1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 846-7500
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.
[ ]
THE AGGREGATE MARKET VALUE (BASED UPON THE CLOSING PRICE ON THE NASDAQ
STOCK MARKET ON MARCH 16, 2001) OF THE 8,020,391 SHARES OF VOTING STOCK HELD BY
NON-AFFILIATES AS OF MARCH 16, 2001 WAS APPROXIMATELY $106,270,181.
AS OF MARCH 16, 2001, THERE WERE 59,909,436 SHARES OF COMMON STOCK, PAR
VALUE $0.01 PER SHARE, OUTSTANDING.
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE ISSUED IN
CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE REGISTRANT TO BE HELD
ON MAY 3, 2001 HAVE BEEN INCORPORATED BY REFERENCE INTO PART III, ITEMS 10, 11,
12 AND 13 OF THIS REPORT.
2
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 17
Item 3. Legal Proceedings............................................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 18
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.................... 18
Item 6. Selected Financial Data..................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 26
Item 8. Financial Statements and Supplementary Data................................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 48
PART III.
Item 10. Directors and Executive Officers of the Registrant........................................... 48
Item 11. Executive Compensation....................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 48
Item 13. Certain Relationships and Related Transactions............................................... 48
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 49
2
3
ITEM 1. BUSINESS
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 in Items 1,7,
and 7A. 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 AND CERTAIN RECENT DEVELOPMENTS
Genencor International, Inc. (the "Company") is a diversified biotechnology
company that develops and delivers products and/or services to the industrial
and consumer, agriculture and health care markets. Using an integrated set of
technology platforms, including gene discovery and functional genomics,
molecular evolution and design, and human immunology, we develop products that
deliver innovative and sustainable solutions to many of the problems of everyday
life.
Our strategy is 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. The Company currently sells over 250 product formulations containing
enzymes used in applications as diverse as removing stubborn stains from
clothing, converting starch to the sweetener in soft drinks and enhancing the
nutritional value of grains and animal feed. The Company manufactures and
markets these products through our global supply chain including eight
manufacturing facilities with over three million liters of fermentation capacity
on four continents and 14 global distribution locations. In addition, the
Company is developing a number of other products through collaborations,
including LowGen, a low allergenic protease being developed in collaboration
with The Procter & Gamble Company for use in skin-care products, 1,3
propanediol, a critical component in a high-performance polyester, Sorona being
developed in collaboration with E.I. du Pont de Nemours and Company, and vitamin
C being developed in collaboration with Eastman Chemical Company.
The Company has a strong commitment to research as an essential component
of its product development effort. The Company focuses its research and
development activities in our technology platforms to discover, optimize,
produce and deliver products to our target markets. An important part of the
Company's research and development effort is undertaken through collaborations
with third parties who are able to contribute significant technology and other
resources to the development and commercialization of products. We believe this
aspect of our research and development efforts will be important as we expand
into new markets, such as health care.
Stock Split
On July 25, 2000 the Company effected a one-for-two reverse stock split of
our common stock. Our stock began trading on a split-adjusted basis on July 28,
2000 when we concluded our initial public offering. All numbers relating to the
number of shares and price per share of common stock give effect to the
one-for-two reverse split of our common stock.
Initial Public Offering
In 2000, the Company completed its initial public offering of 8,050,000
shares of common stock at $18.00 per share, including 7,000,000 shares of common
stock issued July 28, 2000 in the initial offering and 1,050,000 shares of
common stock issued August 25, 2000 pursuant to the exercise of the
underwriters' over-allotment option. The combined net proceeds raised by the
Company from the initial offering and the over-allotment option were $132.7
million.
3
4
We have been conducting research and marketing biotechnology derived
products since 1982 when Genencor, Inc. was formed as a joint venture between
Genentech, Inc. and Corning, Inc. In 1987 Eastman Kodak Company acquired a 25%
interest in Genencor, Inc. The Company commenced in 1990 when Cultor Ltd. and
Eastman Kodak formed a joint venture in the industrial biotechnology area and
acquired Genencor, Inc. In 1993, Eastman Kodak transferred its 50% interest in
the Company to Eastman Chemical Company. In 1999, Danisco A/S acquired Cultor
Ltd., now known as Danisco Finland OY. After the Company's initial public
offering, Eastman and its affiliates and Danisco and its affiliates each own
approximately 42% of our outstanding common stock. Our majority stockholders
will therefore have the ability, acting together, to control fundamental
corporate transactions requiring stockholder approval, including the election of
a majority of our directors, approval of merger transactions involving us and
the sale of all or substantially all of our assets or other business combination
transactions. The concentration of ownership of our common stock may have the
effect of delaying or preventing a change in control favored by other
stockholders.
The Company was incorporated in Delaware in 1989. The Company's principal
executive offices are located at 925 Page Mill Road, Palo Alto, California
94304, and its telephone number at that address is (650) 846-7500.
PRODUCTS AND PRODUCT DEVELOPMENT
We currently market and sell over 250 products that are distributed to over
500 customers in over 80 countries. The continued success of our business,
however, depends on our ability to continuously develop innovative products that
meet our customers' needs in our target markets.
OUR MARKETED PRODUCTS
We group our marketed products into three general functional categories:
enzymes that break down protein, starch or cellulose. These enzyme products are
marketed for fabric care including cleaning and textile processing as well as
the emerging market of personal care. Additionally we market these classes of
enzymes in the grain processing and specialties areas of the agriculture market.
INDUSTRIAL AND CONSUMER MARKETS
Cleaning Products
The Company has been developing and commercializing enzymes for laundry
applications since the early 1980's. Our products include protein degrading
enzymes such as proteases, starch degrading enzymes such as amylases and
cellulose degrading enzymes such as cellulases. These enzymes are formulated in
granular, liquid, tablet and gel forms. Commercially available products include:
- Purafect: A family of high alkaline protease enzymes used in laundry
and dishwashing products to clean stains and soils containing proteins
such as blood, grass, milk, gravy and tomato sauce;
- Properase: A high alkaline protease enzyme available in a variety of
formulations used in low temperature wash conditions to clean stains
and soils containing proteins such as blood, grass, egg, milk, gravy
and tomato sauce;
- Purastar: A series of amylase enzyme containing products used in
laundry and dishwashing products to remove starch-based stains and
soils such as chocolate, gravy, baby food, rice and pasta;
- Puradax: A high alkaline cellulase enzyme product used in laundry
products to provide fabric care such as removal of fuzz and pills and
provide color brightening.
Textile Products
The Company has many years of experience developing, manufacturing and
marketing enzyme products for the global textile industry. Our products include
cellulase, amylase and protease enzymes for applications such as denim
finishing, biofinishing of cotton and cellulosics, desizing and treatment of
wool and silk, respectively. Additionally we market catalase enzymes used to
remove hydrogen peroxide during the textile dyeing process. These products are
available in a variety of formulations including liquid and granular forms and
at various concentrations useful under altered conditions such as high or low
temperature and high or low pH conditions. Commercially available products
include:
4
5
- IndiAge: A family of cellulase products used for denim finishing and
processing of high-performance cellulosic fibers such as lyocell;
- Primafast: An acid cellulase used in the processing of
high-performance cellulosic fibers such as lyocell;
- Optisize: A family of amylase products for low or high temperature
desizing processes;
- OxyGone Catalase: A family of catalase products used by fabric dyers
to eliminate residual hydrogen peroxide in the dyeing process;
- Protex: A family of protease products used in denim processing and the
treatment of wool and silk.
Personal Care Products
In 2000 we developed and commercialized our first product providing a
skin-care benefit to consumers. We commercialized a high-performance protease
used in Dawn Special Care, a hand dish care product sold by The Procter & Gamble
Company offering skin-softening benefits to consumers.
AGRICULTURE
Grain Processing Products
We have marketed our grain processing and specialties products to customers
who process agricultural raw materials such as barley, corn, wheat and soybeans
to produce animal feed, food and food ingredients, industrial products,
sweeteners and renewable fuels. Our grain processing products are used to make
products as diverse as beer, sweeteners and fuel ethanol. Commercially available
grain processing products include:
- Spezyme: A broad family of alpha amylase enzymes useful in high and
low temperature liquefaction of starch;
- Optidex and Optimax: A series of glucoamylase and debranching enzymes
and their blends used in the hydrolysis of starch to glucose;
- Gensweet: A family of isomerase enzymes in both soluble and
immobilized form used in the production of high fructose corn syrup;
- Optimalt and Clarase: Maltogenic enzymes used in the production of
maltose syrups;
- Distillase: A glucoamylase enzyme used in the hydrolysis of starch to
glucose for the production of alcohol;
- Fermenzyme: A product line of glucoamylase and protease enzyme blends
used in the production of alcohol.
Specialties products
Our specialties products are used in the food industry for such purposes as
to improve baking, to process proteins more efficiently and to preserve foods.
Additionally we sell products to improve animal feed and pet food, to treat
animal hides in the leather industry, to recover silver residue in photographic
film processing, and to improve pulp and paper processing. Commercially
available specialties products include:
- Multifect, Protex and Laminex: A full product line of protease,
beta-gluconase, cellulase and xylanase enzymes used for such diverse
applications as brewing, contact lens cleaning, the production of
potable alcohol, waste processing, protein processing and pet food;
- OxyGO and Fermcolase: A line of catalase and glucose oxidase enzymes
used in industrial and food processing.
PRODUCTS IN DEVELOPMENT
We are developing products for the industrial and consumer, agriculture,
and health care markets. While we have product development programs underway in
each of our target markets, to date, we have not marketed any products for the
health care market or portions of the agriculture market in which we do not
currently compete and therefore have not realized any product revenues from
these targeted markets. Our ability to develop products for these markets may be
limited by our resources, our ability to develop and maintain strategic
alliances, and the licensing and development of necessary technology. To date,
we have financed operations and product development from the sale of products,
research and development funding from our strategic partners, government grants
and short-term and long-term borrowings. We currently have a number of products
under development in our target markets including the following:
5
6
INDUSTRIAL AND CONSUMER MARKETS
Ascorbic acid. Together with Eastman Chemical Company, we have announced
our intent to commercialize an advanced process for the production of ascorbic
acid, or vitamin C, from glucose. We believe our biotechnology-driven aqueous
process will deliver the world's lowest cost ascorbic acid production process as
it eliminates several steps from the traditional chemical synthesis.
In September 2000, together with our alliance partners, we successfully
completed our five-year $30 million program supported by the Advanced Technology
Program/National Institute of Standards and Technology (ATP/NIST) for the
development of the ascorbic acid technology. The completed program included a
matching funds five-year grant from ATP/NIST of over $15 million. We have
continued to fund later stage scale up and development work internally with our
partner in anticipation of commercialization. We expect to formulate our
commercial plan in 2001.
Polymer intermediates. The chemical industry currently manufactures a
polyester intermediate, 1,3 propanediol, using a chemical process. Propanediol
is a critical component of a high-performance polyester, Sorona, which E.I. du
Pont de Nemours and Company has announced plans to commercialize in 2003. The
benefits of Sorona include improved fit and comfort, softness of touch,
dyeability, resilience and stretch recovery. This polyester has applications in
textiles and engineering thermoplastics. It is anticipated that its most
significant uses will be for making apparel, upholstery, home fashions and
carpets. Together with our strategic partner E.I. du Pont de Nemours and
Company, we have developed a novel biological process for the production of 1,3
propanediol that we believe will be less expensive than the current chemical
process.
Repeat Sequence Protein Polymers. We completed an exclusive license
agreement with Protein Polymer Technologies, Inc. for use of its proprietary
protein polymer design and production technology to develop novel biomaterials
for non-medical applications. We believe this technology and intellectual
property combined with our expertise in gene expression and molecular evolution
and design will lead to the development of biomaterials including
high-performance fibers, electronic chips, optical switches and other materials.
Low allergenic proteases. Using our i-biotech approach we are developing a
family of reduced allergenic enzymes and proteins for the personal care market
including skin-care, oral care and hair care. In conjunction with our strategic
partner, The Procter & Gamble Company, we are developing a reduced allergenic
protease for certain consumer skin-care applications.
Other new products in development in this market include a new proprietary
protease engineered for improved performance in dish care products, an oxidase
enzyme used in the fabric care market, a novel enzyme acting on synthetic fibers
and cloths for improved fabric care and manufacturing, a novel amylase which
simplifies the starch conversion process and a new enzyme targeting the feed,
brewing and protein processing sectors.
AGRICULTURE
Biomass conversion to ethanol. The agricultural industry produces a vast
amount of waste product known as biomass. Currently the agricultural industry
cannot economically convert biomass on a large scale to useful chemicals such as
ethanol. We are building a significant technology lead in the development of
advanced, low-cost cellulases and other related enzymes for the conversion of
biomass into value added chemicals. We have been awarded a $17 million partial
matching funds contract by the National Renewable Energy Laboratory/Department
of Energy to continue our efforts in developing a low cost enzyme system for the
economic conversion of biomass to ethanol. We have initiated a multifaceted
program to achieve this goal.
Bioingredients for use in the food industry. In October 2000 we entered a
four-year minimum term research and development agreement with Danisco A/S, one
of the worlds leading food ingredients companies, providing us up to $20 million
in funding . An initial product candidate has been identified in anticipation of
a project initiation in early 2001. Development activities for two additional
product targets have been undertaken and a first stage project evaluation for
additional novel bioingredients has been initiated with a projected second
project start date in mid-year 2001.
Production of enzymes from transgenic plants. We are developing a
transgenic plant system for the production of oxidase enzymes together with
Prodigene, Inc. Oxidase enzymes, such as laccase, are used in a variety of
applications including bleaching of stains on clothing and the processing of
textile fabrics. We continue to develop our lead candidate and are initiating
two additional programs.
6
7
Animal feed and nutrition. We are developing a number of key enzymes and
production systems together with our strategic alliance partner, Danisco/Finn
Feeds. Enhanced xylanase, phytase and other enzymes are being developed for use
in animal feed to increase the nutritional value of animal feed or to minimize
pollution in animal waste. A novel enzyme with improved properties for feed
applications has been identified from one of our collaborations and is being
evaluated.
In the area of new activities in the agriculture market, we have initiated
discussions with major agricultural companies as well as the FDA to use our
i-mune assay for the identification of potentially allergenic components of
foods.
HEALTH CARE
In 2000 we made the strategic decision to expand our current technology and
product focus into the high growth health care market. Since this is a recent
initiative for the Company, our product pipeline is not as robust as in our
industrial and consumer product markets. We intend to continue to invest in
internal research programs, such as the human papilloma virus project discussed
below, and to increase our development pipeline through a series of strategic
investments and collaborations in the near future. We are evaluating
opportunities in several areas including therapeutic vaccines, protease and
protease inhibitor compounds and the development of second-generation protein
therapeutics as alternatives to monoclonal antibodies.
Human papilloma virus. We are developing a compound with topical,
anti-human papilloma virus activity. Human papilloma virus has been shown to
contribute to increased incidence of cervical cancer. We have a project team
working to isolate the molecule within one of our fermentation broths that is
responsible for the observed anti-human papilloma virus activity. We have
fractionated the initial fermentation broth and have identified fractions that
contain antiviral activity as measured by our assay. We plan to continue our
development of this molecule. We are using a proprietary high-throughput
screening assay developed in collaboration with Xgene to facilitate our
characterization of the active compound.
Therapeutic vaccines. We have identified therapeutic vaccines as a
potentially important opportunity for the Company. Of particular interest is the
development of candidates targeting the most serious oncogenic viruses including
human papilloma virus, hepatitis C, hepatitis B, HIV and Epstein Barr virus. All
of these viruses represent critical human pathogens which are poorly treated
with available therapeutics. As therapeutic vaccines today represent a new class
of drugs rather than an existing market, the business path forward is as yet
undetermined. We believe that the Company has several key scientific
contributions to make in this new field including our i-mune assay which we
believe can play a central role in optimizing the elements of a vaccine
construct to appropriately up-regulate the immune system and enhance a cytotoxic
T lymphoctye (CTL) response.
We believe our i-mune mouse may also play a key role in the development of
therapeutic vaccines for oncogenic virus targets such as hepatitis C. The i-mune
mouse may serve as a unique animal model of the virus helping to clarify viral
protein and or epitopes involved in the pathogenesis of the disease as well as
screening for active compounds against the disease.
