<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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: 0-25317
-------
INVITROGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0373077
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1600 Faraday Avenue, Carlsbad, CA 92008
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 760-603-7200
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
As of October 19, 1999 there were 16,182,192 shares of Common Stock outstanding.
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS (UNAUDITED) (AUDITED)
------------------- -------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................................... $ 38,216 $ 2,316
Short-term investments........................................................ 809 4,214
Accounts receivable, net of allowance for doubtful accounts of $167 and $266.. 7,923 5,628
Note receivable officer....................................................... 150 150
Inventories................................................................... 5,301 5,374
Deferred income taxes......................................................... 786 767
Prepaid expenses and other current assets..................................... 2,164 1,294
------------------- -------------------
Total current assets........................................................ 55,349 19,743
Property and Equipment, net...................................................... 8,961 10,036
Intangible Assets, net........................................................... 3,577 1,708
Other Assets..................................................................... 386 563
------------------- -------------------
Total assets................................................................ $ 68,273 $ 32,050
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank......................................................... $ - $ 779
Current portion of long-term obligations...................................... 1,137 995
Accounts payable.............................................................. 1,670 3,106
Accrued expenses.............................................................. 6,409 2,836
Income taxes payable.......................................................... 536 802
------------------- -------------------
Total current liabilities................................................... 9,752 8,518
------------------- -------------------
Long term obligations............................................................ 741 1,116
------------------- -------------------
Non-voting Redeemable Common Stock of Invitrogen B.V; Subsidiary common stock,
66,000 shares authorized; no shares issued or outstanding on September 30,
1999 and 18,000 shares issued and outstanding on December 31, 1998............ - 1,599
------------------- -------------------
Convertible Redeemable Preferred stock; $0.01 par value, 2,202,942 shares
authorized; no shares issued or outstanding on September 30, 1999
and 2,202,942 shares issued and outstanding on December 31, 1998.............. - 16,141
------------------- -------------------
Stockholders' Equity:
Common stock; $0.01 par value, 50,000,000 shares authorized; 16,175,259 and
9,948,035 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively............................................... 162 100
Additional paid-in-capital..................................................... 54,794 4,705
Deferred compensation.......................................................... (803) (962)
Value of common stock designated pursuant to Employee Stock Ownership
Plan.......................................................................... - 100
Foreign currency translation adjustment........................................ (230) (40)
Retained earnings.............................................................. 3,857 773
------------------- -------------------
Total stockholders' equity.................................................. 57,780 4,676
------------------- -------------------
Total liabilities and stockholders' equity.................................. $ 68,273 $ 32,050
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................................... $ 17,522 $ 14,507 $ 51,288 $ 39,212
Cost of Revenues....................................................... 5,883 5,427 17,461 13,707
--------- --------- --------- ---------
Gross margin......................................................... 11,639 9,080 33,827 25,505
Operating Expenses:
Sales and marketing.................................................. 3,490 3,005 10,496 8,316
General and administrative........................................... 2,344 1,907 6,742 5,816
Research and development............................................. 2,537 2,341 7,447 6,390
Merger related costs (see Note 5).................................... 4,379 - 4,379 -
--------- --------- --------- ---------
Total operating expenses.......................................... 12,750 7,253 29,064 20,522
--------- --------- --------- ---------
Income (loss) from operations................................... (1,111) 1,827 4,763 4,983
----------- ---------- ---------- ----------
Other Income (Expense):
Gain (loss) on foreign currency transactions......................... 107 84 (99) 78
Interest and other expense........................................... (83) (63) (222) (197)
Interest and other income............................................ 433 132 1,036 319
--------- --------- --------- ---------
457 153 715 200
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes........................ (654) 1,980 5,478 5,183
Benefit (provision) for income taxes................................... 27 (687) (2,157) (1,858)
--------- ---------- ---------- ----------
Net income (loss)...................................................... (627) 1,293 3,321 3,325
Less: Preferred stock dividends.................................... - (225) (163) (675)
Accretion of non-voting redeemable common stock.............. - (52) (74) (150)
Adjustment to beneficial conversion feature related to
convertible preferred stock................................. - - 985 -
--------- --------- --------- ---------
Income (loss) available to common stockholders.................. $ (627) $ 1,016 $ 4,069 $ 2,500
=========== ========== ========= =========
Earnings (loss) per share:
Basic................................................................ $ (0.04) $ 0.08 $ 0.27 $ 0.21
=========== ========= ========= =========
Diluted.............................................................. $ (0.04) $ 0.07 $ 0.23 $ 0.18
=========== ========= ========= =========
Weighted average shares used in per share calculation:
Basic................................................................ 16,006 12,150 15,099 12,154
Diluted.............................................................. 16,006 13,783 17,646 13,648
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 3,321 $ 3,325
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 1,965 1,248
Amortization of deferred compensation.................................. 276 162
Employee stock ownership plan contribution............................. - 75
Deferred income taxes.................................................. (34) (58)
Merger related costs................................................... 1,820 -
Other non-cash adjustments............................................. 182 26
Changes in operating assets and liabilities:
Accounts receivable................................................... (2,409) (2,193)
Inventories........................................................... 24 (1,609)
Prepaid expenses and other current assets............................. (1,379) (831)
Other assets.......................................................... (27) 63
Accounts payable...................................................... (1,380) 787
Accrued expenses...................................................... 3,408 404
Income taxes payable.................................................. (251) 1,099
--------- ---------
Net cash provided by operating activities.......................... 5,516 2,498
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short term investments....................................... 3,405 672
Purchases of property and equipment.................................... (2,261) (6,135)
Payments for intangible assets......................................... (1,071) (389)
---------- ---------
Net cash provided by (used in) investing activities................ 73 (5,852)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from (payments on) line of credit, net........................ (764) 74
Proceeds from long term obligations.................................... - 1,300
Principal payments on long term obligations............................ (1,250) (506)
Redemption of preferred and common stock and payment of accrued dividends (17,060) -
Proceeds from sale of common stock..................................... 49,398 14
Repurchase of common stock............................................. - (150)
--------- ----------
Net cash provided by financing activities.......................... 30,324 732
Effect of exchange rate changes on cash................................ (13) 197
---------- ---------
Net increase (decrease) in cash and cash equivalents................... 35,900 (2,425)
Cash and cash equivalents, beginning of period......................... 2,316 5,540
--------- ---------
Cash and cash equivalents, end of period............................... $ 38,216 $ 3,115
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................. $ 134 $ 162
========= =========
Cash paid for income taxes............................................. $ 2,608 $ 1,256
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Convertible Redeemable Preferred Stock into Redeemable
Preferred Stock...................................................... $ 14,015 $ -
========= =========
Conversion of Redeemable Preferred Stock into Common Stock............. $ 751 $ -
========= =========
Adjustment to beneficial conversion feature related to Convertible
Redeemable Preferred Stock........................................... $ 985 $ -
========= =========
Note issued for patent rights.......................................... $ 1,000 $ -
========= =========
Preferred dividends declared........................................... $ 163 $ 675
========= =========
Contribution of common stock to ESOP................................... $ 100 $ 100
========= =========
Accretion of redemption value for Redeemable Common Stock.............. $ 74 $ 150
========= =========
Deferred compensation.................................................. $ 164 $ 683
========= =========
Note issued for Serva product line assets acquired..................... $ - $ 500
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The consolidated financial statements include the accounts of Invitrogen
Corporation and its 100% controlled subsidiaries, NOVEX, Invitrogen B.V., NOVEX
Electrophoresis GmbH, Serva GmbH, NOVEX International Sales Corporation and
Invitrogen Export Company, Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation. The interim financial
statements have been prepared by Invitrogen, without audit, according to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote 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. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments, which include only normal recurring adjustments, necessary to state
fairly the financial position, results of operations and cash flows as of and
for the periods indicated.
