UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO______________
COMMISSION FILE NUMBER 000-31167
GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1362385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 846-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORT(S), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS
YES [ X ] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS NUMBER OF SHARES OUTSTANDING AT OCTOBER 31, 2001
COMMON STOCK, PAR VALUE $0.01 PER SHARE 59,923,374
----------
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.........................................................................................
Condensed Consolidated Unaudited Balance Sheets as of September 30, 2001 and December 31, 2000............... 3
Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended
September 30, 2001 and 2000................................................................................ 4
Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000................................................................................ 5
Notes to Condensed Consolidated Unaudited Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 19
Item 2. Changes in Securities and Use of Proceeds................................................................... 19
Item 3. Defaults Upon Senior Securities............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 19
Item 5. Other Information........................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K............................................................................ 20
Throughout this Report on Form 10-Q, the terms "the Company," "we," and
"our" refer to Genencor International, Inc. and its subsidiaries
collectively.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 201,329 $ 200,591
Trade accounts receivable, net ................................................. 48,205 46,913
Inventories .................................................................... 49,561 46,938
Other current assets ........................................................... 15,198 17,843
--------- ---------
Total current assets ...................................................... 314,293 312,285
Property, plant and equipment, net ............................................... 210,640 216,983
Intangible assets, net ........................................................... 60,142 64,049
Other assets ..................................................................... 52,452 49,615
--------- ---------
Total assets .............................................................. $ 637,527 $ 642,932
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .................................................................. $ 6,985 $ 4,689
Current maturities of long-term debt ........................................... 28,000 --
Accounts payable and accrued expenses .......................................... 30,804 47,217
Other current liabilities ...................................................... 13,103 12,143
--------- ---------
Total current liabilities ................................................. 78,892 64,049
Long-term debt ................................................................... 113,927 144,360
Other long-term liabilities ...................................................... 29,883 30,297
--------- ---------
Total liabilities ......................................................... 222,702 238,706
--------- ---------
Redeemable preferred stock:
7 -1/2% cumulative series A preferred stock, without par value, authorized
1,000 shares, 970 shares issued and outstanding ............................. 160,657 155,200
--------- ---------
Shareholders' equity:
Common stock, par value $0.01 per share, 200,000,000
shares authorized, 59,923,374 and 59,906,500 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively....................... 599 599
Additional paid-in capital ..................................................... 344,495 344,092
Deferred stock-based compensation .............................................. (3,782) (5,560)
Notes receivable for common stock .............................................. (17,994) (18,008)
Accumulated deficit ............................................................ (15,665) (23,965)
Accumulated other comprehensive loss ........................................... (53,485) (48,132)
--------- ---------
Total shareholders' equity ................................................ 254,168 249,026
--------- ---------
Total liabilities, redeemable preferred stock and shareholders' equity .... $ 637,527 $ 642,932
========= =========
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
3
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Product revenue ............................. $ 77,847 $ 77,359 $ 231,629 $ 227,625
Fees and royalty revenues ................... 2,942 3,369 8,232 12,493
------------ ------------ ------------ ------------
Total revenues ......................... 80,789 80,728 239,861 240,118
Operating expenses:
Cost of products sold ....................... 44,132 44,495 128,557 129,756
Research and development .................... 14,811 13,762 42,810 38,347
Sales, marketing and business development ... 7,124 8,521 20,813 21,367
General and administrative .................. 7,847 6,959 21,669 19,347
Amortization of intangible assets ........... 2,616 2,615 7,306 7,900
Other income ................................ (704) (956) (8) (937)
------------ ------------ ------------ ------------
Total operating expenses ............... 75,826 75,396 221,147 215,780
------------ ------------ ------------ ------------
Operating income .............................. 4,963 5,332 18,714 24,338
Non operating expenses/(income):
Investment income ........................... -- -- -- (16,577)
Interest expense ............................ 2,612 2,608 7,830 7,878
Interest income ............................. (2,264) (2,712) (7,959) (4,056)
------------ ------------ ------------ ------------
Total non operating expenses/(income) .. 348 (104) (129) (12,755)
------------ ------------ ------------ ------------
Income before provision for income taxes ...... 4,615 5,436 18,843 37,093
Provision for income taxes .................... 1,245 683 5,087 11,109
------------ ------------ ------------ ------------
Net income .................................... $ 3,370 $ 4,753 $ 13,756 $ 25,984
============ ============ ============ ============
Net income available to holders of common stock $ 1,552 $ 2,934 $ 8,300 $ 20,527
============ ============ ============ ============
Earnings per common share:
Basic .................................. $ 0.03 $ 0.05 $ 0.14 $ 0.39
============ ============ ============ ============
Diluted ................................ $ 0.03 $ 0.05 $ 0.14 $ 0.37
============ ============ ============ ============
Weighted average common shares:
Basic .................................. 59,921,848 56,873,167 59,914,261 52,703,611
============ ============ ============ ============
Diluted ................................ 60,747,516 59,501,875 61,079,722 54,964,499
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
4
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income ....................................... $ 13,756 $ 25,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................ 26,693 26,550
Amortization of deferred stock-based
compensation ................................. 2,020 962
Loss on disposition of property, plant and
equipment .................................... -- 197
Gain on sale of marketable securities ........ -- (16,577)
(Increase) decrease in operating assets:
Trade accounts receivable ................. (1,968) (2,356)
Inventories ............................... (3,446) 2,576
Other assets .............................. 1,530 (6,298)
(Decrease) increase in operating liabilities:
Accounts payable and accrued expenses ..... (15,307) 1,844
Other liabilities ......................... 2,004 15
--------- ---------
Net cash provided by operating activities . 25,282 32,897
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ....... (14,880) (16,516)
Acquisition of intangible assets ................. (4,098) --
Payments to acquire marketable securities ........ (4,630) --
Proceeds from the sale of marketable securities .. -- 17,568
--------- ---------
Net cash (used in) provided by investing
activities .............................. (23,608) 1,052
--------- ---------
Cash flows from financing activities:
Net proceeds from the issuance of common stock ... -- 132,801
Proceeds from exercise of stock options .......... 164 --
Net (payments) proceeds on notes payable of
foreign affiliate ............................ (31) 966
Payment of long-term debt ........................ -- (10,000)
Other ............................................ -- (86)
--------- ---------
Net cash provided by financing activities . 133 123,681
--------- ---------
Effect of exchange rate changes on cash ............ (1,069) (3,400)
--------- ---------
Net increase in cash and cash equivalents .......... 738 154,230
Cash and cash equivalents -- beginning of period ... 200,591 39,331
--------- ---------
Cash and cash equivalents -- end of period ......... $ 201,329 $ 193,561
========= =========
The accompanying notes are an integral part of the condensed
consolidated unaudited financial statements.
