- --------
$478,764 $475,700 $533,643 $535,019
======== ======== ======== ========
</TABLE>
Note I., "Investments," to our consolidated financial statements contains
information regarding Genzyme General's:
- Equity investments in:
- Abiomed, Inc.;
- Aronex Pharmaceuticals, Inc.;
- BioMarin;
- Celtrix Pharmaceuticals, Inc.
- GelTex;
- Genovo, Inc.;
- Integramed America, Inc.; and
- Pharming.
- Investments in and relationships with Dyax Corporation, Genzyme
Transgenics and ATIII LLC; and
- Investments in the following joint ventures:
- BioMarin/Genzyme LLC;
- Diacrin/Genzyme LLC;
- Pharming/Genzyme LLC; and
- RenaGel LLC.
We incorporate that information into this note by reference.
GG-29
<PAGE>
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE K. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Compensation........................................... $21,363 $20,434
Technology access fee.................................. -- 10,000
Professional fees...................................... 2,938 4,853
Royalties.............................................. 6,891 5,846
Rebates................................................ 7,126 5,663
Other.................................................. 24,196 18,847
------- -------
$62,514 $65,643
======= =======
</TABLE>
NOTE L. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
5 1/4% convertible subordinated notes....................... $250,000 $250,000
Revolving credit facility maturing in November 1999......... -- $ 82,000
5% convertible subordinated debentures...................... 22,622 21,559
Mortgage notes.............................................. -- 3,167
-------- --------
$272,622 $356,726
Less current portion........................................ -- (82,080)
-------- --------
$272,622 $274,646
======== ========
</TABLE>
Over the next five years, Genzyme General will be required to repay the
following principal amounts on its long-term debt (excluding capital leases):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
$0.0 million $0.0 million $0.0 million $22.6 million $0.0 million $250.0 million
</TABLE>
REVOLVING CREDIT FACILITY; CONVERTIBLE DEBT; MORTGAGE NOTE
Note K, "Long Term Debt and Leases," to our consolidated financial
statements contains information regarding our:
- revolving credit facilities;
- 5 1/4% convertible subordinated notes due June 2005;
- 5% convertible subordinated debentures due August 2003; and
- mortgage note.
We incorporate that information into this note by reference.
GG-30
<PAGE>
NOTE L. LONG-TERM DEBT AND LEASES (CONTINUED)
OPERATING LEASES
Genzyme General incurs expense under operating leases for facilities and
personal property that have terms in excess of one year. Genzyme General's total
expense under operating leases was:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
$20.7 million $16.3 million $14.2 million
</TABLE>
Over the next five years, Genzyme General will be required to repay the
following amounts under operating leases:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
$15.8 million $15.3 million $14.0 million $11.9 million $11.4 million $115.4 million
</TABLE>
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year
lease with an unaffiliated lessor. Our expenses under this lease, which are
allocated to Genzyme General, were $1.5 million in 1999 and 1998, and
$1.3 million in 1997. Our rent under this lease increases every five years based
on the Consumer Price Index or, if higher, 3% per year.
Genzyme Tissue Repair leases from Genzyme General a portion of a research
and development facility. Genzyme Tissue Repair is obligated to pay Genzyme
General $0.6 million per year for 3 years commencing on July 1, 1998.
Diacrin/Genzyme LLC has subleased a portion of this facility and is obligated to
pay Genzyme Tissue Repair rent of $0.4 million per year pursuant to the terms of
the sublease agreement.
NOTE M. DIVISION EQUITY
At December 31, 1999 and 1998, 200 million shares of GENZ Stock were
authorized for issuance with a par value of $0.01. At December 31, 1999
approximately 84,352,000 shares of GENZ Stock were issued and approximately
84,245,000 shares of GENZ Stock outstanding and at December 31, 1998
approximately 81,517,000 shares of GENZ Stock were issued and approximately
81,411,000 shares of GENZ Stock were outstanding. At December 31, 1999,
approximately 13,126,000 shares of GENZ Stock were reserved for issuance under
our various equity plans and options to purchase approximately 11,610,000 shares
of GENZ Stock were outstanding.
GG-31
<PAGE>
NOTE M. DIVISION EQUITY (CONTINUED)
The following table contains the components of division equity for Genzyme
General for the periods presented:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 939,967 $745,895 $645,185
Net income................................................ 142,077 133,052 76,642
Allocation of tax benefits generated by:
Genzyme Molecular Oncology.............................. 7,812 3,527 2,755
Genzyme Surgical Products............................... 16,128 17,936 10,112
Genzyme Tissue Repair................................... 10,866 16,394 17,666
Issuance of common stock under stock plans.................. 59,587 74,360 35,963
Exercise of warrants........................................ -- 289 855
Allocation of cash:
To Genzyme Molecular Oncology for designated
shares(1)............................................. -- (5,000) --
To Genzyme Surgical Products for designated shares(1)... (176,706) (41,975) (25,669)
To Genzyme Tissue Repair for designated shares(1)....... (4,937) -- (14,892)
To Genzyme Tissue Repair for research program........... (100) (250) --
To Genzyme Tissue Repair for transfer of interest in
joint venture......................................... (25,000) -- --
Tax benefit from disqualifying dispositions................. 24,238 18,561 4,127
Conversion of debentures for GZMO designated shares(1)...... -- (19,802) --
Conversion of note receivable for GZMO designated
shares(1)................................................. -- (2,696) --
Loss on purchase of facility from Genzyme Tissue Repair..... -- (711) --
Allocation of acquired deferred tax asset................... -- -- 2,900
Stock compensation expense.................................. 58 48 1,218
Equity adjustments.......................................... 13,624 339 (10,967)
---------- -------- --------
Balance at end of period.................................... $1,007,614 $939,967 $745,895
========== ======== ========
</TABLE>
- ------------------------
(1) Designated shares are shares of our common stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to the division tracked by that series of
stock. As of December 31, 1999, there were 1,688,237 GZMO designated shares,
1,164,839 GZSP designated shares and 2,238,053 GZTR designated shares. The
number of GZMO designated shares assumes that Genzyme Molecular Oncology
does not complete a public offering of GZMO Stock prior to June 18, 2000. If
such an offering is completed prior to that date, the number of GZMO
designated shares reserved for issuance in connection with a draw under an
equity line of credit in 1998 will decrease based on a formula set forth in
our charter.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. Genzyme General does not recognize compensation expense for
options granted and shares purchased under the provisions of these plans for
options granted to employees with an exercise price greater than or equal to
fair market value.
GG-32
<PAGE>
NOTE M. DIVISION EQUITY (CONTINUED)
The following table sets forth net income and income per share data for
Genzyme General calculated in accordance with SFAS 123 as if compensation
expense for our stock-based compensation plans was determined based on the fair
value at the grant dates for options granted and shares purchased under the
plans:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income:
As reported............................... $176,883 $170,909 $107,175
Pro forma................................. $159,223 $157,334 $ 95,168
Basic income per share:
As reported............................... $ 2.13 $ 2.16 $ 1.40
Pro forma................................. $ 1.92 $ 1.99 $ 1.24
Diluted income per share:
As reported............................... $ 2.00 $ 2.06 $ 1.36
Pro forma................................. $ 1.81 $ 1.83 $ 1.21
</TABLE>
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding the assumptions we made in calculating net income
and income per share data in accordance with SFAS 123. The effects of applying
SFAS 123 are not likely to be representative of the effects on reported net
income in future years. SFAS 123 does not apply to awards granted prior to 1995,
and additional awards are anticipated in future years.
PREFERRED STOCK, STOCK RIGHTS, EQUITY PLANS, WARRANTS, DESIGNATED SHARES AND
EQUITY LINES
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding:
- our authorized preferred stock;
- our shareholder rights plan;
- our directors' deferred compensation plan;
- our other equity plans;
- warrants exercisable into GENZ Stock;
- designated shares and our policies for distributing them; and
- equity lines of credit made available by Genzyme General to Genzyme
Molecular Oncology and Genzyme Tissue Repair.
We incorporate that information into this note by reference.
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS
Genzyme General's revenue from research and development agreements with
Genzyme Transgenics Corporation was:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
$1.5 million $3.6 million $8.0 million
</TABLE>
GG-33
<PAGE>
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
Note M., "Research and Development Agreements," to our consolidated
financial statements contains information regarding Genzyme General's:
- Relationships with Genzyme Transgenics Corporation; and
- Investments in the following joint ventures:
- BioMarin/Genzyme LLC;
- Diacrin/Genzyme LLC;
- Pharming/Genzyme LLC; and
- RenaGel LLC.
We incorporate that information in this note by reference.
NOTE O. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on Genzyme General's results of operations,
financial condition or liquidity.
NOTE P. INCOME TAXES
Genzyme General's income before income taxes and the related income tax
expense (benefit) are described in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Domestic(1)................................... $210,097 $204,182 $112,349
Foreign....................................... 16,380 9,514 8,822
-------- -------- --------
Total..................................... $226,477 $213,696 $121,171
======== ======== ========
Currently payable:
Federal....................................... $ 77,779 $ 69,567 $ 40,426
State......................................... 4,302 9,354 4,286
Foreign....................................... 5,733 4,016 2,971
-------- -------- --------
Total..................................... $ 87,814 $ 82,937 $ 47,683
======== ======== ========
Deferred:
Federal....................................... $ (3,036) $ (1,734) $ (3,713)
State......................................... (378) (829) (245)
-------- -------- --------
Total..................................... (3,414) $ (2,563) $ (3,958)
-------- -------- --------
Provision for income taxes.................... $ 84,400 $ 80,374 $ 43,725
======== ======== ========
</TABLE>
- ------------------------
(1) Includes $5.4 million in charges for purchased research and development and
$5.5 million in charges for impaired investments in 1999.
GG-34
<PAGE>
NOTE P. INCOME TAXES (CONTINUED)
Genzyme General's provisions for income taxes were at rates other than the
U.S. federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate............................... 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less than 80% owned
subsidiaries with no current tax benefit............... 0.1 0.8 0.8
State taxes, net......................................... 1.2 3.1 3.0
Foreign sales corporation................................ (2.2) (1.5) (1.8)
Nondeductible amortization............................... 0.7 0.8 1.4
Benefit of tax credits................................... (1.4) (1.0) (1.3)
Other, net............................................... 2.2 0.5 (0.8)
---- ---- -----
Effective tax rate before certain charges................ 35.6% 37.7% 36.3%
Charge for impaired investment........................... 0.5 -- --
Charge for purchased research and development............ 0.5 -- --
---- ---- -----
36.6% 37.7% 36.3%
Allocated tax benefits generated by:
Genzyme Molecular Oncology............................. (3.3) (1.7) (2.2)
Genzyme Surgical Products.............................. (6.8) (8.4) (8.4)
Genzyme Tissue Repair.................................. (4.6) (7.7) (14.7)
---- ---- -----
Effective tax rate attributable to GENZ Stock............ 21.9% 19.9% 11.0%
==== ==== =====
</TABLE>
The components of net deferred tax assets are described in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 3,164 $ 2,423
Tax credits......................................... 9,413 3,714
Deferred loss....................................... -- 2,002
Intangible amortization............................. 36,496 38,271
Investments in unconsolidated subsidiary............ 3,396 3,108
Realized and unrealized capital losses.............. 10,088 8,822
Reserves, accruals and other........................ 37,055 35,798
Allocation of tax asset from Genzyme Molecular
Oncology.......................................... 3,787 15,621
Allocation of tax asset from Genzyme Tissue
Repair............................................ 15,510 2,648
-------- --------
Gross deferred tax asset................................ $118,909 $112,407
Valuation allowance..................................... (17,646) (15,383)
-------- --------
$101,263 $ 97,024
Deferred tax liabilities:
Depreciable assets.................................. (22,591) (26,373)
Realized and unrealized capital gains............... (12,686) --
Deferred gains...................................... (878) --
Allocation of tax liability from Genzyme Surgical
Products.......................................... (4,069) (2,788)
-------- --------
Net deferred tax asset.............................. $ 61,039 $ 67,863
======== ========
</TABLE>
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to capital losses from the purchase of in-process
research and development, we placed valuation
GG-35
<PAGE>
NOTE P. INCOME TAXES (CONTINUED)
allowances of $17.6 million in 1999 and $15.4 million in 1998 against otherwise
recognizable deferred tax assets.
Our ability to realize the benefit of net deferred tax assets is dependent
on our generating sufficient taxable income before loss carryforwards expire.
While it is not assured, we believe that it is more likely than not that we will
be able to realize all of our net deferred tax assets. The amount we can
realize, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At December 31, 1999, Genzyme General had for U.S. income tax purposes a net
operating loss carryforwards of $9.0 million and a tax credit carryforward of
$9.4 million. The net operating loss carryforwards expire between 2003 and 2019
and, prior to expiration, Genzyme General's ability to use this carryforward may
be limited under U.S. tax laws. Tax credits of $4.9 million will carryforward
indefinitely and approximately $4.5 million of the tax credit carryforwards will
expire from 2014 to 2019. Approximately $9.4 million of the tax credit
carryforwards relate to exercises of non-qualified stock options and
disqualifying dispositions of incentive stock options, the tax benefit of which,
if realized, will be credited to additional paid-in-capital.
NOTE Q. BENEFIT PLANS
Note P., "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) and other pension plans. We incorporate that
information into this note by reference.
NOTE R. SEGMENT INFORMATION
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." We present segment information in a manner consistent
with the method we use to report this information to our management. Applying
SFAS 131, Genzyme General has two reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme; and
- Diagnostic Products, which provides diagnostic products to niche markets,
focusing on in vitro diagnostics.
GG-36
<PAGE>
NOTE R. SEGMENT INFORMATION (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Therapeutics.......................................... $ 488,705 $ 413,645 $ 332,712
Diagnostic Products................................... 57,971 65,683 66,288
Other................................................. 86,409 85,846 86,927
Eliminations/Adjustments.............................. 2,281 4,145 10,441
----------- --------- ---------
Total..................................................... $ 635,366 $ 569,319 $ 496,368
=========== ========= =========
Depreciation and Amortization Expense:
Therapeutics.......................................... $ 21,068 $ 10,862 $ 10,054
Diagnostic Products................................... 1,909 4,715 4,540
Other................................................. 6,422 11,470 7,410
Eliminations/Adjustments.............................. 20,835 10,711 12,818
----------- --------- ---------
Total..................................................... $ 50,234 $ 37,758 $ 34,822
=========== ========= =========
Equity in Net Loss of Unconsolidated Affiliates:
Therapeutics.......................................... $ (30,094) $ (12,480) $ (2,310)
Diagnostic Products................................... -- -- --
Other................................................. 56 (107) (71)
Eliminations/Adjustments.............................. (7,385) (7,152) (3,401)
----------- --------- ---------
Total..................................................... $ (37,423) $ (19,739) $ (5,782)
=========== ========= =========
Income Tax (Expense) Benefits:
Therapeutics.......................................... $ (84,859) $ (76,606) $ (61,389)
Diagnostic Products................................... (2,485) (13,755) (1,409)
Other................................................. 2,952 2,134 8,658
Eliminations/Adjustments.............................. (8) 7,853 10,415
----------- --------- ---------
Total..................................................... $ (84,400) $ (80,374) $ (43,725)
=========== ========= =========
Net Income:
Therapeutics(1)....................................... $ 133,854 $ 120,832 $ 104,527
Diagnostic Products(2)................................ 3,915 21,694 2,400
Other................................................. (4,661) (3,367) (14,741)
Eliminations/Adjustments(3)........................... 8,969 (6,107) (15,544)
----------- --------- ---------
Total..................................................... $ 142,077 $ 133,052 $ 76,642
=========== ========= =========
</TABLE>
- ------------------------
(1) Therapeutics' net income for 1998 includes a $14.8 million charge to write
down excess inventory used to make Ceredase-Registered Trademark- enzyme.
(2) Diagnostic Products' net income for 1998 and 1999 includes gains on the sale
of product lines of $0.5 million in 1999 and $31.2 million in 1998.
(3) Eliminations/Adjustments includes a $14.4 million gain upon receipt of a
payment associated with the termination of the agreement to acquire Cell
Genesys.
GG-37
<PAGE>
NOTE R. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<S> <C> <C> <C>
Segment Assets:
Therapeutics........................................... $ 338,960 $ 326,305
Diagnostic Products.................................... 40,266 49,430
Other.................................................... 83,088 94,930
Eliminations/Adjustments................................. 937,269 939,726
---------- ----------
Total...................................................... $1,399,583 $1,410,391
========== ==========
</TABLE>
The Other category includes amounts attributable to our genetic testing and
pharmaceuticals businesses. Eliminations/Adjustments consists of the differences
between:
- the segments' net income and our consolidated net income; and
- total segment assets and our consolidated total assets.
The amount in Eliminations/Adjustments for net income consists primarily of
interest income, interest expense and other income and expense items that we do
not specifically allocate to a particular segment.
Segment assets include accounts receivable, inventory and certain fixed and
intangible assets. The amounts in Eliminations/Adjustments for segment assets
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents, and short- and long-term
investments........................................... $513,905 $556,097
Intangibles, net........................................ 34,341 41,556
Property, plant and equipment, net...................... 172,165 133,995
Investment in equity securities......................... 94,719 51,977
Other................................................... 122,139 156,101
-------- --------
Total Eliminations/Adjustments...................... $937,269 $939,726
======== ========
</TABLE>
Genzyme General operates in the healthcare industry and manufactures and
markets its products primarily in the United States and Europe. Genzyme
General's principal manufacturing facilities are located in the United States,
United Kingdom, Switzerland and Germany. It purchases products from our English
and Swiss subsidiaries for sale to customers in the United States. Genzyme
General sets transfer prices from our foreign subsidiaries to allow it to
produce profit margins commensurate with its sales and marketing effort. Our
Dutch subsidiary is Genzyme General's primary distributor of therapeutic
products in Europe.
GG-38
<PAGE>
NOTE R. SEGMENT INFORMATION (CONTINUED)
The following table contains certain financial information by geographic
area:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
U.S........................................ $ 412,611 $371,587 $363,455
Netherlands................................ 35,499 31,413 39,936
Other...................................... 187,256 166,319 92,977
--------- -------- --------
Total.................................... $ 635,366 $569,319 $496,368
========= ======== ========
Long-lived assets:
U.S........................................ $ 647,024 $755,023 $506,085
Netherlands................................ 1,094 730 652
Other...................................... 51,447 56,517 53,546
--------- -------- --------
Total.................................... $ 699,565 $812,270 $560,283
========= ======== ========
</TABLE>
Genzyme General's results of operations are highly dependent on sales of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales
of these products represented 84% of Genzyme General's product revenue in 1999,
81% of product revenue in 1998, and 78% of product revenue in 1997. Genzyme
General sells these products directly to physicians, hospitals and treatment
centers as well as through unaffiliated distributors. Sales to one distributor
represented 20% of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- enzyme revenues in 1999, 19% of these revenues in
1998, and 18% of these revenues in 1997. We believe that our credit risk
associated with trade receivables is mitigated as a result of the fact that
these products are sold to a large number of customers in a number of different
industries and over a broad geographic area.
NOTE S. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Net revenue......................................... $150,766 $154,205 $157,669 $172,726
Gross profit........................................ 113,519 117,557 120,693 126,223
Net income.......................................... 43,226 40,226 38,187 55,244
Income per share of GENZ Stock:
Basic............................................. $ 0.53 $ 0.49 $ 0.46 $ 0.66
Diluted........................................... $ 0.49 $ 0.46 $ 0.43 $ 0.62
1998
Net revenue......................................... 129,896 $141,779 $142,225 $155,419
Gross profit........................................ 89,089 98,860 86,546 117,635
Net income.......................................... 34,056 41,086 53,752 42,015
Income per share of GENZ Stock:
Basic............................................. $ 0.43 $ 0.52 $ 0.68 $ 0.52
Diluted........................................... $ 0.42 $ 0.50 $ 0.64 $ 0.49
</TABLE>
NOTE T. SUBSEQUENT EVENT
In February 2000, we converted our shares of the Series B Convertible
Preferred Stock of Genzyme Transgenics into 1,048,021 shares of Genzyme
Transgenics common stock. Also in February 2000, Genzyme Transgenics completed a
public offering of its common stock. Genzyme General will recognize a gain on
affiliate sale of stock of approximately $20 million in the first quarter of
2000.
GG-39
<PAGE>
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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards
generally accepted in the United States 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
Boston, Massachusetts
February 23, 2000
GG-40
<PAGE>
GENZYME GENERAL DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------- ------------------- --------------------------------- ----------- -------------
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------- ------------------- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts............... $ 9,913,100 $12,216,200 $ -- $ 3,167,400(1) $18,961,900
Inventory reserve........ $17,631,100 $ 1,978,000 $ -- $ 3,918,000 $15,691,100
Year ended December 31,
1998:
Allowance for doubtful
accounts............... $ 8,415,700 $ 5,059,000 $ -- $ 3,561,600(1) $ 9,913,100
Inventory reserve........ $15,471,300 $18,178,000 $ -- $16,018,200 $17,631,100
Year ended December 31,
1997:
Allowance for doubtful
accounts............... $11,967,900 $ 2,080,000 $ -- $ 5,632,200(1) $ 8,415,700
Inventory reserve........ $ 2,631,300 $15,101,000 $ -- $ 2,261,000 $15,471,300
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
GG-41
<PAGE>
EXHIBIT 13.2
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
GENZYME MOLECULAR ONCOLOGY
Combined Selected Financial Data.......................... GMO-2
Management's Discussion and Analysis of Genzyme Molecular
Oncology's Financial Condition and Results of
Operations.............................................. GMO-5
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998
and 1997................................................ GMO-13
Combined Balance Sheets--December 31, 1999 and 1998....... GMO-14
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998
and 1997................................................ GMO-15
Notes to Combined Financial Statements.................... GMO-16
Report of Independent Accountants......................... GMO-28
</TABLE>
GMO-1
<PAGE>
GENZYME MOLECULAR ONCOLOGY COMBINED SELECTED FINANCIAL DATA
Genzyme Molecular Oncology is our operating division that is developing
cancer products, with a focus on cancer vaccines and angiogenesis inhibitors.
Genzyme Molecular Oncology Division Common Stock, which we refer to as "GZMO
Stock," is intended to reflect the value and track the performance of Genzyme
Molecular Oncology.
The following combined selected financial data reflect the results of
operations and financial position of Genzyme Molecular Oncology and should be
read in conjunction with the financial statements of Genzyme Molecular Oncology
and accompanying notes.
GMO-2
<PAGE>
COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenue............................ $ 1,920 $ 2,229 $ 467 $ -- $ --
Service revenue--related party............. 50 466 -- -- --
Research and development revenue--related
party.................................... 496 2,177 315 -- --
Research and development revenue........... -- 3,256 -- -- --
Licensing revenue.......................... 2,125 11,275 -- -- --
Royalty revenue............................ 28 4 -- -- --
-------- -------- -------- ------- -------
Total revenues........................... 4,619 19,407 782 -- --
Operating costs and expenses:
Cost of service revenues................... 620 1,374 50 -- --
Cost of research and development
revenues................................. 698 4,073 287 -- --
Selling, general and administrative........ 5,529 7,155 2,118 185 87
Research and development................... 15,997 12,743 5,341 818 377
Amortization of intangibles................ 11,825 11,983 5,127 -- --
Charge for in-process technology........... -- -- 7,000 -- --
-------- -------- -------- ------- -------
Total operating costs and expenses....... 34,669 37,328 19,923 1,003 464
-------- -------- -------- ------- -------
Operating loss............................... (30,050) (17,921) (19,141) (1,003) (464)
Other income (expenses):
Equity in net loss of joint venture........ (1,870) (1,647) (258) -- --
Interest income............................ 469 782 392 -- --
Interest expense........................... (28) (2,968) (1,663) -- --
-------- -------- -------- ------- -------
Total other income (expenses)............ (1,429) (3,833) (1,529) -- --
-------- -------- -------- ------- -------
Loss before income taxes..................... (31,479) (21,754) (20,670) (1,003) (464)
Tax benefit.................................. 2,647 2,647 1,092 -- --
-------- -------- -------- ------- -------
Net loss attributable to GZMO Stock.......... $(28,832) $(19,107) $(19,578) $(1,003) $ (464)
======== ======== ======== ======= =======
Per GZMO basic and diluted common share:
Net loss................................... $ (2.25) $ (3.81)
======== ========
Weighted average shares outstanding.......... 12,826 5,019
======== ========
Per pro forma GZMO basic and diluted common
share:
Pro forma net loss......................... $ (4.98) $ (0.26) $ (0.12)
======== ======= =======
Pro forma weighted average shares
outstanding................................ 3,929 3,929 3,929
======== ======= =======
</TABLE>
GMO-3
<PAGE>
COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and investments............... $ 3,587 $11,900 $21,229 $ -- $ --
Working capital.................... (5,889) 9,189 11,953 -- --
Total assets....................... 9,692 35,952 53,801 -- --
Long-term debt and convertible
debt............................. -- -- 24,606 -- --
Parent company investment.......... -- -- -- 1,504 501
Division equity.................... (1,215) 23,364 13,466 -- --
</TABLE>
There were no cash dividends paid.
GMO-4
<PAGE>
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 our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme Molecular Oncology and Genzyme Corporation included in this annual
report. You should consider carefully each of these risks and uncertainties in
evaluating the financial condition and results of operations of Genzyme
Molecular Oncology and Genzyme.
We formed Genzyme Molecular Oncology on June 18, 1997 by acquiring
PharmaGenics, Inc. and combining it with several of our ongoing programs in the
field of oncology.
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Molecular Oncology and prepare
separate financial statements for Genzyme Molecular Oncology. Notwithstanding
the allocation of assets and liabilities to Genzyme Molecular Oncology, Genzyme
Corporation continues to hold title to all of the assets and is responsible for
all of the liabilities allocated to Genzyme Molecular Oncology. Holders of GZMO
Stock are common stockholders of Genzyme Corporation and have no specific rights
to the assets to which GZMO Stock relates.
We present financial information and accounting policies specific to Genzyme
Molecular Oncology in the accompanying combined financial statements. We present
financial information and accounting policies relevant to the corporation and
its operating divisions taken as a whole in our consolidated financial
statements.
You should, therefore, read this discussion and analysis of Genzyme
Molecular Oncology's financial position and results of operations in conjunction
with the financial statements and related notes of Genzyme Molecular Oncology,
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 believes are
necessary for an understanding of Genzyme Molecular Oncology's financial
statements.
GMO-5
<PAGE>
The components of Genzyme Molecular Oncology's combined statements of
operations are described in the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues................ $ 4,619 $ 19,407 $ 782 (76%) 2,382%
Cost of revenues.............. 1,318 5,447 337 (76%) 1,516%
Selling, general and
administrative.............. 5,529 7,155 2,118 (23%) 238%
Research and development...... 15,997 12,743 5,341 26% 139%
Amortization of intangibles... 11,825 11,983 5,127 (1%) 134%
Charge for in-process
technology.................. -- -- 7,000 0% (100%)
-------- -------- --------
Total operating costs and
expenses.................. 34,669 37,328 19,923 (7%) 87%
-------- -------- --------
Operating loss................ (30,050) (17,921) (19,141) (68%) 6%
Other expenses, net........... (1,429) (3,833) (1,529) 63% (151%)
-------- -------- --------
Loss before income taxes...... (31,479) (21,754) (20,670) (45%) (5%)
Tax benefit................... 2,647 2,647 1,092 0% 142%
-------- -------- --------
Net loss attributable to GZMO
Stock....................... $(28,832) $(19,107) $(19,578) (51%) 2%
======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Service revenue............... $ 1,970 $ 2,695 $ 467 (27%) 477%
Research and development
revenue..................... 496 5,433 315 (91%) 1,625%
Licensing revenue............. 2,125 11,275 -- (81%) 100%
Royalty revenue............... 28 4 -- 600% 100%
-------- -------- --------
Total revenues.............. $ 4,619 $ 19,407 $ 782 (76%) 2,382%
======== ======== ========
</TABLE>
1999 AS COMPARED TO 1998
Service revenue decreased as a result of a decline in the provision of
genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression
technology.
Research and development revenue also decreased as a result of a reduction
in work performed by Genzyme Molecular Oncology on behalf of StressGen/Genzyme
LLC (Genzyme Molecular Oncology's joint venture with StressGen Biotechnologies
Corporation and the Canadian Medical Discoveries Fund, Inc. to develop stress
gene therapies for the treatment of cancer that was dissolved in 1999) and the
completion of research and development work performed on behalf of
Schering-Plough in 1998.
Licensing revenue decreased in 1999 as a result of the receipt in 1998 of a
licensing fee and milestone payments under a license agreement with
Schering-Plough relating to p53 gene therapy. This amount was partially offset
by amounts received upon the grant by Genzyme Molecular Oncology of licenses
under its rights to the SAGE-TM- gene expression technology and the MDM2
protein.
GMO-6
<PAGE>
1998 AS COMPARED TO 1997
The increase in Genzyme Molecular Oncology's research and development and
licensing revenue was primarily due to $13.0 million in revenue recorded in
connection with a research and license agreement with Schering-Plough. Genzyme
Molecular Oncology's revenue includes work performed for StressGen/Genzyme LLC.
COST OF REVENUES
1999 AS COMPARED TO 1998
Genzyme Molecular Oncology's cost of revenues includes:
- work performed on behalf of StressGen/Genzyme LLC;
- services performed using the SAGE-TM- technology on behalf of third
parties;
- performance of gene therapy research on behalf of Schering-Plough; and
- royalties payable to third parties.
Cost of revenues decreased in 1999 as a result of the completion of the
Schering-Plough research project and a reduction in the royalty rate payable by
Genzyme Molecular Oncology for using the SAGE-TM- gene expression technology on
behalf of third parties.
1998 AS COMPARED TO 1997
The increase in Genzyme Molecular Oncology's cost of revenues in 1998 was
primarily attributable to:
- costs related to the delivery of services using the SAGE-TM- technology;
- royalties payable for using the SAGE-TM- technology on behalf of third
parties; and
- costs incurred in connection with research and development performed on
behalf of StressGen/ Genzyme LLC and Schering-Plough.
SG&A AND R&D EXPENSES
1999 AS COMPARED TO 1998
Genzyme Molecular Oncology's selling, general and administrative expense
decreased primarily as a result of:
- reduced legal costs in 1999 associated with the prosecution and
maintenance of its intellectual property portfolio; and
- a one-time charge taken in 1998 to write off costs incurred in
connection with a public offering of GZMO Stock that was not completed.
Genzyme Molecular Oncology's research and development expense increased as a
result of:
- the initiation of a clinical trial for its melanoma tumor vaccine
product; and
- an increase in the number of research personnel and related expenses
required to support the continued development of its cancer vaccine and
angiogenesis inhibitor programs.
1998 AS COMPARED TO 1997
Genzyme Molecular Oncology's selling, general and administrative expense
increased in 1998 primarily as a result of:
GMO-7
<PAGE>
- increased administrative support needed to support the growth of its
business; and
- a one-time charge taken in the third quarter of 1998 to write off costs
incurred in connection with a public offering of GZMO Stock that was
not completed.
Genzyme Molecular Oncology's research and development expense increased in
1998 as a result of increases in research personnel and related expenses to
support Genzyme Molecular Oncology's SAGE-TM-, gene therapy and small molecule
programs.
AMORTIZATION OF INTANGIBLES
Genzyme Molecular Oncology's amortization of intangibles is attributable to
intangible assets acquired in connection with the acquisition of PharmaGenics,
Inc. in June 1997. Because Genzyme Molecular Oncology only amortized these
assets over a six month period in 1997, amortization expense increased in 1998.
OTHER INCOME AND EXPENSES
1999 AS COMPARED TO 1998
Genzyme Molecular Oncology's other expenses decreased because it had reduced
interest expense resulting from the transfer of its convertible debt to Genzyme
General in August 1998. The decrease in interest expense, however, was offset in
part by a $1.0 million charge taken by Genzyme Molecular Oncology in the third
quarter of 1999 in connection with its repurchase of one-half of the Canadian
Medical Discoveries Fund's interest in StressGen/Genzyme LLC. StressGen/Genzyme
LLC was dissolved in December 1999 and, as a result, Genzyme Molecular Oncology
will no longer incur expenses related to this joint venture.
1998 AS COMPARED TO 1997
Interest income increased in 1998 mainly as the result of higher average
cash balances. 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. These debentures, which had been convertible into shares of GZMO
Stock, were exchanged in August 1998 for 5% convertible debentures convertible
into shares of GENZ Stock.
StressGen/Genzyme LLC was established in July 1997. Genzyme Molecular
Oncology recorded an equity in net loss of the joint venture of $1.6 million in
1998 and $0.3 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, Genzyme Molecular Oncology had cash, cash equivalents
and short-term investments of $3.6 million, a decrease of $8.3 million from
December 31, 1998.
In 1999, Genzyme Molecular Oncology used $14.6 million of cash for
operations. Investing activities provided $2.0 million of cash, which consisted
primarily of $1.0 million in proceeds from the maturities of investments, and
$0.9 million from the distribution of cash from StressGen/Genzyme LLC upon the
joint venture's dissolution. Financing activities provided $5.0 million of cash
from the issuance of debt, and $0.3 million of cash proceeds from the exercise
of stock options and the issuance of stock under our employee stock purchase
plan.
In 1998, our board of directors made $30.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology under an equity line of credit. Under
the terms of this equity line, Genzyme Molecular Oncology may draw down funds as
needed in exchange for GZMO designated shares. GZMO designated shares are shares
of GZMO Stock that are not issued and outstanding, but
GMO-8
<PAGE>
which our board of directors may issue, sell, or distribute without allocating
the proceeds to Genzyme Molecular Oncology. Genzyme Molecular Oncology has not
yet drawn down any funds under this equity line.
At December 31, 1999, $5.0 million of funds outstanding under one of our
revolving credit facilities was allocated to Genzyme Molecular Oncology. Genzyme
Molecular Oncology, together with our other operating divisions, has access to
our revolving credit facilities. At December 31, 1999, $50.0 million was
available under a facility that matures in November 2000 and $77.0 million was
available under a facility that matures in November 2002.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available from the following sources, will be sufficient
to fund its operations through 2000:
- the $30.0 million equity line of credit from Genzyme General;
- our revolving credit facilities;
- revenues generated from the SAGE-TM- gene expression technology; and
- revenues from license agreements.
We expect Genzyme Molecular Oncology to have significant operating losses
for the next several years. Genzyme Molecular Oncology plans to spend
substantial amounts of money on, among other things:
- research and development;
- preclinical and clinical testing; and
- pursuing regulatory approvals.
Genzyme Molecular Oncology's cash needs may differ from those planned as a
result of many factors, including the:
- results of research and development and clinical testing;
- achievement of milestones under existing strategic alliances;
- ability to establish and maintain additional strategic collaborations
and licensing arrangements;
- costs of protecting its intellectual property rights;
- development of competitive products and services; and
- ability to satisfy regulatory requirements of the FDA and other
government authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations. We cannot guarantee 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, scale back or eliminate certain of its programs.
Genzyme Molecular Oncology may also have to give third parties rights to
commercialize technologies or products that it would otherwise have sought to
commercialize itself. Genzyme Molecular Oncology recently announced a proposed
public offering of 3,000,000 shares of GZMO Stock. We cannot guarantee, however,
that this offering will be completed.
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" included in this
annual report.
GMO-9
<PAGE>
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.
GENZYME MOLECULAR ONCOLOGY MAY NEVER BE ABLE TO SUCCESSFULLY DEVELOP OR
COMMERCIALIZE ANY OF ITS CANCER THERAPIES.
Genzyme Molecular Oncology does not have any cancer therapies on the market
and its only therapies in clinical development are its melanoma and breast
cancer vaccines. Before commercializing any cancer therapies, Genzyme Molecular
Oncology will need to conduct substantial research and development, including,
in some cases, the replication of preclinical studies performed by its
collaborators, undertake preclinical and clinical testing and obtain regulatory
approvals. This process involves a high degree of uncertainty and may take
several years. Its product development efforts may fail for many reasons,
including:
- the product fails in preclinical studies;
- clinical trials may not support the safety or effectiveness of the
product; or
- we fail to obtain the required regulatory approvals.
We cannot guarantee that Genzyme Molecular Oncology will successfully
develop any particular product or that any product it successfully develops will
gain market acceptance.
GENZYME MOLECULAR ONCOLOGY ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME
PROFITABLE.
Genzyme Molecular Oncology has not generated significant revenues to date
and does not expect to do so for several years. As of December 31, 1999, Genzyme
Molecular Oncology had an accumulated deficit of approximately $69.0 million. It
expects to have significant operating losses for the next several years. Genzyme
Molecular Oncology plans to spend substantial amounts of money on, among other
things:
- research and development;
- preclinical and clinical testing; and
- pursuing regulatory approvals.
We cannot guarantee that the efforts underlying these expenditures will be
successful or that Genzyme Molecular Oncology's operations will ever be
profitable.
IF GENZYME MOLECULAR ONCOLOGY FAILS TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE
CLINICAL TRIALS.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available under a line of credit from Genzyme General and
revenues generated from our SAGE-TM- technology and license agreements, will be
sufficient to fund its operations through 2000. Genzyme Molecular Oncology's
cash needs may differ from those planned, however, because of many factors,
including the:
- results of research and development and clinical testing;
- achievement of milestones under existing strategic collaborations;
GMO-10
<PAGE>
- ability to establish and maintain additional strategic collaborations
and licensing arrangements;
- costs of protecting its intellectual property rights;
- development of competing products and services; and
- 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. We cannot guarantee that it 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 have to delay, reduce or eliminate some of its
programs. Genzyme Molecular Oncology may also have to give third parties rights
to commercialize technologies or products that it would otherwise have sought to
commercialize itself.
GENZYME MOLECULAR ONCOLOGY MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM
COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A
FAILURE TO ENTER INTO FUTURE COLLABORATIONS.
Genzyme Molecular Oncology's strategy to develop and commercialize some of
its products and services includes entering into various arrangements with
academic and corporate collaborators and licensees. It depends on the success of
these parties in performing research, preclinical and clinical testing and
marketing. These arrangements may require Genzyme Molecular Oncology to transfer
important rights to its corporate collaborators and licensees. These
collaborators and licensees could choose not to devote resources to these
arrangements or, under certain circumstances, may terminate them early. In
addition, these collaborators and licensees, outside of their arrangements with
Genzyme Molecular Oncology, may develop technologies or products that are
competitive with those that Genzyme Molecular Oncology is developing. As a
result, we cannot guarantee that Genzyme Molecular Oncology will receive
revenues from these relationships or that any of its strategic collaborations
will continue or not terminate early. In addition, we cannot guarantee that
Genzyme Molecular Oncology will be able to enter into collaborations in the
future.
GENZYME MOLECULAR ONCOLOGY MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM
COMPETITORS IN ORDER TO DEVELOP AND COMMERCIALIZE SOME OF ITS PRODUCTS AND
SERVICES, AND IT IS UNCERTAIN WHETHER THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by third
parties, if issued, may cover some of the products Genzyme Molecular Oncology is
developing or testing. As a result, Genzyme Molecular Oncology may be required
to obtain licenses from the holders of these patents in order to use or sell
certain products and services. We cannot guarantee that these licenses will be
made available on acceptable terms or at all. If these licenses are not
available, Genzyme Molecular Oncology's ability to commercialize its products
and services may be impaired.
In its cancer vaccine program, Genzyme Molecular Oncology is in the process
of evaluating the therapeutic administration of peptide products and genes that
encode specific tumor antigens, including MART-1 and gp100. Genzyme Molecular
Oncology is aware of two issued U.S. patents directed to the gene that encodes
MART-1. While it has obtained rights under one of these patents, Genzyme
Molecular Oncology is still in the process of evaluating the scope and validity
of the other to determine whether it needs to obtain a license. Genzyme
Molecular Oncology is also evaluating an issued U.S. patent covering the gene
that encodes gp100 and three published Patent Cooperation Treaty applications by
three different applicants that may cover antigens derived from gp100. Genzyme
Molecular Oncology is in the process of evaluating the scope and validity of
these patents and patent applications to determine whether it needs to obtain
licenses.
GMO-11
<PAGE>
GENZYME MOLECULAR ONCOLOGY MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION
OR OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY
RIGHTS.
If Genzyme Molecular Oncology or one of its strategic collaborators initiate
litigation to enforce Genzyme Molecular Oncology's patent or license rights, or
are required to defend these rights in response to third party claims, its
business or financial position may be negatively affected. Genzyme Molecular
Oncology has licensed its p53 gene therapy rights to Schering-Plough. These
patent rights are the subject of an interference proceeding in the U.S. and an
opposition proceeding in Europe. Adverse determinations in these proceedings may
negatively affect Genzyme Molecular Oncology's ability to receive future
milestones and product royalties under its agreement with Schering-Plough.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF GENZYME MOLECULAR ONCOLOGY'S GENE THERAPY
PRODUCTS.
The recent death of a patient undergoing gene therapy using an adenoviral
vector to deliver a therapeutic gene has been widely publicized. This death and
any other adverse events in the field of gene therapy that may occur in the
future may result in greater governmental regulation and potential regulatory
delays relating to the testing or approval of Genzyme Molecular Oncology's gene
therapy products. As a result of this death, the U.S. Senate has commenced
hearings to determine whether additional legislation is required to protect
volunteers and patients who participate in gene therapy clinical trials.
Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory
body to the National Institutes of Health (NIH), has extensively discussed the
use of adenoviral vectors in gene therapy clinical trials and recently issued a
draft report on the safety of adenoviral vectors. While this draft report
recommends that clinical trials using adenoviral vectors should continue with
caution, it also suggested a number of changes in the way gene therapy clinical
trials are conducted. If any new guidelines are adopted by the NIH, Genzyme
Molecular Oncology's gene therapy clinical trials could be delayed or become
more expensive to conduct.
Genzyme Molecular Oncology has reported to the FDA and the NIH that there
have been three deaths in its Phase I/II melanoma cancer vaccine trial at
Massachusetts General Hospital. The principal investigator for this trial
indicated that each of these deaths was due to disease progression and not
related to the patient's treatment. Deaths are not unexpected in a clinical
trial treating patients with advanced stage melanoma because these patients have
short life expectancies. Genzyme Molecular Oncology cannot, however, rule out
the possibility that its cancer vaccines may be a contributing cause of death
for patients in the future.
The commercial success of any gene therapy products that Genzyme Molecular
Oncology develops will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapy is unsafe, and gene therapy may
not gain the acceptance of the public or the medical community. Negative public
reaction to gene therapy could result in greater government regulation and
stricter clinical trial oversight and commercial product labeling requirements
of gene therapies and could cause a decrease in the demand for any gene therapy
product that Genzyme Molecular Oncology may develop.
SUBSEQUENT EVENT
In March 2000, Genzyme Molecular Oncology announced a proposed public
offering of 3,000,000 shares of GZMO Stock.
GMO-12
<PAGE>
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Service revenue........................................... $ 1,920 $ 2,229 $ 467
Service revenue--related party............................ 50 466 --
Research and development--related party................... 496 2,177 315
Research and development.................................. -- 3,256 --
Licensing revenue......................................... 2,153 11,279 --
--------- --------- ---------
Total revenues........................................ 4,619 19,407 782
Operating costs and expenses:
Cost of service revenues.................................. 620 1,374 50
Cost of research and development revenue.................. 698 4,073 287
Selling, general and administrative....................... 5,529 7,155 2,118
Research and development.................................. 15,997 12,743 5,341
Amortization of intangibles............................... 11,825 11,983 5,127
Charge for in-process technology.......................... -- -- 7,000
--------- --------- ---------
Total operating costs and expenses.................... 34,669 37,328 19,923
--------- --------- ---------
Operating loss.............................................. (30,050) (17,921) (19,141)
Other income (expenses):
Equity in net loss of joint venture....................... (1,870) (1,647) (258)
Interest income........................................... 469 782 392
Interest expense.......................................... (28) (2,968) (1,663)
--------- --------- ---------
Total other income (expenses)......................... (1,429) (3,833) (1,529)
--------- --------- ---------
Loss before income taxes.................................... (31,479) (21,754) (20,670)
Tax benefit................................................. 2,647 2,647 1,092
--------- --------- ---------
Net loss attributable to GZMO Stock......................... $ (28,832) $ (19,107) $ (19,578)
========= ========= =========
Per GZMO basic and diluted common share:
Net loss.................................................. $ (2.25) $ (3.81)
========= =========
Weighted average shares outstanding......................... 12,826 5,019
========= =========
Pro forma net loss per GZMO basic and diluted common
share..................................................... $ (4.98)
=========
Pro forma weighted average shares outstanding............... 3,929
=========
Net loss.................................................... $ (28,832) $ (19,107) $ (19,578)
Other comprehensive income (loss) net of tax:
Unrealized gains (losses) on securities arising during the
period.................................................. -- 7 (7)
--------- --------- ---------
Comprehensive loss...................................... $ (28,832) $ (19,100) $ (19,585)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GMO-13
<PAGE>
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,587 $10,868
Short-term investments.................................... -- 1,032
Accounts receivable, net.................................. -- 5,931
Prepaid expenses and other current assets................. 218 85
------- -------
Total current assets.................................. 3,805 17,916
Equipment, net............................................ 467 791
Intangibles, net.......................................... 5,420 17,245
------- -------
Total assets.......................................... $ 9,692 $35,952
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses.......................................... $ 676 $ 1,273
Due to Genzyme General.................................... 3,793 4,773
Payable to joint venture.................................. -- 1,181
Deferred revenue.......................................... 225 1,500
Current portion of long-term debt......................... 5,000 --
------- -------
Total current liabilities............................. 9,694 8,727
Deferred tax liability...................................... 1,213 3,861
------- -------
Total liabilities..................................... 10,907 12,588
Commitments and contingencies (See Notes)
Division equity (Note H).................................... (1,215) 23,364
------- -------
Total liabilities and division equity................. $ 9,692 $35,952
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GMO-14
<PAGE>
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (28,832) $ (19,107) $ (19,578)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization............................. 12,057 12,353 5,245
Charge for in-process technology.......................... -- -- 7,000
Deferred tax benefit...................................... (2,647) (2,647) (1,092)
Accretion of debt conversion feature...................... -- 1,867 957
Equity in loss of joint venture........................... 1,870 1,647 258
Accrued interest/amortization of marketable securities.... 10 131 (141)
Gain on sale of equipment................................. (54) -- --
Provision for bad debts................................... 256 100 --
Non-cash compensation expense............................. 10 114 58
Increase (decrease) in cash from working capital:
Accounts receivable..................................... 5,675 (5,915) (117)
Prepaid expenses and other current assets............... (75) 986 (773)
Accrued expenses, payable to joint venture and deferred
revenue............................................... (1,927) 1,779 2,139
Due to Genzyme General.................................. (980) 553 2,011
--------- --------- ---------
Net cash used in operating activities................. (14,637) (8,139) (4,033)
INVESTING ACTIVITIES:
Acquisition of PharmaGenics, Inc., net of acquired cash..... -- -- 9
Investment in unconsolidated affiliate...................... -- -- (724)
Purchases of investments.................................... -- (2,056) (6,086)
Distribution from joint venture............................. 881 -- --
Maturities of investments................................... 1,022 7,120 --
Acquisitions of equipment................................... (43) (559) (357)
Sale of equipment........................................... 188 -- --
Other....................................................... -- (488) --
--------- --------- ---------
Net cash provided by (used in) investing activities... 2,048 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 debt.............................. 5,000 -- --
Proceeds from issuance of common stock...................... 308 7 --
Proceeds from issuance of warrants.......................... -- -- 724
Proceeds from issuance of convertible debentures, net....... -- -- 19,150
Repayments of debts......................................... -- (5,000) --
Parent company investment, Genzyme General.................. -- -- 1,371
Other....................................................... -- (27) (44)
--------- --------- ---------
Net cash provided by (used in) financing activities... 5,308 (20) 26,201
Increase (decrease) in cash and cash equivalents............ (7,281) (4,142) 15,010
Cash and cash equivalents at beginning of period............ 10,868 15,010 --
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 3,587 $ 10,868 $ 15,010
========= ========= =========
Supplemental disclosures of non-cash transactions:
PharmaGenics acquisition--Note D.