We believe our molecular evolution and design technology platform that has
been key in the Company's successful optimization and expression of protein
products can be similarly deployed to optimize a vaccine construct.
Protease and Protease Inhibitors. We intend to use our current position as
one of the world's leading protease companies to develop protease and protease
inhibitors for the health care market. We intend to access genomic based data to
identify potential novel protease drug targets. We expect to employ our
molecular evolution and design platform including our molecular modeling
capabilities to enable small molecule drug design. We believe our expertise in
enzymology, protein expression, structural biology and design of peptide based
protease inhibitors in conjunction with our large scale protein production
capabilities are highly relevant to establishing both internal and collaborative
efforts in this area.
Second-Generation Protein Therapeutics. In addition to small molecules we
hope to develop novel second-generation protein therapeutics as alternatives to
monoclonal antibodies. As part of our consumer products-based research we have
developed technology that we believe will lead to the development of drugs
having a binding activity similar to monoclonal antibodies, but with improved
profiles with respect to half life, specificity and toxicity.
7
8
RESEARCH AND DEVELOPMENT
The Company has a strong commitment to research as an essential component
of its product development effort. Technology developed in collaborations with
third parties, as well as technologies licensed from outside parties, are also
sources of potential products.
We have developed several related technology platforms that we apply in an
integrated approach we call i-biotech to the discovery, optimization, production
and delivery of our products. Our technology platforms supported the development
of current commercial products and we believe that application of these
technology platforms will generate new product candidates in all of our target
markets. Our technology platforms include:
GENE DISCOVERY AND FUNCTIONAL GENOMICS
Gene discovery is a series of techniques used to identify diverse genes
whose encoded proteins are capable of solving customer needs including the role
such proteins may play in treating a target disease. We identify genes in two
ways, either on the basis of their sequence or on the basis of the function of
their encoded protein products. With this information we identify and develop
potential products. We have completed the sequencing of several genomes of
industrially important organisms both internally and through a number of
external collaborations with academic groups. We have applied this information
to identify novel pathways for potential new products as well as to develop a
better production host for an existing biochemicals project. We have enhanced
our technical capability in the functional genomics and proteomics areas through
additional key hires and capital expenditures. Using microarrayed fungal genomes
and screening for protein structural elements, we have been able to identify
possible future product targets in new families of proteins. Similarly, by using
microarrays and transcriptional analysis we are identifying genes important to
the improved production of products by our host cell systems.
MOLECULAR EVOLUTION AND DESIGN
Molecular evolution and design is the process or set of tools by which we
accelerate the natural evolutionary process in order to engineer or optimize
gene products for their intended use including use in industrial and consumer
markets as well as second-generation biopharmaceuticals. Our high-throughput
screening capabilities have been enhanced through the addition of equipment and
personnel in our dedicated facility in Leiden, the Netherlands. These
technologies are being applied to ongoing projects within the Company, for
example, our biomass conversion to ethanol project.
In nature, evolution occurs at a very slow rate. We accelerate the
evolutionary process to engineer and evolve, or optimize, the function of the
protein we identify in the discovery process. We optimize genes by changing or
mutating their DNA sequence to produce a variant protein with a modified
function. This process is known as mutagenesis. We alter these proteins at a
single site, at multiple sites or randomly over the entire length of the protein
sequence. We employ several state-of-the-art chemical and enzymatic methods for
mutating the DNA sequence of genes. We insert these altered genes into our
proprietary host production organisms so that we can screen the variant proteins
they produce for the identification of product leads.
Generally, we can evaluate the properties of variant proteins generated
through single and multiple site mutation using high- throughput screening. When
we randomly mutate living organisms over the entire length of the protein
sequence, the number of protein variants becomes too large to be screened
efficiently. We evaluate these variants using selection. In this approach, we
make the survival of the host organism dependent upon its production of an
improved protein variant. The organisms that produce improved protein variants
survive. We then evaluate the surviving organisms using high throughput screens
to determine which variant is best. We have applied these evolution techniques
along with a proprietary screening method to develop a production host with
improved efficiency of production for a commercial protease.
Conventional mutagenesis is limited to modification of one or more genes of
a single protein. If the desired biomaterial is a small molecule or chemical the
simultaneous modification of a large number of different proteins may be
required. Conventional techniques cannot create and evaluate such a large number
of variants simultaneously. We have developed MutatorTechnology to address this
shortcoming. Using this approach, we can simultaneously modify hundreds of genes
in a host production organism and select the best host candidate in order to
produce these desired small molecules or chemicals.
HUMAN IMMUNOLOGY
The potential for human allergic response limits the application of some
engineered enzymes in the health care, agriculture and industrial and consumer
markets. To address this limitation, we have developed our human immunology, or
i-mune, platform. We are developing this platform, which includes an automated
assay that predicts human immune response and a mouse line that incorporates
genes supporting the human immune system, which we refer to as our transgenic
mouse model. We believe that this
8
9
platform will also allow us to create models for defective immune systems
associated with genetic autoimmune disorders and study disease progression.
i-mune assay. The human immune system is an extraordinary defense mechanism
capable of rapidly responding to invading pathogens and other foreign molecules.
We have developed a method to recreate the first steps of the human immune
response in an automated assay format. We take a target protein and divide it
into a series of small, easily synthesized pieces. Using our assay, we determine
if the protein contains any pieces capable of causing an immune response. We
then use the tools of our molecular evolution and design platform to modulate
the response. We have shown that we can decrease the allergenic potential of
specific proteases and have in vivo evidence that the in vitro assay accurately
predicts human allergenic results.
Using this tool, we can determine allergenic risk and reduce it without
human testing. We also believe that we can utilize this technology to develop
therapeutic vaccines in which antigens are used to stimulate an immune response
against established infections and cancer. We have shown that we can increase
the allergenic potential of specific proteins and are investigating suitable
business models for our therapeutic vaccine program.
i-mune mouse. We are also developing a series of transgenic mouse models
including a mouse with a functional human immune system. Current transgenic
mouse models either employ mice which are abnormal and do not live their full
life span or do not develop normal immune systems when supplied with normal
mouse or human immune cells. Our immune deficient mice cannot develop their own
immune system but in all other respects are normal. To date we have developed a
transgenic mouse carrying what we believe to be the critical human genes
necessary for development of a functional human immune system in immune
deficient mice. Furthermore, we have shown that these mice express the
transgenes in appropriate levels and tissue locations. We believe this
transgenic mouse can be further developed to support human hematopoietic stem
cell engraftment, resulting in a mouse model with a functional human immune
system. We believe that successful completion of this model could be an
important new system for the modeling of many human diseases.
In addition, we are developing a series of other transgenic mice expressing
certain human genes. We have developed a transgenic mouse model containing the
genetically linked DQ2 and DR3 genes. The DQ2:DR3 haplotype is commonly
associated with a series of human automimmune diseases, including multiple
sclerosis, myasthinia gravis, celiac disease and type 1 diabetes, for example,
and we believe such transgenic mice can be used as models in these autoimmune
diseases. We are pursuing academic and commercial partners for developing and
applying these model systems.
We believe the human immunology platform will allow us to determine the
allergenic potential of proteins, recommend ways to reduce their allergenic
potential, and using our molecular evolution and design platform, develop new
materials with reduced allergenic response profiles without human testing. We
believe these technology platforms will lead to products in all of our target
markets.
Biomaterial production systems
A key element of our i-biotech approach is the concurrent application of
our biomaterial production systems platform with our other technology platforms.
Biomaterial production systems consist of: (a) host production organisms that we
have adapted to accept genes from other organisms, or foreign genes, and produce
the proteins encoded by these foreign genes; and (b) a proprietary process for
growing our host production organisms, which we refer to as our proprietary
fermentation processes. We grow, or ferment, our host production organisms under
controlled conditions, allowing these organisms to grow, divide and efficiently
produce optimized proteins. In our 18 years of operations, we have developed
numerous host production organisms backed by patented technology and process
know-how.
Each host production organism has a unique set of requirements that must be
met before the organism can accept a foreign gene. For each host production
organism, we have identified the key elements that must be added to a foreign
gene to enable the host production organism to accept the gene and to produce
the gene's product, the desired protein. To produce the desired product we
cultivate the host production organisms using our proprietary fermentation
processes.
Our relationship with Protein Polymer Technologies, Inc. has provided
additional patented technology to this platform for expressing novel
biomaterials such as repeat sequence protein polymers having unique functional
characteristics.
9
10
Metabolic pathway engineering
Metabolic pathway engineering is a process we use to modify our host
production organisms to produce small molecules and chemicals, or biochemicals.
Microorganisms make biochemicals through sequences of enzyme-catalyzed
reactions, referred to as pathways. In order to produce these biochemicals, we
often add new pathways or parts of pathways from a variety of organisms into our
host production organisms.
Our approach to metabolic pathway engineering, referred to as DesignPath,
is the integration of a variety of tools including genomics and functional
genomics. We begin with known metabolic pathways of our host production
organisms and then reconstruct the pathways based upon our analysis. Then we add
new genes, identified through our gene discovery and functional genomics
platform and optimized through our molecular evolution and design platform.
Continued progress towards commercialization of vitamin C and 1,3 propanediol
reaffirms our belief in the commercial viability of producing biomaterials that
compete with existing petroleum based processes. This program integrates these
discovery technologies into a powerful solution to improving expression levels
of products and utilization of raw materials.
Formulation delivery systems
Once we have developed a desired biomaterial, we typically formulate it in
a manner customized for the intended use of the customer. Our patented
formulations range from stable liquids to multi-layer granular formulations,
including our Enzoguard granular products, which have sophisticated properties
such as delayed release and oxidation barriers. These formulations protect
biomaterials against harsh chemical and environmental conditions. In addition,
we have designed and developed highly efficient fluidized coating equipment and
processes to make our formulated products. In 2000, we launched a new,
differentiated granule formulation for our cleaning products. This formulation
provides greater compatibility with our customer's formulation as well as
enhanced performance.
STRATEGIC ALLIANCES
A key part of our strategy has been and will continue to be forming
strategic alliances with industry leaders in our target markets. In forming
commercial alliances we seek partners that share our desire and commitment to
grow, hold or have access to significant market share in the target market and
are willing to fund or participate in research and development efforts. We also
fund external alliances to access, apply and develop technologies that are
strategic to our target markets. Some of our key strategic alliances are as
follows:
The Procter & Gamble Company. Our alliance with The Procter & Gamble
Company began in 1984 and continues to the present. Through this relationship we
have conducted joint research and development leading to the commercialization
of five engineered protease enzymes. This relationship has enabled the launch of
major new brand initiatives involving their flagship detergent products Tide and
Ariel. As a result of the success of this relationship, we are now exploring
product opportunities in the skin-care markets.
Our alliance with The Procter & Gamble Company is evidenced by three
agreements. We are party to a research agreement and a technology transfer
agreement, each dated June 30, 2000. These two agreements expire on June 30,
2003. Together, the agreements provide a framework for cooperation in areas to
be agreed, particularly laundry and cleaning products. We are also party to a
commercialization agreement dated April 25, 2000 relating to the development of
proteins with reduced allergic potential for skin-care products. This agreement
provides for up to $15.0 million in milestone payments and royalties as well as
product sales contingent on the successful development and commercialization of
one or more products. This agreement remains in effect through execution of a
supply agreement or expiration of cooperative product development efforts.
E.I. du Pont de Nemours and Company. On September 1, 1995, we entered into
a collaborative research and development agreement with E.I. du Pont de Nemours
and Company to develop and commercialize biologically derived 1,3 propanediol, a
key intermediate for the production of a high-performance polyester. The
agreement provides for research funding and technical milestone payments up to
$17 million over the term of the agreement as well as commercial terms,
including royalties and commercial milestones, contingent on the success of the
research program and commercialization of the product. To date, the alliance has
already met two key technical milestones and is meeting its intended
commercialization timeline. In February 2001 this agreement was extended until
December 31, 2001.
Eastman Chemical Company. Established in 1994, this alliance represents
over a $30 million investment in the development of continuous biocatalytic
processes for the production of a variety of chemicals using renewable
resources. In 1995, the Advanced Technology Program/National Institute of
Standards and Technology awarded our partnership a matching funds five-year
grant of over $15 million. Together with our alliance partners, we successfully
completed this program in September 2000. We have
10
11
continued to fund scale-up and development of the vitamin C process and with our
partner, Eastman Chemical Company, have announced our intention to commercialize
the first product from this alliance, vitamin C.
Prodigene, Inc. In 1997, we acquired rights to a portion of Prodigene,
Inc.'s technology for the production of proteins in plants. We also fund
research and development activities in fields of interest and have taken an
equity position in Prodigene, Inc. Under the agreement, Prodigene, Inc. granted
us exclusive licenses to commercialize products and processes developed during
the term of the agreement that are in the agreement field, subject to
compensation or a royalty to Prodigene, Inc. for commercialized products. This
alliance is designed to develop unique transgenic plant production capabilities
for proteins. We have recently added two additional proteins to the elected
research program and will fund their development.
Xgene Corporation. In 1999, we began developing human skin models for
pharmaceutical and personal care applications with Xgene Corporation. We have
access to their proprietary human skin models and are developing in vitro-based
assays for screening applications.
In September 2000 we expanded our research collaboration with Xgene
Corporation. Under the terms of the expanded research agreement Xgene will
complete development of an in vitro skin equivalent test useful for testing
anti-human papilloma virus compounds. Additionally Xgene will develop a second
in vitro assay useful for testing compounds for the treatment of human skin
inflammation. We will fund Xgene's research activities over two years in
exchange for exclusive rights to use the assays developed under the agreement.
Enchira. On May 17, 2000, we entered into a license agreement with Enchira
acquiring an exclusive license to know-how and intellectual property relating to
Enchira's "chimeragenesis" technology for our fields of interest. Under this
agreement, we have committed license fees and milestone payments up to $1.4
million. Commercial terms such as royalties and commercialization milestones are
contingent on the successful development and commercialization of products.
Enchira's rights in its chimeragenesis technology have been challenged in an
arbitration filed by Maxygen, Inc. In March 2001 the arbitrator found against
Enchira; however, the arbitrator has not specified the remedy at this time.
In the event our rights to the Enchira technology are materially and
adversely affected as a result of the final decision of the arbitrator, the
license fees are refundable.
National Renewable Energy Laboratory/Department of Energy. In April of 2000
the National Renewal Energy Laboratory of the Department of Energy awarded the
Company a $17 million partial matching funds contract to develop enabling enzyme
systems essential for the enzymatic conversion of biomass to ethanol. A
three-year contract, with yearly renewals subject to termination, was executed
in June 2000. This project has been fully staffed and is underway.
Danisco A/S. In October 2000 we entered into a four-year minimum term
research and development agreement with Danisco A/S, one of the world's leading
food ingredients companies, providing up to $20 million in funding to the
Company. The collaboration is directed at the development and production of
innovative biotechnology derived products for use in the food industry. The
first joint project target has been identified and a project plan put in place
with anticipated initiation in early 2001. Further targets for additional joint
projects have been identified and are undergoing evaluation with a target for a
second project initiation in mid-year 2001.
RESEARCH EXPENSES
A major portion of our operating expenses to date has been related to the
research and development of products. During 2000, 1999 and 1998, our total
research and development expenses were $50.9 million, $44.0 million and $40.2
million, respectively. Of these expenses, an estimated $13.2 million, $15.8
million and $10.9 million, respectively, represent total expenses incurred in
conjunction with research collaborations partially funded by various partners.
Our research and development efforts have been the primary source of our
products. We intend to accelerate our investment in research and development as
an essential component of our business strategy. As of December 31, 2000, we had
212 full time employees in technology, 76 of whom hold Ph.D. degrees, and 1 who
holds an M.D. degree.
COMPETITION
We face significant competition in the industrial and consumer and
agriculture markets in which we currently compete. As we develop products for
our newly identified opportunities in the health care, agriculture and
industrial and consumer markets, we face a host of new competitors, including,
for example, biotechnology and pharmaceutical companies.
11
12
In the industrial and consumer market, some competitors may have a stronger
market position and greater financial resources than we do. Specifically, in
cleaning enzymes, Novozymes A/S, our largest competitor, has more product
offerings and a greater market share than we do. In specialty enzymes, DSM N.V.
and Novozymes A/S, have greater market shares and more product offerings than we
do.