5
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL
STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
1 -- BASIS OF PRESENTATION
The condensed consolidated unaudited financial statements should be
read in conjunction with the audited consolidated financial statements and
related footnotes of Genencor International, Inc. and subsidiaries (the Company)
for the year ended December 31, 2000, as included in the Company's Report on
Form 10-K. These interim financial statements have been prepared in conformity
with the rules and regulations of the U.S. Securities and Exchange Commission.
Certain disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations pertaining to interim financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for fair presentation of the interim financial
statements have been included therein. The results of operations of any interim
period are not necessarily indicative of the results of operations for the full
year.
2 -- EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," requires the disclosure of basic and diluted earnings per share. Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. In arriving at net income available to
common shareholders, undeclared and unpaid dividends on redeemable preferred
stock were deducted from net income for each quarter presented and for each nine
month period presented, respectively.
Diluted earnings per share reflects the potential dilution that could
occur if dilutive securities and other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the net income available to common shareholders of the
Company. As a result of stock options outstanding under the Company's Stock
Option and Stock Appreciation Right Plan, there were dilutive securities for the
three and nine months ended September 30, 2001 and 2000. The weighted-average
impact of these has been reflected in the calculation of diluted earnings per
share for the respective periods presented.
The following table reflects the calculation of basic and diluted
earnings per common share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income .................................... $ 3,370 $ 4,753 $ 13,756 $ 25,984
Less: Accrued dividends on preferred stock .. (1,818) (1,819) (5,456) (5,457)
------------ ------------ ------------ ------------
Net income available to holders of common stock $ 1,552 $ 2,934 $ 8,300 $ 20,527
============ ============ ============ ============
Weighted average common shares:
Basic ....................................... 59,921,848 56,873,167 59,914,261 52,703,611
Effect of stock options ..................... 825,668 2,628,708 1,165,461 2,260,888
------------ ------------ ------------ ------------
Diluted ..................................... 60,747,516 59,501,875 61,079,722 54,964,499
============ ============ ============ ============
Earnings per common share:
Basic ....................................... $ 0.03 $ 0.05 $ 0.14 $ 0.39
============ ============ ============ ============
Diluted ..................................... $ 0.03 $ 0.05 $ 0.14 $ 0.37
============ ============ ============ ============
6
3 -- INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------- ---------
Raw materials.......................................... $ 8,157 $ 7,699
Work-in-progress....................................... 8,875 7,874
Finished goods......................................... 32,529 31,365
---------- ---------
Inventories.......................................... $ 49,561 $ 46,938
========== =========
4 -- SHAREHOLDERS' EQUITY
Accumulated other comprehensive loss consists of the following:
FOREIGN MARKETABLE ACCUMULATED
CURRENCY SECURITIES OTHER
TRANSLATION VALUATION COMPREHENSIVE
ADJUSTMENT ADJUSTMENT LOSS
---------- --------- ---------
Balances, December 31, 2000............... $ (48,360) $ 228 $ (48,132)
Current period change................... (3,991) (1,362) (5,353)
---------- --------- ---------
Balances, September 30, 2001.............. $ (52,351) $ (1,134) $ (53,485)
========== ========== ==========
The change in the marketable securities valuation adjustment for the
nine months ended September 30, 2001 of $1,362 ($2,643 pre-tax) relates to
unrealized holding losses on the Company's available-for-sale securities.
5 -- INVESTMENT INCOME
There was no investment income during the three or nine months ended
September 30, 2001. During the nine months ended September 30, 2000, the Company
realized gains from sales of marketable securities in the amount of $16,577.
This amount is included in investment income as part of total non operating
income for the period.
6 -- EPIMMUNE INC. AGREEMENT
During July 2001, the Company acquired a 10% ownership interest in and
entered into a license agreement with Epimmune Inc. The Company also entered
into a research collaboration agreement with Epimmune Inc. Although the
Company's investment in Epimmune Inc. is considered available-for-sale, the
Company has no intent to liquidate its investment in the current period.
Therefore, the investment is recorded at fair value within other assets.
7 -- NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations." The Statement requires the use of the purchase
method of accounting for all business combinations. The Statement also requires
the recognition of certain intangible assets acquired in a business combination
apart from goodwill. SFAS No. 141 applies to all business combinations initiated
after June 30, 2001. Management is currently assessing the impact of this new
standard on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 142, "Goodwill and Other Intangible Assets." This statement requires the
recognition of separately identifiable intangible assets. Furthermore, it
establishes amortization requirements based upon the ability of the intangible
assets to provide cash flows. For those intangible assets with readily
identifiable useful lives, amortization will be recorded in the statement of
operations over such lives. Intangible assets, such as goodwill, which have
indefinite lives, will not result in periodic amortization, but must be tested
at least annually for impairment. This statement may
7
result in reclassifications in the Company's financial statements of
pre-existing intangible assets. The provisions of SFAS No. 142 will be effective
for the Company starting the first quarter 2002. Management is currently
assessing the impact of this new standard on the Company's financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
that obligations associated with the retirement of a tangible long-lived asset
be recorded as a liability when those obligations are incurred, with the amount
of the liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The provisions
of SFAS No. 143 are required to be adopted by the Company as of January 1, 2003,
although earlier adoption is permitted. Management is currently assessing the
impact of this new standard on the Company's financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses the accounting model for long-lived assets to be disposed of
by sale and resulting implementation issues. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The provisions of SFAS No. 144
will be effective for the Company starting the first quarter 2002. Management is
currently assessing the impact of this new standard on the Company's financial
statements.
8 -- INCOME TAXES
The Company's effective income tax rate for the three months ended
September 30, 2001 was 27%, compared with 13% for the three months ended
September 30, 2000, which reflects the year-to-date impact of the Company's
assessment of its annual effective income tax rate. For the three months ended
September 30, 2000, this assessment included the Company's reevaluation of its
ability to utilize certain deferred tax assets, which resulted in the release of
valuation allowances.
The Company's effective income tax rate for the nine months ended
September 30, 2001 was 27%, compared with 30% for the nine months ended
September 30, 2000. The effective rate for the nine months ended September 30,
2000 included the effect of two one-time events. During the nine months ended
September 30, 2000, the Company realized $16,577 of pre-tax gains from the sale
of marketable equity securities and a $3,500 pre-tax gain from the settlement of
certain patent infringement issues, both in the United States and tax effected
at a marginal rate of 38.6%.
