==============================================================================
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 MARCH 31, 2002
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
APRIL 30, 2002
COMMON STOCK, PAR VALUE $0.01 PER SHARE 59,672,706
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets as of March 31, 2002 and December 31, 2001................... 4
Condensed Consolidated Unaudited Statements of Operations for the three months ended
March 31, 2002 and 2001...................................................................................... 5
Condensed Consolidated Unaudited Statements of Cash Flows for the three months ended
March 31, 2002 and 2001...................................................................................... 6
Notes to Condensed Consolidated Unaudited Financial Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................ 23
Item 2. Changes in Securities and Use of Proceeds.................................................................... 23
Item 3. Defaults Upon Senior Securities.............................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 23
Item 5. Other Information............................................................................................ 23
Item 6. Exhibits and Reports on Form 8-K............................................................................. 25
2
This Report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. 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 the words "believes," "anticipates,"
"expects," "estimates," "projects," "will," "may," "might" and words of a
similar nature. The forward-looking statements contained in this Report reflect
the Company'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 in Item 2 of
this Report and in the Company's 2001 Annual Report on Form 10-K. The Company
disclaims any obligation to publicly announce any revisions to these
forward-looking statements to reflect facts or circumstances of which the
Company becomes aware after the date hereof.
Unless otherwise specified, all references in this Report to the "Company",
"we", "us", "our", and "ourselves" refer to Genencor International, Inc. and its
subsidiaries.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 145,103 $ 215,023
Trade accounts receivable, net ............................................ 47,222 47,577
Inventories ............................................................... 53,053 48,382
Other current assets ...................................................... 30,284 23,491
--------- ---------
Total current assets ................................................. 275,662 334,473
Property, plant and equipment, net .......................................... 210,185 207,199
Goodwill .................................................................... 29,694 19,313
Intangible assets, net ...................................................... 37,032 37,832
Other assets ................................................................ 53,500 50,181
--------- ---------
Total assets ......................................................... $ 606,073 $ 648,998
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................. $ 8,367 $ 8,512
Current maturities of long-term debt ...................................... 28,290 28,000
Accounts payable and accrued expenses ..................................... 44,890 47,908
Other current liabilities ................................................. 11,851 16,542
--------- ---------
Total current liabilities ............................................ 93,398 100,962
Long-term debt .............................................................. 85,057 112,419
Other long-term liabilities ................................................. 28,622 27,386
--------- ---------
Total liabilities .................................................... 207,077 240,767
--------- ---------
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par value, authorized
1 shares, 1 shares issued and outstanding .............................. 164,294 162,475
Stockholders' equity:
Common stock, par value $0.01 per share, 200,000 shares authorized, 59,947
and 59,941 shares issued at
March 31, 2002 and December 31, 2001, respectively ..................... 600 599
Additional paid-in capital ................................................ 346,720 345,655
Treasury stock, at cost, 350 shares ....................................... (5,630) (5,630)
Deferred stock-based compensation ......................................... (2,863) (3,517)
Notes receivable for common stock ......................................... (14,647) (14,647)
Accumulated deficit ....................................................... (16,344) (13,466)
Accumulated other comprehensive loss ...................................... (73,134) (63,238)
--------- ---------
Total stockholders' equity ........................................... 234,702 245,756
--------- ---------
Total liabilities, redeemable preferred stock and stockholders' equity $ 606,073 $ 648,998
========= =========
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 OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2002 2001
---- ----
Revenues:
Product revenue .............................. $ 75,548 $ 75,268
Fees and royalty revenues .................... 5,262 2,455
-------- --------
Total revenues .......................... 80,810 77,723
Operating expenses:
Cost of products sold ........................ 42,118 40,898
Research and development ..................... 15,632 12,924
Sales, marketing and business development..... 7,142 5,857
General and administrative ................... 8,032 6,482
Amortization of intangible assets ............ 1,307 2,397
Restructuring and related charges ............ 16,294 --
Other (income)/expense ....................... (1,347) 848
-------- --------
Total operating expenses ................ 89,178 69,406
-------- --------
Operating (loss)/income ........................ (8,368) 8,317
Non operating expenses/(income):
Interest expense ............................. 2,520 2,607
Interest income .............................. (1,401) (3,117)
-------- --------
Total non operating expense/(income) .... 1,119 (510)
-------- --------
(Loss)/income before income taxes .............. (9,487) 8,827
(Benefit from)/provision for income taxes ...... (8,428) 2,550
-------- --------
Net (loss)/income .............................. $ (1,059) $ 6,277
======== ========
Net (loss applicable)/income available to
holders of common stock ....................... $ (2,878) $ 4,458
======== ========
(Loss)/earnings per common share:
Basic ................................... $ (0.05) $ 0.07
======== ========
Diluted ................................. $ (0.05) $ 0.07
======== ========
Weighted average common shares:
Basic ................................... 59,596 59,908
======== ========
Diluted ................................. 60,057 61,459
======== ========
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
5
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
2002 2001
---- ----
Cash flows from operating activities:
Net (loss)/ income ............................... $ (1,059) $ 6,277
Adjustments to reconcile net (loss)/ income to net
cash provided by operating activities:
Depreciation and amortization ................ 7,954 8,990
Amortization of deferred stock-based
compensation ................................. 863 593
Non-cash portion of restructuring and related
charges ...................................... 9,225 --
Decrease (increase) in operating assets:
Trade accounts receivable ................. 1,071 436
Inventories ............................... (2,048) (4,313)
Other assets .............................. (6,531) 4,252
Decrease in operating liabilities:
Accounts payable and accrued expenses ..... (5,158) (7,867)
Other liabilities ......................... (3,309) (3,701)
--------- ---------
Net cash provided by operating activities . 1,008 4,667
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ....... (2,346) (4,706)
Purchases of intangible assets ................... (100) --
Payment to acquire equity securities ............. (3,000) --
Acquisition of business, net of cash acquired .... (35,809) --
--------- ---------
Net cash used in investing activities ....... (41,255) (4,706)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options .......... 57 37
Proceeds from employee stock purchase plan ....... 393 --
Net payments on revolving credit facility ........ (37) --
Net payments on notes payable of foreign affiliate (143) (121)
Payment of long-term debt ........................ (28,000) --
--------- ---------
Net cash used in financing activities ..... (27,730) (84)
--------- ---------
Effect of exchange rate changes on cash ............ (1,943) (3,086)
--------- ---------
Net decrease in cash and cash equivalents .......... (69,920) (3,209)
Cash and cash equivalents-- beginning of period .... 215,023 200,591
--------- ---------
Cash and cash equivalents-- end of period .......... $ 145,103 $ 197,382
========= =========
The accompanying notes are an integral part of the condensed consolidated
unaudited financial statements.