On August 17, 1999, the Company consummated a merger with NOVEX, in a
stock-for-stock transaction (see Note 5). NOVEX, formerly known as Novel
Experimental Technology, a California Corporation, was incorporated on April 5,
1989. NOVEX manufactures protein and nucleic acid electrophoresis gels and
related equipment, solutions, standards, and fine chemicals, primarily for use
in research laboratories. This transaction has been accounted for as a pooling
of interests and, accordingly, the Company's consolidated financial statements
have been restated for all periods prior to the business combination to include
the financial results of Invitrogen and NOVEX.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Registration
Statement and Prospectus filed with the Securities and Exchange Commission on
October 22, 1999.
1. INVENTORIES
Inventories include material, labor and overhead costs and consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1999 1998
------------------ ------------------
<S> <C> <C>
Raw materials and components......................... $ 1,609 $ 1,610
Work in process...................................... 889 1,118
Finished goods....................................... 2,803 2,646
------------------ ------------------
$ 5,301 $ 5,374
================== ==================
</TABLE>
2. ACCUMULATED DEPRECIATION AND AMORTIZATION
Accumulated depreciation and amortization of property, plant and equipment
was $7.3 million and $5.8 million at September 30, 1999 and December 31,
1998, respectively. Accumulated amortization of intangible assets was $.5
million and $.3 million at September 30, 1999 and December 31, 1998,
respectively.
3. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1999 1998
------------------ ------------------
<S> <C> <C>
Accrued purchases.................................... $ 839 $ 678
Accrued payroll and related expenses................. 1,600 1,148
Accrued ESOP contribution............................ 353 254
Accrued merger related costs......................... 2,684 -
Accrued other........................................ 933 756
--------------- ---------------
$ 6,409 $ 2,836
=============== ===============
</TABLE>
4. INITIAL PUBLIC OFFERING, CONVERSION AND REDEMPTION OF PREFERRED STOCK
5
<PAGE>
In February 1999, the Company completed its initial public offering and
issued 3,525,000 newly issued shares of its Common Stock at a price of
$15.00 per share. The Company received $48.1 million in cash, net of
underwriting discounts, commissions and other offering costs.
Simultaneously with the closing of the initial public offering, each of the
2,202,942 outstanding shares of Series A Cumulative Convertible Preferred
Stock was automatically converted into 2,202,942 shares of Common Stock and
2,202,942 shares of Series A Redeemable Preferred Stock (RPS). At the
closing of the IPO, the RPS was redeemed for $14,015,000 and accumulated
dividends on the Series A Cumulative Convertible Preferred Stock of
$1,538,000 were paid. In 1997, when the stock was issued, a charge to
equity of $15 million was recorded to reflect the beneficial conversion
feature of the convertible preferred stock. Upon determination of the final
redemption price of $14,015,000 at the IPO a credit to equity of $985,000
was recorded which has been reported as an adjustment to Income Available
to Common Stockholders in the income statement for the quarter ended March
31, 1999.
5. NOVEX MERGER
On August 17, 1999, the Company consummated a merger with NOVEX, in a
stock-for-stock transaction. NOVEX manufactures protein and nucleic acid
electrophoresis gels and related equipment, solutions, standards, and fine
chemicals, primarily for use in research laboratories.
Invitrogen issued 2,530,124 shares of common stock in exchange for all the
outstanding shares of NOVEX stock based on an exchange ratio of
approximately .23188 shares of Invitrogen common stock for each share of
NOVEX common stock. Invitrogen also assumed and exchanged all options to
purchase NOVEX common stock for options to purchase 469,678 shares of
Invitrogen common stock. The merger is intended to qualify as a tax-free
reorganization and has been accounted for as a pooling of interests. Costs
incurred as a result of the merger and related integration are expected to
be $4.4 million and are subject to change. These costs were expensed in
August 1999, after the merger was completed.
Prior to the merger, NOVEX used a fiscal year ending March 31. In order to
report the combined results on a consistent basis, NOVEX's fiscal years
have been recast to a twelve-month period ended December 31, for all
periods presented. These recast results have been combined with the
corresponding fiscal years ended December 31, 1998, 1997 and 1996, of
Invitrogen to arrive at the financial information presented. The combined
results of operations of Invitrogen and NOVEX are presented as if the
merger had occurred at the beginning of the periods presented.
6
<PAGE>
6. EARNINGS PER SHARE
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
LOSS SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic and Diluted EPS:
Loss available to common stockholders....................... $ (627) 16,006 $ (0.04)
========== ========== ==========
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
INCOME SHARES
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders..................... $ 1,016 12,150 $ 0.08
==========
Stock options............................................... - 1,633
---------- ----------
Diluted EPS:
Income available to common stockholders plus assumed
conversions.............................................. $ 1,016 13,783 $ 0.07
========== ========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
INCOME SHARES
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders..................... $ 4,069 15,099 $ 0.27
==========
Stock options............................................... - 2,547
---------- ----------
Diluted EPS:
Income available to common stockholders plus assumed
conversions.............................................. $ 4,069 17,646 $ 0.23
========== ========== ==========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
INCOME SHARES
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders..................... $ 2,500 12,154 $ 0.21
==========
Stock options............................................... - 1,494
---------- ----------
Diluted EPS:
Income available to common stockholders plus assumed
conversions.............................................. $ 2,500 13,648 $ 0.18
========== ========== ==========
</TABLE>
In accordance with SAB Topic 4D, the Company considers any common stock
issuable upon the occurrence of an IPO for little or no consideration as a
nominal issuance. In accordance with the above bulletin, the Company has
considered 2,202,942 common shares issuable in connection with the conversion of
convertible preferred stock to be a nominal issuance and outstanding for all
periods since the original issuance of the underlying security until the
conversion into common stock upon the IPO in February 1999.
7
<PAGE>
7. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)...................................................... $ (627) $ 1,293 $ 3,321 $ 3,325
Foreign currency translation adjustments............................... 13 146 (190) 166
--------- --------- ---------- ---------
Total comprehensive income (loss).................................... $ (614) $ 1,439 $ 3,131 $ 3,491
=========== ========= ========= =========
</TABLE>
8
<PAGE>
PART 1 FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market research tools in kit form and provide other
research products and services to corporate, academic and government entities.