9 -- SUBSEQUENT EVENTS
During October 2001, the Company entered into a strategic alliance with
Dow Corning Corporation. The alliance combines the organizations' expertise in
their respective fields of biotechnology and silicon chemistry to create a new,
proprietary Silicon Biotechnology(TM) technology platform for the development
of new biomaterials. Over the term of the agreement, the Company has the
potential to earn up to $35,000, including an up-front payment of $12,000,
research funding and milestone payments.
During November 2001, the Company entered into a five-year worldwide
supply contract with Procter & Gamble to provide protease enzymes for laundry
and dish detergents. Under this agreement, the Company has the potential to earn
up to $600,000 in product revenues over the life of the contract.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included in our 2000 Annual Report
on Form 10-K, and the condensed consolidated unaudited financial statements and
related notes included elsewhere in this report. This Report contains
forward-looking statements. These include statements concerning plans,
objectives, goals, strategies, future events or performance and all other
statements which are other than statements of historical fact, including without
limitation, statements containing words such as "believes," "anticipates,"
"expects," "estimates," "projects," "will," "may," "might" and words of a
similar nature. The forward-looking statements contained in this Report reflect
management's current beliefs and expectations on the date of this Report. Actual
results, performance or outcomes may differ materially from those expressed in
the forward-looking statements. Some of the important factors, which, in the
view of the Company, could cause actual results to differ from those expressed
in the forward-looking statements, are discussed below and in our 2000 Annual
Report on Form 10-K. The Company undertakes no obligation to publicly announce
any revisions to these forward-looking statements to reflect facts or
circumstances of which management becomes aware after the date hereof.
OVERVIEW
We are a diversified biotechnology company that develops and delivers
products and/or services to the industrial and consumer, agriculture and health
care markets. Our current revenues result primarily from the sale of enzyme
products to the cleaning, grain processing and textile industries, with the
remainder from research funding, fees and royalties. We intend to apply our
proven and proprietary technologies and manufacturing capabilities to expand
sales in our existing markets and address new opportunities in the health care,
agriculture, industrial and consumer markets. We have formed, and plan to
continue to form, strategic alliances with market leaders to collaborate with us
to develop and launch products.
We manufacture our products through our eight manufacturing facilities
located in the United States, Finland, Belgium, China and Argentina. We conduct
our sales and marketing activities through our direct sales organizations in the
United States, the Netherlands, Singapore, Japan and Argentina. For the nine
months ended September 30, 2001 and 2000, we derived approximately 50% of our
revenues from our foreign operations.
SUMMARY OF RESULTS
For the three months ended September 30, 2001, net income available for
common shareholders decreased to $1.6 million, or $0.03 per diluted share, from
$2.9 million, or $0.05 per diluted share, for the three months ended September
30, 2000. For the nine months ended September 30, 2001, net income available for
common shareholders decreased to $8.3 million, or $0.14 per diluted share, from
$20.5 million, or $0.37 per diluted share, for the nine months ended September
30, 2000. Net income for the nine month period in 2000 was favorably impacted by
gains from sales of marketable equity securities. The after-tax impact to net
income for these non-recurring gains was $10.2 million for the nine month period
ended September 30, 2000.
RECENT DEVELOPMENTS
In July 2001, we acquired a 10% equity stake in Epimmune Inc. We also
entered into a 30-month collaboration with Epimmune focused on the development
of therapeutic vaccines for three oncogenic viruses, including research funding
and milestone payments. Additionally, we exclusively licensed certain Epimmune
technologies and related intellectual property rights on a worldwide basis for
the development of vaccines to treat or prevent hepatitis C (HCV), hepatitis B
(HBV) and human papilloma virus (HPV).
In August 2001, we announced that we obtained worldwide exclusive rights to
Phogen's proprietary VP22 technology to develop second generation therapeutic
vaccines for infectious viral diseases and began a collaboration with Phogen to
develop the vectosome application of VP22 to enhance DNA vaccine formulation.
9
Also in August 2001, we announced a two-year collaboration with The Centre
for Applied Microbiology and Research that focuses on an enzyme-based process
for treating surgical equipment, rendered animal material and blood products to
eliminate prion infectivity. The collaboration will also investigate developing
an effective rapid prion detection test.
In September 2001, we announced achievement of our first technical milestone
in the three-year contract with the U.S. Department of Energy (DOE) Biofuels
Program administered by DOE's National Renewable Energy Laboratory. We developed
and validated processes for improved cellulase enzymes that meet the intended
objective at one-half the cost of currently available technologies.
Also in September 2001, we announced the signing of a licensing agreement
with Integrated Genomics, Inc. for three microbial genome sequencing
technologies that we believe will help to improve efficiencies in fungal cell
factories.
In October 2001, we announced a strategic alliance with Dow Corning
Corporation. The alliance combines the organizations' expertise in their
respective fields of biotechnology and silicon chemistry to create a new,
proprietary Silicon Biotechnology(TM) technology platform for the development
of new biomaterials. The alliance anticipates it will see some of its first
successes through the introduction of new, biologically mediated silicone based
products for the life sciences, personal care, cleaning and fabric care markets.
Over the term of the agreement, we have the potential to earn up to $35.0
million, including an up-front payment of $12.0 million, research funding and
milestone payments.
In November 2001, we announced the signing of a five-year worldwide supply
contract with Procter & Gamble to provide protease enzymes for laundry and dish
detergents. The agreement is estimated to be worth up to $600.0 million in
product revenues over the life of the contract. This contract extends the
companies' almost two-decade-long relationship and further solidifies our
position in the innovation and commercialization of protease enzymes for liquid
and dry formulations.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2001 and 2000
Revenues. Total revenues for the three months ended September 30, 2001 of
$80.8 million were consistent with the three months ended September 30, 2000.
Product Revenues. Product revenues for the three months ended September 30,
2001 increased $0.4 million, or 1%, to $77.8 million from the three months ended
September 30, 2000. For the three months ended September 30, 2001, unit
volume/mix grew 6%, while average prices fell 5%. Volume increased primarily due
to increased protease enzyme sales to a major customer.
Regionally, North American product revenues for the three months ended
September 30, 2001 increased $ 0.6 million, or 2%, to $37.6 million from the
three months ended September 30, 2000, primarily due to increased sales to our
grain processing customers, partially offset by decreased sales to cleaning and
fabric care customers. European product revenues for the three months ended
September 30, 2001 increased $0.4 million, or 2%, to $26.8 million from the
three months ended September 30, 2000, due primarily to increased sales to
cleaning and fabric care customers, partially offset by decreased sales to grain
processing customers. Our product revenues in Latin America for the three months
ended September 30, 2001 decreased $1.4 million, or 26%, to $4.1 million from
the three months ended September 30, 2000 due primarily to decreased sales to
our cleaning and fabric care customers. Product revenues in Asia increased $0.8
million, or 9%, to $9.3 million for the three months ended September 30, 2001
from the three months ended September 30, 2000 due mainly to increased sales to
our cleaning and fabric care customers.