6
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1 -- BASIS OF PRESENTATION
The condensed consolidated unaudited financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
related footnotes for the year ended December 31, 2001, as included in the
Company's Annual 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 conformity with accounting principles generally
accepted in the United States of America 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 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The Company adopted this statement as of January 1, 2002. 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.
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, goodwill and certain
previously acquired technology were determined to have indefinite useful lives.
There were no adjustments made to the amortization periods or residual values of
other intangible assets. As a result, certain reclassifications were made to
previously issued financial statements to conform to the presentation required
by SFAS 142. The Company completed the first step of the transitional goodwill
and indefinite-lived intangible impairment tests and has determined that no
potential impairment exists. As a result, the Company has recognized no
transitional impairment loss to date in fiscal 2002 in connection with the
adoption of SFAS No. 142.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 addresses the
accounting for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires the measurement of long-lived
assets at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No. 144 as of January 1, 2002. There
was no financial impact as a result of the adoption. The Company will apply its
provisions to future impairments or disposals of long-lived assets as they
occur.
3 -- EARNINGS PER SHARE
SFAS 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 (loss applicable)/ income available to holders of common stock,
undeclared and unpaid dividends on redeemable preferred stock of $1,819 were
deducted from net (loss)/income for each quarter presented.
Diluted (loss)/earnings per common 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
7
the net (loss applicable)/income available to holders of common stock 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 months ended March 31, 2002 and 2001. The weighted-average impact of these
has been reflected in the calculation of diluted (loss)/earnings per common
share for the respective periods presented.
The following table reflects the calculation of basic and diluted
(loss)/earnings per common share for the three months ended March 31:
2002 2001
---- ----
Net (loss)/income ................................ $ (1,059) $ 6,277
Less: Accrued dividends on preferred stock ..... (1,819) (1,819)
-------- --------
Net (loss applicable)/income available to holders
of common stock .................................. $ (2,878) $ 4,458
======== ========
Weighted average common shares:
Basic .......................................... 59,596 59,908
Effect of stock options ........................ 461 1,551
-------- --------
Diluted ........................................ 60,057 61,459
======== ========
(Loss)/earnings per common share:
Basic .......................................... $ (0.05) $ 0.07
======== ========
Diluted ........................................ $ (0.05) $ 0.07
======== =======
4 -- FEES AND ROYALTY REVENUES
During October 2001, the Company entered into a strategic alliance with Dow
Corning Corporation to create a new, proprietary technology platform for the
development of new biomaterials. During the first quarter of 2002, the Company
recorded $2,638 in research funding revenues from this collaboration.
5 -- INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Raw materials ........................ $ 7,911 $ 7,526
Work-in-progress ..................... 8,641 7,454
Finished goods ....................... 36,501 33,402
------- -------
Inventories ........................ $53,053 $48,382
======= =======
6 --GOODWILL AND OTHER INTANGIBLE ASSETS
As discussed in Note 2 above, the Company adopted the provisions of SFAS
No. 142 effective as of January 1, 2002. Accordingly, the Company no longer
amortizes goodwill or other intangible assets with indefinite useful lives. The
Company has identified such other indefinite-lived intangible assets to include
certain previously acquired technology. The Company will periodically evaluate
its indefinite-lived intangible assets for impairment in accordance with the
provisions of SFAS No. 142. The Company also has other intangible assets, such
as patents, licenses, and customer lists, which will continue to be amortized
over a weighted average useful life of 13 years using the straight-line method.
These assets are expected to have no residual value once they are fully
amortized.
8
The following table summarizes the changes in each major class of
intangible assets from January 1, 2002 through March 31, 2002:
INTANGIBLE ASSETS GOODWILL
----------------------------------------------- ----------
OTHER
AMORTIZABLE
TECHNOLOGY ASSETS TOTAL
--------------- --------------- -------------
Balances, January 1, 2002....... $ 15,617 $ 51,890 $ 67,507 $ 19,313
Acquired intangible assets... - - - 10,389
Foreign currency translation. - - - (8)
----------- --------- ------------ ----------
Balances, March 31, 2002........ $ 15,617 51,890 67,507 $ 29,694
=========== ========= ============ ==========
Less: Accumulated
amortization................ 30,475 30,475
-------- -----------
Intangible assets, net....... $ 21,415 $ 37,032
======== ===========
In conjunction with the acquisition discussed in Note 10, the Company
acquired certain intangible assets during the three months ended March 31, 2002.