Our products and development programs target the industrial and consumer,
agriculture and health care markets. There are many commercially available
products for each of these markets and for the specific consumer problems we may
attempt to address or for the specific diseases we may attempt to address in
product development. A large number of companies and institutions are spending
considerable amounts of money and resources to develop products in our target
markets.
Competition in our current and target markets is primarily driven by:
- The ability to establish and maintain long-term customer relationships
in our target markets;
- Ability to develop, maintain and protect proprietary products and
technologies;
- Technology advances that lead to better products;
- Product performance, price, features and reliability;
- Timing of product introductions;
- Manufacturing, sales and distribution capabilities;
- Technical support and service; and
- Breadth of product line.
Any product we make in the future will also compete with products offered
by our competitors. If our competitors introduce data that show improved
characteristics of their products, improve or increase their marketing efforts
or lower the price of their products, sales of our products could decrease. We
also cannot be certain that any products we develop in the future will compare
favorably to products offered by our competitors, or that our existing or future
products will compare favorably to any new products that are developed by our
competitors. Our ability to be competitive also depends upon our ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes.
PROPRIETARY RIGHTS
We consider the protection of our proprietary technologies and products to
be important to the success of our business. We rely on a combination of
patents, licenses, trade secrets and trademarks to establish and protect our
proprietary rights in our technologies and products. As of December 31, 2000,
our intellectual property portfolio included 3,400 worldwide owned and licensed
patents and patent applications. Our intellectual property portfolio includes
rights in technologies ranging from specific products to host production
organisms and technology covering research tools such as high-throughput gene
discovery, molecular evolution, immunological screens and metabolic pathway
engineering.
We may not be able to obtain the patents or licenses to technologies that
we will need to develop products for our target markets. Patents may be issued
that would block our ability to obtain patents or to operate our business.
Generally, patents issued in the United States have a term of 17 years from the
date of issue for patents issued from applications submitted prior to June 8,
1995. Patents issued in the United States from applications submitted on or
after June 8, 1995 have a term of 20 years from the date of filing of the
application. Patents in most other countries have a term of 20 years from the
date of filing the patent application. Patent applications are usually not
published until 18 months after they are filed. The publication of discoveries
in scientific or patent literature tends to lag behind actual discoveries by at
least several months. As a result, there may be patent applications or
scientific discoveries we are not currently aware of.
RAW MATERIALS
All raw materials are commercially available products from a number of
independent sources; greater than 65% have alternate sources of supply, with the
remaining supply base being commercially available and interchangeable. Greater
than 50% of all purchases are on one-year contracts, 30% are on semi-annual
programs, and the remainder are on 60-90 day fixed pricing structures.
12
13
MANUFACTURING AND SUPPLY CAPABILITIES
We have a global supply chain consisting of eight manufacturing facilities
with over three million liters of fermentation capacity on four continents and
14 distribution locations around the globe. Our supply organization has a proven
capability to meet customer demands. This involves quality certification, such
as ISO 9002, multi-site product qualification; delivery capabilities and special
custom supply requirements. We produce materials in locations and with processes
that allow us to minimize manufacturing and distribution costs, inventory and
capital investment.
TRADEMARKS
The following are trademarks or registered trademarks of the Company and
its subsidiaries: GENENCOR, GENENCOR INTERNATIONAL, LOWGEN, INDIAGE, PRIMAFAST,
OPTISIZE, PURAFECT, PROPERASE, PURASTAR, PUARDAX, SPEZYME, OPTIDEX, DISTALLASE,
OPTIMAX, FERMENZYME, GENSWEET, OPTIMALT, CLARASE, MULTIFECT, FERMCOLASE,
LAMINEX, OXYGO, I-MUNE, I-BIOTECH, MUTATORTECHNOLOGY, DESIGNPATH, OXYGONE,
PROTEX and ENZOGUARD. The following registered trademarks are owned by the
indicated companies: SORONA (E.I. du Pont de Nemours and Company); DAWN SPECIAL
CARE, TIDE and ARIEL (The Procter & Gamble Company).
MAJOR CUSTOMERS
Our five largest customers collectively accounted for approximately 58% of
our 2000 revenues, with our largest customer, The Procter & Gamble Company,
accounting for over 30% of such revenues. Our five largest customers are The
Procter & Gamble Company, Unilever N.V., Benckiser N.V., Cargill Inc. and the
FinnFeeds Division of Danisco A/S. Any one of these customers may reduce their
level of business with us. Should our largest customer or any mix of our other
large customers decide to reduce or terminate its business with us, our revenues
and profitability would decline significantly.
GEOGRAPHICAL INFORMATION
The financial information concerning geographical areas set forth in footnote 14
of the financial statements contained in Item 8 is incorporated herein by
reference.
REGULATORY ENVIRONMENT
Product regulation- Current Products
Regulatory agencies regulate our products according to their intended use.
The Food and Drug Administration (FDA) regulates food, feed, cosmetic and
pharmaceutical products based on their application. The FDA and the
Environmental Protection Agency regulate non-drug biologically derived products.
The U.S. Department of Agriculture regulates plant, plant pest and animal
products. The Environmental Protection Agency regulates biologically derived
chemicals not within the FDA's jurisdiction or the jurisdiction of other
regulatory agencies. Although the food and industrial regulatory process can
vary significantly in time and expense from application to application, the
timelines generally are shorter in duration than the drug regulatory process and
range from three months to three years.
The European regulatory process for biologically derived products has
undergone significant change in the recent past, as the European Union attempts
to replace national regulatory procedures with a consistent European Union
regulatory standard. Some national regulatory oversight remains although most
countries generally accept either a United States or a European clearance
together with associated data and information for a new biologically derived
product.
Regulatory approval of our products in Asian countries having registration
processes ranges from three months to three years. Some Asian countries rely on
United States and European product registrations.
Product regulation- Health Care
In the United States, all phases of the development and commercialization
of pharmaceuticals are regulated primarily under federal law and subject to
rigorous FDA oversight and approval processes. Before a pharmaceutical candidate
can be tested in humans, it must be studied in laboratory experiments and in
animals to provide data to support its potential safety and benefits. This data
is submitted to the FDA in an Investigational New Drug Application (IND) to gain
their approval to test the material in humans. If the FDA finds the IND to be
acceptable, then and only then can clinical trials in humans begin to
demonstrate the pharmaceutical is safe and effective for its intended use.
13
14
These clinical trials are divided into three separate phases, which may
overlap, can take many years, and are very expensive. The clinical trials are
also subject to extensive regulation. In Phase 1, studies are conducted with a
relatively small number of healthy human subjects or patients to assess the
safety of the product, dose tolerance, pharmacokinetics, metabolism,
distribution and excretion. In Phase 2, the product is given to a limited target
patient population to begin to assess efficacy. If the results of these first
two phases are favorable, then Phase 3 studies are conducted in the target
patient population with a large enough number of subjects to provide sufficient
data to statistically establish safety and efficacy of the product. At the
completion of Phase 3, the Company will submit a New Drug Application or a
Biologics License Application, through which the FDA reviews the clinicals
package and the facilities used to manufacture, fill, test and distribute the
product. If the FDA judges all data, facilities and systems to be satisfactory
and in compliance, they will approve the pharmaceutical for the indications
supported by the clinical study. Any changes in manufacturing or additional
claims after FDA approval is obtained require additional regulatory review and
possibly additional clinical studies.
Licensing procedures in Europe are comparable to those in the United
States, and for pharmaceuticals is done through a centralized procedure which
leads to a single license for the entire European Union. In addition, each
product must receive individual pricing approvals before it can be marketed.
Environmental regulation
We also are subject to federal, state, local and foreign environmental laws
and regulations, including those governing the handling and disposal of
hazardous wastes and other environmental matters. Our research, development and
manufacturing activities involve the controlled use of hazardous materials,
including chemical, radioactive and biological materials. Although we believe
that our safety procedures for handling and disposing of these materials comply
with applicable regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of an
accident, we could be held liable for resulting damages. We do not expect that
compliance with the governmental regulations to which we are subject will have a
material effect on our capital expenditures, earnings or competitive position.
Genetically modified microorganisms
Genetically modified microorganisms and products derived from these
organisms are regulated in many countries around the world. In the United
States, we voluntarily comply with the National Institutes of Health Guidelines
for Research Involving Recombinant DNA Molecules at all of our facilities. We
also comply with the EPA's regulation of intergeneric microorganisms under the
Toxic Substances Control Act. We design our production organisms and processes
to ensure full compliance with regulatory principles and practices in both
manufacturing and commercial venues regardless of the location. By using
production organisms that are classified as Good Industrial Large Scale Practice
or Biosafety Class I organisms we are able to maximize environmental safety
while minimizing regulatory concerns. Through this strategy, we have been
successful in gaining regulatory clearance to use our genetically modified
microorganisms in our factories in the United States, Belgium and Finland and in
our research facilities in the United States and the Netherlands.
Animal Welfare Act
The Animal Welfare Act governs the humane handling, care, treatment and
transportation of some animals used in United States research activities. Mice,
including the mice used in connection with our i-mune transgenic mouse model,
are currently not subject to regulation under the Animal Welfare Act. However,
the U.S. Department of Agriculture, which enforces the Animal Welfare Act, is
presently considering changing the regulations issued under the Animal Welfare
Act to include mice within its coverage. The Animal Welfare Act imposes a wide
variety of specific regulations on producers and users of animal subjects, most
notably personnel, facilities and statistical standards, cage size, feeding,
watering and shipping conditions and environmental enrichment methods.
Currently, we house no mice at our facilities. We believe that our housing
facility vendors and external toxicology laboratories are in compliance with the
Animal Welfare Act.
Compliance
To be able to commercialize our products around the world, we need to
ensure that they are safe and suitable for their intended use and meet
applicable regulatory requirements. Their manufacture also must comply with all
existing regulations at our manufacturing sites. In order to meet this need, we
have an experienced internal regulatory and safety department that is involved
in projects from the earliest stage.
14
15
EMPLOYEES
As of December 31, 2000 we had 1,077 regular employees of our wholly owned
entities, plus 456 employees in our joint venture in Wuxi, China. We plan to
expand our research and development and business operations and hire additional
staff as we expand our technology and market opportunities and establish new
strategic alliances and customer relationships. We continue to search for
qualified individuals with interdisciplinary training and flexibility to address
the various aspects and applications of our technologies. In the United States,
33 of our employees are represented by a labor union. Several of our non-United
States locations are also covered by collective labor agreements, including
employees in Argentina, Belgium, Finland, France, Germany and the Netherlands.
We strive to maintain strong working relationships with all the employee
representatives.
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 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 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 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.
15
16
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;
- Fluctuations in geographic conditions including currency and other
economic conditions such as economic crises in Brazil 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-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
16
17
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. The potential impact of unasserted claims of infringement, as
may from time to time become known to the Company, are difficult to assess with
certainty. 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.
ITEM 2. PROPERTIES
We lease or own 21 facilities throughout the world, including eight
manufacturing facilities located in Cedar Rapids, Iowa; Rochester, New York;
Elkhart, Indiana; Hanko and Jamsankoski, Finland; Brugge, Belgium; Jiangsu
Province, China and Province De Cordoba, Argentina, and 13 other administrative
offices around the world. We lease our principal offices located in 128,000,
43,944, and 29,000 square feet of space in Palo Alto, California, Rochester, New
York, and Leiden, the Netherlands, respectively. The leases for these facilities
expire in 2017, 2009, and 2019, respectively.
Information concerning each of our manufacturing facilities is as follows:
SITE OWNERSHIP SQUARE FOOTAGE
---- --------- --------------
CEDAR RAPIDS Owned 80.0 acres; 135,000 sq. ft.
Genencor International, Inc.
Cedar Rapids, Iowa
ELKHART Owned 6.0 acres leased; 89,000 sq. ft.
Genencor International Indiana, Inc.
Elkhart, Indiana
HANKO Owned 27.1 acres leased; 178,000 sq. ft.
Genencor International Ltd.
Hanko, Finland
BRUGGE Owned 11.5 acres; 251,000 sq. ft.
Genencor International BVBA
Brugge, Belgium
JAMSANKOSKI Owned 7.1 acres; 94,000 sq. ft.
Genencor International Ltd.
Jamsankoski, Finland
ARROYITO Owned 7.4 acres; 99,000 sq. ft.
Genencor International Argentina, S.A.
Prv. De Cordoba, Argentina
RCDC Leased, 50 year term, 22.6 acres; 70,000 sq. ft.
Genencor International, Inc. expiring 2040, with
Rochester, New York right to purchase for
$1.00
WUXI Governmental land use 8.3 acres; 361,000 sq. ft.
Genencor (Wuxi) Bio-Products Co., Ltd. rights to use land
Jiangsu Province, P.R. of China
17
18
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the Nasdaq Stock Market on July
28, 2000 under the symbol "GCOR." The following sets forth the high and low sale
prices per share of common stock , as reported on the Nasdaq Stock Market,
during the periods indicated.
Price
--------------------
High Low
------- -------
Year ended December 31, 2000:
Third Quarter (commencing July 28)........................... $ 36.63 $ 18.00
Fourth Quarter............................................... $ 30.00 $ 12.00
The number of shares of our common stock outstanding as of March 16, 2001
was 59,909,436. As of such date there were approximately 6,300 stockholders of
the company's common stock.
We paid cash dividends to our common stockholders of $10.0 million in both
1997 and 1998. We did not pay any dividends on the Company's common stock in
1999 or 2000. We currently expect to retain our future earnings, if any, for use
in the operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future.
On April 28, 2000, the Company allowed certain key employees to accelerate
the exercise of 1,856,500 stock options granted under the Genencor
International, Inc. Stock Option and Stock Appreciation Right Plan and purchase
restricted shares of common stock at a price of $9.70 per share. The restricted
shares were purchased through the use of notes receivable from the employees.
The vesting provisions of the restricted common stock agreements are the same as
those of the stock options under the Plan. The shares purchased are held in
escrow by the Company until the note has been fully paid. The notes receivable
are due and payable over four years commencing January 27, 2002. Interest is
charged on the notes at a fixed rate of 6.71%. The notes receivable contain a
provision that allows the Company to purchase the restricted common stock under
certain conditions. The total notes receivable for common stock is $18,008,050.
The Company relied on the exemption provided by Section 4 (2) of the Securities
Act of 1933 in connection with this transaction. There were no other
unregistered sales of equity securities for the year ended December 31, 2000.
18
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements, the notes to our
consolidated financial statements, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report. We derived the statement of operations and balance sheet data for the
five-year period ended December 31, 2000 from our audited consolidated financial
statements. Historical results are not indicative of the results to be expected
in the future.
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Amounts in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Product revenue....................... $ 300,978 $ 305,637 $ 279,492 $ 293,643 $ 235,041
Fees and royalty revenues............. 15,252 10,965 9,619 16,699 24,951
------------ ------------ ------------ ------------ ------------
Total revenues........................ 316,230 316,602 289,111 310,342 259,992
Operating expenses:
Cost of product sold.................. 172,265 176,756 167,604 179,112 164,440
Research and development.............. 50,858 43,955 40,205 37,306 33,989
Sales, marketing and business 27,539 24,564 24,394 25,392 22,837
development...........................
