10-K/A 1 a2028489z10-ka.txt 10-K/A SECURITIES AND EXCHANGE COMMISSION (DRAFT) WASHINGTON, D.C. 20549 --------------- FORM 10-K/A AMENDMENT NO. 2 TO 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 NUMBER 0-19373 --------------- BIOMATRIX, INC. (Exact name of registrant as specified in its charter) DELAWARE (201) 945-9550 13-3058261 (State of other jurisdiction of (Registrant's telephone number, (IRS Employer incorporation or organization) including area code) Identification No.)

65 Railroad Avenue Ridgefield, N.J. 07657 (Address of principal executive offices) (Zip Code) --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock. $.0001 Par Value (Title of Class) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Name of exchange on which registered shares are traded: New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during 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 / /. The aggregate market value of the voting stock held by non-affiliates of the registrant as of October 20, 2000, was approximately $261.7 million, based upon the last reported sales price of the registrant's Common Stock on the New York Stock Exchange. At October 20, 2000 there were 23,627,929 shares of the registrant's Common Stock outstanding. --------------- DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference are listed in the Exhibit Index. The following items are amended: Item 1. Business Item 3. Legal Proceedings Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Biomatrix has amended and restated in its entirety each item of its 1999 Form 10-K which has been affected by this Amendment. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this form 10-K/A to otherwise modify or update such disclosures. ITEM 1. BUSINESS OVERVIEW Biomatrix, Inc., together with its subsidiaries in Canada, Europe and Asia, develops, manufactures, markets and sells a series of proprietary viscoelastic products called hylans that are used in therapeutic medical applications and skin care. Hylans are biological polymers that are chemically modified forms of the naturally occurring substance called hyaluronan, also known as hyaluronic acid or sodium hyaluronate. Hylans are the second generation of viscoelastics used in medicine. Their physical properties, such as elasticity, viscosity and pseudoplasticity, have properties that are significantly improved over those of hyaluronan, from which the first generation viscoelastics were made. The discovery of hylans has allowed Biomatrix to develop a range of patented products in the forms of fluids, gels and solids, all having superior viscoelastic properties. Biomatrix was founded in 1981. The majority of our research and development and manufacturing is conducted at our corporate headquarters in Ridgefield, New Jersey that was established in 1983. In 1998, we completed construction of a new manufacturing plant in Ridgefield, New Jersey and began manufacturing operations at that plant. In the fourth quarter of 1998, Biomatrix received ISO 9001/EN46001 certification of our quality control system for manufacturing viscoelastic medical therapeutics. This certification permits us to manufacture and ship our products from the New Jersey facility to the 19 countries of the European Economic Area and a number of countries in Latin America and Asia. During the first quarter of 1999, we received FDA approval to ship our product called Synvisc-Registered Trademark- within the United States from our New Jersey facility. A significant portion of our research and development, manufacturing, marketing and sales activities are conducted outside the United States through various wholly-owned subsidiaries. From 1987 through 1995, Biomatrix conducted research and development work in Europe through our wholly-owned subsidiary, Biomatrix Svenska AB, in Uppsala, Sweden. In 1991, we formed Biomatrix Medical Canada to manufacture and market various medical products in Canada. In 1997, we formed subsidiaries in the United Kingdom, Switzerland and Hong Kong to market and sell certain medical products in those regions. These subsidiaries are called Biomatrix U.K. Limited, Biomatrix Switzerland GmbH and Biomatrix Hong Kong Limited. In 1998, we established subsidiaries in France and Germany, Biomatrix France SARL and Biomatrix Germany GmbH, to assist in marketing various products in those countries. In 1999 we formed Biomatrix Belgium BVBA to market and sell various medical products in Belgium. We believe that Biomatrix is distinguished from other companies in the field by our association with Dr. Endre A. Balazs. Dr. Balazs is a co-founder and current Chief Executive Officer and Chief Scientific Officer of Biomatrix, and is also the author of numerous publications on the medical applications of hyaluronan-based viscoelastic products. Before co-founding Biomatrix, Dr. Balazs invented the use of hyaluronan in medicine and developed the first generation 2 hyaluronan-based viscoelastics used in medicine worldwide. These products were based on a highly purified fraction of the unmodified, naturally occurring hyaluronan. Under Dr. Balazs' leadership, we have developed a new class of biopolymers called hylans. Hylans are polysaccharide molecules that are derived by a chemical modification of hyaluronan. Our hylan products are highly biocompatible like the naturally occurring hyaluronan, which allows hylans to be used in the body without causing allergic or foreign body reactions. We believe that products made of hylans are superior to the products made of first generation hyaluronan due to the enhanced physical or rheological properties, such as elasticity, viscosity and pseudoplasticity, and the prolonged residence time in tissues. Using its patented technology, Biomatrix has developed clear elastoviscous fluids, transparent viscoelastic semi-solid gels, solid particles, sheaths, tubes and other useful configurations. This broad spectrum of proprietary products is manufactured through several patented chemical modifications and cross-linking processes. Our business is to develop, manufacture, market and sell viscoelastics to be used as medical therapeutic devices. The medical use of viscoelastics during the past decades has created several new medical therapeutic modalities including: - VISCOAUGMENTATION, the use of viscoelastic gels for tissue augmentation to provide (1) a scaffolding for tissue regeneration or (2) an inert elastic filler in applications such as augmentation of dermal tissue for the correction of facial wrinkles and depressed scars and the augmentation of the sphincter muscle in urinary incontinence. - VISCOPROTECTION, the use of elastoviscous fluids and viscoelastic gels to shield and protect sensitive tissue surfaces, such as those of the eye, from dryness and noxious environmental conditions. - VISCOREGULATION, the use of the rheological properties of elastoviscous fluids and viscoelastic gels to regulate cell activity, such as the targeted delivery of drugs. - VISCOSEPARATION, the use of viscoelastic gels, membranes and fluids to separate tissues, prevent adhesions, and cover internal and external wounds to facilitate wound healing and decrease scar formation. - VISCOSUPPLEMENTATION, the use of elastoviscous solutions and viscoelastic gels in disease conditions to replace tissues and body fluids. - VISCOSURGERY, the use of elastoviscous fluids to facilitate surgical procedures in ophthalmology, orthopedics and neurosurgery. The viscoelastic acts as a surgical tool or implant to protect, manipulate and separate delicate tissues. Viscoelastic devices are ideally made from the body's own molecules that are found in the intercellular matrix, the highly organized structure that separates cells and integrates them into functional tissues. In medicine, viscoelastic products are used to supplement or replace various surgical procedures. The products are introduced to the intercellular matrix to augment, regulate and manipulate the healing and regenerative processes of the body, and to restore the equilibrium, known as homeostasis, of the intercellular matrix. Therefore, the use of viscoelastics for therapeutic purposes, such as engineering of the intercellular matrix, is called matrix engineering. RECENT DEVELOPMENTS On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Seagull Merger Corporation, a Massachusetts corporation and wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the parties will effect a business combination through a merger of Biomatrix with and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will form a new division, the Genzyme Biosurgery division, and will create a new series of common stock designated as "GZBX division Common Stock," $0.01 par value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the Merger. The currently proposed terms of the GZBX Stock are set forth as an exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue Repair Division and Surgical Products Division will become part of the Genzyme 3 Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock") series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which will be accounted for using the purchase method of accounting, is expected to close in the fourth quarter of 2000. Under the terms of the Merger Agreement, each outstanding share of Biomatrix Common Stock will be converted, at the option of the holder, into either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger Consideration"). Based on the cash election price and the number of shares of Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of the transaction will be approximately $245 million. Under the Merger Agreement, 28.38% of the shares of Biomatrix Common Stock outstanding at the effective time of the Merger will be exchanged for cash and the remaining 71.62% of the shares of Biomatrix Common Stock outstanding at the time of the Merger will be converted into shares of GZBX Stock at a conversion rate of one share of GZBX Stock for each share of Biomatrix Common Stock. However, the number of shares of GZBX Stock to be issued in the Merger is subject to an upward adjustment if the value of the GZBX Stock to be issued in the Merger on the effective date of the Merger is less than 45% of the total Merger Consideration in order to preserve the status of the Merger as a tax-free reorganization. Under the terms of the Merger Agreement, each outstanding share of GSP Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock will convert into 0.3352 shares of GZBX Stock. Based on the number of common shares outstanding for each entity at the signing date, the Genzyme Biosurgery division is expected to have approximately 35.2 million shares outstanding. Consummation of the Merger is subject to the adoption of the Agreement and Plan of Merger by the Biomatrix stockholders, the approval of the issuance of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by the Genzyme stockholders, including the approval of the exchange of GSP Stock for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock by GTR stockholders, the receipt of regulatory approvals and certain other customary closing conditions. Certain officers of Biomatrix holding an aggregate of approximately 34% of the outstanding shares of Biomatrix Common Stock have agreed to vote their shares of Biomatrix Common Stock in favor of the Merger until the earlier to occur of the completion of the Merger or 5 days after the termination of the Merger Agreement. In addition, as a condition to Genzyme's entering into the Merger Agreement, Biomatrix granted Genzyme an option to acquire up to 4.6 million shares of Biomatrix Common Stock at a price of $30 per share. The option may only be exercised by Genzyme upon the termination of the Merger Agreement resulting from our shareholders' voting against the merger or our entering into an alternative transaction that is recommended by our Board. THERAPEUTICS The following discussion addresses our medical therapeutic products, some of which, as noted below, are on the market in some countries; other products are in late stage development. SEE "BUSINESS-GOVERNMENT REGULATION." Synvisc(R) Synvisc-Registered Trademark- is an elastoviscous device made of patented hylan biopolymers. It is used to treat osteoarthritis of the knee to reduce pain and improve joint mobility. Synvisc treatment involves a series of injections into the affected joint. It supplements the elastoviscosity of the synovial fluid of the arthritic joint, and is regarded as a liquid prosthesis for the joint because it replaces the pathologically low elastoviscous fluid with a supplement of fluid with enhanced elastoviscous properties. This medical treatment modality is called viscosupplementation. Synvisc is administered over a fifteen-day period and involves a series of three injections into the arthritic joint. We have completed thirteen clinical studies for Synvisc involving approximately 1,726 patients. These studies were carried out and completed in the United States, Germany, the United Kingdom, Sweden and Canada. The results of these studies indicate that Synvisc is a safe and effective treatment for osteoarthritis of the knee. We received approval to market Synvisc to treat osteoarthritis of the knee joint in Canada in 1992 and in Sweden in 1995. In late 1995, we obtained the CE Mark for Synvisc, which permits us to market the product in the 19 countries of the European Economic Area. In March 1997, we received approval from the People's Republic of China to register Synvisc, allowing us to import and sell Synvisc as a medical device in every province in China. In August 1997, we received FDA approval to use Synvisc to treat osteoarthritis of the knee in the United States. Additionally, we received 4 approvals in October 1997 and December 1997 to market Synvisc in Hong Kong and Israel. During 1998, we received approvals in the following countries to market Synvisc: Czech Republic, Malaysia, Brazil, Singapore, Chile, Argentina, Slovenia, Guatemala, Mexico, Thailand, Australia and Peru. During 1999, we received approval to market Synvisc in the following countries: Dominican Republic, Ecuador, El Salvador, Jamaica, Paraguay, Uruguay, Latvia, South Africa, Colombia, Estonia, Hungary, Jordan, New Zealand, Nicaragua, Panama, Russia, Slovak Republic, Trinidad, Tobago and Venezuela. During the first quarter of 2000, we received approval to market Synvisc in Turkey. As a result of these approvals, Synvisc is approved in fifty-seven of the eighty-five countries that are covered under marketing agreements. Biomatrix began marketing Synvisc in Canada with our own sales force in early 1993. In 1995, we signed a distribution agreement with Rhone-Poulenc Rorer Canada Inc. to share the marketing effort, and in September 1995 began marketing Synvisc jointly in Canada. In December 1999, we terminated the agreement with Rhone-Poulenc and now sell Synvisc directly to the Canadian market through our subsidiary Biomatrix Medical Canada. In June 1995, Roche AB, a subsidiary of F. Hoffmann-La Roche Ltd., began to sell Synvisc in Sweden and obtained the distribution rights for Synvisc in South Africa. In the first quarter of 1999, Biomatrix and Roche launched Synvisc in South Africa. In December 1996, we entered into an agreement with Boehringer Ingelheim France, S.A. to distribute Synvisc in France. The product was officially launched in France in October 1997. In February 1997, we entered into an agreement with Wyeth-Ayerst Laboratories, a division of American Home Products, to distribute Synvisc in the United States, Germany, Austria, Spain, Portugal, Greece and various countries in the Middle East and Central Europe. Synvisc was launched in Germany, Austria and the United States in 1997, and in Spain, Portugal, and Greece in 1998. During 1999, Wyeth launched Synvisc in the Czech Republic. In April 1997, we entered into an agreement with Bayer AG to distribute Synvisc in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore, Taiwan and Thailand. Synvisc was launched in Israel during 1998 and in Malaysia, New Zealand, Singapore, Thailand, and Australia during 1999. In February 1998, we entered into an agreement with Novartis Pharma AG to distribute Synvisc in Latin America and the Caribbean. Synvisc was launched in Argentina, Brazil, Chile, Peru and Panama during 1998. During 1999, Novartis launched Synvisc in Mexico, Colombia, Venezuela and Guatemala. We are currently seeking and negotiating with potential marketing partners to distribute Synvisc in other European and Asian countries. During the fourth quarter of 1999, we announced that a clinical trial has commenced in which Synvisc will be evaluated for the treatment of osteoarthritis of the hip. An open label study is being conducted in France. During the first quarter of 2000, we announced that we filed an investigational device exemption application with the FDA for review and approval to initiate a pivotal clinical trial for Synvisc as a treatment for the pain and discomfort associated with temporomandibular joint disease (TMJ). Additional clinical studies evaluating Synvisc in other joints are planned for the future. Hylaform(R) Hylaform-Registered Trademark- is a patented viscoelastic device made of hylan that is used for viscoaugmentation of dermal tissue to correct facial wrinkles and depressed scars by injection directly into the dermal tissue. In late 1995, we received the CE mark and were approved to market this product as a medical device in the 19 countries of the European Economic Area. In June 1996, we entered into an