The Company is currently in the process of segregating these intangible assets
among the major classes. As such, the estimated value of these intangible assets
has been included in goodwill as of March 31, 2002 and will be reclassified
among the major classes once the Company completes its allocation of the
purchase price.
The following table reflects the comparative net (loss)/income and
(loss)/earnings per common share as though the provisions of SFAS No. 142 were
in effect for the three months ended March 31, 2001 and three months ended March
31, 2002:
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
--------- ---------
Net (loss)/income as reported ............. $ (2,878) $ 4,458
Add back amortization:
Goodwill ($0 and $288 pre-tax) .......... -- 179
Technology ($0 and $838 pre-tax) ........ -- 519
--------- ---------
Net (loss)/income as adjusted ............. $ (2,878) $ 5,156
========= =========
Basic (loss)/earnings per share:
As reported ............................ $ (0.05) $ 0.07
Amortization ........................... -- 0.01
--------- ---------
As adjusted ............................ $ (0.05) $ 0.08
========= =========
Diluted (loss)/earnings per share:
As reported ............................ $ (0.05) $ 0.07
Amortization ........................... -- 0.01
--------- ---------
As adjusted ............................ $ (0.05) $ 0.08
========= =========
Estimated fiscal year amortization expense is as follows:
2002......................$5,200
2003.......................5,200
2004.......................4,500
2005.......................4,500
2006.......................4,500
9
7 --STOCKHOLDERS' EQUITY
Accumulated other comprehensive loss consists of the following:
FOREIGN MARKETABLE ACCUMULATED
CURRENCY SECURITIES OTHER
TRANSLATION VALUATION COMPREHENSIVE
ADJUSTMENT ADJUSTMENT LOSS
-------- -------- --------
Balances, December 31, 2001 .... $(62,599) $ (639) $(63,238)
Current period change ........ (9,565) (331) (9,896)
-------- -------- --------
Balances, March 31, 2002 ....... $(72,164) $ (970) $(73,134)
======== ======== ========
The change in the marketable securities valuation adjustment for the three
months ended March 31, 2002, of $331, ($522 pre-tax) relates to unrealized
holding losses on the Company's available-for-sale securities.
8 -- INCOME TAXES
The effective income tax rate for the three months ended March 31, 2002 was
an 89% tax benefit, compared to a 29% tax expense for the three months ended
March 31, 2001. The effective rate for the three months ended March 31, 2002 was
driven by anticipated annual tax benefits from operating losses in high tax
jurisdictions, partially offset by taxes on operating income generated in low
tax jurisdictions. Factors that affect the Company's estimated annual effective
income tax rate include increased research and development expenditures in the
United States, the statutory income tax rates in foreign jurisdictions,
amortization of certain intangible assets and other items which are not
deductible for tax purposes, and research and experimentation tax credits. The
rate also included the effect of the one-time restructuring and related charges.
The entire tax benefit related to these restructuring and related charges of
approximately $6,000 was recorded in the first quarter of 2002. During the three
months ended March 31, 2002 and 2001 the Company was 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 in 2005.
9 -- COLLABORATIVE AGREEMENTS
During January 2002, the Company entered into a two-year extendable
collaboration agreement with The Johns Hopkins University for the research of
therapeutic vaccines and other immunotherapies targeting cancers and oncogenic
viruses. Under the agreement, the Company received worldwide licenses to certain
proprietary technologies as well as exclusive commercialization rights to any
products developed through the agreement. This collaboration required the
Company to pay an up front license fee as well as annual royalties. The
agreement also requires certain research and development funding and has
potential for additional milestone payments and royalties on future product
sales.
Also during January 2002, the Company formed a strategic alliance with
Seattle Genetics, Inc., to jointly discover and develop a class of cancer
therapeutics. Under terms of the alliance, the companies will share preclinical
and clinical development costs and have the right to jointly commercialize any
resulting products. The Company has made an equity investment in Seattle
Genetics of $3,000 and agreed to pay certain fees and milestone payments.
Seattle Genetics has also agreed to make certain milestone payments to the
Company.
10
10 -- ACQUISITION
During February 2002, the Company acquired Enzyme Bio-Systems Ltd. (EBS)
from Corn Products International, Inc. for a total cash purchase price of
$35,809 and the assumption of $974 in debt. As part of this transaction, the
Company entered into a seven-year supply agreement for a majority of Corn
Products International, Inc.'s North American enzyme requirements. The
acquisition has been accounted for under the purchase method in accordance with
SFAS No. 141, "Business Combinations." The acquired entity's results of
operations have been consolidated with the Company's results of operations
since the acquisition date. The Company is continuing to evaluate the
allocation of the purchase price for the acquisition, including the segregation
of separately identifiable intangible assets. The Company anticipates that this
process will be completed during the quarter ended June 30, 2002. According to
the Company's preliminary allocation of the purchase price, the net assets
acquired consist of the following as of February 2002:
Working capital.................................$ 4,100
Property, plant and equipment................... 22,000
Intangible assets............................... 10,400
Long-term liabilities........................... (691)
------------
$ 35,809
============
Included in working capital acquired is a provision to restructure the
entity of approximately $1,000, which primarily consists of the employee-related
costs to eliminate approximately 22 positions. All affected employees were
notified immediately of the restructuring plan. As of March 31, 2002, costs
totaling $985 had been charged to this restructuring provision.
11 -- RESTRUCTURING AND RELATED CHARGES
During February 2002, as a result of the acquisition of EBS and general
economic conditions in Latin America, including the devaluation of the Argentine
peso, the Company engaged in a plan to restructure its overall supply
infrastructure by ceasing operations at its Elkhart, Indiana plant and
downsizing its Argentine facilities. Approximately 122 positions will be
eliminated as a result of this restructuring. All affected employees were
notified immediately of the restructuring plan. As of March 31, 2002, 62
employees had terminated their employment with the Company.