General and administrative............ 25,818 22,984 22,940 17,995 16,027
Amortization of intangible assets..... 10,478 10,032 9,554 9,055 9,941
Restructuring and related charges..... -- 7,500 -- -- --
Other (income)/expense................ (2,391) (845) (342) 938 (37)
------------ ------------ ------------ ------------ ------------
Total operating expenses.............. 284,567 284,946 264,355 269,798 247,197
------------ ------------ ------------ ------------ ------------
Operating income........................ 31,663 31,656 24,756 40,544 12,795
Non operating (income)/expenses:
Investment income..................... (16,577) -- (990) -- --
Interest expense...................... 10,474 10,487 10,727 11,633 12,419
Interest income....................... (7,752) (750) (557) (446) (1,084)
Other (income)/expense................ -- -- (1,442) 1,100 (5,381)
------------ ------------ ------------ ------------ ------------
Total non operating (income)/expenses. (13,855) 9,737 7,738 12,287 5,954
Income before provision for income taxes
and extraordinary item.................... 45,518 21,919 17,018 28,257 6,841
Provision for income taxes.............. 14,108 5,294 3,279 5,106 6,036
------------ ------------ ------------ ------------ ------------
Net income before extraordinary item.... 31,410 16,625 13,739 23,151 805
Extraordinary loss on early
extinguishment of debt
(Net of income tax benefit of $1,302) -- -- -- -- 1,954
------------ ------------ ------------ ------------ ------------
Net income............................ $ 31,410 $ 16,625 $ 13,739 $ 23,151 $ (1,149)
============ ============ ============ ============ ============
Net income available to holders of
common stock.......................... $ 24,135 $ 9,350 $ 6,464 $ 15,876 $ (8,424)
============ ============ ============ ============ ============
Earnings per common share before
extraordinary item:
Basic............................... $ 0.44 $ 0.19 $ 0.13 $ 0.32 $ (0.13)
============ ============ ============ ============ ============
Diluted............................. $ 0.42 $ 0.19 $ 0.13 $ 0.32 $ (0.13)
============ ============ ============ ============ ============
Earnings per common share:
Basic............................... $ 0.44 $ 0.19 $ 0.13 $ 0.32 $ (0.17)
============ ============ ============ ============ ============
Diluted............................. $ 0.42 $ 0.19 $ 0.13 $ 0.32 $ (0.17)
============ ============ ============ ============ ============
Weighted average common shares:
Basic............................... 54,504,333 50,000,000 50,000,000 50,000,000 50,000,000
============ ============ ============ ============ ============
Diluted............................. 56,855,215 50,000,000 50,000,000 50,000,000 50,000,000
============ ============ ============ ============ ============
Dividends per common share............ -- -- $ 0.20 $ 0.20 --
============ ============ ============ ============ ============
19
20
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- ---------
(AMOUNTS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents.................. $ 200,591 $ 39,331 $ 12,792 $ 10,310 $ 13,597
Working capital............................ 248,236 82,414 84,871 68,485 63,084
Total assets............................... 642,932 499,300 496,478 490,279 525,606
Total long-term debt and capital leases.... 150,215 146,080 158,000 171,000 194,000
Total liabilities.......................... 238,706 246,239 243,515 249,819 280,610
Redeemable preferred stock................. 155,200 147,925 140,650 133,375 126,100
Total shareholders' equity................. 249,026 105,136 112,313 107,085 118,896
A number of items impact the comparability of the selected consolidated
financial data:
- In 2000, we completed an initial public offering of 8,050,000 shares
of common stock at $18.00 per share, including 7,000,000 shares of
common stock issued July 28, 2000 in the initial offering and
1,050,000 shares of common stock issued August 25, 2000 pursuant to
the exercise of the underwriters' over-allotment option. The combined
net proceeds raised from the initial offering and the over-allotment
option were $132.7 million.
- In 2000, we realized a gain on the sale of marketable equity
securities of $16.6 million, $10.2 million tax-effected, and
recognized back royalties in connection with a settlement of patent
infringement claims of $3.5 million, $2.1 million tax-effected.
- In 1999, we acquired an 80% ownership interest in Genencor (Wuxi)
Bio-Products Company, Ltd. We accounted for this transaction by the
purchase method of accounting.
- In 1999, we implemented a plan to restructure our manufacturing
facility in Belgium.
- In 1996, we acquired from Solvay S.A. the outstanding shares of common
stock of Solvay Enzymes Inc., Solvay Enzymes Verwaltungs GmbH, Solvay
Enzimas S.A., and 50% of the outstanding shares of Kyowa Solzyme K.K.
We accounted for this transaction by the purchase method of
accounting.
- In 1996, we extinguished certain long-term debt.
ITEM 7. 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 elsewhere in this report.
This discussion may contain forward-looking statements that involve certain
risks and uncertainties. Our actual results could differ materially from those
anticipated by forward-looking information due to many factors, including those
identified below and elsewhere in this report.
OVERVIEW
We are engaged in the discovery, development, manufacturing and marketing
of biotechnology products for 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 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. In 2000 and
1999, we derived approximately 51% and 60% of our revenues from our foreign
operations, respectively.
20
21
SUMMARY OF RESULTS
In 2000, net income available for common shareholders increased to $24.1
million, or $0.42 per diluted share, from $9.4 million, or $0.19 per diluted
share in 1999. Net income in 2000 was favorably impacted by a gain from the sale
of marketable equity securities. The after-tax impact to net income for this
one-time gain was $10.2 million. Additionally, the 1999 period was impacted by a
$7.5 million restructuring charge associated with our manufacturing facility in
Belgium. The after-tax impact to net income for this was $6.2 million.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2000 and 1999
Revenues. Total revenues in 2000 decreased $0.4 million to $316.2 million
in 2000 from 1999, due to a decrease in product revenues.
Product Revenues. Product revenues in 2000 decreased $4.6 million, or 2%,
to $301.0 million in 2000 from 1999. Without the impact of the stronger U.S.
dollar against foreign currencies, primarily the Euro, product revenues in 2000
would have increased by approximately 3%, to $316.2 million. In 2000, unit
volume/mix grew 6%, while average prices fell 2%. Volume increased primarily due
to increased protease enzyme sales to a major customer and increased sales
volume with our textile and grain processing customers.
Regionally, North American product revenues increased $13.2 million, or
10%, to $145.0 million driven primarily by sales to our cleaning customers, but
European product revenues declined $22.8 million, or 18%, to $100.5 million due
primarily to lower cleaning sales and the impact of currency exchange rates. Our
product revenues in Latin America increased $3.4 million, or 20%, to $20.7
million in 2000 from 1999 due primarily to the increased sales to our largest
Latin American customer. Product revenues in Asia increased $1.7 million, or 5%,
to $34.9 million in 2000 from 1999 due mainly to growth in China, Indonesia, and
Taiwan.
Fees and Royalty Revenues. Fees and royalty revenues increased $4.3
million, or 39%, to $15.3 million in 2000 from 1999. Funded research revenues in
2000 were $10.8 million and $10.7 million in 1999. 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 $3.1 million to $5.2 million in 2000 from 1999
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 decreased $3.0 million, or 35%, to $5.6 million
in 2000 from 1999 primarily due to a $2.0 million milestone payment received in
1999 under one of our collaborative research and development agreements.
Royalties increased $4.3 million in 2000 from 1999 due primarily to the
successful resolution of a patent infringement issue with a customer, for which
one-time royalties of $3.5 million were received during the first quarter of
2000. These one-time royalties pertain to previous sales, using patented
technology, made by the customer to third parties. The related intellectual
property agreement provides for future royalties, of which $0.7 million were
received during the remainder of 2000.
Operating Expenses
Cost of Product Sold. Cost of product sold decreased $4.5 million, or 3%,
to $172.3 million in 2000 from 1999 even though our expanded sales volume/mix
increased costs $4.6 million. This reduction in cost of product sold was driven
primarily by reductions due to the impact of the stronger U.S. dollar against
foreign currencies of $9.3 million, the sale of lower cost inventories of
approximately $1.2 million, and a decrease in long-term incentive compensation
expense of $1.4 million. These reductions were partially offset by increases in
our distribution costs of $2.8 million.
Gross Profit and Margins from Product Sold. Gross profit from product sold
in 2000 remained relatively constant, decreasing $0.2 million to $128.7 million
in 2000 from 1999. This overall decrease was caused by significant product
revenue related factors including a 6% increase in volume/mix being processed
through our plants and an average price decline of 2%. These product revenue
related factors were combined with a decrease in cost of product sold due to
reductions in our manufacturing costs partially offset by increases in our
distribution costs. This net increase in gross profit was partially offset by a
$5.9 million decrease due to the
21
22
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
42.8% in 2000 from 42.2% in 1999.
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 $6.9 million, or 16%, to $50.9
million in 2000 from 1999 as we increased our investment in technology and
product development for new markets, hired additional internal staff, and
established additional outside collaborations to support our health care and
other initiatives. The increase in 2000 from 1999 was partially offset by a
decrease in long and short-term incentive compensation expense of $0.9 million.
As a part of total research and development expenses, estimated expenses related
to research collaborations partially funded by customers decreased approximately
$2.6 million, or 16%, to $13.2 million in 2000 from 1999.
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 $2.9 million,
or 12%, to $27.5 million in 2000 from 1999, primarily due to increases in
consulting and outside services of $1.7 million, salaries and benefits of $0.3
million, long-term incentive compensation of $0.1 million, and in the provision
for doubtful accounts at our Chinese affiliate of $0.6 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 $2.8
million, or 12%, to $25.8 million in 2000 from 1999 due primarily to increased
third party services of $1.1 million, increased salaries and benefits of $0.9
million, and increased costs related to new office space in Rochester, New York
of approximately $0.5 million. These increases were partially offset by
decreased long and short-term incentive compensation expense of approximately
$0.6 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 increased $0.5
million, or 5%, to $10.5 million in 2000 from 1999 due primarily to amortization
of goodwill resulting from the acquisition of an 80% interest in Genencor (Wuxi)
Bio-Products Company, Ltd.
Restructuring and Related Charges. During 1999, we engaged in a plan to
restructure our facility in Belgium. As a result of this plan, restructuring and
related charges of $7.5 million were recorded in our 1999 operating expenses.
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 increased by $1.6 million to $2.4 million in 2000 from 1999 due
mainly to an increase in foreign currency transaction gains.
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, we recorded deferred
compensation expense of approximately $7.1 million. We recorded this amount as a
component of shareholders' equity and will amortize it as a charge to operations
over the vesting period of the options. In total, amortization of deferred
compensation expense in 2000 was $1.6 million. These amounts were reported in
our statement of operations as follows (in millions):
Cost of product sold................................... $ 0.1
Research and development............................... 0.3
Sales, marketing and business development.............. 0.6
General and administrative............................. 0.6
-------------
Total amortization of deferred compensation expense $ 1.6
============
Non Operating Expense and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities. During 2000, we realized a $16.6 million gain on
the sale of marketable equity securities.
22
23
Interest Income. Interest income increased $7.0 million to $7.8 million in
2000 from 1999 due mainly to earnings on proceeds from our initial public
offering as well as earnings from increased cash investments resulting from the
sale of marketable equity securities.
Income Taxes. Several factors affected our effective income tax rate in
2000, 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 2000 was 31.0% compared with 24.2% in 1999. The 2000 effective rate
includes the effect of the $16.6 million pre-tax income resulting from the sale
of marketable equity securities in the United States, as well as $6.4 million of
interest income in the United States, both of which were tax effected at a
marginal rate of 38.6%. The 2000 effective rate also reflects a reevaluation of
our ability to utilize certain deferred tax assets, which resulted in the
release of approximately $0.6 million in valuation allowances to net income. We
are 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.
More information regarding our income tax position can be found in the notes to
our consolidated financial statements.
Comparison of the Years Ended December 31, 1999 and 1998
Revenues. Total revenues for 1999 increased $27.5 million, or 10%, to
$316.6 million from 1998, primarily due to an increase in product revenues.
Product Revenues. Product revenues in 1999 increased $26.1 million, or 9%,
to $305.6 million from 1998. Without the impact of the stronger U.S. dollar
against the Euro in 1999 versus 1998, product revenues in 1999 would have
further increased by 2%, to $310.2 million. In 1999, unit volume grew by 13%,
while price fell 2%. Volume increased primarily due to increased protease enzyme
sales of approximately $20.0 million to a major customer and the successful
launch by a customer of a new enzyme-based dishwasher-cleaning product of
approximately $11.0 million. In both 1999 and 1998, our two largest customers
accounted for 39% of our product revenues.
For 1999 and 1998, The Procter & Gamble Company, Unilever N.V., and
Benckiser N.V. were our three largest customers.
Regionally, our 1999 product revenues in Europe showed a $14.0 million, or
13%, increase to $123.3 million from 1998 due primarily to the increased
protease sales to our largest customer, while our revenues in Asia benefited
from increased market penetration of $6.4 million and the acquisition of an
ownership interest in Genencor (Wuxi) Bio-Products, which reported $6.8 million
in product revenues in 1999. In total, product revenues in Asia increased $13.2
million, or 66%, to $33.2 million from 1998. North America also showed an
increase of $5.2 million, or 4%, to $131.8 million driven by our grain
processing sales, but Latin America product revenues declined by $6.3 million,
or 27%, to $17.3 million due to the economic crisis in Brazil.
The strengthening of the U.S. dollar caused a reduction in our product
revenues of $5.0 million in 1999 from 1998. However, because we incur most of
the costs associated with our Euro revenues in Euros, we minimize the impact on
net income.
Fees and Royalty Revenues. Overall, funded research revenues increased $1.6
million, or 18%, to $10.7 million in 1999 from 1998. Our funded research revenue
as it relates to U.S. Government collaborations decreased $0.4 million, or 16%,
to $2.1 million from in 1999 from 1998 primarily due to a decrease in funding
provided by the Advanced Technology Program of the National Institute of
Standards and Technology to develop low allergenicity enzyme products. Funded
research revenues provided by customers increased $2.0 million, or 30%, to $8.6
million in 1999 from 1998 primarily due to reaching the second of three
milestone targets under one of our collaborative programs.
Operating Expenses
Cost of Product Sold. Cost of product sold increased $9.2 million, or 5%,
to $176.8 million in 1999 from 1998 based on increased product volume of $13.3
million and costs associated with the establishment of new warehouse facilities
in Singapore of $0.5 million, partially offset by favorable impacts of cost
reduction efforts of $1.3 million and a decrease in long-term incentive
compensation expense of $2.1 million.
Gross Profit and Margins from Product Sold. Gross profit from product sold
increased $17.0 million, or 15%, to $128.9 million in 1999 from 1998. This
increase was caused by significant product revenue-related factors including a
13% increase in unit volume and a price decline of 2%. These product
revenue-related factors were combined with an increase of 5% in cost of product
sold due to
23
24
increased unit volume and costs associated with the establishment of new
warehouse facilities in Singapore. These increases were partially offset by
favorable impacts of cost reduction efforts and a decrease in long-term
incentive compensation expense.
As a result of these factors, gross margin on product revenue increased to
42.2% in 1999 from 40.0% in 1998.
Research and Development. These expenses increased $3.8 million, or 9%, to
$44.0 million in 1999 from 1998 as we increased our investment in technology
platforms and enzyme discovery for new markets. The increase in 1999 from 1998
was substantially offset by a decrease in long-term incentive compensation
expense. As a part of total research and development expenses, estimated
expenses related to research collaborations partially funded by customers
increased by $5.0 million, or 46%, to $15.8 million in 1999 from 1998.
Sales, Marketing and Business Development. Total expenses remained
relatively constant in 1999 from 1998.
General and Administrative. In total, these expenses were consistent from
1998 to 1999. Increases, due primarily to strategic consulting fees of $1.0
million and Year 2000 system compliance consulting fees of $0.2 million, were
offset by decreased long-term incentive compensation expense.
Amortization of Intangible Assets. Amortization expense increased $0.5
million, or 5%, to $10.0 million in 1999 from 1998 due to amortization of the
intangible assets resulting from the acquisition of Genencor (Wuxi) Bio-Products
Company, Ltd.
Restructuring and Related Charges. During 1999, we engaged in a plan to
restructure our facility in Belgium. As a result of this plan, restructuring and
related charges of $7.5 million were recorded in our 1999 operating expenses.
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 increased by $0.5 million to $0.8 million in 1999 from 1998 due
mainly to an increase in foreign currency transaction gains.
Non Operating Expense and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities. During 1998 we realized a $1 million gain on the
sale of an equity investment.
Other Expense and Income. Other non operating income, net of other
expenses, decreased $1.4 million in 1999 from 1998 due to the non-recurring
nature of certain items recognized in 1998. These non-recurring events related
to the settlement of patent infringement litigation of $1.0 million, and to a
lesser extent, the sale of assets related to divested product lines of $0.4
million.
Income Taxes. Several factors affected our effective income tax rate in
1999, including the statutory income tax rate in foreign jurisdictions,
amortization of intangible assets which is not deductible for tax purposes, and
research and experimental tax credits. The effective income tax rate for 1999
was 24.2% compared with 19.3% in 1998. The 1998 effective rate includes the
effect of the utilization of research and experimental tax credits totaling $2.5
million. We are 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. More information regarding our income tax position can be found
in the notes to our consolidated financial statements.