Fees and Royalty Revenues. Fees and royalty revenues decreased $0.4 million,
or 12%, to $2.9 million for the three months ended September 30, 2001 from the
three months ended September 30, 2000.
Funded research revenues for the three months ended September 30, 2001
decreased $0.6 million, or 18%, to $2.7 million from the three months ended
September 30, 2000. Revenues generated by research funding result from
collaborative agreements with various parties, including the U.S. Government,
whereby we perform research activities and receive revenues that partially
reimburse us for expenses incurred. Under such agreements, we retain a
proprietary interest in the products and technology developed. Our funded
research revenue as it relates to U.S. Government collaborations decreased $1.4
million, or 61%, to $0.9 million for the three months ended September 30, 2001
from the three months ended September 30, 2000. Funded research revenues
provided by customers
10
increased $0.8 million, or 80%, to $1.8 million for the three months ended
September 30, 2001 from the three months ended September 30, 2000.
Operating Expenses
Cost of Products Sold. Cost of products sold for the three months ended
September 30, 2001 decreased $0.4 million, or 1%, to $44.1 million from the
three months ended September 30, 2000. Cost of products sold reflects decreases
in fixed and variable costs of $0.9 million, partially offset by increased sales
volume/mix of $0.7 million.
Gross Profit and Margins from Products Sold. Gross profit from products sold
increased $0.8 million, or 2%, to $33.7 million for the three months ended
September 30, 2001 from the three months ended September 30, 2000. This overall
increase was caused by significant product revenue related factors including a
6% increase in volume/mix processed through our plants, partially offset by an
average price decline of 5%. This net increase in gross profit was partially
offset by a $0.3 million decrease due to the impact of the stronger U.S. dollar
against foreign currencies, primarily the Euro. As a result of these factors,
gross margin on product revenue increased to 43.3% for the three months ended
September 30, 2001 from 42.5% for the three months ended September 30, 2000.
Research and Development. Research and development expenses primarily
consist of the personnel-related, consulting, and facilities costs incurred in
connection with our research activities conducted in Palo Alto, California and
Leiden, the Netherlands. These expenses increased $1.0 million, or 7%, to $14.8
million for the three months ended September 30, 2001 from the three months
ended September 30, 2000 as we increased our investment in technology and
product development for new markets and hired additional internal staff to
support our health care and other initiatives. As a part of total research and
development expenses, estimated expenses related to research collaborations
partially funded by customers increased $1.3 million, or 72%, to $3.1 million
for the three months ended September 30, 2001 from the three months ended
September 30, 2000.
Sales, Marketing and Business Development. Sales, marketing and business
development expenses primarily consist of the personnel-related and marketing
costs incurred by our global sales force. These expenses decreased $1.4 million,
or 16%, to $7.1 million for the three months ended September 30, 2001 from the
three months ended September 30, 2000 due primarily to decreases in incentive
compensation of $1.3 million and outside services of $0.7 million, partially
offset by an increase in personnel-related costs, including salaries, benefits,
commissions and travel expenses of $0.7 million.
General and Administrative. General and administrative expenses include the
costs of our corporate executive, finance, information technology, legal, human
resources, and communications functions. In total, these expenses increased $0.8
million, or 11%, to $7.8 million for the three months ended September 30, 2001
from the three months ended September 30, 2000 due primarily to increased
personnel-related costs, including salaries, benefits, commissions and travel
expenses of $1.0 million, partially offset by a decrease in incentive
compensation of approximately $0.2 million.
Amortization of Intangible Assets. We amortize our intangible assets,
consisting of patents, licenses, technology and goodwill, on a straight-line
basis over their estimated useful lives. Amortization expense for the three
months ended September 30, 2001 of $2.6 million was consistent with the three
months ended September 30, 2000.
Other Expense and Income. Other income for the three months ended September
30, 2001 decreased $0.3 million, or 30%, to $0.7 million from the three months
ended September 30, 2000. The decrease in other income was due mainly to losses
associated with foreign currency transactions.
11
Deferred Compensation. We measure deferred compensation for options granted
to employees as the difference between the grant price and the estimated fair
value of our common stock on the date we granted the options. This amount is
recorded as a separate component of shareholders' equity and amortized as a
charge to operations over the vesting period of the options. Amortization of
this deferred compensation expense for the three months ended September 30, 2001
and September 30, 2000, was $0.6 million, which was reported in our statements
of operations as follows (in millions):
2001 2000
---------- --------
Research and development............................... $ 0.2 $ 0.2
Sales, marketing and business development.............. 0.2 0.2
General and administrative............................. 0.2 0.2
---------- --------
Total amortization of deferred compensation expense $ 0.6 $ 0.6
========== =======
Non Operating Expense and Income
Investment Income. There was no investment income for the three months ended
September 30, 2001 or September 30, 2000.
Interest Income. Interest income decreased $0.4 million, or 15%, to $2.3
million for the three months ended September 30, 2001 from the three months
ended September 30, 2000 due mainly to lower interest rates.
Income Taxes. Several factors affected our effective income tax rate for the
three months ended September 30, 2001, including the statutory income tax rate
in foreign jurisdictions, amortization of intangible assets and other items
which are not deductible for tax purposes, and research and experimentation tax
credits. The effective income tax rate for the three months ended September 30,
2001 was 27% compared with 13% for the three months ended September 30, 2000.
Our effective income tax rate for the three months ended September 30, 2000 of
13% reflects the year-to-date impact of reevaluating our ability to utilize
certain deferred tax assets, which resulted in the release of valuation
allowances. During both periods we were subject to a tax ruling in the
Netherlands that reduces the local effective income tax rate from 35.0% to
17.5%. This ruling will expire at the end of 2005.
Comparison of the Nine Months Ended September 30, 2001 and 2000
Revenues. Total revenues for the nine months ended September 30, 2001
decreased $0.2 million to $239.9 million from the nine months ended September
30, 2000, primarily due to a decrease in fees and royalty revenues, partially
offset by an increase in product revenues.
Product Revenues. Product revenues in the nine months ended September 30,
2001 increased $4.0 million, or 2%, to $231.6 million from the nine months ended
September 30, 2000. Without the impact of the stronger U.S. dollar against the
Euro in 2001 versus 2000, product revenues in the nine months ended September
30, 2001 would have increased by 4%. In the nine months ended September 30,
2001, unit volume/mix grew 6%, while average prices fell 3%. Volume increased
primarily due to increased protease enzyme sales to a major customer.