As a result of the plan, restructuring and related charges of $16,294 were
recorded in the Company's operating earnings in the three months ended March 31,
2002. These charges were primarily driven by employee severance and related
costs of approximately $3,762, costs to dismantle portions of the restructured
facilities of $1,000, costs to terminate long-term utility agreements of $300,
other costs totaling $400, and $9,225 for property, plant and equipment that was
deemed impaired as it would no longer be utilized by the Company after the
restructuring. The impairment charge was determined based on remaining book
value, as the Company believes there is no active market in which to sell the
specific assets. The Company expects full implementation to be completed in the
fourth quarter of 2002. In addition, the Company recorded costs related to the
restructuring, such as those related to the transition of activities between
Elkhart and EBS, of $1,607 as incurred during the three months ended March 31,
2002. At March 31, 2002, the Company had a remaining liability of $5,183 related
to this restructuring.
11
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 2001 Annual Report
on Form 10-K, and the condensed consolidated unaudited financial statements and
related notes included elsewhere in this report.
OVERVIEW
We are a diversified biotechnology company that develops and delivers
products and/or services to the industrial, consumer, agri-processing 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 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,
agri-processing, 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 nine 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 year
ended December 31, 2001, we derived approximately 50% of our revenues from our
foreign operations. For the three months ended March 31, 2002, we derived
approximately 50% of our revenues from our foreign operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." We adopted this statement as of January
1, 2002. 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.
With the adoption of SFAS 142, we reassessed the useful lives and residual
values of all acquired intangible assets to make any necessary amortization
period adjustments. Based on that assessment, goodwill and certain previously
acquired technology were determined to have indefinite useful lives. Also, there
were no adjustments made to the amortization periods or residual values of other
intangible assets. As a result, certain reclassifications were made to
previously issued financial statements to conform to the presentation required
by SFAS 142. We completed the first step of the transitional goodwill and
indefinite-lived intangible impairment tests and have determined that no
potential impairment exists. As a result, we recognized no transitional
impairment loss to date in fiscal 2002 in connection with the adoption of SFAS
No. 142.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 addresses the
accounting for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires the measurement of long-lived
assets at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. We adopted SFAS No. 144 as of January 1, 2002. There was no
financial impact as a result of the adoption. We will apply its provisions to
future impairments or disposals of long-lived assets as they occur.
SUMMARY OF RESULTS
For the three months ended March 31, 2002, we reported a net loss applicable
to common stockholders of $2.9 million, or a loss of $0.05 per diluted share,
compared to net income available to common stockholders of $4.5 million, or
$0.07 per diluted share for the
12
three months ended March 31, 2001. During the three months ended March 31, 2002,
we recorded restructuring and related charges of $16.3 million. Before these
charges, we would have reported net income available to common stockholders of
$7.4 million, or $0.12 per diluted share.
RECENT DEVELOPMENTS
During January 2002, we entered into a two-year extendable collaboration
agreement with The Johns Hopkins University for the research of therapeutic
vaccines and other immunotherapies targeting cancers and oncogenic viruses.
Under the agreement, we received worldwide licenses to certain proprietary
technologies as well as exclusive commercialization rights to any products
developed through the agreement. This collaboration required us to pay an up
front license fee as well as annual royalties. The agreement also requires
certain research and development funding and has potential for additional
milestone payments and royalties on future product sales.
Also during January 2002, we formed a strategic alliance with Seattle
Genetics, Inc., to jointly discover and develop a class of cancer therapeutics.
Under terms of the alliance, the companies will share preclinical and clinical
development costs and have the right to jointly commercialize any resulting
products. We made an equity investment in Seattle Genetics of $3.0 million and
agreed to pay certain fees and milestone payments. Seattle Genetics has also
agreed to make certain milestone payments to us.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2002 and 2001
Revenues. Total revenues for the three-month period ended March 31, 2002
increased $3.1 million, or 4%, to $80.8 million from the three-month period
ended March 31, 2001, primarily due to an increase in fees and royalty revenues.
Product Revenues. Product revenues for the three months ended March 31, 2002
increased $0.2 million to $75.5 million from the three months ended March 31,
2001. Excluding the impact of the stronger U.S. dollar against foreign
currencies, primarily the Euro, product revenues for the three months ended
March 31, 2002 would have increased by approximately 4%, to $78.0 million. For
the three months ended March 31, 2002, unit volume/mix grew 7%, while average
prices fell 3%. Volume increased primarily due to increased protease enzyme
sales to a major customer and increased sales volume with our grain processing
customers.
Regionally, North American product revenues for the three months ended March
31, 2002 increased $0.2 million, or 1%, to $36.2 million from the three months
ended March 31, 2001, driven primarily by sales to our grain processing
customers, partially offset by decreased sales to cleaning and fabric care
customers. Product revenues in Europe, Africa and the Middle East for the three
months ended March 31, 2002 increased $1.3 million, or 5%, to $27.8 million from
the three months ended March 31, 2001, driven primarily by increased sales to
cleaning and fabric care customers. Our product revenues in Latin America for
the three months ended March 31, 2002 declined $1.7 million, or 40%, to $2.6
million from the three months ended March 31, 2001, primarily due to decreased
sales to our cleaning and fabric care customers and grain processing customers.
Product revenues in the Asia Pacific region increased $0.5 million, or 6%, to
$8.9 million for three months ended March 31, 2002 from the three months ended
March 31, 2001 due mainly to increased sales to our grain processing customers.