Repurchase of interest in StressGen/Genzyme LLC--Note F.
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GMO-15
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Molecular Oncology is our operating division that is developing
cancer products, with a focus on cancer vaccines and angiogenesis inhibitors.
Genzyme Molecular Oncology Division Common Stock, which we refer to as "GZMO
Stock," is intended to reflect the value and track the performance of Genzyme
Molecular Oncology.
BASIS OF PRESENTATION; PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme Molecular Oncology for each
period include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion
of our corporate operations to Genzyme Molecular Oncology using methods we
believe are reasonable. These combined financial statements are prepared using
amounts included in our consolidated financial statements included in this
annual report. We have reclassified certain 1998 and 1997 data to conform with
the 1999 presentation.
We created Genzyme Molecular Oncology in June 1997 by acquiring
PharmaGenics, Inc. and combining it with several of Genzyme General's ongoing
programs in the field of oncology. These financial statements reflect the
financial position, results of operations and cash flows of Genzyme Molecular
Oncology as if it had existed as a separate division of the corporation for all
periods presented.
We use the equity method to account for investments in entities in which
Genzyme Molecular Oncology has a substantial ownership interest (20% to 50%), or
in which it participates in policy decisions. Genzyme Molecular Oncology's
consolidated net income includes its share of the earnings of these entities. We
report at fair value investments in entities in which Genzyme Molecular
Oncology's ownership interest is less than 20%.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Molecular Oncology and prepare
separate financial statements for Genzyme Molecular Oncology. Notwithstanding
the allocation of assets and liabilities to Genzyme Molecular Oncology, Genzyme
Corporation continues to hold title to all of the assets and is responsible for
all of the liabilities allocated to Genzyme Molecular Oncology. Holders of GZMO
Stock are common stockholders of Genzyme Corporation and have no specific rights
to the assets to which GZMO Stock relates.
We prepare the financial statements of Genzyme Molecular Oncology in
accordance with generally accepted accounting principles, our management and
accounting policies and the divisional accounting policies approved by our
board. We present financial information and accounting policies specific to
Genzyme Molecular Oncology in the accompanying combined financial statements. We
present financial information and accounting policies relevant to the
corporation and its operating divisions taken as a whole in our consolidated
financial statements. You should read these consolidated financial statements.
Note A., "Summary of Significant Accounting Policies," to our consolidated
financial statements contains our accounting policies. We incorporate that
information into this note by reference.
GMO-16
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDEND POLICY
We have never paid a cash dividend on shares of GZMO Stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on GZMO Stock in the foreseeable future.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme Molecular Oncology from local currency into U.S. dollars and include
translation adjustments for these subsidiaries in division equity. Genzyme
Molecular Oncology records gains and losses in foreign currency transactions in
income.
We include exchange gains and losses on intercompany balances which are
long-term in nature in our division equity. Our gains and losses on all other
transactions are included in our results of operations.
REVENUE RECOGNITION
Genzyme Molecular Oncology 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
contractual periods as specified by each contract and as costs related to the
contracts are incurred. Up-front license fees and milestone payments are
recognized as revenue only if there are no remaining performance obligations and
the fees are non-refundable.
NET INCOME (LOSS) PER SHARE
To calculate basic earnings per share for Genzyme Molecular Oncology, we
divide the earnings attributable to Genzyme Molecular Oncology by the weighted
average number of outstanding shares of GZMO Stock during the applicable period.
When we calculate diluted earnings per share, we also include in the denominator
all potentially dilutive securities outstanding during the applicable period. We
disclose PRO FORMA net loss per share for Genzyme Molecular Oncology for the
year ended December 31, 1997 because GZMO Stock was not outstanding during the
entire year.
To determine what earnings are attributable to Genzyme Molecular Oncology,
we take its net income or loss for the applicable period (determined in
accordance with generally accepted accounting principles) and adjust it for the
tax benefits allocated to Genzyme General in accordance with our management and
accounting policies.
For all periods presented, basic and diluted net loss per GZMO common share
and PRO FORMA basic and diluted net loss per GZMO common share are the same. We
did not include the securities described in the following table in the
computation of Genzyme Molecular Oncology's diluted net loss
GMO-17
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
per share for each period because these securities would have an anti-dilutive
effect due to Genzyme Molecular Oncology's net loss per share.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GZMO Stock issuable for options................... 1,809 1,158 826
Warrants to purchase GZMO Stock............................. 10 10 10
GZMO designated shares issuable upon conversion of 5 1/4%
convertible subordinated notes allocated to Genzyme
General(1)................................................ 682 682 --
GZMO designated shares(1)................................... 1,006 728 6,000
----- ----- -----
Total shares excluded from the diluted net loss per GZMO
share calculation......................................... 3,507 2,578 6,836
===== ===== =====
</TABLE>
- ------------------------
(1) GZMO designated shares are shares of GZMO Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Molecular Oncology. As of
December 31, 1999, there were 1,688,237 GZMO designated shares. Of these
designated shares:
- 682,316 were issuable upon conversion of the 5 1/4% convertible
subordinated notes and under our directors' deferred compensation plan;
- 291,635 were available for distribution; and
- 714,286 were reserved for issuance in connection with a draw under an
equity line of credit in 1998. If Genzyme Molecular Oncology completes a
public offering of GZMO Stock prior to June 18, 2000, this number will
decrease based on a formula set forth in our charter. If such an offering
is not completed prior to that date, all of these shares will become
available for distribution.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
Because each of our operating divisions is a part of a single company, our
board of directors has adopted policies to address issues that may arise among
divisions and to govern the management of and the relationships between each
division. With some exceptions that are mentioned specifically in this note, our
board may modify or rescind these policies, or adopt additional policies, in its
sole discretion without stockholder approval, subject only to our board's
fiduciary duty to stockholders. Generally accepted accounting principles require
that any change in policy be preferable (in accordance with these principles) to
the previous policy.
INTERDIVISION ASSET TRANSFERS
Our board may at any time reallocate any program, product or other asset
from one division to any other division. We make reallocations at fair market
value, as determined by our board. In determining the fair market value of a
program under development, our board takes into account the following criteria
in the case of a program under development:
- the commercial potential of the program;
- the phase of clinical development of the program;
GMO-18
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
- the expenses associated with realizing any income from the program and the
likelihood and time of the realization; and
- other matters that our board and its financial advisors, if any, deem
relevant.
One division may pay another division the consideration for a reallocation
in cash or other consideration with a value equal to the fair market value of
the reallocated assets. In the case of a reallocation of assets from Genzyme
General to Genzyme Molecular Oncology, our board may elect instead to account
for the reallocation as an increase in GZMO designated shares in accordance with
the provisions of our charter.
Our policy regarding transfers of assets between divisions may not be
changed by our board without the approval of the holders of GZMO Stock voting as
a separate class unless the policy change does not affect Genzyme Molecular
Oncology.
OTHER INTERDIVISION TRANSACTIONS
Our divisions 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. These transactions may include agreements by one division to provide
products and services for use by another division, license agreements and joint
ventures or other collaborative arrangements involving more than one division to
develop new products and services jointly and with third parties. These
transactions are subject to the following conditions:
- We charge research and development (including clinical and regulatory
support), distribution, sales, marketing, and general and administrative
services (including allocated space) performed by one division for another
division to the division for which the services are performed on a cost
basis. We charge direct costs to the division for which we incur them. We
allocate direct labor and indirect costs in reasonable and consistent
manners based on the use by a division of relevant services. Divisions
performing services for other divisions do not recognize revenue for the
services they perform.
- We charge the manufacturing of goods and performance of services by one
division exclusively for another division to the division for which it is
performed on a cost basis. We include in manufacturing costs an interest
charge (based on our short-term borrowing rate at the beginning of the
fiscal year) on the gross fixed assets used in the manufacturing process.
We determine gross fixed assets for the facility used at the beginning of
each fiscal year. We allocate direct labor and indirect costs in
reasonable and consistent manners based on the benefit received by a
division of related goods and services. Divisions performing services for
other divisions do not recognize revenue for the services they perform.
- Other than transactions involving research and development, manufacturing,
distribution, sales, marketing, general and administrative services, which
are addressed above, all interdivisional transactions are performed on
terms and conditions obtainable in arm's length transactions with third
parties. Divisions performing services for other divisions do not
recognize revenue for the services they perform.
- Our board must approve interdivisional transactions that are performed on
terms and conditions other than as described above and are material to one
or more of the participating divisions. In
GMO-19
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
giving its approval, our board must determine that the transaction is fair
and reasonable to each participating division and to holders of the common
stock representing each participating division.
- Divisions may make loans to other divisions. Any loan of $1 million or
less matures within 18 months and accrues interest at the best borrowing
rate available to the corporation for a loan of like type and duration.
Our board must approve any loan in excess of $1 million. In giving its
approval, our board must determine that the material terms of the 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.
- All material interdivisional transactions are set forth in a written
agreement that is signed by an authorized member of the management team of
each division involved in the transaction.
On December 31, 1999, Genzyme Molecular Oncology owed Genzyme General
approximately $3.8 million in connection with these services. On December 31,
1998, approximately $4.8 million was owed.
TAX ALLOCATIONS
We file a consolidated tax return and allocate income taxes to Genzyme
Molecular Oncology based upon the financial statement income, taxable income,
credits and other amounts properly allocable to each division under generally
accepted accounting principles as if it were a separate taxpayer. We assess the
realizability of our deferred tax assets at the division level. As a result, our
consolidated tax provision may not equal the sum of the divisions' tax
provision. As of the end of any fiscal quarter, however, if Genzyme Molecular
Oncology cannot use any projected annual tax benefit attributable to it to
offset or reduce its current or deferred income tax expense, we may allocate the
tax benefit to the other divisions in proportion to their taxable income without
any compensating payment or allocation.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme Molecular Oncology has unrestricted access to all technology and
know-how owned or controlled by Genzyme Corporation that may be useful in its
business, subject to any obligations or limitations that apply to the
corporation generally.
NOTE C. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme Molecular Oncology's trade receivables primarily represent amounts
due from third party collaborators. Genzyme Molecular Oncology performs credit
evaluations of its customers on an ongoing basis and generally does not require
collateral. Genzyme Molecular Oncology states accounts receivable at fair value
after reflecting an allowance for doubtful accounts. This allowance was $0.3
million at December 31, 1999 and $0.1 million at December 31, 1998.
Genzyme Molecular Oncology's net intangible assets include $2.2 million in
goodwill as of December 31, 1999 and $7.1 million in goodwill as of December 31,
1998. This goodwill is primarily a result of the acquisition of
PharmaGenics, Inc. in 1997.
Genzyme Molecular Oncology's accumulated amortization of intangible assets
was $29.0 million as of December 31, 1999 and $17.2 million as of December 31,
1998.
GMO-20
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. PHARMAGENICS ACQUISITION
In June 1997, we acquired PharmaGenics, Inc., a company engaged in the
research and development of products for the treatment of cancer and other
diseases. We allocated this acquisition to Genzyme Molecular Oncology and
accounted for it as a purchase. We allocated the aggregate purchase price of
$27.5 million, plus acquisition costs of $2.5 million and assumed liabilities of
$4.9 million, to the tangible and intangible assets we acquired from
PharmaGenics based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Equipment.................................................. $ 208
Other assets............................................... 50
Completed technology (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, we made an adjustment of $0.5 million in the amount of liabilities
we assumed.
The $7.0 million allocated to in-process technology represents the value we
assigned to PharmaGenics's programs that were still in the development stage and
for which there was no alternative use. We assigned values to all of
PharmaGenics's programs (both complete and in-process) by selecting the maximum
anticipated value of these programs and comparing them to the values of
comparable technologies. In 1997, we recorded a one-time charge to operations
for the amount of the purchase price allocated to in-process technology.
NOTE E. EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Equipment.............................................. $ 966 $1,111
Furniture and fixtures................................. 13 13
------ ------
$ 979 $1,124
Less accumulated depreciation.......................... (512) (333)
------ ------
Equipment, net......................................... $ 467 $ 791
====== ======
</TABLE>
Genzyme Molecular Oncology's depreciation expense was $232,000 in 1999,
$255,000 in 1998, and $74,000 in 1997.
NOTE F. INVESTMENT IN STRESSGEN/GENZYME LLC
In July 1997, together with StressGen Biotechnologies Corp. and the Canadian
Medical Discoveries Fund, Inc., we established StressGen/Genzyme LLC, a joint
venture to develop stress gene therapies for the treatment of cancer.
Because the Canadian Medical Discoveries Fund had the right to require
StressGen and Genzyme Molecular Oncology to purchase its membership interest in
the joint venture, Genzyme Molecular Oncology recorded 50% of the net operating
losses of the joint venture.
GMO-21
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE F. INVESTMENT IN STRESSGEN/GENZYME LLC (CONTINUED)
As of December 31, 1998, Genzyme Molecular Oncology's portion of the
cumulative losses of StressGen/Genzyme LLC exceeded its initial capital
contribution to the joint venture by $1.2 million. As a result, Genzyme
Molecular Oncology recorded the $1.2 million as a noncurrent liability in 1999.
In August 1999, the Canadian Medical Discoveries Fund exercised its put
right and Genzyme Molecular Oncology repurchased one-half of the fund's interest
in the joint venture in October 1999 for approximately $3.9 million by issuing
to the fund 617,200 shares of GZMO Stock. Genzyme Molecular Oncology received a
cash distribution of $0.9 million and recorded a charge of $1.0 million in
connection with the dissolution of StressGen/Genzyme LLC in 1999.
We do not present summary financial information for StressGen/Genzyme LLC
because we do not consider the impact of its activities on our statement of
operations for the years ended December 31, 1999, 1998 and 1997 to be material.
NOTE G. DEBT INSTRUMENTS
REVOLVING CREDIT FACILITY
In November 1999, our $225.0 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. At December 31, 1999, $5.0 million of the amount
outstanding under our revolving credit facility was allocated to Genzyme
Molecular Oncology. On that date, the interest rate on this borrowing was
6.765%.
Genzyme Molecular Oncology incurred interest expense of approximately
$11,000 on the $5.0 million outstanding in 1999. Additionally, Genzyme Molecular
Oncology incurred interest expense of approximately $73,000 in 1998 and $160,000
in 1997 on amounts borrowed under our credit facility that matured in 1999.
6% CONVERTIBLE SUBORDINATED DEBENTURES
In August 1997, we issued $20.0 million in principal of 6% convertible
subordinated debentures. These debentures were convertible into shares of GZMO
Stock at a discount to the market value of that stock. Genzyme Molecular
Oncology recorded charges to interest expense of $1.9 million in 1998 and
$0.9 million in 1997 to reflect the accretion to fair value of the conversion
feature of this debenture. In accordance with the terms of these debentures,
they were exchanged in August 1998 for $21.2 million in principal of 5%
convertible subordinated debentures convertible into GENZ Stock. In
November 1998 we reserved approximately 3.0 million GZMO designated shares for
issuance in connection with this exchange. In October 1999 we increased the
number of GZMO designated shares reserved in connection with this exchange by
approximately 0.3 million.
NOTE H. DIVISION EQUITY
At December 31, 1999 and 1998, 40 million shares of GZMO Stock were
authorized for issuance. At December 31, 1999 13,421,018 shares of GZMO Stock
were issued and outstanding and at December 31, 1998 12,648,295 shares of GZMO
Stock were issued and outstanding. At December 31, 1999, approximately 4,011,000
shares of GZMO Stock were reserved for issuance under our various equity plans
and options to purchase approximately 1,809,000 shares of GZMO Stock were
outstanding.
GMO-22
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table contains the components of division equity for Genzyme
Molecular Oncology for the periods presented:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 23,364 $ 13,466 $ --
Net loss.................................................... (28,832) (19,107) (19,578)
Allocation of cash from Genzyme General for GZMO designated
shares(1)................................................. -- 5,000 1,381
Conversion of debentures into GZMO designated shares........ -- 19,802 --
Conversion of note payable into GZMO designated shares...... -- 2,696 --
Issuance of common stock under stock plans.................. 308 7 --
Sale of warrants............................................ -- -- 724
Stock-based compensation.................................... 10 114 (116)
Shares issued upon acquisition of PharmaGenics.............. -- -- 27,369
Shares issued upon repurchase of joint venture interest..... 3,935 -- --
Value of debt conversion feature............................ -- -- 3,529
Unrealized gain (loss) on investments....................... -- 7 (7)
Other....................................................... -- 1,379 164
-------- -------- --------
Balance at end of period.................................... $ (1,215) $ 23,364 $ 13,466
======== ======== ========
</TABLE>
- ------------------------
(1) GZMO designated shares are shares of GZMO Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Molecular Oncology. As of
December 31, 1999, there were 1,688,237 GZMO designated shares, assuming
that Genzyme Molecular Oncology does not complete a public offering of GZMO
Stock prior to June 18, 2000. If such an offering is completed prior to that
date, the number of GZMO designated shares reserved for issuance in
connection with this transaction will decrease based on a formula set forth
in our charter.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. Genzyme Molecular Oncology does not recognize compensation
expense for options granted and shares purchased under the provisions of these
plans for options granted to employees with an exercise price greater than or
equal to fair market value.
The following table sets forth net income and income per share data for
Genzyme Molecular Oncology calculated in accordance with SFAS 123 as if
compensation expense for our stock-based
GMO-23
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
compensation plans was determined based on the fair value at the grant dates for
options granted and shares purchased under the plans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss:
As reported............................................. $ (28,832) $ (19,107) $ (19,578)
Pro forma............................................... $ (29,973) $ (20,018) $ (19,787)
Basic and diluted loss per share:
As reported............................................. $ (2.25) $ (3.81) $ (4.98)
Pro forma............................................... $ (2.34) $ (3.99) $ (5.04)
</TABLE>
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding the assumptions we made in calculating net income
and income per share data in accordance with SFAS 123.
PREFERRED STOCK, STOCK RIGHTS, EQUITY PLANS, WARRANTS AND DESIGNATED SHARES
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding:
- our authorized preferred stock;
- our shareholder rights plan;
- our directors' deferred compensation plan;
- our other equity plans;
- warrants exercisable for GZMO Stock; and
- GZMO designated shares and our policy for distributing them.
We incorporate that information into this note by reference.
EQUITY LINE OF CREDIT
In 1997, our board of directors made $25.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology under an equity line of credit. This
equity line was subject to dollar-for dollar reduction by the proceeds of
outside financing received by Genzyme Molecular Oncology. When we issued
$20.0 million in principal of 6% convertible subordinated debentures in August
1997, the amount available under the equity line was reduced to $5.0 million. In
September 1998, Genzyme Molecular Oncology drew the remaining $5.0 million
available under this equity line, thus reducing the amount available under this
equity line to zero, in exchange for GZMO designated shares.
In August 1998, our board of directors made an additional $30.0 million of
Genzyme General's cash available to Genzyme Molecular Oncology under an equity
line of credit. Under the terms of this equity line, Genzyme Molecular Oncology
may draw down funds as needed each quarter in exchange for GZMO designated
shares based on the fair market value of GZMO Stock (as defined in our charter)
at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had
not yet drawn any funds from this equity line.
GMO-24
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on Genzyme Molecular Oncology's results of
operations, financial condition, or liquidity.
NOTE J. INCOME TAXES
There was no provision for income taxes due to Genzyme Molecular Oncology's
continuing operating losses. As part of the acquisition of PharmaGenics, Genzyme
Molecular Oncology 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. Genzyme
Molecular Oncology recorded deferred tax benefits of $2.6 million in each of
1999 and 1998 and $1.1 million in 1997.
Genzyme Molecular Oncology's income (loss) before income taxes and the
related income tax expense (benefit) are described in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal................................................... $ -- $ -- $ --
State..................................................... -- -- --
-------- -------- --------
Total................................................. $ -- $ -- $ --
======== ======== ========
Deferred:
Federal................................................... $ (2,438) $ (2,438) $ (1,006)
State..................................................... (209) (209) (86)
-------- -------- --------
Total income tax benefit.............................. $ (2,647) $ (2,647) $ (1,092)
======== ======== ========
</TABLE>
Genzyme Molecular Oncology's provisions for income taxes were at rates other
than the U.S. federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. (35.0)% (35.0)% (35.0)%
State taxes, net............................................ (1.1) (2.0) (3.0)
Tax credits................................................. (2.5) (2.5) (2.4)
Nondeductible interest...................................... -- 3.0 2.7
Nondeductible amortization.................................. 5.4 8.1 6.4
Deductions subject to deferred tax valuation allowance...... 24.8 16.2 22.4
----- ----- -----
Effective tax rate attributable to GZMO Stock............... (8.4)% (12.2)% (8.9)%
===== ===== =====
</TABLE>
GMO-25
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INCOME TAXES (CONTINUED)
The components of net deferred tax assets are described in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 14,720 $ 8,166
Reserves and other........................................ 177 --
Tax credits............................................... 2,209 1,003
-------- --------
Gross deferred tax asset.................................... 17,106 9,169
Valuation allowance......................................... (17,106) (9,169)
-------- --------
Net deferred tax asset...................................... -- --
Deferred tax liabilities:
Intangible amortization................................... (1,213) (3,861)
-------- --------
Net deferred tax liabilities.............................. $ (1,213) $ (3,861)
======== ========
</TABLE>
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to operating loss carryforwards, capital losses
from the purchase of in-process research and development, we placed valuation
allowances of $17.1 million in 1999 and $9.2 million in 1998 against otherwise
recognizable deferred tax assets.
As Genzyme Molecular Oncology recognizes these deferred tax assets in
accordance with generally accepted accounting principles, the benefits of those
assets will be reflected in its tax provision. However, the benefit of these
deferred tax assets has previously been allocated to Genzyme General in
accordance with our management and accounting policies, and will be reflected as
a reduction of Genzyme Molecular Oncology's net income to determine net income
attributable to GZMO Stock.
NOTE K. BENEFIT PLANS
Note P., "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) plan. We incorporate that information into this
note by reference.
NOTE L. SIGNIFICANT CUSTOMERS
Genzyme Molecular Oncology has two significant pharmaceutical customers. The
following table describes the revenue for each customer in comparison to total
revenue (amounts in thousands):
<TABLE>
<CAPTION>
% OF % OF % OF
TOTAL TOTAL TOTAL
1999 REVENUE 1998 REVENUE 1997 REVENUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Customer A.................. $2,800 61% $ 933 5% $467 60%
Customer B.................. -- -- $13,000 67% -- --
</TABLE>
The portion of Genzyme Molecular Oncology's revenues related to work
performed on behalf of StressGen/Genzyme LLC were:
- $0.5 million, or 11% of total revenues in 1999;
GMO-26
<PAGE>
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. SIGNIFICANT CUSTOMERS (CONTINUED)
- $2.2 million, or 11% of total revenues in 1998; and
- $0.3 million, or 40% of total revenues in 1997.
NOTE M. SUBSEQUENT EVENT
In March 2000, Genzyme Molecular Oncology announced a proposed public
offering of 3,000,000 shares of GZMO Stock.
GMO-27
<PAGE>
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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards generally accepted in the
United States 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
Boston, Massachusetts
February 23, 2000
GMO-28
<PAGE>
EXHIBIT 13.3
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
GENZYME SURGICAL PRODUCTS
Combined Selected Financial Data.......................... GSP-2
Management's Discussion and Analysis of Genzyme Surgical
Products' Financial Condition and Results of
Operations.............................................. GSP-4
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998
and 1997................................................ GSP-14
Combined Balance Sheets--December 31, 1999 and 1998....... GSP-15
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998
and 1997................................................ GSP-16
Notes to Combined Financial Statements.................... GSP-17
Report of Independent Accountants......................... GSP-30
</TABLE>
GSP-1
<PAGE>
GENZYME SURGICAL PRODUCTS COMBINED SELECTED FINANCIAL DATA
Genzyme Surgical Products is our operating division that develops,
manufactures and markets surgical products for cardiovascular surgery and
general surgery. Genzyme Surgical Products Division Common Stock, which we refer
to as "GZSP Stock," is intended to reflect the value and track the performance
of Genzyme Surgical Products.
The following combined selected financial data reflects the results of
operations and financial position of Genzyme Surgical Products and should be
read in conjunction with the financial statements of Genzyme Surgical Products
and accompanying notes.
We created Genzyme Surgical Products in June 1999. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
Genzyme Surgical Products consists primarily of the products and assets we
acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra
products (our line of products and product candidates designed to limit post-
operative adhesions), and our research and development programs in biomaterials
and gene and cell therapy for cardiovascular disease. Genzyme General
transferred $150.0 million in cash, cash equivalents and investments, and
certain other assets, to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. In
exchange for this transfer, we issued approximately 14.8 million shares of GZSP
Stock and distributed them as a dividend to holders of GENZ Stock. These
financial statements reflect the financial position, results of operations and
cash flows of Genzyme Surgical Products as if it had existed as a separate
division of the corporation for all periods presented.
We disclose PRO FORMA net loss per share for Genzyme Surgical Products for
all periods presented because GZSP Stock was not outstanding during the entirety
of each of these periods.
GSP-2
<PAGE>
COMBINED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net product sales....................... $ 111,981 $ 103,958 $ 100,835 $ 50,714 $ 8
Operating costs and expenses:
Cost of products sold................. 67,242 72,274 59,802 32,654 733
Selling, general and administrative... 63,237 57,297 54,061 28,399 2,576
Research and development.............. 28,056 18,618 11,287 7,693 5,971
Amortization of intangibles........... 5,750 5,748 5,647 2,984 --
Charge for in-process technology...... -- -- -- 24,170 --
--------- --------- --------- --------- --------
Total operating costs and
expenses.......................... 164,285 153,937 130,797 95,900 9,280
--------- --------- --------- --------- --------
Operating loss.......................... (52,304) (49,979) (29,962) (45,186) (9,272)
Other income (expenses):
Equity in net income (loss) of
unconsolidated affiliates........... (35) (6) (78) 2 (1)
Other................................. 138 60 236 8 --
Investment income..................... 4,199 144 98 84 --
Interest expense...................... (35) (75) (34) (58) --
--------- --------- --------- --------- --------
Total other income (expenses)....... 4,267 123 222 36 (1)
--------- --------- --------- --------- --------
Loss before income taxes................ (48,037) (49,856) (29,740) (45,150) (9,273)
Tax benefit............................. -- -- -- 837 --
--------- --------- --------- --------- --------
Net loss attributable to GZSP Stock..... $ (48,037) $ (49,856) $ (29,740) $ (44,313) $ (9,273)
========= ========= ========= ========= ========
Pro forma net loss per GZSP basic and
diluted common share.................. $ (3.25) $ (3.37) $ (2.01) $ (2.99) $ (0.63)
========= ========= ========= ========= ========
Pro forma weighted average shares
outstanding........................... 14,800 14,800 14,800 14,800 14,800
========= ========= ========= ========= ========
</TABLE>
COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and investments.......................... $126,125 $ -- $ 975 $ 2,182 $ --
Working capital............................... 98,465 32,714 34,279 40,556 118
Total assets.................................. 370,924 234,216 242,566 253,609 175
Division equity............................... 353,918 227,088 234,969 239,040 175
</TABLE>
There were no cash dividends paid.
GSP-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME SURGICAL PRODUCTS'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme Surgical Products and Genzyme Corporation included in this annual
report. You should consider carefully each of these risks and uncertainties in
evaluating the financial condition and results of operations of Genzyme Surgical
Products and Genzyme.
We created Genzyme Surgical Products in June 1999. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
Genzyme Surgical Products consists primarily of the products and assets we
acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra
products (our line of products and product candidates designed to limit post-
operative adhesions), and our research and development programs in biomaterials
and gene and cell therapy for cardiovascular disease. Genzyme General
transferred $150.0 million in cash, cash equivalents, investments, and certain
other assets, to Genzyme Surgical Products in connection with the creation of
Genzyme Surgical Products as a separate division of Genzyme. In exchange for
this transfer, we issued approximately 14.8 million shares of GZSP Stock and
distributed them as a dividend to holders of GENZ Stock. These financial
statements reflect the financial position, results of operations and cash flows
of Genzyme Surgical Products as if it had existed as a separate division of the
corporation for all periods presented.
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Surgical Products and prepare
separate financial statements for Genzyme Surgical Products. Notwithstanding the
allocation of assets and liabilities to Genzyme Surgical Products, Genzyme
Corporation continues to hold title to all of the assets and is responsible for
all of the liabilities allocated to Genzyme Surgical Products. Holders of GZSP
Stock are common stockholders of Genzyme Corporation and have no specific rights
to the assets to which GZSP Stock relates.
We present financial information and accounting policies specific to Genzyme
Surgical Products in the accompanying combined financial statements. We present
financial information and accounting policies relevant to the corporation and
its operating divisions taken as a whole in our consolidated financial
statements.
You should, therefore, read this discussion and analysis of Genzyme Surgical
Products' financial position and results of operations in conjunction with the
financial statements and related notes of Genzyme Surgical Products, 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 in this annual report.
In March 2000, we entered into an agreement to acquire BioMatrix, Inc. Upon
completion of the acquisition, we will form a new operating division, and the
assets of Genzyme Surgical Products will become part of that new division. See
"Subsequent Event" below.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of Genzyme Surgical Products' financial
statements.
GSP-4
<PAGE>
The components of Genzyme Surgical Products' combined statements of
operations are described in the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
--------- --------- --------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues............ $ 111,981 $ 103,958 $ 100,835 8% 3%
Cost of products sold..... 67,242 72,274 59,802 (7)% 21%
Selling, general and
administrative.......... 63,237 57,297 54,061 10% 6%
Research and
development............. 28,056 18,618 11,287 51% 65%
Amortization of
intangibles............. 5,750 5,748 5,647 0% 2%
--------- --------- ---------
Total operating costs
and expenses........ 164,285 153,937 130,797 7% 18%
--------- --------- ---------
Operating loss............ (52,304) (49,979) (29,962) 5% 67%
Other income (expenses),
net..................... 4,267 123 222 3,369% (45)%
--------- --------- ---------
Net loss attributable to
GZSP Stock.............. $ (48,037) $ (49,856) $ (29,740) (4)% 68%
========= ========= =========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Cardiovascular surgery
products................ $ 77,966 $ 74,545 $ 79,560 5% (6)%
General surgery
products................ 25,192 20,249 14,813 24% 37%
Other products............ 8,823 9,164 6,462 (4)% 42%
-------- -------- --------
Total revenues...... $111,981 $103,958 $100,835 8 % 3 %
======== ======== ========
</TABLE>
1999 AS COMPARED TO 1998
Cardiovascular surgery products include chest drainage and fluid management
systems, surgical closures, biomaterials, and instruments for conventional and
minimally invasive cardiac surgery. The increase in cardiovascular surgery
product revenues in 1999 was primarily attributable to increased sales of
instruments for minimally invasive cardiac surgery.
The increase in general surgery product revenues was due primarily to the
increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane.
Sales of Sepra Film-Registered Trademark- bioresorbable membrane in 1999 were
$13.4 million compared to $9.3 million in 1998.
Other surgery product revenues consisted of sales of Genzyme Surgical
Products' Snowden-Pencer-Registered Trademark-line of instruments for plastic
surgery and products sold to original equipment manufacturers, including
sutures.
International sales as a percentage of total sales in 1999 were 30% as
compared to 29% in 1998.
GSP-5
<PAGE>
1998 AS COMPARED TO 1997
Cardiovascular surgery product revenues decreased as a result of a decrease
in sales of fluid management products, which were $39.8 million in 1998 compared
to $42.3 million in 1997. The decrease in fluid management product sales was due
to the termination of a group-purchasing contract in 1997, the impact of which
was realized in 1998.
The increase in general surgery product revenues in 1998 is primarily due to
increased product sales of Sepra Film-Registered Trademark- bioresorbable
membrane. These product sales increased 88% to $9.3 million in 1998 compared to
$4.9 million in 1997, primarily as a result of increased market acceptance.
International sales as a percentage of total sales in 1998 were 29% compared
to 28% in 1997.
MARGINS
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Gross margins.................... $44,739 $31,684 $41,033 41% (23%)
% of total revenues.......... 40% 30% 41%
</TABLE>
1999 AS COMPARED TO 1998
Genzyme Surgical Products sells a broad range of products. As a result,
Genzyme Surgical Products' gross margins may vary significantly depending on the
particular market conditions of each product line.
During 1998, Genzyme Surgical Products recorded a $10.4 million charge to
cost of products sold to write down its inventory of Sepra products to net
realizable value. Without the effect of this charge, Genzyme Surgical Products'
gross margin for 1998 would have been 40%.
1998 AS COMPARED TO 1997
In 1997, Genzyme Surgical Products recorded charges of $5.5 million to cost
of products sold and $1.9 million to selling, general and administrative expense
relating to the manufacture and sale of Sepracoat-TM- coating solution. Genzyme
Surgical Products took these charges after an FDA advisory panel recommended
against granting market approval of this product in 1997. This product is sold
outside of the United States.
Excluding this charge and the charge described above, gross margins for 1998
were 40% compared to 46% in 1997. The decrease in gross margins, excluding the
other charges described below, was primarily due to lower average selling prices
of fluid management products in 1998 and increased sales in 1998 of lower margin
products such as Sepra Film-Registered Trademark- bioresorbable membrane.
SG&A AND R&D EXPENSES
1999 AS COMPARED TO 1998
Genzyme Surgical Products' selling, general and administrative expense
increased in 1999 as a result of higher fringe benefit expenses and costs
associated with the creation of Genzyme Surgical Products as a separate division
of Genzyme.
Genzyme Surgical Products' research and development expense for 1998
includes a $1.7 million charge taken in the third quarter of 1998 to write off
certain costs related to equipment that it used to manufacture the Sepra
products. Excluding this charge, the increase in research and development costs
GSP-6
<PAGE>
was a result of the increased spending for Genzyme Surgical Products' cell and
gene therapy programs as well as the initiation of several clinical trials for
its products. The increase in research and development costs was also
attributable to a $2.0 million milestone payment to a collaborator that was
recorded in June 1999.
1998 AS COMPARED TO 1997
Excluding a charge of $1.9 million in 1997 related to the manufacture and
sale of Sepracoat-TM- coating solution, selling, general and administrative
expense increased by 10% over 1997. The increase in selling, general and
administrative expense was primarily due to increased charges from Genzyme
General, a result of increased support for Genzyme Surgical Products' sales and
marketing programs and initiatives. Sepracoat-TM- coating solution was
discontinued for the U.S. market after an advisory panel of the FDA recommended
against granting market approval of this product. However, this product is sold
outside the United States.
The increase in research and development expense was primarily due to higher
expenditures in cardiovascular gene and cell therapy scientific research as well
as additional clinical trials initiated for the Sepra products. In addition,
during 1998, Genzyme Surgical Products wrote off $1.7 million of certain costs
related to equipment used to manufacture the Sepra products.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Equity in net loss of unconsolidated
affiliates........................ $ (35) $ (6) $ (78) 483% (92%)
Other............................... 138 60 236 130% (75%)
Investment income................... 4,199 144 98 2,816% 47%
Interest expense.................... (35) (75) (34) (53%) 121%
------ ------ ------
Total other income.............. $4,267 $ 123 $ 222 3,369% (45%)
====== ====== ======
</TABLE>
The increase in other income and expenses in 1999 was primarily due to an
increase in investment income. Investment income increased because Genzyme
Surgical Products had a higher average cash balance as a result of the
allocation to Genzyme Surgical Products in June 1999 of $150.0 million in cash
from Genzyme General.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, Genzyme Surgical Products had cash, cash equivalents,
and short- and long-term investments of $126.1 million. Genzyme Surgical
Products had no cash, cash equivalents, and short- and long-term investments at
December 31, 1998.
Genzyme Surgical Products used $41.0 million in cash for operations in 1999.
This was primarily due to Genzyme Surgical Products' net loss of $48.0 million
for the year.
Genzyme Surgical Products' investing activities in 1999 generated $21.7
million in cash from net sales of investments, used $4.0 million to purchase
shares of Focal Inc. common stock, and used $3.9 million to fund capital
expenditures.
GSP-7
<PAGE>
Primarily as a result of the allocation of assets from Genzyme General in
connection with the creation of Genzyme Surgical Products as a separate division
of Genzyme, financing activities generated $50.9 million of cash in 1999.
In June 1999, Genzyme General transferred $150.0 million in cash, cash
equivalents and investments to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. In
exchange for this transfer, approximately 14.8 million shares of GZSP Stock were
issued and distributed as a dividend to holders of GENZ Stock.
Genzyme Surgical Products, together with our other operating divisions, has
access to our revolving credit facilities. At December 31, 1999, $50.0 million
was available under a facility that matures in November 2000 and $77.0 million
was available under a facility that matures in November 2002.
Genzyme Surgical Products believes that its cash resources, together with
the revenues generated from its products and distribution agreements, will be
sufficient to finance its planned operations and capital requirements through
2001. Although Genzyme Surgical Products currently has substantial cash
resources, it intends to use substantial portions of its available cash for:
- research and development;
- product development and marketing, including for the Sepra products;
- expanding facilities; and
- working capital.
In addition, if Genzyme Surgical Products exercises its option to purchase
the limited partnership interests in Genzyme Development Partners, L.P. and uses
cash to pay all or a portion of the purchase price, Genzyme Surgical Products'
cash resources will be diminished (See Note L., "Genzyme Development Partners,
L.P.," to Genzyme Surgical Products' combined financial statements, which are
included in this report and the discussion below).
In March 2000, we entered into an agreement to acquire BioMatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash, allocated at the
option of Biomatrix stockholders. To the extent Genzyme Surgical Products uses
cash to complete this acquisition, its cash reserves will be diminished.
Genzyme Surgical Products' cash needs may differ from those planned as a
result of many factors, including the:
- results of research and development efforts;
- ability to establish and maintain strategic alliances;
- ability to enter into licensing arrangements and additional
distribution arrangements;
- costs involved in enforcing patent claims and other intellectual
property rights;
- market acceptance of novel approaches and therapies;
- development of competitive products; and
- ability to satisfy regulatory requirements of the FDA and other
governmental authorities.
Genzyme Surgical Products may require significant additional financing to
continue operations beyond 2001. We cannot guarantee that Genzyme Surgical
Products will be able to obtain any additional financing or find it on favorable
terms. If Genzyme Surgical Products has insufficient funds or is unable to raise
additional funds, it may delay, scale back or eliminate certain of its programs.
Genzyme Surgical Products may also have to give third parties rights to
commercialize technologies or products that it would otherwise have sought to
commercialize itself.
GSP-8
<PAGE>
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" included in this
annual report.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Surgical Products 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.
GENZYME SURGICAL PRODUCTS ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME
PROFITABLE.
Genzyme Surgical Products expects to have significant operating losses for
the next several years. It plans to spend substantial amounts of money on, among
other things:
- conducting research and development activities;
- pursuing regulatory approvals;
- conducting commercialization activities; and
- providing surgeon education and training.
We cannot guarantee that the efforts underlying these expenditures will be
successful or that Genzyme Surgical Products' operations will ever be
profitable. It may be years before the division generates any revenue from sales
of products currently under development.
IF GENZYME SURGICAL PRODUCTS FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE
CLINICAL TRIALS.
We anticipate that Genzyme Surgical Products' current cash resources,
together with revenues generated from its products and distribution agreements,
will be sufficient to fund its operations through 2001. However, its cash needs
may differ from those planned because of many factors, including:
- the ability to become profitable;
- the results of research and development efforts;
- the ability to establish strategic collaborations and licensing
arrangements for research and development programs;
- the achievement of milestones under strategic collaborations;
- the ability to establish and maintain additional distribution
arrangements;
- the enforcement of patent and other intellectual property rights;
- market acceptance of novel approaches and therapies;
- the development of competitive products; and
- the ability to satisfy regulatory requirements of the FDA and other
government authorities.
Genzyme Surgical Products may require significant additional financing to
continue operations at anticipated levels. We cannot guarantee that it will be
able to obtain any additional financing or find it on favorable terms. If
Genzyme Surgical Products has insufficient funds or is unable to raise
additional funds, it may have to delay, reduce or eliminate some of its
programs. Genzyme Surgical Products may
GSP-9
<PAGE>
also have to give third parties rights to commercialize technologies or products
that it would otherwise have sought to commercialize itself.
IF GENZYME SURGICAL PRODUCTS EXERCISES AN OPTION TO PURCHASE INTERESTS IN
GENZYME DEVELOPMENT PARTNERS, ITS CASH RESOURCES MAY DIMINISH AND THE RIGHTS
OF ITS STOCKHOLDERS MAY BE DILUTED.
In 1989, we organized Genzyme Development Partners, L.P., a special purpose
research and development entity, and transferred to it technology and commercial
rights to the Sepra products. We have an option to purchase the limited
partnership interests in the partnership under certain circumstances for
approximately $26 million plus continuing royalties based on certain sales of
the Sepra products. We have allocated the purchase option to Genzyme Surgical
Products. The option's exercise price is payable in cash, shares of GENZ Stock
or a combination of the two, as determined by Genzyme Surgical Products when it
exercises the option.
If Genzyme Surgical Products exercises this option, it will have to make
substantial cash payments or compensate Genzyme General with shares of GZSP
Stock for the GENZ Stock used, or both. If the division makes cash payments, its
cash resources would diminish. If it makes the payment in whole or in part in
shares of GENZ Stock, then our board of directors would need to approve the
issuance of GENZ Stock in return for Genzyme General receiving a number of GZSP
designated shares with a fair market value equal to the fair market value of the
shares of GENZ Stock. Those GZSP designated shares would be shares of GZSP Stock
that our board would have the option to issue from time to time with all
proceeds allocable to Genzyme General. Beginning on June 30, 2000, and on every
June 30th thereafter, we will have to distribute substantially all the GZSP
designated shares if the number of those shares exceeds 10% of the number of
shares of GZSP Stock then outstanding.
We cannot guarantee that our board would authorize the issuance of shares of
GENZ Stock for payment of the option exercise price and the creation of any GZSP
designated shares. If our board creates and subsequently distributes or
otherwise disposes of any GZSP designated shares, this would substantially
dilute the rights of the holders of GZSP Stock and could significantly affect
the market price of GZSP Stock.
If Genzyme Surgical Products does not exercise the option, the partnership
would have the right to sell or otherwise transfer to a third party a license to
background technology that we granted to it. A sale or transfer of this
technology may terminate our joint venture with the partnership to manufacture
and sell the Sepra products in the U.S. and Canada. In addition, failure to
exercise the option would cause the joint venture to become terminable upon 90
days' prior notice by either Genzyme or Genzyme Development Partners.
GENZYME SURGICAL PRODUCTS IS DEVOTING SIGNIFICANT RESOURCES TO DEVELOPING NOVEL
ALTERNATIVE PRODUCTS AND TREATMENTS THAT MAY NOT BE COMMERCIALLY SUCCESSFUL.
Genzyme Surgical Products is devoting a significant amount of money to
developing products that will represent alternatives to traditional surgical
procedures or treatments. These products will likely require several years of
aggressive and costly marketing before they might become widely accepted by the
surgical community. Genzyme Surgical Products is developing products that are
designed to enable surgeons to perform minimally invasive cardiovascular
surgery. The medical conditions that can be treated with minimally invasive
cardiovascular surgery are currently being treated with widely accepted surgical
procedures such as coronary artery bypass grafting and catheter-based
treatments, including balloon angioplasty, atherectomy and coronary stenting. To
date, minimally invasive cardiovascular surgery has been performed on a limited
basis and its further adoption by the surgical community will partly depend on
Genzyme Surgical Products' ability to educate cardiothoracic surgeons about its
effectiveness and to facilitate the training of cardiothoracic surgeons in
minimally invasive cardiovascular surgery techniques.
GSP-10
<PAGE>
Similarly, until recently surgeons have not used products designed to reduce
the incidence and extent of postoperative adhesions. Since 1996, when Sepra
Film-Registered Trademark- bioresorbable membrane was introduced, market
acceptance of anti-adhesion products has been slow. To increase sales of the
Sepra products, Genzyme Surgical Products has had to educate surgeons and
hospital administrators about the problems of, and costs associated with,
adhesions and the benefit of preventing adhesions. It has also had to train
surgeons on the proper handling and use of these products.
We cannot guarantee that Genzyme Surgical Products' efforts in educating and
training the surgical community will result in the widespread adoption of
minimally invasive cardiovascular surgery and anti-adhesion products or that
surgeons adopting these procedures and products will use Genzyme Surgical
Products' products.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF GENZYME SURGICAL PRODUCTS' GENE THERAPY
PRODUCTS.
The recent death of a patient undergoing gene therapy using an adenoviral
vector to deliver a therapeutic gene has been widely publicized. This death and
any other adverse events in the field of gene therapy that may occur in the
future may result in greater governmental regulation and potential regulatory
delays relating to the testing or approval of Genzyme Surgical Products' gene
therapy products. As a result of this death, the U.S. Senate has commenced
hearings to determine whether additional legislation is required to protect
volunteers and patients who participate in gene therapy clinical trials.
Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory
body to the National Institutes of Health (NIH), has extensively discussed the
use of adenoviral vectors in gene therapy clinical trials and recently issued a
draft report on the safety of adenoviral vectors. While this draft report
recommends that clinical trials using adenoviral vectors should continue with
caution, it also suggested a number of changes in the way gene therapy clinical
trials are conducted. If any new guidelines are adopted by the NIH, Genzyme
Surgical Products' gene therapy clinical trials could be delayed or become more
expensive to conduct.
The commercial success of any gene therapy products that Genzyme Surgical
Products develops will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapy is unsafe, and gene therapy may
not gain the acceptance of the public or the medical community. Negative public
reaction to gene therapy could result in greater government regulation and
stricter clinical trial oversight and commercial product labeling requirements
of gene therapies and could cause a decrease in the demand for any gene therapy
product that Genzyme Surgical Products may develop.
COMPETITION FROM OTHER MEDICAL DEVICE AND TECHNOLOGY COMPANIES COULD HURT
GENZYME SURGICAL PRODUCTS' PERFORMANCE.
The human health care products and services industry is extremely
competitive. Major medical device and technology companies compete or may
compete with Genzyme Surgical Products. These include such companies as:
- Atrium Medical Corporation and Sherwood-Davis & Geck, a division of Tyco
International, Ltd. in the cardiovascular chest drainage and fluid
management market;
- The Ethicon division of Johnson & Johnson Ltd. and U.S. Surgical
Corporation, a division of Tyco in the cardiovascular closure market;
- CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical, Guidant
Corporation, Baxter Healthcare Corporation and Ethicon in the minimally
invasive cardiovascular surgery market;
- Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and
Gliatech, Inc. in the anti-adhesion market; and
GSP-11
<PAGE>
- Karl Storz Endoscopy America, Inc., Scanlan International, Inc., Pilling
Weck Surgical Instruments and the Codman division of Johnson & Johnson
Ltd. in the reusable instruments market.
These competitors may have superior research and development, marketing and
production capabilities. Some competitors also may have greater financial
resources than Genzyme Surgical Products. The division is likely to incur
significant costs developing and marketing new products without any guarantee
that it will be commercially successful. The future success of Genzyme Surgical
Products will depend on its ability to effectively develop and market its
products against those of its competitors.
THE TREND TOWARD CONSOLIDATION IN THE SURGICAL DEVICES INDUSTRY MAY ADVERSELY
AFFECT GENZYME SURGICAL PRODUCTS' ABILITY TO MARKET SUCCESSFULLY ITS PRODUCTS
TO SOME SIGNIFICANT PURCHASERS.
The current trend among hospitals and other significant consumers of
surgical devices is to combine into larger purchasing groups to increase their
purchasing power and thus reduce their purchase price for surgical devices.
Partly in response to this development, surgical device manufacturers have been
consolidating to be able to offer a more comprehensive product line to these
larger purchasing groups. In order to successfully market its products to larger
purchasing groups, Genzyme Surgical Products may have to expand its product
lines or enter into joint marketing or distribution agreements with other
manufacturers of surgical devices. We cannot guarantee that it will be able to
employ either of these initiatives or that, when employed, these initiatives
will increase the marketability of its products.
GENZYME SURGICAL PRODUCTS MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM
COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A
FAILURE TO ENTER INTO FUTURE COLLABORATIONS.
Genzyme Surgical Products' strategy to develop and commercialize some of its
products and services includes entering into various arrangements with academic
and corporate collaborators and licensees. It depends on the success of these
parties in performing research, preclinical and clinical testing and marketing.
These arrangements may require Genzyme Surgical Products to transfer important
rights to its corporate collaborators and licensees. These collaborators and
licensees could choose not to devote resources to these arrangements or, under
certain circumstances, may terminate them early. In addition, these
collaborators and licensees, outside of their arrangements with Genzyme Surgical
Products, may develop technologies or products that are competitive with those
that Genzyme Surgical Products is developing. As a result, we cannot guarantee
that Genzyme Surgical Products will receive revenues from these relationships or
that any of its strategic collaborations will continue or not terminate early.
In addition, we cannot guarantee that Genzyme Surgical Products will be able to
enter into collaborations in the future.
SUBSEQUENT EVENT
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Surgical Products will become part of
Genzyme Biosurgery. In addition, upon shareholder approval, GZSP Stock will be
exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a
purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will not exceed 35% of the total consideration, or
GSP-12
<PAGE>
approximately $245 million. Holders of GZSP Stock will receive 0.6060 share of
GZBX Stock for each share of GZSP Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approval of the
holders of GZSP Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GSP-13
<PAGE>
GENZYME SURGICAL PRODUCTS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Total revenues.............................................. $ 111,981 $ 103,958 $ 100,835
Operating costs and expenses:
Cost of products sold..................................... 67,242 72,274 59,802
Selling, general and administrative....................... 63,237 57,297 54,061
Research and development.................................. 28,056 18,618 11,287
Amortization of intangibles............................... 5,750 5,748 5,647
--------- --------- ---------
Total operating costs and expenses.................... 164,285 153,937 130,797
--------- --------- ---------
Operating loss.............................................. (52,304) (49,979) (29,962)
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (35) (6) (78)
Other..................................................... 138 60 236
Investment income......................................... 4,199 144 98
Interest expense.......................................... (35) (75) (34)
--------- --------- ---------
Total other income (expenses)......................... 4,267 123 222
--------- --------- ---------
Net loss attributable to GZSP Stock......................... $ (48,037) $ (49,856) $ (29,740)
========= ========= =========
Pro forma net loss per GZSP basic and diluted common
share..................................................... $ (3.25) $ (3.37) $ (2.01)
========= ========= =========
Pro forma weighted average shares outstanding............... 14,800 14,800 14,800
========= ========= =========
Net loss.................................................... $ (48,037) $ (49,856) $ (29,740)
Other comprehensive income (loss) net of tax:
Unrealized losses on securities arising during the
period................................................ (1,839) -- --
--------- --------- ---------
Comprehensive loss.................................... $ (49,876) $ (49,856) $ (29,740)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GSP-14
<PAGE>
GENZYME SURGICAL PRODUCTS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,673 $ --
Short-term investments.................................... 41,606 --
Accounts receivable, net.................................. 19,886 15,663
Inventories............................................... 30,491 22,026
Prepaid expenses and other current assets................. 815 1,932
-------- --------
Total current assets.................................. 115,471 39,621
Property, plant and equipment, net........................ 17,621 16,249
Long-term investments..................................... 61,846 --
Intangibles, net.......................................... 172,833 177,897
Investment in equity securities........................... 3,140 --
Other..................................................... 13 449
-------- --------
Total assets.......................................... $370,924 $234,216
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,562 $ 3,925
Accrued expenses.......................................... 7,038 2,982
Due to Genzyme General.................................... 6,406 --
-------- --------
Total current liabilities............................. 17,006 6,907
Noncurrent liabilities...................................... -- 221
-------- --------
Total liabilities..................................... 17,006 7,128
Commitments and contingencies (Note K)
Division equity (Note J).................................... 353,918 227,088
-------- --------
Total liabilities and division equity................. $370,924 $234,216
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GSP-15
<PAGE>
GENZYME SURGICAL PRODUCTS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (48,037) $ (49,856) $ (29,740)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization............................. 8,181 8,008 8,831
Equity in loss of unconsolidated affiliate................ 35 6 78
Accrued interest/amortization of marketable securities.... 1,144 -- --
Loss on sale of plant and equipment....................... 91 -- --
Provision for bad debts and inventory..................... 1,431 526 759
Other..................................................... -- (60) (236)
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (4,579) (2,140) 3,179
Inventories............................................. (9,540) 3,791 2,865
Prepaid expenses and other assets....................... 1,117 (1,469) 259
Accounts payable and accrued expenses................... 2,709 1,885 (2,123)
Due to Genzyme General.................................. 6,406 -- --
--------- --------- ---------
Net cash used in operating activities................. (41,042) (39,309) (16,128)
INVESTING ACTIVITIES:
Purchases of investments.................................... (15,161) -- --
Sales and maturities of investments......................... 36,878 -- --
Purchase of investments in equity securities................ (4,000) -- --
Acquisitions of property, plant and equipment............... (3,877) (1,959) (3,112)
Purchase of technology rights............................... (1,400) -- --
Other....................................................... 401 (688) (1,039)
--------- --------- ---------
Net cash provided by (used in) investing activities... 12,841 (2,647) (4,151)
FINANCING ACTIVITIES:
Net cash allocated from Genzyme General..................... 49,414 41,484 19,003
Payments of debt and capital lease obligations.............. -- (152) (173)
Bank overdraft.............................................. 1,681 -- --
Other....................................................... (221) (351) 242
--------- --------- ---------
Net cash provided by (used in) financing activities... 50,874 40,981 19,072
Increase (decrease) in cash and cash equivalents............ 22,673 (975) (1,207)
Cash and cash equivalents at beginning of period............ -- 975 2,182
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 22,673 $ -- $ 975
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for interest.................... $ 35 $ 9 $ 29
Supplemental disclosures of non-cash transactions:
Transfer of investment--Note A. ..........................
Transfer of property, plant and equipment--Note F. .......
GZSP designated shares--Note J. ..........................
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GSP-16
<PAGE>
GENZYME SURGICAL PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Surgical Products is our operating division that develops,
manufactures and markets surgical products for cardiovascular surgery and
general surgery.
Genzyme Surgical Products Division Common Stock, which we refer to as "GZSP
Stock," is intended to reflect the value and track the performance of Genzyme
Surgical Products.
BASIS OF PRESENTATION; PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme Surgical Products for each
period include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Surgical Products. We also allocate a portion
of our corporate operations to Genzyme Surgical Products using methods we
believe are reasonable. These combined financial statements are prepared using
amounts included in our consolidated financial statements included in this
annual report. We have reclassified certain 1998 and 1997 data to conform with
the 1999 presentation.
We created Genzyme Surgical Products in June 1999. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
Genzyme Surgical Products consists primarily of the products and assets we
acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra
products (our line of products and product candidates designed to limit post-
operative adhesions), and our research and development programs in biomaterials
and gene and cell therapy for cardiovascular disease. Genzyme General
transferred $150.0 million in cash, cash equivalents and investments, and
certain other assets, to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. In
exchange for this transfer, we issued approximately 14.8 million shares of GZSP
Stock and distributed them as a dividend to holders of GENZ Stock. These
financial statements reflect the financial position, results of operations and
cash flows of Genzyme Surgical Products as if it had existed as a separate
division of the corporation for all periods presented.
We use the equity method to account for investments in entities in which
Genzyme Surgical Products has a substantial ownership interest (20% to 50%), or
in which it participates in policy decisions. Genzyme Surgical Products'
consolidated net income includes its share of the earnings of these entities. We
report at fair value investments in entities in which Genzyme Surgical Products'
ownership interest is less than 20%.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Surgical Products and prepare
separate financial statements for Genzyme Surgical Products. Notwithstanding the
allocation of assets and liabilities to Genzyme Surgical Products, Genzyme
Corporation continues to hold title to all of the assets and is responsible for
all of the liabilities allocated to Genzyme Surgical Products. Holders of GZSP
Stock are common stockholders of Genzyme Corporation and have no specific rights
to the assets to which GZSP Stock relates.
We prepare the financial statements of Genzyme Surgical Products in
accordance with generally accepted accounting principles, our management and
accounting policies and the divisional accounting policies approved by our
board. We present financial information and accounting policies specific to
Genzyme Surgical Products in the accompanying combined financial statements. We
present financial
GSP-17
<PAGE>
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
information and accounting policies relevant to the corporation and its
operating divisions taken as a whole in our consolidated financial statements.
You should read these consolidated financial statements.
Note A., "Summary of Significant Accounting Policies" to our consolidated
financial statements contains our accounting policies. We incorporate that
information into this note by reference.
DIVIDEND POLICY
We have never paid a cash dividend on shares of GZSP Stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on GZSP Stock in the foreseeable future.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme Surgical Products from local currency into U.S. dollars and record
translation adjustments for these subsidiaries to division equity. Genzyme
Surgical Products records gains and losses in foreign currency transactions in
income.
We include exchange gains and losses on intercompany balances which are
long-term in nature in our division equity. Our gains and losses on all other
transactions are included in our results of operations.
REVENUE RECOGNITION
Genzyme Surgical Products recognizes revenue from product sales when it
ships the product and title has passed, net of any applicable third party
contractual allowances and rebates.
NET INCOME (LOSS) PER SHARE
To calculate basic earnings per share for Genzyme Surgical Products, we
divide the earnings attributable to Genzyme Surgical Products by the weighted
average number of outstanding shares of GZSP Stock during the applicable period.
When we calculate diluted earnings per share, we also include in the denominator
all potentially dilutive securities outstanding during the applicable period. We
disclose PRO FORMA net loss per share for Genzyme Surgical Products for all
periods presented because GZSP Stock was not outstanding during the entirety of
each of these periods.
To determine what earnings are attributable to Genzyme Surgical Products, we
take its net income or loss for the applicable period (determined in accordance
with generally accepted accounting principles) and adjust it for the tax
benefits allocated to Genzyme General in accordance with our management and
accounting policies.
For all periods presented, basic and diluted pro forma net loss per GZSP
common share are the same. We did not include the securities described in the
following table in the computation of Genzyme
GSP-18
<PAGE>
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Surgical Products' diluted net loss per share for each period because these
securities would have an anti-dilutive effect due to Genzyme Surgical Products'
net loss for the period.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
-------- -------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GZSP Stock issuable for options................... 2,991 -- --
GZSP designated shares issuable upon conversion of 5 1/4%
convertible subordinated notes allocated to Genzyme
General(1)................................................ 1,130 -- --
----- ----- -----
Total shares excluded from the diluted pro forma net loss
per GZSP share calculation................................ 4,121 -- --
===== ===== =====
</TABLE>
- ------------------------
(1) GZSP designated shares are shares of GZSP Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Surgical Products.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
Because each of our operating divisions is a part of a single company, our
board of directors has adopted policies to address issues that may arise among
divisions and to govern the management of and the relationships between each
division. With some exceptions that are mentioned specifically in this note, our
board may modify or rescind these policies, or adopt additional policies, in its
sole discretion without stockholder approval, subject only to our board's
fiduciary duty to stockholders. Generally accepted accounting principles require
that any change in policy be preferable (in accordance with these principles) to
the previous policy.
INTERDIVISION ASSET TRANSFERS
Our board may at any time reallocate any program, product or other asset
from one division to any other division. We make reallocations at fair market
value, as determined by our board. In determining the fair market value of a
program under development, our board takes into account the following criteria
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 and the
likelihood and time of the realization; and
- other matters that our board and its financial advisors, if any, deem
relevant.
One division may pay another division the consideration for a reallocation
in cash or other consideration with a value equal to the fair market value of
the reallocated assets. In the case of a reallocation of assets from Genzyme
General to Genzyme Surgical Products, our board may elect instead to account for
the reallocation as an increase in GZSP designated shares in accordance with the
provisions of our charter. GZSP designated shares are shares of GZSP Stock that
are not issued and outstanding, but which our board of directors may issue,
sell, or distribute without allocating the proceeds to Genzyme Surgical
Products.
GSP-19
<PAGE>
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
Our policy regarding transfers of assets between divisions may not be
changed by our board without the approval of the holders of GZSP Stock voting as
a separate class unless the policy change does not affect Genzyme Surgical
Products.
OTHER INTERDIVISION TRANSACTIONS
Our divisions 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. These transactions may include agreements by one division to provide
products and services for use by another division, license agreements and joint
ventures or other collaborative arrangements involving more than one division to
develop new products and services jointly and with third parties. These
transactions are subject to the following conditions:
- We charge research and development (including clinical and regulatory
support), distribution, sales, marketing, and general and administrative
services (including allocated space) performed by one division for another
division to the division for which the services are performed on a cost
basis. We charge direct costs to the division for which we incur them. We
allocate direct labor and indirect costs in reasonable and consistent
manners based on the use by a division of relevant services. Divisions
performing services for other divisions do not recognize revenue for the
services they perform.
- We charge the manufacturing of goods and performance of services by one
division exclusively for another division to the division for which it is
performed on a cost basis. We include in manufacturing costs an interest
charge (based on our short-term borrowing rate at the beginning of the
fiscal year) on the gross fixed assets used in the manufacturing process.
To perform this calculation, we determine gross fixed assets for the
facility used at the beginning of each fiscal year and apply our
short-term borrowing rate. We allocate direct labor and indirect costs in
reasonable and consistent manners based on the benefit received by a
division of related goods and services. Divisions performing services for
other divisions do not recognize revenue for the services they perform.
- Other than transactions involving research and development, manufacturing,
distribution, sales, marketing, general and administrative services, which
are addressed above, all interdivisional transactions are performed on
terms and conditions obtainable in arm's length transactions with third
parties. Divisions performing services for other divisions do not
recognize revenue for the services they perform.
- Our board must approve interdivisional transactions that are performed on
terms and conditions other than as described above and are material to one
or more of the participating divisions. In giving its approval, our board
must determine that the transaction is fair and reasonable to each
participating division and to holders of the common stock representing
each participating division.
- Divisions may make loans to other divisions. Any loan of $1 million or
less matures within 18 months and accrues interest at the best borrowing
rate available to the corporation for a loan of like type and duration.
Our board must approve any loan in excess of $1 million. In giving its
approval, our board must determine that the material terms of the 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.
GSP-20
<PAGE>
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
- All material interdivisional transactions are set forth in a written
agreement that is signed by an authorized member of the management team of
each division involved in the transaction.
TAX ALLOCATIONS
We file a consolidated tax return and allocate income taxes to each division
based upon the financial statement income, taxable income, credits and other
amounts properly allocable to each division under generally accepted accounting
principles as if it were a separate taxpayer. We assess the realizability of our
deferred tax assets at the division level. As a result, our consolidated tax
provision may not equal the sum of the divisions' tax provision. As of the end
of any fiscal quarter, however, if a division cannot use any projected annual
tax benefit attributable to it to offset or reduce its current or deferred
income tax expense, we may allocate the tax benefit to the other divisions in
proportion to their taxable income without any compensating payment or
allocation.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme Surgical Products has unrestricted access to all technology and
know-how owned or controlled by Genzyme Corporation that may be useful in its
business, subject to any obligations or limitations that apply to the
corporation generally.
NOTE C. OTHER CHARGES
During the third quarter of 1998, Genzyme Surgical Products took a $10.4
million charge to cost of products sold to write down our inventory of Sepra
products to net realizable value. The Sepra products are our line of products
and product candidates designed to limit post-operative adhesions. In addition,
during 1998, Genzyme Surgical Products wrote-off certain costs related to
equipment used to manufacture Sepra products totaling $1.7 million.
In the fourth quarter of 1997, Genzyme Surgical Products also recorded a
$5.5 million charge to cost of products sold and a $1.9 million charge to
selling, general and administrative expense relating to the manufacturing and
sale of Sepracoat-TM- coating solution. Genzyme Surgical Products took these
charges after an FDA advisory panel recommended against granting marketing
approval for the product.
NOTE D. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme Surgical Products' trade receivables primarily represent amounts due
from healthcare service providers. Genzyme Surgical Products performs credit
evaluations of its customers on an ongoing basis and generally does not require
collateral. Genzyme Surgical Products states accounts receivable at fair value
after reflecting an allowance for doubtful accounts. This allowance was $0.3
million at December 31, 1999 and $0.4 million at December 31, 1998.
Genzyme Surgical Products' net intangible assets include $118.5 million in
goodwill as of December 31, 1999 and $122.4 million in goodwill as of December
31, 1998. This goodwill is a result of the acquisition of Deknatel Snowden
Pencer, Inc. in 1996.
Genzyme Surgical Products' accumulated amortization of intangible assets was
$20.1 million as of December 31, 1999 and $13.9 million as of December 31, 1998.
GSP-21
<PAGE>
NOTE E. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials......................................... $15,473 $11,567
Work-in-process....................................... 2,029 1,734
Finished products..................................... 12,989 8,725
------- -------
Total inventory................................... $30,491 $22,026
======= =======
</TABLE>
NOTE F. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Plant and equipment................................... $10,276 $ 8,934
Land and buildings.................................... 8,268 8,261
Leasehold improvements................................ 434 434
Furniture and fixtures................................ 4,001 3,944
Construction-in-progress.............................. 1,407 614
------- -------
$24,386 $22,187
Less accumulated depreciation......................... (6,765) (5,938)
------- -------
Property, plant and equipment, net.................... $17,621 $16,249
======= =======
</TABLE>
Genzyme Surgical Products' depreciation expense was $2.4 million in 1999,
$2.5 million in 1998, and $2.7 million in 1997.
GSP-22
<PAGE>
NOTE G. INVESTMENTS
Genzyme Surgical Products had no cash, cash equivalents, and short- and
long-term investments at December 31, 1998. Investments in marketable securities
at December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------------
MARKET
COST VALUE
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Cash equivalents(1):
Corporate notes....................................... $16,930 $16,915
Money market fund..................................... 4,317 4,317
------- -------
$21,247 $21,232
======= =======
Short-term:
Corporate notes....................................... $41,757 $41,606
======= =======
Long-term:
Corporate notes....................................... $37,598 $36,878
Federal............................................... 4,081 4,026
U.S. Treasury notes................................... 20,979 20,942
------- -------
$62,658 $61,846
======= =======
Investment in equity securities....................... $ 4,000 $ 3,140
======= =======
</TABLE>
- ------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheets.
Genzyme Surgical Products records gross unrealized holding gains and losses
in division equity. The following table sets forth the amounts recorded:
<TABLE>
<CAPTION>
DECEMBER
31, 1999
----------
<S> <C>
Unrealized holding losses............................... $1,839
</TABLE>
The following table contains information regarding the range of contractual
maturities of Genzyme Surgical Products' investments in debt securities:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
----------------------
MARKET
COST VALUE
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Within 1 year.......................................... $ 63,004 $ 62,838
1-2 years.............................................. 62,658 61,846
-------- --------
$125,662 $124,684
======== ========
</TABLE>
Note I., "Investments," to our consolidated financial statements contains
information regarding Genzyme Surgical Products' equity investment in
Focal, Inc. We incorporate that information into this note by reference.
GSP-23
<PAGE>
NOTE H. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
1999
----------------------
MARKET
COST VALUE
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Compensation............................................... $2,812 $1,555
Professional fees.......................................... 466 291
Royalties.................................................. 610 523
Other...................................................... 3,150 613
------ ------
$7,038 $2,982
====== ======
</TABLE>
NOTE I. LONG-TERM DEBT AND LEASES
REVOLVING CREDIT FACILITY
Note K., "Long Term Debt and Leases," to our consolidated financial
statements contains information regarding our revolving credit facilities. We
incorporate that information into this note by reference.
OPERATING LEASES
Genzyme Surgical Products incurs expense under operating leases for
facilities and personal property that have terms in excess of one year. Genzyme
Surgical Products' total expense under operating leases was:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
$0.2 million $0.2 million $0.2 million
</TABLE>
Over the next five years, Genzyme Surgical Products will be required to
repay the following amounts under operating leases (amounts in thousands):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
- --------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.2 $0.3 $0.3 $0.3 $3.0
$0.2 million million million million million million
</TABLE>
NOTE J. DIVISION EQUITY
At December 31, 1999, 60 million shares of GZSP Stock were authorized for
issuance. We had not yet created GZSP Stock at December 31, 1998. At December
31, 1999 approximately 14,835,000 shares of GZSP Stock were issued and
outstanding. At December 31, 1999, approximately 3,800,000 shares of GZSP Stock
were reserved for issuance under our various equity plans and options to
purchase approximately 2,991,000 shares of GZSP Stock were outstanding.
As of December 31, 1999, there were 1,164,839 GZSP designated shares. GZSP
designated shares are shares of GZSP Stock that are not issued and outstanding,
but which our board of directors may from time to time issue, sell or distribute
without allocating the proceeds to Genzyme Surgical Products.
GSP-24
<PAGE>
NOTE J. DIVISION EQUITY (CONTINUED)
The following table contains the components of division equity for Genzyme
Surgical Products for the periods presented:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............... $227,088 $234,969 $239,040
Net loss..................................... (48,037) (49,856) (29,740)
Unrealized gain (loss) on investments........ (1,839) -- --
Allocation from Genzyme General.............. 176,706 41,975 25,669
-------- -------- --------
Balance at end of period..................... $353,918 $227,088 $234,969
======== ======== ========
</TABLE>
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. Genzyme Surgical Products does not recognize compensation
expense for options granted and shares purchased under the provisions of these
plans for options granted to employees with an exercise price greater than or
equal to fair market value.
The following table sets forth net income and income per share data for
Genzyme Surgical Products calculated in accordance with SFAS 123 as if
compensation expense for our stock-based compensation plans was determined based
on the fair value at the grant dates for options granted and shares purchased
under the plans (we only present disclosure for the year ended December 31, 1999
because we had not granted options to purchase GZSP Stock under these plans
prior to 1999) (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Net loss:
As reported......................................... $ (48,037)
Pro forma........................................... $ (50,583)
Basic and diluted loss per share:
As reported......................................... $ (3.25)
Pro forma........................................... $ (3.42)
</TABLE>
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding the assumptions we made in calculating net income
and income per share data in accordance with SFAS 123.
PREFERRED STOCK, STOCK RIGHTS, EQUITY PLANS AND DESIGNATED SHARES
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding:
- our authorized preferred stock;
- our shareholder rights plan;
- our directors' deferred compensation plan;
GSP-25
<PAGE>
NOTE J. DIVISION EQUITY (CONTINUED)
- our other equity plans; and
- GZSP designated shares and our policy for distributing them.
We incorporate that information into this note by reference.
NOTE K. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on Genzyme Surgical Products' results of
operations, financial condition, or liquidity.
NOTE L. GENZYME DEVELOPMENT PARTNERS
Genzyme Development Partners, L.P. was formed in September 1989 to develop,
produce and derive income from the sale of the Sepra products. We refer to
Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the
general partner of GDP. In September 1989, we also formed a joint venture with
GDP to manufacture and market the Sepra products in the United States and Canada
for use in human clinical trials or human clinical procedures. We refer to this
joint venture as GVII. We consolidate GVII for financial statement purposes and
allocate it to Genzyme Surgical Products.
Genzyme Surgical Products has the option to purchase all of the outstanding
partnership interests in GDP for approximately $26.0 million in cash, common
stock or a combination of both, plus future royalty payments on the sale of the
Sepra products. We can exercise this option during the 90-day period beginning
on August 31, 2000. This option will be accelerated if at any time prior to
August 31, 2000 GDP receives distributions from GVII of at least $5.5 million.
While Genzyme Surgical Products had no obligation to fund the research and
development activities of GDP, it elected to fund the following amounts:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------ ------------ ------------
<S> <C> <C>
$ 9.0
million..... $8.4 million $7.3 million
</TABLE>
Genzyme Surgical Products has agreed to fund GDP's research and development
programs and general and administrative expenses during 2000. We believe,
however, that additional funds will be required to complete the development,
clinical testing and commercialization of GDP's products.
NOTE M. INCOME TAXES
Genzyme Surgical Products' provisions for income taxes were at rates other
than the U.S. federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate.................................. (35.0)% (35.0)% (35.0)%
State taxes, net............................................ (1.2) (3.1) (3.0)
Nondeductible amortization.................................. 2.3 2.3 4.0
Other, net.................................................. 0.3 -- --
Deductions subject to deferred tax valuation allowance...... 33.6% 35.8% 34.0%
----- ----- -----
Effective tax rate attributable to GZSP Stock............... 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
GSP-26
<PAGE>
NOTE M. INCOME TAXES (CONTINUED)
The components of net deferred tax assets are described in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 64,156 $ 48,701
Unrealized capital losses........................ -- 1,317
Reserves and other............................... 5,638 4,908
-------- --------
Gross deferred tax asset............................. 69,794 54,926
Valuation allowance.................................. (60,087) (45,896)
-------- --------
$ 9,707 $ 9,030
Deferred tax liabilities:
Intangible amoritization......................... (7,390) (6,712)
Depreciable assets............................... (2,317) (2,318)
-------- --------
Net deferred tax asset............................... $ -- $ --
======== ========
</TABLE>
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to operating loss carryforwards, we placed
valuation allowances of $60.1 million in 1999 and $45.9 million in 1998 against
otherwise recognizable deferred tax assets.
As Genzyme Surgical Products recognizes these deferred tax assets in
accordance with generally accepted accounting principles, the benefits of those
assets are reflected in its tax provision. However, the benefit of these
deferred tax assets has previously been allocated to Genzyme General in
accordance with our management and accounting policies, and will be reflected as
a reduction of Genzyme Surgical Products' net income to determine net income
attributable to GZSP Stock.
NOTE N. BENEFIT PLANS
Note P., "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) and other pension plans. We incorporate that
information into this note by reference.
NOTE O. SEGMENT INFORMATION
We present segment information in a manner consistent with the method we use
to report this information to our management and have restated our 1997 segment
information to conform with this method of presentation. Applying SFAS 131,
Genzyme Surgical Products has two reportable segments:
- Cardiovascular Surgery, which includes chest drainage systems, instruments
and closures used in coronary artery bypass, valve replacement, and other
cardiothoracic surgeries; and
- General Surgery, which includes surgical instruments and Sepra
Film-Registered Trademark- bioresorbable membrane.
GSP-27
<PAGE>
NOTE O. SEGMENT INFORMATION (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Cardiovascular Surgery.................................. $ 77,966 $ 74,545 $ 79,560
General Surgery......................................... 25,192 20,249 14,813
Other................................................... 8,823 9,164 6,462
-------- -------- --------
Total....................................................... $111,981 $103,958 $100,835
======== ======== ========
Gross Profit:
Cardiovascular Surgery.................................. $ 33,360 $ 29,596 $ 33,494
General Surgery......................................... 8,604 (490) 4,772
Other................................................... 2,775 2,578 2,767
-------- -------- --------
Total....................................................... $ 44,739 $ 31,684 $ 41,033
======== ======== ========
</TABLE>
The Other category includes amounts attributable to our products for plastic
surgery.
The following table contains revenue information by geographic area:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
U.S..................................................... $ 78,854 $ 74,072 $ 71,898
Germany................................................. 16,886 17,400 16,839
Other................................................... 16,241 12,486 12,098
-------- -------- --------
Total................................................. $111,981 $103,958 $100,835
======== ======== ========
</TABLE>
All long-lived assets are in the United States.
Genzyme Surgical Products markets its products directly to physicians and
hospitals. Genzyme Surgical Products also markets its products through
distributors and had the following sales as a percentage of total revenue to two
unaffiliated distributors:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998 1997
-------- -------- ----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C>
Revenues:
Distributor A........................................... 16% 18% 20%
Distributor B........................................... 9% 8% 11%
</TABLE>
GSP-28
<PAGE>
NOTE Q. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999:
Net revenue............................................ $ 27,353 $ 26,681 $ 27,385 $30,562
Gross profit........................................... 11,509 9,242 10,587 13,401
Net loss............................................... (10,745) (17,658) (10,953) (8,681)
Net loss per GZSP common share--basic and diluted...... $ N/A $ N/A $ (0.74) $ (0.59)
Pro forma loss per share of GZSP Stock--basic and
diluted.............................................. $ (0.73) $ (1.19) $ N/A $ N/A
1998:
Net revenue............................................ $ 24,227 $ 27,201 $ 24,904 $27,626
Gross profit........................................... 9,504 11,942 (919) 11,157
Net loss............................................... (9,118) (9,886) (21,519) (9,333)
Pro forma loss per share of GZSP Stock--basic
and diluted.......................................... $ (0.62) $ (0.67) $ (1.45) $ (0.63)
</TABLE>
NOTE R. SUBSEQUENT EVENT
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Surgical Products will become part of
Genzyme Biosurgery. In addition, upon shareholder approval, GZSP Stock will be
exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a
purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be capped at 35% of the total consideration, or approximately
$245 million.
Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share
of GZSP Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- Approval by Biomatrix's shareholders;
- Approval by our shareholders, including separate approval of the holders
of GZSP Stock;
- Clearance under federal antitrust laws; and
- Other customary closing conditions.
GSP-29
<PAGE>
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 Surgical Products (as
described in Note A) at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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
auditing standards generally accepted in the United States 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
Surgical Products is a division of Genzyme Corporation; accordingly, the
combined financial statements of Genzyme Surgical Products should be read in
conjunction with the audited consolidated financial statements of Genzyme
Corporation and Subsidiaries.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2000
GSP-30
<PAGE>
GENZYME SURGICAL PRODUCTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------- ------------------- --------------------------------- ---------- -------------
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- -------------------------- ------------------- ---------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts................ $ 365,000 $ 375,000 $ -- $ 407,000(1) $ 333,000
Inventory reserve......... $12,127,000 $ 1,056,000 $ -- $4,460,000 $ 8,723,000
Year ended December 31,
1998:
Allowance for doubtful
accounts................ $ 476,000 $ 166,000 $ -- $ 277,000(1) $ 365,000
Inventory reserve......... $ 3,700,000 $10,758,000 $ -- $2,331,000 $12,127,000
Year ended December 31,
1997:
Allowance for doubtful
accounts................ $ 917,000 $ 275,000 $ -- $ 716,000(1) $ 476,000
Inventory reserve......... $ 3,854,000 $ 484,000 $ -- $ 638,000 $ 3,700,000
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
GSP-31
<PAGE>
EXHIBIT 13.4
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
GENZYME TISSUE REPAIR
Combined Selected Financial Data.......................... GTR-2
Management's Discussion and Analysis of Genzyme Tissue
Repair's Financial Condition and Results of
Operations.............................................. GTR-3
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997........................ GTR-11
Combined Balance Sheets--December 31, 1999 and 1998....... GTR-12
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997........................ GTR-13
Notes to Combined Financial Statements.................... GTR-14
Report of Independent Accountants......................... GTR-25
</TABLE>
GTR-1
<PAGE>
GENZYME TISSUE REPAIR COMBINED SELECTED FINANCIAL DATA
Genzyme Tissue Repair is our operating division that develops and markets
biological products for orthopedic injuries, such as cartilage damage, and
severe burns. Genzyme Tissue Repair Division Common Stock, which we refer to as
"GZTR Stock," is intended to reflect the value and track the performance of
Genzyme Tissue Repair.
The following combined Selected Financial Data reflects the results of
operations and financial position of Genzyme Tissue Repair and should be read in
conjunction with the financial statements of Genzyme Tissue Repair and
accompanying notes.
COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net service sales........................ $ 20,402 $ 17,117 $ 10,856 $ 7,312 $ 5,220
Operating costs and expenses:
Cost of services sold................ 13,237 13,438 11,788 11,193 4,731
Selling, general and
administrative..................... 24,604 24,579 25,571 27,111 12,927
Research and development............. 8,019 10,432 10,845 10,880 10,938
--------- --------- --------- --------- --------
Total operating costs and
expenses......................... 45,860 48,449 48,204 49,184 28,596
--------- --------- --------- --------- --------
Operating loss........................... (25,458) (31,332) (37,348) (41,872) (23,376)
Other income (expenses):
Equity in net loss of joint
venture............................ (3,368) (7,674) (6,719) (1,727) --
Interest income...................... 609 1,176 979 1,432 1,386
Interest expense..................... (1,823) (2,556) (2,896) (148) (40)
--------- --------- --------- --------- --------
Total other income (expenses)...... (4,582) (9,054) (8,636) (443) 1,346
--------- --------- --------- --------- --------
Net loss attributable to GZTR Stock...... $ (30,040) $ (40,386) $ (45,984) $ (42,315) $(22,030)
========= ========= ========= ========= ========
Per GZTR basic and diluted common share:
Net loss............................... $ (1.26) $ (1.99) $ (3.07) $ (3.38) $ (2.28)
========= ========= ========= ========= ========
Weighted average shares outstanding...... 23,807 20,277 14,976 12,525 9,659
========= ========= ========= ========= ========
</TABLE>
COMBINED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and investments........................... $ 9,373 $ 7,732 $31,915 $16,230 $47,573
Working capital (deficit)...................... 12,112 (6,461) 31,623 14,232 44,374
Total assets................................... 19,648 18,954 57,226 42,593 52,649
Long-term debt................................. 18,000 12,579 31,089 18,000 --
Division equity (deficit)...................... (3,455) (16,396) 20,203 18,084 45,926
</TABLE>
There were no cash dividends paid.
GTR-2
<PAGE>
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 our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" for
Genzyme Tissue Repair and Genzyme Corporation included in this annual report.
You should consider carefully each of these risks and uncertainties in
evaluating the financial condition and results of operations of Genzyme Tissue
Repair and Genzyme.
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Tissue Repair and prepare separate
financial statements for Genzyme Tissue Repair. Notwithstanding the allocation
of assets and liabilities to Genzyme Tissue Repair, Genzyme Corporation
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to Genzyme Tissue Repair. Holders of GZTR Stock are common
stockholders of Genzyme Corporation and have no specific rights to the assets to
which GZTR Stock relates.
We present financial information and accounting policies specific to Genzyme
Tissue Repair in the accompanying combined financial statements. We present
financial information and accounting policies relevant to the corporation and
its operating divisions taken as a whole in our consolidated financial
statements.
You should, therefore, read this discussion and analysis of Genzyme Tissue
Repair's financial position and results of operations in conjunction with the
financial statements and related notes of Genzyme Tissue Repair, 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 in this annual report.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division, and the
assets of Genzyme Tissue Repair will become part of that new division. See
"Subsequent Event" below.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management believes are
necessary for an understanding of our financial statements.
GTR-3
<PAGE>
The components of Genzyme Tissue Repair's combined statements of operations
are described in the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues......................... $ 20,402 $ 17,117 $ 10,856 19% 58%
Cost of revenues....................... 13,237 13,438 11,788 (1)% 14%
Selling, general and administrative.... 24,604 24,579 25,571 0% (4)%
Research and development............... 8,019 10,432 10,845 (23)% (4)%
-------- -------- -------- --- ---
Total operating costs and
expenses....................... 45,860 48,449 48,204 (5)% 1%
-------- -------- -------- --- ---
Operating loss......................... (25,458) (31,332) (37,348) (19)% (16)%
Other expenses, net.................... (4,582) (9,054) (8,636) (49)% 5%
-------- -------- -------- --- ---
Net loss attributable to GZTR Stock.... $(30,040) $(40,386) $(45,984) (26)% (12)%
======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Carticel-Registered Trademark-
chondrocytes........................... $15,213 $10,978 $ 6,598 39% 66%
Epicel-TM- skin grafts................... 5,092 6,030 4,258 (16)% 42%
Other.................................... 97 109 -- (11)% N/A
------- ------- ------- --- ---
Total revenues....................... $20,402 $17,117 $10,856 19% 58%
======= ======= ======= === ===
</TABLE>
The increase in sales of Carticel-Registered Trademark- chondrocytes during
both periods was a result of continued increases in the numbers of patients
treated and surgeons trained as well as increases in the number of insurance
reimbursement approvals. Revenue from Epicel-TM- skin grafts varies from year to
year depending on the number of patients requiring severe burn care.
MARGINS
<TABLE>
<CAPTION>
99/98 99/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- ----- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Gross margins.................................. $7,165 $3,679 $(932) 95% 495%
% of total revenues........................ 35% 21% (9)%
</TABLE>
Genzyme Tissue Repair's gross margins improved in both periods as a result
of:
- Increased sales of Carticel-Registered Trademark- chondrocytes;
- Reductions in labor and manufacturing expenses; and
- Decreased material expenses.
GTR-4
<PAGE>
SG&A AND R&D EXPENSES
Genzyme Tissue Repair's selling, general and administrative expenses
remained flat, while revenues increased, in 1999 compared to 1998 as a result of
its efforts to streamline operations. Its selling, general and administrative
expense decreased in 1998 compared to 1997 also as a result of its efforts to
streamline operations.
Genzyme Tissue Repair's research and development expense decreased in 1999
compared to 1998 due to the termination of its TGF-beta and other research and
development programs. Its research and development expense decreased slightly in
1998 compared to 1997.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- ------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Equity in net loss of joint venture....... $(3,368) $(7,674) $(6,719) (56)% 14%
Interest income........................... 609 1,176 979 (48)% 20%
Interest expense.......................... (1,823) (2,556) (2,896) (29)% (12)%
------- ------- ------- --- ---
Total other income (expense), net... $(4,582) $(9,054) $(8,636) (49)% 5%
======= ======= =======
</TABLE>
1999 AS COMPARED TO 1998
Equity in net loss of joint venture decreased in 1999 compared to 1998 as a
result of the reallocation of Genzyme's ownership interest in Diacrin/Genzyme
LLC from Genzyme Tissue Repair to Genzyme General in May 1999. As a result,
Genzyme Tissue Repair will not recognize losses related to the joint venture
going forward. In the period of 1999 prior to the transfer, Genzyme Tissue
Repair provided $3.6 million in funding to the joint venture and realized a net
loss of $3.4 million from the joint venture. During 1998, Genzyme Tissue Repair
realized 12 months of losses from the joint venture.
Interest income decreased in 1999 compared to 1998 as a result of lower
average cash balances.
In the second quarter of 1998, Genzyme Tissue Repair completed the accretion
of the conversion feature of the 6% convertible subordinated note. Interest
expense decreased in 1999 as a result. During 1999, the holder of this note
converted the remaining principal amount of $12.4 million into shares of GZTR
Stock.
1998 AS COMPARED TO 1997
Equity in net loss of joint venture increased in 1998 compared to 1997 as a
result of increased clinical trial activity during 1998. During 1998, Genzyme
Tissue Repair provided $7.2 million of funding to Diacrin/Genzyme LLC and
realized a net loss of $7.7 million from the joint venture.
Interest income increased in 1998 compared to 1997 as a result of higher
average cash balances.
In the second quarter of 1998, Genzyme Tissue Repair completed the accretion
of the conversion feature of the 6% convertible subordinated note. Interest
expense decreased in 1997 as a result. During 1998, the holder of this note
converted $0.6 million of principal into shares of GZTR Stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, Genzyme Tissue Repair had cash and cash equivalents of
$9.4 million, a decrease of $1.6 million from December 31, 1998.
GTR-5
<PAGE>
Genzyme Tissue Repair used $25.1 million in cash for operations during 1999.
This is primarily due to Genzyme Tissue Repair's net loss of $30.0 million for
the year.
During 1999, Genzyme Tissue Repair used $4.4 million in cash as a result of
its investing activities. This amount included $3.6 million contributed to
Diacrin/Genzyme LLC and $0.9 million used to purchase equipment.
Genzyme Tissue Repair's financing activities generated $31.1 million in cash
during 1999. This included $25.0 million in cash allocated from Genzyme General
in connection with the transfer of our interest in Diacrin/Genzyme LLC to
Genzyme General, and $5.0 million allocated to Genzyme Tissue Repair under its
equity line from Genzyme General.
At December 31, 1999, $18.0 million of funds outstanding under our revolving
credit facility was allocated to Genzyme Tissue Repair. Genzyme Tissue Repair,
together with our other operating divisions, has access to our revolving credit
facilities. At December 31, 1999, $50.0 million was available under a facility
that matures in November 2000 and $77.0 million was available under a facility
that matures in November 2002.
In October 1996, our board of directors made $20.0 million of Genzyme
General's cash available to Genzyme Tissue Repair under an equity line of credit
in order for Genzyme Tissue Repair to fund its obligations under its joint
venture with Diacrin. Under this line, Genzyme Tissue Repair may draw down funds
as needed each quarter in exchange for GZTR designated shares based on the fair
market value of GZTR Stock (as defined in our charter) at the time of the draw.
Genzyme Tissue Repair made a $7.0 million draw under this line in 1997.
In May 1998, our board of directors increased the amount available under
this equity line from $20.0 million to $50.0 million. Genzyme Tissue Repair made
a $5.0 million draw under the line in February 1999. In May 1999, the amount
available under this equity line was reduced to $25.0 million in connection with
the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme
Tissue Repair to Genzyme General.
We anticipate that Genzyme Tissue Repair's current cash resources, together
with the $20.0 million that remains available under an equity line of credit
from Genzyme General, will be sufficient to fund its operations through the end
of 2000.
If Diacrin/Genzyme LLC does not initiate a Phase III clinical trial of
NeuroCell-TM- PD by June 30, 2000, Genzyme Tissue Repair will be required to pay
Genzyme General $20 million plus accrued interest at 13.5% per annum. GTR may
pay Genzyme General in cash, GZTR designated shares, or a combination of both,
at its option. If this milestone is not achieved and GTR elects to repay Genzyme
General in cash, its cash reserves will be substantially diminished or depleted
in their entirety.
Genzyme Tissue Repair's cash needs may differ from those planned as a result
of many factors, including the:
- ability to satisfy regulatory requirements of the FDA and other government
agencies;
- results of research and development and clinical testing;
- enforcement of patent and other intellectual property rights; and
- development of competitive products and services.
Genzyme Tissue Repair will require substantial additional funds in order to
continue operations at current levels beyond 2000. We cannot guarantee 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 be required to delay, scale back or eliminate
certain of its
GTR-6
<PAGE>
programs. Genzyme Tissue Repair may also have to give third parties rights to
commercialize technologies or products that it would otherwise have sought to
commercialize itself.
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" included in this
annual report.
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.
THE COMMERCIAL SUCCESS OF GENZYME TISSUE REPAIR'S LEAD PRODUCT,
CARTICEL-REGISTERED TRADEMARK- CHONDROCYTES, IS UNCERTAIN.
Carticel-Registered Trademark- chondrocytes are used to treat knee cartilage
damage. This service involves a proprietary process for growing autologous (a
patient's own) cartilage cells to replace those that are damaged or lost.
Revenues from Carticel-Registered Trademark- chondrocytes accounted for
approximately 75% of Genzyme Tissue Repair's 1999 revenue. The commercial
success of Carticel-Registered Trademark- chondrocytes will depend on many
factors including:
POSITIVE RESULTS FROM POST-MARKETING STUDIES.
- We have agreed with the FDA to conduct two post-marketing studies to
confirm the effectiveness of Carticel-Registered Trademark- chondrocytes.
The first study compares clinical outcomes of patients in Genzyme Tissue
Repair's registry who did not respond to treatment before being implanted
with Carticel-Registered Trademark- chondrocytes. This study will measure
outcomes before and after implantation with Carticel-Registered Trademark-
chondrocytes. The second study compares the long-term clinical effects of
treatment with Carticel-Registered Trademark-chondrocytes to other
available treatments. If these studies demonstrate that treatment with
Carticel-Registered Trademark- chondrocytes is not superior to the
alternatives studied, the FDA may suspend or withdraw its approval of
Carticel-Registered Trademark- chondrocytes. If Genzyme Tissue Repair
cannot market Carticel-Registered Trademark- chondrocytes in the U.S., its
financial results will be negatively impacted.