Our research kits simplify and improve gene cloning, gene expression and gene
analysis techniques as well as other molecular biology activities. Substantially
all of our revenue to date has come from the sale of these research kits and
related products used by a variety of scientific researchers to conduct gene
cloning, expression and analysis experiments. Our research kits are sold
primarily in the United States, Europe and Japan. Our products are used for
research purposes and their use is not regulated by the United States Food and
Drug Administration or by any comparable international organization.
We manufacture the majority of our research kits and other products in our
manufacturing facilities in Carlsbad and San Diego, California. In addition,
we purchase products from third party manufacturers. We also assemble
pre-cast gels and buffers in Frankfurt, Germany and have a manufacturing
facility in Heidelberg, Germany for formulating and packaging fine chemicals.
The majority of our sales activities are conducted through a dedicated direct
sales organization located in the United States and Europe. We also conduct
marketing and distribution activities at our facilities in the United States
and at a facility we own in the Netherlands. A small proportion of our sales
are to international distributors who resell Invitrogen kits to researchers.
These distributors are located in selected territories in Europe, as well as
in Japan and other territories in Asia. We currently have no plans to
establish a direct sales force in these territories, although we may choose
in the future to establish a direct sales organization in additional
territories.
We conduct research activities in the United States and business development
activities in the United States and Europe. As part of these activities we
actively seek to license intellectual property from academic, government and
commercial institutions relating to gene cloning, expression and analysis
technologies. To date, we have obtained over 85 licenses, which provide us with
access to over 200 patents covering gene cloning, expression and analysis
materials and techniques.
In June 1998, we began using our high-throughput cloning and expression
technologies, which we market under the name Invitrogenomics. We are using this
technology to rapidly clone and patent full-length genes which we are licensing
and selling. In addition, we use our Invitrogenomics technology to provide gene
cloning and expression services on a contract basis to pharmaceutical,
biotechnology and agricultural companies. Invitrogenomics products and services
have generated limited revenues to date.
Our revenues have increased significantly since our inception, and from 1994 to
1998, we have experienced compound annual revenue growth of 27%. The increase in
our revenues has been due to several factors, including the continued growth of
the market for gene cloning, expression and analysis kits, increasing market
acceptance of our gene cloning, expression and analysis kits, our introduction
of new research kits for gene cloning, expression and analysis, and the
expansion of our direct sales and marketing efforts. We plan to continue to
introduce new research kits, as we believe continued new product development and
rapid product introduction is a critical competitive factor in the market for
molecular biology research kits. In order to support increased levels of sales
and to augment our long-term competitive position, we anticipate that we will
continue to increase expenditures in sales and marketing, manufacturing and
research and development.
We currently manufacture products for inventory and ship products shortly after
the receipt of orders, and anticipate that we will do so in the future.
Accordingly, we have not developed a significant backlog and do not anticipate
we will develop a material backlog in the future.
We have acquired a significant number of patent rights from third parties as
part of our business activities. These patent rights are used as a basis for the
development of our research kits and Invitrogenomics technologies. We have
historically paid and are obligated to pay in the future to such third parties
royalties relating to sales of some of our research kits and selected services.
Royalty expense is recognized as a cost of revenue as the related royalties are
incurred.
9
<PAGE>
On August 17, 1999 we completed our merger with NOVEX. The transaction has
been accounted for as a pooling of interests and the consolidated financial
statements have been restated for all periods prior to the merger to reflect
the combined financial and operating results of Invitrogen and NOVEX.
In May 1998, NOVEX purchased the assets of the Serva product line from
Boehringer Ingleheim Bioproducts Partnership in Heidelberg, Germany. Revenues,
expenses and acquired assets relating to this product line are included in our
consolidated financial statements from the date of acquisition.
We anticipate that our results of operations may fluctuate from quarter to
quarter and will be difficult to predict. The timing and degree of fluctuation
will depend upon several factors, including:
- - Changes in customer research budgets which are influenced by the timing of
their research and commercialization efforts and their receipt of
government grants;
- - Competitive product introductions;
- - Our ability to successfully introduce or transition the market to new
products;
- - Market acceptance of existing or new products;
- - Our ability to manufacture our products efficiently; and
- - Our ability to control or adjust research and development, marketing, sales
and general and administrative expenses in response to changes in revenues.
In addition, our results of operations could be affected by the timing of orders
from distributors and the mix of sales among distributors and our direct sales
force. Although we have experienced growth in recent years, there can be no
assurance that, in the future, we will sustain revenue growth or remain
profitable on a quarterly or annual basis or that our growth will be consistent
with predictions made by securities analysts. Additionally, quarter to quarter
comparisons of operating results are not necessarily indicative of future
results.
RESULTS OF OPERATIONS
REVENUES. Revenues for the three months ended September 30 increased $3.0
million, or 21%, from $14.5 million in 1998 to $17.5 million for 1999. For
these same periods, revenues in North America increased $2.3 million, or 25%,
from $9.5 million to $11.8 million, and revenues outside of North America
increased $0.7 million, or 13%, from $5.0 million to $5.7 million. For the
three months ended September 30, 1998 the results indicate unusually high
sales of Serva products as customers delayed purchases until after the
10
<PAGE>
acquisition of the product line by NOVEX in May 1998. As a result, Serva
product line revenues declined $0.4 million, or 30%, for the three months
ended September 30, 1999 compared to the same period in 1998. Excluding the
Serva product line revenues for the three months ended September 30,
worldwide revenues increased $3.4 million, or 26% from $13.2 million in 1998
to $16.6 million in 1999 and revenues outside North America increased $1.0
million, or 27% from $3.8 million in 1998 to $4.8 million in 1999.
For the nine months ended September 30, revenues increased $12.1 million, or
31%, from $39.2 million in 1998 to $51.3 million in 1999. Revenues in North
America increased $7.4 million, or 28%, from $26.5 million in 1998 to $33.9
million in 1999 and revenues outside of North America increased $4.7 million,
or 37%, from $12.7 million in 1998 to $17.4 million in 1999. Revenues for the
nine months ended September 30, 1998 include only four months of Serva
product line revenues because the acquisition of Serva occurred at the end of
May 1998. Excluding the Serva product line revenues for the nine months ended
September 30, worldwide revenues increased $10.7 million, or 29% from $37.6
million in 1998 to $48.3 million in 1999 and revenues outside North America
increased $3.3 million, or 30% from $11.0 million in 1998 to $14.3 million in
1999.
The overall increase in revenues for the three and nine months ended September
30, 1999 was primarily attributable to continued market growth for gene cloning,
expression and analysis kits and increased market penetration of our gene
cloning, expression and analysis product lines. We expect that future revenues
will be affected by new product introductions, competitive conditions, customer
research budgets, and the rate of expansion of our customer base.
GROSS MARGIN. Gross margin as a percentage of revenues for the three months
ended September 30, 1999 increased to 66.4% from 62.6% for the same period in
1998. This improvement resulted from general price increases, higher grant
revenue and lower shipping costs.