Fees and Royalty Revenues. Fees and royalty revenues increased $2.8 million
to $5.3 million for the three months ended March 31, 2002 from the three months
ended March 31, 2001, due primarily to an increase in customer funded research.
Funded research revenues for the three months ended March 31, 2002 increased
$2.6 million, to $4.8 million from the three months ended March 31, 2001.
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 increased $0.1 million, or 13%, to $0.9 million
for the three months ended March 31, 2002 from the three months ended March 31,
2001 primarily due to funding provided by the National Renewable Energy
Laboratory to develop an enzymatic process to convert biomass into bioethanol.
Funded research revenues provided by customers increased $2.5 million, to $3.9
million for the three months ended March 31, 2002 from the three months ended
March 31, 2001, primarily driven by funding from a strategic alliance we entered
into with the Dow Corning Corporation during the fourth quarter of 2001.
13
Royalties increased $0.1 million, or 33%, to $0.4 million for the three
months ended March 31, 2002 from the three months ended March 31, 2001, due
primarily to an additional customer that pays royalties to us based on the sales
of its products that are produced using our technology.
Operating Expenses
Cost of Products Sold. Cost of products sold increased $1.2 million, or 3%,
to $42.1 million for the three months ended March 31, 2002 from the three months
ended March 31, 2001. Our expanded sales volume/mix increased costs $2.3 million
along with the sale of higher cost inventories of $1.6 million, partially offset
by reductions due to the impact of the stronger U.S. dollar against foreign
currencies of $2.7 million.
Gross Profit and Margins from Products Sold. Gross profit from products sold
decreased $1.0 million, or 3%, to $33.4 million for the three months ended March
31, 2002 from the three months ended March 31, 2001. This overall decrease was
caused by significant product revenue related factors including a 7% increase in
volume/mix processed through our plants, partially offset by an average price
decline of 3%. This net decrease in gross profit was also affected by a $0.2
million decrease due to the impact of the stronger U.S. dollar against foreign
currencies. As a result of these factors, gross margin on product revenue
decreased to 44.2% for the three months ended March 31, 2002 from 45.7% for the
three months ended March 31, 2001.
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 $2.7 million, or 21%, to $15.6
million for the three months ended March 31, 2002 from the three months ended
March 31, 2001, 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 $1.9 million to $3.8 million for the three months ended
March 31, 2002 from the three months ended March 31, 2001.
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 increased $1.2 million,
or 20%, to $7.1 million for the three months ended March 31, 2002 from the three
months ended March 31, 2001, due primarily to increased personnel related costs,
including salaries, benefits, commissions and travel expenses of $0.5 million,
incentive compensation of $0.6 million and employee programs of $0.4 million,
partially offset by decreases in outside services of $0.2 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 $1.5
million, or 23%, to $8.0 million for the three months ended March 31, 2002 from
the three months ended March 31, 2001, due primarily to increased outside
services of $1.1 million, personnel related costs, including salaries, benefits
and travel expenses of $0.2 million and advertising and promotions costs of
approximately $0.1 million.
Amortization of Intangible Assets. We amortize our intangible assets,
consisting of patents, licenses and other contractual agreements, on a
straight-line basis over their estimated useful lives. Amortization expense
decreased $1.1 million, or 46%, to $1.3 million for the three months ended March
31, 2002 from the three months ended March 31, 2001 due primarily to the
implementation of SFAS No. 142, "Goodwill and Other Intangible Assets."
Other Expense and Income. Other expense and income relates primarily to
foreign currency exchange gains and losses on transactions denominated in other
than the functional currency of the entity in which the transaction occurred.
Other income for the three months ended March 31, 2002 was $1.3 million, as
compared with other expense of $0.8 million for the three months ended March 31,
2001. This $2.1 million increase in income was due mainly to an increase in
Argentine peso-driven foreign currency transaction gains during the three months
ended March 31, 2002.
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. In connection with
the grant of stock options to employees during 2000, amortization of deferred
compensation expense for the three months ended March 31, 2002 was $0.9 million
and for the three months ended March 31, 2001 was $0.6 million.
14
During the fourth quarter of 2001, we converted previously issued stock
appreciation rights (SARs) to stock options. As a result, the SARs were canceled
and new stock options were granted at the exercise price and with vesting
beginning as of the grant date of the previously issued SARs. For the new stock
options, stock-based compensation was then calculated as the difference between
the exercise price and the estimated fair value of the new stock options on the
conversion date.
In total, amortization of deferred stock-based compensation expense was $0.9
million and $0.6 million for the three months ended March 31, 2002 and 2001,
respectively, and was reported in our Consolidated Statement of Operations as
follows (in millions):
2002 2001
---- ----
Cost of products sold .................................. $0.1 $0.0
Research and development ............................... 0.2 0.2
Sales, marketing and business development .............. 0.4 0.2
General and administrative ............................. 0.2 0.2
---- ----
Total amortization of deferred compensation expense .... $0.9 $0.6
==== ====
Non Operating Expense and Income
Interest Income. Interest income decreased $1.7 million, or 55%, to $1.4
million for the three months ended March 31, 2002 from the three months ended
March 31, 2001 due mainly to the reduction of our cash balances, discussed below
under the heading "Liquidity and Capital Resources."
Income Taxes. The effective income tax rate for the three months ended March
31, 2002 was an 89% tax benefit, compared to a 29% tax expense for the three
months ended March 31, 2001. The effective rate for the three months ended March
31, 2002 was driven by anticipated annual tax benefits from operating losses in
high tax jurisdictions, partially offset by taxes on operating income generated
in low tax jurisdictions. Factors that affect our estimated annual effective
income tax rate include increased research and development expenditures in the
United States, the statutory income tax rates in foreign jurisdictions,
amortization of certain intangible assets and other items which are not
deductible for tax purposes, and research and experimentation tax credits. The
rate also included the effect of the one-time restructuring and related charges.
