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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO______________
COMMISSION FILE NUMBER 000-31167
GENENCOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 16-1362385
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
925 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 846-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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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 [ ]
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INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
NUMBER OF SHARES OUTSTANDING AT
CLASS MAY 10, 2001
COMMON STOCK, PAR VALUE $0.01 PER SHARE 59,912,337
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TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.........................................................................................
Condensed Consolidated Unaudited Balance Sheets as of March 31, 2001 and December 31, 2000................... 3
Condensed Consolidated Unaudited Statements of Operations for the three months ended March 31, 2001 and
2000......................................................................................................... 4
Condensed Consolidated Unaudited Statements of Cash Flows for the three months ended
March 31, 2001 and 2000...................................................................................... 5
Notes to Condensed Consolidated Unaudited Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................ 15
Item 2. Changes in Securities and Use of Proceeds.................................................................... 15
Item 3. Defaults Upon Senior Securities.............................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 15
Item 5. Other Information............................................................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................................................. 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 197,382 $ 200,591
Trade accounts receivable, net ................................................ 44,997 46,913
Inventories.................................................................... 49,726 46,938
Other current assets........................................................... 16,455 17,843
----------- -----------
Total current assets...................................................... 308,560 312,285
Property, plant and equipment, net............................................... 208,506 216,983
Intangible assets, net........................................................... 60,409 64,049
Other assets..................................................................... 47,794 49,615
----------- -----------
Total assets.............................................................. $ 625,269 $ 642,932
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................................. $ 6,501 $ 4,689
Current maturities of long-term debt........................................... 28,000 --
Accounts payable and accrued expenses.......................................... 37,488 47,217
Other current liabilities...................................................... 8,738 12,143
----------- -----------
Total current liabilities................................................. 80,727 64,049
Long-term debt................................................................... 114,393 144,360
Other long-term liabilities...................................................... 28,090 30,297
----------- -----------
Total liabilities......................................................... 223,210 238,706
----------- -----------
Redeemable preferred stock:
7 1/2% cumulative series A preferred stock, without par value, authorized
1,000 shares, 970 shares issued and outstanding............................. 157,019 155,200
Shareholders' equity:
Common stock, par value $0.01 per share, 200,000,000
shares authorized, 59,910,253 and 59,906,500 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively.......................... 599 599
Additional paid-in capital..................................................... 344,129 344,092
Deferred stock-based compensation.............................................. (4,967) (5,560)
Notes receivable for common stock.............................................. (18,008) (18,008)
Accumulated deficit............................................................ (19,504) (23,965)
Accumulated other comprehensive loss........................................... (57,209) (48,132)
------------ -----------
Total shareholders' equity................................................ 245,040 249,026
----------- -----------
Total liabilities, redeemable preferred stock and shareholders' equity.... $ 625,269 $ 642,932
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated unaudited financial statements.
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2001 2000
---- ----
Revenues:
Product revenue................................. $ 75,268 $ 73,640
Fees and royalty revenues....................... 2,455 6,059
------------ ------------
Total revenues............................. 77,723 79,699
Operating expenses:
Cost of product sold............................ 40,898 41,998
Research and development........................ 12,924 11,824
Sales, marketing and business development....... 5,857 5,665
General and administrative...................... 6,482 5,542
Amortization of intangible assets............... 2,397 2,672
Other expense/(income).......................... 848 (299)
------------ ------------
Total operating expenses................... 69,406 67,402
------------ ------------
Operating income.................................. 8,317 12,297
Non operating (income)/expenses:
Investment income............................... -- (15,046)
Interest expense................................ 2,607 2,660
Interest income................................. (3,117) (560)
------------ ------------
Total non operating income................. (510) (12,946)
------------ ------------
Income before provision for income taxes.......... 8,827 25,243
Provision for income taxes........................ 2,550 8,700
------------ ------------
Net income........................................ $ 6,277 $ 16,543
============ ============
Net income available to holders of common stock. $ 4,458 $ 14,724
============ ============
Earnings per common share:
Basic...................................... $ 0.07 $ 0.29
=====-====== ===========
Diluted.................................... $ 0.07 $ 0.28
=======-==== ===========
Weighted average common shares:
Basic...................................... 59,908,089 50,000,000
============ ============
Diluted.................................... 61,458,775 51,816,735
============ ============
The accompanying notes are an integral part of the condensed
consolidated unaudited financial statements.