Regionally, North American product revenues increased $2.4 million, or 2%,
to $111.6 million and European product revenues increased $2.5 million, or 3%,
to $80.0 million for the nine months ended September 30, 2001 from the nine
months ended September 30, 2000, each of which were driven primarily by protease
enzyme sales. In the nine months ended September 30, 2001, our product revenues
in Latin America decreased $1.8 million, or 12%, to $13.6 million from the nine
months ended September 30, 2000 due primarily to decreased sales to cleaning and
fabric care customers. Product revenues in Asia for the nine months ended
September 30, 2001 increased $0.9 million, or 4%, to $26.5 million from the nine
months ended September 30, 2000 primarily due to increased sales to cleaning and
fabric care customers.
Fees and Royalty Revenues. Fees and royalty revenues decreased $4.3 million,
or 34%, to $8.2 million for the nine months ended September 30, 2001 from the
nine months ended September 30, 2000.
Funded research revenues for the nine months ended September 30, 2001
decreased $1.2 million, or 14%, to $7.4 million from the nine months ended
September 30, 2000. Revenues generated by research funding result from
collaborative agreements with various
12
parties, including the U.S. Government, whereby we perform research activities
and receive revenues that partially reimburse us for expenses incurred. Under
such agreements, we retain a proprietary interest in the products and technology
developed. Our funded research revenue as it relates to U.S. Government
collaborations decreased $1.4 million, or 34%, to $2.7 million for the three
months ended September 30, 2001 from the three months ended September 30, 2000.
Funded research revenues provided by customers increased $0.1 million, or 2%, to
$4.7 million for the nine months ended September 30, 2001 from the nine months
ended September 30, 2000.
Royalties decreased $3.0 million for the nine months ended September 30,
2001 from the nine months ended September 30, 2000, due primarily to the
successful resolution of a patent infringement issue with a customer, for which
back royalties of $3.5 million were received during the first quarter of 2000.
These royalties pertained to previous sales, using patented technology, made by
the customer to third parties.
Operating Expenses
Cost of Products Sold. Cost of products sold decreased $1.2 million, or 1%,
to $128.6 million for the nine months ended September 30, 2001 from the nine
months ended September 30, 2000 even though our expanded sales volume/mix
increased costs $2.7 million. This decrease in cost of products sold was driven
primarily by reductions due to the impact of the stronger U.S. dollar against
foreign currencies of $2.4 million and the sale of lower cost inventories of
approximately $1.5 million.
Gross Profit and Margins from Products Sold. Gross profit from products sold
increased $5.2 million, or 5%, to $103.0 million for the nine months ended
September 30, 2001 from the nine months ended September 30, 2000. This overall
increase was caused by significant product revenue related factors including a
6% increase in volume/mix processed through our plants, partially offset by an
average price decline of 3%. This net increase in gross profit was partially
offset by a $1.8 million decrease due to the impact of the stronger U.S. dollar
against foreign currencies, primarily the Euro. As a result of these factors,
gross margin on product revenue increased to 44.5% for the nine months ended
September 30, 2001 from 43.0% for the nine months ended September 30, 2000.
Research and Development. Research and development expenses increased $4.5
million, or 12%, to $42.8 million for the nine months ended September 30, 2001
from the nine months ended September 30, 2000 as we increased our investment in
technology and product development for new markets and hired additional internal
staff to support our health care and other initiatives. As a part of total
research and development expenses, estimated expenses related to research
collaborations partially funded by customers decreased $1.9 million, or 21%, to
$7.3 million for the nine months ended September 30, 2001 from the nine months
ended September 30, 2000.
Sales, Marketing and Business Development. Sales, marketing and business
development expenses decreased $0.6 million, or 3%, to $20.8 million for the
nine months ended September 30, 2001 from the nine months ended September 30,
2000, primarily due to decreases in incentive compensation of $1.2 million and
outside services of $0.5 million, partially offset by an increase of $1.1
million in personnel-related costs, including salaries, benefits, commissions
and travel expenses.
General and Administrative. General and administrative expenses increased
$2.4 million, or 12%, to $21.7 million for the nine months ended September 30,
2001 from the nine months ended September 30, 2000, due primarily to increased
salaries and benefits of $2.2 million, and public relations costs of $0.4
million, partially offset by a decrease in outside services of $0.6 million.
Amortization of Intangible Assets. Amortization expense decreased $0.6
million, or 8%, to $7.3 million for the nine months ended September 30, 2001
from the nine months ended September 30, 2000 due primarily to the 2000 release
of an income tax valuation allowance that was reallocated to reduce goodwill.
Other Expense and Income. Other income for the nine months ended September
30, 2001 decreased $0.9 million to less than $0.1 million from the nine months
ended September 30, 2000 due primarily to losses from foreign currency exchange
transactions.
13
Deferred Compensation. Amortization of deferred compensation expense for the
nine months ended September 30, 2001 was $2.0 million and for the three months
ended September 30, 2000 was $1.0 million, which was reported in our statements
of operations as follows (in millions):
2001 2000
---------- ---------
Cost of products sold.................................. $ 0.1 $ 0.1
Research and development............................... 0.7 0.2
Sales, marketing and business development.............. 0.6 0.3
General and administrative............................. 0.6 0.4
---------- ---------
Total amortization of deferred compensation expense $ 2.0 $ 1.0
========== ========
Non Operating Expense and Income
Investment Income. There was no investment income for the nine months ended
September 30, 2001. Investment income of $16.6 million for the nine months ended
September 30, 2000 represents gains from the sale of marketable equity
securities.
Interest Income. Interest income increased $3.9 million, or 95%, to $8.0
million for the nine months ended September 30, 2001 from the nine months ended
September 30, 2000 due mainly to earnings on proceeds from our initial public
offering, partially offset by lower interest rates.
Income Taxes. Several factors affected our effective income tax rate for the
nine months ended September 30, 2001, including the statutory income tax rate in
foreign jurisdictions, amortization of intangible assets and other items which
are not deductible for tax purposes, and research and experimentation tax
credits. The effective income tax rate for the nine months ended September 30,
2001 was 27% compared with 30% for the nine months ended September 30, 2000. The
effective rate for the nine months ended September 30, 2001 is representative of
our most recent assessment of our annual effective income tax rate of
approximately 27%. The effective rate for the nine months ended September 30,
2000 included the effect of two one-time events. During the nine months ended
September 30, 2000, we realized $16.6 million of pre-tax gains from the sale of
marketable equity securities and a $3.5 million pre-tax gain from the settlement
of certain patent infringement issues, both in the United States and tax
effected at a marginal rate of 38.6%. During both periods we were subject to a
tax ruling in the Netherlands that reduces the local effective income tax rate
from 35.0% to 17.5%. This ruling will expire at the end of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our funding needs consist primarily of capital expenditures, research and
development activities, sales and marketing expenses, and general corporate
purposes. We have financed our operations primarily through cash from the sale
of products, the sale of common stock, research and development funding from
partners, government grants, and short-term and long-term borrowings.