The entire tax benefit related to these restructuring and related charges of
approximately $6.0 million was recorded in the first quarter of 2002. 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 in
2005.
ACQUISITION
During February 2002, we acquired Enzyme Bio-Systems Ltd. (EBS) from Corn
Products International, Inc. for a total cash purchase price of $35.8 million
and the assumption of $1.0 million in debt. As part of this transaction, we
entered into a seven-year supply agreement for a majority of Corn Products
International, Inc.'s North American enzyme requirements. The acquisition has
been accounted for under the purchase method in accordance with SFAS No. 141,
"Business Combinations." The acquired entity's results of operations have been
consolidated with our results of operations since the acquisition date. We are
continuing to evaluate the allocation of the purchase price for the acquisition,
including the segregation of separately identifiable intangible assets. We
anticipate that this process will be completed during the quarter ended June 30,
2002. According to our preliminary allocation of the purchase price, the net
assets acquired consist of the following as of February 2002 (in millions):
Working capital ........................................... $ 4.1
Property, plant and equipment ............................. 22.0
Intangible assets ......................................... 10.4
Long-term liabilities ..................................... (0.7)
-----
$35.8
=====
Included in working capital acquired is a provision to restructure the
entity of approximately $1.0 million, which primarily consists of the
employee-related costs to eliminate approximately 22 positions. All affected
employees were notified immediately of the restructuring plan. As of March 31,
2002, costs totaling $1.0 million had been charged to this restructuring
provision.
15
RESTRUCTURING AND RELATED CHARGES
During February 2002, as a result of the acquisition of EBS and general
economic conditions in Latin America, including the devaluation of the Argentine
peso, we engaged in a plan to restructure our overall supply infrastructure by
ceasing operations at our Elkhart, Indiana plant and downsizing our Argentine
facilities. Approximately 122 positions will be eliminated as a result of this
restructuring. All affected employees were notified immediately of the
restructuring plan. As of March 31, 2002, 62 employees had terminated their
employment with us.
As a result of the plan, restructuring and related charges of $16.3 million
were recorded in our operating earnings in the three months ended March 31,
2002. These charges were primarily driven by employee severance and related
costs of approximately $3.8 million, costs to dismantle portions of the
restructured facilities of $1.0 million, costs to terminate long-term utility
agreements of $0.3 million, other costs totaling $0.4 million, and $9.2 million
for property, plant and equipment that was deemed impaired as it would no longer
be utilized by us after the restructuring. The impairment charge was determined
based on remaining book value, as we believe there is no active market in which
to sell the specific assets. We expect full implementation to be completed in
the fourth quarter of 2002. In addition, we recorded costs related to the
restructuring, such as those related to the transition of activities between
Elkhart and EBS, of $1.6 million as incurred during the three months ended March
31, 2002. At March 31, 2002, we had a remaining liability of $5.2 million
related to this restructuring.
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 over 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 March 31, 2002, cash and cash equivalents totaled $145.1 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,
auction rate preferred securities and bank deposits.
Cash provided by operations was $1.0 million and $4.7 million for the three
months ended March 31, 2002 and 2001, respectively. The decrease of $3.7 million
in 2002 from 2001 was generated principally by operating losses, net of non-cash
items such as depreciation and amortization, and changes in operating assets and
liabilities.
Cash used by investing activities was $41.3 million and $4.7 million for the
three months ended March 31, 2002 and 2001, respectively. This increase of $36.6
million was driven primarily by the EBS acquisition of $35.8 million and the
equity investment in Seattle Genetics, Inc. of $3.0 million during the three
months ended March 31, 2002. Capital expenditures for the first quarter were
$2.3 million in 2002 compared with $4.7 million in 2001. A significant portion
of the capital spending included process improvement projects at our
manufacturing and research and development facilities and information technology
enhancements.
Cash used by financing activities was $27.7 million and $0.1 million for the
three months ended March 31, 2002 and 2001, respectively. This difference of
$27.6 million was primarily driven by the 2002 payment made on our long-term
debt of $28.0 million. No dividends were paid to common stockholders during the
three months ended March 31, 2002 and 2001. We currently intend to retain future
earnings to finance the expansion of our business. Any future determination to
pay cash dividends to our common stockholders 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 earnings before interest, taxes, depreciation
and amortization (EBITDA) of 3.5:1.
16
As of March 31, 2002, we had a $60.0 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 $40.0 million of committed borrowings pursuant to a credit agreement that
expires on January 31, 2004, and $20.0 million of committed borrowings pursuant
to a 364-day credit agreement that expires on January 30, 2003. The combined
facility carries facility fees of 0.35% on the amount of unborrowed principal
under the $40.0 million agreement and 0.30% under the $20.0 million agreement.
As of April 30, 2002, there were no borrowings under either facility.
Our long-term debt consists primarily of the 6.82% senior notes issued in
1996 to certain institutional investors. The remaining principal amount of these
notes is $112.0 million. Annual installment payments of $28.0 million commenced
on March 30, 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. Foreign operations, mainly denominated in Euros, accounted for
approximately 50% of our revenues for the three months ended March 31, 2002 and
2001. We believe that we mitigate this risk by locating our manufacturing
facilities so that the costs are denominated in the same currency as our product
revenues. We may manage the foreign currency exposures that remain through the
use of foreign currency forward contracts, currency options and off-setting
currency positions in assets and liabilities where deemed appropriate. At March
31, 2002, there were no forward contracts or option contracts outstanding. There
were no material foreign currency gains in connection with these types of
contracts recorded in the statement of operations for the three months ended
March 31, 2002.