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2001 2000
---- ----
Cash flows from operating activities:
Net income........................................ $ 6,277 $ 16,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 8,990 8,952
Amortization of deferred stock-based
compensation.................................. 593 --
Gain on sale of marketable securities......... -- (15,046)
Decrease (increase) in operating assets:
Trade accounts receivable.................. 436 1,999
Inventories................................ (4,313) (884)
Other assets............................... 4,252 (238)
Decrease in operating liabilities:
Accounts payable and accrued expenses...... (7,867) (2,145)
Other liabilities.......................... (3,701) (5,740)
------------ ------------
Net cash provided by operating activities.. 4,667 3,441
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment........ (4,706) (3,639)
Proceeds from the sale of marketable securities... -- 15,928
---------------- ------------
Net cash (used in) provided by investing
activities.................................... (4,706) 12,289
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options........... 37 --
Net payments on notes payable of foreign affiliate (121) --
------------- ------------
Net cash used in financing activities...... (84) --
------------ ------------
Effect of exchange rate changes on cash............. (3,086) (1,198)
------------ ------------
Net (decrease)/increase in cash and cash equivalents (3,209) 14,532
Cash and cash equivalents-- beginning of period..... 200,591 39,331
------------ ------------
Cash and cash equivalents-- end of period........... $ 197,382 $ 53,863
============ ============
The accompanying notes are an integral part of the condensed
consolidated unaudited financial statements.
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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1 -- BASIS OF PRESENTATION
The condensed consolidated unaudited financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and related footnotes for the year ended December 31, 2000, as included in the
Company's Report on Form 10-K. These interim financial statements have been
prepared in conformity with the rules and regulations of the U.S. Securities and
Exchange Commission. Certain disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations pertaining
to interim financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary for fair presentation of
the interim financial statements have been included therein. The results of
operations of any interim period are not necessarily indicative of the results
of operations for the full year.
2 -- EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share," requires the disclosure of basic
and diluted earnings per share. Basic earnings per share is computed based on
the weighted average number of common shares outstanding during the period. In
arriving at net income available to common shareholders, undeclared and unpaid
dividends on redeemable preferred stock of $1,819 were deducted from net income
for each quarter 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 net income available to common shareholders of the
Company. As a result of stock options outstanding under the Company's Stock
Option and Stock Appreciation Right Plan, there were dilutive securities for the
three months ended March 31, 2001 and 2000. The weighted-average impact of these
has been reflected in the calculation of diluted earnings per share for the
respective periods presented.
The following table reflects the calculation of basic and diluted
earnings per common share for the three months ended March 31:
2001 2000
---- ----
Net income $ 6,277 $ 16,543
Less: Accrued dividends on preferred stock (1,819) (1,819)
------------ ----------
Net income available to holders of common stock $ 4,458 $ 14,724
============ ===========
Weighted average common shares:
Basic 59,908,089 50,000,000
Effect of stock options 1,550,686 1,816,735
------------ ---------
Diluted 61,458,775 51,816,735
============ ===========
Earnings per common share:
Basic $ 0.07 $ 0.29
============ ===========
Diluted $ 0.07 $ 0.28
============ ===========
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3 -- FEES AND ROYALTY REVENUES
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.
4 -- INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Raw materials.......................................... $ 8,492 $ 7,699
Work-in-progress....................................... 8,437 7,874
Finished goods......................................... 32,797 31,365
---------- ----------
Inventories.......................................... $ 49,726 $ 46,938
========== ==========
5 -- SHAREHOLDERS' EQUITY
Accumulated other comprehensive loss consists of the following:
FOREIGN MARKETABLE ACCUMULATED
CURRENCY SECURITIES OTHER
TRANSLATION VALUATION COMPREHENSIVE
ADJUSTMENT ADJUSTMENT LOSS
------------ ---------- -------------
Balances, December 31, 2000............... $ (48,360) $ 228 $ (48,132)
Current period change................... (9,351) 274 (9,077)
---------- ---------- ------------
Balances, March 31, 2001.................. $ (57,711) $ 502 $ (57,209)
========== ========== ============
The change in the marketable securities valuation adjustment for the
three months ended March 31, 2001, of $274 ($435 pre-tax) relates to unrealized
holding gains on the Company's available-for-sale securities.
6 -- INVESTMENT INCOME
There was no investment income during the three months ended March 31,
2001. During the three months ended March 31, 2000, the Company realized a gain
on the sale of marketable securities in the amount of $15,046. This amount is
included in investment income as part of total non operating income for the
period.