For the nine months ended September 30, gross margin increased from 65.0% in
1998 to 66.0% in 1999. The increase resulted from the improvements discussed
above.
We believe that gross margin for future periods could be affected by sale
volumes, competitive conditions, royalty payments on licensed technologies, and
foreign exchange factors. Foreign currency fluctuations had a negligible impact
during both periods. The functional currency of our Netherlands subsidiary,
Invitrogen B.V., is the Netherlands Guilder (NLG) and for our German
subsidiaries, NOVEX GmbH and Serva GmbH, is the Deutsche Mark. The translation
from NLG and the Deutsche Mark to the U.S. Dollar for revenue and expenses is
based on the average exchange rate during the period; large increases or
decreases in the spread between currencies have affected and may continue to
affect gross margin and reported income. All three European subsidiaries conduct
their European business in the currencies of its significant customers. Exchange
gains or losses arising from transactions denominated in these currencies are
recorded using the actual exchange differences on the date of the transaction.
Large increases or decreases in these currency fluctuations could also impact
gross margin and reported profits.
SALES AND MARKETING. Sales and marketing expenses increased $0.5 million from
$3.0 million for the three months ended September 30, 1998 to $3.5 million for
the same period in 1999. As a percentage of revenues, sales and marketing
expenses decreased from 21% to 20% for these periods as our revenue growth
continued to outpace spending for sales and marketing.
For the nine months ended September 30, 1999, sales and marketing expenses
increased $2.2 million from $8.3 million in 1998 to $10.5 million in 1999 and as
a percentage of sales remained the same at 21% for both periods in 1999 and
1998.
We anticipate that sales and marketing expenses will comprise over 20% of
revenues over the next few years as we continue the expansion of our field sales
forces in both North America and Europe.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended September 30 increased $0.4 million from $1.9 million in 1998 to
$2.3 million in 1999. As a percentage of revenues for the same periods, general
and administrative expenses remained the same at 13%.
For the nine months ended September 30, 1999 general and administrative expenses
increased $0.9 million from $5.8 million, or 15% of revenues, in 1998 to $6.7
million, or 13% of revenues in 1999.
The absolute increase resulted from the continued expansion of administrative
resources to support our growth and requirements as a newly public company in
1999. The decline as a percentage of revenues occurred as a fixed portion of our
general and administrative expenses was spread over a larger revenue base.
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RESEARCH AND DEVELOPMENT. Research and development expenses increased $0.2
million from $2.3 million for the third quarter in 1998 to $2.5 million in 1999.
As a percentage of revenues, research and development expenses decreased from
16% in 1998 to 15% in 1999.
For the nine months ended September 30, 1999, research and development expenses
increased $1.0 million to $7.4 million, or 15% of revenues, from $6.4 million
for the same period in 1998, or 16% of revenues. The absolute increase resulted
from increased costs associated with the expansion of research and business
development competencies in our core gene cloning, expression and analysis
business.
OTHER INCOME (EXPENSE). Other income increased $0.3 million from $0.2 million
for the three months ended September 30, 1998 to $0.5 million for the same
period in 1999. The increase was mainly attributable to higher interest and
other income, resulting primarily from the larger balances of cash and
investments during the period.
For the nine months ended September 30, other income increased $0.5 million
from $0.2 million in 1998 to $0.7 million in 1999. The increase in other
income was attributable to higher interest income partially offset by higher
foreign currency transaction costs.
PROVISION FOR INCOME TAXES. Our effective tax rate increased from 36% for the
nine months ended September 30, 1998 to 39% for the same period in 1999. The
increase in our effective tax rate resulted from certain merger related costs
incurred in August 1999 that are not deductible for tax purposes. Including
these non-deductible items, we anticipate that our effective tax rate for
1999 will be approximately 38%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities generated $5.5 million during the first nine
months of 1999. Net cash generated from financing activities totaled $30.3
million and represents $49.4 million in net proceeds from the sale of common
stock in our initial public offering and from stock option exercises, reduced by
$17.1 million that was used to redeem preferred and non-voting common stock and
pay accrued dividends and $2.0 million that was used to pay off debt acquired in
the NOVEX merger. Capital expenditures and payments for intangible assets for
the first nine months of 1999 totaled $2.3 million and $1.1 million,
respectively.
In August 1999 we completed our merger with NOVEX. As consideration for the
merger, we issued 2,530,124 shares of our common stock for all of the
outstanding common stock of NOVEX and assumed the outstanding options of NOVEX
which were converted into options to purchase 469,678 shares of our common
stock. Costs incurred as a result of the merger and related integration are
expected to be $4.4 million and are subject to change. These costs were expensed
in August 1999, after the merger was completed.
As of September 30, 1999 we had cash, cash equivalents and short-term
investments totaling $39.0 million and working capital of $45.6 million. Our
funds are currently invested in U.S. Treasury and government agency
obligations, and dividend-bearing securities. With the cash available from
our initial public offering we reduced our available line of credit from
$10.0 million to $3.0 million in June 1999. This line of credit expires in
October 2001, and at September 30, 1999 no amounts were outstanding. In
August 1999 we assumed NOVEX's $1.2 million line of credit facility, which
expires in August 2000. At September 30, 1999 no amounts were outstanding
under this line of credit.
We expect that our cash, cash equivalents, short term investments, funds from
operations and interest income earned thereon, will be sufficient to fund our
operations for at least two years. Our future capital requirements and the
adequacy of our available funds will depend on many factors, including
scientific progress in our research and development programs, the magnitude of
those programs, our ability to establish collaborative and licensing
arrangements, the cost involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims, competing technological and market developments and
future business acquisitions.
CURRENCY HEDGING AND FOREIGN CURRENCY TRANSLATION
We conduct business transactions with our subsidiary in the Netherlands and with
our foreign distributors, including those in Asia, in U.S. Dollars. Transactions
with the German subsidiaries are denominated in foreign currencies. We have not
taken any action to reduce our exposure to changes in foreign currency exchange
rates, such as options or futures contracts with respect to transactions with
our German subsidiaries or transactions with our European customers. However, in
the normal course of business, Invitrogen B.V. from time to time purchases
exchange-traded put options on U.S. Dollars and U.K. Pounds Sterling to
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mitigate foreign currency exposure. At September 30, 1999 outstanding options
totaled $0.3 million and mature on various dates through December 1999.
NLG is the functional currency for Invitrogen B.V. and the Deutsche Mark is the
functional currency for NOVEX GmbH and Serva GmbH. The translation from NLG and
the Deutsche Mark to the U.S. Dollar for balance sheet accounts is done using
the current exchange rate in effect at the balance sheet date and for revenue
and expense accounts using the average exchange rate during the period. The
effects of translation are recorded as a separate component of stockholder's
equity. Invitrogen B.V., NOVEX GmbH and Serva GmbH conduct their business with
significant customers in their local European currencies; exchange gains and
losses arising from these transactions are recorded using the actual exchange
differences on the date of the transaction and are included in the Consolidated
Statements of Income in the respective period incurred.