agreement with Inamed Corporation, formerly called Collagen Aesthetics, Inc., to distribute Hylaform in Europe, Canada, Japan, Australia and other select countries worldwide. Inamed began marketing Hylaform in various European countries in November 1996 and completed the launch of Hylaform throughout Europe during 1997. During 1997 we received approval to market Hylaform in Canada, Israel, and Chile. We received approval to market Hylaform in Argentina in 1998 and in Australia and China in 1999. In 1998, Inamed launched Hylaform in Canada and Israel. In 1995 and 1996, we filed a Pre-Market Approval application for Hylaform with the FDA, which we subsequently withdrew in December 1997. We have also entered into a distribution agreement with Inamed for Hylaform in the United States. Under this agreement, Inamed has the exclusive distribution rights to Hylaform in the United States, subject to an additional payment and FDA approval. The Company is in discussion with the FDA to start a new trial in the United States in order to obtain U.S. approval for Hylaform. Gelvisc(R)Vet Gelvisc-Registered Trademark-Vet is an elastoviscous device made of hylan biopolymers. Biomatrix developed this product as a viscosupplementation device to treat traumatic arthritis and osteoarthritis in animals. In 1995 and 1996, we received 5 approval to market this product in Sweden and France. Equinord has the right to sell GelviscVet itself in Sweden and through Boehringer Ingelheim in France. Hylashield(R), Hylashield(R)Nite, and i.com(TM) Hylashield-Registered Trademark-, Hylashield-Registered Trademark-Nite and i.com-Trademark- are sterile, preservative-free, elastoviscous eye drops used to protect, lubricate and moisten the surface of the eye. They are used by patients who experience discomfort or pain associated with dryness, noxious environmental conditions and other common ocular symptoms including itching, burning and foreign body sensation. In Canada, Hylashield and Hylashield Nite have been marketed through I-MED Pharma Inc. since 1993. In 1999, i.com was launched in certain European countries by Medical Device Laboratories Europe (MDLE). HsS(R) HsS-Trademark- is a sterile, preservative-free, viscoelastic, clear corneal eye drop that is presented in a single-use container. HsS provides prolonged moisture control and protection to corneal surfaces during surgery. HsS reduces the need to frequently apply saline solution on the corneal surface, which allows for safer and more efficient surgery. We were approved to market the product in Canada, and we are currently planning its commercial launch. Hylashield(R)-CL Hylashield-Registered Trademark- CL is a sterile, preservative-free, elastoviscous shield applied to the surface of the eye for use with gas permeable rigid contact lenses to enhance comfort and contact lens duration of use. During the first quarter of 2000, we received Section 510(K) pre-market notification approval from the FDA for Hylashield CL. HylaSine(R) HylaSine-Trademark- is a viscoelastic proprietary hylan device used in viscoseparation to heal mucous membranes following various sinus surgeries. During the first quarter of 2000, we received Section 510(K) pre-market notification approval from the FDA for HylaSine. THERAPEUTICS IN DEVELOPMENT The following discussion addresses our medical therapeutic products that are in development. Preclinical studies have been completed for these products, and some have been tested in exploratory clinical trials. None of these products have been submitted to regulatory agencies for marketing approval anywhere in the world. We analyze our therapeutics in development according to the following categories: anti-adhesion, ophthalmic and other. ANTI-ADHESION Hylagel(R) Hylagel-Registered Trademark- is a proprietary hylan product used in viscoseparation. The product is a resorbable, injectable treatment that inhibits scar formation in patients undergoing various types of lumbar surgical procedures. We have received approval for an Investigational Device Exemption we filed with the FDA for this product. Hylafilm(R) Hylafilm-Registered Trademark- is a proprietary hylan product in the form of films and membranes to be used in viscoseparation. We have planned clinical trials to address the prevention of postsurgical adhesions after gynecological surgery, Hylafilm-Registered Trademark-GYN, and abdominal surgery, Hylafilm-Registered Trademark-ABD. We also intend to explore the use of Hylafilm in cardiac, neurological and orthopedic surgical procedures for preventing adhesions between tissue surfaces. OPHTHALMIC Hylasol(R) Hylasol-Trademark- is a proprietary elastoviscous hylan solution designed for various ophthalmic surgical indications, including contemporary surgical techniques associated with cataract removal and intraocular lens implantation. Hylagel(R)Eye Hylagel-Registered Trademark-Eye is a proprietary viscoelastic hylan device. We developed this product as a viscosupplementation 6 replacement of the vitreus in retinal detachment surgery. Based on the results of exploratory clinical trials, we are redesigning this product to meet newly emerged therapeutic needs. OTHER Hylagel(R)VASC Hylagel-Registered Trademark- VASC is a proprietary viscoelastic hylan device for viscoregulation. It was developed to facilitate the delivery of blood coagulating agents and drugs to targeted sites in arteriovenous malformations and vascular tumors. We have completed exploratory human clinical trials on this product. The cost of these trials was partially supported by a grant from the Orphan Products Division of the FDA. We are planning to extend and continue these clinical trials. Hylagel(R)URO Hylagel-Registered Trademark-URO is a proprietary hylan polymer device. It was developed to act as a long-lasting viscoelastic tissue implant for viscoaugmentation. Its primary use is to enhance the function of the urinary sphincter muscle by acting as a filler between weakened muscle tissue and the mucosa in cases of urinary incontinence. We received FDA approval to begin multicenter pilot clinical trials for Hylagel-Registered Trademark-URO. These pilot trials have been successfully completed and we are preparing pivotal studies to be carried out in U.S. and Europe. Hylagel(R)VOC Hylagel-Registered Trademark-VOC is a proprietary hylan B product designed to be used in vocal cord augmentation. Clinical trials are in progress in Europe using this product in tissue augmentation after vocal cord dysfunction. Hylarad(R) Hylarad-Registered Trademark- is a hylan-based cream for the relief of skin irritation after sunburn and similar skin inflammation. We are testing this product clinically. DERMAESTHETICS (SKIN CARE PRODUCTS) We have developed and manufacture viscoelastic products also known as specialty intermediates for the skin care industry. Our skin care intermediates are proprietary hyaluronan or hylan products, and their enhanced rheological properties, such as viscosity, elasticity and pseudoplasticity, make them superior to low molecular weight hyaluronan products. These highly elastoviscous formulations of hyaluronan and hylan are unique in their high water-binding, free radical-scavenging and space-filling properties. The following specialty intermediates are marketed directly by Biomatrix: Biomatrix(R) Biomatrix-Registered Trademark- is a patented, cosmetic-grade highly elastoviscous complex of hyaluronan, dermal lipids and proteins. Biomatrix-Registered Trademark- is used as a component in several cosmetic products introduced into the market in the early 1980s. Hyladerm(R) Hyladerm-Registered Trademark- is a patented cosmetic-grade hylan polymer in the form of a highly elastoviscous solution. Its high molecular weight enables it to be used at relatively low concentrations in skin care formulations. Hylasome(R) Hylasome-Registered Trademark- is a patented viscoelastic, cosmetic grade, water-insoluble hylan B gel of non-animal origin. This product, acting as a molecular sponge, is able to entrap various substances and to act as a vehicle for the controlled release of cosmetic ingredients. Hylasome(R) LA-50 Hylasome-Registered Trademark- LA-50 is a viscoelastic, cosmetic grade, water-insoluble hylan B gel of non-animal origin and lactic acid. This product delivers lactic acid slowly to the skin. The following specialty intermediates are marketed worldwide by Amerchol, a subsidiary of Union Carbide Corp: 7 Biocare(R) HA-24 Biocare-Registered Trademark- HA-24 is a patented elastoviscous polymer complex, formed between Hyladerm-Registered Trademark- a polycation, that anchors hylan to skin and hair in a way that resists wash-off. This product augments hylan's moisturizing and smoothing benefits and enables hylan to last for a long period. Biocare(R) HA-24-Bio Biocare-Registered Trademark- HA-24 Bio is a patented elastoviscous polymer complex similar to Biocare-Registered Trademark- HA-24 in all respects, but using hyaluronan of non-animal origin. Biocare(R) BHA-10 Biocare-Registered Trademark- BHA-10 is the first product available to the personal care industry that enhances the utility of a bacteria-derived hyaluronan product by greatly increasing its rheological properties. Biocare-Registered Trademark- BHA-10 is approximately ten-fold more elastoviscous and more substantive than the bacterial hyaluronan from which it is prepared. BIOCARE(R) SA Biocare-Registered Trademark- SA is a patented elastoviscous combination of albumin, dextran sulfate and hylan. Biocare-Registered Trademark- SA is designed to create a light-reflecting layer that diminishes the appearance of surface imperfections. Relief Line(TM) Relief Line-TM- consists of six different skin care formulations developed during 1999, containing as active ingredients hyaluronan and hylan polymers. DISTRIBUTION AGREEMENTS We have entered into distribution agreements with various marketing partners for our medical products. The distribution agreements generally provide that we manufacture and supply our products for a contractual percentage of the marketing partner's sales price, or a minimum price, whichever is greater. We have entered into the following agreements: WYETH-AYERST. In February 1997, we entered into two distribution agreements with Wyeth, a division of American Home Products. The agreements provide Wyeth with exclusive marketing rights to Synvisc in the United States, Germany, Austria, Spain, Portugal, Greece and certain countries in the Middle East and Central Europe. In 1997, Biomatrix received non-refundable payments totaling $17.0 million. Biomatrix also received a milestone payment of $6.0 million during the first quarter of 1999 and a milestone payment of $7.0 million in the third quarter of 1999. Biomatrix could receive additional payments in the future if sales reach certain levels. Additionally, Wyeth reimburses Biomatrix, up to a fixed amount and for a certain period of time, for our costs of maintaining a team of area business consultants to assist in selling Synvisc in Europe and the United States. During 1997, Wyeth launched Synvisc in the United States, Germany and Austria. During 1998, Wyeth launched Synvisc in Spain, Portugal and Greece. During 1999, Wyeth launched Synvisc in the Czech Republic. We are currently in discussion with Wyeth concerning its marketing rights for Synvisc in certain foreign countries. BAYER AG. In April 1997, we entered into a distribution agreement with Bayer. The agreement provides Bayer with exclusive marketing rights to Synvisc in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore, Taiwan and Thailand. In return, we received an up-front non-refundable payment of $3.0 million and could receive a milestone payment of $2.0 million upon certain approvals or if sales reach a certain level. Additionally, Bayer will reimburse Biomatrix, up to a fixed amount and for a certain period of time, for our costs of maintaining a team of area business consultants to assist in selling Synvisc in various countries under the agreement. Bayer launched Synvisc in Israel during 1998 and in Australia, New Zealand, Singapore, Thailand and Malaysia in 1999. NOVARTIS PHARMA AG. In February 1998, we entered into a distribution agreement with Novartis. The agreement provides Novartis with the exclusive marketing rights to Synvisc in Latin America and the Caribbean. In return, we received an up-front non-refundable payment of $1.5 million and received an additional non-refundable $1.6 million in the third quarter of 1999. Additionally, Novartis will reimburse Biomatrix for our costs of maintaining several area business consultants to assist in selling Synvisc in various countries. During 1998, Novartis launched Synvisc in Argentina, Brazil, Chile, Peru and Panama. During 1999, Novartis launched Synvisc in Mexico, Colombia, Venezuela and Guatemala. 8 F. HOFFMANN-LA ROCHE LTD. In 1995, pursuant to the amendment of previous distribution agreements with Syntex, Roche maintained exclusive marketing rights to Synvisc in Sweden and South Africa. Roche began selling Synvisc in Sweden in June 1995 and launched Synvisc in South Africa in 1999. We are currently in discussions with Roche concerning its marketing rights in Sweden beyond 2000. RHONE-POULENC RORER CANADA INC. In September 1995, Biomatrix, through Biomatrix Medical Canada, entered into a distribution agreement with Rhone-Poulenc. The agreement provided Rhone-Poulenc with exclusive marketing rights for Synvisc in Canada. In return, we received an up-front non-refundable payment of $3.5 million. Rhone-Poulenc began selling Synvisc in Canada in November 1995. We terminated the agreement with Rhone-Poulenc on December 31, 1999. Biomatrix now sells Synvisc directly to the Canadian market through Biomatrix Medical Canada. INAMED CORPORATION, FORMERLY COLLAGEN AESTHETICS, INC. In June 1996, we entered into a distribution agreement with Inamed. The agreement provides Inamed with exclusive marketing rights for Hylaform in Europe, Canada, Japan, Australia and other select countries. In return, we received an up-front, non-refundable payment of $5.0 million and are entitled to receive a royalty based upon sales of Inamed's dermal augmentation products, as well as an additional royalty based on the growth of Inamed's total dermal augmentation business. We have also entered into a distribution agreement with Inamed for Hylaform in the United States. Under the latter agreement, Inamed has exclusive distribution rights for Hylaform in the United States subject to an additional payment and FDA approval. Inamed began selling Hylaform in various European countries in November 1996 and successfully completed the launch in every country of the European Economic Area during 1997. In addition, Inamed launched Hylaform in Canada and Israel during 1998. BOEHRINGER INGELHEIM FRANCE, S.A. In December 1996, we entered into a distribution agreement with Boehringer Ingelheim. The agreement provides Boehringer Ingelheim with exclusive marketing rights for Synvisc in France. In return, we received an up-front non-refundable payment of $1.0 million and could receive milestone payments if sales reach certain levels. Additionally, Boehringer Ingelheim reimburses Biomatrix, up to a fixed amount and for a certain period of time, for our costs of maintaining a team of area business consultants to assist in selling Synvisc in France. Boehringer Ingelheim began selling Synvisc in France during 1997. PROTESEKOMPAGNIET A/S. In June 1999, we entered into a distribution agreement with Protesekompagniet A/S to market Synvisc in Denmark. OY BALTRADE CONSULTING LTD. In September 1999, we entered into a distribution agreement with OY Baltrade to market Synvisc in Finland and Russia. RX MEDICAL BV. In May 1999, we entered into a distribution agreement with RX Medical BV to market Synvisc in the Netherlands, Netherlands Antilles, and Aruba. ORTOMEDIC AS. In May 1999, we entered into a distribution agreement with Ortomedic AS to market Synvisc in Norway. I-MED PHARMA INC. In October 1995, we entered into a distribution agreement in Canada with I-MED for three ophthalmic viscoprotection products. FARMILA FARMACEUTICI MILANO S.R.1. In December 1995, we entered into a distribution agreement in Italy with Farmila for two ophthalmic viscoprotection products. We received a non-refundable up-front payment and will manufacture and supply the two products for an agreed-upon percentage of Farmila's sales price. We also licensed to Farmila the formulations for four of our six Relief Line-TM-products with distribution rights for Italy, France and Spain. MEDICAL DEVICE LABORATORIES EUROPE GMBH (MDLE). In April 1999, we entered into a non-exclusive distribution agreement with MDLE for i.com-TM-. MDLE will sell i.com-TM- worldwide except in North America and Japan. EQUINORD KB. We have entered into a distribution agreement with Equinord for the distribution of Gelvisc-Registered Trademark-Vet in the veterinary market in Sweden and France. Under the agreement, Equinord obtained the necessary 9 regulatory approvals and will advertise and promote the product in these countries. Equinord has the right to sell GelviscVet itself in Sweden and through Boehringer Ingelheim in France. EURODERM S.R.L. During 1999, we entered into a licensing and supply agreement with Euroderm to distribute certain dermaesthetic products in Europe. MANUFACTURING In 1991, Biomatrix Medical Canada acquired a manufacturing facility in Canada. It began to manufacture medical devices made from hylan biopolymers in the second half of 1992. During 1993, the Canadian facility was certified by the Health Protection Branch of the Canadian Ministry of Health as meeting good manufacturing practices for the manufacture of small volume injectable products. The facility also qualified as meeting good manufacturing practices by the FDA and also received an ISO 9001/EN46001 certification. During 1997 and 1998, we increased the production capacity of the Canadian facility. In 1998, we completed construction of our New Jersey manufacturing facility and began production of various products. We received an ISO 9001/EN46001 certification of our quality system for manufacturing viscoelastic medical therapeutics in the fourth quarter of 1998. This certification permits Biomatrix to manufacture and ship our products from the New Jersey facility to the 19 countries of the European Economic Area and a number of countries in Latin America and Asia. During the first quarter of 1999, we received FDA approval to ship Synvisc within the United States from our New Jersey facility. HUMAN RESOURCES As of December 31, 1999, Biomatrix and our subsidiaries employed 384 full-time and 4 part-time employees. Of these employees, 24 hold doctoral degrees (M.D., Ph.D.), 51 hold other advanced degrees and 150 hold bachelor's degrees. 