RESTRUCTURING ACTIVITIES
In July 1999, we implemented a plan to restructure our manufacturing
facility in Belgium. Two primary factors drove our decision: developments
leading to a production overcapacity in the enzyme market and operating costs of
the Belgian plant were considerably higher than in any of our other plants.
There were 58 positions eliminated as a result of this restructuring, with
staggered termination dates of July 1999 through January 2001. We immediately
notified all affected employees of the restructuring plan. As of December 31,
2000, 57 employees had terminated their employment with us. As a result of this
plan, we recorded restructuring and related charges of $7.5 million, or $6.2
million after taxes, in 1999. These charges relate primarily to employee
severance and related social costs of $4.9 million, a curtailment loss of $0.8
million under a related defined benefit pension arrangement, and $1.8 million
for manufacturing equipment that we deemed impaired as it would no longer be
utilized after the restructuring. We determined the impairment charge based on
remaining book value as we believe there is no market in which to sell the
specific assets. At December 31, 2000 and 1999, we had a remaining severance
liability related to this restructuring of $1.9 million and $2.9 million,
respectively. As of March 31, 2000, we had completed our activities under this
plan and no adjustments were made to the original plan.
24
25
In May 1999, we acquired an 80% ownership interest in Genencor (Wuxi)
Bio-Products Company, Ltd. located in Wuxi, China, for a total cash purchase
price of $9.9 million. We accounted for the acquisition under the purchase
method. Therefore, we allocated the purchase price to the acquired assets and
liabilities based upon management estimates of fair value. We are amortizing
goodwill of $7.5 million on a straight-line method over ten years. As we intend
to significantly improve the efficiency of the facility, which will continue to
operate as a manufacturing site in the region, we recorded a provision to
restructure the entity of $3.2 million with an offset included in goodwill. The
provision further includes estimated employee-related costs of $2.2 million,
demolishing costs of $0.3 million for pre-existing structures on the site that
we do not intend to use, and costs to effect the restructuring of $0.1 million.
The provision further includes a reserve for incurred but unrecorded liabilities
of the acquired entity of $0.6 million. As of December 31, 2000, there was
approximately $0.5 million charged to this restructuring provision for
employee-related costs. At December 31, 2000 and 1999, we had a remaining
liability related to this restructuring of $2.7 million and $3.2 million,
respectively. We will reallocate to goodwill any reduction in the anticipated
cost to restructure the facility.
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.
During the third quarter of 2000, we completed an initial public offering
of 8,050,000 shares of common stock at $18.00 per share. This included 7,000,000
shares of common stock issued July 28, 2000 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. We anticipate using the net proceeds from the
offering for research and development activities, capital expenditures,
financing possible acquisitions, working capital and other general corporate
purposes.
We believe that our current cash and cash equivalent balances plus funds to
be provided from our current year operating activities will satisfy our funding
needs over the next twelve months. We believe that the proceeds from our initial
public offering in July 2000, including those received from the underwriters'
exercise of their over-allotment option in August 2000, plus funds to be
provided from our operating activities will adequately fund our anticipated
long-term needs thereafter. 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 December 31, 2000, cash and cash equivalents totaled $200.6 million,
including $132.7 million of net proceeds from our initial public offering, which
we invested in short-term instruments including commercial paper, U.S. treasury
bills, institutional money market funds and bank deposits.
Cash provided by operations was $47.3 million in 2000, $58.2 million in
1999, and $46.1 million in 1998. The decrease of $10.9 million in 2000 from
1999, and the increase of $12.1 million in 1999 from 1998 were 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 $9.0 million in 2000, $20.1 million
in 1999, and $21.2 million in 1998. Spending in each of these years was driven
by capital expenditures, which totaled $25.6 million in 2000 compared with $21.3
million in 1999 and $22.9 million in 1998. A significant portion of this
spending included process improvement projects at our manufacturing and research
and development facilities and information technology enhancements. Capital
projects in process at December 31, 2000 relate primarily to further
manufacturing process improvements and information technology system
enhancements.
Cash used by investing activities decreased by $11.1 million in 2000 from
1999. This was driven primarily by proceeds from the sale of marketable
securities in 2000 offset by one-time events that occurred during 1999, such as
completion of a sale/leaseback transaction, the acquisition of Genencor (Wuxi)
Bio-Products, and an equity investment of $1.5 million in Prodigene, Inc.
During 1998, we constructed a new technology and regional operations center
in Leiden, the Netherlands. We included the cost of this project in our cash
paid for purchases of property, plant and equipment under cash flows for
investing activities in our 1998 consolidated financial statements. In 1999, we
sold this facility to ABN AMRO Onroerend Goed Lease en Financieringen B.V. for
$4.2 million and leased it back for a period of 20 years.
25
26
To expand our industrial enzyme manufacturing and distribution presence in
Asia, we invested $9.9 million to acquire an 80% interest in a joint venture in
Wuxi, China, in 1999.
Cash provided by financing activities of $123.7 million during 2000
resulted primarily from the initial public offering of our 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. Cash used
by financing activities was $9.7 million in 1999 and $23.0 million in 1998,
driven primarily by payments against our outstanding borrowings on our revolving
credit facilities, which were fully repaid as of December 31, 1999, and
dividends of $10.0 million paid to our common shareholders in 1998. No dividends
were paid to common shareholders during 2000 and 1999. 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.
At December 31, 2000 we had a $30 million line of credit with a commercial
bank, which was available for general corporate purposes. At December 31, 2000
there were no borrowings under the agreement. Subsequent to December 31, 2000,
we entered into a $48 million revolving credit agreement with a syndicate of
banks, which is available for general corporate purposes. The facility grants us
$32 million of three year committed borrowings and $16 million of one year
committed borrowings, which may be renewed each year. The combined facility
carries a facility fee of 0.28% on the amount of unborrowed principal and
contains various financial covenants including a debt to total capitalization
requirement.
Our long-term debt consists primarily of $140.0 million in senior notes
issued in 1996 to certain institutional investors. These notes bear interest at
6.82% and are payable in annual installments of $28.0 million commencing in
March 2002. We are currently in compliance with all of the financial covenants
included in the senior note agreement. For more information, please refer to the
notes to our consolidated financial statements.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended, requires all derivatives to be recognized as assets or liabilities on
the balance sheet and measured at fair value. Changes in the fair value of
derivatives should be recognized in either net income or other comprehensive
income, depending on the designated purpose of the derivative. This statement is
effective for us on January 1, 2001. As of December 31, 2000, we had no
derivatives and, based on our current risk management strategies, we believe
implementation of this statement will not have a material effect on the
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency risk and interest rate risk are the primary sources of our
market risk. Foreign operations, mainly denominated in Euros, account for
approximately 51% of our 2000 revenues. 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 manage the foreign currency exposures
that remain through the use of foreign currency forward contracts and currency
options. We do not use these instruments for speculative purposes.
As of December 31, 2000, cash and cash equivalents totaled $200.6 million.
Of this amount, $37.8 million was denominated in Euros. The remainder or $162.8
million was primarily denominated in U.S. Dollars. Short-term debt outstanding
at December 31, 2000 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 average annual U.S. Dollar and Japanese Yen denominated
revenues of approximately $40.0 million and $4.0 million, respectively. We use
forward currency contracts and option contracts to hedge these anticipated
revenues. At December 31, 2000, there were no forward contracts or option
contracts outstanding.
26
27
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 effect the interest
earned on our cash equivalents, short-term investments, and long-term
investments.
Foreign currency Exposure
We conduct business throughout the world. We derived approximately 51% of
our 2000 revenues and approximately 67% of our 2000 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.
27
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Genencor International, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in shareholders'
equity, and of cash flows present fairly, in all material respects, the
financial position of Genencor International, Inc. and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
January 30, 2001
Rochester, New York
28
29
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
2000 1999
----------- -------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 200,591 $ 39,331
Trade accounts receivable (less allowance for doubtful accounts of $2,574 in
2000 and $1,814 in 1999)..................................................... 46,913 48,081
Inventories.................................................................... 46,938 50,716
Prepaid expenses and other current assets...................................... 16,299 19,266
Deferred income taxes.......................................................... 1,544 1,104
----------- -----------
Total current assets...................................................... 312,285 158,498
Property, plant and equipment, net............................................... 216,983 215,218
Investments and other assets..................................................... 41,947 37,340
Intangible assets, net........................................................... 64,049 80,448
Deferred income taxes............................................................ 7,668 7,796
----------- -----------
Total assets.............................................................. $ 642,932 $ 499,300
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................................. $ 4,689 $ 5,774
Current maturities of long-term debt........................................... -- 10,000
Accounts payable and accrued expenses.......................................... 47,217 43,506
Interest payable on long-term debt............................................. 2,387 2,392
Accrued employee benefits...................................................... 9,417 11,104
Deferred income taxes.......................................................... 339 3,308
----------- -----------
Total current liabilities................................................. 64,049 76,084
Long-term debt................................................................... 144,360 142,486
Capital lease obligation......................................................... 5,855 3,594
Deferred income taxes............................................................ 12,754 14,388
Other long-term liabilities...................................................... 10,897 8,596
Minority interest................................................................ 791 1,091
----------- -----------
Total liabilities......................................................... 238,706 246,239
----------- -----------
Commitments and contingencies.................................................... -- --
Redeemable preferred stock:
71/2% cumulative series A preferred stock, without par value, authorized
1,000 shares, 970 shares issued and outstanding............................. 155,200 147,925
----------- -----------
Shareholders' equity:
Common stock, par value $0.01 per share, 200,000,000 shares authorized,
59,906,500 and 50,000,000 shares issued and outstanding at December 31, 2000
and 1999, respectively...................................................... 599 500
Additional paid-in capital..................................................... 344,092 186,326
Deferred stock-based compensation.............................................. (5,560) --
Notes receivable for common stock.............................................. (18,008) --
Accumulated deficit............................................................ (23,965) (48,100)
Accumulated other comprehensive loss........................................... (48,132) (33,590)
----------- -----------
Total shareholders' equity................................................ 249,026 105,136
----------- -----------
Total liabilities, redeemable preferred stock and shareholders' equity.... $ 642,932 $ 499,300
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
29
30
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
----------- ------------ ------------
Revenues:
Product revenue................................. $ 300,978 $ 305,637 $ 279,492
Fees and royalty revenues....................... 15,252 10,965 9,619
----------- ------------ ------------
Total revenues............................. 316,230 316,602 289,111
Operating expenses:
Cost of product sold............................ 172,265 176,756 167,604
Research and development........................ 50,858 43,955 40,205
Sales, marketing and business development....... 27,539 24,564 24,394
General and administrative...................... 25,818 22,984 22,940
Amortization of intangible assets............... 10,478 10,032 9,554
Restructuring and related charges............... -- 7,500 --
Other (income)/expense.......................... (2,391) (845) (342)
------------ ------------ ------------
Total operating expenses................... 284,567 284,946 264,355
----------- ------------ ------------
Operating income.................................. 31,663 31,656 24,756
Non operating (income)/expenses:
Investment income............................... (16,577) -- (990)
Interest expense................................ 10,474 10,487 10,727
Interest income................................. (7,752) (750) (557)
Other (income)/expense.......................... -- -- (1,442)
----------- ------------ ------------
Total non operating (income)/expenses...... (13,855) 9,737 7,738
------------ ------------ ------------
Income before provision for income taxes.......... 45,518 21,919 17,018
Provision for income taxes........................ 14,108 5,294 3,279
----------- ------------ ------------
Net income........................................ $ 31,410 $ 16,625 $ 13,739
=========== ============ ============
Net income available to holders of common stock... $ 24,135 $ 9,350 $ 6,464
=========== ============ ============
Earnings per common share:
Basic........................................ $ 0.44 $ 0.19 $ 0.13
=========== =========== ============
Diluted...................................... $ 0.42 $ 0.19 $ 0.13
=========== =========== ============
Weighted average common shares:
Basic........................................ 54,504,333 50,000,000 50,000,000
=========== ============ ============
Diluted...................................... 56,855,215 50,000,000 50,000,000
=========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
30
31
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
NOTES
RECEIVABLE ACCUMULATED
ADDITIONAL DEFERRED FOR OTHER TOTAL
COMMON PAID-IN STOCK-BASED COMMON ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL COMPENSATION STOCK DEFICIT LOSS EQUITY
------- --------- ------------ ------- ----------- ------------- -------------
Balances, December 31, 1997................. $ 500 $ 196,326 $ -- $ -- $ (63,914) $ (25,827) $ 107,085
Comprehensive income:
Net income................................ 13,739 13,739
Other comprehensive income:
Foreign currency translation............ 9,129 9,129
Unrealized holding losses (($365)
pre-tax).............................. (365) (365)
----------
Other comprehensive income.............. 8,764
----------
Comprehensive income...................... 22,503
Preferred stock dividend accrued............ (7,275) (7,275)
Common stock dividend paid.................. (10,000) (10,000)
------- --------- ---------- ------- --------- --------- ----------
Balances, December 31, 1998................. 500 186,326 -- -- (57,450) (17,063) 112,313
------- --------- ---------- ------- --------- --------- ----------
Comprehensive income:
Net Income................................ 16,625 16,625
Other comprehensive loss:
Foreign currency translation............ (21,325) (21,325)
Unrealized holding gains ($7,610 pre-tax) 4,798 4,798
----------
Other comprehensive loss................ (16,527)
----------
Comprehensive income...................... 98
Preferred stock dividend accrued............ (7,275) (7,275)
------- --------- ---------- ------- --------- --------- ----------
Balances, December 31, 1999................. 500 186,326 -- -- (48,100) (33,590) 105,136
------- --------- ---------- ------- --------- --------- ----------
Comprehensive income:
Net Income................................ 31,410 31,410
Other comprehensive loss:
Foreign currency translation............ (10,299) (10,299)
Unrealized holding gains ($3,050 pre-tax) 1,645 1,645
Adjustment for gains included in
earnings (($9,589) pre-tax)........... (5,888) (5,888)
----------
Other comprehensive loss................ (14,542)
----------
Comprehensive income...................... 16,868
Exercise of employee stock options.......... 19 17,989 (18,008) --
Issuance of common stock.................... 80 132,665 132,745
Deferred stock-based compensation........... 7,112 (7,112) --
Amortization of deferred stock-based
compensation................................ 1,552 1,552
Preferred stock dividend accrued............ (7,275) (7,275)
------- --------- ---------- --------- --------- --------- ----------
Balances, December 31, 2000................ $ 599 $ 344,092 $ (5,560) $ (18,008) $ (23,965) $ (48,132) $ 249,026
======= ========= ========== ========= ========= ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
31
32
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
--------- ---------- ---------
Cash flows from operating activities:
Net income........................................ $ 31,410 $ 16,625 $ 13,739
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 35,038 35,558 34,113
Amortization of deferred stock-based
compensation.................................. 1,552 -- --
Loss (gain) on disposition of property, plant
and equipment.............................. 406 1,927 (61)
Gain on sale of marketable securities......... (16,577) -- --
Gain on sale of business...................... -- -- (399)
(Increase) decrease in operating assets:
Trade accounts receivable.................. (571) (6,777) (1,174)
Inventories................................ 1,892 9,999 1,083
Prepaid expenses and other current assets.. (4,664) 1,352 (1,833)
Investments and other assets............... (5,842) 1,693 (928)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses...... 5,207 4,180 (9,624)
Interest payable on long-term debt......... (5) 4 (31)
Accrued employee benefits.................. (1,637) (8,980) 5,683
Other...................................... 1,074 2,599 5,514
--------- ---------- ---------
Net cash provided by operating activities.. 47,283 58,180 46,082
--------- ---------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment........ (25,592) (21,274) (22,855)
Purchases of intangible assets.................... (1,100) -- --
Proceeds from the sale of property, plant and
equipment......................................... 88 463 685
Proceeds from sale of business.................... -- -- 984
Proceeds from the sale of marketable securities... 17,568 -- --
Sale-leaseback of facility........................ -- 4,194 --
Reimbursement of purchase price................... 1,331 --
Acquisition of business, net of cash acquired..... -- (3,293) --
Payment to acquire equity interest in affiliate... -- (1,500) --
--------- ---------- ---------
Net cash used in investing activities...... (9,036) (20,079) (21,186)
--------- ---------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock........ 132,745 -- --
Net payments on revolving credit facilities....... -- (8,000) (13,000)
Net proceeds (payments) on notes payable of foreign
affiliate......................................... 968 (1,708) --
Payment of long-term debt......................... (10,000) -- --
Dividends paid.................................... -- -- (10,000)
--------- ---------- ---------
Net cash provided by (used in) financing
activities........................................ 123,713 (9,708) (23,000)
--------- ---------- ---------
Effect of exchange rate changes on cash............. (700) (1,854) 586
--------- ---------- ---------
Net increase in cash and cash equivalents........... 161,260 26,539 2,482
Cash and cash equivalents-- beginning of year....... 39,331 12,792 10,310
--------- ---------- ---------
Cash and cash equivalents-- end of year............. $ 200,591 $ 39,331 $ 12,792
========= ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
32
33
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- DESCRIPTION OF THE COMPANY AND ACCOUNTING POLICIES
Genencor International, Inc. and subsidiaries (the Company) integrates the
tools of biotechnology in meeting the needs of its customers. The Company's
current products include novel enzymes used in the cleaning, grain processing
and textile industries. The principal geographical markets for these products
are North America, South America, Europe and Asia.