7 -- SUBSEQUENT EVENTS
Subsequent to March 31, 2001 the Company's existing $48 million
revolving credit agreement with a syndicate of banks was amended and the
committed amounts increased to $60 million. The amended facility grants the
Company $40 million of three year committed borrowings and $20 million of one
year committed borrowings, which may be renewed each year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes to those statements included in our 2000 Annual Report
on Form 10-K, and the condensed consolidated unaudited financial statements
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 in our 2000 Annual
Report on Form 10-K.
OVERVIEW
We are a diversified biotechnology company that develops and delivers
products and/or services to the industrial and consumer, agriculture and health
care markets. Our current revenues result primarily from the sale of enzyme
products to the cleaning, grain processing and textile industries, with the
remainder from research funding 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 we
derived approximately 51% of our revenues from our foreign operations. For the
three months ended March 31, 2001, we have derived approximately 50% of our
revenues from our foreign operations.
SUMMARY OF RESULTS
For the three months ended March 31, 2001, net income available for common
shareholders decreased to $4.5 million, or $0.07 per diluted share, from $14.7
million, or $0.28 per diluted share for the three months ended March 31, 2000.
Two non-recurring transactions favorably impacted net income for the quarter
ended March 31, 2000. We recognized a gain of $15.0 million, $9.2 million
tax-effected, from the sale of marketable equity securities and also
successfully settled patent infringement issues with one of our customers,
which resulted in back royalties of $3.5 million, $2.1 million tax-effected.
RECENT DEVELOPMENTS
During the first quarter of 2001, we established a cooperative agreement
with the Mayo Clinic for the development of a celiac disease model in
conjunction with the January 2001 announcement of a key milestone in our
transgenic mouse program. We have the first known in-vivo model that contains
the genetically linked DQ2 and DR3 genes. This human HLA gene locus is most
commonly associated with autoimmune diseases, such as multiple sclerosis, type 1
diabetes and celiac disease. Our cooperative agreement with the Mayo Clinic aims
to build an in-vivo celiac disease model with this mouse. We expect this to be
the first in a series of disease-specific HLA mouse models.
In January 2001, we signed a five-year, $70 million, exclusive supply
agreement with Cargill's U.S. wet corn milling facilities. Cargill has been a
strategic partner of Genencor for more than 10 years.
In March 2001, we signed an agreement with DuPont to expand their multi-year
research and development collaboration in the area of metabolic pathway
engineering. We will continue to develop advanced bioprocessing technology for
the manufacture of a critical monomer for the synthesis of high-performance
polyester from glucose. Under the terms of this agreement, we will receive
research and development funding, potential milestone payments, and upon
commercialization, royalties on product sales.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2001 and 2000
Revenues. Total revenues in 2001 decreased $2.0 million to $77.7 million
in 2001 from 2000, due mainly to a decrease in fees and royalty revenues.
Product Revenues. Product revenues for the three months ended March 31, 2001
increased $1.7 million, or 2%, to $75.3 million from the three months ended
March 31, 2000. Excluding the impact of the stronger U.S. dollar against foreign
currencies, primarily the Euro, product revenues for the three months ended
March 31, 2001 would have increased by approximately 5%, to $77.2 million. For
the three months ended March 31, 2001, unit volume/mix grew 7%, 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 for the three months ended March
31, 2001 increased $1.5 million, or 4%, to $36.0 million from the three months
ended March 31, 2000, driven primarily by sales to our cleaning customers.
European product revenues for the three months ended March 31, 2001 declined
$0.6 million, or 2%, to $26.5 million from the three months ended March 31,
2000, due primarily to lower cleaning sales and the impact of currency exchange
rates. Our product revenues in Latin America for the three months ended March
31, 2001 were consistent with the three months ended March 31, 2000. Product
revenues in Asia increased $0.7 million, or 9%, to $8.4 million for the three
months ended March 31, 2001 from the three months ended March 31, 2000 due
mainly to growth in China, Korea, and Taiwan.
Fees and Royalty Revenues. Fees and royalty revenues decreased $3.6 million,
or 59%, to $2.5 million for the three months ended March 31, 2001 from the three
months ended March 31, 2000, due primarily to a decrease in royalties.
Funded research revenues for the three months ended March 31, 2001 were $2.2
million compared to $2.5 million for the three months ended March 31, 2000.