47 of our full-time employees are engaged in research and development, 199 are engaged in manufacturing, quality control and quality assurance, and 138 are engaged in sales, marketing, finance and administration. We consider our employee relations to be good. RESEARCH AND DEVELOPMENT EXPENDITURES For the years ended December 31, 1999, 1998 and 1997, we expended $9.1 million, $10.3 million and $5.9 million, respectively, on research and development relating primarily to new product development, development of our manufacturing process, preclinical and clinical studies and regulatory expenses in the United States and abroad. The decrease in 1999 research and development expenditures is primarily related to one-time process development costs incurred during 1998 that were associated with our new U.S. manufacturing facility. SALES BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER DATA The information required is incorporated herein by reference to the footnotes to our consolidated financial statements. RISK FACTORS INVESTING IN BIOMATRIX SECURITIES INVOLVES RISKS. YOU SHOULD NOT PURCHASE BIOMATRIX SECURITIES UNLESS YOU CAN BEAR A LOSS OF YOUR INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS. THE EFFECT OF GOVERNMENT REGULATION OF OUR PRODUCTS AND FACILITIES COULD CAUSE SIGNIFICANT DELAYS AND INCREASED COSTS The FDA and foreign regulatory agencies regulate the commercial distribution of our medical products. The regulatory process can delay marketing new products for long periods and can add substantial costs. In addition, changes in governmental rules and regulations could affect us in ways we cannot predict. Changes in regulation could affect products already approved for marketing, products that have not yet been approved, or the approval process itself. Regulatory delays and costs could significantly lower our profitability. 10 The regulatory approval process is costly, complex, and time-consuming, and it is possible that approvals could be delayed or never granted. The FDA classifies medical products as either medical devices or drugs/biologicals. Currently, the FDA and most foreign regulatory agencies consider most of our medical products to be medical devices. Some of our products are currently being reviewed for approval by various regulatory agencies. The FDA and foreign regulatory agencies also inspect our manufacturing facilities both before and after giving their approval to market a product. Additionally, if a material change is made to the manufacturing process, equipment, or location after receiving approval for marketing from regulatory agencies, additional regulatory review may be necessary. The expenses and delays that can surround the regulatory review process for manufacturing facilities could significantly lower our profitability. CHANGES IN REIMBURSEMENT POLICIES COULD SIGNIFICANTLY REDUCE OUR ABILITY TO SELL OUR PRODUCTS The availability of reimbursement by Medicare, Medicaid, private health insurers, and other organizations may affect sales of our products. Limitations on reimbursement may negatively impact sales of our medical products. In the United States, the Health Care Finance Administration, also known as HCFA, and many private health insurance organizations currently provide reimbursement for Synvisc. Synvisc is currently reimbursed by all of the Medicare regional insurance carriers. Synvisc is also on the list of government-reimbursable products in Sweden and the United Kingdom. Currently, Synvisc has not been approved for reimbursement by the Canadian provincial governments; however, several Canadian private insurance companies do provide reimbursement for Synvisc. In addition, we are currently discussing reimbursement for Synvisc with European government agencies. We do not expect insurance companies to pay for Hylaform, another of our products. Changes in reimbursement policies could significantly reduce our ability to sell our products. IF WE CANNOT MAINTAIN OR REPLACE OUR MARKETING PARTNERS, THERE MAY BE SHORT-TERM DISRUPTIONS IN SALES ASSOCIATED WITH RESTRUCTURING OUR DISTRIBUTION ARRANGEMENTS We have entered into many distribution agreements for marketing and distributing some of our products, including Synvisc and Hylaform. As a result, we are dependent on our marketing partners for sales of our product in countries in which we have marketing and distribution agreements. It is possible that we will not be able to maintain or replace these marketing partners. If this happens, there may be short-term disruptions in sales associated with restructuring our distribution arrangements. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS, WE COULD LOSE OUR TECHNOLOGICAL ADVANTAGE In order to protect our core hylan technology, we have obtained patents on our technologies and on our products in key countries. We currently have 22 issued or allowed patents and 1 patent pending in the United States, and 88 issued or allowed patents and over 68 patents pending in foreign countries. We cannot be sure that any patents pending or patent applications we may file in the future will result in issued patents. Any patents we have now, or that may be issued in the future, trade secrets or know-how may not be enough to protect our business against competitors with similar technologies or processes. Others might still infringe upon or design around our issued patents. In addition, others might develop proprietary technologies or processes on their own which are the same as or substantially equivalent to ours. It could be very expensive if we have to defend against patent infringement suits brought against us or if we choose to sue others to protect our patents against infringement. In addition to patent protection, we rely on trade secrets, proprietary know-how and continuing technological developments. We generally try to protect this information by entering into confidentiality agreements with our business partners, employees and consultants. Certain people might break the promises they make in these agreements. If they do, we may not be able to remedy the damage they cause to our business. Even if everyone honors these agreements, our competitors might still discover our trade secrets on their own. 11 OUR MARKET SHARE COULD DECREASE IF OTHER PRODUCTS BECOME MORE ACCEPTED BY DOCTORS AND HEALTH INSURANCE COMPANIES Our industry is driven by technological innovation. Although we believe our patents on hylans make it more difficult for others to develop and sell products made from similar substances, a number of our potential competitors are trying to develop substances that could perform as well or better than ours. Other substances or technologies may be, now or in the future, the basis of competitive products that could render our technology obsolete or non-competitive. If this happens, our sales could be reduced significantly. We believe that our superior technology and our longstanding know-how and experience give us our primary advantages over our competitors. Competition for our product, Synvisc, consists primarily of products based on earlier technology. These products include, in the United States, the FDA-approved Hyalgan-Registered Trademark-, produced by Fidia S.p.A. and marketed in the United States by OrthoLogic Corp. Another product based on earlier technology is Orthovisc-Registered Trademark-, which failed in 1998 to receive approval from the FDA for marketing in the United States but is marketed in Canada and in certain other countries. Orthovisc is produced by Anika Therapeutics, Inc. and marketed by Zimmer, Inc. In Europe, the primary competitive products are Hyalgan and Artz-Registered Trademark-, a Japanese product. To the best of our knowledge, there are no other viscosupplementation products on the market, or in development, which, like Synvisc, have the physical properties of viscosity, elasticity or molecular weight that are comparable to the physical properties of healthy, young synovial fluid. Our ability to compete depends primarily upon product acceptance by doctors and other customers and whether or not health insurance will pay for treatment with our products, as opposed to those of our competitors. If other products become more accepted by doctors, other customers and health insurance companies, our sales could be significantly reduced. CHANGES IN OUR MANUFACTURING CAPABILITIES COULD SIGNIFICANTLY REDUCE OUR ABILITY TO DELIVER OUR PRODUCTS Biomatrix faces manufacturing risks. Our manufacturing process is highly complex and is regulated by the government. It is possible that we will have problems maintaining or expanding our facilities in the future. These problems could cause delays in production or delivery delays. Any significant disruption in our manufacturing operations could significantly hurt our business, results of operations, and financial condition. OUR RECENT EXPANSION MIGHT NOT BRING THE INCREASED PROFITABILITY WE EXPECT Over the past two years, we more than doubled the number of employees. Also, we now operate and have employees in twelve countries. This expansion requires that we spend a significant amount of money to support what we hope will be increased demand for our products. This strategy involves risks, which include supporting higher levels of operating expenses, attracting and retaining employees, and dealing with other management difficulties that arise from rapid growth. A LOSS OF KEY PERSONNEL COULD IMPEDE OUR ABILITY TO EFFICIENTLY IMPLEMENT OUR BUSINESS PLANS Our future success is highly dependent on the members of our management and scientific staff because of the highly specialized and technical nature of our business. The experience of our key employees with our products and processes makes them difficult to replace, and the loss of one or more of our key employees could impede our ability to efficiently implement our business plans. We do not maintain any key person life insurance policies with respect to any of our employees. We have entered into employment agreements with Dr. Endre A. Balazs, our Chief Executive Officer and Chief Scientific Officer and Rory B. Riggs, our President. These agreements restrict Dr. Balazs and Mr. Riggs from engaging in certain activities that are competitive with Biomatrix. We have entered into similar agreements with most but not all of our employees. PRODUCT LIABILITY CLAIMS COULD SIGNIFICANTLY HARM OUR FINANCIAL CONDITION AND OUR REPUTATION Producing and selling health-care products can lead to allegations of product liability, and it is possible that product liability claims could be brought against us. Although we carry product liability insurance in an amount that we consider sufficient, we cannot be sure that the amount of coverage that we currently hold, or will hold in the future, will be adequate. If our insurance coverage is not sufficient, we may not be able to satisfy liability claims out of our other assets. If we attempt to obtain additional insurance in the future, we may not be able to do so on acceptable terms or at an acceptable cost, and any additional insurance we do obtain may not provide adequate coverage against asserted claims. Additionally, allegations of product liability, whether or not proven, 12 could interfere with our ability to sell our products and thereby reduce our revenues. OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND ITS PRICE MAY DROP PRECIPITOUSLY IN THE FUTURE AND OUR STOCK PRICE MAY BE AFFECTED BY THE STOCK PRICES OF GENZYME SURGICAL PRODUCTS AND GENZYME TISSUE REPAIR The market price of our common stock, like that of the securities of many other biomedical and medical device companies, has fluctuated over a wide range, and the market price of the shares of our common stock or other securities could be highly volatile in the future. The price of our common stock as reported by the New York Stock Exchange has ranged from a high of $45.00 to a low of $18.13 in the 52 weeks ended December 31, 1999. Factors including, but not limited to, fluctuation in our operating results or our failure to meet the expectations of the investment community, our ability to manufacture our products, demand for our products, announcements of technological innovations or new commercial products by us or our competitors, governmental regulation, changes in insurance reimbursement policies, developments or disputes concerning patent or other proprietary rights, public concern as to the safety of devices or other products developed by us or our competitors, and general market conditions may from time to time have a significant effect on the market price of our common stock or other securities. In addition, as a result of our agreement to merge with Genzyme, the price of our stock is expected to trade at prices that correlate to the value of the consideration our stockholders will receive in the merger, which is part cash and part stock in Genzyme's newly created tracking stock. The merger is subject to various shareholder approvals of both companies. If the merger is not approved and does not close it may have a negative impact on our stock price. FLUCTUATING OPERATING RESULTS COULD CAUSE DECREASED REVENUES We have planned our operating expenses on the assumption that revenues from sales will continue to grow. If these revenues do not grow as we have projected, our operating results for a particular period may be lower than expected. A revenue shortfall could result from a number of factors, including but not limited to those described in this Form 10-K, lower than expected demand for our products; fewer purchases of our products by our distribution partners; inability to collect from those who owe us money, goods, or services; manufacturing interruptions; and overall economic conditions. ITEM 3. LEGAL PROCEEDINGS In August 1990, we received a notice filed by the Pennsylvania Department of Environmental Protection that we could be one of approximately 1,000 potentially responsible parties that may have clean-up responsibility at the Industrial Solvents and Chemical Company site in York Haven, Pennsylvania. During the late 1980s, we used a licensed waste disposal transport company to ship industrial solvents to that site, which was operating as a recycling facility at the time. The Department of Environmental Protection reviewed hazardous waste found at the site, as well as their own records, to identify additional participants and to quantify each participant's contribution. Biomatrix is a member of a steering committee that consists of many participants. As of December 31, 1997, we had a reserve of $0.7 million related to this matter. During the fourth quarter of 1998, the Department of Environmental Protection selected a final clean-up remedy, and Biomatrix settled out of the matter with a buy-out proposal prepared by the steering committee and reversed the reserve associated with this matter. Therefore, on December 31, 1999 and 1998 Biomatrix no longer had a reserve for any potential litigation regarding this matter. In October 1996, Michael Jarcho filed suit against Biomatrix in the United States District Court for the Southern District of California seeking to recover damages and declaratory judgment for our alleged breach of Jarcho's consulting agreement with Biomatrix, dated December 2, 1988. The agreement provides that Biomatrix is to pay royalties to Jarcho for products that result from his consultancy. Jarcho contends that Hylaform resulted from his consultancy and seeks a royalty on our past and future net sales of Hylaform as well as punitive damages and recovery of attorney fees. The royalty Jarcho alleges he is entitled to would have totalled $0.4 million through December 31, 1999. We disagree with Jarcho's claims and do not believe that we owe Jarcho any royalties as a result of Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the grounds that the agreement requires such disputes to be brought exclusively in New Jersey state court. Jarcho moved for a partial reconsideration of the decision, which we opposed, and his motion was denied. On June 16, 1997, Jarcho filed suit in New Jersey state court. A tentative trial date has been set for May 2000. We have been defending this matter vigorously. In accordance with our policy on 13 contingencies, a provision has been made in the accompanying consolidated financial statements for estimated legal fees expected to be incurred in defending the matter vigorously. The Company is presently unable to predict the ultimate outcome of this matter or whether it would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from the claims made by Jarcho. On July 21, and August 7, 15, and 30, 2000, class action lawsuits requesting unspecified damages were filed in the United States District Court for the District of New Jersey against Biomatrix and two of its officers and directors, Endre A. Balazs and Rory B. Riggs. In these actions, the plaintiffs seek to certify a class of all persons or entities who purchased or otherwise acquired Biomatrix common stock during the period between July 20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things, that the defendants failed to accurately disclose information related to Biomatrix's product Synvisc-Registered Trademark- during the period between July 20, 1999 and April 25, 2000, and assert causes of action under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We disagree with these claims and believe that information related to Synvisc was properly disclosed. Biomatrix intends to defend these actions vigorously. Under the certificate of incorporation of Biomatrix, officers and directors of Biomatrix are entitled to indemnification for such claims from Biomatrix to the full extent permitted by Delaware law. The Company is presently unable to predict the ultimate outcome of these cases or whether they would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from these claims. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We have been principally engaged in the research and development, manufacturing and commercialization of proprietary viscoelastic biological polymers, called hylans, for use in therapeutic medical applications and skin care. During the past five years, a significant source of our revenue has been from certain up-front payments relating to corporate license and distribution agreements. Our business is subject to significant risks. Forward-looking comments included in this discussion and throughout this report are subject to and should be read in conjunction with the "Risk Factors" section of this Form 10-K. We rely on distribution partners to sell our products in the U.S. and in many other major markets. These distribution partners make independent decisions about the amount of our products they will purchase in any given quarter based on a number of factors, including their estimate of future sales in their marketing territories and the level of inventory they decide to maintain at any given time. Further, a portion of our future revenues may be based on payments from corporate license and distribution agreements. Therefore, our total revenues and net income will fluctuate from quarter to quarter. Some of these fluctuations may be significant and, as a result, quarter to quarter comparisons may not be meaningful. As of December 31, 1999, Biomatrix's retained earnings were $10.9 million, as compared to an accumulated deficit of $7.7 million as of December 31, 1998. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES. Total revenues for the year ended December 31, 1999 were $79.7 million, representing an increase of $32.1 million or 67% over total revenues in 1998. Net product sales for the year ended December 31, 1999 of $72.0 million were comprised of $68.2 million from supply price revenues and $3.8 million from formula price adjustment revenues. Net product sales for the year ended December 31, 1998 of $37.8 million were comprised of $22.1 million from supply price revenues and $15.7 million from formula price adjustment revenues. The increase in net product sales of $34.2 million, a 90% increase over 1998, was comprised of $46.1 million from supply price revenues offset by a reduction in formula price adjustment revenues of $11.9 million. The increase in supply price revenues was due primarily to an increase of more than 100% in the supply price of Synvisc to Wyeth-Ayerst US, an increase of more than 80% in shipments to Wyeth-Ayerst US, an increase of more than 200% in unit sales in Europe and the launch of Synvisc in Australia. The increase in unit sales of Synvisc to our marketing partner in the United States is attributable to an increase in end-user sales by our marketing partner of 35% and an increase in our marketing partner's inventory to support increased sales and promotional activities. Formula price adjustment revenues decreased in 1999 primarily because the supply price of Synvisc 14 was increased effective January 1, 1999 pursuant to the distribution agreement with Wyeth-Ayerst for the U.S. market. Income from licenses, royalties, and research contracts was $7.7 million in 1999, a decrease of $2.1 million or 21% from 1998, and represented 10% of total revenues in 1999 as compared to 21% of 1998 total revenues. The $7.7 million recorded in 1999 includes a $7.0 million non-refundable milestone payment by Wyeth, which was earned because Wyeth achieved end-user Synvisc sales in the United States of $100 million over a rolling twelve-month period. The $9.8 million recorded in 1998 includes $3.1 million of up-front non-refundable fees from Novartis and a $6.0 million non-refundable milestone fee from Wyeth, which was recorded on the one-year anniversary of the launch of Synvisc in the United States. The up-front and milestone non-refundable fees that Biomatrix recorded in 1999 and 1998 contained no future performance obligations. Upon adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition," the Company's accounting policy for recognizing revenue related to up front and milestone payments will be to recognize revenue when all performance and economic commitments have been completed. COSTS AND EXPENSES. Total costs and expenses were $48.7 million for the year ended December 31, 1999, representing an increase of $14.8 million or 44% over 1998. Cost of goods sold for the years ended December 31, 1999 and 1998 were $21.1 million and $9.1 million, respectively, resulting in gross margin percentages of 71% and 76%, respectively. This decrease in gross margin percentage is a result of shipments from our new U.S. manufacturing facility which has higher costs because it is operating below capacity. Research and development expenses were $9.1 million for the year ended December 31, 1999, representing a decrease of $1.2 million or 12% over the prior year. The decrease in research and development expenses is primarily related to the inclusion of non-recurring process development costs associated with the Company's new U.S. manufacturing facility in 1998. Selling, general and administrative expenses for the year ended December 31, 1999 were $18.5 million, representing an increase of $4.0 million or 28% over the prior year. The increase in selling, general and administrative expenses was due primarily to increased personnel costs associated with establishing the infrastructure required to market our products globally. During the fourth quarter of 1998, we reversed a reserve of $0.7 million related to an environmental issue that was settled and also established a litigation reserve of $0.4 million for legal fees related to pending litigation. INTEREST AND MISCELLANEOUS INCOME. Interest expense was $1.5 million for the year ended December 31, 1999, which represented an increase of $0.5 million over the prior year. This increase in interest expense is attributable to the full year of interest expense on the convertible debt instrument that Biomatrix issued in May 1998, and a full year of interest expense related to the $2.3 million of equipment financing entered into in December 1998. Interest and miscellaneous income for the year ended December 31, 1999 was $1.5 million, representing an increase of $0.1 million over the prior year. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUES. Total revenues for the year ended December 31, 1998 were $47.6 million, representing an increase of $15.1 million or 46% over total revenues in 1997. Net product sales for the year ended December 31, 1998 of $37.8 million were comprised of $22.1 million from supply price revenues and $15.7 million from formula price adjustment revenues. Net product sales for the year ended December 31, 1997 of $11.7 million were comprised of $9.9 million from supply price revenues and $1.8 million from formula price adjustment revenues. The increase in net product sales of $26.1 million, a 223% increase over 1997, was comprised of $12.2 million from supply price revenues and $13.9 million from formula price adjustment revenues. The increase in supply price revenues was due primarily to an increase of 388% in unit sales of Synvisc in the US, to increased unit sales of Synvisc in Europe and to the launch of Synvisc in certain Latin American countries. Formula price adjustment revenues increased in 1998 primarily due to sales of Synvisc in the U.S. market by Wyeth-Ayerst at prices that exceeded the supply price by more than 100%. Income from licenses, royalties, and research contracts was $9.8 million in 1998, a decrease of $11.0 million or 53% from 1997, and represented 21% of total revenues in 1998 as compared to 64% of 1997 total revenues. The $9.8 million recorded in 1998 includes $3.1 million of up-front non-refundable fees from Novartis and a $6.0 million non-refundable milestone fee from Wyeth, which was recorded on the one year anniversary of the launch of Synvisc in the United States. The decrease from 1997 was due primarily to the fact that 1997 included non-refundable up-front and non-refundable milestone payments from Wyeth of $17.0 million and Bayer of $3.0 million. The up-front and milestone non-refundable fees recorded in 1998 and 1997 contained no future performance obligations. Upon adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition," the Company's accounting policy for recognizing revenue related to up front and milestone payments will be to recognize revenue when all performance and economic commitments have been completed. 15 COSTS AND EXPENSES. Total costs and expenses were $33.9 million for the year ended December 31, 1998, representing an increase of $16.6 million or 96% over 1997. Cost of goods sold for the years ended December 31, 1998 and 1997 were $9.1 million and $3.6 million, respectively, resulting in gross margin percentages of 76% and 69%, respectively. Research and development expenses were $10.3 million for the year ended December 31, 1998, representing an increase of $4.4 million or 75% over the prior year, due nearly entirely to process development costs associated with our new U.S. manufacturing facility. Selling, general and administrative expenses for the year ended December 31, 1998 were $14.5 million, representing an increase of $6.7 million or 86% over the prior year. The increase in selling general and administrative expenses resulted primarily to increased personnel costs associated with establishing the infrastructure required to manufacture and market our products globally. During the fourth quarter of 1998, we reversed a reserve of $0.7 million related to an environmental issue and also established a litigation reserve of $0.4 million for legal fees related to pending litigation. INTEREST AND MISCELLANEOUS INCOME. Interest expense was $1.0 million for the year ended December 31, 1998, which represented an increase of $0.9 million over the prior year. This increase in interest expense is attributable to the convertible debt instrument Biomatrix issued in May 1998 and the fact that we ceased capitalizing interest related to the new manufacturing facility in July 1998, after the facility was completed. Interest and miscellaneous income for the year ended December 31, 1998 was $1.4 million, representing an increase of $0.2 million over the prior year. INCOME TAXES In 1999, 1998 and 1997, we recorded tax provisions totaling $12.4 million, $2.0 million and $0.6 million, respectively, primarily for federal and state taxes. The effective rate for 1999 was 40% which approximated the combined statutory federal and state rates. The 1998 provision of $2.0 million is net of a one-time benefit of approximately $1.8 million related to recognizing certain net deferred tax assets during 1998. We expect our effective tax rate to approximate the combined statutory federal and state rate in 2000. The effective rate could potentially exceed the combined statutory federal and state rate in the future depending on the impact of certain foreign operations and non-deductible items. As of December 31, 1999 we had $0.5 million of net deferred tax assets included in other long term assets and $0.7 million of net deferred tax assets included in other short term assets on our balance sheet. It is probable that Biomatrix will realize the benefit of these net assets. However, we have provided a full valuation allowance on certain foreign related deferred tax assets due to the uncertainty of their realization. LIQUIDITY AND CAPITAL RESOURCES Biomatrix had cash and cash equivalents of $35.0 million at December 31, 1999. It is our policy to invest excess cash in U.S. government securities and, accordingly, any security purchased with a maturity of less than three months is classified as cash and cash equivalents. As of December 31, 1999 all of Biomatrix's cash and cash equivalents were held in operating and money market accounts. Our operations and capital growth over the past three years have been financed primarily from non-refundable up-front and milestone license fee payments from corporate partners, the utilization of our cash and investments, and the private placement of debt and equity securities. Over the past three years, we have received funding of $19.8 million from the private placement of debt and equity securities and $36.4 million from non-refundable license fee and milestone payments. For the year ended December 31, 1999, Biomatrix had cash inflows from operations of $30.9 million. This amount primarily related to cash inflows from increased sales levels of Synvisc and the $7.0 million milestone payment from Wyeth related to the achievement of a sales level milestone for Synvisc. In 1999 Biomatrix invested $9.2 million in property, plant and equipment, primarily associated with building its laboratories in the United States. During 1999, Biomatrix purchased the 93,000 square foot building in New Jersey where our manufacturing facility resides. The purchase price was approximately $4.6 million. Additionally, in 1999 Biomatrix received $1.0 million from the exercise of Biomatrix stock options and $1.2 million from the tax benefit related to stock options. During 2000, we expect to incur higher expenses from developing our internal infrastructure to support the administration of our expanded global operations and increased clinical activity. We believe that our higher operating 16 expenses will be supported by our operations, existing cash position, and milestone payments from existing corporate partners and existing financing arrangements. In May 1998, Biomatrix issued $15.0 million of subordinated convertible debt to a third party. The debt has a five-year term and a coupon rate of 6.9% with interest payable on a semi-annual basis. The debt contains a conversion feature that allows the third party to convert the debt into common shares at $20 per share after one year. Biomatrix can also call the debt at par after three years or after two years upon certain conditions. During the fourth quarter of 1999, the debt holder converted one-third of the debt, or $5.0 million, into 250,000 shares of common stock. Therefore, at December 31, 1999, the outstanding balance of convertible debt was $10.0 million. The agreement includes certain financial covenants with which we have complied. In December 1998, Biomatrix entered into a $2.3 million equipment loan with GE Capital. The debt has a five-year term and a coupon rate of 7.4%. The debt is repayable in equal monthly payments over the five-year term. The agreement includes certain financial covenants with which we have complied. In August 1999, Biomatrix secured a revolving line of credit from Merrill Lynch Business Financial Services, Inc. in the amount of $10.0 million. Funds can be borrowed against the line at an interest rate equal to the 30-Day Commercial Paper Rate, as defined in the agreement, plus 1.99%. To the extent the Company draws down on this line, the borrowed amount will be collateralized by the U.S. manufacturing facility. There were no borrowings against this line at December 31, 1999. We also have a $0.4 million credit agreement with a Canadian bank with an interest rate at prime plus 0.5%. There were no borrowings outstanding at December 31, 1999 and 1998. YEAR 2000 We did not incur any significant unanticipated expenses nor any disruption of business operations as a result of the transition to Year 2000. Our final operating cost to modify our systems for the Year 2000 was approximately $0.3 million. RECENT DEVELOPMENTS On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Seagull Merger Corporation, a Massachusetts corporation and wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the parties will effect a business combination through a merger of Biomatrix with and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will form a new division, the Genzyme Biosurgery division, and will create a new series of common stock designated as "GZBX division Common Stock," $0.01 par value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the Merger. The currently proposed terms of the GZBX Stock are set forth as an exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue Repair Division and Surgical Products Division will become part of the Genzyme Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock") series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which will be accounted for using the purchase method of accounting, is expected to close in the second quarter of 2000. Under the terms of the Merger Agreement, each outstanding share of Biomatrix Common Stock will be converted, at the option of the holder, into either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger Consideration"). Based on the cash election price and the number of shares of Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of the transaction will be approximately $245 million. Under the Merger Agreement, 28.38% of the shares of Biomatrix Common Stock outstanding at the effective time of the Merger will be exchanged for cash and the remaining 71.62% of the shares of Biomatrix Common Stock outstanding at the time of the Merger will be converted into shares of GZBX Stock at a conversion rate of one share of GZBX Stock for each share of Biomatrix Common Stock. However, the number of shares of GZBX Stock to be issued in the Merger is subject to an upward adjustment if the value of the GZBX Stock to be issued in the Merger on the effective date of the Merger is less than 45% of the total Merger Consideration in order to preserve the status of the Merger as a tax-free reorganization. 