Significant accounting policies are as follows:
Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. Investments in affiliates in which the Company has
the ability to exercise significant influence, but not control, are accounted
for by the equity method. All other investments in affiliates are carried at
cost. Intercompany transactions are eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, commercial
paper and bank deposits with original maturity dates of three months or less
from the date of purchase.
Revenue Recognition
The Company's revenue recognition policies comply with the guidance
contained in the provisions of SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." Revenues consist of product revenues and
fees and royalty revenues. Fees and royalty revenues consist primarily of funded
research, technology and license fees and royalties.
Product Revenue
Revenue from product sales is recognized upon shipment to customers.
Funded Research
Research funding revenues result from collaborative agreements with various
parties, including the U.S. Government, whereby the Company performs research
activities and receives revenues that partially reimburse expenses incurred.
Under such agreements the Company retains a proprietary interest in the products
and technology developed. These expense reimbursements primarily consist of
direct expense sharing arrangements and milestone payments. Revenues related to
expense sharing arrangements are recorded as the underlying expenses are
incurred. Milestone payments are contingent upon successful completion of
research activities and are recognized upon satisfaction of those contingencies.
Up front research funding payments are recognized as revenues on a straight-line
basis over the term of the underlying research agreement.
Technology and License Fees
Fees from the sale of technology are recognized upon completion of the
required technology transfer and substantial satisfaction of any performance
related responsibilities. License fees are recognized on a straight-line basis
over the term defined in
33
34
the license agreement. In the event there is no defined term, such as with
permanent licenses, license fees are recognized upon substantial satisfaction of
any performance related responsibilities.
Royalty Revenue
Royalty revenue is recognized in accordance with the underlying contract
terms.
Research and Development
Research and development costs are expensed as incurred. Research and
development expenses include expenses for services rendered related to the
Company's funded research activities.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
All property, plant and equipment is stated at acquisition cost.
Depreciation for financial statement purposes is calculated using the
straight-line method over the estimated useful lives of the assets. Land
improvements and buildings are depreciated over 10-40 years, with a weighted
average estimated useful life of 24 years, and machinery and equipment over 3-15
years, with a weighted average estimated life of 13 years. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the length of the applicable lease term. Property under capital lease is
amortized over the lease term. Maintenance and repair expenditures are expensed
as incurred. Included in machinery and equipment is computer hardware and
software developed or obtained for internal use which is amortized over 3-5
years.
Intangible Assets
Intangible assets consist of patents, licenses, technology and the excess
of cost over the net assets of acquired businesses, which are amortized on a
straight-line basis over their remaining useful lives. Patents and trademarks
are amortized over 15 years, technology over 10-20 years, with a weighted
average estimated useful life of 12 years, the excess of cost over the net
assets of an acquired business over 10-20 years, with a weighted average
estimated useful life of 16 years, and other intangibles over 4-20 years, with a
weighted average estimated useful life of 15 years.
Impairment of Long-Lived Assets
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate their carrying amounts may not be
recoverable. This is accomplished by comparing the expected undiscounted future
cash flows of the assets with the respective carrying amount as of the date of
assessment. Should aggregate future cash flows be less than the carrying value,
a write-down would be required, measured as the difference between the carrying
value and the fair value of the asset. Fair value is estimated either through
independent valuation or as the present value of expected discounted future cash
flows. If the expected undiscounted future cash flows exceed the respective
carrying amount as of the date of assessment, no impairment is recognized.
Foreign Currency
All assets and liabilities of non-U.S. subsidiaries are translated at
exchange rates in effect at the balance sheet dates. Translation gains and
losses are included in determining comprehensive income. All income statement
amounts are translated at the average of the daily exchange rates in effect
during each month.
The Company, on occasion, uses forward exchange contracts and options to
hedge its exposure in foreign currencies. Option and forward exchange contracts
are used to minimize the impact of foreign currency fluctuations on the
Company's revenues and costs and are not used to engage in speculation. At
December 31, 2000 and 1999, the Company had no options or forward exchange
contracts outstanding.
Foreign currency transaction net gains are included in other operating
income/expense. Total foreign currency transaction net gains were $2,837 in
2000, $824 in 1999 and $166 in 1998.
34
35
Financial Instruments
The determination of fair value of financial instruments, consisting of
cash and cash equivalents, accounts receivable, obligations under accounts
payable, accrued expenses, and debt instruments is based on interest rates
available to the Company and comparisons to quoted market prices for the same or
similar issues. At December 31, 2000 and 1999, the fair value of these financial
instruments approximated carrying value.
Investments in Marketable Equity Securities
All of the Company's investments in marketable equity securities are
considered available-for-sale and are recorded at fair value within other
current assets. Unrealized gains and losses, calculated as the difference
between fair value and cost of the security on a specific identification basis,
are recorded as a component of accumulated other comprehensive loss, net of tax.
Gross unrealized gains on available-for-sale securities were $746 at
December 31, 2000 and $7,283 at December 31, 1999. The fair market value of
available-for-sale securities was $823 at December 31, 2000 and $8,351 at
December 31, 1999. The deferred tax liability related to these unrealized gains
was $519 at December 31, 2000 and $2,812 at December 31, 1999.
Investment Income
During 2000, the Company realized a gain on the sale of marketable
securities of $16,577. This amount is included in investment income as part of
total non-operating income for the period.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." This standard requires, among other things, recognition of
deferred tax assets and liabilities for future tax consequences, measured by
enacted rates attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities, and net operating loss
and tax credit carryforwards to the extent that realization of such benefits is
more likely than not.
Major Customers
In 2000, two customers accounted for 42% of sales and 39% of accounts
receivable. In 1999, two customers accounted for 39% of sales and 36% of
accounts receivable. In 1998, two customers accounted for 39% of sales and 28%
of accounts receivable.
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income" as of January 1, 1998. This statement establishes
standards for reporting and presentation of comprehensive income and its
components. This statement requires reporting by major components and as a
single total, all changes in shareholders' equity from nonshareholder sources.
Adoption of this statement did not impact the Company's consolidated financial
position, results of operations or cash flows. The Company has chosen to display
comprehensive income in the Consolidated Statements of Changes in Shareholders'
Equity.
Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings per Share," which 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 income available to common shareholders,
undeclared and unpaid cumulative preferred stock dividends of $7,275 are
deducted for each year presented.
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 earnings of the Company. As there were no dilutive securities
in 1999 and 1998, there was no effect on the numerator or denominator between
the computations of basic and diluted earnings per common share in those years
presented. As a result of stock options outstanding under the Company's Stock
Option and Stock Appreciation Right Plan, there were dilutive securities in
2000. The weighted-average impact of these has been reflected in the calculation
of diluted earnings per share.
35
36
The following table reflects the calculation of basic and diluted earnings per
common share for the year ended December 31:
2000 1999 1998
----------- ----------- -------------
Net income $ 31,410 $ 16,625 $ 13,739
Less: Accrued dividends on preferred stock (7,275) (7,275) (7,275)
----------- ----------- -------------
Net income available to holders of common stock $ 24,135 $ 9,350 $ 6,464
=========== =========== =============
Weighted average common shares:
Basic 54,504,333 50,000,000 50,000,000
Effect of stock options 2,350,882 -- --
----------- ----------- -------------
Diluted 56,855,215 50,000,000 50,000,000
----------- ----------- -------------
Earnings per common share:
Basic $ 0.44 $ 0.19 $ 0.13
=========== =========== =============
Diluted $ 0.42 $ 0.19 $ 0.13
=========== =========== =============
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended, requires all derivatives to be recognized as assets or liabilities on
the balance sheet and measured at fair value. Changes in the fair value of
derivatives should be recognized in either net income or other comprehensive
income, depending on the designated purpose of the derivative. This statement is
effective for the Company on January 1, 2001. As of December 31, 2000, the
Company had no derivatives and, based on the Company's current risk management
strategies, the Company believes implementation of this statement will not have
a material effect on the consolidated financial statements.
2 -- ACQUISITION
During May 1999, the Company acquired an 80% ownership interest in Genencor
(Wuxi) Bio-Products Company, Ltd. located in Wuxi, China for a total cash
purchase price of $9.9 million. The acquisition has been accounted for under the
purchase method. Goodwill is being amortized on a straight-line basis over ten
years. The Company's share of the acquired entity's results of operations has
been consolidated with the Company's results of operations since the acquisition
date. Based on the Company's allocation of the purchase price for the
acquisition, the net assets acquired consisted of the following as of May 1999:
Working capital............................................. $ 500
Property, plant and equipment............................... 7,700
Goodwill.................................................... 7,500
Long-term liabilities....................................... (4,700)
Minority interest........................................... (1,100)
---------
$ 9,900
=========
Included in working capital acquired at the time of acquisition was a
provision to restructure the entity of $3.2 million to improve the manufacturing
efficiency of the facility which will continue to operate as a manufacturing
site in the region. The provision includes estimated employee-related costs of
$2.2 million, demolishing costs of $0.3 million for pre-existing structures on
the site that the Company does not intend to use, and costs to effect the
restructuring of $0.1 million. The provision further includes a reserve for
incurred but unrecorded liabilities of the acquired entity of $0.6 million. As
of December 31, 2000, there was approximately $0.5 million charged to this
restructuring provision for employee-related costs. At December 31, 2000 and
1999 the Company had a remaining liability related to this restructuring of $2.7
million and $3.2 million, respectively. Any reduction in the anticipated cost to
restructure the facility will be reallocated to goodwill.
3 -- RESTRUCTURING AND RELATED CHARGES
During July 1999, the Company engaged in a plan to restructure its facility
in Belgium. This decision was driven primarily by two factors: developments
leading to a production overcapacity in the enzyme market and operating costs of
the Belgian plant that were considerably higher than in any of the Company's
other plants. There were 58 positions eliminated as a result of this
restructuring, with staggered termination dates of July 1999 through January
2001. All affected employees were notified immediately of the restructuring
plan. As of December 31, 2000, 57 employees had terminated their employment with
the Company. As a result of the
36
37
plan, restructuring and related charges of $7.5 million were recorded in the
Company's operating earnings in 1999. These charges were primarily driven by
employee severance and related social costs of $4.9 million, a curtailment loss
of $0.8 million under a related defined benefit pension arrangement, and $1.8
million for manufacturing 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
market in which to sell the specific assets. At December 31, 2000 and 1999, the
Company had a remaining severance liability related to this restructuring of
$1.9 million and $2.9 million, respectively. As of March 31, 2000, we had
completed our activities under this plan and no adjustments were made to the
original plan.
4 -- FEES AND ROYALTY REVENUES
Fees and royalty revenues include the following for the years ended
December 31:
2000 1999 1998
--------- --------- --------
Funded research.......................................... $ 10,848 $ 10,671 $ 9,035
License fees............................................. -- -- 227
Royalties................................................ 4,404 95 157
Other.................................................... -- 199 200
--------- --------- --------
Fees and royalty revenues.............................. $ 15,252 $ 10,965 $ 9,619
========= ========= ========
In January 2000, the Company, in settlement of certain patent infringement
claims with one of its customers, received $3.5 million for payment of back
royalties.
5 -- INVENTORIES
Inventories consist of the following at December 31:
2000 1999
----------- -----------
Raw materials..................................................... $ 7,699 $ 5,730
Work-in-progress.................................................. 7,874 8,024
Finished goods.................................................... 31,365 36,962
----------- -----------
Inventories..................................................... $ 46,938 $ 50,716
=========== ===========
6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
2000 1999
----------- -----------
Land and buildings................................................ $ 122,685 $ 116,448
Machinery and equipment........................................... 257,156 243,533
Construction-in-progress.......................................... 10,246 13,598
----------- -----------
390,087 373,579
Less: Accumulated depreciation.................................... (173,104) (158,361)
----------- -----------
Property, plant and equipment, net.............................. $ 216,983 $ 215,218
=========== ===========
Depreciation expense was $24,560 in 2000, $25,526 in 1999 and $24,559 in
1998.
Construction-in-progress at December 31, 2000, includes primarily process
improvement projects at our manufacturing and research and development
facilities as well as information technology enhancements.
In December 2000, the Company leased a wastewater treatment plant to
service its Belgian manufacturing facility. The agreement is being accounted for
as a capital lease.
During 1999, the Company sold its facility in Leiden, the Netherlands.
There was no gain recorded on the sale of these assets, which are being leased
back from the purchaser over a period of 20 years. This lease is being accounted
for as a capital lease.
37
38
These assets under capital lease are included in property, plant and
equipment as follows at December 31:
2000 1999
----------- -----------
Land and buildings................................................ $ 13,426 $ 10,815
Less: Accumulated depreciation.................................... (2,206) (1,839)
----------- -----------
Capital lease assets, net....................................... $ 11,220 $ 8,976
=========== ===========
The Company entered into a 10-year operating lease during 1999 for office
space in Rochester, New York. Under provisions of the lease agreement, lease
payments commenced in January 2000 and escalate 5.6% as of January 2003 and
another 5.3% as of January 2007. The Company is recording rent expense under
this lease on a straight-line basis over the lease term. The Company may elect
to terminate the lease effective as of January 2007, for which it must provide
written notice by December 2005.
The Company leases certain other facilities and equipment under operating
leases. Rent expense relating to all operating leases was $3,478 for 2000,
$2,994 for 1999 and $3,722 for 1998.
Non-cancelable future minimum rental payments under significant leases
consist of the following for the years ending December 31:
OPERATING CAPITAL
--------- ---------
2001............................................................... $ 3,073 $ 579
2002............................................................... 3,037 563
2003............................................................... 2,915 544
2004............................................................... 2,907 541
2005............................................................... 2,892 541
Thereafter......................................................... 34,895 7,098
--------- ---------
Total minimum lease payments....................................... $ 49,719 9,866
=========
Less: Amount representing interest................................. (4,011)
---------
Capital lease obligation........................................... $ 5,855
=========
7 -- INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
2000 1999
----------- -----------
Patents, licenses and other......................................... $ 47,096 $ 46,978
Technology.......................................................... 41,928 41,928
Excess of cost over net assets of acquired businesses............... 50,960 57,057
----------- -----------
139,984 145,963
Less: Accumulated amortization...................................... (75,935) (65,515)
----------- -----------
Intangible assets, net............................................ $ 64,049 $ 80,448
=========== ===========
Amortization expense was $10,478 in 2000, $10,032 in 1999 and $9,554 in
1998.
38
39
8 -- NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following at December 31:
2000 1999
---------- -----------
6.82% senior notes with payments of $28,000 due annually,
commencing in 2002...................................................... $ 140,000 $ 140,000
Note payable to Gist-Brocades (G-b), as part of a 1995
acquisition, to finance the Company's purchase of a note
from G-b between a third party and G-b. Interest at 5% is
payable on the note only to the extent interest is paid to
the Company by the third party. Principal was paid in full in
June 2000............................................................... -- 10,000
Notes payable of the Company's Chinese affiliate with
principal payments due in 2001 and 2002. Interest rates on
the notes range from 5.58% to 6.53%..................................... 8,555 7,586
Other..................................................................... 494 674
---------- -----------
149,049 158,260
Less: Current maturities.................................................. (4,689) (15,774)
---------- -----------
Long-term debt.......................................................... $ 144,360 $ 142,486
========== ===========
The senior note agreements contain various financial covenants which, among
other things, require the maintenance of certain financial ratios. The most
significant of these relate to: debt to total capital; total debt as a multiple
of earnings before interest, taxes, depreciation and amortization (EBITDA); and
minimum consolidated net worth. The Company is currently in compliance with all
of its financial covenants.