YEAR 2000 EFFECT ON COMPUTER SYSTEMS
Many currently installed computer systems are not capable of distinguishing 21st
century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Some businesses may be financially affected by such
computer problems.
We believe our existing manufacturing, financial and accounting systems will be
year 2000 compliant prior to January 1, 2000, meaning that they will be capable
of distinguishing 21st century dates from 20th century dates. We are in the
process of replacing a portion of our existing computer system with new hardware
and software that will also be year 2000 compliant and expect to complete this
process in the fourth quarter of 1999.
We are in the process of testing our other internal systems, including embedded
control systems in our manufacturing and storage equipment. We currently believe
these systems are year 2000 compliant. We have made inquiries of our suppliers
to attempt to assess their readiness for the year 2000. The failure of systems
maintained by our customers, distributors, and suppliers could reduce our
revenues, cause us to incur significant expenses to remedy any problems, or
otherwise seriously damage our business.
To date we have spent immaterial amounts to comply with accounting and statutory
requirements regarding the year 2000. We believe that we will spend minimal
additional amounts for year 2000 issues in the foreseeable future.
These assessments have not been independently verified.
If we discover year 2000 errors or defects in our internal systems, we may have
to spend substantial amounts in making repairs. These errors may result in the
temporary failure of our manufacturing, accounting and financial systems, which
in turn would delay the taking and processing of orders for a minimum of 3-5
days.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION
On January 1, 1999, certain member states of the European Economic Community,
including the Netherlands, fixed their respective currencies to a new currency,
the Euro. On that day, the Euro became a functional legal currency within these
countries. During the three years beginning on January 1, 1999, business in
these EEC member states will be conducted in both the existing national
currency, such as the Netherlands Guilder, French Franc or Deutsche Mark, and
the Euro. Businesses will be required to complete transition to the Euro and
begin reporting and conducting their transactions in the Euro by January 1,
2002. On July 1, 2002 the existing national currencies will be withdrawn and
will no longer be considered legal tender.
Companies operating in or conducting business in EEC member states will need to
ensure that their financial and other software systems are capable of processing
transactions and properly handling the existing currencies, as well as the Euro.
We are still assessing the impact that the Euro will have on our internal
systems and products. We believe that our enterprise-wide financial and
manufacturing information systems will be Euro compliant by January 1, 2000.
However, we have not determined the costs related to any problems that may arise
in the future. Any such problems may materially adversely affect our business,
operating results and financial condition.
FORWARD-LOOKING STATEMENTS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, such as statements relating to trends
in
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revenues, expenses and net income, and are therefore prospective. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "project," and "continue" or
similar words. You should read statements that contain these words carefully
because they:
- - Discuss our future expectations
- - Contain projections of our future results of operations or of our financial
condition
- - State other "forward-looking" information
Such forward-looking statements are subject to a number of risks, uncertainties
and other factors that could cause actual results to differ materially from
future results expressed or implied by such forward-looking statements. There
may be events in the future that we are not able to predict accurately or over
which we have no control. Potential risks and uncertainties include, but are not
limited to, those listed below under "Risk Factors That May Affect Future
Results" as well as other risks and uncertainties detailed in our Registration
Statement, as amended, filed with the Securities and Exchange Commission on
October 22, 1999.
The above Management's Discussion and Analysis should be read in conjunction
with the consolidated financial statements and notes thereto included in
Invitrogen's Prospectus, as amended, filed with the Securities and Exchange
Commission on October 22, 1999.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
FAILURE TO SUCCESSFULLY INTEGRATE NOVEX INTO OUR OPERATIONS COULD REDUCE OUR
PROFITABILITY
We closed our merger with NOVEX on August 17, 1999. NOVEX is now a
wholly-owned subsidiary of Invitrogen. Integrating the two companies' operations
is ongoing and will require significant efforts from each company, including the
coordination of research and development and sales and marketing efforts.
Invitrogen may find it difficult to integrate the operations of NOVEX. Personnel
may leave or be terminated because of the merger. We recently reduced the size
of our U.S. workforce by approximately 14% in connection with the integration of
the two companies. Also David E. McCarty, former President and Chief Executive
Officer of NOVEX, former Executive Vice President of Invitrogen and a selling
stockholder, is no longer our employee but continues as a director of
Invitrogen. Such employee resignations or terminations may require us to make
severance or other payments and may result in related litigation. Four former
employees of NOVEX, including Mr. McCarty and Sheldon Engelhorn, a former
Executive Vice President of NOVEX and a selling stockholder in this offering,
have retained counsel and threatened to take legal actions against us arising
out of the termination of their employment. These former employees allege fraud
and wrongful termination in connection with the termination of their employment
following the merger between Invitrogen and NOVEX and the reduction of our U.S.
workforce. These former employees have indicated that their damages would
include lost earnings, severance and the value of unvested stock options which
they lost as a result of the termination of their employment. Mr. McCarty has
requested arbitration of his claims. Although no formal legal action has been
filed and no other specific demands have been made, actions may be filed against
us in the future. Additionally, other former employees could assert similar or
other claims arising out of the termination of their employment. We are
currently evaluating all such claims and no assurances can be given as to the
outcome of any resulting litigation.
NOVEX customers, distributors or suppliers may terminate their arrangements
with NOVEX, or demand amended terms to these arrangements, because of the
merger. Invitrogen management may have their attention diverted while trying to
integrate the two companies. Such diversion of management's attention or
difficulties in the transition process could have a material adverse impact on
us. If we are not able to successfully integrate the operations of NOVEX, our
expectations of future results of operations may not be met. Factors which will
determine the success of the merger include:
- Changes in the favorable market reaction to NOVEX's and Invitrogen's
significant products;
- Competitive factors, including technological advances attained by
competitors and patents granted to or contested by competitors, which
would result in their ability to compete against us more effectively;
- The ability of the combined company to increase sales of both NOVEX and
Invitrogen products; and
- The ability of the combined company to operate efficiently and achieve
cost savings.
Even if the two companies are able to integrate operations, there can be no
assurance that the anticipated synergies will be achieved. The failure to
achieve such synergies could have a material adverse effect on the business,
results of operations and financial condition of the combined company.
FAILURE TO MANAGE GROWTH COULD IMPAIR OUR BUSINESS
Our business has grown rapidly. Our net revenues increased from
$32.6 million in 1996 to $53.7 million in 1998. During that same period we
significantly expanded our operations in the United
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States and in Europe. The number of our employees has increased from
approximately 220 at December 31, 1996 to approximately 380 at September 30,
1999.
It is very difficult to manage this rapid growth, and our future success
depends on our ability to implement:
- Research and product development;
- Sales and marketing programs;
- Customer support programs;
- Operational and financial control systems; and
- Recruiting and training of new personnel.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures and to
expand and train our work force worldwide.
We are in the process of upgrading and integrating our enterprise-wide
financial and manufacturing information system. If we fail to successfully
complete this process we could experience manufacturing and shipping delays
which, in turn, could cause increased manufacturing costs and deferred or lost
sales.