17 Under the terms of the Merger Agreement, each outstanding share of GSP Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock will convert into 0.3352 shares of GZBX Stock. Based on the number of common shares outstanding for each entity at the signing date, the Genzyme Biosurgery division is expected to have approximately 35.2 million shares outstanding. Consummation of the Merger is subject to the adoption of the Agreement and Plan of Merger by the Biomatrix stockholders, the approval of the issuance of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by the Genzyme stockholders, including the approval of the exchange of GSP Stock for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock by GTR stockholders, the receipt of regulatory approvals and certain other customary closing conditions. Certain officers of Biomatrix holding an aggregate of approximately 34% of the outstanding shares of Biomatrix Common Stock have agreed to vote their shares of Biomatrix Common Stock in favor of the Merger until the earlier to occur of the completion of the Merger or 5 days after the termination of the Merger Agreement. In addition, as a condition to Genzyme's entering into the Merger Agreement, Biomatrix granted Genzyme an option to acquire up to 4.6 million shares of Biomatrix Common Stock at a price of $30 per share. The option may only be exercised by Genzyme upon the termination of the Merger Agreement resulting from our shareholders' voting against the merger or our entering into an alternative transaction that is recommended by our Board. IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 is not expected to have an impact on our consolidated results of operations, financial position or cash flows. In December 1999, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition, which was amended on March 24, 2000 to delay the implementation date for registrants with fiscal years that begin between December 16, 1999 and March 15, 2000 until no later than their second fiscal quarter of the fiscal year beginning after December 15, 1999. To the extent the guidance in SAB 101 differs from the generally accepted accounting principles previously utilized by an SEC registrant, SAB 101 indicates that the SEC staff will not object to reporting the cumulative effect of a change in accounting principle. Prior to promulgation of SAB 101, we had reported non-refundable up-front and milestone fees received pursuant to distribution agreements in the period earned, which was deemed to be the date when the activity was performed or the milestone was achieved. While we believe the pricing under these agreements entered into with our various marketing partners provides for arms-length pricing of product sales, SAB 101 requires that we review all of our non-refundable fees to determine if they should be linked to supply arrangements and reported as additional revenue from product sales made pursuant to those arrangements. We are currently in the process of evaluating the impact of SAB 101 on our accounting policy for non-refundable fees received pursuant to distribution agreements with our marketing partners. We are in the process of reviewing each of our many distribution agreements to assess whether non-refundable, up-front license fees and/or milestone payments should be deferred in accordance with SAB 101. Accordingly, we anticipate that a change in our accounting policy will result in a cumulative effect adjustment for a change in accounting principle. The total cumulative effect of the non-cash, after-tax charge is preliminarily estimated to range from $13.0 million to $20.0 million. Such amount would be recorded as deferred revenue and recognized as product revenue in future periods. We will continue to assess the impact of SAB 101 and currently intend to implement changes resulting from SAB 101 in the second quarter of 2000. CONTINGENT LIABILITY In August 1990, we were notified by the Pennsylvania Department of Environmental Protection that we could be one of approximately 1,000 potentially responsible parties that may have clean-up responsibility at the Industrial 18 Solvents and Chemical Company site in York Haven, Pennsylvania. During the late 1980s, we used a licensed waste disposal transport company to ship industrial solvents to the site, which was operating as a recycling facility at that time. The Department of Environmental Protection reviewed hazardous waste found at the site, as well as its own records, to identify additional participants and to quantify their volumetric contributions. Biomatrix was a member of a steering committee that consisted of many participants. As of December 31, 1997 Biomatrix had a reserve of $0.7 million related to this matter. During the fourth quarter of 1998, the final remedy was selected by the Department of Environmental Protection selected its final clean-up remedy and Biomatrix, settled out of the matter through a buy-out proposal prepared by the steering committee. At this time, Biomatrix reversed its reserve associated with this matter. Therefore, at December 31, 1999 and 1998 Biomatrix no longer had a reserve for any potential claims regarding this matter. In October 1996, Michael Jarcho filed suit against Biomatrix in the United States District Court for the Southern District of California seeking to recover damages and declaratory judgment for our alleged breach of Jarcho's consulting agreement with Biomatrix, dated December 2, 1988. The agreement provides that Biomatrix is to pay royalties to Jarcho for products that result from his consultancy. Jarcho contends that Hylaform resulted from his consultancy and seeks a royalty on our past and future net sales of Hylaform as well as punitive damages and recovery of attorney fees. The royalty Jarcho alleges he is entitled to would have totalled $0.4 million through December 31, 1999. We disagree with Jarcho's claims and do not believe that we owe Jarcho any royalties as a result of Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the grounds that the agreement requires such disputes to be brought exclusively in New Jersey state court. Jarcho moved for a partial reconsideration of the decision, which we opposed, and his motion was denied. On June 16, 1997, Jarcho filed suit in New Jersey state court. A tentative trial date has been set for May 2000. We have been defending this matter vigorously. In accordance with our policy on contingencies, a provision has been made in the accompanying consolidated financial statements for estimated legal fees expected to be incurred in defending the matter vigorously. The Company is presently unable to predict the ultimate outcome of this matter or whether it would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from the claims made by Jarcho. On July 21, and August 7, 15, and 30, 2000, class action lawsuits requesting unspecified damages were filed in the United States District Court for the District of New Jersey against Biomatrix and two of its officers and directors, Endre A. Balazs and Rory B. Riggs. In these actions, the plaintiffs seek to certify a class of all persons or entities who purchased or otherwise acquired Biomatrix common stock during the period between July 20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things, that the defendants failed to accurately disclose information related to Biomatrix's product Synvisc-Registered Trademark- during the period between July 20, 1999 and April 25, 2000, and assert causes of action under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We disagree with these claims and believe that information related to Synvisc was properly disclosed. Biomatrix intends to defend these actions vigorously. Under the certificate of incorporation of Biomatrix, officers and directors of Biomatrix are entitled to indemnification for such claims from Biomatrix to the full extent permitted by Delaware law. The Company is presently unable to predict the ultimate outcome of these cases or whether they would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from these claims. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K LIST OF FINANCIAL STATEMENTS See page F-1 of this Report, which includes an index to consolidated financial statements. LIST OF FINANCIAL STATEMENT SCHEDULES None. 19 LIST OF EXHIBITS (numbered in accordance with Item 601 of Regulations S-K) 2.1 Agreement and Plan of Merger, dated as of March 6, 2000, among Genzyme Corporation, Seagull Merger Corporation and Biomatrix, Inc. as filed as an exhibit to current report in Form 8-K dated March 15, 2000, and incorporated herein by reference thereto. 2.2 Form of Voting Agreement, dated as of March 6, 2000, between Genzyme Corporation and Certain Holders of Biomatrix, Inc. Common Stock as filed as an exhibit to current report in Form 8-K dated March 15, 2000, and incorporated herein by reference thereto. 2.3 Stock Option Agreement, dated as of March 6, 2000, between Genzyme Corporation and Biomatrix, Inc. as filed as an exhibit to current report in Form 8-K dated March 15, 2000, and incorporated herein by reference thereto. 3.1 Amended and Restated Certificate of Incorporation of Biomatrix, Inc. as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 3.2 Amendment to Amended and Restated Certificate of Incorporation to reflect the increase in authorized shares. 3.3 Amended and Restated Bylaws of Biomatrix as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 4 Specimen Stock Certificate. 10.1 Technology License Agreement dated as of June 21, 1991 between Biomatrix, Inc. and Biomatrix Medical Canada Inc. as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 10.2 Management Services Agreement dated as of June 21, 1991 between Biomatrix, Inc. and Biomatrix Medical Canada Inc. as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 10.3 Employment Agreement dated February 29, 2000 between Biomatrix, Inc. and Endre A. Balazs, M.D. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.4 Development Agreement by and among Biomatrix, Inc., Biomatrix Svenska AB and OA Investor KB (Up-Will) dated February, 1990 as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 10.5 1984 Stock Option Plan (as amended), and forms of Incentive and Non-Statutory Stock Option Agreements as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.6 Forms of Employment and Confidentiality Agreements, as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 10.7 License Agreements dated as of May 21, 1982 by and between Biomatrix, Inc. and each of Drs. Endre A. Balazs, Janet L. Denlinger and Gerald S. Lazarus, as filed as an Exhibit to Registration No. 33-41424, and incorporated herein by reference thereto. 10.8 Amendment to Employment Agreement dated December 30, 1988 between Biomatrix, Inc. and Endre A. Balazs, M.D., as filed as an Exhibit to the 1992 annual report on Form 10-K, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 20 10.9 Retirement Plan Agreement dated July 1, 1992 between Biomatrix, Inc. and the trustees of Biomatrix, as filed as an Exhibit to the 1992 annual report on Form 10-K, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.10 Consulting Agreement dated June 1, 1993 between Biomatrix, Inc. and Julius A. Vida, Ph.D., as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.11 Agreement dated August 29, 1995, between Biomatrix, Inc. and Rory B. Riggs, as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.12 Amendment dated July 10, 1995, to the Consulting Agreement dated June 1, 1993 between Biomatrix, Inc. and Julius A. Vida, as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.13 1994 Stock Option Plan. Filed as an exhibit to Biomatrix's proxy statement filed pursuant to Rule 14a-6 dated June 7, 1994, as filed as an Exhibit to the 1995 annual report on Form 10-K, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.14 Non-employee director stock option plan. Filed as an exhibit to Biomatrix's proxy statement filed pursuant to Rule 14a-6 dated May 23, 1995, as filed as an Exhibit to the 1995 annual report on Form 10-K, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.15 United States Distribution Agreement dated June 14, 1996 between Biomatrix, Inc. and Collagen Corporation, as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.16 International Distribution Agreement, dated June 14, 1996, between Biomatrix, Inc. and Collagen Corporation, as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.17 Agreement of Lease, dated April 18, 1996, between Ridgefield Associates and Biomatrix, Inc., as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.18 Employment Agreement, dated April 2, 1996, between Biomatrix, Inc. and Rory B. Riggs, as filed as an Exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.19 Amendment dated March 31, 1996 to the Consulting Agreement, dated June 1, 1993, between Biomatrix, Inc. and Julius A. Vida, as filed as and Exhibit to the quarterly report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.20 United States Licensing Agreement dated February 7, 1997 between Biomatrix, Inc. and American Home Products Corporation as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended 21 March 31, 1997, and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.21 International Licensing Agreement dated February 7, 1997 between Biomatrix, Inc. and American Home Products Corporation as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended March 31, 1997, and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.22 Supply Agreement dated February 7, 1997 between Biomatrix, Inc. and American Home Products Corporation as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended March 31, 1997, and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.23 Trademark License Agreement dated February 7, 1997 between Biomatrix, Inc. and American Home Products Corporation as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended March 31, 1997, and incorporated herein by reference thereto. (Confidential portions have been omitted and filed separately with the Commission.) 10.24 Form of Restricted Stock Purchase Agreement under Biomatrix's 1997 Restricted Stock Plan as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended June 30, 1997, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.25 Form of Secured Promissory Note under Biomatrix's 1997 Restricted Stock Plan as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended June 30, 1997, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 10.26 Form of Stock Pledge Agreement under Biomatrix's 1997 Restricted Stock Plan as filed as an Exhibit to the quarterly report on Form 10Q for the quarter ended June 30, 1997, and incorporated herein by reference thereto. Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 21 List of Subsidiaries. 23.1 Consent of PricewaterhouseCoopers LLP, independent accountants of Biomatrix. 27.1 Financial Data Schedule REPORTS ON FORM 8-K 2.4 Agreement and Plan of Merger among Genzyme Corporation and Biomatrix, Inc., dated as of March 6, 2000. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BIOMATRIX, INC. By: /s/ Endre A. Balazs ----------------------------------------------- (Endre A. Balazs) Chief Executive Officer, Chief Scientific Officer, Director 23 BIOMATRIX, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial statement schedules are omitted for the reason that they are not applicable or the required information is included in the consolidated financial statements or notes thereto. F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Biomatrix, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Biomatrix, Inc. 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. 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. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York January 28, 2000, except for Note 18, as to which the date is March 7, 2000 and Note 19, as to which the date is October 23, 2000 F-2 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions, except share amounts)