We believe that our current cash and cash equivalent balances plus funds to
be provided from our current year operating activities, together with those
available under our lines of credit, will satisfy our funding needs for at least
the next twelve months. Factors that could negatively impact our cash position
include, but are not limited to, future levels of product, fees and royalty
revenues, expense levels, capital expenditures, acquisitions, and foreign
currency exchange rate fluctuations.
As of September 30, 2001, cash and cash equivalents totaled $201.3 million.
The funds were invested in short-term instruments including A1-P1 rated
commercial paper, master notes, U.S. treasury bills, institutional money market
funds and bank deposits.
Cash provided by operations was $25.3 million and $32.9 million for the nine
months ended September 30, 2001 and 2000, respectively. The decrease of $7.6
million in 2001 from 2000 was generated principally by operating earnings, net
of non-cash items such as depreciation and amortization, and changes in
operating assets and liabilities.
Cash used by investing activities was $23.6 million for the nine months
ended September 30, 2001. Cash provided by investing activities was $1.1 million
for the nine months ended September 30, 2000. This difference of $24.7 million
was driven primarily by proceeds of $17.6 million received from the sale of
marketable equity securities during the nine months ended September 30, 2000.
During the third quarter of 2001, we paid $4.6 million to acquire marketable
securities. Also during the third quarter
14
of 2001 we paid $4.1 million to license certain technologies in connection with
our collaborative research efforts. Capital expenditures totaled $14.9 million
for the nine months ended September 30, 2001 compared with $16.5 million for the
nine months ended September 30, 2000. In each of these periods, this spending
was driven by process improvement projects at our manufacturing and research and
development facilities and information technology enhancements.
Cash provided by financing activities was $0.1 million during the nine
months ended September 30, 2001, compared to $123.7 million for the nine months
ended September 30, 2000. The cash provided by financing activities for the nine
months ended September 30, 2000 resulted primarily from our initial public
offering of common stock, partially offset by the payment of a long-term note to
Gist-Brocades (G-b) related to the 1995 acquisition of the G-b industrial enzyme
business. There were no dividends paid to our common shareholders for the nine
months ended September 30, 2001 and 2000. We currently intend to retain future
earnings to finance the expansion of our business. Any future determination to
pay cash dividends will be at the discretion of our board of directors and will
depend upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant, including covenants in our debt instruments that
may limit our ability to declare and pay cash dividends on our capital stock.
Covenants in our senior note agreement restrict the payment of dividends or
other distributions in cash or other property to the extent the payment puts us
in default of these covenants. Such covenants include, but are not limited to,
maintaining a debt to total capitalization of no greater than 55% and a maximum
ratio of debt to EBITDA of 3.5:1.
As of September 30, 2001 we had a $60 million revolving credit facility with
a syndicate of banks, which is available for general corporate purposes. The
facility, which consists of two separate credit agreements, makes available to
us $40 million of committed borrowings pursuant to a three-year credit agreement
and $20 million of committed borrowings pursuant to a 364-day credit agreement.
The combined facility carries facility fees of 0.35% on the amount of unborrowed
principal under the three-year agreement and 0.30% under the 364-day agreement.
As of September 30, 2001 there were no borrowings under this facility.
Our long-term debt consists primarily of the 6.82% senior notes issued in
1996 to certain institutional investors. The total principal amount of these
notes is $140 million with annual installment payments of $28 million to
commence in March 2002. We are currently in compliance with all of the financial
covenants included in the senior note agreement.
MARKET RISK
Foreign currency risk and interest rate risk are the primary sources of our
market risk. To date, foreign operations, mainly denominated in Euros, account
for approximately 50% of our 2001 revenues. We believe that we substantially
mitigate this risk by locating our manufacturing facilities so that the costs
are denominated in the same currency as our product revenues. We manage the
foreign currency exposures that remain through the use of foreign currency
forward contracts, currency options and off-setting currency loans where deemed
appropriate. We do not use these instruments for speculative purposes. At
September 30, 2001, there were no material forward contracts or option contracts
outstanding.
As of September 30, 2001, cash and cash equivalents totaled $201.3 million.
Of this amount, $55.7 million was denominated in Euros. The remainder or $145.6
million was primarily denominated in U.S. dollars. Other than the first
installment due in March 2002 under our 6.82% senior notes discussed under the
heading "Liquidity and Capital Resources," short-term debt outstanding at
September 30, 2001 was not significant. To the extent U.S. dollar and Euro
interest rates fluctuate either up or down, the return on the cash investments
will also fluctuate. To the extent such Euro cash investments remain
outstanding, we will be subject to the risks of future foreign exchange
fluctuations and its impact on the translation of these cash investments into
U.S. dollars.
Our subsidiary based in the Netherlands, which adopted the Euro as its
functional currency, has U.S. dollar and Japanese Yen denominated revenues. We
use forward currency contracts and option contracts from time to time as deemed
appropriate to hedge these anticipated revenues.
Interest Rates
Our interest income is sensitive to changes in the general level of
short-term interest rates primarily in the United States and Europe. In this
regard, changes in the U.S. dollar and Euro currency rates affect the interest
earned on our cash equivalents, short-term investments, and long-term
investments.
15
Foreign Currency Exposure
We conduct business throughout the world. To date, we have derived
approximately 50% of our 2001 revenues and approximately all of our 2001
operating income from foreign operations. Economic conditions in countries where
we conduct business and changing foreign currency exchange rates affect our
financial position and results of operations. We are exposed to changes in
exchange rates in Europe, Latin America, and Asia. The Euro presents our most
significant foreign currency exposure risk. Changes in foreign currency exchange
rates, especially the strengthening of the U.S. dollar, may have an adverse
effect on our financial position and results of operations as they are expressed
in U.S. dollars.