We have developed a high-throughput gene cloning and expression system by
scaling up our TOPO TA Cloning technology. We are commercializing this
technology under the name Invitrogenomics. Our future business growth depends in
part on the success of our Invitrogenomics products and services. In order to
succeed in this business we may need to hire additional senior managers.
Moreover, operation of Invitrogenomics may present unfamiliar management
challenges that we might not successfully address. We may not be able to locate
or hire the necessary managers or successfully address the potentially
unfamiliar management issues that may occur in Invitrogenomics or other areas of
our business.
We recently merged with NOVEX, requiring additional investments in
operations, product research and development and sales and marketing which are
significant expenses. Failure to successfully manage and coordinate the growth
of the combined company could adversely impact our revenue and profits.
REDUCTION IN RESEARCH AND DEVELOPMENT BUDGETS AND GOVERNMENT FUNDING MAY IMPACT
SALES
Our customers include researchers at pharmaceutical and biotechnology
companies, academic institutions and government and private laboratories.
Fluctuations in the research and development budgets of these researchers and
their organizations could have a significant effect on the demand for our
products. Research and development budgets fluctuate due to changes in available
resources, spending priorities and institutional budgetary policies. Our
business could be seriously damaged by any significant decrease in life sciences
research and development expenditures by pharmaceutical and biotechnology
companies, academic institutions or government and private laboratories.
In recent years, the United States pharmaceutical industry has undergone
substantial downsizing and consolidation. Further mergers or corporate
consolidations in the pharmaceutical industry could cause us to lose existing
customers and potential future customers, which could have a material adverse
effect on our business, financial condition and results of operations.
A significant portion of our sales have been to researchers, universities,
government laboratories and private foundations whose funding is dependent upon
grants from government agencies such as the U.S. National Institutes of Health
and similar domestic and international agencies. Also, a portion of our direct
revenues comes from NIH Small Business Innovation Research grant funds. Although
the
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level of research funding has increased during the past several years, we cannot
assure you that this trend will continue. Government funding of research and
development is subject to the political process, which is inherently fluid and
unpredictable. Our revenues may be adversely affected if our customers delay
purchases as a result of uncertainties surrounding the approval of government
budget proposals. Also, government proposals to reduce or eliminate budgetary
deficits have sometimes included reduced allocations to the NIH and other
government agencies that fund research and development activities. A reduction
in government funding for the NIH or other government research agencies could
seriously damage our business.
Our customers generally receive funds from approved grants at particular
times of the year, as determined by the federal government. Grants have, in the
past, been frozen for extended periods or have otherwise become unavailable to
various institutions without advance notice. The timing of the receipt of grant
funds affects the timing of purchase decisions by our customers and, as a
result, can cause fluctuations in our sales and operating results.
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT
Our business model of providing products to researchers working on a variety
of genetic projects requires us to develop a wide spectrum of products. To
generate broad product lines it is advantageous to sometimes license
technologies from the scientific community at large rather than depending
exclusively on our own employees. As a result, we believe our ability to
in-license new technologies from third parties is and will continue to be
critical to our ability to offer new products. Over 40% of our revenues are from
products manufactured or sold under licenses from third parties.
From time to time we are notified or become aware of patents held by third
parties which are related to technologies we are selling or may sell in the
future. After a review of these patents, we may decide to obtain a license for
these technologies from such third parties. We are currently in the process of
negotiating several such licenses and expect that we will also negotiate these
types of licenses in the future. There can be no assurances that we will be able
to negotiate such licenses on favorable terms, or at all.
Our ability to gain access to technologies needed for new products and
services depends in part on our ability to convince inventors that we can
successfully commercialize their inventions. We cannot assure you that we will
be able to continue to identify new technologies developed by others. Even if we
are able to identify new technologies of interest, we may not be able to
negotiate a license on favorable terms, or at all.
LOSS OF LICENSES COULD HURT OUR PERFORMANCE
Some of our licenses do not run for the length of the underlying patent. We
may not be able to renew our existing licenses on favorable terms, or at all. If
we lose the rights to a patented technology, we may need to stop selling certain
of our products or redesign our products or lose a competitive advantage.
Potential competitors could in-license technologies that we fail to license and
potentially erode our market share for certain products.
Our licenses typically subject us to various commercialization, sublicensing
and other obligations. If we fail to comply with these requirements we could
lose important rights under a license, such as the right to exclusivity in a
certain market. In some cases, we could also lose all rights under a license. In
addition, certain rights granted under the license could be lost for reasons out
of our control. For example, the licensor could lose patent protection for a
number of reasons, including invalidity of the licensed patent. We typically do
not receive significant indemnification from a licensor against third party
claims of intellectual property infringement. See "Business--Technology
Licensing" regarding our current licenses.
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OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE
The market for our products and services is only about fifteen years old.
Rapid technological change and frequent new product introductions are typical
for the market. For example, prepackaged kits to perform research in particular
cell lines and already-isolated genetic material are only now coming into
widespread use among researchers. Our future success will depend in part on
continuous, timely development and introduction of new products that address
evolving market requirements. We believe successful new product introductions
provide a significant competitive advantage because customers make an investment
of time in selecting and learning to use a new product, and are reluctant to
switch thereafter. To the extent we fail to introduce new and innovative
products, we may lose market share to our competitors, which will be difficult
or impossible to regain. An inability, for technological or other reasons, to
successfully develop and introduce new products could reduce our growth rate or
damage our business.
We have made a substantial investment in developing the technology
underlying Invitrogenomics products and services. The products portion of
Invitrogenomics was launched commercially in 1998, and has not achieved
significant revenues. We cannot be sure that Invitrogenomics will achieve any
commercial success or that revenues will equal or exceed the cost of our
investment.
In the past we have experienced, and are likely to experience in the future,
delays in the development and introduction of products. We cannot assure you
that we will keep pace with the rapid rate of change in life sciences research,
or that our new products will adequately meet the requirements of the
marketplace or achieve market acceptance. Some of the factors affecting market
acceptance of new products include:
- Availability, quality and price relative to competitive products;
- The timing of introduction of the product relative to competitive
products;
- Scientists' opinion of the product's utility;
- Citation of the product in published research; and
- General trends in life sciences research.
The expenses or losses associated with unsuccessful product development
activities or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition.
LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS
Our products and services are highly technical in nature. In general only
highly qualified and trained scientists have the necessary skills to develop and
market our products and provide our services. We face intense competition for
these professionals from our competitors and our customers, marketing partners
and companies throughout our industry. Any failure on our part to hire, train
and retain a sufficient number of qualified professionals would seriously damage
our business. We do not generally enter into employment agreements requiring
these employees to continue in our employment for any period of time. See
"Management."
COMPETITION IN THE LIFE SCIENCES RESEARCH MARKET COULD REDUCE SALES
The markets for our products are very competitive and price sensitive. Many
other life sciences research product suppliers have greater financial,
operational, sales and marketing resources, and more experience in research and
development than we do. These and other companies may have developed or could in
the future develop new technologies that compete with our products or even
render our products obsolete. If a competitor develops superior technology or
cost-effective alternatives to our kits and other products, our business,
operating results and financial condition could be materially adversely
affected.