Revenues generated by research funding result from collaborative agreements with
various parties, including the U.S. Government, whereby we perform research
activities and receive revenues that partially reimburse us for expenses
incurred. Under such agreements, we retain a proprietary interest in the
products and technology developed. Our funded research revenue as it relates to
U.S. Government collaborations increased $0.1 million to $0.8 million for the
three months ended March 31, 2001 from the three months ended March 31, 2000
primarily due to funding provided by the National Renewable Energy Laboratory to
develop an enzymatic process to convert biomass into bioethanol. This increase
was partially offset by a decrease in U.S. Government funded research revenues
for the three months ended March 31, 2001 due to the successful completion
during September 2000 of a program partially funded by the Advanced Technology
Program/National Institute of Standards and Technology. Funded research revenues
provided by customers decreased $0.4 million, or 22%, to $1.4 million for the
three months ended March 31, 2001 from the three months ended March 31, 2000
primarily due to a decrease in funding received under a collaborative agreement
with a major customer.
Royalties decreased $3.6 million for the three months ended March 31, 2001
from the three months ended March 31, 2000 due primarily to the successful
resolution of a patent infringement issue with a customer, for which back
royalties of $3.5 million were received during the first quarter of 2000. These
one-time royalties pertain to previous sales, using patented technology, made by
the customer to third parties.
Operating Expenses
Cost of Product Sold. Cost of product sold decreased $1.1 million, or 3%, to
$40.9 million for the three months ended March 31, 2001 from the three months
ended March 31, 2000 even though our expanded sales volume/mix increased costs
$1.3 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 $1.1 million, the sale of lower cost inventories of approximately
$0.7 million, and a decrease in long-term incentive compensation expense of $0.2
million.
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Gross Profit and Margins from Product Sold. Gross profit from product sold
increased $2.8 million, or 9%, to $34.4 million for the three months ended March
31, 2001 from the three months ended March 31, 2000. This overall increase was
caused by significant product revenue related factors including a 7% increase in
volume/mix being processed through our plants, partially offset by 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.
This net increase in gross profit was partially offset by a $0.8 million
decrease due to the impact of the stronger U.S. dollar against foreign
currencies, primarily the Euro. As a result of these factors, gross margin on
product revenue increased to 45.7% for the three months ended March 31, 2001
from 42.9% for the three months ended March 31, 2000.
Research and Development. Research and development expenses primarily
consist of the personnel related, consulting, and facilities costs incurred in
connection with our research activities conducted in Palo Alto, California, and
Leiden, the Netherlands. These expenses increased $1.1 million, or 9%, to $12.9
million for the three months ended March 31, 2001 from the three months ended
March 31, 2000 as we increased our investment in technology and product
development for new markets and hired additional internal staff to support our
health care and other initiatives. As a part of total research and development
expenses, estimated expenses related to research collaborations partially funded
by customers decreased $1.9 million, or 50%, to $1.9 million for the three
months ended March 31, 2001 from the three months ended March 31, 2000.
Sales, Marketing and Business Development. Sales, marketing and business
development expenses primarily consist of the personnel related and marketing
costs incurred by our global sales force. These expenses increased $0.2 million,
or 4%, to $5.9 million for the three months ended March 31, 2001 from the three
months ended March 31, 2000.
General and Administrative. General and administrative expenses include the
costs of our corporate executive, finance, information technology, legal, human
resources, and communications functions. In total, these expenses increased $1.0
million, or 18%, to $6.5 million for the three months ended March 31, 2001 from
the three months ended March 31, 2000 due primarily to increased salaries and
benefits of $0.6 million and increased advertising and promotions costs of
approximately $0.2 million.
Amortization of Intangible Assets. We amortize our intangible assets,
consisting of patents, licenses, technology and goodwill, on a straight-line
basis over their estimated useful lives. Amortization expense decreased $0.3
million, or 11%, to $2.4 million for the three months ended March 31, 2001 from
the three months ended March 31, 2000 due primarily to the 2000 release of an
income tax valuation allowance that was reallocated to goodwill.
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 expense for the three months ended March 31, 2001 was $0.8 million, as
compared with other income of $0.3 million for the three months ended March 31,
2000. This $1.1 million increase in expense was due mainly to an increase in
foreign currency transaction losses during the three months ended March 31,
2001.
Deferred Compensation. We measure deferred compensation for options granted
to employees as the difference between the grant price and the estimated fair
value of our common stock on the date we granted the options. In connection with
the grant of stock options to employees during 2000, amortization of deferred
compensation expense for the three months ended March 31, 2001 was $0.6 million.