Management monitors foreign currency exposures and may in the ordinary
course of business enter into foreign currency forward contracts or options
contracts related to specific foreign currency transactions or anticipated cash
flows. These contracts generally cover periods of nine months or less and are
not material. We do not hedge the translation of financial statements of
consolidated subsidiaries that maintain their local books and records in foreign
currencies.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations." The Statement requires the use of the purchase method
of accounting for all business combinations. The Statement also requires the
recognition of certain intangible assets acquired in a business combination
apart from goodwill. SFAS No. 141 applies to all business combinations initiated
after June 30, 2001. We are currently assessing the impact of this new standard
on our financial statements.
In June 2001, the Financial Accounting Standards Board also issued SFAS No.
142, "Goodwill and Other Intangible Assets." This statement requires the
recognition of separately identifiable intangible assets. Furthermore, it
establishes amortization requirements based upon the ability of the intangible
assets to provide cash flows. For those intangible assets with readily
identifiable useful lives, amortization will be recorded in the statement of
operations over such lives. Intangible assets, such as goodwill, which have
indefinite lives, will not result in periodic amortization, but must be tested
at least annually for impairment. This statement may result in reclassifications
in our financial statements of pre-existing intangible assets. The provisions of
SFAS No. 142 will be effective for us starting the first quarter 2002. We are
currently assessing the impact of this new standard on our financial statements.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that
obligations associated with the retirement of a tangible long-lived asset be
recorded as a liability when those obligations are incurred, with the amount of
the liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The provisions
of SFAS No. 143 are required to be adopted as of January 1, 2003, although
earlier adoption is permitted. We are currently assessing the impact of this new
standard on our financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No.
144 addresses the accounting model for long-lived assets to be disposed of by
sale and resulting implementation issues. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The provisions of SFAS No. 144
will be effective for the Company starting the first quarter 2002. We are
currently assessing the impact of this new standard on our financial statements.
16
Risk Factors
IF WE FAIL TO DEVELOP PRODUCTS FOR THE HEALTH CARE AND AGRICULTURE MARKETS, THEN
WE MAY NEVER ACHIEVE A RETURN ON OUR RESEARCH AND DEVELOPMENT EXPENDITURES OR
REALIZE PRODUCT REVENUES FROM THESE MARKETS.
A key element of our business strategy is to utilize our technologies for
the development and delivery of products to the health care market and segments
of the agriculture market in which we do not currently compete. We have not
produced any products for these markets. We intend to significantly increase our
investment in research and development to develop products for these markets.
The successful development of products is highly uncertain and is dependent on
numerous factors, many of which are beyond our control, and may include the
following:
- The product may be ineffective or have undesirable side effects in
preliminary and commercial testing or, specifically in the health care
area, in preclinical and clinical trials;
- The product may fail to receive necessary governmental and regulatory
approvals, or the government may delay regulatory approvals
significantly;
- The product may not be economically viable because of manufacturing
costs or other factors;
- The product may not gain acceptance in the marketplace; or
- The proprietary rights of others or competing products or technologies
for the same application may preclude us from commercializing the
product.
Due to these factors we may never achieve a return on our research and
development expenditures or realize product revenues from the health care and
agriculture markets that we are targeting.
IF WE FAIL TO ENTER INTO STRATEGIC ALLIANCES WITH PARTNERS IN OUR TARGET MARKETS
OR INDEPENDENTLY RAISE ADDITIONAL CAPITAL, WE WILL NOT HAVE THE RESOURCES
NECESSARY TO CAPITALIZE ON ALL OF THE MARKET OPPORTUNITIES AVAILABLE TO US.
We do not currently possess the resources necessary to independently develop
and commercialize products for all of the market opportunities that may result
from our technologies. We intend to form strategic alliances with industry
leaders in our target markets to gain access to funding for research and
development, expertise in areas where we lack such expertise, and distribution
channels. We may fail to enter into the necessary strategic alliances or fail to
commercialize the products anticipated from the alliances. Our alliances could
be harmed if:
- We fail to meet our agreed upon research and development objectives;
- We disagree with our strategic partners over material terms of the
alliances, such as intellectual property or manufacturing rights; or
- Our strategic partners become competitors of ours or enter into
agreements with our competitors.
New strategic alliances that we enter into, if any, may conflict with the
business objectives of our current strategic partners and negatively impact
existing relationships. In addition, to capitalize on the market opportunities
we have identified, we may need to seek additional capital, either through
private or public offerings of debt or equity securities. Due to market and
other conditions beyond our control, we may not be able to raise additional
capital on acceptable terms or conditions, if at all.
17
WE INTEND TO ACQUIRE BUSINESSES, TECHNOLOGIES AND PRODUCTS, BUT WE MAY FAIL TO
REALIZE THE ANTICIPATED BENEFITS OF SUCH ACQUISITIONS AND WE MAY INCUR COSTS
THAT COULD SIGNIFICANTLY NEGATIVELY IMPACT OUR PROFITABILITY.
We intend to acquire businesses, technologies and products that we believe
are a strategic fit with our business. If we undertake any transaction of this
sort, we may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire without a significant
expenditure of operating, financial and management resources, if at all.
Further, we may fail to realize the anticipated benefits of any acquisition.
Future acquisitions could dilute our stockholders' interest in us and could
cause us to incur substantial debt, expose us to contingent liabilities and
result in amortization expenses related to goodwill and other intangible assets
and could negatively impact our profitability.
IF THE DEMAND FOR PROTEIN DEGRADING ENZYMES DECREASES, OUR REVENUES COULD
SIGNIFICANTLY DECLINE.
Our largest selling family of products, protein degrading enzymes, or
proteases, accounted for approximately 55% of our 2000 revenue. If the demand
for proteases decreases or alternative proteases render our products
noncompetitive, our revenues could significantly decline.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO
ACHIEVE OUR EXPANSION OBJECTIVES.
Our ability to manage our anticipated growth, if realized, effectively
depends on our ability to attract and retain highly qualified executive officers
and technology and business personnel. In particular, our product development
programs depend on our ability to attract and retain highly skilled researchers.
Competition for such individuals is intense. If we fail to attract and retain
qualified individuals, we will not be able to achieve our expansion objectives.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed. Accordingly, if product revenue
declines or does not grow as we anticipate or non-product revenue declines due
to the expiration or termination of strategic alliance agreements or the failure
to obtain new agreements or grants, we may not be able to correspondingly reduce
our operating expenses in any particular quarter. Our quarterly revenue and
operating results have fluctuated in the past and are likely to do so in the
future. If our operating results in some quarters fail to meet the expectations
of stock market analysts and investors, our stock price would likely decline.
Some of the factors that could cause our revenue and operating results to
fluctuate include:
- The ability and willingness of strategic partners to commercialize
products derived from our technology or containing our products on
expected timelines;
- Our ability to successfully commercialize products developed
independently and the rate of adoption of such products; or
- Fluctuations in geographic conditions including currency and other
economic conditions such as economic crises in South America or Asia.