At December 31, 2000 the Company has a $30,000 line of credit with a
commercial bank, of which there were no amounts outstanding.
At December 31, 2000, principal obligations on notes payable and long-term
debt are as follows:
2001...................................................................... $ 4,689
2002...................................................................... 31,921
2003...................................................................... 28,056
2004...................................................................... 28,058
2005...................................................................... 28,060
Thereafter................................................................ 28,265
-----------
Total................................................................... $ 149,049
===========
9 -- REDEEMABLE PREFERRED STOCK
On December 1, 1991, the Company and its shareholders agreed to exchange
$97,000 of advances from shareholders (including interest payable of $12,604)
for 970 shares of no par value, 7 1/2% Cumulative Series A preferred stock
(Series A preferred stock). Dividends are cumulative from the date of issuance
and are subtracted from net income in 2000, 1999 and 1998 in determining net
income available to common shareholders. The Series A preferred stock was
authorized and issued on May 5, 1992 and has no voting rights except as required
by law or in respect to certain matters involving the Series A preferred stock.
The shares are redeemable at any time in whole or in part for $100,000 per share
plus accrued unpaid dividends to the date of redemption. The total redemption
value of the Series A preferred stock at December 31, 2000 and 1999 in the
amounts of $155,200 and $147,925, respectively, is classified on the Company's
balance sheet as Redeemable Cumulative Series A Preferred Stock and includes
$58,200 and $50,925 of accrued and unpaid dividends, respectively. The
liquidation value is $100,000 per share plus accrued dividends to be paid on a
pro rata basis from assets available after payment of debt and prior to any
distribution on common stock.
39
40
10 -- SHAREHOLDERS' EQUITY
In addition to the Series A preferred stock, the Company has the authority
to issue 1,000,000 shares of preferred stock having a par value of $.01 per
share. No shares have been issued as of December 31, 2000.
Certain covenants of the Company's 6.82% Senior Notes restrict the payment
of dividends or other distributions in cash or other property to the extent the
payment puts the Company in default of these covenants. Such covenants include,
but are not limited to, the maintenance of debt to total capitalization of no
greater than 55% and that the Company will maintain a maximum ratio of debt to
EBITDA of 3.5:1.
In December 1998, the Company's Board of Directors declared and the Company
paid a dividend of $5 million to each of the Company's common shareholders. No
dividend was declared or paid to common shareholders in 2000 or 1999.
Accumulated other comprehensive loss consists of the following:
FOREIGN MARKETABLE ACCUMULATED
CURRENCY SECURITIES OTHER
TRANSLATION VALUATION COMPREHENSIVE
ADJUSTMENT ADJUSTMENT LOSS
---------- --------- ----------
Balances, December 31, 1997............... $ (25,865) $ 38 $ (25,827)
Current period change................... 9,129 (365) 8,764
---------- --------- ----------
Balances, December 31, 1998............... (16,736) (327) (17,063)
Current period change................... (21,325) 4,798 (16,527)
---------- --------- ----------
Balances, December 31, 1999............... (38,061) 4,471 (33,590)
Current period change................... (10,299) (4,243) (14,542)
---------- --------- ----------
Balances, December 31, 2000............... $ (48,360) $ 228 $ (48,132)
========== ========= ==========
The change in the marketable securities valuation adjustment for 2000
includes a $5,888 ($9,589 pre-tax) reduction of accumulated other comprehensive
loss related to realized gains from the sale of marketable equity securities.
The remaining $1,645 ($3,050 pre-tax) relates to unrealized holding gains on the
Company's available-for sale securities.
On July 25, 2000, the Company increased the authorized number of shares of
common stock to 200,000,000 with a par value of $0.01.
The Company completed its initial public offering of 8,050,000 shares of
common stock at $18.00 per share, including 7,000,000 shares of common stock
issued July 28, 2000 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 raised by the Company from the
initial offering and the over-allotment option were $132,745.
Majority shareholders of the Company are Eastman Chemical Company and
Danisco A/S (Danisco), with each holding approximately 42% of the common stock
outstanding, and 50% each of the Series A preferred stock.
11 -- EMPLOYEE BENEFIT PLANS
Stock Option and Stock Appreciation Right Plan
On December 9, 1999, the Company adopted the Genencor International, Inc.
Stock Option and Stock Appreciation Right Plan (the Plan). Substantially all of
the Company's employees are eligible to participate in the Plan. The Plan allows
for the grant, generally at estimated market value as of the date of grant, of
incentive or non-statutory stock options to purchase the Company's common stock
and stock appreciation rights (SARs), based on the underlying value of the
Company's common stock. Under the terms of the Plan, the Company has the ability
to grant stock options and SARs representing up to 9 million shares of common
stock. Options vest ratably over a three-year period and expire 10 years from
their grant date. SARs vest 50% after three years, the remaining 50% after four
years, and expire 10 years from their grant date.
40
41
On December 9, 1999, the Company granted 5,465,250 nonqualified stock
options and 452,625 SARs to employees of the Company at an exercise price of
$9.70 per share. All of the options granted on December 9, 1999 remained
outstanding at December 31, 1999. Additionally, there were no options or SARs
exercisable at December 31, 1999.
The following table summarizes the stock option activity for the year
ending December 31, 2000:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------
Options outstanding at December 31, 1999..................... 5,465,250 $ 9.70
Granted.................................................. 1,317,600 13.93
Exercised................................................ (1,856,500) 9.70
Forfeitures.............................................. (37,250) 9.91
----------
Options outstanding at December 31, 2000..................... 4,889,100 $ 10.84
==========
Options outstanding at December 31, 2000 had exercise prices ranging from
$9.70 to $33.07 with a weighted average remaining contractual life of 9.1 years.
No options were vested or exercisable at December 31, 2000.
In connection with the grant of 881,125 stock options to employees between
January 1, 2000 and July 27, 2000, we recorded deferred compensation expense of
$7,112. We determine 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. We recorded this amount as a
component of shareholders' equity and will amortize it as a charge to operations
over the vesting period of the options. In total, amortization of deferred
compensation expense for 2000 was $1,552. These amounts were reported in our
Statement of Operations as follows:
Cost of product sold......................................... $ 77
Research and development..................................... 330
Sales, marketing and business development.................... 548
General and administrative................................... 597
---------
Total amortization of deferred stock-based compensation $ 1,552
=========
On April 28, 2000, the Board of Directors of the Company allowed certain
key employees to accelerate the exercise of 1,856,500 stock options granted
under the Plan and purchase restricted shares of common stock. The restricted
shares were purchased through the use of notes receivable from the employees.
The vesting provisions of the restricted common stock agreements are the same as
those of stock options under the Plan. The shares purchased are held in escrow
by the Company until the note has been fully paid. The notes receivable contain
a provision that allows the Company to repurchase the restricted common stock
under certain conditions.
Under the provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has elected to continue to account for stock options
in accordance with the provisions of APB Opinion No. 25 "Accounting for Stock
Issued to Employees." Had compensation cost for the Company's stock options been
determined consistent with the provisions of SFAS No. 123, there would have been
no effect on the Company's 1999 net income available to holders of common stock
as the vesting period for the options granted commenced on January 1, 2000. For
purposes of this disclosure, the weighted average grant date fair value of
options granted in 2000 and 1999 is summarized below (amounts in dollars):
2000 1999
---------------- -------------
Fair Exercise Fair Exercise
Value Price Value Price
----- ----- ----- -----
Options whose exercise price equaled grant date market value $ 8.24 $ 19.77 $ 2.16 $ 9.70
Options whose exercise was less than grant date market value 10.54 11.29 N/A N/A
41
42
The fair value of options at date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
2000 1999
---- ----
Expected life 4 years 4 years
Interest rate 6.39% 6.48%
Volatility 0%-44.7% 0%
Dividend yield N/A N/A
Volatility assumed to be zero for options granted prior to July 28, 2000 in
accordance with the minimum value method.
On a pro forma basis, had compensation cost for the Company's stock option
plan been determined based on the weighted average fair value at the grant date,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts shown below:
2000 1999
--------- -------
Net income available to holders of common stock:
As reported $ 24,135 $ 9,350
Pro forma $ 21,803 $ 9,350
Basic earnings per share:
As reported $ 0.44 $ 0.19
Pro forma $ 0.40 $ 0.19
Diluted earnings per share:
As reported $ 0.42 $ 0.19
Pro forma $ 0.38 $ 0.19
The pro forma figures in the preceding table may not be representative of
pro forma amounts in future years.
SARs are accounted for under the provisions of APB 25 as interpreted by
Financial Interpretation No. 28 "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, an interpretation of APB Opinions
No. 15 and 25." FIN 28 requires that compensation expense be recognized over the
vesting period for any increase in the estimated market value of the underlying
stock. Decreases in the estimated market value of the underlying stock in
subsequent periods would cause compensation expense to be reduced in that period
although the related accrued liability would never be reduced below zero. In
2000, the Company recorded compensation expense of $1,166 to reflect the
increase in the estimated market value of common stock during the period in
relation to the grant price of the Company's outstanding SARs. At December 31,
2000 there were 520,700 SARs outstanding, none of which were exercisable.
Equity Value Plan
Effective July 15, 1994 the Company adopted the Equity Value Plan. Under
EVP, 4.15 million units out of a total 27.7 million units were reserved for
issuance. Units granted between July 15, 1994 and July 14, 1998 vested over a
two year period and expired five years from the date of grant. Effective July
15, 1998, units granted under the EVP vested over a three year period and
expired seven years from the date of grant. Grant and payout values under EVP
were based upon a valuation of the Company as determined annually by the Board
of Directors. In addition, the annual payout was subject to certain cash flow
requirements. Effective July 1, 1999, the Company terminated the plan. At that
time, units outstanding had exercise prices ranging from $11.50 to $16.67. All
units became fully vested and were paid out at $17.50 per unit. The Company paid
out a total of $15,867 and recognized EVP expense of $3,571 in 1999 and $12,296
in 1998. These expenses are included in cost of product sold, research and
development, sales, marketing and business development and general and
administrative expenses for all periods presented.
Defined Contribution Pension Plans
The Company maintains employee benefit plans in the United States which
allow its eligible employees to make contributions, up to a certain limit, on a
tax deferred basis under Section 401(k) of the Internal Revenue Code.
The Company also contributes to the plans. Total employer contributions to
the plans for 2000, 1999 and 1998 amounted to approximately $2,531, $2,222 and
$2,053, respectively.
42
43
Defined Benefit Pension and Other Postretirement Benefits
The Company provides defined benefit pension and postretirement benefit
plans to employees. The following provides a reconciliation of benefit
obligations, plan assets, and funded status of all plans of the Company:
PENSION BENEFITS OTHER BENEFITS
------------------------------ --------------------------
2000 1999 2000 1999
-------------- -------------- ----------- -----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year......................... $ 36,808 $ 40,207 $ 1,032 $ 695
Service cost.................................................... 2,218 2,820 118 108
Interest cost................................................... 2,141 2,374 88 72
Plan participants' contributions................................ 152 110 -- --
Amendments...................................................... -- -- -- 383
Actuarial (gain)/loss........................................... 2,060 (1,385) 230 (208)
Curtailment..................................................... -- 828 0 --
Benefits paid................................................... (2,293) (2,786) (29) (18)
Translation..................................................... (2,128) (5,360) -- --
-------------- -------------- ----------- -----------
Benefit obligation at end of year............................... $ 38,958 $ 36,808 $ 1,439 $ 1,032
============== ============== =========== ===========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.................. $ 68,247 $ 70,476 $ -- $ --
Actual return on plan assets.................................... 998 7,393 -- --
Employer contributions.......................................... 2,983 3,085 -- --
Plan participants' contributions................................ 152 110 -- --
Benefits paid................................................... (2,293) (2,786) -- --
Translation..................................................... (4,293) (10,031) -- --
-------------- -------------- ----------- -----------
Fair value of plan assets at end of year........................ $ 65,794 $ 68,247 $ -- $ --
============== ============== =========== ===========
FUNDED STATUS................................................... $ 26,836 $ 31,439 $ (1,439) $ (1,032)
Unrecognized net actuarial (gain)/loss.......................... (9,622) (16,926) 66 (166)
Unrecognized prior service cost................................. (424) (507) 273 328
-------------- -------------- ----------- -----------
Prepaid cost (accrued benefit).................................. $ 16,790 $ 14,006 $ (1,100) $ (870)
============== ============== =========== ===========
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS CONSIST OF:
Prepaid benefit cost............................................ $ 18,678 $ 17,103 $ -- $ --
Accrued benefit cost............................................ (1,888) (3,097) (1,100) (870)
-------------- -------------- ----------- ------------
Net amount recognized........................................... $ 16,790 $ 14,006 $ (1,100) $ (870)
============== ============== =========== ============
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate................................................... 6.00%-- 7.75% 6.00%-- 8.00% 7.75% 8.00%
Expected return on plan assets.................................. 6.00%-- 8.00% 6.00%-- 8.00% N/A N/A
Rate of compensation increase................................... 0.00%-- 6.50% 0.00%-- 6.50% N/A N/A
PENSION BENEFITS OTHER BENEFIT
------------------------------ -----------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- --------- ----- ------
COMPONENTS OF NET PERIODIC (BENEFIT) COST:
Service cost.................................... $ 2,218 $ 2,820 $ 2,622 $ 119 $ 108 $ 27
Interest cost................................... 2,141 2,374 2,172 88 72 44
Expected return on plan assets.................. (4,348) (4,476) (4,215) -- -- --
Amortization of prior service cost.............. (49) (56) (59) 55 55 --
Recognized net actuarial gain................... (735) (622) (516) (1) -- --
-------- -------- -------- --------- ----- ------
Net periodic (benefit) cost..................... (773) 40 4 261 235 71
Curtailment..................................... -- 828 -- 0 -- --
-------- -------- -------- -------- ----- ------
Total net periodic (benefit) cost..... $ (773) $ 868 $ 4 $ 261 $ 235 $ 71
======== ======== ======== ======== ===== ======
43
44
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were as follows:
2000 1999
---- ----
Projected benefit obligation................................. $ 4,042 $ 2,583
Accumulated benefit obligation............................... 3,614 2,374
Fair value of plan assets.................................... 3,159 1,088
As a result of the reduction in the number of employees covered by the
restructuring plan in Belgium, a curtailment loss is reflected in the net
periodic pension cost for 1999.
Effective January 1, 1999, the Company established the Genencor
International, Inc. Retiree Medical Plan covering eligible non-union employees
in the United States. This plan resulted in an accrued liability of $322 and
$157, and a projected benefit obligation of $613 and $427 as of December 31,
2000 and December 31, 1999, respectively.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The trend rates assumed for pre-65
claims graded to 5.00% in 2005, were 10% in 2000, and 7.00% in 1999. The trend
rates assumed for post-65 claims graded to 5.00% in 2005, were 10% in 2000, and
6.00% in 1999. For both pre and post-65 claims, the trend rate was assumed to
remain at 5.00% after 2003. A one percentage point increase in assumed health
care cost trend rates would increase total service and interest cost by $16 and
increase the postretirement benefit obligation by $125. A one percentage point
decrease in assumed health care cost trend rates would decrease total service
and interest cost by $18 and decrease the postretirement benefit obligation by
$148.
12 -- NON OPERATING EXPENSES/(INCOME)
During the years 2000 and 1999, there were no other non-operating expenses
or income. In 1998 there was other non-operating income of $1,442. This income
consisted of a $442 gain on the sale of a business, and $1,000 gain from a
litigation settlement.