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The market for our electrophoresis products is also subject to specific
competitive risks. The recent sale by FMC of its BioProducts division to a
competitor of NOVEX may result in additional market and pricing pressure on our
products. Further, NOVEX recently increased its prices, which may be met with
customer resistance and could give competing companies an additional opening
into our markets. The gel electrophoresis market is highly price competitive.
Our competitors have in the past and may in the future compete by lowering
prices on certain products. In certain cases, we may respond by lowering our
prices which would reduce revenues and profits. Conversely, failure to
anticipate and respond to price competition may hurt our market share.
We believe that customers in our markets display a significant amount of
loyalty to their initial supplier of a particular product. Therefore, it may be
difficult to generate sales to customers who have purchased products from
competitors. To the extent we are unable to be the first to develop and supply
new products, our competitive position will suffer. See "Business--Competition"
for more information.
DISTRIBUTORS MAY FORCE US TO USE MORE EXPENSIVE MARKETING AND DISTRIBUTION
CHANNELS
Certain of our customers have developed purchasing initiatives to reduce the
number of vendors they purchase from in order to lower their supply costs. In
some cases these accounts have established agreements with large distributors,
which include discounts and the distributors' direct involvement with the
purchasing process. These activities may force us to supply the large
distributors with our products at a discount to reach those customers. For
similar reasons many larger customers, including the federal government, have
requested and may in the future request special pricing arrangements, including
blanket purchase agreements. These agreements may limit our pricing flexibility,
especially with respect to our electrophoresis products, which could adversely
impact our business, financial condition and results of operations. Currently we
do not have the capability to accept and process orders through our website.
Accordingly, we may implement sales through Internet vendors. Internet sales
through third parties may negatively impact our gross margins as the commission
paid on Internet sales would be an additional cost not incurred through the use
of non-Internet vendors.
WE RELY ON THIRD-PARTY MANUFACTURERS TO MANUFACTURE SOME OF OUR PRODUCTS AND
COMPONENTS
We rely on third-party manufacturers to supply many of our raw materials,
product components and in some cases, entire products. In particular, we
purchase all of the cassettes used in our electrophoresis pre-cast gels from a
single third-party manufacturer. Also, we recently contracted with an outside
vendor for the production of our PowerEase instrument products. Manufacturing
problems may occur with these and other outside sources. If such problems occur,
there can be no assurance that we will be able to manufacture our products
profitably or on time.
INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR
RESULTS
Including subsidiaries and distributors, our products are currently marketed
in over 30 countries throughout the world. Our international revenues, which
include revenues from our Netherlands and Germany subsidiaries and export sales,
represented 35% of our product revenues in 1998, 29% in 1997 and 25% in 1996. We
expect that international revenues will continue to account for a significant
percentage of our revenues for the foreseeable future, in part because we intend
to expand our international operations.
There are a number of risks arising from our international business,
including:
- General economic and political conditions in the markets in which we
operate;
- Potential increased costs associated with overlapping tax structures;
- Potential trade restrictions and exchange controls;
- More limited protection for intellectual property rights in some
countries;
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- Difficulties and costs associated with staffing and managing foreign
operations;
- Uncertain effects of the movement in Europe to a unified currency;
- Slower growth in the European market before the unified currency is fully
adopted;
- Unexpected changes in regulatory requirements;
- The difficulties of compliance with a wide variety of foreign laws and
regulations;
- Longer accounts receivable cycles in certain foreign countries; and
- Import and export licensing requirements.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the currencies in which we do
business have caused and will continue to cause foreign currency transaction
gains and losses. We cannot predict the effects of exchange rate fluctuations
upon our future operating results because of the number of currencies involved,
the variability of currency exposures and the potential volatility of currency
exchange rates. We engage in foreign exchange hedging transactions to manage our
foreign currency exposure, but we cannot assure you that our strategies will
adequately protect our operating results from the effects of exchange rate
fluctuations. For more information see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Currency Hedging and Foreign
Currency Translation."
The Asia/Pacific region has recently experienced unstable economic
conditions and significant devaluation in its currencies. The economic situation
in the region may result in slower payments of outstanding receivable balances.
To date this region has not represented a significant portion of our revenues.
However, to the extent the Asia/Pacific region becomes increasingly important,
or to the extent the factors affecting the region begin to affect other
geographic locations, our business could be damaged.
INABILITY TO PROTECT OUR TECHNOLOGIES COULD AFFECT OUR ABILITY TO COMPETE
Our success depends to a significant degree upon our ability to develop
proprietary products and technologies. However, we cannot assure you that
patents will be granted on any of our patent applications. We also cannot assure
you that the scope of any of our issued patents will be sufficiently broad to
offer meaningful protection. We only have patents issued in selected countries.
Therefore, third parties can make, use and sell products covered by our patents
in any country in which we do not have patent protection. In addition, our
issued patents or patents we license could be successfully challenged,
invalidated or circumvented so that our patent rights would not create an
effective competitive barrier. The right to use our products is given to our
customers under label licenses that are for research purposes only. These
licenses could be contested and no assurances can be made that we would either
be aware of an unauthorized use or be able to enforce the restrictions in a
cost-effective manner. See "Business--Patents and Proprietary Technologies" for
more information regarding our existing and pending patents.
PUBLICITY OF TRADE SECRETS COULD AID OUR COMPETITORS
We attempt to protect our trade secrets by entering into confidentiality
agreements with third parties, employees and consultants. However, these
agreements can be breached and, if they are, there may not be an adequate remedy
available to us. If our trade secrets become known we may lose our competitive
position.
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INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. We are aware that patents have been
applied for and in some cases issued to others claiming technologies which are
closely related to ours. As a result, and in part due to the ambiguities and
evolving nature of intellectual property law, we periodically receive notices of
potential infringement of patents held by others. Although we have to date
successfully resolved these types of claims, we may not be able to do so in the
future.
In the event of an intellectual property dispute we may be forced to
litigate. Such litigation could involve proceedings declared by the U.S. Patent
and Trademark Office or the International Trade Commission, as well as
proceedings brought by affected third parties. Intellectual property litigation
can be extremely expensive, and such expense, as well as the consequences should
we not prevail, could seriously harm our business.
If a third-party claimed an intellectual property right to technology we
use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease certain activities.
Although we might under these circumstances attempt to obtain a license to such
intellectual property, we may not be able to do so on favorable terms, or at
all.
In addition to intellectual property litigation, other substantial, complex
or extended litigation could result in large expenditures by us and distraction
of our management. For example, lawsuits by employees, stockholders,
collaborators or distributors could be very costly and substantially disrupt our
business. Disputes from time to time with such companies or individuals are not
uncommon and we cannot assure you that we will always be able to resolve them
out of court.