FDA APPROVAL OF RELATED DEVICE.
- Genzyme Tissue Repair has developed a device to improve the procedure for
implanting Carticel-Registered Trademark- chondrocytes and plans to file
for marketing approval with the FDA. Genzyme Tissue Repair believes it
will begin marketing this device in 2000. We cannot guarantee that the FDA
will approve this device, that this device will improve the procedure for
implanting Carticel-Registered Trademark-chondrocytes, or that this device
will gain commercial acceptance.
THE AVAILABILITY OF THIRD PARTY REIMBURSEMENT.
- Since the FDA approved Carticel-Registered Trademark- chondrocytes, we
have seen a substantial increase in the number of third party payers who
cover it. Some third party payers, however, do not cover
Carticel-Registered Trademark- chondrocytes. We cannot guarantee that any
third party payers will continue to cover it 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
GTR-7
<PAGE>
that its Technology Assessment Committee does not believe that
Carticel-Registered Trademark- chondrocytes meets all of its published
criteria for new treatments. We believe that Carticel-Registered
Trademark- chondrocytes does in fact meet all of such criteria and are
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-Registered Trademark- chondrocytes without a favorable evaluation
by the Blue Cross Blue Shield Association, many Blue Cross Blue Shield
plans have delayed approving Carticel-Registered Trademark- chondrocytes
from 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 U.S., this ruling has delayed our access to a
substantial portion of the market for Carticel-Registered Trademark-
chondrocytes.
THE SUCCESS OF COMPETITIVE PRODUCTS.
- The process we use to grow a patient's cartilage cells is not patentable,
and we do not yet have significant patent protection covering the other
processes used in providing Carticel-Registered Trademark-chondrocytes.
Consequently, we 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-Registered Trademark-chondrocytes. If a
competitor were to develop such ability and obtain FDA approval for a
competitive product or service, Genzyme Tissue Repair's financial results
of operations would be negatively impacted. We are aware of at least two
other companies that are growing autologous cartilage cells for cartilage
repair in the European market. Also, several pharmaceutical and
biotechnology companies are developing alternative treatments for knee
cartilage damage. One or more of these companies may develop products or
services superior to the Carticel-Registered Trademark-chondrocytes.
MARKET ACCEPTANCE BY ORTHOPEDIC SURGEONS.
- We are marketing Carticel-Registered Trademark- chondrocytes to orthopedic
surgeons. We cannot guarantee that we will train enough surgeons who
incorporate it into their practice to make it commercially successful.
GENZYME TISSUE REPAIR ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE.
We expect Genzyme Tissue Repair to have significant operating losses at
least through 2000 as it continues to commercialize Carticel-Registered
Trademark- chondrocytes and to conduct research and development and clinical
programs. We cannot guarantee that Genzyme Tissue Repair's operations will ever
be profitable.
IF GENZYME TISSUE REPAIR FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE
CLINICAL TRIALS.
We anticipate that Genzyme Tissue Repair's current cash resources, together
with amounts available under an equity line of credit from Genzyme General, will
be sufficient to fund Genzyme Tissue Repair's operations through the end of
2000.
In 1999, Genzyme Tissue Repair received $25 million in cash from Genzyme
General in connection with the transfer to Genzyme General of our interest in
our joint venture with Diacrin, Inc. If the joint venture does not initiate a
Phase III clinical trial of NeuroCell-TM--PD by June 30, 2000, Genzyme Tissue
Repair will be required to pay Genzyme General $20 million plus accrued interest
at 13.5%. Genzyme Tissue Repair may repay this amount in cash, GZTR designated
shares, or combination of both, at its option. GZTR designated shares are shares
of GZTR Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Tissue Repair. If these milestones are not achieved, and Genzyme Tissue
GTR-8
<PAGE>
Repair elects to repay Genzyme General in cash, its cash reserves will be
substantially diminished or depleted in their entirety. If Genzyme Tissue Repair
elects to repay Genzyme General in GZTR designated shares, this would
substantially dilute the rights of the holders of GZTR Stock and could
significantly affect the market price of GZTR Stock.
Genzyme Tissue Repair's cash needs may differ from those planned as a result
of various factors, including the:
- ability to satisfy regulatory requirements of the FDA and other government
agencies;
- results of research and development and clinical testing;
- enforcement of patent and other intellectual property rights; and
- development of competitive products and services.
Genzyme Tissue Repair will require substantial additional funds in order to
continue operations at current levels beyond 2000. We cannot guarantee 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 be required to delay, scale back or eliminate
certain of its programs. Genzyme Tissue Repair may also have to give rights to
third parties to commercialize technologies or products that it would otherwise
commercialize itself.
GENZYME TISSUE REPAIR'S RESULTS FLUCTUATE QUARTERLY AND THIS COULD HAVE AN
ADVERSE EFFECT ON ITS OPERATIONS.
We expect that the revenues from the sale of the Carticel-Registered
Trademark- chondrocytes will fluctuate based on Genzyme Tissue Repair's success
in penetrating the market, the availability of competitive procedures and the
availability of third party reimbursement. We cannot predict the timing or
magnitude of these fluctuations. Furthermore, we expect that revenues from
Carticel-Registered Trademark- chondrocytes will be lower in the summer months
because fewer operations are typically performed during those months.
We also expect 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 severe
burn patients who are treated with Epicel-TM- skin grafts.
Since Genzyme Tissue Repair must maintain extensive tissue culture
facilities and a trained staff for both Carticel-Registered Trademark-
chondrocytes 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.
GENZYME TISSUE REPAIR RELIES ON KEY COLLABORATORS TO SUPPORT FURTHER RESEARCH
AND DEVELOPMENT OF CARTICEL-REGISTERED TRADEMARK-CHONDROCYTES AND THESE
EFFORTS COULD SUFFER IF IT EXPERIENCES PROBLEMS WITH THESE COLLABORATORS.
Carticel-Registered Trademark- chondrocytes were 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, however,
expired in 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
Carticel-Registered Trademark- chondrocytes.
We cannot guarantee that the two physicians will sign a new consulting
agreement or continue to advise Genzyme Tissue Repair.
In addition, individuals who are familiar with the know-how underlying
Carticel-Registered Trademark- chondrocytes 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.
We have 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
GTR-9
<PAGE>
agreement is to conduct additional research on Carticel-Registered Trademark-
chondrocytes. 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 Genzyme Tissue
Repair's property, with royalties payable to the inventing member. We cannot
guarantee that these members will honor their obligations under the sponsored
research agreement.
SUBSEQUENT EVENT
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Tissue Repair will become part of Genzyme
Biosurgery. In addition, upon shareholder approval, GZTR Stock will be exchanged
for GZBX Stock. We will account for the acquisition of BioMatrix as a purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be not exceed 35% of the total consideration, or
approximately $245 million. Holders of GZTR Stock will receive 0.3352 share of
GZBX Stock for each share of GZTR Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approval of the holders
of GZTR Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GTR-10
<PAGE>
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Total revenues........................................... $ 20,402 $ 17,117 $ 10,856
Operating costs and expenses:
Cost of services sold.................................. 13,237 13,438 11,788
Selling, general and administrative.................... 24,604 24,579 25,571
Research and development............................... 8,019 10,432 10,845
--------- --------- ---------
Total operating costs and expenses................. 45,860 48,449 48,204
--------- --------- ---------
Operating loss........................................... (25,458) (31,332) (37,348)
Other income (expenses):
Equity in net loss of joint venture.................... (3,368) (7,674) (6,719)
Interest income........................................ 609 1,176 979
Interest expense....................................... (1,823) (2,556) (2,896)
--------- --------- ---------
Total other income (expenses)...................... (4,582) (9,054) (8,636)
--------- --------- ---------
Net loss attributable to GZTR Stock...................... $ (30,040) $ (40,386) $ (45,984)
========= ========= =========
Per GZTR basic and diluted common share:................. $ (1.26) $ (1.99) $ (3.07)
========= ========= =========
Weighted average shares outstanding...................... 23,807 20,277 14,976
========= ========= =========
Net loss................................................. $ (30,040) $ (40,386) $ (45,984)
Other comprehensive income (loss), net of tax:
Unrealized gains on securities arising during the
period............................................. -- 9 (9)
--------- --------- ---------
Comprehensive loss..................................... $ (30,040) $ (40,377) $ (45,993)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GTR-11
<PAGE>
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,373 $ 7,732
Accounts receivable, net.................................. 4,968 3,833
Inventories............................................... 2,394 2,645
Other current assets...................................... 253 1,723
------- --------
Total current assets.................................... 16,988 15,933
Plant and equipment, net.................................... 2,545 2,836
Other....................................................... 115 185
------- --------
Total assets............................................ $19,648 $ 18,954
======= ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,062 $ 1,355
Accrued expenses.......................................... 3,131 2,491
Due to Genzyme General.................................... 683 548
Current portion of long-term debt......................... -- 18,000
------- --------
Total current liabilities............................... 4,876 22,394
Convertible note, net....................................... -- 12,579
Long-term debt.............................................. 18,000 --
Other....................................................... 227 377
------- --------
Total liabilities....................................... 23,103 35,350
Commitments and Contingencies (See Notes)
Division equity (Note I).................................... (3,455) (16,396)
------- --------
Total liabilities and division equity................... $19,648 $ 18,954
======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GTR-12
<PAGE>
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (30,040) $ (40,386) $ (45,984)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization............................. 1,186 1,757 2,482
Loss on disposal of property, plant and equipment......... -- -- 24
Non-cash compensation expense............................. -- 108 221
Accrued interest/amortization on bonds.................... -- 188 (188)
Provision for bad debts and inventory..................... 2,718 2,985 4,400
Accretion of debt discount................................ 220 453 1,071
Equity in net loss of joint venture....................... 3,368 7,674 6,719
Amortization of deferred rent............................. (150) (150) (150)
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (1,319) (1,869) (1,024)
Inventories............................................. (2,283) (3,400) (4,070)
Other current assets.................................... 1,248 (719) (587)
Accounts payable and accrued expenses................... (151) (574) (39)
Due to Genzyme General.................................. 135 (665) (391)
--------- --------- ---------
Net cash used in operating activities................. (25,068) (34,598) (37,516)
INVESTING ACTIVITIES:
Purchases of investments.................................. -- -- (10,614)
Sales and maturities of investments....................... -- 10,614 318
Investment in joint venture............................... (3,594) (7,163) (6,820)
Purchases of property, plant and equipment................ (894) (670) (496)
Sale of property, plant and equipment to Genzyme
General................................................. -- 16,500 852
Other..................................................... 70 15 (428)
--------- --------- ---------
Net cash provided by (used in) investing activities... (4,418) 19,296 (17,188)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... 462 2,204 31,475
Proceeds from issuance of debt, net....................... -- -- 13,542
Payments of debt and capital lease obligations............ (96) (445) 3
Cash allocated from Genzyme General....................... 30,037 155 14,892
Bank overdraft............................................ 724 -- --
--------- --------- ---------
Net cash provided by financing activities............. 31,127 1,914 59,912
Increase (decrease) in cash and cash equivalents............ 1,641 (13,388) 5,208
Cash and cash equivalents at beginning of period............ 7,732 21,120 15,912
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 9,373 $ 7,732 $ 21,120
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for interest.................... $ 1,594 $ 2,265 $ 1,127
Supplemental disclosures of non-cash transactions:
Transfer of plant and equipment--Note E.
Conversion of 6% convertible subordinated note--Note H.
GZTR designated shares--Note I.
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
GTR-13
<PAGE>
GENZYME TISSUE REPAIR
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Tissue Repair is our operating division that develops and markets
biological products for orthopedic injuries, such as cartilage damage, and
severe burns.
Genzyme Tissue Repair Division Common Stock, which we refer to as "GZTR
Stock," is intended to reflect the value and track the performance of Genzyme
Tissue Repair.
BASIS OF PRESENTATION; PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme Tissue Repair for each period
include the balance sheets, results of operations and cash flows of the business
units we allocate to Genzyme Tissue Repair. We also allocate a portion of our
corporate operations to Genzyme Tissue Repair using methods we believe are
reasonable. These combined financial statements are prepared using amounts
included in our consolidated financial statements included in this annual
report. We have reclassified certain 1998 and 1997 data to conform with the 1999
presentation.
We use the equity method to account for investments in entities in which
Genzyme Tissue Repair has a substantial ownership interest (20% to 50%), or in
which it participates in policy decisions. Genzyme Tissue Repair's consolidated
net income includes its share of the earnings of these entities.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Tissue Repair and prepare separate
financial statements for Genzyme Tissue Repair. Notwithstanding the allocation
of assets and liabilities to Genzyme Tissue Repair, Genzyme Corporation
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to Genzyme Tissue Repair. Holders of GZTR Stock are common
stockholders of Genzyme Corporation and have no specific rights to the assets to
which GZTR Stock relates.
We prepare the financial statements of Genzyme Tissue Repair in accordance
with generally accepted accounting principles, our management and accounting
policies and the divisional accounting policies approved by our board. We
present financial information and accounting policies specific to Genzyme Tissue
Repair in the accompanying combined financial statements. We present financial
information and accounting policies relevant to the corporation and its
operating divisions taken as a whole in our consolidated financial statements.
You should read these consolidated financial statements.
Note A., "Summary of Significant Accounting Policies," to our consolidated
financial statements, contains our accounting policies. We incorporate that
information into this note by reference.
DIVIDEND POLICY
We have never paid a cash dividend on shares of GZTR Stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on GZTR Stock in the foreseeable future.
GTR-14
<PAGE>
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme Tissue Repair from local currency into U.S. dollars and include
translation adjustments for these subsidiaries to division equity. Genzyme
Tissue Repair records gains and losses in foreign currency transactions in
income.
We include exchange gains and losses on intercompany balances which are
long-term in nature in our division equity. Our gains and losses on all other
transactions are included in our results of operations.
REVENUE RECOGNITION
Genzyme Tissue Repair recognizes revenue from sales of Carticel-Registered
Trademark- chondrocytes and Epicel-TM- skin grafts when the cartilage or skin
cells, as applicable, are shipped and title has passed. Cancellation charges
apply to cancelled shipments of Epicel-TM- skin grafts.
NET INCOME (LOSS) PER SHARE
To calculate basic earnings per share for Genzyme Tissue Repair, we divide
the earnings attributable to Genzyme Tissue Repair by the weighted average
number of outstanding shares of GZTR Stock during the applicable period. When we
calculate diluted earnings per share, we also include in the denominator all
potentially dilutive securities outstanding during the applicable period. To
determine what earnings are attributable to Genzyme Tissue Repair, we take its
net income or loss for the applicable period (determined in accordance with
generally accepted accounting principles) and adjust it for the tax benefits
allocated to Genzyme General in accordance with our management and accounting
policies.
For all periods presented, basic and diluted net loss per GZTR common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Tissue Repair's diluted loss per share for each
period because these securities would have an anti-dilutive effect due to
Genzyme Tissue Repair's net loss for the period.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998 1997
----- ------ -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GZTR Stock issuable for options............. 4,176 3,398 2,777
GZTR designated shares(1)............................. 2,238 716 885
Shares of GZTR Stock issuable upon conversion of 6%
convertible subordinated note....................... -- 7,810 1,772
----- ------ -----
Total shares excluded from the diluted loss per GZTR
share calculation................................... 6,414 11,924 5,434
===== ====== =====
</TABLE>
- ------------------------
(1) GZTR designated shares are shares of GZTR Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Tissue Repair.
GTR-15
<PAGE>
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
Because each of our operating divisions is a part of a single company, our
board of directors has adopted policies to address issues that may arise among
divisions and to govern the management of and the relationships between each
division. With some exceptions that are mentioned specifically in this note, our
board may modify or rescind these policies, or adopt additional policies, in its
sole discretion without stockholder approval, subject only to our board's
fiduciary duty to stockholders. Generally accepted accounting principles require
that any change in policy be preferable (in accordance with these principles) to
the previous policy.
INTERDIVISION ASSET TRANSFERS
Our board may at any time reallocate any program, product or other asset
from one division to any other division. We make reallocations at fair market
value, as determined by our board. In determining the fair market value of a
program under development, our board takes into account the following criteria
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 and the
likelihood and time of the realization; and
- other matters that our board and its financial advisors, if any, deem
relevant.
One division may pay another division the consideration for a reallocation
in cash or other consideration with a value equal to the fair market value of
the reallocated assets. In the case of a reallocation of assets from Genzyme
General to Genzyme Tissue Repair, our board may elect instead to account for the
reallocation as an increase in GZTR designated shares in accordance with the
provisions of our charter.
Our policy regarding transfers of assets between divisions may not be
changed by our board without the approval of the holders of GZTR Stock voting as
a separate class unless the policy change does not affect Genzyme Tissue Repair.
OTHER INTERDIVISION TRANSACTIONS
Our divisions 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. These transactions may include agreements by one division to provide
products and services for use by another division, license agreements and joint
ventures or other collaborative arrangements involving more than one division to
develop new products and services jointly and with third parties. These
transactions are subject to the following conditions:
- We charge research and development (including clinical and regulatory
support), distribution, sales, marketing, and general and administrative
services (including allocated space) performed by one division for another
division to the division for which the services are performed on a cost
basis. We charge direct costs to the division for which we incur them. We
allocate direct labor and indirect costs in reasonable and consistent
manners based on the use by a division of relevant services. Divisions
performing services for other divisions do not recognize revenue for the
services they perform.
GTR-16
<PAGE>
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
- We charge the manufacturing of goods and performance of services by one
division exclusively for another division to the division for which it is
performed on a cost basis. We include in manufacturing costs an interest
charge (based on our short-term borrowing rate at the beginning of the
fiscal year) on the gross fixed assets used in the manufacturing process.
To perform this calculation, we determine gross fixed assets for the
facility used at the beginning of each fiscal year and apply our
short-term borrowing rate. We allocate direct labor and indirect costs in
reasonable and consistent manners based on the benefit received by a
division of related goods and services. Divisions performing services for
other divisions do not recognize revenue for the services they perform.
- Other than transactions involving research and development, manufacturing,
distribution, sales, marketing, general and administrative services, which
are addressed above, all interdivisional transactions are performed on
terms and conditions obtainable in arm's length transactions with third
parties. Divisions performing services for other divisions do not
recognize revenue for the services they perform.
- Our board must approve interdivisional transactions that are performed on
terms and conditions other than as described above and are material to one
or more of the participating divisions. In giving its approval, our board
must determine that the transaction is fair and reasonable to each
participating division and to holders of the common stock representing
each participating division.
- Divisions may make loans to other divisions. Any loan of $1 million or
less matures within 18 months and accrues interest at the best borrowing
rate available to the corporation for a loan of like type and duration.
Our board must approve any loan in excess of $1 million. In giving its
approval, our board must determine that the material terms of the 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.
- All material interdivisional transactions are set forth in a written
agreement that is signed by an authorized member of the management team of
each division involved in the transaction.
TAX ALLOCATIONS
We file a consolidated tax return and allocate income taxes to Genzyme
Tissue Repair based upon the financial statement income, taxable income, credits
and other amounts properly allocable to each division under generally accepted
accounting principles as if it were a separate taxpayer. We assess the
realizability of our deferred tax assets at the division level. As a result, our
consolidated tax provision may not equal the sum of the divisions' tax
provision. As of the end of any fiscal quarter, however, if Genzyme Tissue
Repair cannot use any projected annual tax benefit attributable to it to offset
or reduce its current or deferred income tax expense, we may allocate the tax
benefit to the other divisions in proportion to their taxable income without any
compensating payment or allocation.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme Tissue Repair has unrestricted access to all technology and know-how
owned or controlled by Genzyme Corporation that may be useful in its business,
subject to any obligations or limitations that apply to the corporation
generally.
GTR-17
<PAGE>
NOTE C. ACCOUNTS RECEIVABLE
Genzyme Tissue Repair performs credit evaluations of its customers on an
ongoing basis and generally does not require collateral. Genzyme Tissue Repair
states accounts receivable at fair value after reflecting an allowance for
doubtful accounts. This allowance was $1.0 million at December 31, 1999 and
1998.
NOTE D. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Raw materials............................................ $ 428 $ 264
Work-in-process.......................................... 1,938 2,381
Finished products........................................ 28 --
------ ------
Total inventory.................................... $2,394 $2,645
====== ======
</TABLE>
NOTE E. PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Plant and equipment.................................... $ 4,675 $ 3,845
Leasehold improvements................................. 2,597 2,577
Furniture and fixtures................................. 191 146
------- -------
7,463 6,568
Less accumulated depreciation.......................... (4,918) (3,732)
------- -------
Plant and equipment, net............................... $ 2,545 $ 2,836
======= =======
</TABLE>
Genzyme Tissue Repair's depreciation and amortization expense was $1.2
million in 1999, $1.6 million in 1998, and $2.3 million in 1997.
In June 1998, our board of directors reallocated a manufacturing facility
(including land, building and equipment) from Genzyme Tissue Repair to Genzyme
General in exchange for $16.5 million in cash. Genzyme Tissue Repair recorded a
gain in division equity of approximately $0.7 million in connection with this
reallocation.
NOTE F. DIACRIN JOINT VENTURE
In May 1999, we reallocated our ownership interest in Diacrin/Genzyme LLC,
our joint venture with Diacrin, Inc. for the development and commercialization
of NeuroCell-TM--PD for the treatment of Parkinson's disease and
NeuroCell-TM--HD for the treatment of Huntington's disease, from Genzyme Tissue
Repair to Genzyme General in exchange for $25.0 million in cash. For the period
October 1996 through May 1999, Genzyme Tissue Repair provided a total of
$19.5 million of funding to the joint venture, $5.1 million of which was
provided by Genzyme General in exchange for 489,810 GZTR designated shares.
Genzyme Tissue Repair realized net losses from the joint venture of
$3.4 million in 1999, $7.7 million in 1998 and $6.8 million in 1997.
If Diacrin/Genzyme LLC does not initiate a Phase III clinical trial of
NeuroCell-TM--PD by June 30, 2000, Genzyme Tissue Repair is required to pay
Genzyme General $20 million plus accrued interest at
GTR-18
<PAGE>
NOTE F. DIACRIN JOINT VENTURE (CONTINUED)
13.5% per annum. Genzyme Tissue Repair may pay Genzyme General in cash, GZTR
designated shares, or a combination of both, at its option.
Condensed financial information and allocation of the losses of the
Diacrin/Genzyme LLC are summarized below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses............................ $ (10,718) $ (9,595) $ (6,809)
Net loss...................................... (10,713) (9,595) (6,809)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
---- ----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Current assets.............................................. $443 $364
Noncurrent assets........................................... 192 220
Current liabilities......................................... 972 885
Noncurrent liabilities...................................... -- --
</TABLE>
NOTE G. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Compensation............................................. $1,569 $1,271
Professional fees........................................ 334 505
Royalties................................................ 97 88
Other.................................................... 1,131 627
------ ------
Total accrued expenses............................. $3,131 $2,491
====== ======
</TABLE>
NOTE H. DEBT INSTRUMENTS AND OPERATING LEASES
REVOLVING CREDIT FACILITY
During 1999, we refinanced our revolving credit facility allocated to
Genzyme Tissue Repair, which matured in October 1999. At December 31, 1999,
$18.0 million of the amount outstanding under our new revolving credit facility
was allocated to Genzyme Tissue Repair. On that date, the interest rate on this
borrowing was approximately 6.635%. Genzyme Tissue Repair incurred interest
expense of $0.2 million on amounts borrowed under this revolving credit
facility.
Genzyme Tissue Repair incurred interest expense of $0.8 million in 1999,
$1.1 million in 1998 and $1.1 million in 1997 on amounts borrowed under our
credit facility that matured in 1999.
6% CONVERTIBLE SUBORDINATED NOTE
In February 1997, we issued a 6% convertible subordinated note in a
principal amount of $13.0 million. This note was convertible into shares of GZTR
Stock at a discount to the market value of GZTR stock. Genzyme Tissue Repair
recorded a $0.2 million charge to interest expense in 1999, $0.5
GTR-19
<PAGE>
NOTE H. DEBT INSTRUMENTS AND OPERATING LEASES (CONTINUED)
million in 1998 and $1.1 million in 1997, to reflect the accretion to fair value
of the conversion feature of this note.
In 1998, the holder of this note converted $0.6 million in principal amount
into 223,405 shares of GZTR Stock. Genzyme Tissue Repair paid $1.1 million in
accrued interest in connection with these conversions. In 1999, the holder
converted the remaining $12.4 million in principal amount into 7,257,573 shares
of GZTR Stock. Genzyme Tissue Repair paid $0.5 million in accrued interest in
connection with these conversions. As of December 31, 1999, there was no
principal or interest remaining on this convertible note.
OPERATING LEASES
Genzyme Tissue Repair incurs expense under operating leases for facilities
and personal property that have terms in excess of one year. Genzyme Tissue
Repair's total expense under operating leases was:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
$1.7 million $2.2 million $1.8 million
</TABLE>
Over the next five years, Genzyme Tissue Repair will be required to repay
the following amounts under operating leases:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
$1.9 million $1.8 million $1.5 million $1.5 million $1.5 million $1.5 million
</TABLE>
NOTE I. DIVISION EQUITY
At December 31, 1999 and 1998, 40 million shares of GZTR Stock were
authorized for issuance. At December 31, 1999, 28,499,000 shares of GZTR Stock
were issued and outstanding and at December 31, 1998, 20,921,000 shares of GZTR
Stock were issued and outstanding. At December 31, 1999, approximately 5,544,000
shares of GZTR Stock were reserved for issuance under our various equity plans
and options to purchase approximately 4,176,000 shares of GZTR Stock were
outstanding.
GTR-20
<PAGE>
NOTE I. DIVISION EQUITY (CONTINUED)
The following table contains the components of division equity for Genzyme
Tissue Repair for the periods presented:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $(16,396) $ 20,203 $ 18,084
Net loss.................................................... (30,040) (40,386) (45,984)
Issuance of common stock under stock plans.................. 397 2,109 2,438
Allocation of cash to Genzyme Tissue Repair for designated
shares(1)................................................. 5,001 -- 14,892
Shares issued in public offering............................ -- -- 29,037
Payment from Genzyme General for research program........... 100 250 --
Payment from Genzyme General for transfer of interest in
joint venture............................................. 25,000 -- --
Stock compensation expense.................................. -- 108 221
Value of debt conversion feature............................ -- -- 1,524
Shares issued upon conversion of convertible debt........... 12,483 600 --
Gain on transfer of facility................................ -- 711 --
Equity adjustments.......................................... -- 9 (9)
-------- -------- --------
Balance at end of period.................................... $ (3,455) $(16,396) $(20,203)
======== ======== ========
</TABLE>
- ------------------------
(1) GZTR designated shares are shares of GZTR Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Tissue Repair. As of December 31,
1999, there were 2,238,053 GZTR designated shares.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. Genzyme Tissue Repair does not recognize compensation expense
for options granted and shares purchased under the provisions of these plans for
options granted to employees with an exercise price greater than or equal to
fair market value.
The following table sets forth net income and income per share data for
Genzyme Tissue Repair calculated in accordance with SFAS 123 as if compensation
expense for our stock-based compensation plans was determined based on the fair
value at the grant dates for options granted and shares purchased under the
plans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net loss:
As reported......................... $ (30,040) $ (40,386) $ (45,984)
Pro forma........................... $ (33,292) $ (44,481) $ (49,547)
Basic and diluted loss per share:
As reported......................... $ (1.26) $ (1.99) $ (3.07)
Pro forma........................... $ (1.40) $ (2.19) $ (3.31)
</TABLE>
GTR-21
<PAGE>
NOTE I. DIVISION EQUITY (CONTINUED)
Note L, "Stockholders' Equity," to our consolidated financial statements
contains information regarding the assumptions we made in calculating net income
and income per share data in accordance with SFAS 123.
PREFERRED STOCK, STOCK RIGHTS, EQUITY PLANS AND DESIGNATED SHARES
Note L, "Stockholders' Equity," to our consolidated financial statements
contains information regarding:
- our authorized preferred stock;
- our shareholder rights plan;
- our directors' deferred compensation plan;
- our other equity plans; and
- GZTR designated shares and our policy for distributing them.
We incorporate that information into this note by reference.
EQUITY LINE OF CREDIT
In October 1996, our board of directors made $20.0 million of Genzyme
General's cash available to Genzyme Tissue Repair under an equity line of credit
in order for Genzyme Tissue Repair to fund its obligations under its joint
venture with Diacrin. Under this line, Genzyme Tissue Repair may draw down funds
as needed each quarter in exchange for GZTR designated shares based on the fair
market value of GZTR Stock (as defined in our charter) at the time of the draw.
Genzyme Tissue Repair made a $7.0 million draw under this line in 1997.
In May 1998, our board of directors increased the amount available under
this equity line from $20.0 million to $50.0 million. Genzyme Tissue Repair made
a $5.0 million draw under the line in February 1999. In May 1999, the amount
available under this equity line was reduced to $25.0 million in connection with
the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme
Tissue Repair to Genzyme General.
NOTE J. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on Genzyme Tissue Repair's results of operations,
financial condition, or liquidity.
GTR-22
<PAGE>
NOTE K. INCOME TAXES
Genzyme Tissue Repair's provisions for income taxes were at rates other than
the U.S. federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rate...................... (35.0)% (35.0)% (35.0)%
State taxes, net................................ (1.3) (2.8) (3.0)
Benefit of tax credits.......................... (0.1) (3.4) (1.4)
Other, net...................................... 0.2 0.6 1.0
Deductions subject to deferred tax valuation
allowance..................................... 36.2 40.6 38.4
----- ----- -----
Effective tax rate attributable to GZTR stock... 0.0 % 0.0 % 0.0 %
===== ===== =====
</TABLE>
The components of net deferred tax assets are described in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 66,011 $ 55,582
Tax credits.......................................... 2,360 2,331
Intangible amortization.............................. 9,651 10,586
Reserves and other................................... 5,830 5,035
-------- --------
Gross deferred tax assets................................ $ 83,852 $ 73,534
Valuation allowance...................................... (83,852) (73,534)
-------- --------
Net deferred tax asset................................... $ -- $ --
======== ========
</TABLE>
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to operating loss carryforwards, we placed
valuation allowances of $83.9 million in 1999 and $73.5 million in 1998 against
otherwise recognizable deferred tax assets.
As Genzyme Tissue Repair recognizes these deferred tax assets in accordance
with generally accepted accounting principles, the benefits of those assets are
reflected in its tax provision. However, the benefit of these deferred tax
assets has previously been allocated to Genzyme General in accordance with our
management and accounting policies, and will be reflected as a reduction to
Genzyme Tissue Repair's net income to determine net income attributable to GZTR
Stock.
NOTE L. BENEFIT PLANS
Note P, "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) plan. We incorporate that information into this
note by reference.
NOTE M. SUBSEQUENT EVENT
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Tissue Repair will become part of
GTR-23
<PAGE>
NOTE M. SUBSEQUENT EVENT (CONTINUED)
Genzyme Biosurgery. In addition, upon shareholder approval, GZTR Stock will be
exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a
purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be not exceed 35% of the total consideration, or
approximately $245 million. Holders of GZTR Stock, upon shareholder approval,
will receive 0.3352 share of GZBX Stock for each share of GZTR Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approval of the holders
of GZTR Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GTR-24
<PAGE>
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 cash flows present fairly, in all material
respects, the financial position of Genzyme Tissue Repair (as described in
Note A) at December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards
generally accepted in the United States 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 significantly 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
Boston, Massachusetts
February 23, 2000
GTR-25
<PAGE>
GENZYME TISSUE REPAIR
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------- ------------------- --------------------------------- ---------- -------------
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------- ------------------- ---------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts............... $ 1,021,000 $ 184,000 $ -- $ 215,000(1) $ 990,000
Inventory reserve........ $10,652,000 $ 2,534,000 $ -- $ -- $13,186,000
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
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
GTR-26
<PAGE>
EXHIBIT 13.5
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Selected Financial Data........................ GCS-2
Management's Discussion and Analysis of Genzyme Corporation
and Subsidiaries' Financial Condition and Results of
Operations................................................ GCS-4
Consolidated Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.......................... GCS-21
Consolidated Balance Sheets--December 31, 1999 and 1998..... GCS-23
Consolidated Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.......................... GCS-25
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. GCS-27
Notes to Consolidated Financial Statements.................. GCS-30
Report of Independent Accountants........................... GCS-72
</TABLE>
GCS-1
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
The following consolidated selected financial data reflect the results of
operations and financial position of each of our divisions and corporate
operations taken as a whole and should be read in conjunction with our
consolidated financial statements and accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales....................... $683,482 $613,685 $529,927 $424,483 $304,373
Net service sales....................... 79,448 74,791 67,158 68,950 52,450
Revenues from research and development
contracts:
Related parties....................... 2,012 5,745 8,356 23,011 26,758
Other................................. 7,346 15,114 3,400 2,310 202
-------- -------- -------- -------- --------
Total revenues...................... 772,288 709,335 608,841 518,754 383,783
Operating costs and expenses:
Cost of products sold................... 182,337 211,076 206,028 155,930 113,964
Cost of services sold................... 49,444 48,586 47,289 54,082 35,868
Selling, general and administrative..... 242,797 215,203 200,476 162,264 110,447
Research and development (including
research and development related to
contracts)............................ 150,516 119,005 89,558 80,849 68,845
Amortization of intangibles............. 24,674 24,334 17,245 8,849 4,647
Purchase of in-process research and
development........................... 5,436 -- 7,000 130,639 14,216
Other................................... -- -- -- 1,465 --
-------- -------- -------- -------- --------
Total operating costs and expenses.... 655,204 618,204 567,596 594,078 347,987
-------- -------- -------- -------- --------
Operating income (loss)................... 117,084 91,131 41,245 (75,324) 35,796
Other income (expenses):
Equity in net loss of unconsolidated
affiliates............................ (42,696) (29,006) (12,258) (5,373) (1,810)
Gain on affiliate sale of stock......... 6,683 2,369 -- 1,013 --
Minority interest....................... 3,674 4,285 -- -- 1,608
Gain on sale of investments in equity
securities............................ 1,963 3,391 -- 1,711 --
Gain on sale of product line............ 8,018 31,202 -- -- --
Charge for impaired investments......... (5,712) (3,397) -- -- --
Other................................... 14,527 -- (2,000) -- --
Investment income....................... 36,158 25,055 11,409 15,341 8,814
Interest expense........................ (21,771) (22,593) (12,667) (6,990) (1,109)
-------- -------- -------- -------- --------
Total other income (expenses)......... 844 11,306 (15,516) 5,702 7,503
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 117,928 102,437 25,729 (69,622) 43,299
Provision for income taxes................ (46,947) (39,870) (12,100) (3,195) (21,649)
-------- -------- -------- -------- --------
Net income (loss)......................... $ 70,981 $ 62,567 $ 13,629 $(72,817) $ 21,650
======== ======== ======== ======== ========
</TABLE>
GCS-2
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL:
Net income attributable to GENZ Stock............. $176,883 $170,909 $107,175 $ 13,811 $52,953
======== ======== ======== ======== =======
Per GENZ common share:
Net income per Genzyme General common share--basic.. $ 2.13 $ 2.16 $ 1.40 $ 0.20 $ 0.95
======== ======== ======== ======== =======
Weighted average shares outstanding............... 83,092 79,063 76,531 68,289 55,531
======== ======== ======== ======== =======
Net income per GENZ common and common equivalent
share--diluted.................................... $ 2.00 $ 2.06 $ 1.36 $ 0.19 $ 0.83
======== ======== ======== ======== =======
Adjusted weighted average shares outstanding...... 93,228 85,822 78,925 73,038 63,967
======== ======== ======== ======== =======
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss attributable to GZMO Stock................. $(28,832) $(19,107) $(19,578) $ (1,003) $ (464)
======== ======== ======== ======== =======
Per GZMO basic and diluted common share:
Net loss.......................................... $ (2.25) $ (3.81)
======== ========
Weighted average shares outstanding................. 12,826 5,019
======== ========
Pro forma net loss per GZMO basic and diluted common
share............................................. $ (4.98) $ (0.26) $ (0.12)
======== ======== =======
Pro forma weighted average shares outstanding....... 3,929 3,929 3,929
======== ======== =======
ATTRIBUTABLE TO GENZYME SURGICAL PRODUCTS:
Net loss attributable to GZSP Stock................. $(48,037) $(49,856) $(29,740) $(44,313) $(9,273)
======== ======== ======== ======== =======
Pro forma net loss per GZSP basic and diluted common
share............................................. $ (3.25) $ (3.37) $ (2.01) $ (2.99) $ (0.63)
======== ======== ======== ======== =======
Pro forma weighted average shares outstanding....... 14,800 14,800 14,800 14,800 14,800
======== ======== ======== ======== =======
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss attributable to GZTR Stock................. $(30,040) $(40,386) $(45,984) $(42,315) $(22,030)
======== ======== ======== ======== =======
Per GZTR basic and diluted common share:
Net loss.......................................... $ (1.26) $ (1.99) $ (3.07) $ (3.38) $ (2.28)
======== ======== ======== ======== =======
Weighted average shares outstanding................. 23,807 20,277 14,976 12,525 9,659
======== ======== ======== ======== =======
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, short- and long-term
investments................................ $ 652,990 $ 575,729 $ 246,341 $ 187,955 $326,236
Working capital.............................. 592,249 417,116 350,822 395,605 352,410
Total assets................................. 1,787,281 1,688,854 1,295,453 1,270,508 905,201
Long-term debt and convertible debt.......... 290,622 287,225 170,276 241,998 124,473
Stockholders' equity......................... 1,356,392 1,172,535 1,012,050 902,309 705,207
</TABLE>
There were no cash dividends paid.
GCS-3
<PAGE>
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 our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" below.
You should consider carefully each of these risks and uncertainties in
evaluating our financial condition and results of operations.
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
We currently have four designated series of common stock. Each of these
series is intended to reflect the value and track the performance of one of our
divisions. We refer to our series of common stock by their Nasdaq trading
symbols:
- Genzyme General Division Common Stock = "GENZ Stock;"
- Genzyme Molecular Oncology Division Common Stock = "GZMO Stock;"
- Genzyme Surgical Products Division Common Stock = "GZSP Stock;" and
- Genzyme Tissue Repair Division Common Stock = "GZTR Stock."
For purposes of financial presentation, we allocate all of our programs,
products, assets and liabilities to our divisions and prepare separate financial
statements for each of our divisions. We provide separate financial statements
for each of our divisions as well as consolidated financial statements that
include the consolidated results of each of our divisions and our corporate
operations taken as a whole. Holders of GENZ Stock, GZMO Stock, GZSP Stock and
GZTR Stock are common stockholders of Genzyme Corporation and have no specific
rights to the assets to which each stock relates. Genzyme Corporation continues
to hold title to all of the assets and is responsible for all of the liabilities
allocated to each of our divisions.
You should read this discussion and analysis of our financial position and
results of operations in conjunction with our consolidated financial statements
and related notes, which are included in this annual report.
GCS-4
<PAGE>
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of our consolidated financial statements.
The components of our consolidated statements of operations are described in
the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues................ $772,288 $709,335 $608,841 9% 17%
Cost of products and services
sold........................ 231,781 259,662 253,317 (11)% 3%
Selling, general and
administrative.............. 242,797 215,203 200,476 13% 7%
Research and development
(including research and
development related to
contracts).................. 150,516 119,005 89,558 26% 33%
Amortization of intangibles... 24,674 24,334 17,245 1% 41%
Purchase of in-process
research and development.... 5,436 -- 7,000 N/A N/A
-------- -------- --------
Total operating costs and
expenses.................... 655,204 618,204 567,596 6% 9%
-------- -------- --------
Operating income.............. 117,084 91,131 41,245 28% 121%
Other income (expenses),
net......................... 844 11,306 (15,516) (93)% 173%
-------- -------- --------
Income before income taxes.... 117,928 102,437 25,729 15% 298%
Provision for income taxes.... (46,947) (39,870) (12,100) 18% 230%
-------- -------- --------
Net income.................... $ 70,981 $ 62,567 $ 13,629 13% 359%
======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Product revenue............... $683,482 $613,685 $529,927 11% 16%
Service revenue............... 79,448 74,791 67,158 6% 11%
-------- -------- --------
Total product and service
revenue..................... 762,930 688,476 597,085 11% 15%
Research and development
revenue..................... 9,358 20,859 11,756 (55)% 77%
-------- -------- --------
Total revenues................ $772,288 $709,335 $608,841 9% 17%
======== ======== ========
</TABLE>
PRODUCT REVENUE
We derive product revenue from sales by Genzyme General of therapeutic,
diagnostic and other products, including Cerezyme-Registered Trademark- enzyme
and Ceredase-Registered Trademark- enzyme, and sales by Genzyme Surgical
GCS-5
<PAGE>
Products of cardiovascular and general surgery products, including Sepra
Film-Registered Trademark- bioresorbable membrane.
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Genzyme General:
Therapeutics................ $488,705 $413,645 $332,712 18% 24%
Diagnostic Products......... 57,971 65,683 66,288 (12)% (1)%
Other....................... 24,825 30,399 30,092 (18)% 1%
Genzyme Surgical Products..... 111,981 103,958 100,835 8% 3%
======== ======== ========
Total product revenues........ $683,482 $613,685 $529,927 11% 16%
======== ======== ========
</TABLE>
1999 AS COMPARED TO 1998
Our increase in product revenue was largely due to:
- increased sales of Cerezyme-Registered Trademark- enzyme, which is a
therapy for the treatment of Gaucher disease; and
- increased sales of Sepra Film-Registered Trademark- bioresorbable membrane
and instruments for minimally invasive cardiac surgery.
The increase in sales of Cerezyme-Registered Trademark- enzyme in 1999 was
attributable to our identification of new Gaucher disease patients throughout
the world. We also sell Ceredase-Registered Trademark- enzyme for the treatment
of Gaucher disease, but we have successfully converted virtually all Gaucher
disease patients to a treatment regimen using Cerezyme-Registered Trademark-
enzyme. Our operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sale of
this product would adversely affect our results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. We are aware of companies
that have initiated efforts to develop competitive products and other companies
may do so in the future. Information on the growth of sales of
Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
in 1999 and their relationship to our total product revenues for each year is
provided in the table below:
<TABLE>
<CAPTION>
99/98
INCREASE/(DECREASE)
1999 1998 % CHANGE
-------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Sales of Cerezyme-Registered Trademark- enzyme and
Ceredase-Registered Trademark- enzyme.............. $478,538 $411,060 16%
% of total product revenue........................... 70% 67%
</TABLE>
Sales of Sepra Film-Registered Trademark- bioresorbable membrane, which is
used to limit the incidence and severity of postoperative adhesions, increased
43% to $13.3 million in 1999 as compared to $9.3 million in 1998.
1998 AS COMPARED TO 1997
Our increase in product revenue primarily due to:
- increased sales of Cerezyme-Registered Trademark- enzyme; and
- an 88% increase in sales of Sepra Film-Registered Trademark- bioresorbable
membrane from $4.9 million in 1997 to $9.3 million in 1998, primarily as a
result of increased market acceptance of the product.
GCS-6
<PAGE>
For both 1998 and 1997, our product revenue consisted mainly of sales of
Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
as indicated in the table below:
<TABLE>
<CAPTION>
98/97
INCREASE/(DECREASE)
1998 1997 % CHANGE
-------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Sales of Cerezyme-Registered Trademark- enzyme and
Ceredase-Registered Trademark- enzyme.............. $411,060 $332,712 24%
% of total product revenue........................... 60% 54%
</TABLE>
SERVICE REVENUE
We derive service revenue from four principal sources:
- genetic testing services performed by Genzyme General;
- Genzyme Tissue Repair's Carticel-Registered Trademark- chondrocytes for
the treatment of cartilage damage;
- Genzyme Tissue Repair's Epicel-TM- skin grafts for the treatment of severe
burns; and
- genomics services using Genzyme Molecular Oncology's SAGE-TM- gene
expression technology.
1999 AS COMPARED TO 1998
Our service revenue increased during 1999 as compared to 1998 as a result of
increases in the provision of genetic testing services as well as increased
sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
The increase in sales of Carticel-Registered Trademark- chondrocytes was a
result of continued increases in the numbers of patients treated and surgeons
trained as well as an increase in the number of insurance reimbursement
approvals. Sales of genomics services decreased during this period.
1998 AS COMPARED TO 1997
Our service revenue during 1998 increased from 1997 as a result of increased
sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
Sales of Carticel-Registered Trademark- chondrocytes increased in 1998 for the
same reasons they increased in 1999.
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of our revenue was generated outside of the United
States, as described in the following table. Most of this revenue was
attributable to sales of Cerezyme-Registered Trademark- enzyme.
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
International product and
service revenue............. $311,080 $281,744 $220,592 10% 28%
% of total product and service
revenue..................... 41% 41% 37%
</TABLE>
GCS-7
<PAGE>
MARGINS
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Product margin................ $501,145 $402,609 $323,899 24% 24%
% of product revenue........ 73% 66% 61%
Service margin................ 30,004 26,205 19,869 14% 32%
% of service revenue........ 38% 35% 30%
Total gross margin............ 531,149 428,814 343,768 24% 25%
% of total product and
service revenues.......... 70% 62% 58%
</TABLE>
We provide a broad range of healthcare products and services. As a result,
our gross margin varies significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme-Registered Trademark-
enzyme, result in higher margins than sales of surgical or diagnostic products.
During 1998, we recorded a $25.2 million charge to cost of products sold.
The components of this charge were:
- a $14.8 million charge allocated to Genzyme General to write down excess
inventory used to make Ceredase-Registered Trademark- enzyme. We took this
charge following our determination that, based on the status of our
efforts to convert Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, our existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated
patient needs.
- a $10.4 million charge allocated to Genzyme Surgical Products to write
down our inventory of Sepra products to net realizable value. The Sepra
products are our line of products and product candidates designed to limit
post-operative adhesions.
Without the effect of this charge, our product margin for 1998 would have been
70% and our total gross margin during that period would have been 66%.
Excluding the charge described above, the increases in product margin and
total gross margin during both periods were a result of increased efficiency and
process improvements in manufacturing as well as increased sales of
Cerezyme-Registered Trademark- enzyme.