13 -- INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31:
2000 1999 1998
--------- --------- -------
Current:
Federal............................................. $ 5,868 $ 1,080 $ 570
State............................................... 627 107 --
Foreign............................................. 2,551 2,603 2,433
-------- -------- ---------
9,046 3,790 3,003
-------- -------- ---------
Deferred:
Federal and State................................... 5,258 (146) (1,572)
Foreign............................................. 384 1,811 1,848
-------- -------- ---------
5,642 1,665 276
-------- -------- ---------
Decrease in valuation allowances...................... (580) (161) --
-------- -------- ---------
$ 14,108 $ 5,294 $ 3,279
======== ======== =========
44
45
The components of deferred tax assets and liabilities consist of the
following at December 31:
2000 1999
---------- ----------
Current assets and liabilities:
Unrealized appreciation on marketable securities............. $ (519) $ (2,812)
Inventories.................................................. 525 486
Accrued expenses............................................. 844 519
Other items, net............................................. 355 114
---------- ----------
1,205 (1,693)
---------- ----------
Non-current assets and liabilities:
Net operating loss and tax credit carryforwards.............. 18,073 21,855
Employee costs............................................... (6,529) (5,499)
Depreciation and amortization................................ (14,868) (14,464)
Other items, net............................................. (342) (1,195)
---------- ----------
(3,666) 697
Valuation allowances........................................... (1,420) (7,800)
---------- ----------
Net deferred tax liability................................... $ (3,881) $ (8,796)
========== ==========
The Company's practice is to reinvest the earnings of its foreign
subsidiaries in these operations. Deferred income taxes have not been provided
on these earnings, as the Company does not plan to initiate any action that
would require the payment of related U.S. income taxes. It is not practicable to
estimate the amount of additional tax that might be payable on these
undistributed foreign earnings.
The Company has net operating loss carryforwards of $0.6 million for
Chinese tax purposes which expire in 2005. Certain other foreign carryforwards
have no expiration date. The Company also has research and experimentation tax
credit carryforwards of $5.3 million for U.S. federal income tax purposes which
expire in 2001 through 2014. Additionally, the Company has alternative minimum
tax credit carryforwards of $9.0 million, which may be used indefinitely to
reduce U.S. federal income taxes.
A valuation allowance is provided for deferred tax assets if management
believes it is more likely than not these items will either expire before the
Company is able to realize their benefit, or that future deductibility is
uncertain. Although realization is not assured, management believes it is more
likely than not that the recorded deferred tax assets, net of valuation
allowance provided, will be realized. The Company's valuation allowances are
$1.4 million and $7.8 million at December 31, 2000 and 1999, respectively.
During 2000, the Company reassessed its ability to realize the benefit of
certain deferred tax assets and reversed valuation allowances totaling $6.4
million, approximately $0.6 million of which was recorded to the provision for
income taxes in the statement of operations and $5.8 million, which related to
acquired deferred tax assets, was recorded as a reduction to goodwill.
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective income tax rate is as
follows for the years ending December 31:
2000 1999 1998
--------- --------- -------
U.S. federal statutory income tax rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit................... 1.6% 0.7% 0.5%
Amortization of non-deductible intangible assets........................ 3.8% 7.7% 9.0%
Foreign and U.S. tax effects attributable to foreign operations......... (4.3%) (15.2%) (11.1%)
Change in valuation allowances.......................................... (1.3%) (0.7%) --
Tax credits............................................................. (2.9%) (3.3%) (13.7%)
Other, net.............................................................. (0.9%) -- (0.4%)
----- ----- ------
31.0% 24.2% 19.3%
===== ===== ======
The Company is subject to a tax ruling in The Netherlands, which
effectively reduces the local effective income tax rate from 35% to 17.5%. This
ruling will expire at the end of 2005.
45
46
14 -- SEGMENT AND PRODUCT DATA
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The Company maintains one industry segment,
which produces and distributes novel enzymes. Product revenues are attributed to
countries based on the geographic location of the customer. Intercompany
transactions between countries have been eliminated. Long-lived assets include
property, plant, and equipment, intangible assets, and investments and other
assets and are attributed to countries based on physical location. Included in
non-U.S. long-lived assets are $46 million in 2000, $40 million in 1999 and $48
million in 1998 in Belgium and $35 million in 2000, $34 million in 1999 and $42
million 1998 in Finland. Geographical information is as follows:
U.S. NON-U.S. CONSOLIDATED
----------- ----------- -----------
2000
Product revenue............................... $ 139,170 $ 161,808 $ 300,978
Long-lived assets............................. $ 184,398 $ 124,058 $ 308,456
1999
Product revenue............................... $ 125,442 $ 180,195 $ 305,637
Long-lived assets............................. $ 217,377 $ 118,489 $ 335,866
1998
Product revenue............................... $ 120,385 $ 159,107 $ 279,492
Long-lived assets............................. $ 246,390 $ 104,758 $ 351,148
Product revenue by similar product groupings is as follows:
2000 1999 1998
----------- ----------- --------
Protein degrading enzyme products................. $ 166,394 $ 167,125 $ 139,726
Starch degrading enzyme products.................. 84,865 88,196 84,017
Cellulose degrading enzyme products............... 35,775 39,694 48,801
Other............................................. 13,944 10,622 6,948
----------- ----------- -----------
Total................................... $ 300,978 $ 305,637 $ 279,492
=========== =========== ===========
15 -- RELATED PARTY TRANSACTIONS
Danisco and its affiliates purchased approximately $8 million, $9 million
and $15 million of products from the Company during 2000, 1999 and 1998,
respectively. The Company purchased products from and/or through these related
parties for approximately $4 million in 2000 and $9 million in both 1999 and
1998. Also, the Company received approximately $400, $300, and $600 in fees and
royalty revenues from a Danisco affiliate during 2000, 1999 and 1998,
respectively. These revenues were received under a collaboration agreement for
the development and commercialization of enzymes for the animal feed market. In
October 2000, the Company signed an exclusive agreement with Danisco A/S for the
development of innovative bioingredients for the food industry. The four-year
minimum term agreement provides for up to $20 million in funding to the Company.
At December 31, 2000 and 1999, the Company had amounts due from Danisco of
$1 and $685, respectively, and due to Danisco of $362 and $371, respectively.
The Company had outstanding notes receivable with balances totaling $3,995
and $1,466 from officers of the Company, at December 31, 2000 and 1999,
respectively. The notes are non-interest bearing and are due at the conclusion
of five to five and one-half years from the date of issuance. Accordingly,
interest income is imputed at 5.22% to 6.80% per year on the notes, with an
offset recorded as compensation expense.
The Company also had outstanding promissory notes of $18,008 and $691 of
accumulated accrued interest receivable at December 31, 2000, relating to the
exercise of stock options granted to executive officers. The promissory notes
are secured by a pledge of the stock purchased and are recourse to the extent of
50% of the outstanding principal balance. The notes are due and payable over
four years with a fixed interest rate of 6.71% interest per year.
46
47
16 -- SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
-------- -------- ------
Interest paid............................ $ 10,474 $ 10,487 $ 10,758
======== ======== ========
Taxes paid............................... $ 6,043 $ 2,254 $ 1,279
======== ======== ========
Schedule of non-cash investing and
financing activity:
Sale-leaseback of facility............. $ -- $ 4,194 $ --
======== ======== ========
Debt of acquired business.............. $ -- $ 4,700 $ --
======== ======== ========
Capital lease obligation............... $ 2,845 $ -- $ --
======== ======== ========
Issuance of restricted stock........... $ 18,008 $ -- $ --
======== ======== ========
17 -- COMMITMENTS AND CONTINGENCIES
The Company, from time to time, is involved in legal proceedings, which are
handled and defended in the ordinary course of business. There are no such
proceedings pending at this time.
18 -- SELECTED QUARTERLY DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
2000 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
Product revenue............................ $ 73,640 $ 76,626 $ 77,359 $ 73,353
Gross profit............................... 31,642 33,363 32,864 30,844
Net income................................. 16,543 4,688 4,753 5,426
Net income available to holders of common
stock...................................... 14,724 2,869 2,934 3,608
Basic earnings per common share............ $ 0.29 $ 0.06 $ 0.05 $ 0.06
========= ======== ======== ========
Diluted earnings per common share.......... $ 0.28 $ 0.05 $ 0.05 $ 0.06
========= ======== ======== ========
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
---- ------- ------- ------- -------
Product revenue............................ $ 72,602 $ 75,439 $ 74,211 $ 83,385
Gross profit............................... 29,102 31,283 29,967 38,529
Net income (loss).......................... 5,075 2,553 (293) 9,290
Net income (loss) available to holders of
common stock............................... 3,256 734 (2,112) 7,472
Basic earnings per common share............ $ 0.07 $ 0.01 $ (0.04) $ 0.15
========= ======== ======== ========
Diluted earnings per common share.......... $ 0.07 $ 0.01 $ (0.04) $ 0.15
========= ======== ======== ========
47
48
19 -- SUBSEQUENT EVENTS
Subsequent to December 31, 2000 the Company entered into a $48 million
revolving credit agreement with a syndicate of banks, which is available for
general corporate purposes. The facility grants the Company $32 million of three
year committed borrowings and $16 million of one year committed borrowings,
which may be renewed each year. The combined facility carries a facility fee of
0.28% on the amount of unborrowed principal and contains various financial
covenants including a debt to total capitalization requirement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 3, 2001 under "Election of
Directors" and "Executive Officers," which proxy statement will be filed within
120 days after the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 3, 2001 under "Executive
Compensation," which proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 3, 2001 under "Security Ownership
of Certain Beneficial Owners and Management," which proxy statement will be
filed within 120 days after the end of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 3, 2001 under "Certain
Transactions," which proxy statement will be filed within 120 days after the end
of the Company's fiscal year.
48
49
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14 (a)(1), 14(a)(2) and 14(d):
Consolidated financial statements:
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The following financial statement schedule is filed as part of this Report
at page 56 hereof:
Schedule II- Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
the consolidated financial statements and notes thereto.
Item 14 (a)(3) and 14(c):
See Index to Exhibits
Item 14(b):
During the last quarter of the fiscal year ended December 31, 2000, the
Registrant did not file a Current Report on Form 8-K.
49
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
March, 2001.
GENENCOR INTERNATIONAL, INC.
By: /s/ W. Thomas Mitchell
---------------------------------------
W. Thomas Mitchell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 2001.
/s/ W. Thomas Mitchell Director, President and
------------------------------- Chief Executive Officer
W. Thomas Mitchell (Principal Executive Officer)
/s/ Raymond J. Land Senior Vice President and
------------------------------- Chief Financial Officer
Raymond J. Land (Principal Financial Officer)
/s/ Darryl L. Canfield Vice President and Corporate Controller
------------------------------- (Principal Accounting Officer)
Darryl L. Canfield
/s/ Soren Bjerre-Nielsen Director
-------------------------------
Soren Bjerre-Nielsen
/s/ J.L. Chitwood Director
-------------------------------
James L. Chitwood
/s/ Bruce C. Cozadd Director
-------------------------------
Bruce C. Cozadd
/s/ Juha Kurkinen Director
-------------------------------
Juha Kurkinen
/s/ Robert H. Mayer Director
-------------------------------
Robert H. Mayer
/s/ Joseph A. Mollica Director
-------------------------------
Joseph A. Mollica
/s/ David M. Pond Director
-------------------------------
David M. Pond
/s/ Norbert G. Riedel Director
-------------------------------
Norbert G. Riedel
/s/ James P. Rogers Director
-------------------------------
James P. Rogers
50
51
FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
SCHEDULE II
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF VALUATION AND QUALIFYING ACCOUNTS
REDUCTIONS
(ADDITIONS)
BALANCE AT ADDITIONS CHARGED TO DEDUCTIONS/ BALANCE AT
BEGINNING CHARGED TO ACQUIRED AMOUNTS END
OF PERIOD EARNINGS GOODWILL WRITTEN OFF OF PERIOD
--------- ------- ------- ------- ---------
(AMOUNTS IN THOUSANDS)
Year Ended December 31, 2000
Deducted in the Consolidated Balance
Sheet:
From current assets:
Trade accounts receivable, allowance
for doubtful accounts........... $ (1,814) $ (414) $ -- $ (346) $ (2,574)
Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments..................... (2,255) -- -- 212 (2,043)
--------- ------- ------- ------- ---------
Total................................ (4,069) (414) -- (134) (4,617)
========= ======= ======= ======= =========
Deferred tax valuation allowance..... (7,800) (920) 5,800 1,500 (1,420)
========= ======= ======= ======= =========
From current liabilities:
Restructuring reserves............ (6,100) -- -- 3,421 (2,679)
========= ======= ======= ======= =========
Year Ended December 31, 1999
Deducted in the Consolidated Balance
Sheet:
From current assets:
Trade accounts receivable, allowance
for doubtful accounts........... (976) (1,500) -- 662 (1,814)
Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments..................... (2,676) -- -- 421 (2,255)
========= ======= ======= ======= =========
Total................................ (3,652) (1,500) -- 1,083 (4,069)
========= ======= ======= ======= =========
Deferred tax valuation allowance..... (7,961) -- -- 161 (7,800)
========= ======= ======= ======= =========
From current liabilities:
Restructuring reserves............ -- (7,500) (3,200) 4,600 (6,100)
========= ======= ======= ======= =========
Year Ended December 31, 1998
Deducted in the Consolidated Balance
Sheet:
From current assets:
Trade accounts receivable, allowance
for doubtful accounts........... (1,178) (147) -- 349 (976)
Reserve for obsolete and slow moving
inventory and lower of cost or market
adjustments..................... (2,842) -- -- 166 (2,676)
--------- ------- ------- ------- ---------
Total................................ (4,020) (147) -- 515 (3,652)
========= ======= ======= ======= =========
Deferred tax valuation allowance..... $ (7,961) $ -- $ -- $ -- $ (7,961)
========= ======= ======= ======= =========
52
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 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.
(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 June 26, 2000.
(d) Line of Credit Offering Letter for a $30,000,000 Line of Credit
between the Company and The Chase Manhattan Bank, dated May 4, 2000 is
incorporated herein by reference to Exhibit 4.3 to Amendment No. 1 to
the Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000.
(e) $10 million Promissory Note by the Company in favor of Gist-Brocades
International B.V., dated June 2, 1995 is incorporated herein by
reference to Exhibit 4.4 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452) filed
on June 26, 2000.
(9) Voting Trust Agreement
Not applicable.
(10) Material Contracts
(a) Stockholder Agreement between the Company, Eastman Chemical Company
and Danisco A/S, dated July 25, 2000 is incorporated herein by
reference to Exhibit 10.5 to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452) filed
on July 26, 2000.
(b) Research Agreement between the Company and The Procter & Gamble
Company, dated June 30, 2000 is incorporated herein by reference to
Exhibit 10.11 to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-36452) filed on July 24,
2000.
(c) Technology Transfer Agreement between the Company and The Procter &
Gamble Company, dated June 30, 2000 is incorporated herein by
reference to Exhibit 10.12 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452) filed
on July 24, 2000.
(d) Commercialization Agreement between the Company and The Procter &
Gamble Company, dated April 25, 2000 is incorporated herein by
reference to Exhibit 10.13 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (Registration No. 333-36452) filed
on July 24, 2000.
51
53
(e) National Renewable Energy Laboratory Letter Subcontract, dated April
18, 2000, between Midwest Research Institute acting through its
National Renewable Energy Laboratory Division and the Company is
incorporated herein by reference to Exhibit 10.27 to Amendment No. 1
to the Company's Registration Statement on Form S-1 (Registration No.
333-36452) filed on June 26, 2000.
(f) License Agreement, dated May 17, 2000, between Energy Biosystems
Corporation and the Company is incorporated herein by reference to
Exhibit 10.30 to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-36452) filed on July 24,
2000.
(11) Statement re computation of per share earnings
Computation can be clearly determined from Note 1 to the financial
statements included herein under Item 8.
(12) Statements re computation of ratios
Not applicable.
(13) Annual report to security holders, Form 10-Q, or quarterly report to
security holders
Not applicable.
(16) Letter re change in certifying accountant
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(21) Subsidiaries of the Registrant
Subsidiaries of the Registrant are listed on Exhibit 21.1.
(22) Published report regarding matters submitted to a vote of security holders
Not applicable.
(23) Consents of experts and counsel
Consent of independent accountants is included herein as Exhibit 23.1.
(24) Power of Attorney
Not applicable.
(27) Financial Data Schedule
The Financial Data Schedule is included herein as Exhibit 27.
(99) Additional Exhibits
Not applicable.
52