These amounts were reported in our statement of operations as follows (in
millions):
Research and development............................... $ 0.2
Sales, marketing and business development.............. 0.2
General and administrative............................. 0.2
------------
Total amortization of deferred compensation expense $ 0.6
============
Non Operating Expense and Income
Investment Income. Investment income represents gains from the sale of
marketable equity securities. During the three months ended March 31, 2000, we
realized a $15.0 million gain on the sale of marketable equity securities.
Interest Income. Interest income increased $2.5 million to $3.1 million for
the three months ended March 31, 2001 from the three months ended March 31, 2000
due mainly to earnings on proceeds from our initial public offering.
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Income Taxes. Several factors affected our effective income tax rate for the
three months ended March 31, 2001, including the statutory income tax rate in
foreign jurisdictions, amortization of certain intangible assets and other items
which are not deductible for tax purposes, and research and experimentation tax
credits. The effective income tax rate for the three months ended March 31, 2001
was 29% compared with 34% for the three months ended March 31, 2000. The
effective rate for the three months ended March 31, 2000 included the effect of
two one-time events. During the first quarter of 2000, we realized $15.0 million
of pre-tax gains from the sale of marketable equity securities and a $3.5
million pre-tax gain from the settlement of certain patent infringement issues,
both in the United States and tax effected at a marginal rate of 38.6%. During
both periods we were subject to a tax ruling in the Netherlands that reduces the
local effective income tax rate from 35.0% to 17.5%. This ruling will expire at
the end of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our funding needs consist primarily of capital expenditures, research and
development activities, sales and marketing expenses, and general corporate
purposes. We have financed our operations primarily through cash from the sale
of products, the sale of common stock, research and development funding from
partners, government grants, and short-term and long-term borrowings.
We believe that our current cash and cash equivalent balances plus funds to
be provided from our current year operating activities 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 March 31, 2001, cash and cash equivalents totaled $197.4 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 $4.7 million and $3.4 million for the three
months ended March 31, 2001 and 2000, respectively. The increase of $1.3 million
in 2001 from 2000 was generated principally by operating earnings, net of
non-cash items such as depreciation and amortization, and changes in operating
assets and liabilities.
Cash used by investing activities was $4.7 million for the three months
ended March 31, 2001. Cash provided by investing activities was $12.3 million
for the three months ended March 31, 2000. This difference of $17.0 million was
driven primarily by proceeds of $15.9 million received from the sale of
marketable equity securities during the three months ended March 31, 2000.
Spending in each of these quarters was driven by capital expenditures, which
totaled $4.7 million in 2001 compared with $3.6 million in 2000. A significant
portion of this spending included process improvement projects at our
manufacturing and research and development facilities and information technology
enhancements.
Cash used by financing activities of $0.1 million during the three months
ended March 31, 2001 resulted from reductions in our outstanding borrowings on
our foreign credit facilities partially offset by cash received from the
exercise of stock options during the quarter. There were no dividends paid to
our common shareholders for the three months ended March 31, 2001 and 2000. We
currently intend to retain future earnings to finance the expansion of our
business. Any future determination to pay cash dividends will be at the
discretion of our board of directors and will depend upon our financial
condition, results of operations, capital requirements, general business
conditions and other factors that the board of directors may deem relevant,
including covenants in our debt instruments that may limit our ability to
declare and pay cash dividends on our capital stock. Covenants in our senior
note agreement restrict the payment of dividends or other distributions in cash
or other property to the extent the payment puts us in default of these
covenants. Such covenants include, but are not limited to, maintaining a debt to
total capitalization of no greater than 55% and a maximum ratio of debt to
EBITDA of 3.5:1.
As of March 31, 2001 we had 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. As of March 31, 2001 there were no borrowings under
this facility. Subsequent to March 31, 2001 the facility was amended and the
committed amounts increased to $60 million. The amended facility grants the
Company $40 million of three year committed borrowings and $20 million of one
year committed borrowings, which may be renewed each year.
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Our long-term debt consists primarily of the 6.82% senior notes issued in
1996 to certain institutional investors. The total principal amount of these
notes is $140 million, with annual installment payments of $28 million
commencing in March 2002. We are currently in compliance with all of the
financial covenants included in the senior note agreement.
MARKET RISK
Foreign currency risk and interest rate risk are the primary sources of
our market risk. To date, foreign operations, mainly denominated in Euros,
account for approximately 50% of our 2001 revenues. We believe that we mitigate
this risk by locating our manufacturing facilities so that the costs are
denominated in the same currency as our product revenues. We manage the foreign
currency exposures that remain through the use of foreign currency forward
contracts, currency options and off-setting currency loans where deemed
appropriate. We do not use these instruments for speculative purposes.