Our service margin also increased during both periods. These increases were
attributable to:
- an increase in sales of DNA and cancer testing services;
- increased sales of Carticel-Registered Trademark- chondrocytes; and
- a reduction in labor, materials and production costs for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
OPERATING EXPENSES
1999 AS COMPARED TO 1998
The increase in selling, general and administrative expense in 1999 as
compared to 1998 was related to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- an increased reserve for doubtful accounts in Genzyme General's genetic
testing business;
GCS-8
<PAGE>
- costs associated with the market introduction of
Thyrogen-Registered Trademark- hormone in January 1999; and
- an increase in professional service fees in connection with the creation
of Genzyme Surgical Products as a separate division of Genzyme.
The increase in research and development expense in 1999 as compared to 1998
was a result of:
- increased costs in connection with the results of ATIII LLC, our joint
venture with Genzyme Transgenics Corporation for the development and
commercialization of transgenic recombinant human antithrombin III; and
- increased spending on our program to develop Fabrazyme-TM- enzyme for the
treatment of Fabry disease, and other internal programs.
In the fourth quarter of 1998, Genzyme General began amortizing a milestone
payment that it made to GelTex Pharmaceuticals, Inc. upon FDA approval of
Renagel-Registered Trademark- capsules. As a result, amortization of intangibles
increased slightly during 1999 as compared to 1998.
The purchase of in-process research and development in 1999 consisted of
costs incurred when we acquired Peptimmune, Inc.
1998 AS COMPARED TO 1997
The increase in selling, general and administrative expense in 1998 as
compared to 1997 was related to:
- increased sales and marketing costs related to the product launch of
Thyrogen-Registered Trademark- hormone; and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme.
The increase in research and development expense in 1998 as compared to 1997
was attributable to $12.0 million in additional costs resulting from the
consolidation of the results of ATIII LLC, for which there were no comparable
amounts in 1997.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Equity in net loss of
unconsolidated affiliates... $(42,696) $(29,006) $(12,258) 47% 137%
Gain on affiliate sale of
stock....................... 6,683 2,369 -- 182% N/A
Minority interest............. 3,674 4,285 -- (14)% N/A
Gain on sale of investments in
equity securities........... 1,963 3,391 -- (42)% N/A
Gain on sale of product
line........................ 8,018 31,202 -- (74)% N/A
Charge for impaired
investments................. (5,712) (3,397) -- 68% N/A
Other......................... 14,527 -- (2,000) N/A N/A
Investment income............. 36,158 25,055 11,409 44% 120%
Interest expense.............. (21,771) (22,593) (12,667) (4)% 78%
-------- -------- --------
Total other income (expense),
net......................... $ 844 $ 11,306 $(15,516) (93)% 173%
======== ======== ========
</TABLE>
GCS-9
<PAGE>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
At December 31, 1999, we owned approximately 33% of the common stock of
Genzyme Transgenics and record in net loss of unconsolidated affiliates our
portion of its results. We also record the results of the following joint
ventures in net loss of unconsolidated affiliates:
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------- ---------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General
Inc. capsules for the reduction of
serum phosphorus in patients
with end-stage renal disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Aldvrazyme-TM- enzyme for the Genzyme General
Inc. treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General
treatment of Pompe disease
Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine fetal cells Genzyme Tissue
for the treatment of Parkinson's Repair (until May
and Huntington's diseases 1999); Genzyme
General (after May
1999)
StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular
LLC(1) Biotechnologies Corp.; treatment of cancer Oncology
Canadian Medical
Discoveries Fund Inc.
(until October 1999)
</TABLE>
- ------------------------------
(1) StressGen/Genzyme LLC was dissolved in December 1999.
Our equity in net loss of unconsolidated affiliates increased as a result
of:
- increased losses from our joint ventures with GelTex, BioMarin, Pharming
and Diacrin in both periods; and
- a $1.0 million charge incurred in connection with our repurchase of
one-half of the Canadian Medical Discoveries Fund's interest in
StressGen/Genzyme LLC in October 1999.
These increases were offset in part by decreased losses from Genzyme
Transgenics for both periods.
GAIN ON AFFILIATE SALE OF STOCK
In 1999 and 1998, we recorded gains on our investment in Genzyme Transgenics
as a result of its issuance of additional shares of common stock.
MINORITY INTEREST
We consolidate the results of ATIII LLC and record Genzyme Transgenics'
portion of the losses of that joint venture as minority interest. Minority
interest decreased in both periods, notwithstanding increases in ATIII LLC's
losses, because Genzyme Transgenics' portion of those losses decreased.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
We recorded gains of $2.0 million in January 1999 and $3.4 million in
December 1998 upon our sales of shares of Techne Corporation common stock that
we received when we sold our research products business to Techne.
GAIN ON SALE OF PRODUCT LINE
In July 1999, we recorded a gain of $0.5 million in connection with the sale
of our immunochemistry product lines to an operating unit of Sybron Laboratory
Products Corporation.
GCS-10
<PAGE>
In June 1999, we recorded a gain of $7.5 million representing the payment of
a note receivable that we received as partial consideration for the sale of
Genetic Design, Inc. in 1996. We had previously fully reserved the amount of
this note because we considered the repayment of the note to be uncertain.
In July 1998, we recorded a gain of $31.2 million in connection with the
sale of our research products business to Techne.
CHARGE FOR IMPAIRED INVESTMENTS
In 1999, we recorded $5.7 million in charges in connection with strategic
investments in collaborators' common stock because we considered the decline in
the value of those securities to be other than temporary.
In 1998, we recorded a $3.4 million charge in connection with a strategic
investment in a company because we considered the decline in the value of the
company's common stock to be other than temporary.
OTHER
In December 1999, we recorded a net gain of $14.4 million upon receipt of a
payment associated with the termination of our agreement to acquire Cell
Genesys, Inc.
INVESTMENT INCOME
Our investment income for both periods increased because our cash balances
were higher. The increase in cash balances was attributable to our issuance in
May 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations.
INTEREST EXPENSE
Our interest expense increased in both periods primarily as a result of the
issuance of the 5 1/4% convertible subordinated notes.
GCS-11
<PAGE>
TAX PROVISION AND ALLOCATED TAX BENEFITS
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Provision for income taxes.... $(46,947) $(39,870) $(12,100) 18% 230%
Net tax rate.................. 40% 39% 47%
</TABLE>
Our tax rates for all periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash, cash-equivalents, and short- and
long-term investments of $653.0 million, an increase of $77.3 million from
December 31, 1998.
We generated $204.0 million in cash from our operations in 1999.
Our investing activities used $182.2 million in cash in 1999. These
activities generated:
- $5.0 million from the sale of our immunochemistry product lines;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with our sale
of Genetic Design.
These activities used:
- $70.6 million for net purchases of investments;
- $57.7 million to fund capital expenditures;
- $40.0 million to fund our investments in joint ventures;
- $6.5 million to fund our acquisition of Peptimmune;
- $10.0 million to GelTex to make a milestone payment upon the first
anniversary of FDA approval of Renagel-Registered Trademark- capsules;
- $6.6 million to Genzyme Transgenics for the purchase of preferred stock;
- $10.0 million to BioMarin for the purchase of common stock; and
- $3.4 million to Genovo, Inc. for the purchase of preferred stock.
In 1999, we received $60.0 million in cash from employee stock plans and
borrowed $5.0 million under a bank credit facility. In 1999, we used
$85.1 million in cash to repay debt and capital lease obligations.
GCS-12
<PAGE>
In 1999, we refinanced our $225 million revolving credit facility with a
$50.0 million revolving credit facility that matures in November 2000 and a
$100.0 million revolving credit facility that matures in November 2002. At
December 31, 1999, $23.0 million was outstanding under the credit facility that
matures in 2002.
We believe that our available cash, investments and cash flow from
operations will be sufficient to fund our planned operations and capital
requirements for the foreseeable future. Although we currently have substantial
cash resources and positive cash flow, we intend to use substantial portions of
our available cash for:
- product development and marketing;
- expanding facilities; and
- working capital.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock, GZMO Stock and
GZSP Stock;
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
If we use cash to pay or redeem this debt, including the interest due on it,
our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash, allocated at the
option of Biomatrix stockholders. To the extent we use cash to complete this
acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities on our balance sheets and
measure those instruments at fair value. We are currently assessing the effects
of adopting SFAS 133 and have not yet made a determination of the impact
SFAS 133 will have on our 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.
GCS-13
<PAGE>
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.
We have 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. Our
management believes that the Euro conversion will not affect any of our
outstanding foreign exchange forward contracts, or any other material commercial
contracts. Similarly, our management does not foresee any increased currency
exchange rate risk as a result of the Euro conversion.
We are 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 us 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, we believe that there will be no material tax
consequences of the conversion.
Because our existing accounting and finance software is currently able to
use Euro-based accounts, we believe 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 unless they are modified or upgraded to adequately address
the problem.
We conducted a Year 2000 compliance program intended to identify and
minimize our exposure to Year 2000 problems. The compliance program was a
coordinated effort conducted by each of our divisions, business units and
departments using our own MIS personnel. The program involved four phases:
- conducting an inventory of our Year 2000 issues;
- prioritizing identified systems, programs and equipment based on
materiality to our operations;
- assessing Year 2000 compliance; and
- resolving Year 2000 issues through upgrades, replacements or repairs.
As of the date of this annual report, we have not experienced any material
adverse effects on our business, results of operations or financial condition as
a result of the Year 2000 issue.
In 1999, we also conducted a survey of third parties that we consider
critical to our business about their Year 2000 readiness. Based on the results
of this survey, we believe that our critical suppliers and distributors have
successfully transitioned into the year 2000 and we are not presently aware of
any third party Year 2000 problems that could have a significant impact on our
business.
We will continue to monitor our operations and the operations of third
parties critical to our operations for potential Year 2000 problems. However, we
do not anticipate that we will discover any
GCS-14
<PAGE>
future Year 2000 issues that will have a material effect on our business,
results of operations or financial condition.
As of March 23, 2000, total costs incurred in connection with our Year 2000
compliance program were approximately $1.2 million and were funded through
operations.
MARKET RISK
We are exposed to potential loss from exposure to market risks represented
principally by changes in interest rates, foreign exchange rates, and equity
prices. At December 31, 1999 we held various derivative contracts in the form of
foreign exchange forwards. The derivatives contain no leverage or option
features. We also held a number of other financial instruments, including
investments in marketable securities, and had balances outstanding under several
debt securities.
INTEREST RATE RISK
We are exposed to potential loss due to changes in interest rates. The
principal interest rate exposure is to changes in domestic interest rates.
Investments with interest rate risk include short-term deposits with financial
institutions, and short-term and long-term investments in marketable securities.
Debt with interest rate risk includes fixed rate convertible debt and borrowings
under a credit facility.
To estimate the potential loss due to changes in interest rates we performed
a sensitivity analysis for a one-day horizon. In order to estimate the potential
loss, we used an adverse change in interest rates of 100 basis points across the
yield curve at year-end. We used the following assumptions in preparing the
sensitivity analysis:
- convertibles that are "in-the-money" at year end are considered equity
securities and are excluded;
- convertibles that are "out-of-the-money" at year end are treated as fixed
rate debt securities and we assumed we will repay the principal amount in
full at maturity and we ignored the exercise of embedded equity option;
and
- financial instruments contain no other call or leverage features material
to our analysis.
On this basis, we estimate the potential loss in fair value from changes in
interest rates to be $3.1 million, virtually all of which is attributable to
Genzyme General.
The estimate of potential loss does not include a separate determination of
potential losses due to changes in credit spreads. Our investments are
investment grade securities and deposits are with investment grade financial
institutions. We believe that the realization of losses due to changes in credit
spreads is unlikely. The potential loss estimated above on all market risk
sensitive instruments reflects a fair value loss on debt offset by a fair value
loss on assets. We expect to hold our debt to maturity or conversion, whichever
is sooner. Therefore, the realization of the potential loss on debt obligations
is unlikely.
FOREIGN EXCHANGE RISK
As a result of our worldwide operations, we face exposure to adverse
movements in foreign currency exchange rates, primarily to the Euro and its
component currencies, British pounds and Japanese yen. These exposures are
reflected in market risk sensitive instruments, including foreign currency
receivables and payables and foreign exchange forward contracts. During 1999,
our risk management strategy related to foreign exchange exposure periodically
included the use of forward contracts. As of December 31, 1999, we estimate the
potential loss in fair value of the forward contracts due to a 10% change in
exchange rates to be $2.1 million, virtually all of which is attributable to
Genzyme General.
GCS-15
<PAGE>
EQUITY PRICE RISK
We hold investments in a limited number of domestic and European equity
securities, substantially all of which are allocated to Genzyme General. We
estimate the potential loss in fair value due to a 10% decrease in equity prices
of each security held at year-end to be $8.9 million. This estimate assumes no
change in foreign exchange rates from year-end spot rates. The increase in
potential equity risk is largely explained by the fact that the size of our
portfolio has increased from a market value of $51 million to $96 million.
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, which relate to us generally and affect all of our
operating divisions.
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We generate a majority of our product revenues from sales of
enzyme-replacement products for patients with Gaucher disease. We entered this
market in 1991 with Ceredase-Registered Trademark- enzyme. Because production of
Ceredase-Registered Trademark- enzyme was subject to supply constraints, we
developed Cerezyme-Registered Trademark- enzyme, a recombinant form of the
enzyme. Recombinant technology uses specially engineered cells to produce
enzymes, or other substances, by inserting into the cells of one organism the
genetic material of a different species. In the case of
Cerezyme-Registered Trademark- enzyme, Chinese hamster ovary cells are
engineered to produce human alpha glucocerebrosidase. We stopped producing
Ceredase-Registered Trademark- enzyme, except for small quantities, during 1998,
after substantially all the patients who previously used
Ceredase-Registered Trademark- enzyme converted to
Cerezyme-Registered Trademark- enzyme. Sales of Ceredase-Registered Trademark-
enzyme and Cerezyme-Registered Trademark- enzyme totaled $478.5 million for the
year ended December 31, 1999, representing approximately 70% of our product
revenues for that year.
Because our business is highly dependent on Cerezyme-Registered Trademark-
enzyme, a reduction in revenue from sales of this product would have an adverse
effect on our operations and may cause the value of our securities to decline
substantially. Revenues from Cerezyme-Registered Trademark- enzyme would be
impacted negatively if competitors develop alternative treatments for Gaucher
disease and these alternative products gained commercial acceptance. Some
companies have initiated efforts to develop competitive products, and other
companies may do so in the future. Cerezyme-Registered Trademark- enzyme has
orphan drug status, providing it with market exclusivity in the U.S. until
May 2001. We also have patents protecting its manufacturing method until 2010
and its composition until 2013. We cannot predict the effect that the expiration
of orphan drug status and market exclusivity will have on sales of
Cerezyme-Registered Trademark- enzyme after May 2001.
GOVERNMENT REGULATION IMPOSES SIGNIFICANT COSTS AND RESTRICTIONS ON THE
DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND SERVICES.
Our ability to successfully satisfy regulatory requirements will
significantly determine our future success. We cannot guarantee that any
required regulatory approvals will be granted or that they will be granted on a
timely basis. The production and sale of healthcare products and provision of
health care services are highly regulated. In particular, the U.S. Food and Drug
Administration (FDA) and comparable agencies in foreign countries must approve
human therapeutic and diagnostic products before they are marketed. This
approval process can involve lengthy and detailed laboratory and clinical
testing, sampling activities and other costly and time-consuming procedures.
This regulation may delay the time at which a product or service first can be
sold, limit how a product or service may be used, or adversely impact third
party reimbursement. In addition, therapies that have received, or in the future
receive, regulatory approval for commercial sale may still face subsequent
regulatory difficulties.
GCS-16
<PAGE>
The FDA and comparable foreign regulatory agencies, for example, may require
postmarketing clinical trials. In addition, a marketed therapy, its manufacturer
and the manufacturer's facilities are subject to continual review and periodic
inspections by regulatory agencies. The discovery of previously unknown problems
with a therapy, manufacturer or facility can result in restrictions on the
therapy or manufacturer, including withdrawal of the therapy from the market.
The failure to comply with applicable regulatory approval requirements can
result in, among other things:
- warning letters;
- fines and other civil penalties;
- suspended regulatory approvals;
- refusal to approve pending applications or supplements to approved
applications;
- suspension of product sales in the U.S. and/or exports from the U.S.;
- product recalls; and
- seizure of products.
LEGISLATIVE CHANGES MAY ADVERSELY IMPACT OUR BUSINESS.
Some of our products, including Cerezyme-Registered Trademark- enzyme, have
been designated as orphan drugs under the Orphan Drug Act. The Orphan Drug Act
provides incentives to manufacturers to develop and market drugs for rare
diseases, generally by entitling the first developer that receives FDA marketing
approval for an orphan drug to a seven-year exclusive marketing period in the
U.S. for that product. Legislation periodically has been introduced in recent
years to change the Orphan Drug Act to shorten the period of automatic market
exclusivity and to allow marketing rights to simultaneous developers of the
drug. We cannot be sure whether the Orphan Drug Act will be amended, or if
amended, what effect the changes may have on us.
We have also received orphan drug designation for some of our products that
are still in development, including Fabrazyme-TM- enzyme for the treatment of
Fabry disease. We are aware of other companies developing products for the
treatment of Fabry disease. If any of those companies receive FDA approval for
their Fabry disease therapy before we receive FDA approval for Fabrazyme-TM-
enzyme, the Orphan Drug Act will preclude us from selling Fabrazyme-TM- enzyme
in the U.S. for up to seven years.
In addition, healthcare reform is an area of significant government focus.
Any reform measures, if adopted, could adversely affect:
- the pricing of therapeutic products in the U.S. or internationally; and
- the amount of reimbursement available from governmental agencies or other
third party payers.
BECAUSE THE DEVELOPMENT OF OUR PRODUCTS INVOLVES A LENGTHY AND COMPLEX PROCESS,
IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS
CURRENTLY IN DEVELOPMENT.
Before we can commercialize our development-stage products, we will need to:
- conduct substantial research and development;
- undertake preclinical and clinical testing; and
- pursue regulatory approvals.
GCS-17
<PAGE>
This process involves a high degree of risk and takes several years. Our
product development efforts may fail for many reasons, including:
- the product fails in preclinical studies;
- clinical trials may not support the safety or effectiveness of the
product; or
- we fail to obtain the required regulatory approvals.
We cannot guarantee that we will successfully develop any particular product.
ANY MARKETABLE PRODUCTS THAT WE DEVELOP MAY NOT BE COMMERCIALLY SUCCESSFUL.
The commercial success of any marketable product that we develop will depend
on many factors, including:
- regulation by the FDA and other government authorities;
- market acceptance by doctors and hospital administrators;
- the effectiveness of our sales force;
- the effectiveness of our production and marketing capabilities;
- the success of competitive products; and
- the availability of third party reimbursement.
We cannot guarantee that any product we successfully develop will be
commercially successful.
WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS, IF AT ALL.
As of December 31, 1999, we had approximately $653.0 million in cash, cash
equivalents and short-and long-term investments, excluding investments in equity
securities.
Although we currently have substantial cash resources and positive cash
flow, we intend to use substantial portions of our available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
We will further reduce available cash reserves to pay principal and interest
on the following debt:
- In May 1998, we issued $250.0 million in convertible notes, the entire
principal amount of which is allocated to Genzyme General. These
convertible notes bear interest at an annual rate of 5.25% and mature on
June 1, 2005. However, the holders of these notes may exchange principal
on the notes for shares of GENZ Stock, GZMO Stock, and GZSP Stock.
- As of December 31, 1999, we owed approximately $23.0 million under a
revolving credit facility with a group of commercial banks. Of this
amount, we have allocated $18.0 million to Genzyme Tissue Repair and
$5.0 million to Genzyme Molecular Oncology. Amounts borrowed under this
revolving credit facility bear interest at a floating rate based upon an
applicable margin above either the prime rate announced by Fleet National
Bank or the London InterBank Offered Rate. We must repay all borrowings
under this facility no later than November 12, 2002.
- In August 1998, we issued $21.2 million in convertible debentures, the
entire principal amount of which is allocated to Genzyme General. These
convertible debentures bear interest at an annual rate of 5% and mature on
August 29, 2003, but the holders of these convertible debentures may
GCS-18
<PAGE>
exchange principal, and under some circumstances interest, on the
convertible debentures for shares of GENZ Stock.
If we use cash to pay or redeem this debt, including the principal and
interest due on it, our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash, allocated at the
option of Biomatrix stockholders. To the extent we use cash to complete this
acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW
COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our long-term success largely depends on our ability to obtain and maintain
patent and other proprietary right protection for our technology and products.
If we fail to obtain or maintain these protections, we may not be able to
prevent third parties from using our proprietary rights.
Patents based on our currently pending or our future patent applications may
not issue. In addition, our issued patents may not contain claims sufficiently
broad to protect us against third parties with similar technologies or products,
or provide us with any competitive advantage. Further, our patents, our
collaborators' patents, and those patents for which we have license rights may
be challenged, narrowed, invalidated or circumvented.
The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights. Any policies that are adopted may result in changes in or
interpretations of the patent laws that adversely affect our patent position.
We also rely upon trade secrets, proprietary know-how, and continuing
technological innovation to remain competitive. We have taken measures to
protect our trade secrets and know-how, including the use of confidentiality
agreements with our employees, consultants and corporate collaborators. It is
possible that these agreements may be breached and that any remedies for a
breach will not make us whole. We also cannot guarantee that other parties will
not independently develop our know-how or otherwise obtain access to our
technology.
WE MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM COMPETITORS IN ORDER TO DEVELOP
AND COMMERCIALIZE SOME OF OUR PRODUCTS AND SERVICES, AND IT IS UNCERTAIN
WHETHER THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by third
parties, if issued, may cover some of the products that we or our strategic
collaborators are developing or testing. As a result, we or a strategic
collaborator may be required to obtain licenses from the holders of these
patents in order to use, manufacture or sell these products and services, and
payments under these licenses may reduce the profitability of the products.
Furthermore, we cannot be sure that these licenses would be available to us on
acceptable terms or at all. If these licenses are not available, our or our
strategic collaborators' ability to commercialize these products and services
may be impaired.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS
RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS.
If we or one of our strategic collaborators initiate litigation to enforce
our patent or license rights, or are required to defend these rights in response
to third party claims, it could consume a substantial
GCS-19
<PAGE>
portion of our resources. We cannot guarantee that we or our strategic
collaborator would prevail in such litigation. If we do not prevail, we or our
strategic collaborators may be required to:
- pay monetary damages;
- stop commercial activities relating to the affected products or services;
or
- obtain a license in order to continue manufacturing or marketing the
affected products or services.
If we are required to pay damages or if commercial activities are disrupted,
our business or financial position may be negatively impacted. In addition, if
we or our strategic collaborators are required to obtain a license, we cannot
guarantee that one would be made available to us or made available on acceptable
terms or at all.
WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
Individuals who use our products or services may bring product liability
claims against us. While we have taken, and continue to take, what we believe
are appropriate precautions, we cannot guarantee that we will avoid significant
liability exposure. We have only limited amounts of product liability insurance,
and we cannot be sure that this insurance will provide sufficient coverage
against any product liability claims. If we attempt to obtain additional
insurance in the future, we may not be able to do so on acceptable terms, and
any additional insurance we do obtain may not provide adequate coverage against
any asserted claims. In addition, regardless of merit or eventual outcome,
product liability claims may result in:
- diversion of management time and attention;
- expenditure of large amounts of cash on legal fees, expenses and payment
of damages;
- decreased demand for our products and services; and
- injury to our reputation.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.
The human health care products and services industry is extremely
competitive. Our competitors include major pharmaceutical companies and other
biotechnology companies. Some of these competitors may have more extensive
research and development, marketing and production capabilities. Some
competitors also may have greater financial resources than us. Our future
success will depend on our ability to develop and market effectively our
products against those of our competitors.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS OR
SERVICES MAY BECOME OBSOLETE.
The field of biotechnology is characterized by significant and rapid
technological change. Although we attempt to expand our technological
capabilities in order to remain competitive, research and discoveries by others
may make our products or services obsolete. For example, some of our competitors
may develop a product to treat Gaucher disease that is more effective or less
expensive than Cerezyme-Registered Trademark- enzyme.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM
THIRD PARTY PAYERS, THE COMMERCIAL POTENTIAL OF OUR PRODUCTS WILL BE
SIGNIFICANTLY LIMITED.
A substantial portion of our revenue comes from payments by third party
payers, including government health administration authorities and private
health insurers. Third party payers may not reimburse patients for newly
approved health care products. Increasingly, third party payers are attempting
to contain healthcare costs by:
- challenging the prices charged for healthcare products and services;
- limiting both coverage and the amount of reimbursement for new therapeutic
products;
GCS-20
<PAGE>
- denying or limiting coverage for products that are approved by the FDA,
but are considered experimental or investigational by third party payers;
and
- refusing, in some cases, to provide coverage when an approved product is
used for disease indications in a way that has not received FDA marketing
approval.
Government and other third party payers may not provide adequate insurance
coverage or reimbursement for our products and services, which could impair our
financial results.
In addition, Congress occasionally has discussed implementing broad-based
measures to contain healthcare costs. It is possible that Congress will enact
legislation specifically designed to contain healthcare costs. We cannot predict
the effect that legislation of this type would have on our business.
CHANGES IN THE ECONOMIC, POLITICAL, LEGAL AND BUSINESS ENVIRONMENTS IN THE
FOREIGN COUNTRIES IN WHICH WE DO BUSINESS COULD CAUSE OUR INTERNATIONAL SALES
AND OPERATIONS, WHICH ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR CONSOLIDATED
NET SALES, TO BE LIMITED OR DISRUPTED.
Our international operations accounted for 41% of our consolidated revenues
in 1999 and 1998, and we expect that international sales will continue to
account for a significant percentage of our revenues for the foreseeable future.
In addition, we have direct investments in a number of subsidiaries outside of
the U.S., primarily in Europe and Japan. Our international sales and operations
could be limited or disrupted, and the value of our direct investments may be
adversely affected, by any of the following:
- fluctuations in currency exchange rates;
- the imposition of government controls;
- less favorable intellectual property or other applicable laws;
- the inability to obtain any necessary foreign regulatory approvals of
products in a timely manner;
- import and export license requirements;
- political instability;
- trade restrictions;
- changes in tariffs;
- difficulties in staffing and managing international operations; and
- longer payment cycles.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the currencies in which we do
business have caused foreign currency transaction gains and losses in the past
and will likely do so in the future. We cannot predict the effects of exchange
rate fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposures and the potential
volatility of currency exchange rates.
SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE OUR STOCKHOLDERS OF THE OPPORTUNITY
TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL.
Provisions of Massachusetts law and our charter, by-laws and shareholder
rights plan could delay or prevent a change in control of Genzyme or a change in
our management.
Our tracking stock structure may also deprive our stockholders of the
opportunity to receive a premium for their shares upon a change in control
because, in order to obtain control of a particular division, an acquiror would
have to obtain control of the entire corporation.
In addition, our board of directors may, in their sole discretion:
- exchange shares of GZMO Stock, GZSP Stock or GZTR Stock for GENZ Stock at
a 30% premium over the market value of the exchanged shares; and
GCS-21
<PAGE>
- issue shares of undesignated preferred stock from time to time in one or
more series.
Either of these board actions could increase the cost of an acquisition of
Genzyme and thus discourage a takeover attempt.
SUBSEQUENT EVENTS
In March 1999, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue
Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR
Stock will be exchanged for GZBX Stock. We will account for the acquisition of
Biomatrix as a purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be capped at 35% of the total consideration, or approximately
$245 million.
Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share
of GZSP Stock they hold, and holders of GZTR Stock will receive 0.3352 share of
GZBX Stock for each share of GZTR Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approvals of the holders
of GZSP Stock and GZTR Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GENZYME TRANSGENICS
In February 2000, we converted our shares of the Series B Convertible
Preferred Stock of Genzyme Transgenics into 1,048,021 shares of Genzyme
Transgenics common stock. Also in February 2000, Genzyme Transgenics completed a
public offering of its common stock. We will recognize a gain on affiliate sale
of stock of approximately $20 million in the first quarter of 2000.
PUBLIC OFFERING OF GZMO STOCK
In March 2000, we announced a proposed public offering of 3,000,000 shares
of GZMO Stock.
GCS-22
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Net product sales......................................... $683,482 $613,685 $529,927
Net service sales......................................... 79,448 74,791 67,158
Revenue from research and development contracts:
Related parties......................................... 2,012 5,745 8,356
Other................................................... 7,346 15,114 3,400
-------- -------- --------
Total revenues........................................ 772,288 709,335 608,841
Operating costs and expenses:
Cost of products sold..................................... 182,337 211,076 206,028
Cost of services sold..................................... 49,444 48,586 47,289
Selling, general and administrative....................... 242,797 215,203 200,476
Research and development (including research and
development related to contracts)....................... 150,516 119,005 89,558
Amortization of intangibles............................... 24,674 24,334 17,245
Purchase of in-process research and development........... 5,436 -- 7,000
-------- -------- --------
Total operating costs and expenses.................... 655,204 618,204 567,596
-------- -------- --------
Operating income............................................ 117,084 91,131 41,245
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (42,696) (29,006) (12,258)
Gain on affiliate sale of stock........................... 6,683 2,369 --
Gain on sale of investments in equity securities.......... 1,963 3,391 --
Minority interest......................................... 3,674 4,285 --
Gain on sale of product line.............................. 8,018 31,202 --
Charge for impaired investments........................... (5,712) (3,397) --
Other..................................................... 14,527 -- (2,000)
Investment income......................................... 36,158 25,055 11,409
Interest expense.......................................... (21,771) (22,593) (12,667)
-------- -------- --------
Total other income (expenses)......................... 844 11,306 (15,516)
-------- -------- --------
Income before income taxes.................................. 117,928 102,437 25,729
Provision for income taxes.................................. (46,947) (39,870) (12,100)
-------- -------- --------
Net income.................................................. $ 70,981 $ 62,567 $ 13,629
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-23
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL:
Net income................................................ $142,077 $133,052 $ 76,642
Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 3,527 2,755
Tax benefit allocated from Genzyme Surgical Products...... 16,128 17,936 10,112
Tax benefit allocated from Genzyme Tissue Repair.......... 10,866 16,394 17,666
-------- -------- --------
Net income attributable to GENZ Stock..................... $176,883 $170,909 $107,175
======== ======== ========
Per GENZ common share:
Net income per GENZ common share--basic..................... $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Weighted average shares outstanding......................... 83,092 79,063 76,531
======== ======== ========
Net income per GENZ common and common equivalent
share--diluted.......................................... $ 2.00 $ 2.06 $ 1.36
======== ======== ========
Adjusted weighted average shares outstanding.............. 93,228 85,822 78,925
======== ======== ========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss.................................................. $(28,832) $(19,107) $(19,578)
======== ======== ========
Per GZMO basic and diluted common share:
Net loss................................................ $ (2.25) $ (3.81)
======== ========
Weighted average shares outstanding....................... 12,826 5,019
======== ========
Per GZMO pro forma basic and diluted common share:
Pro forma net loss...................................... $ (4.98)
========
Pro forma weighted average shares outstanding............. 3,929
========
ATTRIBUTABLE TO GENZYME SURGICAL PRODUCTS:
Net loss.................................................. $(48,037) $(49,856) $(29,740)
======== ======== ========
Per GZSP pro forma basic and diluted common share:
Pro forma net loss...................................... $ (3.25) $ (3.37) $ (2.01)
======== ======== ========
Pro forma weighted average shares outstanding............. 14,800 14,800 14,800
======== ======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss.................................................. $(30,040) $(40,386) $(45,984)
======== ======== ========
Per GZTR basic and diluted common share:
Net loss................................................ $ (1.26) $ (1.99) $ (3.07)
======== ======== ========
Weighted average shares outstanding....................... 23,807 20,277 14,976
======== ======== ========
COMPREHENSIVE INCOME:
Net income................................................ $ 70,981 $ 62,567 $ 13,629
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments................ (14,883) 7,681 (11,704)
Unrealized (gains) losses on securities:
Unrealized (gains) losses arising during the period... 24,946 (6,043) 817
Reclassification adjustment for gains (losses)
included in net income.............................. 2,092 2,100 --
-------- -------- --------
Unrealized gains (losses) on securities, net........ 27,038 (3,943) 817
-------- -------- --------
Other comprehensive income (loss)......................... 12,155 3,738 (10,887)
-------- -------- --------
Comprehensive income...................................... $ 83,136 $ 66,305 $ 2,742
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-24
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 130,156 $ 118,612
Short-term investments.................................... 255,846 175,453
Accounts receivable, net.................................. 166,803 163,042
Inventories............................................... 117,269 109,833
Prepaid expenses and other current assets................. 18,918 31,467
Deferred tax assets--current.............................. 41,195 39,725
---------- ----------
Total current assets.................................... 730,187 638,132
Property, plant and equipment, net........................ 383,181 382,619
Long-term investments..................................... 266,988 281,664
Intangibles, net.......................................... 253,153 279,516
Deferred tax assets--noncurrent........................... 18,631 24,277
Investments in equity securities.......................... 97,859 51,977
Other noncurrent assets................................... 37,283 30,669
---------- ----------
Total assets............................................ $1,787,282 $1,688,854
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-25
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 27,853 $ 27,604
Accrued expenses.......................................... 73,359 72,370
Payable to joint venture.................................. -- 1,181
Income taxes payable...................................... 27,946 16,543
Deferred revenue.......................................... 3,700 2,731
Current portion of long-term debt and capital lease
obligations............................................. 5,080 100,568
---------- ----------
Total current liabilities............................... 137,938 220,997
Noncurrent liabilities:
Long-term debt.............................................. 18,000 3,087
Convertible notes and debentures............................ 272,622 284,138
Other noncurrent liabilities................................ 2,330 8,078
---------- ----------
Total liabilities....................................... 430,890 516,300
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....................................... -- --
Preferred Stock, Series D 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; 141,000,483 issued and outstanding:
GENZ Stock, $0.01 par value, 200,000,000 shares
authorized; 84,351,662 shares issued and 84,245,304
shares outstanding at December 31, 1999 and 81,517,446
shares issued and 81,411,088 shares outstanding at
December 31, 1998..................................... 842 814
GZMO Stock, $0.01 par value, 40,000,000 shares
authorized; 13,421,018 shares issued and outstanding
at December 31, 1999 and 12,648,295 shares issued and
outstanding at December 31, 1998...................... 134 126
GZSP Stock, $0.01 par value, 60,000,000 shares
authorized; 14,835,161 shares issued and outstanding
at December 31,1999................................... 148 --
GZTR Stock, $0.01 par value, 40,000,000 shares
authorized; 28,503,728 shares issued and 28,498,729
shares outstanding at December 31, 1999 and 20,925,809
shares issued and 20,920,810 shares outstanding at
December 31, 1998..................................... 285 209
Treasury common stock, at cost:
GENZ Stock, 106,358 shares at both December 31, 1999 and
1998.................................................... (901) (901)
Additional paid-in capital--Genzyme General................. 469,776 593,042
</TABLE>
GCS-26
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Additional paid-in capital--Genzyme Molecular Oncology...... 67,672 63,427
Additional paid-in capital--Genzyme Surgical Products....... 542,343 365,785
Additional paid-in capital--Genzyme Tissue Repair........... 217,103 174,198
Retained earnings (accumulated deficit)..................... 57,202 (13,779)
Accumulated other comprehensive income (loss)............... 1,788 (10,367)
---------- ----------
Total stockholders' equity.................................. 1,356,392 1,172,554
---------- ----------
Total liabilities and stockholders' equity.................. $1,787,282 $1,688,854
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-27
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 70,981 $ 62,567 $ 13,629
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization............................. 70,651 58,869 50,964
Loss on disposal of fixed assets.......................... 1,008 108 1,258
Non-cash compensation expense............................. 68 8,740 3,160
Equity in loss of unconsolidated affiliates............... 42,696 29,006 12,258
Accrued interest/amortization of marketable securities.... (493) (6,923) (900)
Provisions for bad debts and inventory.................... 18,599 11,990 14,580
Accretion of debt conversion feature...................... -- 3,025 2,028
Gain on affiliate sale of stock........................... (6,683) (2,369) --
Minority interest in net loss of subsidiary............... (3,674) (4,285) --
Gain on sale of product line.............................. (8,018) (31,202) --
Gain on sale of investments in equity securities.......... (1,963) (3,391) --
Charge for impaired investments........................... 5,712 3,397 --
Deferred income tax benefit............................... (6,061) (5,669) (5,061)
Charge for in-process research and development............ 5,436 -- 7,000
Other..................................................... 626 26 528
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (18,682) (46,215) (11,076)
Inventories............................................. (15,258) 27,907 (29,299)
Prepaid expenses and other assets....................... 12,215 (11,987) (10,062)
Accounts payable, accrued expenses, income taxes payable
and deferred revenue.................................. 36,851 17,509 (9,333)
--------- --------- ---------
Net cash provided by operating activities............. 204,011 111,103 39,674
INVESTING ACTIVITIES:
Purchases of investments.................................... (509,177) (441,487) (147,897)
Sales and maturities of investments......................... 438,530 136,605 81,185
Proceeds from sale of investments in equity securities...... 11,090 9,564 --
Acquisitions of property, plant and equipment............... (57,724) (39,467) (29,309)
Sale of property, plant and equipment....................... 188 1,262 852
Proceeds from sale of product line.......................... 5,000 24,760 --
Acquisitions, net of acquired cash and assumed
liabilities............................................... (6,500) (9,949) 9
Purchase of technology rights............................... (11,400) (15,100) --
Purchase of investments in equity securities................ (17,700) (25,783) (13,993)
Investments in unconsolidated affiliates.................... (46,621) (21,974) --
Loans to affiliates......................................... -- (1,000) (4,601)
Proceeds from notes receivable.............................. 8,360 -- --
Repayment of loans by affiliates............................ -- 3,019 --
Final distribution from joint venture....................... 881 -- --
Other....................................................... 2,859 (5,592) (1,419)
--------- --------- ---------
Net cash used in investing activities................. (182,214) (385,142) (115,173)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-28
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 59,986 76,860 156,036
Proceeds from issuance of debt.............................. 5,000 250,000 32,127
Payments of debt............................................ (85,081) (38,833) (101,115)
Bank overdraft.............................................. 9,625 -- --
Other....................................................... 2,289 1,884 --
-------- -------- --------
Net cash (used in) provided by financing activities... (8,181) 289,911 87,048
Effect of exchange rate changes on cash..................... (2,072) 334 (2,275)
-------- -------- --------
Increase in cash and cash equivalents....................... 11,544 16,206 9,274
Cash and cash equivalents at beginning of period............ 118,612 102,406 93,132
-------- -------- --------
Cash and cash equivalents at end of period.................. $130,156 $118,612 $102,406
======== ======== ========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest.................................................. $ 20,151 $ 17,385 $ 9,811
Income taxes.............................................. $ 30,992 $ 24,463 $ 18,887
Supplemental disclosures of non-cash transactions:
Other gains and charges--Note B.
Dispositions of assets--Note C.
Acquisitions--Note D.
Investment in unconsolidated affiliate--Note I.
Conversion of 5% convertible subordinated note--Note K.
Conversion of 6% convertible subordinated debentures into 5%
convertible subordinated debentures--Note K.
Warrant exercise--Note L.
Distributions of GZMO, GZSP and GZTR designated shares--
Note L.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-29
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS:
GENZ STOCK:
Balance at beginning of year........................ 81,395 77,693 75,537 $ 814 $ 777 $ 755
Issuance of GENZ Stock under stock plans............ 2,850 3,695 2,117 28 37 22
Exercise of warrants................................ -- 7 39 -- -- --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 84,245 81,395 77,693 $ 842 $ 814 $ 777
====== ====== ====== ===== ===== =====
GZMO STOCK:
Balance at beginning of year........................ 12,648 3,929 -- $ 126 $ 39 $ --
Issuance of GZMO Stock under stock plans............ 129 1 -- 2 -- --
Exercise of warrants................................ -- 1 -- -- -- --
Issuance of GZMO designated shares.................. 27 8,717 -- -- 87 --
Issuance of GZMO Stock in connection with the
purchase of joint venture interest................ 617 -- -- 6 -- --
Issuance of GZMO Stock in connection with the
acquisition of PharmaGenics....................... -- -- 3,929 -- -- 39
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 13,421 12,648 3,929 $ 134 $ 126 $ 39
====== ====== ====== ===== ===== =====
GZSP STOCK:
Balance at beginning of year........................ -- -- -- $ -- $ -- $ --
Initial distribution of GZSP designated shares...... 14,792 -- -- 148 -- --
Issuance of GZSP Stock under stock plans............ 43 -- -- -- --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 14,835 -- -- $ 148 $ -- $ --
====== ====== ====== ===== ===== =====
GZTR STOCK:
Balance at beginning of year........................ 20,921 19,941 13,162 $ 209 $ 199 $ 132
Issuance of GZTR Stock under stock plans............ 320 756 487 3 8 4
Issuance of GZTR designated shares.................. -- 2,292 -- -- 23
Shares issued in public offering.................... -- -- 4,000 -- -- 40
Issuance of GZTR Stock in connection with conversion
of 6% convertible note............................ 7,258 224 -- 73 2 --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 28,499 20,921 19,941 $ 285 $ 209 $ 199
====== ====== ====== ===== ===== =====
TREASURY COMMON STOCK (AT COST):
GENZ Stock:
Balance at beginning of year.......................... (106) (106) (106) $(901) $(901) $(890)
Purchases............................................. -- -- -- -- -- (11)
------ ------ ------ ----- ----- -----
Balance at end of year................................ (106) (106) (106) $(901) $(901) $(901)
====== ====== ====== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-30
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
GENZYME GENERAL:
Balance at beginning of year............................ $593,035 $571,530 $572,879
Issuance of GENZ Stock under stock plans................ 59,587 74,323 35,888
Exercise of warrants.................................... -- 289 855
Allocation to Genzyme Tissue Repair for GZTR designated
shares................................................ (4,937) -- (14,892)
Tax benefit from disqualified dispositions.............. 24,238 18,561 4,127
Allocation of cash to Genzyme Molecular Oncology for
GZMO designated shares................................ -- (5,000) (2,886)
Allocation to Genzyme Surgical Products................. (176,706) (41,975) (25,669)
Exchange of 6% debentures convertible into shares of
GZMO Stock for 5% debentures convertible into shares
of GENZ Stock......................................... -- (19,802) --
Conversion of note receivable from Genzyme Molecular
Oncology into GZMO designated shares.................. -- (2,696) --
Transfer of interest in joint venture from Genzyme
Tissue Repair......................................... (25,000) -- --
Loss on purchase of facility from Genzyme Tissue
Repair................................................ -- (711) --
Payment to Genzyme Tissue Repair for research program... (100) (250) --
Stock compensation expense.............................. 58 48 1,218
Purchase of treasury stock.............................. -- -- 10
Other................................................... (399) (1,282) --
-------- -------- --------
Balance at end of year.................................. $469,776 $593,035 $571,530
======== ======== ========
GENZYME MOLECULAR ONCOLOGY:
Balance at beginning of year............................ $ 63,427 $ 34,517 $ --
Issuance of GZMO Stock under stock plans................ 306 7 --
Issuance of GZMO Stock in connection with declared
dividend of GZMO designated shares.................... -- (87) --
Conversion of note payable to Genzyme General into GZMO
designated shares..................................... -- 2,696 --
Issuance of GZMO Stock in connection with the
acquisition of PharmaGenics........................... -- -- 27,330
Sale of warrants........................................ -- -- 724
Value of debt conversion feature........................ -- -- 3,529
Exchange of 6% debentures convertible into shares of
GZMO Stock for 5% debentures convertible into shares
of GENZ Stock......................................... -- 19,802 --
Allocation from Genzyme General for GZMO designated
shares................................................ -- 5,000 2,886
Shares issued upon purchase of joint venture interest... 3,929 -- --
Stock compensation expense (unearned compensation),
net................................................... 10 113 (116)
Other................................................... -- 1,379 164
-------- -------- --------
Balance at end of year.................................. $ 67,672 $ 63,427 $ 34,517
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-31
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
GENZYME SURGICAL PRODUCTS:
Balance at beginning of year.............................. $365,785 $323,810 $298,141
Allocation from Genzyme General........................... 176,706 41,975 25,669
Initial distribution of GZSP designated shares............ (148) -- --
-------- -------- --------
Balance at end of year.................................... $542,343 $365,785 $323,810
======== ======== ========
GENZYME TISSUE REPAIR:
Balance at beginning of year.............................. $174,198 $170,430 $122,385
Issuance of GZTR Stock under stock plans.................. 458 2,101 2,434
Issuance of GZTR designated shares........................ -- -- (23)
Issuance of GZTR Stock in public offering................. -- -- 28,997
Issuance of GZTR Stock in connection with conversion of 6%
convertible note........................................ 12,410 598 --
Value of debt conversion feature.......................... -- -- 1,524
Gain on transfer of interest in joint venture to Genzyme
General................................................. 25,000 -- --
Gain on transfer of facility.............................. -- 711 --
Payment from Genzyme General for research program......... 100 250 --
Allocation from Genzyme General for GZTR designated
shares.................................................. 4,937 -- 14,892
Stock compensation expense (unearned compensation), net... -- 108 221
-------- -------- --------
Balance at end of year.................................... $217,103 $174,198 $170,430
======== ======== ========
RETAINED EARNINGS (ACCUMULATED DEFICIT):
Balance at beginning of year.............................. $(13,779) $(76,346) $(89,975)
Net income................................................ 70,981 62,567 13,629
-------- -------- --------
Balance at end of year.................................... $ 57,202 $(13,779) $(76,346)
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year.............................. $(10,367) $(12,005) $ (1,118)
Foreign currency translation adjustments.................. (14,883) 7,681 (11,704)
Unrealized gains (losses) on investments.................. 27,038 (6,043) 817
-------- -------- --------
Accumulated other comprehensive income (loss)............. $ 1,788 $(10,367) $(12,005)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-32
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
We currently have four designated series of common stock. Each of these
series is intended to reflect the value and track the performance of one of our
divisions. We refer to our series of common stock by their Nasdaq trading
symbols:
- Genzyme General Division Common Stock = "GENZ Stock;"
- Genzyme Molecular Oncology Division Common Stock = "GZMO Stock;"
- Genzyme Surgical Products Division Common Stock = "GZSP Stock;" and
- Genzyme Tissue Repair Division Common Stock = "GZTR Stock."