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS
Portions of our operations require the controlled use of hazardous and
radioactive materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of such an accident, we
could be liable for any damages that result, which could seriously damage our
business. Additionally, any accident could partially or completely shut down our
research and manufacturing facilities and operations.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL
CONDITION
We face a potential risk of liability claims based on our products or
services. We carry product liability insurance coverage which is limited in
scope and amount but which we believe to be adequate. We cannot assure you,
however, that we will be able to maintain this insurance at reasonable cost and
on reasonable terms. We also cannot assure you that this insurance will be
adequate to protect us against a product liability claim, should one arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See discussion under Currency Hedging and Foreign Currency Translation in the
Management Discussion and Analysis for quantitative and qualitative disclosures
about market risk.
20
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders was held on August 16, 1999.
(b) Not applicable.
(c) The proposal to approve and adopt the merger agreement, dated as of
June 14, 1999, among Invitrogen Corporation, a Delaware corporation,
Invo Merger Corporation, a California corporation and a wholly owned
subsidiary of Invitrogen, and NOVEX, a California corporation, pursuant
to which, among other things (a) Invo Merger Corporation would be
merged with and into NOVEX, and NOVEX would become a wholly owned
subsidiary of Invitrogen (b) each outstanding share of common stock of
NOVEX would be converted into the right to receive from Invitrogen a
fraction of a share of Invitrogen common stock which would be newly
issued by Invitrogen and (c) each outstanding option to purchase a
share of common stock of NOVEX would be converted into a right to
purchase a fraction of a share of Invitrogen common stock was approved
by 12,220,479 affirmative votes vs. 1,640 negative votes vs. 220
abstentions vs. zero broker non-votes;
The proposal to amend Invitrogen's 1997 Stock Option Plan to increase
the number of shares reserved for issuance under the plan by 1,000,000
shares (subject to adjustments specified in the plan) for a total of
5,485,479 shares of common stock was approved by 11,078,200 affirmative
votes vs. 1,139644 negative votes vs. 4,495 abstentions vs. zero broker
non-votes.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
*3.1 Restated Certificate of Incorporation of the Company, as
amended
*3.2 Amended and Restated Bylaws of the Company
*4.1 Specimen Common Stock Certificate
*10.1 Form of Indemnification Agreement for directors and
executive officers
*10.2 1995 Stock Option Plan and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement
thereunder
*10.3 1997 Stock Option Plan, as amended, and forms of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder
*10.4 1998 Employee Stock Purchase Plan and form of subscription
agreement thereunder
*10.5 Patent License Agreement, effective as of July 1, 1998,
among F. Hoffmann-La Roche Ltd, Roche Molecular Systems,
Inc. and Invitrogen Corporation
*10.6 License Agreement, dated May 10, 1990, between Molecular
Chimerics Corporation and Invitrogen Corporation
*10.7 Purchase Agreement, effective July 1, 1994, between Cayla
and Invitrogen, as amended
*10.8 License Agreement, dated January 22, 1997, between
Sloan-Kettering Institute for Cancer Research and
Invitrogen
*10.9 Lease, dated November 1, 1995, as amended, between CRC and
Invitrogen
*10.10 Stock Purchase and Stockholders Agreement dated June 20,
1997 among Invitrogen, Lyle C. Turner, Joseph Fernandez,
TA/Advent VIII L.P., Advent Atlantic and Pacific III, L.P.
and TA Venture Investors L.P.
*10.11 Stock Purchase Agreement dated November 3, 1998, between
MorphaGen, Inc., Heidi Short and Invitrogen Corporation
*10.12 Employment Agreement between Theodore De Frank and
Invitrogen dated September 28, 1995
**10.13 Assignment of Intellectual Property Conditional on Payment
Dated as of May 31, 1999, by and between Molecular Biology
Resources and Invitrogen Corporation.
**10.14 Agreement and Plan of Merger, dated as of June 14, 1999,
among Invitrogen Corporation, INVO Merger Corporation and
NOVEX.
***10.15 1996 NOVEX Stock Option/Stock Issuance Plan and forms of
Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement thereunder.
***10.16 1998 NOVEX Stock Option/Stock Issuance Plan and forms of
Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement thereunder.
***10.17 Employment Agreement between NOVEX and David E. McCarty
dated July 22, 1997, assumed by Invitrogen on August 17,
1999.
***10.18 Promissory Note from Lyle C. Turner dated December 1998.
***10.19 Novel Experimental Technology 401(k) Employee Ownership Plan
and Trust Agreement, dated April 1, 1997, as amended.
***10.20 Invitrogen Corporation Employee Stock Ownership Plan, dated
January 1, 1996.
27.01 Financial Data Schedule
- ------------------------
* Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File NO. 333-68665)
** Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (File NO. 333-82593)
*** Incorporated by reference to the Registrant's Registration
Statement on Form S-1/A (File No. 333-87085).
21
<PAGE>
(b) A Form 8-K dated August 17, 1999 was filed on August 31, 1999 to report the
completion of the merger agreement between Invitrogen Corporation and
NOVEX. A Form 8-K/A dated September 14, 1999 was filed on September 14,
1999 to report the following financial statements:
NOVEX audited (i) Consolidated Balance Sheets as of March 31, 1999 and
1998; (ii) Consolidated Statements of Income for the years ended March
31, 1999, 1998 and 1997; (iii) Consolidated Statements of Stockholders'
Equity for the years ended March 31, 1999, 1998 and 1997; (iv)
Consolidated Statements of Cash Flows for the years ended March 31,
1999, 1998 and 1997; and related Notes to Consolidated Financial
Statements.
NOVEX unaudited (i) Consolidated Balance Sheet as of June 30, 1999;
(ii) Consolidated Statements of Income for the three months ended June
30, 1999 and 1998; and (iii) Consolidated Statements of Cash Flows for
the three months ended June 30, 1999 and 1998.
Invitrogen Corporation and NOVEX Unaudited Pro Forma (i) Combined
Balance Sheet as of June 30, 1999; (ii) Combined Statements of Income
for the six months ended June 30, 1999 and 1998 and for the years ended
December 31, 1998, 1997 and 1996; and (iii) related Notes to Combined
Financial Statements.
22
<PAGE>
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.
INVITROGEN CORPORATION
Date: October 22, 1999 By: /s/ James R. Glynn
----------------------------- ----------------------------
James R. Glynn
Executive Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INVITROGEN'S
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 38,216 3,115
<SECURITIES> 809 3,105
<RECEIVABLES> 8,090 6,398
<ALLOWANCES> 167 266
<INVENTORY> 5,301 4,862
<CURRENT-ASSETS> 55,349 19,616
<PP&E> 16,264 14,882
<DEPRECIATION> 7,303 5,183
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<CURRENT-LIABILITIES> 9,752 8,435
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0 17,457
0 0
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<OTHER-SE> 57,618 3,632
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<SALES> 50,024 38,476
<TOTAL-REVENUES> 51,288 39,212
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<OTHER-EXPENSES> 29,064 20,522
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<INTEREST-EXPENSE> 222 197
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<INCOME-TAX> 2,157 1,858
<INCOME-CONTINUING> 3,321 3,325
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<NET-INCOME> 3,321 3,325
<EPS-BASIC> 0.27 0.21
<EPS-DILUTED> 0.23 0.18
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