As of March 31, 2001, cash and cash equivalents totaled $197.4 million.
Of this amount, $35 million was denominated in Euros. The remainder or $162.4
million was primarily denominated in U.S. Dollars. Other than the first
installment due in March 2002 under our 6.82% senior notes discussed under the
heading "Liquidity and Capital Resources," short-term debt outstanding at March
31, 2001 was not significant. To the extent U.S. Dollar and Euro interest rates
fluctuate either up or down, the return on the cash investments will also
fluctuate. To the extent such Euro cash investments remain outstanding, we will
be subject to the risks of future foreign exchange fluctuations and its impact
on the translation of these cash investments into U.S. Dollars.
Our subsidiary based in the Netherlands, which adopted the Euro as its
functional currency, has U.S. Dollar and Japanese Yen denominated revenues. We
use forward currency contracts and option contracts from time to time as deemed
appropriate to hedge these anticipated revenues. At March 31, 2001, there were
no forward contracts or option contracts outstanding.
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. To date, we have derived
approximately 50% of our 2001 revenues and approximately 93% of our 2001
operating income from foreign operations. Economic conditions in countries where
we conduct business and changing foreign currency exchange rates affect our
financial position and results of operations. We are exposed to changes in
exchange rates in Europe, Latin America, and Asia. The Euro presents our most
significant foreign currency exposure risk. Changes in foreign currency exchange
rates, especially the strengthening of the U.S. dollar, may have an adverse
effect on our financial position and results of operations as they are expressed
in U.S. dollars.
Management monitors foreign currency exposures and may in the ordinary
course of business enter into foreign currency forward contracts or options
contracts related to specific foreign currency transactions or anticipated cash
flows. These contracts generally cover periods of nine months or less and are
not material. We do not hedge the translation of financial statements of
consolidated subsidiaries that maintain their local books and records in foreign
currencies.
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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.
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
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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 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.
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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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented in Item 2 of Part I of this Report on Form 10-Q
under the heading "Market Risk" is hereby incorporated by reference.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The information presented in Item 2 of Part I of this Report on Form
10-Q under the heading "Liquidity and Capital Resources" is hereby incorporated
by reference. The Company's Registration Statement on Form S-1 (Registration No.
333-36452) was effective as of July 27, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
SEE INDEX TO EXHIBITS
b. REPORTS ON FORM 8-K
NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENENCOR INTERNATIONAL, INC.
May 15, 2001
----------------------------- By: /s/ Raymond J. Land
Date ----------------------------
Raymond J. Land
Senior Vice President and Chief
Financial Officer
May 15, 2001
----------------------------- By: /s/ Darryl L. Canfield
Date ----------------------------
Darryl L. Canfield
Vice President and Corporate
Controller (Chief Accounting
Officer)
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INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
(3) (i) Form of Restated Certificate of Incorporation is
incorporated herein by reference to Exhibit 3.3 to Amendment
No. 3 to the Company's Registration Statement on Form S-1
(Registration No. 333-36452) filed on July 24, 2000.
(ii) Form of Amended and Restated Bylaws is incorporated herein
by reference to Exhibit 3.4 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-36452) filed on July 24, 2000.
(4) Instruments defining the rights of securities holders, including
indentures
(a) The documents listed under (3) are incorporated herein by
reference.
(b) Form of Specimen Common Stock Certificate is incorporated
herein by reference to Exhibit 4.1 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-36452) filed on July 24, 2000.
(c) Note Agreement for the $140,000,000 6.82% Senior Notes due
2006 between the Company and the purchasers identified
therein, dated March 28, 1996 is incorporated herein by
reference to Exhibit 4.2 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No.
333-36452) filed on 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.
(10) Material Contracts
*(10.1) Enzyme Supply Agreement by and between the Company and
Cargill, Incorporated dated as of January 5, 2001
(11) Statement re computation of per share earnings
Computation can be clearly determined from Note 2 to the
financial statements included herein under Item 1.
(15) Letter re unaudited interim financial information
Not applicable.
(18) Letter re change in accounting principles
Not applicable.
(19) Report furnished to security holders
Not applicable.
(22) Published report regarding matters submitted to a vote of
security holders
Not applicable.
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(23) Consents of experts and counsel
Not applicable.
(24) Power of Attorney
Not applicable.
(99) Additional Exhibits
Not applicable
-------------------------
* Exhibit filed with this Report
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