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
Upon the creation of Genzyme Surgical Products, we transferred $150.0 million in
cash, cash equivalents and investments, and certain other assets, from Genzyme
General to Genzyme Surgical Products. In exchange, 14.8 million shares of GZSP
Stock were distributed as a dividend to holders of GENZ Stock. We restated
Genzyme General's financial statements, including earnings per share
information, for all periods prior to the creation of Genzyme Surgical Products
to reflect the ongoing business of Genzyme General.
BASIS OF PRESENTATION; PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements for each period include the balance
sheets, results of operations and cash flows of each of our divisions and
corporate operations taken as a whole. We eliminate all significant intracompany
items and transactions in consolidation. We have reclassified certain 1998 and
1997 data to conform with our 1999 presentation.
We use the equity method to account for our investments in entities in which
we have a substantial ownership interest (20% to 50%), or in which we
participate in policy decisions. Our consolidated net
GCS-33
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income includes our share of the earnings of these entities. We report at fair
value our investments in entities in which our ownership interest is less than
20%.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate our programs, products,
assets and liabilities among our four operating divisions and prepare, in
addition to the accompanying consolidated financial statements, separate
financial statements for each division in accordance with generally accepted
accounting principles. Notwithstanding the allocation of assets and liabilities
among our divisions, Genzyme Corporation continues to hold title to all of the
assets and is responsible for all of the liabilities allocated to each division.
Holders of each series of our common stock are common stockholders of Genzyme
Corporation and have no specific rights to the assets to which each series of
common stock relates.
DIVIDEND POLICY
We have never paid a cash dividend on shares of our stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on our stock in the foreseeable future.
USE OF ESTIMATES
Under generally accepted accounting principles, we are required to make
certain estimates and assumptions that affect reported amounts of assets,
liabilities, revenues, expenses, and disclosure of contingent assets and
liabilities in our financial statements. Our actual results could differ from
these estimates.
FINANCIAL INSTRUMENTS
A number of financial instruments subject us to significant credit risk,
including cash and cash equivalents, current and non-current investments, and
accounts receivable. We generally invest our cash in investment-grade securities
to mitigate risk.
CASH AND CASH EQUIVALENTS
We value our cash and cash equivalents at cost plus accrued interest, which
we believe approximates their market value. Our cash equivalents consist
principally of money market funds and municipal notes with initial maturities of
three months or less.
INVESTMENTS
We classify our investments with remaining maturities of twelve months or
less as short-term investments. We classify our investments with remaining
maturities of greater than twelve months as long-term investments.
We classify our investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time we
purchase the securities. We report available-for-sale investments at fair value
as of each balance sheet date and include any unrealized holding gains and
GCS-34
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses (the adjustment to fair value) in stockholders' equity. If any adjustment
to fair value reflects a decline in the value of the investment, we consider all
available evidence to evaluate the extent to which the decline is "other than
temporary" and mark the investment to market through a charge to our statement
of operations. As of each balance sheet date presented, we classified all of our
investments in debt securities as available-for-sale.
We classify all of our equity investments as available-for-sale. If our
investment is in a publicly traded security, we calculate fair value based on
market quotations. Investments in equity securities for which fair value is not
readily determinable are carried at cost.
INVENTORIES
We value inventories at cost or, if lower, fair value. We determine cost
using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
We record property, plant and equipment at cost. When we dispose of these
assets, we remove the related cost and accumulated depreciation and amortization
from the related accounts on our balance sheet and include any resulting gain or
loss in our statement of operations.
We generally compute depreciation using the straight-line method over the
estimated useful lives of the assets. We compute useful lives as follows:
- plant and equipment--three to ten years
- furniture and fixtures--five to seven years
- buildings--20 to 40 years
We depreciate certain specialized manufacturing equipment and facilities
allocated to Genzyme General over their remaining useful lives using the
units-of-production method. We evaluate the remaining life and recoverability of
this equipment periodically based on the appropriate facts and circumstances.
We amortize leasehold improvements over their useful life or, if shorter,
the term of the applicable lease.
For products we expect to be commercialized, we capitalize, to
construction-in-progress, the costs we incur in validating and optimizing the
manufacturing process. We begin this capitalization when we consider the product
to have demonstrated technological feasibility and end this capitalization when
the asset is substantially complete and ready for its intended use. These
capitalized costs include incremental labor and direct material, and incremental
fixed overhead and interest. We generally depreciate these costs using the
units-of-production method.
INTANGIBLES
Our intangible assets consist of:
- goodwill;
GCS-35
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- covenants not to compete;
- customer lists; and
- patents, trademarks, trade names and other technology rights.
We amortize intangible assets using the straight-line method over useful
lives of three to 40 years. We evaluate the recoverability of our intangible and
other long-lived assets when the facts and circumstances suggest that these
assets may be impaired. When we conduct such an evaluation we consider several
factors including operating results, business plans, economic projections,
strategic plans and market emphasis. Our evaluations also compare expected
cumulative, undiscounted operating incomes or cash flows of these assets with
the net book values of the related intangible assets. We charge unrealizable
intangible and long-lived asset values to operations if our evaluations indicate
that the value of these assets are impaired.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of our foreign subsidiaries from local
currency into U.S. dollars using:
- the current exchange rate at each balance sheet date for assets and
liabilities; and
- the average exchange rate prevailing during each period for revenues and
expenses.
We consider the local currency for all of our foreign subsidiaries to be the
functional currency for that subsidiary. As a result, we included translation
adjustments for these subsidiaries in stockholders' equity. We also record as a
charge or credit to stockholders' equity exchange gains and losses on
intercompany balances that are of a long-term investment nature. Our
stockholders' equity includes cumulative foreign currency adjustments of
$19.7 million at December 31, 1999 and $4.8 million at December 31, 1998.
Our gains and losses on all other foreign currency transactions are included
in our results of operations. We recorded a net gain of $0.1 million in 1999, a
net gain of $0.3 million in 1998 and a net loss of $0.3 million in 1997.
FOREIGN CURRENCY HEDGING
We periodically enter into forward contracts to reduce our foreign currency
exchange risk. On each balance sheet date, we revalue these contracts using the
exchange rates that are then in effect. We include in net income all gains and
losses resulting from these revaluations, although these amounts are not
material to our financial statements. We had $6.0 million outstanding in foreign
currency forward contracts at December 31, 1999. These forward contracts, which
were denominated in Euros, had a fair value of $0.7 million. We allocated these
contracts to Genzyme General. We had no forward contracts at December 31, 1998.
INTEREST RATE HEDGE AGREEMENTS
We use interest rate hedge agreements to mitigate the interest rate risks
and costs that are inherent in our debt portfolio. We enter into these
agreements primarily to change the fixed/variable interest rate mix of the
portfolio, which reduces our exposure to movements in interest rates. We do
GCS-36
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not hold or issue derivative financial instruments for trading purposes. We
recognize in income any differential that we may receive or pay under contracts
designated as hedges. This recognition occurs over the life of the applicable
contract as an adjustment to interest expense. We estimate the fair value of
interest rate hedge agreements based on the amount it would cost to terminate
the agreements.
REVENUE RECOGNITION
We recognize revenue from product sales when we ship the product and title
has passed, net of any applicable third party contractual allowances and
rebates. We recognize revenue from service sales when we have finished providing
the service or when we have achieved an applicable milestone. We recognize
revenue from research and development contracts over the term of the applicable
contract and as we incur costs related to that contract. Up-front license fees
and milestone payments are recognized as revenue only if there are no remaining
performance obligations and the fees are non-refundable.
RESEARCH AND DEVELOPMENT
We expense research and development costs in the period incurred. We also
expense the cost of purchased technology in the period of purchase if we believe
that the technology has not demonstrated technological feasibility and that it
does not have an alternative future use.
ISSUANCE OF STOCK BY A SUBSIDIARY OR AN AFFILIATE
We include gains on the issuance of stock by our subsidiaries and affiliates
in net income unless that 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, we account for the change
in our equity ownership of that subsidiary or affiliate as an equity
transaction.
INCOME TAXES
We use the asset and liability method of accounting for deferred income
taxes. Our 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.
We have not provided for possible U.S. taxes on the undistributed earnings
of foreign subsidiaries. We do not believe it is practicable to determine the
tax liability associated with the repatriation of our foreign earnings because
it is our policy to indefinitely reinvest these earnings in non-U.S. operations.
At December 31, 1999, these undistributed foreign earnings totaled approximately
$6.0 million.
NET INCOME (LOSS) PER SHARE
We calculate earnings per share of each of our operating divisions. To
calculate basic earnings per share for each division, we divide the earnings
attributable to that division by the weighted average number of outstanding
shares of that division's tracking stock during the applicable period. When we
calculate diluted earnings per share, we also include in the denominator all
potentially dilutive securities outstanding during the applicable period. To
determine what earnings are attributable to a particular division, we take that
division's net income or loss for the applicable period (determined in
GCS-37
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accordance with generally accepted accounting principles) and adjust it for the
tax benefits allocated to or from that division in accordance with our
management and accounting policies.
The following tables set forth our computation of basic and diluted earnings
per share:
GENZYME GENERAL:
The following table sets forth our computation of basic and diluted earnings
per share of GENZ Stock:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income--basic..................................... $176,883 $170,909 $107,175
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes(1):
Interest expense.................................. 8,375 4,911 --
Amortization of purchasers' discount and offering
costs(2)........................................ 597 348 --
5% convertible subordinated debentures(3):
Interest expense.................................. 676 258 --
Amortization of debt offering costs(4)............ 113 434 --
-------- -------- --------
Net income--diluted................................... $186,644 $176,860 $107,175
======== ======== ========
Shares used in net income per common share--basic..... 83,092 79,063 76,531
Effect of dilutive securities:
Employee and director stock options............... 3,173 2,661 2,387
Warrants.......................................... 20 10 7
5 1/4% convertible subordinated notes(1).......... 6,313 3,874 --
5% convertible subordinated debentures(3)......... 630 214 --
-------- -------- --------
Dilutive potential common shares(5)................. 10,136 6,759 2,394
-------- -------- --------
Shares used in net income per common
share--diluted(5)................................... 93,228 85,822 78,925
======== ======== ========
Net income per common share--basic.................... $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Net income per common share--diluted(5)............... $ 2.00 $ 2.06 $ 1.36
======== ======== ========
</TABLE>
- ------------------------
(1) We issued these notes in May 1998.
(2) We are amortizing the purchasers' discount and offering costs of
approximately $7.0 million over the term of these notes, which mature in
June 2005.
(3) We issued these debentures in August 1998.
(4) We are amortizing the offering costs of approximately $0.9 million over the
term of these debentures, which mature in August 2003.
GCS-38
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for each period
because these securities had an exercise price greater than the average
market price of GENZ Stock:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GENZ Stock issuable for options*.................. 2,094 2,827 5,921
Shares of GENZ Stock issuable for warrants.................. 26 40 40
----- ----- -----
Total shares with exercise prices greater than the average
market price of GENZ Stock during the period.............. 2,120 2,867 5,961
===== ===== =====
</TABLE>
- ------------------------
*These options had exercise price ranges of $48.06--$62.33 in 1999,
$28.67--$47.88 in 1998, and $23.59--$38.00 in 1997.
GENZYME MOLECULAR ONCOLOGY:
We disclose PRO FORMA net loss per share for Genzyme Molecular Oncology for
the year ended December 31, 1997 because GZMO Stock was not outstanding during
the entire year.
For all periods presented, basic and diluted net loss per GZMO common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Molecular Oncology's diluted net loss per share
for each period because these securities would have an anti-dilutive effect due
to Genzyme Molecular Oncology's net loss per share.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GZMO Stock issuable for options.............. 1,809 1,158 826
Warrants to purchase GZMO Stock........................ 10 10 10
GZMO designated shares issuable upon conversion of
5 1/4% convertible subordinated notes allocated to
Genzyme General(1)................................... 682 682 --
GZMO designated shares(1).............................. 1,006 728 6,000
----- ----- -----
Total shares excluded from the diluted net loss per
GZMO share calculation............................... 3,507 2,578 6,836
===== ===== =====
</TABLE>
- ------------------------
(1) GZMO designated shares are shares of GZMO Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Molecular Oncology. As of
December 31, 1999, there were 1,688,237 GZMO designated shares, assuming
that Genzyme Molecular Oncology does not complete a public offering of GZMO
Stock prior to June 18, 2000. If such an offering is completed prior to that
date, the number of GZMO designated shares reserved for issuance in
connection with a draw under an equity line of credit in 1998 will decrease
based on a formula set forth in our charter.
GCS-39
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GENZYME SURGICAL PRODUCTS:
We disclose PRO FORMA net loss per share for Genzyme Surgical Products for
all periods presented because GZSP Stock was not outstanding during the entirety
of each of these periods.
For all periods presented, basic and diluted net loss per GZSP common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Surgical Products' diluted net loss per share for
each period because these securities would have an anti-dilutive effect due to
Genzyme Surgical Products' net loss per share.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GZSP Stock issuable for options.............. 2,991 -- --
GZSP designated shares issuable upon conversion of
5 1/4% convertible subordinated notes allocated to
Genzyme General(1)................................... 1,130 -- --
----- ----- -----
Total shares excluded from the diluted pro forma net
loss per GZSP share calculation...................... 4,121 -- --
===== ===== =====
</TABLE>
- ------------------------
(1) GZSP designated shares are shares of GZSP Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Surgical Products.
GENZYME TISSUE REPAIR:
For all periods presented, basic and diluted net loss per GZTR common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Tissue Repair's diluted net loss per share for
each period because these securities would have an anti-dilutive effect due to
Genzyme Tissue Repair's net loss per share.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of GZTR Stock issuable for options................... 4,176 3,398 2,777
GZTR designated shares(1)................................... 2,238 716 885
Shares of GZTR Stock issuable upon conversion of 5%
convertible subordinated note............................. -- 7,810 1,772
----- ------ -----
Total shares excluded from the diluted net loss per GZTR
share calculation......................................... 6,414 11,924 5,434
===== ====== =====
</TABLE>
- ------------------------
(1) GZTR designated shares are shares of GZTR Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Tissue Repair.
GCS-40
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
As of January 1, 1998, we adopted SFAS 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income, which
consists of net income and all changes in equity from non-shareholder sources.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS 123, we include PRO FORMA net income and PRO FORMA
earnings per share information (calculated using the fair value based method)
under the heading "Compensation Expense" in note L to these consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities on our balance sheets and
measure those instruments at fair value. We are currently assessing the effects
of adopting SFAS 133 and have not yet made a determination of the impact SFAS
133 will have on our consolidated financial statements.
UNCERTAINTIES
We are subject to risks and uncertainties common to companies in the
biotechnology industry. These risks and uncertainties may affect our future
results, and include:
- our ability to successfully complete preclinical and clinical development
of our products and services;
- our ability to manufacture sufficient amounts of our products for
development and commercialization activities;
- our ability to obtain timely regulatory approval of our products and
services;
- our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services;
- the content and timing of decisions made by the FDA and other regulatory
agencies regarding our products and services;
- the accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- market acceptance of our products and services;
- our ability to obtain reimbursement for our products and services by third
party payers;
- our ability to establish and maintain licenses, strategic collaborations
and distribution arrangements;
GCS-41
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- the continued funding of our joint ventures; and
- the accuracy of our information regarding the products and resources of
our competitors and potential competitors.
NOTE B. OTHER GAINS AND CHARGES
During the fourth quarter of 1999, we recorded a net gain of $14.4 million
upon receipt of a payment associated with the termination of our agreement to
acquire Cell Genesys, Inc. We recorded this gain as other income in our
statement of operations and allocated it to Genzyme General.
During the third quarter of 1998, we recorded a $25.2 million charge to cost
of products sold. The components of this charge are:
- a $14.8 million charge allocated to Genzyme General to write down excess
inventory used to make Ceredase-Registered Trademark- enzyme. We took this
charge following our determination that, based on the status of our
efforts to convert Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, our existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated
patient needs.
- a $10.4 million charge allocated to Genzyme Surgical Products to write
down our inventory of Sepra products to net realizable value. The Sepra
products are our line of products and product candidates designed to limit
post-operative adhesions.
We also recorded $29.1 million in other charges in the fourth quarter of
1997. The components of these charges are:
- an $18.1 million charge to cost of products sold to write down excess
inventory in our melatonin, bulk pharmaceuticals and fine chemical product
lines. We took this charge, which was allocated to Genzyme General, after
we discontinued these product lines.
- a $5.5 million charge to cost of products sold and a $3.5 million charge
to selling, general and administrative expense relating to the manufacture
and sale of Sepracoat-TM- coating solution. We took these charges, which
were allocated to Genzyme Surgical Products, after an FDA advisory panel
recommended against granting marketing approval for the product.
- a $2.0 million charge to other expense relating to our uncertainty in
collecting a note receivable that we issued when we sold Genetic
Design, Inc. This charge was allocated to Genzyme General.
NOTE C. DISPOSITIONS OF ASSETS
SYBRON LABORATORY PRODUCTS
In July 1999, we sold the assets of our immunochemistry product line to an
operating unit of Sybron Laboratory Products Corp. for $5.0 million in cash. We
recorded a gain of $0.5 million in connection with the sale of this product
line. The immunochemistry product line had been allocated to Genzyme General.
GCS-42
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. DISPOSITIONS OF ASSETS (CONTINUED)
LABORATORY CORPORATION OF AMERICA
In 1996, we sold Genetic Design to Laboratory Corporation of America. A
portion of the purchase price was a note for which we previously had fully
reserved because of uncertainty regarding collection. In April 1999, we received
an $8.4 million payment on that note and recorded a $7.5 million gain in
connection with that payment. Genetic Design had been allocated to Genzyme
General.
TECHNE
In July 1998, we sold the assets of our research products business to Techne
Corporation in exchange for:
- $24.8 million in cash;
- approximately 987,000 shares of Techne common stock; and
- royalties on product sales by Techne's biotechnology group through
June 2003.
We will record royalty income as it is earned. In 1998, we recorded a
$31.2 million gain in connection with the sale of this business and an
additional $3.4 million gain upon the sale of a portion of our investment in
Techne common stock. We recorded these gains as gain on sale of equity
investments. In 1999, we recorded a gain of $2.0 million upon the sale of our
remaining shares of Techne common stock. The research products business had been
allocated to Genzyme General.
NOTE D. ACQUISITIONS
PEPTIMMUNE
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General and accounted for it as a
purchase. We allocated the aggregate purchase price of $6.5 million and assumed
liabilities of $0.3 million to the tangible and intangible assets we acquired
from Peptimmune based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total..................................................... $6,793
======
</TABLE>
The $5.4 million allocated to in-process technology represents the value we
assigned to Peptimmune's programs that were still in the development stage and
for which there was no alternative future use. We recorded this amount as a
charge to operations.
PHARMAGENICS
In June 1997, we acquired PharmaGenics, Inc., a company engaged in the
research and development of products for the treatment of cancer and other
diseases. We allocated this acquisition to Genzyme Molecular Oncology and
accounted for it as a purchase. We allocated the aggregate purchase price of
$27.5 million, plus acquisition costs of $2.5 million and assumed liabilities of
GCS-43
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITIONS (CONTINUED)
$4.9 million, to the tangible and intangible assets we acquired from
PharmaGenics based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Equipment................................................... $ 208
Other assets................................................ 50
Completed technology (to be amortized over 3 years)......... 20,000
Goodwill (to be amortized over 3 years)..................... 12,293
Deferred tax asset.......................................... 2,900
Deferred tax liability (to be amortized over 3 years)....... (7,600)
In-process technology....................................... 7,000
-------
Total..................................................... $34,851
=======
</TABLE>
In 1998, we made an adjustment of $0.5 million in the amount of liabilities
we assumed.
The $7.0 million allocated to in-process technology represents the value we
assigned to PharmaGenics' programs that were still in the development stage and
for which there was no alternative future use. We assigned values to all of
PharmaGenics' programs (both complete and in-process) by selecting the maximum
anticipated value of these programs and comparing them to the values of
comparable technologies. In 1997, we recorded a one-time charge to operations
for the amount of the purchase price allocated to in-process technology.
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.
NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
We periodically enter into interest rate swap contracts to reduce borrowing
costs by effectively modifying the interest rate under our debt instruments. We
generally enter into these contracts concurrently with the issuance of the debt
they are intended to modify. The notional amount, interest payment and maturity
dates of these contracts generally match the principal, interest payment and
maturity dates of the related debt. As a result, any market risk or opportunity
associated with a swap contract is fully offset by the opposite market impact on
the related debt. We record payments that we make or receive under these
contracts as interest expense.
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Our trade receivables primarily represent amounts due from distributors,
healthcare service providers, and companies and institutions engaged in
research, development or production of pharmaceutical and biopharmaceutical
products. We perform credit evaluations of our customers on an ongoing basis and
generally do not require collateral. We state accounts receivable at fair value
after reflecting an allowance for doubtful accounts. This allowance was
$19.3 million at December 31, 1999 and $13.9 million at December 31, 1998.
Our net intangible assets include $162.2 million in goodwill as of
December 31, 1999 and $178.0 million in goodwill as of December 31, 1998. This
goodwill is primarily a result of acquisitions.
Our accumulated amortization of intangible assets was $87.6 million as of
December 31, 1999 and $70.7 million as of December 31, 1998.
GCS-44
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials........................................... $ 39,958 $ 41,328
Work-in-process......................................... 44,559 27,474
Finished products....................................... 32,752 41,031
-------- --------
Total................................................. $117,269 $109,833
======== ========
</TABLE>
NOTE H. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Plant and equipment..................................... $246,068 $257,706
Land and buildings...................................... 188,892 156,067
Leasehold improvements.................................. 93,159 71,425
Furniture and fixtures.................................. 17,374 17,619
Construction-in-progress................................ 28,371 30,805
-------- --------
$573,864 $533,622
Less accumulated depreciation........................... (190,683) (151,003)
-------- --------
Property, plant and equipment, net...................... $383,181 $382,619
======== ========
</TABLE>
Our depreciation expense was $40.7 million in 1999, $39.2 million in 1998,
and $33.5 million in 1997.
We attribute our fixed assets among our operating divisions based on use.
We have capitalized approximately $39.4 million, which represents the costs
we have incurred in validating and optimizing the manufacturing process for
products which have reached technological feasibility. We have capitalized the
following amounts of interest costs incurred in financing the construction of
our manufacturing facilities:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------ ------------ ------------
<S> <C> <C>
$ 1.0
million..... $0.7 million $0.5 million
</TABLE>
GCS-45
<PAGE>
NOTE I. INVESTMENTS
MARKETABLE SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents(1):
Corporate notes............................... $ 51,038 $ 51,023 $ 8,131 $ 8,129
Money market fund............................. 26,527 26,527 70,805 70,805
-------- -------- -------- --------
$ 77,565 $ 77,550 $ 78,936 $ 78,934
======== ======== ======== ========
Short-term:
Corporate notes............................... $252,711 $251,779 $175,002 $175,453
Federal....................................... 4,065 4,067 -- --
-------- -------- -------- --------
$256,776 $255,846 $175,002 $175,453
======== ======== ======== ========
Long-term:
Corporate notes............................... $175,080 $172,387 $226,002 $226,259
Federal....................................... 4,081 4,026 33,412 33,581
U.S. Treasury notes........................... 90,904 90,575 21,323 21,824
-------- -------- -------- --------
$270,065 $266,988 $280,737 $281,664
======== ======== ======== ========
Investments in equity securities.............. $ 63,983 $ 97,859 $ 62,244 $ 51,977
======== ======== ======== ========
</TABLE>
- ------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheet.
We attribute marketable securities among our operating divisions.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
We recorded gains of $2.0 million in 1999 and $3.4 million in 1998 upon the
sale of our investment in shares of Techne common stock. We also recorded
charges of $5.7 million in 1999 and $3.4 million in 1998 because we considered
the decline in the value of certain strategic investments in collaborators'
common stock to be other than temporary.
We record gross unrealized holding gains and losses in stockholders' equity.
The following table sets forth the amount we recorded:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Unrealized holding gains........................ $37.1 million $3.6 million
Unrealized holding losses....................... $6.9 million $12.5 million
</TABLE>
GCS-46
<PAGE>
NOTE I. INVESTMENTS (CONTINUED)
The following table contains information regarding the range of contractual
maturities of our investments in debt securities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 years.......................... $334,341 $333,396 $253,939 $254,387
1-2 years............................... 168,704 166,152 259,363 259,788
2-10 years.............................. 101,361 100,836 21,373 21,876
-------- -------- -------- --------
$604,406 $600,384 $534,675 $536,051
======== ======== ======== ========
</TABLE>
We attribute strategic investments in equity securities of unconsolidated
entities among our operating divisions. We attribute all of the investments
included in the following table to Genzyme General except for our investment in
Focal, Inc., which we attribute to Genzyme Surgical Products.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------
ADJUSTED UNREALIZED
COST MARKET VALUE GAIN/(LOSS)
-------- ------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Entity
Abiomed, Inc................................ $15,804 $42,404 $26,600
Aronex Pharmaceutical Inc................... 1,693 1,323 (370)
BioMarin Pharmaceutical Inc................. 18,000 24,705 6,705
Celtrix Pharmaceuticals, Inc. (1)........... 4,898 8,692 3,794
Dyax Corporation............................ 3,000 3,000 --
Focal, Inc.................................. 4,000 3,140 (860)
GelTex Pharmaceuticals, Inc................. 2,500 1,281 (1,219)
Genovo, Inc................................. 3,400 3,400 --
Integramed America, Inc. (2)................ 117 115 (2)
Pharming Group, N.V. (3).................... 7,886 7,723 (163)
Other....................................... 2,076 2,076 --
------- ------- -------
Total..................................... $63,374 $97,859 $34,485
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
ADJUSTED COST MARKET VALUE UNREALIZED LOSS
------------- ------------ ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total................................. $62,244 $51,977 $10,267
======= ======= =======
</TABLE>
- ------------------------
(1) In December 1998, we determined that a portion of the impairment in our
investment in Celtrix was other than temporary and recorded a charge to
operations of $3.4 million.
(2) In December 1999, we determined that a portion of the impairment in our
investment in Integramed America was other than temporary and recorded a
charge to operations of $0.2 million.
(3) Our investment in Pharming is denominated in Euros. We translated this
investment into U.S. dollars at the current exchange rate on December 31,
1999. In June 1999, we determined that a
GCS-47
<PAGE>
NOTE I. INVESTMENTS (CONTINUED)
portion of the impairment in our investment in Pharming was other than
temporary and recorded a charge to operations of $5.5 million.
GENZYME TRANSGENICS CORPORATION
At December 31, 1999, we owned approximately 33% of the outstanding common
stock of GTC and record in net loss of unconsolidated affiliates our portion of
its results. We refer to Genzyme Transgenics in this note as "GTC." Our portion
of GTC's net losses was $7.1 million in 1999, $7.4 million in 1998, and
$2.9 million in 1997. The fair market value of our investment in GTC common
stock was $93.8 million on December 31, 1999 and $41.8 million on December 31,
1998.
In November 1999, we purchased $6.6 million in shares of Series B
convertible preferred stock of GTC. We can convert these shares into shares of
GTC common stock at any time at a price of $6.30 per share. We will receive an
escalating annual dividend of between 11% and 12% on amounts that we convert
into common stock.
Our Chairman and Chief Executive Officer is a director of GTC.
The following table contains condensed statement of operations and balance
sheet data for GTC:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues....................................... $ 68,784 $ 62,412 $ 62,938
Operating loss................................. (2,666) (19,365) (8,352)
Net loss....................................... (18,761) (19,950) (9,343)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets........................................ $29,604 $32,417
Noncurrent assets..................................... 54,708 50,920
Current liabilities................................... 43,471 37,297
Noncurrent liabilities................................ 14,676 9,836
</TABLE>
AGREEMENTS WITH GTC
We have a number of agreements with GTC, including the following:
- services agreement under which GTC pays us for services provided by us,
including treasury, data processing and laboratory support services.
- sublease agreement under which we sublease a portion of one of our
facilities in Framingham, Massachusetts; and
- research and development agreement under which each of the parties
performs research services for the other.
During 1999, we received approximately $2.2 million from GTC under these
agreements and we paid GTC approximately $1.2 million under the research and
development agreement. At December 31, 1999, GTC owed Genzyme $0.5 million under
these agreements.
We have guaranteed GTC's obligations under a $17.5 million revolving credit
facility and a $7.1 million term loan with a commercial bank. In exchange for
this guarantee, GTC issued us a
GCS-48
<PAGE>
NOTE I. INVESTMENTS (CONTINUED)
warrant to purchase up to 288,000 shares of GTC common stock at an exercise
price of $4.875 per share. Of these shares, 192,000 are currently exercisable.
GTC also issued us a warrant to purchase 145,000 shares of GTC common stock at
an exercise price of $2.84375 per share in connection with our guarantee of
GTC's obligations under a prior credit facility. All of the shares subject to
this warrant are exercisable.
We have also made a $6.3 million line of credit available to GTC. No amounts
were outstanding under this credit line as of December 31, 1999. This credit
line expires in March 2000. Upon expiration, GTC may convert any outstanding
balance into a three-year term loan. The line of credit requires GTC to meet
financial covenants similar to those under GTC's bank credit facility.
ATIII LLC. In 1998, we formed ATIII LLC, a joint venture with GTC for the
development and commercialization of recombinant human transgenic antithrombin
III, which we refer to as ATIII. Both parties contributed applicable
intellectual property to the joint venture. We will fund 70% of the first
$33.0 million in development costs under the program and 50% of all development
costs thereafter. 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. ATIII LLC has the right to commercialize ATIII
worldwide, excluding Asia. We are required to make milestone payments to GTC
upon the occurrence of certain events. GTC will manufacture ATIII in bulk form
and we will perform the finished processing work. As the exclusive distributor
for ATIII LLC, we will market and sell products for the joint venture in the
territory. We consolidate the results of ATIII LLC and record GTC's portion of
the losses of that joint venture as minority interest.
DYAX CORP.
In March 1996, we entered into two license agreements with Dyax Corp. and
Protein Engineering Corporation, a wholly-owned subsidiary of Dyax, for Dyax's
phage display technology. We pay annual license maintenance fees of $50,000 for
this license. We will also make milestone payments and pay royalties on net
sales of diagnostic and therapeutic products discovered, made or developed using
the licensed technology. In September 1996, we subleased office and laboratory
space in Cambridge, Massachusetts to Dyax. Current rent under this sublease is
$53,943 per month.
In October 1998, we entered into a collaboration agreement with Dyax 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, we 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. To date, Dyax has not
borrowed any money under the line of credit. We will make milestone payments to
Dyax upon FDA approval of products that arise out of the collaboration, and we
will share equally with Dyax all profits from the sale of these products.
One of our directors is chairman and chief executive officer of Dyax and
three of our directors are directors of Dyax.
GCS-49
<PAGE>
NOTE I. INVESTMENTS (CONTINUED)
INVESTMENTS IN JOINT VENTURES
Except as described below, we own a 50% interest in the following joint
ventures:
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
- ------------- ---------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General
Inc.(1) capsules for the reduction of
serum phosphorus in patients
with end-stage renal disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Alpha-L-iduronidase for the Genzyme General
Inc. treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General
treatment of Pompe disease
Diacrin/ Genzyme LLC Diacrin, Inc.(2) October 1996 Products using porcine fetal cells Genzyme Tissue
for the treatment of Parkinson's Repair (until May
and Huntington's diseases 1999); Genzyme
General (after May
1999)
StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular
LLC(3) Biotechnologies Corp.; treatment of cancer Oncology
Canadian Medical
Discoveries Fund Inc.
(until October 1999)
</TABLE>
- ------------------------------
(1) Our Chairman and Chief Executive Officer is a director of GelTex and one of
our other directors is Chairman of GelTex.
(2) Our Chairman and Chief Executive Officer is a director of Diacrin.
(3) We owned a 33 1/3% interest in StressGen/Genzyme LLC until October 1999,
when we repurchased one-half of the Canadian Medical Discoveries Fund's
interest. Following that repurchase, we owned a 50% interest in
StressGen/Genzyme LLC. StressGen/Genzyme LLC was dissolved in
December 1999.
The following table describes:
- the amount of funding we have provided to each joint venture to date;
- our portion of the losses of each joint venture for the periods presented,
which we have recorded as charges to equity in net loss of unconsolidated
affiliates in our statement of operations; and
GCS-50
<PAGE>
NOTE I. INVESTMENTS (CONTINUED)
- amounts due to us by each joint venture as of December 31, 1999 for
services we provided on behalf of the joint venture, which we have
recorded on our balance sheet as prepaids and other current assets.
<TABLE>
<CAPTION>
NET LOSSES FROM RECEIVABLES
TOTAL FUNDING AS OF JOINT VENTURE FOR THE YEAR AS OF
JOINT VENTURE DECEMBER 31, 1999 ENDED DECEMBER 31 DECEMBER 31, 1999
- ------------- ------------------- ------------------------------------------- -----------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
RenaGel LLC(1)............. $29.1 million $ 8.1 million $7.5 million $2.3 million $2.1 million
BioMarin/
Genzyme LLC.............. $ 8.3 million $ 7.0 million $0.9 million -- $0.5 million
Pharming/ Genzyme
LLC...................... $14.9 million $10.3 million $4.0 million -- $0.4 million
Diacrin/Genzyme
LLC...................... $23.7 million $ 8.0 million $7.6 million $6.8 million $1.0 million
StressGen/
Genzyme LLC(2)........... $ 0.7 million $ 1.9 million $1.6 million $0.3 million --
</TABLE>
- ------------------------
(1) As part of this joint venture, we made payments to GelTex of $10.0 million
in 1999 and $15.0 million in 1998 in exchange for certain technology access
rights. We capitalized these payments and are amortizing these amounts over
15 years.
(2) Because the Canadian Medical Discoveries Fund had the right to require us to
repurchase the fund's interest in the joint venture, we recorded 50% of the
losses incurred by the joint venture. When the fund exercised its repurchase
right in August 1999, we recorded a $1.0 million charge to our statement of
operations in connection with the repurchase.
Condensed financial information for our joint ventures, including the
allocation of losses, is summarized below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue.......................................... $ 21,100 $ 226 $ --
Gross profit..................................... 13,738 153 --
Operating expenses............................... (59,981) (32,555) (12,109)
Net loss......................................... (52,453) (34,000) (11,830)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $28,293 $15,161
Noncurrent assets........................................... 8,157 7,429
Current liabilities......................................... 13,155 10,618
Noncurrent liabilities...................................... -- 4,574
</TABLE>
GCS-51
<PAGE>
NOTE J. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Compensation.......................................... $25,909 $23,310
Technology access fee................................. -- 10,000
Professional fees..................................... 3,908 6,146
Royalties............................................. 7,667 6,895
Rebates............................................... 7,125 5,663
Other................................................. 28,650 20,375
------- -------
$73,359 $72,389
======= =======
</TABLE>
NOTE K. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
While Genzyme Corporation is responsible for repaying all long-term debt
obligations, we allocate these obligations to our operating divisions for
financial reporting purposes based on the intended use of the funds.
Our long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
5 1/4% convertible subordinated notes................... $250,000 $250,000
Revolving credit facility maturing in November 2002..... 23,000 --
Revolving credit facility maturing in November 1999..... -- 100,000
5% convertible subordinated debentures.................. 22,622 21,559
6% convertible subordinated note........................ -- 12,579
Mortgage notes.......................................... -- 3,167
-------- --------
295,622 387,305
-------- --------
Less current portion.................................... (5,000) (100,080)
-------- --------
$290,622 $287,225
======== ========
</TABLE>
Over the next five years, we will be required to repay the following
principal amounts on our long-term debt (excluding capital leases):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
- ------------ ------------ ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$5.0 million $0.0 million $18.0 million $22.6 million $0.0 million $250.0 million
</TABLE>
REVOLVING CREDIT FACILITY
In November 1999, our $225 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. When we refinanced the credit facility,
$100.0 million was outstanding. Of this amount, we:
- repaid the $82.0 million that was allocated to Genzyme General; and
GCS-52
<PAGE>
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
- refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
Loans under the new credit facility bear interest at LIBOR plus an
applicable margin pursuant to the terms and conditions defined in the credit
agreement, and are collateralized by the stock of Genzyme Securities
Corporation. This facility requires us to satisfy a number of financial
covenants.
At December 31, 1999, $23.0 million was outstanding under the facility that
matures in November 2002. Of this amount, $5.0 million was allocated to Genzyme
Molecular Oncology and $18.0 million was allocated to Genzyme Tissue Repair. The
interest rate on these borrowings was approximately 6.8%.
5 1/4% CONVERTIBLE SUBORDINATED NOTES
In May 1998, we issued $250.0 million in principal of 5 1/4% convertible
subordinated notes due June 2005. After deducting the initial purchasers'
discount and offering costs, we received $243.0 million in proceeds from this
issuance.
We pay interest on the notes on June 1 and December 1 of each year and made
the first interest payment in December 1998. The notes are convertible into one
share of GENZ Stock, 0.10805 share of GZMO Stock and 0.17901 share of GZSP Stock
at a price of $39.60 and contain anti-dilution adjustments. We may redeem all or
part of the notes at our option after June 10, 2001 at the following prices
(expressed as a percentage of the principal amount), plus accrued interest:
<TABLE>
<CAPTION>
ON OR BEFORE 5/31/02 6/1/02--5/31/03 6/1/03--5/31/04 ON OR AFTER 6/1/04
- -------------------- --------------- --------------- ------------------
<S> <C> <C> <C>
102.63% 101.75% 100.88% 100.00%
</TABLE>
The fair value of these notes at December 31, 1999 was $317.5 million.
6% CONVERTIBLE SUBORDINATED NOTE
In February 1997, we issued a 6% convertible subordinated note in a
principal amount of $13.0 million. This note was convertible into shares of GZTR
Stock at a discount to the market value of that stock. We recorded charges to
interest expense of $0.2 million in 1999, $0.5 million in 1998 and $1.1 million
in 1997, to reflect the accretion to fair value of the conversion feature of
this note.
In 1998, the holder of this note converted $0.6 million in principal amount
into 223,405 shares of GZTR Stock. We paid $1.1 million in accrued interest in
connection with these conversions. In 1999, the holder converted the remaining
$12.4 million in principal amount into 7,257,573 shares of GZTR Stock. We paid
$0.5 million in accrued interest in connection with these conversions. As of
December 31, 1999, there was no principal or interest remaining on this
convertible note.
5% CONVERTIBLE SUBORDINATED DEBENTURES
In August 1997, we issued $20.0 million in principal of 6% convertible
subordinated debentures. These debentures were convertible into shares of GZMO
Stock at a discount to the market value of that stock. We recorded charges to
interest expense of $1.9 million in 1998 and $0.9 million in 1997 to reflect the
accretion to fair value of the conversion feature of the 6% debentures. In
accordance with the terms of these debentures, they were exchanged in
August 1998 for $21.2 million in principal of 5% convertible subordinated
debentures due August 2003. These debentures are convertible into shares of GENZ
Stock. In November 1998 we reserved approximately 3.0 million GZMO designated
shares for issuance in connection with this exchange. In October 1999 we
increased the number of GZMO designated shares reserved in connection with this
exchange by approximately 0.3 million.
GCS-53
<PAGE>
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
MORTGAGE NOTES
In 1999, we repaid the remaining $3.1 million of principal and accrued
interest of $0.1 million under our mortgage note due in December 2000. This
obligation had been allocated to Genzyme General.
OPERATING LEASES
We lease facilities and personal property under operating leases with terms
in excess of one year. Our total expense under operating leases was:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
$22.2
million...... $18.4 million $16.3 million
</TABLE>
Over the next five years, we will be required to repay the following amounts
under operating leases:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
- ------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$17.5 million $17.0 million $15.7 million $13.6 million $13.1 million $119.9 million
</TABLE>
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year
lease with an unaffiliated lessor. Our expenses under this lease were $1.5
million in 1999 and 1998 and $1.3 million in 1997. Our rent under this lease
increases every five years based on the Consumer Price Index or, if higher, 3%
per year.
NOTE L. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Our charter permits us to issue shares of preferred stock at any time in one
or more series. Our board of directors will establish the preferences, voting
powers, qualifications, and special or relative rights or privileges of any
series of preferred stock before it is issued.
STOCK RIGHTS
Under our shareholder rights plan, each outstanding share of GENZ Stock,
GZMO Stock, GZSP Stock and GZTR Stock also represents one preferred stock
purchase right for that series of stock. When the stock purchase rights become
exercisable, the holders of our common stock will be entitled to purchase the
following:
- GENZ stock right: 0.01 share of Series A Junior Participating Preferred
Stock for $300.00;
- GZMO stock right: 0.01 share of Series C Junior Participating Preferred
Stock for $26.00;
- GZSP stock right: 0.01 share of Series D Junior Participating Preferred
Stock for $150.00; and
- GZTR stock right: 0.01 share of Series B Junior Participating Preferred
Stock for $26.00.
These stock purchase rights expire in March 2009.
STOCK OFFERINGS
In 1997, we sold 4,000,000 shares of GZTR Stock for net proceeds of
$29.0 million.
GCS-54
<PAGE>
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
DIRECTORS' DEFERRED COMPENSATION PLAN
Each member of our board of directors who is not also one of our officers or
employees may defer receipt of all or a portion of the cash compensation payable
to him or her as a director and receive either cash or stock in the future.
Under this plan, the director may defer his or her compensation until his or her
services as a director cease or until another date specified by the director. As
of December 31, 1999, one of the six eligible directors was participating in
this plan. We have reserved the following numbers of shares to cover
distributions credited to stock accounts under the plan:
- 50,000 shares of GENZ Stock;
- 50,000 shares of GZMO Stock;
- 50,000 shares of GZSP Stock; and
- 100,000 shares of GZTR Stock.
We had not made any distributions under this plan as of December 31, 1999.
EQUITY PLANS
At December 31, 1999, we had reserved the following numbers of shares for
issuance under our 1990 Equity Incentive Plan, 1997 Equity Plan, 1998 Director
Stock Option Plan, and 1999 Employee Stock Purchase Plan:
- 13,126,000 shares of GENZ Stock;
- 4,011,000 shares of GZMO Stock;
- 3,800,000 shares of GZSP Stock; and
- 5,544,000 shares of GZTR Stock.
STOCK OPTIONS
The following number of shares are currently authorized and available for
grant under our 1990 Equity Incentive Plan and 1997 Equity Plan:
- 24,500,000 shares of GENZ Stock;
- 3,500,000 shares of GZMO Stock;
- 3,200,000 shares of GZSP Stock; and
- 5,300,000 shares of GZTR Stock.
We grant stock options with exercise prices not less than fair market value
at date of grant. The plans provide for the grant of stock appreciation rights,
performance shares, restricted stock and stock units. Each of these instruments
has a maximum term of ten years and generally vest over four years.
The following number of shares are currently authorized and available for
grant under our director stock option plan:
- 340,000 shares of GENZ Stock;
- 140,000 shares of GZMO Stock;
- 100,000 shares of GZSP Stock; and
GCS-55
<PAGE>
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
- 200,000 shares of GZTR Stock.
Options under the director plan are automatically granted with an exercise
price at fair market value to members of our board of directors when they are
elected or re-elected as directors. These options expire ten years after the
initial grant date and generally vest over four years.
The following table depicts activity under our various stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES UNDER AVERAGE NUMBER
OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
GENZ STOCK:
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
Granted........................................ 1,647,719 43.43
Granted--premium price......................... 1,272,376 58.97
Exercised...................................... (2,526,838) 20.63
Forfeited and cancelled........................ (376,480) 30.22
-----------
Outstanding at December 31, 1999................. 11,609,507 $31.11 5,633,053
===========
GZMO STOCK:
Outstanding at 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
Granted........................................ 286,363 3.46
Granted--premium price......................... 402,615 5.39
Exercised...................................... (362) 3.50
Forfeited and cancelled........................ (37,291) 6.67
-----------
Outstanding at December 31, 1999................. 1,809,110 $ 6.14 656,648
===========
GZSP STOCK:
Outstanding at June 28, 1999................... --
Granted........................................ 3,050,690 $ 6.65
Exercised...................................... 0 --
Forfeited and cancelled........................ (60,120) 6.69
-----------
Outstanding at December 31, 1999................. 2,990,570 $ 6.65 563,048
===========
</TABLE>
GCS-56
<PAGE>
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
SHARES UNDER AVERAGE NUMBER
OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
GZTR STOCK:
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
Granted........................................ 667,120 2.22
Granted--premium price......................... 402,615 7.71
Exercised...................................... (357) 2.09
Forfeited and cancelled........................ (291,558) 7.49
-----------
Outstanding at December 31, 1999................. 4,175,766 $ 8.02 1,905,031
===========
</TABLE>
In 1999, we granted the following stock options with exercise prices above
fair market value:
- 1,272,376 shares of GENZ Stock at 120% of fair market value on the date of
grant;
- 402,615 shares of GZMO Stock at 200% of fair market value on the date of
grant; and
- 402,615 shares of GZTR Stock at 200% of fair market value on the date of
grant.
The total exercise proceeds for all options outstanding at December 31, 1999
is:
- $361,260,000 for GENZ Stock;
- $11,106,000 for GZMO Stock;
- $19,897,000 for GZSP Stock, and
- $33,482,000 for GZTR Stock.
The following table contains information regarding the range of option
prices as of December 31, 1999:
GENZ STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$8.19--$19.44 2,710,664 3.94 $15.92 1,840,504 $16.48
19.50--27.56 2,456,522 6.80 26.06 1,342,620 25.30
27.63--28.00 829,734 6.09 27.96 761,791 27.97
28.06--58.06 4,325,198 8.03 35.81 1,688,138 31.73
58.88--62.33 1,287,389 9.08 58.98 0 0.00
---------- ---- ------ --------- ------
$8.19--$62.33 11,609,507 6.79 $31.11 5,633,053 $24.71
</TABLE>
GCS-57
<PAGE>
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
GZMO STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.31--$5.75 658,396 9.18 $4.63 39,627 $3.48
7.00 1,150,714 7.97 7.00 617,021 7.00
--------- ---- ----- ------- -----
$2.31--$7.00 1,809,110 8.41 $6.14 656,648 $6.79
</TABLE>
GZSP STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$4.63--$5.94 79,400 9.86 $5.33 0 $0.00
6.69--7.50 2,911,170 9.65 6.69 563,048 6.69
--------- ---- ----- ------- -----
$4.63--$7.50 2,990,570 9.66 $6.65 563,048 $6.69
</TABLE>
GZTR STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
--------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$1.63-$3.50 859,572 9.20 $2.41 83,128 $2.31
4.03-6.50 1,244,702 6.32 5.60 942,694 5.37
6.63-9.88 976,902 8.32 8.58 315,066 9.36
10.00-17.50 1,048,037 6.21 14.35 527,816 12.98
17.63-25.75 46,553 6.10 22.10 36,327 22.01
--------- ---- ----- --------- -----
$1.63-$25.75 4,175,766 7.35 $8.02 1,905,031 $8.32
</TABLE>
GCS-58
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan is an amendment and replacement of our
1990 Employee Stock Purchase Plan. This plan allows employees to purchase our
stock at 85% of fair market value. The number of shares authorized for purchase
under the plan are:
- 589,299 shares of GENZ Stock;
- 500,000 shares of GZMO Stock;
- 500,000 shares of GZSP Stock; and
- 500,001 shares of GZTR Stock.