See notes to consolidated financial statements. F-3 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except share and per share data)

See notes to consolidated financial statements. F-4 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in millions, except shares, per share amounts and par value)

See notes to consolidated financial statements. F-5 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)

See notes to consolidated financial statements. F-6 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Biomatrix, Inc. (the "Company") was founded in 1981 to develop, manufacture and commercialize a series of proprietary viscoelastic products made of biological polymers called hylans for use in therapeutic medical applications and skin care. Hylans are chemically modified forms of the naturally occurring hyaluronan (also known as hyaluronic acid or sodium hyaluronate). Hylans are the second generation of viscoelastics used in medicine, and are characterized by significantly enhanced physical (rheological) properties (elasticity, viscosity and pseudoplasticity) as compared to naturally occurring hyaluronan, from which the first generation viscoelastics are made. The discovery of hylans has allowed the Company to develop a range of patented products with superior viscoelastic properties in the forms of fluids, gels and solids. The Company's operations consist of therapeutic medical products, skin care intermediate products and toxicity testing. The Company's business is subject to certain risks and uncertainties, including but not limited to governmental regulation, reimbursement, dependence on distribution relationships, patents, competition, manufacturing, rapid growth, dependence on key personnel, fluctuation in operating results and product liability. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Biomatrix Medical Canada Inc., Biomatrix UK Ltd., Biomatrix France SARL, Biomatrix Switzerland GmbH, Biomatrix Svenska AB, Biomatrix Germany GmbH, Biomatrix Belgium BVBA and its majority-owned subsidiary, Biomatrix Limited Hong Kong. All significant intercompany accounts and transactions have been eliminated in consolidation. PROPERTY, PLANT AND EQUIPMENT AND CAPITALIZED INTEREST Property, plant and equipment is recorded at cost. Interest related to borrowings for a construction project with a term greater than one year is capitalized. The interest is capitalized during the term of the project and capitalization ceases when the project is completed. Building, research laboratory equipment, office equipment and manufacturing equipment are depreciated on the straight-line method over their estimated useful lives. Capital leases and leasehold improvements are amortized on the straight-line method over the estimated useful life of the property or the terms of the related lease, whichever is shorter. Expenditures for additions, major renewals and improvements are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in income for the period. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized. The impairment loss is measured by the amount the book value exceeds the fair value of the asset. The fair value would be determined by obtaining a quote from an independent third party or by using a discounted expected future cash flow model. There were no impaired long-lived assets at December 31, 1999. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid short-term investments in money market funds, at cost, and U.S. Government or Government Agency securities purchased with a maturity of less than three months. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts receivable, notes receivable, accounts payable and accrued liabilities are reflected in the financial statement at fair value because of the short-term maturity of those instruments. The fair value of the Company's notes payable and capital lease obligations (including current installments) are estimated based on the current rate offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's notes payable and capital lease obligations approximates the carrying value at December 31, 1999 and 1998. INVENTORY Inventory is stated at the lower of cost or market and costs are removed on a first-in first-out (FIFO) basis. Inventory is reviewed on a quarterly basis for obsolete, slow-moving or impaired items. There were no obsolete, slow-moving or impaired items at December 31, 1999. F-7 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS Investments, which typically consist of U.S. Government and Government Agency Securities, are classified as held-to-maturity and are reported at amortized cost, which approximates market. DEFERRED DEBT FEES Deferred debt fees are included in other assets and are amortized over the term of the corresponding debt. REVENUE RECOGNITION Revenue from product sales is recognized at the time the products are shipped to the customer or marketing partner. These Revenues are recorded at the minimum/supply price. Additional Revenue from product sales in the form of formula price adjustments, which is based on the difference between the contractual percentage of net sales of a marketing partner to their customers and the minimum/supply price, is recognized in the same period that the marketing partner records the sale to their customers. Revenue from non-refundable up-front and milestone payments is recognized in the period earned, which is when the activity has been performed or the milestone has been achieved under the terms of the contracts with the marketing partners. The Company is planning to adopt Staff Accounting Bulletin No. 101, "Revenue Recognition," during the second quarter of 2000, which will impact the way the Company records its non-refundable up-front and milestone payments. (See Note 17 for further discussion). Research contract revenue is recognized at the time the service is performed. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONTINGENCIES The Company accounts for contingencies in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." As such when a loss is probable and reasonably estimable a reserve is established and information regarding such reserve is disclosed in the notes to the financial statements. In the event the Company plans to defend a legal matter vigorously, and the costs of such defense are not covered by an insurance policy, the Company will establish a reserve for future probable estimated legal fees, if estimable. INCOME TAXES Deferred taxes are provided on the liability method, in accordance with SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portions or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's subsidiaries are translated into U.S. dollars at year-end exchange rates and revenue and expense items are translated at average rates of exchange prevailing during the year. Resulting translation adjustments are a component of accumulated other comprehensive income in shareholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the Company's functional currency) are included in miscellaneous income. ACCOUNTING FOR STOCK-BASED COMPENSATION In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee stock option plans. See Note 11 for a summary of the pro forma effects on reported net income and earnings per share for fiscal 1999, 1998, and 1997 based on the fair value of options and shares granted as prescribed by SFAS No. 123. F-8 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER COMMON SHARE In 1998, the Company adopted SFAS No. 128, "Earnings per Share," which requires the presentation of basic earnings per share and diluted earnings per share. Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding for the period. Diluted net income per share is reflective of all common share equivalents. The Company has convertible debt which converts into 500,000 shares of common stock at December 31, 1999, and 750,000 shares of common stock at December 31, 1998. However, this instrument has not been included in diluted earnings per share for 1999 and 1998 because its effect would be anti-dilutive. A reconciliation of weighted average shares outstanding from basic to diluted is as follows:

RECLASSIFICATION Certain amounts in the 1998 and 1997 consolidated statements of operations and the 1998 consolidated balance sheet have been reclassified in order to conform to the 1999 presentation. 3. INVENTORIES Inventories at December 31, 1999 and 1998 consisted of:

4. NOTES RECEIVABLE - RELATED PARTIES Notes receivable - related parties relate to the acquisition of common stock of the Company at fair market value by several officers and directors of the Company during 1999, 1998, and 1997. The notes are with recourse and are payable with simple interest upon maturity. The interest rates, which are determined in accordance with Internal Revenue Service standards, on the notes outstanding as of December 31, 1999 range from 5.30% to 7.18%. The amount of the notes outstanding at December 31, 1999 and 1998 mature at the following dates:

In August 1998, an officer of the Company repaid a note in the amount of $2.8 million including interest. All notes issued during 1999, 1998 and 1997 have been for common stock issued pursuant to the Company's 1997 Restricted Stock Plan. F-9 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1999 and 1998 consisted of:

Depreciation expense for the three years ended December 31, 1999, 1998 and 1997 was, $3.7 million, $1.6 million and $0.7 million, respectively. Capitalized interest for the years ended December 31, 1998 and 1997 was $0.2 million and $0.4 million, respectively. There was no capitalized interest for the year ended December 31, 1999. Repairs and maintenance expenses for the three years ended December 31, 1999, 1998 and 1997 were $0.8 million, $0.4 million and $0.1 million, respectively. Assets recorded under capital leases of $4.6 million as of December 31, 1998 were included in land, buildings and construction in progress. The accumulated depreciation of assets under capital leases was $0.1 million at December 31, 1998. There were no assets under capital leases at December 31, 1999. Assets pledged under equipment financing at December 31, 1999 and 1998 are included in manufacturing equipment in the amount of $3.7 million. Assets mortgaged as of December 31, 1999 and 1998 are included in buildings in the amount of $2.3 million and $2.1 million, respectively. 6. ACCRUED EXPENSES Accrued expenses at December 31, 1999 and 1998 consisted of:

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-Term Debt and Capital Lease Obligations at December 31, 1999 and 1998 consisted of:

F-10 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) In July 1996, the Company refinanced an outstanding mortgage on its Canadian manufacturing facility with another mortgage that accrues interest at an annual rate of 9.5% and has a final payment of $0.3 million due in June 2001. The Company's majority-owned Canadian subsidiary obtained a $1.0 million construction and manufacturing equipment loan from the Canadian government of which $0.9 million and $0.1 million was funded in 1993 and 1994, respectively. Interest on the loan accrues at the prevailing annual variable rate, which was approximately 8.0% at December 31, 1999 and 8.25% at December 31, 1998. In January 1996, the Company amended the repayment terms of the agreement, whereby the Company will make quarterly principal payments and a final payment in 2001. The principal payments shall correspond to 30% of the Canadian subsidiary's quarterly net profit (excluding depreciation), with an annual maximum of $0.2 million and an annual minimum of $0.1 million. The loan agreement contains covenants that require the maintenance of certain financial ratios by the Canadian subsidiary, with which the Company has complied. In September 1996, the Company entered into a capital lease of a building and land where the Company's U.S. manufacturing facility is located. This lease was accounted for as a capital lease and had an imputed interest rate of approximately 9%. During 1999, the Company exercised its option to acquire this building and purchased it at a price of approximately $4.6 million. In May 1998, the Company issued $15.0 million of subordinated convertible debt to a third party. The debt has a five-year term and a coupon rate of 6.9% with interest payable on a semi-annual basis. The debt contains a conversion feature that allows the third party to convert the debt into common shares at $20 per share after one year. In addition, the Company can call the debt at par after three years or after two years if certain conditions are satisfied. During the fourth quarter of 1999, the debt holder converted one-third, or $5.0 million, of the debt into 250,000 shares of common stock. Therefore at December 31, 1999, there is $10.0 million of convertible debt outstanding. Debt fees related to this transaction of $0.3 million and $0.6 million at December 31, 1999 and 1998 are included in other assets and are being amortized on a straight-line basis over the five-year term of the debt. The debt contains certain financial covenants, with which the Company has complied. In December 1998, the Company obtained equipment financing from GE Capital in the amount of $2.3 million. The debt has a five-year term, a coupon rate of 7.4%, and is payable in equal monthly installments. Certain of the Company's machinery and equipment is pledged as collateral for this financing. The debt contains certain financial covenants which the Company has complied with. Future minimum payments due under the note payable and mortgage obligations are as follows at December 31, 1999:

In August 1999, the Company secured a revolving line of credit from Merrill Lynch Business Financial Services, Inc. in the amount of $10.0 million. Funds can be borrowed against the line at an interest rate equal to the 30-Day Commercial Paper Rate, as defined in the agreement, plus 1.99%. To the extent the Company draws down on this line, the borrowed amount will be collateralized by the U.S. manufacturing facility. There were no borrowings against this line at December 31, 1999. The Company also has a $0.4 million credit agreement with a Canadian bank with an interest rate at prime plus 0.5%. There were no borrowings outstanding at December 31, 1999 and 1998. F-11 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. CAPITAL STOCK In March 1995, the Company completed a private sale of 500,000 shares of common stock to Recordati Industria Chimica e Farmaceutica S.p.A. ("Recordati"). Net proceeds to the Company related to this sale were $2.0 million. In July 1997, the Company repurchased 86,666 shares of common stock from Recordati. This purchase required approximately $0.9 million of funds and these shares are included at cost on the balance sheet as treasury stock. In April 1996, the Company completed a private sale of 400,000 shares of common stock at fair market value to an officer of the Company. The aggregate purchase price of $2.5 million was financed in full with a full recourse promissory note issued from the Company. In August 1998, the officer of the Company repaid the note in full plus accrued interest. In 1997, the Company completed sales of 266,000 shares of restricted common stock to several officers and directors of the Company. The aggregate purchase price of $2.3 million was financed with full recourse promissory notes issued from the Company. In 1998, the Company completed sales of 606,000 shares of restricted common stock to several officers and directors of the Company. The aggregate purchase price of $9.8 million was financed with full recourse promissory notes issued from the Company. In 1999, the Company completed sales of 82,000 shares of restricted common stock to several officers and a consultant of the Company. The aggregate purchase price of $2.6 million was financed with full recourse promissory notes issued from the Company. On April 6, 1999 the Company announced a two-for-one common stock split to be distributed in the form of a 100% stock dividend (the "Stock Split"). As a result of this action, on April 23, 1999, an additional 11,503,408 shares were distributed to the shareholders of record on April 16, 1999, of which 46,147 shares represented treasury stock of the Company. The shares issued, outstanding and in treasury of 11,424,179, 11,378,032 and 46,147 at December 31, 1998 have been restated to 22,848,358, 22,756,064, and 92,294 to reflect the Stock Split. Par value remains at $0.0001 per share. The par value of the additional shares resulting from the Stock Split has been reclassified from additional paid-in capital to common stock. All historical share and per share amounts in the accompanying statements have been restated to reflect the Stock Split. The 3,000 shares of authorized preferred stock are issuable by the Board of Directors. The terms, designations and other criteria are determinable by the Board of Directors upon issuance. In June 1991, Biomatrix, Inc. capitalized Biomatrix Medical Canada ("BMC"). In connection with this transaction additional capital was raised through a Canadian venture capital firm for which it received 62,500 shares of Class A stock in BMC. In April 1998, the Canadian venture capital firm exercised its right to convert the 62,500 shares of Class A stock in BMC into 76,924 shares of Biomatrix, Inc. common stock. As a result, BMC is now a wholly-owned subsidiary of Biomatrix, Inc. No gain or loss was recognized on the conversion of shares. F-12 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. INCOME TAXES

A reconciliation of the United States federal statutory rate to the Company's effective tax rate for the years ended December 31, 1999, 1998, and 1997 is as follows:

Temporary differences and carryforwards which give rise to deferred tax assets are as follows:

At December 31, 1999, approximately $0.7 million of the deferred tax assets is included in prepaid expenses and other current assets, and $0.5 million is included in other assets. At December 31, 1998, deferred tax assets of $2.8 million were included in other assets. The Company's valuation allowance of $4.3 million and $3.8 million in 1999 and 1998, respectively, was provided on deferred tax assets, which were primarily foreign related items, due to the uncertainty of realization. The Company has foreign federal net operating loss carryforwards of approximately $5.4 million of which $1.6 million expire at various times from December 31, 2001 through December 31, 2006. Approximately $3.8 million of the foreign federal net operating loss carryforwards will carryover indefinitely. In addition, the Company has foreign tax credit carryovers at December 31, 1999 of approximately $0.6 million of which $0.3 million expire at various times from December 31, 2002 through December 31, 2007. Approximately $0.3 of the foreign tax credits carryover indefinitely. F-13 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. COMMITMENTS OPERATING LEASE The Company occupies office and laboratory space under a lease expiring in July 2004. Rent expense for operating leases charged to operations for the years ended December 31, 1999, 1998 and 1997 approximated $0.7 million, $0.7 million and $0.5 million, respectively. Future minimum operating lease payments for the facility and other items are: 2000............................................ $ 1.0 2001............................................ 0.9 2002............................................ 0.8 2003............................................ 0.7 2004............................................ 0.7 Thereafter...................................... - ----- Total minimum obligations....................... $ 4.1 =====

LICENSE AGREEMENTS In November 1993 and June 1994, the Company entered into license and distribution agreements with Syntex Pharmaceuticals International Limited ("Syntex") to market Synvisc in selected European countries and South Africa. In return, for the exclusive marketing rights, Syntex paid up-front payments in 1993 and 1994 of $1.2 million, and $5.0 million, respectively. Subsequent to these agreements, Syntex was acquired by Roche AB, ("Roche"), a subsidiary of F. Hoffmann-LaRoche Ltd. Subsequent to the acquisition of Syntex by Roche, in the fourth quarter of 1995 the Company signed an agreement with Roche reacquiring the marketing rights to Synvisc for all countries identified in the previous agreements, except for Sweden and South Africa. The Company received a non-refundable initial payment in 1995 and a non-refundable final payment in 1996 in connection with the finalization of this agreement, which amounts have been included in income from licenses in the respective years. We are currently in discussions with Roche concerning its marketing rights in Sweden. In September 1995, the Company entered into a distribution agreement with Rhone-Poulenc Rorer Canada Inc. ("RPR"). The agreement provides RPR with exclusive marketing rights for Synvisc in Canada. In return, in 1995, the Company received an up-front non-refundable license fee payment of $3.5 million, which has been included in income from licenses. The Company terminated this agreement on December 31, 1999. The Company currently markets and sells Synvisc to the Canadian market through our subsidiary Biomatrix Medical Canada Inc. In June 1996, the Company entered into a distribution agreement with Inamed Corporation ("Inamed"), formerly Collagen Aesthetics, Inc.. The agreement provides Inamed with exclusive marketing rights for Hylaform in Europe, Canada, Japan, Australia and other select countries. In return, the Company received an up-front, non-refundable payment of $5.0 million in consideration of the costs and expenses that have been incurred by the Company related to the research and development of Hylaform. The Company is entitled to receive a royalty based upon sales of Inamed's dermal augmentation products as well as an additional royalty on the potential growth of Inamed's total dermal augmentation business. Additionally, the Company manufactures and supplies Hylaform to Inamed for a contractual percentage of Inamed's sales price. The Company has also entered into a distribution agreement with Inamed for the United States. Under such agreement, Inamed has the exclusive distribution rights to Hylaform in the United States subject to an additional payment and FDA approval. In December 1996, the Company entered into a distribution agreement with Boehringer Ingelheim France, S.A. ("Boehringer Ingelheim"). The agreement provides Boehringer Ingelheim with exclusive marketing rights for Synvisc in France. In return, the Company received an up-front non-refundable payment of $1.0 million, which has been included in income from licenses in 1996, and could receive milestone payments of up to $7.0 million if sales reach certain levels. The Company manufactures and supplies Synvisc to Boehringer Ingelheim for a contractual percentage of Boehringer Ingelheim's sales price. Additionally, Boehringer Ingelheim reimburses the Company, up to a fixed amount and for a certain period of time, for its costs of maintaining a team of area business consultants to assist in selling Synvisc in France. F-14 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. COMMITMENTS (CONTINUED) In February 1997, the Company entered into distribution agreements with Wyeth-Ayerst Laboratories ("Wyeth"), a division of American Home Products. The agreements provide Wyeth with exclusive marketing rights to Synvisc in the United States, Germany, Austria, Spain, Portugal, Greece and certain countries in the Middle East and Central Europe. In 1997, the Company received various non-refundable payments totaling $17.0 million. In 1998, the Company earned a non-refundable milestone of $6.0 million; such payment was received in February 1999. In 1999, the Company earned a milestone payment of $7.0 million as end-user sales reached a certain level. The Company could receive additional payments in the future if sales reach certain levels. The Company manufactures and supplies Synvisc to Wyeth for a contractual percentage of Wyeth's sales price. Additionally, Wyeth reimburses the Company, up to a fixed amount and for a certain period of time, for its costs of maintaining a team of area business consultants to assist in selling Synvisc in Europe and the United States. We are currently in discussions with Wyeth concerning its marketing rights for Synvisc in certain foreign countries. In April 1997, the Company entered into a distribution agreement with Bayer AG ("Bayer"). The agreement provides Bayer with exclusive marketing rights to Synvisc in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore, Taiwan and Thailand. In return, the Company received an up-front non-refundable payment of $3.0 million and could receive a milestone payment of $2.0 million upon certain approvals or if sales reach a certain level. The Company manufactures and supplies Synvisc to Bayer for a contractual percentage of Bayer's sales price. Additionally, Bayer will reimburse the Company, up to a fixed amount and for a certain period of time, for its costs of maintaining several area business consultants to assist in selling Synvisc in certain countries. In February 1998, the Company entered into a distribution agreement with Novartis Pharma AG ("Novartis"). The agreement provides Novartis with the exclusive marketing rights to Synvisc in Latin America and the Caribbean. In return, the Company earned a non-refundable payment of $3.1 million, of which $1.5 million was paid up-front in 1998 and $1.6 million was paid during the third quarter of 1999. The Company manufactures and supplies Synvisc to Novartis for a contractual percentage of Novartis' sales price. Additionally, Novartis will reimburse the Company for its costs of maintaining several area business consultants to assist in selling Synvisc in certain countries. RESEARCH AND DEVELOPMENT AGREEMENTS In July 1991, the Company entered into an agreement with Pharmacia to perform certain toxicity testing. The Company received $0.1 million, $0.6 million and $0.6 million of revenues relating to this testing for the years ended December 31, 1999, 1998, and 1997, respectively. Such amounts have been included in research contract revenue. During February 1990, the Company and its wholly owned subsidiary, Biomatrix Svenska AB, entered into an agreement with a Swedish Limited Partnership, Up-Will Investor KB ("Up-Will"). Up-Will invested in Biomatrix Svenska AB in order that the Company could pursue the obtainment of regulatory approvals to manufacture and market Synvisc in Germany, France, Spain and the United Kingdom. Up-Will provided Svenska AB with a total of approximately $1.5 million. In return, Up-Will receives a royalty from the Company equal to 6% of all net sales of Synvisc in the countries referred to above, for a period of 10 years from the date of first commercial sale in each country, regardless of whether the sales are made by the Company, Biomatrix Svenska AB or another party. Two of the Company's officers hold convertible debt in Up-Will. F-15 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS The Company has two fixed stock option plans which reserve shares of common stock for issuance to executives, employees, consultants and directors. The Company applies the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock based compensation plans. Accordingly, compensation expense has been recognized to the extent applicable in the financial statements with respect to the two plans in accordance with APB No. 25. Had compensation cost for the Company's two stock option plans been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123 "Accounting For Stock Based Compensation," the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:

Since option grants awarded during 1999, 1998 and 1997 typically vest over several years and additional awards are expected to be issued in the future, the pro forma results shown above are not likely to be representative of the effects on future years of the application of the fair value based method. The fair market value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Under the amended plan approved by the shareholders in May 1997, the total number of shares of common stock that may be granted is 6,000,000. In May 1995, the shareholders approved a Stock Option Plan for Non-Employee Directors of the Company. This plan authorizes the granting of options on 200,000 shares of common stock to directors who are not employees of the Company, who will automatically receive an option to acquire 5,000 shares upon election or re-election to the Board. F-16 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS (CONTINUED) These plans provide that shares granted come from the Company's authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans is generally equal to the fair market value of the shares on the date of grant. The options are generally exercisable over four to five years. The options expire ten years from the grant date. Information regarding these option plans for 1999, 1998 and 1997 is as follows:

The following table summarizes information about stock options at December 31, 1999:

Compensation expense of $0.2 million, $0.2 million and $0.1 million was recorded for the years ended December 31, 1999, 1998 and 1997, respectively, in accordance with APB No. 25. F-17 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. CONTINGENCY In August 1990, the Company received a notice from the Pennsylvania Department of Environmental Protection ("DEP") that it is one of approximately 1,000 potentially responsible parties ("PRPs") that may have clean-up responsibility at the Industrial Solvents and Chemical Company site in York Haven, Pennsylvania (the "Site"). During the late 1980s, the Company, through a licensed waste disposal transport company, shipped industrial solvents to the Site, which was operating as a recycling facility. The DEP reviewed hazardous waste found at the Site as well as the DEP's own records in order to identify additional PRPs and to quantify each PRP's volumetric contributions. The Company is a member of a steering committee that consists of many PRPs. As of December 31, 1997 the Company had a reserve of $0.7 million related to this matter. During the fourth quarter of 1998, the final remedy was selected by the DEP and the Company settled out of the matter pursuant to a buy-out proposal prepared by the steering committee and reversed the reserve. Therefore, at December 31, 1999 and 1998 the Company no longer had a reserve for any potential litigation regarding this matter. LITIGATION In October 1996, Michael Jarcho filed suit against Biomatrix in the United States District Court for the Southern District of California seeking to recover damages and declaratory judgment for our alleged breach of Jarcho's consulting agreement with Biomatrix, dated December 2, 1988. The agreement provides that Biomatrix is to pay royalties to Jarcho for products that result from his consultancy. Jarcho contends that Hylaform resulted from his consultancy and seeks a royalty on the Company's past and future net sales of Hylaform as well as punitive damages and recovery of attorney fees. The royalty Jarcho alleges he is entitled to would have totalled $0.4 million through December 31, 1999. The Company disagrees with Jarcho's claims and does not believe that Jarcho is owed any royalties as a result of Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the grounds that the agreement requires such disputes to be brought exclusively in New Jersey state court. Jarcho moved for a partial reconsideration of the decision, which the Company opposed, and his motion was denied. On June 16, 1997, Jarcho filed suit in New Jersey state court. A tentative trial date has been set for May 2000. The Company has been defending this matter vigorously. In accordance with the Company's policy on contingencies, a provision has been made in the accompanying consolidated financial statements for estimated legal fees expected to be incurred in defending the matter vigorously. The Company is presently unable to predict the ultimate outcome of this matter or whether it would have a material impact on the results of operations, financial position or cash flows of Biomatrix. The Company has not made any provisions for any liability that might result from the claims made by Jarcho. 13. EMPLOYEE BENEFIT PLAN The Company adopted a defined contribution retirement savings plan effective January 1, 1992. Pursuant to Section 401k of the Internal Revenue Code, if a participant decides to contribute, a portion of the contribution can be matched by the Company. Company contributions are discretionary and plan expenses, which are immaterial, are paid by the Company on behalf of the plan. Presently, the Company does not offer its employees postretirement or postemployment benefits. Therefore, the Company is not impacted by the SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" or SFAS No. 112, "Employers' Accounting for Postemployment Benefits." F-18 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. CONCENTRATION OF CREDIT RISK AND MARKET RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company's temporary cash investments consist primarily of cash and money market funds. Concentration of credit risk with respect to trade receivables exists due to the Company's dependence on a few customers. However, the Company has not sustained any losses related to these customers. Because we currently have operations outside the U.S., we are exposed to market risk from changes in foreign exchange rates. To reduce the risk from fluctuations in foreign currencies, we have structured our various distribution agreements in United States dollars. Approximately 2% of 1999 total revenues were generated in foreign currencies. As of December 31, 1999, 9% of our total assets were located outside of the United States, and no single country had a significant concentration of cash. 15. SEGMENT DATA In the fourth quarter of 1998 the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires a new basis of determining the reportable business segments using the management reporting approach. Given the importance of revenue growth and product launches, the Company analyzes its revenues by product line and sales destination. The Company does not allocate its assets to the various product lines, but does analyze its assets on a geographic basis. The following data is utilized by the Company's Executive Committee (the chief operating decision makers) when analyzing the performance of the Company.

16. MAJOR CUSTOMER AND LICENSE FEE DATA A significant portion of the Company's products are sold to customers under the terms of multiple-year marketing and distribution agreements. In many cases, a customer has paid license fees to the Company for the exclusive rights in the respective territory. Of the reported product sales for each of the years ended December 31, 1999, 1998 and 1997, one customer accounted for 81% (Customer A 81%), one customer accounted for 78% (Customer A 78%), and three customers accounted for 64% (Customer A 40%, Customer B 14%, and Customer C 10%), respectively. Of the reported income from licenses, royalties, and research contracts for each of the years ended December 31, 1999, 1998 and 1997, one corporate partner accounted for 91% (Partner A 91%), two corporate partners accounted for 93% (Partner A 61% and Partner B 32%), and two corporate partners accounted for 96% (Partner A 82% and Partner C 14%), respectively. F-19 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 17. IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 is not expected to have an impact on the Company's consolidated results of operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue recognition ("SAB 101"), which was amended on March 24, 2000 to delay the implementation date for registrants with fiscal years that begin between December 16, 1999 and March 15, 2000 until no later than their second fiscal quarter of the fiscal year beginning after December 15, 1999. To the extent the guidance in SAB 101 differs from the generally accepted accounting principles previously utilized by an SEC registrant, SAB 101 indicates that the SEC staff will not object to reporting the cumulative effect of a change in accounting principle. Prior to promulgation of SAB 101, the Company had reported non-refundable up-front and milestone fees received pursuant to distribution agreements in the period earned, which was deemed to be the date this activity was performed or the milestone was achieved. While the Company believes the pricing under these agreements entered into with various marketing partners provides for arms-length pricing of product sales, SAB 101 requires that the Company reviews all of its non-refundable fees to determine if they should be linked to the supply arrangements and reported as additional revenue from product sales made pursuant to those arrangements. The Company is currently in the process of evaluating the impact of SAB 101 on its accounting policy for non-refundable fees received pursuant to distribution agreements with marketing partners. The Company is in the process of reviewing each of its many distribution agreements to assess whether non-refundable, up-front license fees and/or milestone payments should be deferred in accordance with SAB 101. Accordingly, the Company anticipates that a change in its accounting policy will result in a cumulative effect adjustment for a change in accounting principle. The total cumulative effect of the non-cash, after-tax charge is preliminarily estimated to range from $13.0 million to $20.0 million. Such amount would be recorded as deferred revenue and recognized as product revenue in future periods. The Company will continue to assess the impact of SAB 101 and currently intends to implement changes resulting from SAB 101 in the second quarter of 2000. 18. SUBSEQUENT EVENTS - MERGER On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Seagull Merger Corporation, a Massachusetts corporation and wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the parties will effect a business combination through a merger of Biomatrix with and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will form a new division, the Genzyme Biosurgery division, and will create a new series of common stock designated as "GZBX division Common Stock," $0.01 par value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the Merger. The currently proposed terms of the GZBX Stock are set forth as an exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue Repair Division and Surgical Products Division will become part of the Genzyme Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock") series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which will be accounted for using the purchase method of accounting, is expected to close in the second quarter of 2000. Under the terms of the Merger Agreement, each outstanding share of Biomatrix Common Stock will be converted, at the option of the holder, into either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger Consideration"). Based on the cash election price and the number of shares of Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of the transaction will be approximately $245 million. Under the Merger Agreement, 28.38% of the shares of Biomatrix Common Stock outstanding at the effective time of the Merger will be exchanged for cash and the remaining 71.62% of the shares of Biomatrix Common Stock outstanding at the time of the Merger will be converted into shares of GZBX Stock at a conversion rate of one share of GZBX Stock for each share of Biomatrix Common Stock. However, the number of shares of GZBX Stock to be issued in the Merger is subject to an upward adjustment if the value of the GZBX Stock to be issued in the Merger on the effective date of the Merger is less than 45% of the total Merger Consideration in order to preserve the status of the Merger as a tax-free reorganization. F-20 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 18. SUBSEQUENT EVENTS - MERGER (CONTINUED) Under the terms of the Merger Agreement, each outstanding share of GSP Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock will convert into 0.3352 shares of GZBX Stock. Based on the number of common shares outstanding for each entity at the signing date, the Genzyme Biosurgery division is expected to have approximately 35.2 million shares outstanding. Consummation of the Merger is subject to the adoption of the Agreement and Plan of Merger by the Biomatrix stockholders, the approval of the issuance of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by the Genzyme stockholders, including the approval of the exchange of GSP Stock for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock by GTR stockholders, the receipt of regulatory approvals and certain other customary closing conditions. Certain officers of Biomatrix holding an aggregate of approximately 34% of the outstanding shares of Biomatrix Common Stock have agreed to vote their shares of Biomatrix Common Stock in favor of the Merger until the earlier to occur of the completion of the Merger or 5 days after the termination of the Merger Agreement. In addition, as a condition to Genzyme's entering into the Merger Agreement, Biomatrix granted Genzyme an option to acquire up to 4.6 million shares of Biomatrix Common Stock at a price of $30 per share. The option may only be exercised by Genzyme upon the termination of the Merger Agreement resulting from our shareholders' voting against the merger or our entering into an alternative transaction that is recommended by our Board. 19. SUBSEQUENT EVENTS - LITIGATION On July 21, and August 7, 15, and 30, 2000, class action lawsuits requesting unspecified damages were filed in the United States District Court for the District of New Jersey against Biomatrix and two of its officers and directors, Endre A. Balazs and Rory B. Riggs. In these actions, the plaintiffs seek to certify a class of all persons or entities who purchased or otherwise acquired Biomatrix common stock during the period between July 20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things, that the defendants failed to accurately disclose information related to Biomatrix's product Synvisc-Registered Trademark- during the period between July 20, 1999 and April 25, 2000, and assert causes of action under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We disagree with these claims and believe that information related to Synvisc was properly disclosed. Biomatrix intends to defend these actions vigorously. Under the certificate of incorporation of Biomatrix, officers and directors of Biomatrix are entitled to indemnification for such claims from Biomatrix to the full extent permitted by Delaware law. The Company is presently unable to predict the ultimate outcome of these cases or whether they would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from these claims. F-21

BIOMATRIX INC 10-K/A