We also have incurred significant one-time charges within given quarters,
such as those incurred in conjunction with restructuring activities, and
recognized investment income from sales of available-for-sale marketable
securities.
IF WE FAIL TO SECURE ADEQUATE INTELLECTUAL PROPERTY PROTECTION OR BECOME
INVOLVED IN AN INTELLECTUAL PROPERTY DISPUTE, IT COULD SIGNIFICANTLY HARM OUR
FINANCIAL RESULTS AND ABILITY TO COMPETE.
The patent positions of biotechnology companies, including our patent
positions, can be highly uncertain and involve complex legal and factual
questions and, therefore, enforceability is uncertain. We will be able to
protect our proprietary rights from unauthorized use by third parties only to
the extent that we protect our technologies with valid and enforceable patents
or as trade secrets. We rely in part on trade secret protection for our
confidential and proprietary information by entering into confidentiality
agreements and non-
18
disclosure policies with our employees and consultants. Nonetheless,
confidential and proprietary information may be disclosed and others may
independently develop substantially equivalent information and techniques or
otherwise gain access to our trade secrets.
We file patent applications in the United States and in foreign countries as
part of our strategy to protect our proprietary products and technologies. The
loss of significant patents or the failure of patents to issue from pending
patent applications that we consider significant could impair our operations. In
addition, third parties could successfully challenge, invalidate or circumvent
our issued patents or patents licensed to us so that our patent rights would not
create an effective competitive barrier. Further, we may not obtain the patents
or licenses to technologies that we will need to develop products for our target
markets. The laws of some foreign countries may also not protect our
intellectual property rights to the same extent as United States law.
Extensive litigation regarding patents and other intellectual property
rights is common in the biotechnology industry. In the ordinary course of
business, we periodically receive notices of potential infringement of patents
held by others and patent applications that may mature to patents held by
others. The impact of such claims of potential infringement, as may from time to
time become known to the Company, are difficult to assess. In the event of an
intellectual property dispute, we may become involved in litigation.
Intellectual property litigation is expensive and may divert management's time
and resources away from our operations. The outcome of any such litigation is
inherently uncertain. Even if we are successful, the litigation would be costly
in terms of dollars spent and diversion of management time.
If a third party successfully claims an intellectual property right to
technology we use, it may force us to discontinue an important product or
product line, alter our products and processes, pay license fees, pay damages
for past infringement or cease certain activities. Under these circumstances, we
may attempt to obtain a license to this intellectual property; however, we may
not be able to do so on commercially reasonable terms, or at all. In addition,
regardless of the validity of such a claim, its mere existence may affect the
willingness of one or more customers to use or continue to use our products and,
thereby, materially impact us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in Item 2 of Part I of this Report on Form 10-Q
under the heading "Market Risk" is hereby incorporated by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The information presented in Item 2 of Part I of this Report on Form
10-Q under the heading "Liquidity and Capital Resources" is hereby incorporated
by reference. The Company's Registration Statement on Form S-1 (Registration No.
333-36452) was effective as of July 27, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
See the Index to Exhibits immediately following the signature page to
this Report on Form 10-Q.
b. Reports on Form 8-K
On August 10, 2001, the Company filed a Form 8-K (under Item 5)
regarding the adoption of trading plans under Rule 10b5-1 by all of
its executive officers and the potential for some or all of its
directors and key employees to establish such trading plans in the
future. This report did not include any financial statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENENCOR INTERNATIONAL, INC.
November 14, 2001 By: /s/ Raymond J. Land
------------------------------------ --------------------------
Date Raymond J. Land
Senior Vice President and
Chief Financial Officer
November 14, 2001 By: /s/ Darryl L. Canfield
------------------------------------ --------------------------
Date Darryl L. Canfield
Vice President and Corporate
Controller
(Chief Accounting Officer)
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INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (i) Form of Restated Certificate of Incorporation is incorporated
herein by reference to Exhibit 3.3 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
(ii) Form of Amended and Restated Bylaws is incorporated herein by
reference to Exhibit 3.4 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
(4) Instruments defining the rights of securities holders, including
indentures
(a) The documents listed under (3) are incorporated herein by
reference.
(b) Form of Specimen Common Stock Certificate is incorporated
herein by reference to Exhibit 4.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on July 24, 2000.
(c) Note Agreement for the $140,000,000 6.82% Senior Notes due
2006 between the Company and the purchasers identified
therein, dated March 28, 1996 is incorporated herein by
reference to Exhibit 4.2 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on September 26, 2000.
(d) $32,000,000 Three Year Credit Agreement dated as of January
31, 2001 among the Company, the Lenders party thereto and The
Chase Manhattan Bank, as Administrative Agent is incorporated
herein by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration No.
333-61450) filed on May 23, 2001.
(e) $16,000,000 364-Day Credit Agreement dated as of January 31,
2001 among the Company, the Lenders party thereto and The
Chase Manhattan Bank, as Administrative Agent is incorporated
herein by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (Registration No.
333-61450) filed on May 23, 2001.
(f) Amendment No. 1 dated as of April 20, 2001 to the $32,000,000
Three Year Credit Agreement dated as of January 31, 2001 among
the Company, the Lenders party thereto and The Chase Manhattan
Bank, as Administrative Agent is incorporated herein by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 333-61450) filed on
May 23, 2001.
(g) Amendment No. 1 dated as of April 20, 2001 to the $16,000,000
364-Day Credit Agreement dated as of January 31, 2001 among
the Company, the Lenders party thereto and The Chase Manhattan
Bank, as Administrative Agent is incorporated herein by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-8 (Registration No. 333-61450) filed on
May 23, 2001.
(10) Material Contracts
*+10.1 License Agreement by and between Epimmune Inc. and the Company
dated as of July 9, 2001.
*+10.2 Collaboration Agreement by and between Epimmune Inc. and the
Company dated as of July 9, 2001.
*+10.3 Securities Purchase Agreement by and between Epimmune Inc. and the
Company dated as of July 9, 2001.
22
(11) Statement re computation of per share earnings Computation can be
clearly determined from Note 2 to the financial statements included
herein under Item 1.
(15) Letter re unaudited interim financial information
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(19) Report furnished to security holders
Not applicable.
(22) Published report regarding matters submitted to a vote of
security holders
Not applicable.
(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(99) Additional Exhibits
Not applicable
---------------
* Exhibits filed with this Report.
+ Confidential Treatment requested as to certain information, which has been
filed separately with the Commission pursuant to an application for such
treatment.
23