We place limitations on the number of shares of each series of stock that can be
purchased under the plan in a given year.
The following table shows the shares purchased by employees under both
plans:
<TABLE>
<CAPTION>
SHARES ISSUED GENZ STOCK GZMO STOCK GZTR STOCK
- ------------- ---------- ---------- ----------
<S> <C> <C> <C>
1997..................................... 366,922 0 280,819
1998..................................... 388,048 0 515,936
1999..................................... 313,180 126,066 208,375
Available for purchase as of
December 31, 1999...................... 351,472 373,934 345,744
</TABLE>
As of December 31, 1999, we had not offered shares of GZSP Stock for sale to
employees.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. We do not recognize compensation expense for options granted
and shares purchased under the provisions of these plans for options granted to
employees with an exercise price greater than or equal to fair market value.
The following table sets forth net income (loss) and income (loss) per share
data calculated in accordance with SFAS 123 as if compensation expense for our
stock-based compensation plans was determined based on the fair value at the
grant dates for options granted and shares purchased under the plans (in the
case of Genzyme Surgical Products, disclosure is presented only for the year
ended
GCS-59
<PAGE>
December 31, 1999, because we had not granted options to purchase GZSP Stock
under these plans prior to 1999):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED:
Net income (loss):
As reported............................................. $ 70,981 $ 62,567 $ 13,629
Pro forma............................................... $ 46,382 $ 43,986 $ (2,150)
GENZYME GENERAL
Net income:
As reported............................................. $176,883 $170,909 $107,175
Pro forma............................................... $159,223 $157,334 $ 95,168
Basic income per share:
As reported............................................. $ 2.13 $ 2.16 $ 1.40
Pro forma............................................... $ 1.92 $ 1.99 $ 1.24
Diluted income per share:
As reported............................................. $ 2.00 $ 2.06 $ 1.36
Pro forma............................................... $ 1.81 $ 1.83 $ 1.21
GENZYME MOLECULAR ONCOLOGY:
Net loss:
As reported............................................. $(28,832) $(19,107) $(19,578)
Pro forma............................................... $(29,973) $(20,018) $(19,787)
Basic and diluted loss per share:
As reported............................................. $ (2.25) $ (3.81) $ (4.98)
Pro forma............................................... $ (2.34) $ (3.99) $ (5.04)
GENZYME SURGICAL PRODUCTS:
Net loss:
As reported............................................. $(48,037) -- --
Pro forma............................................... $(50,583) -- --
Basic and diluted loss per share:
As reported............................................. $ (3.25) -- --
Pro forma............................................... $ (3.42) -- --
GENZYME TISSUE REPAIR:
Net loss:
As reported............................................. $(30,040) $(40,386) $(45,984)
Pro forma............................................... $(33,292) $(44,481) $(49,547)
Basic and diluted loss per share:
As reported............................................. $ (1.26) $ (1.99) $ (3.07)
Pro forma............................................... $ (1.40) $ (2.19) $ (3.31)
</TABLE>
GCS-60
<PAGE>
We estimate the fair value of each option grant using the Black-Scholes
option-pricing model. In computing these PRO FORMA amounts, we used the
following assumptions:
<TABLE>
<CAPTION>
RISK-FREE DIVIDEND TERM OF GRANT
INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE
------------- ---------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
GENZYME GENERAL:
1999.................................... 5.58% 45% 0 5 $20.31
1998.................................... 5.59% 44% 0 4 $12.87
1997.................................... 5.96% 42% 0 4 $12.21
GENZYME MOLECULAR ONCOLOGY:
1999.................................... 5.58% 70% 0 5 $ 2.16
1998.................................... 5.59% 70% 0 4 $ 3.92
1997.................................... 5.96% 45% 0 4 $ 2.97
GENZYME SURGICAL PRODUCTS:
1999.................................... 5.58% 42% 0 5 $ 2.99
GENZYME TISSUE REPAIR:
1999.................................... 5.58% 68% 0 5 $ 1.36
1998.................................... 5.59% 73% 0 4 $ 3.27
1997.................................... 5.96% 70% 0 4 $ 5.66
</TABLE>
For stock options that were granted in 1999 at prices above fair market
value, we made the following assumptions:
<TABLE>
<CAPTION>
RISK-FREE DIVIDEND TERM OF GRANT
INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE
------------- ---------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Genzyme General..................... 4.73% 45% 0 5 $15.26
Genzyme Molecular Oncology.......... 4.73% 70% 0 5 $ 2.03
Genzyme Tissue Repair............... 4.73% 68% 0 5 $ 1.05
</TABLE>
WARRANTS
In 1997, we sold warrants to purchase a total of 120,000 shares of GENZ
Stock for an aggregate purchase price of $1.0 million (Canadian). All of these
warrants were cancelled in August 1999 when the Canadian Medical Discoveries
Fund exercised its right to require us to repurchase the fund's interest in
StressGen/Genzyme LLC.
In 1992 and 1995, we issued warrants which, if exercised between
December 16, 1994 and July 10, 1997, would have entitled the holders to purchase
two shares of GENZ Stock and .0675 share of GZTR Stock. If the holders had
exercised the warrants after July 10, 1997, they would have received two shares
of GENZ Stock and .0975 share of GZTR Stock. We granted these warrants in
exchange for the receipt of options to purchase the callable common stock of
Neozyme II Corporation and in connection with our acquisition of IG
Laboratories, Inc.
GCS-61
<PAGE>
Activity for Genzyme General warrants is summarized below:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE
-------- --------------------
<S> <C> <C>
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
Cancelled........................................ (120,000) 30.18
--------
Outstanding at December 31, 1999................... 0 --
========
</TABLE>
When we acquired PharmaGenics in 1997, we assumed a warrant that expires in
2001. This warrant is exercisable into 9,563 shares of GZMO Stock at $8.04 per
share.
DESIGNATED SHARES
Designated shares are authorized shares of GZMO, GZSP and GZTR Stock that
are not issued and outstanding, but which our board of directors may issue, sell
or distribute without allocating the proceeds or benefits to the division that
the series of stock tracks. Designated shares are not eligible to receive
dividends and cannot be voted by Genzyme. We create designated shares when we
transfer cash or other assets from Genzyme General to Genzyme Molecular
Oncology, Genzyme Surgical Products or Genzyme Tissue Repair or from other
interdivision transactions. Our board of directors may issue designated shares:
- as a stock dividend to the holders of GENZ Stock;
- by selling the shares in a public or private sale and allocating all of
the proceeds to Genzyme General; and
- when convertible securities are converted, the proceeds of which will be
allocated to Genzyme General.
DISTRIBUTION OF DESIGNATED SHARES
We will distribute designated shares of GZMO, GZSP and GZTR Stock each year
to holders of GENZ Stock if the number of designated shares of a particular
series exceeds 10% of the number of shares of that series issued and outstanding
as of the following dates:
- November 30, 2000 for GZMO Stock;
- June 30, 2000 for GZSP Stock; and
- May 31, 2000 for GZTR Stock.
We will not distribute designated shares reserved for issuance upon the
exercise or conversion of Genzyme General convertible securities and the number
of designated shares our board of directors may reserve for sale not later than
six months after these dates. Any proceeds from the sale of designated shares
will be allocated to Genzyme General.
GCS-62
<PAGE>
Designated share activity is summarized in the following table:
<TABLE>
<CAPTION>
GZMO GZSP GZTR
DESIGNATED DESIGNATED DESIGNATED
SHARES SHARES SHARES
------------ ----------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996............ -- -- 1,793,592
Established at merger................. 6,000,000 -- --
Stock options exercised............... -- -- (103,729)
Stock warrants exercised.............. -- -- (2,617)
Exercise of Genzyme Tissue Repair
purchase option..................... -- -- 1,000,000
Increase from equity line............. -- -- 489,810
Dividend distribution................. -- -- (2,292,003)
------------ ----------
Balance at December 31, 1997............ 6,000,000 -- 885,053
Debenture exchange.................... 3,028,571 -- --
Credit facility exchange.............. 385,972 -- --
Increase from equity line (1)......... 714,286 -- --
Dividend distribution................. (8,717,485) -- --
Stock options exercised............... -- -- (167,064)
Stock warrants exercised.............. (1,352) -- (1,721)
------------ ----------
Balance at December 31, 1998............ 1,409,992 -- 716,268
Established........................... -- 16,000,000 --
Dividend distribution................. (14,835,161)
Debenture adjustment.................. 278,245 --
Increase from equity line............. -- -- 1,633,399
Stock options exercised............... -- -- (111,614)
------------ ----------- ----------
Balance at December 31, 1999............ 1,688,237 1,164,839 2,238,053
============ =========== ==========
</TABLE>
- ------------------------
(1) Assumes that Genzyme Molecular Oncology does not complete a public offering
of GZMO Stock prior to June 18, 2000. If such an offering is completed prior
to that date, the number of GZMO designated shares reserved for issuance in
connection with this transaction will decrease based on a formula set forth
in our charter.
In October 1999, we adjusted the number of GZMO designated shares reserved
in connection with the exchange in August 1998 of 6% debentures convertible into
GZMO Stock into 5% debentures convertible into GENZ Stock. We made this
adjustment based on the fair market value of GZMO Stock on October 16, 1999 in
accordance with the terms of the exchange established by our board.
In June 1999, we distributed GZSP designated shares to holders of GENZ
Stock.
In November 1998, we distributed GZMO designated shares to holders of GENZ
Stock.
Prior to our acquisition of PharmaGenics, we made a credit facility
available to fund PharmaGenics' operating costs pending completion of the
acquisition. When the acquisition was completed, the $2,450,000 drawn by
PharmaGenics under this facility became a liability allocated to Genzyme
Molecular Oncology. In September 1998, our board of directors approved the
exchange of that credit facility to Genzyme General, plus accrued interest of
$246,080, for GZMO designated shares based on the fair market value of the GZMO
Stock. We reclassified the amount of the note and the accrued interest to
division equity upon the exchange.
GCS-63
<PAGE>
In July 1997, we distributed GZTR designated shares to holders of GENZ Stock
and reserved approximately 394,000 GZTR designated shares for issuance upon the
exercise of GENZ Stock options and warrants outstanding on the record date.
We had an option to allocate up to $30.0 million in cash from Genzyme
General to Genzyme Tissue Repair, at $10.00 per GZTR designated share. In
June 1997, our board of directors allocated $10.0 million in cash from Genzyme
General to Genzyme Tissue Repair in exchange for 1,000,000 GZTR designated
shares. This option has expired.
EQUITY LINES OF CREDIT
GENZYME MOLECULAR ONCOLOGY
In 1997, our board of directors made $25.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology under an equity line of credit. This
equity line was subject to dollar-for dollar reduction by the proceeds of
outside financing received by Genzyme Molecular Oncology. When Genzyme Molecular
Oncology issued $20.0 million in convertible debentures in August 1997, the
amount available under the equity line was reduced to $5.0 million. In
September 1998, Genzyme Molecular Oncology drew the remaining $5.0 million
available under this equity line in exchange for GZMO designated shares.
In August 1998, our board of directors made an additional $30.0 million of
Genzyme General's cash available to Genzyme Molecular Oncology under an equity
line of credit. Under the terms of this equity line, Genzyme Molecular Oncology
may draw down funds as needed each quarter in exchange for GZMO designated
shares based on the fair market value of GZMO Stock (as defined in our charter)
at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had
not yet drawn any funds from this equity line.
GENZYME TISSUE REPAIR
In October 1996, our board of directors made $20.0 million on Genzyme
General's cash available to Genzyme Tissue Repair under an equity line of credit
in order for Genzyme Tissue Repair to fund its obligations under its joint
venture with Diacrin. Under this line, Genzyme Tissue Repair may draw down funds
as needed each quarter in exchange for GZTR designated shares based on the fair
market value of GZTR Stock (as defined in our charter) at the time of the draw.
Genzyme Tissue Repair made a $7.0 million draw under this line in 1997.
In May 1998, our board of directors increased the amount available under
this equity line from $13.0 million to $50.0 million. Genzyme Tissue Repair made
a $5.0 million draw under the line in February 1999. In May 1999, the amount
available under this equity line was reduced by $25.0 million in connection with
the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme
Tissue Repair to Genzyme General.
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Our revenues from research and development agreements with related parties
include the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Genzyme Transgenics Corporation......................... $1,516 $3,568 $8,041
StressGen/Genzyme LLC................................... 496 2,177 315
------ ------ ------
$2,012 $5,745 $8,356
====== ====== ======
</TABLE>
GCS-64
<PAGE>
We allocate all of our research and development agreements with
unconsolidated affiliates to our operating divisions based on the business to
which the research relates.
AGREEMENTS ALLOCATED TO GENZYME GENERAL
GENZYME TRANSGENICS. Note I., "Investments," contains disclosure regarding
our relationship with Genzyme Transgenics.
JOINT VENTURES. Note I., "Investments," contains disclosure regarding the
following joint ventures:
- RenaGel LLC;
- BioMarin/Genzyme LLC;
- Pharming/Genzyme LLC;
- Diacrin/Genzyme LLC; and
- ATIII LLC.
AGREEMENT ALLOCATED TO GENZYME MOLECULAR ONCOLOGY
Note I., "Investments," contains disclosure regarding StressGen/Genzyme LLC.
AGREEMENTS ALLOCATED TO GENZYME SURGICAL PRODUCTS
Genzyme Development Partners, L.P. was formed in September 1989 to develop,
produce and derive income from the sale of the Sepra products. We refer to
Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the
general partner of GDP. In September 1989, we also formed a joint venture with
GDP to manufacture and market the Sepra products in the United States and Canada
for use in human clinical trials or human clinical procedures. We refer to this
joint venture as GVII. We consolidate GVII for financial statement purposes and
allocate it to Genzyme Surgical Products.
We have the option to purchase all of the outstanding partnership interests
in GDP for approximately $26.0 million in cash, common stock or a combination of
both, plus future royalty payments on the sale of the Sepra products. We can
exercise this option during the 90-day period beginning on August 31, 2000. This
option will be accelerated if at any time prior to August 31, 2000 GDP receives
distributions from GVII of at least $5.5 million. While we had no obligation to
fund the research and development activities of GDP, we elected to fund the
following amounts:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------ ------------ ------------
<S> <C> <C>
$ 9.0
million..... $8.4 million $7.3 million
</TABLE>
We have agreed to fund GDP's research and development programs and general
and administrative expenses during 2000. We believe, however, that additional
funds will be required to complete the development, clinical testing and
commercialization of GDP's products.
NOTE N. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on our results of operations, financial
condition, or liquidity.
GCS-65
<PAGE>
NOTE O. INCOME TAXES
Our income (loss) before income taxes and the related income tax expense
(benefit) are described in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Domestic(1).................................... $101,548 $ 92,923 $16,907
Foreign........................................ 16,380 9,514 8,822
-------- -------- -------
Total...................................... $117,928 $102,437 $25,729
======== ======== =======
Currently payable:
Federal...................................... $ 41,638 $ 32,501 $11,344
State........................................ 2,990 6,375 1,754
Foreign...................................... 5,733 4,016 2,971
-------- -------- -------
Total...................................... $ 50,361 $ 42,892 $16,069
======== ======== =======
Deferred:
Federal...................................... $ (3,036) $ (2,180) $(3,723)
State........................................ (378) (842) (246)
-------- -------- -------
Total...................................... (3,414) $ (3,022) $(3,969)
======== ======== =======
Provision for income taxes................... $ 46,947 $ 39,870 $12,100
======== ======== =======
</TABLE>
- ------------------------
(1) Includes $5.4 million in charges for purchased research and development and
acquisition expenses in 1999 and $7.0 million in similar charges in 1997 as
well as $5.7 million in charges for impaired investments in 1999.
Our provisions for income taxes were at rates other than the U.S. federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<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.................................. 0.2 1.7 3.1
State taxes, net....................................... 1.3 3.5 3.0
Foreign sales corporation.............................. (4.0) (3.2) (6.7)
Nondeductible amortization............................. 3.3 4.2 10.6
Benefit of tax credits................................. (3.3) (3.9) (7.7)
Nondeductible interest and other....................... 3.9 1.6 (0.4)
---- ---- -----
Effective tax rate before certain charges.............. 36.4% 38.9% 36.9%
---- ---- -----
Charge for impaired investment......................... 1.7%
Charge for purchased research and development net of
related tax benefit.................................. 1.7% -- 10.1%
---- ---- -----
Effective tax rate..................................... 39.8% 38.9% 47.0%
==== ==== =====
</TABLE>
GCS-66
<PAGE>
The components of net deferred tax assets are described in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 5,568 $ 6,853
Tax credits........................................... 10,648 3,714
Deferred loss......................................... -- 2,002
Intangible amortization............................... 38,757 42,717
Investments in unconsolidated subsidiaries............ 3,396 3,108
Realized and unrealized capital losses................ 11,405 10,139
Reserves, accruals and other.......................... 48,531 44,509
-------- --------
Gross deferred tax asset................................ $118,305 $113,042
Valuation allowance..................................... (18,963) (16,700)
-------- --------
$ 99,342 $ 96,342
Deferred tax liabilities:
Depreciable assets.................................... (24,736) (28,479)
Realized and unrealized capital gains................. (12,686) --
Deferred gain......................................... (878) --
Intangible amortization............................... (1,213) (3,861)
-------- --------
Net deferred tax asset................................ $ 59,829 $ 64,002
======== ========
</TABLE>
As a result of uncertainty surrounding our ability to realize certain
favorable tax attributes that primarily relate to capital losses from the
purchase of in-process research and development, we placed valuation allowances
of $19.0 million in 1999 and $16.7 million in 1998 against otherwise
recognizable deferred tax assets.
Our ability to realize the benefit of net deferred tax assets is dependent
on our generating sufficient taxable income before loss carryforwards expire.
While it is not assured, we believe that it is more likely than not that we will
be able to realize all of our net deferred tax assets. The amount we can
realize, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
For U.S. income tax purposes, we had net operating loss carryforwards of
$15.9 million in 1999 and $19.6 million in 1998. Our net operating loss
carryforwards expire between 2003 and 2019. Prior to expiration, our ability to
use these carryforwards may be limited under U.S. tax laws, specifically
Section 382 of the Internal Revenue Code.
Approximately, $10.6 million of the tax carryforwards we have available for
federal income tax purposes relate to exercises of non-qualified stock options
and disqualifying dispositions of incentive stock options. The tax benefits from
stock exercises under these plans, if realized, will be credited to additional
paid-in capital.
NOTE P. BENEFIT PLANS
We have a 401(k) plan that covers nearly all of our employees. We also
maintain a separate 401(k) plan for the former employees of Deknatel Snowden
Pencer, Inc., which we acquired in 1996. These plans permit qualifying employees
to make contributions up to a specified percentage of their
GCS-67
<PAGE>
compensation, and we match a portion of those contributions. We contributed the
following amounts to the 401(k) plans:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Allocated to Genzyme General.......... $3.9 million $3.0 million $1.1 million
Allocated to Genzyme Surgical 0.8 million
Products............................ 0.8 million 0.8 million
Allocated to Genzyme Tissue Repair.... 0.1 million 0.1 million 0.2 million
------------ ------------ ------------
$4.8 million $3.9 million $2.1 million
============ ============ ============
</TABLE>
We also maintain defined-benefit pension plans for qualifying employees of a
number of our foreign subsidiaries and qualifying former employees of Deknatel
Snowden Pencer. We fund pension costs as they are accrued. Our expense related
to these plans was:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Allocated to Genzyme General.......... $1.3 million $0.8 million $0.8 million
Allocated to Genzyme Surgical 0.5 million
Products............................ 0.3 million 0.3 million
------------ ------------ ------------
$1.8 million $1.1 million $1.1 million
============ ============ ============
</TABLE>
We do not present actuarial and other disclosures for these plans because we
do not consider them to be material.
NOTE Q. SEGMENT INFORMATION
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." We present segment information in a manner consistent
with the method we use to report this information to our management. Applying
SFAS 131, we have five reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme.
- Diagnostic Products, which provides diagnostic products to niche markets,
focusing on in vitro diagnostics.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors.
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery.
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage repair, and severe burns.
GCS-68
<PAGE>
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Genzyme General:
Therapeutics............................................ $ 488,705 $413,645 $332,712
Diagnostic Products..................................... 57,971 65,683 66,288
Other................................................... 86,409 85,846 86,927
Genzyme Molecular Oncology................................ 4,619 19,407 782
Genzyme Surgical Products................................. 111,981 103,958 100,835
Genzyme Tissue Repair..................................... 20,402 17,117 10,856
Eliminations/Adjustments.................................. 2,201 3,679 10,441
--------- -------- --------
Total....................................................... $ 772,288 $$709,335 $608,841
========= ======== ========
Depreciation and Amortization Expense:
Genzyme General:
Therapeutics............................................ 21,068 $ 10,862 $ 10,054
Diagnostic Products..................................... 1,909 4,715 4,540
Other................................................... 6,422 11,470 7,410
Genzyme Molecular Oncology................................ 12,057 12,354 5,245
Genzyme Surgical Products................................. 8,181 8,449 8,220
Genzyme Tissue Repair..................................... 1,186 1,757 2,482
Eliminations/Adjustments.................................. 19,828 9,262 13,013
--------- -------- --------
Total....................................................... $ 70,651 $ 58,869 $ 50,964
========= ======== ========
Equity in Net Loss of Unconsolidated Affiliates:
Genzyme General:
Therapeutics............................................ $ (30,094) $(12,480) $ (2,310)
Diagnostic Products..................................... -- -- --
Other................................................... 56 (107) (71)
Genzyme Molecular Oncology................................ (1,870) (1,647) (258)
Genzyme Surgical Products................................. (35) -- --
Genzyme Tissue Repair..................................... (3,368) (7,674) (6,719)
Eliminations/Adjustments.................................. (7,385) (7,098) (2,900)
--------- -------- --------
Total....................................................... $ (42,696) $(29,006) $(12,258)
========= ======== ========
Income Tax (Expense) Benefits:
Genzyme General:
Therapeutics............................................ $ (84,859) $(76,606) $(61,389)
Diagnostic Products..................................... (2,485) (13,755) (1,409)
Other................................................... 2,963 2,134 8,658
Genzyme Molecular Oncology................................ 2,647 2,647 1,092
Genzyme Surgical Products................................. -- -- --
Genzyme Tissue Repair..................................... -- -- --
Eliminations/Adjustments.................................. 34,787 45,710 40,948
--------- -------- --------
Total....................................................... $ (46,947) $(39,870) $(12,100)
========= ======== ========
</TABLE>
GCS-69
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Income:
Genzyme General:
Therapeutics (1)........................................ $ 133,854 $120,832 $104,527
Diagnostic Products(2).................................. 3,915 21,694 2,400
Other (3)............................................... (4,661) (3,367) (14,741)
Genzyme Molecular Oncology................................ (28,832) (19,107) (19,578)
Genzyme Surgical Products(4).............................. (48,037) (31,000) (17,384)
Genzyme Tissue Repair..................................... (30,040) (40,386) (45,984)
Eliminations/Adjustments(5)............................... 44,782 13,901 4,389
--------- -------- --------
Total....................................................... $ 70,981 $ 62,567 $ 13,629
========= ======== ========
</TABLE>
- ------------------------
(1) Therapeutics' net income for 1998 includes a $14.8 million charge to write
down excess inventory used to make Ceredase enzyme.
(2) Diagnostic Products' net income for 1998 and 1999 includes gains on the sale
of product lines of $0.5 million in 1999 and $31.2 million in 1998.
(3) Other net income for 1999 includes a $7.5 million gain on the sale of a
product line.
(4) In 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost
of goods sold to reduce Sepra products inventory to net realizable value.
(5) Includes a $14.4 million gain upon receipt of a payment associated with the
termination of the agreement to acquire Cell Genesys.
<TABLE>
<S> <C> <C>
Segment Assets:
Genzyme General:
Therapeutics............................................ $ 338,960 $ 326,305
Diagnostic Products..................................... 40,266 49,430
Other................................................... 83,088 94,930
Genzyme Molecular Oncology................................ 9,692 35,952
Genzyme Surgical Products................................. 370,924 277,578
Genzyme Tissue Repair..................................... 19,648 18,954
Eliminations/Adjustments.................................. 924,704 887,405
---------- ----------
Total....................................................... $1,787,282 $1,690,554
========== ==========
</TABLE>
The Other category includes amounts attributable to our genetic testing and
pharmaceuticals businesses. Eliminations/Adjustments consists of the differences
between:
- The segments' net income and our consolidated net income; and
- Total segment assets and our consolidated total assets.
The amount in Eliminations/Adjustments for net income consists primarily of
interest income, interest expense and other income and expense items that we do
not specifically allocate to a particular segment.
GCS-70
<PAGE>
Segment assets include accounts receivable, inventory, and certain fixed and
intangible assets. The amounts in Eliminations/Adjustments for segment assets
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents, and short- and long-term
investments............................................... $513,905 $575,729
Intangibles, net............................................ 33,871 40,079
Property, plant and equipment, net.......................... 172,165 133,995
Investment in equity securities............................. 94,719 51,977
Other....................................................... 110,044 85,625
-------- --------
Total Eliminations / Adjustments............................ $924,704 $887,405
======== ========
</TABLE>
We operate in the healthcare industry and we manufacture and market our
products primarily in the United States and Europe. Our principal manufacturing
facilities are located in the United States, United Kingdom, Switzerland and
Germany. We purchase products from our English and Swiss subsidiaries for sale
to customers in the United States. We set transfer prices from our foreign
subsidiaries to allow us to produce profit margins commensurate with our sales
and marketing effort. Our Dutch subsidiary is our primary distributor of
therapeutic products in Europe.
The following table contains certain financial information by geographic
area:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
U.S...................................................... $ 512,304 $ 485,864 $446,991
Other.................................................... 259,984 223,471 161,850
---------- ---------- --------
Total.................................................. $ 772,288 $ 709,335 $608,841
========== ========== ========
Long-lived assets:
U.S...................................................... $ 732,771 $ 970,898 $755,040
Other.................................................... 52,540 57,247 54,349
---------- ---------- --------
Total.................................................. $ 785,311 $1,028,145 $809,389
========== ========== ========
</TABLE>
Our results of operations are highly dependent on sales of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales
of these products represented 70% of product revenue in 1999, 67% of product
revenue in 1998, and 63% of product revenue in 1997. We sell these products
directly to physicians, hospitals and treatment centers as well as through
unaffiliated distributors. Sales to one distributor represented 20% of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzyme
revenues in 1999, 19% of these revenues in 1998, and 18% of these revenues in
1997. We believe that our credit risk associated with trade receivables is
mitigated as a result of the fact that we sell these products to a large number
of customers in a number of different industries and over a broad geographic
area.
GCS-71
<PAGE>
NOTE R. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ST QUARTER 3RD QUARTER 4(TH) QUARTER
1999 1999 1999 1999
----------- ----------- ----------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue...................................... $183,744 $186,684 $191,415 $210,445
Gross profit..................................... 126,526 128,683 133,404 142,536
Net income....................................... 16,057 6,291 13,778 34,855
Income per share:
Attributable to GENZ Stock:
Basic.......................................... $ 0.53 $ 0.49 $ 0.46 $ 0.66
Diluted........................................ $ 0.49 $ 0.46 $ 0.43 $ 0.62
Attributable to GZMO Stock:
Basic and diluted.............................. $ (0.56) $ (0.64) $ (0.60) $ (0.46)
Attributable to GZSP Stock
Basic and diluted.............................. N/A N/A $ (0.74) $ (0.59)
Pro forma basic and diluted.................... $ (0.73) $ (1.19) N/A N/A
Attributable to GZTR Stock:
Basic and diluted.............................. $ (0.44) $ (0.37) $ (0.25) $ (0.22)
</TABLE>
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
1998 1998 1998 1998
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue..................................... $160,551 $174,874 $173,394 $200,516
Gross profit.................................... 99,434 111,436 87,142 130,802
Net income...................................... 7,784 13,096 14,967 26,720
Income per share:
Attributable to GENZ Stock:
Basic....................................... $ 0.43 $ 0.52 $ 0.68 $ 0.52
Diluted..................................... $ 0.42 $ 0.50 $ 0.64 0.49
Attributable to GZMO Stock:
Basic......................................... $ (1.66) $ (1.90) $ (2.06) $ 0.36
Diluted....................................... $ (1.66) $ (1.90) $ (2.06) $ 0.22
Attributable to GZSP Stock
Pro forma basic and diluted................... $ (0.62) $ (0.67) $ (1.45) $ (0.63)
Attributable to GZTR Stock:
Basic and diluted............................. $ (0.57) $ (0.52) $ (0.47) $ (0.44)
</TABLE>
NOTE S. SUBSEQUENT EVENTS
ACQUISITION OF BIOMATRIX
In March 1999, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue
Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR
Stock will be exchanged for GZBX Stock. We will account for the acquisition of
Biomatrix as a purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be capped at 35% of the total consideration, or approximately
$245 million.
GCS-72
<PAGE>
Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share
of GZSP Stock they hold, and holders of GZTR Stock will receive 0.3352 share of
GZBX Stock for each share of GZTR Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approvals of the holders
of GZSP Stock and GZTR Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GENZYME TRANSGENICS
In February 2000, we converted our shares of the Series B Convertible
Preferred Stock of Genzyme Transgenics into 1,048,021 shares of Genzyme
Transgenics common stock. Also in February 2000, Genzyme Transgenics completed a
public offering of its common stock. We will recognize a gain on affiliate sale
of stock of approximately $20 million in the first quarter of 2000.
PUBLIC OFFERING OF GZMO STOCK
In March 2000, we announced a proposed public offering of 3,000,000 shares
of GZMO Stock.
GCS-73
<PAGE>
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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally accepted in the
United States 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
Boston, Massachusetts
February 23, 2000
GCS-74
<PAGE>
GENZYME CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------- ------------------- --------------------------------- ----------- -------------
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------------- ------------------- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts............... $11,299,100 $12,775,200 $ -- $ 3,789,400 $20,284,900
Inventory reserve........ $40,410,100 $ 5,568,400 $ -- $ 8,378,400 $37,600,100
Year ended December 31,
1998:
Allowance for doubtful
accounts............... $ 9,730,700 $ 5,482,000 $ -- $ 3,913,600 $11,299,100
Inventory reserve........ $27,518,300 $31,664,000 $ -- $18,772,200 $40,410,100
Year ended December 31,
1997:
Allowance for doubtful
accounts............... $13,292,900 $ 2,835,000 $ -- $ 6,397,200(1) $ 9,730,700
Inventory reserve........ $10,912,300 $19,505,000 $ -- $ 2,899,000 $27,518,300
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
GCS-75
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME DIRECT PARENT OWNERSHIP INCORPORATION
- ---- ------------- --------- -------------
<S> <C> <C>
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation
Allston Landing Genzyme Corporation 100% Massachusetts
Corporation II
BioMarin/Genzyme LLC Genzyme Corporation 50% Delaware
Deknatel Snowden Genzyme Corporation 100% Delaware
Pencer, Inc.
Diacrin/Genzyme LLC Genzyme Corporation 50% Massachusetts
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% United Kingdom
Genzyme Securities Genzyme Corporation 100% Massachusetts
Corporation
Genzyme Transgenics Genzyme Corporation 30% Massachusetts
Corporation
Genzyme Virotech GmbH Genzyme Corporation 100% Germany
Pharming/Genzyme LLC Genzyme Corporation 50% Delaware
RenaGel LLC Genzyme Corporation 50% Delaware
</TABLE>
<PAGE>
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, 333-83677, 33-30007, 33-68208, 33-58351,
333-33265, 333-10005, 333-33251, 333-83669, 33-22464, 33-29440, 33-51416,
33-68186, 33-58353, 33-58355, 33-60435, 333-33291, 333-64095, 33-21241,
333-42371, 333-64103, 333-81275, 333-87967, 333-81277, 333-83673, 333-83681)
and on Form S-3 (file Nos. 33-61853, 333-59513, 333-68629, 33-64901,
333-31548, 333-82395, 333-34913, 333-26351, 333-87449, 333-82395) of our
reports, dated February 23, 2000 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, the combined financial statements
and financial statement schedule of Genzyme Surgical Products and the
combined financial statements of Genzyme Molecular Oncology Division as of
December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, which reports are included in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 130,156
<SECURITIES> 522,834
<RECEIVABLES> 186,094
<ALLOWANCES> 19,291
<INVENTORY> 117,269
<CURRENT-ASSETS> 730,187
<PP&E> 573,864
<DEPRECIATION> 190,683
<TOTAL-ASSETS> 1,787,282
<CURRENT-LIABILITIES> 137,938
<BONDS> 0
0
0
<COMMON> 1,409
<OTHER-SE> 1,354,983
<TOTAL-LIABILITY-AND-EQUITY> 1,787,282
<SALES> 762,930
<TOTAL-REVENUES> 772,288
<CGS> 182,337
<TOTAL-COSTS> 231,781
<OTHER-EXPENSES> 385,461
<LOSS-PROVISION> 15,347
<INTEREST-EXPENSE> 21,771
<INCOME-PRETAX> 117,928
<INCOME-TAX> 46,947
<INCOME-CONTINUING> 70,981
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,981
<EPS-BASIC> 2.13<F1>
<EPS-DILUTED> 2.00<F1>
<FN>
<F1>Genzyme reports earnings per share for each of its four series of common
stock. The earnings per share information presented on this schedule represents
earnings per share data for net income attributable to Genzyme General Division
Common Stock. For the period presented, net income attributable to Genzyme
General was $176,883. For the period presented, net loss attributable to
Genzyme Molecular Oncology was $(28,832), or $(2.25) per basic and diluted share
of Genzyme Molecular Oncology Division Common Stock, net loss attributable to
Genzyme Surgical Products was $(48,037), or $(3.25) per basic and diluted pro
forma share of Genzyme Surgical Products Division Common Stock, and net loss
attributable to Genzyme Tissue Repair was $(30,040), or $(1.26) per basic and
diluted share of Genzyme Tissue Repair Division Common Stock. Genzyme Surgical
Products was created in June 1999 and previously operated as part of Genzyme
General. All earnings (loss) and earnings (loss) per share information are
presented as if Genzyme Surgical Products had existed as a separate division
of Genzyme for the full period presented.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.2
FACTORS AFFECTING FUTURE OPERATING RESULTS
From time to time, we or our management may make forward-looking
statements about our operations. These statements are based upon the assumptions
of our management at the time they are made and are only expectations of future
results. These statements are also subject to risks and uncertainties, and our
actual results may differ significantly than those described in the
forward-looking statements. These risks and uncertainties are described below.
In this document, the words "we," "us," "our," and "Genzyme" refer
to Genzyme Corporation and all of its operating divisions taken as a whole, and
"our board of directors" or "our board" refer to the board of directors of
Genzyme Corporation. In addition, we refer to our four operating divisions as
follows:
o Genzyme General Division = Genzyme General
o Genzyme Molecular Oncology Division = Genzyme Molecular Oncology
o Genzyme Surgical Products Division = Genzyme Surgical Products
o Genzyme Tissue Repair Division = Genzyme Tissue Repair
We also refer to the series of Genzyme common stock that reflect the
value and track the performance of these divisions by their Nasdaq trading
symbols:
o Genzyme General Division Common Stock = GENZ Stock
o Genzyme Molecular Oncology Division Common Stock = GZMO Stock
o Genzyme Surgical Products Division Common Stock = GZSP Stock
o Genzyme Tissue Repair Division Common Stock = GZTR Stock
RISKS RELATED TO GENZYME
The following risk factors relate to us generally and affect all of
our operating divisions
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We generate a majority of our product revenues from sales of
enzyme-replacement products for patients with Gaucher disease. We entered this
market in 1991 with Ceredase-Registered Trademark- enzyme. Because production of
Ceredase-Registered Trademark- enzyme was subject to supply constraints, we
developed Cerezyme-Registered Trademark- enzyme, a recombinAnt form of the
enzyme. Recombinant technology uses specially engineered cells to produce
enzymes, or other substances, by inserting into the cells of one organism the
genetic material of a different species. In the case of Cerezyme-Registered
Trademark- enzyme, Chinese hamster ovary cells are engineered to produce human
alpha glucocerebrosidase. We stopped producing Ceredase-Registered Trademark-
enzyme, except for small quantities, during 1998, after substantially all the
patients who previously used Ceredase-Registered Trademark- enzyme converted to
Cerezyme-Registered Trademark- enzyme. Sales of Ceredase-Registered Trademark-
enzyme and Cerezyme-Registered Trademark- enzyme totaled $478.5 million for the
year ended December 31, 1999, representing approximately 70% of our product
revenues for that year.
Because our business is highly dependent on Cerezyme-Registered
Trademark- enzyme, a reduction in revenue from sales of this product would have
an adverse effect on oUr operations and may cause the value of our securities to
decline substantially. Revenues from Cerezyme-Registered Trademark- enzyme would
be impacted negatively if competitors develop alternative treatments for Gaucher
disease and these alternative products gained commercial acceptance. Some
companies have initiated efforts to develop competitive products, and other
companies may do so in the future. Cerezyme-Registered Trademark- enzyme has
orphan drug status, providing it with market exclusivity iN the U.S. until May
2001. We also have patents protecting its manufacturing method until 2010 and
its composition until 2013. We cannot predict the effect that the expiration of
orphan drug status and market exclusivity will have on sales of
Cerezyme-Registered Trademark- enzyme after May 2001.
<PAGE>
GOVERNMENT REGULATION IMPOSES SIGNIFICANT COSTS AND RESTRICTIONS ON THE
DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND SERVICES.
Our ability to successfully satisfy regulatory requirements will
significantly determine our future success. We cannot guarantee that any
required regulatory approvals will be granted or that they will be granted on a
timely basis. The production and sale of healthcare products and provision of
health care services are highly regulated. In particular, the U.S. Food and Drug
Administration (FDA) and comparable agencies in foreign countries must approve
human therapeutic and diagnostic products before they are marketed. This
approval process can involve lengthy and detailed laboratory and clinical
testing, sampling activities and other costly and time-consuming procedures.
This regulation may delay the time at which a product or service first can be
sold, limit how a product or service may be used, or adversely impact third
party reimbursement. In addition, therapies that have received, or in the future
receive, regulatory approval for commercial sale may still face subsequent
regulatory difficulties. The FDA and comparable foreign regulatory agencies, for
example, may require postmarketing clinical trials. In addition, a marketed
therapy, its manufacturer and the manufacturer's facilities are subject to
continual review and periodic inspections by regulatory agencies. The discovery
of previously unknown problems with a therapy, manufacturer or facility can
result in restrictions on the therapy or manufacturer, including withdrawal of
the therapy from the market. The failure to comply with applicable regulatory
approval requirements can result in, among other things:
o warning letters;
o fines and other civil penalties;
o suspended regulatory approvals;
o refusal to approve pending applications or supplements to approved
applications;
o suspension of product sales in the U.S. and/or exports from the
U.S.;
o product recalls; and
o seizure of products.
LEGISLATIVE CHANGES MAY ADVERSELY IMPACT OUR BUSINESS.
Some of our products, including Cerezyme-Registered Trademark- enzyme,
have been designated as orphan drugs under the Orphan Drug Act. The Orphan Drug
Act provides incentives to manufacturers to develop and market drugs for rare
diseases, generally by entitling the first developer that receives FDA marketing
approval for an orphan drug to a seven-year exclusive marketing period in the
U.S. for that product. Legislation periodically has been introduced in recent
years to change the Orphan Drug Act to shorten the period of automatic market
exclusivity and to allow marketing rights to simultaneous developers of the
drug. We cannot be sure whether the Orphan Drug Act will be amended, or if
amended, what effect the changes may have on us.
We have also received orphan drug designation for some of our
products that are still in development, including Fabrazyme-TM- enzyme for
the treatment of Fabry disease. We are aware of other companies developing
products for the treatment of Fabry disease. If any of those companies
receive FDA approval for their Fabry disease therapy before we receive FDA
approval for Fabrazyme-TM- enzyme, the Orphan Drug Act will preclude us from
selling Fabrazyme-TM- enzyme in the U.S. for up to seven years.
In addition, healthcare reform is an area of significant government
focus. Any reform measures, if adopted, could adversely affect:
o the pricing of therapeutic products in the U.S. or internationally;
and
o the amount of reimbursement available from governmental agencies or
other third party payers.
BECAUSE THE DEVELOPMENT OF OUR PRODUCTS INVOLVES A LENGTHY AND COMPLEX PROCESS,
IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS
CURRENTLY IN DEVELOPMENT.
Before we can commercialize our development-stage products, we will
need to:
2
<PAGE>
o conduct substantial research and development;
o undertake preclinical and clinical testing; and
o pursue regulatory approvals.
This process involves a high degree of risk and takes several years.
Our product development efforts may fail for many reasons, including:
o the product fails in preclinical studies;
o clinical trials may not support the safety or effectiveness of the
product; or
o we fail to obtain the required regulatory approvals.
We cannot guarantee that we will successfully develop any particular
product.
ANY MARKETABLE PRODUCTS THAT WE DEVELOP MAY NOT BE COMMERCIALLY SUCCESSFUL.
The commercial success of any marketable product that we develop will
depend on many factors, including:
o regulation by the FDA and other government authorities;
o market acceptance by doctors and hospital administrators;
o the effectiveness of our sales force;
o the effectiveness of our production and marketing capabilities;
o the success of competitive products; and
o the availability of third party reimbursement.
WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS, IF AT ALL.
As of December 31, 1999, we had approximately $653.0 million in cash,
cash equivalents and short- and long-term investments, excluding investments
in equity securities.
Although we currently have substantial cash resources and positive cash
flow, we intend to use substantial portions of our available cash for:
o product development and marketing;
o expanding facilities;
o working capital; and
o strategic business initiatives.
We will further reduce available cash reserves to pay principal and
interest on the following debt:
o In May 1998, we issued $250.0 million in convertible notes, the
entire principal amount of which is allocated to Genzyme General.
These convertible notes bear interest at an annual rate of 5.25%
and mature on June 1, 2005. However, the holders of these notes may
exchange principal on the notes for shares of GENZ Stock, GZMO
Stock, and GZSP Stock.
3
<PAGE>
o As of December 31, 1999, we owed approximately $23.0 million under
a revolving credit facility with a group of commercial banks. Of
this amount, we have allocated $18.0 million to Genzyme Tissue
Repair and $5.0 million to Genzyme Molecular Oncology. Amounts
borrowed under this revolving credit facility bear interest at a
floating rate based upon an applicable margin above either the
prime rate announced by Fleet National Bank or the London InterBank
Offered Rate. We must repay all borrowings under this facility no
later than November 12, 2002.
o In August 1998, we issued $21.2 million in convertible debentures,
the entire principal amount of which is allocated to Genzyme
General. These convertible debentures bear interest at an annual
rate of 5% and mature on August 29, 2003, but the holders of these
convertible debentures may exchange principal, and under some
circumstances interest, on the convertible debentures for shares of
GENZ Stock.
If we use cash to pay or redeem this debt, including the principal and
interest due on it, our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc.
The consideration for the proposed acquisition consists of shares of a new
series of our common stock and up to approximately $245 million in cash,
allocated at the option of Biomatrix stockholders. To the extent we use cash to
complete this acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain
additional financing. We cannot guarantee that we will be able to obtain any
additional financing, extend any existing financing arrangement, or obtain
either on favorable terms.
WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW
COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our long-term success largely depends on our ability to obtain and
maintain patent and other proprietary right protection for our technology and
products. If we fail to obtain or maintain these protections, we may not be able
to prevent third parties from using our proprietary rights.
Patents based on our currently pending or our future patent
applications may not issue. In addition, our issued patents may not contain
claims sufficiently broad to protect us against third parties with similar
technologies or products, or provide us with any competitive advantage. Further,
our patents, our collaborators' patents, and those patents for which we have
license rights may be challenged, narrowed, invalidated or circumvented.
The U.S. Patent and Trademark Office and the courts have not
established a consistent policy regarding the breadth of claims allowed in
biotechnology patents. The allowance of broader claims may increase the
incidence and cost of patent interference proceedings and the risk of
infringement litigation. On the other hand, the allowance of narrower claims
may limit the value of our proprietary rights. Any policies that are adopted
may result in changes in or interpretations of the patent laws that adversely
affect our patent position.
We also rely upon trade secrets, proprietary know-how, and continuing
technological innovation to remain competitive. We have taken measures to
protect our trade secrets and know-how, including the use of confidentiality
agreements with our employees, consultants and corporate collaborators. It is
possible that these agreements may be breached and that any remedies for a
breach will not make us whole. We also cannot guarantee that other parties will
not independently develop our know-how or otherwise obtain access to our
technology.
WE MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM COMPETITORS IN ORDER TO DEVELOP
AND COMMERCIALIZE SOME OF OUR PRODUCTS AND SERVICES, AND IT IS UNCERTAIN WHETHER
THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by
third parties, if issued, may cover some of the products that we or our
strategic collaborators are developing or testing. As a result, we or a
strategic collaborator may be required to obtain licenses from the holders of
these patents in order to use, manufacture or sell
4
<PAGE>
these products and services, and payments under these licenses may reduce the
profitability of the products. Furthermore, we cannot be sure that these
licenses would be available to us on acceptable terms or at all. If these
licenses are not available, our or our strategic collaborators' ability to
commercialize these products and services may be impaired.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS
RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS.
If we or one of our strategic collaborators initiate litigation to
enforce our patent or license rights, or are required to defend these rights in
response to third party claims, it could consume a substantial portion of our
resources. We cannot guarantee that we or our strategic collaborator would
prevail in such litigation. If we do not prevail, we or our strategic
collaborators may be required to:
o pay monetary damages;
o stop commercial activities relating to the affected products or
services; or
o obtain a license in order to continue manufacturing or marketing
the affected products or services.
If we are required to pay damages or if commercial activities are
disrupted, our business or financial position may be negatively impacted. In
addition, if we or our strategic collaborators are required to obtain a license,
we cannot guarantee that one would be made available to us or made available on
acceptable terms or at all.
WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
Individuals who use our products or services may bring product
liability claims against us. While we have taken, and continue to take, what we
believe are appropriate precautions, we cannot guarantee that we will avoid
significant liability exposure. We have only limited amounts of product
liability insurance, and we cannot be sure that this insurance will provide
sufficient coverage against any product liability claims. If we attempt to
obtain additional insurance in the future, we may not be able to do so on
acceptable terms, and any additional insurance we do obtain may not provide
adequate coverage against any asserted claims. In addition, regardless of merit
or eventual outcome, product liability claims may result in:
o diversion of management time and attention;
o expenditure of large amounts of cash on legal fees, expenses and
payment of damages;
o decreased demand for our products and services; and
o injury to our reputation.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.
The human health care products and services industry is extremely
competitive. Our competitors include major pharmaceutical companies and other
biotechnology companies. Some of these competitors may have more extensive
research and development, marketing and production capabilities. Some
competitors also may have greater financial resources than us. Our future
success will depend on our ability to develop and market effectively our
products against those of our competitors.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS OR
SERVICES MAY BECOME OBSOLETE.
The field of biotechnology is characterized by significant and rapid
technological change. Although we attempt to expand our technological
capabilities in order to remain competitive, research and discoveries by others
5
<PAGE>
may make our products or services obsolete. For example, some of our competitors
may develop a product to treat Gaucher disease that is more effective or less
expensive than Cerezyme-Registered Trademark- enzyme.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM
THIRD PARTY PAYERS, THE COMMERCIAL POTENTIAL OF OUR PRODUCTS WILL BE
SIGNIFICANTLY LIMITED.
A substantial portion of our revenue comes from payments by third party
payers, including government health administration authorities and private
health insurers. Third party payers may not reimburse patients for newly
approved healthcare products. Increasingly, third party payers are attempting
to contain health care costs by:
o challenging the prices charged for healthcare products and
services;
o limiting both coverage and the amount of reimbursement for new
therapeutic products;
o denying or limiting coverage for products that are approved by the
FDA, but are considered experimental or investigational by third
party payers; and
o refusing, in some cases, to provide coverage when an approved
product is used for disease indications in a way that has not
received FDA marketing approval.
Government and other third party payers may not provide adequate
insurance coverage or reimbursement for our products and services, which could
impair our financial results.
In addition, Congress occasionally has discussed implementing
broad-based measures to contain healthcare costs. It is possible that Congress
will enact legislation specifically designed to contain healthcare costs. We
cannot predict the effect that legislation of this type would have on our
business.
CHANGES IN THE ECONOMIC, POLITICAL, LEGAL AND BUSINESS ENVIRONMENTS IN THE
FOREIGN COUNTRIES IN WHICH WE DO BUSINESS COULD CAUSE OUR INTERNATIONAL SALES
AND OPERATIONS, WHICH ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR CONSOLIDATED
NET SALES, TO BE LIMITED OR DISRUPTED.
Our international operations accounted for 41% of our consolidated
revenues in 1999 and 1998, and we expect that international sales will continue
to account for a significant percentage of our revenues for the foreseeable
future. In addition, we have direct investments in a number of subsidiaries
outside of the U.S., primarily in Europe and Japan. Our international sales and
operations could be limited or disrupted, and the value of our direct
investments may be adversely affected, by any of the following:
o fluctuations in currency exchange rates;
o the imposition of government controls;
o less favorable intellectual property or other applicable laws;
o the inability to obtain any necessary foreign regulatory approvals
of products in a timely manner;
o import and export license requirements;
o political instability;
o trade restrictions;
o changes in tariffs;
o difficulties in staffing and managing international operations; and
6
<PAGE>
o longer payment cycles.
A significant portion of our business is conducted in currencies other
than the U.S. dollar, which is our reporting currency. We recognize foreign
currency gains or losses arising from our operations in the period incurred. As
a result, currency fluctuations among the U.S. dollar and the currencies in
which we do business have caused foreign currency transaction gains and losses
in the past and will likely do so in the future. We cannot predict the effects
of exchange rate fluctuations upon our future operating results because of the
number of currencies involved, the variability of currency exposures and the
potential volatility of currency exchange rates.
SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE OUR STOCKHOLDERS OF THE OPPORTUNITY
TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL.
Provisions of Massachusetts law and our charter, by-laws and
shareholder rights plan could delay or prevent a change in control of Genzyme or
a change in our management.
Our tracking stock structure may also deprive our stockholders of the
opportunity to receive a premium for their shares upon a change in control
because, in order to obtain control of a particular division, an acquiror would
have to obtain control of the entire corporation.
In addition, our board of directors may, in their sole discretion:
o exchange shares of GZMO Stock, GZSP Stock or GZTR Stock for GENZ
Stock at a 30% premium over the market value of the exchanged
shares; and
o issue shares of undesignated preferred stock from time to time in
one or more series.
Either of these board actions could increase the cost of an acquisition
of Genzyme and thus discourage a takeover attempt.
RISKS RELATED TO GENZYME TRACKING STOCKS
We have four series of tracking stock: GENZ Stock, GZMO Stock, GZSP
Stock and GZTR Stock. The following are risks related to owning shares of our
tracking stock.
HOLDERS OF OUR TRACKING STOCK ARE STOCKHOLDERS OF A SINGLE COMPANY AND
UNFAVORABLE FINANCIAL TRENDS AFFECTING ONE DIVISION COULD NEGATIVELY AFFECT OUR
OTHER DIVISIONS.
None of our divisions are separate legal entities. Holders of our
tracking stock are stockholders of a single company and face all of the risks of
an investment in Genzyme.
For purposes of financial presentation, we allocate programs, products,
assets and liabilities among our four divisions. Genzyme Corporation, however,
continues to own all of the assets and is responsible for all of the liabilities
of each division. A holder of GENZ Stock, for example, does not have any
specific rights to the assets allocated to Genzyme General in our financial
statements. Furthermore, if we are unable to satisfy one division's liabilities
out of the assets we allocate to that division, we may be required to satisfy
those liabilities with assets we have allocated to another division.
Accordingly, we encourage you to review our consolidated financial statements
and the financial statements of each of our divisions included in the reports
that we file with the SEC.
OUR BOARD OF DIRECTORS MAY TAKE ACTIONS THAT, WHILE IN THE BEST INTERESTS OF
GENZYME AS A WHOLE, HAVE AN UNEQUAL AND ADVERSE EFFECT ON THE HOLDERS OF ONE OR
MORE SERIES OF OUR TRACKING STOCK.
There may be times when the interests of holders of each series of our
common stock diverge or appear to diverge. Massachusetts law does not define a
board of directors' duties in that situation. Based on the advice of counsel,
however, we believe that a Massachusetts court would conclude 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 particular
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group of stockholders. That duty is the fiduciary duty to act in good faith and
in a manner the board reasonably believes to be in the best interests of the
corporation. Under Massachusetts law, if a disinterested and adequately informed
board of directors determines in good faith that an action would be in the
corporation's best interests, taking into account both the interests of holders
of each series of tracking stock as well as the alternatives reasonably
available, then the board of directors should be able to successfully defend
against any stockholder claim that the action could have an unequal effect on
different series of tracking stock.
In March 1999, the Delaware Court of Chancery, in two separate cases,
dismissed all stockholder claims that the board of directors had violated its
fiduciary duties under Delaware law by approving actions that had a disparate
impact on holders of different classes of tracking stock. The court indicated in
each case that even where the decision of the board of directors affected
holders of separate classes of tracking stock differently, stockholders must
allege facts sufficient to indicate that a board of directors' approval was not
based on the good faith belief that the approved actions were in the
corporation's best interests. While Delaware case law is not binding on a
Massachusetts court, we believe that a Massachusetts court would be influenced
by these decisions in addressing similar issues. A Massachusetts court hearing a
case, however, may apply principles of Massachusetts law other than those
described above or develop new principles of Massachusetts law to decide the
case.
MEMBERS OF OUR BOARD OF DIRECTORS MAY FAVOR ONE SERIES OF TRACKING STOCK OVER
ANOTHER IF THEY OWN A DISPROPORTIONATE AMOUNT OF THAT SERIES.
A member of our board may own a disproportionate amount of tracking
stock in a particular series, or the value of his or her holdings of a
particular series of stock may be different from the value of his or her
holdings in another series. This disparate stock ownership may cause the board
member to favor one series of stock over another. Nevertheless, we believe that
a member of our board could properly discharge his or her fiduciary
responsibilities even if his or her interests in shares of different series were
disproportionate or of unequal values. Our board members may create committees
to review matters that raise conflict-of-interest issues. If a committee is
formed, it would report to the full board.
HOLDERS OF OUR TRACKING STOCK HAVE LIMITED DECISION-MAKING POWER BECAUSE THEY
HAVE LIMITED SEPARATE VOTING RIGHTS.
Holders of all series of our tracking stock vote together as a single
class on all matters requiring common stockholder approval, including the
election of directors. Holders of one series of tracking stock do not have the
right to vote on matters separately from the other series except in limited
circumstances. These circumstances are dictated by Massachusetts law, our
charter and the management and accounting policies adopted by our board of
directors. Therefore, stockholders of one series of tracking stock generally
could not make a proposal that would require approval only of the holders of
that series. Instead, they would have to obtain approval from all common
stockholders.
THE LIQUIDATION RIGHTS FOR EACH SERIES OF TRACKING STOCK ARE NOT ADJUSTED TO
REFLECT CHANGES IN THE SERIES' MARKET VALUE.
If we dissolve, liquidate or wind up our affairs, other than as part of
a merger, business combination or sale of substantially all of our assets, our
stockholders will receive any remaining assets according to the percentage of
total liquidation units that they hold. The number of liquidation units per
share for each series of our tracking stock is as follows:
o each share of GENZ Stock has 100 liquidation units;
o each share of GZMO Stock has 25 liquidation units;
o each share of GZSP Stock has 61 liquidation units; and
o each share of GZTR Stock has 58 liquidation units.
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Although we adjust liquidation units to prevent dilution in the event
of some subdivisions, combinations or distributions of common stock, we do not
adjust them to reflect changes in the relative market value or performance of
the divisions. Accordingly, at the time of a dissolution, liquidation or winding
up, the relative liquidation units attributable to each series of tracking stock
may not correspond to the value of the underlying assets of that division.
OUR BOARD OF DIRECTORS MAY CHANGE OUR MANAGEMENT AND ACCOUNTING POLICIES TO THE
DETRIMENT OF ONE SERIES OF TRACKING STOCK WITHOUT STOCKHOLDER APPROVAL.
Our board of directors has adopted management and accounting policies
that are used to govern our business and to prepare our financial statements.
These policies cover the allocation of corporate expenses, assets and
liabilities and other accounting matters, and the reallocation of assets between
divisions and other matters. Our board generally may modify or rescind these
policies or adopt new ones without stockholder approval. Any revised policies
could have different effects on each series of our tracking stock and could be
detrimental to one series as compared to another. The discretion of our board to
make changes is limited only by the policies themselves and the board's
fiduciary duty to all of our stockholders. We encourage you to review the full
text of these policies, which are filed as Exhibit 99.1 to our registration
statement on Form S-3 filed on March 3, 2000.
WE MAY ELIMINATE TRACKING STOCK IF A CORPORATE OR SHAREHOLDER LEVEL TAX IS
IMPOSED ON THE ISSUANCE OR RECEIPT OF TRACKING STOCK.
In 1999, the Clinton Administration proposed legislation that would
have imposed a corporate level tax on issuances of tracking stock. More
recently, the Clinton Administration has proposed legislation that would tax
stockholders upon the receipt of tracking stock from the issuing corporation as
a distribution or in a recapitalization. Although Congress has not enacted
either of these proposals into law, if these or similar proposals are enacted
into law or effected through Treasury regulations in the future, we could be
taxed on an amount up to the gain realized in future financings in which we sell
tracking stock, including GENZ Stock. Also, any use of our tracking stock to
acquire other companies could be taxed. We also may be taxed if we distribute to
stockholders "designated" shares of tracking stock, which are shares designated
by the tracked division as issuable at the option of our board for Genzyme
General's benefit. In addition, stockholders could be taxed if they receive a
distribution of designated shares of tracking stock or if they receive shares of
tracking stock in exchange for other Genzyme stock. These or similarly adverse
tax consequences could cause us to eliminate tracking stock from our capital
structure. We cannot predict, however, whether Congress will enact legislation,
or the Treasury Department will issue regulations, effecting these or similar
proposals.
THE USE OF OPERATING LOSSES TO LOWER THE REPORTED TAX LIABILITY OF OUR
PROFITABLE DIVISIONS WILL CAUSE LOWER REPORTED EARNINGS IN THE FUTURE FOR THE
DIVISIONS GENERATING THESE OPERATING LOSSES.
Genzyme Corporation, rather than its divisions, is liable for taxes.
Under our management and accounting policies, for financial reporting purposes
we generally allocate taxes among our divisions as if they were separate
taxpayers. However, our board of directors has adopted a policy that provides
that if any of our divisions is unable to use our operating losses or other
projected annual tax benefits to reduce our current or deferred income tax
expense, we may reallocate these losses or benefits to our profitable divisions
on a quarterly basis for financial reporting purposes. This will result in a
division with current losses (such as Genzyme Molecular Oncology, Genzyme
Surgical Products and Genzyme Tissue Repair) reporting lower earnings available
to its common stockholders in the future than would be the case if that division
had retained its historical losses or other benefits in the form of a net
operating loss carryforward. We encourage you to review full text of this
policy, which is filed as Exhibit 99.1 to our registration statement on Form S-3
filed on March 3, 2000.
THE NON-COMPETE POLICY AMONG OUR DIVISIONS MAY NOT COVER ALL OF THE ACTIVITIES
OF A PARTICULAR DIVISION.
Our board of directors has adopted a policy regarding competition among
our divisions. This non-compete policy requires that we develop certain products
and services within a given division, as opposed to another division, or through
joint ventures involving a given division, because the product or service is
within the field of activity of that division. This non-compete policy, however,
does not cover the entire field of activity of each division. For example,
Genzyme General Division or Genzyme Molecular Oncology may develop certain
tissue repair products or services. In order words, we cannot guarantee that all
products and services we develop in a given field of activity
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will be allocated to a division primarily engaged in that field of activity. We
encourage you to review full text of this policy, which is filed as Exhibit 99.1
to our registration statement on Form S-3 filed on March 3, 2000.
FUTURE SALES OR DISTRIBUTIONS OF DESIGNATED SHARES OF GZMO STOCK, GZSP STOCK OR
GZTR STOCK MAY SIGNIFICANTLY DILUTE YOUR OWNERSHIP OF THE AFFECTED SHARES OF
TRACKING STOCK.
Our management and accounting policies require us to sell or distribute
any designated shares of GZMO Stock, GZSP Stock or GZTR Stock that may be
created, subject to certain limitations. Proceeds from a sale or distribution
will not be allocated to the affected divisions and the issuance and sale may
substantially dilute your ownership of tracking stock of the affected divisions.
RISKS RELATING TO GENZYME GENERAL
The following risks and uncertainties may adversely affect the business
of Genzyme General.
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON GENZYME GENERAL'S BUSINESS.
Genzyme General generates a majority of our product revenues from sales
of Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark-
enzyme, which are products for patients with Gaucher disease. Sales of
Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme
totaled $478.5 million for the year ended December 31, 1999, representing
approxImately 84% of Genzyme General's product revenues for that year.
Because Genzyme General's business is highly dependent on
Cerezyme-Registered Trademark- enzyme, a reduction in revenue from sales of this
product would have an adverSe effect on its operations and may cause the value
of GENZ Stock to decline substantially. Revenues from Cerezyme-Registered
Trademark- enzyme would be impacted negatively if competitors develop
alternative treatments for Gaucher disease and these alternative products gained
commercial acceptance. Some companies have initiated efforts to develop
competitive products, and other companies may do so in the future.
Cerezyme-Registered Trademark- enzyme has orphan drug status, providing it with
market exclusivity in the U.S. until May 2001. We also have patents protecting
its manufacturing method until 2010 and its composition until 2013. We cannot
predict the effect that the expiration of orphan drug status and market
exclusivity will have on sales of Cerezyme-Registered Trademark- enzyme after
May 2001.
GENZYME GENERAL MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE
THYROGEN-Registered Trademark- HORMONE AND RENAGEL-Registered Trademark-
CAPSULES.
In January 1999, Genzyme General, together with Knoll Pharmaceutical
Company, launched U.S. sales of Thyrogen-Registered Trademark- recombinant
thyroid stimulating hormone for use in the treatment of thyroid cancer. At about
the same time, Genzyme General, in collaboration with GelTex Pharmaceuticals,
Inc., launched Renagel-Registered Trademark- capsules, a non-absorbed phosphate
binder used in the treatment of end-stage renal disease. The commercial success
of Thyrogen-Registered Trademark- hormone and REnagel-Registered Trademark-
capsules will depend on a number of factors, including:
o regulation by the FDA;
o the ability to obtain regulatory approvals in foreign countries;
o the development and commercial success of competitive products; and
o the availability of third party reimbursement.
Genzyme General cannot be sure that market penetration of
Thyrogen-Registered Trademark- hormone and Renagel-Registered Trademark-
capsules will increase.
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IF THE STRATEGIC COLLABORATIONS GENZYME GENERAL HAS ENTERED INTO TO DEVELOP AND
COMMERCIALIZE ITS PRODUCTS ARE NOT SUCCESSFUL, GENZYME GENERAL'S RESULTS OF
OPERATIONS WILL BE ADVERSELY IMPACTED.
Several of Genzyme General's strategic initiatives involve
collaborations with other biotechnology companies and arrangements with academic
medical centers. These include:
o a joint venture with GelTex Pharmaceuticals, Inc. for the
commercialization of Renagel-Registered Trademark- capsules;
o an agreement with Knoll Pharmaceutical Company for the marketing of
our Thyrogen-Registered Trademark- hormone in the U.S.;
o an agreement with Biogen, Inc. for the marketing of
AVONEX-Registered Trademark- (Interferon-beta 1a), Biogen's
treatment for relapsing forms of multiple sclerosis, in Japan
following regulatory approval;
o a joint venture with BioMarin Pharmaceutical Inc. for the
development and commercialization of Aldurazyme-TM- enzyme for the
treatment of the lysosomal storage disorder known as
mucopolysaccharidosis I;
o a joint venture with Genzyme Transgenics Corporation for the
development and commercialization of transgenic antithrombin III, a
human protein that Genzyme Transgenics produces in the milk of
genetically modified animals;
o a joint venture with Pharming Group N.V. for the development and
commercialization of human alpha-glucosidase for the treatment of
Pompe disease;
o an agreement with Genovo Inc. for the development of gene therapy
products for the treatment of lysosomal storage disorders;
o a relationship with Mount Sinai Medical Center for the development
of a therapy for the treatment of Niemann-Pick disease;
o a joint venture with Diacrin, Inc. to develop and commercialize
products and processes using porcine fetal cells for the treatment
of Parkinson's disease and Huntington's disease; and
o an agreement with Dyax Corp. to develop and commercialize the
protein EPI-KAL2 for the treatment of chronic inflammatory
diseases.
Genzyme General plans to enter into additional collaborations in the
future. The success of these arrangements are largely dependent on the efforts
and skills of Genzyme General's collaborators. Genzyme General cannot guarantee
that:
o these agreements will not be terminated;
o its strategic collaborators will devote significant resources to
the collaborations; or
o any of these collaborations will result in the successful
development or commercialization of any products.
OUR OPTION TO PURCHASE LIMITED PARTNERSHIP INTERESTS COULD DILUTE THE RIGHTS OF
HOLDERS OF GENZ STOCK.
We organized Genzyme Development Partners, L.P. ,a special purpose
research and development entity, in 1989 and transferred to it technology and
commercial rights to our hyaluronic acid-based products designed to prevent the
occurrence and severity of post-operative adhesions. These products, which we
refer to as the Sepra
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products, are now allocated to Genzyme Surgical Products. We have an option to
purchase the limited partnership interests in the partnership. If we exercise
this option, we may have to issue shares of GENZ Stock or make substantial cash
payments or both. If we make payments in GENZ Stock, the rights of holders of
GENZ Stock could be diluted and the market price of that stock may fall. If we
make cash payments, our cash resources would diminish.
RISKS RELATED TO GENZYME MOLECULAR ONCOLOGY
The following risks and uncertainties may adversely affect the business
of Genzyme Molecular Oncology.
GENZYME MOLECULAR ONCOLOGY MAY NEVER BE ABLE TO SUCCESSFULLY DEVELOP OR
COMMERCIALIZE ANY OF ITS CANCER THERAPIES.
Genzyme Molecular Oncology does not have any cancer therapies on the
market and its only therapies in clinical development are its melanoma and
breast cancer vaccines. Before commercializing any cancer therapies, Genzyme
Molecular Oncology will need to conduct substantial research and development,
including, in some cases, the replication of preclinical studies performed by
its collaborators, undertake preclinical and clinical testing and obtain
regulatory approvals. This process involves a high degree of uncertainty and may
take several years. Its product development efforts may fail for many reasons,
including:
o the product fails in preclinical studies;
o clinical trials may not support the safety or effectiveness of the
product; or
o we fail to obtain the required regulatory approvals.
We cannot guarantee that Genzyme Molecular Oncology will successfully
develop any particular product or that any product it successfully develops will
gain market acceptance.
GENZYME MOLECULAR ONCOLOGY ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME
PROFITABLE.
Genzyme Molecular Oncology has not generated significant revenues to
date and does not expect to do so for several years. As of December 31, 1999,
Genzyme Molecular Oncology had an accumulated deficit of approximately $69.0
million. It expects to have significant operating losses for the next several
years. Genzyme Molecular Oncology plans to spend substantial amounts of money
on, among other things:
o research and development;
o preclinical and clinical testing; and
o pursuing regulatory approvals.
We cannot guarantee that the efforts underlying these expenditures will
be successful or that Genzyme Molecular Oncology's operations will ever be
profitable.
IF GENZYME MOLECULAR ONCOLOGY FAILS TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL
TRIALS.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available under a line of credit from Genzyme General and
revenues generated from our SAGE-TM- technology and license agreements, will be
sufficient to fund its operations through 2000. Genzyme Molecular Oncology's
cash needs may differ from those planned, however, because of many factors,
including the:
o results of research and development and clinical testing;
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o achievement of milestones under existing strategic collaborations;
o ability to establish and maintain additional strategic
collaborations and licensing arrangements;
o costs of protecting our intellectual property rights;
o development of competing products and services; and
o 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. We cannot guarantee that it 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 have to delay, reduce or eliminate some of its
programs. Genzyme Molecular Oncology may also have to give third parties rights
to commercialize technologies or products that it would otherwise have sought to
commercialize itself.
GENZYME MOLECULAR ONCOLOGY MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM
COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A
FAILURE TO ENTER INTO FUTURE COLLABORATIONS.
Genzyme Molecular Oncology's strategy to develop and commercialize some
of its products and services includes entering into various arrangements with
academic and corporate collaborators and licensees. It depends on the success of
these parties in performing research, preclinical and clinical testing and
marketing. These arrangements may require Genzyme Molecular Oncology to transfer
important rights to its corporate collaborators and licensees. These
collaborators and licensees could choose not to devote resources to these
arrangements or, under certain circumstances, may terminate them early. In
addition, these collaborators and licensees, outside of their arrangements with
Genzyme Molecular Oncology, may develop technologies or products that are
competitive with those that Genzyme Molecular Oncology is developing. As a
result, we cannot guarantee that Genzyme Molecular Oncology will receive
revenues from these relationships or that any of its strategic collaborations
will continue or not terminate early. In addition, we cannot guarantee that
Genzyme Molecular Oncology will be able to enter into collaborations in the
future.
GENZYME MOLECULAR ONCOLOGY MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM
COMPETITORS IN ORDER TO DEVELOP AND COMMERCIALIZE SOME OF ITS PRODUCTS AND
SERVICES, AND IT IS UNCERTAIN WHETHER THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by
third parties, if issued, may cover some of the products Genzyme Molecular
Oncology is developing or testing. As a result, Genzyme Molecular Oncology may
be required to obtain licenses from the holders of these patents in order to use
or sell certain products and services. We cannot guarantee that these licenses
will be made available on acceptable terms or at all. If these licenses are not
available, Genzyme Molecular Oncology's ability to commercialize its products
and services may be impaired.
In its cancer vaccine program, Genzyme Molecular Oncology in the
process of evaluating the therapeutic administration of peptide products and
genes that encode specific tumor antigens, including MART-1 and gp100. Genzyme
Molecular Oncology is aware of two issued U.S. patents directed to the gene that
encodes MART-1. While it has obtained rights under one of these patents, Genzyme
Molecular Oncology is still in the process of evaluating the scope and validity
of the other to determine whether it needs to obtain a license. Genzyme
Molecular Oncology is also evaluating an issued U.S. patent covering the gene
that encodes gp100 and three published Patent Cooperation Treaty applications by
three different applicants that may cover antigens derived from gp100. Genzyme
Molecular Oncology is in the process of evaluating the scope and validity of
these patents and patent applications to determine whether it needs to obtain
licenses.
GENZYME MOLECULAR ONCOLOGY MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION
OR OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS.
If Genzyme Molecular Oncology or one of its strategic collaborators
initiate litigation to enforce Genzyme Molecular Oncology's patent or license
rights, or are required to defend these rights in response to third party
claims, its business or financial position may be negatively affected. Genzyme
Molecular Oncology has licensed its p53 gene
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therapy rights to Schering-Plough. These patent rights are the subject of an
interference proceeding in the U.S. and an opposition proceeding in Europe.
Adverse determinations in these proceedings may negatively affect Genzyme
Molecular Oncology's ability to receive future milestones and product royalties
under its agreement with Schering-Plough.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF GENZYME MOLECULAR ONCOLOGY'S GENE THERAPY
PRODUCTS.
The recent death of a patient undergoing gene therapy using an
adenoviral vector to deliver a therapeutic gene has been widely publicized. This
death and any other adverse events in the field of gene therapy that may occur
in the future may result in greater governmental regulation and potential
regulatory delays relating to the testing or approval of Genzyme Molecular
Oncology's gene therapy products. As a result of this death, the U.S. Senate has
commenced hearings to determine whether additional legislation is required to
protect volunteers and patients who participate in gene therapy clinical trials.
Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory
body to the National Institutes of Health (NIH), has extensively discussed the
use of adenoviral vectors in gene therapy clinical trials and recently issued a
draft report on the safety of adenoviral vectors. While this draft report
recommends that clinical trials using adenoviral vectors should continue with
caution, it also suggested a number of changes in the way gene therapy clinical
trials are conducted. If any new guidelines are adopted by the NIH, Genzyme
Molecular Oncology's gene therapy clinical trials could be delayed or become
more expensive to conduct.
Genzyme Molecular Oncology has reported to the FDA and the NIH that
there have been three deaths in its Phase I/II melanoma cancer vaccine trial at
Massachusetts General Hospital. The principal investigator for this trial
indicated that each of these deaths was due to disease progression and not
related to the patient's treatment. Deaths are not unexpected in a clinical
trial treating patients with advanced stage melanoma because these patients have
short life expectancies. Genzyme Molecular Oncology cannot, however, rule out
the possibility that its cancer vaccines may be a contributing cause of death
for patients in the future.
The commercial success of any gene therapy products that Genzyme
Molecular Oncology develops will depend in part on public acceptance of the use
of gene therapies for the prevention or treatment of human diseases. Public
attitudes may be influenced by claims that gene therapy is unsafe, and gene
therapy may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy could result in greater government
regulation and stricter clinical trial oversight and commercial product labeling
requirements of gene therapies and could cause a decrease in the demand for any
gene therapy product that Genzyme Molecular Oncology may develop.
RISKS RELATED TO GENZYME SURGICAL PRODUCTS
The following risks and uncertainties may adversely affect the business
of Genzyme Surgical Products.
GENZYME SURGICAL PRODUCTS ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME
PROFITABLE.
Genzyme Surgical Products expects to have significant operating losses
for the next several years. It plans to spend substantial amounts of money on,
among other things:
o conducting research and development activities;
o pursuing regulatory approvals;
o conducting commercialization activities; and
o providing surgeon education and training.
We cannot guarantee that the efforts underlying these expenditures will
be successful or that Genzyme Surgical Products' operations will ever be
profitable. It may be years before the division generates any revenue from sales
of products currently under development.
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IF GENZYME SURGICAL PRODUCTS FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL
TRIALS.
We anticipate that Genzyme Surgical Products' current cash resources,
together with revenues generated from its products and distribution agreements,
will be sufficient to fund its operations through 2001. However, its cash needs
may differ from those planned because of many factors, including:
o the ability to become profitable;
o the results of research and development efforts;
o the ability to establish strategic collaborations and licensing
arrangements for research and development programs;
o the achievement of milestones under strategic collaborations;
o the ability to establish and maintain additional distribution
arrangements;
o the enforcement of patent and other intellectual property rights;
o market acceptance of novel approaches and therapies;
o the development of competitive products; and
o the ability to satisfy regulatory requirements of the FDA and other
government authorities.
Genzyme Surgical Products may require significant additional financing
to continue operations at anticipated levels. We cannot guarantee that it will
be able to obtain any additional financing or find it on favorable terms. If
Genzyme Surgical Products has insufficient funds or is unable to raise
additional funds, it may have to delay, reduce or eliminate some of its
programs. Genzyme Surgical Products may also have to give third parties rights
to commercialize technologies or products that it would otherwise have sought to
commercialize itself.
IF GENZYME SURGICAL PRODUCTS EXERCISES AN OPTION TO PURCHASE INTERESTS IN
GENZYME DEVELOPMENT PARTNERS, ITS CASH RESOURCES MAY DIMINISH AND THE RIGHTS OF
ITS STOCKHOLDERS MAY BE DILUTED.
In 1989, we organized Genzyme Development Partners, L.P., a special
purpose research and development entity, and transferred to it technology and
commercial rights to the Sepra products. We have an option to purchase the
limited partnership interests in the partnership under certain circumstances for
approximately $26 million plus continuing royalties based on certain sales of
the Sepra products. We have allocated the purchase option to Genzyme Surgical
Products. The option's exercise price is payable in cash, shares of GENZ Stock
or a combination of the two, as determined by Genzyme Surgical Products when it
exercises the option.
If Genzyme Surgical Products exercises this option, it will have to
make substantial cash payments or compensate Genzyme General with shares of GZSP
Stock for the GENZ Stock used, or both. If the division makes cash payments, its
cash resources would diminish. If it makes the payment in whole or in part in
shares of GENZ Stock, then our board of directors would need to approve the
issuance of GENZ Stock in return for Genzyme General receiving a number of GZSP
designated shares with a fair market value equal to the fair market value of the
shares of GENZ Stock. Those GZSP designated shares would be shares of GZSP Stock
that our board would have the option to issue from time to time with all
proceeds allocable to Genzyme General. Beginning on June 30, 2000, and on every
June 30th thereafter, we will have to distribute substantially all the GZSP
designated shares if the number of those shares exceeds 10% of the number of
shares of GZSP Stock then outstanding.
We cannot guarantee that our board would authorize the issuance of
shares of GENZ Stock for payment of the option exercise price and the creation
of any GZSP designated shares. If our board creates and subsequently
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distributes or otherwise disposes of any GZSP designated shares, this would
substantially dilute the rights of the holders of GZSP Stock and could
significantly affect the market price of GZSP Stock.
If Genzyme Surgical Products does not exercise the option, the
partnership would have the right to sell or otherwise transfer to a third party
a license to background technology that we granted to it. A sale or transfer of
this technology may terminate our joint venture with the partnership to
manufacture and sell the Sepra products in the U.S. and Canada. In addition,
failure to exercise the option would cause the joint venture to become
terminable upon 90 days' prior notice by either Genzyme or Genzyme Development
Partners.
GENZYME SURGICAL PRODUCTS IS DEVOTING SIGNIFICANT RESOURCES TO DEVELOPING NOVEL
ALTERNATIVE PRODUCTS AND TREATMENTS THAT MAY NOT BE COMMERCIALLY SUCCESSFUL.
Genzyme Surgical Products is devoting a significant amount of money to
developing products that will represent alternatives to traditional surgical
procedures or treatments. These products will likely require several years of
aggressive and costly marketing before they might become widely accepted by the
surgical community. Genzyme Surgical Products is developing products that are
designed to enable surgeons to perform minimally invasive cardiovascular
surgery. The medical conditions that can be treated with minimally invasive
cardiovascular surgery are currently being treated with widely accepted surgical
procedures such as coronary artery bypass grafting and catheter-based
treatments, including balloon angioplasty, atherectomy and coronary stenting. To
date, minimally invasive cardiovascular surgery has been performed on a limited
basis and its further adoption by the surgical community will partly depend on
Genzyme Surgical Products' ability to educate cardiothoracic surgeons about its
effectiveness and to facilitate the training of cardiothoracic surgeons in
minimally invasive cardiovascular surgery techniques.
Similarly, until recently surgeons have not used products designed to
reduce the incidence and extent of postoperative adhesions. Since 1996, when
Sepra Film-Registered Trademark- bioresorbable membrane was introduced, market
acceptance of anti-adhesion products has been slow. To increase sales of the
Sepra products, Genzyme Surgical Products has had to educate surgeons and
hospital administrators about the problems of, and costs associated with,
adhesions and the benefit of preventing adhesions. It has also had to train
surgeons on the proper handling and use of these products.
We cannot guarantee that Genzyme Surgical Products' efforts in
educating and training the surgical community will result in the widespread
adoption of minimally invasive cardiovascular surgery and anti-adhesion products
or that surgeons adopting these procedures and products will use Genzyme
Surgical Products' products.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF GENZYME SURGICAL PRODUCTS' GENE THERAPY
PRODUCTS.
The recent death of a patient undergoing gene therapy using an
adenoviral vector to deliver a therapeutic gene has been widely publicized. This
death and any other adverse events in the field of gene therapy that may occur
in the future may result in greater governmental regulation and potential
regulatory delays relating to the testing or approval of Genzyme Surgical
Products' gene therapy products. As a result of this death, the U.S. Senate has
commenced hearings to determine whether additional legislation is required to
protect volunteers and patients who participate in gene therapy clinical trials.
Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory
body to the National Institutes of Health (NIH), has extensively discussed the
use of adenoviral vectors in gene therapy clinical trials and recently issued a
draft report on the safety of adenoviral vectors. While this draft report
recommends that clinical trials using adenoviral vectors should continue with
caution, it also suggested a number of changes in the way gene therapy clinical
trials are conducted. If any new guidelines are adopted by the NIH, Genzyme
Surgical Products' gene therapy clinical trials could be delayed or become more
expensive to conduct.
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The commercial success of any gene therapy products that Genzyme
Surgical Products develops will depend in part on public acceptance of the use
of gene therapies for the prevention or treatment of human diseases. Public
attitudes may be influenced by claims that gene therapy is unsafe, and gene
therapy may not gain the acceptance of the public or the medical community.
Negative public reaction to gene therapy could result in greater government
regulation and stricter clinical trial oversight and commercial product labeling
requirements of gene therapies and could cause a decrease in the demand for any
gene therapy product that Genzyme Surgical Products may develop.
COMPETITION FROM OTHER MEDICAL DEVICE AND TECHNOLOGY COMPANIES COULD HURT
GENZYME SURGICAL PRODUCTS' PERFORMANCE.
The human health care products and services industry is extremely
competitive. Major medical device and technology companies compete or may
compete with Genzyme Surgical Products. These include such companies as:
o Atrium Medical Corporation and Sherwood-Davis & Geck, a division of
Tyco International, Ltd. in the cardiovascular chest drainage and
fluid management market;
o The Ethicon division of Johnson & Johnson Ltd. and U.S. Surgical
Corporation, a division of Tyco in the cardiovascular closure
market;
o CardioThoracic Systems, Inc., Medtronic, Inc., U.S. Surgical,
Guidant Corporation, Baxter Healthcare Corporation and Ethicon in
the minimally invasive cardiovascular surgery market;
o Ethicon, Lifecore Biomedical, Inc., Life Medical Sciences, Inc. and
Gliatech, Inc. in the anti-adhesion market; and
o Karl Storz Endoscopy America, Inc., Scanlan International, Inc.,
Pilling Weck Surgical Instruments and the Codman division of
Johnson & Johnson Ltd. in the reusable instruments market.
These competitors may have superior research and development, marketing
and production capabilities. Some competitors also may have greater financial
resources than Genzyme Surgical Products. The division is likely to incur
significant costs developing and marketing new products without any guarantee
that it will be commercially successful. The future success of Genzyme Surgical
Products will depend on its ability to effectively develop and market its
products against those of its competitors.
THE TREND TOWARD CONSOLIDATION IN THE SURGICAL DEVICES INDUSTRY MAY ADVERSELY
AFFECT GENZYME SURGICAL PRODUCTS' ABILITY TO MARKET SUCCESSFULLY ITS PRODUCTS TO
SOME SIGNIFICANT PURCHASERS.
The current trend among hospitals and other significant consumers of
surgical devices is to combine into larger purchasing groups to increase their
purchasing power and thus reduce their purchase price for surgical devices.
Partly in response to this development, surgical device manufacturers have been
consolidating to be able to offer a more comprehensive product line to these
larger purchasing groups. In order to successfully market its products to larger
purchasing groups, Genzyme Surgical Products may have to expand its product
lines or enter into joint marketing or distribution agreements with other
manufacturers of surgical devices. We cannot guarantee that it will be able to
employ either of these initiatives or that, when employed, these initiatives
will increase the marketability of its products.
GENZYME SURGICAL PRODUCTS MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM
COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A
FAILURE TO ENTER INTO FUTURE COLLABORATIONS.
Genzyme Surgical Products' strategy to develop and commercialize some
of its products and services includes entering into various arrangements with
academic and corporate collaborators and licensees. It depends on the success of
these parties in performing research, preclinical and clinical testing and
marketing. These arrangements may require Genzyme Surgical Products to transfer
important rights to its corporate collaborators and licensees. These
collaborators and licensees could choose not to devote resources to these
arrangements or, under certain circumstances, may
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terminate them early. In addition, these collaborators and licensees, outside of
their arrangements with Genzyme Surgical Products, may develop technologies or
products that are competitive with those that Genzyme Surgical Products is
developing. As a result, we cannot guarantee that Genzyme Surgical Products will
receive revenues from these relationships or that any of its strategic
collaborations will continue or not terminate early. In addition, we cannot
guarantee that Genzyme Surgical Products will be able to enter into
collaborations in the future.
RISKS RELATED TO GENZYME TISSUE REPAIR
The following risks and uncertainties may adversely affect the business
of Genzyme Tissue Repair.
THE COMMERCIAL SUCCESS OF GENZYME TISSUE REPAIR'S LEAD PRODUCT,
CARTICEL-Registered Trademark- CHONDROCYTES, IS UNCERTAIN.
Carticel-Registered Trademark- chondrocytes are used to treat knee
cartilage damage. This service involves a proprietary process for growing
autologous (a patient's own) cartilage cells to replace those that are damaged
or lost. Revenues from Carticel-Registered Trademark- chondrocytes accounted for
approximately 75% of Genzyme Tissue Repair's 1999 revenue. The commercial
success of Carticel-Registered Trademark- chondrocytes will depend on many
factors including:
o POSITIVE RESULTS FROM POST-MARKETING STUDIES.
We have agreed with the FDA to conduct two post-marketing studies
to confirm the effectiveness of Carticel-Registered Trademark-
chondrocytes. The first study compares clinical outcomes of
patients in Genzyme Tissue Repair's registry who did not respond
to treatment before being implanted with Carticel-Registered
Trademark- chondrocytes. This study will measure outcomes before
and after implantation with Carticel-Registered Trademark-
chondrocytes. The second study compares the long-term clinical
effects of treatment with Carticel-Registered Trademark-
chondrocytes to other available treatments. If these studies
demonstrate that treatment with Carticel-Registered Trademark-
chondrocytes is not superior to the alternatives studied, the FDA
may suspend or withdraw its approval of Carticel-Registered
Trademark- chondrocytes. If Genzyme Tissue Repair cannot market
Carticel-Registered Trademark- chondrocytes in the U.S., its
financial results will be negatively impacted.
o FDA APPROVAL OF RELATED DEVICE.
Genzyme Tissue Repair has developed a device to improve the
procedure for implanting Carticel-Registered Trademark-
chondrocytes and plans to file for marketing approval with the
FDA. Genzyme Tissue Repair believes it will begin marketing this
device in 2000. We cannot guarantee that the FDA will approve
this device, that this device will improve the procedure for
implanting Carticel-Registered Trademark- chondrocytes, or that
this device will gain commercial acceptance.
o THE AVAILABILITY OF THIRD PARTY REIMBURSEMENT.
Since the FDA approved Carticel-Registered Trademark-
chondrocytes, we have seen a substantial increase in the number
of third party payers who cover it. Some third party payers,
however, do not cover Carticel-Registered Trademark-
chondrocytes. We cannot guarantee that any third party payers
will continue to cover it 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-Registered Trademark- chondrocytes meets
all of its published criteria for new treatments. We believe that
Carticel-Registered Trademark- chondrocytes does in fact meet all
of such criteria and are 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-Registered Trademark- chondrocytes without a favorable
evaluation by the Blue Cross Blue Shield Association, many Blue
Cross Blue Shield plans have delayed approving
Carticel-Registered Trademark- chondrocytes from coverage under
their policies as a direct result of this unfavorable ruling.
Since
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these remaining plans represent a significant percentage of
insured lives in the U.S., this ruling has delayed our access to
a substantial portion of the market for Carticel-Registered
Trademark- chondrocytes.
o THE SUCCESS OF COMPETITIVE PRODUCTS.
The process we use to grow a patient's cartilage cells is not
patentable, and we do not yet have significant patent protection
covering the other processes used in providing
Carticel-Registered Trademark- chondrocytes. Consequently, we
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-Registered Trademark-
chondrocytes. If a competitor were to develop such ability and
obtain FDA approval for a competitive product or service, Genzyme
Tissue Repair's financial results of operations would be
negatively impacted. We are aware of at least two other companies
that are growing autologous cartilage cells for cartilage repair
in the European market. Also, several pharmaceutical and
biotechnology companies are developing alternative treatments for
knee cartilage damage. One or more of these companies may develop
products or services superior to the Carticel-Registered
Trademark- chondrocytes.
o MARKET ACCEPTANCE BY ORTHOPEDIC SURGEONS.
We are marketing Carticel-Registered Trademark- chondrocytes to
orthopedic surgeons. We cannot guarantee that we will train
enough surgeons who incorporate it into their practice to make it
commercially successful.
GENZYME TISSUE REPAIR ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME PROFITABLE.
We expect Genzyme Tissue Repair to have significant operating losses at
least through 2000 as it continues to commercialize Carticel-Registered
Trademark- chondrocytes and to conduct research and development and clinical
programs. We cannot guarantee that Genzyme Tissue Repair's operations will ever
be profitable.
IF GENZYME TISSUE REPAIR FAILS TO OBTAIN CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE CLINICAL
TRIALS.
We anticipate that Genzyme Tissue Repair's current cash resources,
together with amounts available under an equity line of credit from Genzyme
General, will be sufficient to fund Genzyme Tissue Repair's operations through
the end of 2000.
In 1999, Genzyme Tissue Repair received $25 million in cash from
Genzyme General in connection with the transfer to Genzyme General of our
interest in our joint venture with Diacrin, Inc. If the joint venture does
not initiate a Phase III clinical trial of NeuroCell-TM--PD by June 30, 2000,
Genzyme Tissue Repair will be required to pay Genzyme General $20 million
plus accrued interest at 13.5%. Genzyme Tissue Repair may repay this amount
in cash, GZTR designated shares, or combination of both, at its option. GZTR
designated shares are shares of GZTR Stock that are not issued and
outstanding, but which our board may issue, sell or distribute without
allocating the proceeds to Genzyme Tissue Repair. If these milestones are not
achieved, and Genzyme Tissue Repair elects to repay Genzyme General in cash,
its cash reserves will be substantially diminished or depleted in their
entirety. If Genzyme Tissue Repair elects to repay Genzyme General in shares
of GZTR designated shares, this would substantially dilute the rights of the
holders of GZTR Stock and could significantly affect the market price of GZTR
Stock.
Genzyme Tissue Repair's cash needs may differ from those planned as a
result of various factors, including the:
o ability to satisfy regulatory requirements of the FDA and other
government agencies;
o results of research and development and clinical testing;
o enforcement of patent and other intellectual property rights; and
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o development of competitive products and services.
Genzyme Tissue Repair will require substantial additional funds in
order to continue operations at current levels beyond 2000. We cannot guarantee
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 be required to delay, scale back or
eliminate certain of its programs. Genzyme Tissue Repair may also have to give
rights to third parties to commercialize technologies or products that it would
otherwise commercialize itself.
GENZYME TISSUE REPAIR'S RESULTS FLUCTUATE QUARTERLY AND THIS COULD HAVE AN
ADVERSE EFFECT ON ITS OPERATIONS.
We expect that the revenues from the sale of the Carticel-Registered
Trademark- chondrocytes will fluctuate based on Genzyme Tissue Repair's success
in penetrating the market, the availability of competitive procedures and the
availability of third party reimbursement. We cannot predict the timing or
magnitude of these fluctuations. Furthermore, we expect that revenues from
Carticel-Registered Trademark- chondrocytes will be lower in the summer months
because fewer operations are typically performed during those months.
We also expect 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
severe burn patients who are treated with Epicel-TM- skin grafts.
Since Genzyme Tissue Repair must maintain extensive tissue culture
facilities and a trained staff for both Carticel-Registered Trademark-
chondrocytes 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.
GENZYME TISSUE REPAIR RELIES ON KEY COLLABORATORS TO SUPPORT FURTHER RESEARCH
AND DEVELOPMENT OF CARTICEL-Registered Trademark- CHONDROCYTES AND THESE EFFORTS
COULD SUFFER IF IT EXPERIENCES PROBLEMS WITH THESE COLLABORATORS.
Carticel-Registered Trademark- chondrocytes were 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, however,
expired in 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
Carticel-Registered Trademark- chondrocytes.
We cannot guarantee that the two physicians will sign a new consulting
agreement or continue to advise Genzyme Tissue Repair.
In addition, individuals who are familiar with the know-how underlying
Carticel-Registered Trademark- chondrocytes 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.
We have 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-Registered Trademark- chondrocytes. 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 Genzyme Tissue Repair's property, with royalties payable to the
inventing member. We cannot guarantee that these members will honor their
obligations under the sponsored research agreement.
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