As of March 31, 2002, cash and cash equivalents totaled $145.1 million.
Of this amount, $58.7 million was denominated in Euros. The remainder, or $86.4
million, was primarily denominated in U.S. dollars. Other than the first
installment of $28.0 million paid in March 30, 2002 under our 6.82% senior notes
discussed under the heading "Liquidity and Capital Resources" in this Report,
short-term debt outstanding at March 31, 2002 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 the impact on the translation of these cash
investments into U.S. dollars.
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. Our interest expense is generated primarily from fixed rate debt,
the $112.0 million 6.82% senior notes outstanding at March 31, 2002, which
mature evenly in installments of $28.0 million per year commencing March 30,
2003.
On January 31, 2002, we entered into an interest rate swap contract to pay a
variable rate of interest based on the six month London Interbank Offered Rate
(LIBOR) and receive fixed rates of interest at 6.82% on a $28.0 million notional
amount of our long-term indebtedness. The contract will mature on March 30,
2004. The net gain or loss on the ineffective portion of the interest rate swap
contract was not material as of March 31, 2002. On May 14, 2002 we entered into
an interest rate swap contract to pay a variable rate of interest based on the
six month London Interbank Offered Rate (LIBOR) and receive fixed rates of
interest at 6.82% on an additional $28.0 million notional amount of our
long-term indebtedness. The contract will mature on March 30, 2004. These
contracts together, effectively converted 50% of our fixed rate debt to floating
rate debt. Both financial instruments are entered with major, creditworthy banks
and thus are not considered to be subject to significant counter-party credit
risk.
Foreign Currency Exposure
We conduct business throughout the world. During the three month period
ended March 31, 2002, we derived approximately 50% of our revenues from foreign
operations, and these foreign operations generated income that offset our net
losses during the same three-month period. Economic conditions in countries
where we conduct business and changing foreign currency exchange
17
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 and the
Argentine peso present 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.
Our manufacturing and administrative operations for Latin America are
located in Argentina. During 2001, severe economic conditions, which have lasted
for several years, resulted in a year-end devaluation of the Argentine Peso. As
a result, our subsidiary, which has an Argentine Peso functional currency,
reported lower U.S. dollar net assets due to the translation impact resulting
from the devaluation. Due to the fact that a significant part of our Latin
American revenues were denominated in U.S. dollars, our statement of operations
reflected a $1.8 million foreign currency gain from the remeasurement of related
accounts receivable as of March 31, 2002.
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.
18
RISK FACTORS
If any of the following risks actually occur, they could harm our business,
financial condition, and/or results of operations.
IF WE FAIL TO DEVELOP PRODUCTS FOR THE HEALTH CARE AND AGRI-PROCESSING 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 new
segments of the agri-processing market. 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
new agri-processing 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 we lack 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 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.
19
IF THE DEMAND FOR PROTEIN DEGRADING ENZYMES DECREASES OR IF MAJOR CUSTOMERS
REDUCE OR TERMINATE BUSINESS WITH US, OUR REVENUES COULD SIGNIFICANTLY DECLINE.
Our largest selling family of products, protein degrading enzymes, or
proteases, accounted for approximately 57% of our 2001 revenues. If the demand
for proteases decreases or alternative proteases render our products
noncompetitive, our revenues could significantly decline.
In addition, our five largest customers collectively accounted for over 57%
of our 2001 product revenues with our largest customer, The Procter & Gamble
Company, accounting for over 35% of such revenues. Our five largest customers in
2001 were Benckiser N.V., Cargill, Incorporated, the FinnFeeds Division of
Danisco A/ S, The Procter & Gamble Company, and Unilever N.V. Any one of these
customers may reduce their level of business with us. Should any of our largest
customers decide to reduce or terminate business with us, our revenues and
profitability could decline significantly.
We have arrangements of various durations with our major customers and are
routinely involved in discussions regarding the status of these relationships.
These discussions may lead to extensions or new commercial arrangements, or may
be unsuccessful. Our customer relationships involve uncertainty by virtue of
economic conditions, customer needs, competitive pressures, our production
capabilities and other factors. Consequently, our customer base will change over
time as will the nature of our relationships with individual customers,
including major customers.
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.
In the future, we may acquire other 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
including our recent acquisition of Enzyme Bio-Systems Ltd. Future acquisitions
could dilute our stockholders' interest in us and could cause us to incur
substantial debt, expose us to contingent liabilities and could negatively
impact our profitability.
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-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 can be 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 can be costly
in terms of dollars spent and the diversion of management time.
20
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.
Those companies with which we have entered or may enter into strategic
alliances encounter similar risks and uncertainties with respect to their
intellectual property. To the extent that any such alliance companies suffer a
loss or impairment of their respective technologies, we may suffer a
corresponding loss or impairment that may materially and adversely affect our
investments.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO
ACHIEVE OUR STATED CORPORATE 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 stated corporate
objectives.
FOREIGN CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL CONDITIONS IN FOREIGN
COUNTRIES COULD CAUSE OUR REVENUES AND PROFITS TO DECLINE.
In 2001, we derived approximately 50% of our revenues from our foreign
operations. Our foreign operations generate sales and incur expenses in local
currency. As a result, we are exposed to a market risk related to unpredictable
interest rates and foreign currency exchange rate fluctuations. We recognize
foreign currency gains or losses arising from our operations in the period
incurred. As a result, currency fluctuations between the U.S. dollar and the
currencies in which we do business could cause our revenues and profits to
decline.
Product revenues denominated in Euros accounted for approximately 21% of
total product revenues for 2001, and the fluctuations in the currency exchange
rate against the U.S. dollar can have a significant impact on our reported
product revenues.
We expect to continue to operate in foreign countries and that our
international sales will continue to account for a significant percentage of our
revenues. As such, we are subject to certain risks arising from our
international business operations that could be costly in terms of dollars
spent, the diversion of management's time, and revenues and profits, including:
- Difficulties and costs associated with staffing and managing
foreign operations;
- Unexpected changes in regulatory requirements;
- Difficulties of compliance with a wide variety of foreign laws
and regulations;
- Changes in our international distribution network and direct
sales forces;
- Political trade restrictions and exchange controls;
- Political, social, or economic unrest;
- Labor disputes including work stoppages, strikes and
embargoes;
- Inadequate and unreliable services and infrastructure;
- Import or export licensing or permit requirements; and
- Greater risk on credit terms and long accounts receivable
collection cycles in some foreign countries.
21
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;
- Fluctuations in consumer demand for products containing our
technologies or products, such as back to school sales of blue
jeans and other denim products, resulting in an increase in
textile processing enzymes, and fluctuations in laundry
detergent use due to promotional campaigns run by consumer
products companies; and
- Fluctuations in geographic conditions including currency and
other economic conditions such as economic crises in Latin
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 ARE SUBJECT TO A COSTLY PRODUCT LIABILITY DAMAGE CLAIM OR AWARD, OUR
PROFITS COULD DECLINE.
We may be held liable if any product we develop, or any product that a
third party makes with the use or incorporation of any of our products, causes
injury or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Our current product liability insurance may not cover our
potential liabilities. Inability to obtain sufficient insurance coverage in the
future at an acceptable cost or otherwise to protect against potential liability
claims could prevent or inhibit the commercialization of products developed by
us or our strategic partners. If a third party sues us for any injury caused by
our products, our liability could exceed our insurance coverage amounts and
total assets and our profits could decline.
IF WE ARE SUBJECT TO COSTLY ENVIRONMENTAL LIABILITY DUE TO THE USE OF HAZARDOUS
MATERIALS IN OUR BUSINESS, OUR PROFITS COULD DECLINE.
Our research and development processes involve the controlled use of hazardous
materials, including chemical, radioactive and biological materials. Our
operations also generate hazardous waste. We cannot eliminate entirely the risk
of contamination or the discharge of hazardous materials and any resultant
injury from these materials. Federal, state, local and foreign laws and
regulations govern the use, manufacture, storage, handling and disposal of these
materials. Third parties may sue us for any injury or contamination that results
from our use or the third party's use of these materials. Any accident could
partially or completely shut down our research and manufacturing facilities and
operations. In addition, if we are required to comply with any additional
applicable environmental laws and regulations, we may incur additional costs,
and any such current or future environmental regulations may impair our
research, development or production efforts.
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.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this Report, we are not engaged in any legal proceeding
that we expect to have a material adverse effect on our financial condition.
At the time we acquired Enzyme Bio-Systems Ltd. (EBS) in February
2002, EBS was a defendant in a patent infringement claim filed by Novozymes A/S
on or about December 4, 2001 in U.S. District Court for the State of Delaware
(Civil Action No. 01-804). Genencor International, Inc. is not a party in this
action. The former owner of EBS prosecuted a defense with respect to this
preexisting claim. This matter has been settled, and the settlement had no
material impact on us.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the third quarter of 2000, the Company completed an initial public
offering of 8,050,000 shares of common stock at $18.00 per share. The Company's
Registration Statement on Form S-1 (Registration No. 333-36452) was effective as
of July 27, 2000 and included 7,000,000 shares of common stock issued July 28,
2001 in the initial offering and 1,050,000 shares of common stock issued August
25, 2000 pursuant to the underwriters' exercise of the over-allotment option.
The combined net proceeds from the initial offering and the over-allotment
option exercise were approximately $132.7 million. The Company has used and
expects to continue using the net proceeds from the offering for research and
development activities, capital expenditures, financing possible acquisitions,
working capital and other general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See Index to Exhibits
B. REPORTS ON FORM 8-K
None
23
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.
May 15, 2002 By: /s/ Raymond J. Land
------------------------------- ------------------------------------------
Date
Raymond J. Land
Senior Vice President and Chief Financial
Officer
May 15, 2002 By: /s/ Darryl L. Canfield
------------------------------- ------------------------------------------
Date Darryl L. Canfield
Vice President and Corporate Controller
(Chief Accounting Officer)
24
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 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.
3.2 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
4.1 Exhibit 3.1 to this Report is incorporated herein by
reference.
4.2 Exhibit 3.2 to this Report is incorporated herein by
reference.
4.3 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.
4.4 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 June 26, 2000.
4.5 $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.
4.6 $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.
4.7 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.
4.8 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.
4.9 Amendment No. 2 dated as of January 31, 2002 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 4.9 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
4.10 Letter Agreement dated as of January 31, 2002 among JP Morgan
Chase Bank, ABN AMRO Bank, NV, the Bank of New York, Credit
Suisse First Boston and the Company regarding Credit
Agreements dated as of January 31, 2001 and Acquisition of
Enzyme Bio-Systems is incorporated herein by reference to
Exhibit 4.10 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
(10) MATERIAL CONTRACTS
*+10.1 Enzyme Supply Agreement between the Company and Corn Products
International, Inc., dated February 5, 2002.
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Not included as a separate exhibit as computation can be
determined from Note 3 to the financial statements
included in this Report under Item 1.
25
(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 separately filed with the Securities and Exchange
Commission pursuant to an application for such treatment.
26